<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1998
REGISTRATION NO. 333-60122
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)
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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:
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Douglas Rein, Esq. Warren Lazarow, Esq. Cheryl L. Barr, Esq.
Gray Cary Ware & Freidenrich Brobeck Phleger & Harrison LLP The Titan Corporation
4365 Executive Drive, Suite 2200 Geng Road 3033 Science Park Road
1600 Palo Alto, California 94303 San Diego, California 92121
San Diego, California 92121 Telephone: (650) 424-0160 Telephone: (619) 552-9842
Telephone: (619) 677-1400
</TABLE>
------------------------
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. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
[DELFIN LETTERHEAD]
September 24, 1998
Delfin Systems
3000 Patrick Henry Drive
Santa Clara, California 95054
Dear Shareholder:
You are invited to attend a Special Meeting of the Shareholders (the
"Special Meeting") of Delfin Systems ("Delfin") to be held on October 23, 1998,
at 11:00 a.m. at the corporate headquarters, located at 3000 Patrick Henry
Drive, Santa Clara, California. This Special Meeting will be held to consider
and vote upon a proposal to adopt an Agreement and Plan of Reorganization which,
if approved, will result in Delfin becoming a wholly-owned subsidiary of The
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 shares of Delfin Common Stock for shares of Titan Common Stock. Titan is a
public company whose common stock is listed on the New York Stock Exchange under
the symbol "TTN." The formula by which the Delfin Common Stock will be converted
into Titan Common Stock in the merger transaction contains three variables: (i)
the amount outstanding under Delfin's line of credit with Silicon Valley Bank as
of the closing of the merger transaction, (ii) the "Titan Stock Price", which
will be the average price per share of the Titan Common Stock over the twenty
trading days prior to the closing of the merger transaction subject to a
"collar" providing that if the Titan Stock Price is less than $6.00 then $6.00
will be used as the Titan Stock Price and if the Titan Stock Price is greater
than $8.00 then $8.00 will be used as the Titan Stock Price, and (iii) the
number of shares of Delfin Common Stock outstanding immediately prior to the
closing of the merger transaction. The number of shares of Titan Common Stock
that Delfin shareholders will receive in exchange for each of an assumed
aggregate 7,221,484 shares of Delfin Common Stock is anticipated to range from
.332 to .469 shares. The formula can also be used to determine the anticipated
maximum and minimum value of the Titan Common Stock to be received in the merger
transaction; however, Delfin shareholders will not realize cash from the merger
transaction until they sell their Titan Common Stock. Each share of Delfin
Common Stock would be exchanged within a range of $2.22 worth of Titan Common
Stock to $2.81 worth of Titan Common Stock, with values below $2.52 occurring if
the market price of Titan Common Stock is below the $6.00 collar. Recorded
information with respect to day-to-day trading prices of Titan Common Stock may
be obtained until the Delfin Meeting by calling (800) 382-8492. 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 the exchange of Delfin Common Stock into Titan
Common Stock.
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED MERGER TRANSACTION IS IN
THE BEST INTEREST OF THE DELFIN SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS 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,
/s/ Mellon C. Baird
--------------------------------------
Mellon C. Baird
<PAGE>
DELFIN SYSTEMS
3000 PATRICK HENRY DRIVE
SANTA CLARA, CALIFORNIA 95054
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 23, 1998
------------------------
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders (the
"Special Meeting") of Delfin Systems, a California corporation ("Delfin"), will
be held on October 23, 1998, at 11:00 a.m., local time, at the corporate
headquarters of Delfin, located at 3000 Patrick Henry Drive, Santa Clara,
California.
The Special Meeting is for the following purposes:
1. To consider and vote upon a proposal (the "Merger Proposal") to (A)
approve and adopt an Agreement and Plan of Reorganization dated as of
June 30, 1998, (the "Merger Agreement"), among Delfin, The Titan
Corporation, a Delaware corporation ("Titan"), and Delsys Merger Corp.
("Titan Sub"), a newly formed, wholly-owned Delaware subsidiary of Titan
and (B) approve and consent to the merger of Titan Sub with and into
Delfin (the "Merger"), pursuant to which, among other things, Titan Sub
will cease to exist and Delfin will survive as a wholly-owned subsidiary
of Titan. As more fully described in the enclosed Prospectus/Proxy
Statement, and subject to market fluctuations in the price of Titan
Common Stock, each share of Delfin Common Stock would be exchanged within
a range from $2.22 worth of Titan Common Stock to $2.81 worth of Titan
Common Stock, with values below $2.52 occurring if the market price of
Titan Common Stock is below the $6.00 collar. The formula by which the
Delfin Common Stock will be converted into Titan Common Stock in the
merger transaction contains three variables: (i) the amount outstanding
under Delfin's line of credit with Silicon Valley Bank as of the closing
of the merger transaction, (ii) the "Titan Stock Price", which will be
the average price per share of the Titan Common Stock over the twenty
trading days prior to the closing of the merger transaction subject to a
"collar" providing that if the Titan Stock Price is less than $6.00 then
$6.00 will be used as the Titan Stock Price and if the Titan Stock Price
is greater than $8.00 then $8.00 will be used as the Titan Stock Price,
and (iii) the number of shares of Delfin Common Stock outstanding
immediately prior to the closing of the merger transaction. The section
of the Prospectus/Proxy Statement accompanying this Notice entitled
"Terms of the Merger--Manner and Basis for Converting Shares" contains
more information about these factors. Recorded information with respect
to day-to-day trading prices of Titan Common Stock may be obtained until
the Delfin Meeting by calling (800) 382-8492. As another result of the
Merger, options to acquire Delfin Common Stock will be converted into
options for Titan Common Stock, based upon the same exchange ratio
pursuant to which shares of Delfin Common Stock convert 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 Delfin recommends that you vote FOR each of the
proposals described above.
Only the holders of record of Delfin Common Stock at the close of business
on September 21, 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
/s/ Mellon C. Baird
--------------------------------------
Mellon C. Baird
CHIEF EXECUTIVE OFFICER
Santa Clara, California
September 24, 1998
<PAGE>
PROSPECTUS
THE TITAN CORPORATION
PROSPECTUS
---------------------
DELFIN SYSTEMS
PROXY STATEMENT
This Prospectus/Proxy Statement (the "Prospectus/Proxy Statement") is being
furnished to the shareholders of Delfin Systems, a California corporation
("Delfin"), on behalf of the Delfin Board of Directors (the "Delfin Board") for
use at the Special Meeting of shareholders of Delfin to be held on October 23,
1998 at 11:00 a.m., local time, at the corporate headquarters of Delfin, located
at 3000 Patrick Henry Drive, Santa Clara, California and at any adjournments or
postponements thereof (the "Delfin Meeting").
The Delfin Meeting is being called in connection with the proposed merger of
Delsys Merger Corp. ("Titan Sub"), a newly formed, wholly-owned Delaware
subsidiary of The Titan Corporation ("Titan"), with and into Delfin (the
"Merger"), pursuant to an Agreement and Plan of Reorganization (the "Merger
Agreement"), dated as of June 30, 1998, among Titan, Titan Sub, and Delfin. 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 Delfin will survive as a wholly-owned subsidiary of Titan. Delfin
Common Stock will be converted into Titan Common Stock using a formula
containing three variables: (i) the amount outstanding under Delfin's line of
credit with Silicon Valley Bank as of the closing of the Merger (the "Line of
Credit Deduction"), (ii) the "Titan Stock Price", which will be the average
price per share of the Titan Common Stock over the twenty trading days prior to
the closing of the Merger subject to a "collar", and (iii) the number of shares
of Delfin Common Stock outstanding immediately prior to the closing of the
Merger. The number of shares of Titan Common Stock that Delfin shareholders will
receive in exchange for each of an assumed aggregate 7,221,484 shares of Delfin
Common Stock is anticipated to range from .332 to .469 shares. The formula can
also be used to determine the anticipated maximum and minimum value of the Titan
Common Stock to be received in the merger transaction; however, Delfin
shareholders will not realize cash from the merger transaction until they sell
their Titan Common Stock. Each share of Delfin Common Stock would be exchanged
within a range from $2.22 worth of Titan Common Stock to $2.81 worth of Titan
Common Stock, with values below $2.52 occurring if the market price of Titan
Common Stock is below the $6.00 collar. The collar provides a potential
adjustment to the dollar value of the Titan Common Stock to be received by
Delfin shareholders: under its terms if the Titan Stock Price is less than
$6.00, then $6.00 will be used to determine the number of shares of Titan Common
Stock to be received by Delfin shareholders in the Merger, and if the Titan
Stock Price is greater than $8.00, then $8.00 will be used to determine the
number of shares of Titan Common Stock to be received by Delfin shareholders in
the Merger. If the Titan Stock Price is below $5.00 or above $9.00 then the
transaction contemplated by the Merger Agreement may not be consummated or may
be renegotiated. The section of this Prospectus/Proxy Statement entitled "Terms
of the Merger--Manner and Basis for Converting Shares" contains a more detailed
discussion regarding the formula utilized to determine the number of shares of
Titan Common Stock issuable to Delfin shareholders in the Merger. As another
result of the Merger, options to acquire Delfin Common Stock will be converted
into options for Titan Common Stock, based upon the same exchange ratio pursuant
to which shares of Delfin Common Stock convert into shares of Titan Common Stock
(the "Exchange Ratio").
------------------------
NO PERSON HAS BEEN AUTHORIZED BY TITAN OR DELFIN 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,
DELFIN 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 is listed on the New York Stock Exchange ("NYSE") under
the symbol "TTN". It is a condition of the obligations of Titan and Delfin 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 SEPTEMBER 24, 1998.
<PAGE>
The exact value of the shares of Titan Common Stock to be received by
Delfin's shareholders in the Merger will not be known at the time of the Delfin
Meeting. Such value may vary substantially due to a deduction based upon the
Line of Credit Deduction and due to fluctuations in the Titan Stock Price.
Shareholders of Delfin are encouraged to gain information regarding the Titan
Stock Price, including whether the Titan Common Stock may be valued at less than
$6.00 or greater than $8.00, by obtaining current market quotations for Titan
Common Stock prior to the Delfin Meeting. On September 21, 1998 the closing
price of Titan Common Stock on the NYSE was $5.125; however, the Titan Stock
Price will not be determined based upon such closing price. Recorded information
with respect to day-to-day trading prices of Titan Common Stock may be obtained
until the Delfin Meeting by calling (800) 382-8492.
In part to limit the range of potential dollar values of Titan Common Stock
to be issued to Delfin's shareholders under the terms of the Merger Agreement,
(i) Titan may terminate the Merger Agreement prior to the consummation of the
Merger if the Titan Stock Price is greater than $9.00, and (ii) Delfin may
terminate the Merger Agreement prior to the consummation of the Merger if the
Titan Stock Price is less than $5.00. If Delfin's termination right is triggered
and the Delfin Board determines to proceed with a re-negotiated transaction, if
any, with Titan, Delfin may conduct a resolicitation consistent with the
exercise of the Delfin Board's fiduciary duties to shareholders under California
law. In considering at that time whether to recommend to the Delfin shareholders
the approval of the Merger, the Delfin 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 Delfin and Titan, the trading history and share value of Titan
Common Stock, economic conditions and the Risk Factors discussed in this
Prospectus/Proxy Statement.
If the Merger is consummated, the aggregate number of shares of Titan Common
Stock to be issued to Delfin shareholders (including shares not issued at the
time of the Merger but subject to outstanding options) is expected to range
between 2,946,000 and 4,153,000 shares, with the actual number depending upon
the Line of Credit Deduction, the Titan Stock Price and the capitalization of
Delfin immediately preceding the closing date of the Merger. The corresponding
number of shares of Titan Common Stock to be received in exchange for a single
share of Delfin Common Stock would range from .332 to .469 shares of Titan
Common Stock.
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 Delfin Common Stock. Based upon the
32,833,158 shares of Titan Common Stock issued and outstanding as of September
21, 1998, and after giving effect to the issuance of Titan Common Stock in the
Merger and the exercise of all such options to purchase Delfin Common Stock
assumed by Titan, the former holders of Delfin Common Stock and options to
purchase Delfin Common Stock would hold and have voting power with respect to
approximately 11.06% of the total issued and outstanding Titan Common Stock, or
approximately 10.99% 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 shareholders of Delfin is
received and other conditions to the Merger are satisfied or waived, the Merger
is expected to be consummated on or promptly following the date of the Delfin
Meeting (the "Closing"). In any event, it is anticipated that the Closing will
occur not later than two business days following the date of the Delfin Meeting.
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 Delfin has been supplied by Delfin.
This Prospectus/Proxy Statement is first being mailed to shareholders of
Delfin on or about September 24, 1998.
THE MATTERS SUMMARIZED ABOVE ARE DISCUSSED IN DETAIL IN THIS
PROSPECTUS/PROXY STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION.
SHAREHOLDERS OF DELFIN 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 15.
------------------------
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>
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 (the "Public Reference Room") 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. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. 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. Additional
information regarding Titan and Delfin may also be found on their respective web
sites, www.titan.com and www.delfin.com; such information is for reference
purposes only and does not constitute part of this Registration Statement.
Under the rules and regulations of the Commission, the solicitation of
proxies from shareholders of Delfin 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.
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE
The financial statements of Horizons Technology, Inc. and audit report
thereon contained on pages F-36 through F-52 of Titan's Registration Statement
on Form S-4 (No. 333-47633), as amended, are incorporated by reference in this
Prospectus/Proxy Statement.
------------------------
This Prospectus/Proxy Statement contains trademarks and registered
trademarks of Titan, Delfin and other companies.
i
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TABLE OF CONTENTS
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AVAILABLE INFORMATION...................................................................................... i
SUMMARY.................................................................................................... 1
General.................................................................................................. 1
The Parties.............................................................................................. 1
Meeting of Delfin Shareholders........................................................................... 2
Risk Factors............................................................................................. 3
Interests of Certain Persons in The Merger............................................................... 3
Regulatory Matters....................................................................................... 3
Federal Income Tax Matters............................................................................... 3
Accounting Treatment..................................................................................... 4
Dissenter's Rights of Delfin Shareholders................................................................ 4
The Merger............................................................................................... 4
Market Price Data........................................................................................ 8
Selected Historical Financial Data....................................................................... 10
SELECTED PRO FORMA CONDENSED FINANCIAL DATA................................................................ 13
COMPARATIVE PER SHARE DATA................................................................................. 14
RISK FACTORS............................................................................................... 15
Risks Related to the Merger.............................................................................. 15
Integration of Operations................................................................................ 15
Additional Shares to be Issued by Titan; Shares Eligible for Future Sale................................. 15
Potential Adjustments to Consideration to be Received by Holders of Delfin Common Stock.................. 16
Risks Related to Titan's and Delfin's Businesses......................................................... 16
Ability to Implement Spin-Out Strategy................................................................... 16
Recent Acquisitions; Risks Associated with Acquisition Strategy.......................................... 17
Dependence on Government Contracts....................................................................... 18
Fluctuations in Results of Operations.................................................................... 18
Rapid Industry Change; Technological Obsolescence........................................................ 19
Ability to Commercialize New Technologies................................................................ 19
Market Acceptance of New Technologies.................................................................... 20
Risks of International Operations; Risks of Doing Business in Developing Countries....................... 20
Competition.............................................................................................. 21
Reliance on Strategic Relationships...................................................................... 21
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................................................................................ 24
Impact of the Year 2000 Issue............................................................................ 25
Anti-Takeover Effects of Certain Charter Provisions; Stockholder Rights Plan............................. 25
THE DELFIN MEETING......................................................................................... 27
Date, Time and Place of Meeting.......................................................................... 27
Record Date and Outstanding Shares....................................................................... 27
Voting of Proxies........................................................................................ 27
Revocability of Proxies.................................................................................. 27
Shareholder Vote Required; Quorum; Voting Agreements..................................................... 27
Solicitation of Proxies; Expenses........................................................................ 28
</TABLE>
ii
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Board Recommendation..................................................................................... 28
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............................................................ 29
Background of the Merger................................................................................. 29
Titan's Reasons for the Merger........................................................................... 30
Delfin's Reasons for the Merger.......................................................................... 31
Interests of Certain Persons in the Merger............................................................... 32
Regulatory Matters....................................................................................... 32
Federal Income Tax Matters............................................................................... 33
Accounting Treatment..................................................................................... 35
Dissenters' Rights of Delfin Shareholders................................................................ 35
TERMS OF THE MERGER........................................................................................ 36
Effective Time........................................................................................... 36
Manner and Basis for Converting Shares................................................................... 36
Effect of the Merger..................................................................................... 37
Treatment of Employee Equity Benefit Plans............................................................... 38
Stock Ownership Following the Merger..................................................................... 38
Representations and Warranties........................................................................... 39
Covenants................................................................................................ 39
No Solicitation.......................................................................................... 40
Conditions to the Merger................................................................................. 41
Termination of the Merger Agreement...................................................................... 42
Effect of Termination.................................................................................... 42
Break-up Fees............................................................................................ 43
Merger Expenses and Fees and Other Costs................................................................. 43
Related Agreements....................................................................................... 43
Affiliates' Restrictions On Sale of Titan Common Stock................................................... 43
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION............................................... 45
TITAN BUSINESS............................................................................................. 53
General Development and Description of Business.......................................................... 53
Communications Systems Segment........................................................................... 53
Software Systems Segment................................................................................. 54
Information Technologies Segment......................................................................... 55
Medical Sterilization and Food Pasteurization Segment.................................................... 56
Emerging Technologies and Businesses Segment............................................................. 57
Government Contracts..................................................................................... 57
Industry Segments and Export Revenues.................................................................... 58
Raw Materials............................................................................................ 58
Patents, Trademarks and Trade Secrets.................................................................... 58
Backlog.................................................................................................. 59
Research and Development................................................................................. 59
Employees................................................................................................ 60
Properties............................................................................................... 60
Legal Proceedings........................................................................................ 61
TITAN MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION................ 62
Company Overview......................................................................................... 62
Operating Results........................................................................................ 64
Communications Systems................................................................................... 67
Software Systems......................................................................................... 67
Titan Information Technologies........................................................................... 67
</TABLE>
iii
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Medical Sterilization and Food Pasteurization............................................................ 69
Emerging Technologies and Businesses..................................................................... 70
Liquidity and Capital Resources.......................................................................... 70
Forward Looking Information; Certain Cautionary Statements............................................... 70
OWNERSHIP OF TITAN'S SECURITIES............................................................................ 71
TITAN MANAGEMENT AND EXECUTIVE COMPENSATION................................................................ 72
Executive Officers and Directors......................................................................... 72
Compensation Committee Interlocks and Insider Participation.............................................. 73
Summary of Cash and Certain Other Compensation........................................................... 74
SUMMARY COMPENSATION TABLE................................................................................. 74
Stock Options............................................................................................ 75
Option Exercises and Holdings............................................................................ 76
Agreements with Executive Officers....................................................................... 76
DELFIN BUSINESS............................................................................................ 77
Overview................................................................................................. 77
Engineering and Management Services Division............................................................. 77
Information Solutions Division........................................................................... 78
Signal Products Division................................................................................. 80
Business Environment..................................................................................... 81
Backlog; Export Sales.................................................................................... 81
Competition.............................................................................................. 81
Employees................................................................................................ 82
Facilities............................................................................................... 82
DELFIN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 83
Results of Operations.................................................................................... 83
Liquidity and Capital Resources.......................................................................... 84
Year 2000................................................................................................ 84
Recent Accounting Pronouncements......................................................................... 84
OWNERSHIP OF DELFIN'S SECURITIES........................................................................... 85
COMPARISON OF RIGHTS OF TITAN STOCKHOLDERS AND DELFIN SHAREHOLDERS......................................... 87
Capital Stock............................................................................................ 87
Amendment of Bylaws...................................................................................... 87
Amendment of Delfin Articles and Titan Certificate....................................................... 88
Special Meetings......................................................................................... 88
Actions by Written Consent............................................................................... 88
Size of the Board of Directors........................................................................... 88
Classification of the Board of Directors................................................................. 88
Cumulative Voting........................................................................................ 88
Removal of Directors..................................................................................... 88
Filling Vacancies in the Board of Directors.............................................................. 89
Payment of Dividends; Redemption or Repurchase of Shares................................................. 89
Limitation of Liability of Directors..................................................................... 89
Indemnification.......................................................................................... 90
Loans to Directors, Officers and Employees............................................................... 90
EXPERTS.................................................................................................... 90
LEGAL MATTERS.............................................................................................. 90
</TABLE>
iv
<PAGE>
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. SHAREHOLDERS OF DELFIN 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, Delfin's 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 included elsewhere in this
Prospectus/Proxy Statement.
GENERAL
This Prospectus/Proxy Statement is being provided to shareholders of Delfin
in connection with the proposed Merger of Titan Sub with and into Delfin,
pursuant to which Titan Sub will cease to exist and Delfin 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.
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, Validity
Corporation ("Validity") in March 1998 and Horizons Technology, Inc.
("Horizons") in June 1998. The Medical Sterilization and Food Pasteurization
segment utilizes 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. In addition, Titan's most recent acquisition of VisiCom Laboratories,
Inc. ("VisiCom") will be integrated into the Emerging Technologies segment.
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 June 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.
DELFIN. Delfin was founded in 1984 initially to conduct systems engineering
and software development for the United States Navy (the "Navy") and others in
the intelligence community. In 1991 Delfin
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merged with Maxim Technologies, Inc., of Santa Clara, California. Maxim was
engaged in the design and manufacture of light-weight low-power systems to
intercept, geolocate and analyze signals for tactical situation awareness and
response. In 1993 Delfin acquired substantially all of the assets of the
WorkGroup Division of Simpact Corporation. This division, now called the
Information Solutions Division, is engaged in the computer security, message
handling and work group computing businesses. From this beginning, Delfin has
evolved into a company with three business units that have been involved
predominantly in providing software, computer systems and network integration,
technical consulting services, and signals intelligence electronic hardware.
Customers include the United States defense and intelligence establishment and
numerous commercial and foreign customers.
The range of technical capabilities provided by Delfin encompasses tactical
information management systems for shipboard applications, intelligence analyst
software support tools, heterogeneous database access tools, tactical situation
modeling and simulation, and other computer-based applications. In the technical
consulting services area, Delfin has developed a wide array of systems
management experience and provides essential day-to-day technical and program
management support to many government offices. The technical consulting services
are focused on the development of defense command and control communications
computer and intelligence ("C4I") systems.
Unless otherwise indicated, "Delfin" refers to Delfin Systems, a California
corporation. Delfin's executive offices are located at 3000 Patrick Henry Drive,
Santa Clara, California 95054. Its telephone number is (408) 748-1200.
MEETING OF DELFIN SHAREHOLDERS
DATE, TIME AND PLACE. The Delfin Meeting will be held on October 23, 1998
at 11:00 a.m., local time, at the corporate headquarters of Delfin located at
3000 Patrick Henry Drive, Santa Clara, California.
PURPOSE OF THE MEETING. At the Delfin meeting, shareholders of Delfin will
be asked to consider and vote upon a proposal to: (i) approve and adopt the
Merger Agreement; and (ii) approve and consent to the Merger, pursuant to which,
among other things, Merger Sub will cease to exist and Delfin will survive as a
wholly-owned subsidiary of Titan. Delfin Common Stock will be converted into
Titan Common Stock in the Merger, using a formula (the "Exchange Ratio")
containing three variables: (A) the amount outstanding under Delfin's line of
credit with Silicon Valley Bank as of the closing of the Merger (the "Line of
Credit Deduction"), (B) the "Titan Stock Price", which will be the average price
per share of the Titan Common Stock over the twenty trading days prior to the
closing of the Merger subject to a "collar" providing that if the Titan Stock
Price is less than $6.00 then $6.00 will be used as the Titan Stock Price and if
the Titan Stock Price is $8.00 then $8.00 will be used as the Titan Stock Price,
and (C) the number of shares of Delfin Common Stock outstanding immediately
prior to the closing of the Merger. The number of shares of Titan Common Stock
that Delfin shareholders will receive in exchange for each of an assumed
aggregate 7,221,484 shares of Delfin Common Stock is anticipated to range from
.332 to .469 shares. Each share of Delfin Common Stock would be exchanged within
a range from $2.22 worth of Titan Common Stock to $2.81 worth of Titan Common
Stock, with values below $2.52 occurring if the market price of Titan Common
Stock is below the $6.00 collar. If the Titan Stock Price is below $5.00 or
above $9.00 then the transaction contemplated by the Merger Agreement may not be
consummated or may be renegotiated. Although this Prospectus/Proxy Statement
provides a range of values of Titan Common Stock which Titan management and
Delfin management expect Delfin shareholders may receive, the actual value of
such Titan Common Stock will vary depending upon the variables used to determine
the Exchange Ratio and market fluctuations in the price of Titan Common Stock.
The section of this Prospectus/Proxy Statement entitled "Terms of the
Merger--Manner and Basis for Converting Shares" contains a detailed discussion
regarding the formula utilized to determine the number of shares of Titan Common
Stock issued to Delfin shareholders in the Merger. In addition, options to
acquire Delfin Common Stock will be converted as a result of the Merger into
equivalent options to acquire Titan Common Stock, based upon the Exchange Ratio.
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<PAGE>
RECORD DATE; SHARES ENTITLED TO VOTE. Only shareholders of record of Delfin
at the close of business on September 21, 1998 (the "Record Date") are entitled
to notice of and to vote at the Delfin Meeting. At the close of business on the
Record Date, there were outstanding and entitled to vote 7,221,484 shares of
Delfin Common Stock, each of which will be entitled to one vote on each matter
to be acted upon at the Delfin 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 Delfin Common Stock. As a group, all executive
officers and directors of Delfin and their respective affiliates owned
approximately 21.8% of the Delfin Common Stock as of the Record Date. The
executive officers and directors of Delfin have each agreed to vote all shares
of Delfin over which they have voting power or control in favor of the Merger
Agreement and the Merger.
RECOMMENDATION OF DELFIN BOARD OF DIRECTORS. The Delfin Board has approved
the Merger Agreement and the Merger and has determined that the Merger is in the
best interests of Delfin and its shareholders. THE DELFIN BOARD UNANIMOUSLY
RECOMMENDS APPROVAL OF THE MERGER PROPOSAL BY THE DELFIN SHAREHOLDERS. The
primary factors considered and relied upon by the Delfin Board in reaching its
recommendation are described below under "Approval of the Merger and Related
Transactions--Delfin's 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 Delfin.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Delfin Board with respect to the
Merger Proposal, holders of Delfin Common Stock should be aware that certain
members of the Delfin Board and certain Delfin executive officers may have
certain interests in the Merger that are in addition to the interests of the
holders of Delfin Common Stock generally. The members of the Delfin 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 could 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. Titan and Delfin filed
notification and report forms under the HSR Act with the FTC and the Antitrust
Division on July 23, 1998. The period of time such agencies had to review the
filings has now lapsed. 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. See
"Approval of the Merger and Related Transactions--Regulatory Matters."
FEDERAL INCOME TAX MATTERS
As a condition to the closing, Gray Cary Ware & Freidenrich LLP ("GCWF"),
counsel to Titan must issue an opinion to Titan, and Brobeck Phleger and
Harrison LLP ("Brobeck"), counsel to Delfin must issue an opinion to Delfin,
that the Merger will be a tax-free reorganization for federal income tax
3
<PAGE>
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 Delfin
shareholders on the exchange of Delfin Common Stock for Titan Common Stock,
except to the extent that Delfin shareholders receive cash in lieu of fractional
shares or in payment for shares as to which dissenters' rights have been
perfected. Neither Delfin nor Titan will obtain a ruling from the Internal
Revenue Service as to the tax consequences of the Merger. 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 and Delfin management have each concluded that no conditions
exist relating to Delfin that would preclude Titan from accounting for the
Merger as a pooling of interests. See "Approval of the Merger and Related
Transactions-- Accounting Treatment."
DISSENTERS' RIGHTS OF DELFIN SHAREHOLDERS
Holders of Delfin capital stock may have certain dissenters' rights if their
shares qualify as "dissenting shares" under California law. These rights may
require Delfin to purchase any such "dissenting shares" from Delfin shareholders
for cash at fair market value as of June 30, 1998. Delfin shareholders must
strictly comply with applicable California law to exercise their dissenter's
rights. A copy of the pertinent statutory provisions are attached to this
Prospectus/Proxy Statement as Appendix B. See "Approval of the Merger and
Related Transactions--Dissenters' Rights of Delfin Shareholders."
THE MERGER
TERMS OF THE MERGER; EXCHANGE OF STOCK. As a result of the Merger, Delfin
will become a wholly-owned subsidiary of Titan. Each share of Delfin Common
Stock will be converted into the right to receive from an estimated $2.22 worth
of Titan Common Stock to $2.81 worth of Titan Common Stock. The conversion will
be calculated using the Exchange Ratio, in which variables include: (i) the Line
of Credit Deduction, (ii) the Titan Stock Price, subject to a collar, and (iii)
the number of shares of Delfin Common Stock outstanding immediately preceding
the closing of the Merger. The collar provides a potential adjustment to the
dollar value of the Titan Common Stock to be received by Delfin shareholders:
under its terms if the Titan Stock Price is less than $6.00, then $6.00 will be
used to determine the number of shares of Titan Common Stock to be received by
Delfin shareholders in the Merger, and if the Titan Stock Price is greater than
$8.00, then $8.00 will be used to determine the number of shares of Titan Common
Stock to be received by Delfin shareholders in the Merger. If the Titan Stock
Price is below $5.00 or above $9.00 then the transaction contemplated by the
Merger Agreement may not be consummated or may be renegotiated. Although this
Prospectus/Proxy Statement provides a range of values of Titan Common Stock
which Titan management and Delfin management expect Delfin shareholders may
receive, the actual value of such Titan Common Stock will vary depending upon
the variables used to determine the Exchange Ratio. The section of the
Prospectus/Proxy Statement entitled "Terms of the Merger--Manner and Basis for
Converting Shares" contains a detailed discussion regarding the formula utilized
to determine the number of shares of Titan Common Stock issued to Delfin
shareholders in the Merger. Assuming a $2,550,000 Line of Credit Deduction, a
Titan Stock Price equal to the $5.125 closing price of Titan Common Stock on the
New York Stock Exchange ("NYSE") on September 21, 1998, and a capitalization of
Delfin equal to the 7,221,484 outstanding shares as of the close of business on
the Record Date, an aggregate of approximately 3,325,000 shares of Titan Common
Stock would be issued in the Merger. In addition, Titan will assume all
outstanding Delfin options, which, using the assumptions specified above, would
be converted into options to acquire approximately 756,700 additional shares of
Titan Common Stock. See "Terms of the Merger--Manner and Basis for Converting
Shares."
4
<PAGE>
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 shareholders
of Delfin 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 California Secretary of
State (the "Effective Time"). At the Effective Time, Titan Sub will merge with
and into Delfin, with the result that Delfin will be the surviving corporation
in the Merger and a wholly-owned subsidiary of Titan (the "Surviving
Corporation"). The shareholders of Delfin 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 Titan
Stockholders and Delfin Shareholders."
EXCHANGE OF DELFIN 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 Delfin Common 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 DELFIN
COMMON 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."
DELFIN OPTIONS. At the Effective Time, each unexpired and unexercised
option to purchase Delfin Common Stock, whether vested or unvested, in effect on
the date of the Merger Agreement that has been granted by Delfin to current or
former directors, officers or employees of Delfin (each, a "Delfin Option"),
will be assumed by Titan and will be automatically converted into an option (a
"Titan Exchange Option") to purchase that number of shares of Titan Common Stock
equal to the number of shares of Delfin Common Stock issuable immediately prior
to the Effective Time upon exercise of the Delfin Option (without regard to
actual restrictions on exercisability), multiplied by the Exchange Ratio, with
an exercise price per share equal to the exercise price per share that existed
under the corresponding Delfin Option, divided by the Exchange Ratio, and with
other terms and conditions (such as vesting) that are the same as the terms and
conditions of such Delfin Option immediately before the Effective Time. As of
the Record Date 1,643,532 shares of Delfin Common Stock were issuable upon the
exercise of outstanding Delfin Options, which options will be assumed by Titan
and will be converted into Titan Exchange Options to acquire from approximately
546,200 shares to 770,000 shares of Titan Common Stock at the Effective Time.
The weighted average exercise price per share of all Delfin Options outstanding
as of the Record Date is approximately $.6938 per share. Following the Merger
the weighted average exercise price per share of all Titan Exchange Options will
be from approximately $1.48 to $2.09 per share (depending upon the Exchange
Ratio). The unvested portion of each Delfin Option will continue to vest as a
Titan Exchange Option upon the same schedule as the corresponding Delfin Option.
To the extent any Delfin Options are exercised from the date of the Merger
Agreement to the Effective Time, the issued Delfin Common Stock will be
converted into equivalent options to purchase Titan Common Stock using the
Exchange Ratio. Following the Effective Time, Titan will 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 Benefit Plans."
STOCK OWNERSHIP FOLLOWING THE MERGER. Assuming a $2,550,000 Line of Credit
Deduction, a Titan Stock Price equal to the $5.125 closing price of Titan Common
Stock on the NYSE on the Record Date, and a capitalization of Delfin equal to
the 7,221,484 outstanding shares as of the Record Date, an aggregate of
approximately 3,325,000 shares of Titan Common Stock would be issued to Delfin
shareholders in the Merger. In addition Titan will assume all outstanding Delfin
Options which, using the above
5
<PAGE>
assumptions, would be converted into options to acquire approximately 756,700
shares of Titan Common Stock at the Effective Time. Based upon the number of
shares of Titan Common Stock, Titan's $1.00 Cumulative Convertible Preferred
Stock, $1.00 par value ("Titan Public Preferred"), issued and outstanding as of
September 21, 1998, and after giving effect to the issuance of Titan Common
Stock in the Merger and giving effect to the exercise of all Titan Exchange
Options, the former holders of Delfin Common Stock would have approximately
10.99% of the voting power of Titan's total issued and outstanding shares on a
fully diluted basis. The foregoing percentages are subject to change to reflect
any changes in the capitalization of either Titan or Delfin subsequent to the
dates indicated and prior to the Effective Time. There can be no assurance as to
the actual capitalization of Titan or Delfin 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."
BOARD OF DIRECTORS; MANAGEMENT FOLLOWING THE MERGER. There will be no
change in the current Titan Board of Directors (the "Titan Board") or officers
of Titan as a result of the Merger. At the Effective Time, the officers of
Delfin will become the officers of the Surviving Corporation; the directors of
the Surviving Corporation will be Mellon C. Baird, Eric DeMarco, Gene W. Ray and
J.S. Webb. Mellon C. Baird, who is currently acting as interim President of
Titan Technologies and Information Systems Corporation, will become President of
such subsidiary following the closing. See "Terms of the Merger-- Effect of the
Merger."
COVENANTS. Pursuant to the Merger Agreement, Delfin 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,
Delfin 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 reasonable efforts to keep in full force all
of its existing insurance policies. In addition, subject to certain exceptions,
Delfin 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. Delfin has further agreed to take actions
necessary to give notice of, convene and hold a meeting of shareholders, and
solicit proxies with respect to the meeting. Each of Delfin 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, to provide certain documents to the other and to keep the other's
information confidential. See "Terms of the Merger--Covenants."
NO SOLICITATION. Pursuant to the Merger Agreement, except under certain
limited circumstances, Delfin has agreed (on behalf of itself and each of its
subsidiaries) that it will not directly or indirectly (i) solicit any alternate
acquisition, (ii) furnish any non-public information concerning Delfin in
connection with or in response to an alternative acquisition proposal, or (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
shareholders of Delfin, (iii) absence of any material legal proceeding relating
to the Merger, (iv) receipt by Titan and Delfin 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 Delfin have agreed that, if
the Merger is not consummated, under certain
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<PAGE>
circumstances Titan or Delfin, as the case may be, will pay to the other a sum
equal to 10% of the Total Acquisition Price (as defined herein). See "Terms of
the Merger--Termination of the Merger Agreement," "--Effect of Termination" and
"--Break-Up Fees."
STOCK VOTING AGREEMENTS. In connection with the execution of the Merger
Agreement, certain of the officers, directors and institutional investor
shareholders (the "Affiliated Shareholders"), owning in the aggregate
approximately 53% of the Delfin Common Stock, executed a Stock Voting Agreement
with Titan. Pursuant to such agreements, each of such persons agreed to vote all
shares of Delfin 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."
AFFILIATE AGREEMENTS. As a condition to Titan's obligations to consummate
the Merger, each affiliate of Delfin 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 and the applicability of the
"pooling of interests" accounting treatment. See "Terms of the Merger--Related
Agreements--Affiliate Agreements."
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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 filing of the S-4 Registration Statement and
this Prospectus/Proxy Statement and any amendments or supplements thereto. Titan
and Delfin equally shared filing fees under the HSR Act. See "Terms of the
Merger--Merger Expenses and Fees and Other Costs."
Titan estimates that Titan and Delfin will incur direct transaction costs of
approximately $1 million associated with the Merger. These nonrecurring
transaction costs are expected to be charged to operations as incurred, which is
expected to be in the quarter ending September 30, 1998. See "Unaudited Pro
Forma Combined Condensed Financial Information" and "Risk Factors--Integration
of Operations."
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, as reported on the
NYSE under the symbol "TTN". Titan Public Preferred is traded on the NYSE under
the symbol "TTNPR"; however because only a small amount of such stock is issued
and outstanding, it is thinly traded.
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
TITAN COMMON STOCK:
Fiscal year ending December 31, 1998:
1st Quarter.................................................................................... $ 6.81 $ 5.75
2nd Quarter.................................................................................... 8.13 5.81
3rd Quarter (through September 21, 1998)....................................................... 6.56 3.94
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 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, 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
DATE PRECEDING PUBLIC ANNOUNCEMENT
- -------------------------------------------------------------------------------------------------
June 30, 1998 (Closing Price).................................................................... $ 6.00 --
</TABLE>
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<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
TITAN PUBLIC PREFERRED:
Fiscal year ending December 31, 1998:
1st Quarter.................................................................................. $ 13.38 $ 11.81
2nd Quarter.................................................................................. 14.38 13.19
3rd Quarter (through September 21, 1998)..................................................... 14.00 11.00
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 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, 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
DATE PRECEDING PUBLIC ANNOUNCEMENT
- -----------------------------------------------------------------------------------------------
June 30, 1998 (Closing Price).................................................................. $ 13.94 --
</TABLE>
There is no public trading market for Delfin's capital stock.
As of September 21, 1998, there were approximately 3,482 stockholders of
record of Titan Common Stock, approximately 655 stockholders of record of Titan
Public Preferred, and one stockholder of record of Series B Preferred, as shown
on the stock records of Titan.
As of the Record Date, there were 319 shareholders of record of Delfin
Common Stock as shown on the stock records of Delfin.
Titan has never paid any cash dividends on its common stock. Since January
1973, Titan has paid a quarterly dividend of $0.25 per share 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.
On June 30, 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 $6.00 per share and
$13.94 per share, respectively. As of September 21, 1998, the closing prices on
the NYSE for Titan Common Stock and Titan Public Preferred respectively, were
$5.125 per share, and $11.00 per share. 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."
9
<PAGE>
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 in
the period 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 financial data for all periods
presented has not been restated to reflect the June 30, 1998 merger with
Horizons accounted for as a pooling of interests. The selected historical
financial data set forth below with respect to the statements of operations of
Delfin for each of the three years in the period ended September 30, 1997 and
with respect to Delfin's balance sheets at September 30, 1996 and 1997 are
derived from the audited financial statements of Delfin included elsewhere in
this Prospectus/Proxy Statement. The selected historical financial data set
forth below with respect to the statements of operations of Delfin for each of
the two years in the period ended September 30, 1994 and with respect to
Delfin's balance sheets at September 30, 1993, 1994 and 1995 are derived from
the audited financial statements of Delfin not included in this Prospectus/Proxy
Statement.
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>
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- ---------
Revenues...................................................... $ 195,884 $ 155,954 $ 161,231 $ 160,522 $ 182,712
--------- --------- --------- --------- ---------
Cost of revenues.............................................. 153,269 124,477 123,914 122,793 164,825
Selling, general and administrative expense................... 23,574 23,693 25,867 21,978 27,682
Research and development expense.............................. 6,140 3,576 5,113 4,420 2,257
Write-down of assets, investments and environmental
accrual(2).................................................. 6,600 -- -- -- --
Restructuring and other (income) expense...................... -- -- 6,249 (1,200) --
--------- --------- --------- --------- ---------
Total costs and expenses.................................... 189,583 151,746 161,143 147,991 194,764
--------- --------- --------- --------- ---------
Operating profit (loss)....................................... 6,301 4,208 88 12,531 (12,052)
Interest expense.............................................. (5,101) (3,201) (1,353) (1,278) (2,039)
Interest income............................................... 869 639 392 389 197
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle..... 2,069 1,646 (873) 11,642 (13,894)
Income tax provision (benefit)................................ 3,292 221 (540) 3,674 (6,497)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before cumulative
effective of change in accounting........................... (1,223) 1,425 (333) 7,968 (7,397)
Cumulative effect of change in accounting principle........... -- -- -- -- 1,700
Loss from discontinued operation, net of tax.................. (343) (3,642) (1,972) (1,178) --
--------- --------- --------- --------- ---------
Net income (loss)............................................. (1,566) (2,217) (2,305) 6,790 (5,697)
Dividend requirements on preferred stock...................... (875) (803) (695) (695) (695)
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stock $ (2,441) $ (3,020) $ (3,000) $ 6,095 $ (6,392)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share:
Income (loss) from continuing operations...................... $ (0.09) $ 0.03 $ (0.05) $ 0.38 $ (0.37)
Loss from discontinued operation.............................. (0.02) (0.17) (0.10) (0.06) --
--------- --------- --------- --------- ---------
Net income (loss) per common share............................ $ (0.11) $ (0.14) $ (0.15) $ 0.32 $ (0.37)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding........................... 22,230 21,418 19,438 19,042 17,050
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share:
Income (loss) from continuing operations...................... $ (0.09) $ 0.03 $ (0.05) $ 0.38 $ (0.37)
Loss from discontinued operation.............................. (0.02) (0.17) (0.10) (0.06) --
--------- --------- --------- --------- ---------
Net income (loss) per common share............................ $ (0.11) $ (0.14) $ (0.15) $ 0.32 $ (0.37)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding........................... 22,230 21,418 19,438 19,042 17,050
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 10,612 $ 4,751 $ 9,035 $ 8,780 $ 9,465
Investments................................................... 4,499 9,888 5,000 -- --
Working capital............................................... 70,381 59,330 35,873 35,638 33,341
Property and equipment, net................................... 24,432 26,445 29,411 24,862 21,421
Total assets.................................................. 166,227 158,749 126,672 110,889 123,901
Total debt.................................................... 50,764 42,081 16,426 4,052 23,575
Redeemable preferred stock.................................... 3,000 3,000 -- -- --
Stockholders' equity.......................................... 74,900 74,460 65,063 63,400 51,392
</TABLE>
- ------------------------------
(1) During 1993, Titan was involved in a contractual dispute with the 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 $5.7 million net loss for the year.
(2) During 1997, Titan recorded an aggregate $6.6 million charge primarily
related to the write-down of assets and investments and an accrual for
environmental liabilities.
11
<PAGE>
DELFIN SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Revenues................................................... $ 26,631 $ 29,731 $ 27,288 $ 25,144 $ 21,704
Costs and expenses:
Cost of revenues......................................... 22,873 24,856 22,944 20,207 21,129
Selling, general and administrative expense.............. 3,497 4,427 4,879 4,258 189
--------- --------- --------- --------- ---------
Total costs and expenses................................... 26,370 29,283 27,823 24,465 21,318
--------- --------- --------- --------- ---------
Operating profit (loss).................................... 261 448 (535) 679 386
Interest expense, net...................................... (233) (366) (470) (290) --
--------- --------- --------- --------- ---------
Income (loss) before income taxes.......................... 28 82 (1,005) 389 386
Income tax provision (benefit)............................. 58 72 (250) 150 135
--------- --------- --------- --------- ---------
Net income (loss).......................................... $ (30) $ 10 $ (755) $ 239 $ 251
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic net income (loss) per share.......................... $ 0.00 $ 0.00 $ (0.11) $ 0.03 $ 0.04
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares.................................... 7,137 7,053 6,975 6,922 7,003
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted net income (loss) per share........................ $ 0.00 $ 0.00 $ (0.11) $ 0.03 $ 0.03
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares.................................... 7,137 7,304 6,975 7,278 7,416
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 30 $ 105 $ 32 $ 35 $ 12
Working capital............................................ 3,345 3,320 3,374 3,667 3,486
Property and equipment, net................................ 730 719 842 1,113 1,227
Total assets............................................... 9,737 9,635 11,583 12,961 11,467
Total debt................................................. 1,641 1,438 4,061 4,246 3,158
Shareholders' equity....................................... 4,148 4,170 4,104 4,847 4,597
</TABLE>
12
<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 of Titan and Horizons which was consummated on June 30, 1998,
combined with the prospective Merger with Delfin 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,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
PRO FORMA COMBINED STATEMENT OF INCOME DATA:
Revenues................................................................... $ 248,796 $ 215,236 $ 215,010
---------- ---------- ----------
Costs and expenses:
Cost of revenues......................................................... 194,477 169,341 164,789
Selling, general and administrative expense.............................. 31,770 32,234 34,667
Research and development expense......................................... 6,221 3,681 5,162
Write-off of assets, investments and environmental accrual............... 6,600 -- --
Restructuring and other income........................................... -- -- 6,249
---------- ---------- ----------
Total costs and expenses............................................... 239,068 205,256 210,867
---------- ---------- ----------
Operating Profit........................................................... 9,728 9,980 4,143
Interest expense........................................................... (5,856) (4,162) (2,380)
Interest income............................................................ 872 642 403
---------- ---------- ----------
Income from continuing operations before income taxes...................... 4,744 6,460 2,166
Income tax provision....................................................... 4,356 2,091 747
---------- ---------- ----------
Income from continuing operations.......................................... $ 388 $ 4,369 $ 1,419
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share:
Income (loss) per share from continuing operations....................... $ (0.02) $ 0.13 $ 0.03
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares.................................................. 29,205 28,393 26,413
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share:
Income (loss) per share from continuing operations....................... $ (0.02) $ 0.13 $ 0.03
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares.................................................. 29,205 28,393 26,413
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents......................................................................... $ 11,165
Investments....................................................................................... 4,499
Working capital................................................................................... 66,664
Property and equipment, net....................................................................... 25,467
Total assets...................................................................................... 180,617
Total debt........................................................................................ 57,916
Redeemable preferred stock........................................................................ 3,000
Shareholders' equity.............................................................................. 71,841
</TABLE>
13
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain pro forma per share data of Titan
Common Stock and Delfin 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 pro forma combined financial statements of Titan and
Delfin, 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, 1997, 1996 and 1995 have been combined with Horizons' financial
data at January 31, 1998, 1997 and 1996, and Delfin's financial data at
September 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Pro Forma Historical--Titan combined with Horizons:
Net income (loss) per share......................................................... $ (0.26) $ (0.08) $ (0.36)
Book value per share(1,2)........................................................... 2.22
Historical--Delfin:
Net income (loss) per share......................................................... $ 0.00 $ 0.00 $ (0.11)
Book value per share(1,2)........................................................... 0.58
Pro Forma Combined Per Titan Share(2):
Net income (loss) per share......................................................... $ (0.17) $ (0.07) $ (0.34)
Book value per share(1,2)........................................................... 2.09
Equivalent Pro Forma Combined Per Delfin Share(3):
Net income (loss) per share......................................................... $ (0.09) $ (0.04) $ (0.18)
Book value per share(1,2)........................................................... 1.09
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing shareholders'
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 shareholders' 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 Delfin 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 Combined Condensed Financial
Information" and accompanying notes thereto.
(3) The equivalent pro forma combined per Delfin share amounts are calculated by
dividing the pro forma combined per Titan share amounts by the exchange
ratio.
14
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED BY HOLDERS OF DELFIN 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, DELFIN'S 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, the stockholders of Titan and the shareholders of
Delfin 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 Titan
or shareholders of Delfin 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 acquisitions of DBA, Validity, Horizons,
VisiCom or of other potential acquisitions. 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. See "--Recent Acquisitions; Risks Associated with
Acquisition Strategy."
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 balance of the Delfin line of credit with Silicon Valley Bank
as of the Closing and the capitalization of Delfin immediately preceding the
Closing, but depending upon the Titan Stock Price, an aggregate of from
approximately 2,946,000 to approximately 4,153,000 shares of Titan Common Stock
(the "Merger Consideration") will be issued in exchange for the issued and
outstanding shares of Delfin Common Stock. In addition, Titan will assume all
outstanding options to purchase Delfin Common Stock, which would be converted
into options to acquire from approximately 546,200 to 770,000 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 Delfin and Titan, pursuant to Rules 144 and/or 145
under the Securities Act. A more detailed discussion of limitations regarding
affiliates is set forth in this Prospectus/Proxy Statement under the caption
"Terms of the Merger--Related Agreements--Affiliate Agreements." An aggregate of
approximately 23.2% of the shares issued in the
15
<PAGE>
Merger will be beneficially owned by persons who may be deemed to be affiliates
of Delfin 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 of
Titan.
Upon completion of the Merger, Titan will have outstanding an aggregate of
from approximately 35,233,200 to 36,216,500 shares of Titan Common Stock,
assuming no exercise of outstanding options and 694,872 shares of Titan Public
Preferred. Assuming that 3,325,000 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 approximately 88.94% of the outstanding Titan Common
Stock. After the Merger, former Delfin shareholders in the aggregate will
control approximately 11.06% of Titan Common Stock.
In addition, promptly following the Effective Time, Titan will file a Form
S-8 registering a total of up to approximately 770,000 shares of Titan Common
Stock issuable as a result of the exercise of Titan Exchange Options. 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. Thus, the Titan Exchange Options may further dilute
the current Titan stockholders' ownership of Titan Common Stock.
POTENTIAL ADJUSTMENTS TO CONSIDERATION TO BE RECEIVED BY HOLDERS OF DELFIN
COMMON STOCK
The dollar value of the Titan Common Stock actually received in the Merger
will vary depending upon: (i) the amount outstanding under Delfin's line of
credit with Silicon Valley Bank as of the Closing, (ii) the Titan Stock Price,
subject to a collar below $6.00 or above $8.00, and (iii) the number of shares
of Delfin Common Stock outstanding immediately prior to the Closing Date. In the
event the Titan Stock Price on the NYSE over the twenty trading days prior to
the date of the Merger is less than $6.00 then $6.00 will be used to determine
the number of shares of Titan Common Stock to be received by Delfin shareholders
in the Merger. With such an application of the collar, the Exchange Ratio would
be calculated using a higher dollar value for Titan Common Stock then Delfin
shareholders may be able to realize in the marketplace. There can be no
assurance that the Titan Stock Price will be $6.00 or more. 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. If the Titan Stock Price is below
$5.00 or above $9.00 then the transaction contemplated by the Merger Agreement
may not be consummated or may be renegotiated. Holders of Delfin Common Stock
are therefore strongly urged to obtain current market quotations for Titan
Common Stock prior to the Delfin Meeting. Recorded information with respect to
day-to-day trading prices of Titan Common Stock may be obtained until the Delfin
Meeting by calling (800) 382-8492.
Although the parties expect holders of Delfin Common Stock will be entitled
to from approximately $2.22 to approximately $2.81 of Titan Common Stock per
share of Delfin Common Stock the amount could decrease if the Line of Credit
Deduction exceeds $3.3 million. This decrease would result because an increase
in the size of the Line of Credit Deduction directly reduces the Merger
Consideration. The Delfin line of credit with Silicon Valley Bank allows
borrowing up to a maximum of $4.3 million.
RISKS RELATED TO TITAN'S AND DELFIN'S 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
16
<PAGE>
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 effectively eliminate Titan's ability to
complete an initial public offering of a minority interest of any of its present
or future subsidiaries. In particular, in June 1998 Titan announced that it was
withdrawing its planned spin-out of Linkabit Wireless as a result of adverse
market conditions. The failure of a planned spin-out 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.
RECENT ACQUISITIONS; RISKS ASSOCIATED WITH ACQUISITION STRATEGY
Titan has adopted a strategy of acquiring complementary businesses or
technologies that could expand its existing core businesses or constitute new
business. In February 1998, Titan acquired DBA in a stock-for-stock merger, in
March 1998 Titan acquired Validity in a cash purchase, in June 1998 Titan
acquired Horizons in a stock-for-stock merger, and in August 1998, Titan
acquired VisiCom in a stock-for-stock merger. 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 acquisitions of DBA,
Validity, Horizons and VisiCom and the proposed acquisition of Delfin 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 value of
the businesses of DBA, Validity, Horizons, Delfin or VisiCom or that the
acquisitions by Titan of DBA, Validity, Horizons, Delfin or VisiCom 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.
17
<PAGE>
These risks are discussed under the caption "--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, Validity, Horizons, Delfin, VisiCom 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,
Validity, Horizons, Delfin, VisiCom 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 Delfin are dependent
upon continued funding of United States 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, United States government business represented
approximately 78% and 75% of Titan's revenues, respectively; and for the fiscal
years ended September 30, 1996 and 1997, United States government business
represented 92% and 91% of Delfin's revenues, respectively. United States
defense budgets and the budgets of other government agencies have been declining
in real terms since the mid-1980's, and may continue to do so in the future.
Further significant reductions in the funding of United States government
agencies or in the funding areas targeted by Titan or Delfin could materially
and adversely affect Titan's and Delfin's business, results of operations and
financial condition.
Titan's and Delfin's contracts with the United States 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 Delfin 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 Delfin 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
United States government. As part of the audit process, the government audit
agency verifies that all charges made by a contractor against a contract are
legitimate and appropriate. Audits may result in recalculation of contract
revenues and non-reimbursement of some contract costs and fees. There can be no
assurance that any audits of contract-related costs and fees will not result in
material adjustments to Titan's and Delfin's revenues. In addition, United
States government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds on a fiscal
year basis even though contract performance may take several years.
Consequently, at the outset of a major program, the contract is usually
incrementally funded. 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 Delfin. Such failures could adversely affect
the value of the shares of each of Titan and Delfin, and in the case of Delfin's
shareholders in the event the Merger did not occur, could delay or prevent
shareholder liquidity through the public market or another potential acquisition
transaction.
FLUCTUATIONS IN RESULTS OF OPERATIONS
Titan and Delfin have experienced and expect to continue to experience
significant fluctuations in quarterly and annual revenues, gross margins and
operating results. Factors that have contributed or may
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contribute in the future to these fluctuations include, among others: (i)
varying demand for Titan's and Delfin'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 or Delfin's products, (ii) announcements by
Titan or Delfin or 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 or Delfin's products, (iii) the timing and
amount of revenues resulting from the complex and lengthy procurement process of
Titan's and Delfin's customers or sales cycles for Titan's and Delfin's
products, (iv) the delay, rescheduling or cancellation of purchase orders from a
significant customer of any of Titan's or Delfin's core businesses, (v) the
failure by Titan or Delfin 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
or Delfin'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 and Delfin to forecast or control, and any of these or other
factors could materially adversely affect Titan's and Delfin's business,
financial condition and results of operations from period to period. As a
result, Titan and Delfin believe that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. The above factors could also adversely affect the value of Titan
capital stock through the public market, including the Titan Common Stock that
will be issued to Delfin's shareholders in the Merger.
RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE
The industries in which Titan and Delfin compete are characterized by rapid
and continuous technological change. Future technological changes in these
industries or the availability of new products could render Titan's and Delfin's
products noncompetitive or obsolete. Titan's and Delfin's success will depend in
part upon the success of new product introductions by Titan and Delfin, 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 or Delfin 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 and Delfin's products noncompetitive
or obsolete. Titan and Delfin 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 or Delfin's products after
commencement of deliveries, which could result in the loss of or delay in market
acceptance. Any failure by Titan or Delfin 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 or Delfin's products noncompetitive or obsolete could have a
material adverse effect on Titan's or Delfin's business, financial condition and
results of operations, and could adversely affect 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
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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.
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. No other segment
of Titan's business engages in a significant amount of business in the Pacific
Rim. Titan generally denominates its foreign contracts in United States dollars.
As a result, the recent decline in the value of certain foreign currencies
relative to the United States dollar may result in consumers in those countries
having less buying power in general and could make certain of Titan's
communications products less affordable and thus reduce the demand for such
products. 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 communications 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 one or more foreign currencies
relative to the United States dollar will not have a material adverse effect on
Titan's business, financial condition, results of operations and share value.
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. Moreover, the risks of engaging in business in Pacific Rim
countries, and in particular Indonesia, have recently increased due to
instability in their governments. Certain of Titan's customer purchase
agreements are governed by foreign laws, which may differ significantly from
United States 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. Further, public awareness of the risks
associated with international operations may increase the volatility of the
market price of Titan capital stock. This potential of volatility has been
evidenced recently by stock market fluctuations attributed to recent
developments in Asia. In addition, Titan is subject to the Foreign Corrupt
Practices Act (the "FCPA"), which may place Titan at a competitive
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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.
Delfin performs a small portion of its business internationally through a
network of commissioned sales representatives. As a result of the recent decline
in the value of certain foreign currencies relative to the United States dollar,
those countries have less buying power which in turn makes certain of Delfin's
products less affordable and reduces the demand for such products. Additional
risks inherent in Delfin's international business activities include 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, longer payment cycles and the potential for difficulty
in accounts receivable collection. Purchase decisions involving foreign
governments are lengthy and may involve unique government regulations or
purchase terms that increase risk to the company. For example, acceptance may be
a lengthy process with the result of delayed final payment and increased
warranty exposure to the company. In addition, Delfin is subject to the FCPA,
which may place Delfin at a competitive disadvantage to foreign companies, which
are not subject to the FCPA. Delfin generally denominates its foreign contracts
in United States dollars and receives letters of credit. There can be no
assurance that any of these factors will not have a material adverse effect on
Delfin's business, financial condition and results of operations.
COMPETITION
The industries and markets in which Titan and Delfin operate are highly
competitive, and Titan and Delfin expect that competition will increase in these
markets. Titan's and Delfin's 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 Delfin 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 Delfin. 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 Delfin. 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
profit margins and loss of market share, any of which could have a material
adverse effect on Titan's or Delfin's business, financial condition and results
of operations. There can be no assurance that Titan or Delfin 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 Delfin's
business, financial condition and results of operations. Competition pressures
could also suppress the market price of Titan capital stock, and, in the case of
Delfin's shareholders in the event the Merger does not occur, could delay or
prevent shareholder 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 satellites,
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which efforts are geared toward increasing use of both companies' products. 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 Navy, with respect to
Titan's Mini-DAMA product, and the Federal Aviation Administration (the "FAA"),
with respect to an Intranet-based Executive Information System, represent
significant customers of Titan's Communications Systems and Software Systems
segments, respectively. In the case of Delfin, the U.S. Special Operations
Command represents a significant portion of the Signal Products Division. 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 or on Titan as a whole.
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. Such regulations could have a material adverse
effect on Titan's and Delfin's business, financial condition, results of
operations and share value. 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. Changes in, or the failure by Titan or Delfin,
or their strategic partners or customers, to comply with, applicable domestic
and international regulations could have a material adverse effect on Titan's
and Delfin's business, financial condition, results of operations and share
value.
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.
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DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
Titan's internal manufacturing capacity is limited. Therefore, Titan and
Delfin utilize contract manufacturers to produce several products or components
thereof. Certain components and services necessary for the manufacture of
certain of Titan's and Delfin's products are obtained from a sole supplier or a
limited group of suppliers in connection with specific contracts; Titan and
Delfin do not carry significant inventories or have long-term or exclusive
supply contracts with vendors for such supply. Titan's and Delfin'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 and Delfin were
to change certain of their vendors or qualify additional vendors for such
components or products, Titan and Delfin could be required to negotiate
different 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 or Delfin are 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.
Such delays could damage relationships with current or prospective customers and
have a material adverse effect on Titan's and Delfin's business, financial
condition and results of operations. In such case the market value of Titan's
capital stock could decline.
LIMITED INTELLECTUAL PROPERTY PROTECTION; DEPENDENCE ON PROPRIETARY TECHNOLOGY
Titan's and Delfin's 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 Delfin
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 Delfin 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 Delfin to protect its intellectual property will be
adequate to deter misappropriation of Titan's or Delfin's technology or to
prevent others from independently developing or acquiring substantially
equivalent technologies or otherwise gaining access to Titan's or Delfin's
proprietary and confidential technological expertise or disclosing such
technologies or that Titan or Delfin 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
intellectual property rights to the same extent as do the laws of the United
States. Any failure of Titan or Delfin to protect its proprietary information
could have a material adverse effect on Titan's or Delfin's business, financial
condition and results of operations.
Litigation may be necessary to enforce Titan's or Delfin's intellectual
property rights, to determine the validity and scope of the proprietary rights
of others or to defend against claims of infringement or misappropriation. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on Titan's or Delfin's business, financial
condition and results of operations. There can be no assurance that Titan's or
Delfin's products do not infringe the intellectual property rights of others or
that one or more parties will not make claims that Titan's or Delfin's 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
Delfin, Titan or Delfin 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 Delfin decide to litigate
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such claims, such litigation could be extremely expensive and time consuming and
could materially adversely affect Titan's or Delfin's 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 Delfin would withstand claims brought by others in such litigation. If
Titan's or Delfin's products are found to infringe upon the rights of third
parties, Titan or Delfin 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 Delfin 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 and a significant portion of Delfin's revenue was derived
from fixed-price contracts in 1997. Titan and Delfin assume 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 and Delfin's business 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 or Delfin'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 and
Delfin management believe that they adequately estimate 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 capital
stock may be adversely affected.
RELIANCE ON KEY PERSONNEL
Each of Titan's and Delfin's 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 Delfin's classified work and computer
programmers proficient in the C++ JAVA language 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 Delfin's business, financial
condition and results of operations. Titan's and Delfin's key personnel are
generally not subject to employment or noncompetition agreements. Competition
for such personnel from 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. There can be no assurance that Titan or Delfin will be
successful in hiring or retaining such key personnel. See "--Ability to
Implement Spin-Out Strategy."
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 this "Risk Factors" section, could cause the price of
Titan Common Stock to fluctuate, perhaps substantially. In addition, in recent
years the stock market in
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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. Delfin shareholders 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 has begun implementation of the
Year 2000 project during 1998 with completion estimated to occur in the middle
of 1999, 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 exact 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.
Delfin has assessed that most of its computer systems are Year 2000
compliant. Those systems that require modification to process dates beyond
December 31, 1999 will be upgraded by the end of 1998. The upgrades are covered
under an existing maintenance and support contract with the software company.
However, there can be no assurance that the upgrades will be completed on a
timely basis or that additional costs of upgrades will not be incurred.
Titan and Delfin plan to maintain communications with all of their
significant suppliers and large customers to determine the extent to which Titan
and Delfin are 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 a failure to convert by another company or a
conversion that is incompatible with Titan's or Delfin's systems would not have
a material adverse effect on Titan and Delfin or their business, financial
condition or results of operations.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS; STOCKHOLDER RIGHTS PLAN
As of September 21, 1998, there were 694,872 shares of Titan Public
Preferred issued and outstanding. Such Preferred Stock entitles the holders
thereof to rights not available to holders of Titan Common Stock. Certain rights
of the existing Preferred Stock are described in the section of the
Prospectus/Proxy
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Statement entitled "Comparison of Rights of Titan Stockholders and Delfin
Shareholders--Capital Stock." Furthermore, the Board of Directors of Titan may
issue additional shares of Preferred Stock, including shares of new classes 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.
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 DELFIN MEETING
DATE, TIME AND PLACE OF MEETING
The Delfin Meeting will be held on October 23, 1998 at 11:00 a.m., local
time, at the corporate headquarters of Delfin, located at 3000 Patrick Henry
Drive, Santa Clara, California. Delfin intends to mail this Prospectus/Proxy
Statement on or about September 24, 1998 to all Delfin shareholders entitled to
vote at the Delfin Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only shareholders of record at the close of business on the Record Date are
entitled to notice of and to vote at the Delfin Meeting. As of the Record Date,
there were 7,221,484 shares of Delfin capital stock outstanding and entitled to
vote, held of record by 319 shareholders. Each Delfin shareholder is entitled to
one vote for each share held of Delfin Common Stock.
VOTING OF PROXIES
The Delfin proxy accompanying this Prospectus/Proxy Statement is solicited
on behalf of the Delfin Board for use at the Delfin Meeting and at any
adjournment or postponement thereof. Delfin shareholders 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 Delfin 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 Delfin
shareholders, as recommended by the Delfin Board, as indicated herein. The
Delfin Board is not currently aware of any business to be brought before the
Delfin Meeting other than the specific proposal referred to in this
Prospectus/Proxy Statement and specified in the accompanying notice of the
Delfin Meeting. As to any other business that may properly come before the
Delfin 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.
REVOCABILITY OF PROXIES
A Delfin shareholder who has given a proxy may revoke it at any time before
it is exercised at the Delfin Meeting by (i) delivering to the Secretary of
Delfin (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 Delfin Meeting or (iii) attending the Delfin
Meeting and voting in person (although attendance at the Delfin Meeting will
not, by itself, revoke a proxy).
SHAREHOLDER VOTE REQUIRED; QUORUM; VOTING AGREEMENTS
The affirmative vote of the holders of a majority of the outstanding shares
of Delfin Common Stock, as of the Record Date, is required to approve the Merger
Proposal. As a group, the directors and executive officers of Delfin and their
respective affiliates beneficially owned 1,901,470 shares of Common Stock, or
approximately 23.2% of the voting power of Delfin capital stock. See "Ownership
of Delfin's Securities."
The presence, in person or by proxy, of at least a majority of the
outstanding shares of the Delfin Common Stock 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 Affiliated Shareholders of Delfin owning in the aggregate
approximately 53% of the outstanding shares of Delfin Common Stock have each
agreed to vote or direct the vote of all Delfin capital stock
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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
Delfin will bear the cost of the solicitation of votes of Delfin
shareholders, including printing, assembly and mailing of this Prospectus/Proxy
Statement, the proxy and any additional information furnished to its
shareholders. Original solicitation of proxies by mail may be supplemented by
telephone, telecopier, letter or personal solicitation by directors, officers or
other employees of Delfin.
BOARD RECOMMENDATION
THE DELFIN BOARD HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF DELFIN AND ITS SHAREHOLDERS 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 DELFIN'S 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.
In mid-February 1998, Dr. Gene Ray, Titan's President and Chief Executive
Officer, contacted, by telephone, Mr. Mellon (Bud) C. Baird, Delfin's Chairman,
Chief Executive Officer and President, to discuss the possibility of Titan's
acquisition of Delfin.
On February 23, 1998, Dr. Ray and Mr. Baird met at Titan's Corporate Office
in San Diego and discussed the possibility of a business combination.
On March 19, 1998, Mr. Baird reviewed Titan's interest in Delfin during the
regular Delfin board meeting.
On April 8, 1998, Titan and Delfin entered into a confidentiality agreement
and Delfin provided certain financial information to Titan.
On May 1, 1998, Dr. Ray and Mr. Eric DeMarco, Titan's Senior Vice President
and Chief Financial Officer, met with Mr. Baird and Byron P. Rovegno, Delfin's
Vice President and Chief Financial Officer, and discussed the operations of
Delfin and Titan and the possibility of a business combination between Delfin
and Titan. Informal terms were presented by Titan that were taken under
consideration by Delfin.
On May 19 and 20, 1998, Messrs. Baird and Rovegno met Messrs. Ray and
DeMarco at Titan to negotiate the terms of a possible business combination.
Financial and business risks and opportunities were discussed in detail.
During June 1998, representatives of Titan conducted a due diligence
investigation of Delfin; Titan's legal counsel prepared a draft merger
agreement. Delfin's and Titan's legal counsel engaged in negotiations with
respect to the terms of the merger agreement. Delfin also conducted a due
diligence review of Titan.
In early 1998, in regular and special meetings, the Titan Board discussed
the general terms of the proposed acquisition of Delfin, including various
financial aspects of the proposed acquisition. The Titan Board authorized the
officers of Titan to proceed with discussions with Delfin.
On June 26, 1998, at a special 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. Prior to
the meeting, current 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 Delfin, 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
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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's Reasons for the Merger."
On June 30, 1998, the Delfin Board met to consider the final proposed terms
of the merger. All of the members of the Delfin 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 Delfin Common Stock were
discussed. Delfin's officers and employees made presentations to the Delfin
Board members on their due diligence investigation with respect to Titan, and
Delfin's legal counsel made a presentation to the Delfin Board with respect to
certain responsibilities of the directors in connection with considering and
acting upon a merger proposal. Dr. Ray met with the Delfin Board to discuss the
proposed business combination of Titan and Delfin. Dr. Ray made a presentation
to the Delfin Board concerning Titan, including Titan's background, products,
and financial performance over the past five years and current financial
condition. Dr. Ray also commented and answered questions on the terms and
certain advantages and disadvantages of the proposed business combination. Then
the Delfin Board met privately and discussed the presentation. A final draft
Merger Agreement was considered and the Delfin Board (i) approved Delfin's
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,
Delfin's shareholders; (iii) approved the transactions contemplated thereby; and
(iv) resolved to recommend that the holders of the Delfin Common Stock adopt the
Merger Agreement and the transactions contemplated therein, including the
Merger. See "--Delfin's Reasons for the Merger."
Also on June 30, 1998, the Merger Agreement was executed, and the parties
issued a press release announcing the execution thereof on July 1, 1998, prior
to the opening of the NYSE trading session.
TITAN'S 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 Delfin's 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 management's of
Titan and Delfin; (iv) potential 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 Delfin.
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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 operating
efficiencies sufficient 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, which will be expensed in the periods
in which the costs will be incurred, which is expected to be in the quarter
ended December 31, 1998 (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 Delfin, including Delfin's
ability to retain key personnel such as Mellon C. Baird, 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. Individual directors may have given differing weights to different
factors.
DELFIN'S REASONS FOR THE MERGER
As part of its review, the Delfin Board considered, among other things, (i)
information concerning the financial performance, condition, business operations
and prospects of each of Delfin and Titan, (ii) the proposed terms and structure
of the Merger, (iii) the marketability and value of Delfin Common Stock and
Titan Common Stock, (iv) the terms of the Merger Agreement, including the
parties' mutual representations, warranties, covenants and the conditions to
their respective obligations, (v) the alternatives to the Merger (including
discussions held with other companies) and (vi) the business advantages expected
to result from the combination of Delfin and Titan.
The Delfin board believes that the Merger is fair to, and in the best
interests of, Delfin shareholders for the following reasons:
GROWTH POTENTIAL. The Delfin Board believes that the Merger will constitute
a strategic combination, accelerating the ability of Delfin 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 Delfin
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 Delfin outweighed the risks.
SHAREHOLDER VALUE AND LIQUIDITY. The Delfin Board believes that the
consideration to be received in the Merger by the Delfin shareholders is fair to
the Delfin shareholders 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 Delfin shareholders not currently
available to them, and such liquidity will enable them to realize the market
value of their shareholdings.
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ALTERNATIVE TRANSACTIONS. The Delfin Board considered that the Merger
Agreement provides that Delfin may not solicit any alternate transaction. The
Delfin Board reviewed the status of other acquisition discussions and expressed
the view that other acquisition proposals were speculative at this time.
Additionally, the Delfin Board noted that such alternatives could be more
disruptive to Delfin's established operations and, thus, less likely to achieve
the strategic values desired. The Delfin Board noted that the Merger Agreement
provides that Delfin may furnish information to and enter into discussions or
negotiations with, any party that makes an unsolicited bona fide written
proposal to acquire Delfin or substantially all of its assets on terms which, in
an exercise of the Delfin Board's fiduciary duty after the consideration of
advice from Delfin's legal advisors, a majority of Delfin's directors determines
is likely to be more beneficial to Delfin shareholders than the Merger. The
Delfin Board also noted that the Merger Agreement provides for the payment of a
termination fee of 10% of the Total Acquisition Price (as defined herein) if
Delfin 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 Delfin 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 benefits of the Merger to Delfin
outweighed the risks.
In considering the Merger, the Delfin 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 sought 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 Delfin. Notwithstanding
these risks, the Delfin Board concluded that the positive factors described
above outweighed the negative considerations.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement, the Delfin 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 Delfin Board has determined that the
Merger is advisable and in the best interests of Delfin and its shareholders and
has recommended a vote for approval of the Merger Proposal.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Delfin Board with respect to the
Merger Proposal, holders of shares of Delfin Common Stock should be aware that
certain directors and executive officers of Delfin have certain interests in the
Merger that are in addition to the interests of holders of Delfin Common Stock
generally. The Delfin Board has considered these interests, among other matters,
in approving the Merger Agreement and the Merger.
REGULATORY MATTERS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger could not be consummated until notifications were given and certain
information was furnished to the FTC and the Antitrust Division and specified
waiting period requirements were satisfied. Titan and Delfin filed notification
and report forms under the HSR Act with the FTC and Antitrust Division on July
23, 1998. These filings commenced a 30-day waiting period under the HSR Act,
which has now run.
Notwithstanding the expiration of the waiting period relating to filings
with the FTC and the Antitrust Division, 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
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assets of Titan or Delfin or their subsidiaries or seeking to impose conditions
on Titan with respect to the business operations of the combined companies.
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 Delfin 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 Delfin
Common Stock. This discussion assumes that holders of shares of Delfin Common
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 Delfin's shareholders.
Delfin shareholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular Delfin
shareholders in light of their particular circumstances, such as shareholders
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 the exercise of stock options or through 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 a condition to the Closing that GCWF, counsel to Titan, issue an
opinion to Titan, and Brobeck, counsel to Delfin, issue an opinion to Delfin,
that the Merger will qualify as a reorganization (a "Reorganization") for
federal income tax purposes within the meaning of Section 368(a) of the Code
(collectively, the "Tax Opinions"). A discussion of the issuance of the Tax
Opinions as a condition to Closing is set forth under "Terms of the
Merger--Conditions to the Merger." The Tax 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 Delfin; (iii) will be based on the assumption that the
Merger will be consummated in accordance with the terms of the Merger Agreement;
and (iv) will be subject to the limitations discussed below. Neither Titan nor
Delfin 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, qualifications and assumptions referred to
herein and in the Tax Opinions, if the Merger qualifies as a Reorganization, the
following United States federal income tax consequences will generally result:
- Titan, Merger Sub and Delfin each will be considered to be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.
- No gain or loss will be recognized for federal income tax purposes by the
holders of Delfin Common Stock upon the receipt of Titan Common Stock
solely in exchange for such Delfin
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Common Stock in the Merger except to the extent that cash, if any, is
received in lieu of fractional shares or as a result of the exercise of
dissenters' rights.
- The aggregate tax basis of the Titan Common Stock so received by Delfin
shareholders in the Merger will be the same as the aggregate tax basis of
the Delfin Common Stock surrendered in exchange therefor, reduced by any
basis attributable to a fractional share of Titan Common Stock for which
the shareholder receives cash.
- The holding period of the Titan Common Stock so received by each Delfin
shareholder in the Merger will include the holding period of the shares of
Delfin Common Stock surrendered in exchange therefor, provided the Delfin
Common Stock was held as a capital asset by the Delfin shareholder.
- Cash payments received by holders of Delfin Common 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 Delfin shareholder receiving such cash will recognize gain or
loss for federal income tax purposes 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 the Delfin Common Stock was held as a capital
asset by the Delfin shareholder.
- A holder of Delfin Common Stock who exercises dissenter's rights with
respect to a share of Delfin Common 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 shareholder'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 dissenter's
rights generally will not be a Dividend Equivalent Transaction if, as a
result of such exercise, the shareholder exercising the dissenter's 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.
A successful IRS challenge to the Reorganization status of the Merger could
result in significant adverse tax consequences to Delfin shareholders. A Delfin
shareholder would recognize gain or loss with respect to each share of Delfin
Common Stock surrendered equal to the difference between the shareholder'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 shareholder's
aggregate basis in the Titan Common Stock so received would equal its fair
market value; the shareholder'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 Delfin
Common Stock surrendered. In addition, to the extent that a Delfin shareholder
were treated as receiving (directly or indirectly) consideration other than
Titan Common Stock in exchange for such shareholder's Delfin Common Stock, gain,
if any, would have to be recognized.
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Certain noncorporate Delfin shareholders 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 shareholder 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 shareholder who fails to provide the correct TIN on Form
W-9 may be subject to a $50 penalty imposed by the IRS.
Each Delfin shareholder will be required to retain records and file with
such holder's United States 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. HOLDERS OF
DELFIN COMMON 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 Delfin as a "pooling of
interests" pursuant to generally accepted accounting principles. Titan
management and Delfin management have concluded that no conditions exist
relating to Delfin that would preclude Titan from accounting for the Merger as a
pooling of interests. It is a condition precedent to Titan's obligation to
consummate the Merger that Titan receive letters from each of Arthur Andersen
LLP and Ernst & Young LLP, dated as of the Closing Date, concurring with the
conclusions of Titan management and Delfin management that the Merger may be
accounted for as a "pooling of interests" in accordance with Generally Accepted
Accounting Principles and certain specified accounting conventions. Section
7.5(e) of the Merger Agreement provides further information regarding this
condition.
DISSENTERS' RIGHTS OF DELFIN SHAREHOLDERS
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER THE CALIFORNIA CORPORATION
CODE (THE "CCC") IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 1300 ET
SEQ. OF THE CCC, THE COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS APPENDIX B.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN SECTION 1300 ET SEQ.
OF THE CCC MAY RESULT IN THE LOSS, TERMINATION OR WAIVER OF DISSENTERS' RIGHTS.
A DELFIN SHAREHOLDER 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
DISSENTER'S RIGHTS. A DELFIN SHAREHOLDER WHO DESIRES TO EXERCISE DISSENTER'S
RIGHTS MUST ALSO SUBMIT A WRITTEN DEMAND FOR APPRAISAL OF HIS OR HER SHARES
PRIOR TO THE DATE OF THE DELFIN MEETING.
DISSENTERS' RIGHTS. Holders of Delfin capital stock may have certain
dissenters' rights if their shares qualify as "dissenting shares" under
California law. These rights may require Delfin to purchase any such "dissenting
shares" from Delfin shareholders for cash at fair market value as of June 30,
1998. Delfin shareholders must strictly comply with applicable California law to
exercise their dissenters' rights. A copy of the pertinent statutory provisions
are attached to this Prospectus/Proxy Statement as Appendix B. See "Approval of
the Merger and Related Transactions--Dissenters' Rights of Delfin Shareholders."
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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 Delfin.
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 shareholders of Delfin are urged to read
the Merger Agreement in its entirety.
EFFECTIVE TIME
It is anticipated that the Merger will be consummated on or promptly
following the date of the Delfin Meeting, or such other date as the parties may
otherwise agree, but in no event later than the second business day following
the satisfaction of all conditions to the merger. The Merger will become
effective on the date the Certificate of Merger is duly filed with the
California Secretary of State (the "Effective Time"). At the Effective Time,
Titan Sub will merge with and into Delfin, with the result that Delfin will be
the Surviving Corporation in the Merger and will be wholly-owned by Titan. As
described below, the shareholders of Delfin will become shareholders of Titan,
and their rights will be governed by the Titan Certificate and the Titan Bylaws.
See "Comparison of Rights of Titan Stockholders and Delfin Shareholders."
MANNER AND BASIS FOR CONVERTING SHARES
EXCHANGE OF STOCK. At the Effective Time, each outstanding share of Delfin
Common Stock will be converted into the right to receive an amount of Titan
Common Stock to be determined based upon a formula. Certain components of the
formula will be indeterminable or variable until the date of the closing of the
Merger is determined. As a result, the exact value of the shares of Titan Common
Stock to be received by Delfin's shareholders in the Merger will not be known at
the time of the Delfin Meeting. The value of Titan Common Stock which Delfin
shareholders will receive in the Merger will depend upon the variables used to
determine the Exchange Ratio and the market price of such stock when it is sold.
The Exchange Ratio (the number of shares of Titan Common Stock to be
received for each share of Delfin Common Stock) will equal the amount obtained
by subtracting the unpaid principal and accrued interest owed by Delfin on its
line of credit with Silicon Valley Bank as of the Closing from $22,500,000 (such
difference being the "Total Acquisition Price") and dividing the result by the
product of (a) the aggregate number of outstanding shares of Delfin Common
Stock, and (b) the Titan Stock Price. The numerator of this formula would be
$19,950,000 based upon an estimated Line of Credit Deduction of $2,550,000. The
denominator of the Exchange Ratio would be approximately $43,328,904 assuming
(i) the $5.125 closing price of Titan Common Stock on the NYSE for the Record
Date were the Titan Stock Price and (ii) the aggregate number of shares of
Delfin Common Stock issued and outstanding on the Record Date was unchanged on
the date immediately preceding the Closing. Based upon the above assumptions,
each outstanding share of Delfin Common Stock would be converted into the right
to receive approximately $2.36 worth of Titan Common Stock. Under the same
assumptions, the aggregate value of the Titan Common Stock issued to Delfin
shareholders would be approximately $17,040,625. There can be no assurances that
the Line of Credit Deduction, the Titan Stock Price, or the number of
outstanding shares of Delfin Common Stock will equal such assumed figures.
Variations in the Line of Credit Deduction or the Titan Stock Price could
substantially alter the Exchange Ratio.
Under the terms of the Merger Agreement, the Titan Stock Price will be
determined based upon the average closing price of Titan Common Stock over the
twenty trading days prior to consummation of the Merger, subject to a minimum
amount of $6.00 and a maximum amount of $8.00. The concept of such a
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minimum and maximum price is commonly known as a "collar." The potential
adjustment to the consideration to be paid to Delfin shareholders resulting from
the collar could be material to the parties and to the Delfin shareholders,
because an adjustment would result in an increase or decrease, as applicable, in
both the per share consideration and the aggregate consideration to be received
by the Delfin shareholders. In particular, (i) if the Titan Stock Price is below
$6.00 it will be treated as if it was $6.00 exactly, which will result in Delfin
shareholders receiving stock in the Merger with an actual value less than its
attributed value, and (ii) if the Titan Stock Price is above $8.00 it will be
treated as if it was $8.00 exactly, which will result in Delfin shareholders
receiving stock in the Merger with an actual value greater than its attributed
value. No assurances can be given regarding the Titan Stock Price. If the Titan
Stock Price is less than $5.00, Delfin may, but has no obligation to effect the
Merger. If the Titan Stock Price is more than $9.00, Titan may, but has no
obligation to effect the Merger. Delfin shareholders are urged to review Section
1.5 of the Merger Agreement for further information as to how the consideration
to be received by Delfin shareholders will be determined at the time of the
Merger. Delfin shareholders should also refer to "Risk Factors--Risks Related to
the Merger".
At the Effective Time, all options to purchase Delfin Common Stock then
outstanding under Delfin's 1988 and 1990 Stock Option Plans (the "Delfin Option
Plans") (each a "Delfin Option" and, collectively, the "Delfin Options") will be
assumed by Titan. All outstanding Delfin options would be converted into options
to acquire from approximately 546,200 to 770,000 additional shares of Titan
Common Stock, based upon the above assumptions. 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
Corporation. Each certificate evidencing ownership of shares of Titan Sub Common
Stock will evidence ownership of such shares of capital stock of the Surviving
Corporation.
Promptly after the Effective Time, Titan, acting through the Exchange Agent,
will deliver a letter of transmittal 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 Delfin Common Stock. The letter
of transmittal may 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 DELFIN COMMON 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 Delfin shareholder 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
Titan Stock Price. 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 Delfin will remain as the Surviving Corporation.
Pursuant to the Merger Agreement, the Articles of Incorporation and the
Bylaws of Delfin immediately prior to the Effective Time will be the Articles of
Incorporation and the Bylaws of the Surviving Corporation. At the Effective
Time, the officers of Delfin will become the officers of the Surviving
Corporation; the directors of the Surviving Corporation will be Mellon C. Baird,
Eric DeMarco, Gene W. Ray and J.S. Webb. Mellon C. Baird who is currently acting
as interim President of Titan Technologies and Information Systems Corporation,
a wholly owned subsidiary of Titan, will become president of such subsidiary.
There will be no change in the current Titan Board and officers of Titan as a
result of the Merger.
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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. These risks are more fully set forth in "Risk
Factors--Integration of Operations".
TREATMENT OF EMPLOYEE EQUITY BENEFIT PLANS
STOCK OPTIONS. As of the Effective Time, each Delfin Option, whether or not
exercisable, will be assumed by Titan 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 issued (if applicable) and the stock option agreement by which it is
evidenced. From and after the Effective Time, (i) each Delfin Option will be or
become exercisable for Titan Common Stock rather than Delfin Common Stock, (ii)
the number of shares of Titan Common Stock subject to each Delfin Option shall
be equal to the number of shares of Delfin Common Stock subject to such option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounding down to the nearest whole share, (iii) the per share exercise price
under each Delfin Option shall be adjusted by dividing the per share exercise
price under such option by the Exchange Ratio and rounding up to the nearest
cent, and (iv) any restriction on the exercise of any such option shall continue
in full force and effect and the term, exercisability, vesting schedule and
other provisions of each such option shall otherwise remain unchanged.
FORM S-8 FILING. Titan will file with the Commission a registration
statement on Form S-8, promptly following the Effective Time to register shares
of Titan Common Stock issuable as the result of the assumption of the Delfin
Options.
STOCK OWNERSHIP FOLLOWING THE MERGER
Depending upon the Exchange Ratio, a range of from approximately 2,946,000
to 4,153,000 shares of Titan Common Stock will be issued in the Merger and Titan
will assume options to acquire from approximately 546,200 to 770,000 additional
shares of Delfin Common Stock. Based upon the number of shares of Titan Common
Stock issued and outstanding as of September 21, 1998, and after giving effect
to the issuance of Titan Common Stock in the Merger and the exercise of all
options to purchase Delfin Common Stock assumed by Titan, the former holders of
Delfin Common Stock and options to purchase Delfin Common Stock would hold, and
have voting power with respect to, approximately 11.06% of the total issued and
outstanding Titan Common Stock, or approximately 10.99% of the total voting
power of the capital stock of Titan. The foregoing numbers of shares and
percentages are subject to change to reflect any changes in the capitalization
of either Titan or Delfin subsequent to the dates indicated and prior to the
Effective Time. There can be no assurance as to the actual capitalization of
Titan or Delfin as of the Effective Time or of Titan at any time following the
Effective Time. For a discussion of the rights of
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holders of Titan Common Stock to receive dividends, see "Comparison of Rights of
Titan Stockholders and Delfin Shareholders--Payment of Dividends; Redemption or
Repurchase of Shares."
REPRESENTATIONS AND WARRANTIES
Pursuant to the Merger Agreement, each of Titan, Delfin and Titan Sub made
certain representations and warranties relating to its respective business and
various other matters. None of the representations and warranties made by Titan,
Delfin and Titan Sub will survive the Merger.
COVENANTS
Pursuant to the Merger Agreement, Delfin has agreed that, until the earlier
of the termination of the Merger Agreement 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, maintain its relations and goodwill with
all suppliers, customers, landlords, creditors, employees and others with which
it has business relationships, and use 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, Delfin 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 (except that Delfin may repurchase Delfin Common Stock from
former employees pursuant to the terms of existing restricted stock purchase
agreements);
(b) 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; provided, however, that Delfin may
issue Delfin Common Stock upon the valid exercise of Delfin Options (and
make certain other limited grants and issuances consistent with past
practice);
(c) amend or permit the adoption of any amendment to its articles 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
$500,000;
(f) (i) 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 contracts;
(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 or waive or relinquish any material right, except in compliance with
the limits set forth in clause (e) above;
(h) lend money to any person or entity, or incur or guarantee any
indebtedness (except that Delfin may make routine borrowings in the ordinary
course of business under its line of credit);
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(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 (k) above.
Delfin has also 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 Delfin's 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. Delfin has further agreed to
take actions necessary to give notice of, convene and hold a meeting of
shareholders and solicit proxies with respect to the meeting.
Each of Delfin 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, Delfin has agreed that, during the
Pre-Closing Period, Delfin will not 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 Delfin to any person (other than Titan), relating to or in
conjunction with a possible Acquisition Transaction; or (iii) consider,
entertain or accept any proposal or offer from any person (other than Titan). 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 Delfin's business assets; or (b) the issuance, disposition
or acquisition of (i) any capital stock or other equity security of Delfin
(other than common stock issued to employees of Delfin, upon exercise of Delfin
Options or otherwise, in routine transactions in accordance with Delfin'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 Delfin
(other than stock options granted to employees of Delfin in routine transactions
in accordance with Delfin'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 Delfin; or (c) any merger,
consolidation, business combination, reorganization or similar transaction
involving Delfin. Pursuant to the Merger Agreement, Delfin further agreed that
it will promptly advise Titan in writing of any inquiry, proposal or offer
relating to a possible Acquisition Transaction received by Delfin.
Notwithstanding the foregoing, but subject to the restrictions on the
conduct of Delfin's business described above, prior to the Effective Time, to
the extent the Delfin Board determines, in good faith, based upon advice of its
outside legal counsel, that the Board's fiduciary duties under applicable law
require it to do so, Delfin may participate in discussions or negotiations with,
and furnish nonpublic information and afford access to the properties, books or
records of Delfin to, any person, entity or group after such person, entity or
group has delivered to Delfin in writing an unsolicited bona fide proposed
Acquisition Transaction which the Delfin Board in its good faith reasonable
judgment determines, could
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reasonably be expected to result in a transaction more favorable than the Merger
to the shareholders of Delfin (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
shareholders of Delfin; (ii) the Commission shall have declared effective the
Registration Statement of which this Prospectus/Proxy Statement is a part 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 HSR Act,
relating to the transactions contemplated hereby will have expired or terminated
early; (v) Titan and Delfin shall have received a legal opinion from Brobeck and
the General Counsel of Titan, respectively, dated as of the Closing Date,
reasonably satisfactory in form and substance to the receiving party; (vi) Titan
and Delfin shall each have received written opinions from their respective tax
counsel (GCWF and Brobeck, 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; (vii) the shares of Titan Common Stock
issuable to shareholders of Delfin in the Merger shall have been authorized for
listing on the NYSE upon official notice of issuance; (viii) Titan shall have
received a certificate from Delfin's Chief Executive Officer and Delfin shall
have received a certificate from Titan's Chief Executive Officer confirming that
certain conditions have been duly satisfied; or (ix) 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 Delfin 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
Delfin: (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 Delfin 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 Delfin; and (ii) Delfin 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.
The obligation of Titan to consummate and effect the Merger is also subject
to Titan's receipt of the following agreements and documents (i) voting
agreements executed by the Affiliated Shareholders; (ii) a letter from Arthur
Andersen LLP, Titan's independent accountants, and Ernst & Young LLP relating to
the applicability of pooling of interests treatment to the Merger; and (iii)
Affiliate Agreements in the form
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attached to the Merger Agreement, executed by each person who is reasonably
determined to be an "affiliate" of Delfin (as that term is used in Rule 145
promulgated under the Act). See "Approval of the Merger and Related
Transactions--Federal Income Tax Matters." Additionally, the obligation of Titan
to consummate and effect the Merger is subject to the Delfin's Modified Current
Ratio being greater than or equal to 1.55. As used herein, and in the Merger
Agreement, the term "Modified Current Ratio" means the quotient of (i) the value
of current assets divided by (ii) the difference between the value of current
liabilities and Five Hundred Thousand Dollars ($500,000). All such values shall
be determined using generally accepted accounting principles and based on such
amounts existing at the Closing.
Finally, each of Titan and Delfin has a condition to its obligation to
consummate the Merger concerning the Titan Stock Price. In the event the Titan
Stock Price is less than $5.00, Delfin has no obligation to consummate the
Merger. In the event the Titan Stock Price is greater than $9.00 per share,
Titan has no obligation to consummate the Merger.
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 the Delfin
Shareholders' Meeting required by Section 6.2 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 Delfin, if Delfin reasonably determines that the timely
satisfaction of any condition to Delfin's performance under the Merger
Agreement has become impossible other than as a result of any failure on the
part of Delfin 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 Delfin, if the Merger is not consummated by
September 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 except that neither party may terminate
prior to January 1, 1999 in the event the only conditions that have not been
satisfied are the receipt of regulatory approvals or third party consents;
and
(d) by mutual written consent of Titan and Delfin.
In addition, Delfin may terminate the Merger Agreement if Delfin and the
Delfin Board conclude in good faith that Delfin must accept a Superior Proposal;
PROVIDED, HOWEVER, that Delfin shall pay Titan a nonrefundable fee equal to 10%
of the Total Acquisition Price in cash upon Delfin's election to accept such
Superior Proposal.
Titan may terminate the Merger Agreement and Delfin shall pay to Titan a
termination fee equal to 10% of the Total Acquisition Price payable upon
termination of the Merger Agreement if at any time prior to the Merger Delfin
accepts a Superior Proposal or Delfin fails to use its best efforts to complete
the Delfin Meeting, or the Delfin Board does not recommend to the Delfin
shareholders that they approve the merger.
EFFECT OF TERMINATION
If the Merger Agreement is terminated by Titan or Delfin as described above,
the Merger Agreement will be of no further force or effect, except that certain
provisions contained therein, including those
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discussed below relating to "break-up" fees payable by Titan to Delfin or by
Delfin to Titan under certain circumstances, will survive such termination, and
Titan, Delfin 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 Delfin shall be obligated to pay to Titan
a termination fee equal to 10% of the Total Acquisition Price if the Merger
Agreement is terminated under certain circumstances described above. Further,
the Merger Agreement provides that a termination fee equal to 10% of the Total
Acquisition Price will be incurred by Titan or Delfin, 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 expenses
incurred in connection with the printing and filing of the Registration
Statement and this Prospectus/Proxy Statement and any amendments or supplements
thereto. The parties shared equally the cost of the HSR filing fee. See
"--Termination of the Merger Agreement."
Titan estimates that Titan and Delfin will incur direct transaction costs of
approximately $1 million associated with the Merger. These nonrecurring
transaction costs will be charged to operations as incurred, which is expected
in the quarters ending September 30, 1998 and December 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 Affiliated Shareholders entered into a Stock Voting Agreement
with Titan pursuant to which the Affiliated Shareholders each agreed that they
will vote all shares of Delfin held by them in favor of the Merger Proposal and
each of the other actions contemplated by the Merger Agreement.
AFFILIATE AGREEMENTS. To help ensure that the Delfin Shareholders comply
with applicable securities laws, certain affiliates of Delfin have 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
Delfin 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
Delfin. 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 Delfin Common Stock who (i) are not deemed
to be affiliates of Delfin at the time of the Delfin 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 Delfin, certain officers and certain
significant shareholders of Delfin may be deemed to be affiliates of Delfin at
the time of the Delfin Meeting.
Such affiliates have entered into agreements not to make any public sale of
any Titan Common Stock received upon conversion of Delfin 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
43
<PAGE>
shares of Delfin 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 Delfin. 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).
44
<PAGE>
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, which was consummated on June
30, 1998, combined with the prospective Merger with Delfin 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 June 30, 1998
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 and Horizons' consolidated financial
statements for the three years ended December 31, 1995, 1996 and 1997 and the
three fiscal years ended January 31, 1996, 1997 and 1998 and the consolidated
financial statements for Titan (which include the accounts of Horizons,
accounted for as a pooling of interests) for the six months ended June 30, 1998,
respectively, have been combined with Delfin's financial statements for the
three fiscal years ended September 30, 1995, 1996 and 1997 and for the six
months ended June 30, 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 at such dates and Horizons
for each of the three years in the period ended January 31, 1998 and derived
from the audited historical financial statements of Delfin for each of the three
years in the period ended September 30, 1997, and should be read in conjunction
with historical financial statements and accompanying notes for Titan and Delfin
included elsewhere in this Prospectus/Proxy Statement. The pro-forma combined
condensed financial statements as of and for the six month periods ended June
30, 1998 for Titan (which include the accounts of Horizons, accounted for as a
pooling of interests) Delfin and have been prepared in accordance with generally
accepted accounting principles applicable to interim financial information and,
in the respective opinions of Titan's and Horizons' management and Delfin's
management, include all adjustments necessary for a fair presentation of
financial information for such interim periods.
45
<PAGE>
THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC. AND DELFIN SYSTEMS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
TITAN HORIZONS (NOTE 2) COMBINED DELFIN (NOTE 2) COMBINED
---------- --------- ------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 161,231 $ 26,491 -- $ 187,722 $ 27,288 -- $ 215,010
Costs and expenses:
Cost of revenues.................... 123,914 17,931 -- 141,845 22,944 -- 164,789
Selling, general and administrative
expense........................... 25,867 3,921 -- 29,788 4,879 -- 34,667
Research and development expense.... 5,113 49 -- 5,162 -- -- 5,162
Restructuring and other (income)
expense........................... 6,249 -- -- 6,249 -- -- 6,249
---------- --------- ------ ----------- --------- ----------- -----------
Total costs and expenses.......... 161,143 21,901 -- 183,044 27,823 -- 210,867
---------- --------- ------ ----------- --------- ----------- -----------
Operating profit (loss)............... 88 4,590 -- 4,678 (535) -- 4,143
Interest expense...................... (1,353) (546) -- (1,899) (481) -- (2,380)
Interest income....................... 392 -- -- 392 11 -- 403
---------- --------- ------ ----------- --------- ----------- -----------
Income (loss) from continuing
operations before income taxes...... (873) 4,044 -- 3,171 (1,005) -- 2,166
Income tax provision (benefit)........ (540) 1,537 -- 997 (250) -- 747
---------- --------- ------ ----------- --------- ----------- -----------
Income (loss) from continuing
operations.......................... $ (333) $ 2,507 -- $ 2,174 $ (755) -- $ 1,419
---------- --------- ------ ----------- --------- ----------- -----------
---------- --------- ------ ----------- --------- ----------- -----------
Basic earnings per share
Income (loss) from continuing
operations........................ $ (0.05) $ 0.33 $ -- $ 0.07 $ (0.11) $ -- $ 0.03
Weighted average shares............. 19,438 7,424 (4,199) 22,663 6,975 (3,225) 26,413
---------- --------- ------ ----------- --------- ----------- -----------
---------- --------- ------ ----------- --------- ----------- -----------
Diluted earnings per share
Income (loss) from continuing
operations........................ $ (0.05) $ 0.33 $ -- $ 0.07 $ (0.11) -- $ 0.03
Weighted average shares............. 19,438 7,542 (4,317) 22,663 6,975 (3,225) 26,413
---------- --------- ------ ----------- --------- ----------- -----------
---------- --------- ------ ----------- --------- ----------- -----------
</TABLE>
46
<PAGE>
THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC. AND DELFIN SYSTEMS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
TITAN HORIZONS (NOTE 2) COMBINED DELFIN (NOTE 2) COMBINED
---------- --------- ------------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 155,954 $ 29,551 -- $ 185,505 $ 29,731 -- $ 215,236
---------- --------- ------ ----------- --------- ------ -----------
Costs and expenses:
Cost of revenues.................... 124,477 20,008 -- 144,485 24,856 -- 169,341
Selling, general and administrative
expense........................... 23,693 4,114 -- 27,807 4,427 -- 32,234
Research and development expense.... 3,576 105 -- 3,681 -- -- 3,681
---------- --------- ------ ----------- --------- ------ -----------
Total costs and expenses.......... 151,746 24,227 -- 175,973 29,283 -- 205,256
---------- --------- ------ ----------- --------- ------ -----------
Operating profit...................... 4,208 5,324 -- 9,532 448 -- 9,980
Interest expense...................... (3,201) (592) -- (3,793) (369) -- (4,162)
Interest income....................... 639 -- -- 639 3 -- 642
---------- --------- ------ ----------- --------- ------ -----------
Income from continuing operations
before income taxes................. 1,646 4,732 -- 6,378 82 -- 6,460
Income tax provision.................. 221 1,798 -- 2,019 72 -- 2,091
---------- --------- ------ ----------- --------- ------ -----------
Income from continuing operations..... $ 1,425 $ 2,934 -- $ 4,359 $ 10 -- $ 4,369
---------- --------- ------ ----------- --------- ------ -----------
---------- --------- ------ ----------- --------- ------ -----------
Basic earnings per share
Income from continuing operations... $ 0.03 $ 0.39 -- $ 0.14 $ 0.00 -- $ 0.13
Weighted average shares............. 21,418 7,497 (4,272) 24,643 7,053 (3,303) 28,393
---------- --------- ------ ----------- --------- ------ -----------
---------- --------- ------ ----------- --------- ------ -----------
Diluted earnings per share
Income from continuing operations... $ 0.03 $ 0.39 -- $ 0.14 $ 0.00 -- $ 0.13
Weighted average shares............. 21,418 7,542 (4,317) 24,643 7,304 (3,554) 28,393
---------- --------- ------ ----------- --------- ------ -----------
---------- --------- ------ ----------- --------- ------ -----------
</TABLE>
47
<PAGE>
THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC. AND DELFIN SYSTEMS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
TITAN HORIZONS (NOTE 2) COMBINED DELFIN (NOTE 2) COMBINED
---------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 195,884 $ 26,281 $ -- $ 222,165 $ 26,631 $ -- $ 248,796
Costs and expenses:
Cost of revenues.................... 153,269 18,335 -- 171,604 22,873 -- 194,477
Selling, general and administrative
expense........................... 23,574 4,699 -- 28,273 3,497 -- 31,770
Research and development expense.... 6,140 81 -- 6,221 -- -- 6,221
Write-down of assets, investments
and environmental accrual......... 6,600 -- -- 6,600 -- -- 6,600
---------- --------- ----------- ----------- --------- ----------- -----------
Total costs and expenses.......... 189,583 23,115 -- 212,698 26,370 -- 239,068
---------- --------- ----------- ----------- --------- ----------- -----------
Operating profit...................... 6,301 3,166 -- 9,467 261 -- 9,728
Interest expense...................... (5,101) (519) -- (5,620) (236) -- (5,856)
Interest income....................... 869 -- -- 869 3 -- 872
---------- --------- ----------- ----------- --------- ----------- -----------
Income from continuing operations
before income taxes................. 2,069 2,647 -- 4,716 28 -- 4,744
Income tax provision.................. 3,292 1,006 -- 4,298 58 -- 4,356
---------- --------- ----------- ----------- --------- ----------- -----------
Income (loss) from continuing
operations.......................... $ (1,223) $ 1,641 -- $ 418 $ (30) -- $ 388
---------- --------- ----------- ----------- --------- ----------- -----------
---------- --------- ----------- ----------- --------- ----------- -----------
Basic earnings per share
Income (loss) from continuing
operations........................ $ (0.09) $ 0.22 $ -- $ (0.02) $ 0.00 $ -- $ (0.02)
Weighted average shares............. 22,230 7,497 (4,272) 25,455 7,137 (3,387) 29,205
---------- --------- ----------- ----------- --------- ----------- -----------
---------- --------- ----------- ----------- --------- ----------- -----------
Diluted earnings per share
Income (loss) from continuing
operations........................ $ (0.09) $ 0.22 $ -- $ (0.02) $ 0.00 $ -- $ (0.02)
Weighted average shares............. 22,230 7,510 (4,285) 25,455 7,137 (3,387) 29,205
---------- --------- ----------- ----------- --------- ----------- -----------
---------- --------- ----------- ----------- --------- ----------- -----------
</TABLE>
48
<PAGE>
THE TITAN CORPORATION AND DELFIN SYSTEMS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR
THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN* DELFIN (NOTE 2) COMBINED
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................................................... $ 108,783 $ 14,842 $ -- $ 123,625
Costs and expenses:
Cost of revenues..................................................... 84,681 12,311 -- 96,992
Selling, general and administrative expense.......................... 12,516 1,903 -- 14,419
Research and development expense..................................... 2,512 -- -- 2,512
Special charges...................................................... 1,460 -- -- 1,460
---------- --------- ----------- -----------
Total costs and expenses........................................... 101,169 14,214 -- 115,383
---------- --------- ----------- -----------
Operating profit....................................................... 7,614 628 -- 8,242
Interest expense....................................................... (3,000) (169) -- (3,169)
Interest income........................................................ 188 1 -- 189
---------- --------- ----------- -----------
Income from continuing operations before income taxes.................. 4,802 460 -- 5,262
Income tax provision................................................... 1,633 189 -- 1,822
---------- --------- ----------- -----------
Income from continuing operations...................................... $ 3,169 $ 271 -- $ 3,440
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Basic earnings per share
Income from continuing operations.................................... $ 0.10 $ 0.04 $ -- $ 0.10
Weighted average shares.............................................. 26,344 7,160 (3,428) 30,076
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Diluted earnings per share
Income from continuing operations.................................... $ 0.10 $ 0.04 -- $ 0.09
Weighted average shares.............................................. 27,063 7,392 (3,428) 31,027
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
- ------------------------
* Note: All Titan amounts shown above include the operating results of
Horizons, which merged with Titan on June 30, 1998 in a transaction
accounted for as a pooling of interests.
49
<PAGE>
THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC.
AND DELFIN SYSTEMS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS
ASSETS TITAN HORIZONS (NOTE 2) COMBINED DELFIN (NOTE 2)
--------- ----------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash.................................... $ 10,612 $ 523 $ -- $ 11,135 $ 30 $ --
Investments............................. 4,499 -- -- 4,499 -- --
Accounts receivable--net................ 58,612 6,064 -- 64,676 7,168 --
Inventories............................. 15,480 -- -- 15,480 1,193 --
Net assets of discontinued operations... 11,512 (3,277) -- 8,235 -- --
Prepaid expenses and other.............. 2,160 238 -- 2,398 43 --
Deferred income taxes................... 7,950 -- 400 8,350 348 200
--------- ----------- ------ ----------- --------- ------
Total Current Assets.................. 110,825 3,548 400 114,773 8,782 200
Property and equipment--net............... 24,432 305 -- 24,737 730 --
Goodwill--net............................. 20,587 -- -- 20,587 -- --
Other assets.............................. 8,097 -- -- 8,097 225 --
Net assets of discontinued operation...... 2,286 -- -- 2,286 -- --
--------- ----------- ------ ----------- --------- ------
Total assets.......................... $ 166,227 $ 3,853 $ 400 $ 170,480 $ 9,737 $ 200
--------- ----------- ------ ----------- --------- ------
--------- ----------- ------ ----------- --------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.......................... $ 12,350 $ 5,327 $ -- $ 17,677 $ 1,250 $ --
Accounts payable........................ 11,258 1,403 -- 12,661 1,521 --
Current portion of long-term debt....... 1,104 -- -- 1,104 239 --
Accrued compensation and benefits....... 8,899 2,561 -- 11,460 1,597 --
Other accrued liabilities............... 6,833 119 1,000 7,952 830 1,000
--------- ----------- ------ ----------- --------- ------
Total current liabilities............. 40,444 9,410 1,000 50,854 5,437 1,000
--------- ----------- ------ ----------- --------- ------
Long-term debt............................ 37,310 184 -- 37,494 152 --
Other non-current liabilities............. 10,573 266 -- 10,839 -- --
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, $13,897
liquidation preference: 694,872 shares
issued and outstanding................ 695 -- -- 695 -- --
Common stock; ($.01 par value,
authorized 45,000,000 shares; issued
and outstanding: 23,804,809 shares)... 238 75 (45) 268 71 (34)
Capital in excess of par value............ 50,936 3,762 50 54,748 4,414 34
Retained earnings (deficit)............... 25,622 (9,849) (600) 15,173 (337) (800)
Treasury stock: (971,894 shares, at
cost)................................... (2,591) -- -- (2,591) -- --
--------- ----------- ------ ----------- --------- ------
Total stockholders' equity............ 74,900 (6,007) (600) 68,293 4,148 (800)
--------- ----------- ------ ----------- --------- ------
Total liabilities and stockholders'
equity.................................. $ 166,227 $ 3,853 $ 400 $ 170,480 $ 9,737 $ 200
--------- ----------- ------ ----------- --------- ------
--------- ----------- ------ ----------- --------- ------
<CAPTION>
PRO FORMA
ASSETS COMBINED
-----------
<S> <C>
Current assets:
Cash.................................... $ 11,165
Investments............................. 4,499
Accounts receivable--net................ 71,844
Inventories............................. 16,673
Net assets of discontinued operations... 8,235
Prepaid expenses and other.............. 2,441
Deferred income taxes................... 8,898
-----------
Total Current Assets.................. 123,755
Property and equipment--net............... 25,467
Goodwill--net............................. 20,587
Other assets.............................. 8,322
Net assets of discontinued operation...... 2,286
-----------
Total assets.......................... $ 180,417
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.......................... $ 18,927
Accounts payable........................ 14,182
Current portion of long-term debt....... 1,343
Accrued compensation and benefits....... 13,057
Other accrued liabilities............... 9,782
-----------
Total current liabilities............. 57,291
-----------
Long-term debt............................ 37,646
Other non-current liabilities............. 10,839
Series B Cumulative convertible redeemable
Preferred stock, $3,000 liquidation
preference, 6% cumulative annual
dividend, 500,000 shares issued and
outstanding............................. 3,000
Stockholders' equity:
Preferred stock; $1 par value;
authorized 2,500,000 shares:.......... --
Cumulative convertible, $13,897
liquidation preference: 694,872 shares
issued and outstanding................ 695
Common stock; ($.01 par value,
authorized 45,000,000 shares; issued
and outstanding: 23,804,809 shares)... 306
Capital in excess of par value............ 59,195
Retained earnings (deficit)............... 14,036
Treasury stock: (971,894 shares, at
cost)................................... (2,591)
-----------
Total stockholders' equity............ 71,641
-----------
Total liabilities and stockholders'
equity.................................. $ 180,417
-----------
-----------
</TABLE>
50
<PAGE>
THE TITAN CORPORATION AND DELFIN SYSTEMS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
ASSETS TITAN* DELFIN (NOTE 2) COMBINED
--------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash.................................................................... $ 4,314 $ 83 $ -- $ 4,397
Accounts receivable--net................................................ 76,754 9,800 -- 86,554
Inventories............................................................. 18,732 706 -- 19,438
Net assets of discontinued operations................................... 9,890 -- -- 9,890
Prepaid expenses and other.............................................. 3,390 91 -- 3,481
Deferred income taxes................................................... 8,134 348 200 8,682
--------- --------- ------ -----------
Total Current Assets.................................................. 121,214 11,028 200 132,442
Property and equipment--net............................................... 23,363 710 -- 24,073
Goodwill--net............................................................. 38,915 -- -- 38,915
Other assets.............................................................. 5,565 278 -- 5,843
Net assets of discontinued operation...................................... 295 -- -- 295
--------- --------- ------ -----------
Total assets.......................................................... $ 189,352 $ 12,016 $ 200 $ 201,568
--------- --------- ------ -----------
--------- --------- ------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.......................................................... $ 26,337 $ 3,700 $ -- $ 30,037
Accounts payable........................................................ 17,606 959 -- 18,565
Acquisition debt........................................................ 3,000 -- -- 3,000
Current portion of long-term debt....................................... 1,157 118 -- 1,275
Accrued compensation and benefits....................................... 10,861 1,606 -- 12,467
Other accrued liabilities............................................... 7,637 1,110 1,000 9,747
--------- --------- ------ -----------
Total current liabilities............................................. 66,598 7,493 1,000 75,091
--------- --------- ------ -----------
Long-term debt............................................................ 32,303 85 -- 32,388
Other non-current liabilities............................................. 13,720 -- -- 13,720
Series B Cumulative convertible redeemable Preferred stock, $500
liquidation preference, 6% cumulative annual dividend, 83,383 shares
issued and outstanding.................................................. 500 -- -- 500
Stockholders' equity:
Preferred stock; $1 par value; authorized 2,500,000 shares:............. -- -- -- --
Cumulative convertible, $13,897 liquidation preference: 694,872 shares
issued and outstanding................................................ 695 -- -- 695
Common stock; ($.01 par value, authorized 45,000,000 shares; issued and
outstanding: 28,290,392 shares)....................................... 283 72 (36) 321
Capital in excess of par value............................................ 59,288 4,442 36 63,765
Retained earnings......................................................... 18,544 (76) (800) 17,668
Treasury stock: (962,530 shares, at cost)................................. (2,579) -- -- (2,579)
--------- --------- ------ -----------
Total stockholders' equity............................................ 76,231 4,438 (800) 79,869
--------- --------- ------ -----------
Total liabilities and stockholders' equity................................ $ 189,352 $ 12,016 $ 200 $ 201,568
--------- --------- ------ -----------
--------- --------- ------ -----------
</TABLE>
- ------------------------
* Note: All Titan amounts shown above include the operating results of
Horizons, which merged with Titan on June 30, 1998 in a transaction
accounted for as a pooling of interests.
51
<PAGE>
THE TITAN CORPORATION AND DELFIN SYSTEMS
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 Titan for the years ended December 31,
1997, 1996 and 1995 with the historical statements of operations of Horizons for
the years ended January 31, 1998, 1997 and 1996 (the merger between Titan and
Horizons was consummated on June 30, 1998) and the historical statements of
operations of Delfin for the years ended September 30, 1997, 1996 and 1995.
NOTE 2. MERGER COSTS
Titan estimates that Titan and Horizons and Titan and Delfin will incur
direct transaction costs of approximately $1 million associated with the Titan
and Horizons merger and approximately $1 million associated with the Titan and
Delfin 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 and June 30, 1998, 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 .42
of Titan Common Stock for each share of Horizons Common Stock and an exchange
ratio of approximately .52 of Titan Common Stock for each share of Delfin Common
Stock, assuming no borrowings on the Delfin line of credit (a zero Line of
Credit Deduction), a $6.00 Titan Stock Price and 7,221,500 issued and
outstanding shares of Delfin Common Stock. The effect of the assumed conversion
of Titan's convertible subordinated debentures was antidilutive for all periods
presented.
52
<PAGE>
TITAN BUSINESS
GENERAL DEVELOPMENT AND DESCRIPTION OF BUSINESS
Titan was incorporated in 1969. 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. 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, 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 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, DBA merged with and into Titan, 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 Titan 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.
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
53
<PAGE>
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 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 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 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
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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 United
States government agencies, in particular the intelligence community, NATO and
other United States 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 and in March 1998, Titan acquired Validity, an
information technologies company.
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 United States Government over a five-year period.
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
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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's newly acquired subsidiary, Validity, is an operating company of
Titan Information Technologies. Validity is an information technologies company
providing systems engineering and integration, software engineering, network
technologies, and test and evaluation services to the military and a variety of
governmental customers.
Titan's recent acquisition, Horizons, is predominantly involved in providing
software, computer systems integration and technical consulting services,
primarily for the United States defense establishment.
Titan Information Technologies is one of many companies involved in
providing information systems solutions for a variety of programs for agencies
of the United States 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 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
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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.
Titan's most recent acquisition, VisiCom, primarily provides information
technology solutions for real-time, open architecture, embedded computers
worldwide. VisiCom develops innovative hardware and software products and
provides systems engineering services.
GOVERNMENT CONTRACTS
A substantial portion of Titan's revenues are dependent upon continued
funding of United States 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, United States government business represented
approximately 75%, 78% and 67% of Titan's revenues, respectively. United States
defense budgets and the budgets of other government agencies have been declining
in real terms since the mid-1980's, and may continue to do so in the future. Any
significant reductions in the funding of United States 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.
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Titan's direct contracts with the United States government and its
subcontracts with prime contractors that have direct contracts with the United
States 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 United States government. As part of the
audit process, the government audit agency verifies that all charges made by a
contractor against a contract are legitimate and appropriate. Audits may result
in recalculation of contract revenues and non-reimbursement of some contract
costs and fees. Any audits of Titan's contract-related costs and fees could
result in material adjustments to Titan's revenues. In addition, United States
government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds on a fiscal
year basis even though contract performance may take several years.
Consequently, at the outset of a major program, the contract is usually
incrementally funded and additional funds are normally committed to the contract
by the procuring agency as 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 AND EXPORT REVENUES
Reference is made to Note 7 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 United States 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 unfair competition and trade
secrets to protect its unpatented proprietary rights. Titan
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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 United States 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 United States Government are funded by
the procuring agency from year to year, primarily based on its fiscal
requirements. This results in two different categories of United States
Government backlog: funded and unfunded backlog. "Funded backlog" consists of
the aggregate contract revenues remaining to be earned by 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 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 United States government
contracts included in backlog, whether or not funded, may be terminated at the
convenience of the United States government. See "Risk Factors--Dependence on
Government Contracts."
Titan expects to realize approximately 35% of its 1997 backlog by the end of
1998.
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'
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costs are expensed as incurred. Total expenditures for research and development
were $11,281,000, $8,082,000 and $15,876,000 in 1997, 1996 and 1995,
respectively. These expenditures included company funded research and
development of $6,140,000, $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 United States
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 800,000 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.
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TITAN MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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 United States 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, United States government business represented
approximately 75%, 78% and 67% of Titan's revenues, respectively. United States
defense budgets and the budgets of other government agencies have been declining
in real terms since the mid-1980's, and may continue to do so in the future. Any
significant reductions in the funding of United States 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 United States 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. See "Risk Factors--Risks of
International Operations; Risks of Doing Business in Developing Countries".
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. In June 1988 this registration statement was
withdrawn from the Commission. 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 registration
statement will be re-filed or 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 devaluations in
Indonesia, Malaysia, Taiwan and the Philippines, on its Communications Systems
segment. See "Risk Factors--Risks of International Operations; Risks of Doing
Business in Developing Countries." The Company believes that recent events in
Asia will not have a material impact on other segments of Titan's business
because Titan does not engage in a significant amount of business in the Pacific
Rim in any segment other than 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 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 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 United States 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.
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
(DOLLAR AMOUNTS IN THOUSANDS)
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.
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 twelve months ended
December 31, 1997, and for the fiscal years ended June 30, 1996 and 1995,
respectively.
The combining periods are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1996
-------------------------------------
<S> <C>
Titan.................................................. Fiscal year ended December 1996
DBA.................................................... Fiscal year ended June 1996
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERLY PERIODS
--------------------------------------------
Q1 '97 Q2 '97 Q3 '97 Q4 '97
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Titan.......................................... March 97 June 97 Sept. 97 Dec. 97
DBA............................................ March 97 June 97 Sept. 97 Dec. 97
</TABLE>
For the six months ended December 31, 1996, revenue of $11,724, costs and
expenses of $10,693, operating income of $1,031 income before taxes of $1,104
and net income of $695 was reported by DBA. Such amounts are not reflected in
the accompanying statements of operations as DBA's fiscal year ended June 30,
1997 was conformed to Titan's fiscal year ended December 31, 1997, which
resulted in such amounts being incurred in the omitted period from July 1, 1996
through December 31, 1996.
For the six months ended December 31, 1997, revenue of $10,914, costs and
expenses of $19,530, operating loss of $8,616, loss before tax benefit of $8,663
and net loss of $7,821 was reported by DBA, and such amounts are included in the
results of operations in the accompanying financial statements for the year
ended December 31, 1997. The decrease in revenue of $810 in the six month period
ended
64
<PAGE>
December 31, 1997 from the same period in 1996 primarily resulted from high pass
through of material costs and higher direct labor utilization during the six
month period ended December 31, 1996. The costs and expenses during the six
month period ended December 31, 1997 include certain non-recurring charges
related to the write down of land and a building as well as certain inventory
and other assets to net realizable value in addition to a charge for estimated
environmental liabilities related to the land and buildings. These costs
aggregated approximately $9,800 and are disclosed elsewhere in this
"Management's Discussion and Analysis" section. Excluding the non-recurring
charges discussed above, operating income increased $199 in the six months ended
December 31, 1997 from the same period in 1996 due to more favorable results
following completion of certain contracts.
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................................................. $ 195,884 $ 155,954 $ 161,231
Operating profit......................................... 6,301 4,208 88
Interest expense, net.................................... 4,232 2,562 961
Income (loss) from continuing operations, before income
taxes.................................................. 2,069 1,646 (873)
Income tax provision (benefit)........................... 3,292 221 (540)
Loss from discontinued operation, net.................... (343) (3,642) (1,972)
Net income (loss)........................................ (566) (2,217) (2,305)
</TABLE>
- ------------------------
(1) Restated to reflect the April 1997 discontinuance of the operations of
Titan's broadband division.
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..................................................... 3.2 2.7 0.1
Interest expense, net................................................ 2.2 1.7 0.6
Income (loss) from continuing operations, before income taxes........ 1.1 1.0 (0.5)
Income tax provision (benefit)....................................... 1.7 0.1 (0.3)
Loss from discontinued operation, net................................ (0.2) (2.3) (1.2)
Net income (loss).................................................... (0.3) (1.4) (1.4)
</TABLE>
As noted above, Titan's consolidated revenues were $195,884, $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 $23,574, $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
65
<PAGE>
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.
Special charges of $9,846 were recorded during the fiscal year ended
December 31, 1997 primarily related to the write down of various DBA assets to
estimated net realizable value and the recognition of an estimated environmental
liability. For further discussion regarding these special charges, refer to the
Titan Information Technologies segments discussion of results of operations set
forth below and Note 3 to the accompanying financial statements.
Research and development ("R&D") expenses were $6,140, $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 159%, 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. The
effective rate in 1997 is primarily due to significant non-deductible expenses
which were recorded for financial reporting purposes.
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
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. Management does not
anticipate that the ultimate disposition of the broadband communications
business will have a material impact on Titan's financial statements.
66
<PAGE>
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 United
States 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 $112,923, $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 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 $2,127, compared to $9,191 in 1996, and
$4,402 in 1995. The net decrease in 1997 is related to restatements from
previously filed results of $9.8 million recorded by DBA primarily to recognize
certain asset impairments and an estimated environmental liability as
67
<PAGE>
described below. The increase in 1996 is 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. The Information
Technologies Segment's operating income for the year ended December 31, 1997
include restatements of previously filed DBA financial statements as follows:
DBA has a 141,000 square foot manufacturing facility in Kissimmee, Florida
which has been held for sale since June 1996, at which time the recorded book
value was approximately $4.4 million. An independent appraisal of the building
and land was performed in August 1996, which indicated that the property had a
market value of approximately $5.0 million. Several potential buyers expressed
interest in acquiring the property throughout fiscal 1997. A written offer was
received in July 1997, at which time negotiations with the prospective buyer
commenced for the sale of the property at an amount which management believed
supported the recorded book value at that time. These negotiations eventually
terminated and did not result in the sale of the property. DBA received no
further offers until October 1997, at which time a written offer was received at
an amount substantially below the recorded book value. Negotiations with this
potential buyer took place but, again, did not result in a sale of the property.
During this extended time period for which the property had been held for sale,
DBA reduced ongoing maintenance and general upkeep of the property. As a result
of these factors, management concluded that there has been an impairment in the
carrying value of the asset. A special charge of $2.0 million was recorded in
the Titan's financial statements for the year ended December 31, 1997 which
reflects management's estimate of the impairment, including estimated disposal
costs. Management has currently reinstated a program of ongoing maintenance (and
environmental remediation--see below) and is actively marketing the property for
sale through various channels. Management regularly reviews the adjusted value
of this asset for further impairment, and believes that the current book value
reflects an amount which approximates fair market value.
As a part of Titan's due diligence performed in connection with its
acquisition of DBA a preliminary environmental site assessment of all DBA's land
and property was performed in October 1997. This study revealed certain
environmental matters at DBA's Kissimmee, Florida property discussed above.
These environmental matters included, but were not limited to, soil
contamination and potential asbestos and lead based paint contamination. Titan
engaged these environmental consultants to perform a limited initial assessment
of the potential range of costs to remediate such contamination as well as to
determine whether any additional environmental exposures exist with DBA's
property. An initial assessment considering pre-cleanup activities, and
operation and maintenance of the remediation plan, indicates that these costs
could range from approximately $3.0 million to $5.5 million (undiscounted). Such
amounts represent an initial estimate, which could change significantly as more
extensive studies are performed. In accordance with SFAS No. 5, "Accounting for
Contingencies" and SOP 96-1, "Environmental Remediation Liabilities," DBA
recorded a $3.0 million special charge, representing the low end of the estimate
as no amount within the range was deemed to be a better estimate at that time.
These environmental remediation actions are being undertaken at the sole
discretion of management and have not been induced by threat, by government
agencies, or by litigation. In the accompanying balance sheet as of December 31,
1997, approximately $.2 million is included in other current liabilities and the
remaining $2.8 million is included in non-current liabilities, based upon the
estimated timing of remediation work to be performed. DBA commenced its
pre-clean up activities which are expected to continue through at least fiscal
year 1998.
In December 1997, DBA received verbal indication from a systems integrator
for whom it had been developing special purpose mammography scanners that the
integrator would likely terminate further discussions regarding its pending
contract with DBA. Subsequent to December 31, 1997, DBA received written
notification that the integrator would likely terminate further discussions
regarding its pending contract with DBA. Prior to December 31, 1997, DBA had
identified several customers for fingerprint scanners, which are based on
similar technology to the mammography scanners, and had entered into
68
<PAGE>
contracts to sell fingerprint scanners. Since the scanners could not be utilized
in their intended form, management identified an impairment in the value of this
inventory and recorded an adjustment of $1.3 million in the accompanying results
from operations for the year ended December 31, 1997 in order to reflect these
scanners at their net realizable value.
In December 1997, DBA determined that certain test machinery and equipment
which it needed to perform on a recently awarded contract was missing parts
essential to its operation. Management believes that the parts may have been
removed for use in other equipment, however, management is unable to determine
the exact disposition and/or timing of the use of such equipment. Without these
essential parts, the test machinery and equipment was of little or no value and
DBA determined that replacing this test machinery and equipment appeared to be
more economically advantageous than repairing it. The net book value of this
equipment was approximately $.6 million at December 31, 1997. Accordingly, DBA
is recording a charge of $.6 million to write off the book value of these assets
in the accompanying results of operations for the year ended December 31, 1997.
Management believes that this resulted from a breakdown in DBA's internal
controls over physical assets. Titan is in the process of critically reviewing
all of DBA's internal control procedures, particularly those regarding physical
assets, and will take further actions in order to align DBA's internal control
policies and procedures with those of Titan.
In September 1997, DBA invested $1.6 million by purchasing convertible
preferred Series B stock in Flash Comm, Inc. ("FCI"), a start-up venture. At the
time of making this investment, DBA management was led to believe that FCI would
be raising significant additional debt or equity financing by December 31, 1997,
which amounts would enable FCI to perform under its $10.6 million contract to
purchase products from DBA. FCI to date has not raised the additional capital,
has not yet generated any significant business, and to date, no products have
been purchased by FCI under its contract with DBA. To management's knowledge,
FCI has generated no significant revenue to date. In light of these
circumstances, and the current financial condition of FCI, management presently
believes that there is doubt about FCI's ability to achieve commercial success,
and thus recognizes that there has been an impairment in the value of the $1.6
million investment recorded by DBA. An adjustment to write-down the investment
by $1.6 million is reflected in the results of operations for the year ended
December 31, 1997.
DBA recorded approximately $.6 million in unbilled receivables in fiscal
years 1991, 1992 and 1994 related to an overrun claim which is being litigated.
The Company had entered into settlement discussions with the United States
government. In 1992 the settlement offer of the United States government was
rejected. Management believes that this amount should have been written off in
prior reporting periods. However, the amounts were not written off until
December 1997, due to a breakdown in internal controls. The $.6 million is
reflected as a charge to SG&A for the year ended December 31, 1997. Management
believes that the continuing recognition of this receivable by DBA represents a
breakdown in DBA's internal controls. As stated above, Titan is reviewing DBA's
internal control procedures.
At December 31, 1997, DBA had inappropriately capitalized rate variances of
$.7 million on its Cost Plus Fixed Fee (CPFF) contracts representing costs
incurred in excess of provisional billing rates. Such variances occurred
primarily in the quarter ended December 31, 1997. A charge of $.7 million was
recorded against revenue at December 31, 1997 to write off these variances.
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.
69
<PAGE>
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 $1,667 cash from its continuing operations. In
addition, Titan's loss from continuing operations, of $1,223, and other uses of
cash from operations included increases in receivables and inventories of $8,227
and $1,901, respectively, principally related to commercial rural telephony
products and to government satellite communications products. Significant
funding requirements included liabilities of continuing operations of $6,196,
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.
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.
70
<PAGE>
OWNERSHIP OF TITAN'S SECURITIES
The following table sets forth certain information as to the number of
shares beneficially owned as of September 21, 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 4.89%
James T. Palmer(3)......................................... Common Stock 1,453,320 4.43%
Charles R. Allen........................................... Common Stock 34,339(4) *
Joseph F. Caligiuri........................................ Common Stock 28,500(4) *
Daniel J. Fink............................................. Common Stock 29,850(4) *
Cornelius L. Hensel........................................ Common Stock 53,516(5) *
Robert E. La Blanc......................................... Common Stock 16,750(4) *
Thomas G. Pownall.......................................... Common Stock 36,015(4) *
Gene W. Ray................................................ Common Stock 622,977(4) 1.90%
J. S. Webb................................................. Common Stock 117,758(4) *
Louis L. Fowler............................................ Common Stock 45,670(4) *
Ronald B. Gorda............................................ Common Stock 161,454(4) *
Eric M. DeMarco............................................ Common Stock 31,350(3) *
Frederick L. Judge......................................... Common Stock 67,182(4) *
All Directors and Officers as a Group (19 Persons)......... Common Stock 2,255,276(4) 6.87%
</TABLE>
- ------------------------
* Less than 1%
(1) The address of each owner other than Mr. Wechsler and James T. Palmer 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, New York 10006.
(3) The address of James T. Palmer is 6157 Calle Vera Cruz, San Diego,
California 92037.
(4) Including (A) 17,500; 12,500; 17,500; 8,750; 11,250; 330,000; 45,000;
28,500; 143,750; 25,000; 50,000; and 712,500 shares subject to outstanding
options held by Messrs. Allen, Caligiuri, Fink, La Blanc, Pownall, Ray,
Webb, Fowler, Gorda, DeMarco, Judge and all directors and officers as a
group, respectively, which are currently exercisable or may become
exercisable within 60 days after September 21, 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) 85,055; 26,294; 17,377;
15,407; 1,063; 2,899 and 154,158 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, DeMarco, Judge, and all directors and
officers as a group, respectively.
(5) Mr. Hensel resigned from Titan in January 1998. The information shown is the
most recent information available to Titan, and includes 50,000 shares
subject to outstanding options exercisable within 60 days after March 19,
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; Titan has no information as to whether any shares shown in this table
are subject to California community property law.
71
<PAGE>
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
NAME POSITION AGE OFFICER OR DIRECTOR
- ------------------------------ -------------------------------------------------------- --- -------------------
<S> <C> <C> <C>
J.S. Webb..................... Chairman of the Board of Directors 78 1984
Gene W. Ray................... President and Chief Executive Officer 60 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
Deanna H. Petersen............ Vice President and 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.
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.
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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.
Ms. Petersen has been Corporate Controller since December 1996 and Vice
President since July 1998. From September 1993 to December 1996, Ms. Peterson
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 other committees, 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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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/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(A) ($)(B) SARS(#) ($)(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 62,000 60,000 34,187
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
Eric M. DeMarco............................ 1997 144,830 100,000 100,000 20,423
Senior Vice President 1996 -- -- -- --
and Chief Financial 1995 -- -- -- --
Officer
</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.
Judge: (i) $7,500; (ii) $0; (iii) $0; and (iv) $11,681; Mr. DeMarco: (i)
$3,526; (ii) $15,000 (iii) $0; and (iv) $1,897.
(D) Mr. Hensel resigned from Titan in January 1998.
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STOCK OPTIONS
The following table contains information concerning the grant of stock
options made during fiscal 1997 under Titan's long-term incentive program to the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR (A)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK PRICE
GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION OPTION TERM(F)
GRANTED FISCAL YEAR PRICE DATE ---------------------
NAME (B) (C) ($/SH)(D) (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................................ -- -- -- -- -- --
Eric M. DeMarco(G)................................ 50,000 8.64% 5.625 7/16/07 176,877 448,240
--------- ----- ----- ----------- --------- ----------
50,000 8.64% 3.625 1/16/07 113,987 288,866
</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.
(G) Eric M. DeMarco received two grants of options in fiscal year 1998.
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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
IN-THE-MONEY
OPTIONS AT
NUMBER OF UNEXERCISED FY-END
SHARES VALUE OPTIONS AT FY-END (#) ($)(C)
ACQUIRED ON REALIZED -------------------------- -----------
NAME EXERCISE (#) ($)(B) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------------- ----------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Gene W. Ray................................ -- -- 230,000 300,000 636,040
Louis L. Fowler............................ -- -- 13,500 47,500 27,881
Ronald B. Gorda............................ -- -- 95,000 130,000 223,948
Cornelius L. Hensel........................ -- -- 42,500 132,500 60,798
Frederick L. Judge......................... -- -- 37,500 12,500 128,925
Eric M. DeMarco............................ -- -- -- 100,000 --
<CAPTION>
NAME UNEXERCISABLE
- ------------------------------------------- -------------
<S> <C>
Gene W. Ray................................ 520,450
Louis L. Fowler............................ 85,023
Ronald B. Gorda............................ 223,653
Cornelius L. Hensel........................ 216,468
Frederick L. Judge......................... 42,975
Eric M. DeMarco............................ 218,800
</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 Gene W. Ray, Eric M. DeMarco, Ronald
B. Gorda, Frederick L. Judge and Ira Frazer (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 two 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.
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<PAGE>
DELFIN BUSINESS
OVERVIEW
Delfin is a California corporation that was founded in Santa Clara,
California in 1984, initially to conduct systems engineering and software
development for the Navy and others in the intelligence community. In 1991,
Delfin merged, via a pooling of interests transaction, with Maxim Technologies
Inc. of Santa Clara, California. Maxim was engaged in the design and manufacture
of light-weight low-power systems to intercept, geolocate and analyze signals
for tactical situation awareness and response. In 1993, Delfin acquired the
WorkGroup Division of Simpact Corporation, which was engaged in the computer
security, message handling and work group computing businesses. From this
beginning, Delfin evolved three business units that have been predominantly
involved in providing software, computer systems and into network integration,
technical consulting services and signals intelligence electronic hardware.
Customers include the United States defense and intelligence establishment and
numerous commercial and foreign customers.
The range of technical capabilities provided by Delfin encompasses tactical
information management systems for shipboard applications, intelligence analyst
software support tools, heterogeneous database access tools, tactical situation
modeling and simulation, and other computer-based applications. In the technical
consulting services area, Delfin has developed a wide array of systems
management experience and provides essential day-to-day technical and program
management support to many government offices. The business and technical
consulting focus is on the development of defense C4I systems.
ENGINEERING AND MANAGEMENT SERVICES DIVISION
The Engineering and Management Services Division ("EMSD") of Delfin provides
engineering services, information solutions and decision systems in the areas of
Command, Control, Communication, Computing, Intelligence, Surveillance, and
Reconnaissance ("C4ISR") for various organizations and agencies of the United
States government and for commercial customers. EMSD consists of 134 technical
personnel operating from six Delfin facilities and numerous government
facilities both in the United States and abroad.
CUSTOMERS AND PROGRAMS. EMSD focuses on marketing its C4ISR services to
United States government Space and Naval communities. The largest business
segment involves classified space sensors and communications. Delfin is
particularly involved in assisting the government in the system engineering of
prototype systems and product developments that deliver information to a range
of customers from front-line operational forces to the National Command
Authority ("NCA"). Further, Delfin provides National Systems Training &
Education, Exercise Support and Data Analysis to war fighters worldwide. In
addition, engineering services are provided to the government for the design,
development, procurement and eventual fielding of data communications systems.
As an example, Delfin provides systems engineering support to the Marine Corps
with the goal of applying new technologies providing intelligence information to
combat Marine units.
Navy C4ISR is also an important area of expertise. Delfin provides
integration services for a major portion of the Navy's shipboard C4I PC systems
which are part of the Global Command and Control System-Maritime ("GCCS-M,"
formerly JMCIS). Delfin also performs the WindowsNT-TM- software integration and
installation services for the Navy's IT21 unclassified networks afloat. These
networks range in size from 2 servers and 17 workstations on unit level ships to
8 servers and 600 workstations on carriers. Delfin maintains a team of "at sea
qualified" Microsoft Certified System Engineers who provide worldwide coverage
to install and maintain Navy commercial off the shelf systems. In addition to
the integration of commercial software, Delfin engineers integrate government
off-the-shelf software, such as the C2PC application and Common Message
Processor, both of which are associated with the classified network
infrastructure. Delfin engineers test and integrate new Asynchronous Transfer
Mode networks aboard ship, interfacing PC systems to UNIX systems, and
automating message handling. Delfin is the sole
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<PAGE>
developer of the GCCS-M Automated Message Handling System PC client that is also
used at major shore commands such as the Staff of the Commander-In-Chief, United
States Pacific Fleet.
Other C4ISR engineering support customers include the Defense Information
Systems Agency, the Defense Modeling and Simulation Office, the National Imagery
and Mapping Agency, the Joint Strike Fighter Program and several foreign navies.
Delfin personnel are involved in designing and implementing Navy and Joint C4I
architectures at all security levels in order to create a coalition of wide area
networks for both shore and shipboard systems and for the Global Broadcast
System. Delfin also supports a joint program to develop a new air mission
planning system that is to be used by both the Navy and the United States Air
Force.
SOFTWARE TOOLS. EMSD also provides early warning decision systems to assist
government and commercial intelligence organizations. Intelliscape-TM-,
developed by Delfin, is a early warning Year 2000 compliant Department of
Defense Intelligence Information Systems migration tool set that provides
intelligence fusion from heterogeneous databases, visualizes and shows
relationships among the data, and provides indications and warning based upon
the compilation of that information. The Intelliscape design utilizes
object-oriented technology and knowledge-based decisions to aid operating under
the UNIX operating systems.
INFORMATION SOLUTIONS DIVISION
The Information Solutions Division ("ISD") of Delfin delivers information
technology solutions. ISD is the successor to the WorkGroup Division of Simpact
Corporation acquired by Delfin in 1993. ISD provided integrated office
automation and secure communications systems into workflow applications for the
foreign affairs community beginning in 1984. Since Delfin acquired ISD in 1993,
ISD has developed and deployed a wide range of workflow, collaborative
computing, process automation, and secure communications solutions, as well as
related maintenance and support services. Today, ISD customers include United
States government agencies and commercial companies in such fields as health
care, telecommunications and the financial community. ISD is headquartered in
Fairfax, Virginia.
CAPABILITIES. The technical focus of ISD is development and deployment of
applications on PC-based networks including local area networks and wide area
networks connected via the World Wide Web (the "web"). When Lotus Notes was
first released, ISD recognized its importance to building more efficient and
effective workflow and collaborative computing solutions in the distributed PC
environment. ISD was one of the first to partner with Lotus Notes development
and has maintained a partnership with Lotus as a Premium Business Partner.
Similarly, as Microsoft has developed products that can provide a base for
collaborative solutions beyond a basic operating system, ISD has become a
Microsoft Solutions Provider. ISD is also a Novell Authorized Partner designing,
installing and maintaining Novell-based networks. ISD staff are experienced in a
number of areas, including:
- Business process analysis and engineering
- Custom software development in C and C++
- Enterprise planning, deployment and management of PC-based networks
- Full life-cycle project management
- Computer and network security
SERVICES. ISD applies technical expertise in the following areas:
- Business process analysis. ISD transforms customers' business strategy
into reality by providing business process analysis and improvement,
requirements verification and documentation, implementation and
information security planning, and systems design.
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<PAGE>
- Process automation. ISD develops and deploys processes which assist
customers in managing their businesses and making timely and effective
business and operational decisions. ISD emphasizes the optimum reuse of
computing solutions by using Lotus Notes and Domino-TM- as well as
Microsoft applications and the web.
- Secure communications solutions. ISD develops ground-up custom
applications where required, and provides United States government
customers with a variety of specialized secure communications
capabilities.
- Network integration. ISD builds and manages network infrastructure that
will reliably support customers' business processes. This includes
providing network audits to determine the state of existing networks,
designing and installing PC-based networks, web sites and intranets, and
providing on-going system administration and management.
- Computer forensics and security. Based on ISD's background of building
solutions for secure government applications, ISD has developed an
in-depth knowledge of computer and network security. ISD has a long
history of security solutions deployment for government customers,
including monitoring networks and computers for security-relevant events
or intruders. ISD computer security knowledge has been innovatively
applied to the field of computer forensics where it provides automated
capability for the processing of computer-based evidence and the
examination of computer media. This capability has been used in developing
secure solutions for commercial customers.
CUSTOMERS AND SOLUTIONS. The United States Intelligence community is ISD's
largest government customer. ISD provides custom-built special purpose secure
communications systems and computer security applications for these customers.
For the FBI, ISD has developed a PC network-based automated computer forensics
system known as ACES, which provides fast and efficient forensic examination and
protection of computer media. While ISD continues to add additional capabilities
to ACES, the division also provided derivative architectures systems to
Intelligence community customers, to the Defense Department, and to foreign law
enforcement agencies in the United Kingdom and Australia. For the United States
Marine Corps Reserves, ISD has developed a very successful integration of a
Lotus Notes based system that automates and simplifies the scheduling of and
approval for the training schedules of 42,000 Marine reservists. With the ISD
system in place the typical processing time of a training request has gone from
weeks to hours. Current development includes a related web-based personnel
system for the Reserves that will permit military reservists world-wide to
access their personnel records securely over the web.
ISD's commercial customers are drawn from a number of industries. An example
is a web-based Time and Attendance reporting system for Global One, a
telecommunications company. This application was built on Lotus Notes/Domino-TM-
and connects with back-end databases and with the Global One accounting system.
It streamlines the collection and management of employee time reporting
throughout Global One's world-wide operation.
WEB SOLUTIONS. ISD has created web sites for a number of customers,
including the National Association of Women Business Owners ("NAWBO"), which was
performed under contract from IBM. ISD currently hosts the NAWBO web site.
Another important web site developed by ISD is the Housing Research Foundation
(HRF) site. HRF has a cooperative agreement with the Department of Housing and
Urban Development ("HUD") under which HRF provides assistance and direction to
local Public Housing Authorities across the country who are awarded grants from
HUD. The ISD-developed web site, and the Lotus Notes network behind it, permit
HRF to coordinate its activities securely and efficiently with the Public
Housing Authorities over the web.
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<PAGE>
SIGNAL PRODUCTS DIVISION
Delfin's Signal Products Division ("SPD") is the result of a merger between
Delfin Systems and Maxim Technologies in 1991. SPD's primary products are SIGINT
communications manpackable radio direction finding systems, radio receivers,
antennas and associated components for the Department of Defense, other US
Government agencies and the international market. SPD's business strategy is to
use the AN/PRD-13(V)2 Improved SIGINT Manpack System production program to
expand its standard products business base in receivers, antennas, associated
products, and small custom systems. Today, the Department of Defense market is
oriented to lightweight and mobile operations such as Special Forces, the
Marines, and the Navy Seals as well as various government agencies. They can use
SPD products with a workstation and on various platforms including fixed ground,
mobile, airborne, patrol boats or unattended autonomous vehicles. Small, light
weight, low power consumption, reliable equipment that performs is critical to
the success of these missions.
SIGINT MANPACK SYSTEMS. SPD offers advanced technology demonstrated by the
success of the AN/PRD-13 SIGINT Manpack System built for the United States
Special Operations Command. Hundreds of systems have been delivered to various
domestic and foreign customers since 1993. These systems have demonstrated
excellent reliability in field operations with very low maintenance and repair
costs. The AN/PRD-13 can be powered by battery, solar blanket, vehicle battery,
or AC power.
In April 1998, Delfin received the initial production delivery order for
AN/PRD-13(V)2 systems. This contract provides for procurement of up to 398
Improved SIGINT Manpack Systems (ISSMS) over five years for a value in excess of
$30 million. A key feature of the design is compatibility of mature and new
equipment, forward and backward and between the various models. The major
improved manpack system components are interchangeable with the equivalent
component of the older design, the AN/PRD-13, which allows the new antennas to
be used with the older receiver processor. Upgrades of the older equipment can
extend usable life while new antennas increase the frequency range and improve
sensitivity. The system and its many configurations is intended for use on
platforms including fixed ground, ground mobile, patrol boat, helicopter and
C-130 transport aircraft.
NEW PRODUCTS. SPD produces highly reliable, low-power, light-weight
receivers that have broad application in the global marketplace. Fielded systems
have logged over 2,000,000 hours with outstanding operational up-time.
RECEIVERS AND SPECTRUM PROCESSORS. SPD offers receiver and spectrum
processor configurations as standard products. The receivers are the MD-440 and
the MR-203. The equipment is designed to meet a variety of field conditions. The
units are low power, therefore do not require special installations for heat
dissipation. The MD-440 is a high performance receiver processor that has the
capability to perform direction finding with any of the direction finding
antennas built by SPD. The MR-203 is a receiver without the direction finding
capability; it functions as a communications search and/or analysis receiver.
Standard spectrum processors SP201 and SP202 are also designed for rugged
field conditions. The SP202 is a standard product on Navy patrol aircraft.
Spectrum processors are available in a variety of packages to meet customer
requirements.
ANTENNAS. SPD has a variety of standard antennas in addition to the
antennas supplied with the AN/PRD-13 and AN/PRD-13(V)2 configurations. These
antennas are used for fixed sites and naval surface ships.
CUSTOMERS. SPD's major customer for the AN/PRD-13 and the AN/PRD-13(V)2 is
United States Special Operations Command. Other customers include various
government agencies and prime contractors. In addition Delfin SPD sells
equipment internationally in Europe, the Middle East, Asia, Australia, and
Central and South America. SPD uses commissioned sales representatives to
facilitate foreign sales. International business comprises between 20% and 25%
of SPD revenues.
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MANUFACTURING. SPD manufactures its products in Santa Clara, California.
All fabrication of printed circuit boards and mechanical parts are purchased
items. Almost all printed circuit assembly and cables are subcontracted. There
are a number of consignment contractors that provide this service. SPD does
subassembly and unit or box assembly and test. The systems are then integrated,
tested and subjected to environmental stress screening prior to shipping.
PATENTS. Delfin holds a patent for single channel interferometer direction
finding. The patent is the basis of all the direction finding equipment that
Delfin markets. There are two other patents related to processing.
BUSINESS ENVIRONMENT
The United States market demand is growing for light-weight, low-power, low
cost, highly reliable equipment. It is highly competitive and constant
innovation is required. The international market is also growing due to
political instability in the world. Additionally, the war on drugs and terrorist
activity is increasing product demand.
BACKLOG; EXPORT SALES
Delfin's backlog of unfilled orders at August 28, 1998 was approximately $84
million compared to $30.7 million at August 29, 1997. The backlog at August 28,
1998 consists of $13.6 million in firm backlog and $70.4 million in unfunded and
other backlog. The August 29, 1997 backlog consists of $7.2 million in firm
backlog and $23.5 million in unfunded and other backlog. Delfin expects that all
of the August 28, 1998 backlog will be converted into revenue by the end of the
fiscal year ended September 30, 2002.
Orders are entered into backlog only when Delfin receives a definite
commitment for products or services from a customer. Delivery orders received by
Delfin 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.
Delfin's 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 Delfin's future contract revenue and consequently,
the dollar amount of the backlog is not necessarily indicative of the future
revenue of Delfin.
Delfin's aggregate export sales were approximately $1 million in 1997, $1.2
million in 1996 and $1.5 million in 1995.
COMPETITION
Delfin experiences competition in its target markets and competes with both
large and small businesses.
Competitors of EMSD include such companies as Booz-Allen Hamilton, SAIC,
PRC, BTG, Anteon and TASC. ISD's competition within the intelligence community
and the department of defense includes a large number of federal systems
integrators in the Washington, D.C. area, including many larger companies such
as CSC, SAIC, Booz-Allen Hamilton and Logicon. SPD's competition includes
Watkins Johnson, Techcom, Cubic, Argo Systems, Sanders Lockheed Martin, Scicom
Andrew, Condor, Zeta, TCI, Rhode and Schwartz, and Thompson CSF.
Competition for commercial business varies for Notes or Microsoft
Development, network integration, or business process engineering. For Notes
applications, the competition includes Lotus Consulting, Cost Management
Systems, Realogic, and Ikon. Microsoft partners typically compete for Microsoft
applications. Microsoft and Novell integration partners usually compete for
network integration projects.
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<PAGE>
Large consulting companies such as Andersen Consulting and Booz-Allen Hamilton
often compete for the larger business process engineering projects.
Many of Delfin's competitors have far greater financial, engineering,
technological, marketing, sales and distribution and customer service resources
than Delfin. In addition, many of these competitors have more experience in
certain of Delfin's targeted markets. Delfin 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 Delfin
to compete in its target markets 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 September 24, 1998 Delfin had 219 employees. Delfin is not subject to
any collective bargaining agreements with its employees.
FACILITIES
Delfin's operations occupy approximately 60,600 square feet of space located
throughout the United States. The large majority of the space is office space.
All of Delfin's facilities are leased. For lease commitment information,
reference is made to Note 5 to the accompanying financial statements.
It is management's policy to maintain Delfin'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 Delfin's present needs.
Substantially all of the machinery and equipment employed by Delfin in its
business is owned by Delfin, but is collateral for equipment financing
agreements arranged by the company.
The locations of the principal operating facilities of Delfin at June 30,
1998 were as follows:
Engineering and Management Services Division
San Diego, California
Fairfax, Virginia
Norfolk, Virginia
Aurora, Colorado
Information Solutions Division
Fairfax, Virginia
Signal Products Division
Santa Clara, California
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DELFIN 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 reflect Delfin
management's best judgment based on factors currently known, and 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,
including, but not limited to, reductions in government spending, budget
overruns on fixed price contracts, and increased competition. See "Risk
Factors." Forward-looking information provided by Delfin pursuant to the safe
harbor established by recent securities legislation should be evaluated in the
context of these factors.
Delfin has incurred net losses in two of the last three fiscal years. In
1995 Delfin settled a claim for equitable adjustment on a government contract.
This resulted in a $478 pre-tax loss. In addition, various firm fixed price
hardware development programs caused additional losses in 1995, 1996 and 1997.
The last of such loss programs completed shipments by the end of fiscal year
1997.
In fiscal year 1998, Delfin received the initial production delivery order
against a contract that allows for procurement of up to 398 Improved SIGINT
Manpack Systems (ISSMS) over five years for a value in excess of $30 million.
Systems to be delivered under this contract have successfully passed testing by
both the Army and the Navy with resultant approval for full scale production.
This production base represents a paradigm shift in operating levels and
attendant efficiencies.
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 Delfin will be successful in generating significant revenues
and/or sufficient cash flows in future periods to meet its ongoing obligations.
RESULTS OF OPERATIONS
NINE MONTHS FISCAL YEAR 1998 COMPARED WITH NINE MONTHS FISCAL YEAR 1997
Revenues for nine months of fiscal year 1998 were $20,961, an increase of
$2,131 compared to nine months of fiscal year 1997. The increase in revenue was
primarily the result of labor rate increases recoverable on cost plus type
contracts and the commencement of work on the improved SIGINT Manpack System
contract.
After an inventory write down of $241, nine months operating profit was $674
in 1998 versus $246 for the same period in 1997. This increase was primarily the
result of the absence of losses on fixed price development contracts in Signal
Products Division (SPD) and an increase in the general level of business.
Net interest expense for nine months of fiscal year 1998 was $224 as
compared to $150 for the same period in fiscal year 1997. The increase was the
result of bank borrowing to meet the growing work in process on the Improved
SIGINT Manpack System.
A net profit of $261 for six months of fiscal year 1998 represented an
increase of $202 compared to the same period in fiscal year 1997. This
improvement was primarily the result of expense cost control on an increasing
revenue base.
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996
Revenues for fiscal year 1997 were $26,631, a decrease of $3,100 compared to
fiscal year 1996. The decrease in revenue was primarily the result of a shortage
of backlog in SPD and reduced "pass through" subcontract activity service
contracts in Engineering and Management Services Division (EMSD).
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<PAGE>
Operating profit was $261 in 1997 and $448 in 1996. This reduction was
primarily the result of work done on fixed price development contracts in excess
of the contract value.
Net interest expense for fiscal year 1997 was $233 as compared to $366 in
fiscal year 1996. The decrease was the result of carrying less accounts
receivable credit line debt through fiscal year 1997 than in the prior fiscal
year and the completion of payments on equipment leases.
In both fiscal years 1997 and 1996, the tax provisions in the income
statement were significantly higher than a normal combined federal and state
income tax rate of 38.5%, due principally to unallowable deductions.
A net loss of $30 in fiscal year 1997 represented a decrease of $40 compared
to fiscal year 1996 profit of $10. This reduction was primarily the result of
delayed order bookings in SPD.
FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995
Revenues for fiscal year 1996 were $29,731, an increase of $2,443 over
fiscal year 1995. This increase was due to increased direct labor volume on
service contracts.
Operating profit totaled $448 for fiscal year 1996 compared to an operating
loss of $535 in fiscal year 1995. The improvement was due to the fact that 1995
operating results included writing off $478 related to a request for equitable
adjustment claim on a government contract.
Net interest expense in fiscal year 1996 totaled $366, a decrease of $104
from fiscal year 1995. During the fiscal year, bank accounts receivable credit
line and term debt decreased from a total of approximately $4,061 to $1,438.
Loan repayments were financed mainly by billing and collections of unbilled
receivables.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, cash totaled $83. Trade receivables totaled $9,800, an
increase of $2,632 from September 1997. The receivable increase is primarily due
to work in process on the Improved SIGINT Manpack System.
At June 30, 1998, Delfin's bank debt was $3,700 against the secured accounts
receivable line of credit. The interest rate on the line is 0.75% in excess of
the bank prime lending rate, and the effective rate was 9.25% at June 30, 1998.
The existing bank agreement provides for advances against the line not to exceed
a balance of $4,300 and matures on February 15, 1999.
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 Delfin's remaining government business will be successful in
generating significant revenues and/or sufficient cash flows in future periods
to enable Delfin to meet its ongoing obligations.
During fiscal years 1997 and 1998, with the exception of minor exercises of
stock options, there has been no activity related to common stock. There is no
public trading market for Delfin's capital stock.
YEAR 2000
The Company has performed a general review of its computer systems for the
Year 2000 issue. Those systems that are identified as not Year 2000 compliant
will be upgraded in 1998. The upgrade will be covered under the maintenance and
support contract with the software company. The Company will also be initiating
discussions with significant suppliers, customers and financial institutions to
ensure that their systems are Year 2000 compliant. It does not expect its
results of operations or financial conditions to be materially affected by Year
2000 issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 does not change the
recognition or measurement of pension or postretirement benefit plans, but
revises and standardizes disclosure requirements for pensions and other
postretirement benefits. The adoption of SFAS 132 has no impact on the Company's
results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. The adoption of SFAS 133 has no impact on the Company's results of
operations or financial condition.
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<PAGE>
OWNERSHIP OF DELFIN'S SECURITIES
Set forth below is information regarding beneficial ownership of Delfin's
capital stock as of the Record Date, by (i) each person or entity who is known
to Delfin to own beneficially 5% or more of the outstanding shares of Delfin
Common Stock, (ii) each present director of Delfin, and (iii) all Delfin
directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
IDENTITY OF OWNER OR GROUP(1) BENEFICIAL OWNERSHIP CLASS OF STOCK CLASS
- ------------------------------------------------------------ -------------------- ----------------- -------------
<S> <C> <C> <C>
Hambrecht & Quist .......................................... 1,228,070 Common Stock 17.0%
One Bush Street, 14th Floor
San Francisco, California 94104
American Premier Underwriters, Inc. ........................ 750,030 Common Stock 10.4%
One East Fourth Street
Cincinnati, Ohio 45202
SAS Capital Corporation(2) ................................. 564,692 Common Stock 7.8%
515 Figueroa Street, 6th Floor
Los Angeles, California 90071
Edwin T. Lester ............................................ 375,000 Common Stock 5.2%
10385 Barrywood Way
San Diego, California 92131
Ronald L. Murphy ........................................... 381,458 Common Stock 5.3%
Mellon C. Baird ............................................ 477,000(3) Common Stock 6.2%
Robert M. Hanisee .......................................... 91,547(3) Common Stock 1.3%
Bill B. May ................................................ 50,000 Common Stock *
Merrill E. Newman .......................................... 49,398(3) Common Stock *
John A. General ............................................ 197,500(3) Common Stock 2.7%
L. Owen Brown .............................................. 15,000(3) Common Stock *
Lin Conger ................................................. 15,000(3) Common Stock *
Allen Drue Branch........................................... 165,000(3) Common Stock 2.3%
Gerald P. Florence.......................................... 40,000(3) Common Stock *
Byron P. Rovegno............................................ 159,107(3) Common Stock 2.2%
John Forbus................................................. 110,000(3) Common Stock 1.5%
All Directors and Executive Officers as a Group (14
persons) ................................................. 1,901,470 Common Stock 23.2%
</TABLE>
- ------------------------
* = less than 1%
(1) The address of each owner other than Hambrecht & Quist, SAS Capital
Corporation, American Financial Group, Inc. and Edwin T. Lester is c/o
Delfin Systems, 3000 Patrick Henry Drive, Santa Clara, California 92121.
(2) Includes 485,000 shares owned by SAS Associates, a limited partnership of
which SAS Capital Corporation is a general partner. In addition, Roland
Seidler, Jr., President of SAS Capital Corporation, owns 133,744 shares.
(3) Includes 477,000; 21,992; 15,000; 10,000; 15,000; 15,000; 105,000; 40,000;
84,000; 110,000 and 969,492 shares subject to outstanding options to
purchase Common Stock held by Messrs. Baird, Hanisee, Newman, General,
Brown, Conger, Branch, Florence, Rovegno and Forbus and all directors and
officers as a group, respectively, which are currently exercisable or may
become exercisable within 60 days after September 21, 1998.
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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. Delfin has no information as to whether any shares shown in this table
are subject to California community property law.
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COMPARISON OF RIGHTS OF TITAN STOCKHOLDERS AND DELFIN SHAREHOLDERS
The rights of Titan stockholders are governed by the Titan Certificate, the
Titan Bylaws and the Delaware General Corporation Law (the "DGCL"). The rights
of Delfin shareholders are currently governed by Delfin's Articles of
Incorporation (the "Delfin Articles"), its Bylaws (the "Delfin Bylaws") and the
California Corporations Code (the "CCC"). Upon consummation of the Merger,
Delfin shareholders 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 Delfin shareholders 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 Delfin.
CAPITAL STOCK
The authorized capital stock of Titan consists of 45,000,000 shares of Titan
Common Stock, of which 32,833,158 shares were issued and outstanding on
September 21, 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"), none of which are outstanding
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.
Each holder of $1.00 Cumulative Convertible Preferred Stock is entitled to
one-third vote per share of such stock; each holder of Series B Preferred Stock
is entitled to one vote per share of such stock. Holders of Common Stock, $1.00
Cumulative Convertible Preferred Stock and Common Stock generally vote as a
single class.
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. Series B Preferred
Stock accrues dividends at a rate of 6% per annum payable quarterly in arrears
and has a liquidation preference of $6.00 per share plus accrued and unpaid
dividends.
The authorized capital stock of Delfin consists of 30,000,000 shares of
Delfin Common Stock, no par value, of which 7,221,484 shares were issued and
outstanding on September 21, 1998, and no shares of Preferred Stock.
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 Delfin Bylaws state that, in general, they may be amended or repealed by
the Delfin Board or by the affirmative vote of a majority of the outstanding
shares; certain amendments to the size of the Board of Directors may only be
approved by the shareholders.
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AMENDMENT OF DELFIN ARTICLES 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 CCC, the
Delfin Articles may only be amended by a majority of Delfin's outstanding
capital stock entitled to vote on, or consent to, such amendment.
SPECIAL MEETINGS
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
Delfin Bylaws permit a special meeting to be called by the Board of Directors,
the Chairman of the Board, the President or holders of at least 10% of the
outstanding shares of Delfin. Notices of such special meeting must be in writing
and state the general nature of the business to be transacted at the proposed
meeting.
ACTIONS BY WRITTEN CONSENT
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 CCC provides that any
action which may be taken at any annual or special meeting may be taken without
a meeting, if the number of holders of Delfin's outstanding capital stock
otherwise sufficient to approve 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. The Delfin Bylaws currently provide that the number of
directors presently authorized is no less than five and no more than nine.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The DGCL permits but does not require, a classified board of directors.
Under the CCC, certain publicly traded corporations may adopt a classified board
of directors. Delfin is not eligible to adopt 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.
Under the CCC, cumulative voting is available except that certain publicly
traded corporations may eliminate cumulative voting rights. Delfin is not
eligible to eliminate cumulative voting rights.
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.
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The CCC and the Delfin Bylaws provide that any or all directors may be
removed without cause at any meeting of the stockholders called expressly for
such purpose, by the approval of a majority of the outstanding shares.
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.
Similarly, the CCC provides that unless otherwise provided in the articles
of incorporation or bylaws, vacancies may be filled by approval of the board, by
unanimous consent of the directors then in office, by a majority of directors in
office at a meeting, or by a sole remaining director. The Delfin Bylaws use
comparable language.
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 CCC permits distributions to the shareholders if the amount of retained
earnings equals or exceeds the amount of the proposed distribution, or if
certain specified assets of the corporation at least equals 1 1/4 its
liabilities, unless the corporation would be unable to meet its liabilities as
they mature.
LIMITATION OF LIABILITY OF DIRECTORS
The DGCL and the CCC permit corporations to adopt a provision in their
certificate of incorporation and articles of incorporation, respectively,
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 Delfin Articles provide that the liability of directors of Delfin is
eliminated to the fullest extent permissible under California law.
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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 CCC authorizes corporations to indemnify persons
who are party or threatened to be made a party to any proceeding (other than an
action by or in the right of the corporation to procure a judgment in its favor)
by reason of the fact that the person was an agent of the corporation, if that
person acted in good faith and in a manner the person reasonably believed to be
in the best interests in the corporation, and in the case of a criminal
proceeding, had no reasonable cause to believe the conduct of the person was
unlawful. No indemnification shall be made in respect of a matter as to which
the person shall have been adjudged liable to the corporation, unless a court
shall determine otherwise; no indemnification shall be made for amounts paid in
settling of or expenses incurred in defending a pending action without court
approval. The Delfin Articles states that Delfin may indemnify officers,
directors, employees and agents of Delfin beyond that provided by Section 317 of
the CCC, but subject to limitations regarding excess indemnification contained
in the CCC. However, the Delfin Bylaws provide that the Corporation shall have
no obligation to grant such indemnification except as expressly set forth in
Section 317 of the CCC.
LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES
The DGCL and the Titan Bylaws permit Titan to make loans to, guarantee the
obligations of, or otherwise assist its officers or other employees when such
action, in the judgment of the directors, may reasonably be expected to benefit
Titan. The Delfin Bylaws specify that Delfin can take similar actions if it has
outstanding shares held of record by 100 or more persons.
EXPERTS
The audited consolidated financial statements of The Titan Corporation
included or incorporated by reference 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.
The financial statements of Delfin Systems as of September 30, 1996 and 1997
and for each of the three years ended September 30, 1997 appearing in this
Prospectus/Proxy Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed on
for Titan by the General Counsel of Titan. The federal income tax consequences
of the Merger will be passed upon for Titan by Gray Cary Ware & Freidenrich, 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
Delfin by Brobeck Phleger & Harrison LLP, Palo Alto, California.
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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
UNAUDITED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.......................... F-27
Unaudited Consolidated Statements of Operations for the Six Months Ended June 30, 1998................... F-28
Unaudited Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 1998 and
1997................................................................................................... F-29
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997.......... F-30
Notes to Unaudited Consolidated Financial Statements..................................................... F-31
DELFIN SYSTEMS
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors........................................................................... F-40
Balance Sheets as of September 30, 1997 and 1996......................................................... F-41
Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995........................... F-42
Statements of Shareholders' Equity for the Years Ended September 30, 1997, 1996, 1995 and 1994........... F-43
Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995........................... F-44
Notes to Financial Statements............................................................................ F-45
UNAUDITED FINANCIAL STATEMENTS
Unaudited Balance Sheets as of June 30, 1998 and September 30, 1997...................................... F-51
Unaudited Statements of Operations for the Nine Months Ended June 30, 1998 and 1997...................... F-52
Unaudited Statements of Cash Flows for the Nine Months Ended June 30, 1998 and 1997...................... F-53
Notes to Unaudited Financial Statements.................................................................. F-54
</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
June 10, 1998 (except with respect to the matters
discussed in Note 16, as to which
the date is June 30, 1998)
F-2
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, 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................................................................ 58,612 50,985
Inventories............................................................................. 15,480 14,979
Net assets of discontinued operation.................................................... 11,512 1,304
Prepaid expenses and other.............................................................. 2,160 2,245
Deferred income taxes................................................................... 7,950 6,037
--------- ---------
Total current assets.................................................................. 110,825 90,189
Property and equipment--net............................................................... 24,432 26,445
Goodwill--net of accumulated amortization of $5,780 and $4,824............................ 20,587 21,580
Other assets--net......................................................................... 8,097 13,271
Net assets of discontinued operation...................................................... 2,286 7,264
--------- ---------
Total assets.............................................................................. $ 166,227 $ 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............................................................... 6,833 11,138
Note payable to related party........................................................... -- 1,000
--------- ---------
Total current liabilities............................................................. 40,444 30,859
--------- ---------
Long-term debt............................................................................ 37,310 40,071
--------- ---------
Other non-current liabilities............................................................. 10,573 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......................................................................... 25,622 27,420
Treasury stock (971,894 and 1,106,114 shares), at cost.................................... (2,591) (2,960)
--------- ---------
Total stockholders' equity.............................................................. 74,900 74,460
--------- ---------
Total liabilities and stockholders' equity................................................ $ 166,227 $ 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..................................................................... $ 195,884 $ 155,954 $ 161,231
Costs and expenses:
Cost of revenues........................................................... 153,269 124,477 123,914
Selling, general and administrative expense................................ 23,574 23,693 25,867
Research and development expense........................................... 6,140 3,576 5,113
Write-down of assets, investments and environmental accrual (Note 3)....... 6,600 -- --
Restructuring and other expense, net....................................... -- -- 6,249
---------- ---------- ----------
Total costs and expenses................................................... 189,583 151,746 161,143
---------- ---------- ----------
Operating profit............................................................. 6,301 4,208 88
Interest expense............................................................. (5,101) (3,201) (1,353)
Interest income.............................................................. 869 639 392
---------- ---------- ----------
Income (loss) from continuing operations before income taxes................. 2,069 1,646 (873)
Income tax provision (benefit)............................................... 3,292 221 (540)
---------- ---------- ----------
Income (loss) from continuing operations..................................... (1,223) 1,425 (333)
Loss from discontinued operation, net of taxes............................... (343) (3,642) (1,972)
---------- ---------- ----------
Net loss..................................................................... (1,566) (2,217) (2,305)
Dividend requirements on preferred stock..................................... (875) (803) (695)
---------- ---------- ----------
Net loss applicable to common stock.......................................... $ (2,441) $ (3,020) $ (3,000)
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share:
Income (loss) from continuing operations................................... $ (0.09) $ .03 $ (.05)
Loss from discontinued operation........................................... (0.02) (.17) (.10)
---------- ---------- ----------
Net loss................................................................... $ (0.11) $ (.14) $ (.15)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares.................................................... 22,230 21,418 19,438
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share:
Income (loss) from continuing operations................................... $ (0.09) $ .03 $ (.05)
Loss from discontinued operation........................................... (0.02) (.17) (.10)
---------- ---------- ----------
Net loss................................................................... $ (0.11) $ (.14) $ (.15)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares.................................................... 22,230 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, 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................. -- -- -- 695 -- 695
Dividends on preferred stock-- Cumulative
Convertible, $1.00 per share................ -- -- -- (695) -- (695)
Series B, 6% annual........................... -- -- -- (180) -- (180)
Net loss...................................... -- -- -- (1,566) -- (1,566)
----- ----- ----------- --------- --------- ---------
Balances at December 31, 1997................. $ 695 $ 238 $ 50,936 $ 25,622 $ (2,591) $ 74,900
----- ----- ----------- --------- --------- ---------
----- ----- ----------- --------- --------- ---------
</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................................ $ (1,223) $ 1,425 $ (333)
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used for) continuing operations:
Depreciation and amortization........................................... 7,229 6,222 5,044
Deferred income taxes and other......................................... 1,901 (1,830) 304
Write-off of assets, investments and environmental accrual.............. 9,846 -- --
Pooling of interests.................................................... 695 -- --
Change in operating assets and liabilities, net of effects from
businesses sold and acquired:
Accounts receivable..................................................... (8,227) 7,060 (2,770)
Inventories............................................................. (1,901) (5,144) (3,048)
Prepaid expenses and other assets....................................... (2,089) 199 1,788
Accounts payable........................................................ 2,272 (4,356) 4,051
Income taxes payable.................................................... -- (653) --
Accrued compensation and benefits....................................... 175 (2,542) (1,673)
Restructuring activities................................................ (815) (4,099) (486)
Other liabilities....................................................... (6,196) (419) (542)
--------- --------- ---------
Net cash provided by (used for) continuing operations................... 1,667 (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 used for operating activities.................................. (3,906) (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.................... 5,861 (4,284) 255
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.
The accompanying consolidated financial statements do not include the accounts
of Horizons Technology, Inc., which merged with Titan on June 30, 1998 in a
transaction accounted for as a pooling of interests (see Note 16).
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.
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)
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
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.
Included in the accompanying consolidated statement of operations for the year
ended December 31, 1997 is amortization of $90, resulting in a net carrying
balance of approximately $200 in the accompanying consolidated balance sheets.
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
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)
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 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.
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 1997, 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.
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
F-9
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2. MERGER AND ACQUISITION (CONTINUED)
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 twelve months ended
December 31, 1997, and for the fiscal years ended June 30, 1996 and 1995,
respectively.
The combining periods are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1996
--------------------------------------------
<S> <C> <C> <C> <C>
Titan.......................................... Fiscal year ended December 1996
DBA............................................ Fiscal year ended June 1996
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERLY PERIODS
--------------------------------------------
Q1 '97 Q2 '97 Q3 '97 Q4 '97
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Titan.......................................... March 97 June 97 Sept. 97 Dec. 97
DBA............................................ March 97 June 97 Sept. 97 Dec. 97
</TABLE>
For the six months ended December 31, 1996, revenue of $11,724, costs and
expenses of $10,693, operating income of $1,031 income before taxes of $1,104
and net income of $695 was reported by DBA. Such amounts are not reflected in
the accompanying statements of operations as DBA's fiscal year ended June 30,
1997 was conformed to Titan's fiscal year end December 31, 1997, which resulted
in such amounts being reflected in the omitted period from July 1, 1996 through
December 31, 1996.
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 six-month period before the combination was
consummated that are included in the current combined results of operations of
Titan:
<TABLE>
<CAPTION>
TITAN COMBINED
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- DBA -----------------
DECEMBER 31, 1997(A)
--------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues......................... $ 171,186 $ 24,698 $ 195,884
Net income (loss)................ 5,165 (6,731) (1,566)
</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>
- ------------------------
(a) The net loss for the twelve months ended December 31, 1997 includes
recognition of a special charge of $9,846, for the write-down of certain
assets to net realizable value and accrual for certain liabilities as
described in Note 3 as well as "Management's Discussion and Analysis".
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.
F-11
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2. MERGER AND ACQUISITION (CONTINUED)
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>
NOTE 3. RESTATEMENT OF PREVIOUSLY FILED DBA FINANCIAL STATEMENTS
Restatements of $9,800 were recorded during the fiscal year ended December
31, 1997 related to the write down of certain assets of DBA to net realizable
value and the recognition of environmental liabilities. These restatements were
recorded as follows:
DBA has a 141,000 square foot manufacturing facility in Kissimmee, Florida
which has been held for sale since June 1996, at which time the recorded book
value was approximately $4.4 million. An independent appraisal of the building
and land was performed in August 1996, which indicated that the property had a
market value of approximately $5.0 million. Several potential buyers expressed
interest in acquiring the property throughout fiscal 1997. A written offer was
received in July 1997, at which time negotiations with the prospective buyer
commenced for the sale of the property at an amount which management believed
supported the recorded book value at that time. These negotiations eventually
terminated and did not result in the sale of the property. DBA received no
further offers until October 1997, at which time a written offer was received at
an amount substantially below the recorded book value. Negotiations with this
potential buyer took place but, again, did not result in a sale of the property.
During this extended time period for which the property had been held for sale,
DBA reduced ongoing maintenance and general upkeep of the property. As a result
of these factors, management concluded that there has been an impairment in the
carrying value of the asset. A charge of $2.0 million was recorded in the
Titan's financial statements for the year ended December 31, 1997 which reflects
management's estimate of the impairment, including estimated disposal costs.
Management has currently reinstated a program of ongoing maintenance (and
environmental remediation--see below) and is actively marketing the property for
sale through various channels. Management regularly reviews the adjusted value
of this asset for further impairment, and believes that the current book value
reflects an amount which approximates fair market value.
As a part of Titan's due diligence performed in connection with its
acquisition of DBA, a preliminary environmental site assessment of all DBA's
land and property was performed in October 1997. This study revealed certain
environmental matters at DBA's Kissimmee, Florida property discussed above.
These environmental matters included, but were not limited to, soil
contamination and potential asbestos and lead based paint contamination. Titan
engaged these environmental consultants to perform a limited initial assessment
of the potential range of costs to remediate such contamination as well as to
determine whether any additional environmental exposures exist with DBA's
property. An initial assessment considering pre-cleanup activities, and
operation and maintenance of the remediation plan, indicates that these costs
could range from approximately $3.0 million to $5.5 million (undiscounted). Such
amounts represent an initial estimate, which could change significantly as more
extensive studies are performed. In accordance with SFAS No. 5, "Accounting for
Contingencies" and SOP 96-1, "Environmental Remediation
F-12
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3. RESTATEMENT OF PREVIOUSLY FILED DBA FINANCIAL STATEMENTS (CONTINUED)
Liabilities," DBA recorded a $3.0 million special charge, representing the low
end of the estimate as no amount within the range was deemed to be a better
estimate at that time. These environmental remediation actions are being
undertaken at the sole discretion of management and have not been induced by
threat, by government agencies, or by litigation. In the accompanying balance
sheet as of December 31, 1997, approximately $.2 million is included in other
current liabilities and the remaining $2.8 million is included in non-current
liabilities, based upon the estimated timing of remediation work to be
performed. DBA commenced its pre-clean up activities which are expected to
continue through at least fiscal year 1998.
In December 1997, DBA received verbal indication from a systems integrator
for whom it had been developing special purpose mammography scanners that the
integrator would likely terminate further discussions regarding its pending
contract with DBA. Subsequent to December 31, 1997, DBA received written
notification that the integrator was terminating discussions regarding the
contract. Prior to December 31, 1997, DBA had identified several customers for
fingerprint scanners, which are based on similar technology to the mammography
scanners, and had entered into contracts to sell fingerprint scanners. Since the
scanners could not be utilized in their intended form, management identified an
impairment in the value of this inventory and recorded an adjustment of $1.3
million in the accompanying results from operations for the year ended December
31, 1997 in order to reflect these scanners at their net realizable value.
In December 1997, DBA determined that certain test machinery and equipment
which it needed to perform on a recently awarded contract was missing parts
essential to its operation. Management believes that the parts may have been
removed for use in other equipment, however, management is unable to determine
the exact disposition and/or timing of the use of such equipment. Without these
essential parts, the test machinery and equipment was of little or no value and
DBA determined that replacing this test machinery and equipment appeared to be
more economically advantageous than repairing it. The net book value of this
equipment was approximately $.6 million at December 31, 1997. Accordingly, DBA
recorded a charge of $.6 million to write off the book value of these assets in
the accompanying results of operations for the quarter ended December 31, 1997.
Management believes that this resulted from a breakdown in DBA's internal
controls over physical assets. Titan is in the process of critically reviewing
all of DBA's internal control procedures, particularly those regarding physical
assets, and will take further actions in order to align DBA's internal control
policies and procedures with those of Titan.
In September 1997, DBA invested $1.6 million by purchasing convertible
preferred Series B stock in Flash Comm, Inc. ("FCI"), a start-up venture. At the
time of making this investment, DBA management was led to believe that FCI would
be raising significant additional debt or equity financing by December 31, 1997,
which amounts would enable FCI to perform under its $10.6 million contract to
purchase products from DBA. FCI to date has not raised the additional capital,
has not yet generated any significant business, and to date, no products have
been purchased by FCI under its contract with DBA. To management's knowledge,
FCI has generated no significant revenue to date. In light of these
circumstances, and the current financial condition of FCI, management presently
believes that there is doubt about FCI's ability to achieve commercial success,
and thus recognizes that there has been an impairment in the value of the $1.6
million investment recorded by DBA. An adjustment to write-down the investment
by $1.6 million is reflected in the results of operations for the year ended
December 31, 1997.
F-13
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3. RESTATEMENT OF PREVIOUSLY FILED DBA FINANCIAL STATEMENTS (CONTINUED)
DBA recorded approximately $.6 million in unbilled receivables in fiscal
years 1991, 1992 and 1994 related to an overrun claim which is being litigated.
The Company had previously entered into settlement discussions with the U.S.
government. In 1992 the settlement offer of the U.S. government was rejected.
Management believes that this amount should have been written off in prior
reporting periods. However, the amounts were not written off until December
1997, due to a breakdown in internal controls. The $.6 million is reflected as a
charge to SG&A for the year ended December 31, 1997. Management believes that
the continuing recognition of this receivable by DBA represents a breakdown in
DBA's internal controls. As stated above, Titan is reviewing DBA's internal
control procedures.
At December 31, 1997, DBA had inappropriately capitalized rate variances of
$.7 million on its Cost Plus Fixed Fee (CPFF) contracts representing costs
incurred in excess of provisional billing rates. Such variances occurred
primarily in the quarter ended December 31, 1997. A charge of $.7 million was
recorded against revenue at December 31, 1997 to write off these variances.
NOTE 4. 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 5. 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.
F-14
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6. 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............................................. 22,107 22,564
Trade................................................................. 15,964 8,956
Less allowance for doubtful accounts.................................. (451) (404)
--------- ---------
$ 58,612 $ 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 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........................................................ 1,527 3,729
--------- ---------
$ 15,480 $ 14,979
--------- ---------
--------- ---------
Property and Equipment:
Machinery and equipment............................................... $ 39,144 $ 37,909
Furniture and fixtures................................................ 5,382 6,670
Land, buildings and leasehold improvements............................ 14,011 13,593
Construction in progress.............................................. 406 938
--------- ---------
58,943 59,110
Less accumulated depreciation and amortization.......................... (34,511) (32,665)
--------- ---------
$ 24,432 $ 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, $3,000 and $0 for estimated environmental costs, and
liabilities for post-retirement benefits for employees of previously
discontinued operations of $2,436 and $2,923.
F-15
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7. 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.
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.
F-16
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7. SEGMENT INFORMATION (CONTINUED)
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................................................... 112,923 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
---------- ---------- ----------
$ 195,884 $ 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 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........................................................ 2,127 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)
--------- --------- ---------
$ 6,301 $ 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................................................... 70,535 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................................................... 25,318 27,140 23,596
---------- ---------- ----------
$ 166,227 $ 158,749 $ 123,524
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-17
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7. 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 8. 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......................................................... $ 1,211 $ 85 $ (1,621)
State........................................................... 214 -- (164)
--------- --------- ---------
1,425 85 (1,785)
Deferred.......................................................... 1,867 136 1,245
--------- --------- ---------
$ 3,292 $ 221 $ (540)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8. 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..................................................... $ (415) $ 560 $ (297)
State income taxes, net of Federal income tax benefit............ (74) (256) (44)
Research credit.................................................. (324) -- --
Goodwill amortization............................................ 351 88 160
Environmental expenses........................................... 1,000 -- --
Keyman life insurance............................................ 24 36 75
Other............................................................ 2,730 (207) (434)
--------- --------- ---------
Actual tax provision (benefit) on continuing operations.......... $ 3,292 $ 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........................................................ $ 5,777 $ 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
--------- ---------
9,464 11,331
Valuation allowance...................................................... (1,200) (1,200)
--------- ---------
Net deferred tax asset................................................... $ 8,264 $ 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-19
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9. 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 10. 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-20
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On April 19, 1995 Titan was served in a lawsuit entitled DONALD P. SHAW V.
TITAN CORPORATION (the "Lawsuit"). The Lawsuit was pending in the United States
District Court for the Eastern District of Virginia, Alexandria Division, and
sought compensatory damages in an aggregate amount of $3,000,000 and punitive
damages in the amount of $1,050,000 on account of alleged wrongful termination
and intentional infliction of emotional distress. The Lawsuit resulted in a
verdict for the plaintiff awarding $65,000 in compensatory damages and $350,000
in punitive damages which was affirmed on appeal in February 1998. Titan
believes that the outcome of the Lawsuit 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 11. 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 12. 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 13. 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
F-21
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13. COMMON STOCK (CONTINUED)
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 ("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 14. 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 loss.......................................................... As reported $ (1,566) $ (2,217) $ (2,305)
Pro forma (3,273) (2,887) (2,479)
Net loss per share, basic and diluted............................. As reported $ (.11) $ (.14) $ (.15)
Pro forma (.15) (.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-22
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14. 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:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
FIXED OPTIONS (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
RANGE OF NUMBER REMAINING WEIGHTED- EXERCISABLE WEIGHTED-
EXERCISE OUTSTANDING AT CONTRACTUAL AVERAGE AT AVERAGE
PRICES 12/31/97 LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- -------------- -------------- --------------- --------------- ------------- ---------------
<C> <C> <S> <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 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%.
F-23
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15. 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 16. SUBSEQUENT EVENTS
On March 31, 1998, Titan acquired all of the outstanding common stock of
Validity Corporation ("Validity"), a California corporation, for $12 million in
cash, and notes payable to the shareholders of Validity totaling $3 million, due
and payable March 31, 1999, and bearing interest at the prime rate. The
transaction has been accounted for as a purchase; therefore, Validity's results
of operations will be consolidated with Titan's results of operations beginning
April 1, 1998.
On June 18, 1998, the Company withdrew its registration statement for the
proposed initial public offering of common stock of Linkabit Wireless, Inc., a
wholly owned subsidiary of the Company (Note 7). The registration statement was
withdrawn due to unfavorable market conditions for initial public offerings.
On June 30, 1998, Titan consummated a merger with Horizons Technology, Inc.
("Horizons") in a stock-for-stock transaction. Horizons is a provider of systems
engineering and program management services, computer systems integration and
high-end software and will become part of Titan's Information Technologies
segment. Titan issued approximately 3,200,000 shares of common stock in exchange
for all the outstanding shares of Horizons stock based on an exchange ratio of
approximately .37 and .82 shares of Titan's common stock for each share of
Horizons' common stock and Horizons' preferred stock, respectively. The merger
constituted a tax-free reorganization and will be accounted for as a pooling of
interests. In connection therewith, Horizons' January 31 fiscal year-end has
been changed to coincide with Titan's
F-24
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16. SUBSEQUENT EVENTS (CONTINUED)
year-end. The following unaudited pro forma data summarize the combined
operating results of Titan and Horizons as if the merger had occurred at the
beginning of the periods presented.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue...................................................................... $ 222,165 $ 185,505 $ 187,722
Net loss..................................................................... (5,787) (1,273) (7,473)
Net loss per share:
Basic...................................................................... $ (0.26) $ (0.08) $ (0.36)
Diluted.................................................................... (0.26) (0.08) (0.36)
</TABLE>
Prior to the merger, Horizons used a fiscal year ending January 31.
Accordingly, the combined pro forma results reflect the results for the Titan
fiscal years ended December 31, 1997, 1996 and 1995 combined with Horizons'
results for the fiscal years ended January 31, 1998, 1997 and 1996,
respectively.
On June 30, 1998, Titan entered into a definitive merger agreement with
Delfin Systems ("Delfin"), a California corporation, whereby, if approved by the
stockholders of Delfin, Delfin 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. On June 30, 1998, Titan signed a letter
of intent to acquire VisiCom Laboratories, Inc., a California corporation,
whereby, if approved by the stockholders of VisiCom, VisiCom will become a
wholly-owned subsidiary of the Titan Corporation in a stock-for-stock
transaction.
F-25
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
1997 QUARTER QUARTER QUARTER QUARTER YEAR
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 49,671 $ 49,352 $ 47,638 $ 49,223 $ 195,884
Gross profit............................................... 10,424 12,192 11,664 8,335 42,615
Income (loss) from continuing operations................... 1,522 1,404 (2,279) (1,870) (1,223)
Net income (loss).......................................... 1,179 1,404 (2,279) (1,870) (1,566)
Basic earnings per share:
Income (loss) from continuing operations................. .06 .05 (.11) (.09) (.09)
Net income (loss)........................................ .04 .05 (.11) (.09) (.11)
Diluted earnings per share:
Income (loss) from continuing operations................. .06 .05 (.11) (.09) (.09)
Net income (loss)........................................ .04 .05 (.11) (.09) (.11)
</TABLE>
<TABLE>
<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
ncome (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-26
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARES AND PAR VALUES)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 4,314 $ 11,135
Investments.......................................................................... -- 4,499
Accounts receivable--net............................................................. 76,754 64,676
Inventories.......................................................................... 18,732 15,480
Net assets of discontinued operations................................................ 9,890 8,235
Prepaid expenses and other........................................................... 3,390 2,398
Deferred income taxes................................................................ 8,134 7,950
---------- ------------
Total current assets............................................................. 121,214 114,373
Property and equipment--net............................................................ 23,363 24,737
Goodwill--net.......................................................................... 38,915 20,587
Other assets........................................................................... 5,565 8,097
Net assets of discontinued operation................................................... 295 2,286
---------- ------------
Total assets..................................................................... $ 189,352 $ 170,080
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit...................................................................... $ 26,337 $ 17,677
Accounts payable..................................................................... 17,606 12,661
Acquisition debt..................................................................... 3,000 --
Current portion of long-term debt.................................................... 1,157 1,104
Accrued compensation and benefits.................................................... 10,861 11,460
Other accrued liabilities............................................................ 7,637 6,952
---------- ------------
Total current liabilities........................................................ 66,598 49,854
---------- ------------
Long-term debt......................................................................... 32,303 37,494
Other non-current liabilities.......................................................... 13,720 10,839
Series B cumulative convertible redeemable preferred stock, $500 and $3,000 liquidation
preference, 6% cumulative annual dividend, issued and outstanding: 83,333 and
500,000.............................................................................. 500 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:
28,290,392 and 26,966,998........................................................ 283 270
Capital in excess of par value....................................................... 59,288 54,746
Retained earnings.................................................................... 18,544 15,773
Treasury stock (962,530 and 971,894 shares), at cost................................. (2,579) (2,591)
---------- ------------
Total stockholders' equity....................................................... 76,231 68,893
---------- ------------
Total liabilities and stockholders' equity....................................... $ 189,352 $ 170,080
---------- ------------
---------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues........................................................... $ 58,815 $ 56,511 $ 108,783 $ 112,729
--------- --------- ---------- ----------
Costs and expenses:
Cost of revenues................................................. 46,444 42,198 84,681 85,805
Selling, general and administrative expense...................... 6,081 8,164 12,516 14,819
Research and development expense................................. 994 2,005 2,512 3,630
Special acquisition related charges.............................. -- -- 1,460 --
--------- --------- ---------- ----------
Total costs and expenses....................................... 53,519 52,367 101,169 104,254
--------- --------- ---------- ----------
Operating profit................................................... 5,296 4,144 7,614 8,475
Interest expense................................................... (1,525) (1,380) (3,000) (2,805)
Interest income.................................................... 38 220 188 410
--------- --------- ---------- ----------
Income from continuing operations before income taxes.............. 3,809 2,984 4,802 6,080
Income tax provision............................................... 1,276 1,242 1,633 2,217
--------- --------- ---------- ----------
Income from continuing operations.................................. 2,533 1,742 3,169 3,863
Loss from discontinued operations, net of taxes.................... -- (262) -- (1,096)
--------- --------- ---------- ----------
Net income......................................................... 2,533 1,480 3,169 2,767
Dividend requirements on preferred stock........................... 210 218 429 437
--------- --------- ---------- ----------
Net income applicable to common stock.............................. $ 2,323 $ 1,262 $ 2,740 $ 2,330
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Basic earnings per share:
Income from continuing operations................................ $ .09 $ .06 $ .10 $ .13
Loss from discontinued operations................................ -- (.01) -- (.04)
--------- --------- ---------- ----------
Net income....................................................... $ .09 $ .05 $ .10 $ .09
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Weighted average shares.......................................... 26,659 25,299 26,344 25,298
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Diluted earnings per share:
Income from continuing operations................................ $ .08 $ .06 $ .10 $ .12
Loss from discontinued operations................................ -- (.01) -- (.03)
--------- --------- ---------- ----------
Net income....................................................... $ .08 $ .05 $ .10 $ .09
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Weighted average shares.......................................... 36,289 35,251 27,063 35,265
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE CAPITAL
CONVERTIBLE IN EXCESS
PREFERRED COMMON OF PAR RETAINED TREASURY
STOCK STOCK VALUE EARNINGS STOCK TOTAL
------------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Balances at December 31, 1997................ $ 695 $ 270 $ 54,746 $ 15,773 $ (2,591) $ 68,893
Pooling of interests....................... 31 31
Conversion of subordinated debentures...... 11 4,036 4,047
Conversion of warrants..................... 1 349 350
Exercise of stock options and other........ 1 269 12 282
Shares contributed to employee benefit
plans.................................... (112) (112)
Dividends on preferred stock--
Cumulative convertible, $.50 per share... (347) (347)
Series B, 6% annual........................ (82) (82)
Net income................................. 3,169 3,169
----- ----- ----------- --------- --------- ---------
Balances at June 30, 1998.................... $ 695 $ 283 $ 59,288 $ 18,544 $ (2,579) $ 76,231
----- ----- ----------- --------- --------- ---------
----- ----- ----------- --------- --------- ---------
SIX MONTHS ENDED JUNE 30, 1997
Balances at December 31, 1996................ $ 695 $ 264 $ 52,883 $ 21,792 $ (2,960) $ 72,674
Pooling of interests....................... (545) 695 545 695
Exercise of stock options and other........ 231 (64) (545) (378)
Shares contributed to employee benefit
plans.................................... 165 165
Dividends on preferred stock-- Cumulative
convertible, $.50 per share.............. (347) (347)
Series B, 6% annual........................ (90) (90)
Net income................................. 2,767 2,767
----- ----- ----------- --------- --------- ---------
Balances at June 30, 1997.................... $ 695 $ 264 $ 52,569 $ 24,753 $ (2,795) $ 75,486
----- ----- ----------- --------- --------- ---------
----- ----- ----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations......................................................... $ 3,169 $ 3,863
Adjustments to reconcile income from continuing operations to net cash provided by (used
for) continuing operations, net of effects of business acquired:
Depreciation and amortization........................................................... 3,181 3,414
Deferred income taxes and other......................................................... (44) 921
Poolings of interests................................................................... 31 (211)
Special acquisition related charges..................................................... (1,460) --
Changes in operating assets and liabilities, net of the effects of business acquired and
business sold:
Accounts receivable................................................................... (8,849) 300
Inventories........................................................................... (3,252) 895
Prepaid expenses and other assets..................................................... 1,253 (1,153)
Accounts payable...................................................................... 3,401 1,227
Accrued compensation and benefits..................................................... (1,279) (26)
Restructuring activities.............................................................. -- (815)
Other liabilities..................................................................... (627) (4,489)
----------- ---------
Net cash provided by (used for) continuing operations..................................... (4,476) 3,926
----------- ---------
Loss from discontinued operations......................................................... -- (1,096)
Changes in net assets of discontinued operations.......................................... 336 (3,322)
----------- ---------
Net cash provided by (used for) discontinued operations................................... 336 (4,418)
----------- ---------
Net cash used for operating activities.................................................... (4,140) (492)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................................... (1,173) (1,714)
Acquisition of business, net of cash acquired............................................. (11,679) --
Sale of investments....................................................................... 4,499 172
Other..................................................................................... 557 438
----------- ---------
Net cash used for investing activities.................................................... (7,796) (1,104)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt......................................................................... 8,660 7,881
Retirements of debt....................................................................... (1,091) (2,924)
Redemption of Series B preferred stock.................................................... (2,500) --
Dividends paid............................................................................ (429) (437)
Proceeds from stock issuances............................................................. 620 167
Other..................................................................................... (145) (484)
----------- ---------
Net cash provided by financing activities................................................. 5,115 4,203
----------- ---------
Net increase (decrease) in cash and cash equivalents...................................... (6,821) 2,607
Cash and cash equivalents at beginning of period.......................................... 11,135 5,167
----------- ---------
Cash and cash equivalents at end of period................................................ $ 4,314 $ 7,774
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (1) BASIS OF FINANCIAL STATEMENT PREPARATION
The accompanying consolidated financial information of The Titan Corporation
and its subsidiaries ("the Company" or "Titan") should be read in conjunction
with the Notes to Consolidated Financial Statements contained in the Company's
Annual Report on Form 10-K/A to the Securities and Exchange Commission for the
year ended December 31, 1997 and DBA Systems, Inc.'s ("DBA") Annual Report on
Form 10-K for the year ended June 30, 1997. The accompanying financial
information includes all subsidiaries on a consolidated basis and all normal
recurring adjustments which are considered necessary by the Company's management
for a fair presentation of the financial position and results of operations for
the periods presented. However, these results are not necessarily indicative of
results for a full year. The prior year financial statements have been restated
to reflect two mergers in 1998 (see Note 2) and the discontinuance of certain
operations in 1997 (see Note 3). Additionally, certain prior year amounts have
been reclassified to conform to the 1998 presentation.
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.
NEW ACCOUNTING STANDARDS. In January 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners
("comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The adoption of the accounting and
disclosure provisions of SFAS 130 has had no material impact on the Company's
financial statements and results of operations, as comprehensive income is the
same as net income for all periods presented herein.
In March 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). This statement revises and standardizes
employers' disclosures about pension and other postretirement benefit plans, but
it does not change the measurement or recognition of those plans. This Statement
further requires restatement of disclosure provisions for earlier periods
provided for comparative purposes. The adoption of SFAS 132 has had no material
impact on the Company's financial statements or related disclosures thereto.
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). This Statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal-use software as well
as assists in determining when computer software is for internal use. SOP 98-1
is effective for fiscal years beginning after December 15, 1998, with earlier
application permitted. The Company has not yet determined what impact, if any,
the adoption of the accounting and disclosure provisions of SOP 98-1 will have
on the Company's financial statements, results of operations or related
disclosures thereto.
F-31
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (1) BASIS OF FINANCIAL STATEMENT PREPARATION (CONTINUED)
In April 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). This Statement provides guidance on the financial reporting of
start-up costs and organization costs and requires that such costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, with earlier application permitted. The
Company expects to adopt the provisions of SOP 98-5, which will result in a
charge to be reported as a cumulative effect of a change in accounting
principle. Management believes that the adoption of this bulletin may result in
a significant non-cash charge. However, management has not yet determined what
impact the adoption of this bulletin will have on net income.
NOTE (2) MERGERS AND ACQUISITION
On June 30, 1998, the Company consummated a merger with Horizons Technology,
Inc. ("Horizons"), a Delaware corporation, in a stock-for-stock transaction.
Horizons is a provider of systems engineering and program management services,
computer systems integration and high-end software and has become part of
Titan's Information Technologies segment. Titan issued approximately 3,200,000
shares of common stock in exchange for all the outstanding shares of Horizons
stock based on exchange ratios of approximately .37 and .82 shares of Titan's
common stock for each share of Horizons' common stock and Horizons' preferred
stock, respectively. The merger constituted a tax-free reorganization and has
been accounted for as a pooling of interests.
On February 27, 1998, the Company consummated a merger with DBA Systems,
Inc. ("DBA"), a Florida Corporation, 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 is included in
Titan's Information Technologies segment. Titan issued approximately 6,100,000
shares of common stock for all the outstanding shares of DBA stock based on an
exchange ratio of approximately 1.37 shares of Titan common stock for each share
of DBA stock. The special charges of $1,460 in the six months ended June 30,
1998, primarily represent the costs and expenses related to this merger. The
merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests.
In connection with its acquisition of DBA, Titan acquired land and a
building which are included in other non-current assets. DBA recorded a $2.0
million charge in its quarter ended September 30, 1997 to recognize an
impairment in the value of this asset. Management is actively marketing the
property for sale through various channels and believes that the carrying value
of this asset, as reflected in the accompanying financial statements for the
quarter ended June 30, 1998, is stated at an amount that is fully recoverable.
DBA also recorded a $3.0 million charge in the quarter ended September 30,
1997, in recognition of certain environmental matters at its Kissimmee facility
including, but not limited to, soil contamination and potential asbestos and
lead based paint contamination. These matters became known to DBA as a result of
an environmental study performed as part of Titan's acquisition due diligence
process. The accrual has been recorded in accordance with SFAS No. 5 and SOP
96-1 and represents an initial estimate which could change significantly as
further studies are performed. In the accompanying balance sheet, approximately
$.2 million is included in other current liabilities and the remaining $2.8
million is included in other non-current liabilities based on the estimated
timing of continued assessments and remediation work to be
F-32
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (2) MERGERS AND ACQUISITION (CONTINUED)
performed. The Company had commenced its pre cleanup activities which are
expected to continue through at least fiscal 1998.
Also, concurrent with this acquisition, DBA recorded certain charges, in
addition to those noted above, aggregating to $4.8 million, relating to the
write down of certain assets to estimated net realizable value in the quarter
ended December 31, 1997.
Effective January 1, 1998, Horizons' January 31 and DBA's June 30 fiscal
year-ends have been changed to coincide with the Company's year-end. The 1997
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of Horizons and DBA as
if the mergers had occurred at the beginning of the periods presented.
The combining periods of Titan, DBA and Horizons are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1996
--------------------------------------------
<S> <C> <C> <C> <C>
Titan.......................................... Fiscal year ended December 1996
DBA............................................ Fiscal year ended June 1996
Horizons....................................... Fiscal year ended January 1997
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERLY PERIODS
--------------------------------------------
Q1 '97 Q2 '97 Q3 '97 Q4 '97
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Titan.......................................... March 97 June 97 Sept. 97 Dec. 97
DBA............................................ March 97 June 97 Sept. 97 Dec. 97
Horizons....................................... April 97 July 97 Oct. 97 Jan. 98
</TABLE>
A pooling of interests adjustment has been made in the consolidated
statements of cash flows and consolidated statements of stockholders' equity for
the six months ended June 30, 1997 to reflect the activity for DBA in the six
months ended December 31, 1996, as reported in DBA's Form 10-Q for the fiscal
quarter ended December 31, 1996. The pooling of interests adjustments in the
consolidated statements of cash flows and consolidated statements of
stockholders' equity for the six months ended June 30, 1998, reflect the
activity for Horizons for the month ended January 31, 1998, included in Titan's
results of operations in both the year ended December 31, 1997, and the six
months ended June 30, 1998. Revenues from continuing operations for Horizons for
January 1998 were $2,032.
F-33
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (2) MERGERS AND ACQUISITION (CONTINUED)
The separate and combined results of Titan, DBA and Horizons in 1997 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------- -----------------
<S> <C> <C>
Revenues:
Titan.............................................. $ 41,949 $ 85,239
DBA................................................ 7,403 13,784
Horizons........................................... 7,159 13,706
------- --------
Combined....................................... $ 56,511 $ 112,729
------- --------
------- --------
Net income...........................................
Titan.............................................. $ 1,018 $ 1,493
DBA................................................ 386 1,090
Horizons........................................... 76 184
------- --------
Combined....................................... $ 1,480 $ 2,767
------- --------
------- --------
</TABLE>
On March 31, 1998, the Company acquired all of the outstanding common stock
of Validity Corporation ("Validity"), a California corporation, for $12 million
in cash, and notes payable to the shareholders of Validity totaling $3 million,
subject to post-closing adjustments, if any, due and payable March 31, 1999, and
bearing interest at the prime rate. The transaction has been accounted for as a
purchase; accordingly, the consolidated balance sheet includes Validity as of
June 30, 1998. The excess of the purchase price over the estimated fair value of
net assets acquired, to be amortized on a straight-line basis over 30 years, was
approximately $18.9 million as of June 30, 1998, based on net assets acquired of
$560. Validity's results of operations have been consolidated with the Company's
results of operations beginning April 1, 1998.
NOTE (3) DISCONTINUED OPERATIONS
In April 1997, the Company's Board of Directors adopted a plan to divest the
Company's broadband communications business. The results of the broadband
communications business have been accounted for as a discontinued operation in
accordance with Accounting Principles Board Opinion No. 30, which among other
provisions, anticipates that the plan of disposal will be carried out within one
year. Management has identified several potential strategic investors with whom
it is presently involved in negotiations for the sale of all or part of the
business and/or technology of the broadband communications business.
Concurrently, Titan continues to search for other potential investors. During
the first quarter of 1998, the Company received approximately $2,600 as
settlement of certain contingencies related to the broadband patents and
intangibles as well as initial payments related to licensing the technology.
These proceeds were applied to net current assets of discontinued operations.
The Company hopes to receive additional cash proceeds, amounts of which cannot
be presently determined, through September 30, 1998, at which time management
expects to have adequate information to determine the ultimate realizability of
the net assets of this discontinued operation.
Revenues for the broadband communications business were $47 and $5 for the
three months and $47 and $529 for the six months ended June 30, 1998 and 1997,
respectively. Included in the loss from
F-34
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (3) DISCONTINUED OPERATIONS (CONTINUED)
discontinued operation of $343 is a tax benefit of $177 for the six months ended
June 30, 1997. The Company deferred losses from the discontinued operation of
$9,721 in fiscal year 1997 and $661 and $3,951 in the three and six months ended
June 30, 1998, respectively, which primarily represented amortization costs of
intangible assets, and to a lesser extent, certain wind-down costs of the
business. Included in the deferred losses is interest of $90 and $190 in the
three and six months ended June 30, 1998, respectively, allocated to the
discontinued operation based on the ratio of net assets to be sold to the sum of
total net assets of the Company. Net current assets of the discontinued
operation consist primarily of accounts receivable, inventory, and cummulative
deferred losses from the date of discontinuance net of accounts payable, accrued
compensation and other current liabilities. Net noncurrent assets of
discontinued operation consist primarily of property and equipment.
In December 1997, the Horizons' Board of Directors adopted a plan to wind
down and exit its commercial software business (Information Systems segment or
"ISG"), in order to focus 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.
In the fourth quarter of 1997, 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 restated
combined financial statements reflect the ISG business as a discontinued
operation. Revenues for the ISG business were $683 and $800 for the three months
and $1,299 and $1,565 for the six months ended June 30, 1998 and 1997,
respectively. Losses from ISG applied to the deferred charge were $946 and
$1,601 in the three and six month periods ended June 30, 1998, respectively.
Included in the losses of $262 and $753 from discontinued operations are tax
benefits of $75 and $216 for the three and six months ended June 30, 1997,
respectively.
NOTE (4) DEBT
In March 1998, the Company's line of credit agreement was amended to
increase the available credit to $30,000 and extend the maturity date to June
30, 1999. At June 30, 1998, borrowings outstanding under the line of credit were
$20,800, at a weighted average interest rate of 7.89% and commitments under
letters of credit under this agreement were $1,081. At June 30, 1998, Horizons
had $5,537 outstanding under a line of credit at an interest rate of 10.5%. At
June 30, 1998, the Company was in compliance with all financial covenants under
its various debt agreements.
On July 29, 1998, the Company entered into a credit agreement with a bank
syndicate under which it may borrow up to $80 million. The credit facility
includes a five year $55 million working capital line of credit and a one year
$25 million component dedicated for acquisitions which converts any outstanding
balances after one year into a term loan, to be repaid in increasing quarterly
amounts over four years. The Company has the option to borrow at the bank base
rate or at LIBOR, plus applicable margins based on the ratio of total debt to
EBITDA (earnings before interest, taxes, depreciation and amortization). The
F-35
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (4) DEBT (CONTINUED)
agreement contains, among other financial covenants, provisions which set
maximum debt to EBITDA limits and which require the Company to maintain
stipulated levels of EBITDA, tangible net worth, a minimum quick ratio, and
minimum coverage of fixed charges, as defined. Initial proceeds of $36.1 million
were used to pay off and replace the outstanding line of credit balances with
Titan's and Horizons' banks and for working capital purposes.
NOTE (5) OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Inventories:
Materials.......................................................... $ 3,692 $ 2,285
Work-in-process.................................................... 12,888 11,668
Finished goods..................................................... 2,152 1,527
--------- ------------
$ 18,732 $ 15,480
--------- ------------
--------- ------------
</TABLE>
Supplemental disclosure of cash payments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
JUNE 30 , JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest............................................... $ 2,383 $ 2,159 $ 2,840 $ 2,559
Income taxes........................................... 146 304 835 293
</TABLE>
During the six month period ended June 30, 1997, the Company utilized
treasury stock of $165 for benefit plan funding and contributions.
F-36
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (5) OTHER FINANCIAL DATA (CONTINUED)
The following tables summarize revenues and operating profit (loss) by
industry segment for the three and six month periods ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Information Technologies......................................... $ 39,018 $ 36,128 $ 70,495 $ 72,977
Communications Systems........................................... 10,877 12,501 22,775 23,526
Software Systems................................................. 4,183 3,857 7,674 7,896
Medical Sterilization and Food Pasteurization.................... 3,221 1,484 5,168 2,629
Emerging Technologies and Businesses............................. 1,516 2,541 2,671 5,701
--------- --------- ---------- ----------
$ 58,815 $ 56,511 $ 108,783 $ 112,729
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Operating Profit (Loss):
Information Technologies......................................... $ 5,131 $ 4,689 $ 7,696 $ 8,748
Communications Systems........................................... 316 (564) 1,112 (433)
Software Systems................................................. 1,064 653 1,712 1,428
Medical Sterilization and Food Pasteurization.................... 432 4 640 (22)
Emerging Technologies and Businesses............................. -- (52) (431) 254
--------- --------- ---------- ----------
Segment operating profit before Corporate.......................... 6,943 4,730 10,729 9,975
Corporate.......................................................... (1,647) (586) (3,115) (1,500)
--------- --------- ---------- ----------
$ 5,296 $ 4,144 $ 7,614 $ 8,475
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
The operating profit of the Information Technologies segment for the six
months ended June 30, 1998, reflects $1,460 of special charges representing
costs and expenses of the merger with DBA (see Note 2).
On June 18, 1998, the Company withdrew its registration statement for the
proposed initial public offering of common stock of Linkabit Wireless, Inc., a
wholly owned subsidiary of the Company. The registration statement was withdrawn
due to unfavorable market conditions for initial public offerings.
F-37
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (5) OTHER FINANCIAL DATA (CONTINUED)
The following data summarize information relating to the per share
computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 THREE MONTHS ENDED JUNE 30, 1997
--------------------------------------------- ---------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS (NUMERATOR) (DENOMINATOR) AMOUNTS
------------- --------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations................... $ 2,533 $ 1,742
Less preferred stock
dividends.................... (210) (218)
------ ------
Basic EPS:
Income from continuing
operations available to
common stockholders.......... 2,323 26,659 $ .09 1,524 25,299 $ .06
Effect of dilutive securities:
Stock options.................. -- 753 (.00) -- 94 (.00)
Warrants....................... -- 23 (.00) -- 1 (.00)
Debentures..................... 472 8,854 (.01) 505 9,857 (.00)
------ ------ ----- ------ ------ -----
Diluted EPS:
Income from continuing
operations available to
common stockholders plus
assumed conversions.......... $ 2,795 36,289 $ .08 $ 2,029 35,251 $ .06
------ ------ ----- ------ ------ -----
------ ------ ----- ------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------- ---------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS (NUMERATOR) (DENOMINATOR) AMOUNTS
------------- --------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations................... $ 3,169 $ 3,863
Less preferred stock
dividends.................... (429) (437)
------ ------
Basic EPS:
Income from continuing
operations available to
common stockholders.......... 2,740 26,344 $ .10 3,426 25,298 $ .13
Effect of dilutive securities:
Stock options.................. -- 685 (.00) -- 110 (.00)
Warrants....................... -- 34 (.00) -- -- (.00)
Debentures..................... -- -- -- 1,000 9,857 (.01)
------ ------ --- ------ ------ -----
Diluted EPS:
Income from continuing
operations available to
common stockholders plus
assumed conversions.......... $ 2,740 27,063 $ .10 $ 4,426 35,265 $ .12
------ ------ --- ------ ------ -----
</TABLE>
In the three and six months ended June 30, 1998, respectively, options to
purchase 277,100 and 279,800 shares of common stock at prices ranging from $7.00
to $9.50 and $6.69 to $9.50 per share were not included in the computation of
diluted EPS, as the exercise price of such options was greater than the average
market price of the common shares. Similarly, in the three and six months ended
June 30, 1997,
F-38
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (5) OTHER FINANCIAL DATA (CONTINUED)
respectively, options to purchase 1,045,500 and 1,302,900 shares of common stock
at prices ranging from $3.63 to $9.50 and $3.58 to $9.50 were not included in
the computation of EPS. In the six months ended June 30, 1998, 9,121,200 shares
of common stock that could result from the conversion of the Company's
convertible subordinated debentures were not included in the computation of
diluted EPS, as the effect would have been anti-dilutive. In all periods in both
1998 and 1997, 463,248 shares of common stock that could result from the
conversion of cumulative convertible preferred stock were not included in the
computation of diluted EPS, as the effect would have been anti-dilutive.
In 1998 and 1997, 333,333 common shares that could result from the
conversion of Series B Cumulative Convertible Redeemable Preferred Stock were
not included in the computation of diluted EPS, as the effect would have been
anti-dilutive. In June 1998, the Company redeemed 416,667 shares of this stock
at $6.00 per share. In July 1998, the Company redeemed the remainder of this
stock. Also anti-dilutive in the six months ended June 30, 1997, were warrants
outstanding for 100,000 common shares. The warrants were exercised in June 1998.
NOTE (6) COMMITMENTS AND CONTINGENCIES
On April 19, 1995, the Company was served in a lawsuit entitled DONALD P.
SHAW V. TITAN CORPORATION (the "Lawsuit"). The Lawsuit was pending in the United
States District Court for the Eastern District of Virginia, Alexandria Division,
and sought compensatory damages in an aggregate amount of $3,000,000 and
punitive damages in the amount of $1,050,000 on account of alleged wrongful
termination and intentional infliction of emotional distress. The Lawsuit
resulted in a verdict for the plaintiff awarding $65,000 in compensatory damages
and $350,000 in punitive damages which was affirmed on appeal in February 1998,
and was paid in June 1998. The outcome of the Lawsuit did not have a material
adverse effect on the financial position or results of operations of the
Company.
NOTE (7) SUBSEQUENT EVENTS
On June 30, 1998, the Company entered into a definitive merger agreement
with Delfin Systems ("Delfin"), a California corporation, whereby, if approved
by the stockholders of Delfin, Delfin will become a wholly-owned subsidiary of
The Titan Corporation in a stock-for-stock transaction. On August 7, 1998, Titan
entered into a definitive agreement with VisiCom Laboratories, Inc., a
California corporation, whereby, if approved by the stockholders of VisiCom,
VisiCom will become a wholly-owned subsidiary of The Titan Corporation in a
stock-for-stock transaction. Both acquisitions will be accounted for as poolings
of interests.
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Delfin Systems
We have audited the accompanying balance sheets of Delfin Systems as of
September 30, 1997 and September 30, 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Delfin Systems at September
30, 1997 and September 30, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
December 9, 1997, except for Note 8
as to which the date is
June 30, 1998
F-40
<PAGE>
DELFIN SYSTEMS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................................................... $ 30 $ 105
Accounts receivable
Billed................................................................................... 4,764 5,375
Unbilled................................................................................. 2,404 1,761
Inventories................................................................................ 1,193 1,122
Deferred income taxes...................................................................... 348 245
Income tax refund receivable............................................................... -- 25
Prepaid expenses and other current assets.................................................. 43 23
--------- ---------
Total current assets......................................................................... 8,782 8,656
Property and equipment, at cost:
Machinery and production equipment......................................................... 2,312 2,713
Demonstration and development equipment.................................................... 418 394
Office equipment, furniture and fixtures................................................... 621 607
Leasehold improvements..................................................................... 611 520
--------- ---------
3,962 4,234
Accumulated depreciation and amortization.................................................. (3,232) (3,515)
--------- ---------
730 719
Deferred income taxes........................................................................ 140 145
Other assets................................................................................. 85 115
--------- ---------
$ 9,737 $ 9,635
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit........................................................................ $ 1,250 $ 1,050
Accounts payable........................................................................... 1,521 2,140
Accrued compensation and benefits.......................................................... 1,597 1,591
Current portion of long-term debt.......................................................... 239 259
Contract-related liabilities............................................................... 585 253
Other accrued liabilities.................................................................. 245 43
--------- ---------
Total current liabilities.................................................................... 5,437 5,336
Long-term debt, net of current portion....................................................... 152 129
Commitments
Shareholders' equity:
Common stock, par value $0.01; authorized 30,000,000 shares; 7,142,296 and 7,130,737 shares
issued and outstanding at September 30, 1997 and September 30, 1996, respectively........ 4,485 4,477
Accumulated deficit........................................................................ (337) (307)
--------- ---------
Total shareholders' equity................................................................... 4,148 4,170
--------- ---------
$ 9,737 $ 9,635
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-41
<PAGE>
DELFIN SYSTEMS
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Contract revenues................................................................ $ 26,631 $ 29,731 $ 27,288
Costs and expenses:
Cost of revenues............................................................... 22,873 24,856 22,944
General, administrative and other.............................................. 3,497 4,427 4,879
Interest expense, net.......................................................... 233 366 470
--------- --------- ---------
Total costs and expenses......................................................... 26,603 29,649 28,293
--------- --------- ---------
Income (loss) before provision for income taxes.................................. 28 82 (1,005)
Provision (benefit from) for income taxes........................................ 58 72 (250)
--------- --------- ---------
Net income (loss)................................................................ $ (30) $ 10 $ (755)
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share:
Basic.......................................................................... $ 0.00 $ 0.00 $ (0.11)
Diluted........................................................................ $ 0.00 $ 0.00 $ (0.11)
Shares used in per share calculation:
Basic.......................................................................... 7,137 7,053 6,957
Diluted........................................................................ 7,137 7,304 6,957
</TABLE>
See accompanying notes.
F-42
<PAGE>
DELFIN SYSTEMS
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS/
---------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
----------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Balances at September 30, 1994......................................... 6,939 $ 4,409 $ 438 $ 4,847
Issuance of common stock............................................. 35 12 -- 12
Net loss............................................................. -- -- (755) (755)
----- --------- ----- ---------
Balances at September 30, 1995......................................... 6,974 $ 4,421 $ (317) $ 4,104
Issuance of common stock............................................. 156 56 -- 56
Net income........................................................... -- -- 10 10
----- --------- ----- ---------
Balances at September 30, 1996......................................... 7,130 4,477 (307) 4,170
Issuance of common stock............................................. 12 8 -- 8
Net loss............................................................. -- -- (30) (30)
----- --------- ----- ---------
Balances at September 30, 1997......................................... 7,142 $ 4,485 $ (337) $ 4,148
----- --------- ----- ---------
----- --------- ----- ---------
</TABLE>
See accompanying notes.
F-43
<PAGE>
DELFIN SYSTEMS
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................. $ (30) $ 10 $ (755)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 416 534 608
(Increase) decrease in assets:
Accounts receivable........................................................... (32) 2,012 1,120
Inventories................................................................... (71) (335) 53
Income tax refund receivable.................................................. 25 175 (201)
Prepaid expenses, deferred income taxes and other assets...................... (88) 46 132
Increase (decrease) in liabilities:
Accounts payable.............................................................. (619) 434 (237)
Accrued compensation and benefits............................................. 6 219 15
Contract-related liabilities.................................................. 332 (68) 321
Other accrued liabilities..................................................... 202 22 (549)
--------- --------- ---------
Total adjustments................................................................. 171 3,039 1,262
--------- --------- ---------
Net cash provided by operating activities......................................... 141 3,049 507
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment............................................ (427) (409) (337)
--------- --------- ---------
Net cash used in investing activities............................................. (427) (409) (337)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under bank line of credit.............................................. 9,312 5,840 3,009
Payments under bank line of credit................................................ (9,112) (8,140) (3,319)
Proceeds from long-term debt...................................................... -- -- 465
Borrowings from long-term debts................................................... 339
Principal payments under long-term debts.......................................... (336) (323) (198)
Payment of note related to WSD acquisition........................................ -- -- (141)
Proceeds from issuance of common stock............................................ 8 56 11
--------- --------- ---------
Net cash provided by (used in) financing activities............................... 211 (2,567) (173)
--------- --------- ---------
Increase (decrease) in cash....................................................... (75) 73 (3)
Cash at the beginning of year..................................................... 105 32 35
--------- --------- ---------
Cash at the end of year........................................................... $ 30 $ 105 $ 32
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid..................................................................... $ 251 $ 479 $ 480
--------- --------- ---------
--------- --------- ---------
Income taxes paid................................................................. $ 3 $ 178 $ 536
--------- --------- ---------
--------- --------- ---------
Income tax refund received........................................................ $ 80 $ 253 $ --
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITY
Disposition of fully-depreciated assets with no resultant gain or loss............ $ 726 $ 363 $ 1,475
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-44
<PAGE>
DELFIN SYSTEMS
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Delfin Systems (the "Company") provides contract services and products
primarily in the defense, intelligence and workgroup computing fields. During
1997, approximately 91% of the Company's revenues are derived from contracts
with agencies of the United States Government or prime contractors to these
government agencies (92% in 1996, 90% in 1995).
The Company is subject to certain risks, similar to other companies in its
industry, including dependence on key individuals, competition from larger
established companies, audits of its costs and contracts by United States
Government agencies and United States Government budget constraints affecting
defense and intelligence contracts.
The Company's financial year ends on the last Friday of September. For
presentation purposes, the year ends are disclosed as September 30.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONTRACTS AND CONTRACT ACCOUNTING
Approximately 75% of fiscal 1997 total revenues (80% in fiscal 1996, 76% in
fiscal 1995) are represented by cost reimbursement type government contracts. In
accounting for these contracts, all costs are charged to operations as incurred
(including allowable administrative expenses) and revenues are recognized based
on costs plus estimated effective fee rates. Estimated effective fee rates are
determined on a contract-by-contract basis according to the type of fee (i.e.,
fixed, incentive or award) and the most recent estimated cost at completion of
the individual contract.
Approximately 19% of fiscal 1997 total revenues (16% in fiscal 1996, 14% in
fiscal 1995) are represented by fixed price type government contracts. In
accounting for these contracts, the Company uses the percentage-of-completion
method. All contract costs (including administrative expenses) are charged to
operations as incurred, and revenues are recognized based on total costs
incurred to date compared to estimated total costs at completion on a
contract-by-contract basis. The cost estimates are revised as the work is
performed and revenues and profit adjustments, if any, are reflected in the
period in which such estimates are revised. Losses on any individual contracts
are provided for at the time they become apparent.
Accounts receivable are segregated between billed and unbilled accounts.
Unbilled accounts receivable represent the amount of contract revenues
recognized to date in excess of contract billings to date and are comprised
primarily of amounts to be billed to customers when the Company's indirect
expense rates for open years are approved by the United States Government and
deliveries are performed under fixed price contracts.
The Company regards the credit risk of its business to be minimal.
F-45
<PAGE>
DELFIN SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and related overhead. Inventories consisted of the
following costs not yet charged to contracts (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Raw materials.............................................................. $ 538 $ 755
Work-in-process............................................................ 370 28
Finished goods............................................................. 285 339
--------- ---------
$ 1,193 $ 1,122
--------- ---------
--------- ---------
</TABLE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided using the straight-line method
over estimated useful lives of five years for plant equipment and furniture and
three years for computer, demonstration and development equipment. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's borrowings under its line of credit
agreement and long-term debt approximate their fair value. The fair value of the
Company's long-term debt is estimated using discounted cash flow analyses, based
on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
STOCK-BASED COMPENSATION
The Company is required to adopt the Statement of Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") this financial year.
SFAS 123 allows companies to choose whether to account for stock-based
compensation on a fair value method or to continue to account for stock-based
compensation under the current intrinsic value method and provide pro forma
disclosures of net income and earnings per share as if the accounting provisions
of this statement had been adopted. The Company has adopted only the disclosure
requirements of SFAS 123.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements and
accompanying notes. Actual results may differ from those recorded using such
estimates.
NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
Under the provisions of SFAS 128, basic earnings per share is calculated based
on the weighted average number of common stocks outstanding
F-46
<PAGE>
DELFIN SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
during the period. Diluted earnings per share also gives effect to the dilutive
effect of stock options (calculated based on the treasury stock method). All
prior periods will be restated. The adoption of this standard will have no
impact on the Company's operation or financial condition. A reconciliation of
shares used in the per share calculation is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Basic:
Weighted average common shares outstanding........................................ 7,137 7,053 6,957
--------- --------- ---------
--------- --------- ---------
Diluted:
Weighted average common shares.................................................... 7,137 7,053 6,957
Dilutive effect of stock options.................................................. -- 251 --
--------- --------- ---------
Weighted average shares outstanding............................................... 7,137 7,304 6,957
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1997, options outstanding of 1,501,721 were excluded from the diluted net
loss per share calculation as they were anti-dilutive. (In 1995, options
outstanding of 1,680,650 were excluded.)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components and is effective for the Company in fiscal year 1998. SFAS 131
establishes standards for annual and interim disclosures of operating segments,
products and services, geographic areas and major customers, and is also
effective for the Company in fiscal year 1998. The Company is in the process of
evaluating the disclosure requirements of the new standards, the adoption of
which will have no impact on the Company's results of operations or financial
condition.
3. BANK LINE OF CREDIT
The Company has a bank line of credit available for the lesser of $4,260,000
(including a sublimit of $500,000 for standby and commercial letters of credit)
or 80% of eligible accounts receivable, as defined, at a floating interest rate
of prime plus 0.75% (9.25% at September 30, 1997).
The line of credit expires on February 15, 1998. As of September 30, 1997,
there were outstanding borrowings of $1,200,000 under the line and commercial
letters of credit of $252,978 outstanding at September 30, 1997. Borrowings are
collateralized by a security interest in substantially all of the assets of the
Company. The line of credit agreement requires the Company to maintain certain
financial covenants on a monthly basis which include, among other things, a
quick ratio of at least 0.75 to 1.00, a minimum tangible net worth plus
subordinated debt of $3,750,000 and a ratio of total senior debt to tangible net
worth plus subordinated debt not to exceed 1.70 to 1.00. Additionally, the
Company is required to be profitable on a quarterly basis but may incur one
quarterly loss in each fiscal year, provided that for the fiscal year 1997, the
Company's losses shall not exceed $400,000 year-to-date. At September 30, 1997,
the Company was in compliance with respect to such covenants.
F-47
<PAGE>
DELFIN SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
The Company has equipment financing agreements totaling $804,000 which is
payable in fixed monthly installments through 1999 at interest rates of 8.78% to
9.66%. The aggregate cost of all equipment secured by such agreements (including
those entered into in 1995) is $932,000. Accumulated depreciation for such
equipment approximated $721,000 at September 30, 1997.
Required payments of long-term debt for the fiscal years 1998, 1999 and
2,000 are $239,000, $120,000 and $32,000 respectively.
5. COMMITMENTS
The Company leases its facilities and certain equipment under operating
lease agreements, which extend through fiscal 2004. Rent expense under these
leases for the years ended September 30, 1997, 1996 and 1995 was approximately
$885,000, $968,000 and $1,019,000, respectively. As of September 30, 1997,
future minimum lease payments required under all operating leases are as follows
(in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 933
1999........................................................ 870
2000........................................................ 854
2001........................................................ 776
2002 and beyond............................................. 1,448
---------
$ 4,881
---------
---------
</TABLE>
The Company has entered into a noncancelable sublease agreement for one of
its U.S. facilities which provides rental income of approximately $131,000 for
each of the three years through 2000 and approximately $98,000 in 2001. Such
sublease amounts have not been reflected in the above minimum annual lease
payments.
6. SHAREHOLDERS' EQUITY
COMMON STOCK
Most of the 7,142,296 common shares outstanding at September 30, 1997 were
issued to employees, directors, investors and consultants under the terms of
stock purchase plans or agreements. These plans or agreements permit the Company
to repurchase, at the original issuance price, unvested shares if the holder's
employment or services to the Company cease. Generally, the issued shares vest
(the repurchase rights lapse) over a period of four years. At September 30,
1997, no shares remain subject to these repurchase rights. (1996 nil, 1995 17
shares).
STOCK OPTION PLANS
The Delfin Systems 1988 Stock Option Plan (the "1988 Plan") provides for the
grant of incentive stock options and nonstatutory stock options to employees,
directors and consultants of the Company at prices ranging from 85% to 100%
(depending on the type of grant) of the fair value of the common stock on the
date of grant. The vesting and exercise provisions of the option grants are
determined by the board of directors. A total of 665,115 common shares have been
authorized for the 1988 Plan. As of September 30, 1997, the Company has 121,661
common shares reserved for future option grants.
F-48
<PAGE>
DELFIN SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
The Delfin Systems 1990 Stock Option Plan (the "1990 Plan") provides for the
grant of incentive stock options and nonstatutory stock options to employees,
directors and consultants of the Company at prices ranging from 85% to 110%
(depending on the type of grant) of the fair value of the common stock on the
date of grant. The vesting and exercise provisions of the option grants are
determined by the board of directors. The Company has the right of first refusal
to repurchase any unvested shares at fair value. A total of 2,100,000 common
shares have been authorized for the 1990 Plan. As of September 30, 1997, the
Company has 893,032 common shares reserved for future option grants.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
1997 AVERAGE 1996 AVERAGE 1995 AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- --------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 1,601,848 $ 0.67 1,680,650 $ 0.51 1,276,918 $ 0.51
Granted............................... 8,000 0.80 655,335 0.79 498,500 0.70
Exercised............................. (11,559) 0.65 (156,062) 0.36 (34,956) 0.33
Canceled.............................. (97,018) 0.77 (578,075) 0.57 (59,812) 0.60
---------- ---------- ----------
Outstanding at end of year.............. 1,501,271 $ 0.67 1,601,848 $ 0.67 1,680,650 0.56
---------- ---------- ----------
---------- ---------- ----------
Weighted-average fair value of options
granted during the period............. $ 0.20 $ 0.20 $ 0.18
----- ----- -----
----- ----- -----
</TABLE>
Exercise prices of options outstanding and options exercisable were as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
----------------------------------------------------
WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE REMAINING AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE
- -------------------------------------------- ---------- --------------------- -----------------
<S> <C> <C> <C>
$0.70-$0.80................................. 1,123,771 8.16 $ 0.75
$0.50-$0.60................................. 227,500 4.12 0.56
$0.24....................................... 150,000 3.12 0.24
---------- --- -----
1,501,271 7.04 $ 0.67
---------- --- -----
---------- --- -----
</TABLE>
As permitted by SFAS 123, the Company applies APB 25 in accounting for
option grants to employees under the Plan and accordingly, does not recognize
compensation expense for options granted to employees at fair value on the grant
date. The effect of applying the minimum value method of valuing options to the
Company's stock options resulted in net income/loss that are not materially
different from the amounts reported. The minimum value method was applied using
the following assumptions for 1995, 1996 and 1997, respectively: risk-free
interest rates of 5.8%, a dividend yield of zero, an expected option life of
five years. Future pro forma results of operations may be materially different
from actual amounts reported.
F-49
<PAGE>
DELFIN SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The components of the provision for income taxes consist of the following
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal...............................................................
Current............................................................. $ 123 $ 87 $ (182)
Deferred............................................................ (84) (20) (69)
--------- --- ---------
39 67 (251)
State
Current............................................................. 33 13 1
Deferred............................................................ (14) (8) --
--------- --- ---------
19 5 1
--------- --- ---------
$ 58 $ 72 $ (250)
--------- --- ---------
--------- --- ---------
</TABLE>
The difference between the effective income tax rate and the statutory
Federal income tax rate of 34% is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ---------
<S> <C> <C> <C>
Expected Federal income tax............................................. $ 9 $ 28 $ (342)
State income tax, net of Federal benefit................................ 12 3 1
Nondeductible penalties................................................. -- 2 36
Meals and entertainment................................................. 34 39 31
Other................................................................... 3 -- 24
--- --- ---------
Provision for income taxes.............................................. $ 58 $ 72 $ (250)
--- --- ---------
--- --- ---------
</TABLE>
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 assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently deductible for tax...................... $ 325 $ 218
Book over tax depreciation and amortization................................. 183 192
Valuation allowance......................................................... (20) (20)
--------- ---------
Total deferred tax assets..................................................... $ 488 $ 390
--------- ---------
--------- ---------
</TABLE>
8. SUBSEQUENT EVENTS
On June 30, 1998, the Company entered into a definitive merger agreement
with The Titan Corporation ("Titan"), a public company. If approved by the
shareholders of the Company and consummated, the Company will become a
wholly-owned subsidiary of Titan and shareholders of the Company will receive
common shares of Titan in exchange for their shares in the Company.
F-50
<PAGE>
DELFIN SYSTEMS
BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
JUNE 30, -------------
1998
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................... $ 83 $ 30
Accounts receivable................................................................ 9,800 7,168
Inventories........................................................................ 706 1,193
Deferred income taxes.............................................................. 348 348
Prepaid expenses and other current assets.......................................... 91 43
----------- ------
Total current assets................................................................. 11,028 8,782
Property and equipment, net.......................................................... 710 730
Deferred income taxes................................................................ 140 140
Other assets......................................................................... 138 85
----------- ------
$ 12,016 $ 9,737
----------- ------
----------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit................................................................ $ 3,700 $ 1,250
Accounts payable................................................................... 959 1,521
Accrued compensation and benefits.................................................. 1,606 1,597
Current portion of long-term debt.................................................. 118 239
Contract-related liabilities....................................................... 803 585
Other accrued liabilities.......................................................... 307 245
----------- ------
Total current liabilities............................................................ 7,493 5,437
Long-term debt, net of current portion............................................... 85 152
Shareholders' equity:
Common stock....................................................................... 4,514 4,485
Accumulated deficit................................................................ (76) (337)
----------- ------
Total shareholders' equity........................................................... 4,438 4,148
----------- ------
$ 12,016 $ 9,737
----------- ------
----------- ------
</TABLE>
See accompanying notes
F-51
<PAGE>
DELFIN SYSTEMS
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Contract revenues........................................................................... $ 20,961 $ 18,830
Costs and expenses:
Cost of revenues............................................................................ 17,426 15,993
General, administrative and other........................................................... 2,861 2,591
--------- ---------
Total operating costs and expenses.......................................................... 20,287 18,584
--------- ---------
Operating income............................................................................ 674 246
Interest expense............................................................................ (225) (153)
Interest income............................................................................. 1 3
--------- ---------
Net income before provision for income taxes................................................ 450 96
Provision for income taxes.................................................................. (189) (37)
--------- ---------
Net income.................................................................................. $ 261 $ 59
--------- ---------
--------- ---------
Net income per share:
Basic..................................................................................... $ 0.04 $ 0.01
Diluted................................................................................... $ 0.04 $ 0.01
Weighted average shares:
Basic..................................................................................... 7,160 7,060
Diluted................................................................................... 7,392 7,304
</TABLE>
See accompanying notes
F-52
<PAGE>
DELFIN SYSTEMS
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................................... $ 261 $ 59
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.............................................................. 275 320
(Increase) decrease in assets:
Accounts receivable...................................................................... (2,632) (841)
Inventories.............................................................................. 487 180
Prepaid expenses, deferred income taxes and other assets................................. (101) (59)
Increase (decrease) in liabilities:
Accounts payable......................................................................... (562) (1,047)
Income tax payable....................................................................... 62 49
Accrued compensation and benefits........................................................ 9 (104)
Contract-related liabilities............................................................. 218 309
Other accrued liabilities................................................................ -- (22)
--------- ---------
Net cash used in operating activities........................................................ (1,983) (1,156)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment....................................................... (255) (336)
--------- ---------
Net cash used in investing activities........................................................ (255) (336)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Additional borrowings........................................................................ 7,524 7,593
Payment of indebtedness...................................................................... (5,262) (6,212)
Proceeds from issuance of common stock....................................................... 29 8
--------- ---------
Net cash provided by financing activities.................................................... 2,291 1,389
--------- ---------
Increase (decrease) in cash.................................................................. 53 (103)
Cash at the beginning of period.............................................................. 30 105
--------- ---------
Cash at the end of period.................................................................... $ 83 $ 2
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid................................................................................ $ 225 $ 167
--------- ---------
--------- ---------
Income taxes paid............................................................................ $ 127 $ 3
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
F-53
<PAGE>
DELFIN SYSTEMS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
1. BASIS OF PRESENTATION
The information at June 30, 1998 and for the nine months ended June 30, 1998
and 1997 is unaudited, but includes all adjustments, consisting only of normal
recurring adjustments, which the management of Delfin Systems (the "Company")
considers necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for the periods presented. The results of
the interim periods are not necessarily indicative of results for the full year.
The financial statements should be read in conjunction with the audited
financial statements for the year ended September 30, 1997.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts recorded in the financial statements and
accompanying notes. Actual results may differ from those recorded using such
estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In fiscal year 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income: ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity, to be
included in comprehensive income. The adoption of this Statement had no impact
on the Company's financial statements and results of operations as comprehensive
income is the same as net income/(loss) for all periods presented herein.
In fiscal year 1998, the Company also adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131") and Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 131 establishes standards for
reporting for annual and interim disclosures of operating segments, products and
services, geographic areas and major customers. SFAS 132 does not change the
recognition or measurement of pension or postretirement benefit plans, but
revises and standardizes disclosure requirements for pensions and other
postretirement benefits. The adoption of SFAS 131 and SFAS 132 has no impact on
the Company's results of operations or financial condition.
NET INCOME PER SHARE
In fiscal year 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under the provisions of
SFAS 128, basic earnings per share is calculated based on the weighted average
number of common stocks outstanding during the period. Diluted earnings per
share also gives effect to the dilutive effect of stock options (calculated
based on the
F-54
<PAGE>
DELFIN SYSTEMS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. BASIS OF PRESENTATION (CONTINUED)
treasury stock method). All prior periods have been restated. A reconciliation
of shares used in the per share calculation is as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
Basic:
Weighted average common stocks outstanding.............................. 7,160 7,060
----- -----
----- -----
Diluted:
Weighted average common stocks.......................................... 7,160 7,060
Dilutive effect of stock options........................................ 232 244
----- -----
Weighted average stocks outstanding..................................... 7,392 7,304
----- -----
----- -----
</TABLE>
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and related overhead. Inventories consisted of the
following costs not yet charged to contracts (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 26,
1998 1997
----------- -------------
<S> <C> <C>
Raw materials........................................................ $ 187 $ 539
Work-in-process...................................................... 227 370
Finished goods....................................................... 292 284
----- ------
$ 706 $ 1,193
----- ------
----- ------
</TABLE>
3. TAXATION
The estimated annual effective tax rate for 1998 is 41%. The difference
between the federal statutory rate and the estimated annual effective rate is
primarily attributable to state taxes and other nondeductible items.
4. MERGER WITH THE TITAN CORPORATION
On June 30, 1998, the Company entered into a definitive merger agreement
with The Titan Corporation ("Titan"), a public company. If approved by the
shareholders of the Company and consummated, the Company will become a
wholly-owned subsidiary of Titan and shareholders of the Company will receive
common shares of Titan in exchange for their shares in the Company.
F-55
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THE TITAN CORPORATION,
A DELAWARE CORPORATION;
DELSYS MERGER CORP.
A DELAWARE CORPORATION; AND
DELFIN SYSTEMS
A CALIFORNIA CORPORATION;
DATED AS OF JUNE 30, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
1. THE MERGER............................................................................................. A-1
1.1 Merger of Merger Sub into Delfin............................................................ A-1
1.2 Closing; Effective Time..................................................................... A-1
1.3 Effect of the Merger........................................................................ A-1
1.4 Certificate of Incorporation and Bylaws; Directors and Officers............................. A-1
1.5 Effect on Capital Stock..................................................................... A-2
1.6 Stock Options............................................................................... A-3
1.7 Closing of Delfin's Transfer Books.......................................................... A-3
1.8 Exchange of Certificates.................................................................... A-3
1.9 Dissenting Shares........................................................................... A-4
1.10 Tax Consequences............................................................................ A-5
1.11 Accounting Treatment........................................................................ A-5
1.12 Further Action.............................................................................. A-5
2. REPRESENTATIONS AND WARRANTIES OF DELFIN............................................................... A-5
2.1 Due Organization; Subsidiaries.............................................................. A-5
2.2 Articles of Incorporation and Bylaws; Records............................................... A-5
2.3 Capitalization, etc......................................................................... A-6
2.4 Financial Statements........................................................................ A-7
2.5 Absence of Changes.......................................................................... A-7
2.6 Title to Assets............................................................................. A-8
2.7 Accounts Receivable......................................................................... A-8
2.8 Equipment; Real Property Interests.......................................................... A-8
2.9 Proprietary Assets.......................................................................... A-8
2.10 Contracts................................................................................... A-10
2.11 Liabilities................................................................................. A-13
2.12 Compliance With Legal Requirements.......................................................... A-13
2.13 Governmental Authorizations................................................................. A-13
2.14 Tax Matters................................................................................. A-13
2.15 Employee and Labor Matters; Benefit Plans................................................... A-14
2.16 Environmental Matters....................................................................... A-16
2.17 Bank Accounts............................................................................... A-17
2.18 Insurance................................................................................... A-17
2.19 Related Party Transactions.................................................................. A-17
2.20 Legal Proceedings; Orders................................................................... A-17
2.21 Authority; Binding Nature of Agreement...................................................... A-18
2.22 Non-Contravention; Consents................................................................. A-18
2.23 Full Disclosure............................................................................. A-19
2.24 Accounting Matters.......................................................................... A-19
2.25 Brokers..................................................................................... A-19
3. REPRESENTATIONS AND WARRANTIES OF TITAN AND MERGER SUB................................................. A-19
3.1 Due Organization; Qualification............................................................. A-19
3.2 Certificate of Incorporation and Bylaws..................................................... A-20
3.3 Capitalization, etc......................................................................... A-20
3.4 SEC Filings; Financial Statements........................................................... A-20
3.5 Absence of Certain Changes or Events........................................................ A-21
</TABLE>
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(CONTINUED)
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3.6 Compliance With Legal Requirements.......................................................... A-21
3.7 Governmental Authorizations................................................................. A-21
3.8 Legal Proceedings; Orders................................................................... A-21
3.9 Authority; Binding Nature of Agreement...................................................... A-22
3.10 Valid Issuance.............................................................................. A-22
3.11 Non-Contravention; Consents................................................................. A-22
3.12 Full Disclosure............................................................................. A-23
3.13 Government Contracts; Government Bids....................................................... A-23
3.14 Accounting Matters.......................................................................... A-23
3.15 Brokers..................................................................................... A-23
4. CERTAIN COVENANTS OF DELFIN............................................................................ A-24
4.1 Access and Investigation.................................................................... A-24
4.2 Operation of Delfin's Business.............................................................. A-24
4.3 Notification; Updates to Delfin Disclosure Schedule......................................... A-25
4.4 No Negotiation.............................................................................. A-26
5. CERTAIN COVENANTS OF TITAN............................................................................. A-26
5.1 Access and Investigation.................................................................... A-26
5.2 Notification; Updates to Titan Disclosure Schedule.......................................... A-26
5.3 Registration Statement on Form S-8.......................................................... A-27
6. ADDITIONAL COVENANTS OF DELFIN AND TITAN............................................................... A-27
6.1 Filings and Consents........................................................................ A-27
6.2 Delfin Shareholders' Meeting................................................................ A-27
6.3 Public Announcements........................................................................ A-27
6.4 Pooling of Interests........................................................................ A-27
6.5 Affiliate Agreements........................................................................ A-28
6.6 Best Efforts................................................................................ A-28
6.7 Registration Statement; Proxy Statement..................................................... A-28
6.8 Regulatory Approvals........................................................................ A-28
6.9 Tax Matters................................................................................. A-29
6.10 FIRPTA Matters.............................................................................. A-29
6.11 Treatment of Employee Plans and Benefits.................................................... A-29
6.12 Directors' and Officers' Indemnification.................................................... A-29
6.13 Earnings Release............................................................................ A-29
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF TITAN AND MERGER SUB............................................ A-30
7.1 Accuracy of Representations................................................................. A-30
7.2 Performance of Covenants.................................................................... A-30
7.3 Shareholder Approval........................................................................ A-30
7.4 Consents.................................................................................... A-30
7.5 Agreements and Documents.................................................................... A-30
7.6 FIRPTA Compliance........................................................................... A-31
7.7 Compliance With the Securities Act.......................................................... A-31
7.8 Listing..................................................................................... A-31
7.9 No Restraints............................................................................... A-31
7.10 Effectiveness of Registration Statement..................................................... A-31
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
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7.11 No Legal Proceedings........................................................................ A-31
7.12 HSR Act..................................................................................... A-31
7.13 Titan Stock Price........................................................................... A-31
7.14 Voting Agreement............................................................................ A-31
7.15 Tax Representation Letters.................................................................. A-31
7.16 Modified Current Ratio...................................................................... A-31
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF DELFIN.......................................................... A-31
8.1 Accuracy of Representations................................................................. A-32
8.2 Performance of Covenants.................................................................... A-32
8.3 Documents................................................................................... A-32
8.4 Listing..................................................................................... A-32
8.5 No Restraints............................................................................... A-32
8.6 Effectiveness of Registration Statement..................................................... A-32
8.7 HSR Act..................................................................................... A-32
8.8 Titan Stock Price........................................................................... A-32
9. TERMINATION............................................................................................ A-32
9.1 Termination Events.......................................................................... A-32
9.2 Termination Procedures...................................................................... A-33
9.3 Termination Fees............................................................................ A-33
9.4 Effect of Termination....................................................................... A-34
10. SURVIVAL OF REPRESENTATIONS............................................................................ A-34
10.1 No Survival of Representations.............................................................. A-34
10.2 Indemnification............................................................................. A-34
11. MISCELLANEOUS PROVISIONS............................................................................... A-34
11.1 Further Assurances.......................................................................... A-34
11.2 Fees and Expenses........................................................................... A-35
11.3 Attorneys' Fees............................................................................. A-35
11.4 Notices..................................................................................... A-35
11.5 Confidentiality............................................................................. A-36
11.6 Time of the Essence......................................................................... A-36
11.7 Headings.................................................................................... A-36
11.8 Counterparts................................................................................ A-36
11.9 Governing Law............................................................................... A-36
11.10 Successors and Assigns...................................................................... A-36
11.11 Remedies Cumulative; Specific Performance................................................... A-36
11.12 Waiver...................................................................................... A-36
11.13 Amendments.................................................................................. A-37
11.14 Severability................................................................................ A-37
11.15 Parties in Interest......................................................................... A-37
11.16 Entire Agreement............................................................................ A-37
11.17 Construction................................................................................ A-37
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LIST OF EXHIBITS:
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EXHIBIT A-- CERTAIN DEFINITIONS
EXHIBIT B1-- FORM OF AFFILIATE AGREEMENT
EXHIBIT B2-- PERSONS TO EXECUTE AFFILIATE AGREEMENTS
EXHIBIT C-- FORM OF TAX REPRESENTATION LETTER OF TITAN
EXHIBIT D-- FORM OF TAX REPRESENTATION LETTER OF DELFIN
EXHIBIT E-- FORM OF LEGAL OPINION OF COUNSEL TO DELFIN
EXHIBIT F-- FORM OF LEGAL OPINION OF GENERAL COUNSEL OF TITAN
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and entered
into as of June 30, 1998, by and among THE TITAN CORPORATION, a Delaware
corporation ("Titan"); DELSYS MERGER CORP., a Delaware corporation and a wholly
owned subsidiary of Titan ("Merger Sub"); and DELFIN SYSTEMS, a California
corporation ("Delfin"). Certain other capitalized terms used in this Agreement
are defined in Exhibit A attached hereto.
RECITALS
A. Under and subject to the terms of this Agreement, Titan, Merger Sub and
Delfin intend to effect a merger of Merger Sub into Delfin (the "Merger") in
accordance with the Delaware General Corporation Law ("DGCL") and the California
Corporations Code ("CCC").
B. The parties intend 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").
C. The parties intend that for the Merger be treated as a "pooling of
interests" for accounting purposes and both Titan and Delfin will receive
assurances from their independent accountants to that effect.
D. This Agreement has been approved by the respective boards of directors of
Titan, Merger Sub and Delfin.
AGREEMENT
NOW THEREFORE, in reliance on the foregoing and in and for the consideration
and the mutual covenants set forth herein, the parties agree as follows:
1. THE MERGER
1.1 MERGER OF MERGER SUB INTO DELFIN. At the Effective Time (as
defined in Section 1.2), upon the terms and subject to the conditions set
forth in this Agreement, Merger Sub shall be merged with and into Delfin,
and the separate existence of Merger Sub shall cease. Delfin will continue
as the surviving corporation in the Merger (the "Surviving Corporation").
1.2 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the
offices of Titan, 3033 Science Park Road, San Diego, California 92121, on
September 30, 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 7 and 8 have been satisfied or waived
(the "Closing Date"). Contemporaneously with or as promptly as practicable
after the Closing, a properly executed Certificate of Merger conforming to
the requirements of the DGCL and CCC shall be filed with the Secretaries of
State of the States of Delaware and California. 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 California (the "Effective Time").
1.3 EFFECT OF THE MERGER. The Merger shall have the effects set forth
in this Agreement and in the applicable provisions of the DGCL and CCC.
Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all of the property, rights, privileges, powers and
franchises of Delfin and Merger Sub shall vest in the Surviving Corporation,
and all debts, liabilities and duties of Delfin and Merger Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND
OFFICERS. Unless otherwise determined by Titan and Delfin prior to the
Effective Time:
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(a) the Articles of Incorporation of Delfin in effect immediately
prior to the Effective Time shall be the Articles of Incorporation of the
Surviving Corporation as of the Effective Time;
(b) the Bylaws of Delfin 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 Merger Sub shall be the directors
and officers of the Surviving Corporation immediately after the Effective
Time.
1.5 EFFECT ON CAPITAL STOCK.
(a) Subject to Sections 1.5(b) and 1.9, at the Effective Time, by
virtue of the Merger and without any further action on the part of Titan,
Merger Sub, Delfin or any shareholder of Delfin:
(i) each share of the Common Stock, no par value, of Delfin
("Delfin Common Stock") outstanding immediately prior to the
Effective Time shall be automatically converted into the right to
receive the number of shares of the common stock, par value $.01 per
share, of Titan ("Titan Common Stock") equal to the Exchange Ratio
(as defined in Section 1.5(c)(i)); and
(ii) each share of the common stock, par value $.01, of Merger
Sub outstanding immediately prior to the Effective Time shall be
converted into and become one share of common stock of the Surviving
Corporation.
(b) No fractional shares of Titan 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
Delfin Common Stock who would otherwise be entitled to receive a fraction
of a share of Titan Common Stock (after aggregating all fractional shares
of Titan Common Stock issuable to such holder) shall, upon surrender of
such holder's Delfin 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 Titan Stock Price (as defined in
Section 1.5(c)(iii)).
(c) For purposes of this Agreement:
(i) The "Exchange Ratio" shall be the quotient of: (A)
Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000) minus
the "Line of Credit Deduction" (such difference, the "Total
Acquisition Price") divided by (B) the product of the "Delfin Shares
Outstanding" times the "Titan Stock Price."
(ii) The "Delfin Shares Outstanding" shall be the aggregate
number of shares of Delfin Common Stock issued and outstanding
immediately preceding the Closing Date (including any such shares
that are subject to a repurchase option or risk of forfeiture under
any restricted stock purchase agreement or other agreement but
excluding shares of Delfin Common Stock underlying Delfin Options
thus outstanding).
(iii) The "Titan Stock Price" shall be (A) the average of the
closing sale prices of a share of Titan 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 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.
(iv) The "Line of Credit Deduction" shall be the amount of
unpaid principal and accrued interest owed by Delfin under the line
of credit with Silicon Valley Bank as of the Closing.
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1.6 STOCK OPTIONS. At the Effective Time, each stock option that is
then outstanding under Delfin's 1990 Stock Option Plan and 1988 Stock Option
Plan (collectively, "Delfin's Stock Option Plans"), whether vested or
unvested (a "Delfin Option") that does not by its terms terminate in
connection with the Merger, shall be assumed by Titan in accordance with the
terms (as in effect as of the date of this Agreement) of Delfin's Stock
Option Plans and the stock option agreement by which such Delfin Option is
evidenced. All rights with respect to Delfin Common Stock under outstanding
Delfin Options shall thereupon be converted into rights with respect to
Titan Common Stock. Accordingly, from and after the Effective Time, (A) each
Delfin Option assumed by Titan may be exercised solely for shares of Titan
Common Stock, (B) the number of shares of Titan Common Stock subject to each
such assumed Delfin Option shall be equal to the number of shares of Delfin
Common Stock that were subject to such Delfin Option immediately prior to
the Effective Time multiplied by the Exchange Ratio, rounded down to the
nearest whole number of shares of Titan Common Stock, (C) the per share
exercise price for the Titan Common Stock issuable upon exercise of each
such assumed Delfin Option shall be determined by dividing the exercise
price per share of Delfin Common Stock subject to such Delfin Option, as in
effect immediately prior to the Effective Time, by the Exchange Ratio, and
rounding the resulting exercise price up to the nearest whole cent, and (D)
all restrictions on the exercise of each such assumed Delfin Option shall
continue in full force and effect, and the term, exercisability, vesting
schedule and other provisions of such Delfin Option shall otherwise remain
unchanged; provided, however, that each such assumed Delfin Option 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 Titan after the
Effective Time. Delfin and Titan shall take all actions that may be
necessary (under Delfin's Stock Option Plans and otherwise) to effectuate
the provisions of this Section 1.6. Following the Closing, Titan will send
to each holder of an assumed Delfin Option a written notice setting forth
(i) the number of shares of Titan Common Stock subject to such assumed
Delfin Option, and (ii) the exercise price per share of Titan Common Stock
issuable upon exercise of such assumed Delfin Option.
1.7 CLOSING OF DELFIN'S TRANSFER BOOKS. At the Effective Time, holders
of certificates representing shares of capital stock of Delfin that were
outstanding immediately prior to the Effective Time shall cease to have any
rights as stockholders of Delfin, and the stock transfer books of Delfin
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 Delfin'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 Delfin's capital stock (a
"Delfin Stock Certificate") is presented to the Surviving Corporation or
Titan, such Delfin 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, Titan, or
a transfer agent designated by Titan (the "Transfer Agent") will send to
the holders of Delfin Stock Certificates (i) a letter of transmittal in
customary form and containing such provisions as Titan may reasonably
specify, and (ii) instructions for use in effecting the surrender of
Delfin Stock Certificates in exchange for certificates representing Titan
Common Stock. Upon surrender of a Delfin Stock Certificate to Titan for
exchange, together with a duly executed letter of transmittal and such
other documents as may be reasonably required by Titan or the Transfer
Agent, the holder of such Delfin Stock Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of
whole shares of Titan Common Stock that such holder has the right to
receive pursuant to the provisions of this Section 1, and Delfin Stock
Certificate so surrendered shall be canceled. Until surrendered as
contemplated by this Section 1.8, each Delfin 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 Titan
Common Stock (and
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cash in lieu of any fractional share of Titan Common Stock) as
contemplated by this Section 1. If any Delfin Stock Certificate shall
have been lost, stolen or destroyed, Titan may, in its discretion and as
a condition precedent to the issuance of any certificate representing
Titan Common Stock, require the owner of such lost, stolen or destroyed
Delfin Stock Certificate to provide an appropriate affidavit and to
deliver a bond (in such sum as Titan may reasonably direct) as indemnity
against any claim that may be made against Titan or the Surviving
Corporation with respect to such Delfin Stock Certificate.
(b) No dividends or other distributions declared or made with respect
to Titan Common Stock with a record date after the Effective Time shall
be paid to the holder of any unsurrendered Delfin Stock Certificate with
respect to the shares of Titan 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 Delfin Stock Certificate in
accordance with this Section 1.8 (at which time such holder shall be
entitled to receive all such dividends and distributions since the
Effective Time and such cash payment).
(c) Titan 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 or former
holder of capital stock of Delfin pursuant to this Agreement such amounts
as Titan 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, Titan or the Transfer Agent,
at Titan'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.
(d) Neither Titan nor the Surviving Corporation shall be liable to
any holder or former holder of capital stock of Delfin for any shares of
Titan 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 Delfin 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 Titan Common Stock in accordance with Section 1.5 (or cash in
lieu of fractional shares in accordance with Section 1.8(b)), 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) Titan Common Stock
in accordance with Section 1.5 (and cash in lieu of fractional shares in
accordance with Section 1.8(b)).
(b) Delfin shall give Titan (i) prompt notice of any written demand
received by Delfin prior to the Effective Time to require Delfin to
purchase shares of capital stock of Delfin pursuant to applicable law and
of any other demand, notice or instrument delivered to Delfin 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. Delfin shall not make any payment or
settlement offer prior to the Effective Time with respect to any such
demand unless Titan shall have consented in writing to such payment or
settlement offer.
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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 1.3682(g) and
1.3683(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 Titan to be necessary or desirable to carry
out the purposes of this Agreement or to vest the Surviving Corporation or
Titan with full right, title and possession of and to all rights and
property of Merger Sub and Delfin, the officers and directors of the
Surviving Corporation and Titan shall be fully authorized (in the name of
Merger Sub, in the name of Delfin and otherwise) to take such action.
2. REPRESENTATIONS AND WARRANTIES OF DELFIN
Delfin represents and warrants to Titan and Merger Sub that, except as set
forth in the disclosure schedule prepared by Delfin and delivered by Delfin to
Titan on the date of this Agreement (the "Delfin Disclosure Schedule"):
2.1 DUE ORGANIZATION; SUBSIDIARIES.
(a) Except as identified in Part 2.1 of the Delfin Disclosure
Schedule, each of Delfin and its Subsidiaries (each of Delfin 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 California 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 Delfin Contracts.
(b) Since January 1, 1993, Delfin 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(s)
listed in Part 2.1 of the Delfin Disclosure Schedule.
(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 to Delfin's knowledge 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 Delfin Disclosure Schedule 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 Delfin
Disclosure Schedule, none of the Acquired Corporations owns, beneficially
or otherwise, any shares or other securities of, or any direct or
indirect equity interest in, any Entity. None of the Acquired
Corporations has agreed or is obligated to make any future investment in
or capital contribution to any Entity. None of the Acquired Corporations
has guaranteed or is responsible or liable for any obligation of any of
the Entities in which it owns any equity interest.
2.2 ARTICLES OF INCORPORATION AND BYLAWS; RECORDS. Delfin has
delivered or made available to Titan accurate and complete copies of: (1)
Delfin's Articles of Incorporation and bylaws, including all
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<PAGE>
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 Delfin'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 Articles of Incorporation or bylaws or other charter documents of any
of the Acquired Corporations, and each of the Acquired Corporations has not
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, current and complete.
2.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of Delfin consists of: (i)
30,000,000 shares of Common Stock, no par value, of which 7,188,088
shares have been issued and are outstanding; and (ii) no shares of
Preferred Stock, no par value, none of which are issued or are
outstanding. All of the outstanding shares of Delfin Common Stock have
been duly authorized and validly issued, and are fully paid and
nonassessable. Delfin has made available to Titan an accurate and
complete description of the terms of each repurchase option which is held
by Delfin and to which any of such shares is subject as well as any
obligation by Delfin to pay dividends on any of its stock.
(b) Delfin has reserved 2,470,172 shares of Delfin Common Stock for
issuance under the Delfin Stock Option Plans, of which options to
purchase 1,684,739 shares are outstanding as of the date of this
Agreement. There are no outstanding warrants to purchase Delfin Common
Stock. Part 2.3 of the Delfin Disclosure Schedule sets forth, with
respect to each Delfin Option that is outstanding as of the date of this
Agreement: (i) the name of the holder of such Delfin Option; (ii) the
total number of shares of Delfin Common Stock that are subject to such
Delfin Option and the number of shares of Delfin Common Stock with
respect to which such Delfin Option is immediately exercisable; (iii) the
date on which such Delfin Option was granted and the term of such Delfin
Option; (iv) the exercise schedule or period, as applicable, for such
Delfin Option; (v) the exercise price per share of Delfin Common Stock
purchasable under such Delfin Option; and (vi) whether such Delfin Option
has been designated an "incentive stock option" as defined in Section 422
of the Code. Except as set forth above, there are no: (i) outstanding
subscriptions, options, calls, warrants or rights (whether or not
currently exercisable) to acquire any shares of the capital stock or
other securities of Delfin; (ii) outstanding securities, instruments or
obligations that are or may become convertible into or exchangeable for
any shares of the capital stock or other securities of Delfin; or (iii)
Contracts under which Delfin is or may become obligated to sell or
otherwise issue any shares of its capital stock or any other securities.
(c) All outstanding shares of Delfin Common Stock and all outstanding
Delfin Options, 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 Delfin Disclosure Schedule,
since January 1, 1993, Delfin has never repurchased, redeemed or
otherwise reacquired any shares of capital stock or other securities of
Delfin. All securities so reacquired by Delfin were reacquired in
compliance with (i) the applicable provisions of the CCC and all other
applicable Legal Requirements, and
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(ii) all requirements set forth in applicable restricted stock purchase
agreements and other applicable Contracts.
(e) No shares of Delfin Common Stock, and no other securities of
Delfin, have been issued and are held by Delfin's 401(k) Retirement Plan.
(f) All of the outstanding shares of capital stock of each of the
Subsidiaries are validly issued (in compliance with all applicable
securities laws and other Legal Requirements and applicable Delfin
Contracts), fully paid and nonassessable and are owned beneficially and
of record by Delfin or its wholly owned Subsidiaries, free and clear of
any Encumbrance.
2.4 FINANCIAL STATEMENTS.
(a) Delfin has delivered to Titan the following financial statements
and notes (collectively, the "Delfin Financial Statements"):
(i) the balance sheets of Delfin as of September 30, 1997 and
1996, and the related statements of operations, statements of
shareholders' equity and statements of cash flows of Delfin for the
years then ended, together with the notes thereto.
(ii) the unaudited balance sheet of Delfin as of March 31, 1998
(the "Unaudited Interim Balance Sheet"), and the related unaudited
income statement of Delfin for the six months then ended.
(b) Delfin Financial Statements are accurate and complete and present
fairly the financial position of Delfin 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 Delfin and the other Acquired
Corporations for the periods covered thereby. Delfin 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 customary year end
adjustments which will not be material). Delfin has provided Titan with
copies of all management letters received from the auditors of Delfin
since September 30, 1996.
2.5 ABSENCE OF CHANGES. Since September 30, 1997, Delfin has not: (a)
suffered any change, or any development or combination of developments that
has had, or to Delfin's knowledge would reasonably be expected to have, a
Material Adverse Effect on Delfin, (b) suffered any damage, destruction or
loss, whether or not covered by insurance, that has had, or to Delfin's
knowledge would reasonably be expected to have, a Material Adverse Effect on
Delfin; (c) granted any material increase in the compensation payable or to
become payable by Delfin to its officers or employees other than increases
in the ordinary course of business to employees who are not officers; (d)
declared, set aside or paid any dividend or made any other distribution on
or in respect of the shares of its capital stock or declared any direct or
indirect redemption, retirement, purchase or other acquisition of such
shares; (e) issued any shares of its capital stock or any warrants, rights,
or options for, or entered into any commitment relating to such capital
stock; (f) made any change in the accounting methods or practices it
follows, whether for general financial or tax purposes, or any change in
depreciation or amortization policies or rates; (g) sold, leased, abandoned
or otherwise disposed of any real property, machinery, equipment or other
operating property other than in the ordinary course of business; (h) sold,
assigned, transferred, licensed or otherwise disposed of any patent, patent
right, trademark, trade name, brand name, copyright (or pending application
for any patent, trademark or copyright), invention, work of authorship,
process, know how, formula or trade secret or interest thereunder or other
material intangible asset except for end-user or other license transactions
entered into in the ordinary course of its business pursuant to Delfin's
standard forms of license agreement; (i) entered into any material
commitment or transaction (including without limitation any borrowing) other
than commitments or transactions entered into in the ordinary course
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of business that to Delfin's knowledge are not reasonably likely to have a
Material Adverse Effect on Delfin; (j) permitted or allowed any of its
property or assets to be subjected to any new mortgage, deed of trust,
pledge, lien, security interest or other encumbrance of any kind, except for
liens for current taxes not yet due and purchase money security interests
incurred in the ordinary course of business; (k) made any capital
expenditure or commitment for additions to property, plant or equipment
individually in excess of $50,000, or, in the aggregate, in excess of
$500,000; (l) paid, loaned or advanced any amount to, or sold, transferred
or leased any properties or assets to, or entered into any agreement or
arrangement with, any of its officers, directors or stockholders or any
affiliate of any of the foregoing, other than employee compensation and
benefits and reimbursement of employment related business expenses incurred
in the ordinary course of business; or (m) agreed to take any action
described in this Section 2.6 or which would constitute a breach of any of
the representations or warranties of Delfin contained in this Agreement.
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 and 2.9 of Delfin Disclosure
Schedule and all of its rights under the Contracts identified in Part
2.10 of Delfin 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 Delfin 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 Delfin Disclosure Schedule identifies all assets that
are material to the business of the Acquired Corporations and that are
being leased or licensed to any of the Acquired Corporations.
2.7 ACCOUNTS RECEIVABLE. Delfin has provided to Titan accurate records
reflecting a breakdown and aging of all accounts receivable, notes
receivable and other receivables of the Acquired Corporations as of May 1,
1998. Except as set forth in Part 2.7 of Delfin 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 May 1, 1998 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 will be collected in full when due, without any counterclaim or
set off (net of the allowance for doubtful accounts included in such
financial statements).
2.8 EQUIPMENT; REAL PROPERTY INTERESTS.
(a) All 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 Delfin Disclosure
Schedule.
2.9 PROPRIETARY ASSETS.
(a) Part 2.9(a)(i) of Delfin Disclosure Schedule sets forth, with
respect to each Delfin 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
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names of the jurisdictions covered by the applicable registration or
application. Part 2.9(a)(ii) of Delfin Disclosure Schedule identifies and
provides a brief description of all other material Delfin Proprietary
Assets owned by Delfin or any other Acquired Corporation. Part
2.9(a)(iii) of Delfin Disclosure Schedule identifies and provides a brief
description of each material Proprietary Asset licensed to Delfin or any
other Acquired Corporation by any Person (except for any Proprietary
Asset that is licensed to Delfin 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 Delfin or any other
Acquired Corporation. Except as set forth in Part 2.9(a)(iv) of Delfin
Disclosure Schedule, Delfin (or any other Acquired Corporation, as
appropriate) has good, valid and marketable title to all of Delfin
Proprietary Assets identified in Parts 2.9(a)(i) and 2.9(a)(ii) of Delfin
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 Delfin Disclosure Schedule.
Except as set forth in Part 2.9(a)(v) of Delfin Disclosure Schedule, no
Acquired Corporation is obligated to make any payment to any Person for
the use of any Delfin Proprietary Asset. Except as set forth in Part
2.9(a)(vi) of Delfin Disclosure Schedule, no Acquired Corporation has
developed jointly with any other Person any Delfin 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 Delfin Proprietary Assets (except Delfin Proprietary
Assets whose value would be unimpaired by public disclosure) and
otherwise to maintain and protect the value of all Delfin Proprietary
Assets.
(c) None of Delfin 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 Delfin, 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 Delfin Proprietary
Asset.
(d) Except as set forth in Part 2.9(d) of Delfin Disclosure Schedule:
(i) each Delfin 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 Delfin 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 Delfin,
there is no basis for any such claim. Delfin 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 Delfin Proprietary Assets.
(e) Delfin 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 Delfin Disclosure
Schedule, (i) the Acquired Corporations have not licensed any of Delfin
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.
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(f) Except as set forth in Part 2.9(f) of Delfin Disclosure Schedule,
(i) all current employees of, and those persons who have been employed in
the last three years by, 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 Delfin and previously
delivered to Titan, and (ii) all current consultants and independent
contractors, and those persons who have provided consulting or
independent contractor services in the last three years, 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 Delfin and previously delivered to Titan.
2.10 CONTRACTS.
(a) Part 2.10 of Delfin Disclosure Schedule identifies each Contract
of Delfin or any of the other Acquired Corporations material to the
Acquired Corporations, considered as a whole (each a "Material Delfin
Contract"), including the following (to the extent material):
(i) each Delfin Contract relating to the employment of, or the
performance of services by, any employee, consultant or independent
contractor;
(ii) each Delfin Contract relating to the acquisition, transfer,
use, development, sharing or license of any Proprietary Asset;
(iii) each Delfin 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 Delfin Contract creating or involving any agency
relationship, distribution arrangement or franchise relationship;
(v) each Delfin Contract relating to the creation of any
Encumbrance with respect to any asset of any of the Acquired
Corporations;
(vi) each Delfin Contract involving or incorporating any
guaranty, any pledge, any performance or completion bond, any
indemnity or any surety arrangement;
(vii) each Delfin Contract creating or relating to any
partnership or joint venture or any sharing of revenues, profits,
losses, costs or liabilities;
(viii) each Delfin 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 Delfin 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
Titan accurate and complete copies of all written Contracts identified in
Part 2.10 of Delfin Disclosure Schedule, including all amendments
thereto. Each Contract identified in Part 2.10 of Delfin Disclosure
Schedule is valid and in full force and effect, and, to the best of the
knowledge of Delfin, 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.
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(c) Except as set forth in Part 2.10 of Delfin Disclosure Schedule:
(i) none of the Acquired Corporations is in material violation
or in breach, or in any material default under, any Delfin Contract,
and, to the best of the knowledge of Delfin, no other Person has
materially violated or breached, or committed any material default
under, any Delfin Contract;
(ii) to the best of the knowledge of Delfin, 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 Delfin Contract, (B) give any Person
the right to declare a default or exercise any remedy under any
Material Delfin Contract, (C) give any Person the right to accelerate
the maturity or performance of any Material Delfin Contract, or (D)
give any Person the right to cancel, terminate or modify any Material
Delfin Contract;
(iii) since September 30, 1997, none of the Acquired Corporations
has received any notice or other communication regarding any material
violation or breach of, or default under, any Delfin Contract; and
(iv) none of the Acquired Corporations has waived any of its
material rights under any Material Delfin Contract.
(d) No Person is currently renegotiating any amount paid or payable
to Delfin under any Material Delfin Contract or any other material term
or provision of any Material Delfin Contract.
(e) The Contracts identified in Part 2.10 of Delfin 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) Delfin has made available to Titan all material documentation
regarding any bid, offer, award, written proposal or term sheet which has
been submitted or received by the Acquired Corporations since September
30, 1996.
(g) Delfin has made available to Titan all material documentation
regarding the Acquired Corporations' current backlog under Delfin
Contracts.
(h) Since September 30, 1992, except as set forth in Part 2.10(h) of
Delfin 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 5220.22M), (H) the Defense
Industrial Security Regulation (DOD 5220.22R) or any related security
regulations, or (I) any other applicable procurement law or
regulation or other Legal Requirement;
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(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 Delfin'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 Delfin, no circumstances exist that would sustain a
debasement 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 September 30, 1996, 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 Delfin 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);
(x) except as set forth in Part 2.10 of Delfin 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 Delfin, to any Person (other than to any bona
fide employee or agent (as defined in subpart 3.4 of the FAR) of
Delfin) 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 had, and to Delfin's knowledge would not reasonably be expected
to have, a Material Adverse Effect on Delfin;
(xiv) in each case in which any Acquired Corporation has
delivered or otherwise provided any technical data, computer software
or Delfin 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
Delfin 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 Delfin Proprietary Asset;
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(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 and that year
is 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. None of the Acquired Corporations has any 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 Delfin Financial Statements or
provided in Delfin Disclosure Schedule.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. Each of the Acquired
Corporations is, and has at all times since September 30, 1994 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 Delfin. Except as set forth in Part 2.12 of
Delfin Disclosure Schedule, since September 30, 1994, none of the Acquired
Corporations has 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 Delfin.
2.13 GOVERNMENTAL AUTHORIZATIONS. Part 2.13 of Delfin Disclosure
Schedule identifies each material Governmental Authorization held by each of
the Acquired Corporations. The Governmental Authorizations identified in
Part 2.13 of Delfin 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 to Delfin's knowledge will not have, a Material Adverse Effect on
Delfin. Each of the Acquired Corporations is, and at all times since
September 30, 1994 has been, in substantial compliance with the terms and
requirements of the respective Governmental Authorizations identified in
Part 2.13 of Delfin Disclosure Schedule. Since September 30, 1994, Delfin
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 "Delfin
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 Delfin Returns to
be due on or before the Closing Date have been or will be paid on or
before the Closing Date. Delfin has delivered or made available to Titan
accurate and complete copies of all Delfin Returns filed since September
30, 1994 which have been requested by Titan.
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(b) Delfin 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 Delfin Disclosure Schedule,
there have been no examinations or audits of any Delfin Return since
September 30, 1994. Delfin has delivered to Titan accurate and complete
copies of all audit reports and similar documents (to which it has
access) relating to Delfin Returns. Except as set forth in Part 2.14 of
Delfin Disclosure Schedule, no extension or waiver of the limitation
period applicable to any of Delfin 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 Delfin Disclosure Schedule,
since September 30, 1994 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 that, considered
individually or considered collectively with any other such Contracts,
will, or to Delfin's knowledge 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 Delfin 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, 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 Delfin Disclosure
Schedule, the Acquired Corporations do not maintain, sponsor or
contribute to, and, to the best of the knowledge of Delfin, 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
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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
Delfin Disclosure Schedule (the "Welfare Plans"), none of which is a
multi-employer plan (within the meaning of Section 3(37) of ERISA).
(d) With respect to each Plan, Delfin has delivered to Titan:
(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 Delfin, has ever been required to be, treated as a
single employer with any other Person under 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
Delfin, the Acquired Corporations have never made a complete or partial
withdrawal from a multi-employer 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 Delfin 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)).
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(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, Delfin 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 Delfin 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) Delfin has provided to Titan 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 Delfin's employees are "at will" employees.
(m) Part 2.15(m) of Delfin 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.
(o) Except as set forth in Part 2.15(o) of Delfin Disclosure
Schedule, each of the Acquired Corporations has good labor relations, and
Delfin 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 Delfin, 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 Delfin, 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
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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 Delfin 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 BANK ACCOUNTS. Delfin has provided to Titan accurate records for
each account (including account numbers) maintained by or for the benefit of
any of the Acquired Corporations at any financial institution and the
persons authorized to draw on such accounts.
2.18 INSURANCE. Part 2.18 of Delfin 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
since January 1, 1993, and Delfin has delivered or made available to Titan
accurate and complete copies of the insurance policies identified on Part
2.18 of Delfin Disclosure Schedule. Each of the insurance policies
identified in Part 2.18 of Delfin Disclosure Schedule is in full force and
effect. Since January 1, 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 stated in Part 2.19 of the
Delfin Disclosure Schedule, no Related Party has, and no Related Party has
at any time since September 30, 1994 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
September 30, 1994 been, indebted to any of the Acquired Corporations; (c)
since September 30, 1994, no Related Party has entered into, or has had any
direct or indirect financial interest in, any Material Delfin Contract,
transaction or business dealing involving any of the Acquired Corporations;
(d) no Related Party is competing, or has at any time since September 30,
1994 competed, directly or indirectly, with any of the Acquired
Corporations; and (e) no Related Party has any claim or right against any of
the Acquired Corporations (other than rights under Delfin Options 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 individual who
is, or who has at any time since January 1, 1995 been, an officer any of the
Acquired Corporations; (ii) each member of the immediate family of each of
the individuals referred to in clause "(i)" above; and (iii) any trust or
other Entity (other than the Acquired Corporations) in which any one of the
individuals referred to in clauses "(i)" and "(ii)" 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 Titan with respect to this
Section 2.19.)
2.20 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 2.20 of Delfin Disclosure Schedule,
there is no pending Legal Proceeding, and (to the best of the knowledge
of Delfin) no Person has threatened to commence
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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 Delfin) 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 Delfin,
except as set forth in Part 2.20 of Delfin Disclosure Schedule, no event
has occurred, and no claim, dispute or other condition or circumstance
exists, that will, or to Delfin's knowledge 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 Delfin 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 Delfin, 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 shareholders of Delfin, Delfin has the full right and authority to
enter into and to perform its obligations under this Agreement; and the
execution, delivery and performance by Delfin of this Agreement have been
duly authorized by all necessary action on the Part of Delfin and its board
of directors. This Agreement constitutes the legal, valid and binding
obligation of Delfin, enforceable against Delfin 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
Delfin 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 Delfin's Articles of Incorporation or bylaws, or (ii)
any resolution adopted by Delfin's shareholders, Delfin's board of
directors or any committee of each of Delfin'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 Delfin, 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 Delfin Contract that
is, or to Delfin's knowledge would constitute, a
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Material Adverse Effect, or give any Person the right to (i) declare a
default or exercise any remedy under any such Delfin Contract, (ii)
accelerate the maturity or performance of any such Delfin Contract, or
(iii) cancel, terminate or modify any such Delfin 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 Delfin Disclosure
Schedule, and except as may be required by the HSR Act, 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 Delfin 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 Delfin for inclusion in the S-4
Registration Statement (as defined in Section 6.7) will not, as of the
date the S-4 Registration Statement becomes effective or as of the date
of Delfin Shareholders' Meeting (as defined in Section 6.2), (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 Delfin, based on
consultation with its independent accountants, neither Delfin nor any of its
affiliates has taken or agreed to, or plans to, take any action that would
prevent Titan from accounting for the Merger as a "pooling of interests."
2.25 BROKERS. No broker, finder or financial adviser retained by
Delfin is entitled to any brokerage, finder's or other fee or commission
from Delfin in connection with the transactions contemplated by this
Agreement.
3. REPRESENTATIONS AND WARRANTIES OF TITAN AND MERGER SUB
Titan and Merger Sub (each of the Titan and Merger Sub is individually
referred to herein as "Acquiring Corporation" and collectively as the "Acquiring
Corporations") jointly and severally represent and warrant to Delfin that:
3.1 DUE ORGANIZATION; QUALIFICATION.
(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 Delfin 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
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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.
3.2 CERTIFICATE OF INCORPORATION AND BYLAWS. True, correct and
complete copies of the Certificates of Incorporation and Bylaws, each as
amended to date, of Titan and Merger Sub have been made available to Delfin.
The Certificates of Incorporation and Bylaws of Titan and each of the other
Acquiring Corporations are in full force and effect. Neither Titan nor any
of the other Acquiring Corporations is in violation of any provision of its
Certificate of Incorporation or Bylaws.
3.3 CAPITALIZATION, ETC. The authorized capital stock of Titan
consists of: (i) 45,000,000 shares of Common Stock, $.01 par value per
share, of which 24,976,427 shares were issued and are outstanding as of June
29, 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, of which 694,872 shares were issued and are outstanding as
of May 31, 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 May 31, 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 Titan's 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 November 1996, Titan 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 Titan 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 Titan 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 Titan, free and clear of any Encumbrances and were issued in
compliance with all applicable securities laws and other applicable Legal
Requirements. Titan has outstanding options to purchase 3,019,522 shares of
common stock as of the date hereof, with exercise prices ranging between
$2.625 to $9.50. In addition, Titan has issued 100,000 warrants to acquire
common stock at an exercise price of $3.50 per share. The shares of Titan
Common Stock to be issued to Delfin's shareholders in the Merger, when
issued by Titan 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 Titan (subject to the terms of Affiliate Agreements entered
into as contemplated by this Agreement).
3.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Titan has delivered or made available to Delfin 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 Titan with the SEC between January 1, 1997 and
the date of this Agreement (the "Titan 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 Titan 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 Titan 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.
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(b) The consolidated financial statements contained in the Titan 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 yearend audit adjustments; and (iii) fairly present the
consolidated financial position of Titan and its subsidiaries as of the
respective dates thereof and the consolidated results of operations of
Titan and its subsidiaries for the periods covered thereby.
3.5 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 Titan, 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 Titan.
3.6 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 Titan. 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 Titan.
3.7 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 Titan. Each of the Acquiring Corporations is in
substantial compliance with the terms and requirements of such Governmental
Authorizations.
3.8 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in the Titan SEC Documents, 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 Titan: (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 Titan) 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 Titan, except as set forth in the Titan SEC Documents, 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 the Titan SEC Documents, no material
Legal Proceeding has ever been commenced by or has ever been pending
against any of the Acquiring Corporations since December 31, 1996.
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(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 Titan, 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.
3.9 AUTHORITY; BINDING NATURE OF AGREEMENT. Titan 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 Titan and Merger Sub of this Agreement (including the
contemplated issuance of Titan Common Stock in the Merger in accordance with
this Agreement) have been duly authorized by all necessary action on the
Part of Titan and Merger Sub and their respective boards of directors. No
vote of Titan's stockholders is needed to approve the Merger. This Agreement
constitutes the legal, valid and binding obligation of Titan 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.
3.10 VALID ISSUANCE. The Titan 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.
3.11 NON-CONTRAVENTION; CONSENTS. Except for any consents required
from lenders to Titan, 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 Titan, 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 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 to
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any consents required from lenders to Titan, 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.
3.12 FULL DISCLOSURE.
(a) This Agreement 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 6.7)
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.
3.13 GOVERNMENT CONTRACTS; GOVERNMENT BIDS. Except for disallowances
for costs determined from time to time at the closing of government audit
periods:
(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 5220.22M), (H) the Defense Industrial
Security Regulation (DOD 5220.22R) 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 Titan'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 Titan,
no circumstances exist that would sustain a debasement or suspension of
any Acquiring Corporation or any employee of any Acquiring Corporation;
and
3.14 ACCOUNTING MATTERS. To the knowledge of Titan, Titan has not
taken and has not agreed, and does not plan, and will not take any action
that would prevent Titan from accounting for the business combination to be
effected by the Merger as a "pooling of interest."
3.15 BROKERS. No broker, finder or financial adviser retained by Titan
and Merger Sub is entitled to any brokerage, finder's or other fee or
commission from Titan and Merger Sub in connection with the transactions
contemplated by this Agreement.
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4. CERTAIN COVENANTS OF DELFIN
4.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement through the Effective Time (the "Pre-Closing Period"), Delfin
shall, and shall cause its Representatives to: (A) provide Titan and Titan's
Representatives with reasonable access to Delfin's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to Delfin; and (B)
provide Titan and Titan's Representatives with copies of such existing
books, records, Tax Returns, work papers and other documents and information
relating to Delfin, and with such additional financial, operating and other
data and information regarding Delfin, as Titan may reasonably request.
4.2 OPERATION OF DELFIN'S BUSINESS. During the Pre-Closing Period,
except pursuant to prior written consent of Titan, Delfin 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 Delfin 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 Delfin may repurchase Delfin 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 Delfin
shall be permitted (y) to grant stock options to employees in accordance
with its past practices, and (z) to issue Delfin Common Stock to
employees upon the exercise of outstanding Delfin Options;
(f) not amend or waive any of its rights under, or permit the
acceleration of vesting under, (i) any provision of Delfin's Stock Plans,
(ii) any provision of any agreement evidencing any outstanding Delfin
Option, 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 Delfin's Articles of Incorporation or
bylaws, or effect or permit Delfin to become a party to any Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(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 $500,000 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 Delfin Contract, or (ii) amend or prematurely terminate, or
waive any material right or remedy under, any such Material Delfin
Contract;
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(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 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 Delfin
Contracts;
(l) not (i) lend money to any Person or (ii) incur or guarantee any
indebtedness for borrowed money (except that Delfin may make routine
borrowings in the ordinary course of business under its line of credit
with Silicon Valley Bank);
(m) except as set forth in Delfin 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 Titan or pursuant to agreements in effect on the date hereof,
or in accordance with Delfin's past practices, or (iii) hire any new
indirect employee whose aggregate annual compensation from Delfin 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 Delfin shall change its methods
of accounting or accounting practices with respect to determinations of
Working Capital to the extent reasonably requested by Titan 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.
4.3 NOTIFICATION; UPDATES TO DELFIN DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, Delfin shall promptly notify
Titan in writing of:
(i) the discovery by Delfin 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 Delfin 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 Delfin 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 Delfin; and
(iv) any event, condition, fact or circumstance that would make
the timely satisfaction of any of the conditions set forth in Section
7 or Section 8 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required
to be disclosed pursuant to Section 4.3(A) requires any change in the
Delfin Disclosure Schedule, or if any such event, condition, fact or
circumstance would require such a change assuming the Delfin Disclosure
Schedule were dated as of the date of the occurrence, existence or
discovery of such event, condition, fact or circumstance, then Delfin
shall promptly deliver to Titan an update to Delfin
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Disclosure Schedule specifying such change. No such update shall be
deemed to supplement or amend Delfin Disclosure Schedule for the purpose
of (i) determining the accuracy of any of the representations and
warranties made by Delfin in this Agreement, or (ii) determining whether
any of the conditions set forth in Section 7 has been satisfied;
provided, however, that if Closing occurs, the Delfin Disclosure Schedule
shall be deemed to be modified at such time by such update.
4.4 NO NEGOTIATION. Subject to the penultimate paragraph of this
Section 4.4, during the Pre-Closing Period, Delfin shall not, directly or
indirectly:
(a) solicit or encourage the initiation of any inquiry, proposal or
offer from any Person (other than Titan) relating to a possible
Acquisition Transaction;
(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any nonpublic information or afford access to
the properties, books or records of Delfin to any Person (other than
Titan) 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 Titan) 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 Delfin acting as agent) of
any of the Acquired Corporations shall be deemed a breach by Delfin.
This Section 4.4 does not prohibit Delfin from furnishing information
regarding Delfin 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
Delfin concludes in good faith, after consultation with outside legal counsel,
that such action is required in order for the Board of Directors of Delfin to
comply with its fiduciary obligations to Delfin's shareholders under applicable
law.
Delfin shall promptly notify Titan in writing of any inquiry, proposal or
offer relating to a possible Acquisition Transaction that is received by Delfin
during the Pre-Closing Period.
5. CERTAIN COVENANTS OF TITAN
5.1 ACCESS AND INVESTIGATION. During the pre-closing period, Titan
shall, and shall cause its Representatives to: (A) provide Delfin and
Delfin's Representatives with reasonable access to Titan's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to Titan; and (B)
provide Delfin and Delfin's Representatives with copies of such existing
books, records, Tax Returns, work papers and other documents and information
relating to Titan, and with such additional financial, operating and other
data and information regarding Titan, as Delfin may reasonably request.
5.2 NOTIFICATION; UPDATES TO TITAN DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, Titan shall promptly notify
Delfin in writing of:
(i) the discovery by Titan 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 Titan 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 Titan in this Agreement if (A) such
representation or warranty had been made as of the time of the
occurrence, existence or discovery of such
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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 Titan; and
(iv) any event, condition, fact or circumstance that would make
the timely satisfaction of any of the conditions set forth in Section
7 or Section 8 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required
to be disclosed pursuant to Section 5.2(a) requires any change in the
Titan Disclosure Schedule, or if any such event, condition, fact or
circumstance would require such a change assuming the Titan Disclosure
Schedule were dated as of the date of the occurrence, existence or
discovery of such event, condition, fact or circumstance, then Titan
shall promptly deliver to Delfin an update to the Titan Disclosure
Schedule specifying such change. No such update shall be deemed to
supplement or amend the Titan Disclosure Schedule for the purpose of (i)
determining the accuracy of any of the representations and warranties
made by Titan in this Agreement, or (ii) determining whether any of the
conditions set forth in Section 8 has been satisfied.
5.3 REGISTRATION STATEMENT ON FORM S-8. Unless the Delfin Options that
are assumed are included in a Titan Stock Option Plan that has already been
registered under the Securities Act, Titan shall use its reasonable efforts
to file with the SEC promptly after the Effective Time a Registration
Statement of Form S-8 covering the Delfin Options that are to be assumed by
Titan as provided by Section 1.6.
6. ADDITIONAL COVENANTS OF DELFIN AND TITAN
6.1 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. Delfin shall (upon request) promptly deliver
to Titan a copy of each such filing made, each such notice given and each
such Consent obtained by Delfin during the Pre-Closing Period.
6.2 DELFIN SHAREHOLDERS' MEETING. Delfin shall, in accordance with its
Articles of Incorporation and Bylaws, the applicable requirements of the CCC
and SEC requirements with respect to preparation and mailing of the
Prospectus/Proxy Statement, call and hold a special meeting of its
shareholders (or if agreed upon by Delfin and Titan, solicit the vote of its
shareholders by way of written consent) as promptly as practicable for the
purpose of permitting them to consider and to vote upon and approve the
Merger and this Agreement (for purposes of this Agreement, such meeting, or
the time at which Delfin shall have received such written consent from the
shareholders of Delfin shall be referred to as the "Delfin Shareholders'
Meeting"). As soon as permissible under the rules of the CCC, Delfin shall
solicit the vote of its shareholders with respect to the Merger and the
transactions contemplated hereby.
6.3 PUBLIC ANNOUNCEMENTS. During the Pre-Closing Period, (A) Delfin
shall not (and Delfin 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 Titan's prior written consent, which shall not be
unreasonably withheld, and (B) Titan will use reasonable efforts to consult
with Delfin prior to issuing any press release or making any public
statement regarding the Merger.
6.4 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 Titan to
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account for the Merger as a "pooling of interests."
6.5 AFFILIATE AGREEMENTS. Delfin shall use its best efforts to cause
each Person identified on Exhibit B-2 (and any other Person that could
reasonably be deemed to be an "affiliate" of Delfin for purposes of the
Securities Act), to execute and deliver to Titan, as promptly as practicable
after the execution of this Agreement, an Affiliate Agreement in the form of
Exhibit B-1.
6.6 BEST EFFORTS. During the Pre-Closing Period, (a) Delfin shall use
its best efforts to cause the conditions set forth in Section 7 to be
satisfied on a timely basis, and (b) Titan and Merger Sub shall use their
best efforts to cause the conditions set forth in Section 8 to be satisfied
on a timely basis.
6.7 REGISTRATION STATEMENT; PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement,
Titan and Delfin shall prepare and cause to be filed with the SEC a
registration statement on Form S-4 covering the Titan Common Stock to be
issued to Delfin shareholders 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 Titan and Delfin 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.
Delfin will use all reasonable efforts to cause the Prospectus/Proxy
Statement to be mailed to Delfin's shareholders, as promptly as
practicable after the S-4 Registration Statement is declared effective
under the Securities Act. Delfin shall promptly furnish to Titan all
information concerning the Acquired Corporations and Delfin's
shareholders that may be required or reasonably requested in connection
with any action contemplated by this Section 6.7. If any event relating
to any of the Acquired Corporations occurs, or if Delfin 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
Delfin shall promptly inform Titan thereof and shall cooperate with Titan
in filing such amendment or supplement with the SEC and, if appropriate,
in mailing such amendment or supplement to the shareholders of Delfin.
(b) Prior to the Effective Time, Titan shall use reasonable efforts
to obtain all regulatory approvals needed to ensure that the Titan 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 registered holder of Delfin Common Stock has an address of record on
the record date for determining the shareholders entitled to notice of
and to vote upon this Agreement and the Merger as provided herein;
provided, however, that Titan 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.
6.8 REGULATORY APPROVALS. In addition to the obligations of the
parties set forth in the preceding section, Delfin and Titan 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, Delfin and Titan 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. Delfin and
Titan 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 Delfin and
Titan shall
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(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. Delfin and Titan 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
Delfin and Titan 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.
6.9 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, Titan and Delfin shall execute and deliver to each other tax
representation letters in substantially the form of Exhibit C and Exhibit D,
respectively.
6.10 FIRPTA MATTERS. At the Closing (A) Delfin shall deliver to Titan
a statement (in such form as may be reasonably requested by counsel to
Titan) conforming to the requirements of Section 1.8972(h)(l)(i) of the
United States Treasury Regulations, and (B) Delfin may deliver to the
Internal Revenue Service the notification required under Section
1.8972(h)(2) of the United States Treasury Regulations.
6.11 TREATMENT OF EMPLOYEE PLANS AND BENEFITS. Except as otherwise
agreed to by Titan and Delfin, Titan shall ensure that upon the Closing, the
benefit plans and benefit arrangements of employees of Delfin will remain
unchanged. By year end, benefits will be reviewed in consonance with Titan
benefit plans and arrangements, applicable law and marketplace factors.
6.12 DIRECTORS' AND OFFICERS' INDEMNIFICATION. Titan and Delfin agree
to provide indemnification in favor of any director or officer of Delfin and
its Subsidiaries (the "Indemnified Parties"), as currently provided in their
respective articles of incorporation or bylaws, or in an agreement between
an Indemnified Party and Delfin or one of its Subsidiaries set forth in Part
6.12 of Delfin Disclosure Schedule, and rights to indemnification shall
survive the Merger and shall continue in full force and effect for a period
of three years after the Effective Time; provided that in the event any
claim or claims are asserted or made within such three-year period, all
rights to indemnification in respect to any such claim shall continue until
final disposition of such claim. In addition, Titan shall provide the
Indemnified Parties with Directors and Officers insurance, which shall
include claims arising from the transactions contemplated herein, in the
amount of $4 million for three years following the Closing.
6.13 EARNINGS RELEASE. Titan 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 20 days
after the end of the first full calendar month following the Closing.
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7. CONDITIONS PRECEDENT TO OBLIGATIONS OF TITAN AND MERGER SUB.
The obligations of Titan 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:
7.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by Delfin in 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 Delfin
Disclosure Schedule not consented to in writing by Titan, 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).
7.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations
that Delfin is 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.
7.3 SHAREHOLDER APPROVAL. The principal terms of the Merger shall have
been duly approved at Delfin Shareholders' Meeting as necessary for approval
under the CCC; and the holders of not more than 10% of the outstanding
shares of Delfin shall have exercised dissenters rights as described in
Section 1.9.
7.4 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 Delfin
Disclosure Schedule) shall have been obtained and shall be in full force and
effect.
7.5 AGREEMENTS AND DOCUMENTS. Titan and Merger Sub, 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 B-1 executed by any
Person who could reasonably be deemed to be an "affiliate" of Delfin for
purposes of the Securities Act;
(b) a legal opinion of Gray Cary Ware & Freidenrich 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 rending such opinion, such counsel may rely on the
tax representation letters referred to in Section 6.9);
(c) to the extent reasonably requested by Titan, confidential
invention and assignment agreements, reasonably satisfactory in form and
content to Titan, executed by all employees of Delfin and by all
consultants and independent contractors to Delfin who have not already
signed such agreements (including the individuals identified in Part
2.9(f) of Delfin Disclosure Schedule);
(d) a legal opinion of Brobeck, Phleger & Harrison LLP, dated as of
the Closing Date, addressing the items set forth in Exhibit E;
(e) letters from each of Arthur Andersen LLP and Ernst & Young LLP,
dated as of the Closing Date, regarding each firm's concurrence with the
conclusions of the management of Titan and the management of Delfin,
respectively, as to the appropriateness of 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;
(f) a certificate executed by Delfin's Chief Executive Officer
(solely in his capacity as such and containing the representation and
warranty that each of the representations and warranties
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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 7.1, 7.2, 7.3, 7.4 and 7.16 have been duly satisfied (the
"Delfin Closing Certificate"); and
(g) if requested by Titan, written resignations of all officers and
directors of the Acquired Corporations, effective as of the Effective
Time, except as otherwise provided herein or otherwise agreed by Titan
and Delfin.
7.6 FIRPTA COMPLIANCE. Delfin shall have filed with the Internal
Revenue Service the noitfication referred to in Section 7.10(b).
7.7 COMPLIANCE WITH THE SECURITIES ACT. All applicable requirements of
the Securities Act and state securities laws shall have been satisfied.
7.8 LISTING. The shares of Titan 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.
7.9 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 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.
7.10 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.
7.11 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 Titan of any material right
pertaining to its ownership of stock of the Surviving Corporation.
7.12 HSR ACT. The waiting period applicable to the consummation of the
Merger under the HSR Act (if applicable) shall have expired or been
terminated.
7.13 TITAN STOCK PRICE. The Titan Stock Price shall be less than or
equal to $9.00 per share.
7.14 VOTING AGREEMENT. The Voting Agreement shall be in full force and
effect and enforceable against each signatory thereto.
7.15 TAX REPRESENTATION LETTERS. Each of Titan and Delfin shall have
executed and delivered a tax representation letter as set forth in Section
6.9.
7.16 MODIFIED CURRENT RATIO. At the Closing Date, the Modified Current
Ratio of Delfin shall be greater than or equal to 1.55. As used herein, the
term "Modified Current Ratio" means the quotient of (i) the value of current
assets divided by (ii) the difference between the value of current
liabilities and Five Hundred Thousand Dollars ($500,000). All such values
(a) shall be based on amounts tied to the most recent interim closing
balance sheet with disclosure from Delfin management of any material interim
changes from the date of such interim closing balance sheet to the Closing
that would affect compliance with this condition, as documented in a
certificate of the Chief Financial Officer of Delfin, and (b) shall be
computed by applying the generally accepted accounting principles used in
the preparation of the last audited financial statements of Delfin.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF DELFIN.
The obligations of Delfin 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:
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8.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by Titan and Merger Sub in this Agreement and in each of the
other agreements and instruments delivered to Delfin in connection herewith,
shall have been accurate in all material respects as of the date of this
Agreement (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),
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).
8.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations
that Titan 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.
8.3 DOCUMENTS. Delfin shall have received the following documents:
(a) a legal opinion of the General Counsel of Titan, dated as of the
Closing Date, in the form of Exhibit F;
(b) a legal opinion of Brobeck Phleger & Harrison 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 rending such opinion, such counsel may rely upon the
tax representation letters referred to in Section 6.9); and
(c) a certificate executed by Titan's Chief Executive Officer (solely
in his capacity as such) and containing the representation and warranty
that each of the representations and warranties set forth in Section 3 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 and 8.2 have been
duly satisfied (the "Titan Closing Certificate").
8.4 LISTING. The shares of Titan 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.
8.5 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.
8.6 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.
8.7 HSR ACT. The waiting period applicable to the consummation of the
Merger under the HSR Act (if applicable) shall have expired or been
terminated.
8.8 TITAN STOCK PRICE. The Titan Stock Price shall be greater than or
equal to $5.00 per share.
9. TERMINATION
9.1 TERMINATION EVENTS. This Agreement may be terminated prior to the
Closing without either party (except as provided in Section 9.1(e))
incurring any termination fee:
(a) by Titan, if Titan reasonably determines that the timely
satisfaction of any condition set forth in Section 7 (other than as
related to Delfin Shareholders' Meeting covered by Section 6.2) has
become impossible (other than as a result of any failure on the part of
Titan or Merger Sub to comply with or perform any covenant or obligation
of Titan or Merger Sub set forth in this Agreement or in any other
agreement or instrument delivered to Delfin);
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(b) by Delfin, if Delfin reasonably determines that the timely
satisfaction of any condition set forth in Section 8 has become
impossible (other than as a result of any failure on the part of Delfin
to comply with or perform any covenant or obligation set forth in this
Agreement or in any other agreement or instrument delivered to Titan);
(c) by Titan, if the Closing has not taken place on or before
September 30, 1998 (other than as a result of any failure on the part of
Titan to comply with or perform any covenant or obligation of Titan set
forth in this Agreement or in any other agreement or instrument delivered
to Delfin); provided that, Titan shall not have the right to terminate
prior to January 1, 1999 in the event the only conditions prohibiting the
Closing are regulatory approvals or third party consents;
(d) by Delfin, if the Closing has not taken place on or before
September 30, 1998 (other than as a result of the failure on the part of
Delfin to comply with or perform any covenant or obligation set forth in
this Agreement or in any other agreement or instrument delivered to
Titan); provided that, Delfin shall not have the right to terminate prior
to January 1, 1999 in the event the only conditions prohibiting the
Closing are (i) regulatory approvals or third party consents or (ii)
market factors that are unique to Titan that affect satisfaction of the
conditions set forth in Section 8.8;
(e) by Delfin (at any time prior to shareholder approval of this
Agreement, the Merger and the transactions contemplated hereby) if,
pursuant to and in compliance with Section 4.4, Delfin and its Board of
Directors conclude in good faith that Delfin 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 Delfin's
shareholders 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 9.1(e), Delfin shall pay to Titan a
nonrefundable fee of 10% of Total Acquisition Price in cash (and no
additional fee will be required under Section 9.3) upon Delfin's (or its
Board of Directors') election to accept such Superior Proposal. Such cash
payment shall be Titan's sole recourse in the event of termination under
this Section 9.1(e). 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 Titan and Delfin;
(g) by Titan, as provided in Section 9.3.
9.2 TERMINATION PROCEDURES. If Titan wishes to terminate this
Agreement pursuant to Section 9.1(a), Section 9.1(c) or Section 9.1(f),
Titan shall deliver to Delfin prompt written notice stating that Titan is
terminating this Agreement and setting forth a brief description of the
basis on which Titan is terminating this Agreement. If Delfin wishes to
terminate this Agreement pursuant to Section 9.1(b), Section 9.1(d) or
Section 9.1(e), Delfin shall deliver to Titan prompt written notice stating
that Delfin is terminating this Agreement and setting forth a brief
description of the basis on which Delfin is terminating this Agreement.
9.3 TERMINATION FEES.
(a) Titan may terminate this Agreement immediately (unless already
terminated as provided in subsection (iii) below) and Delfin shall pay to
Titan a termination fee of 10% of Total Acquisition Price, payable upon
termination of this Agreement, if (i) at any time prior to the Closing
Date, Delfin 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 Titan; (ii) Delfin fails to use its best
efforts to complete Delfin Shareholders' Meeting as required herein or if
the Board of Directors of Delfin does not recommend to the shareholders
of Delfin that they approve the Merger and this Agreement at Delfin
Shareholders' Meeting; or (iii) Delfin
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terminates this Agreement other than pursuant to Section 9.1; such
termination fee shall be the sole recourse of Titan in the event of
termination under this Section 9.3.
(b) Titan shall pay to Delfin a termination fee of 10% of Total
Acquisition Price, payable upon termination of this Agreement, if Titan
terminates this Agreement other than pursuant to Section 9.1 or this
Section 9.3; such termination fee shall be the sole recourse of Delfin in
the event of termination under this Section 9.3.
9.4 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 9.1, all further obligations of the parties under this Agreement
shall terminate; provided, however, that neither Delfin nor Titan 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 9.3; the parties shall, in all
events, remain bound by and continue to be subject to the provisions set
forth in Section 11; and (c) Delfin shall, in all events, remain bound by
and continue to be subject to Section 6.3.
10. SURVIVAL OF REPRESENTATIONS.
10.1 NO SURVIVAL OF REPRESENTATIONS.
(a) Absent the failure to disclose information that a party knows or
reasonably should have known, all representations and warranties made by
Delfin, Titan and Merger Sub shall terminate and expire as of the
Effective Time, and any liability of Delfin, Titan and Merger Sub with
respect to such representations and warranties shall thereupon cease.
(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
Delfin 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 Delfin Disclosure Schedule or in any update to
Delfin Disclosure Schedule shall be deemed to be a representation and
warranty made by Delfin in this Agreement.
10.2 INDEMNIFICATION.
(a) From and after the Effective Time (but subject to Section
10.1(a)), Indemnitees shall be held harmless and indemnified by the
Shareholders from and against, and shall be compensated and reimbursed by
the Shareholders 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 any failure by
Delfin to disclose information that any officer of Delfin knew or should
have known.
(b) From and after the Effective Time (but subject to Section
10.1(a)), the Shareholders shall be held harmless and indemnified by
Titan from and against, and shall be compensated and reimbursed by the
Shareholders for, any Damages which are directly or indirectly suffered
or incurred by any of the Shareholders or to which any of the
Shareholders 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 any failure by
Titan to disclose information that any officer of Titan knew or should
have known.
11. MISCELLANEOUS PROVISIONS.
11.1 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
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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.
11.2 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 Titan and its Representatives
with respect to Delfin's business (and the furnishing of information to
Titan and its Representatives in connection with such investigation and
review), (b) the negotiation, preparation and review of this Agreement
(including Delfin 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 Titan shall bear the filing fees associated with the
printing and filing of the S-4 Registration Statement; provided, further,
that any fees associated with the filing of any notifications required to be
filed by Delfin or Titan under the HSR Act shall be shared equally by Delfin
and Titan. All such fees payable by Delfin shall be paid or provided for
prior to Closing.
11.3 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.
11.4 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 Titan:
The Titan Corporation
Attn.: Legal Department
3033 Science Park Road
San Diego, CA 92121
Telephone: (619) 552-9500
Facsimile: (619) 522-9759
with a copy to:
Gray Cary Ware & Freidenrich LLP
Attn.: Douglas J. Rein, Esq.
4365 Executive Drive, Suite 1600
San Diego, CA 92121-2189
Telephone: (619) 677-1400
Facsimile: (619) 677-1477
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if to Delfin:
Delfin Systems
3000 Patrick Henry Drive
Santa Clara, CA 95054
Telephone: (408) 748-1200
Facsimile: (408) 982-9509
with a copy to:
Warren T. Lazarow, Esq.
Brobeck Phleger & Harrison LLP
2200 Geng Road
Palo Alto, CA 94303
Telephone: (650) 496-2887
Facsimile: (650) 496-2733
11.5 CONFIDENTIALITY. Without limiting the generality of anything
contained in Section 6.3, the 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.
11.6 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
11.7 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.
11.8 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.
11.9 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.
11.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon:
Delfin and its successors and assigns (if any); Delfin's shareholders (to
the extent set forth in Section 10.2); Titan 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: Delfin; Delfin's shareholders (to
the extent set forth in Section 1.5); the holders of assumed Delfin Options
(to the extent set forth in Section 1.6); Titan; Merger Sub; the other
Indemnitees (subject to Section 10.2); and the respective successors and
assigns (if any) of the foregoing. Titan 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 Delfin; and Delfin may not
assign any or all of its rights hereunder, in whole or in part, without
obtaining the prior written consent of Titan.
11.11 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.
11.12 WAIVER.
(a) No failure on the Part of any Person to exercise any power,
right, privilege or remedy
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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.
11.13 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.
11.14 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.
11.15 PARTIES IN INTEREST. Except for the provisions of Sections 1.5,
1.6 and 10, 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).
11.16 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 Titan and Delfin 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 of (A) the Effective Time, or (B) the date
on which such agreement is terminated in accordance with its terms.
11.17 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.
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The parties hereto have caused this Agreement to be executed and delivered
as of June 30, 1998.
<TABLE>
<S> <C> <C>
THE TITAN CORPORATION,
A DELAWARE CORPORATION
By: /s/ Gene W. Ray
Gene W. Ray
DELSYS MERGER COP.
A DELAWARE CORPORATION
By: /s/ Cheryl L. Barr
Cheryl L. Barr
DELFIN SYSTEMS,
A CALIFORNIA CORPORATION
By: /s/ Mellon C. Baird
Mellon C. Baird
Chairman, CEO and President
</TABLE>
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EXHIBIT A
TO APPENDIX A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
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 Delfin or any other Acquired Corporation is
a party; (b) by which Delfin or any other Acquired Corporation or any assets of
any of them is or may become bound or under which Delfin or any other Acquired
Corporation has, or may become subject to, any obligation; or (c) under which
Delfin 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 Delfin's business or assets;
(b) the issuance, disposition or acquisition of (i) any capital
stock or other equity security of Delfin (other than common stock issued
to employees of Delfin, upon exercise of Delfin Options or otherwise, in
routine transactions in accordance with Delfin'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
Delfin (other than stock options granted to employees of Delfin in
routine transactions in accordance with Delfin'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 Delfin; or
(c) any merger, consolidation, business combination, reorganization
or similar transaction involving Delfin.
AGREEMENT. "Agreement" shall mean the Agreement and Plan of Reorganization
to which this Exhibit A is attached (including Delfin Disclosure Schedule), as
it may be amended from time to time.
COMMERCIAL CONTRACT. "Commercial Contract" shall mean any customer Contract
relating to the Delfin's commercial business entered into by Delfin that
contemplates or includes (a) the payment or delivery of cash or other
consideration in an amount of having a value in excess of $50,000 in the
aggregate, or (b) the performance of services having a value in excess of
$50,000 in the aggregate.
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.
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.
DELFIN DISCLOSURE SCHEDULE. "Delfin Disclosure Schedule" shall mean the
schedule (dated as of the date of the Agreement) delivered to Titan on behalf of
Delfin.
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DELFIN PROPRIETARY ASSET. "Delfin Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to Delfin or any other Acquired
Corporation or otherwise used by Delfin or any other Acquired Corporation.
DELFIN SHAREHOLDERS' MEETING. "Delfin Shareholders' Meeting" shall have the
meaning set forth in Section 6.2.
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 nonprofit
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.
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.
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 Titan and any other indemnified party
under the terms of Section 10 of the Agreement.
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.
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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 Delfin 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 Delfin
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 DELFIN CONTRACT. "Material Delfin Contract" shall have the meaning
set forth in Section 2.10(a).
MERGER EXPENSES. "Merger Expenses" means the costs and expenses (including
legal, accounting, financial advisor or other costs) of Delfin incurred in
connection with the Merger.
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 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 December
31, 1994 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 6.7(a).
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
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SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as
amended.
SHAREHOLDERS. "Shareholders" shall mean all shareholders of Delfin
immediately prior to the Closing whose shares of Delfin Common Stock are
converted into shares of Titan Common Stock at the Closing as a result of the
Merger.
SUPERIOR PROPOSAL. "Superior Proposal" shall have the meaning set forth in
Section 9.1(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.
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APPENDIX B
CALIFORNIA CORPORATION CODE--
CHAPTER 13 DISSENTERS' RIGHTS
SECTION 1300 REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation is a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to any
class of shares described in subparagraph (A) or (B) if demands for payment
are filed with respect to 5 percent or more of the outstanding shares of
that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SECTION 1301 NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS: DEMAND
FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of
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the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302 SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303 PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
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SECTION 1304 ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305 REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306 PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
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SECTION 1307 DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308 RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309 TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310 SUSPENSION OF RIGHT TO COMPENSATION ON OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311 EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION 1312 RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION;
CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or
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rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
organization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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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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2.1** Agreement and Plan of Reorganization by and among the Registrant, Delsys Merger Corp. ("Titan Sub") and
Delfin Systems (Delfin), dated as of June 30, 1998.*
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.
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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.
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 General Counsel of Titan.
8.1** Tax Opinion of Gray Cary Ware & Freidenrich LLP.
8.2** Tax Opinion of Brobeck, Phleger & Harrison LLP
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.
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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 Agreement and Plan of Merger and Reorganization dated as of January 5, 1998, by and among the
Registrant, Eagle Acquisition Sub, Inc. and DBA Systems, Inc., which was Exhibit 2.1 to Registrant's
Form S-4 dated February 6, 1998, is incorporated herein by this reference.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
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10.20 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.
10.21 Third Amendment to Amended and Restated Commercial Loan Agreement, dated as of March 27, 1998, by and
between the Registrant and Sumitomo Bank of California and Imperial Bank which was Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q dated June 11, 1998, is incorporated herein by this
reference.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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 10.30 to Registrant's
1997 Annual Report on Form 10-K, is incorporated herein by this reference.
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10.33 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.
10.34 Agreement re. Release of Certain Titan Information Systems Corporation Collateral, dated December 8,
1997, by and between Registrant and Imperial Bank and Sumitomo Bank of California, which was filed as
Exhibit 10.28 to Registrant's 1998 Annual Report on Form 10-K, is incorporated herein by this
reference.
10.35 Amendment to Agreement re. Release of Certain Titan Information Systems Collateral, dated February 25,
1998, by and among the Registrant, Imperial Bank and Sumitomo Bank of California which was 6(a)(10) to
Registrant's Quarterly Report on Form 10-Q dated June 11, 1998, is incorporated herein by this
reference.
10.36 Lease dated July 22, 1994 between Delfin and Ruffin Tech Center Ltd which was Exhibit 10.32 to
Registrant's Registration Statement on Form S-4 (File No. 333-47633), is incorporated herein by this
reference.
21.1 Subsidiaries of Registrant which was Exhibit 21.1 to the Registrant's Registration Statement on Form
S-4 (File No. 333-47633), is incorporated herein by this reference.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.3 Consent of Ernst & Young LLP, Independent Public Accountants.
24.1** Power of Attorney.
99.1 Form of Proxy Card for Delfin Meeting--Holders of Delfin Common Stock.
</TABLE>
- ------------------------
* 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.
** Previously filed.
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;
II-5
<PAGE>
(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.
(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 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.
(h) 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 such action 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
appropriate 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.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, The
Titan Corporation has duly caused this 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 September 21, 1998.
<TABLE>
<S> <C> <C>
THE TITAN CORPORATION
By: /s/ ERIC M. DEMARCO
-----------------------------------------
Eric M. DeMarco,
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities on September 21, 1998.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ J.S. WEBB
- ------------------------------ Chairman of the Board of
J.S. Webb Directors
/s/ GENE W. RAY
- ------------------------------ President and Chief
Gene W. Ray Executive Officer
/s/ ERIC DEMARCO
- ------------------------------ Senior Vice President and
Eric DeMarco Chief Financial Officer
/s/ DEANNA H. PETERSEN
- ------------------------------ Corporate Controller and
Deanna H. Petersen Vice President
/s/ CHARLES R. ALLEN
- ------------------------------ Director
Charles R. Allen
/s/ JOSEPH F. CALIGIURI
- ------------------------------ Director
Joseph F. Caligiuri
/s/ DANIEL J. FINK
- ------------------------------ Director
Daniel J. Fink
/s/ ROBERT E. LA BLANC
- ------------------------------ Director
Robert E. La Blanc
/s/ THOMAS G. POWNALL
- ------------------------------ Director
Thomas G. Pownall
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
2.1** Agreement and Plan of Reorganization by and among the Registrant, Delsys Merger Corp. ("Titan Sub") and
Delfin Systems (Delfin), dated as of June 30, 1998.*
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.
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 General Counsel of Titan.
8.1** Tax Opinion of Gray Cary Ware & Freidenrich LLP.
8.2** Tax Opinion of Brobeck, Phleger & Harrison LLP
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
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 Agreement and Plan of Merger and Reorganization dated as of January 5, 1998, by and among the
Registrant, Eagle Acquisition Sub, Inc. and DBA Systems, Inc., which was Exhibit 2.1 to Registrant's
Form S-4 dated February 6, 1998, is incorporated herein by this reference.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.19 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.
10.20 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.
10.21 Third Amendment to Amended and Restated Commercial Loan Agreement, dated as of March 27, 1998, by and
between the Registrant and Sumitomo Bank of California and Imperial Bank which was Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q dated June 11, 1998, is incorporated herein by this
reference.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.32 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 10.30 to Registrant's
1997 Annual Report on Form 10-K, is incorporated herein by this reference.
10.33 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.
10.34 Agreement re. Release of Certain Titan Information Systems Corporation Collateral, dated December 8,
1997, by and between Registrant and Imperial Bank and Sumitomo Bank of California, which was filed as
Exhibit 10.28 to Registrant's 1998 Annual Report on Form 10-K, is incorporated herein by this
reference.
10.35 Amendment to Agreement re. Release of Certain Titan Information Systems Collateral, dated February 25,
1998, by and among the Registrant, Imperial Bank and Sumitomo Bank of California which was 6(a)(10) to
Registrant's Quarterly Report on Form 10-Q dated June 11, 1998, is incorporated herein by this
reference.
10.36 Lease dated July 22, 1994 between Delfin and Ruffin Tech Center Ltd which was Exhibit 10.32 to
Registrant's Registration Statement on Form S-4 (File No. 333-47633), is incorporated herein by this
reference.
21.1 Subsidiaries of Registrant which was Exhibit 21.1 to the Registrant's Registration Statement on Form
S-4 (File No. 333-47633), is incorporated herein by this reference.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.3 Consent of Ernst & Young LLP, Independent Public Accountants.
24.1 Power of Attorney.
99.1 Form of Proxy Card for Delfin Meeting--Holders of Delfin Common Stock.
</TABLE>
- ------------------------
* 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.
** Previously filed.
<PAGE>
Exhibit 23.1
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
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
September 24, 1998
<PAGE>
Exhibit 23.2
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated March 9, 1998
included in the Company's Form S-4 Registration Statement (No. 333-47633) and
to all references to our Firm included in this Registration Statement.
ARTHUR ANDERSEN LLP
San Diego, California
September 24, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 9, 1997 (except for note 8, as to which
the date is June 30, 1998) in Amendment No. 1 to the Registration Statement
(Form S-4) of The Titan Corporation for the registration of shares of its
common stock, and in the related Prospectus/Proxy Statement of Delfin Systems.
/s/ ERNST & YOUNG LLP
Palo Alto, California
September 24, 1998
<PAGE>
DELFIN SYSTEMS
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Mellon C. Baird and Byron Rovegno, and each
of them, the Proxy or proxies of the undersigned, with full power of
substitution, and hereby authorizes them to represent and vote, as designated
below, all of the shares of Common Stock of Delfin Systems (the "Company"), held
of record by the undersigned on September 21, 1998 which the undersigned is
entitled to vote, either on his own behalf or on behalf of any entity or
entities, at the Special Meeting of Shareholders (the "Special Meeting") to be
held at the corporate headquarters of Delfin Systems, 3000 Patrick Henry Drive,
Santa Clara California, on October 23, 1998 at 11:00 a.m., and at any
adjournment or postponement thereof, with the same force and effect as the
undersigned might or could do if personally present thereat:
<TABLE>
<S> <C> <C> <C>
1. FOR / / AGAINST / / To approve and adopt an Agreement and Plan of Reorganization, dated
as of June 30, 1998, among Delfin Systems, Titan Corporation, a
Delaware corporation, and Delsys Merger Corp., a newly formed
wholly- owned Delaware subsidiary of Titan Corporation ("Titan
Sub").
1. FOR / / AGAINST / / To approve and consent to the merger of Titan Sub with and into
Delfin Systems.
</TABLE>
<PAGE>
THE SHARES COVERED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
UNDERSIGNED'S INSTRUCTION WITH RESPECT TO ANY MATTER IN WHICH A CHOICE IS
SPECIFIED. UNLESS A CONTRARY INSTRUCTION IS INDICATED, THIS PROXY WILL BE VOTED
IN FAVOR OF PROPOSALS 1 AND 2, AND WILL BE VOTED AT THE DISCRETION OF THE PROXY
HOLDERS ON SUCH OTHER MATTERS AS MAY COME BEFORE THE SPECIAL MEETING.
Each of the proxies or their substitutes as shall be present and acting at
the Special Meeting shall have and may exercise all of the powers of all of said
proxies hereunder.
Please print the name(s) appearing
on each certificate over which you
have voting authority:
__________________________________
[Print Name on Certificate]
Please sign your name:
__________________________________
[Authorized Signature]
__________________________________
[Date of Signature]
