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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
-OR-
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-6035
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THE TITAN CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 95-2588754
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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3033 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121-1199
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (858) 552-9500
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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$1.00 Cumulative Convertible Preferred Stock, $1.00 par New York Stock Exchange
value
Common Stock, $.01 par value
Preferred Stock Purchase Rights
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 2000: $2,162,691,969.
Number of shares of Common Stock outstanding as of March 20, 2000 was:
50,618,107.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the 2000 Annual Meeting of Stockholders on May 30, 2000.
(The Company has filed a definitive proxy statement with the Commission within
120 days after the close of the fiscal year pursuant to Regulation 14A). With
the exception of those portions which are incorporated by reference in this Form
10-K Annual Report, the Proxy Statement for the 2000 Annual Meeting of
Stockholders is not deemed to be filed as part of this Report, Parts II and III.
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FORM 10-K/A
INDEX
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PAGE
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PART I
ITEM 1 Business.................................................... 3
ITEM 2 Properties.................................................. 36
ITEM 3 Legal Proceedings........................................... 36
ITEM 4 Submission Of Matters To a Vote of Security Holders......... 36
PART II
ITEM 5 Market for the Company's Common Equity And Related
Stockholder Matters....................................... 37
ITEM 6 Selected Financial Data..................................... 38
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 38
ITEM 7A Quantitative and Qualitative Disclosures about Market
Risk...................................................... 54
ITEM 8 Financial Statements and Supplementary Data................. 55
PART III
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 91
ITEM 10 Directors and Executive Officers of the Company............. 91
ITEM 11 Executive Compensation...................................... 91
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 91
ITEM 13 Certain Relationships and Related Transactions.............. 91
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 92
Signatures.................................................. 96
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PART I
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
ITEM 1. BUSINESS
Except for the historical information contained in this Annual Report on
Form 10-K, the information contained herein constitutes forward looking
information within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, including, in particular, statements about the
Company's plans, strategies and prospects. These statements, which may include
words such as "may," "will," "expect," "believe," "intend," "plan,"
"anticipate," "estimate," or similar words, are based on the Company's current
beliefs, expectations and assumptions and are subject to a number of risks and
uncertainties. Although the Company believes that its beliefs, expectations and
assumptions reflected in these statements are reasonable, the Company's actual
results and financial performance may prove to be very different from what the
Company might have predicated on the date of this Annual Report on Form 10-K.
Some of the risks and uncertainties that might cause such differences are
discussed below and others are discussed under the headings "Business --
Government Contracts," "Business -- Backlog," and "Business -- Risk Factors."
OVERVIEW
The future we believe that we are creating within The Titan Corporation
today is one of entrepreneurship. Titan's most valuable assets are its
employees, who are the source and basis of our technical expertise and
entrepreneurial spirit. We believe that Titan is truly a technology and business
incubator where the significant resources that Titan has to offer can be applied
to the leading-edge technology developed by our employees to create, build and
launch technology-based businesses that address global markets. The key to
Titan's success is through our people, and we endeavor to provide a work
environment where their ideas can come to fruition while generating significant
value for shareholders.
We are a leading diversified technology company that is dedicated to
creating, building and launching technology-based businesses. We believe that we
can quickly focus the necessary resources -- financial, management, marketing,
support infrastructure, capital, etc. -- in response to opportunities, which
enables us to successfully execute this strategy. Titan's formula for executing
our strategy of creating, building and launching technology-based businesses is
as follows:
- Within our Emerging Technologies segment, identify a Titan technology that
is proprietary or leading-edge, which addresses a large, potentially
global market.
- Establish a management team with significant experience and expertise in
the target market industry.
- Set up our newly created business as a wholly-owned subsidiary of The
Titan Corporation with its own employee stock option plan.
- Focus Titan corporate resources on the new business -- financing,
infrastructure, investment banking, etc. -- to accelerate time to market
of the new business.
- At the appropriate time, execute for the new business a spin out (IPO),
spin-off, or sale.
We provide information technology, communications and electron beam food
pasteurization and medical product sterilization systems and services. Through
extensive government-funded research and development activities since 1981 under
contracts totaling in excess of $2 billion, and through a company funded
research and development program, we have accumulated a broad portfolio of
technologies, intellectual property and expertise from which we have developed
new businesses. The core technologies supporting our SureBeam and Titan Wireless
segments were derived from technologies originally
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developed for government applications. We believe that our government contracts
business enhances our technical expertise with sophisticated technologies and
facilitates our ability to develop commercial applications. We fund the
development of commercial technologies from our technology base both internally
as well as in conjunction with partners. In 1996, for example, we contributed
the core technology to form Servnow! NetTechnologies, Inc., which was
subsequently named IPivot. IPivot develops software products that improve the
performance of server farms, web sites and software applications. We raised the
capital required to fund IPivot from venture capital sources. In November 1999,
we received approximately $42 million in cash for our approximate 8% equity
interest when IPivot was acquired by Intel Corporation. Up to an additional $3
million may be received by Titan within one year subject to certain post-closing
adjustments. We plan to continue building our technology portfolio, identifying
commercial applications and entering into strategic relationships to further our
growth. We believe that each of our four core businesses -- Titan Systems,
Cayenta, SureBeam and Titan Wireless -- is well positioned in its respective
market for sustained long-term growth, and our business strategy is to spin
these businesses off to become independent stand-alone public companies.
We have organized our business into five segments that reflect the specific
markets and industries in which we operate:
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SEGMENT SEGMENT DESCRIPTION
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Titan Systems........... Information technology and communications solutions for
defense, intelligence, and other U.S. and allied
government agencies
Cayenta................. Total services provider of comprehensive information
technology solutions for its customers' business
functions, including e-business, finance, accounting,
customer billing and collection, contract management,
supply-chain management and equipment monitoring and
maintenance
SureBeam................ Electron beam food pasteurization and medical product
sterilization systems and services
Titan Wireless.......... Satellite communication systems and services which provide
telephony and Internet access in developing countries
Emerging Technologies Development of commercial applications for technologies
and Businesses........ created by our other business segments through internal
and government-sponsored research and development programs
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Each of our segments has a management team with significant relevant
experience in the segment's particular business and market area. Consistent with
our strategy of aligning management motivation with stockholder interests, each
of our segments (except Emerging Technologies which is not a separate
subsidiary) has its own key employee stock option plan to foster an
entrepreneurial environment.
On February 25, 2000, we consummated a merger with Advanced Communication
Systems, Inc. ("ACS") in a stock-for-stock, pooling of interests transaction.
Accordingly, all information and/or other disclosure included in this Form
10-K/A, including the consolidated financial statements of The Titan Corporation
and its subsidiaries, have been restated to include ACS for all periods
presented. ACS provides communications, information systems and aerospace
services and solutions primarily to U.S. government agencies, ACS' primary
operations will be integrated into the Titan Systems segment, with certain
operations reported in the Emerging Technologies and Businesses segment.
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We believe that the markets in which we operate are large and growing:
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SEGMENT TARGET MARKET PROFILE
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Titan Systems........... The U.S. government is among the largest buyers of
information technology systems and services in the world.
According to the Government Electronic Industries
Alliance, the U.S. government's information technology
budget for its fiscal year 2000 is expected to be
approximately $34 billion. In a statement to the House
Committee on National Security, Secretary of Defense
William S. Cohen stated that the defense budget will
emphasize advanced information technologies related to
Command, Control, Communications, Computers, Intelligence,
Surveillance and Reconnaissance, or C4ISR.
Cayenta................. Forrester Research projects that the market for business
to business e-business will grow from $43 billion in 1998
to $1.3 trillion in 2003. In addition, International Data
Corporation estimates that the worldwide market for
consulting, design, systems integration, support,
management and outsourcing services associated with the
development, deployment and management of Internet sites
will grow at a five year compounded annual growth rate of
59% from $7.8 billion in 1998 to $78.5 billion in 2003.
SureBeam................ With 75.4 billion pounds of meat, including beef, pork and
poultry, produced in the United States in 1999, SureBeam
estimates that the market for food pasteurization systems
and services could develop to be in excess of $3.0 billion
annually if irradiated foods gain consumer acceptance. If
such consumer acceptance occurs, SureBeam believes that
meat producers will initially elect to pasteurize a
portion of their ground beef and poultry production. Also,
according to a market research report, the global market
for sterilization services for medical products was
approximately $368 million in 1999.
Titan Wireless.......... In our targeted markets, telephone availability is
relatively low. In 1998, according to the International
Telecommunication Union, countries in our targeted
markets, which represent approximately one-third of the
world's population, had fewer than two subscriber lines
per 100 inhabitants compared to 66.13 in the United
States.
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COMPETITIVE STRENGTHS
We attribute our growth and performance to several factors within each of
our business segments:
TITAN SYSTEMS
LONG STANDING CUSTOMER RELATIONSHIPS. Founded in 1981, Titan Systems has an
extensive history of providing information systems and communications solutions
to defense, intelligence and other U.S. and allied government agencies.
Collectively, Titan Systems' senior management has on average 20 years of
industry experience and has developed long-standing, key customer relationships
across all of the U.S.
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military services and several NATO countries, which has contributed to Titan
Systems' success in securing new contracts.
BROAD SOLUTION CAPABILITIES. Titan Systems has extensive knowledge of the
operations and information systems and communications requirements of the
defense industry and provides a full range of systems engineering and technical
support for the C4ISR initiatives of the Department of Defense, or DoD. Titan
Systems designs, builds, tests, installs and maintains systems that collect,
digitize, compress, transmit, receive, decompress, and display information and
permit their users to analyze data in a secured environment. This ability to
provide full-service solutions, coupled with our employee base of over 2,800
"Secret" and above-cleared personnel, enables us to bid on larger, more
comprehensive C4ISR defense contracts.
PROVEN ACQUISITION STRATEGY. In anticipation of changes in U.S. government
procurement policies toward awarding more comprehensive contracts to meet its
defense-related requirements, we initiated an acquisition strategy in 1997.
Since January 1, 1998, we have acquired, including Advanced Communications
Systems, LinCom Corporation and Pulse Engineering, ten defense information
technology companies into Titan Systems. These three companies will be
integrated into Titan Systems in 2000. We believe the enhanced technology and
personnel resources provided by our acquisitions enable Titan Systems to serve
its customers with comprehensive solutions for their information systems needs.
CAYENTA
TOTAL SERVICES PROVIDER. As a total services provider, or TSP, Cayenta
delivers comprehensive, tailored solutions to support the management and
automation of its customers' business processes. Cayenta typically delivers
solutions in phases. These solutions may include a thorough evaluation of a
customers' information technology strategy and existing system architecture,
followed by a redesign of components of the architecture. The next phase may
include systems integration, including the delivery of solutions that integrate
a customer's internal systems, such as billing and collections, with a
customer's web site and e-business order processing systems. Cayenta uses its
integration expertise to eliminate the need for manual re-entry of data into
separate systems and to organize and combine data from disparate systems. As
part of the TSP offering, Cayenta also deploys custom configured third party and
proprietary software applications that support the automation and management of
business functions such as managing supply chains and customer relationships.
Cayenta will either license its proprietary software or rent access to the
software as an application service provider. We believe that Cayenta's TSP
offering provides customers with a number of benefits over typical internal
systems that include proprietary applications and third party applications from
different vendors that are not integrated. These advantages include lower and
more predictable costs of capital and operating costs, systems that are more
adaptable, scalable and reliable and more rapid deployment of new systems.
COMPLETE E-BUSINESS SOLUTION. Cayenta integrates customers' web sites with
business support systems and provides its customers with a single point of
contact for managing and monitoring their e-business transactions. Cayenta
integrates a customer's web site and other business support systems with its
proprietary software applications for order processing, catalog management,
customer service, inventory management, order fulfillment, billing, collections,
and account settlement.
REVENUE CYCLE SERVICES OFFERING. Cayenta offers solutions that enable its
customers to address their complex pricing, billing, settlement and supply-chain
requirements. Cayenta's software also provides audit and compliance functions
that accommodate the complex contract terms prevalent in e-business and permit
Cayenta's customers to more effectively monitor their receivables and manage the
fulfillment process.
INTEROPERABLE AND ADAPTABLE SOLUTIONS. Cayenta uses systems architecture
for service operating systems and application software that permit its customers
to integrate different information technology
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systems within their organizations and between their organizations and those of
their trading partners. Cayenta's solutions also are adaptable, accommodating
customer technology preferences for server operating systems, while facilitating
accessibility of software applications over the Internet. Cayenta offers
solutions that reduce its customers' manual and redundant business processes and
permit them to add or change software applications as their businesses evolve.
TAILORED SOLUTIONS FOR CUSTOMERS' BUSINESS PROCESSES. Cayenta has expertise
in its target industries that helps it to define and deliver timely solutions
tailored to its customers' industries and markets. All of Cayenta's solutions
allow customers to supplement standard third party software applications with
additional functions that are tailored to their business needs. Cayenta adds
these functions by using separate software applications that extend the
capabilities of standard software applications.
SUREBEAM
SUPERIOR ELECTRON BEAM PASTEURIZATION AND STERILIZATION
TECHNOLOGY. SureBeam provides patented and proprietary systems and services
which pasteurize food and sterilize medical products in an efficient, safe and
environmentally friendly manner. The market for pasteurization and sterilization
systems has historically been served by two technologies -- Gamma and etholene
oxide, or EtO. We believe SureBeam's proprietary electron beam process, or
SureBeam system, which uses commercial electricity as its source of power, is
superior to Gamma and EtO technology because it:
- requires significantly less processing time;
- poses no known environmental risks;
- may result in reduced product degradation; and
- can be introduced directly into a food processor's or manufacturer's
production line and is scalable to meet customer processing requirements.
Gamma and EtO technologies require the handling and use of hazardous
materials. Other costs associated with Gamma and EtO typically include the cost
of transporting the product from the customer's production site to the Gamma or
EtO facility, and the associated inventory carrying cost. We believe our
SureBeam systems offer a reliable, efficient, more environmentally acceptable
and generally superior alternative to Gamma and EtO.
REGULATORY CLEARANCE FOR SUREBEAM TECHNOLOGY. In December 1997, the Food
and Drug Administration, or FDA, approved irradiation of meat, finding that
irradiation of meat, at its recommended doses, does not diminish the food's
nutritional value in any detectable way. In December 1999, the U.S. Department
of Agriculture, or USDA, issued regulations setting forth guidelines for the
irradiation of meat.
EXCLUSIVE CUSTOMER ARRANGEMENTS. SureBeam has executed multiyear
arrangements with many of the major poultry and meat providers and producers in
the United States, including Cargill, IBP, Tyson Foods, Emmpak and Huisken
Meats, among others. These companies produced approximately 75% of the 25.8
billion pounds of beef and approximately 43% of the 75.4 billion pounds of meat,
including beef, pork and poultry, produced in the United States in 1999.
SureBeam believes that if irradiated foods gain market acceptance, these
producers will initially elect to pasteurize a portion of their ground beef and
poultry production. SureBeam's multiyear arrangements with its customers
generally provide that it will be the exclusive provider of electronic
pasteurization services whenever any of these companies elect to use
pasteurization technology. In addition, at Cloverleaf Cold Storage's facility in
Sioux City, Iowa, SureBeam has built the first electron beam pasteurization
facility in the United States, and also has arrangements with Zero Mountain Cold
Storage, Mitsubishi and Hawaii Pride to build similar facilities.
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TITAN WIRELESS
SOLUTIONS ARE WELL-SUITED TO TARGET MARKETS. Telephone service for remote
areas of many developing countries has not been practical for a number of
economic and technical reasons. In our targeted markets, primarily rural and
emerging areas around the globe, telephone availability is relatively low. In
1998, according to the International Telecommunication Union, countries in our
targeted markets, which represent approximately one-third of the world's
population, had fewer than two subscriber lines per 100 inhabitants compared to
66.13 in the United States. Titan Wireless has designed a network of fixed-site
satellite terminals that provide cost-effective telephone, facsimile and data
communications services to areas not previously served by developing countries'
national public switched telephone networks, or PSTNs. These solutions are
well-suited to conditions in developing countries, which are Titan Wireless'
target markets, because they combine the following characteristics:
LOW OPERATING COSTS. Titan Wireless' telephony products utilize its
DAMALink network management software system, which allows for multiple
simultaneous users to efficiently access the same satellite channel,
resulting in "space segment" cost savings and improved operational
flexibility.
CONNECTS TO NATIONAL AND INTERNATIONAL TELEPHONE NETWORKS. Titan
Wireless' telephony system is one of the first revenue generating systems to
provide a direct connection to a country's PSTN. This system makes it
possible for telephone calls to be placed from remote terminals to any phone
within the country through a national PSTN and any phone in the world
through an international PSTN.
SCALABLE AND ADAPTABLE. Titan Wireless' telephony systems are scalable
to provide the capacity required to meet a specific location's
communications needs. In addition, the core technologies and designs of
Titan Wireless' telephony terminals can be adapted for private commercial
networks.
ACCOMMODATES A VARIETY OF POWER SOURCES. Titan Wireless' ground
terminals are capable of operating on a wide range of locally available
power sources. For example, its Xpress Connection is capable of operating on
solar power.
STRONGLY POSITIONED THROUGH STRATEGIC ALLIANCES. Titan Wireless develops
and markets its telephony products through strategic alliances in developing
countries in Africa, Latin America, the Middle East and Asia. Through its Sakon
joint venture, Titan Wireless is currently building out a ground infrastructure
network of hubs, gateways and VSATs (Very Small Aperture Terminals), all of
which are interconnected through geosynchronous orbit satellites. We are also
planning on providing voice over IP (Internet Protocol) and Internet services
over the network. Through this network, Titan and Sakon are currently providing
long distance telecommunications services in ten developing countries, and
expects to provide long distance telecommunications in at least twenty to
twenty-five additional locations.
EMERGING TECHNOLOGIES AND BUSINESSES
PROVEN ABILITY TO TRANSITION OUR TECHNOLOGY TO COMMERCIAL BUSINESSES. Titan
has over 130 patents worldwide. Emerging Technologies introduces new commercial
applications from our rich technology portfolio, superior research and
development capabilities and stream of government-funded projects. This is where
we build technology-based businesses prior to establishing these businesses as
stand-alone segments. The core technologies supporting SureBeam and Titan
Wireless were created from technologies originally developed for government use.
In 1996, we contributed the core technology to form Servnow!
NetTechnologies, Inc., which is now known as IPivot. In November 1999, as a
result of the acquisition by Intel Corporation of IPivot, we received
approximately $42 million for our approximate 8% equity interest, for which the
entire amount was recorded as a gain. Up to an additional $3 million may be
received by Titan within one year subject to certain post-closing adjustments.
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BUSINESS STRATEGY
We believe a key element of Titan's success is our innovative use of
technology that provides comprehensive, efficient solutions to our government
and commercial customers. We believe that our sophisticated technical abilities
will allow us to expand our customer base, improve our operating results and
continue to grow.
Our objectives are:
- to enhance our leading position in providing information technology and
communications solutions to defense, intelligence and other U.S. and
allied government agencies; and
- to further our strong track record of commercializing proprietary
technologies designed to serve global markets.
To achieve these objectives, we intend to pursue the following strategies:
MAINTAIN TECHNOLOGY LEADERSHIP. Since inception, we have received
substantial government funding to conduct research and development and
create advanced information technology solutions and communications systems
for government uses. Based largely on activities that have been supported by
government funding, we have created a diversified portfolio of technology
and developed many of our commercial businesses, like SureBeam and Titan
Wireless. We will continue to bid for government-funded research and
development work and government contracts that we believe will expose our
technical personnel to sophisticated technologies, challenge their skills,
and increase their abilities to transition systems and solutions developed
for the government to commercial applications. We will also continue to
actively seek acquisition candidates whose technology portfolio and
personnel resources complement and supplement our own. We believe that these
efforts, combined with our extensive expertise and capabilities, will allow
us to further our government relationships and position us to win new
government contracts, while also strengthening our ability to provide
systems and solutions to commercial customers in a variety of markets. We
will continue to invest the resources necessary to maintain our position as
a leading-edge technology company.
PURSUE STRATEGIC TRANSACTIONS. Our acquisition program is a key
component to our overall business strategy. We believe the enhanced
technology and personnel resources which our acquisitions have provided
enable us to complete larger, more comprehensive government contracts and to
market our services to new customers. To further our growth and enter new
markets, we intend to pursue strategic acquisitions of complementary
businesses, technologies and products. We plan to achieve operating
efficiencies and cost savings following our acquisitions through
centralization of strategic planning, corporate development, administrative,
financial and other services. We also intend to pursue strategic alliances,
primarily to access new customers and establish additional channels of
distribution for our core businesses and technologies.
GROW PROFITABLY. We are dedicated to growing our business and enhancing
our profitability. We have instituted successful cost reduction programs for
each of our acquired companies and continually seek opportunities to improve
our operating margins. In early 1997, we implemented a streamlining process
for our administrative functions. This process focused on eliminating
redundancies and resulted in increased efficiencies and reduced
infrastructures and costs. We plan to continue implementing similar
initiatives and to improve cash flow through enhanced receivables management
and overall operational efficiency.
PURSUE INITIAL PUBLIC OFFERINGS FOR CORE SUBSIDIARIES. We intend to
finance the growth of Cayenta, SureBeam and Titan Wireless by obtaining
public or private financing, including through initial public offerings of
common stock of these segments. To the extent possible, we intend to
structure these initial public offerings in order to preserve the ability to
later distribute the stock we retain in these segments to our stockholders
on a tax-free basis. Under existing law, we must own at least 80% of the
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total voting power and 80% of any class of nonvoting capital stock of a
subsidiary to be able to effect a tax-free distribution of a subsidiary's
stock. In addition, both Titan and the subsidiary must meet numerous other
requirements under the Internal Revenue Code, including requirements
relating to the subsidiary's operating history and the subsidiary must have
a business purpose for the spin-off distribution. To date, our subsidiary
Cayenta has filed a registration statement for an initial public offering of
its stock. If the offering is completed, we have no present intention of
distributing our Cayenta shares to the Titan stockholders. With the
exception of Cayenta, our new credit facility currently does not permit us
to distribute the stock of our subsidiaries to Titan stockholders without
consent of the lenders. Our new credit facility also requires that if we
complete an offering of securities of a subsidiary, with the exception of
Cayenta, we must pay down the credit facility by the amount of the net
proceeds of the offering unless otherwise required. We believe that we
should be able to obtain the lenders' consent, or otherwise arrange to
distribute the stock of our subsidiaries as necessary. As a result of the
foregoing factors and other factors, we may not be able to distribute
interests in these segments to our stockholders.
OPERATING SEGMENTS
TITAN SYSTEMS
OVERVIEW. Titan Systems provides comprehensive information systems
solutions to defense, intelligence, and other U.S. and allied government
agencies with sophisticated data management, information processing, information
fusion, knowledge-based systems and communications requirements. Titan Systems
also develops and manufactures digital imaging products, electro-optical
systems, threat simulation/training systems and intelligence electronic hardware
primarily used in defense and intelligence applications. Titan Systems also
installs, tests and maintains all of these specialized products. In addition,
Titan Systems develops and delivers defense communications products to the U.S.
military and allied governments.
INDUSTRY OVERVIEW. The U.S. government is among the largest buyers of
information technology systems and services in the world. According to the
Government Electronic Industries Alliance, the U.S. government's information
technology budget for its fiscal year 2000 is expected to be approximately $34
billion. In a statement to the House Committee on National Security, Secretary
of Defense William S. Cohen stated that the defense budget will emphasize
advanced information technologies related to Command, Control, Communications,
Computers, Intelligence, Surveillance and Reconnaissance, or C4ISR. The U.S.
government's focus on information technology reflects the critical role that
this capability plays both in national security and in improving government
efficiency. The U.S. military is placing greater emphasis on increasing
productivity while using fewer resources by employing systems that act as "force
multipliers." To further this strategy, military agencies are relying on
communications products and systems that provide secure, reliable and efficient
transmission of voice and data in demanding environments. Additionally, the
government is increasingly using open systems that incorporate commercial
off-the-shelf products, which are generally less expensive and more available
than products specifically designed for military purposes, to minimize the
impact of the shrinking defense budget.
STRATEGY. Titan Systems' objective is to be the premier provider of
information technology and communications solutions to defense, intelligence and
other U.S. and allied government agencies. To achieve this objective, Titan
Systems intends to pursue the following strategies:
FURTHER TECHNOLOGY ADVANTAGE. Titan Systems has received in excess of
$2 billion in government funds, the majority of which have been directed
towards the research and development of advanced information technology and
communications systems and solutions. Titan Systems' successful track record
with research and development projects has helped us create a diversified
portfolio of technology and obtain additional research and development
funding. We believe that, because of Titan Systems' expertise and
capabilities with a wide range of technologies, it is well positioned to
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provide information technology and communications systems and services to
its customers. Titan Systems will seek to maintain this advantage by keeping
pace with new developments in technology, by continuing to compete for
contracts that require high-quality, sophisticated technical solutions, and
by continuing to make strategic acquisitions that bring it additional
technology and enhance its overall solutions capabilities.
BUILD UPON OUR COMPETITIVE STRENGTHS IN THE DEFENSE MARKET. Founded in
1981, Titan Systems has an extensive history of providing information
systems and communications solutions to defense and intelligence-related
government agencies. Through this experience, we have established a broad
base of customer relationships, comprehensive information systems and
communications solutions, extensive intellectual property and more than
2,800 "Secret" and above cleared personnel. We intend to build upon these
competitive strengths to further existing customer relationships and to
secure new opportunities.
PURSUE STRATEGIC ACQUISITIONS. Strategic acquisitions are a key
component to Titan Systems' overall business strategy. We believe that the
enhanced technical and personnel resources resulting from our recent and
pending acquisitions will enable Titan Systems to provide more comprehensive
information technology solutions to serve its customers' needs. We intend to
continue to pursue strategic acquisitions of complementary businesses,
technologies and products that will enable Titan Systems to expand further
its existing businesses and to gain access to new markets, technologies, and
products.
SERVICES AND PRODUCTS
INFORMATION SYSTEMS SOLUTIONS. Titan Systems' information technology
solutions and services include systems analysis and design, object-oriented
software development services and systems integration. Titan Systems' initial
work in this area generally involves a joint analysis of the customer's
enterprise structure and processes and information system needs. Once this
analysis is completed, Titan Systems provides process re-engineering and designs
the technology solution to meet the customer's needs. This process typically
involves software development by Titan Systems, coupled with integration of
commercial off-the-shelf software and hardware as available. Titan Systems 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. As a result of
the complex nature of Titan Systems' customer solutions, its engagements often
are long-term and involve follow-on contracts. Titan Systems markets its
information systems solution services to military and intelligence agencies of
the U.S. government, countries within NATO and other U.S. defense partners
worldwide.
Examples of Titan Systems' information systems solution services and
products include the following:
- NATO INFORMATION SYSTEMS. Titan Systems' initial contract with NATO
provided for the design and delivery of an integrated secure
communications and information system for automated support of data
transfer between intelligence sites throughout Europe. Titan Systems has
since won NATO's three follow-on command and control system contracts and,
to date, has been NATO's primary contractor for its command and control
systems.
- JOINT INTEROPERABILITY TEST COMMAND C4I SUPPORT. Titan Systems supports a
wide range of the Joint Interoperability Test Command's Command, Control,
Communications, Computers and Intelligence, or C4I, information systems
initiatives under a $141 million five-year contract. Its activities in
support of these initiatives include planning, conducting, evaluating and
reporting all C4I testing, as well as designing, developing, engineering
and acquiring selected items of equipment, instrumentation and systems
used in the testing process.
- SUPPORT OF JOINT STARS AIRCRAFT AND GROUND SYSTEMS. Titan Systems supports
a variety of research and development and test and evaluation efforts on
the Joint Surveillance Target Attack Radar
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System, or STARS, aircraft and related ground systems. This contract is
the latest in a series of sole source and competitive awards under which
Titan Systems has provided engineering services to the Joint STARS Joint
Task Force since its inception. Titan Systems was awarded this $49 million
"indefinite delivery, indefinite quantity" labor hour contract in April
1997. Under this contract, Titan Systems provides the following: flight
test engineering and test mission planning, test engineering, operations
and ground/flight execution support, test management, computer operations,
configuration management, human factors engineering, administrative
support, logistics support, computer analysis and modeling, resource
management, and prototyping in support of test and contingency operations.
- FAA SYSTEM ENGINEERING. Titan Systems has been instrumental in providing
high quality technical support and services and related infrastructure to
the FAA's National Airspace System, or NAS, modernization program. Under
this five-year contract awarded in 1999, Titan Systems provides engineers,
mathematicians, computer scientists and other technical personnel to
support high fidelity simulations and to perform technical studies and
evaluations for the NAS's system engineering and laboratory development
operations.
- COMMUNICATION SERVICES. Titan Systems' communication services include the
design, development, integration and implementation of complete
communications solutions across the full spectrum of media, ranging from
land lines to wireless technologies, with particular strengths in
satellite communication services, information systems and aerospace
services.
- INFORMATION SERVICES. Titan Systems' information services include the
design and installation of and support services for information management
and local area network/wide area network systems, as well as multimedia
training, Internet/intranet solutions and database support.
- AEROSPACE SERVICES. Titan Systems' aerospace services include systems
engineering, life-cycle support, and program management services for a
broad range of military systems.
COMMUNICATIONS PRODUCTS. Titan Systems designs and develops its
communications products using an approach that is similar to the approach it
uses to design, develop and implement its information technology solutions and
services. Titan Systems offers a range of turnkey, fully functional line of
defense communications products. Examples of Titan Systems' communications
products include the following:
- DAMA PRODUCTS. Titan Systems' Demand Assigned Multiple Access, or DAMA,
products combine low cost, low power, reduced weight and size, and reduced
component count for high reliability. Each of Titan Systems' DAMA products
has been developed with an open-architecture format that allows future
upgrades and enhancements to be provided as communications needs evolve,
and are designed to support commercial off-the-shelf components. Titan
Systems markets its DAMA products directly to all branches of the U.S.
military, its allies and international companies that supply such allies,
and also works with strategic partners such as Motorola Corporation to
incorporate its technologies into their products.
- SIGNAL INTELLIGENCE MANPACK SYSTEMS. Titan Systems provides small, low
weight communications intercept and direction finding Manpack systems to
U.S. special forces under a contract with the U.S. Special Operations
Command. An incumbent on this program for 10 years, these systems are worn
by individual soldiers and used to intercept and exploit enemy signals for
force protection and early detection of enemy location. Manpacks are
designed to operate and survive in urban, forested and desert terrain
battlefield environments.
CONTRACT PROFILE
TITAN SYSTEMS. Titan Systems is one of a select group of qualified
suppliers of information technology solutions and services to the U.S.
government under multiple long-term contract vehicles. Titan Systems is
currently performing work under approximately 646 contracts. No single Titan
Systems contract accounted
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for more than 3.3% of Titan's total 1999 revenues, and no single Titan Systems
contract accounted for more than 3.9% of Titan Systems' 1999 revenues. Of Titan
Systems' total government revenues in 1999, approximately 21% were generated by
time and materials contracts, approximately 52% were generated by cost
reimbursement contracts, and approximately 27% were generated by fixed-price
contracts.
BACKLOG. Titan Systems possesses a substantial backlog of contracts that
provide multiyear revenues. Most of our contracts generate revenue over a one to
five-year period. In the past, Titan Systems has generally been successful in
expanding the scope of their principal contracts by offering more comprehensive
information technology solutions. Titan Systems' had an estimated total funded
contract backlog of $226 million and a total unfunded contract backlog of
$691 million and $618 million of priced options as of December 31, 1999. These
backlog amounts consist of "funded" backlog, which is based upon aggregate
contract revenues remaining to be earned by Titan Systems 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 the aggregate contract revenues expected to be earned as customers
incrementally allot funding to existing contracts, whether Titan Systems is
acting as a prime contractor or subcontractor, and the aggregate contract
revenues to be funded on contracts which have been newly awarded to Titan
Systems.
Management believes that year-to-year comparisons of backlog are difficult
and not necessarily indicative of future revenues. Titan Systems' 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.
CAYENTA
OVERVIEW. Cayenta is a total services provider, or TSP, of comprehensive
information technology solutions for its customers' business functions. As a
TSP, Cayenta expands upon the delivery and hosting of standard third party
software application packages generally provided by companies called application
service providers. Cayenta's solutions combine standard and proprietary software
applications that Cayenta tailors for its customers' business processes with
operational, hosting, management and support services that Cayenta provides for
those software applications. Cayenta's solutions address the following business
processes of its customers: e-business, finance, accounting, customer billing
and collection, contract management, supply-chain management and equipment
monitoring and maintenance. Cayenta's solutions are scalable and reliable.
Cayenta's solutions also operate with its customers' existing internal systems
and with those of their trading partners and provide its customers with a single
source of contact for their information technology requirements, including their
e-business information technology requirements.
INDUSTRY OVERVIEW. The rapid growth of the Internet and increased frequency
of e-business transactions is creating significant new opportunities and
challenges for businesses. Businesses are using the Internet to improve
communications internally and with their trading partners, to enhance
operational efficiencies and to strengthen customer relationships. The impact of
the Internet encompasses both business-to-business and business-to-customer
transactions. Forrester Research, an independent research firm, projects that
the market for business-to-business e-business will grow from $43 billion in
1998 to $1.3 trillion in 2003 while business-to-consumer e-business will grow
from $8 billion to $108 billion over the same period.
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The complexity of e-business transactions has accelerated with the
widespread adoption of the Internet and the need for business to business
exchanges. For example, these transactions frequently contain complex billing
and settlement terms that involve multiple parties who participate in the supply
and fulfillment chain. Tracking these payments and settlements requires scalable
and reliable information technology systems that facilitate the flow of
information both within organizations and externally. Businesses face
significant challenges in their efforts to capitalize on the opportunities
presented by the Internet, including:
- developing comprehensive end-to-end e-business solutions that link web
sites with accounting and fulfillment systems and accommodate and account
for complex billing, settlement and supply-chain transactions;
- tailoring standard software applications to their business processes while
ensuring that these applications are compatible with those of their
trading partners;
- solving integration and compatibility issues caused by the patchwork of
legacy systems that businesses often implemented without a focused
information technology strategy;
- integrating data from disparate systems to increase its value; and
- adopting and integrating new and rapidly changing technologies while
preserving investments in existing systems.
Companies must meet these challenges while overcoming a number of obstacles,
including:
- capital constraints and total cost of ownership;
- technological obsolescence of many current systems;
- ensuring that e-business applications are available at all times;
- meeting increased online customer service demands; and
- attracting and retaining qualified information technology professionals.
International Data Corporation, an independent research firm, expects the
worldwide market for Internet services to grow at a five-year compounded annual
growth rate of 59% from $7.8 billion in 1998 to $78.5 billion in 2003.
International Data Corporation defines Internet services as the consulting,
design, systems integration, support, management and outsourcing services
associated with the development, deployment and management of Internet sites.
Many businesses currently have to juggle multiple software applications,
systems integrators and service vendors to address their e-business challenges.
Most information technology companies specialize in only a single aspect of
services delivery, such as web design, software application development, systems
integration or hosting of commercially available software applications. For
example, application service providers generally only host and manage standard
third-party software applications at a centrally managed facility. We believe
that the complexity of combining all of these elements from different providers
makes it difficult for businesses to implement e-business solutions in a
cost-effective and timely manner.
Accordingly, we expect that businesses will increasingly demand that
information technology services companies understand their business processes
and deliver a tailored solution that combines strategies for improving business
processes with systems integration, hosting and support. Cayenta believes that
this demand is largely unmet in the information technology service provider and
application service provider marketplaces.
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STRATEGY. Cayenta's objective is to be the leading TSP. To achieve this
objective, Cayenta intends to pursue the following strategies:
BUILD ITS TSP CUSTOMER BASE. Cayenta intends to market its TSP offering
to existing customers of its software applications or other elements of its
TSP offering as they replace or upgrade their information technology systems
and increase their e-business activities. Cayenta will also market its TSP
offering to new customers by developing an industry-focused direct sales
force specializing in TSP sales. Cayenta will provide special incentives to
its sales force to increase sales of its TSP offering to existing customers
of its software applications or other elements of its TSP offering. Cayenta
also intends to create new sales channels for its TSP offering by developing
relationships with hosting companies and third-party software providers.
Cayenta believes its TSP offering will allow it to establish stronger
relationships with customers, provide a recurring revenue stream, and enable
it to sell additional services.
CONTINUE TO ENHANCE ITS TSP OFFERING. Cayenta intends to expand the
functions provided by its TSP offering by establishing centers where it will
monitor, manage and support its customer solutions, including elements of
those solutions provided by third parties. Cayenta also intends to establish
additional facilities near its customers where its customers will
collaborate with Cayenta in developing a customer-specific TSP offering.
Cayenta further intends to enhance its TSP offering by adding functions to
that offering to address other business processes, such as customer
relationship management. Cayenta plans to add these new functions by
establishing strategic alliances and entering into supply and service
agreements with industry and technology leaders as well as by enhancing its
current software applications.
TARGET SPECIFIC INDUSTRIES. Cayenta targets industries with complex
business processes and related information technology. Cayenta currently has
expertise in multiple industries, including utilities, telecommunications
and retail. Cayenta intends to further penetrate these industries by
establishing strategic alliances and joint ventures with industry leaders
and by hiring senior executives from within these industries. As part of
these efforts, Cayenta intends to engage in joint development with industry
participants of information technology solutions for their industries and
also enter into joint arrangements with customers to resell these solutions
for elements of them that have been developed for these customers. For
example, through a joint venture, Cayenta provides TSP services to that
joint venture's customers in the utility industry. Cayenta expects that
these ventures will provide it with opportunities to broaden its technical
offerings and to create new sales and marketing channels. Cayenta believes
that focusing on several specific industries provides it with a competitive
advantage in developing solutions for those industries, and expands its
market coverage while decreasing its dependence on individual industries.
PROMOTE THE CAYENTA BRAND. Cayenta's goal is to create brand
recognition of Cayenta as the leading TSP. To promote its brand, Cayenta
intends to expand its corporate marketing and advertising efforts, with the
specific objective of targeting selected industries. Cayenta believes
establishing the Cayenta brand will enable it to market its TSP offering
more effectively and to differentiate it from its competitors.
PURSUE RESCUE MISSIONS. Cayenta plans to provide rescue services for
customers faced with failing information technology projects and to use
these rescue projects to establish long-term customer relationships. Cayenta
believes that providing these solutions and services will result in
sustained revenues and future opportunities to sell its TSP offering.
ATTRACT AND TRAIN QUALIFIED PERSONNEL. To expand its business and
satisfy anticipated increases in customer demand for its TSP offering,
Cayenta intends to aggressively recruit new staff. Cayenta also may add new
staff through strategic acquisitions. Cayenta believes opening new
facilities that allow it
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to support its customers locally will relieve its staff's travel burdens and
be attractive to potential technical and consulting employees.
CONTINUE TO DEVELOP CORE COMPETENCIES. Cayenta will expand its
expertise in building and deploying software applications and in integrating
its customers' internal information technology systems with one another and
those of their trading partners. Cayenta intends to continue incorporating
technologies that support its customers' complex computing needs into both
standard and tailored software applications that Cayenta designs and
implements for customers. These technologies include Internet and portal
applications, data warehouses and custom client server and distributed
systems. Cayenta seeks out and tests new technologies as part of its
internal research activities and in conjunction with customer projects.
Cayenta augments its software offerings by utilizing open source software
that is published publicly and available for reuse from other Internet-
based software development initiatives. Cayenta's ability to successfully
implement solutions based on leading technology enables it to gain insight
into the relative strengths and weaknesses of competing technologies and to
sell value-added consulting and system integration services.
SERVICES. Cayenta is a TSP of comprehensive information technology
solutions for its customers' business functions. As a TSP, Cayenta expands upon
the delivery and hosting of standard third party software application packages
generally provided by companies called application service providers. Cayenta's
solutions combine standard and proprietary software applications that Cayenta
tailors for its customers' business processes with operational, hosting,
management and support services that Cayenta provides for those software
applications. Cayenta solutions address the following business processes of its
customers: e-business, finance, accounting, customer billing and collection,
contract management, supply-chain management and equipment monitoring and
maintenance.
Cayenta has a well-defined approach that enables it to deliver
cost-effective and timely solutions. This approach is grounded on reusable
processes and software applications, including industry-specific templates, and
the use of Cayenta facilities to develop solutions in collaboration with
customers. These facilities afford the collaborating Cayenta/customer team
complete access to Cayenta's reusable processes, software applications and
industry-specific templates. Cayenta has expertise in multiple industries,
including utilities, telecommunications and retail, and intends to further
penetrate these industries by establishing strategic alliances and joint
ventures. Cayenta has also entered into supply and service agreements with
leading providers of software, hardware and other elements of its TSP offering.
The following examples are representative of the information technology
challenges that Cayenta has addressed, and the solutions it has provided to its
customers.
- Sempra Energy Challenge:
To facilitate the integration of the information technology operations of
two large utilities that merged and create an information technology solution
for operations in the deregulated industry.
CAYENTA SOLUTION. As an initial step, Cayenta developed software
operating tools to support Sempra's migration from a mainframe-based system
to a system that distributes processing and applications to servers,
mainframes and desktops. Cayenta then linked SAP supply chain management
software with Sempra Energy's mainframe-based software systems in less than
200 days, developed a new billing and contract management system for the
utility environment, and deployed Internet business applications for Sempra
Energy. Cayenta also created training and mentoring programs to assist
Sempra Energy's information technology staff.
- Energy America Challenge:
To build in under eight weeks a comprehensive information technology
solution to manage the revenue generating transactions and third party
settlement transactions for a rapidly growing retailer of gas
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and electricity, and to provide ongoing operational support, through Soliance,
LLC, a joint venture partner, as a TSP.
CAYENTA SOLUTION. Cayenta provided customer enrollment, contract
management, and customer billing and care software applications to Energy
America that are reusable and facilitate its entrance into new markets.
Cayenta also integrated Energy America's information technology systems for
accounting and wholesale commodity purchases with the information technology
systems of its banking, utility, and printing service providers. Cayenta
assists Energy America in developing new rates, resolving customer disputes,
and performing analysis of its operations. Energy America uses this analysis
both for internal use as well as to help satisfy certain regulatory
requirements.
- Federal Aviation Administration Challenge:
To create a unified information system to monitor and analyze the status of
the U.S. air traffic control system for the FAA.
CAYENTA SOLUTION. Cayenta developed a web based software application
that utilizes its systems integration, data warehousing, and web technology
to link major information systems of the FAA. These systems integrate and
organize data from the FAA's disparate operational and reporting systems,
enabling a consolidation and a segmentation of data that allows the FAA to
gain insight on the operating performance of the U.S. air traffic control
system. These solutions are accessible on the FAA's intranet using standard
browser technology.
- Waste Management Challenge:
To provide Waste Management with scalable information technology systems
that integrate operations resulting from its merger and acquisition activity.
CAYENTA SOLUTION. In one week, Cayenta created web-based tracking and
status tools that enable Waste Management to monitor financial and key
operational measures. Cayenta also provided a complete information
technology blueprint to enhance Waste Management's information technology
environment, including recommendations for software applications, system
integration, system management tools, data architecture, and Internet
strategy. Cayenta also recommended improvements in Waste Management's
revenue cycle management process. Cayenta continues to build and deploy
Internet solutions to help Waste Management better manage its core
operations.
- 800.com Challenge:
To create a scalable end-to-end e-business solution for a leading Internet
retailer of consumer electronics and home entertainment products.
CAYENTA SOLUTION. Cayenta installed its e-business software
applications for order processing and 800.com's revenue generating
transactions and integrated those software applications with 800.com's web
site and back-end accounting and fulfillment systems. This solution reduced
800.com's manual business processes, and enables it to handle over 10,000
orders per day, reduce its manual business processes and provide customer
care over the Internet and through its call centers. With Cayenta's
solution, 800.com can recognize and process an order as soon as it is
placed.
SUREBEAM
OVERVIEW. SureBeam utilizes its patented electron beam technology to
provide food pasteurization turnkey systems and services to the food processing
industry and sterilization systems and services to medical product
manufacturers. SureBeam developed its proprietary electron beam pasteurization
and sterilization process from technology developed during our involvement in
the Strategic Defense Initiative, or "Star Wars," program of the 1980s.
SureBeam's electron beam process disrupts the DNA structure of microorganisms on
or within the product being pasteurized or sterilized. We believe that our
patented
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electron beam pasteurization and sterilization systems, or SureBeam systems,
which use commercial electricity as their source of power, offer a reliable,
efficient, more environmentally acceptable and generally superior alternative to
their principal competition, Gamma and EtO.
SureBeam has executed multiyear arrangements with many of the major poultry
and meat providers and producers in the United States, including Cargill, IBP,
Tyson Foods, Emmpak, and Huisken Meats, among others. These companies produced
approximately 75% of the 25.8 billion pounds of beef and approximately 43% of
the 75.4 billion pounds of meat, including beef, pork and poultry, produced in
the United States in 1999. SureBeam believes that if irradiated foods gain
market acceptance, these producers will initially elect to pasteurize a portion
of their ground beef and poultry production. SureBeam's multiyear arrangements
with its customers generally provide that it will be the exclusive provider of
electronic pasteurization services whenever any of these companies elect to use
pasteurization technology.
INDUSTRY OVERVIEW. Although contaminated food is one of the most widespread
health problems in the world, lack of regulatory approval and consumer
acceptance historically have limited the development of the market for
electronic food pasteurization. In December 1997, the FDA approved irradiation
of meat, finding that irradiation of meat, at its recommended doses, does not
diminish the food's nutritional value in any detectable way. In December 1999,
the USDA issued regulations setting forth guidelines for the irradiation of
meat. We believe our SureBeam technology meets these regulations. Subject to
consumer acceptance of irradiated foods, SureBeam estimates that the U.S. market
for food pasteurization systems and services could develop to be in excess of
$3.0 billion annually. If such consumer acceptance occurs, SureBeam believes
that meat producers will initially elect to pasteurize a portion of their ground
beef and poultry production.
Commercial sterilization of medical products began in the early 1960s.
Government regulations in the United States and many other countries require
medical products to be sterile or to have minimal microbial levels. Accordingly,
sterilization has become an essential step in the manufacturing process for
medical products in many countries throughout the world. In order to provide
safe products and to comply with applicable government regulations,
manufacturers generally have either developed internal sterilization
capabilities or have outsourced their sterilization needs through service
contracts. According to a market research report, the global market for
sterilization services for medical products was approximately $368 million in
1999.
STRATEGY. SureBeam's objectives are to be the world's leading provider of
food pasteurization systems and services, and to increase its presence as a
provider of sterilization services for medical product manufacturers. To achieve
these objectives, SureBeam intends to pursue the following strategies:
BUILD STRATEGICALLY LOCATED FACILITIES. SureBeam intends to continue to
build food pasteurization facilities that provide electron beam
pasteurization services in strategic locations that are near major producers
or providers of beef, chicken, fruits or vegetables. For example, our
facility in Sioux City, Iowa is located in proximity to several leading meat
producers, including IBP and Cargill. We expect that building facilities in
strategic locations will accelerate the development of a market for food
pasteurization services.
INSTALL MORE TURNKEY FOOD PASTEURIZATION SYSTEMS. We intend to sell or
lease turnkey food pasteurization systems directly into customer production
lines. Where feasible, we intend to enter into strategic relationships where
we will receive equity in the production line's operator and/or continued
service revenues in exchange for providing our pasteurization products and
services.
DEVELOP NEW OPPORTUNITIES FOR SUREBEAM. While currently focused on
pasteurizing beef, chicken, fruits and vegetables and sterilizing medical
products, we are evaluating new applications for our SureBeam technology. In
addition, we are seeking to enter new geographic markets. In January 2000,
SureBeam announced that it had sold a SureBeam system to Japan's Mitsubishi
Corp. that is expected to be fully operational by the first quarter of 2001.
In connection with the sale, Mitsubishi will form a
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new entity to operate the SureBeam system, which is expected to be initially
used for medical product sterilization, SureBeam will hold an equity
interest in the new entity, and Mitsubishi will market SureBeam's
proprietary technology in Japan.
TURNKEY SYSTEMS AND SERVICES. SureBeam's proprietary technology provides
customers with distinct advantages compared to Gamma and ethylene oxide ("EtO")
technologies:
INCORPORATED INTO CUSTOMER PRODUCTION LINE. SureBeam can be
incorporated into customers' production lines, which eliminates the
transportation and associated inventory carrying costs that are common with
Gamma and EtO technologies.
SCALABLE SYSTEM. SureBeam systems are scalable and can be easily
integrated into a customer's production line or in a facility to meet large
processing requirements.
FASTER PROCESSING TIME. An electron beam pasteurizes food products or
sterilizes medical products in a matter of seconds, as compared to Gamma and
EtO technologies that may require several hours.
REDUCED MATERIAL DEGRADATION. Because of the shorter exposure time to
the irradiation source, electron beam processing reduces the oxidation
effects to products and thus reduces material degradation.
FLEXIBLE DOSING. SureBeam's electron beam systems can switch from one
targeted dose to another in a matter of a few seconds.
UNIFORM, CONTROLLED DOSE. Electron beam processing delivers a
measurable and consistent dose to products based upon pre-set accelerator
parameters. All processing parameters are under constant measurement by a
built-in computer, and variation occurring during a processing run
automatically shuts down the system until the reason for the variation can
be determined and corrected.
NO RE-SOURCING REQUIRED. SureBeam processing is not accomplished via a
radioactive isotope such as Cobalt 60, which is used in Gamma sterilization,
but rather through accelerated electrical energy. Accordingly, a SureBeam
facility does not need to be out of service for any period of time in order
to re-introduce the pasteurization or sterility source into operation.
SAFETY. SureBeam facilities do not use Gamma or EtO radiation. They
operate using electrical power and, in the event of a problem, can be
deactivated by simply shutting off the power.
SureBeam provides its customers with turnkey SureBeam systems for use in
their own production lines and provides processing services for food
pasteurization and medical device sterilization. In anticipation of the recently
issued USDA regulations, SureBeam built, at Cloverleaf Cold Storage's facility
in Sioux City, Iowa, the first electron food pasteurization facility in the
United States. This facility is specifically designed for the pasteurization of
various types of food. The Sioux City facility became operational in
December 1999 and, at full capacity, will be able to pasteurize in excess of 250
million pounds of product annually. The facility has the capability of
pasteurizing large cases of products as well as products that are not uniform in
shape or size. In January 2000, SureBeam announced that it will build a facility
in Arkansas with its partner, Zero Mountain Cold Storage. The facility is
scheduled to become operational in December of 2000. Zero Mountain Cold Storage
will form a new entity to operate the SureBeam system, and SureBeam will own a
minority interest in the new entity. In January 2000, SureBeam announced that it
had sold a SureBeam system to Japan's Mitsubishi Corp. that is expected to be
fully operational by the first quarter of 2001. In connection with the sale,
Mitsubishi will form a new entity to operate the SureBeam system, which is
expected to be initially used for medical product sterilization, SureBeam will
hold an equity interest in the new entity, and Mitsubishi will market
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SureBeam's proprietary technology in Japan. SureBeam is also currently building,
with a partner, a SureBeam facility in Hilo, Hawaii for the disinfestation of
fruits and vegetables.
To date, turnkey SureBeam systems are used in medical device production
lines of Guidant Corporation in San Diego, California, Baxter Corporation in the
Dominican Republic, Rochialle Corporation in Wales and BSE-Mediscan in Austria.
In addition, SureBeam offers contract sterilization services for medical product
manufacturers at facilities that it owns in San Diego and Denver. These
facilities have performed over 100,000 hours of contract sterilization services
and are currently running seven days per week and performing sterilization
services 19 hours per day.
TITAN WIRELESS
OVERVIEW. Titan Wireless develops and produces advanced satellite ground
terminals, satellite voice/ data modems, networking systems and other products
to support telephony in developing countries for government and commercial
customers worldwide. Additionally, Titan Wireless is increasingly generating
recurring service revenues from the telephony systems it installs. Titan
Wireless' technology relies heavily on our DAMA technology, which enables more
cost-effective and efficient use of satellite transmission capacity by allowing
each ground terminal in a satellite network to communicate with any other
terminal in the network. Our DAMA technology was developed under DoD contracts
beginning in 1983. Titan Wireless has also developed substantial expertise in
critical engineering disciplines such as satellite ground system design, radio
frequency and digital engineering, digital and communications signal processing
software, network management and modem technology. With Titan Wireless'
strategic partner, Sakon, we are building a global infrastructure of ground
based satellite communications equipment that is interconnected. This network,
which once in place is global in nature, is allowing us to provide telephony,
data, wire over IP (Internet Protocol), and Internet connectivity to the rural
and emerging areas of the world. We believe that our Demand Assigned Multiple
Access (DAMA) technology allows us to route more customer connectivity requests,
and route them more efficiently, than any of our competitors.
Titan Wireless' leading product, Xpress Connection, uses existing
geosynchronous satellites to provide low-cost voice, facsimile and data services
to connect villages to a national public switched telephone network, making it
possible to provide low-cost telephone service to vast unserved areas. Titan
Wireless develops and markets its telephony systems through strategic alliances
for sales of products in developing countries. For example, through its
strategic relationship with Sakon, Titan Wireless is providing international
long distance telephony services in El Salvador, Cameroon, Kuwait, Jordan, Saudi
Arabia, Guatemala, Nigeria and Bangladesh.
INDUSTRY OVERVIEW. Vast regions of the world remain without adequate
telecommunications infrastructure. In 1998, according to the International
Telecommunication Union, countries in our targeted markets, which represent
one-third of the world's population, had fewer than two subscriber lines per 100
inhabitants compared to 66.13 in the United States. Although many of these
countries are developing urban wired telephony systems, economic considerations
in these countries have made the provision of wired telephone service to remote
areas cost prohibitive. A combination of several factors, including advancement
in voice transmission technologies, development of low cost ground terminals and
the existence of commercial satellite availability has made telephone service
(including voice, fax and data services) possible in these remote areas.
Today, there are principally three transmission alternatives available for
providing telephone service in remote areas: wired, terrestrial wireless and
satellite networks. Of these three alternatives, satellite networks are uniquely
suited to provide a rapidly available, lower cost solution for the telephony
market. Wired networks require the installation of significant infrastructure
over long distances and difficult terrain and are generally cost prohibitive for
use in remote areas and can take a number of years to complete. Terrestrial
wireless systems, in particular microwave radio networks, are subject to
line-of-sight limitations requiring a large number of microwave towers (one
approximately every 20 to 50 kilometers), compete for
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use of radio frequencies and require substantial time and expense to install.
Satellite networks, on the other hand, provide broad geographic coverage. In
fact, most areas with large rural populations are within the range of one or
more commercial satellites in orbit today. At any location within the range of
these satellite networks, telephony services can be established simply by
installing small, low-cost ground terminals with links to the country's public
switched telephone network. Moreover, such satellite networks have relatively
lower infrastructure costs compared to wired and terrestrial wireless networks,
are not constrained by topographical or climatic characteristics and can be
rapidly and economically deployed, upgraded and reconfigured.
The three principal types of satellite communications networks are direct
broadcast, mobile, and fixed-site. Direct broadcast satellite networks, which
provide a direct transmission link from high-power satellites to customers over
a wide geographic area, are best suited for one-way, continuous transmissions
such as direct-to-home television, music and data. For this reason, direct
broadcast is not optimal in the telephony market. Mobile satellite networks,
which enable voice and data communications through small portable terminals,
utilize specially designed satellites which operate at higher power and at lower
frequencies with less bandwidth. As a result, mobile satellite systems generally
are more expensive and are not as well suited for telephony applications in
developing countries. Fixed-site satellite telephony systems, which provide
television, voice, facsimile and data communications between fixed ground
terminals and geosynchronous satellites, are increasingly being utilized by
developing countries.
STRATEGY. Titan Wireless' objective is to become a leading provider of
telephony systems and services in developing countries. To achieve this
objective, Titan Wireless intends to pursue the following strategies:
INCREASE SERVICE REVENUES. Titan Wireless intends to expand its sales,
installation and integration activities for telephony systems and
participate in the service revenues from installed equipment. One of its key
initiatives is to provide long distance telecommunications services in
developing countries. Through its Sakon joint venture, Titan Wireless is
currently providing long distance telecommunications services in eight
developing countries, and expects to provide long distance
telecommunications in at least six additional developing countries. Titan
Wireless' business plan is to derive at least 50% of all future revenues
from providing telecommunications services.
EXPAND STRATEGIC ALLIANCES. Titan Wireless utilizes strategic alliances
to enter new markets. Titan Wireless continually evaluates potential
additional strategic alliances that can provide financial, technological
and/or marketing resources for its products. Titan Wireless seeks
partnerships with regional and local telephone service providers who can
obtain operating permits and play a key role in the installation and
operation of a satellite telephone network in a developing country.
LEAD SATELLITE COMMUNICATIONS TECHNOLOGY INNOVATION. Titan Wireless has
combined expertise gained under government-sponsored development projects
and its own internal development efforts to become a leader in low-cost,
efficient satellite communications technology. Titan Wireless' close ties
with satellite-based telecommunications service providers enable it to
identify and understand the current needs of the market, anticipate future
trends and develop technologies and products that are designed to address
those needs and trends.
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PRODUCTS AND SERVICES. Titan Wireless develops and sells bandwidth
efficient, turnkey systems and products which address the demand for
telephony solutions in developing countries. Titan Wireless' commercial
products include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------- -----------
<S> <C>
Xpress Connection.............. Network of fixed-site satellite ground terminals
designed to provide basic telephony solutions to
remote areas of developing countries. Interoperable
with national public switched telephone network.
Multi-Media Very Small Aperture
Terminals or VSATs........... Key portions of ground terminal, primarily software
and Application Specific Integrated Circuit chip
sets to be used in a satellite-based communication
system designed to provide quality and cost
competitive multi-function telecommunications
services to individual homes and businesses in areas
not adequately served by the public switched
telephone network. Interoperable with Xpress
Connection and public switched telephone network,
the Internet and other public data networks.
CCM 4000....................... Modem product designed to allow a single ground
terminal to provide service for up to four
simultaneous users. Utilized in Xpress Connection
networks and in private telephone and data networks.
Cost-effective alternative to installing additional
terminals where demand warrants.
MRVC........................... Voice digitizing, compression and multiplexing
product sold to commercial markets.
</TABLE>
Titan Wireless establishes switched telephone network gateways in developing
countries that effectively route calls via satellite through a bank of local
telephone lines. The quality of service provided by Titan Wireless is near toll
quality, which we believe will satisfy the quality demands of many citizens of
developing countries. Through one network management center, or hub, Titan
Wireless can manage up to 50 gateways, which connect directly into the hub, and
10,000 VSATs. Titan Wireless currently operates a hub and intends to add other
hubs in key geographic locations which will enable it to provide global
telephony coverage.
Titan Wireless' project for the national telephone company of Benin, Africa,
illustrates the combination of Titan Wireless' product and services offerings.
Titan Wireless, the prime contractor for the project, will install the major
satellite hub, the VSAT hardware, the billing system and network control system.
Alcatel of France is a major subcontractor to Titan Wireless on this project,
and will handle the delivery, installation and integration of the digital
cellular system, wireless local loop, fiber optic system and primary hub
switching technology of the system. Titan Wireless will build out the entire
system, which is expected to be completed in 2001, co-operate the system with
the national telephone company for approximately eight years, and then transfer
the operations to the national telephone company. In addition to realizing
revenue and profit on the equipment portion of the project, Titan Wireless will
share in the revenue and profit generated by the system while it is co-operating
the system.
Titan Wireless is also building upon its experience in telephony to
selectively pursue private networking opportunities in developing countries. For
example, in Thailand, Titan Wireless sold key
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elements of a private voice, data and facsimile communications network to The
Bank for Agriculture and Agricultural Cooperatives.
EMERGING TECHNOLOGIES AND BUSINESSES
Emerging Technologies consists of new technologies and early-stage
businesses, including some businesses in which we own only a minority interest.
Emerging Technologies pursues commercial applications for technologies
originally developed in government-sponsored research and development programs
and, to a lesser extent, in internally funded programs. Emerging Technologies
employs our rich technology portfolio, superior research and development
capabilities and stream of government-funded projects to create solutions for
technology-related problems that we can sell to multiple commercial markets.
The following are examples of some of the technologies and businesses that
are currently included in our Emerging Technologies segment.
MICRO ELECTROMECHANICAL SYSTEMS (MEMS) technology developed as a result
of our work for the federal government is being applied to commercial uses
for very small wide band antennas.
IMAGCLEAR 5000 automatically scans over 2,500 fingerprint cards per day
and can extract individual fingerprints from each card for electronic
distribution to the FBI and other law enforcement agencies around the globe.
This technology has received the highest level of certification attainable
from the FBI for capturing fingerprint images. To date, we have received
orders to provide over 40 ImagClear 5000 card scan systems and supporting
equipment, including to NEC Technologies, which will use the fingerprint
processors as part of its participation in the FBI's Card Scan Service
program.
NETWORK, INTERNET AND INFORMATION SECURITY targets commercial businesses
needing to detect and protect against network intrusions, as well as those
seeking to conduct more secure electronic communications and transactions.
WAVX, a publicly traded company, acquired its core encryption technology
from us. WAVX's core product, the embedded application security system, is a
firewall-on-a-chip technology that enables localization of secure e-commerce
transactions at a personal computer, set-top box, or other information
sharing device. We have realized almost a million dollars from sales of our
residual equity interest in WAVX over the past few years. We no longer have
an equity interest in WAVX. We are entitled to receive 5% of any revenues
derived from WAVX products that utilize our technology for the first $1
million in revenues, and 2% on any revenues in excess of $1 million.
In 1996, we contributed the core technology to form Servnow!
NetTechnologies, Inc., which is now known as IPivot. IPivot develops software
products that improve the performance of server farms, web sites and software
applications. In 1997, we secured $4.6 million of venture capital and ultimately
raised a total of $15 million of venture capital for the development of this
business. In November 1999, we received approximately $42 million in cash for
our approximate 8% equity interest in IPivot when IPivot was acquired by Intel
Corporation. Up to an additional $3 million may be received by Titan within one
year subject to certain post-closing adjustments.
We intend to utilize both public and private investments as the primary
funding source for the continued commercial development of our rich technology
portfolio. We have no capitalized amounts on our consolidated balance sheets for
any of the developing technologies and businesses within our Emerging
Technologies segment.
GOVERNMENT CONTRACTS
A substantial portion of our revenues are dependent upon continued funding
of United States and allied government agencies, as well as continued funding of
the programs targeted by our businesses. Our
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revenues from U.S. government business represented approximately 83% of our
total revenues for the years ended December 31, 1997 and 1998, and approximately
80% of our total revenues for the year ended December 31, 1999. Any significant
reductions in the funding of United States government agencies or in the funding
areas targeted by our businesses could materially and adversely affect our
business, results of operations and financial condition.
U.S. government contracts are subject to termination for the convenience of
the government, as well as termination, reduction or modification in the event
of budgetary constraints or any change in the government's requirements. When we
subcontract with prime contractors, such subcontracts are also subject to the
ability of the prime contractor to perform its obligations under its prime
contract. We 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 our loss of
our subcontract. In addition, our contract-related costs and fees, including
allocated indirect costs, are subject to audits and adjustments by negotiation
between us and the U.S. government. As part of the audit process, the government
audit agency verifies that all charges made by a contractor against a contract
are legitimate and appropriate. Audits may result in recalculation of contract
revenues and non-reimbursement of some contract costs and fees. Any audits of
our contract-related costs and fees could result in material adjustments to our
revenues. In addition, U.S. government contracts are conditioned upon the
continuing availability of congressional appropriations. Congress usually
appropriates funds on a fiscal year basis even though contract performance may
take several years. Consequently, at the outset of a major program, the contract
is usually incrementally funded and additional funds are normally committed to
the contract by the procuring agency as Congress makes appropriations for future
fiscal years. Any failure of such agencies to continue to fund such contracts
could have a material adverse effect on our business, results of operations and
financial condition.
Our business with the U.S. government and prime contractors is generally
performed under cost reimbursement, fixed-price or time and materials contracts.
Cost reimbursement contracts for the government provide for reimbursement of
costs plus the payment of a fee. Under fixed-price contracts, we agree to
perform certain work for a fixed price. Under time and materials contracts, we
are reimbursed for labor hours at negotiated hourly billing rates and are
reimbursed for travel and other direct expenses at actual costs plus applied
general and administrative expense. The following table gives the percentage of
revenues realized by us from the three primary types of government contracts
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
CONTRACT TYPE 1997 1998 1999
- ------------- -------- -------- --------
<S> <C> <C> <C>
Cost Reimbursement................................... 52.9% 47.3% 51.5%
Fixed-Price.......................................... 33.2 29.1 28.1
Time and Materials................................... 13.9 23.6 20.4
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
RAW MATERIALS
We operate both fabrication and assembly facilities and also purchase
certain components and assemblies from other suppliers. No one supplier accounts
for a significant portion of total purchases.
PATENTS, TRADEMARKS AND TRADE SECRETS
Our policy is to apply for patents and other appropriate statutory
protection when we develop new or improved technology. We presently hold 130
U.S. and international patents, as well as a number of trademarks and
copyrights. However, we do not rely solely on these statutory protections to
protect our technology and intellectual property. In addition to seeking patent
protection for our inventions, we rely on the laws of unfair competition and
trade secrets to protect our unpatented proprietary rights. We
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attempt to protect our trade secrets and other unpatented proprietary
information through agreements with customers, vendors, employees and
consultants. In addition, various names used by us for our products and services
have been registered with the United States Patent and Trademark Office.
BACKLOG
Contracts undertaken by us may extend beyond one year. Accordingly, portions
are carried forward from one year to the next as part of backlog. Because many
factors affect the scheduling of projects, no assurance can be given as to when
revenue will be realized on projects included in our backlog. Although backlog
represents only business which is considered to be firm, we cannot guarantee
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 us to all or a portion of our costs incurred and potential fees.
Many of our contracts with the U.S. government are funded by the procuring
agency from year to year, primarily based on its fiscal requirements. This
results in two different categories of U.S. government backlog: funded and
unfunded backlog. "Funded backlog" consists of the aggregate contract revenues
remaining to be earned by us 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 the aggregate
contract revenues expected to be earned as our customers incrementally allot
funding to existing contracts, whether we are acting as a prime contractor or
subcontractor, and the aggregate contract revenues to be funded on contracts
which have been newly awarded to us. "Backlog" is the total of the government
and commercial funded and unfunded backlog.
Our backlog consisted of the following approximate amounts as of
December 31 for the following years:
<TABLE>
<CAPTION>
BACKLOG 1997 1998 1999
- ------- -------- ---------- ----------
<S> <C> <C> <C>
U.S. Government funded backlog............. $132,043 $ 164,089 $ 226,044
U.S. Government unfunded backlog........... 383,186 514,363 696,030
Commercial backlog......................... 48,367 47,227 86,434
-------- ---------- ----------
Total backlog.............................. $563,596 $ 725,679 $1,008,508
======== ========== ==========
</TABLE>
In addition to the backlog described above, at December 31, 1999, we had
priced options of over $618 million. We expect that a substantial number of
these options will be exercised in the future, although we cannot guarantee that
any options will be exercised.
Management believes that year-to-year comparisons of backlog are difficult
and not necessarily indicative of future revenues. Our 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.
We expect to realize approximately 52% of our December 31, 1999 backlog by
December 31, 2000.
COMPETITION
TITAN SYSTEMS. Titan Systems is one of many companies involved in providing
information systems solutions for a variety of programs for agencies of the U.S.
government and prime contractors for these agencies. Most activities in which
Titan Systems engages are very competitive and require highly skilled and
experienced technical personnel. Many of Titan Systems' competitors have
significantly greater financial and personnel resources than Titan Systems.
Competitors in this industry include Anteon Corp., Autometrics, BTG, Inc.,
Booz-Allen Hamilton Inc., CACI International, Inc., Comptek Research, Inc.,
Computer Sciences Corporation, Dynamics Research Corporation, General Dynamics
Corporation,
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Government Technology Services, Inc., Lockheed Martin Corporation, Metric,
Raytheon Company, Science Applications International Corporation, Tracor, TRW,
and ViaSat. Titan Systems believes that the primary competitive factors for its
information systems services and products include technical skills, experience
in the industry and customer relationships.
CAYENTA. The information technology services business is intensely
competitive and subject to rapid technological change. Cayenta expects the
competition to continue and intensify. Cayenta's competitors include:
- application service providers, such as Breakaway Solutions and
USinternetworking;
- information technology service providers and system integrators, such as
Andersen Consulting, Answerthink, Cambridge Technology, EDS, KPMG, Sapient
and Tanning Technology;
- Internet professional service providers, such as Proxicom, Scient, and US
Interactive; and
- internal information technology departments of current and potential
clients.
In comparison with Cayenta, many of its competitors are larger, and have
more brand recognition and substantially greater financial infrastructure,
personnel, and marketing resources. In addition, there are low barriers to entry
into Cayenta's business. Cayenta does not own any technologies that preclude or
inhibit competitors from entering its industry. Existing or future competitors
may independently develop and patent or copyright technologies that are superior
or substantially similar to Cayenta's technologies. The costs to develop and to
provide information technology services are relatively low. Moreover, barriers
to entry, particularly in the application integration and consulting components
of Cayenta's TPS offering, are low. Therefore, Cayenta will likely continue to
face additional competition from new entrants into its industry, like software
product companies.
SUREBEAM. The market for turnkey food pasteurization systems and services
has only recently begun to develop. We expect that food producers and providers
will continue to be reluctant to use Gamma radiation to pasteurize foods. As the
market for electronic pasteurization of food develops, we expect competition to
increase.
The market for medical product sterilization services is intensely
competitive and is characterized by significant price competition. SureBeam's
market for medical product sterilization services is fragmented as a result of
geographical limitations on the transportation of products for sterilization,
multiple technologies and the mix of in-house and contract sterilization
facilities. Although SureBeam believes that it is the only provider of
relatively small, low-cost, turnkey systems for in-house use by medical product
manufacturers, SureBeam currently faces competition from several providers of
contract Gamma sterilization services, several providers of contract electron
beam sterilization services and a significantly larger number of providers of
contract EtO sterilization services. Certain of SureBeam's competitors and
potential competitors in the medical product sterilization market have
substantially greater financial, marketing, distribution, technical and other
resources than SureBeam, 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.
TITAN WIRELESS. The industries and markets in which Titan Wireless competes
are highly competitive, and we expect that competition will increase in such
markets. Titan Wireless encounters intense competition from numerous companies,
including large and emerging domestic and international companies, many of which
have far greater financial, engineering, technological, marketing, sales and
distribution and customer service resources than Titan Wireless. Some of Titan
Wireless' 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.
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EMERGING TECHNOLOGIES AND BUSINESSES. Because it is attempting to
commercialize a number of diverse technologies and products, Emerging
Technologies effectively competes in many areas. Other companies are engaged in
significant research and development activities in these areas, either on their
own or in collaboration with others. Some of these companies have greater
financial and personnel resources, and more experience in these specific areas
than we do. We anticipate that Emerging Technologies will face increased
competition in the future as new companies enter these areas and additional and
potentially more sophisticated technologies become available.
RESEARCH AND DEVELOPMENT
We maintain a staff of engineers, other scientific professionals and support
personnel engaged in development of new applications of technology and
improvement of existing products. These programs' costs are expensed as
incurred. Total expenditures for research and development were $12.8 million in
1997, $10.0 million in 1998 and $10.9 million in 1999. These expenditures
included Titan-funded research and development of $7.5 million in 1997, $5.6
million in 1998 and $6.7 million in 1999. The remainder of our research and
development expenditures were customer-sponsored. The majority of our customer-
sponsored research and development activity is funded under contracts with the
United States government.
GOVERNMENT AND ENVIRONMENTAL REGULATIONS
We must comply with and are affected by various government regulations.
These regulations affect how we and our customers can do business and, in some
instances, impose added costs to our businesses. Any changes in applicable laws
could adversely affect the financial performance of the business affected by the
changed regulations. Any failure to comply with applicable laws could result in
material fines and penalties or affect how we conduct our business in the
future.
We are subject to environmental and safety laws and regulations governing
the use, storage and disposal of hazardous substances or wastes and imposing
liability for the cleanup of contamination from these substances. We cannot
completely eliminate the risk of contamination or injury from these substances
or wastes, and, in the event of such an incident, we could be held liable for
any damages that result. From time to time, we have been notified of violations
of government and environmental regulations. We attempt to correct these
violations promptly without any material impact on our operations. In addition,
we may be required to incur significant additional costs to comply with
environmental laws and regulations in the future. These costs, and any future
violations or liability under environmental laws or regulations, could have a
material adverse effect on our business, financial condition and results of
operations.
EMPLOYEES
As of December 31, 1999, we employed approximately 5,125 employees,
predominantly located in the United States.
RISK FACTORS
RISKS RELATING TO OUR BUSINESS AND COMMON STOCK
OUR CAYENTA, SUREBEAM AND TITAN WIRELESS BUSINESSES OPERATE IN EMERGING
MARKETS AND WE WILL BE UNABLE TO EXPAND THESE BUSINESSES AS WE EXPECT IF THE
PRINCIPAL PRODUCTS AND SERVICES OF THOSE BUSINESSES DO NOT MEET WITH MARKET
ACCEPTANCE.
If any of the primary markets targeted by Cayenta, SureBeam or Titan
Wireless fails to develop as we anticipate, our revenues will be less than we
expected, our business will suffer and we may be unable to recoup the
investments we have made to develop and market the principal products and
services of those businesses.
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To grow as currently contemplated, we will need to derive an increasing
portion of our revenues from our Cayenta, SureBeam and Titan Wireless
businesses.
To date, none of Cayenta's revenues have been derived from direct sales by
it of its total services provider, or TSP, offering, which combines standard and
proprietary software applications with operational, hosting, management and
support services that Cayenta provides for those software applications.
Cayenta's only TSP-related revenues have resulted from providing TSP services to
the customers of a joint venture in which it holds a 10% equity interest.
Cayenta has only recently begun providing operational, hosting, management and
support services for its software applications, and Cayenta cannot be certain
that the market for TSP offerings will develop.
The use of our SureBeam electron beam technology for food irradiation has
only recently been approved by the applicable regulatory authorities in the
United States. Accordingly, a market for pasteurized foods has only recently
begun to develop, and its continued development will depend on broad acceptance
of irradiated foods by consumers, food producers and providers, restaurant
chains and food retailers. This acceptance may not occur.
Titan Wireless' principal strategy is to provide products used in telephony
systems in developing countries. We cannot guarantee that a substantial market
for telephony services in developing countries will ever develop, or if such a
market does develop, that fixed-site satellite equipment will capture a
significant portion of that market. The development of a market for telephony
services in developing countries will depend upon a variety of factors including
whether a particular country has sufficient resources to support such a market
and whether the telephony services are offered at a reasonable cost to the end
users of such services. Titan Wireless' ability to penetrate the telephony
market in developing countries will be adversely affected to the extent that
other competing elements of the communications infrastructure, such as telephone
lines, other satellite-delivered solutions and fiber optic cable and television
cable, are installed in the developing countries. In addition, the development
and implementation of telephony systems will be dependent upon, among other
items, the continued development of necessary technologies, continued financial
and other support from governmental agencies, the implementation of
cost-effective systems, market acceptance for such systems and approval by
appropriate regulatory agencies.
WE HAVE A LIMITED HISTORY OF COMMERCIALIZING NEW TECHNOLOGIES AND OUR
COMMERCIAL BUSINESSES MAY NOT REMAIN OR EVER BECOME SUCCESSFUL.
In 1991, we adopted a strategy of seeking to develop commercial businesses
using technology developed in our defense businesses. Our SureBeam and Titan
Wireless businesses are a product of this strategy. Many of our commercial
businesses are in an early stage of development or have only recently begun to
offer their products, services, systems or solutions in the emerging markets in
which they operate. These technology-based businesses are subject to risks
inherent in companies at these early stages of development, including:
- the risks that their base technology will become obsolete and that they
will fail to respond in a timely and cost-effective manner to rapid
technological changes;
- the risks associated with operating in markets that are subject to a high
degree of competition;
- the risk that they will have inadequate management resources to capitalize
on market opportunities and execute their strategy;
- the risk that they will be unable to manage rapid growth effectively;
- the risk that they will be unable to execute successfully each portion of
their business strategy on schedule;
- the risk that we may not identify markets with sufficient opportunities to
justify our investments in products and solutions for these markets;
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- the market and operating risks that are unique to each particular
business; and
- the risk that adequate capital may not be available to fund their
continued development.
WE CANNOT GUARANTEE THAT CAYENTA'S PENDING INITIAL PUBLIC OFFERING WILL
CLOSE OR THAT WE WILL BE ABLE TO EXECUTE ON OUR STRATEGY OF OBTAINING PUBLIC OR
PRIVATE FINANCING TO FUND THE GROWTH OF OUR COMMERCIAL BUSINESSES.
As part of our strategy of seeking external financing to grow our commercial
businesses, our Cayenta subsidiary has filed a registration statement for an
initial public offering of its common stock. We cannot guarantee that Cayenta
will succeed in completing the offering, which may be adversely affected by
market conditions or other factors. We have extended a credit facility of up to
a maximum of $70.0 million to Cayenta under which Cayenta owed us approximately
$68.4 million as of March 20, 2000. Cayenta may not use the proceeds of its
initial public offering to pay amounts outstanding under its credit facility
with us.
In addition, we may seek public or private financing for one or more of our
commercial businesses to fund their growth, including through initial public
offerings or spin-offs for any of our segments. We cannot guarantee that
adequate capital to fund our growth will be available to us or be available on
acceptable terms or that we will complete any spin-off of any of our segments.
WE DEPEND ON GOVERNMENT CONTRACTS FOR A MAJORITY OF OUR REVENUES.
We earn a majority of our total revenues from U.S. government contracts. Any
cancellations or modifications of our significant contracts or subcontracts, or
failure by the U.S. government to exercise an option period relating to those
contracts or subcontracts, could hurt our business, financial condition and
results of operations in the short or long term. Continuing declines in U.S.
defense and other federal agency budgets also may hurt our prospects. Our
revenues from U.S. government business represented approximately 83% of our
total revenues in 1997 and 1998, and 80% of our total revenues in 1999. This
percentage may rise in the future. Although we bid for and are awarded long-term
U.S. government contracts and subcontracts, the U.S. government only funds these
contracts on an annual basis, and many of our contracts and subcontracts include
option years. The U.S. government may cancel these contracts at any time without
penalty or may change its requirements, programs or contract budget, and
generally has the right not to exercise option periods. The U.S. Congress may
decline to appropriate funds needed to complete the contracts awarded to us or
the prime contractor. On our subcontracts, we generally do not control the prime
contractor's allocation of resources. We also depend upon the prime contractor
to perform its obligations on the primary government contract. In addition to
contract cancellations and declines in agency budgets, our prospects may be
adversely affected by:
- budgetary constraints affecting U.S. government spending generally, and
changes in fiscal policy or available funding;
- curtailment of the U.S government's use of technology services providers;
- the adoption of new laws or regulations;
- technological developments;
- U.S. government shutdowns, such as that which occurred during the U.S.
government's 1996 fiscal year;
- competition and consolidation in our business areas; and
- general economic conditions.
These or other factors could cause government agencies to reduce their
purchases under contracts, to exercise their right to terminate contracts or not
to exercise options to renew contracts. Any of these actions could have a
material adverse effect on our business, financial condition and results of
operations.
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GOVERNMENT AUDITS OF OUR GOVERNMENT CONTRACTS COULD CAUSE A MATERIAL
NEGATIVE ADJUSTMENT TO OUR REVENUES.
Our government contracts are subject to cost audits by the government. These
audits may occur several years after completion of the audited work. Audits may
result in a recalculation of contract revenues or result in the government
refusing to reimburse some of our contract costs and fees. Generally, we resolve
audit issues by negotiation without material adjustments. However, in the
future, we could have a material adjustment to revenue as a result of an audit,
including an audit of one of the companies we have recently acquired. Before we
acquired them, some of our recently acquired companies did not impose internal
controls as rigorous as those we impose on the government contracts we perform.
As part of the integration process, we seek to apply our policies throughout the
acquired companies.
OUR OPERATING MARGINS MAY DECLINE UNDER OUR FIXED-PRICE CONTRACTS IF WE FAIL
TO ESTIMATE ACCURATELY THE RESOURCES NECESSARY TO SATISFY OUR OBLIGATIONS.
Some of our contracts are fixed-price contracts under which we bear the risk
of any cost overruns. Our profits are adversely affected if our costs under
these contracts exceed the assumptions we used in bidding for the contract.
WE ARE NOT ABLE TO GUARANTEE THAT WE WILL RETAIN OUR CONTRACTS WITH THE U.S.
GOVERNMENT AND SUBCONTRACTS UNDER U.S. GOVERNMENT PRIME CONTRACTS IN ANY
COMPETITIVE REBIDDING PROCESS.
Upon expiration of a U.S. government contract or subcontract under U.S.
government prime contracts, if the government customer requires further services
of the type provided in the contract, there is frequently a competitive
rebidding process. We cannot guarantee that we, or the prime contractor, will
win any particular bid, or that we will be able to replace business lost upon
expiration or completion of a contract. Further, all U.S. government contracts
are subject to protest by competitors. The unexpected termination of one or more
of our significant contracts could result in significant revenue shortfalls. The
termination or nonrenewal of any of our significant contracts, short-term
revenue shortfalls, the imposition of fines or damages, or our suspension or
debarment from bidding on additional contracts could have a material adverse
effect on our business, financial condition and results of operations.
MANY OF OUR U.S. GOVERNMENT CUSTOMERS SPEND THEIR PROCUREMENT BUDGETS
THROUGH GSA SCHEDULE CONTRACTS, AND WE ARE REQUIRED TO COMPETE FOR POST-AWARD
ORDERS.
Budgetary pressures and reforms in the procurement process have caused many
U.S. government customers increasingly to purchase goods and services through
"indefinite delivery, indefinite quantity" contracts, General Service
Administration, or GSA, Schedule contracts and other multiple award or
government-wide acquisitions contract vehicles. Our failure to compete
effectively in this procurement environment could have a material adverse effect
on our business, financial condition and results of operations. These contract
vehicles have resulted in increased competition and pricing pressure and
required us to make sustained post-award efforts to realize revenues under the
relevant contract. We cannot guarantee that we will continue to increase
revenues or otherwise sell successfully under these contract vehicles.
WE MAY BE LIABLE FOR PENALTIES UNDER A VARIETY OF PROCUREMENT RULES AND
REGULATIONS, AND CHANGES IN GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR
BUSINESS.
Our defense and commercial businesses must comply with and are affected by
various government regulations. Among the most significant regulations are the
following:
- the Federal Acquisition Regulations, which comprehensively regulate the
formation, administration and performance of government contracts;
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<PAGE>
- the Truth in Negotiations Act, which requires certification and disclosure
of all cost and pricing data in connection with contract negotiations;
- the Cost Accounting Standards, which impose accounting requirements that
govern our right to reimbursement under certain cost-based government
contracts; and
- laws, regulations and Executive Orders restricting the use and
dissemination of information classified for national security purposes and
the exportation of certain products and technical data.
These regulations affect how our customers and we do business and, in some
instances, impose added costs on our businesses. Any changes in applicable laws
could adversely affect the financial performance of the business affected by the
changed regulations. Any failure to comply with applicable laws could result in
contract termination, price or fee reductions or suspension or debarment from
contracting with the U.S. government.
OUR FAILURE TO RETAIN QUALIFIED TECHNICAL AND MANAGEMENT PERSONNEL COULD
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
We need to maintain our workforce of highly qualified technical and
management personnel for each of our segments, including our engineers, computer
programmers and personnel with security clearances required for classified work.
In addition, our future success will depend in part on our ability to identify,
recruit and retain additional qualified personnel, including individuals with
security clearances required for classified work. The loss of any key personnel
could negatively affect our business, financial condition and results of
operations. Our employees generally have many other job opportunities, and there
is intense competition for their services. Consequently, we strive to maintain
an entrepreneurial work environment and provide financial incentives to attract
and retain our key personnel. We cannot guarantee that we will be able to
continue to attract and retain personnel with the advanced technical and
security clearance qualifications necessary for the development of our business.
WE COMPETE IN HIGHLY COMPETITIVE MARKETS AGAINST MANY COMPANIES THAT ARE
LARGER, BETTER FINANCED AND BETTER KNOWN THAN TITAN.
Our businesses operate in highly competitive markets. Many of our
competitors are larger, better financed and better known companies who may
compete more effectively than us. We believe we must continue to expand our
defense information technology business so that we can remain price competitive
and compete for larger contracts. For that reason, we are continuing to look for
acquisition candidates. Our commercial businesses compete against other
technologies as well as against companies with similar products. In order to
remain competitive, we must invest to keep our products technically advanced and
compete on price and on value added to our customers. Our ability to compete may
be adversely affected by limits on our capital resources and our ability to
invest in maintaining and expanding our market share. Any adverse financial
developments could make us a less effective competitor.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR ACQUISITIONS OF OTHER COMPANIES.
Since January 1, 1998, including our acquisitions of Advanced Communication
Systems, Pulse Engineering and LinCom Corporation in 2000, we have acquired ten
defense information technology companies as part of our consolidation strategy
for our defense business. Five of these ten transactions were structured as
stock-for-stock pooling of interests transactions. In addition, since
January 1, 1999, we have acquired four information technology services and
solutions companies as part of Cayenta's development of its total services
provider offering. We closed our acquisition of Advanced Communication Systems
on February 25, 2000. Advanced Communication Systems itself has acquired
multiple companies, most recently in September 1999. In March 2000, we closed
two acquisitions, LinCom Corporation and Pulse Engineering. The acquisition and
integration of new companies involves risk. The integration of
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<PAGE>
acquired businesses may be costly and may result in a decrease in our revenues
or a decrease in the value of our common stock for the following reasons, among
others:
- we may need to divert more management resources to integration than we
planned, which may adversely affect our ability to pursue other more
profitable activities;
- the difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations, integrating personnel
with disparate business backgrounds and combining different corporate
cultures;
- we may not eliminate as many redundant costs as we anticipated in
selecting our acquisition candidates; and
- one or more of our acquisition candidates also may have liabilities or
adverse operating issues that we failed to discover through our due
diligence prior to the acquisition.
Consequently, our recent acquisitions may not improve our business, financial
condition and results of operations in the short-term or long-term as we expect
them to do.
We intend to continue to look for complementary businesses or technologies
to acquire so that we can expand our core businesses. However, we may not find
any more attractive candidates or may find that the acquisition terms are not
favorable to us. In addition, we may compete with other companies for these
acquisition candidates. Instability in the U.S. securities markets and
volatility in our stock price may make acquisitions with our stock more
expensive. We also may not adequately assess the risks inherent in a particular
acquisition candidate or correctly assess the candidate's potential contribution
to our financial performance. Accordingly, our acquisition strategy may not
improve our overall business, financial condition and results of operations and
could weaken them.
WE MAY INCUR SIGNIFICANT COSTS IN PROTECTING OUR INTELLECTUAL PROPERTY.
As a policy, we seek to protect our proprietary technology and inventions
through patents, copyrights, trade secret law and other legal protections. While
our patent portfolio is valuable, our financial success ultimately depends upon
our ability to deliver products and services that meet customer needs, not on
intellectual property laws. We may, however, incur significant expense both in
protecting our intellectual property and in defending or assessing claims with
respect to intellectual property owned by others. Any patent or other
infringement litigation by or against us could have an adverse effect on our
business, financial condition and results of operations. We also could be forced
to modify or abandon one or more planned or current products based upon our
assessment of intellectual property risks or actual or threatened claims by
other companies.
On January 6, 2000, Ion Beam Applications s.a., a Belgian corporation, and
some of its U.S. subsidiaries filed an action for declaratory judgment in a
federal court in Virginia against us relating to our patent for our SureBeam
technology. The action attacks the validity of our patent, seeks a declaration
that Ion Beam Applications and its customers have not infringed any of the 62
claims in our patent, and alleges that we have engaged in unfair competition and
that our conduct constitutes patent misuse. We intend to vigorously defend our
patent position. However, a finding in favor of Ion Beam Applications in this
action could adversely affect our business, financial condition and results of
operations by reducing the growth of our Titan Scan business segment and
preventing us from generating the revenues that we expect from food
pasteurization.
OUR QUARTERLY AND ANNUAL FINANCIAL PERFORMANCE AND STOCK PRICE HAVE
HISTORICALLY FLUCTUATED AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY IN THE
FUTURE.
Our revenues are affected by factors such as the unpredictability of sales
and contracts awards due to the long procurement process for most of our
products and services, defense and intelligence budgets,
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competition and general economic conditions. Our product mix and unit volume,
our ability to keep expenses within budgets, our distribution channels and our
pricing affect our gross margins. These factors and other risk factors described
herein may adversely affect our financial performance within a period and cause
our financial results to fluctuate significantly on a quarterly or annual basis.
Consequently, we do not believe that comparison of our financial performance
from period to period is necessarily meaningful or predictive of our likely
future performance. It is possible that in some future quarter or quarters our
operating results will be below the expectations of public market analysts or
investors. If so, the market price of our common stock may decline
significantly.
From time to time, there may be significant volatility in the market price
for our common stock. Over the past three years, the market price of our common
stock has fluctuated over a wide range. During our last four complete fiscal
quarters, the highest sale price of our common stock on the New York Stock
Exchange was $48.38 and the lowest sale price of our common stock was $4.75. A
number of factors involving Titan and our industry could contribute to future
fluctuations in our stock price, including the risk factors described herein.
RISKS OF OUR INTERNATIONAL OPERATIONS, INCLUDING ECONOMIC CONDITIONS IN
EMERGING MARKETS, COULD ADVERSELY AFFECT THE PROSPECTS OF OUR COMMERCIAL
COMMUNICATIONS BUSINESS.
We sell commercial communications products and services primarily in
developing countries. Our revenues from sales of these products and services in
foreign countries represented 5% of our total revenues for the year ended
December 31, 1999. We expect our revenues from these activities in foreign
countries to increase. Although we generally sell our commercial communications
products and services in U.S. dollars, currency devaluations and adverse market
conditions in emerging markets have negatively affected demand for our
commercial communications products and services and, consequently, our revenues
for this segment. Our commercial communications products generally require
substantial capital investments, and our potential customers have not had the
capital resources to make these investments. We have assisted our established
marketing partner in Indonesia by providing trade credit that has subsequently
been extended with a final installment due in September 2000. Because of market
conditions in Indonesia and other factors, there is a risk that our customer in
Indonesia may not be able to pay this debt in accordance with the extended
terms. Further, we do not have the capital resources or tolerance of risk to
finance the purchase of our commercial communications products, and therefore
rely upon our customers' abilities to obtain financing. As a result, revenues in
this group may be adversely affected by economic conditions in emerging markets
and the unavailability of financing on reasonable terms. We also are
increasingly seeking opportunities to capture operating revenues from the use of
our systems to provide telephony services. These services generally are billed
in U.S. dollars but may in the future be billed in local currency. We do not
believe that our international operations currently subject us to material risks
from fluctuations in currency exchange rates. However, as we increase our
commercial communications activities in foreign countries, our risks from
fluctuations in currency exchange rates could increase.
Selling products or services in international markets also entails other
market, economic, cultural, legal and political risks, conditions and expenses.
These risks include:
- trade barriers;
- export and import restrictions and other applicable laws;
- political and economic instability;
- difficulties in collecting amounts owed to us; and
- difficulties in managing overseas employees and contractors.
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Any one of these factors or other international business risks could adversely
affect our financial performance.
OUR OPERATING RESULTS MAY SUFFER IF A SIGNIFICANT NUMBER OF OUR U.S. NAVY
CONTRACTS ARE DELAYED OR CANCELED.
A significant percentage of our products and services are predominantly sold
and performed under contracts with various parts of the U.S. Navy or with prime
contractors to the U.S. Navy. Although these various parts of the U.S. Navy are
subject to common budgetary pressures and other factors, our various U.S. Navy
customers exercise independent purchasing decisions. However, because of such
concentration of our contracts, we are vulnerable to adverse changes in our
business, financial condition and results of operations if a significant number
of our U.S. Navy contracts and subcontracts are simultaneously delayed or
canceled for budgetary or other reasons.
THE COVENANTS IN OUR NEW CREDIT FACILITY RESTRICT OUR FINANCIAL AND
OPERATIONAL FLEXIBILITY.
Our new credit facility contains covenants that restrict, among other
things, our ability to borrow money, make particular types of investments or
other restricted payments, swap or sell assets, merge or consolidate, or make
acquisitions. An event of default under our credit facility could allow the
lenders to declare all amounts outstanding to be immediately due and payable. We
have pledged substantially all of our consolidated assets and the stock of our
subsidiaries to secure the debt under our credit facility. If the amounts
outstanding under the credit facility were accelerated, the lenders could
proceed against our consolidated assets and the stock of our subsidiaries. Any
event of default, therefore, could have a material adverse effect on our
business. Our credit facility also requires us to maintain specified financial
ratios. Our ability to meet these financial ratios can be affected by events
beyond our control, and we cannot assure you that we will meet those ratios. We
also may incur future debt obligations that might subject us to restrictive
covenants that could affect our financial and operational flexibility or subject
us to other events of default.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY DISRUPTIONS IN OUR SUPPLY
OF PRODUCTS AND COMPONENTS OR SERVICES.
Because our internal manufacturing capacity is limited, we use contract
manufacturers. While we use care in selecting our manufacturers, this
arrangement gives us less control over the quality and price of products or
components than if we manufactured them ourselves. In some cases, we obtain
products from a sole supplier or a limited group of suppliers. Consequently, we
risk disruptions in our supply of key products and components if our suppliers
fail or are unable to perform because of strikes, natural disasters, financial
condition or other factors. Any material supply disruptions could adversely
affect our business, financial condition and results of operations as well as
our ongoing product cost structure.
OUR BUSINESS IS SUBJECT TO SIGNIFICANT ENVIRONMENTAL REGULATION.
We are subject to environmental and safety laws and regulations governing
the use, storage and disposal of hazardous substances or wastes and imposing
liability for the cleanup of contamination from these substances. We cannot
completely eliminate the risk of contamination or injury from these substances
or wastes, and, in the event of such an incident, we could be held liable for
any damages that result. From time to time, we have been notified of violations
of government and environmental regulations. We attempt to correct these
violations promptly without any material impact on our operations. In addition,
we may be required to incur significant additional costs to comply with
environmental laws and regulations in the future. These costs, and any future
violations or liability under environmental laws or regulations, could have a
material adverse effect on our business, financial condition and results of
operations.
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SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE OPEN MARKET BY
FORMER ADVANCED COMMUNICATION SYSTEMS STOCKHOLDERS COULD DEPRESS OUR STOCK
PRICE.
On February 25, 2000, we issued approximately 5,082,000 shares of our common
stock to complete the acquisition of Advanced Communication Systems. If former
stockholders of Advanced Communication Systems sell substantial amounts of our
common stock in the public market, including shares issued on the exercise of
outstanding options, the market price of our common stock could fall. These
sales might also make it more difficult for us to sell equity or equity-related
securities at a time and price that we would deem appropriate. In connection
with our acquisition of Advanced Communication Systems, we also assumed options
to acquire approximately 263,000 shares of our common stock. All of the shares
of our common stock issued to Advanced Communication Systems stockholders,
including those issued upon the exercise of options, are freely tradable without
restrictions or further registration under the Securities Act, unless they were
issued to an "affiliate" of Advanced Communication Systems as that term is
defined under the Securities Act, at the time the acquisition was submitted for
approval by Advanced Communication Systems stockholders. The term "affiliate"
would include directors, executive officers and some significant stockholders of
Advanced Communication Systems.
WE DO NOT ANTICIPATE THAT WE WILL PAY DIVIDENDS ON OUR COMMON STOCK.
We have not paid cash dividends on our common stock within the past three
years and we do not anticipate that we will pay cash dividends in the
foreseeable future. We may pay cash dividends only if we comply with financial
tests and other restrictions contained in agreements relating to our
indebtedness.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND IN DELAWARE
LAW COULD DISCOURAGE TAKEOVER ATTEMPTS WE OPPOSE EVEN IF OUR STOCKHOLDERS MIGHT
BENEFIT FROM A CHANGE IN CONTROL OF TITAN.
Provisions in our certificate of incorporation and bylaws and in the
Delaware General Corporation Law may make it difficult and expensive for a third
party to pursue a takeover attempt we oppose even if a change in control of
Titan would be beneficial to the interests of our stockholders. Our bylaws
permit our stockholders to take action by written consent instead of at a
meeting and to nominate directors or bring other business before stockholder
meetings only if they comply with advance notice and other procedural
requirements in our bylaws. Our board of directors currently has the authority
under our certificate of incorporation to issue up to 2,500,000 authorized
shares of its preferred stock in one or more series and to fix the powers,
preferences and rights of each series without stockholder approval. The ability
to issue preferred stock could discourage unsolicited acquisition proposals or
make it more difficult for a third party to gain control of Titan, or otherwise
could adversely affect the market price of our common stock. Further, as a
Delaware corporation, we are subject to section 203 of the Delaware General
Corporation Law. This section generally prohibits us from engaging in mergers
and other business combinations with stockholders that beneficially own 15% or
more of our voting stock, or with their affiliates, unless our directors or
stockholders approve the business combination in the prescribed manner.
WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN WHICH COULD DISCOURAGE HOSTILE
ACQUISITIONS OF CONTROL IN WHICH OUR STOCKHOLDERS MAY WISH TO PARTICIPATE.
In 1995, our board of directors adopted a "poison pill" shareholder rights
plan, which may discourage a third party from making a proposal to acquire Titan
which we have not solicited or do not approve, even if the acquisition would be
beneficial to our stockholders. As a result, our stockholders who wish to
participate in such a transaction may not have an opportunity to do so. Under
our rights plan, preferred share purchase rights, which are attached to our
common stock, generally will be triggered upon the acquisition, or actions that
would result in the acquisition, of 15% or more of our common stock by any
person or group. If triggered, these rights would entitle our stockholders other
than the acquiror to purchase, for the exercise price, shares of our common
stock having a market value of two times the exercise price. In addition, if a
company acquires us in a merger or other business combination not
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approved by the board of directors, these rights will entitle our stockholders
other than the acquiror to purchase, for the exercise price, shares of the
common stock of the acquiring company having a market value of two times the
exercise price.
ITEM 2. PROPERTIES
The Company's operations occupy approximately 1,363,000 square feet of space
located throughout the United States. The large majority of the space is office
space. Substantially all of the Company's facilities are leased. For lease
commitment information, reference is made to Note 9 to the accompanying
consolidated financial statements.
It is management's policy to maintain the Company's facilities and equipment
in good condition and at a high level of efficiency. Existing facilities are
considered to be generally suitable and adequate for the Company's present
needs. The Company owns substantially all of the machinery and equipment
employed by it in its business.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, defense contractors are subject to many
levels of audit and investigation by various government agencies. Further, the
Company and its subsidiaries are subject to claims and from time to time are
named as defendants in legal proceedings. The Company may also assert claims
from time to time. In the opinion of management, the amount of ultimate
liability or recovery with respect to these actions will not materially affect
the financial position or results of operations of the Company taken as a whole.
On January 6, 2000, Ion Beam Applications s.a., a Belgian corporation and
some of its U.S. subsidiaries filed an action for declaratory judgment in a
federal court in Virginia against us relating to our patent for our SureBeam
technology. The action attacks the validity of our patent, seeks a declaration
that Ion Beam Applications and its customers have not infringed any of the 62
claims in our patent, and alleges that we have engaged in unfair competition and
that our conduct constitutes patent misuse. We intend to vigorously defend our
patent position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No information is required by Item 4.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock and cumulative convertible preferred stock are
traded on the New York Stock Exchange ("NYSE"). As of March 3, 2000, there were
approximately 3,443 holders of record of the Company's common stock and 600
holders of record of the Company's preferred stock, excluding beneficial owners
of shares held in the names of brokers or other nominees. The closing prices for
the common and preferred stock on the NYSE as of March 3, 2000, were $37.81 and
$26.19, respectively. The quarterly market price ranges for the Company's common
and preferred stock on the NYSE in 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
COMMON STOCK ------------------- -------------------
FISCAL QUARTER HIGH LOW HIGH LOW
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
First....................................... $ 6.25 $ 4.75 $ 6.88 $ 5.50
Second...................................... 11.00 4.94 8.25 5.75
Third....................................... 14.63 9.38 6.56 3.81
Fourth...................................... 48.38 13.13 6.19 4.25
<CAPTION>
CUMULATIVE CONVERTIBLE 1999 1998
PREFERRED STOCK ------------------- -------------------
FISCAL QUARTER HIGH LOW HIGH LOW
- ---------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
First....................................... $11.63 $10.63 $13.38 $11.81
Second...................................... 14.25 11.25 14.38 13.19
Third....................................... 15.25 14.06 14.00 11.00
Fourth...................................... 32.00 14.31 11.94 11.25
</TABLE>
No dividends were paid on the Company's common stock in 1999 or 1998.
Regular quarterly dividends of $.25 per share were paid on the cumulative
convertible preferred stock in both years.
[THIS SPACE LEFT INTENTIONALLY BLANK]
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ITEM 6. SELECTED FINANCIAL DATA (in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues.................................. $624,803 $411,180 $328,117 $277,641 $268,606
Income from continuing operations before
cumulative effect of change in
accounting principle.................... 40,781 11,587 354 7,247 2,627
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle per common share:
Basic................................. $ .91 $ .28 $ (.01) $ .17 $ .05
Diluted............................... .80 .27 (.01) .17 .05
FINANCIAL POSITION:
Cash, cash equivalents and investments.... $ 13,364 $ 13,536 $ 18,626 $ 16,784 $ 15,069
Total assets.............................. 545,899 310,035 209,690 205,952 169,673
Line of credit, long-term................. 175,187 74,632 -- 2,688 1,821
Other long-term debt...................... 10,136 32,223 37,565 40,521 6,874
Redeemable preferred stock................ -- -- 3,000 3,000 --
Stockholders' equity...................... 160,642 95,594 79,275 86,654 74,188
Preferred dividends....................... 695 778 875 803 695
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
included in this document. (Amounts in thousands, except share and per share
data, or as otherwise noted.)
OVERVIEW AND OUTLOOK
We are a leading diversified technology company that is dedicated to
creating, building and launching technology-based businesses. We provide
information technology, communications and electron beam food pasteurization and
medical product sterilization systems and services. Through extensive
government-funded research and development activities since 1981 under contracts
totaling in excess of $2 billion, and through a company funded research and
development program, we have accumulated a broad portfolio of technologies,
intellectual property and expertise from which we have developed new businesses.
The core technologies supporting our SureBeam and Titan Wireless segments were
derived from technologies originally developed for government applications. We
believe that our government contracts business enhances our technical expertise
with sophisticated technologies and facilitates our ability to develop
commercial applications. We fund the development of commercial technologies from
our technology base both internally as well as in conjunction with partners. In
1996, for example, we contributed the core technology to form Servnow!
NetTechnologies, Inc., which is now known as IPivot, Inc. IPivot develops
software products that improve the performance of server farms, web sites and
software applications. We raised the capital required to fund IPivot from
venture capital sources. In November 1999, we received approximately $42 million
in cash for our approximate 8% equity interest when IPivot was acquired by Intel
Corporation. We plan to continue building our technology portfolio, identifying
commercial applications and entering into strategic relationships to further our
growth. We believe that each of our four core businesses -- Titan Systems,
Cayenta, SureBeam and Titan Wireless -- is well positioned in its respective
market for sustained long-term growth, and our business strategy is to spin
these businesses off to become independent stand-alone public companies.
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We have organized our business into five segments that reflect the specific
markets and industries in which we operate:
<TABLE>
<CAPTION>
SEGMENT SEGMENT DESCRIPTION
- ------- -------------------
<S> <C>
Titan Systems........... Information technology and communications solutions for
defense, intelligence, and other U.S. and allied
government agencies
Cayenta................. Total services provider of comprehensive information
technology solutions for its customers' business
functions, including e-business, finance, accounting,
customer billing and collection, contract management,
supply-chain management and equipment monitoring and
maintenance
SureBeam................ Electron beam food pasteurization and medical product
sterilization systems and services
Titan Wireless.......... Satellite communication systems and services which provide
telephony in developing countries
Emerging Technologies... Development of commercial applications for technologies
created by our other business segments through internal
and government-sponsored research and development programs
</TABLE>
Each of Titan Systems, SureBeam and Titan Wireless is a wholly owned
subsidiary of ours, and has a management team that has significant relevant
experience in the segment's particular business and market area. Consistent with
our strategy of aligning management motivation with stockholder interests, each
of these wholly owned subsidiaries has its own key employee stock option plan to
foster an entrepreneurial environment. We have created stock option plans for
each of Titan Systems, SureBeam and Titan Wireless. As of December 31, 1999,
Titan Systems had approximately 13% of its fully diluted common stock that had
been reserved for issuance under its plan, and each of SureBeam and Titan
Wireless had approximately 16% of their fully diluted common stock that had been
reserved for issuance under their respective plans.
We control approximately 97% of the voting power of Cayenta through our
ownership of 10 million shares of Class B common stock. Each Class A share is
entitled to one vote and each Class B share is entitled to ten votes, with Class
A and Class B shares voting together on all matters submitted to the vote of the
holders of common stock. Cayenta has filed a registration statement on Form S-1
for an initial public offering of an as yet undetermined number of shares of its
Class A common stock. If the proposed offering is completed, the 2,345,000
outstanding shares of Series A preferred stock of Cayenta will convert into
Class A common stock of Cayenta. We cannot be certain that Cayenta will be able
to complete its offering or complete the offering at the currently expected
offering size. We currently expect to retain in excess of 90% of the voting
power of Cayenta following its proposed initial public offering. In addition,
Cayenta has reserved 2,500,000 shares of Class A common stock under stock option
plans. Cayenta has also issued warrants for 495,800 shares of its Class A common
stock that have a weighted average exercise price of $13.11 per share.
TITAN SYSTEMS
Titan Systems provides and is expected to continue to provide the largest
percentage of our consolidated revenues. During the year ended December 31,
1999, Titan Systems had total revenues of $527.0 million, which represented 84%
of our consolidated revenues for the period. Titan System's revenues have
continued to grow internally and through our well-defined strategy of increasing
our core competencies through acquiring defense information technology companies
as part of the industry
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consolidation of defense companies. We expect to continue to support this
segment's growth through strategic acquisitions.
On February 25, 2000, we consummated a merger with Advanced Communication
Systems, Inc. in a stock-for-stock, pooling of interests transaction. Advanced
Communication Systems provides communications, information systems and aerospace
services and solutions primarily to U.S. government agencies. Advanced
Communication Systems itself has participated in the industry consolidation and
acquired another company in September 1999 in a cash transaction accounted for
as a purchase.
During 1999, Titan Systems acquired System Resources Corporation ("System
Resources") for a cash purchase price of approximately $35 million, subject to
certain post-closing working capital adjustments and offsets for indemnification
claims, consisting of approximately $33 million in cash paid at closing, less a
$0.5 million holdback, and $2 million in promissory notes which bear interest at
7% per annum and become fully payable, subject to purchase price adjustments and
indemnification claims, on June 9, 2000. In addition, we agreed to pay the
System Resources stockholders one-half of approximately $1.5 million in System
Resources receivables aged more than 720 days to the extent that any of those
receivables are collected within the two-year period following the closing date,
net of certain post-closing adjustments and indemnification obligations that are
offset against such collections. We also retired approximately $10 million in
System Resources indebtedness. Also in 1999, Titan Systems acquired Atlantic
Aerospace Electronics Corporation for cash of approximately $18 million, subject
to certain post-closing adjustments, plus potential payments of up to $3 million
contingent upon certain future contract awards, subject to offsets for
indemnification claims. We accounted for both of these acquisitions as purchases
and recorded approximately $44.2 million in goodwill.
During 1998, we completed five acquisitions, DBA Systems, Inc. on
February 27th, Validity Corporation on March 31st, Horizons Technology, Inc. on
June 30th, VisiCom Laboratories, Inc. on August 24th, and Delfin Systems, Inc.
on October 23rd. With the exception of the Validity acquisition, each of these
mergers was a stock-for-stock transaction accounted for as a pooling of
interests. We recorded goodwill of approximately $18.9 million in connection
with the Validity transaction.
Titan Systems' backlog, including both funded and unfunded backlog, was
approximately $924 million at December 31, 1999. Titan Systems also had priced
options of approximately $618 million at December 31, 1999. Although backlog
represents only business which is considered to be firm, we cannot guarantee
that cancellations or scope adjustments will not occur.
Titan Systems' operating margin is affected by the mix of contract types
(cost reimbursement, fixed-price or time and materials) as well as by the mix of
prime contracts versus subcontracts. Significant portions of Titan Systems'
contracts are cost reimbursement contracts, under which Titan Systems is
reimbursed for all actual costs, plus a fee or profit. The financial risks under
these contracts generally are lower than those associated with other types of
contracts, and margins are also typically lower. The U.S. government also has
awarded Titan Systems fixed-price contracts. Such contracts carry higher
financial risks because Titan Systems must deliver the contracted services at a
cost below the fixed price in order to earn a profit.
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<PAGE>
The following table summarizes the percentage of government revenues of
Titan Systems attributable to each contract type for the period indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
CONTRACT TYPE 1998 1999
- ------------- -------- --------
<S> <C> <C>
Cost Reimbursement......................................... 53.2% 52.6%
Fixed-Price................................................ 27.3 26.6
Time and Materials......................................... 19.5 20.8
----- -----
100.0% 100.0%
===== =====
</TABLE>
Revenues on cost reimbursement contracts are recognized to the extent of
costs incurred plus a proportionate amount of fees earned. Revenues on time and
materials contracts are recognized at the contractual rates as labor hours and
direct expenses are incurred. Revenues on fixed-price contracts are recognized
on the percentage-of-completion method based on costs incurred in relation to
total estimated costs.
CAYENTA
During the period between 1995 and January 1999, Cayenta developed its
systems integration and software application expertise. In January 1999, Cayenta
acquired substantially all of the assets of Transnational Partners II, LLC
("Transnational Partners"), a consulting company that focused on systems
integration and architecture, to broaden its capabilities in those areas and
access Transnational Partners' customer base. Cayenta acquired these assets for
an initial installment of $7.0 million in cash and 2,345,000 shares of its
convertible preferred stock. In February 2000, Cayenta paid off an additional
$2.8 million note that it issued as part of its acquisition of Transnational
Partners, plus 7% interest thereon. During late 1999, Cayenta acquired JB
Systems, Inc., an enterprise asset management company doing business under the
name Mainsaver ("Mainsaver"), that sells software that enables its customers to
efficiently manage their equipment maintenance processes. Cayenta acquired
Mainsaver for $13.2 million in cash, subject to certain post-closing
adjustments, of which $9.7 million was paid at the closing. Of the $3.5 million
withheld at the closing, $0.5 million is due in March 2000, and $3.0 million is
due in May 2001, plus 7.5% interest thereon in each case, after satisfaction of
possible working capital adjustments or indemnification obligations. In
addition, Cayenta paid approximately $1.9 million to reduce outstanding
indebtedness of Mainsaver. Also during late 1999, Cayenta acquired Assist
Cornerstone Technologies, Inc. ("Assist"), a company that sells e-commerce
software. Cayenta acquired Assist for 516,458 shares of its Class A common stock
and approximately $13 million in cash, of which $10 million was paid at the
closing. Of the $3.0 million withheld at the closing, $1.7 million is due in
March 2000 and $1.3 million is due in June 2001, plus 8% interest thereon in
each case, after satisfaction of possible working capital adjustments or
indemnification obligations. In addition, Cayenta paid approximately $3.2
million to retire outstanding indebtedness of Assist. Cayenta also acquired SFG
Technologies Inc. ("SFG Technologies"), a company that sells software to
utilities that utilities use to manage and monitor rate setting, billing,
collection and settlement transactions, during the fourth quarter of 1999.
Cayenta acquired SFG Technologies for $11.6 million in cash, of which $9.6
million was paid at the closing. Of the approximately $2.0 million placed into
escrow at the closing, approximately $0.5 million is due in March 2000 and $1.5
million is due in June 2001, after satisfaction of possible working capital
adjustments or indemnification obligations. In addition, Cayenta paid
approximately $3.1 million to retire outstanding indebtedness of SFG
Technologies. Cayenta intends to integrate the software and solutions developed
by these companies into its total services provider, or TSP, offering.
In September 1999, together with Sempra Energy Information Solutions, a
subsidiary of Sempra Energy, and modis, a company that focuses on configuring
customers' software applications, Cayenta
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<PAGE>
established Soliance, LLC, a joint venture that markets and delivers information
technology systems and solutions, including TSP offerings, to the utility
industry. Cayenta owns a 10% equity interest in Soliance and has a management
services agreement with Soliance under which it provides TSP services to
Soliance's customers.
Cayenta has historically derived its revenues from its consulting services
and from sales of its proprietary software applications. For the twelve months
ended December 31, 1999, Cayenta's revenues from consulting services represented
94.6% of its actual revenues and its revenues from software applications
represented 5.4% of its actual revenues. Cayenta provides its services primarily
on a fixed-time, fixed-price basis and, to a lesser extent, on a time and
materials basis. Under its fixed-time, fixed-price contracts, Cayenta recognizes
revenues on a percentage of completion basis. Cayenta's fixed-time, fixed-price
contracts usually require an advance payment from its customer with additional
payments due on achievement of specific milestones or on a predetermined
schedule. Revenues earned but not yet billed are recorded as unbilled
receivables. Under its time and materials contracts, Cayenta is paid at an
agreed upon hourly rate for the actual time spent on a customer's projects, and
revenues are recorded at the time services are performed. For the twelve months
ended December 31, 1999, Cayenta's consulting services revenues from fixed-time,
fixed-price contracts represented 70.0% of its actual consulting services
revenues and its consulting services revenues from time and materials contracts
represented 30.0% of its actual consulting services revenues. Each of Mainsaver,
Assist and SFG Technologies recognizes revenues from the sale of its proprietary
software when the software is delivered and accepted, in accordance with the
American Institute of Certified Public Accountants' Statement of Position 97-2,
"Software Revenue Recognition." The related software support and maintenance is
billed at the beginning of the maintenance period, recognized ratably over the
term of the applicable contract and recorded as deferred revenues until
recognized.
Cayenta intends to focus its sales and marketing efforts on its TSP
offering. As Cayenta expands the portion of its business that is based on its
TSP offering, Cayenta intends to enter into contracts with terms of between
three and five years. Cayenta expects revenues from its TSP offering to consist
of periodic recurring fees from ongoing services that will be recognized ratably
over the applicable contract's term. To the extent that Cayenta is able to enter
into contracts of this type, we expect that Cayenta's historic consulting
services and software applications types of revenues will decrease as a
percentage of total revenues.
Historically, Cayenta's interest expense has related to borrowings from us
to fund its acquisitions and working capital requirements. As of March 20, 2000,
Cayenta owed approximately $68.4 million to us under a credit facility on which
Cayenta will make quarterly interest payments at the greater of the rate of 10%
per annum or our effective weighted average interest rate under our senior
credit facility. Titan's effective weighted average interest rate is calculated
at any given period of time by multiplying the daily balance of Titan's total
bank debt outstanding times the applicable interest rate for that day, which
yields an interest expense amount for that day. The sum of the daily interest
expense amount is divided by the sum of the daily balances of the total bank
debt outstanding to yield a daily weighted effective interest rate which is then
multiplied by 365 to yield an annual weighted average interest rate. Cayenta may
not use the proceeds of its proposed initial public offering to pay amounts
outstanding under its credit facility with us.
Under its variable stock option plan, Cayenta has granted options to certain
employees who have agreed to resell shares purchased with those options to
Cayenta. Cayenta has recorded deferred compensation related to these option
grants in an aggregate amount of $203 through December 31, 1999. As of December
31, 1999, there are 654,500 options outstanding that are subject to this buyback
provision, for which Cayenta expects to record deferred compensation expense
equal to the difference between these options' exercise price of $0.36 per share
and the price per share in the proposed initial public offering multiplied by
all 654,500 options. Upon the occurrence of an initial public offering, the
options convert to fixed price options. Cayenta also issued 645,500 options to
employees not covered by this buyback option at exercise prices that were less
than the deemed fair market value of the underlying common shares on
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<PAGE>
the date of grant. Cayenta has recognized deferred compensation relating to
these grants of $638 and will amortize this deferred charge to expense over the
four-year vesting period of these options. We expect that there will be an
additional charge related to deferred compensation at the time the initial
public offering closes, and that this charge may be material.
If Cayenta completes its proposed initial public offering, Cayenta expects
to incur operating losses as it invests in the further development of its total
services provider, or TSP, offering. Cayenta expects its selling, general and
administrative expenses to increase significantly as it expands its recruiting
efforts, further develops and launches its TSP offering, initiates its branding
campaign, increases its direct sales staff and builds its administrative
infrastructure. Cayenta also expects its research and development expenses to
increase as it integrates recently acquired software into, and further develops,
its TSP offering.
SUREBEAM
SureBeam currently derives primarily all its revenues from providing turnkey
medical product sterilization systems for use at a customer's own facility and
from providing medical product sterilization services at Titan-owned facilities
in San Diego and Denver. SureBeam's San Diego and Denver facilities currently
run seven days per week, perform sterilization services for an average of 19
hours per day, and have performed over 100,000 hours of contract sterilization
services.
SureBeam currently derives a small portion of its revenues, and in the
future expects to derive significant revenues, from providing electron beam food
pasteurization services using our SureBeam technology. In December 1999, the
U.S. Department of Agriculture ("USDA") issued regulations setting forth
guidelines for the irradiation of meats. In anticipation of these regulations,
SureBeam built, at Cloverleaf Cold Storage's facility in Sioux City, Iowa, the
first electron beam food pasteurization facility in the United States. In
addition, SureBeam entered into multiyear arrangements with many of the major
poultry and meat providers in the United States, including Cargill, IBP, Tyson
Foods, Emmpak and Huisken Meats, among others. SureBeam's multiyear arrangements
with its customers generally provide that SureBeam will be the exclusive
provider of electronic pasteurization services whenever these companies elect to
use pasteurization technology. Our Sioux City, Iowa facility became operational
in December 1999 and once at full capacity will be able to pasteurize in excess
of 250 million pounds of product annually. In January 2000, SureBeam agreed to
build a second facility in Arkansas with a strategic partner. The strategic
partner will form a new entity to operate the SureBeam system, and SureBeam will
own a minority interest in the new entity. The facility is scheduled to become
operational in December 2000. Also in January 2000, SureBeam announced that it
had sold a SureBeam system to Japan's Mitsubishi Corp. that is expected to be
fully operational by the first quarter of 2001. In connection with the sale,
Mitsubishi will form a new entity to operate the SureBeam system, which is
expected to be initially used for medical product sterilization, SureBeam will
hold an equity interest in the new entity, and Mitsubishi will market SureBeam's
proprietary SureBeam technology in Japan. We cannot be certain that consumers
will accept irradiated foods and that meat and poultry providers and producers
will begin to use our pasteurization services. We also cannot guarantee the
volume of beef or poultry that meat and poultry providers and producers will
elect to have electronically pasteurized.
Together with a strategic partner, we are currently building a facility in
Hilo, Hawaii that will use our SureBeam technology for the disinfestation of
fruits and vegetables produced in Hawaii. SureBeam will receive revenues from
the installation of our system in the plant and has an option to purchase up to
a 20% minority equity interest in the entity operating the facility, which will
receive revenues from disinfestation services. We cannot be certain that the
facility will attain market acceptance or generate significant revenues that
will be realized by SureBeam through profit allocations if SureBeam exercises
its option to purchase an equity interest in the entity operating the facility.
On January 6, 2000, Ion Beam Applications s.a., a Belgian corporation, and
some of its U.S. subsidiaries filed an action for declaratory judgment in a
federal court in Virginia against us relating to our
43
<PAGE>
patent for our SureBeam technology. The action attacks the validity of our
patent, seeks a declaration that Ion Beam Applications and its customers have
not infringed any of the 62 claims in our patent, and alleges that we have
engaged in unfair competition and that our conduct constitutes patent misuse. We
intend to vigorously defend our patent position. However, a finding in favor of
Ion Beam Applications in this action could adversely affect our business,
financial condition and results of operation by reducing the growth of our
SureBeam business segment and preventing us from generating the revenues that we
expect from food pasteurization.
With respect to equipment sales, we recognize revenue on a percentage of
completion basis. Service revenues are recognized as the related services are
performed.
If irradiated foods gain market acceptance, SureBeam expects that its
revenues from pasteurization services would increase significantly. Depending
upon market demand, SureBeam may build additional food pasteurization
facilities, which would increase its level of capital expenditures.
TITAN WIRELESS
Titan Wireless develops and produces advanced satellite ground terminals,
satellite voice/data modems, networking systems and other products to support
telephony in developing countries for government and commercial customers
worldwide. Titan Wireless' technology relies heavily on our Demand Assigned
Multiple Access, or DAMA, technology, which enables more cost-effective and
efficient use of satellite transmission capacity by allowing each ground
terminal in a satellite network to communicate with any other terminal in the
network.
To date, Titan Wireless' revenues have been generated primarily through the
sale of products to commercial carriers of telephony services. Titan Wireless is
increasingly seeking to generate recurring service revenues from the telephony
systems it installs, and intends to derive at least 50% of all future revenues
from providing telecommunications services. In 1999, Titan Wireless formed Sakon
LLC with Sakon Corporation to provide carrier, direct dial telephony and
enhanced communications services, including voice over IP and Internet services,
in certain developing countries. In November 1999, Titan Wireless formed a
strategic relationship with Telecel International Limited, a large wireless
communications service provider to the African continent, to provide
satellite-based telecommunications services in Africa.
Titan Wireless' wholly-owned subsidiary, Titan Africa, Inc., is building a
satellite-based telephone system for Benin's national telephone company. Titan
Wireless, the prime contractor for the project, will install the major satellite
hub, the Very Small Aperture Terminal hardware, the billing system and network
control system. Alcatel of France is a major subcontractor to Titan Wireless on
this project, and will handle the delivery, installation and integration of the
digital cellular system, wireless local loop, fiber optic system and primary hub
switching technology of the system. Titan Wireless will build out the entire
system, which is expected to be completed in 2001, co-operate the system with
the national telephone company for approximately eight years, and then transfer
the operations to the national telephone company. A majority of the build-out
costs under this contract will be subcontract costs payable by Titan Wireless to
Alcatel. Titan Wireless' operating margin on work performed by subcontractors is
substantially lower than its operating margin on work it performs itself. In
addition to realizing revenue and profit on the equipment portion of the
project, Titan Wireless will share in the revenue and profit generated by the
system while it is co-operating the system.
With respect to systems sales, we recognize revenue on a percentage of
completion basis. For equipment sales, we recognize revenue on shipment. Service
revenues are recognized as the related services are performed. As Titan Wireless
increases the number of developing countries in which it provides international
long distance telecommunications, Titan Wireless expects its revenues and
operating income to increase.
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<PAGE>
EMERGING TECHNOLOGIES AND BUSINESSES
This segment's operating activities consist primarily of the ImagClear 5000
fingerprint digitization system business, our truck and train tracking and
monitoring system business, our information security business and other early
stage commercial businesses, including businesses in which we have less than a
20% equity interest. Emerging Technologies pursues commercial applications for
technologies originally developed in our Titan Systems' segment or developed by
defense companies we have acquired.
In November 1999, we received approximately $42 million in cash for our
approximate 8% equity interest in IPivot, Inc., which was acquired by Intel
Corporation. Up to an additional $3 million may be received by Titan within one
year subject to certain post-closing adjustments. IPivot develops software
products that improve the performance of server farms, web sites and software
applications. In 1996, we contributed the core technology to form Servnow!
NetTechnologies, Inc., which later changed its name to IPivot. IPivot was one of
the businesses contained in our Emerging Technologies segment. The entire amount
received from Intel was recorded as a gain.
[THIS SPACE LEFT INTENTIONALLY BLANK]
45
<PAGE>
CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $328,117 $411,180 $624,803
Cost of revenues............................................ 254,240 301,888 465,929
Selling, general and administrative......................... 47,859 66,387 102,960
Research and development.................................... 7,466 5,590 6,690
Acquisition related charges and other....................... 8,510 9,891 (28,880)
-------- -------- --------
Operating profit............................................ 10,042 27,424 78,104
Interest expense, net....................................... 5,754 8,821 12,938
Income tax provision........................................ 3,934 7,016 24,385
Cumulative effect of change in accounting principle, net.... -- (19,474) --
Loss from discontinued operations, net...................... (17,930) (7,444) (5,600)
-------- -------- --------
Net income (loss)........................................... $(17,576) $(15,331) $ 35,181
======== ======== ========
</TABLE>
SEGMENT FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
TITAN SYSTEMS
Revenues.................................................. $277,880 $367,151 $526,952
Operating profit.......................................... 9,830 34,341 35,434
SOFTWARE SYSTEMS
Revenues.................................................. 17,374 21,470 45,922
Operating profit.......................................... 4,580 5,137 6,962
SUREBEAM
Revenues.................................................. 8,254 11,184 14,295
Operating profit (loss)................................... (204) 1,121 2,039
TITAN WIRELESS
Revenues.................................................. 18,405 6,717 27,325
Operating profit (loss)................................... (1,074) (6,732) 5,063
EMERGING TECHNOLOGIES AND BUSINESSES
Revenues.................................................. 6,204 4,658 10,309
Operating profit (loss)................................... (286) 34 43,023
CORPORATE................................................... (2,804) (6,477) (14,417)
-------- -------- --------
TOTAL REVENUES.............................................. $328,117 $411,180 $624,803
TOTAL OPERATING PROFIT...................................... $ 10,042 $ 27,424 $ 78,104
</TABLE>
[THIS SPACE LEFT INTENTIONALLY BLANK]
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<PAGE>
AS A PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 77.5 73.4 74.6
Selling, general and administrative......................... 14.6 16.1 16.4
Research and development.................................... 2.3 1.4 1.1
Acquisition related charges and other....................... 2.5 2.4 (4.6)
----- ----- -----
Operating profit............................................ 3.1 6.7 12.5
Interest expense, net....................................... 1.8 2.1 2.1
Income tax provision........................................ 1.2 1.7 3.9
Cumulative effect of change in accounting principle, net.... -- (4.8) --
Loss from discontinued operations, net...................... (5.5) (1.8) (.9)
----- ----- -----
Net income (loss)........................................... (5.4)% (3.7)% 5.6%
===== ===== =====
</TABLE>
Historically, we operated our business in five segments -- Information
Technologies, Software Systems, Medical Sterilization and Food Pasteurization,
Communications Systems and Emerging Technologies and Businesses. We have renamed
three of our five historical segments as follows: Information Technologies has
been renamed Titan Systems, Medical Sterilization and Food Pasteurization has
been renamed SureBeam and Communications Systems has been renamed Titan
Wireless. All of our segments are comprised of multiple operating entities.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
CONSOLIDATED. Our consolidated revenues increased from $328.1 million in
1997 to $411.2 million in 1998 and from $411.2 million in 1998 to $624.8 million
in 1999. Increased revenues were reported across all business units in 1999,
with the most notable increases in our Titan Wireless segment and our Software
Systems segment, with revenue increases of 307% and 114%, respectively in 1999.
Revenue growth in 1999 was primarily attributable to the impact of the
acquisition of Semcor, Inc. ("Semcor") made in June 1998, and the acquisitions
of System Resources Corporation and Atlantic Aerospace Electronics Corporation
made in 1999 in our Titan Systems segment, the acquisition of substantially all
of the assets of Transnational Partners II and other new business by Cayenta,
and shipments of hardware to Benin, Africa in our Titan Wireless segment.
Revenue growth in 1998 was primarily attributable to the impact of acquisitions
made and integrated into our Titan Systems segment, work performed on new
business in the Software Systems segment, and the near-completion of two
SureBeam systems in our SureBeam segment.
TITAN SYSTEMS. Titan Systems' revenues increased from $277.9 million in
1997 to $367.2 million in 1998 and from $367.2 million in 1998 to $526.9 million
in 1999. The increase in 1999 primarily relates to an increase of $87.4 million
and $30.1 million of revenue generated from Semcor and System Resources
Corporation, respectively, which were purchased in June 1998 and June 1999,
respectively, and to a lesser extent, due to internal revenue growth experienced
in certain of our information technology businesses. The increase in 1998
primarily relates to $23.0 million of revenue generated from Validity, which was
purchased in March 1998, $35.1 million in revenue generated from Semcor, and to
a lesser degree, revenues related to a claim with the U.S. government for work
performed in a prior year, and internal revenue growth experienced in certain of
our product based businesses.
SOFTWARE SYSTEMS (INCLUDING CAYENTA). Software Systems' revenues increased
from $17.4 million in 1997 to $21.5 million in 1998 and from $21.5 million in
1998 to $45.9 million in 1999. The increase in 1999
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<PAGE>
resulted primarily from revenues generated from several new customers, the
largest of which was the government of Washington D.C., which revenues derived
were $15.3 million in 1999, and revenues of approximately $11.1 million derived
from Cayenta's contract with Sempra Energy. Revenues from the Federal Aviation
Administration accounted for approximately $8.9 million, $11.2 million and $8.5
million of Software Systems' revenues during 1997, 1998 and 1999, respectively.
Cayenta expects to diversify its customer base as it expands its sales and
marketing efforts and further develops and launches its TSP offering.
SUREBEAM. SureBeam's revenues increased from $8.3 million in 1997 to $11.2
million in 1998 and from $11.2 million in 1998 to $14.3 million in 1999. The
increase in 1999 is primarily related to revenues recognized, using the
percentage-of-completion method of accounting, on the Company's first x-ray
pasteurization system for Hawaii Pride, and to a lesser extent, due to the
completion of two medical sterilization in line systems. The revenue increase in
1998 resulted from the work performed on two medical sterilization systems noted
previously, which were ordered by customers in late 1997, and which were
substantially completed during 1998. Increased processing of medical products at
our two medical sterilization facilities also contributed to this revenue growth
in 1998. Revenues in 1997 were also favorably impacted by increased processing
of medical products as well as the sale of our turnkey sterilization systems to
Guidant Corporation and Baxter Healthcare.
TITAN WIRELESS. Titan Wireless' revenues decreased from $18.4 million in
1997 to $6.7 million in 1998 and increased from $6.7 million in 1998 to $27.3
million in 1999. The increase in 1999 revenues was due primarily to the
shipments of hardware for a telecommunications systems Titan Wireless is
building in Benin, Africa, and, to a lesser extent, the launching of
international long distance service by Titan's consolidated joint venture, Sakon
LLC in the countries of El Salvador, Cameroon, Jordan, Kuwait and Saudi Arabia.
The decline in 1998 revenues was due primarily to the decreased shipments made
on our contract with Pasifik Satelit Nusantara for telephony units in Indonesia,
resulting from the political and economic conditions in Indonesia.
EMERGING TECHNOLOGIES AND BUSINESSES. Emerging Technologies' revenues
decreased from $6.2 million in 1997 to $4.7 million in 1998 and increased from
$4.7 million in 1998 to $10.3 million in 1999. The increase in 1999 was due to
increased shipments of digitized fingerprint systems and an increase in revenues
in our information security business. The decrease in 1998 was due primarily to
the wind-down of our environmental consulting business during the first quarter
of 1998, partially offset by increased sales volume of our fingerprint
digitization systems.
SELLING, GENERAL AND ADMINISTRATIVE
Our SG&A expenses increased from $47.9 million in 1997 to $66.4 million in
1998 and from $66.4 million in 1998 to $103.0 million in 1999. SG&A, as a
percentage of revenues, increased from 14.6% in 1997 to 16.1% in 1998 and from
16.1% in 1998 to 16.4% in 1999. The increases in 1998 and 1999 are primarily due
to increased amortization of goodwill related to the companies acquired in 1998
offset partially by the impact of cost reduction measures as well as economies
of scale and efficiencies that have been achieved. The increase in 1999 also
included a $1.8 million charge for an uncollected receivable. In early 1997, we
implemented a streamlining process of our administrative functions. This process
focused on eliminating redundancies, and resulted in increased efficiencies,
reduced infrastructures, and, ultimately, reduced costs. This process continued
throughout 1998 and 1999, and we intend to continue to seek these cost savings.
RESEARCH AND DEVELOPMENT
Our R&D expenses decreased from $7.5 million in 1997 to $5.6 million in 1998
and increased from $5.6 million in 1998 to $6.7 million in 1999. The increased
level of R&D expenditures in 1999 was primarily related to increased development
costs for certain imaging and video processing products. The reduced
48
<PAGE>
level of R&D expenditures in 1998 primarily reflects the completion of certain
development and certification efforts of certain defense communications products
within our Titan Systems segment which were substantially completed in 1997.
OPERATING PROFIT
CONSOLIDATED. Our operating profit increased from $10.0 million in 1997 to
$27.4 million in 1998 and increased from $27.4 million in 1998 to $78.1 million
in 1999. Our operating profits have been significantly impacted by a number of
factors in each of 1997, 1998 and 1999. The 1999 operating results include a net
credit of $28.9 million, reflecting a $41.8 million gain we realized on the sale
of our minority ownership interest in IPivot, net of $12.9 million of
acquisition, integration, and reorganization costs. These costs are primarily
comprised of estimated costs to eliminate duplicate leased facilities, including
lease cancellation costs, employee termination costs related to approximately 32
employees, employee relocation costs, and the write-down of certain assets, as
well as direct professional fees related to the reorganization and integration
of certain businesses within our Titan Systems subsidiary. In addition, our 1999
operating results include a $3.9 million charge related to previously
capitalized software development costs as well as a $1.8 million charge for an
uncollected receivable from the Australian Navy. The 1998 operating results
include a charge of $9.9 million primarily related to the direct transaction
costs incurred on the Delfin, VisiCom, Horizons and DBA mergers, and to a lesser
degree certain costs incurred to integrate these businesses into us, as well as
certain integration costs incurred in other business segments. The 1997
operating results include a charge of $9.8 million related primarily to
provisions taken to reflect certain asset impairments and an estimated
environmental liability pertaining to a DBA manufacturing facility which is held
for sale, and also includes a $1.9 million charge for acquired in-process
research and development costs incurred in connection with the acquisition of RF
Microsystems, Inc..
TITAN SYSTEMS. Titan Systems' operating profit increased from $9.8 million
in 1997 to $34.3 million in 1998 and increased from $34.3 million in 1998 to
$35.4 million in 1999. The 1999 operating results include a charge of $4.7
million of acquisition, integration and reorganization costs primarily comprised
of costs to eliminate duplicate facilities, lease termination costs and employee
termination and relocation costs and a charge of $3.9 million to write off
previously capitalized software development costs and a $1.8 million charge for
an uncollected receivable. The 1998 operating income includes a charge of $7.2
million related to $6.8 million of special acquisition and integration related
charges principally comprised of direct transaction and integration costs
incurred by us in connection with the mergers of DBA, Horizons, VisiCom and
Delfin and $0.4 million of costs incurred to file a registration statement with
the SEC which was ultimately withdrawn. The 1997 operating income includes
charges of $9.8 million related to the write down of property held for sale, an
estimated environmental liability for DBA, which we acquired during 1998 and for
which we recorded a special charge of $3.0 million during 1997, certain other
asset write-downs recorded in connection with the acquisition of DBA and a
$1.9 million charge for acquired in-process research and development costs.
Excluding the impact of these charges, Titan Systems' operating income increased
from $21.5 million in 1997 to $41.5 million in 1998 and increased from
$41.5 million in 1998 to $45.8 million in 1999. The reduced operating margins in
1999 reflects the increased utilization of subcontractors, resulting in lower
operating margins, and increased planned investments in research and development
for certain imaging and video processing products. We expect to continue this
level of increased research and development expenditures in fiscal 2000. The
increased operating income in 1998 is primarily a result of the increased
revenue volumes.
SOFTWARE SYSTEMS (INCLUDING CAYENTA). Software Systems' operating profit
increased from $4.6 million in 1997 to $5.1 million in 1998 and from $5.1
million in 1998 to $7.0 million in 1999. Included in the 1999 operating results
is a $2.1 million charge related to reorganization and severance costs we
incurred primarily during the fourth quarter to restructure and wind-down our
Year 2000 business unit. Employee termination costs, facilities costs and lease
termination costs comprised a substantial portion of this charge. Excluding the
impact of this charge, Software Systems' operating profit increased from $4.6
million in 1997
49
<PAGE>
to $5.1 million in 1998 and to $9.1 million in 1999. The increased operating
profit in 1999 and 1998 reflects the impact of the increased revenues discussed
previously.
SUREBEAM. SureBeam's operating results improved from an operating loss of
$0.2 million in 1997 to operating profit of $1.1 million in 1998 and from $1.1
million operating income in 1998 to $2.0 million in 1999. Included in the 1999
operating results is $0.8 million of reorganization and restructuring costs
consisting primarily of employee termination and relocation costs. Excluding the
impact of these costs, SureBeam's operating income increased from an operating
loss of $0.2 million in 1997 to operating income of $1.1 million in 1998 and to
operating income of $2.9 million in 1999. Increased operating profits in 1999
and 1998 were a result of the increased revenue volumes noted previously.
Management does not expect this trend to continue due to increased investments
to be made in this business.
TITAN WIRELESS. Titan Wireless' operating performance declined from an
operating loss of $1.1 million in 1997 to an operating loss of $6.7 million in
1998 and improved from an operating loss of $6.7 million in 1998 to an operating
profit of $5.1 million in 1999. The 1998 operating results include special
charges of $2.4 million including pre-operating and start-up costs of $0.5
million related to the Titan Africa, Benin operation, $1.4 million related to
employee termination and retention costs related to the reorganization of this
business, as well as approximately $0.5 million related to costs on the
previously mentioned registration statement with the SEC which was ultimately
withdrawn. Excluding the impact of these charges, operating loss, as adjusted,
was $4.3 million in 1998 compared to an operating loss of $1.1 million in 1997
and operating income of $5.1 million in 1999. The improved operating income in
1999 is directly related to the increase in revenues noted previously. The
increase in operating loss in 1998 was attributable to the decline in revenues
noted above.
EMERGING TECHNOLOGIES AND BUSINESSES. Emerging Technologies' operating
results improved from an operating loss of $0.3 million in 1997 to operating
income of $0.03 million in 1998 and improved from operating income of $0.03
million in 1998 to operating income of $43.0 million in 1999. Included in the
1999 operating results is a $41.8 million gain resulting from the sale of the
Company's approximate 8% equity interest in IPivot. Excluding the impact of this
gain, operating income was $1.2 million. The improved operating results in 1999
and 1998 were due primarily to the increase in revenues discussed above.
INTEREST EXPENSE, NET
Our net interest expense increased from $5.8 million in 1997 to
$8.8 million in 1998 and from $8.8 million in 1998 to $12.9 million in 1999. Net
interest expense has increased over 1997, 1998 and 1999, primarily as a direct
result of the increased level of our borrowings, primarily to fund the growth in
the various segments, and to fund the acquisitions of System Resources
Corporation and Atlantic Aerospace Electronics Corporation in 1999. Borrowings
in 1998 to fund the acquisitions of Semcor, Inc. and Advanced Management
Incorporation also resulted in increased interest expense. In 1998 and 1997, the
principal component of interest expense was related to our convertible senior
subordinated debentures, all of which had been converted into our common stock
or redeemed by the end of the fourth quarter of 1999. Borrowings from our
primary bank lines of credit, excluding working capital lines from acquired
companies, averaged $10.8 million in 1997 at a weighted average rate of 8.1%,
$28.9 million at a weighted average interest rate of 7.7% during 1998, and $88.8
million at a weighted average interest rate of 7.9% during 1999. Also included
in interest expense is interest on our deferred compensation and retiree medical
obligations. Interest expense related to these items was $0.8 million for 1997,
$0.9 million for 1998, and $1.1 million for 1999. We expect interest expense to
increase due to increased levels of borrowings, acquisitions and investments in
commercial businesses.
50
<PAGE>
INCOME TAXES
Income taxes reflect effective rates of 92% in 1997 and 38% in 1998 and 37%
in 1999. The difference between the actual provision and the effective rate
(based on the United States statutory tax rate) was due primarily to the
utilization of net operating losses in 1999 and to state income taxes in 1998.
The increased rate in 1997 was due primarily to significant non-deductible
expenses which were recorded for financial reporting purposes, as well as the
inability to offset losses of certain acquired entities with income of other
entities. We anticipate that our effective income tax rate will remain stable in
the foreseeable future at an approximate rate of 30% to 40%, before the impact
of specific transactions such as acquisitions.
NET INCOME (LOSS)
Our reported net loss increased from $17.6 million in 1997 to $15.3 million
in 1998 and from a net loss of $15.3 million in 1998 to net income of $35.2
million in 1999. Included in the net income for 1999 is the $41.8 million gain
from the sale of the Company's interest in IPivot, net of certain integration,
acquisition and reorganization costs of $12.9 million. Included in the net
income for 1999 and the net losses for 1997 and 1998 are net losses from
discontinued operations of $5.6 million, $17.9 million and $7.4 million,
respectively, relating to our winding down of our access control systems and
broadband communications businesses as well as operations discontinued by
certain of the companies acquired by us during 1998. In addition, we adopted
Statement of Position (SOP) 98-5 ("Start-up Costs") in 1998, which resulted in a
$19.5 million write-off of capitalized start-up costs recorded as a cumulative
effect of a change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
We have used our cash principally to acquire businesses and fund our capital
expenses and working capital. We fund our cash requirements principally from
cash flows from our operations, borrowings under our senior credit facility and
the proceeds from the sale of securities.
Our operating activities provided cash of $17.9 million in 1999, primarily
due to the cash received from the IPivot sale, partially offset by an increase
in receivables and inventory. Our investing activities used cash of
$107.3 million in 1999, primarily to fund the acquisitions that we completed
during that period. Our financing activities provided cash of $93.5 million,
which amount primarily reflected additional borrowings under our then-effective
senior credit facility. We replaced that senior credit facility on February 23,
2000 with a new $275 million facility funded by a new bank syndicate, with
Credit Suisse First Boston as administrative agent.
The new credit facility is secured by substantially all of our and our
subsidiaries' assets and guaranteed by substantially all of our subsidiaries.
The $275 million facility is comprised of a seven-year senior secured multi-draw
term loan facility in an aggregate principal amount of up to $75 million, a
six-year senior secured term loan facility in an aggregate principal amount of
$100 million, and a five-year senior secured revolving credit facility in an
aggregate principal amount of up to $100 million. Loans made under the
multi-draw term loan facility would mature on the sixth anniversary of the
closing date of the new credit facility, and amortize as follows: 2.5% quarterly
in year two of the credit facility, 3.75% quarterly in year three of the credit
facility, 5% quarterly in year four of the credit facility, 6.25% quarterly in
year five of the credit facility and 7.5% quarterly in year six of the credit
facility. Loans made under the term loan facility would mature on the seventh
anniversary of the closing date of the new credit facility, and amortize as
follows: 0.25% quarterly for years one through six of the credit facility and
23.5% quarterly for year seven of the credit facility. Under each of the term
loan facilities and the revolving facility, we would have the option to borrow
at the bank's base rate or at adjusted LIBOR plus, in each case, an applicable
ratio based on the ratio of our total debt to EBITDA (earnings before interest
and taxes and depreciation and amortization). The agreement contains financial
covenants that set maximum debt to EBITDA limits and require us to maintain
minimum interest and fixed charge coverages and levels of net worth. Cayenta and
51
<PAGE>
its subsidiaries shall cease being guarantors under the new credit facility, and
their assets shall no longer be collateral for the new bank syndicate if Cayenta
completes its proposed initial public offering.
On February 9, 2000, Titan Capital Trust, our wholly owned subsidiary,
issued 4 million convertible preferred securities (Remarketable Term Income
Deferrable Equity Securities, "HIGH TIDES") at $50 per security, for an
aggregate total of $200 million, with an overallotment exercised on
February 16, 2000 of an additional 1 million securities, for an additional $50
million. The trust used the proceeds from the sale of the HIGH TIDES to purchase
from us 5 3/4% Convertible Senior Subordinated Debentures, due February 15,
2030. The debentures have the same financial terms as the HIGH TIDES. The HIGH
TIDES will accrue distributions of 5 3/4% per annum, with quarterly
distributions to be paid in arrears on February 15, May 15, August 15 and
November 15, commencing May 15, 2000. The trust's ability to pay distributions
on the HIGH TIDES is solely dependent on its receipt of interest payments from
us on the debentures. Approximately five years after issuance of the HIGH TIDES,
the HIGH TIDES may be remarketed, which means that a remarketing agent will
attempt to establish an annual distribution rate, conversion price and
redemption features for the HIGH TIDES that are consistent with a price per HIGH
TIDES equal to 101% of its liquidation preference and also are most favorable to
us. The 5 3/4% per annum rate will be applicable from the date of original
issuance to, but excluding the reset date established by the remarketing agent.
The reset date is any date (a) not later than February 15, 2005, or the final
reset date, or, if the day is not a business day, the next succeeding day, and
(b) not earlier than 70 business days prior to February 15, 2005, as may be
determined by the remarketing agent, in its sole discretion. On or after the
reset date, the applicable rate will be the term rate established by the
remarketing agent based on the outcome of the remarketing. We can, on one or
more occasions, defer the interest payments due on the debentures (which will
result in a deferral of the distribution payments due on the HIGH TIDES) for up
to 20 consecutive quarters unless an event of default under the debentures has
occurred and is continuing. The holders of the HIGH TIDES may convert each
security into shares of common stock of Titan at the initial rate of 1.0076
shares of common stock for each HIGH TIDES (equivalent to an initial conversion
price of $49.625 per share of common stock). We may redeem the debentures (which
will result in the redemption of the HIGH TIDES) in whole or in part, at any
time on or after February 20, 2003 until but excluding the tender notification
date established in the remarketing agreement, at a redemption price equal to
101.44% of the principal amount of the debentures, declining to 100% of the
principal amount of the debentures on or after February 20, 2004, plus any
accrued and unpaid interest; and after the reset date, in accordance with the
term call projections, if any, established in the remarketing or, upon a failed
final remarketing, on or after the third anniversary of the reset date at a
redemption price equal to 100% of the principal amount of debentures, plus any
accrued and unpaid interest.
We used $100 million of the new term loan facility and part of the total
$250 million proceeds from the sale of the debentures to repay all outstanding
balances on our previous credit facility, which aggregated approximately $152
million. In addition, we used proceeds of approximately $74 million from the
HIGH TIDES proceeds to repay existing indebtedness of Advanced Communication
Systems when we closed the acquisition on February 25, 2000, and to pay certain
acquisition-related expenses. As of March 8, 2000, we have $100 million in
outstanding borrowings on our secured term loan facility, $1.9 million in
letters of credit and $97 million in cash and cash equivalents.
We have a receivable of approximately $3.9 million from our Indonesian
customer, PSN, due on September 30, 2000, which accrues interest at 10% per
annum. At any time prior to the payment of the obligation in full, we may elect
to convert all or a portion of the principal and interest due into common stock
of PSN, based on its then current market value. In addition, if PSN sells any of
its interest in its wholly-owned subsidiary, subject to other third party
obligations, PSN is required to immediately pay to us the lesser of the $3.9
million or the total amount of the outstanding balance owed to us. In the event
that PSN obtains financing from additional sources, the payment terms of its
obligations to us will be renegotiated at that time. Titan received a payment of
$3.9 million from PSN in the third quarter of 1999, in accordance with the
negotiated payment terms.
52
<PAGE>
In September 1999, Cayenta established Soliance, LLC, a joint venture formed
with Sempra Energy Information Solutions, a subsidiary of Sempra Energy, and
modis. Cayenta invested $5 million in cash in this joint venture.
In November 1999, we received approximately $42 million in cash for our
approximate 8% equity interest in IPivot, Inc. when IPivot was acquired by Intel
Corporation. IPivot develops software products that improve the performance of
server farms, web sites and software applications, and was one of the businesses
in our Emerging Technologies segment. In 1996, we formed Servnow!
NetTechnologies, Inc., which later changed its name to IPivot, and contributed
its core technology. We are entitled to receive up to approximately $3 million
in additional purchase price upon expiration of the escrow arrangements for this
transaction.
During the fourth quarter of 1999, Cayenta acquired Mainsaver, Assist and
SFG Technologies to further develop its TSP offering. Cayenta paid cash at the
closings for these acquisitions of approximately $37.5 million, which went to
the applicable sellers as well as to retire outstanding indebtedness and redeem
outstanding redeemable preferred stock of the entities acquired. Holdbacks and
other amounts due, subject to post-closing adjustments and indemnification
obligations, within the next eighteen months related to these acquisitions total
$8.5 million at December 31, 1999.
On December 10, 1999, the Company's wholly owned subsidiary, Titan
Africa, Inc. ("Titan Africa"), in connection with its contract to build a
satellite-based telephone system for the national telephone company of Benin,
Africa, entered into a Loan Facility Agreement for up to 30.0 billion Francs CFA
(the currency of the African Financial Community), equivalent to approximately
$45.0 million U.S. dollars, with a syndicate of five banks, with Africa Merchant
Bank as the Arranger. This medium term financing is a non-recourse loan to Titan
Africa which is guaranteed by the national telephone company of Benin, Africa
and secured by the national telephone company's equipment and revenues related
to the project. The facility has a fixed interest rate of 9.5% and will be
repaid in seven equal semi-annual payments beginning on December 31, 2000, and
ending on December 31, 2003. The borrowings on this facility will be utilized to
fund the subcontractor costs incurred by Alcatel of France, a major
subcontractor to this project. The equipment provided by Titan Africa will be
paid for in seven equal semi-annual installments commencing December 31, 2000.
The terms of Titan Africa's agreement with the customer include, among other
things, a revenue sharing of total net receipts earned on this project for up to
a period of 9 years. If Titan Africa's proportionate interest of the revenue
sharing portion of the project exceeds these fixed semi-annual payments, the
amounts outstanding could be paid in full prior to December 31, 2003. As of
December 31, 1999, approximately $8 million was drawn on this facility.
As part of our strategy of seeking external financing to grow our commercial
businesses, our Cayenta subsidiary has filed a registration statement for an
initial public offering of its common stock. We cannot guarantee that Cayenta
will succeed in completing the offering, which may be adversely affected by
market conditions or other factors. We have extended a credit facility of up to
a maximum of $70.0 million to Cayenta under which Cayenta owed us approximately
$68.4 million as of March 20, 2000. Cayenta may not use the proceeds of its
initial public offering to pay amounts outstanding under its credit facility
with us.
Funding for the advancement of our strategic goals, including acquisitions
and continued investment in targeted commercial businesses and start-up
ventures, is expected to continue. We plan to finance these requirements from a
combination of sources, which include cash generation from our core businesses,
our new credit facility as described above and other available cash sources.
Management believes that the combination of net proceeds from the HIGH TIDES
offering, amounts available under the new credit facility and cash flow expected
to be generated from our operations will be sufficient to fund planned
investments and working capital requirements for at least the next twelve
months. However, we could elect, or we could be required, to raise additional
funds during that period and we may need to raise additional capital in the
future. Additional capital may not be available at all, or may not be available
on terms favorable to us. Any additional issuance of equity or equity-linked
securities may result in substantial
53
<PAGE>
dilution to our stockholders. Management is continually monitoring and
reevaluating its level of investment in all of its operations, specifically the
increased investment required in fiscal 2000 to further grow its commercial
businesses, and the financing sources available to achieve our goals in each
business area.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The principal objective of our asset/liability management activities is to
maximize net investment income, while maintaining acceptable levels of interest
rate risk and facilitating our funding needs. Our net investment income and
interest expense are subject to the risk of interest rate fluctuations. To
mitigate the impact of fluctuations in interest rates, we manage the structure
of the maturity of debt and investments. As of December 31, 1999, we did not
hold any material amounts of marketable securities. The amount of marketable
securities we hold fluctuates based upon our cash needs, including the use of
our available cash resources to fund acquisitions in furtherance of our
strategy. As a policy matter, we invest cash in excess of our cash needs for
limited periods in cash equivalents.
The following table provides information about our financial instruments
that are sensitive to changes in interest rates as of December 31, 1999. For
debt obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For terms relating to our
long-term debt, see Note 8 of the notes to our consolidated financial
statements.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 BEYOND TOTAL
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets: None
Liabilities:
Long-term debt, including debt
due within one year:
Fixed rate.................... $ 3,404 $ 3,765 $ 2,504 $ 2,286 $ -- $ -- $ 11,959
Average interest rate......... 8.35% 9.14% 9.41% 9.50% --% --% 9.04%
Variable rate................. $10,336 $13,562 $18,500 $22,437 $39,063 $35,625 $139,523
Average interest rate......... 8.70% 8.79% 8.78% 9.02% 9.44% 9.50% 9.18%
<CAPTION>
FAIR
VALUE
--------
<S> <C>
Assets: None
Liabilities:
Long-term debt, including debt
due within one year:
Fixed rate.................... $ 11,959
Average interest rate......... 9.04%
Variable rate................. $139,523
Average interest rate......... 9.18%
</TABLE>
On February 9, 2000, we received $250 million in proceeds from the issuance
of 5 million convertible preferred securities (Remarketable Term Income
Deferrable Equity Securities, "HIGH TIDES"). On February 23, 2000, we entered
into a credit agreement for $275 million of financing from a syndicate of
commercial banks which replaced our current credit facility. The terms of both
are more fully discussed in Note 16 of the notes to our consolidated financial
statements. We used $100 million of the new credit facility and part of the HIGH
TIDES proceeds to repay all outstanding balances on our previous credit
facility, which aggregated approximately $152 million. In addition, we used
proceeds of approximately $74 million from the HIGH TIDES proceeds to repay
existing indebtedness of Advanced Communication Systems when we closed the
acquisition on February 25, 2000, and to pay certain acquisition-related
expenses. The remaining HIGH TIDES proceeds were invested in commercial paper
with ratings of A1/P1 and a money market fund with a rating of Class A at
interest rates of 5.60% to 5.97% to fund operations. The funds may also be used
to fund our strategic goals, including acquisitions and continued investment in
targeted commercial businesses and start-up ventures. As of March 20, 2000
approximately $77 million remained invested in these investments at a weighted
average interest rate of 5.84%.
54
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... 56
Financial Statements:
Consolidated Statements of Operations..................... 57
Consolidated Balance Sheets............................... 58
Consolidated Statements of Cash Flows..................... 59
Consolidated Statements of Stockholders' Equity........... 60
Notes to Consolidated Financial Statements................ 61
Supporting Financial Schedule Covered by the Foregoing
Report of
Independent Public Accountants:
Schedule II -- Valuation and Qualifying Accounts.......... 97
</TABLE>
55
<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, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Titan Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and financial statement schedules is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Diego, California
January 31, 2000 (except with respect to
the matters discussed in Note 16,
as to which the date is March 30, 2000)
56
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues.................................................... $624,803 $411,180 $328,117
-------- -------- --------
Costs and expenses:
Cost of revenues.......................................... 465,929 301,888 254,240
Selling, general and administrative expense............... 102,960 66,387 47,859
Research and development expense.......................... 6,690 5,590 7,466
Acquisition related charges and other..................... (28,880) 9,891 8,510
-------- -------- --------
Total costs and expenses................................ 546,699 383,756 318,075
-------- -------- --------
Operating profit............................................ 78,104 27,424 10,042
Interest expense............................................ (14,125) (9,295) (6,779)
Interest income............................................. 1,187 474 1,025
-------- -------- --------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle....... 65,166 18,603 4,288
Income tax provision........................................ 24,385 7,016 3,934
-------- -------- --------
Income from continuing operations before cumulative effect
of change in accounting principle......................... 40,781 11,587 354
Cumulative effect of change in accounting principle, net of
taxes..................................................... -- (19,474) --
Loss from discontinued operations, net of taxes............. (5,600) (7,444) (17,930)
-------- -------- --------
Net income (loss)........................................... 35,181 (15,331) (17,576)
Dividend requirements on preferred stock.................... (695) (778) (875)
-------- -------- --------
Net income (loss) applicable to common stock................ $ 34,486 $(16,109) $(18,451)
======== ======== ========
Basic earnings (loss) per share:
Income (loss) from continuing operations.................. $ 0.91 $ 0.28 $ (0.01)
Cumulative effect of change in accounting principle....... -- (0.50) --
Loss from discontinued operations......................... (0.13) (0.19) (0.51)
-------- -------- --------
Net income (loss)......................................... $ 0.78 $ (0.41) $ (0.52)
======== ======== ========
Weighted average shares................................... 44,246 38,995 35,539
======== ======== ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations.................. $ 0.80 $ 0.27 $ (0.01)
Cumulative effect of change in accounting principle....... -- (0.48) --
Loss from discontinued operations......................... (0.11) (0.19) (0.51)
-------- -------- --------
Net income (loss)......................................... $ 0.69 $ (0.40) $ (0.52)
======== ======== ========
Weighted average shares................................... 51,030 40,336 35,539
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
57
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 13,364 $ 13,536
Accounts receivable -- net................................ 220,040 141,293
Inventories............................................... 15,640 9,229
Prepaid expenses and other................................ 9,381 3,134
Deferred income taxes..................................... 11,001 9,919
-------- --------
Total current assets.................................... 269,426 177,111
Property and equipment -- net............................... 43,269 33,746
Goodwill -- net of accumulated amortization of $13,058 and
$8,343.................................................... 210,894 88,310
Other assets -- net......................................... 21,753 10,223
Net assets of discontinued operations....................... 557 645
-------- --------
Total assets............................................ $545,899 $310,035
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit........................................... $ 10,035 $ 368
Accounts payable.......................................... 44,760 30,912
Acquisition debt.......................................... 4,800 3,000
Current portion of long-term debt......................... 3,791 1,668
Income taxes payable...................................... 9,857 1,104
Accrued compensation and benefits......................... 28,551 23,786
Other accrued liabilities................................. 53,797 24,427
Net liabilities of discontinued operations................ 7,142 5,872
-------- --------
Total current liabilities............................... 162,733 91,137
-------- --------
Line of credit.............................................. 175,187 74,632
-------- --------
Long-term debt.............................................. 10,136 32,223
-------- --------
Other non-current liabilities............................... 31,851 16,449
-------- --------
Commitments and contingencies
Minority interests.......................................... 5,350 --
-------- --------
Stockholders' Equity:
Preferred stock: $1 par value:
Cumulative convertible, authorized 2,500,000 shares,
$13,897 liquidation preference:
694,850 and 694,872 shares issued and outstanding..... 695 695
Series A junior participating: authorized 454,071
shares:
None issued........................................... -- --
Common stock: $.01 par value, authorized 100,000,000
shares, issued and outstanding: 50,362,222 and
41,530,266 shares....................................... 504 415
Capital in excess of par value............................ 147,296 116,001
Deferred compensation..................................... (738) --
Retained earnings (deficit)............................... 15,554 (18,938)
Cumulative foreign currency translation adjustment........ (33) --
Treasury stock (966,398 and 962,530 shares), at cost...... (2,636) (2,579)
-------- --------
Total stockholders' equity.............................. 160,642 95,594
-------- --------
Total liabilities and stockholders' equity.................. $545,899 $310,035
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
58
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations........................... $ 40,781 $ 11,587 $ 354
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Depreciation and amortization........................... 13,592 9,390 9,684
Deferred income taxes and other......................... 7,569 580 1,688
Write-off of assets, investments and environmental
accrual................................................ -- -- 9,846
Provision for doubtful accounts......................... 1,800 -- --
Write-off of capitalized software development costs..... 3,893 -- --
Write-off of acquired in-process research and
development costs...................................... -- -- 1,910
Poolings of interests................................... -- (109) 695
Deferred compensation charge............................ 103 -- --
Changes in operating assets and liabilities, net of
effects from businesses sold and acquired:
Accounts receivable................................... (54,336) (22,163) (13,819)
Inventories........................................... (6,271) (2,329) (1,229)
Prepaid expenses and other assets..................... (11,687) 2,788 (2,181)
Accounts payable...................................... 6,407 2,246 1,589
Income taxes payable.................................. 8,985 1,165 --
Accrued compensation and benefits..................... 1,566 6,969 1,737
Restructuring activities.............................. -- -- (815)
Other liabilities..................................... 5,495 (8,805) (1,388)
--------- -------- --------
Net cash provided by continuing operations.................. 17,897 1,319 8,071
--------- -------- --------
Loss from discontinued operations........................... (5,600) (7,444) (17,930)
Changes in net assets and liabilities of discontinued
operations................................................ 1,358 5,630 7,426
--------- -------- --------
Net cash used for discontinued operations................... (4,242) (1,814) (10,504)
--------- -------- --------
Net cash provided by (used for) operating activities........ 13,655 (495) (2,433)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (14,644) (6,530) (7,325)
Proceeds, net of transaction costs, from sale of
businesses................................................ -- -- 200
Payment for purchase of businesses, net of cash acquired.... (86,958) (65,854) (4,438)
Capitalized software development costs...................... (707) (2,339) (626)
Proceeds from sale of investments........................... -- 4,499 19,199
Purchase of investments..................................... (5,400) -- (15,410)
Other....................................................... 388 146 678
--------- -------- --------
Net cash used for investing activities...................... (107,321) (70,078) (7,722)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt........................................... 109,237 51,870 12,671
Retirements of debt......................................... (14,897) (2,331) (5,838)
Redemption of Series B Preferred Stock...................... -- (3,000) --
Deferred debt issuance costs................................ (3,494) (45) --
Stockholders' distributions................................. -- -- (3,164)
Proceeds from stock issuances............................... 3,936 24,411 15,129
Purchase of stock from benefit plan......................... -- -- (471)
Dividends paid.............................................. (695) (778) (875)
Other....................................................... (560) (145) (66)
--------- -------- --------
Net cash provided by financing activities................... 93,527 69,982 17,386
--------- -------- --------
Effect of exchange rate changes on cash..................... (33) -- --
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (172) (591) 7,231
Cash and cash equivalents at beginning of year.............. 13,536 14,127 6,896
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 13,364 $ 13,536 $ 14,127
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
59
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE CAPITAL
CONVERTIBLE IN EXCESS RETAINED
PREFERRED COMMON OF PAR DEFERRED EARNINGS
STOCK STOCK VALUE COMPENSATION (DEFICIT)
----------- -------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996...................... $695 $360 $ 83,271 $ -- $ 21,726
Conversion of subordinated debt.................. -- 5 1,597 -- --
Sale of common stock............................. -- 15 14,349 -- --
Stockholder distributions........................ -- -- -- -- (6,625)
Exercise of stock options and other.............. -- 2 717 -- (51)
Stock issued for acquisition..................... -- 2 503 -- --
Shares contributed to employee benefit plans..... -- -- 12 -- --
Shares purchased from benefit plan............... -- -- (545) -- --
Income tax benefit from employee stock
transactions................................... -- -- 40 -- --
Pooling of interests............................. -- -- -- -- 695
Cancellation of stock repurchase agreements...... -- -- (16,438) -- --
Foreign currency translation adjustment.......... -- -- -- -- (13)
Dividends on preferred stock --
Cumulative Convertible, $1.00 per share........ -- -- -- -- (695)
Series B, 6% annual............................ -- -- -- -- (180)
Net loss......................................... -- -- -- -- (17,576)
---- ---- -------- ------- --------
Balances at December 31, 1997...................... 695 384 83,506 -- (2,719)
Conversion of subordinated debt.................. -- 15 5,368 -- --
Sale of common stock............................. -- 9 22,638 -- --
Stock issued for acquisition..................... -- 3 3,297 -- --
Stock repurchase................................. -- (1) (752) -- --
Exercise of stock options and other.............. -- 4 1,398 -- --
Conversion of warrants........................... -- 1 349 -- --
Poolings of interests............................ -- -- -- -- (109)
Shares contributed to employee benefit plans..... -- -- (100) -- --
Income tax benefit from employee stock
transactions................................... -- -- 297 -- --
Foreign currency translation adjustment.......... -- -- -- -- (1)
Dividends on preferred stock --
Cumulative Convertible, $1.00 per share........ -- -- -- (695)
Series B, 6% annual............................ -- -- -- -- (83)
Net loss......................................... -- -- -- -- (15,331)
---- ---- -------- ------- --------
Balances at December 31, 1998...................... 695 415 116,001 -- (18,938)
Conversion of subordinated debt.................. -- 79 26,191 -- --
Exercise of stock options and other.............. -- 10 3,908 -- --
Shares contributed to employee benefit plans..... -- -- (537) -- --
Deferred compensation, related to the issuance of
stock options.................................. -- -- 841 (738) --
Income tax benefit from employee stock
transactions................................... -- -- 892 -- --
Dividends on preferred stock --
Cumulative Convertible, $1.00 per share........ -- -- -- (695)
Foreign currency translation adjustment.......... -- -- -- -- 6
Net income....................................... -- -- -- -- 35,181
---- ---- -------- ------- --------
Balances at December 31, 1999...................... $695 $504 $147,296 $ (738) $ 15,554
==== ==== ======== ======= ========
<CAPTION>
ADJUSTMENT FOR
REDEMPTION CUMULATIVE
VALUE GREATER FOREIGN
THAN AMOUNTS CURRENCY
PAID IN BY TRANSLATION TREASURY
STOCKHOLDERS ADJUSTMENT STOCK TOTAL
-------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1996...................... $(16,438) $ -- $(2,960) $ 86,654
Conversion of subordinated debt.................. -- -- -- 1,602
Sale of common stock............................. -- -- -- 14,364
Stockholder distributions........................ -- -- -- (6,625)
Exercise of stock options and other.............. -- -- 37 705
Stock issued for acquisition..................... -- -- -- 505
Shares contributed to employee benefit plans..... -- -- 332 344
Shares purchased from benefit plan............... -- -- -- (545)
Income tax benefit from employee stock
transactions................................... -- -- -- 40
Pooling of interests............................. -- -- -- 695
Cancellation of stock repurchase agreements...... 16,438 -- -- --
Foreign currency translation adjustment.......... -- -- -- (13)
Dividends on preferred stock --
Cumulative Convertible, $1.00 per share........ -- -- -- (695)
Series B, 6% annual............................ -- -- -- (180)
Net loss......................................... -- -- -- (17,576)
-------- ---- ------- --------
Balances at December 31, 1997...................... -- -- (2,591) 79,275
Conversion of subordinated debt.................. -- -- -- 5,383
Sale of common stock............................. -- -- -- 22,647
Stock issued for acquisition..................... -- -- -- 3,300
Stock repurchase................................. -- -- -- (753)
Exercise of stock options and other.............. -- -- 12 1,414
Conversion of warrants........................... -- -- -- 350
Poolings of interests............................ -- -- -- (109)
Shares contributed to employee benefit plans..... -- -- -- (100)
Income tax benefit from employee stock
transactions................................... -- -- -- 297
Foreign currency translation adjustment.......... -- -- -- (1)
Dividends on preferred stock --
Cumulative Convertible, $1.00 per share........ -- -- -- (695)
Series B, 6% annual............................ -- -- -- (83)
Net loss......................................... -- -- -- (15,331)
-------- ---- ------- --------
Balances at December 31, 1998...................... -- -- (2,579) 95,594
Conversion of subordinated debt.................. -- -- -- 26,270
Exercise of stock options and other.............. -- -- (57) 3,861
Shares contributed to employee benefit plans..... -- -- -- (537)
Deferred compensation, related to the issuance of
stock options.................................. -- -- -- 103
Income tax benefit from employee stock
transactions................................... -- -- -- 892
Dividends on preferred stock --
Cumulative Convertible, $1.00 per share........ -- -- -- (695)
Foreign currency translation adjustment.......... -- (33) (27)
Net income....................................... -- -- -- 35,181
-------- ---- ------- --------
Balances at December 31, 1999...................... $ -- $(33) $(2,636) $160,642
======== ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
60
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Titan Corporation (the "Company" or "Titan") is a
diversified technology company dedicated to creating, building and launching
technology-based businesses. The Company provides information technology,
communications and electron beam food pasteurization and medical product
sterilization systems and services to government and commercial customers. The
Company groups its businesses into four core business segments -- Titan Systems,
Software Systems, SureBeam, and Titan Wireless -- and a fifth business segment,
Emerging Technologies and Businesses. Titan Systems provides information
technology and communications solutions for defense, intelligence, and other
U.S. and allied government agencies. Software Systems is a total services
provider of comprehensive information technology solutions for its customers'
business functions, including e-business, finance, accounting, customer billing
and collection, contract management, supply-chain management and equipment
monitoring and maintenance. SureBeam manufactures electron beam food
pasteurization and medical product sterilization systems and provides
sterilization and pasteurization services at its own facilities. Titan Wireless
designs, manufactures and installs satellite communication systems and provides
services which support telephony and Internet access in developing countries.
The Emerging Technologies and Businesses segment develops commercial
applications for technologies created by our other business segments through
government-sponsored and internally-funded research and development programs.
The Company is involved in a number of start-up businesses, most notably the
TSP business in Software Systems, the commercial satellite communications
business in the Titan Wireless segment and the electronic food pasteurization
business of SureBeam. The Company believes that the primary source of revenues
for the Titan Wireless business will be international customers in developing
countries, primarily within Asia, Africa and South America.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Titan and its subsidiaries. All significant intercompany
transactions and balances have been eliminated. From time to time, the Company
makes investments in joint ventures which primarily involve international
locations and operations. Management evaluates its investment in each joint
venture on an individual basis for purposes of determining whether or not
consolidation is appropriate. Investments in such ventures are generally
consolidated in instances where the Company retains control through
decision-making ability and/or a greater than 50% ownership interest. In the
absence of such factors, the Company generally accounts for these investments
under the equity method.
On February 25, 2000, the Company consummated a merger with Advanced
Communication Systems, Inc. ("ACS") in a stock-for-stock, pooling of interests
transaction (see Note 2). The accompanying consolidated financial statements
have been restated to reflect this acquisition for all periods presented.
MINORITY INTEREST IN SUBSIDIARIES. Minority interest in subsidiaries
consists primarily of equity securities issued in 1999 by the Company's
subsidiary Cayenta, Inc., which is the primary ongoing operations of the
software systems business. The Company owned substantially all of the voting
equity of the subsidiary both before and after the transactions. The Company
records minority interest expense which reflects the portion of the earnings of
majority-owned operations which are applicable to the minority interest
partners. These amounts were not significant in 1999.
FOREIGN CURRENCY TRANSLATION. The financial statements of the Company's one
foreign subsidiary are measured using the local functional currency. Assets and
liabilities of the subsidiary are translated at exchange rates in effect as of
the balance sheet date. Revenues and expenses are translated at average rates
61
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of exchange in effect during the year. The resulting cumulative translation
adjustments have been recorded as a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in consolidated net
income.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION. A majority of the Company's revenue, both government
and commercial, is derived from products manufactured and services performed
under cost-reimbursement, time-and-materials, and fixed-price contracts wherein
revenues are generally recognized as services are performed, using the
percentage-of-completion method, which includes revenues recognized as units are
delivered. Total estimated costs are based on management's assessment of costs
to complete the project based upon evaluation of the level of work achieved and
costs expended to date. Estimated contract losses are fully charged to
operations when identified.
The Company's Software Systems segment also generates revenues from
licensing the rights to use its software products primarily to end users. This
segment further generates revenues from post-contract support (maintenance),
consulting and training services performed for customers who license its
products.
Revenues from software license agreements are recognized currently, provided
that all of the following conditions are met, a noncancelable license agreement
has been signed, the software has been delivered, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable and the risk of concession is deemed remote, and
no other significant vendor obligations exist. Revenues from maintenance
services are recognized ratably over the term of the maintenance period,
generally one year. Maintenance revenues which are bundled with license
agreements are unbundled using vendor specific objective evidence.
DEFERRED REVENUES. Included in other accrued liabilities are deferred
revenues which consist principally of customer deposits and payments for
software maintenance agreements with customers whereby the Company receives
payment in advance of performing the service. Revenue from these contracts is
recognized ratably over the contract period.
CASH EQUIVALENTS. All highly liquid investments purchased with an original
maturity of three months or less are classified as cash equivalents.
UNBILLED ACCOUNTS RECEIVABLE. Unbilled accounts receivable include
work-in-process which will be billed in accordance with contract terms and
delivery schedules, as well as amounts billable upon final execution of
contracts, contract completion, milestones or completion of rate negotiations.
Generally, unbilled accounts receivable are expected to be collected within one
year. Payments to the Company for perfor-mance on certain U.S. Government
contracts are subject to audit by the Defense Contract Audit Agency. Revenues
have been recorded at amounts expected to be realized upon final settlement.
CONCENTRATION OF CREDIT RISK. As the Company expands its business into
international markets and developing countries, certain accounts receivable may
be exposed to credit risk due to political and
62
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
economic instability in these areas. To mitigate credit risk in foreign
countries, the Company generally denominates its foreign contracts in U.S.
dollars and requires payment primarily in the form of stand-by letters of
credit, advance deposits, or wire transfers, prior to shipment. In addition, the
Company has obtained political risk insurance to cover equipment located in
certain foreign countries to cover loss or damage resulting from abandonment,
deprivation, expropriation, riot and terrorism and other acts of revolution in
those countries.
INVENTORIES. Inventories include the cost of material, labor and overhead,
and are stated at the lower of cost, determined on the first-in, first-out
(FIFO) and weighted average methods, or market. The Company periodically
evaluates its on-hand stock and makes appropriate disposition of any stock
deemed excess or obsolete.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is provided using the straight-line method, with estimated useful
lives of 25 to 40 years for buildings, 2 to 40 years for leasehold improvements
and 3 to 10 years for machinery and equipment and furniture and fixtures.
Certain machinery and equipment in the Company's medical sterilization and food
pasteurization 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 40 years. The Company periodically re-evaluates
the original assumptions and rationale utilized in the establishment of the
carrying value and estimated lives of its goodwill. The criteria used for these
evaluations include management's estimate of the asset's continuing ability to
generate positive income from operations and positive cash flow in future
periods as well as the strategic significance of the intangible asset to the
Company's business objectives.
IMPAIRMENT OF LONG-LIVED ASSETS. Periodically, the Company reviews for
possible impairment its long-lived assets and certain identifiable intangibles
to be held and used. Whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be fully recoverable based on evaluation
of the estimated undiscounted future cash flow to derived from the asset, asset
values are adjusted to fair value accordingly.
STOCK-BASED COMPENSATION. The Company has elected to adopt the disclosure
only provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, the Company
will continue to account for its stock-based compensation plans under the
provisions of APB No. 25.
INCOME TAXES. The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), which requires the use of the liability method of accounting for deferred
income taxes. Under this method, deferred income taxes are recorded to reflect
the tax consequences on future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end.
If it is more likely than not that some portion or all of a deferred tax asset
will not be realized, a valuation allowance is recognized.
PER SHARE INFORMATION. The Company computes earnings per share based on the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128").
63
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following data summarize information relating to the per share
computations for continuing operations before the cumulative effect of a change
in accounting principle:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------
INCOME SHARES (000'S) PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------- -------------- ---------
<S> <C> <C> <C>
Income from continuing operations................. $40,781
Less preferred stock dividends.................... (695)
-------
Basic EPS:
Income from continuing operations available to
common stockholders........................... 40,086 44,246 $ .91
Effect of dilutive securities: Stock Options,
including dilutive effect of subsidiary stock
options......................................... -- 2,392 (.05)
Debentures...................................... 769 4,392 (.06)
------- ------ -----
Diluted EPS:
Income from continuing operations available to
common stockholders plus assumed
conversions................................... $40,855 51,030 $ .80
======= ====== =====
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------
INCOME SHARES (000'S) PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------- -------------- ---------
<S> <C> <C> <C>
Income from continuing operations................. $11,587
Less preferred stock dividends.................... (778)
-------
Basic EPS:
Income from continuing operations available to
common stockholders........................... 10,809 38,995 $ .28
Effect of dilutive securities: Stock Options...... -- 1,341 (.01)
------- ------ -----
Diluted EPS:
Income from continuing operations available to
common stockholders plus assumed
conversions................................... $10,809 40,336 $ .27
======= ====== =====
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------
INCOME SHARES (000'S) PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------- -------------- ---------
<S> <C> <C> <C>
Income from continuing operations................. $ 354
Plus preferred stock dividends.................... (875)
-------
Basic EPS:
Loss from continuing operations available to
common stockholders........................... $ (521) 35,539 $(.01)
======= ====== =====
Diluted EPS: Same as basic
</TABLE>
64
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1999 and 1998, options to purchase approximately 8,000 and 999,000
shares, respectively, of common stock were not included in the computation of
diluted EPS, because the options' exercise price was greater than the average
market price of the common shares. In 1999, 1998 and 1997, approximately 463,200
shares of common stock that could result from the conversion of cumulative
convertible preferred stock, 8,513,000 common shares in 1998 and 9,823,000
common shares in 1997 that could result from the conversion of the Company's
convertible subordinated debentures and 500,000 common shares in 1997 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 on the results of continuing operations.
The effect of minority interests outstanding in 1999 did not affect the above
computation.
COMPREHENSIVE INCOME. Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of the statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner changes
in equity.
During the year ended December 31, 1999, the Company's only element of other
comprehensive income resulted from foreign currency translation adjustments in
1999, which are reflected in the consolidated statements of changes in
stockholders' equity as foreign currency translation adjustments.
START-UP COSTS. The Company expenses the costs of start-up activities as
incurred in accordance with the provisions of AICPA Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). The Company
adopted SOP 98-5 in 1998, recording a one-time, non-cash charge of $19,474,
reflected as a cumulative effect of a change in accounting principle in the
Statement of Operations for the year ended December 31, 1998. The charge
primarily represents previously capitalized start-up costs and deferred contract
costs as well as non-recurring engineering costs previously carried in
inventory.
BUSINESS SEGMENTS. The Company reports its business segment information in
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). On March 31, 1999, the Company realigned and renamed certain operations
among its business segments to better position these operations for strategic
transactions pursuant to the Company's corporate strategy. As a result, the
Company is reporting all commercial satellite communications operating results
in its Titan Wireless segment, and all defense information technologies and
services operating results are reported in its Titan Systems segment. This
realignment also conforms to the provisions of SFAS 131. All prior year segment
data presented in these financial statements have been restated to conform to
the 1999 realignment.
NEW ACCOUNTING STANDARDS. In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." This SAB summarizes the SEC's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. This SAB is effective for all registrants during the
second quarter of
65
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fiscal 2000. Management has reviewed the impact of SAB 101 on the Company's
financial statements, and does not believe that its adoption will have a
material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the effective date of SFAS 133 was amended to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 by Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of Effective Date of
FASB Statement No. 133". The Company anticipates that the adoption of SFAS 133
will not have a material impact on the Company's financial position or results
of operations.
NOTE 2. MERGERS, ACQUISITIONS AND JOINT VENTURES
On December 22, 1999, Cayenta Operating Company (formerly known as Titan
Software Systems Corporation) and Cayenta, Inc. (collectively "Cayenta" which
comprises the principal operations of the Software Systems segment) acquired
substantially all of the outstanding stock of SFG Technologies Inc. ("SFG"), a
solutions and software provider focusing on revenue cycle management services
for the utilities industry. The purchase price, subject to certain post-closing
adjustments was $11.6 million in cash, less a $2 million holdback. Of the $2
million holdback placed into escrow at the closing, $0.4 million was paid in
March 2000, $0.1 was offset against post-closing adjustments in March 2000, and
$1.5 million is due in June 2001, after satisfaction of certain working capital
adjustments or indemnification obligations. In addition, Cayenta paid
approximately $3.1 million to retire outstanding indebtedness of SFG. The
transaction was accounted for as a purchase and, accordingly, SFG's results of
operations have been consolidated with the Company's results of operations since
December 23, 1999. The excess of the purchase price over the estimated fair
value of the net assets acquired was approximately $17.5 million at
December 31, 1999.
On December 13, 1999, Cayenta acquired all of the outstanding stock of
Assist Cornerstone Technologies, Inc. ("Assist"), an e-commerce solutions and
software provider, for approximately 5% of the outstanding common stock of
Cayenta, Inc., plus approximately $13 million in cash, subject to certain post-
closing adjustments, less a $3 million holdback. Of the $3 million holdback,
which bears interest at 8% per annum, $1.7 million is due in March 2000 and $1.3
million is due in June 2001, after satisfaction of certain working capital
adjustments or indemnification obligations. In addition, Cayenta paid
approximately $3.2 million to retire outstanding indebtedness of Assist. The
transaction was accounted for as a purchase, and accordingly, Assist's results
of operations have been consolidated with the Company's results of operations
since December 14, 1999. The excess of the fair market value of the net assets
acquired was approximately $20.1 million at December 31, 1999.
On November 2, 1999, Cayenta acquired all of the outstanding stock of JB
Systems, Inc. doing business as Mainsaver, a provider of enterprise asset
management software and distributed workflow management technology to global
customers, for a purchase price of $13.2 million in cash, subject to certain
post-closing adjustments, less a $3.5 million holdback, bearing interest at
7.5%. Of the $3.5 million holdback, $0.5 million is due in March 2000, and $3.0
million is due in May 2001, after satisfaction of
66
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 2. MERGERS, ACQUISITIONS AND JOINT VENTURES (CONTINUED)
possible working capital adjustments or indemnification obligations. In
addition, Cayenta paid approximately $1.9 million to reduce outstanding
indebtedness of Mainsaver. The transaction was accounted for as a purchase, and
accordingly, Mainsaver's results of operations have been consolidated with the
Company's results of operations since November 3, 1999. The excess of the fair
market value of the net assets acquired was approximately $17.7 million at
December 31, 1999.
In connection with the SFG, Assist and Mainsaver acquisitions described
above, Cayenta, Inc. issued warrants to a financial advisor to purchase 495,800
shares of subsidiary common stock. The warrants are exercisable at any time at a
value of $13.11 per share and expire in 5 years.
In November 1999, the Company entered into a definitive agreement with
Telecel International Limited ("Telecel"), a wireless communications service
provider in Africa, to create a joint venture that will provide satellite based
telecommunications services in Africa. The joint venture has the right to
provide rural telephony service in each market in which Telecel owns a license.
In September 1999, together with Sempra Energy Information Solutions, a
subsidiary of Sempra Energy, and modis, a company that focuses on configuring
customers' software applications, Cayenta established Soliance, LLC, a joint
venture that markets and delivers information technology systems and solutions,
including TSP offerings, to the utility industry. Cayenta owns a 10% equity
interest in Soliance and has a management services agreement with Soliance under
which it provides TSP services to Soliance's customers. At December 31, 1999,
the Company's investment of $5 million in this joint venture is included in
Other Assets. The investment is being accounted for under the cost method.
In September 1999, the Company acquired all of the outstanding shares of
Program Support Associates Inc. ("PSA") for $2.3 million in cash, of which
$0.7 million is included in accrued expenses at December 31, 1999, and
additional contingent payments, up to $1 million, upon the achievement of
certain financial goals during the period commencing January 1, 2000, and ending
December 31, 2000. The acquisition has been accounted for as a purchase, and
accordingly, the total purchase price has been allocated to the acquired assets
and liabilities assumed at their estimated fair values. The excess of the
purchase price over the net assets acquired is being carried as goodwill in the
amount of approximately $1.9 million. PSA's results of operations have been
consolidated with the Company's results of operations from the date of
acquisition.
On July 22, 1999, the Company's wholly owned subsidiary Titan Systems
Corporation ("TSC"), (formerly named Titan Technologies and Information Systems
Corporation) acquired all of the outstanding stock of Atlantic Aerospace
Electronics Corporation ("AAEC"), a defense and commercial technology and
systems company which focuses on applied research and development in information
technologies, for cash of approximately $18 million, subject to certain
post-closing adjustments, plus potential payments of up to $3 million contingent
upon certain future contract awards, subject to offsets for indemnification
claims. The transaction was accounted for as a purchase, and the excess of the
purchase price over the estimated fair value of the net assets acquired was
approximately $11.8 million at December 31, 1999. AAEC's results of operations
have been consolidated with the Company's results of operations since July 23,
1999.
On June 9, 1999, TSC acquired System Resources Corporation ("SRC"), an
information technology government contractor, through a stock purchase for a
purchase price of approximately $35 million, subject to certain post-closing
working capital adjustments and offsets for indemnification claims,
67
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 2. MERGERS, ACQUISITIONS AND JOINT VENTURES (CONTINUED)
consisting of approximately $33 million in cash paid at closing, less a $0.5
million holdback, and $2 million in promissory notes which bear interest at 7%
per annum and become fully payable, subject to purchase price adjustments and
indemnification claims, on June 9, 2000. In addition, the Company agreed to pay
the SRC stockholders one-half of approximately $1.5 million in SRC receivables
aged more than 720 days to the extent that any of those receivables are
collected within the two year period following the closing date, net of certain
post-closing adjustments and indemnification obligations that are offset against
such collections. The Company also retired approximately $10 million in SRC
indebtedness. The transaction was accounted for as a purchase, and, accordingly,
SRC's results of operations have been consolidated with the Company's results of
operations since June 10, 1999. The purchase agreement provided for a post-
closing adjustment to the purchase price based on the final valuation of the
acquired assets and assumed liabilities, which resulted in an increase of
approximately $4.1 million to the excess of the purchase price over the
estimated fair value of the net assets acquired (goodwill) in the quarter ended
September 30, 1999. In connection with the determination of the fair value of
assets acquired in the quarter ended December 31, 1999, and pursuant to the
provisions of Accounting Principles Board Opinion No. 16, the Company has valued
acquired contracts in process at contract price, minus the estimated costs to
complete and an allowance for the normal industry profit on its effort to
complete such contracts, which amounted to $2,709. This adjustment has been
reflected in the accompanying balance sheet as an increase to goodwill and a
corresponding increase to deferred profit. The Company recognized approximately
$861 as a reduction of costs in 1999, with the remaining $1,848 to be recorded
as a reduction of costs in future periods as work on certain contracts is
performed, which is estimated to be through fiscal 2002. The goodwill was
approximately $31.8 million at December 31, 1999.
On January 1, 1999, Cayenta acquired substantially all of the assets of
Transnational Partners II, LLC ("TNP"), a software services company which
provides infrastructure and electronic business solutions for major
corporations, for a purchase price of $9.8 million, consisting of $7 million
cash, a $2.8 million note paid in February 2000 (plus interest at 7%), and
preferred stock representing a minority interest in Cayenta. The transaction was
accounted for as a purchase, and the excess of the purchase price over the
estimated fair value of net assets acquired was approximately $12.3 million at
December 31, 1999. TNP's results of operations have been consolidated with the
Company's results of operations since January 2, 1999.
In June 1998, the Company acquired all of the outstanding shares of Semcor,
Inc. ("Semcor") for a preliminary purchase price of $38.1 million in cash and
additional contingent payments based on the achievement of certain financial
goals for the six-month period ending December 31, 1998, up to a maximum of
$5 million and for the twelve-month period ending December 31, 1999, up to a
maximum of $10 million. Semcor successfully achieved the financial goals for the
six-month period ended December 31, 1998, as outlined in the stock purchase
agreement, and accordingly the selling shareholders were paid the maximum of
$5 million in February 1999. The second contingent payment was due and paid in
February 2000. The acquisition has been accounted for as a purchase, and
accordingly the preliminary purchase price has been allocated to the acquired
assets and liabilities assumed at their estimated fair values, based on a
third-party appraisal. In connection with the final determination of the fair
value of assets acquired and pursuant to the provisions of Accounting Principles
Board Opinion No. 16, the Company has valued acquired contracts in process at
contract price, minus the estimated costs to complete and an alllowance for the
normal industry profit on its effort to complete such contracts, which amounted
to $6,343. Effective April 1, 1999, this adjustment has been reflected in the
accompanying balance sheet as an increase to
68
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 2. MERGERS, ACQUISITIONS AND JOINT VENTURES (CONTINUED)
goodwill and a corresponding increase to deferred profit. The Company recognized
approximately $1,024 as a reduction of costs in fiscal 1999, with the remaining
$5,319 to be recorded as a reduction of costs in future periods as work on
certain contracts is performed. The excess of the preliminary purchase price and
the first contingent payment over the net assets acquired is being carried as
goodwill in the amount of $41,784. The amount paid for the second contingent
payment was recorded when paid subsequent to year-end as additional goodwill.
Semcor's results of operations have been consolidated with the Company's results
of operations from the date of acquisition.
On March 31, 1998, the Company acquired all of the outstanding common stock
of Validity Corporation ("Validity"), for $12 million in cash, and notes payable
to the shareholders of Validity totaling $3 million (bearing interest at the
prime rate), subject to post-closing adjustments, if any, due and payable
March 31, 1999. The notes and interest were paid in April 1999. The transaction
was accounted for as a purchase, and accordingly, Validity's results of
operations have been consolidated with the Company's results of operations
beginning April 1, 1998. The Company has valued acquired contracts in process at
contract price, minus the estimated costs to complete and an allowance for the
normal industry profit on its effort to complete such contracts, which amounted
to $1,852. This estimate has been reflected in the accompanying balance sheet as
an increase to goodwill and a corresponding increase to deferred profit. The
Company recognized approximately $721 as a reduction of costs in 1999, with the
remaining $1,131 to be recorded as a reduction of costs in future periods as
work on certain contracts is performed, which is estimated to be through fiscal
2002. The goodwill was approximately $17.9 million as of December 31, 1999.
In February 1998, the Company acquired all of the outstanding shares of
Advanced Management Incorporated ("AMI") for $19.5 million in cash and
additional contingent payments for each of two consecutive twelve month periods
following the closing date of the acquisition up to a maximum of $5.25 million
for each period. AMI did not achieve the financial goals required for the first
twelve-month period nor did it achieve the financial goals for the second
twelve-month period ending January 31, 2000. The acquisition has been accounted
for as a purchase, and accordingly, the purchase price has been allocated to the
acquired assets and liabilities assumed at their estimated fair values. The
excess of the purchase price over the net assets acquired is being carried as
intangible assets, including goodwill and customer lists, in the amounts of
approximately $12.6 million and $4.1 million. AMI's results of operations have
been consolidated with the Company's results of operations from the date of
acquisition.
In November 1997, the Company acquired all of the outstanding shares of
Integrated Systems Control, Inc. ("ISC") in exchange for 475,000 shares of the
Company's common stock. The acquisition has been accounted for as a purchase and
accordingly the total purchase price has been allocated to acquired assets and
liabilities assumed at their estimated fair values. The excess of the purchase
price over the net assets acquired is being carried as goodwill in the amount of
approximately $1.4 million. ISC's results of operations have been consolidated
with the Company's results of operations from the date of acquisition.
In August 1997, the Company acquired all of the outstanding common stock of
RF Microsystems, Inc. ("RFM") for cash consideration of $5 million. The
acquisition has been accounted for as a purchase, and RFM's results of
operations have been consolidated with the Company's results of operations from
the date of acquisition. The total purchase price has been allocated to the
acquired assets and liabilities assumed at their estimated fair values in
accordance with the provisions of Accounting Principles Board Opinion No. 16.
The excess of the purchase price over the net assets acquired is being carried
as goodwill
69
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 2. MERGERS, ACQUISITIONS AND JOINT VENTURES (CONTINUED)
in the amount of approximately $1.7 million. The consolidated statement of
operations includes a $1,910 charge, based on a third-party appraisal, taken at
the time of the acquisition for acquired in-process research and development
costs related to acquired technology that has not reached technological
feasibility and that has no alternative future use.
The goodwill associated with each of the acquisitions discussed above is
being amortized on a straight-line basis over periods of 5 to 40 years.
Unaudited proforma data giving effect to the purchase of AMI, SEMCOR, SRC,
AAEC, PSA, Mainsaver, Assist and SFG as if they had been acquired at the
beginning of 1998 are shown below. Proforma information related to the TNP and
Validity acquisitions is not included, because the effect is not significant.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues................................................ $686,259 $593,784
Income from continuing operations before cumulative
effect of change in accounting principle.............. 30,429 2,867
Net income (loss)....................................... 24,829 (24,051)
Basic earnings (loss) per share:
Income from continuing operations before cumulative
effect of change in accounting principle............ $ .67 $ .05
Net income (loss)..................................... .55 (.64)
Diluted earnings (loss) per share:
Income from continuing operations before cumulative
effect of change in accounting principle............ $ .60 $ .05
Net income (loss)..................................... .49 (.62)
</TABLE>
On February 25, 2000, the Company consummated a merger with Advanced
Communication Systems, Inc. ("ACS"), a government information technology
services company, in a stock-for-stock transaction. ACS' primary operations are
included in the Titan Systems segment, with certain operations reported in the
Emerging Technologies and Businesses segment. Titan issued approximately
5,082,000 shares of Titan common stock for all the outstanding shares of ACS and
assumed ACS stock options representing approximately 263,000 shares of Titan
common stock for each share of ACS common stock, based on an exchange ratio of
approximately .57 shares of Titan common stock for each share of ACS common
stock. The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests.
In connection with the merger, ACS' September 30 fiscal year-end has been
changed to coincide with the Company's year-end. Prior to the merger, ACS used a
fiscal year ending September 30. Accordingly, the consolidated results reflect
the results for the Titan fiscal years ended December 31, 1999, 1998 and 1997
combined with ACS' results for fiscal years ended September 30, 1999, 1998 and
1997, respectively. ACS revenues and net income for the three months ended
December 31, 1999 were $46,255 and $1,352,
70
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 2. MERGERS, ACQUISITIONS AND JOINT VENTURES (CONTINUED)
respectively. The net income of $1,352 for the three months ended December 31,
1999 will be reflected as a pooling of interests adjustment in the Company's
first quarter of 2000. All amounts and disclosures in these consolidated
financial statements have been restated to give effect to the ACS merger as a
pooling of interests.
The separate and combined results of Titan and ACS in 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------
INCOME FROM
CONTINUING
REVENUES OPERATIONS NET INCOME
-------- -------------- ----------
<S> <C> <C> <C>
Titan.................................. $406,551 $37,200 31,600
ACS.................................... 218,252 3,581 3,581
-------- ------- --------
$624,803 $40,781 $ 35,181
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------
INCOME FROM
CONTINUING NET INCOME
REVENUES OPERATIONS (LOSS)
-------- -------------- ----------
<S> <C> <C> <C>
Titan.................................. $303,428 $ 7,213 $ (19,705)
ACS.................................... 107,752 4,374 4,374
-------- ------- ---------
$411,180 $11,587 $ (15,331)
======== ======= =========
</TABLE>
On October 23, 1998, the Company consummated a merger with Delfin Systems
("Delfin") in a stock-for-stock transaction. Titan issued approximately
3,628,000 shares of Titan common stock in exchange for all the outstanding
shares of Delfin common stock and assumed Delfin stock options representing
approximately 823,000 shares of Titan common stock, based on an exchange ratio
of approximately .50 shares of Titan common stock for each share of Delfin
common stock. The merger constituted a tax-free reorganization and was accounted
for as a pooling of interests.
On August 24, 1998, the Company consummated a merger with VisiCom
Laboratories, Inc., ("VisiCom") in a stock-for-stock transaction. Titan issued
approximately 4,172,000 shares of common stock in exchange for all the
outstanding shares of VisiCom and assumed VisiCom's stock options representing
approximately 593,000 shares of Titan common stock, based on an exchange ratio
of approximately .45 shares of Titan common stock for each share of VisiCom's
common stock. The merger constituted a tax-free reorganization and was accounted
for as a pooling of interests. In February 2000, the Company received back
153,067 previously escrowed shares as settlement of contingencies.
On June 30, 1998 the Company consummated a merger with Horizons Technology,
Inc., ("Horizons") in a stock-for-stock transaction. Titan issued approximately
3,200,000 shares of common stock in exchange for all the outstanding shares of
Horizons stock based on exchange ratios of approximately .37 and .82 shares of
Titan common stock for each share of Horizons' common stock and Horizons'
preferred stock, respectively. The merger constituted a tax-free reorganization
and was accounted for as a pooling of interests.
71
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 2. MERGERS, ACQUISITIONS AND JOINT VENTURES (CONTINUED)
On February 27, 1998, the Company consummated a merger with DBA
Systems, Inc. ("DBA"), in a stock-for-stock transaction. Titan issued
approximately 6,100,000 shares of common stock in exchange for all the
outstanding shares of DBA stock and assumed options representing approximately
441,000 shares of Titan common stock based on an exchange ratio of approximately
1.37 shares of Titan's common stock for each share of DBA stock. The merger
constituted a tax-free reorganization and was accounted for as a pooling of
interests.
Effective January 1, 1998, Delfin's September 30, VisiCom's March 31,
Horizons' January 31 and DBA's June 30 fiscal year-ends were changed to coincide
with Titan's year-end. Adjustments to conform Delfin's, VisiCom's and Horizons'
fiscal year-ends were not significant and resulted in a net pooling adjustment
of $(109) in 1998, which is reflected in the accompanying Statement of
Stockholders' Equity for the year ended December 31, 1998.
The separate and combined results of Titan, ASC, Delfin, VisiCom, Horizons
and DBA in 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------
INCOME
(LOSS) FROM
CONTINUING NET INCOME
REVENUES OPERATIONS (LOSS)
-------- ----------- ----------
<S> <C> <C> <C>
Titan........................................ $167,050 $ 5,188 $ 5,165
ACS.......................................... 52,194 1,736 1,736
Delfin....................................... 26,534 (127) (127)
VisiCom...................................... 31,360 (1,352) (13,397)
Horizons..................................... 26,281 1,640 (4,222)
DBA.......................................... 24,698 (6,731) (6,731)
-------- ------- --------
$328,117 $ 354 $(17,576)
======== ======= ========
</TABLE>
DBA's loss from continuing operations and net loss for the year ended
December 31, 1997 include recognition of a special charge of $9,846 for the
write-down of certain assets to net realizable value and accrual for certain
liabilities as described in Notes 9 and 15. Net income (loss) reflects the
discontinued operations of the broadband communications business, the access
control systems business and certain operations discontinued by companies prior
to their acquisition by Titan. Refer to Note 4 for further discussion.
72
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 3. ACQUISITION RELATED CHARGES AND OTHER
During the year ended December 31, 1999, the Company recorded acquisition
and related charges of $12,908, which include approximately $3.6 million of
legal costs and approximately $9.3 million of integration and restructuring
expenses. The integration and restructuring expenses include $2.1 million
related to the wind-down of our Year 2000 business, consisting primarily of
employee termination costs and lease termination costs, a $2.1 million write-off
of intangible costs to estimated realizable value, approximately $1.7 million
for severance, outplacement and relocation costs related to approximately 32
employees across the Company, except in the Emerging Businesses and Technologies
segment, and $3.4 million related to the closure and elimination of leased
facilities, primarily duplicate field offices. These charges were all cash
charges, with the exception of the write-off of intangible costs. Accruals for
unpaid special charges of $5,880 remain in other current liabilities at
December 31, 1999. Unpaid amounts at year-end are primarily termination and
other integration costs which will be paid by December 31, 2000.
On October 26, 1999, the Company received approximately $41.8 million in
cash as a result of the acquisition by Intel Corporation of IPivot, Inc.
("IPivot"), a technology spin-off from Titan. The cash payment to the Company
was for its ownership interest in IPivot of approximately 8% after the dilutive
impact of IPivot stock options, warrants and other equity investments. The
income is netted against the charges discussed above in acquisition related
charges and other.
During the year ended December 31, 1998, the Company recorded
acquisition-related and other charges of $9,891, which includes approximately
$5.5 million of direct transaction costs (consisting primarily of investment
banking and other professional fees), $3.8 million of integration expenses and
$0.6 million of pre-operating and start-up costs of the Titan Africa, Inc.,
Benin operation. Approximately $4.6 million of the direct transaction costs were
incurred in connection with the Delfin, VisiCom, Horizons and DBA mergers. The
remaining $0.9 million in transaction fees were related to costs incurred to
file a withdrawn registration statement of the Company's former Communications
Systems segment. The integration costs included approximately $3.5 million for
severance, outplacement and retention costs incurred in the Titan Systems and
Titan Wireless segments. Included in these amounts were termination benefits
associated with employment agreements, as well as retention amounts associated
with employee retention agreements. The integration costs also included $0.3
million related to the closure and elimination of leased facilities, primarily
duplicate field offices. Accruals for unpaid special charges of $2,785 and $250
were in other current and non-current liabilities, respectively, at
December 31, 1998. All amounts accrued at December 31, 1998 were substantially
paid by December 31, 1999.
NOTE 4. DISCONTINUED OPERATIONS
In 1998 and 1997, the Company's Board of Directors adopted a plan to wind
down the Company's access control systems business and broadband communications
business, respectively. Accordingly, the results of these businesses have been
accounted for as discontinued operations. In addition, the accompanying
consolidated financial statements reflect operations discontinued by certain of
the companies acquired by Titan during 1998. All periods presented reflect these
specific operations as discontinued operations. Net liabilities of discontinued
operations of approximately $7,100 at December 31, 1999 consist primarily of
accrued liabilities of approximately $11,100 net of current assets of
approximately $4,000 (primarily accounts receivable and inventories). The
liabilities consist of accruals for contract losses, estimated wind-down costs
and costs related to the closure and elimination of certain leased facilities.
Charges of approximately $6,200 were made against the accrued liabilities in
1999. The
73
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 4. DISCONTINUED OPERATIONS (CONTINUED)
liabilities were increased by a $5,600 charge in 1999 based on management's most
recent review of estimated future wind-down costs. Long-term net assets of
discontinued operations are primarily fixed assets. Management continues to
assess the estimated wind-down and and/or disposal costs associated with the
businesses, and may from time to time adjust the allowance for such costs
accordingly.
NOTE 5. OTHER FINANCIAL DATA
Following are details concerning certain balance sheet accounts:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accounts Receivable:
U.S. Government -- billed............................. $ 97,138 $ 66,109
U.S. Government -- unbilled........................... 71,989 57,279
Trade................................................. 52,642 19,293
Less allowance for doubtful accounts.................. (1,729) (1,388)
-------- --------
$220,040 $141,293
======== ========
Inventories:
Materials............................................. $ 7,725 $ 3,871
Work-in-process....................................... 4,357 1,788
Finished goods........................................ 3,558 3,570
-------- --------
$ 15,640 $ 9,229
======== ========
Property and Equipment:
Machinery and equipment............................... $ 66,736 $ 54,905
Furniture and fixtures................................ 16,312 12,797
Land, buildings and leasehold improvements............ 18,300 17,078
Construction in progress.............................. 2,023 358
-------- --------
103,371 85,138
Less accumulated depreciation and amortization........ (60,102) (51,392)
-------- --------
$ 43,269 $ 33,746
======== ========
</TABLE>
Other non-current liabilities at December 31, 1999 include a tax liability
of $6,964.
NOTE 6. SEGMENT INFORMATION
Management evaluates the performance of its operating segments separately to
individually monitor the different factors affecting financial performance.
Segment profit or loss includes substantially all of the segment's costs of
operations and administration. The Company manages income taxes on a corporate-
wide basis. Thus, the Company evaluates segment performance based on profit or
loss before income taxes and before allocated costs of corporate overhead,
exclusive of any significant gains or losses on the disposition of investments
or other assets. The Company typically manages and evaluates equity investments
and related income on a segment level. However, certain significant investments
are managed
74
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
at the corporate level. Financial costs, such as gains and losses and interest
income and expense, are managed at the Corporate segment.
On March 31, 1999, the Company realigned certain operations among its
business segments to better position these operations for strategic transactions
pursuant to the Company's corporate strategy. As a result, the Company is
reporting all commercial satellite communications operating results in its Titan
Wireless segment, and all defense information technologies and services
operating results are reported in its Titan Systems segment. This realignment
also conforms to the provisions of SFAS 131. All current and prior year segment
data presented in these financial statements have been restated to conform to
the 1999 realignment.
The Titan Systems segment provides information systems solutions primarily
to government customers with large data management, information manipulation,
information fusion, knowledge-based systems and communications requirements,
develops and produces advanced satellite communications products and
manufactures digital imaging products, electro-optical systems and threat
simulation/training systems primarily used by the defense and intelligence
communities. This segment also supports high priority government programs by
providing systems integration, information systems engineering services,
development of systems and specialized products, as well as systems research,
development and prototyping. Other services provided include research and
development under government funded contracts for the Department of Defense
(DoD) and other customers.
The Software Systems segment is a total services provider of comprehensive
information technology for commercial and non-defense customers' business
functions, including e-commerce, finance, accounting, customer billing and
collection, contract management, supply-chain management and equipment
monitoring and maintenance. Also included in this segment is the Company's Year
2000 business unit, which is being wound-down.
The SureBeam 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 Titan Wireless segment develops and produces advanced satellite
communication systems and services which support telephony and Internet access
in developing countries.
The Software Systems segment contains the Company's majority owned
subsidiary, Cayenta, Inc. In December 1999, the Company filed a registration
statement including a preliminary prospectus with the Securities and Exchange
Commission ("SEC") for an initial public offering. The Company controls
approximately 97% of the voting power of Cayenta through its ownership of 10
million shares of Class B common stock. Each Class A share is entitled to one
vote and each Class B share is entitled to ten votes, with Class A and Class B
shares voting together on all matters submitted to the vote of the holders of
common stock. Cayenta has filed a registration statement on Form S-1 for an
initial public offering of an as yet undetermined number of shares of its
Class A common stock. If the proposed offering is completed, the 2,345,000
outstanding shares of Series A preferred stock of Cayenta will convert into
Class A common stock of Cayenta. The Company cannot be certain that Cayenta will
be able to complete its offering. Approximately $0.5 million in costs related to
this offering have been deferred and are classified as prepaid expenses at
December 31, 1999.
75
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
The Emerging Technologies and Businesses segment includes several businesses
which apply the Company's proprietary knowledge and core competencies to
industrial and commercial opportunities.
Substantially all of the Company's operations are located in the United
States. Export and foreign revenues amounted to approximately $33,986, $19,760,
and $23,278 in 1999, 1998 and 1997, respectively, primarily to countries in
Africa, Asia and Western Europe. Substantially all international sales are
denominated in U.S. dollars.
The following tables summarize industry segment data for 1999, 1998 and
1997.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Titan Systems............................... $526,952 $367,151 $277,880
Software Systems............................ 45,922 21,470 17,374
SureBeam.................................... 14,295 11,184 8,254
Titan Wireless.............................. 27,325 6,717 18,405
Emerging Technologies and Businesses........ 10,309 4,658 6,204
-------- -------- --------
$624,803 $411,180 $328,117
======== ======== ========
</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 $502,557 in 1999, $340,023 in 1998, and $273,300 in
1997. Inter-segment sales were not significant in any year.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating Profit (Loss):
Titan Systems................................. $ 35,434 $34,341 $ 9,830
Software Systems.............................. 6,962 5,137 4,580
SureBeam...................................... 2,039 1,121 (204)
Titan Wireless................................ 5,063 (6,732) (1,074)
Emerging Technologies and Businesses.......... 43,023 34 (286)
Corporate..................................... (14,417) (6,477) (2,804)
-------- ------- -------
$ 78,104 $27,424 $10,042
======== ======= =======
</TABLE>
Operating profit for the Titan Systems, Software Systems and SureBeam
segments for the year ended December 31, 1999, included acquisition and other
charges of $4,690, $2,111 and $811, respectively. In addition, 1999 operating
results included a $3,893 charge related to previously capitalized software
development costs as well as a $1,800 charge for an uncollected receivable.
Operating profit for Emerging Technologies and Businesses includes the $41,788
gain on IPivot stock as discussed in Note 2. Operating profit for the Titan
Systems and Titan Wireless segments for the year ended December 31, 1998,
included acquisition-related and other charges of $7,218 and $2,398
respectively. Operating profit for Titan Systems in 1997 includes recognition of
a special charge of $9,846 for the write-down of certain assets to net
realizable value and accrued for certain liabilities as discussed in Notes 9 and
15, and a $1,910 charge for acquired in-process research and development costs.
76
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
Corporate includes corporate general and administrative expenses, certain
corporate, integration, legal and restructuring charges ($5,296 in 1999 and $275
in 1998), 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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Identifiable Assets:
Titan Systems............................... $331,370 $246,382 $132,626
Software Systems............................ 94,450 14,959 8,114
SureBeam.................................... 24,242 14,518 15,466
Titan Wireless.............................. 35,598 5,085 10,655
Emerging Technologies and Businesses........ 4,610 67 6,391
Discontinued Operations, net................ 557 645 7,605
General corporate assets.................... 55,072 28,379 28,833
-------- -------- --------
$545,899 $310,035 $209,690
======== ======== ========
</TABLE>
General corporate assets are principally cash, accounts receivable, prepaid
expenses, property and equipment, deferred income taxes and other assets.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Depreciation and Amortization of Property and
Equipment, Goodwill, and Other Assets:
Titan Systems.................................... $ 9,882 $7,033 $6,866
Software Systems................................. 1,063 475 617
SureBeam......................................... 840 876 681
Titan Wireless................................... 607 381 453
Emerging Technologies and Businesses............. 71 25 85
Corporate........................................ 1,129 600 982
------- ------ ------
$13,592 $9,390 $9,684
======= ====== ======
Capital Expenditures:
Titan Systems.................................... $ 5,293 $5,143 $5,666
Software Systems................................. 1,002 325 453
SureBeam......................................... 3,605 211 643
Titan Wireless................................... 3,839 463 358
Emerging Technologies and Businesses............. 73 30 86
Corporate........................................ 832 358 119
------- ------ ------
$14,644 $6,530 $7,325
======= ====== ======
</TABLE>
77
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 7. INCOME TAXES
The components of the income tax provision (benefit) from continuing
operations are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $19,404 $2,141 $2,046
State............................................ 4,366 718 374
------- ------ ------
23,770 2,859 2,420
Deferred......................................... 615 4,157 1,514
------- ------ ------
$24,385 $7,016 $3,934
======= ====== ======
</TABLE>
Following is a reconciliation of the income tax provision from continuing
operations expected (based on the United States federal income tax rate
applicable in each year) to the actual tax provision on income:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected Federal tax provision on continuing
operations....................................... $22,751 $6,328 $1,458
State income taxes, net of Federal income tax
benefit.......................................... 3,934 761 92
Research credit.................................... -- -- (324)
Goodwill amortization.............................. 378 218 351
Keyman life insurance.............................. -- 24 24
Acquistion charges and other....................... (678) (315) 3,088
Utilization of NOL not realized in prior periods... (2,000) -- --
Effect of S corporation status..................... -- -- (755)
------- ------ ------
Actual tax provision on continuing operations...... $24,385 $7,016 $3,934
======= ====== ======
</TABLE>
78
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 7. INCOME TAXES (CONTINUED)
The net deferred tax asset as of December 31, 1999 and 1998, results from
the following temporary differences:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Loss carryforward..................................... $ 9,037 $ 7,746
Employee benefits..................................... 6,256 5,264
Tax credit carryforwards.............................. 999 2,096
Inventory and contract loss reserves.................. 9,957 10,407
Acquired in-process R&D write-off..................... 659 711
Cash to accrual adjustment............................ 423 846
Other................................................. 400 87
-------- --------
27,731 27,157
Valuation allowance................................... (11,200) (11,200)
-------- --------
16,531 15,957
-------- --------
Deferred tax liabilities:
Unbilled receivables.................................. (4,309) (2,332)
Cash to accrual adjustment............................ (456) (879)
Capitalized software development costs................ -- (1,217)
Depreciation and amortization......................... (2,596) (1,628)
Acquired contracts in process......................... (379) --
Other................................................. (309) (386)
-------- --------
(8,049) (6,442)
-------- --------
Deferred tax asset, net................................. $ 8,482 $ 9,515
======== ========
</TABLE>
Realization of certain components of the net deferred tax asset is dependent
upon the Company generating sufficient taxable income prior to expiration of
loss and credit carryforwards. Although realization is not assured, management
believes it is more likely than not that the net deferred tax asset will be
realized. The amount of the net deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are changed. Also, under Federal tax law, certain
potential changes in ownership of the Company which may not be within the
Company's control may limit annual future utilization of these carryforwards.
Other non-current liabilities at December 31, 1999 and 1998 include a deferred
liability of $2,519 and $858, respectively. Deferred income tax assets of $454
are included in Other Assets at December 31, 1998.
Cash paid for income taxes was $4,598, $1,541 and $1,803 in 1999, 1998 and
1997, respectively.
NOTE 8. DEBT
In June 1999, in conjunction with the acquisition of SRC (see Note 2), the
Company's bank syndicate, with The Bank of Nova Scotia ("Scotia Bank") as the
administrative agent, amended and increased the Company's existing credit
facility. The revised credit facility, totaling $190 million, included a $55
million
79
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 8. DEBT (CONTINUED)
line of credit for working capital and general corporate purposes, $60 million
($25 million original and $35 million new facility) in lines of credit dedicated
to acquisitions and a $75 million term loan. At December 31, 1999, total
borrowings outstanding were $138,250 at a weighted average interest rate of
8.79%. Commitments under letters of credit, which reduce availability of the
working capital line, were $1,872 at December 31, 1999. Of the total borrowings,
$9,063 was short-term. At December 31, 1999, deferred financing costs included
in Other Assets related primarily to this facility were $3,633 and are being
amortized over the term of the agreement. In February 2000, the Company entered
into a new credit facility agreement which replaces this facility and which is
described in Note 16. As a result, the deferred financing costs related to the
current agreement will be expensed as an extraordinary item in the first quarter
of 2000.
In November 1996, Titan issued $34,500 of 8 1/4% convertible subordinated
debentures due 2003. On September 7, 1999, the Company announced a call for
redemption on November 2, 1999, of the debentures still outstanding. At the time
of the call, the Company had outstanding debentures in the aggregate principal
amount of approximately $11.6 million. All except $1 of the debentures were
converted prior to the redemption date. Accordingly, the remaining $1 was
redeemed on November 2, 1999. The conversion of the debentures was a non-cash
transaction.
On December 10, 1999, the Company's wholly owned subsidiary, Titan
Africa, Inc. ("Titan Africa"), in connection with its contract to build a
satellite-based telephone system for the national telephone company of Benin,
Africa, entered into a Loan Facility Agreement for up to 30.0 billion Francs CFA
(the currency of the African Financial Community), equivalent to approximately
$45.0 million U.S. dollars, with a syndicate of five banks, with Africa Merchant
Bank as the Arranger. This medium-term financing is a non-recourse loan to Titan
Africa which is guaranteed by the national telephone company of Benin, Africa
and secured by the national telephone company's equipment and revenues related
to the project. The facility has a fixed interest rate of 9.5% and will be
repaid in seven equal semi-annual payments beginning on December 31, 2000, and
ending on December 31, 2003. Approximately $8 million was drawn on this facility
at December 31, 1999.
At December 31, 1999 and 1998, Titan had $2,227 and $3,328, respectively,
outstanding under two promissory notes, secured by certain machinery and
equipment, at interest rates of 8.5% and 7.42%. At December 31, 1999, $1,004 is
due within one year. At December 31, 1999 and 1998, the Company also had
outstanding a mortgage note collateralized by real estate with a balance of $698
and $747, respectively, at an interest rate of LIBOR plus 2.5%, which was paid
in full in February 2000. Long-term debt at entities acquired by the Company in
1998 was $1,867 ($471 short-term) at December 31, 1999. A line of credit
remaining at one of the Company's 1999 acquisitions was $973 at December 31,
1999.
ADVANCED COMMUNICATION SYSTEMS DEBT
In February 1998, Advanced Communication Systems ("ACS") entered into a line
of credit arrangement, consisting of two credit facilities aggregating
$35 million with a commercial bank, refinancing ACS' then existing line of
credit and the outstanding commercial bank debt of ISC. ACS' subsidiary, ISC,
had three notes payable totaling approximately $1,671 at the date of
acquisition, secured by accounts receivable, equipment and other assets, which
were repaid using the above mentioned facility in February 1998. The credit
facility was also used to finance the acquisition of AMI and to provide for the
working capital needs of the Company. The first facility, in an amount up to
$15 million, could be used to finance
80
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 8. DEBT (CONTINUED)
acquisitions, working capital, and other corporate purposes, and bears interest
at either the bank's prime rate or at a London interbank offered rate ("LIBOR")
for one, two or three month periods, plus a percentage, not more than 2.2%,
which depends on ACS' historical performance. The second facility, in an amount
up to $20 million, may be used to finance acquisitions and bears interest at
either the bank's prime rate or at a LIBOR rate plus a percentage, not more than
2.45%, which depends on ACS' historical financial performance. The credit
agreement contains various covenants requiring the Company and its subsidiaries,
on a consolidated basis, to maintain certain financial ratios, including, funded
debt to earnings before interest, depreciation, income taxes and amortization
("EBITDA"), EBITDA coverage ratio and minimum net worth and prohibits the
payment of dividends.
In June 1998, the line of credit arrangement was increased to $45 million,
from $35 million, to finance the acquisition of Semcor and to provide for the
working capital needs of ACS. This credit arrangement was subject to similar
terms and conditions as the original arrangement that was entered into in
February 1998.
In February 1999, the line of credit arrangement was increased to
$60 million to finance the additional contingent payment to the selling
shareholders of Semcor and to provide for the working capital needs of ACS. This
credit arrangement was subject to similar terms and conditions as the original
arrangement that was entered into in February 1998.
Subsequent to September 30, 1999, ACS and the commercial bank executed an
amendment to the line of credit arrangement that restated the definition of
EBITDA to exclude $4.8 million in calculating the funded debt to EBITDA
financial covenant with respect to any fiscal period from September 30, 1999,
through and including June 30, 2000. As of September 30, 1999 $58,400 was
available on this credit arrangement and the outstanding balance was
$46 million with an additional $3.8 million in standby letters of credit.
In September 1999, ACS acquired PSA, and as a result, assumed its
liabilities that, in part, consisted of $50 outstanding under a line of credit.
This credit arrangement with a commercial bank, in the amount of $400, bears
interest at the bank's prime rate plus one percent and is due on demand.
At September 30, 1999, and 1998, ACS had $46,050 and $35,000, respectively,
outstanding under these arrangements. For the years ended September 30, 1999,
1998 and 1997, interest expense under these credit facilities was approximately
$3,803, $1,410 and $136, respectively, at weighted average interest rates of
8.16%, 8.10% and 8.75%, respectively.
Maturities of long-term debt, excluding the Company's line of credit with
Scotia Bank and ACS' line of credit, are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 3,791
2001........................................................ 3,807
2002........................................................ 2,549
2003 and thereafter......................................... 3,780
-------
$13,927
=======
</TABLE>
81
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 8. DEBT (CONTINUED)
Cash paid for interest, primarily on these borrowings, was $13,385, $8,416
and $6,390 in 1999, 1998 and 1997, respectively. At December 31, 1999 the
Company was in compliance with all financial covenants under its various debt
agreements.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases certain buildings and equipment under non-cancelable
operating lease agreements. These leases generally require the Company to pay
all executory costs such as taxes, insurance and maintenance related to the
leased assets. Certain of the leases contain provisions for periodic rate
accelerations to reflect cost-of-living increases. Rental expense under these
leases was $14,762 in 1999, $12,892 in 1998 and $10,780 in 1997. Through August
1999, the Company was obligated under a long-term lease agreement for facilities
which are owned by an entity in which Titan has a minority ownership interest.
Rental expense in 1999, 1998 and 1997 includes $593, $921 and $904,
respectively, paid under this agreement. Also included is rent expense of $280,
$336 and $257 for 1999, 1998 and 1997 incurred by ACS on a lease for office
space with a related party which includes the principal stockholders of ACS. In
February 2000, Cayenta entered into a new long-term lease agreement with this
entity which requires future minimum lease payments of approximately $6.6
million over 7 years. There is additional space in the facilities which, if
vacant or desired by Cayenta, could obligate Cayenta for additional future
minimum lease payments of approximately $0.7 million over the 7 years. The
Company is a guarantor on the lease.
Future minimum lease payments under noncancellable operating leases at
December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................................ $12,994
2001........................................................ 10,861
2002........................................................ 8,579
2003........................................................ 6,196
2004........................................................ 3,509
Thereafter.................................................. 7,899
-------
Total minimum lease payments.............................. $50,038
=======
</TABLE>
In 1997, DBA recorded a $3.0 million charge in recognition of certain
environmental matters at its Kissimmee facility including, but not limited to,
soil contamination and potential asbestos and lead-based paint contamination.
These matters became known to DBA as a result of an environmental study
performed as part of Titan's due diligence process related to the merger with
DBA. The accrual has been recorded in accordance with SFAS No. 5 and SOP 96-1
and represents an initial estimate which could change significantly as further
studies are performed. In the accompanying balance sheet, approximately $.2
million is included in other current liabilities and the remaining $2.8 million
is included in other non-current liabilities based on the estimated timing of
continued assessments and remediation work to be performed. The Company's
cleanup activities are substantially complete, and the property is currently in
escrow (see Note 15). The liabilities recorded for the cleanup will be evaluated
in total with the net book value of the property against the final proceeds from
the sale of the building.
82
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 6, 2000, Ion Beam Applications s.a., a Belgian corporation, and
some of its U.S. subsidiaries filed an action for declaratory judgment in a
federal court in Virginia against the Company relating to its patent for
SureBeam technology. The action attacks the validity of the Company's patent,
seeks a declaration that Ion Beam Applications and its customers have not
infringed any of the 62 claims in the Company's patent, and alleges that the
Company has engaged in unfair competition and that Titan's conduct constitutes
patent misuse. The Company intends to vigorously defend its patent position.
In the ordinary course of business, defense contractors are subject to many
levels of audit and investigation by various government agencies. Further, the
Company and its subsidiaries are subject to claims and from time to time are
named as defendants in legal proceedings. The Company may also assert claims
from time to time. In the opinion of management, the amount of ultimate
liability or recovery with respect to these actions will not materially affect
the financial position or results of operations of the Company.
NOTE 10. SERIES B CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
The Company's Series B Preferred Stock had a par value of $1.00, accrued
dividends at a rate of 6% per annum payable quarterly in arrears cumulatively,
had a liquidation preference of $6.00 per share plus accrued and unpaid
dividends (the "Series B Liquidation Preference") and entitled the holder
thereof to one vote per outstanding share, voting together as a class with the
holders of shares of outstanding Common Stock (and any other series or classes
entitled to vote therewith) on all matters submitted for a shareholder vote. The
Series B Preferred Stock was redeemable at the Series B Liquidation Preference
(i) at the holder's option, after May 24, 1998 until May 24, 2001, and (ii) at
the Company's option, after May 24, 2001 until May 24, 2006. The Company
redeemed all of the outstanding shares of Series B Preferred Stock in 1998.
NOTE 11. CUMULATIVE CONVERTIBLE PREFERRED STOCK
Each share of $1.00 cumulative convertible preferred stock is entitled to
1/3 vote, annual dividends of $1 per share and is convertible at any time into
2/3 share of the Company's common stock (subject to customary anti-dilution
adjustments). Common stock of 463,233 shares has been reserved for this purpose.
The $1.00 cumulative convertible preferred stock is redeemable at the Company's
option at a redemption price of $20 per share, plus cumulative dividends in
arrears. Upon liquidation, the $1.00 cumulative convertible preferred
stockholders are entitled to receive $20 per share, plus cumulative dividends in
arrears, before any distribution is made to the common stockholders.
NOTE 12. COMMON STOCK
At December 31, 1999, approximately 9,207,000 common shares were reserved
for future issuance for conversion of preferred stock, employee benefit and
stock incentive plans and acquisition-related obligations.
On August 17, 1995, the Board of Directors adopted a Shareholder Rights
Agreement and subsequently distributed one preferred stock purchase right
("Right") for each outstanding share of the Company's common stock. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $1.00 per
share (the
83
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 12. COMMON STOCK (CONTINUED)
"Preferred Shares") at a price of $42.00 per one one-hundredth of a Preferred
Share, subject to adjustment. The Rights become exercisable if a person or group
acquires, in a transaction not approved by the Company's Board of Directors
("Board"), 15% or more of the Company's common stock or announces a tender offer
for 15% or more of the stock.
If a person or group acquires 15% or more of the Company's common stock,
each Right (other than Rights held by the acquiring person or group which become
void) will entitle the holder to receive upon exercise a number of shares of the
Company's common stock having a market value of twice the Right's exercise
price. If the Company is acquired in a transaction not approved by the Board,
each Right may be exercised for common shares of the acquiring company having a
market value of twice the Right's exercise price. Titan may redeem the Rights at
$.01 per Right, subject to certain conditions. The Rights expire on August 17,
2005.
NOTE 13. STOCK-BASED COMPENSATION PLANS
The Company provides stock-based compensation to officers, directors and key
employees through various fixed stock option plans and to all non-executive
employees through an employee stock purchase plan. The Company has adopted the
disclosure only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the fixed stock option or stock purchase plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's results of
operations would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss).................. As reported $35,181 $(15,331) $(17,576)
Pro forma 31,761 (16,936) (19,372)
Net income (loss) per share,
basic............................ As reported .78 (.41) (.52)
Pro forma .70 (.45) (.57)
Net income (loss) per share,
diluted.......................... As reported .69 (.40) (.52)
Pro forma .62 (.44) (.57)
</TABLE>
Options authorized for grant under the Stock Option Plans of 1994 and 1997,
and The 1996 Directors' Stock Option and Equity Participation Plan (the "1996
Directors' Plan") are 2,000,000 and 125,000, 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. Grants in 1999 exceeded the
remaining shares available under these plans. A proposal for a Stock Option Plan
of 2000 is subject to shareholder approval at the Company's Annual Meeting of
Stockholders on May 30, 2000. Under all plans, the exercise price of each option
equals the market price of the Company's stock on the date of grant. Under the
employee plans, an option's maximum term is ten years. Under the directors'
plan, 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. All options vest in 25% increments beginning one year after
the grant date. Stock options assumed by the Company as a result of the mergers
discussed in Note 2 generally retain the terms under which they were granted.
84
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
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 67% in 1999, 71% in 1998 and 70% in 1997; and a risk free
interest rate of 6.55% in 1999, 4.74% in 1998 and 5.72% in 1997.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1999, 1998 and 1997, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
-------- ---------------- -------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 4,020 $4.90 3,901 $4.04 3,286 $3.45
Granted.......................... 1,234 9.54 1,031 7.58 1,302 4.66
Exercised........................ (777) 3.37 (306) 3.87 (253) 2.47
Canceled......................... (280) 6.61 (606) 4.42 (434) 3.18
----- ----- -----
Outstanding at end of year....... 4,197 6.76 4,020 4.90 3,901 4.04
===== ===== =====
Options exercisable at
year-end....................... 1,994 1,922 1,994
Weighted-average fair value of
options granted during the
year........................... $9.54 $7.58 $4.66
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 - $3.94 1,104,860 5.08 years $ 2.06 965,112 $2.01
4.00 - 9.50 1,784,173 7.38 years 5.45 938,830 5.62
9.75 - 25.32 1,307,929 8.88 years 12.53 89,780 17.70
--------- ---------
4,196,962 7.24 years 1,993,722
========= =========
</TABLE>
Under the 1995 Employee Stock Purchase Plan, the Company is authorized to
issue up to 500,000 shares of common stock to its full-time employees. Elected
officers of the Company are not eligible to participate. Under the terms of the
plan, employees may elect to have between 1 and 10 percent of their regular
earnings, as defined in the plan, withheld to purchase the Company's common
stock. The purchase price of the stock is 85 percent of the lower of its market
price at the beginning of a two-year period or at the end of each offering
period. An offering period is two years, beginning January 1 and July 1 of each
year. Approximately 10%, 13% and 11% of eligible employees participated in the
Plan and purchased 215,907, 92,089 and 110,461 shares of the Company's common
stock in 1999, 1998 and 1997, respectively. The weighted-average fair value of
the purchase rights granted in 1999, 1998 and 1997 was $5.60, $1.61 and $1.06,
respectively.
85
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Each of Titan Systems, SureBeam and Titan Wireless is a wholly owned
subsidiary of Titan and has its own key employee stock option plan. The Company
has created stock option plans for each of Titan Systems, SureBeam and Titan
Wireless. As of December 31, 1999, Titan Systems had approximately 13% of its
fully diluted common stock that had been reserved for issuance under its plan,
and each of SureBeam and Titan Wireless had approximately 16% of their fully
diluted common stock that had been reserved for issuance under their respective
plans.
Cayenta has reserved 2,500,000 shares of Class A common stock under stock
option plans. Under its variable stock option plan, Cayenta has granted options
to certain employees who have agreed to resell shares purchased with those
options to Cayenta. Cayenta has recorded deferred compensation related to these
option grants in an aggregate amount of $203 through December 31, 1999. As of
December 31, 1999, there are 654,500 options outstanding that are subject to
this buyback provision, for which Cayenta expects to record deferred
compensation expense equal to the difference between these options' exercise
price of $0.36 per share and the price per share in the proposed initial public
offering multiplied by all 654,500 options. Upon the occurrence of an initial
public offering, the options convert to fixed price options. Cayenta also issued
645,500 options to employees not covered by this buyback option at exercise
prices that were less than the deemed fair market value of the underlying common
shares on the date of grant. Cayenta has recognized deferred compensation
relating to these grants of $638 and will amortize this deferred charge to
expense over the four-year vesting period of these options.
NOTE 14. BENEFIT PLANS
The Company has various defined contribution benefit plans covering certain
employees. The Company's contributions to these plans were $6,917, $4,186 and
$3,150 in 1999, 1998 and 1997, respectively. The Company's combined
discretionary contributions to their Employee Stock Ownership Plans were $1,055,
$295 and $372 in 1999, 1998 and 1997, respectively. Discretionary contributions
to a profit sharing plan covering certain employees were $150, $150 and $175 in
1999, 1998 and 1997, respectively. During 1997, the Company utilized treasury
stock of $344 for benefit plan contributions.
The Company has a non-qualified executive deferred compensation plan for
certain officers and key employees. The Company's expense for this plan was
$1,039, $824 and $821 in 1999, 1998 and 1997, respectively. Interest expense for
the years ended December 31, 1999, 1998 and 1997 includes $828, $650 and $527,
respectively, related to the plan. Included in other non-current liabilities is
$4,643 and $4,311 related to this plan at December 31, 1999 and 1998,
respectively. Cash surrender value of the life insurance related to this plan
was $8,401 and $976 (net of loans) included in Other Assets at December 31, 1999
and 1998, respectively. The Company also has performance bonus plans for certain
of its employees. Related expense amounted to approximately $4,687, $3,316 and
$2,125 in 1999, 1998 and 1997, respectively.
The Company has previously provided for postretirement benefit obligations
of operations discontinued in prior years. The Company has no postretirement
benefit obligations for any of its continuing operations nor for its recently
discontinued businesses.
NOTE 15. DBA ASSET IMPAIRMENTS
The Company has a 141,000 square foot manufacturing facility located in
Kissimmee, Florida which was acquired in the merger with DBA. The property has
been held for sale since June 1996. As a result of
86
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 15. DBA ASSET IMPAIRMENTS (CONTINUED)
several factors, including offers received by third parties, management
concluded that there had been an impairment in the carrying value of the asset.
A charge of $2.0 million was recorded in the Company's financial statements for
the year ended December 31, 1997 which reflects management's estimate of the
impairment, including estimated disposal costs. Titan management has a program
of ongoing maintenance (and environmental remediation -- see Note 9) and the
property is currently in escrow. Management regularly reviews this asset for
further impairment, and believes that the recorded book value at December 31,
1999 reflects an amount which is not less than net realizable value.
In September 1997, DBA invested $1.6 million in a start-up venture. To date,
this start-up venture has not yet generated any significant business and has
generated no significant revenue. In light of these circumstances, Titan
management believed that there was an impairment in the value of the investment
as recorded by DBA. An adjustment to write down the investment by $1.6 million
was recorded in the results of operations for the year ended December 31, 1997.
NOTE 16. SUBSEQUENT EVENTS
On January 31, 2000, the Company entered into a definitive agreement to
acquire substantially all of the stock of LinCom Corporation ("LinCom"), for a
purchase price of approximately $23 million in cash, subject to certain
post-closing adjustments and indemnification obligations, less a $1 million
holdback and a $2 million promissory note. The $1 million holdback is due
approximately 60 days after the closing date, and the $2 million note is due one
year after the closing date and accrues interest at 7%. LinCom is a developer of
wireless communications and information systems for both commercial and
government customers. The transaction was consummated on March 30, 2000 and will
be accounted for as a purchase. The excess of the purchase price over the
estimated fair market value of the net assets acquired to be amortized on a
straight line basis over 30 years, was approximately $19.9 million at March 31,
2000.
On February 9, 2000, the Company and Titan Capital Trust (the "Trust"), our
wholly owned subsidiary, issued 4 million convertible preferred securities
(Remarketable Term Income Deferrable Equity Securities, "HIGH TIDES") at $50 per
security, for an aggregate total of $200 million, with an overallotment
exercised on February 16, 2000 of an additional 1 million securities, for an
additional $50 million. The Trust used the proceeds from the sale of the HIGH
TIDES to purchase from the Company 5 3/4% Convertible Senior Subordinated
Debentures, due February 15, 2030. The debentures have the same financial terms
as the HIGH TIDES. The HIGH TIDES will accrue distributions of 5 3/4% per annum,
with quarterly distributions to be paid in arrears on February 15, May 15,
August 15 and November 15, commencing May 15, 2000. The Trust's ability to pay
distributions on the HIGH TIDES is solely dependent on its receipt of interest
payments from the Company on the debentures. Approximately five years after
issuance of the HIGH TIDES, the HIGH TIDES may be remarketed, which means that a
remarketing agent will attempt to establish an annual distribution rate,
conversion price and redemption features for the HIGH TIDES that are consistent
with a price per HIGH TIDES equal to 101% of its liquidation preference and also
are most favorable to the Company. The 5 3/4% per annum rate will be applicable
from the date of original issuance to, but excluding the reset date. The reset
date is any date (a) not later than February 15, 2005, or the final reset date,
or, if the day is not a business day, the next succeeding day, and (b) not
earlier than 70 business days prior to February 15, 2005, as may be determined
by the remarketing agent, in its sole discretion. On or after the reset date,
the applicable rate will be the term rate established by the remarketing agent
based on the outcome of the remarketing. We can, on one
87
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 16. SUBSEQUENT EVENTS (CONTINUED)
or more occasions, defer the interest payments due on the debentures for up to
20 consecutive quarters unless an event of default under the debentures has
occurred and is continuing. The holders of the HIGH TIDES may convert each
security into shares of common stock of Titan at the initial rate of 1.0076
shares of common stock for each HIGH TIDES (equivalent to an initial conversion
price of $49.625 per share of common stock). The Company may redeem the
debentures in whole or in part, at any time on or after February 20, 2003 until
but excluding the tender notification date, at a redemption price equal to
101.44% of the principal amount of the debentures, declining to 100% of the
principal amount of the debentures on or after February 20, 2004, plus any
accrued and unpaid interest; and after the reset date, in accordance with the
term call projections, if any, established in the remarketing or, upon a failed
final remarketing, on or after the third anniversary of the reset date at a
redemption price equal to 100% of the principal amount of debentures, plus any
accrued and unpaid interest.
On February 25, 2000, the Company consummated a merger with Advanced
Communication Systems, Inc., in a transaction accounted for as a pooling of
interests. See Note 2 for further discussion.
On February 23, 2000, the Company entered into a credit agreement for $275
million of financing from a syndicate of commercial banks including Credit
Suisse First Boston acting as Lead Arranger and Administrative Agent, First
Union Securities, Inc. acting as Co-Arranger and Syndication Agent and the Bank
of Nova Scotia serving as Documentation Agent. The proceeds of the loan were
used in part to refinance outstanding indebtedness on the Company's $190 million
credit facility arranged by Bank of Nova Scotia in June 1999 (see Note 8). The
balance at March 20, 2000 on the new facility was $100 million on the term loan.
The new credit facility is secured by substantially all of our and our
subsidiaries' assets and guaranteed by substantially all of our subsidiaries.
The $275 million facility is comprised of a seven-year senior secured multi-draw
term loan facility in an aggregate principal amount of up to $75 million, a
six-year senior secured term loan facility in an aggregate principal amount of
$100 million, and a five-year senior secured revolving credit facility in an
aggregate principal amount of up to $100 million. Loans made under the
multi-draw term loan facility would mature on the sixth anniversary of the
closing date of the new credit facility, and amortize as follows: 2.5% quarterly
in year two of the credit facility, 3.75% quarterly in year three of the credit
facility, 5% quarterly in year four of the credit facility, 6.25% quarterly in
year five of the credit facility and 7.5% quarterly in year six of the credit
facility. Loans made under the term loan facility would mature on the seventh
anniversary of the closing date of the new credit facility, and amortize as
follows: 0.25% quarterly for years one through six of the credit facility and
23.5% quarterly for year seven of the credit facility. Under each of the term
loan facilities and the revolving facility, we would have the option to borrow
at the bank's base rate or at adjusted LIBOR plus, in each case, an applicable
ratio based on the ratio of our total debt to EBITDA (earnings before interest
and taxes and depreciation and amortization). The agreement contains financial
covenants that set maximum debt to EBITDA limits and require us to maintain
minimum interest and fixed charge coverages and levels of net worth. Cayenta and
its subsidiaries shall cease being guarantors under the new credit facility, and
their assets shall no longer be collateral for the new bank syndicate if Cayenta
completes its proposed initial public offering.
On March 24, 2000, the Company completed the acquisition of all the
outstanding stock of Pulse Engineering ("Pulse") for a purchase price of
approximately $27.4 million in cash, subject to certain post-closing adjustments
and indemnification obligations, less a $1 million holdback placed in escrow and
a $2 million deferred payment. The holdback is due approximately 90 days from
the closing date and the
88
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 16. SUBSEQUENT EVENTS (CONTINUED)
deferred payment is due one year from the closing date. Pulse provides highly
specialized security and signal intelligence systems and services to the
intelligence community. The transaction will be accounted for as a purchase. The
excess of the purchase price over the estimated fair market value of the net
assets acquired, to be amortized on a straight line basis over 30 years, was
approximately $21.5 million at March 31, 2000.
On March 24, 2000, the Company signed a definitive agreement for the
acquisition of AverStar, Inc., a private company headquartered in Burlington,
Massachusetts, which provides information technology services in the areas of
information assurance, information operations and network and information
security for government and commercial customers. Under the terms of the
definitive agreement, AverStar will receive a total equity value of
approximately $140 million, if Titan's share price is between $44.00 and $56.00
per share at the time of closing. If Titan's share price is between $39.60 and
$44.00, the equity value will decrease ratably from $140 million to
approximately $126 million. At a Titan share price of less than $39.60, AverStar
has the right to terminate the definitive agreement subject to a Titan option to
assure a minimum equity value of approximately $126 million. If Titan's share
price is between $56.00 and $61.60, the equity value will increase ratably from
$140 million to approximately $154 million. At a Titan share price of more than
$61.60, Titan has the right to terminate the definitive agreement subject to an
AverStar option to agree to receive a maximum equity value of approximately
$154 million. The transaction has been approved by the board of directors of
both companies and is subject to regulatory and shareholder approval. The
transaction, which is expected to close by the end of June 2000, will be
accounted for as a pooling of interests.
NOTE 17. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
- ---- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $126,213 $140,783 $163,467 $194,340 $624,803
Gross profit.............................. 32,467 38,776 41,889 45,742 158,874
Income from continuing operations......... 3,985 5,851 8,080 22,865 40,781
Net income................................ 3,985 5,851 8,080 17,265 35,181
Basic earnings per share:
Income from continuing operations....... $ .09 $ .13 $ .17 $ .48 $ .91
Net income.............................. .09 .13 .17 .36 .78
Diluted earnings per share:
Income from continuing operations....... .08 .12 .15 .44 .80
Net income.............................. .08 .12 .15 .33 .69
</TABLE>
89
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, OR AS OTHERWISE NOTED)
NOTE 17. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA) (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
- ---- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 78,800 $ 93,793 $104,483 $134,104 $411,180
Gross profit.............................. 20,202 23,592 27,102 38,396 109,292
Income from continuing operations before
cumulative effect of change in
accounting principle.................... 1,608 3,816 3,110 3,053 11,587
Net income (loss)......................... (17,695) 4,027 (2,889) 1,226 (15,331)
Basic earnings per share:
Income from continuing operations....... $ .04 $ .09 $ .07 $ .07 $ .28
Net income (loss)....................... (.48) .10 (.08) .03 (.41)
Diluted earnings per share:
Income from continuing operations....... .04 .08 .07 .07 .27
Net income (loss)....................... (.46) .09 (.06) .03 (.40)
</TABLE>
The above financial information for each quarter reflects all normal and
recurring adjustments.
Income (loss) from continuing operations and net income (loss) include other
income of $41.8 million, net of acquisition and integration charges of $12.9
million and a write-off of $3.9 million of capitalized software development
costs and a $1.8 million write-off of an uncollected receivable, in the fourth
quarter of 1999, and acquisition and other charges of $1,460, $3,093 and $5,338
in the first, third and fourth quarters of 1998, respectively (see Notes 2 and
15).
90
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No information is required by Item 9.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by Item 10 with respect to the directors and the
executive officers of the Company is incorporated herein by this reference to
such information on pages 5-8 and 27 of the Company's definitive proxy statement
for the 2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by this reference
to such information on pages 9-14 of the Company's definitive proxy statement
for the 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by this reference
to such information on page 4 of the Company's definitive proxy statement for
the 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No information is required by Item 13.
91
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements being filed as part of this report are listed
in the index in Item 8, on page 56.
(b) The Company filed the following reports on Form 8-K during the fourth
quarter of 1999:
(1) Current Report on Form 8-K, dated November 2, 1999, regarding the
acquisition of JB Systems, Inc., d.b.a. Mainsaver Corporation.
(2) Current Report on Form 8-K, dated December 9, 1999, regarding the merger
agreement between the Registrant and Advanced Communication
Systems, Inc., ("ACS"), whereby Titan will acquire ACS.
(3) Current Report on Form 8-K, dated December 22, 1999, regarding the
acquisition of SFG Technologies Inc.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------- ----------- --------
<C> <S> <C>
3.1 Registrant's Certificate of Amendment of Restated *
Certificate of Incorporation dated as of October 21, 1998,
which was Exhibit No. 3.1 to Registrant's Quarterly Report
on Form 10-Q dated November 16, 1998, is incorporated herein
by this reference. Registrant's Restated Certificate of
Incorporation dated as of November 6, 1986, which was
Exhibit No. 3.1 to Registrant's 1987 Annual Report on
Form 10-K is incorporated herein by this reference.
Registrant's Certificate of Amendment of Restated
Certificate of Incorporation dated as of June 30, 1987,
which was Exhibit 3.2 to Registrant's 1987 Annual Report on
Form 10-K is incorporated herein by this reference.
3.2 Registrant's By-laws, as amended, which was filed with the *
Company's Quarterly Report on Form 10-Q dated November 13,
1995, as Exhibit 6(a)(3)is incorporated herein by this
reference.
3.3 Registrant's By-laws, as amended. **
4.1 Rights Amendment, dated as of August 21, 1995, between The *
Titan Corporation and American Stock Transfer and Trust
Company, which was Exhibit 1 to Registrant's Form 8-A dated
September 5, 1995, is incorporated herein by this reference.
4.2 Letter Agreement dated February 4, 1998 between the Company *
and DBA Systems, Inc. ("DBA") regarding certain registration
rights granted in connection with the acquisition of DBA
which was Exhibit 10.38 to Registration Statement on Form
S-4 (no. 333-45719) is incorporated herein by this
reference.
10.1 Stock Option Plan of 1990, which was filed in the 1990 *
definitive proxy statement and was Exhibit 10.11 to
Registrant's 1989 Annual Report on 10-K is incorporated
herein by this reference.
10.2 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.
10.3 Amendment to Stock Option Plan Of 1994. **
10.4 Stock Option Plan of 1997, which was filed in the Company's **
1997 Definitive Proxy Statement as Appendix A, is
incorporated herein by this reference.
10.5 Amendment to Stock Option Plan of 1997. **
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------- ----------- --------
<C> <S> <C>
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 Amendment to The Titan Corporation Supplemental Retirement **
Plan For Key Executives dated February 17, 2000.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 Executive Severance Plan entered into by the Company with *
Ronald B. Gorda, 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.
10.15 Executive Severance Plan entered into by the Company with **
Gene W. Ray, Eric M. DeMarco and Nicholas J. Costanza.
10.16 Loan and Security Agreement, dated December 29, 1995, by and *
between Registrant and Capital Associates
International, Inc., which was Exhibit 10.17 to Registrant's
1995 Annual Report on Form 10-K, is incorporated by this
reference.
10.17 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.
10.18 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.
10.19 Agreement and Plan of Merger and Reorganization dated *
January 6, 1998 among The Titan Corporation, Titan
Acquisition Sub, Inc. and DBA Systems, Inc. which was filed
as Exhibit 2.1 to the Company's Registration Statement on
Form S-4 (No. 333-45719), is incorporated herein by this
reference.
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------- ----------- --------
<C> <S> <C>
10.20 Agreement and Plan of Merger and Reorganization dated *
February 26, 1998, among The Titan Corporation, Sunrise
Acquisition Sub, Inc., Horizons Technology, Inc.
("Horizons") and certain stockholders of Horizons, which was
filed as Appendix A to the Company's Registration Statement
on Form S-4 (No. 333-47633) is incorporated herein by this
reference.
10.21 Stock Purchase Agreement dated as of March 24, 1998 between **
Titan Technologies and Information Systems Corporation,
Validity Corporation and the Shareholders of Validity
Corporation.
10.22 Agreement and Plan of Reorganization dated as of June 30, *
1998 by and among The Titan Corporation, Delsys Merger
Corp., and Delfin Systems, which was filed as Exhibit 2.1 to
the Company's Registration Statement on Form S-4 (No.
333-60127) is incorporated herein by this reference.
10.23 Agreement and Plan of Merger and Reorganization dated as of **
August 7, 1998 among The Titan Corporation, Merger Sub
Acquisition Corp., VisiCom Laboratories, Inc., and Certain
Shareholders of VisiCom Laboratories, Inc.
10.24 Stock Purchase Agreement dated as of June 9, 1999 among *
Titan Technologies and Information Systems Corporation,
System Resources Corporation and the Stockholders of System
Resources Corporation, which was filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated June 9, 1999 is
incorporated herein by this reference.
10.25 Agreement and Plan of Merger and Reorganization dated as of **
July 1, 1999 among Titan Technologies and Information
Systems Corporation, TTIS MergerCo, Inc., Atlantic Aerospace
Electronics Corporation, and the Designated Stockholders.
10.26 Limited Liability Company Agreement of Soliance Networks, **
LLC dated as of August 25, 1999 among Sempra Energy
Information Solutions, modis, Inc., and Cayenta.com, Inc.
10.27 Agreement and Plan of Merger, as amended, dated as of **
October 4, 1999 among IPIVOT, Inc., Intel Corporation, WCXT
Acquisition Corporation and Brett Helm and William Strensrud
as the representatives of the Escrow Securityholders.
10.28 Stock Purchase Agreement dated as of November 2, 1999 among *
Cayenta.com, Inc., J B Systems, Inc, d.b.a. Mainsaver
Corporation and Mainsaver, JKS Separate Property Trust, The
Gehl Living Trust, JBS Acquisition Company, LLC, Epicor
Software Corporation, Mark Stevens and The Titan
Corporation, which was filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated November 2, 1999 is
incorporated herein by this reference.
10.29 Stock Exchange and Stock Purchase Agreement dated as of **
December 7, 1999 among Cayenta, Cayenta Operating Company,
The Titan Corporation, Assist Cornerstone
Technologies, Inc. and the Selling Shareholders We have not
filed Schedules and similar attachments to this Exhibit.
Upon request, the Company will furnish supplementally to the
Commission a copy of any omitted schedule.
10.30 Agreement and Plan of Merger dated as of December 9, 1999 *
among The Titan Corporation, Advanced Communication
Systems, Inc., and AT Acquisition Corp, which was filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated December 9, 1999 is incorporated herein by this
reference.
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------- ----------- --------
<C> <S> <C>
10.31 Agreement and Plan of Merger, dated as of December 9, 1999 *
as amended as of January 20, 2000, among the Company, Merger
Sub and ACS, which was filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (No. 333-95245) is
incorporated herein by this reference.
10.32 Loan Facility Agreement dated as of December 10, 1999 among **
Titan Africa, Inc., Office des Postes et Telecommunications
of the State of Benin, Banque Belgolaise, Eco Bank Benin,
Banque Ouest Africain pour le Developpement, Banque
Internationale du Benin, Continental Bank Benin and Bank of
Africa Benin.
10.33 Stock Purchase Agreement dated as of December 23, 1999 among *
Cayenta, SFG Technologies, Inc., the Common Selling
Shareholders, the Preferred Selling Shareholders and the
Option Holders, which was filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated December 22, 1999
is incorporated herein by this reference.
10.34 Agreement and Plan of Reorganization dated as of **
January 28, 2000 among The Titan Corporation, MT Acquisition
Corp., William C. Lindsey, Inc. (DBA LinCom Corporation) and
the Principal Shareholder of William C. Lindsey, Inc. We
have not filed Schedules and similar attachments to this
Exhibit. Upon request, the Company will furnish
supplementally to the Commission a copy of any omitted
schedule.
10.35 5 3/4 % Convertible Preferred Securities Remarketable Term **
income Deferrable Equity Securities (High Tides) dated as of
February 3, 2000.
10.36 Senior Secured Credit Agreement, dated as of February 23, **
2000 among the Company, Various financial institutions from
time to time parties thereto (the "Lenders"), Credit Suisse
First Boston, as the Lead Arranger and as the Administrative
Agent for the Lenders, First Union Securities, Inc. as
Co-Arranger and as Syndication Agent and The Bank of Nova
Scotia as the Documentation Agent.
10.37 Agreement and Plan of Merger dated as of March 10, 2000 **
among The Titan Corporation, Titan Acquisition Corporation
and Pulse Engineering, Inc. We have not filed Schedules and
similar attachments to this Exhibit. Upon request, the
Company will furnish supplementally to the Commission a copy
of any omitted schedule.
13 The Titan Corporation 1999 Annual Report to Shareholders. **
21 Subsidiaries of Registrant as of December 31, 1999. **
23 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27 Financial Data Schedule for the year ended December 31, ***
1999.
</TABLE>
- ------------------------
* Previously filed as indicated and incorporated herein by reference from
filings previously made by the Company.
** Previously filed with the Company's 1999 Annual Report on Form 10-K.
*** Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
95
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE TITAN CORPORATION
By: /s/ GENE W. RAY
-----------------------------------------
Gene W. Ray,
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
May 23, 2000
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GENE W. RAY
-------------------------------------- President, Chief Executive Officer May 23, 2000
Gene W. Ray and Chairman of the Board
/s/ ERIC M. DEMARCO Executive Vice President and Chief
-------------------------------------- Financial Officer (Principal May 23, 2000
Eric M. DeMarco Financial Officer)
/s/ DEANNA HOM PETERSEN
-------------------------------------- Vice President, Corporate Controller May 23, 2000
Deanna Hom Petersen (Principal Accounting Officer)
-------------------------------------- Director
Charles R. Allen
/s/ JOSEPH F. CALIGIURI
-------------------------------------- Director May 23, 2000
Joseph F. Caligiuri
/s/ DANIEL J. FINK
-------------------------------------- Director May 23, 2000
Daniel J. Fink
-------------------------------------- Director
Robert M. Hanisee
/s/ ROBERT E. LA BLANC
-------------------------------------- Director May 23, 2000
Robert E. La Blanc
/s/ THOMAS G. POWNALL
-------------------------------------- Director May 23, 2000
Thomas G. Pownall
-------------------------------------- Director
George A. Robinson
-------------------------------------- Director
James Roth
</TABLE>
96
<PAGE>
THE TITAN CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED TO
BEGINNING OF (CHARGES TO OTHER BALANCE AT
YEAR EXPENSE) ACCOUNTS(A) DEDUCTIONS END OF YEAR
------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1999:
Accrued merger and integration
costs.............................. $3,035 $9,288 -- $6,443 $5,880
Allowance for doubtful accounts...... 1,388 3,191(c) -- 2,850 1,729
1998:
Accrued merger and integration
costs.............................. -- 5,038 -- 2,003 3,035
Allowance for doubtful accounts...... 718 -- 1,917 1,247(b) 1,388
1997:
Accrued merger and integration
costs.............................. -- -- -- -- --
Allowance for doubtful accounts...... 481 297 -- 60 718
</TABLE>
- ------------------------
(a) Represents amounts that were charged to the allowance for doubtful accounts
as a result of purchase accounting and the allocation of the purchase price
to the acquired assets and liabilities at their fair values.
(b) Includes $267 reclassed to unbilled accounts receivable.
(c) Includes $279 added through acquisitions.
97
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------- ----------- --------
<C> <S> <C>
3.1 Registrant's Certificate of Amendment of Restated *
Certificate of Incorporation dated as of October 21, 1998,
which was Exhibit No. 3.1 to Registrant's Quarterly Report
on Form 10-Q dated November 16, 1998, is incorporated herein
by this reference. Registrant's Restated Certificate of
Incorporation dated as of November 6, 1986, which was
Exhibit No. 3.1 to Registrant's 1987 Annual Report on
Form 10-K is incorporated herein by this reference.
Registrant's Certificate of Amendment of Restated
Certificate of Incorporation dated as of June 30, 1987,
which was Exhibit 3.2 to Registrant's 1987 Annual Report on
Form 10-K is incorporated herein by this reference.
3.2 Registrant's By-laws, as amended, which was filed with the *
Company's Quarterly Report on Form 10-Q dated November 13,
1995, as Exhibit 6(a)(3)is incorporated herein by this
reference.
3.3 Registrant's By-laws, as amended.
4.1 Rights Amendment, dated as of August 21, 1995, between The *
Titan Corporation and American Stock Transfer and Trust
Company, which was Exhibit 1 to Registrant's Form 8-A dated
September 5, 1995, is incorporated herein by this reference.
4.2 Letter Agreement dated February 4, 1998 between the Company *
and DBA Systems, Inc. ("DBA") regarding certain registration
rights granted in connection with the acquisition of DBA
which was Exhibit 10.38 to Registration Statement on Form
S-4 (no. 333-45719) is incorporated herein by this
reference.
10.1 Stock Option Plan of 1990, which was filed in the 1990 *
definitive proxy statement and was Exhibit 10.11 to
Registrant's 1989 Annual Report on 10-K is incorporated
herein by this reference.
10.2 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.
10.3 Amendment to Stock Option Plan Of 1994. **
10.4 Stock Option Plan of 1997, which was filed in the Company's **
1997 Definitive Proxy Statement as Appendix A, is
incorporated herein by this reference.
10.5 Amendment to Stock Option Plan of 1997.
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 Amendment to The Titan Corporation Supplemental Retirement **
Plan For Key Executives dated February 17, 2000.
10.10 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.
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------- ----------- --------
<C> <S> <C>
10.11 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.
10.12 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.
10.13 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.
10.14 Executive Severance Plan entered into by the Company with *
Ronald B. Gorda, 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.
10.15 Executive Severance Plan entered into by the Company with **
Gene W. Ray, Eric M. DeMarco and Nicholas J. Costanza.
10.16 Loan and Security Agreement, dated December 29, 1995, by and *
between Registrant and Capital Associates
International, Inc., which was Exhibit 10.17 to Registrant's
1995 Annual Report on Form 10-K, is incorporated by this
reference.
10.17 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.
10.18 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.
10.19 Agreement and Plan of Merger and Reorganization dated *
January 6, 1998 among The Titan Corporation, Titan
Acquisition Sub, Inc. and DBA Systems, Inc. which was filed
as Exhibit 2.1 to the Company's Registration Statement on
Form S-4 (No. 333-45719), is incorporated herein by this
reference.
10.20 Agreement and Plan of Merger and Reorganization dated *
February 26, 1998, among The Titan Corporation, Sunrise
Acquisition Sub, Inc., Horizons Technology, Inc.
("Horizons") and certain stockholders of Horizons, which was
filed as Appendix A to the Company's Registration Statement
on Form S-4 (No. 333-47633) is incorporated herein by this
reference.
10.21 Stock Purchase Agreement dated as of March 24, 1998 between **
Titan Technologies and Information Systems Corporation,
Validity Corporation and the Shareholders of Validity
Corporation.
10.22 Agreement and Plan of Reorganization dated as of June 30, *
1998 by and among The Titan Corporation, Delsys Merger
Corp., and Delfin Systems, which was filed as Exhibit 2.1 to
the Company's Registration Statement on Form S-4 (No.
333-60127) is incorporated herein by this reference.
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------- ----------- --------
<C> <S> <C>
10.23 Agreement and Plan of Merger and Reorganization dated as of **
August 7, 1998 among The Titan Corporation, Merger Sub
Acquisition Corp., VisiCom Laboratories, Inc., and Certain
Shareholders of VisiCom Laboratories, Inc.
10.24 Stock Purchase Agreement dated as of June 9, 1999 among *
Titan Technologies and Information Systems Corporation,
System Resources Corporation and the Stockholders of System
Resources Corporation, which was filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated June 9, 1999 is
incorporated herein by this reference.
10.25 Agreement and Plan of Merger and Reorganization dated as of **
July 1, 1999 among Titan Technologies and Information
Systems Corporation, TTIS MergerCo, Inc., Atlantic Aerospace
Electronics Corporation, and the Designated Stockholders.
10.26 Limited Liability Company Agreement of Soliance Networks, **
LLC dated as of August 25, 1999 among Sempra Energy
Information Solutions, modis, Inc., and Cayenta.com, Inc.
10.27 Agreement and Plan of Merger, as amended, dated as of **
October 4, 1999 among IPIVOT, Inc., Intel Corporation, WCXT
Acquisition Corporation and Brett Helm and William Strensrud
as the representatives of the Escrow Securityholders.
10.28 Stock Purchase Agreement dated as of November 2, 1999 among *
Cayenta.com, Inc., J B Systems, Inc, d.b.a. Mainsaver
Corporation and Mainsaver, JKS Separate Property Trust, The
Gehl Living Trust, JBS Acquisition Company, LLC, Epicor
Software Corporation, Mark Stevens and The Titan
Corporation, which was filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated November 2, 1999 is
incorporated herein by this reference.
10.29 Stock Exchange and Stock Purchase Agreement dated as of **
December 7, 1999 among Cayenta, Cayenta Operating Company,
The Titan Corporation, Assist Cornerstone
Technologies, Inc. and the Selling Shareholders We have not
filed Schedules and similar attachments to this Exhibit.
Upon request, the Company will furnish supplementally to the
Commission a copy of any omitted schedule.
10.30 Agreement and Plan of Merger dated as of December 9, 1999 *
among The Titan Corporation, Advanced Communication
Systems, Inc., and AT Acquisition Corp, which was filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated December 9, 1999 is incorporated herein by this
reference.
10.31 Agreement and Plan of Merger, dated as of December 9, 1999 *
as amended as of January 20, 2000, among the Company, Merger
Sub and ACS, which was filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (No. 333-95245) is
incorporated herein by this reference.
10.32 Loan Facility Agreement dated as of December 10, 1999 among **
Titan Africa, Inc., Office des Postes et Telecommunications
of the State of Benin, Banque Belgolaise, Eco Bank Benin,
Banque Ouest Africain pour le Developpement, Banque
Internationale du Benin, Continental Bank Benin and Bank of
Africa Benin.
10.33 Stock Purchase Agreement dated as of December 23, 1999 among *
Cayenta, SFG Technologies, Inc., the Common Selling
Shareholders, the Preferred Selling Shareholders and the
Option Holders, which was filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated December 22, 1999
is incorporated herein by this reference.
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------------------- ----------- --------
<C> <S> <C>
10.34 Agreement and Plan of Reorganization dated as of **
January 28, 2000 among The Titan Corporation, MT Acquisition
Corp., William C. Lindsey, Inc. (DBA LinCom Corporation) and
the Principal Shareholder of William C. Lindsey, Inc. We
have not filed Schedules and similar attachments to this
Exhibit. Upon request, the Company will furnish
supplementally to the Commission a copy of any omitted
schedule.
10.35 5 3/4 % Convertible Preferred Securities Remarketable Term **
income Deferrable Equity Securities (High Tides) dated as of
February 3, 2000.
10.36 Senior Secured Credit Agreement, dated as of February 23, **
2000 among the Company, Various financial institutions from
time to time parties thereto (the "Lenders"), Credit Suisse
First Boston, as the Lead Arranger and as the Administrative
Agent for the Lenders, First Union Securities, Inc. as
Co-Arranger and as Syndication Agent and The Bank of Nova
Scotia as the Documentation Agent.
10.37 Agreement and Plan of Merger dated as of March 10, 2000 **
among The Titan Corporation, Titan Acquisition Corporation
and Pulse Engineering, Inc. We have not filed Schedules and
similar attachments to this Exhibit. Upon request, the
Company will furnish supplementally to the Commission a copy
of any omitted schedule.
13 The Titan Corporation 1999 Annual Report to Shareholders. **
21 Subsidiaries of Registrant as of December 31, 1999. **
23 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27 Financial Data Schedule for the year ended December 31, ***
1999.
</TABLE>
- ------------------------
* Previously filed as indicated and incorporated herein by reference from
filings previously made by the Company.
** Previously filed with the Company's 1999 Annual Report on Form 10-K.
*** Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
101
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K/A, into the Company's previously filed
Registration Statements (as amended, as applicable) File Numbers 33-4041,
33-9570, 33-12119, 33-15680, 33-37827, 33-56762, 33-65123, 33-83402, 333-07413,
333-10919, 333-10965, 333-30947, 333-57651, 333-66149, 333-47633, 333-66147,
333-67341, 333-68621, 333-90133, 333-90139, 333-35102 and 333-35274. It should
be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1999 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
San Diego, California
May 23, 2000
