<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.c. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 24, 2000
THE TITAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
001-06035 95-2588754
(Commission File No.) (IRS Employer Identification No.)
3033 Science Park
San Diego, California 92121-1199
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (858) 552-9500
ITEM 5. OTHER EVENTS.
We are filing the following information with the Securities and Exchange
Commission for purposes of updating our publicly available disclosure.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein, the words "we," "our," "ours," "us" and "Titan" refers to
The Titan Corporation and its subsidiaries.
OVERVIEW AND OUTLOOK
We are a leading diversified technology company that provides 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, we have accumulated a broad portfolio of technologies,
intellectual property and expertise from which we have developed many of our
commercial businesses. The core technologies supporting our Titan Scan 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 8.1% 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 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 integration and enterprise asset
management
Titan Scan Electron beam food pasteurization and medical product
sterilization systems and services
Titan Wireless Satellite communication systems and services which
support telephony in developing countries
Emerging Technologies Development of commercial applications for
technologies created by our other business segments
through government-sponsored research and development
programs
</TABLE>
Each of Titan Systems, Titan Scan 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
2
<PAGE>
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, Titan Scan 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 Titan Scan 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 that are estimated to have an aggregate value, excluding
the over-allotment option, of $70.0 million. 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 2,450,000 shares of Class A common
stock under stock option plans, of which 2,344,250 were subject to outstanding
options as of December 31, 1999. 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 nine months ended
September 30, 1999, Titan Systems had total revenues of $219.5 million, which
represented 80.1% 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 consolidation of
defense companies. We expect to continue to support this segment's growth
through strategic acquisitions.
On December 9, 1999, we entered into an Agreement and Plan of Merger to
acquire Advanced Communication Systems, Inc. in a stock-for-stock, pooling of
interest transaction that we expect to close by the end of our first quarter of
2000. Advanced Communication Systems provides communications, information
systems and aerospace services and solutions primarily to U.S. government
agencies. During the twelve months ended September 30, 1999, Advanced
Communication Systems had revenues from government contracts of approximately
$199 million. 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. As of September 30, 1999, Advanced
Communication Systems had recorded goodwill of $57.6 million that is being
amortized over a period from five to 40 years in connection with its
acquisitions. Advanced Communication Systems also expects to record additional
goodwill of up to approximately $10 million at December 31, 1999 relating to a
potential $10 million earn-out that will be payable in February 2000 in
connection with an acquisition it made in 1998. The additional goodwill will be
amortized over 40 years.
During 1999, Titan Systems acquired System Resources Corporation ("System
Resources") for a cash purchase price of approximately $35.0 million, subject
to certain post-closing working capital adjustments and offsets for
indemnification claims, consisting of $33.0 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 on June 9, 2000, the one
year anniversary of the closing of the transaction. In addition, we agreed to
pay the System Resources stockholders one-half of approximately $1.5 million
in System Resources receivables aged
3
<PAGE>
more than 720 days to the extent that any of those receivables are collected
within the two-year period following the closing date. We also retired
approximately $10 million in System Resources indebtedness. On July 22nd,
Titan Systems also acquired Atlantic Aerospace Electronics Corporation for
approximately $18 million, all of which was paid at closing. In addition, we
may pay up to $3 million in connection with earn-outs tied to the receipt of
specific future contract awards, subject to offsets for indemnification
claims. We accounted for both of these acquisitions as purchases and recorded
approximately $41 million in goodwill, which is being amortized on a
straightline basis over 40 years.
During 1998, we completed five acquisitions, DBA Systems, Inc. on
February 27th, The 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 million in connection with the Validity transaction, which
is being amortized over 30 years.
Titan Systems' backlog, including both funded and unfunded backlog, was
approximately $621.3 million at September 30, 1999. Titan Systems also had
remaining priced options of approximately $207 million at September 30, 1999.
If Titan Systems' completes its acquisition of Advanced Communication
Systems, it expects a substantial increase in its backlog. At September 30,
1999, Advanced Communication Systems had funded and unfunded backlog of
$704.6 million. 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.
The following table summarizes the percentage of 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................................ 49.8% 44.6%
Fixed-Price....................................... 32.0 27.0
Time and Materials................................ 18.2 28.4
------ ------
100.0% 100.0%
====== ======
</TABLE>
The percentage of Advanced Communication Systems' revenues attributable to cost
reimbursement contracts was 45.0%, the percentage attributable to fixed-price
contracts was 23.0%, and the percentage attributable to time and materials
contracts was 32.0%, for the twelve months ended September 30, 1999.
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.
4
<PAGE>
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"), an enterprise application integration
consulting company, to broaden its systems integration capabilities 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. Cayenta will pay off an additional $2.8
million note that it issued as part of its acquisition of Transnational
Partners, plus 7% interest thereon, in February 2000. During late 1999,
Cayenta acquired J.B. Systems, Inc., an enterprise asset management company
doing business under the name Mainsaver ("Mainsaver"). Cayenta acquired
Mainsaver for $11.7 million in cash, of which $8.2 million was paid at the
closing. Of the $3.5 million withheld at the closing, $0.5 million is due in
February 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 $3.4
million to reduce outstanding indebtedness of Mainsaver. Also during late
1999, Cayenta acquired Assist Cornerstone Technologies, Inc. ("Assist"), an
e-commerce solutions and software provider. Cayenta acquired Assist for
516,458 shares of its Class A common stock and approximately $12.9 million in
cash, of which $9.9 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 and redeem all of its outstanding
redeemable preferred stock. Cayenta also acquired SFG Technologies, Inc.
("SFG Technologies"), a solutions and software provider focusing on revenue
cycle services for the utility industry, during the fourth quarter of 1999.
Cayenta acquired SFG Technologies for $11.6 million in cash, of which $9.5
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 and redeem all of its outstanding redeemable preferred stock.
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's information solutions
subsidiary and modis, an application integrator, Cayenta established Soliance,
LLC, a joint venture that markets and delivers 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 application
integration and consulting services and from sales of its proprietary software
solutions. 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 nine months ended September 30, 1999, Cayenta's revenues
from fixed-time, fixed-price contracts represented 66% of its actual revenues
and its revenues from time and materials contracts represented 34% of its actual
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
5
<PAGE>
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.
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. In addition, Cayenta expects to receive
application integration and consulting fees that will be recognized in
accordance with its revenue recognition policies discussed above.
Historically, Cayenta's interest expense has related to borrowings from us
to fund its acquisitions and working capital requirements. As of January 21,
2000, Cayenta owed approximately $54.0 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. 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 $155,000 through September 30, 1999. As of
September 30, 1999, there are 628,000 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 628,000 options. Cayenta also issued 245,000 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 $514,000 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.
TITAN SCAN
Titan Scan 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. Titan Scan'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.
Titan Scan 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, Titan Scan built, at Cloverleaf Cold Storage's facility in Sioux
City, Iowa, the first electron beam food pasteurization facility in the
United States. In addition, Titan Scan 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.
Titan Scan's
6
<PAGE>
multiyear arrangements with its customers generally provide that Titan Scan
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, Titan Scan 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 Titan Scan will own a minority interest in the new
entity. The facility is scheduled to become operational in December 2000.
Also in January 2000, Titan Scan 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, Titan Scan will hold an equity
interest in the new entity, and Mitsubishi will market Titan Scan's 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. Titan Scan will receive revenues from
the installation of our system in the plant and has an option to purchase a less
than 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 Titan Scan through profit allocations if Titan Scan
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 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 Titan Scan 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, Titan Scan expects that its
revenues from pasteurization services would increase significantly. Depending
upon market demand, Titan Scan 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's 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's 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
7
<PAGE>
Sakon Corporation to provide carrier, direct dial telephony and enhanced
communications 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 also owns a 50% equity interest in Titan Africa, Benin,
which 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's 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.
EMERGING TECHNOLOGIES.
This segment's operating activities consist primarily of the ImagClear
5000 fingerprint digitization system business, our truck and train tracking
and monitoring system 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
8.1% equity interest in IPivot, Inc., which was acquired by Intel
Corporation. 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 portfolio businesses
contained in our Emerging Technologies segment.
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
(IN THOUSANDS) (IN THOUSANDS)
------------------------------ ---------------------
CONSOLIDATED FINANCIAL DATA 1996 1997 1998 1998 1999
- --------------------------- -------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $245,976 $275,923 $303,428 $218,678 $274,059
Cost of revenues.......................... 192,657 216,553 232,041 168,816 211,147
Selling, general and administrative....... 36,226 36,731 37,553 26,936 32,957
Research and development.................. 5,023 7,466 5,590 4,025 5,317
Special acquisition related charges and
other................................... -- 6,600 9,891 4,553 --
Operating profit.......................... 12,070 8,573 18,353 14,348 24,638
Interest expense, net..................... 4,125 5,771 6,985 5,137 6,127
Income tax provision...................... 2,603 4,184 4,155 3,336 5,553
Cumulative effect of change in accounting
principle, net.......................... -- -- (19,474) (19,474) --
Loss from discontinued operations, net.... (6,326) (17,930) (7,444) (5,617) --
Net income (loss)......................... (984) (19,312) (19,705) (19,821) 12,958
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ ---------------------
AS A PERCENTAGE OF REVENUES 1996 1997 1998 1998 1999
- --------------------------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 78.4 78.5 76.5 77.2 77.0
Selling, general and administrative....... 14.7 13.3 12.4 12.3 12.0
Research and development.................. 2.0 2.7 1.8 1.8 1.9
Special acquisition related charges and
other................................... -- 2.4 3.3 2.1 --
Operating profit.......................... 4.9 3.1 6.0 6.6 9.0
Interest expense, net..................... 1.7 2.1 2.3 2.3 2.2
Income tax provision...................... 1.1 1.5 1.4 1.5 2.0
Cumulative effect of change in accounting
principle, net.......................... -- -- (6.4) -- --
Loss from discontinued operations, net.... (2.6) (6.5) (2.4) -- --
Net income (loss)......................... (0.4) (7.0) (6.5) -- 4.7
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
(IN THOUSANDS) (IN THOUSANDS)
------------------------------ ---------------------
1996 1997 1998 1998 1999
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SEGMENT FINANCIAL DATA:
INFORMATION TECHNOLOGIES
Revenues................................ $211,124 $225,686 $259,442 $188,366 $219,545
Operating profit ....................... 18,770 8,361 25,270 18,356 21,604
TITAN SOFTWARE SYSTEMS
Revenues................................ 18,505 17,374 21,470 13,242 29,330
Operating profit (loss)................. (137) 4,580 5,137 3,232 6,173
MEDICAL STERILIZATION AND FOOD
PASTEURIZATION
Revenues................................ 7,930 8,254 11,184 8,049 9,985
Operating profit (loss)................. (390) (204) 1,121 503 1,668
COMMUNICATIONS SYSTEMS
Revenues................................ 3,430 18,405 6,717 6,004 9,885
Operating profit (loss)................. (5,421) (1,074) (6,732) (3,057) 1,656
EMERGING TECHNOLOGIES AND BUSINESSES
Revenues................................ 4,987 6,204 4,615 3,017 5,314
Operating profit (loss)................. (209) (286) 34 (235) 732
CORPORATE/OTHER........................... (543) (2,804) (6,477) (4,451) (7,195)
-------- -------- -------- -------- --------
TOTAL REVENUES............................ $245,976 $275,923 $303,428 $218,678 $274,059
TOTAL OPERATING PROFIT.................... $ 12,070 $ 8,573 $ 18,353 $ 18,353 $ 24,638
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ ---------------------
1996 1997 1998 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
SEGMENT REVENUES AS A PERCENTAGE OF TOTAL
REVENUES:
INFORMATION TECHNOLOGIES.................. 85.9% 81.8% 85.5% 86.1% 80.1%
TITAN SOFTWARE SYSTEMS.................... 7.5% 6.3% 7.1% 6.1% 10.7%
MEDICAL STERILIZATION AND FOOD
PASTEURIZATION.......................... 3.2% 3.0% 3.7% 3.7% 3.6%
COMMUNICATIONS SYSTEMS.................... 1.4% 6.7% 2.2% 2.7% 3.6%
EMERGING TECHNOLOGIES AND BUSINESSES...... 2.0% 2.2% 1.5% 1.4% 1.9%
-------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
REVENUES
CONSOLIDATED. Revenues increased from $218.7 million for the nine months
ended September 30, 1998 to $274.1 million for the nine months ended
September 30, 1999.
INFORMATION TECHNOLOGIES. Information Technologies' revenues increased
from $188.4 million for the nine months ended September 30, 1998 to $219.5
million for the nine months ended September 30, 1999. This increase was due
primarily to revenues generated as a result of the acquisitions of Validity,
System Resources and Atlantic Aerospace and increased subcontract revenues
and to a lesser degree due to internal growth experienced by several of the
information technologies and systems businesses. These
10
<PAGE>
increased revenues were partially offset by reduced shipments of certain defense
communications products.
SOFTWARE SYSTEMS. Software Systems' revenues increased from $13.2
million for the nine months ended September 30, 1998 to $29.3 million for the
nine months ended September 30, 1999. This growth resulted primarily from a
significant new contract with a customer that accounted for $9.8 million in
revenues in the period and $8.3 million in revenues contributed by the
Transnational Partners business that was acquired in January 1999.
MEDICAL STERILIZATION AND FOOD PASTEURIZATION. Medical Sterilization and
Food Pasteurization's revenues increased from $8.0 million for the nine
months ended September 30, 1998 to $10.0 million for the nine months ended
September 30, 1999. This increase primarily relates to the completion of two
medical sterilization systems during the second quarter of 1999, and to
increased utilization at the San Diego and Denver contract medical
sterilization facilities and at the medical sterilization facility in the
Dominican Republic that we operate for Baxter Corporation.
COMMUNICATIONS SYSTEMS. Communications Systems' revenues increased from
$6.0 million for the nine months ended September 30, 1998 to $9.9 million for
the nine months ended September 30, 1999. The increase in revenues was due
principally to revenues recorded on its contract to provide a telecommunications
system in Benin, Africa, and to a lesser extent, due to revenues related to the
launching of long distance service in El Salvador and Cameroon. Also included in
revenues for the nine months ended September 30, 1999 is $1.5 million reflecting
the collection of a portion of receivables from PT. Pasifik Satelit Nusantara
("PSN"), for which we had previously provided a valuation allowance against the
amounts outstanding.
EMERGING TECHNOLOGIES AND BUSINESSES. Emerging Technologies' revenues
increased from $3.0 million for the nine months ended September 30, 1998 to $5.3
million for the nine months ended September 30, 1999. This increase was due
primarily to increased shipments of fingerprint digitization systems.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses ("SG&A") increased from
$26.9 million for the nine months ended September 30, 1998 to $33.0 million for
the nine months ended September 30, 1999. SG&A, as a percentage of revenue,
decreased slightly from 12.3% for the nine months ended September 30, 1998 to
12.0% for the nine months ended September 30, 1999. This decrease resulted
primarily from the cost reduction measures implemented in our Information
Technologies segment.
RESEARCH AND DEVELOPMENT
Research and development costs ("R&D") increased from $4.0 million for
the nine months ended September 30, 1998 to $5.3 million for the nine months
ended September 30, 1999. These increases were due to the increased level of
R&D spending in the Information Technologies segment, specifically related to
imaging products. We anticipate that the level of R&D spending will continue
to increase for the remainder of fiscal 1999 and through fiscal 2000 across
all of our core business segments.
OPERATING PROFIT
CONSOLIDATED. Our operating profit increased from $14.3 million for the
nine months ended September 30, 1998 to $24.6 million for the nine months ended
September 30, 1999. This increase was due primarily to the increased revenues
noted above and a special charge for merger-related and other expenses of $4.6
million included in operating results for the nine months ended September 30,
1998.
INFORMATION TECHNOLOGIES. Information Technologies' operating profit
increased from $18.4 million for the nine months ended September 30, 1998 to
$21.6 million for the nine months ended September 30, 1999. This increase was
due primarily to the increased revenues noted above. Included in Titan
11
<PAGE>
Systems' results of operations for the nine months ended September 30, 1998 are
special acquisition related charges of $3.4 million and $0.4 million related to
costs incurred to file a registration statement with the Securities and Exchange
Commission ("SEC"). Excluding these special charges, operating income decreased
$0.6 million from $22.2 million in the nine months ended September 30, 1998 to
$21.6 million in the same period in 1999. One time credits in the nine months
ended September 30, 1998 resulted in higher than normal operating profit
margins. In addition, a change in product and service revenue mix, an increase
in lower margin subcontract revenue volumes, and increased R&D expenditures for
certain imaging and defense satellite communications products also resulted in
lower operating margins during the nine months ended September 30, 1999. The
impact of the change in revenue mix and increased R&D investment was partially
offset by credits related to favorable determinations from certain government
agencies.
SOFTWARE SYSTEMS. Software Systems' operating profit increased from $3.2
million for the nine months ended September 30, 1998 to $6.2 million for the
nine months ended September 30, 1999. This increase resulted primarily from the
increase in revenues noted above.
MEDICAL STERILIZATION AND FOOD PASTEURIZATION. Titan Scan's operating
profit increased from $0.5 million for the nine months ended September 30, 1998
to $1.7 million for the nine months ended September 30, 1999. This increase
resulted primarily from the increase in revenues noted above.
COMMUNICATIONS SYSTEMS. Communications Systems' operating results improved
from an operating loss of $3.1 million for the nine months ended September 30,
1998 to an operating profit of $1.7 million for the nine months ended
September 30, 1999. This increase resulted primarily from the increase in
revenues noted above. Communications Systems' operating results for the nine
months ended September 30, 1999 include $2.1 million reflecting the collection
of a portion of receivables from PSN, for which we had previously provided a
valuation allowance against the amounts outstanding. Communications Systems'
operating results for the nine months ended September 30, 1998 include special
charges of $0.4 million related to costs incurred in connection with a withdrawn
registration statement.
EMERGING TECHNOLOGIES AND BUSINESSES. Emerging Technologies' operating
results improved from an operating loss of $0.2 million for the nine months
ended September 30, 1998 to an operating profit of $0.7 million for the nine
months ended September 30, 1999. This increase resulted primarily from the
increased revenues noted above.
INTEREST EXPENSE, NET
Our net interest expense increased from $5.1 million for the nine months
ended September 30, 1998 to $6.1 million for the nine months ended
September 30, 1999. This increase resulted primarily from increased borrowings
under our bank credit facility, principally in connection with our acquisitions
of System Resources and Atlantic Aerospace.
INCOME TAXES
Our income tax provision decreased from a 36% effective rate for the nine
months ended September 30, 1998 to a 30% effective rate for the nine months
ended September 30, 1999. The higher rate for the nine months ended
September 30, 1998 was due primarily to the inability to offset losses of
certain acquired entities with income of other entities. We expect our effective
income tax rate to remain stable in the foreseeable future at an approximate
rate of 30% to 34%.
NET INCOME (LOSS)
We reported net income of $13.0 million for the nine months ended
September 30, 1999 compared to a net loss of $19.2 million for the nine months
ended September 30, 1998. Included in the results for the nine months ended
September 30, 1998 is a special pre-tax charge for merger-related and other
12
<PAGE>
expenses of $4.6 million. Included in the results for the nine months ended
September 30, 1998 are losses from discontinued operations of $5.6 million. 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.
FISCAL YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES
CONSOLIDATED. Our consolidated revenues increased from $246.0 million in
1996 to $275.9 million in 1997 and from $275.9 million in 1997 to $303.4
million in 1998. Increased revenues were reported in the Information
Technologies, Software Systems and Medical Sterilization and Food
Pasteurization segments in 1998. Revenue growth in 1998 was primarily
attributable to the impact of acquisitions made and integrated into our
Information Technologies segment, work performed on new business in the
Software Systems segment, and the near-completion of two SureBeam systems in
the Medical Sterilization and Food Pasteurization segment. Revenue growth in
1997 was primarily attributable to revenues generated by Eldyne, Inc. and
Unidyne Corporation, which integrate, install and maintain information
systems on U.S. ships and submarines and we acquired in May 1996 and
integrated into Titan Systems, as well as increased deliveries of telephony
units and Mini-DAMA units in our Communications Systems and Information
Technologies segments.
INFORMATION TECHNOLOGIES. Information Technologies' revenues increased
from $211.1 million in 1996 to $225.7 million in 1997 and from $225.7 million
in 1997 to $259.4 million in 1998. The increase in 1998 primarily relates to
$23.0 million of revenue generated from Validity, which was purchased in
March 1998, and to a lesser degree, revenues related to a claim with the U.S.
government for work performed in a prior year, increased shipments of
Mini-DAMA units and increased sales volume of certain VisiCom products. The
increased revenue in 1997 was primarily related to a full-year's revenues
generated from Eldyne and Unidyne, which were acquired in May 1996, increased
shipments of Mini-DAMA units and increased revenues generated under a
contract awarded to DBA in 1996.
SOFTWARE SYSTEMS. Software Systems' revenues decreased from $18.5 million
in 1996 to $17.4 million in 1997 and increased from $17.4 million in 1997 to
$21.5 million in 1998. The increase in 1998 resulted primarily from several new
customers and from increased revenues from one federal agency which accounted
for approximately $6.8 million, $8.9 million and $11.2 million of Software
Systems' revenues during 1996, 1997 and 1998, respectively, partially offset by
a reduction in revenues from a major telecommunications customer. The decline in
1997 resulted primarily from reduced demand from the latter customer,
substantially offset by increased revenues from several new and existing
customers. Cayenta expects to diversify its customer base as it expands its
sales and marketing efforts and further develops and launches its TSP offering.
MEDICAL STERILIZATION AND FOOD PASTEURIZATION. Medical Sterilization and
Food Pasteurization revenues increased from $7.9 million in 1996 to $8.3
million in 1997 and from $8.3 million in 1997 to $11.2 million in 1998. The
increase in 1998 is a result of revenue recognized, using the
percentage-of-completion method of accounting, for two turnkey sterilization
systems which were ordered by customers in late 1997 and substantially
completed in 1998. Increased processing of medical products at our two
medical sterilization facilities also contributed to this revenue growth.
Revenues in 1997 were also favorably impacted by increased processing of
medical products as well as the sale of our turnkey sterilization systems to
Guidant Corporation and Baxter Healthcare.
13
<PAGE>
COMMUNICATIONS SYSTEMS. Communications Systems' revenues increased from
$3.4 million in 1996 to $18.4 million in 1997 and decreased from $18.4 million
in 1997 to $6.7 million in 1998. The decline in 1998 revenues was due primarily
to the decreased shipments made on our contract with PSN for telephony units in
Indonesia. The revenue increase in 1997 primarily reflected the fulfillment of
our initial contract with PSN for telephony units and increased market
acceptance for certain of our modem and networking products.
EMERGING TECHNOLOGIES AND BUSINESSES. Emerging Technologies' revenues
increased from $5.0 million in 1996 to $6.2 million in 1997 and decreased from
$6.2 million in 1997 to $4.6 million in 1998. The decline 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. The increase in 1997 revenues was due to
increased sales volume of fingerprint digitization systems.
SELLING GENERAL AND ADMINISTRATIVE
Our SG&A expenses increased from $36.2 million in 1996 to $36.7 million in
1997 and from $36.7 million in 1997 to $37.6 million in 1998. SG&A, as a
percentage of revenues, decreased from 14.7% in 1996 to 13.3% in 1997 and from
13.3% in 1997 to 12.4% in 1998. The reductions in 1997 and 1998 reflect the
impact of cost reduction measures as well as economies of scale and efficiencies
that have been achieved. In addition, we have eliminated many duplicate
functions and costs as part of our process of integrating certain of our
acquired businesses. 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 we intend to continue
it.
RESEARCH AND DEVELOPMENT
Our R&D expenses increased from $5.0 million in 1996 to $7.5 million in 1997
and decreased from $7.5 million in 1997 to $5.6 million in 1998. The reduced
level of R&D expenditures in 1998 primarily reflects the completion of certain
development and certification efforts of certain defense communications products
within our Information Technologies segment which were substantially completed
in 1997. The increase in 1997 was due primarily to these development and
certification efforts that were completed in 1998, certain of which took longer
than expected to complete.
OPERATING PROFIT
CONSOLIDATED. Our operating profit decreased from $12.1 million in 1996 to
$8.6 million in 1997 and increased from $8.6 million in 1997 to $18.4 million in
1998. Our operating profits have been significantly impacted by a number of
factors in each of 1996, 1997 and 1998. 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. The 1996 operating performance reflects our continuing investment in
and funding of our commercial ventures.
INFORMATION TECHNOLOGIES. Information Technologies' operating profit
decreased from $18.8 million in 1996 to $8.4 million in 1997 and increased
from $8.4 million in 1997 to $25.3 million in 1998. 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 conjunction with the
mergers of DBA, Horizons, VisiCom and Delfin and $0.4 million of costs
14
<PAGE>
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, and certain other asset write-downs recorded
in connection with the acquisition of DBA. Excluding the impact of these
charges, Titan Systems' operating income decreased from $18.8 million in 1996 to
$18.2 million in 1997 and increased from $18.2 million in 1997 to $32.5 million
in 1998, primarily from the increased revenues discussed above, as well as from
certain cost reduction efforts taken during 1997 and 1998.
SOFTWARE SYSTEMS. Software Systems' operating profit improved from an
operating loss of $0.1 million in 1996 to an operating profit of $4.6 million in
1997 and from an operating profit of $4.6 million in 1997 to an operating profit
of $5.1 million in 1998. The 1998 increase in operating performance reflects the
impact of the increased revenues discussed above. The 1997 results reflect the
impact of cost reductions achieved, offset somewhat by additional costs
associated with a negotiated conclusion of certain contracts. The 1996 operating
loss was due primarily to reduced sales from the previously mentioned
telecommunications customer, the timing of corresponding decreases in SG&A, and
additional costs associated with the aforementioned conclusion of contracts.
MEDICAL STERILIZATION AND FOOD PASTEURIZATION. Medical Sterilization and
Food Pasteurization's operating results improved from an operating loss of
$0.4 million in 1996 to an operating loss of $0.2 million in 1997 and from an
operating loss of $0.2 million in 1997 to an operating profit of $1.1 million
in 1998. This improvement was primarily due to the increase in revenues
mentioned above.
COMMUNICATIONS SYSTEMS. Communications Systems' operating results improved
from an operating loss of $5.4 million in 1996 to an operating loss of $1.1
million in 1997 and worsened from an operating loss of $1.1 million in 1997 to
an operating loss of $6.7 million in 1998. 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 incurred
to file a 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 an
operating loss of $5.4 million in 1996. The increase in operating loss in 1998
was attributable to the decline in revenues noted above. Operating performance
improved in 1997 from 1996 due primarily to increased revenues combined with
decreased SG&A and R&D expenses as a percentage of revenues.
EMERGING TECHNOLOGIES AND BUSINESSES. Emerging Technologies' operating
results declined from an operating loss of $0.2 million in 1996 to an operating
loss of $0.3 million in 1997 and improved from an operating loss of $0.3 million
in 1997 to an operating profit of $0.03 million in 1998. The improved operating
results in 1998 were due primarily to the increase in revenues discussed above.
INTEREST EXPENSE, NET
Our net interest expense increased from $4.1 million in 1996 to $5.8 million
in 1997 and from $5.8 million in 1997 to $7.0 million in 1998. Net interest
expense has increased over 1996, 1997 and 1998, primarily as a direct result of
the increased level of our borrowings, primarily to fund the growth in the
various segments. In 1998 and 1997, the principal component of interest expense
was related to our convertible senior subordinated debentures, substantially all
of which had been converted into our common stock by the end of the fourth
quarter of 1999. In 1996, the principal component of interest expense was
related to our borrowings under our bank lines of credit. Borrowings from our
primary
15
<PAGE>
bank lines of credit, excluding working capital lines from acquired companies,
averaged $28.9 million at a weighted average interest rate of 7.7% during 1998,
$10.8 million at a weighted average interest rate of 8.1% during 1997, and $12.3
million at a weighted average interest rate of 8.2% during 1996. Also included
in interest expense is interest on our deferred compensation and retiree medical
obligations. Interest expense related to these items was $0.9 million for 1998,
$0.8 million for 1997 and $0.8 million for 1996.
INCOME TAXES
Income taxes reflect effective rates of 37% in 1998, 149% in 1997 and 33% in
1996. The difference between the actual provision and the effective rate (based
on the United States statutory tax rate) in 1998 and 1996 was due primarily to
state income taxes. The increased rate in 1997 was due primarily to significant
non-deductible expenses which were recorded for financial reporting purposes, as
well as the inability to offset losses of certain acquired entities with income
of other entities. We anticipate that our effective income tax rate will remain
stable in the foreseeable future at an approximate rate of 30% to 34%.
NET LOSS
Our reported net loss increased from $1.0 million in 1996 to $19.3 million
in 1997 and from $19.3 million in 1997 to $19.7 million in 1998. Included in the
net losses for 1996, 1997 and 1998 are net losses from discontinued operations
of $6.3 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
During the nine months ended September 30, 1999, we used $8.7 million for
the operating requirements of continuing operations. Cash of $50.9 million was
used for our acquisitions of Transnational Partners, System Resources and
Atlantic Aerospace and cash used for discontinued operations was $5.8 million.
Cash was provided primarily by borrowings under our line of credit of $76.9
million.
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 has received payments from PSN in accordance with the negotiated
payment terms.
On June 9, 1999, in conjunction with the acquisition of System Resources,
our bank syndicate, with The Bank of Nova Scotia as the administrative agent,
amended and increased our existing credit facility. The revised credit facility,
totaling $190 million, includes a $55 million 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. The credit facility is secured by substantially all of the
assets of Titan. Quarterly repayment schedules are in increasing percentages
over 4 years beginning September 1999 for the $25 million original portion of
the
16
<PAGE>
acquisition line and June 2000 for the $35 million new portion of the
acquisition line. The $75 million term loan is to be repaid quarterly at .25%
of original principal beginning September 30, 1999 through September 29, 2004
and at 23.75% thereafter until the final payment at maturity on June 9, 2005.
We have the option to borrow at the bank's base rate plus a margin of 2% or
at LIBOR plus a margin of 3% on the $75 million term loan. Margins applicable
to the remaining lines are based on the ratio of total debt to earnings
before interest, taxes, depreciation and amortization, or EBITDA. As of
January 21, 2000, we had $141 million of indebtedness outstanding under this
credit facility. We are seeking a new credit facility to replace our existing
credit facility. We cannot guarantee that a new credit facility will be
available to us or will be available to us on acceptable terms.
In November 1999, we received approximately $42 million in cash for our
8.1% 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 the 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 $39.1 million, which went to
the applicable sellers as well as to retire outstanding indebtedness and redeem
outstanding redeemable preferred stock of the entities acquired.
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 existing credit facility and any new credit
facility we obtain, and other available cash sources. Management believes
that the combination of net proceeds from
17
<PAGE>
amounts available under our existing credit facility and any new credit
facility we obtain, 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
issuance of equity or equity-linked securities may result in substantial
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.
YEAR 2000 READINESS DISCLOSURE
We implemented a Year 2000 compliance program to address our current
hardware and software products and development tools and all of our major
computing information systems networks, desktop systems and infrastructure. In
addition, we contacted business associates such as our third party vendors,
business partners, contractors and service providers to assess their level of
readiness. We estimate that the cost of moving business units to new systems
will ultimately range from $1.0 million to $2.0 million. We do not expect to
experience any material disruptions or other problems relating to the Year 2000
rollover in the operation of our internal hardware and software systems. As a
result of prior assessments, we do not expect our current products or services
to have material Year 2000 issues, and, to date, we have not received any claims
or other indications that any of our segment's products and services are not
Year 2000 compliant. Our products and services generally do not have provisions
for extended warranties; as such, we do not expect that we will have to spend
any material amounts to make any of our prior products Year 2000 compliant.
Since September 30, 1999, our subsidiary Cayenta has completed three
acquisitions of computer software companies. Each of the acquired companies
represented to Cayenta that they used commercially reasonable efforts to make
their systems and products Year 2000 compliant. We cannot predict whether any of
the products of our recently acquired businesses may have Year 2000 issues.
Most of our customers, in particular the U.S. government, utilize complex
billing and accounting systems to determine the timing and the amounts that will
be paid to us under our various contracts. In addition, several of our major
strategic partners rely on complex software systems to coordinate and control
their day-to-day operations. These complex systems may not be Year 2000
compliant. Although these customers and strategic partners have advised us that
they expect to resolve any Year 2000 issues prior to December 31, 1999, we
cannot guarantee that our billing procedures and cycles, or our joint sales and
marketing efforts, will not be interrupted. If these customers' or business
partners' Year 2000 issues are not resolved on time, or at all, our financial
position, results of operations or cash flows could be materially and adversely
affected.
18
<PAGE>
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 revenues from U.S.
government business represented approximately 81% of our total revenues for
the year ended December 31, 1996, approximately 82% of our total revenues for
the year ended December 31, 1997, approximately 80% of our total revenues for
the year ended December 31, 1998, and approximately 80% of our total revenues
for the nine months ended September 30, 1999. On a pro forma basis giving
effect to our acquisition of Advanced Communication Systems, our revenues
from U.S. government business represented approximately 88% of our total
revenues for the twelve months ended September 30, 1999. The Government
Electronic Industries Alliance forecasts that U.S. government spending on
defense information technology will grow on an inflation adjusted basis at a
rate of 1.3% over the next five years. 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............................... 51.6% 49.8% 44.6%
Fixed-Price...................................... 32.8 32.0 27.0
Time and Materials............................... 15.6 18.2 28.4
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
The following table gives the percentage of revenues realized by Advanced
Communication Systems from the three primary types of government contracts
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
CONTRACT TYPE 1997 1998 1999
- ------------- -------- -------- --------
<S> <C> <C> <C>
Cost Reimbursement............................... 59.0% 41.0% 45.0%
Fixed-Price...................................... 35.0 22.0 23.0
Time and Materials............................... 6.0 37.0 32.0
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
19
<PAGE>
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 the
following dates:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
BACKLOG ------------------- --------------------------
- ------- 1997 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government funded backlog.............. $126,720 $106,635 $ 171,574
U.S. Government unfunded backlog............ 356,052 466,149 449,769
Commercial backlog.......................... 48,367 47,227 47,651
-------- -------- --------------------------
Total backlog............................... $531,139 $620,011 $ 668,994
======== ======== ==========================
</TABLE>
In addition to the backlog described above, at September 30, 1999, we had
remaining priced options of over $207 million for the delivery of certain
Command, Control, Communications, Computing, Intelligence, Surveillance and
Reconnaissance systems and program management services. We expect that a
substantial number of these options will be exercised in the future, although
there is no assurance that any options will be exercised.
Management believes that year-to-year comparisons of backlog are difficult
and not necessarily indicative of future revenues. 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.
20
<PAGE>
We expect to realize approximately 46% of our September 30, 1999 backlog by
September 30, 2000.
Advanced Communication Systems' backlog consisted of the following
approximate amounts as of the following dates:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
BACKLOG 1997 1998 1999
- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Funded........................................ $ 5,323 $ 57,454 $ 64,797
Unfunded...................................... 141,314 456,592 639,809
-------- -------- --------
Total......................................... $146,637 $514,046 $704,606
======== ======== ========
</TABLE>
Advanced Communication Systems includes remaining priced options in its
unfunded backlog amount, which we exclude from unfunded backlog. Advanced
Communication Systems believes that approximately 29.6% of its backlog as of
September 30, 1999 will result in revenues on or prior to September 30, 2000.
Included in Advanced Communication Systems' total contract backlog at
September 30, 1999, is approximately $52.5 million attributable to its two
significant cost plus fixed fee contracts with the U.S. Navy. During 1999, the
U.S. Navy established an Omnibus contract, that was awarded to a competitor in
September 1999. This contract encompassed a number of the tasks that previously
were performed under these two contracts. Management of Advanced Communication
Systems believes that it will be able to utilize other contract vehicles to
perform a substantial number of tasks previously performed under these
contracts, however there is no assurance that Advanced Communication Systems
will be able to do so.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Certain matters discussed in this 8-K are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as "may," "will," "intends," "plans,"
"believes," "anticipates," "expects," "estimates," "potential," "continue,"
or "opportunity," the negative of these words or words of similar import.
Similarly, statements that describe our future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those anticipated as of the date of this 8-K.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: January 24, 2000 THE TITAN CORPORATION
a Delaware Corporation
By: /s/ Nicholas J. Costanza
Senior Vice President,
General Counsel and Secretary
22
