<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
-OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission File No. 1-6035
THE TITAN CORPORATION
(Exact name of registrant as specified in its charter)
---------------
DELAWARE 95-2588754
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3033 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121-1199
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (619) 552-9500
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- ----------------------------------- --------------------------------------
<S> <C>
$1.00 Cumulative Convertible New York Stock Exchange
Preferred Stock, $1.00 par value
Common Stock, $.01 par value
Preferred Stock Purchase Rights
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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 22, 1999: $173,561,859.
Number of shares of Common Stock outstanding as of March 22, 1999 was:
36,235,133
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the 1999 Annual Meeting of Stockholders on May 18,
1999. (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 1999 Annual Meeting of
Stockholders is not deemed to be filed as part of this Report, Part III.
<PAGE>
FORM 10-K/A
The Company is republishing Item 8 of its Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 for the purpose of reflecting the effects
of its realignment of some of its operations among its existing segments. On
March 31, 1999, the Company realigned these operations to better position
them for strategic transactions. To accomplish this, the undersigned
registrant hereby amends the following items and exhibits:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ITEM 8 Financial Statements and Supplementary Data........................................ 4-25
PART IV
ITEM 14 Exhibits........................................................................... 26
Signatures......................................................................... 27
</TABLE>
2
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................................ 4
Financial Statements:
Consolidated Statements of Operations............................................................ 5
Consolidated Balance Sheets...................................................................... 6
Consolidated Statements of Cash Flows............................................................ 7
Consolidated Statements of Stockholders' Equity.................................................. 8
Notes to Consolidated Financial Statements....................................................... 9-25
</TABLE>
3
<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, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Titan Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
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
February 15, 1999 (except with respect
to the matter discussed in Notes 1 and
5 for which the date is March 31, 1999)
4
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Revenues $303,428 $275,923 $245,976
--------- --------- ---------
Costs and expenses:
Cost of revenues 232,041 216,553 192,657
Selling, general and administrative expense 37,553 36,731 36,226
Research and development expense 5,590 7,466 5,023
Special acquisition related charges and other 9,891 6,600 --
--------- --------- ---------
Total costs and expenses 285,075 267,350 233,906
--------- --------- ---------
Operating profit 18,353 8,573 12,070
Interest expense (7,377) (6,643) (4,764)
Interest income 392 872 639
--------- --------- ---------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle 11,368 2,802 7,945
Income tax provision 4,155 4,184 2,603
--------- --------- ---------
Income (loss) from continuing operations before cumulative effect
of change in accounting principle 7,213 (1,382) 5,342
Cumulative effect of change in accounting principle, net of taxes (19,474) -- --
Loss from discontinued operations, net of taxes (7,444) (17,930) (6,326)
--------- --------- ---------
Net loss (19,705) (19,312) (984)
Dividend requirements on preferred stock (778) (875) (803)
--------- --------- ---------
Net loss applicable to common stock $ (20,483) $ (20,187) $ (1,787)
--------- --------- ---------
--------- --------- ---------
Basic earnings (loss) per share:
Income (loss) from continuing operations $ .18 $ (.07) $ .14
Cumulative effect of change in accounting principle (.56) -- --
Loss from discontinued operations (.21) (.54) (.20)
--------- --------- ---------
Net loss (.59) (.61) (.06)
--------- --------- ---------
--------- --------- ---------
Weighted average shares 34,895 33,094 32,068
--------- --------- ---------
--------- --------- ---------
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ .18 $ (.07) $ .14
Cumulative effect of change in accounting principle (.54) -- --
Loss from discontinued operations (.21) (.54) (.20)
--------- --------- ---------
Net loss $ (.57) $ (.61) $ (.06)
--------- --------- ---------
--------- --------- ---------
Weighted average shares 36,177 33,094 32,445
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,079 $ 11,383
Investments -- 4,499
Accounts receivable--net 88,068 72,653
Inventories 8,646 18,826
Net assets of discontinued operations -- 3,930
Prepaid expenses and other 2,176 2,743
Deferred income taxes 10,978 8,298
----------- ----------
Total current assets 120,947 122,332
Property and equipment--net 25,702 27,666
Goodwill--net of accumulated amortization of $7,620 and $6,078 38,694 21,274
Other assets--net 6,579 8,756
Net assets of discontinued operations 645 3,675
----------- ----------
Total assets $ 192,567 $ 183,703
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit $ 368 $ 23,130
Accounts payable 21,335 16,086
Acquisition debt 3,000 --
Current portion of long-term debt 1,581 1,505
Accrued compensation and benefits 12,682 14,300
Other accrued liabilities 11,659 10,522
Net liabilities of discontinued operations 5,872 --
----------- ----------
Total current liabilities 56,497 65,543
----------- ----------
Line of credit 39,632 --
----------- ----------
Long-term debt 30,659 37,565
----------- ----------
Other non-current liabilities 15,068 12,148
----------- ----------
Commitments and contingencies
Series B cumulative convertible redeemable preferred stock, $3,000 liquidation
preference, 6% cumulative annual dividend, -0- and 500,000 shares issued and
outstanding -- 3,000
----------- ----------
Stockholders' Equity:
Preferred stock: $1 par value, authorized 2,500,000 shares:
Cumulative convertible, $13,897 liquidation preference:
694,872 shares issued and outstanding 695 695
Series A junior participating, authorized 250,000 shares:
None issued -- --
Common stock: $.01 par value, authorized 100,000,000 shares, issued and
outstanding: 36,650,460 and 34,776,764 shares 367 348
Capital in excess of par value 75,157 69,332
Retained earnings (deficit) (22,929) (2,337)
Treasury stock (962,530 and 971,894 shares), at cost (2,579) (2,591)
----------- ----------
Total stockholders' equity 50,711 65,447
----------- ----------
Total liabilities and stockholders' equity $ 192,567 $ 183,703
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 7,213 $ (1,382) $ 5,342
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used for) continuing operations:
Depreciation and amortization 7,126 9,213 8,044
Deferred income taxes and other (498) 1,926 (1,655)
Write-off of assets, investments and environmental accrual -- 9,846 --
Poolings of interests (109) 695 --
Change in operating assets and liabilities, net of effects from
businesses sold and acquired:
Accounts receivable (12,427) (4,102) 7,989
Inventories (2,290) (1,047) (6,069)
Prepaid expenses and other assets 1,081 (879) 594
Accounts payable 3,705 874 (3,467)
Income taxes payable -- -- (653)
Accrued compensation and benefits (2,298) 1,531 (1,587)
Restructuring activities -- (815) (4,099)
Other liabilities (1,635) (6,165) (684)
--------- --------- ---------
Net cash provided by (used for) continuing operations (132) 9,695 3,755
--------- --------- ---------
Loss from discontinued operations (7,444) (17,930) (6,326)
Changes in net assets and liabilities of discontinued operations 5,630 7,426 (2,639)
--------- --------- ---------
Net cash used for discontinued operations (1,814) (10,504) (8,965)
--------- --------- ---------
Net cash used for operating activities (1,946) (809) (5,210)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,038) (6,647) (6,638)
Proceeds, net of transaction costs, from sale of businesses -- 200 2,492
Payment for purchase of businesses, net of cash acquired (11,679) -- (2,679)
Proceeds from sale of investments 4,499 19,199 5,000
Purchase of investments -- (15,410) (9,888)
Other 146 235 (283)
--------- --------- ---------
Net cash used for investing activities (11,072) (2,423) (11,996)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt 16,870 12,671 37,762
Retirements of debt (1,447) (3,137) (21,909)
Redemption of Series B Preferred Stock (3,000) -- --
Deferred debt issuance costs -- -- (2,035)
Proceeds from stock issuances 1,214 708 433
Purchase of stock from benefit plan -- (471) --
Dividends paid (778) (875) (803)
Other (145) -- --
--------- --------- ---------
Net cash provided by financing activities 12,714 8,896 13,448
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (304) 5,664 (3,758)
Cash and cash equivalents at beginning of year 11,383 5,719 9,477
--------- --------- ---------
Cash and cash equivalents at end of year $ 11,079 $ 11,383 $ 5,719
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE CAPITAL
CONVERTIBLE IN EXCESS RETAINED
PREFERRED OF PAR EARNINGS/ TREASURY
STOCK COMMON STOCK VALUE (DEFICIT) STOCK TOTAL
----------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 695 $ 317 $ 54,933 $ 19,270 $ (3,524) $ 71,691
Stock issued for acquisition -- 18 10,659 -- -- 10,677
Other stock issued -- 1 161 -- -- 162
Exercise of stock options and other -- 3 349 (16) (62) 274
Shares contributed to employee benefit
plans -- -- 827 (261) 626 1,192
Income tax benefit from employee stock
transactions -- -- 70 -- -- 70
Dividends on preferred stock--
Cumulative Convertible, $1.00 per
share -- -- -- (695) -- (695)
Series B, 6% annual -- -- -- (108) -- (108)
Net loss -- -- -- (984) -- (984)
----------- ------------ --------- ---------- --------- ---------
Balances at December 31, 1996 695 339 66,999 17,206 (2,960) 82,279
Conversion of subordinated debt -- 5 1,597 -- -- 1,602
Exercise of stock options and other -- 2 726 (51) 37 714
Stock issued for acquisition -- 2 503 -- -- 505
Shares contributed to employee benefit
plans -- -- 12 -- 332 344
Shares purchased from benefit plan -- -- (545) -- -- (545)
Income tax benefit from employee stock
transactions -- -- 40 -- -- 40
Pooling of interests -- -- -- 695 -- 695
Dividends on preferred stock--
Cumulative Convertible, $1.00 per
share -- -- -- (695) -- (695)
Series B, 6% annual -- -- -- (180) -- (180)
Net loss -- -- -- (19,312) -- (19,312)
----------- ------------ --------- ---------- --------- ---------
Balances at December 31, 1997 695 348 69,332 (2,337) (2,591) 65,447
Conversion of subordinated debt -- 15 5,368 -- -- 5,383
Stock repurchase -- (1) (752) -- -- (753)
Exercise of stock options and other -- 4 848 -- 12 864
Conversion of warrants -- 1 349 -- -- 350
Poolings of interests -- -- -- (109) -- (109)
Shares contributed to employee benefit
plans -- -- (100) -- -- (100)
Income tax benefit from employee stock
transactions -- -- 112 -- -- 112
Dividends on preferred stock--
Cumulative Convertible, $1.00 per
share -- -- -- (695) -- (695)
Series B, 6% annual -- -- -- (83) -- (83)
Net loss -- -- -- (19,705) -- (19,705)
----------- ------------ --------- ---------- --------- ---------
Balances at December 31, 1998 $ 695 $ 367 $ 75,157 $ (22,929) $ (2,579) $ 50,711
----------- ------------ --------- ---------- --------- ---------
----------- ------------ --------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
8
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Titan Corporation (the "Company" or "Titan")
provides information technology and electronic systems and services to
government and commercial customers. The Company groups its businesses into
four core business segments -- Information Technologies, Software Systems,
Medical Sterilization and Food Pasteurization, and Communications Systems --
and a fifth business segment, Emerging Technologies and Businesses. The
Company provides engineering, technical, management and consulting services
in the areas of national security, software systems, communication systems,
information systems, threat simulation/training systems, electronic control
systems, advanced research and development, and medical products
sterilization and food pasteurization. The Company also develops, designs,
manufactures and markets satellite communications subsystems, digital imaging
products, electro-optical systems, and pulsed power products including linear
accelerators.
The Company is involved in a number of start-up ventures, most notably
the commercial satellite communications business in Titan's Communications
Systems segment. The Company believes that the primary source of revenues for
this 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. The accompanying
consolidated financial statements have been restated to reflect four
acquisitions in 1998 that have been accounted for as poolings of interests
(see Note 2). 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 a greater than 50% ownership interest. In the absence of such factors,
the Company generally accounts for these investments under the equity method.
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.
CASH EQUIVALENTS. All highly liquid investments purchased with an
original maturity of three months or less are classified as cash equivalents.
INVESTMENTS. The Company does not invest in securities as its primary
business and does not maintain a trading account. Occasionally, however, the
Company purchases financial instruments with maturities greater than three
months from the date of acquisition, principally investment grade commercial
paper and U.S. Treasury obligations. Such securities are classified as
"available for sale" as required by Statement of Financial Accounting
Standards No. 115 ("SFAS 115") "Accounting for Certain Investments in Debt
and Equity Securities." As of December 31, 1998, the Company has no such
investments. As of December 31, 1997, all such investment securities owned by
the
9
<PAGE>
Company matured in one year or less and were carried at their current market
value, which approximated their cost, as required by SFAS 115.
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 performance on certain
U.S. Government contracts are subject to audit by the Defense Contract Audit
Agency. Revenues have been recorded at amounts expected to be realized upon
final settlement.
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 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.
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 business is depreciated based on units of production.
GOODWILL. The excess of the cost over the fair value of net assets of
purchased businesses ("goodwill") is amortized on a straight-line basis over
varying lives ranging from 5 to 30 years. 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,
asset values are adjusted 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.
[THIS SPACE LEFT INTENTIONALLY BLANK]
10
<PAGE>
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").
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, 1998
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
------------ ------------- ----------
<S> <C> <C> <C>
Income from continuing operations $ 7,213
Less preferred stock dividends (778)
------------
Basic EPS:
Income from continuing operations available to common stockholders 6,435 34,895 $ .18
Effect of dilutive securities: Stock options -- 1,282 (.00)
------------ ------------- ----------
Diluted EPS:
Income from continuing operations available to common stockholders
plus assumed conversions $ 6,435 36,177 $ .18
------------ ------------- ----------
------------ ------------- ----------
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
------------ ------------- ----------
<S> <C> <C> <C>
Loss from continuing operations $ (1,382)
Less preferred stock dividends (875)
------------
Basic EPS:
Loss from continuing operations available to common stockholders $ (2,257) 33,094 $ (.07)
------------ ------------- ----------
------------ ------------- ----------
Diluted EPS: Same as basic
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
------------ ------------- ----------
<S> <C> <C> <C>
Income from continuing operations $ 5,342
Less preferred stock dividends (803)
------------
Basic EPS:
Income from continuing operations available to common stockholders 4,539 32,068 $ .14
Effect of dilutive securities: Stock options -- 377 (.00)
------------ ------------- ----------
Diluted EPS:
Income from continuing operations available to common stockholders plus
assumed conversions $4,539 32,445 $ .14
------------ ------------- ----------
------------ ------------- ----------
</TABLE>
In 1998, options to purchase approximately 742,000 shares 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 1998, 1997 and 1996, 463,268 shares of common stock that
could result from the conversion of cumulative convertible preferred stock,
as well as common shares that could result from the conversion of the
Company's convertible subordinated debentures and 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.
11
<PAGE>
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. The adoption of the accounting and disclosure provisions of SFAS
130 has had no impact on the Company's financial statements, as comprehensive
income is the same as net income for all periods presented.
BUSINESS SEGMENTS. In December 1997, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). This statement establishes
standards for reporting and disclosure of operating segments on a basis
consistent with that of the management structure. As a result of adopting
SFAS 131, in 1997, the Company restated its segments for all periods
presented. 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 Communications Systems segment, and all defense information
technologies and services operating results are reported in its Information
Technologies 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 realignement.
NEW ACCOUNTING STANDARDS. In 1998, the Company adopted Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions
and Other Postretirement Benefits" ("SFAS 132"). This statement revises and
standardizes employers' disclosures about pension and other postretirement
benefit plans, but it does not change the measurement or recognition of those
plans. This statement further requires restatement of disclosure provisions
for earlier periods provided for comparative purposes. The adoption of SFAS
132 has had no material impact on the Company's financial statements or
related disclosures thereto.
In 1998, the Company adopted the provisions of AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). This statement provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and identifies characteristics of internal-use software as well
as assists in determining when computer software is for internal use. The
adoption had no material impact on the Company's financial statements or
related disclosure thereto.
In 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This Statement provides guidance on the financial reporting of start-up and
organization costs and requires that such costs of start-up activities be
expensed as incurred. The Company adopted SOP 98-5 in the third quarter ended
September 30, 1998, recording a one-time, non-cash charge of $19,474. The
charge primarily represents previously capitalized start-up costs incurred in
the Company's discontinued broadband communications business and deferred
pre-contract costs as well as non-recurring engineering costs previously
carried in inventory in accordance with SOP 81-1 in the Company's
Communications Systems segment. The adoption of SOP 98-5 by the Company was
recorded effective January 1, 1998 as a cumulative effect of change in
accounting principle in the Statement of Operations for the year ended
December 31, 1998.
NOTE 2. MERGERS AND ACQUISITIONS
On October 23, 1998, the Company consummated a merger with Delfin
Systems ("Delfin") in a stock-for-stock transaction. Delfin provides systems
engineering and program management services, signal intelligence systems, and
program integration and high-end software. 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 has
been 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. VisiCom
specializes in information technology solutions. Titan issued approximately
12
<PAGE>
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 has been
accounted for as a pooling of interests.
On June 30, 1998 the Company consummated a merger with Horizons
Technology, Inc., ("Horizons") in a stock-for-stock transaction. Horizons is
a provider of systems engineering and program management services, computer
systems integration and high-end software. 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 has been accounted for as a pooling of interests.
On February 27, 1998, the Company consummated a merger with DBA Systems,
Inc. ("DBA"), in a stock-for-stock transaction. DBA is a developer and
manufacturer of digital imaging products, electro-optical systems and threat
simulation/training systems whose products and systems are primarily used by
the defense and intelligence communities. 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 has been 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 have been changed to
coincide with Titan's year-end. Accordingly, the accompanying financial
statements presented herein have been restated to include the combined
results of operations, financial positions and cash flows of Delfin, VisiCom,
Horizons and DBA as if the mergers had occurred at the beginning of the
periods presented.
The combining periods of Titan, Delfin, VisiCom, Horizons and DBA are as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS 1997 AND 1996
----------------------------------------------
<S> <C>
Titan Fiscal years ended December 1997 and 1996
Delfin Fiscal years ended September 1997 and 1996
VisiCom Fiscal years ended March 1998 and 1997
Horizons Fiscal years ended January 1998 and 1997
DBA Twelve months ended December 1997 and June 1996
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997 QUARTERLY PERIODS
--------------------------------------------------------------
Q1 97 Q2 97 Q3 97 Q4 97
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Titan March 97 June 97 Sept. 97 Dec. 97
Delfin Dec. 96 March 97 June 97 Sept. 97
VisiCom June 97 Sept. 97 Dec. 97 March 98
Horizons April 97 July 97 Oct. 97 Jan. 98
DBA March 97 June 97 Sept. 97 Dec. 97
</TABLE>
For the six months ended December 31, 1996, revenues of $11,724 and net
income of $695 were reported by DBA. Such amounts are not reflected in the
accompanying statements of operations as DBA's fiscal year ended June 30,
1997 was conformed to Titan's fiscal year ended December 31, 1997. DBA's
six-month 1996 net income of $695 is reflected as a pooling adjustment in the
accompanying Statement of Stockholders' Equity for the year ended December
31, 1996. Other 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.
13
<PAGE>
The separate and combined results of Titan, Delfin, VisiCom, Horizons
and DBA in prior years are as follows:
<TABLE>
<CAPTION>
FOR THE 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
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)
--------- ----------- ----------
$275,923 $ (1,382) $ (19,312)
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------
INCOME
LOSS FROM
CONTINUING NET INCOME
REVENUES OPERATIONS (LOSS)
--------- ----------- ----------
<S> <C> <C> <C>
Titan $133,676 $ (50) $ (3,378)
Delfin 29,629 (92) (92)
VisiCom 32,650 1,389 381
Horizons 29,551 2,934 944
DBA 20,470 1,161 1,161
--------- ----------- ----------
$245,976 $ 5,342 $ (984)
--------- ----------- ----------
--------- ----------- ----------
</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 8 and 14.
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 3 for further discussion.
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,
subject to post-closing adjustments, if any, due and payable March 31, 1999,
and bearing interest at the prime rate. The transaction has been accounted
for as a purchase; accordingly, Validity's results of operations have been
consolidated with the Company's results of operations beginning April 1,
1998. The excess of the purchase price over the estimated fair value of net
assets acquired is being amortized on a straight line basis over 30 years,
and amounted to approximately $18.6 million as of December 31, 1998.
During the year ended December 31, 1998, the Company recorded
special acquisition related and other charges of $9,891, which includes
approximately $5,500 of direct transaction costs (consisting primarily of
investment banking and other professional fees), $3,800 of integration
expenses and $600 of pre-operating and start-up costs of the AfroNetwork,
Benin operation. Approximately $4,600 of the direct transaction costs were
incurred in connection with the Delfin, VisiCom, Horizons and DBA mergers.
The remaining $900 in transaction fees were related to costs incurred to file
a withdrawn registration statement of Linkabit Wireless.
The integration costs included approximately $3,500 for severance,
outplacement and retention costs incurred in the Information Technologies and
Communications Systems 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
include $330 related to the closure and elimination of leased facilities,
primarily duplicate field offices.
14
<PAGE>
Accruals for unpaid special charges of $1,090 and $250 remain in
other current and non-current liabilities, respectively, at December 31,
1998. Unpaid amounts at year-end are primarily termination, retention and
other integration costs which will be paid by December 31, 1999.
On May 24, 1996, the Company completed the acquisition of three
privately-held affiliated businesses--Eldyne, Inc. ("Eldyne"), Unidyne
Corporation ("Unidyne") and Diversified Control Systems, LLC ("DCS"). The
overall transaction consideration, excluding associated transaction costs and
expenses, consisted of $1 million cash, 1,779,498 shares of Titan common
stock with an assigned value of $6.00 per share, the issuance of 500,000
shares of a new class of cumulative convertible redeemable preferred stock
(see Note 9), assumption of indebtedness and a promissory note for $1 million
issued to the principal stockholder of the acquired companies. The $1 million
note was due and paid on March 15, 1997, and earned interest of 10% per
annum. Titan also entered into an agreement with the principal stockholder,
providing for annual payments of $.3 million, payable monthly, for 6 years
beginning May 24, 1996. The net present value of this agreement ($1.5
million) was recorded as additional purchase price at the acquisition date.
This obligation was settled in full on January 2, 1997. Estimated other
direct costs of the acquisition were approximately $3 million. The
acquisition has been accounted for as a purchase, and, accordingly, Titan's
consolidated financial statements include the operating results of the three
acquired companies since May 24, 1996. The excess of the purchase price over
the estimated fair value of net assets acquired of $16.9 million at December
31, 1998 is being amortized using a straight-line method over 30 years.
NOTE 3. DISCONTINUED OPERATIONS
In December 1998, the Company's Board of Directors adopted a plan to
wind down the Company's access control systems business. The results of this
business have been accounted for as a discontinued operation. Revenues for
the access control business were $3,122, $4,136 and $1,808 and operating
profit (loss) was $(3,026), $492 and $483 for the years ended December 31,
1998, 1997 and 1996, respectively. The 1998 loss includes a charge of $1,500
for the estimated costs to be incurred in future periods in connection with
the winding down of this business.
In 1997, the Company's Board of Directors adopted a plan to divest the
Company's broadband communications business. The results of the broadband
communications business have been accounted for as a discontinued operation
in accordance with Accounting Principles Board Opinion No. 30, which among
other provisions, anticipates that the plan of disposal will be carried out
within one year. During 1998, the Company received cash payments of $4,400
for licensing of the broadband technology and as settlement of certain
contingencies related to the broadband patents. As a result of a periodic
review by management of the likelihood of receiving further proceeds from the
sale of the broadband technology, which would enable the Company to realize
the remaining net assets of the broadband business, a decision was reached by
management in the third quarter of 1998 to write off such remaining net
assets. The write-off resulted in a pre-tax charge to loss from discontinued
operations of $4,638. Additionally, approximately $7,200 in previously
capitalized start-up costs were written off as part of the cumulative effect
of the change in accounting principle (see Note 1). Revenues for the
broadband communications business were $-0-, $551 and $2,238 for the years
ended December 31, 1998, 1997 and 1996, respectively. Titan deferred losses
from the discontinued operation of $9,271 in 1997, which primarily
represented amortization and wind-down costs of the business.
In addition to the discontinued operations of the access control systems
business and the broadband business as discussed above, the accompanying
consolidated financial statements reflect operations discontinued by certain
of the companies acquired by Titan in 1998. The decisions to dispose of or
otherwise wind down these operations were made by the separate Boards of
Directors of the respective acquired companies prior to entering into any
discussions with Titan regarding the potential acquisitions of these entities
by Titan. All periods presented reflect these specific operations as
discontinued operations. Revenue for these discontinued operations aggregated
$10,899, $7,999 and $9,367 for the years ended December 31, 1998, 1997 and
1996, respectively, and losses attributable to these discontinued operations
aggregated $-0-, $17,907 and $2,998 for the same respective periods.
Aggregate charges for estimated costs to be incurred in future periods in
connection with the winding down of these operations amounted to
approximately $6,800, substantially all of which was recorded by the acquired
companies in the last quarter of 1997. Operating losses of approximately $5.8
million were charged against this accrual during
15
<PAGE>
1998. Additionally, a pre-tax charge of $1,300 was taken in the third quarter
of 1998 based on management's most recent review of estimated future
wind-down costs.
Net liabilities of discontinued operations at December 31, 1998 consist
primarily of accrued liabilities of approximately $12,700, net of current
assets (primarily accounts receivable and inventory) of approximately $6,200.
The liabilities consist of accruals for contract losses, estimated wind-down
costs and costs related to the closure and elimination of leased facilities.
Long-term net assets of discontinued operations are primarily fixed assets.
NOTE 4. OTHER FINANCIAL DATA
Following are details concerning certain balance sheet accounts:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Accounts Receivable:
U.S. Government--billed $ 44,021 $ 33,031
U.S. Government--unbilled 30,710 23,648
Trade 13,586 16,692
Less allowance for doubtful accounts (249) (718)
---------- --------
$ 88,068 $ 72,653
---------- --------
---------- --------
Inventories:
Materials $ 3,871 $ 4,343
Work-in-process 1,788 12,421
Finished goods 2,987 2,062
---------- --------
$ 8,646 $ 18,826
---------- --------
---------- --------
Property and Equipment:
Machinery and equipment $ 45,299 $ 51,238
Furniture and fixtures 8,320 6,726
Land, buildings and leasehold improvements 13,902 14,960
Construction in progress 358 406
---------- --------
67,879 73,330
Less accumulated depreciation and amortization (42,177) (45,664)
---------- --------
$ 25,702 $ 27,666
---------- --------
---------- --------
</TABLE>
NOTE 5. SEGMENT INFORMATION
In the fourth quarter of 1997, the Company realigned certain operations
within its existing segments and added a fifth segment as a result of
adopting 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 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
Communications Systems segment, and all defense information technologies and
services operating results are reported in its Information Technologies
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 Information Technologies segment provides information systems
solutions primarily to government customers with large data management,
information manipulation, information fusion, knowledge-based systems and
communications requirements, 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
16
<PAGE>
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 systems integrator that provides
systems integration services and solutions for commercial and non-defense
clients with distributed computing environments.
The Medical Sterilization and Food Pasteurization segment provides
medical product sterilization services at two Titan facilities and
manufactures and sells turnkey electron beam sterilization and food
pasteurization systems to customers for use in their own facilities.
The Communications Systems segment develops and produces advanced
satellite communications products and systems for commercial customers.
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 revenues amounted to approximately $18,893, $21,365 and
$10,693 in 1998, 1997 and 1996, respectively, primarily to countries in the
Far East and Western Europe. All international sales are denominated in U.S.
dollars.
The following tables summarize industry segment data for 1998, 1997 and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Information Technologies $259,442 $225,686 $211,124
Software Systems 21,470 17,374 18,505
Medical Sterilization and Food Pasteurization 11,184 8,254 7,930
Communications Systems 6,717 18,405 3,430
Emerging Technologies and Businesses 4,615 6,204 4,987
-------- -------- --------
$303,428 $275,923 $245,976
-------- -------- --------
-------- -------- --------
</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 $242,560 in 1998, $225,016 in 1997, and $199,901 in
1996. Inter-segment sales were not significant in any year.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating Profit (Loss):
Information Technologies $ 25,270 $ 8,361 $ 18,770
Software Systems 5,137 4,580 (137)
Medical Sterilization and Food Pasteurization 1,121 (204) (390)
Communications Systems (6,732) (1,074) (5,421)
Emerging Technologies and Businesses 34 (286) (209)
Corporate (6,477) (2,804) (543)
--------- --------- ---------
$ 18,353 $ 8,573 $ 12,070
--------- --------- ---------
--------- --------- ---------
</TABLE>
17
<PAGE>
Corporate includes corporate general and administrative expenses, certain
corporate restructuring charges, and gains or losses from the sale of
businesses. Corporate general and administrative expenses are generally
recoverable from contract revenues by allocation to operations.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Identifiable Assets:
Information Technologies $ 131,371 $ 109,383 $ 123,875
Software Systems 14,959 8,114 6,139
Medical Sterilization and Food Pasteurization 14,518 15,466 14,851
Communications Systems 5,085 10,655 3,525
Emerging Technologies and Businesses 67 6,391 1,759
Discontinued Operations, net 645 7,605 15,031
General corporate assets 25,922 26,089 28,108
--------- --------- ---------
$ 192,567 $ 183,703 $ 193,288
--------- --------- ---------
--------- --------- ---------
</TABLE>
General corporate assets are principally cash, prepaid expenses,
property and equipment, deferred income taxes and other assets.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Depreciation and Amortization of Property and
Equipment, Goodwill, and Other Assets:
Information Technologies $ 4,769 $ 6,395 $ 5,494
Software Systems 475 617 1,152
Medical Sterilization and Food Pasteurization 876 681 781
Communications Systems 381 453 139
Emerging Technologies and Businesss 25 85 65
Corporate 600 982 413
-------- -------- ---------
$ 7,126 $ 9,213 $ 8,044
--------- --------- ---------
--------- --------- ---------
Capital Expenditures:
Information Technologies $ 2,651 $ 4,988 $ 3,995
Software Systems 325 453 261
Medical Sterilization and Food Pasteurization 211 643 1,378
Communications Systems 463 358 694
Emerging Technologies and Businesses 30 86 83
Corporate 358 119 227
--------- --------- ---------
$ 4,038 $ 6,647 $ 6,638
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 6. INCOME TAXES
The components of the income tax provision from continuing operations are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 782 $ 2,046 $ 2,131
State 278 374 377
--------- --------- ---------
1,060 2,420 2,508
Deferred 3,095 1,764 95
--------- --------- ---------
18
<PAGE>
$ 4,155 $ 4,184 $ 2,603
--------- --------- ---------
--------- --------- ---------
</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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected Federal tax provision on continuing $ 3,865 $ 953 $ 2,701
operations
State income taxes, net of Federal income tax 341 92 (18)
benefit
Research credit -- (324) --
Goodwill amortization 218 351 88
Keyman life insurance 24 24 36
Acquisition special charges and other (293) 3,088 (204)
--------- --------- ---------
Actual tax provision on continuing operations $ 4,155 $ 4,184 $ 2,603
--------- --------- ---------
--------- --------- ---------
</TABLE>
The deferred tax asset as of December 31, 1998 and 1997, results from the
following temporary differences:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Loss carryforward $ 7,746 $ 7,798
Employee benefits 4,275 4,923
Loss from discontinued operations -- (3,338)
Tax credit carryforwards 2,096 2,546
Inventory and contract loss reserves 10,199 8,919
Depreciation (1,378) (1,400)
Deferred tax on foreign profit -- 1,123
Other (306) (759)
--------- ---------
22,632 19,812
Valuation allowance (11,200) (11,200)
--------- ---------
Net deferred tax asset $ 11,432 $ 8,612
--------- ---------
--------- ---------
</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. Deferred income taxes of $454 and
$314 are included in Other Assets at December 31, 1998 and 1997, respectively.
Cash paid for income taxes was $1,343 and $1,195 in 1998 and 1997,
respectively. Net tax refunds in 1996 were $277.
NOTE 7. DEBT
On July 29, 1998, the Company entered into a credit agreement with a
bank syndicate under which it may borrow up to $80 million, replacing its
existing line of credit agreement. The credit facility includes a five year
$55 million working capital line of credit and a $25 million component
dedicated for acquisitions which converts any outstanding balances after one
year into a term loan, to be repaid in increasing quarterly amounts over four
years. The Company has the option to borrow at the bank base rate or at
LIBOR, plus applicable margins based on the ratio
19
<PAGE>
of total debt to EBITDA (earnings before interest, taxes, depreciation and
amortization). The agreement contains, among other financial covenants,
provisions which set maximum debt to EBITDA limits and which require the
Company to maintain stipulated levels of EBITDA, tangible net worth, a
minimum quick ratio, and minimum coverage of fixed charges, as defined.
Initial proceeds of $36.1 million were used to pay off and replace the then
outstanding line of credit balances with the Company's, Horizons' and
VisiCom's banks and for working capital purposes. At December 31, 1998, the
outstanding balances on the working capital line and the acquisition line
were $35 million and $5 million (of which $368 is current), respectively. The
borrowings were subject to a weighted average interest rate of 7.09%, and
commitments under letters of credit reducing availability under the working
capital line were $950.
In November 1996, Titan issued $34,500 of 8.25% convertible subordinated
debentures due 2003. At December 31, 1998, $27,515 remain outstanding. The
debentures are convertible into common stock of the Company at a conversion
price of $3.50 per share, subject to adjustment upon the occurrence of
certain events. The debentures are redeemable, on or after November 2, 1999,
initially at 104.125% of principal amount and at decreasing prices thereafter
to 100% of principal amount through maturity, in each case together with
accrued interest. The debentures also may be repaid at the option of the
holder upon a change in control, as defined in the indenture governing the
debentures, at 100% of principal amount plus accrued interest. The net
proceeds from the issuance of these securities were used to repay borrowings
under the Company's bank lines of credit and for working capital and general
corporate purposes.
At December 31, 1998 and 1997, Titan had $3,328 and $4,319,
respectively, outstanding under two promissory notes, secured by certain
machinery and equipment, at interest rates of 8.5% and 7.42%, respectively.
At December 31, 1998, $1,101 is due within one year. At December 31, 1998 and
1997, the Company also had outstanding a mortgage note collateralized by real
estate with a balance of $747 and $1,196, respectively, at an interest rate
of LIBOR plus 2.5%, of which $112 is due within one year. Long-term debt at
entities acquired by the Company in 1998 was $650 ($368 short-term) at
December 31, 1998.
Cash paid for interest, primarily on these borrowings, was $6,491,
$6,254 and $3,847 in 1998, 1997, and 1996, respectively. At December 31, 1998
the Company was in compliance with all financial covenants under its various
debt agreements.
NOTE 8. 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 $10,130 in 1998, $9,457 in 1997 and $11,928 in 1996. The Company
has entered into a long-term lease agreement for facilities which are owned
by an entity in which Titan has a minority ownership interest. Rental expense
in 1998, 1997 and 1996 includes $921, $904 and $884, respectively, paid under
this agreement.
Future minimum lease payments under noncancelable operating leases at
December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 $ 8,311
2000 6,649
2001 5,310
2002 4,567
2003 3,613
Thereafter 9,343
-------
Total minimum lease payments $37,793
-------
-------
</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.
20
<PAGE>
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. This property is currently
on the market and the Company has received several indications of interest
(see Note 14). The Company has commenced its pre-cleanup activities, which
are being coordinated with the sale of the property.
On April 19, 1995 Titan was served in a lawsuit entitled DONALD P. SHAW
V. TITAN CORPORATION (the "Lawsuit"). The Lawsuit was pending in the United
States District Court for the Eastern District of Virginia, Alexandria
Division, and sought compensatory damages in an aggregate amount of $3,000
and punitive damages in the amount of $1,050 on account of alleged wrongful
termination and intentional infliction of emotional distress. The Lawsuit
resulted in a verdict for the plaintiff awarding $65 in compensatory damages
and $350 in punitive damages which was affirmed on appeal in February 1998.
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 9. 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 10. 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. Common stock of 463,248 shares
has been reserved for this purpose. Upon liquidation, the $1.00 cumulative
convertible preferred stockholders are entitled to receive $20 per share,
plus cumulative dividends in arrears, before any distribution is made to the
common stockholders.
NOTE 11. COMMON STOCK
At December 31, 1998, approximately 47,974,672 common shares were
reserved for future issuance for conversion of convertible subordinated
debentures, preferred stock, and all stock incentive plans.
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 "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
21
<PAGE>
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 12. 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>
1998 1997 1996
-------------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss As reported $ (19,705) $ (19,312) $ (984)
Pro forma (20,827) (21,019) (1,654)
Net loss per share, basic As reported (.59) (.61) (.06)
Pro forma (.62) (.66) (.08)
Net loss per share, diluted As reported (.57) (.61) (.06)
Pro forma (.60) (.66) (.08)
</TABLE>
The Company currently has options available for grant under the Stock
Option Plans of 1990, 1994 and 1997, The 1989 Directors' Stock Option Plan
and The 1996 Directors' Stock Option and Equity Participation Plan (the "1996
Directors' Plan"). Options authorized for grant under the employee plans and
under the directors' plans are 3,000,000 and 185,000, respectively. Under the
1996 Directors' Plan, a director may elect to receive stock in lieu of fees,
such stock to have a fair market value equal to the fees. Under all plans,
the exercise price of each option equals the market price of the Company's
stock on the date of grant. Under the employee plans, an option's maximum
term is ten years. Under the directors' plans, options expire 90 days after
the option holder ceases to be a director. Employee options may be granted
throughout the year; directors' options are granted annually during the first
two or three years as a director. All options vest in 25% increments
beginning one year after the grant date. 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.
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 71% in 1998, 70% in 1997 and 87%
in 1996; and a risk free interest rate of 4.74% in 1998, 5.72% in 1997 and
6.57% in 1996.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1998, 1997 and 1996, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
--------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,697 $ 3.66 3,155 $ 3.37 3,148 $ 3.22
Granted 808 4.30 1,175 3.77 1,202 3.45
Exercised (258) 2.70 (207) 2.75 (241) 2.13
Cancelled (589) 4.31 (426) 3.10 (954) 2.71
------- -------- --------
Outstanding at end of year 3,658 3.77 3,697 3.66 3,155 3.37
------- -------- --------
------- -------- --------
Options exercisable at year-end 1,898 1,994 1,814
Weighted-average fair value of
options granted during the year $ 5.46 $ 3.42 $ 2.47
</TABLE>
22
<PAGE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------- ------------------------------------------------
Range of Number Weighted Weighted Number Weighted-
Exercise Outstanding Average Average Exercisable at Average
Prices at 12/31/98 Remaining Exercise Price 12/31/98 Exercise Price
- ---------------- ----------- ---------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.05 - 3.94 1,852,964 6.06 years $2.19 1,283,420 $2.25
4.00 - 5.88 1,418,805 8.39 years 4.79 445,636 4.60
6.06 - 9.50 386,232 7.81 years 7.57 168,732 8.34
--------- ---------
3,658,001 7.15 years 1,897,788
--------- ---------
--------- ---------
</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 or at the end of
each subscription period. A subscription period is six months, beginning
January 1 and July 1 of each year. Approximately 13%, 11% and 11% of eligible
employees participated in the Plan and purchased 92,089, 110,461 and 89,865
shares of the Company's common stock in 1998, 1997 and 1996, respectively.
The weighted-average fair value of the purchase rights granted in 1998, 1997
and 1996 was $1.61, $1.06 and $1.71, respectively.
Four of the Company's wholly-owned subsidiaries have stock option plans
for the granting of subsidiary common stock, which is not publicly traded.
The exercise price of all options granted under these plans equals the fair
value of the subsidiary stock at the date of grant as determined by the
subsidiaries' board of directors. If all options available for grant in these
plans were exercised, the Company's ownership in each of the subsidiaries
would be diluted by no greater than 20% to 30%.
NOTE 13. BENEFIT PLANS
The Company has various defined contribution benefit plans covering
certain employees. The Company's contributions to these plans were $3,326,
$2,914 and $3,040 in 1998, 1997 and 1996, respectively. Titan's and Horizons'
combined discretionary contributions to their Employee Stock Ownership Plans
were $295, $372 and $120 in 1998, 1997 and 1996, respectively. Discretionary
contributions to a profit sharing plan covering certain employees were $150,
$175 and $150 in 1998, 1997 and 1996, respectively. During 1997 and 1996, the
Company utilized treasury stock of $344 and $1,192, respectively, 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
$824, $821 and $901 in 1998, 1997 and 1996, respectively. Interest expense
for the years ended December 31, 1998, 1997 and 1996 includes $650, $527 and
$561, respectively, related to the plan. Included in other non-current
liabilities is $4,311 and $3,954 related to this plan at December 31, 1998
and 1997, respectively. The Company also has performance bonus plans for
certain of its employees. Related expense amounted to approximately $3,316,
$2,125 and $1,709 in 1998, 1997 and 1996, 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 14. 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 several
23
<PAGE>
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 8)
and is actively marketing the property for sale through various channels.
Management regularly reviews this asset for further impairment, and believes
that the recorded book value at December 31, 1998 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 15. SUBSEQUENT EVENT
In January 1999, the Company's wholly-owned subsidiary, Titan Software
Systems Corporation, acquired Transnational Partners II, LLP ("TNP"), a
software services company which provides infrastructure and enterprise
resources planning solutions for major corporations, for $9.8 million in a
transaction that will be accounted for as a purchase. The purchase price
consisted of $7 million cash, a $2.8 million note due January 2000 (bearing
interest at 7%), subject to certain post-closing adjustments, and a preferred
stock representing a minority interest in Titan Software Systems Corporation,
which comprises the Company's Software Systems segment.
[THIS SPACE LEFT INTENTIONALLY BLANK]
24
<PAGE>
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
1998 QUARTER QUARTER QUARTER QUARTER YEAR
- ---- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $64,630 $75,413 $78,635 $84,750 $303,428
Gross profit 15,163 17,071 17,628 21,525 71,387
Income from continuing operations
before cumulative effect of change
in accounting principle 954 2,973 1,948 1,338 7,213
Net income (loss) (18,349) 3,184 (4,051) (489) (19,705)
Basic earnings per share:
Income from continuing operations .02 .08 .05 .03 .18
Net income (loss) (.55) .09 (.11) (.02) (.59)
Diluted earnings per share:
Income from continuing operations .02 .07 .05 .03 .18
Net income (loss) (.53) .08 (.09) (.02) (.57)
FIRST SECOND THIRD FOURTH TOTAL
1997 QUARTER QUARTER QUARTER QUARTER YEAR
- ---- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $67,827 $70,255 $66,931 $ 70,910 $275,923
Gross profit 14,808 17,102 14,776 12,684 59,370
Income (loss) from continuing
operations 2,253 2,301 (4,366) (1,570) (1,382)
Net income (loss) 1,172 1,619 (15,765) (6,338) (19,312)
Basic earnings (loss) per share:
Income (loss) from continuing
operations .06 .06 (.14) (.05) (.07)
Net income (loss) .03 .04 (.48) (.20) (.61)
Diluted earnings (loss) per share:
Income (loss) from continuing
operations .06 .06 (.14) (.05) (.07)
Net income (loss) .03 .04 (.48) (.20) (.61)
</TABLE>
The above financial information for each quarter reflects all normal and
recurring adjustments.
Previously reported amounts have been restated to reflect the
acquisitions, accounted for as poolings of interests, of Horizons, VisiCom
and Delfin in the second, third and fourth quarters of 1998, respectively,
the discontinuance of the Company's access control systems business in the
fourth quarter of 1998, and to reflect the cumulative effect of a change in
accounting principle as effective in the first quarter of 1998.
Net results for the first quarter of 1998 reflect a charge of $19,474
for the cumulative effect of a change in accounting principle (see Note 1).
Income (loss) from continuing operations and net income (loss) include
special charges of $1,460, $3,093 and $5,338 in the first, third and fourth
quarters of 1998, respectively, and asset and investment write-downs and
environmental accrual of $5,000 and $4,846 in the third and fourth quarters
of 1997, respectively (see Notes 2 and 14).
25
<PAGE>
PART IV
ITEM 14. EXHIBITS
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
26
<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.
THE TITAN CORPORATION
By: /s/ Gene W. Ray
---------------------------------------
Gene W. Ray, President, Chief Executive
Officer and Chairman of the Board
January 21, 2000
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
--------- ----- ----
<S> <C> <C>
/s/ Gene W. Ray President, Chief Executive Officer and January 21, 2000
- --------------------------------------- Chairman of the Board
Gene W. Ray
/s/ Eric M. DeMarco Executive Vice President and Chief January 21, 2000
- ---------------------------------------- Financial Officer
Eric M. DeMarco (Principal Financial Officer)
/s/ Deanna Hom Petersen Vice President, Corporate Controller January 21, 2000
- ---------------------------------------- (Principal Accounting Officer)
Deanna Hom Petersen
/s/ Charles R. Allen
- ---------------------------------------- Director January 22, 2000
Charles R. Allen
/s/ Joseph F. Caligiuri
- ---------------------------------------- Director January 22, 2000
Joseph F. Caligiuri
/s/ Daniel J. Fink
- ---------------------------------------- Director January 22, 2000
Daniel J. Fink
- ---------------------------------------- Director January ___, 2000
Robert M. Hanisee
/s/ Robert E. La Blanc
- ---------------------------------------- Director January 22, 2000
Robert E. La Blanc
- ---------------------------------------- Director January ___, 2000
Thomas G. Pownall
/s/ James Roth
- ---------------------------------------- Director January 22, 2000
James Roth
</TABLE>
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
</TABLE>
28
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports 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 and 333-90139. It should be noted
that we have not audited any financial statements of the Company subsequent
to December 31, 1998 or performed any audit procedures subsequent to the date
of our report.
ARTHUR ANDERSEN LLP
San Diego, California
January 24, 2000
