<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -------
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --------
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6035
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The Titan Corporation
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(Exact name of registrant as specified in its charter)
Delaware 95-2588754
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3033 Science Park Road, San Diego, California 92121
- --------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (619) 552-9500
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(Former name, former address and former fiscal year,
if changed since last report.)
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
---- ----
The number of shares of registrant's common stock outstanding at November
10, 1998, was 32,875,757.
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................. $ 68,662 $ 61,827 $195,911 $189,270
-------- -------- -------- --------
Costs and expenses:
Cost of revenues..................... 52,527 47,687 149,503 144,840
Selling, general and administrative
expense............................ 8,296 9,155 24,590 25,807
Research and development expense...... 990 2,163 3,809 6,232
Special acquisition related charges
and other.......................... 3,093 5,000 4,553 5,000
-------- -------- -------- --------
Total costs and expenses........... 64,906 64,005 182,455 181,879
-------- -------- -------- --------
Operating profit (loss).................. 3,756 (2,178) 13,456 7,391
Interest expense......................... (1,720) (1,692) (5,161) (4,848)
Interest income.......................... 73 261 261 671
-------- -------- -------- --------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle and income taxes. 2,109 (3,609) 8,556 3,214
Income tax provision..................... 759 645 3,168 2,869
-------- -------- -------- --------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle.................. 1,350 (4,254) 5,388 345
Cumulative effect of change in
accounting principle, net of taxes.... --- --- (17,728) ---
Loss from discontinued operations,
net of taxes.......................... (5,344) (11,490) (5,344) (13,306)
-------- -------- -------- -------
Net loss................................. (3,994) (15,744) (17,684) (12,961)
Dividend requirements on preferred stock. 176 219 605 655
-------- -------- -------- --------
Net loss applicable to common stock...... $ (4,170) $(15,963) $(18,289) $(13,616)
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share:
Income (loss) from continuing
operations before cumulative effect
of change in accounting principle... $ .04 $ (.15) $ .15 $ (.01)
Cumulative effect of change in
accounting principle................ --- --- (.57) ---
Loss from discontinued operations...... (.17) (.38) (.17) (.45)
-------- -------- -------- --------
Net loss............................... $ (.13) $ (.53) $ (.59) $ (.46)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares................. 31,766 29,854 31,159 29,711
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share:
Income (loss) from continuing
operations before cumulative effect
of change in accounting principle... $ .04 $ (.15) $ .15 $ (.01)
Cumulative effect of change in
accounting principle................ --- --- (.44) ---
Loss from discontinued operations...... (.17) (.38) (.13) (.45)
-------- -------- -------- --------
Net loss............................... $ (.13) $ (.53) $ (.42) $ (.46)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares................ 32,548 29,854 40,747 29,711
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except shares and par values)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 4,710 $ 11,353
Investments..................................... --- 4,499
Accounts receivable - net....................... 86,585 69,508
Inventories..................................... 9,107 17,633
Net assets of discontinued operations........... --- 1,802
Prepaid expenses and other...................... 2,172 2,707
Deferred income taxes........................... 10,165 7,950
-------- --------
Total current assets......................... 112,739 115,452
Property and equipment - net....................... 24,855 26,951
Goodwill - net..................................... 39,137 21,274
Other assets....................................... 6,319 8,639
Net assets of discontinued operations.............. 780 3,552
-------- --------
Total assets $183,830 $175,868
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................. $ --- $ 21,880
Accounts payable................................ 20,278 14,919
Acquisition debt................................ 3,000 ---
Current portion of long-term debt............... 1,298 1,266
Accrued compensation and benefits............... 11,872 12,851
Other accrued liabilities....................... 8,073 9,092
Net liabilities of discontinued operations...... 5,471 ---
-------- --------
Total current liabilities.................... 49,992 60,008
-------- --------
Long-term debt..................................... 30,769 37,565
Line of credit..................................... 39,000 ---
Other non-current liabilities...................... 14,010 11,996
Series B cumulative convertible redeemable
preferred stock, $-0- and $3,000 liquidation
preference, 6% cumulative annual dividend,
issued and outstanding: 0 and 500,000........... --- 3,000
Stockholders' equity:
Preferred stock: $1 par value, authorized
2,500,000 shares:
Cumulative convertible, $13,897 liquidation
preference: 694,872 shares issued and
outstanding............................... 695 695
Series A junior participating: authorized
250,000 shares: none issued............... --- ---
Common stock: $.01 par value, authorized
45,000,000 shares, issued and outstanding:
32,833,158 and 31,152,330.................... 327 311
Capital in excess of par value.................. 70,004 64,884
Retained earnings (deficit)..................... (18,388) ---
Treasury stock (962,530 and 971,894 shares),
at cost...................................... (2,579) (2,591)
-------- --------
Total stockholders' equity................... 50,059 63,299
-------- --------
Total liabilities and stockholders' equity...... $183,830 $175,868
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations............. $(12,340) $ 345
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
(used for) operating activities, net of effects
of businesses acquired:
Depreciation and amortization.................. 4,976 6,160
Deferred income taxes and other................ (35) 1,119
Poolings of interests.......................... (99) (211)
Cumulative effect of change in accounting
principle................................... 17,728 ---
Write-down of assets, investments and
environmental accrual....................... --- 5,000
Changes in operating assets and liabilities,
net of the effects of businesses acquired
and business sold:
Accounts receivable......................... (14,089) (4,650)
Inventories................................. (2,198) 678
Prepaid expenses and other assets........... 1,167 (1,531)
Accounts payable............................ 3,815 1,234
Accrued compensation and benefits........... (1,659) (966)
Restructuring activities.................... --- (815)
Other liabilities........................... (4,703) (4,302)
-------- --------
Net cash provided by (used for)
continuing operations............................. (7,437) 2,061
-------- --------
Loss from discontinued operations.................... (5,344) (13,306)
Changes in net assets of discontinued operations .... 2,843 5,221
-------- --------
Net cash used for discontinued operations............ (2,501) (8,085)
-------- --------
Net cash used for operating activities............... (9,938) (6,024)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................. (1,834) (3,388)
Acquisition of business, net of cash acquired........ (11,679) ---
Purchase of investments.............................. --- (12,321)
Sale of investments.................................. 4,499 9,483
Other................................................ (298) 320
-------- --------
Net cash used for investing activities............... (9,312) (5,906)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt.................................... 17,120 14,751
Retirements of debt.................................. (1,406) (4,285)
Redemption of Series B preferred stock............... (3,000) ---
Dividends paid....................................... (605) (655)
Proceeds from stock issuances........................ 631 347
Other................................................ (133) (522)
-------- --------
Net cash provided by financing activities............ 12,607 9,636
-------- --------
Net decrease in cash and cash equivalents............ (6,643) (2,294)
Cash and cash equivalents at beginning of period..... 11,353 5,614
-------- --------
Cash and cash equivalents at end of period........... $ 4,710 $ 3,320
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Cumulative Capital
Convertible in Excess Retained
Preferred Common of Par Earnings Treasury
Stock Stock Value (Deficit) Stock Total
------------ ---------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1998
Balances at December 31, 1997 $ 695 $ 311 $ 64,884 $ --- $ (2,591) $ 63,299
Poolings of interests (99) (99)
Conversion of subordinated
debentures 15 5,343 5,358
Stock repurchase (1) (752) (753)
Conversion of warrants 1 349 350
Exercise of stock options and
other 1 280 12 293
Shares contributed to employee
benefit plans (100) (100)
Dividends on preferred stock -
Cumulative convertible, $.75
per share (521) (521)
Series B, 6% annual (84) (84)
Net loss (17,684) (17,684)
-------- ------- -------- -------- --------- --------
Balances at September 30, 1998 $ 695 $ 327 $ 70,004 $(18,388) $ (2,579) $ 50,059
-------- ------- -------- -------- --------- --------
-------- ------- -------- -------- --------- --------
NINE MONTHS ENDED SEPTEMBER 30, 1997
Balances at December 31, 1996 $ 695 $ 303 $ 62,553 $ 19,421 $(2,960) $ 80,012
Pooling of interests (545) 695 545 695
Stock issued for acquisition 3 503 506
Exercise of stock options
and other 384 (64) (545) (225)
Shares contributed to employee
benefit plans 14 331 345
Dividends on preferred stock -
Cumulative convertible, $.75
per share (521) (521)
Series B, 6% annual (134) (134)
Net loss (12,961) (12,961)
-------- ------- -------- -------- --------- --------
Balances at September 30, 1997 $ 695 $ 306 $ 62,909 $ 6,436 $ (2,629) $ 67,717
-------- ------- -------- -------- --------- --------
-------- ------- -------- -------- --------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Dollar amounts in thousands, except per share data)
NOTE (1) BASIS OF FINANCIAL STATEMENT PREPARATION
The accompanying consolidated financial information of The Titan Corporation
and its subsidiaries ("the Company" or "Titan") should be read in conjunction
with the Notes to Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K/A to the Securities and Exchange
Commission for the year ended December 31, 1997 and DBA Systems, Inc.'s
("DBA") Annual Report on Form 10-K for the year ended June 30, 1997. The
accompanying financial information includes all subsidiaries on a
consolidated basis and all normal recurring adjustments which are considered
necessary by the Company's management for a fair presentation of the
financial position and results of operations for the periods presented.
However, these results are not necessarily indicative of results for a full
year. The prior year financial statements have been restated to reflect three
mergers in 1998 (see Note 2). Additionally, certain prior year amounts have
been reclassified to conform to the 1998 presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS. In January 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This Statement establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure
of all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners
("comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The adoption of the accounting and
disclosure provisions of SFAS 130 has had no impact on the Company's
financial statements, as comprehensive income is the same as net income for
all periods presented herein.
In March 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). This statement revises and
standardizes employers' disclosures about pension and other postretirement
benefit plans, but it does not change the measurement or recognition of those
plans. This Statement further requires restatement of disclosure provisions
for earlier periods provided for comparative purposes. The adoption of SFAS
132 has had no material impact on the Company's financial statements or
related disclosures thereto.
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). This Statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal-use software as well
as assists in determining when computer software is for internal use. SOP 98-1
6
<PAGE>
is effective for fiscal years beginning after December 15, 1998, with earlier
application permitted. The Company has not yet determined what impact, if
any, the adoption of the accounting and disclosure provisions of SOP 98-1
will have on the Company's financial statements, results of operations or
related disclosures thereto.
In April 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). This Statement provides guidance on the financial reporting of
start-up costs and organization costs and requires that such costs of
start-up activities be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998, with earlier application permitted.
Prior to the issuance of SOP 98-5, companies had the option of capitalizing
or expensing costs associated with start-up activities in accordance with
generally accepted accounting principles. SOP 98-5 broadly defines start-up
activities as one-time activities related to the opening of a new facility,
the introduction of a new product or service, the commencement of business in
a new territory, the establishment of business with a new class of customer,
the initiation of a new process in an existing facility or the commencement
of a new operation.
The Company adopted SOP 98-5 in the current quarter ended September 30, 1998,
recording a one-time, non-cash charge reflected as the cumulative effect of a
change in accounting principle of $17,728, net of an estimated tax benefit of
$1,970. The charge primarily represents previously capitalized start-up costs
incurred in the Company's 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. As required by SOP 98-5, the cumulative
charge is reflected as if recorded at the beginning of the current year.
NOTE (2) MERGERS AND ACQUISITION
On August 24, 1998, the Company consummated a merger with VisiCom,
Laboratories, Inc. ("VisiCom"), a California Corporation, in a
stock-for-stock transaction. VisiCom specializes in information technology
solutions and has become part of Titan's Emerging Technologies segment. Titan
issued approximately 4,168,000 shares of common stock in exchange for all
the outstanding shares of VisiCom and assumed VisiCom stock options
representing approximately 593,200 shares of Titan common stock, based on an
exchange ratio of .4465 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"), a Delaware corporation, in a stock-for-stock transaction.
Horizons is a provider of systems engineering and program management
services, computer systems integration and high-end software and has become
part of Titan's Information Technologies segment. Titan issued approximately
3,200,000 shares of common stock in exchange for all the outstanding shares
of Horizons stock based on exchange ratios of approximately .37 and .82
shares of Titan's common stock for each share of Horizons' common stock and
Horizons' preferred stock, respectively. The merger constituted a tax-free
reorganization and has been accounted for as a pooling of interests.
7
<PAGE>
On February 27, 1998, the Company consummated a merger with DBA Systems, Inc.
("DBA"), a Florida Corporation, in a stock-for-stock transaction. DBA is a
developer and manufacturer of digital imaging products, electro-optical
systems and threat simulation/training systems. DBA's products and systems
are primarily used by the defense and intelligence communities; accordingly,
it is included in Titan's Information Technologies segment. Titan issued
approximately 6,100,000 shares of common stock for all the outstanding shares
of DBA stock based on an exchange ratio of approximately 1.37 shares of Titan
common stock for each share of DBA stock. The merger constituted a tax-free
reorganization and has been accounted for as a pooling of interests.
The special charges of $3,093 and $4,553 in the three and nine months ended
September 30, 1998, respectively, primarily represent the costs and expenses
related to these mergers.
In connection with the merger with Delfin Systems in October 1998 (see Note
6), the Company will record the costs related to this transaction during the
fourth quarter of 1998. In addition, the Company is currently developing an
integration plan which will include, but not be limited to, the consolidation
and closure of duplicate facilities, centralization of administrative
functions and the consolidation of management information systems. The
Company will record a charge in the fourth quarter of 1998 for such costs
related to this integration plan.
In connection with its acquisition of DBA, Titan acquired land and a building
which are included in other non-current assets. DBA recorded a $2.0 million
charge in its quarter ended September 30, 1997 to recognize an impairment in
the value of this asset. Management is actively marketing the property for
sale through various channels and believes that the carrying value of this
asset, as reflected in the accompanying financial statements for the quarter
ended September 30, 1998, is stated at an amount that is fully recoverable.
DBA also recorded a $3.0 million charge in the quarter ended September 30,
1997, in recognition of certain environmental matters at its Kissimmee
facility including, but not limited to, soil contamination and potential
asbestos and lead based paint contamination. These matters became known to
DBA as a result of an environmental study performed as part of Titan's
acquisition due diligence process. The accrual has been recorded in
accordance with SFAS No. 5 and SOP 96-1 and represents an initial estimate
which could change significantly as further studies are performed. In the
accompanying balance sheet, approximately $.2 million is included in other
current liabilities and the remaining $2.8 million is included in other
non-current liabilities based on the estimated timing of continued
assessments and remediation work to be performed. The Company has commenced
its pre cleanup activities which are expected to continue through at least
fiscal 1998.
Also, concurrent with this acquisition, DBA recorded certain charges, in
addition to those noted above, aggregating to $4.8 million, relating to the
write down of certain assets to estimated net realizable value in the quarter
ended December 31, 1997.
Effective January 1, 1998, VisiCom's March 31, Horizons' January 31 and DBA's
June 30 fiscal year-ends have been changed to coincide with the Company's
year-end. The 1997 financial statements presented have been restated to
include the combined results of operations, financial position and cash flows
of VisiCom, Horizons and DBA as if the mergers had occurred at the beginning
of the periods presented.
8
<PAGE>
The combining periods of Titan, DBA, Horizons and VisiCom are as follows:
<TABLE>
<CAPTION>
Fiscal Year 1996
----------------------------------
<S> <C>
Titan Fiscal year ended December 1996
DBA Fiscal year ended June 1996
Horizons Fiscal year ended January 1997
VisiCom Fiscal year ended March 1997
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1997 Quarterly Periods
--------------------------------------
Q1 '97 Q2 '97 Q3 '97 Q4 '97
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Titan March 97 June 97 Sept. 97 Dec. 97
DBA March 97 June 97 Sept. 97 Dec. 97
Horizons April 97 July 97 Oct. 97 Jan. 98
VisiCom June 97 Sept.97 Dec. 97 Mar. 98
</TABLE>
A pooling of interests adjustment has been made in the consolidated
statements of cash flows and consolidated statements of stockholders' equity
for the nine months ended September 30, 1997 to reflect the activity for DBA
in the six months ended December 31, 1996, as reported in DBA's Form 10-Q for
the fiscal quarter ended December 31, 1996. The poolings of interests
adjustments in the consolidated statement of cash flows and consolidated
statement of stockholders' equity for the nine months ended September 30,
1998, reflect the activity for Horizons for the month ended January 31, 1998,
and the activity for VisiCom for the three months ended March 31, 1998,
included in Titan's results of operations in both the year ended December 31,
1997, and the nine months ended September 30, 1998. Revenues from continuing
operations for VisiCom for the three months ended March 31, 1998, were
$8,413. Revenues from continuing operations for Horizons for January 1998
were $2,032.
The separate and combined results of Titan, DBA, Horizons and VisiCom in 1997
are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenues:
Titan $ 41,973 $ 127,212
DBA 5,665 19,449
Horizons 5,955 19,661
VisiCom 8,234 22,948
------- -------
Combined $ 61,827 $ 189,270
------- -------
------- -------
Net income (loss):
Titan $ 1,537 $ 3,030
DBA (3,816) (2,726)
Horizons 78 262
VisiCom (13,543) (13,527)
------- -------
Combined $ (15,744) $ (12,961)
------- -------
------- -------
</TABLE>
On March 31, 1998, the Company acquired all of the outstanding common stock
of Validity Corporation ("Validity"), a California corporation, for $12
million in cash, and notes payable to the shareholders of Validity totaling
$3 million, subject to post-closing adjustments, if any, due and payable
March 31, 1999, and bearing interest at the prime rate. The transaction has
been accounted for as a purchase; accordingly, the consolidated balance sheet
includes Validity as of
9
<PAGE>
September 30, 1998. The excess of the purchase price over the estimated fair
value of net assets acquired, to be amortized on a straight-line basis over
30 years, was approximately $18.7 million as of September 30, 1998, based on
net assets acquired of $560. Validity's results of operations have been
consolidated with the Company's results of operations beginning April 1, 1998.
NOTE (3) DISCONTINUED OPERATIONS
In April 1997, the Company's Board of Directors adopted a plan to divest the
Company's broadband communications business. The results of the broadband
communications business have been accounted for as a discontinued operation
in accordance with Accounting Principles Board Opinion No. 30, which among
other provisions, anticipates that the plan of disposal will be carried out
within one year. In the third quarter of 1998, the Company concluded
negotiations with certain investors resulting in a cash payment in October of
$1,800 for licensing of the broadband technology. During the first quarter of
1998, the Company received approximately $2,600 as settlement of certain
contingencies related to the broadband patents and intangibles as well as
initial payments related to licensing the technology. As a result of the
conclusion of these negotiations and the periodic review by management of the
realizability of further proceeds from the sale of the technology, the
remaining net assets of the broadband business were written off in the
quarter ended September 30, 1998, resulting in a pre-tax charge to loss from
discontinued operations of $4,638. Additionally, approximately $7,200 in
start-up costs were written off in the cumulative effect of the change in
accounting principle discussed above.
In addition to the discontinued operations of the broadband business as
discussed above, the accompanying consolidated financial statements reflect
operations discontinued by certain of the companies acquired by Titan in
1998. These discontinued operations include the ceramic board business of
VisiCom and the commercial software business of Horizons. The decisions to
dispose or otherwise wind down these operations were made by the separate
Boards of Directors of the respective acquired companies prior to entering
into any dicussions 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
$3,200 and $2,814 for the three months and $8,099 and $5,768 for the nine
months ended September 30, 1998 and 1997, respectively, and losses
attributable to these discontinued operations aggregated $1,234 and $11,490
and $5,027 and $12,964 for the same respective periods. Such losses are net
of tax benefits of $174 and $822 for the three and nine months ended
September 30, 1997. Aggregate charges for 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. 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 wind-down costs. Net liabilities of discontinued
operations at September 30, 1998 consist primarily of accrued liabilities of
approximately $12,000, primarily accruals for wind down costs, net of current
assets of approximately $6,500. The current assets are composed primarily of
accounts receivable and inventory. Long-term net assets of discontinued
operations are primarily fixed assets.
10
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NOTE (4) 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 the existing
line of credit agreement. The credit facility includes a five year $55
million working capital line of credit and a one year $25 million component
dedicated for acquisitions which converts any outstanding balances after one
year into a term loan, to be repaid in increasing quarterly amounts over four
years. The Company has the option to borrow at the bank base rate or at
LIBOR, plus applicable margins based on the ratio of total debt to EBITDA
(earnings before interest, taxes, depreciation and amortization). The
agreement contains, among other financial covenants, provisions which set
maximum debt to EBITDA limits and which require the Company to maintain
stipulated levels of EBITDA, tangible net worth, a minimum quick ratio, and
minimum coverage of fixed charges, as defined. Initial proceeds of $36.1
million were used to pay off and replace the outstanding line of credit
balances with Titan's and Horizons' banks and for working capital purposes.
Also, as part of the terms of the merger with VisiCom discussed in Note 2,
Titan retired VisiCom's bank line of credit of $4,980 in August 1998.
At September 30, 1998, borrowings outstanding under the working capital line
of credit were $39,000, at a weighted average interest rate of 7.396% and
commitments under letters of credit reducing availability under this
agreement were $950. At September 30, 1998, the Company was in compliance
with all financial covenants under its various debt agreements.
NOTE (5) OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Inventories:
Materials $ 3,862 $ 3,269
Work-in-process 3,098 12,400
Finished goods 2,147 1,964
------ ------
$ 9,107 $ 17,633
------ ------
------ ------
</TABLE>
11
<PAGE>
Supplemental disclosure of cash payments is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 , September 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest $ 761 $ 729 $ 4,080 $ 3,681
Income taxes 26 69 872 407
</TABLE>
During the nine month period ended September 30, 1997, the Company utilized
treasury stock of $345 for benefit plan funding and contributions.
The following tables summarize revenues and operating profit (loss) by
industry segment for the three and nine month periods ended September 30,
1998 and 1997:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 , September 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Information Technologies $40,299 $33,449 $110,794 $106,426
Software Systems 5,568 4,310 13,242 12,206
Medical Sterilization and
Food Pasteurization 1,933 1,719 7,101 4,348
Communications Systems 10,373 11,306 33,148 34,832
Emerging Technologies and Businesses 10,489 11,043 31,626 31,458
------ ------ ------ ------
$68,662 $61,827 $195,911 $189,270
------ ------ ------ ------
------ ------ ------ ------
Operating Profit (Loss):
Information Technologies $ 2,818 $(1,133) $ 10,658 $ 7,613
Software Systems 1,465 1,192 3,232 2,620
Medical Sterilization and
Food Pasteurization 203 (64) 843 (86)
Communications Systems (11) (373) 1,101 (806)
Emerging Technologies and Businesses 1,602 (843) 2,074 507
------ ------ ------ ------
Segment operating profit (loss) before
Corporate 6,077 (1,221) 17,908 9,848
Corporate (2,321) (957) (4,452) (2,457)
------ ------ ------ ------
$ 3,756 $(2,178) $13,456 $ 7,391
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The operating profit of the Information Technologies segment for the three
and nine months periods ended September 30, 1998, reflects $929 and $2,389 of
special charges representing costs and expenses of the mergers with Horizons,
and with Horizons and DBA, respectively (see Note 2). In both the three and
nine month periods in 1997, the Information Technologies segment operating
results reflects the $2.0 million and $3.0 million charges at DBA for
impairment of real estate held for sale and reserves for environmental
matters, respectively, as discussed in Note 2. Corporate expenses in the
three and nine months periods ended September 30, 1997 include other charges
of $275 related to other merger-related expenses.
On June 18, 1998, the Company withdrew its registration statement for the
proposed initial public offering of common stock of Linkabit Wireless, Inc.,
a wholly owned subsidiary of the Company. The registration statement was
withdrawn due to unfavorable market conditions for initial public offerings.
The operating results for the three and nine months ended September 30, 1998
in the Communications Systems segment reflect $886 in costs and expenses
related to the registration statement.
12
<PAGE>
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>
Three months ended Sept. 30, 1998 Three months ended Sept. 30, 1997
---------------------------------- ---------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations $1,350 $(4,254)
Less preferred
stock dividends (176) (219)
----- -----
Basic EPS:
Income (loss) from
continuing operations
available to
common stockholders 1,174 31,766 $ .04 (4,473) 29,854 $ (.15)
Effect of
dilutive securities:
Stock options -- 782 (.00) -- -- --
Warrants -- -- -- -- -- --
Debentures -- -- -- -- -- --
----- ------ ------ ----- ------ ------
Diluted EPS:
Income (loss) from
continuing operations
available to
common stockholders
plus assumed
conversions $1,174 32,548 $ .04 $(4,473) 29,854 $ (.15)
----- ------ ------ ----- ------ ------
----- ------ ------ ----- ------ ------
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Sept. 30, 1998 Nine months ended Sept. 30, 1997
---------------------------------- --------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income from
continuing operations $5,388 $ 345
Less preferred
stock dividends (605) (655)
----- -----
Basic EPS:
Income (loss) from
continuing operations
available to
common stockholders 4,783 31,159 $ .15 (310) 29,711 $ (.01)
Effect of
dilutive securities:
Stock options -- 757 (.00) -- -- --
Warrants -- 32 (.00) -- -- --
Debentures 1,304 8,799 (.00) -- -- --
----- ------ ------ ----- ------ ------
Diluted EPS:
Income from
continuing operations
available to
common stockholders
plus assumed
conversions $6,087 40,747 $ .15 $ (310) 29,711 $ (.01)
----- ------ ------ ----- ------ ------
----- ------ ------ ----- ------ ------
</TABLE>
13
<PAGE>
In the three and nine months ended September 30, 1998, respectively, options
to purchase 850,300 and 336,060 shares of common stock at prices ranging from
$5.63 to $9.50 and $6.19 to $9.50 per share were not included in the
computation of diluted EPS, as the exercise price of such options was greater
than the average market price of the common shares. Options were not included
in the computation of diluted EPS in the three and nine months ended
September 30, 1997, as the effect would have been anti-dilutive. In all
periods in both 1998 and 1997, 463,248 shares of common stock that could
result from the conversion of cumulative convertible preferred stock were not
included in the computation of diluted EPS, as the effect would have been
anti-dilutive.
In 1998 and 1997, 333,333 common shares that could result from the conversion
of Series B Cumulative Convertible Redeemable Preferred Stock were not
included in the computation of diluted EPS, as the effect would have been
anti-dilutive. In June 1998, the Company redeemed 416,667 shares of this
stock at $6.00 per share. In July 1998, the Company redeemed the remainder of
this stock. Also anti-dilutive in the nine months ended September 30, 1997,
were warrants outstanding for 100,000 common shares. The warrants were
exercised in June 1998.
NOTE (6) SUBSEQUENT EVENT
On October 23, 1998, the Company consummated a merger with Delfin Systems
("Delfin"), a California corporation, whereby Delfin became a wholly-owned
subsidiary of The Titan Corporation in a stock-for-stock transaction. Delfin
provides systems engineering and program management services, signal
intelligence systems, computer systems integration and high-end software, and
will be included in Titan's Information Technologies segment. Titan will
issue approximately 3,628,000 shares of Titan common stock in exchange for
all the outstanding shares of Delfin common stock and assume Delfin stock
options representing approximately 822,600 shares of Titan common stock,
based on an exchange ratio of approximately .5021 shares of Titan common
stock for each share of Delfin stock. The merger constituted a tax-free
reorganization and will be accounted for as a pooling of interests.
14
<PAGE>
THE TITAN CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(Dollar amounts in thousands,
except per share data)
RESULTS OF OPERATIONS
Consolidated results:
Revenues for the third quarter of 1998 increased from $61,827 in the third
quarter of 1997 to $68,662. Revenues for the nine months ended September 30
were $195,911 and $189,270 in 1998 and 1997, respectively. In both the third
quarter and nine months ended September 30, 1998 compared to the
corresponding periods of 1997, the Information Technologies, Software Systems
and Medical Sterilization and Food Pasteurization segments reported increased
revenues and operating income. The Company reported net losses of $3,994 and
$17,684 for the third quarter and nine months of 1998 compared to $15,744 and
$12,961 for the third quarter and nine months of 1997. Included in the third
quarter and nine months ended September 30, 1998 are special acquisition
related transaction charges of $3,093 and $4,553, respectively. Non-recurring
charges related to the write-down of certain assets and accruals for certain
environmental liabilities of $5,000 are included in the third quarter and
nine months ended September 30, 1997. Included in the third quarter and nine
months of 1998 and 1997 is a loss from discontinued operations of $5,344 and
$11,490 and $5,344 and $13,306, respectively. In addition, the Company
adopted Statement of Position (SOP) 98-5 in the third quarter of 1998, which
resulted in a one-time, non-cash write-off of $17,728, net of an estimated
tax benefit of $1,970, of capitalized start-up costs in the first quarter as
a cumulative effect of a change in accounting principle.
Income from continuing operations in the third quarter and nine months of
1998 was $1,350 and $5,388, respectively, compared to a loss of $4,254 and
income of $345 in the third quarter and nine months of 1997. This difference
was primarily due to the impact of the changes in revenues noted above, as
well as the impact of the special merger related expenses in 1998 and other
charges related to the write-down of certain assets in 1997.
Selling, general and administrative expense ("SG&A") as a percentage of
revenue decreased from 15% in the third quarter of 1997 to 12% for the same
period in 1998, and from 14% in the nine months of 1997 to 13% for the same
period in 1998. These decreases were due primarily to the impact of ongoing
cost reduction measures taken across all business segments. Research and
development costs ("R&D") decreased overall from $2,163 in the third quarter
of 1997 to $990 for the same period in 1998, and from $6,232 for the nine
months of 1997 to $3,809 for the same period in 1998. This change was
primarily due to the completion of certain development and certification
efforts in the Communications Systems segment in early 1998.
Net interest expense increased $216 and $723 in the third quarter and nine
months ended September 30, 1998 compared to the comparable
15
<PAGE>
periods of 1997, primarily from interest related to increased borrowings on
the Company's line of credit.
The income tax provision is a 36% and 37% effective rate in the third quarter
and nine months of 1998 compared to a 118% and 89% effective rate in the
third quarter and nine months of 1997, respectively. The effective rates
recorded in 1997 were substantially and negatively impacted by the inability
to deduct for tax purposes certain write-offs recorded primarily by companies
acquired by Titan. These effective rates approximate the expected combined
federal and state statutory rates, less expected credits, primarily R&D
credits.
Business Segments:
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997:
In the Information Technologies segment, revenues grew $6,850, from $33,449
in the third quarter of 1997 to $40,299 in the third quarter of 1998. The
increase in revenues is principally due to the revenues generated by the
acquired business Validity, which was acquired in March 1998. Operating
income increased $3,951 from an operating loss of $1,133 in the third quarter
of 1997 to income of $2,818 in the third quarter of 1998. Included in the
third quarter of 1998 are special acquisition charges of $929 related to the
Horizons merger, and, included in the third quarter of 1997 results are
charges of $5,000 related to the write down of certain assets of DBA to net
realizable value and the recognition of environmental liabilities. Excluding
the impact of these special charges and write downs, operating income
decreased slightly from $3,867 in the third quarter of 1997 to $3,747 in
1998. The change was due primarily to the impact of certain non-recurring
credits which were recorded in 1997.
Software Systems segment revenues increased $1,258 from $4,310 in the third
quarter of 1997 to $5,568 in the third quarter of 1998, primarily due to
increased work performed on contracts with existing customers of this
segment. The increase in operating income of $273 from $1,192 of operating
income in the third quarter of 1997 to $1,465 in the third quarter of 1998
was principally due to increased revenues.
Revenues and operating performance in the Medical Sterilization and Food
Pasteurization segment improved from revenue of $1,719 and an operating loss
of $64 in the third quarter of 1997 to revenue of $1,933 and operating income
of $203 in the third quarter of 1998, respectively. This improvement
primarily relates to work performed on the Company's two contracts awarded in
late 1997 to provide in-house SureBeam sterilization systems.
Revenues in the Communications Systems segment decreased $933 from $11,306 in
the third quarter of 1997 to $10,373 in the third quarter of 1998, due to
decreased shipments made on the Company's contract with PT. Pasifik Satelit
Nusantara (PSN) to provide rural telephony terminals for a system in Indonesia.
This was partially offset by increased revenues recorded on the Company's
Mini-DAMA production contract. Operating performance for this segment improved
from an operating loss of $373 in the third quarter of 1997 to $11 in the third
quarter of 1998, principally due to increased margins, as well as the winding
down from 1997 to 1998 of significant development and certification efforts.
Operating results for the third quarter of 1998 include special charges of $886
related to costs incurred to file a registration statement with the Securities
and Exchange Commission ("SEC") for an initial public offering of 2,700,000
shares of Linkabit Wireless common stock that the Company has subsequently
withdrawn. Excluding the impact of these charges, operating performance improved
16
<PAGE>
$1,248 from an operating loss of $373 in the third quarter of 1997 to
operating income of $875 in the third quarter of 1998.
The commercial satellite communications business accounted for approximately
$619 of the Communications Systems segment revenues generated in the third
quarter of 1998. The commercial satellite communications business provides
Xpress Connection terminals to PSN as well as the ground segment for the
multi media Asia (M2A) project. The ongoing economic and political turmoil in
Asia could result in a material and adverse impact on this segment's revenues
for the remainder of 1998.
In the Emerging Technologies segment, revenues declined $554 from $11,043 in
the third quarter of 1997 to $10,489 in the third quarter of 1998 primarily
due to the wind down of the Company's environmental consulting business
during the first quarter of 1998, partially offset by increased revenues in
the Company's VisiCom business. Operating performance improved $2,445 from an
operating loss of $843 in the third quarter of 1997 to operating income of
$1,602 in the third quarter of 1998. This improvement primarily resulted from
the impact of the increased revenues noted above, the impact of a favorable
product mix, as well as the recognition of certain non-recurring license
fees. Included in the third quarter of 1998 operating results are special
acquisition charges of $1,003 related to the VisiCom merger. Excluding the
impact of these charges, operating performance improved from an operating
loss of $843 to operating income of $2,605.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997:
In the Information Technologies segment, revenues and operating income
increased from $106,426 and $7,613 in the nine months ended September 30,
1997 to $110,794 and $10,658 in the nine months ended September 30, 1998. The
increase in revenues was primarily due to the revenues generated by the
acquired business Validity, offset partially by the impact of the
redeployment of Department of Defense ("DOD") funding appropriations, which
impacted certain work the Company performs for the U.S. Navy. Included in the
nine months ended September 30, 1998 are special acquisition charges of
$2,389 related to the DBA and Horizons mergers, and, included in the nine
months ended September 30, 1997 results are charges of $5,000 related to the
write down of certain assets of DBA to net realizable value and the
recognition of environmental liabilities. Excluding the impact of these
special charges and write downs, operating income increased from $12,613 in
the nine months of 1997 to $13,047 in 1998. The increase was due primarily to
the impact of the increased revenues noted above.
Software Systems segment revenues and operating income increased $1,036 and
$612, from $12,206 and $2,620 in the nine months ended September 30, 1997 to
$13,242 and $3,232 in the nine months ended September 30, 1998, respectively.
This growth primarily resulted from work performed on contracts with certain
new customers in this business.
Revenues and operating performance in the Medical Sterilization and Food
Pasteurization segment improved from revenues of $4,348 and an operating loss
of $86 in the nine months ended September 30, 1997 to revenues of $7,101 and
operating income of $843 in the nine months ended September 30, 1998. This
improvement primarily relates to work performed on the Company's two
contracts awarded in late 1997 to provide in-house SureBeam sterilization
systems and the near completion of an in-house sterilization system awarded
in early 1997.
Revenues for the Communications Systems segment decreased $1,684 from $34,832 in
the nine months ended September 30, 1997 to $33,148 in the
17
<PAGE>
nine months ended September 30, 1998, due primarily to the decreased
shipments made on the Company's contract for a rural telephony system in
Indonesia noted above, offset partially by increased revenues generated on
the Company's Mini-DAMA contract. Segment operating performance improved
$1,907 from an operating loss of $806 in the nine months ended September 30,
1997 to operating income of $1,101 in the nine months ended September 30,
1998. This improvement reflects the wind-down of significant development and
certification expenditures incurred in the prior year, as well as the impact
of the increased revenues on the Mini-DAMA contract. Operating results for
the nine months ended September 30, 1998 include special charges of $886
related to costs incurred to file the withdrawn registration statement with
the SEC noted above. Excluding the impact of these charges, operating
performance improved $2,793 from an operating loss of $806 in the nine months
ended September 30, 1997 to operating income of $1,987 in the nine months
ended September 30, 1998.
The Emerging Technologies segment revenues and operating performance improved
from revenues and an operating income of $31,458 and $507 in the nine months
ended September 30, 1997 to $31,626 and $2,074 in the nine months ended
September 30, 1998, respectively. Increased revenues from the VisiCom
business were offset primarily by the wind down of the Company's
environmental consulting business during the first quarter of 1998 and, to a
lesser extent, due to the near completion of certain of the Company's
contracts to build linear electron accelerators. The operating performance
improvement primarily resulted from the impact of the increased revenues
noted above, the impact of a favorable product mix, as well as the
recognition of certain non-recurring, non-refundable license fees. Included
in the nine months ended September 30, 1998 operating results are special
acquisition charges of $1,003 related to the VisiCom merger. Excluding the
impact of these charges, operating income improved from $507 in the nine
months ended September 30, 1997 to $3,077 in the nine months ended September
30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998, Titan used $7,437 for the
operating requirements of continuing operations. Significant cash uses
include an increase in accounts receivable balances of $14,089 primarily in
the Information Technologies and Communications Systems segments due
primarily to contractual billing terms, funding requirements for acquisition
related charges of $4,553, an increase in inventories of $2,198 primarily
related to commercial rural telephony products and digitized fingerprint
scanners, and the funding requirements for accrued compensation obligations
of $1,659.
Approximately $1,000 and $2,500 of the increase in receivables and inventory,
respectively, is related to the commercial satellite communications business.
Titan's aggregate investment in the commercial satellite communications
business is reflected in the balance sheet primarily within the captions of
Accounts Receivable, Inventories, and Property and Equipment and aggregates
approximately $7,600 at September 30, 1998. The Company has negotiated a
payment plan agreement with its customer PSN for settlement of all amounts
due from PSN. The payment plan agreement provides for an immediate payment by
PSN of $1,000, with the remaining balance to be paid in equal installments of
$3,907 on September 30, 1999 and September 30, 2000. All outstanding balances
will accrue interest at 10% per annum. At any time prior to the payment of
the obligations in full, the Company may elect to convert all or a portion of
the principal and interest on each payment obligation due into common stock
of PSN, based on its then current market value. In addition, if at any time
after the execution of this agreement, PSN sells any of its interest in
its wholly owned subsidiary, subject to another third party obligation, PSN
will immediately pay the lesser of the $3,907 or the total of the amount of
the outstanding balance. In the event that
18
<PAGE>
PSN obtain financing from additional sources, the payment terms will be
renegotiated at that time. The Company is continually assessing the impact of
the recent events in Asia, including the currency devaluation in Indonesia,
Malaysia, Taiwan and the Philippines, on its Communications Systems segment,
and presently does not believe that there has been any significant impairment
in its aggregate investment, as mentioned above. However, there can be no
assurance that PSN will be able to satisfy their debt to Titan in accordance
with the extended terms.
Cash of $11,679, net of cash acquired, was used for the Company's acquisition
of Validity Corporation. Cash was provided primarily by the Company's lines
of credit ($17,120), by the sale of investments ($4,499), and by receipts and
receivables for licensing the technology of its broadband communications
business ($4,395). On July 29, 1998, the Company entered into a credit
agreement with a bank syndicate under which it may borrow up to $80 million.
The credit facility includes a five year $55 million working capital line of
credit and a one year $25 million component dedicated for acquisitions which
converts any outstanding balances after one year into a term loan, to be
repaid in increasing quarterly amounts over four years. The Company has the
option to borrow at the bank base rate or at LIBOR, plus applicable margins
based on the ratio of total debt to EBITDA (earnings before interest, taxes,
depreciation and amortization). The agreement contains, among other financial
covenants, provisions which set maximum debt to EBITDA limits and which
require the Company to maintain stipulated levels of EBITDA, tangible net
worth, a minimum quick ratio, and minimum coverage of fixed charges, as
defined. Initial proceeds of $36.1 million were used to pay off and replace
the outstanding line of credit balances with Titan's and Horizons' banks and
for working capital purposes. Also, as part of the terms of Titan's merger
with VisiCom, Titan retired VisiCom's bank line of credit of $4,980 in August
1998.
Funding for the advancement of the Company's strategic goals, including
acquisitions and continued investment in targeted commercial businesses and
start-up ventures, is expected to continue throughout 1998. The Company plans
to finance these requirements from a combination of sources, which include
cash generation from the Company's core businesses and the Company's expanded
bank line of credit as described above. One of Titan's primary strategies is
the funding of growth in specific subsidiaries through spin-out transactions.
If Titan is unable to implement this strategy, whether in whole or in part,
then the Company may need to complete additional equity or debt financings to
fund the continued expansion of its operations and potential acquisitions of
new technologies. Any additional equity or convertible debt financings could,
however, result in substantial dilution to the Company's stockholders.
Management is continually monitoring and reevaluating its level of investment
in all of its operations and the financing sources available to achieve the
Company's goals in each business area.
The Company has a 141,000 square foot facility in Kissimmee, Florida, which
was obtained in the acquisition of DBA. The property has been held for sale
since June 1996. A charge was recorded by DBA in the quarter ended December
31, 1997 to adjust the carrying value of the property to estimated fair
market value. Management continues to actively market the property and
regular reviews it for further impairment. Management believes that the
recorded value of the property continues to approximate estimated fair market
value.
DBA also recorded a $3.0 million charge in the quarter ended September 30, 1997
in recognition of certain environmental matters including, but not limited to
soil contamination and potential asbestos and lead based paint contamination at
the Company's Kissimmee, Florida facility. These matters became known to DBA as
a result of a limited environmental study performed as part of Titan's
acquisition due diligence process. The accrual has been recorded in accordance
with
19
<PAGE>
SFAS No. 5 and SOP 96-1 and represents an initial estimate, which could
change significantly as further studies are performed. In the accompanying
balance sheet, approximately $.2 million is included in other current
liabilities and the remaining $2.8 million is included in other non-current
liabilities based on the estimated timing of remediation work to be
performed. The Company has commenced its pre cleanup activities, which are
expected to continue through at least fiscal 1998.
IMPACT OF THE YEAR 2000 ISSUE: We have 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 are contacting business
associates such as our third party vendors, business partners, contractors
and service providers to assess their level of readiness.
Our Software Systems group provides Year 2000 services to other companies so
we are using internal expertise to develop and implement our program. We are
using the same common project methodologies that we use for our customers'
programs. We are in the process of assessing whether all of our business unit
products and services are Year 2000 compliant. Because we are in an
information technology company, we have been sensitive to Year 2000 issues
for a number of years. We do not expect our current products or services to
have material Year 2000 issues. In some cases, our government customers have
contracted with us to modify our older products to be Year 2000 compliant.
Our products are not sold under extended warranties so we do not expect that
we will have to spend any material amounts to make any of our prior products
Year 2000 compliant. However, we are in the process of assessing all of our
products, including the products of our recently acquired businesses and we
cannot be certain that Year 2000 issues will not arise.
As part of the program, we are reviewing all of the internally developed and
third party software that we use for accounting, manufacturing process and
other business functions. Because of our history of acquisitions, we have a
number of business units that use different systems; some of which we know
are not Year 2000 compliant. Based upon our assessment, we may elect to move
business units to other Year 2000 compliant systems that we currently use as
part of an overall plan to consolidate the number of different systems being
used. We estimated the cost of moving business units to new systems will
range from $3 million to $5 million, of which only approximately 30% is
related to the replacement of non-compliant systems. Some of our business
units may use internal resources to convert legacy application systems to be
Year 2000 compliant. Finally, many of our government contracts related
business units use an accounting package that is not currently Year 2000
compliant. We understood that our supplier will release a Year 2000 compliant
version during the fourth quarter of 1998. Under our maintenance agreement,
we will receive the upgrade at no additional cost. We expect to incur any
material Year 2000 related costs during fiscal year 1999. These fiscal 1999
costs could have a material adverse effect on our financial position, results
of operations or cash flows. If we cannot timely correct all Year 2000
problems, these problems also may cause material adverse effects on our
financial position, results of operations or cash flows.
After we complete the assessment of our Year 2000 readiness, we plan on
developing contingency plans in the event that our internal systems or our
third party business associates' systems are not timely corrected.
20
<PAGE>
Finally, we have formed a Year 2000 steering committee to monitor
implementation of our overall program and the plans of each of the business
units. Each business unit has formed a steering committee to develop and
implement compliance plans.
FORWARD LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition that are not related to
historical results are forward looking statements. Actual results may differ
materially from those stated or implied in the forward looking statements.
Further, certain forward looking statements are based upon assumptions of
future events which may not prove to be accurate. These forward looking
statements involve risks and uncertainties including but not limited to those
referred to in the Company's Form S-3 Registration Statement No. 333-66149
filed October 26, 1998, regarding entry into commercial business, risk of
international operations, and dependence on defense spending.
21
<PAGE>
THE TITAN CORPORATION
PART II - OTHER INFORMATION
ITEM 2. (c) CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 24, 1998, the Titan Corporation consummated a merger
with VisiCom Laboratories, Inc. ("VisiCom") in a stock for
stock transaction. Titan issued 4,167,833 shares of its common
stock for all of the outstanding shares of VisiCom stock based
on an exchange ratio of 0.447 shares of Titan common stock for
each share of VisiCom stock. The shares were issued in a
private transaction under Sec. 4(2) under the Securities Act
of 1933 as amended. Each shareholder represented that such
shareholder acquired the shares for investment without a view
toward distribution.
ITEM 4. (a) AND (c) SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
At a Special Meeting of Stockholders held on October 21, 1998,
the following matter was submitted and approved by
shareholders:
Amendment of the Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock from
45,000,000 to 100,000,000.
Affirmative Votes 15,215,716
Negative Votes 3,702,258
Abstaining 78,474
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)(3.1) Registrant's Certificate of Amendment of Restated Certificate
of Incorporation dated as of October 21, 1998. The
Registrant's Restated Certificate of Incorporation dated as of
November 6, 1998, which was Exhibit 3.1 to Registrant's 1987
Annual Report on Form 10-K is incorporated herein by this
reference. The Registrant's Certificate of Amendment of
Restated Certificate of Incorporation dated as of June 30,
1987, which was Exhibit 3.2 to Registrant's 1987 Annual Report
on Form 10-K is incorporated herein by this reference.
(27.1) Financial Data Schedule for the nine months ended
September 30, 1998.
22
<PAGE>
(27.2) Restated Financial Data Schedule for the years ended December
31, 1997 and 1996, and for the three month, six month and nine
month periods ended March 31, 1997, June 30, 1997 and
September 30, 1997, respectively.
(27.3) Restated Financial Data Schedule for the year December 31,
1995 and for the three month, six month and nine month periods
ended March 31, 1996, June 30, 1996, and September 30, 1996,
respectively.
(b) During the three months ended September 30, 1998, and the
subsequent period prior to filing this report on Form 10-Q,
Registrant filed the following:
(1) Current report on Form 8-K dated October 23, 1998, to report
the consummation of a merger pursuant to which Delfin Systems,
a California corporation ("Delfin") became a wholly owned
subsidiary of Titan pursuant to the Agreement and Plan of
Reorganization dated as of June 30, 1998 by and among the
Titan Corporation, Delsys Merger Corp., and Delfin Systems.
(2) Amendment No. One on Form 8-K/A dated August 12, 1998, to
amend Form 8-K dated June 30, 1998, to provide certain
required financial statements.
23
<PAGE>
THE TITAN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November 16, 1998
THE TITAN CORPORATION
/s/ Eric M. DeMarco
---------------------------------
By: Eric M. DeMarco
Executive Vice President,
Chief Financial Officer
/s/ Deanna H. Petersen
---------------------------------
By: Deanna H. Petersen
Vice President,
Corporate Controller
(Principal Accounting Officer)
24
<PAGE>
EXHIBIT 3.1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE Page 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "THE TITAN CORPORATION", FILED IN THIS OFFICE ON THE
TWENTY-SECOND DAY OF OCTOBER, A.D. 1998, AT 9 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL] /s/ EDWARD J. FREEL,
-----------------------------------
Edward J. Freel, Secretary of State
0720430 8100
AUTHENTICATION: 9368642
981408772 DATE: 10-23-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 10/22/1998
981408772 - 0720430
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
THE TITAN CORPORATION
The Titan Corporation (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
FIRST: The Board of Directors of the Corporation declared an amendment to
the Corporation's Certificate of Incorporation, as amended (the
"Certificate") advisable and approved a resolution to delete Article Fourth
of the Certificate in its entirety and replace it with the following:
Fourth: The Corporation is authorized to issue two classes
of stock, which shall be designated Preferred Stock and
Common Stock, respectively. The total number of shares of all
classes of stock which the Corporation shall have the authority
to issue shall be 102,500,000, consisting of 2,500,000 shares
of Preferred Stock of the par value of $1.00 per share, and
100,000,000 shares of Common Stock of the par value of $.01
per share.
SECOND: Thereafter, the Board of Directors called a Special Meeting of
the Stockholders for October 21, 1998, at which the necessary number of shares
as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment
to be signed and attached by its duly authorized officer this 21st day of
October, 1998.
By: /s/ CHERRYL BARR
--------------------------------
Cherryl Barr, Assistant Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TITAN CORPORATION'S REPORT ON FORM 10-Q FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,710
<SECURITIES> 0
<RECEIVABLES> 86,585
<ALLOWANCES> 0<F1>
<INVENTORY> 9,107
<CURRENT-ASSETS> 112,739
<PP&E> 62,658
<DEPRECIATION> 37,803
<TOTAL-ASSETS> 183,830
<CURRENT-LIABILITIES> 49,992
<BONDS> 69,769
0
695
<COMMON> 327
<OTHER-SE> 49,037
<TOTAL-LIABILITY-AND-EQUITY> 183,830
<SALES> 195,848
<TOTAL-REVENUES> 195,911
<CGS> 149,503
<TOTAL-COSTS> 149,503
<OTHER-EXPENSES> 32,952
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 5,161
<INCOME-PRETAX> 8,556
<INCOME-TAX> 3,168
<INCOME-CONTINUING> 5,388
<DISCONTINUED> (5,344)
<EXTRAORDINARY> 0
<CHANGES> (17,728)
<NET-INCOME> (17,684)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.42)
<FN>
<F1>Due to the use of condensed financial statements for interim reporting, this
information is not completed on a quarterly basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1997
DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1997 JAN-01-1997
JAN-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1996 MAR-31-1997 JUN-30-1997
SEP-30-1997
<CASH> 11,353 5,614 4,781 7,938
3,320
<SECURITIES> 4,449 9,888 11,766 9,311
12,321
<RECEIVABLES> 69,508 63,732 65,467 63,660
67,747
<ALLOWANCES> 578 437 0<F1> 0<F1>
0<F1>
<INVENTORY> 17,633 17,857 18,389 16,480
3,959
<CURRENT-ASSETS> 115,452 111,828 114,911 116,478
113,044
<PP&E> 68,890 68,107 66,875 66,792
68,107
<DEPRECIATION> 42,230 40,606 38,737 39,218
40,606
<TOTAL-ASSETS> 175,868 185,206 187,478 187,605
179,282
<CURRENT-LIABILITIES> 60,008 50,611 53,650 53,092
57,584
<BONDS> 37,565 40,521 40,015 39,810
39,605
0 0 0 0
0
3,695 3,695 3,695 3,695
3,695
<COMMON> 311 303 303 303
306
<OTHER-SE> 66,293 79,014 80,471 82,404
66,714
<TOTAL-LIABILITY-AND-EQUITY> 175,868 185,206 187,478 187,605
179,282
<SALES> 253,275 217,931 63,067 127,318
189,083
<TOTAL-REVENUES> 253,525 218,155 63,130 127,443
189,270
<CGS> 196,918 168,846 49,048 97,153
144,840
<TOTAL-COSTS> 196,918 168,846 49,048 97,153
144,840
<OTHER-EXPENSES> 47,707 37,092 9,412 20,720
37,039
<LOSS-PROVISION> 240 77 0<F1> 0<F1>
0<F1>
<INTEREST-EXPENSE> 6,407 4,398 1,579 3,156
4,848
<INCOME-PRETAX> 3,362 8,458 3,281 6,824
3,214
<INCOME-TAX> 4,298 2,700 975 2,224
2,869
<INCOME-CONTINUING> (936) 5,758 2,306 4,600
345
<DISCONTINUED> (18,250) (6,640) (1,148) (1,816)
(13,306)
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (19,186) (882) 1,158 2,784
(12,961)
<EPS-PRIMARY> (.46)<F2> (.06) .03 .08
(.46)
<EPS-DILUTED> (.46)<F3> (.06) .03 .08
(.46)
<FN>
<F1>Due to the use of condensed financial statements for interim reporting, this
information is not compiled on a quarterly basis.
<F2>Basic EPS in accordance with SFAS No. 128.
<F3>Diluted EPS in accordance with SFAS No. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 9,445 11,902 15,910 14,332
<SECURITIES> 5,000 0 0 0
<RECEIVABLES> 58,438 60,933 60,644 61,426
<ALLOWANCES> 467 0<F1> 0<F1> 0<F1>
<INVENTORY> 14,829 14,416 18,065 17,133
<CURRENT-ASSETS> 102,128 100,382 111,225 109,748
<PP&E> 63,730 67,431 73,170 69,603
<DEPRECIATION> 31,842 34,789 39,318 36,783
<TOTAL-ASSETS> 152,679 151,655 181,916 180,234
<CURRENT-LIABILITIES> 66,971 64,017 73,773 74,160
<BONDS> 6,874 8,553 8,725 7,957
0 0 0 0
695 695 3,695 3,695
<COMMON> 283 284 303 304
<OTHER-SE> 68,411 67,284 83,989 83,046
<TOTAL-LIABILITY-AND-EQUITY> 152,679 151,655 181,916 180,234
<SALES> 217,570 50,878 102,316 156,415
<TOTAL-REVENUES> 217,739 50,907 102,407 156,569
<CGS> 166,293 39,278 77,560 119,785
<TOTAL-COSTS> 166,293 39,278 77,560 119,785
<OTHER-EXPENSES> 45,790 8,907 17,893 27,755
<LOSS-PROVISION> 266 0<F1> 0<F1> 0<F1>
<INTEREST-EXPENSE> 2,347 770 1,804 2,908
<INCOME-PRETAX> 3,701 2,083 5,438 6,595
<INCOME-TAX> 1,246 721 1,848 2,325
<INCOME-CONTINUING> 2,455 1,362 3,590 4,270
<DISCONTINUED> (12,942) (2,806) (136) (2,062)
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (10,487) (1,444) 3,454 2,208
<EPS-PRIMARY> (.42)<F2> (.06) .11 .06
<EPS-DILUTED> (.40)<F3> (.06) .11 .06
<FN>
<F1>Due to the use of condensed financial statements for interim reporting, this
information is not compiled on a quarterly basis.
<F2>Basic EPS in accordance with SFAS No. 128.
<F3>Diluted EPS in accordance with SFAS No. 128.
</FN>
</TABLE>
