UNITED STATES
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 June 30, 1999
-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 number 1-6035
The Titan Corporation
(Exact name of registrant as specified in its charter)
Delaware 95-2588754
(State or other jurisdiction of (I.R.S. 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) (858) 552-9500
-------------------------------------------------------------------------
(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.
[X] Yes [ ] No
The number of shares of registrant's common stock outstanding at August 6, 1999,
was 40,905,616.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 89,471 $ 75,413 $ 168,160 $ 140,043
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues 67,950 58,342 129,501 107,809
Selling, general and administrative expense 11,042 9,305 21,244 17,855
Research and development expense 2,252 1,164 3,726 2,973
Special acquisition related charges -- -- -- 1,460
--------- --------- --------- ---------
Total costs and expenses 81,244 68,811 154,471 130,097
--------- --------- --------- ---------
Operating profit 8,227 6,602 13,689 9,946
Interest expense (2,235) (1,814) (3,831) (3,610)
Interest income 14 38 21 189
--------- --------- --------- ---------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle 6,006 4,826 9,879 6,525
Income tax provision 1,802 1,853 2,963 2,598
--------- --------- --------- ---------
Income from continuing operations before
cumulative effect of change in accounting principle 4,204 2,973 6,916 3,927
Cumulative effect of change in accounting
principle, net of taxes -- -- -- (19,474)
Income from discontinued operations, net of taxes -- 211 -- 382
--------- --------- --------- ---------
Net income (loss) 4,204 3,184 6,916 (15,165)
Dividend requirements on preferred stock (173) (210) (347) (429)
--------- --------- --------- ---------
Net income (loss) applicable to common stock $ 4,031 $ 2,974 $ 6,569 $ (15,594)
========= ========= ========= =========
Basic earnings (loss) per share:
Income from continuing operations before
cumulative effect of change in accounting principle $ .11 $ .08 $ .18 $ .10
Cumulative effect of change in accounting principle -- -- -- (.57)
Income from discontinued operations -- .01 -- .01
--------- --------- --------- ---------
Net income (loss) $ .11 $ .09 $ .18 $ (.46)
========= ========= ========= =========
Weighted average shares 37,508 34,563 36,813 34,228
========= ========= ========= =========
Diluted earnings (loss) per share:
Income from continuing operations before
cumulative effect of change in accounting principle $ .10 $ .07 $ .16 $ .10
Cumulative effect of change in accounting principle -- -- -- (.55)
Income from discontinued operations -- .01 -- .01
--------- --------- --------- ---------
Net income (loss) $ .10 $ .08 $ .16 $ (.44)
========= ========= ========= =========
Weighted average shares 45,605 45,243 45,312 35,774
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 5,135 $ 11,079
Accounts receivable - net 129,726 88,068
Inventories 10,605 8,646
Prepaid expenses and other 4,910 2,176
Deferred income taxes 8,731 10,978
--------- ---------
Total current assets 159,107 120,947
Property and equipment - net 27,512 25,702
Goodwill - net 72,791 38,694
Other assets 10,365 6,579
Net assets of discontinued operations 536 645
--------- ---------
Total assets $ 270,311 $ 192,567
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit $ 4,500 $ 368
Accounts payable 26,204 21,335
Acquisition debt 4,800 3,000
Current portion of long-term debt 2,206 1,581
Accrued compensation and benefits 16,872 12,682
Other accrued liabilities 10,370 11,659
Net liabilities of discontinued operations 1,248 5,872
--------- ---------
Total current liabilities 66,200 56,497
--------- ---------
Line of credit 98,000 39,632
Long-term debt 17,767 30,659
Other non-current liabilities 17,816 15,068
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: 40,530,784 and 36,650,460 405 367
Capital in excess of par value 88,388 75,157
Retained earnings (deficit) (16,360) (22,929)
Treasury stock (962,837 and 962,530 shares), at cost (2,600) (2,579)
--------- ---------
Total stockholders' equity 70,528 50,711
--------- ---------
Total liabilities and stockholders' equity $ 270,311 $ 192,567
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Six months ended
June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Income from continuing operations $ 6,916 $ 3,927
Adjustments to reconcile income from continuing
operations to net cash used for operating
activities, net of effects of businesses acquired:
Depreciation and amortization 4,031 3,655
Deferred income taxes and other 2,032 538
Poolings of interests -- (109)
Changes in operating assets and liabilities,
net of the effects of businesses acquired:
Accounts receivable (20,938) (12,331)
Inventories (1,959) (3,098)
Prepaid expenses and other assets (5,150) 1,335
Accounts payable 1,804 3,064
Accrued compensation and benefits 2,722 (1,197)
Other liabilities (1,650) (909)
-------- --------
Net cash used for continuing operations (12,192) (5,125)
-------- --------
Income from discontinued operations -- 382
Changes in net assets and liabilities of discontinued operations (4,515) (765)
-------- --------
Net cash used for discontinued operations (4,515) (383)
-------- --------
Net cash used for operating activities (16,707) (5,508)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (3,846) (1,484)
Acquisition of businesses, net of cash acquired (35,729) (11,679)
Proceeds from sale of investments -- 4,499
Other 124 442
-------- --------
Net cash used for investing activities (39,451) (8,222)
-------- --------
Cash Flows From Financing Activities:
Additions to debt 62,500 10,808
Retirements of debt (13,365) (1,258)
Redemption of Series B Preferred Stock -- (2,500)
Dividends paid (347) (429)
Proceeds from stock issuances 1,447 650
Other (21) (145)
-------- --------
Net cash provided by financing activities 50,214 7,126
-------- --------
Net decrease in cash and cash equivalents (5,944) (6,604)
Cash and cash equivalents at beginning of period 11,079 11,383
-------- --------
Cash and cash equivalents at end of period $ 5,135 $ 4,779
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands of dollars, except per share data)
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>
Six months ended June 30, 1999:
Balances at December 31, 1998 $ 695 $ 367 $ 75,157 $(22,929) $ (2,579) $ 50,711
Conversion of subordinated debentures 34 11,788 11,822
Exercise of stock options and other 4 1,443 (21) 1,426
Dividends on preferred stock -
Cumulative convertible, $.50 per share (347) (347)
Net income 6,916 6,916
-------- -------- -------- -------- -------- --------
Balances at June 30, 1999 $ 695 $ 405 $ 88,388 $(16,360) $ (2,600) $ 70,528
======== ======== ======== ======== ======== ========
Six months ended June 30, 1998:
Balances at December 31, 1997 $ 695 $ 348 $ 69,332 $ (2,337) $ (2,591) $ 65,447
Conversion of subordinated debentures 11 4,036 4,047
Poolings of interests (109) (109)
Exercise of stock options and other 2 298 12 312
Conversion of warrants 1 349 350
Shares contributed to employee benefit plans (112) (112)
Dividends on preferred stock -
Cumulative convertible, $.50 per share (347) (347)
Series B, 6% annual (82) (82)
Net loss (15,165) (15,165)
-------- -------- -------- -------- -------- --------
Balances at June 30, 1998 $ 695 $ 362 $ 73,903 $(18,040) $ (2,579) $ 54,341
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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 ("Titan" or "the Company") should be read in conjunction with
the Notes to Consolidated Financial Statements contained in the Company's Annual
Report on Form 10-K to the Securities and Exchange Commission for the year ended
December 31, 1998. 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, results of operations and cash flows for the periods
presented. However, these results are not necessarily indicative of results for
a full fiscal year. The prior year financial statements have been restated to
reflect as poolings of interests the acquisitions of VisiCom Laboratories, Inc.
and Delfin Systems in the third and fourth quarters of 1998, respectively. The
prior year financial statements have also been restated for operations
discontinued in the fourth quarter of 1998 (see Note 3) and to reflect the
adoption of AICPA Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP 98-5") in the third quarter of 1998. The adoption of
SOP 98-5 was recorded effective January 1, 1998 as a cumulative effect of change
in accounting principle which resulted in a non-cash charge totaling $19,474.
Additionally, certain prior year amounts have been reclassified to conform to
the 1999 presentation (see Note 5).
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.
NOTE (2) Acquisitions
On June 9, 1999, the Company's wholly owned subsidiary Titan Systems Corporation
(formerly named Titan Technologies and Information Systems Corporation) acquired
System Resources Corporation ("SRC"), an information technology government
contractor, through a stock purchase for a purchase price of $35 million,
subject to certain post-closing adjustments, consisting of $33 million in cash
paid at closing, less a $0.5 million holdback, and $2 million in promissory
notes which bear interest at 7% per annum and become fully payable on June 9,
2000. In addition, the Company agreed to pay the SRC stockholders one-half of
approximately $1.5 million in SRC receivables aged more than 720 days to the
extent that any of those receivables are collected within two the year period
following the closing date. The transaction was accounted for as a purchase, and
the excess of the purchase price over the estimated fair value of the net assets
acquired, to be amortized on a straight-line basis over 40 years, was
approximately $24.4 million at June 30, 1999. SRC's results of operations have
been consolidated with the Company's results of operations since June 10, 1999.
On January 1, 1999, the Company's wholly-owned subsidiary, Titan Software
Systems Corporation, acquired certain assets of Transnational Partners II, LLP
("TNP"), a software services company which provides infrastructure and
enterprise resources planning solutions for major corporations, for a purchase
price of $9.8 million, consisting of $7 million cash, a $2.8 million note due
January 2000 (bearing interest at 7%), subject to certain post-closing
adjustments, and preferred stock representing a minority interest in Titan
Software Systems Corporation. The transaction was accounted for as a purchase,
and 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 $10.6 million at June 30, 1999. TNP's results of operations have
been consolidated with the Company's results of operations since January 2,
1999.
<PAGE>
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
(bearing interest at the prime rate), subject to post-closing adjustments, if
any, due and payable March 31, 1999. The notes and interest were paid in April
1999. The transaction was accounted for as a purchase, and accordingly,
Validity's results of operations have been consolidated with the Company's
results of operations beginning April 1, 1998.
At December 31, 1998, the Company had $1,090 and $250 in other current and
non-current liabilities, respectively, primarily related to termination,
retention and other integration costs, which will be paid by December 31, 1999.
Charges against these reserves were approximately $560 in the first six months
of 1999. These charges were primarily related to termination, retention and
other integration costs.
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; accordingly, the results of this
business have been accounted for as a discontinued operation. In addition to the
discontinued operations of the access control systems business, the accompanying
consolidated financial statements reflect operations discontinued by certain of
the companies acquired by Titan during 1998. All periods presented reflect these
specific operations as discontinued operations. Net liabilities of discontinued
operations of approximately $1,200 at June 30, 1999 consist primarily of accrued
liabilities of approximately $7,200, net of current assets (primarily accounts
receivable and inventories) of approximately $6,000. The liabilities consist of
accruals for contract losses, estimated wind-down costs and costs related to the
closure and elimination of certain leased facilities. Charges of approximately
$2,100 and $5,500 were made against the accrued liabilities in the three months
and six months ended June 30, 1999, respectively. Long-term net assets of
discontinued operations are primarily fixed assets.
NOTE (4) DEBT
On June 9, 1999, in conjunction with the acquisition of SRC (see Note 2), the
Company's bank syndicate, with The Bank of Nova Scotia as the administrative
agent, amended and increased the Company's existing credit facility. The revised
credit facility, totaling $190 million, includes a $55 million line of credit
for working capital and general corporate purposes, $60 million ($25 million
original and $35 million new facility) in lines of credit dedicated to
acquisitions and a $75 million term loan. The credit facilities are secured by
substantially all of the assets of Titan. Quarterly repayment schedules are in
increasing percentages over 4 years beginning September 1999 and June 2000 for
the $25 million original and the $35 million new portions of the acquisition
line, respectively. The $75 million term loan is to be repaid quarterly at .25%
beginning September 30, 1999 through September 29, 2004 and at 23.75% thereafter
until the final payment at maturity on June 9, 2005. The Company has the option
to borrow at the bank's base rate plus a margin of 2% or at LIBOR plus a margin
of 3% on the $75 million term loan. Margins applicable to the remaining lines
are based on the ratio of total debt to EBITDA (earnings before interest, taxes,
depreciation and amortization).
At June 30, 1999, total borrowings outstanding were $102,500 (the $75 million
term loan, $25 million related to acquisitions and $2.5 million of the revolving
line) at a weighted average interest rate of 7.86 %. Commitments under letters
of credit, which reduce availability of the working capital line, were $873 at
June 30, 1999. Of the total borrowings, $4,500 was short term. At June 30, 1999,
the Company was in compliance with all financial covenants under its various
debt agreements.
NOTE (5) OTHER FINANCIAL INFORMATION
In the first quarter of 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 conforms to the provisions of Statement of Financial Accounting
Standards No. 131 "Disclosure about Segments of an Enterprise and Related
Information." All prior year segment data have been restated to conform to the
1999 presentation.
<PAGE>
The following tables summarize revenues and operating profit (loss) by operating
segment for the three and six month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Information Technologies $ 71,216 $ 65,864 $ 133,918 $ 119,397
Software Systems 10,466 4,183 18,860 7,674
Medical Sterilization and Food
Pasteurization 2,948 3,398 6,710 5,649
Communications Systems 2,559 1,205 4,876 5,385
Emerging Technologies and Businesses 2,282 763 3,796 1,938
--------- --------- --------- ---------
$ 89,471 $ 75,413 $ 168,160 $ 140,043
========= ========= ========= =========
Operating Profit (Loss):
Information Technologies $ 7,257 $ 7,571 $ 13,095 $ 11,895
Software Systems 2,071 1,064 3,501 1,767
Medical Sterilization and Food
Pasteurization 648 490 989 368
Communications Systems (191) (1,250) (394) (1,708)
Emerging Technologies and Businesses 344 (89) 566 (246)
--------- --------- --------- ---------
Segment operating profit before Corporate 10,129 7,786 17,757 12,076
Corporate (1,902) (1,184) (4,068) (2,130)
--------- --------- --------- ---------
$ 8,227 $ 6,602 $ 13,689 $ 9,946
========= ========= ========= =========
</TABLE>
The operating profit of the Information Technologies segment for the six months
ended June 30, 1998, includes $1,460 of special charges representing costs and
expenses of the merger with DBA Systems, Inc. in February 1998.
[THIS SPACE LEFT INTENTIONALLY BLANK]
<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 June 30, 1999 Three months ended June 30, 1998
--------------------------------------- --------------------------------------
Per
Income Shares Per-Share Income Shares Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations $ 4,204 $ 2,973
Less preferred stock dividends (173) (210)
----------- -----------
Basic EPS:
Income from continuing
operations available to
common stockholders 4,031 37,508 $ .11 2,763 34,563 $ .08
Effect of dilutive securities:
Stock options -- 1,710 (.01) -- 1,803 (.00)
Warrants -- -- -- -- 23 (.00)
Debentures 326 6,387 (.00) 451 8,854 (.01)
----------- ------------- ---------- ----------- ------------- --------
Diluted EPS:
Income from continuing
operations available to
common stockholders plus
assumed conversions $ 4,357 45,605 $ .10 $ 3,214 45,243 $ .07
=========== ============= ========== =========== ============= ========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999 Six months ended June 30, 1998
--------------------------------------- --------------------------------------
Per
Income Shares Per-Share Income Shares Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations $ 6,916 $ 3,927
Less preferred stock dividends (347) (429)
----------- -----------
Basic EPS:
Income from continuing
operations available to
common stockholders 6,569 36,813 $ .18 3,498 34,228 $ .10
Effect of dilutive securities:
Stock options -- 1,528 (.01) -- 1,511 (.00)
Warrants -- -- -- -- 35 (.00)
Debentures 741 6,971 (.01) -- -- --
----------- ------------- ---------- ----------- ------------- --------
Diluted EPS:
Income from continuing
operations available to
common stockholders plus
assumed conversions $ 7,310 45,312 $ .16 $ 3,498 35,774 $ .10
=========== ============= ========== =========== ============= ========
</TABLE>
<PAGE>
In the three and six months ended June 30, 1999, respectively, options to
purchase approximately 171,232 and 270,250 shares of common stock at prices
ranging from $7.50 to $9.50 and $6.69 to $9.50 per share were not included in
the computation of diluted EPS, as the exercise price of such options was
greater than the average market price of the common shares. In the three and six
months ended June 30, 1998, respectively, options to purchase approximately
284,378 and 287,040 shares of common stock at prices ranging from $7.00 to $9.50
and $6.69 to $9.50 were similarly not included in the computation of diluted
EPS. The potential conversion of convertible subordinated debt to common shares
was anti-dilutive in the six month period ended June 30, 1998. In both 1999 and
1998, 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.
Following are details concerning certain balance sheet data:
June 30, December 31,
1999 1998
------- -------
Inventories:
Materials $ 4,895 $ 3,871
Work-in-process 3,550 1,788
Finished goods 2,160 2,987
------- -------
$10,605 $ 8,646
======= =======
Supplemental disclosure of cash payments is as follows:
Three months ended Six months ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
Interest $2,910 $2,694 $3,897 $3,487
Income taxes 355 146 363 846
NOTE (6) SUBSEQUENT EVENT
On July 22, 1999, the Company acquired Atlantic Aerospace Electronics
Corporation ("AAEC"), a defense and commercial technology and systems company
which focuses on applied research and development in information technologies,
for cash of $18 million, subject to certain post-closing adjustments, plus
potential payments of up to $3 million contingent upon certain future contract
awards. The transaction, a stock purchase, will be accounted for as a purchase.
[THIS SPACE LEFT INTENTIONALLY BLANK]
<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
In the first quarter of 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.
Consolidated results:
Revenues for the second quarter of 1999 increased to $89,471 from $75,413 in the
second quarter of 1998. Increased revenues were reported in the Information
Technologies, Software Systems, Communications Systems and Emerging Technologies
and Businesses segments. Improved operating performance was experienced in the
Software Systems, Communications Systems, Medical Sterilization and Food
Pasteurization and Emerging Technologies and Businesses segments. The Company
reported net income of $4,204 and $6,916 for the second quarter and the first
six months of 1999 compared to net income of $3,184 and a net loss of $15,165
for the second quarter and the first six months of 1998. Included in the first
six months ended June 30, 1998 is a special pre-tax charge for merger related
expenses of $1,460 related to the acquisition of DBA Systems in February 1998.
Included in the second quarter and first six months of 1998 is income from
discontinued operations of $211 and $382, respectively. In addition, effective
January 1, 1998, the Company adopted Statement of Position 98-5, which resulted
in a $19,474 non-cash charge recorded as a cumulative effect of a change in
accounting principle in the first six months ended June 30, 1998.
Income from continuing operations in the second quarter and the first six months
of 1999 was $4,204 and $6,916, respectively, compared to $2,973 and $3,927 in
the second quarter and the first six months of 1998, respectively. This
difference was primarily attributable to the impact of the increase in revenues
noted previously as well as due to the special merger related expenses in 1998
discussed above.
Selling, general and administrative expense ("SG&A") as a percentage of revenues
remained flat at 12.3% in the second quarter of 1998 and the same period in
1999, and decreased slightly from 12.7% in the six months of 1998 to 12.6% for
the same period in 1999. Research and development costs ("R&D") increased
overall from $1,164 in the second quarter of 1998 to $2,252 for the same period
in 1999, and from $2,973 for the first six months in 1998 to $3,726 for the same
period in 1999. These increases were due to an increased level of R&D spending
in the Information Technologies businesses.
Net interest expense increased $445 and $389 in the second quarter and first six
months ended June 30, 1999, compared to the comparable periods of 1998,
primarily due to increased borrowings on the Company's credit facilities,
principally on the Company's acquisition line resulting from the Company's
acquisition of SRC on June 9, 1999.
The income tax provision reflects a 30% effective rate in the second quarter and
first six months of 1999 compared to a 38% and 40% effective rate in the second
quarter and first six months of 1998, respectively. The higher rates in 1998
were due primarily to the inability to offset losses of certain acquired
entities with income of other entities. The Company expects its effective income
tax rate to remain stable in the foreseeable future at an approximate rate of
30% to 34%.
<PAGE>
Business Segments:
Three months ended June 30, 1999 and 1998:
In the Information Technologies segment, revenues grew $5,352, from $65,864 in
the second quarter of 1998 to $71,216 in the second quarter of 1999. The
increase in revenues was principally due to the following: revenues generated by
the acquisition of System Resources Corporation ("SRC"), which was acquired on
June 9, 1999, increased subcontract revenues and, to a lesser degree, internal
revenue growth experienced by several of the Information Technologies
businesses, partially offset by reduced shipments on certain defense
communications products. Operating income decreased $314 from $7,571 in the
second quarter of 1998 to $7,257 in the second quarter of 1999, primarily due to
increased R&D expenditures, and to a lesser degree, due to the impact of the mix
of lower-margin subcontract revenues.
Software Systems segment revenues increased $6,283 from $4,183 in the second
quarter of 1998 to $10,466 in the second quarter of 1999, primarily due to
increased work performed on contracts with existing customers in this business,
and due to the revenues generated by the acquired business of Transnational
Partners II, LLP, ("TNP") which was acquired in January 1999. The increase in
operating income of $1,007 from $1,064 of operating income in the second quarter
of 1998 to $2,071 in the second quarter of 1999 was principally due to increased
revenues, offset partially by increased SG&A costs associated with the growth of
the business.
Revenues in the Medical Sterilization and Food Pasteurization segment declined
$450 from $3,398 in the second quarter of 1998, to $2,948 in the second quarter
of 1999. The change in revenues reflects the timing of the Company's manufacture
of several medical sterilization systems, all at different production stages,
during the second quarter of 1998. Operating income improved from $490 in the
second quarter of 1998 to $648 in the second quarter of 1999. This improvement
primarily relates to the winding down of a lower margin contract in 1998, and to
a lesser degree, the completion of two medical sterilization systems during the
quarter, for which the Company recorded the remaining profit on these contracts
as the systems were delivered.
Revenues in the Communications Systems segment increased $1,354 from $1,205 in
the second quarter of 1998 to $2,559 in the second quarter of 1999, due
principally to revenues recorded on the Company's contract to provide a
telecommunications system in Benin, Africa. Operating performance for this
segment improved from an operating loss of $1,250 in the second quarter of 1998
to an operating loss of $191 in the second quarter of 1999, principally due to
the increased revenues, as well as the winding down from 1998 to 1999 of
significant development and certification efforts.
In the Emerging Technologies and Businesses segment, revenues increased $1,519
from $763 in the second quarter of 1998 to $2,282 in the second quarter of 1999
primarily due to increased shipments of fingerprint digitization systems.
Operating performance improved $433 from an operating loss of $89 in the second
quarter of 1998 to operating income of $344 in the second quarter of 1999. This
improvement primarily resulted from the impact of the increased revenues noted
above.
Six months ended June 30, 1999 and 1998:
In the Information Technologies segment, revenues grew $14,521, from $119,397 in
the six months ended June 30, 1998 to $133,918 in the six months ended June 30,
1999. The increase in revenues is principally due to the following: increased
subcontract revenues, internal revenue growth experienced by several of the
Information Technologies businesses, revenues generated by the acquired business
SRC, which was acquired on June 9, 1999, partially offset by reduced shipments
on certain defense communications products. Operating income increased $1,200
from $11,895 for the six months ended June 30, 1998 to $13,095 for the six
months ended June 30, 1999. Included in the operating results for the six months
ended June 30, 1998 is a $1,460 charge for merger related expenses. Excluding
the impact of these merger related expenses, operating income decreased $260
from $13,355 in the six months ended June 30, 1998 to $13,095 in the six months
ended June 30, 1999, primarily due to increased R&D expenditures, and to a
lesser degree, due to the impact of the mix of lower-margin subcontract
revenues.
<PAGE>
Software Systems segment revenues increased $11,186 from $7,674 in the six
months ended June 30, 1998 to $18,860 in the six months ended June 30, 1999,
primarily due to increased work performed on contracts with existing customers
in this business, and due to the revenues generated by the acquired business of
TNP, which was acquired in January 1999. The increase in operating income of
$1,734 from $1,767 of operating income in the six months ended June 30, 1998 to
$3,501 in the six months ended June 30, 1999 was principally due to increased
revenues, offset partially by increased SG&A costs associated with the growth of
the business.
Revenues and operating income in the Medical Sterilization and Food
Pasteurization segment increased from $5,649 and $368 for the six months ended
June 30, 1998, to $6,710 and $989 for the six months ended June 30, 1999,
respectively. This improvement primarily relates to the winding down of a
lower-margin contract in 1998, and to a lesser degree, the completion of two
medical sterilization systems during the quarter, for which the Company recorded
the remaining profit on these contracts as the systems were delivered.
Revenues in the Communications Systems segment decreased from $5,385 for the six
months ended June 30, 1998 to $4,876 for the same period in 1999. The decrease
in revenues was due to reduced shipments on the Company's contract with PT.
Pasifik Satelit Nusantara ("PSN"), offset partially by revenues recorded on the
Company's contract to provide a telecommunications system in Benin, Africa.
Operating performance improved from an operating loss of $1,708 for the six
months ended June 30, 1998 to an operating loss of $394 for the six months ended
June 30, 1999. The improvement in operating performance was due primarily to the
winding down from 1998 to 1999 of significant development and certification
efforts.
In the Emerging Technologies and Businesses segment, revenues and operating
income increased from revenues of $1,938 and an operating loss of $246 in the
six months ended June 30, 1998 to revenues of $3,796 and operating income of
$566 in the six months ended June 30, 1999. This improvement was due principally
to increased shipments of fingerprint digitization systems.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, Titan used $12,192 for the operating
requirements of continuing operations, primarily due to an increase in accounts
receivable balances of $20,938 primarily in the Information Technologies and
Software Systems segments.
Cash of $35,729 was used for the Company's acquisitions of TNP and SRC and cash
used for discontinued operations was $4,515. Cash was provided primarily by the
Company's line of credit of $62,500.
The Company has a receivable of approximately $7,800 from its Indonesian
customer, PSN. The Company has negotiated a payment plan agreement with PSN for
settlement of all amounts due from PSN. PSN is required to pay the remaining
balance in equal installments of $3,907 each on September 30, 1999 and September
30, 2000. All outstanding balances accrue interest at 10% per annum. At any time
prior to the payment of all the obligations in full, the Company may elect to
convert all or a portion of the principal and interest due into common stock of
PSN, based on its then current market value. In addition, if at any time after
the execution of this agreement, PSN sells any of its interest in its
wholly-owned subsidiary, subject to other third party obligations, PSN is
required by the agreement to immediately pay to the Company the lesser of the
$3,907 or the total amount of the outstanding balance owed to the Company. In
the event that PSN obtains financing from additional sources, the payment terms
of its obligations to the Company will be renegotiated at that time. PSN's
business has been adversely affected by the Indonesian economy and there is no
assurance that these receivables will be collected within the payment terms
discussed above.
<PAGE>
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 1999. The Company plans to
finance these requirements from a combination of sources, which include cash
generation from the Company's core businesses, the Company's expanded bank line
of credit and other available cash sources. One of the Company's primary
strategies is the funding of growth in specific subsidiaries through spin-out
transactions. If the Company is unable to implement this strategy, whether in
whole or in part, then the Company may need to complete additional equity or
convertible debt financings which 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.
Management believes that the combination of cash on hand, amounts available on
its credit facility and cash flow expected to be generated from its operations
will be sufficient to fund planned investments and working capital requirements
through fiscal 1999.
Year 2000 Readiness Disclosure
The Company has implemented a Year 2000 compliance program to address its
current hardware and software products and development tools and all of its
major computing information systems networks, desktop systems and
infrastructure. In addition, the Company is contacting business associates such
as its third party vendors, business partners, contractors and service providers
to assess their level of readiness. Finally, the Company has formed a Year 2000
steering committee to monitor implementation of its overall program and the
plans of each of its business units. Each of the Company's business units has
formed steering committees to develop and implement compliance plans.
The Company is in the process of assessing whether its business unit
products and services are Year 2000 compliant. The Company does not expect its
current products or services to have material Year 2000 issues. In some cases,
the Company's government customers have contracted with the Company to modify
the Company's older products so that they are Year 2000 compliant. The Company's
products are not generally sold under extended warranties, so the Company does
not expect that it will have to spend any material amounts to make any of its
prior products Year 2000 compliant. However, the Company is in the process of
assessing its products, including the products of its recently acquired
businesses, and it cannot predict whether any Year 2000 issues will arise.
As part of its Year 2000 compliance program, the Company has reviewed the
internally developed and third party software that it uses for accounting,
manufacturing processes and other business functions. Because of its history of
acquisitions, the Company has a number of business units that use different
systems; some of which it knows are not Year 2000 compliant at this time. Based
upon the Company's assessment, it may elect to move business units to other Year
2000 compliant systems that the Company currently uses as part of an overall
plan to consolidate the number of different systems being used. It is estimated
that the cost of moving business units to new systems will range from $1 million
to $2 million. Some of the Company's business units are using internal resources
to convert legacy application systems to be Year 2000 compliant. The Company
does not separately track the costs incurred of its own employees on the Year
2000 project. Finally, many of the Company's government contracts related
business units use an accounting package that is not currently Year 2000
compliant. The supplier of this package has released a Year 2000 compliant
version that the Company is near completion of installing. If the Company cannot
timely correct all Year 2000 problems, these problems may cause material adverse
effects on the Company's financial position, results of operations or cash
flows.
Some of the Company's customers, in particular the U.S. government, utilize
complex billing and accounting systems to determine when and what amounts will
be paid to the Company under its various contracts. In addition, several of the
Company's major strategic partners rely on complex software systems to
coordinate and control their day-to-day operations. These complex systems may
not be Year 2000 compliant. Although these customers and strategic partners have
advised the Company that they expect to resolve any Year 2000 issues prior to
December 31, 1999, the Company cannot guarantee that its billing procedures and
cycles, or its joint sales and marketing efforts, will not be interrupted. If
these customers' or business partners' Year 2000 issues are not resolved on
time, or at all, the Company's financial position, results of operations or cash
flows could be materially and adversely affected. The Company plans on
developing contingency plans in the event that its internal systems or third
party business associates' systems are not timely corrected.
<PAGE>
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
Annual Report on Form 10-K for the year ended December 31, 1998, regarding
ability to commercialize new technologies, risks of international operations and
dependence on government contracts.
[THIS SPACE LEFT INTENTIONALLY BLANK]
<PAGE>
THE TITAN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 16, 1999
THE TITAN CORORATION
/s/ Eric M. DeMarco
----------------------------
By: Eric M. DeMarco
Executive Vice President
Chief Financial Officer
/s/ Deanna Hom Petersen
----------------------------
By: Deanna Hom Petersen
Vice President,
Corporate Controller
(Principal Accounting Officer)
<PAGE>
THE TITAN CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) (27) Financial Data Schedule.
(b) During the three months ended June 30, 1999, Registrant filed the
following:
(1) Current Report on Form 8-K dated June 9, 1999, to report the
acquisition of System Resources Corporation ("SRC") and the
amendment to and increase in the Company's credit facility.
<TABLE> <S> <C>
<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
three and six months ended June 30, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000032258
<NAME> The Titan Corporation
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<CURRENT-ASSETS> 159,107
<PP&E> 72,757
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0
695
<COMMON> 405
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<FN>
<F1> Due to the use of condensed financial statements for interim reporting,
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</TABLE>
