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 March 31, 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) (619) 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 May 7, 1999,
was 37,333,272.
<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
March 31,
--------------------
1999 1998
<S> <C> <C>
-------- --------
Revenues ................................................... $ 78,689 $ 64,630
-------- --------
Costs and expenses:
Cost of revenues ...................................... 61,551 49,467
Selling, general and administrative expense ........... 10,202 8,550
Research and development expense ...................... 1,474 1,809
Special acquisition related charges ................... -- 1,460
-------- --------
Total costs and expenses .......................... 73,227 61,286
-------- --------
Operating profit ........................................... 5,462 3,344
Interest expense ........................................... (1,596) (1,796)
Interest income ............................................ 7 151
-------- --------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle 3,873 1,699
Income tax provision ....................................... 1,161 745
-------- --------
Income from continuing operations before
cumulative effect of change in accounting principle ... 2,712 954
Cumulative effect of change in accounting
principle, net of taxes ............................... -- (19,474)
Income from discontinued operations, net of taxes .......... -- 171
-------- --------
Net income (loss) .......................................... 2,712 (18,349)
Dividend requirements on preferred stock ................... 174 219
-------- --------
Net income (loss) applicable to common stock ............... $ 2,538 $(18,568)
======== ========
Basic earnings (loss) per share:
Income from continuing operations before
cumulative effect of change in accounting principle $ .07 $ .02
Cumulative effect of change in accounting principle ... -- (.57)
Income from discontinued operations ................... -- .00
-------- --------
Net income (loss) ..................................... $ .07 $ (.55)
======== ========
Weighted average shares ............................... 36,076 33,890
======== ========
Diluted earnings (loss) per share:
Income from continuing operations before
cumulative effect of change in accounting principle $ .07 $ .02
Cumulative effect of change in accounting principle ... -- (.55)
Income from discontinued operations ................... -- .00
-------- --------
Net income (loss) ..................................... $ .07 $ (.53)
======== ========
Weighted average shares ............................... 44,756 35,326
======== ========
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)
March 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ................................... $ 4,383 $ 11,079
Accounts receivable - net ................................... 105,522 88,068
Inventories ................................................. 8,064 8,646
Prepaid expenses and other .................................. 2,141 2,176
Deferred income taxes ....................................... 10,268 10,978
--------- ---------
Total current assets .................................... 130,378 120,947
Property and equipment - net ..................................... 26,651 25,702
Goodwill - net ................................................... 48,945 38,694
Other assets ..................................................... 6,791 6,579
Net assets of discontinued operations ............................ 655 645
--------- ---------
Total assets ............................................ $ 213,420 $ 192,567
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit .............................................. $ 2,588 $ 368
Accounts payable ............................................ 20,501 21,335
Acquisition debt ............................................ 5,800 3,000
Current portion of long-term debt ........................... 1,525 1,581
Accrued compensation and benefits ........................... 13,847 12,682
Other accrued liabilities ................................... 10,425 11,659
Net liabilities of discontinued operations .................. 3,277 5,872
--------- ---------
Total current liabilities ............................... 57,963 56,497
--------- ---------
Line of credit ................................................... 53,912 39,632
Long-term debt ................................................... 29,136 30,659
Other non-current liabilities .................................... 17,399 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: 37,199,936 and 36,650,460 ....... 372 367
Capital in excess of par value .............................. 76,913 75,157
Retained earnings (deficit) ................................. (20,391) (22,929)
Treasury stock (962,803 and 962,530 shares), at cost ........ (2,579) (2,579)
--------- ---------
Total stockholders' equity .............................. 55,010 50,711
--------- ---------
Total liabilities and stockholders' equity .................. $ 213,420 $ 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)
Three months ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Income from continuing operations .............................. $ 2,712 $ 954
Adjustments to reconcile income from continuing
operations to net cash used for operating
activities, net of effects of businesses acquired:
Depreciation and amortization ......................... 2,089 1,755
Deferred income taxes and other ....................... 780 (899)
Poolings of interests ................................. -- (109)
Changes in operating assets and liablities,
net of the effects of businesses acquired:
Accounts receivable .......................... (17,454) (12,820)
Inventories .................................. 582 (3,094)
Prepaid expenses and other assets ............ (342) (446)
Accounts payable ............................. (834) (31)
Accrued compensation and benefits ............ 1,165 (2,969)
Other liabilities ............................ 27 3,680
-------- --------
Net cash used for continuing operations ........................ (11,275) (13,979)
-------- --------
Income from discontinued operations ............................ -- 171
Changes in net assets and liabilities of discontinued operations (2,605) 2,383
-------- --------
Net cash provided by (used for) discontinued operations ........ (2,605) 2,554
-------- --------
Net cash used for operating activities ......................... (13,880) (11,425)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures ........................................... (2,240) (623)
Acquisition of businesses, net of cash acquired ................ (7,000) (11,679)
Proceeds from sale of investments .............................. -- 4,499
Other .......................................................... (84) 419
-------- --------
Net cash used for investing activities ......................... (9,324) (7,384)
-------- --------
Cash Flows From Financing Activities:
Additions to debt .............................................. 16,500 9,931
Retirements of debt ............................................ (135) (425)
Dividends paid ................................................. (174) (219)
Proceeds from stock issuances .................................. 317 143
Other .......................................................... -- (112)
-------- --------
Net cash provided by financing activities ...................... 16,508 9,318
-------- --------
Net decrease in cash and cash equivalents ...................... (6,696) (9,491)
Cash and cash equivalents at beginning of period ............... 11,079 11,383
-------- --------
Cash and cash equivalents at end of period ..................... $ 4,383 $ 1,892
======== ========
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>
Three months ended March 31, 1999:
Balances at December 31, 1998 ................... $ 695 $ 367 $ 75,157 $(22,929) $ (2,579) $ 50,711
Conversion of subordinated debentures ...... 4 1,440 1,444
Exercise of stock options and other ........ 1 316 317
Dividends on preferred stock -
Cumulative convertible, $.25 per share . (174) (174)
Net income ................................. 2,712 2,712
-------- -------- -------- -------- -------- --------
Balances at March 31, 1999 ...................... $ 695 $ 372 $ 76,913 $(20,391) $ (2,579) $ 55,010
======== ======== ======== ======== ======== ========
Three months ended March 31, 1998:
Balances at December 31, 1997 ................... $ 695 $ 348 $ 69,332 $ (2,337) $ (2,591) $ 65,447
Poolings of interests ...................... (109) (109)
Exercise of stock options and other ........ 1 142 45 188
Shares contributed to employee benefit plans (112) (112)
Conversion of subordinated debentures ...... 38 38
Dividends on preferred stock -
Cumulative convertible, $.25 per share . (174) (174)
Series B, 6% annual .................... (45) (45)
Net loss ................................... (18,349) (18,349)
-------- -------- -------- -------- -------- --------
Balances at March 31, 1998 ...................... $ 695 $ 349 $ 69,400 $(21,014) $ (2,546) $ 46,884
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 Horizons Technologies,
Inc., VisiCom Laboratories, Inc. and Delfin Systems in the second, 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 January 1, 1999, the Company's wholly-owned subsidiary, Titan Software
Systems Corporation, acquired Transnational Partners II, LLP ("TNP"), a software
services company which provides infrastructure and enterprise resources planning
solutions for major corporations, for 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,
which comprises the Company's Software Systems segment. 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 $10.7 million at March 31, 1999. TNP's
results of operations have been consolidated with the Company's results of
operations since January 1, 1999.
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 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.
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; therefore, 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 $3,277 at March 31, 1999 consist primarily of accrued liabilities
of approximately $9,300, net of current assets (primarily accounts receivable
and inventory) 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 leased facilities. Charges of approximately $3,400 were made
against the accrued liabilities in the first quarter of 1998. Long-term net
assets of discontinued operations are primarily fixed assets.
NOTE (4) DEBT
At March 31, 1999, borrowings outstanding under the Company's $80 million
combined working capital line of credit and term loan available for acquisitions
were $56,500, at a weighted average interest rate of 6.76%, and commitments
under letters of credit reducing availability under this agreement were $973. Of
the total borrowings, $2,588 was short-term. At March 31, 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.
The following tables summarize revenues and operating profit (loss) by operating
segment for the three-month periods ended March 31, 1999 and 1998:
Three months ended March 31,
1999 1998
-------- --------
Revenues:
Information Technologies ........... $ 62,702 $ 53,533
Software Systems ................... 8,394 3,491
Medical Sterilization and Food
Pasteurization ................. 3,762 2,251
Communications Systems ............. 2,317 4,180
Emerging Technologies and Businesses 1,514 1,175
-------- --------
$ 78,689 $ 64,630
======== ========
Operating Profit (Loss):
Information Technologies ........... $ 5,838 $ 4,324
Software Systems ................... 1,430 703
Medical Sterilization and Food
Pasteurization ................. 341 (122)
Communications Systems ............. (203) (458)
Emerging Technologies and Businesses 222 (157)
-------- --------
Segment operating profit before Corporate 7,628 4,290
Corporate ................................ (2,166) (946)
-------- --------
$ 5,462 $ 3,344
======== ========
The operating profit of the Information Technologies segment for the three
months ended March 31, 1998, includes $1,460 of special charges representing
costs and expenses of the merger with DBA Systems, Inc. in February 1998.
The following data summarizes 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 March 31, 1999 Three months ended March 31, 1998
------------------------------------ -----------------------------------
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 ................ $ 2,712 $ 954
Less preferred stock dividends .. (174) (219)
-------- --------
Basic EPS:
Income from continuing operations
operations available to
common stockholders ....... 2,538 36,076 $ .07 735 33,890 $ .02
Effect of dilutive securities:
Stock options ................ -- 1,089 (.00) -- 1,392 (.00)
Warrants ..................... -- -- -- -- 44 (.00)
Debentures ................... 415 7,591 (.00) -- -- --
-------- -------- ------- -------- -------- -------
Diluted EPS:
Income from continuing operations
available to common
stockholders plus assumed
conversions ............... $ 2,953 44,756 $ .07 $ 735 35,326 $ .02
======== ======== ======= ======== ======== =======
</TABLE>
In the three months ended March 31, 1999 and 1998, respectively, options to
purchase approximately 1,060,500 and 329,400 shares of common stock at prices
ranging from $5.63 to $9.50 and $6.25 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. The potential
conversion of convertible subordinated debt to common shares was anti-dilutive
in the first quarter of 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:
March 31, December 31,
1999 1998
---------- ----------
Inventories:
Materials $ 3,732 3,871
Work-in-process 1,973 1,788
Finished goods 2,359 2,987
---------- ----------
$ 8,064 $ 8,646
========== ==========
Supplemental disclosure of cash payments is as follows:
Three months ended
March 31,
----------------------
1999 1998
-------- --------
Interest $ 987 $ 793
Income taxes 8 700
<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 first quarter of 1999 increased from $64,630 in the first
quarter of 1998 to $78,689. Increased revenues were reported in the Information
Technologies, Software Systems, Medical Sterilization and Food Pasteurization
and Emerging Technologies and Businesses segments. Improved operating
performance was experienced across all of the Company's business segments in the
first quarter of 1999. The Company reported net income of $2,712 for the first
quarter of 1999 compared to a net loss of $18,349 for the first quarter of 1998.
Included in the first quarter of 1998 are special acquisition related
transaction charges of $1,460 and income from discontinued operations of $171.
In addition, the Company adopted Statement of Position (SOP) 98-5 in 1998, which
resulted in a $19,474 write-off recorded as a cumulative effect of a change in
accounting principle.
Income from continuing operations in the first quarter of 1999 was $2,712
compared to $954 in the first quarter of 1998. 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 the first quarter of 1998.
Selling, general and administrative expense ("SG&A") as a percentage of revenues
decreased slightly from 13.2% in the first quarter of 1998 to 13.0% for the same
period in 1999. Research and development costs (R&D) decreased overall from
$1,809 in the first quarter of 1998 to $1,474 for the same period in 1999.
However, the Company anticipates that the level of R&D spending in the remainder
of 1999 will increase in absolute dollars primarily in the Information
Technologies business.
Net interest expense decreased slightly from $1,645 in the first quarter of 1998
compared to $1,589 in the first quarter of 1999. Increased interest expense due
to increased levels of borrowings of the Company's lines of credit were offset
by the impact of a lower weighted average interest rate for the period as well
as decreased interest due to conversions of a portion of the Company's
convertible subordinated debentures to common stock.
The income tax provision reflects a 30% effective rate in the first quarter of
1999 compared to a 44% effective rate in the first quarter of 1998. The higher
rate in 1998 was primarily attributable 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%.
Business Segments:
Three months ended March 31, 1999 and 1998:
In the Information Technologies segment, revenues grew $9,169, from $53,533 in
the first quarter of 1998 to $62,702 in the first quarter of 1999. The increase
in revenues is principally due to the revenues generated by the acquisition of
Validity Corporation, which was acquired in March 1998, and to a lesser degree
due to internal revenue growth experienced by several of the information
technologies and systems businesses. Operating income increased $1,514 from
$4,324 in the first quarter of 1998 to $5,838 in the first quarter of 1999.
Included in the first quarter of 1998 are special acquisition charges of $1,460
related to the DBA merger. Excluding the impact of these special charges,
operating income increased from $5,784 in the first quarter of 1998 to $5,838 in
1999. The change was due primarily to the impact of the increased revenues noted
above, offset by the increased mix of lower margin subcontract revenue in the
first quarter of 1999.
Software Systems segment revenues increased $4,903 from $3,491 in the first
quarter of 1998 to $8,394 in the first quarter of 1999, primarily due to
increased work performed on contracts with existing customers in this business,
and to a lesser degree due to the revenues generated by the acquisition of
Transnational Partners II, LLP ("TNP"), which was acquired in January 1999. The
increase in operating income of $727 from $703 of operating income in the first
quarter of 1998 to $1,430 in the first quarter of 1999 was principally due to
increased revenues.
Revenues and operating performance in the Medical Sterilization and Food
Pasteurization segment improved from revenue of $2,251 and an operating loss of
$122 in the first quarter of 1998 to revenue of $3,762 and operating income of
$341 in the first quarter of 1999, respectively. This improvement primarily
relates to work performed on the Company's contract to provide a linear electron
accelerator for the Commissariat `a l'Energie Atomique (CEA) in France, and to a
lesser degree, due to revenues generated on an operating agreement.
Revenues in the Communications Systems segment decreased $1,863 from $4,180 in
the first quarter of 1998 to $2,317 in the first quarter of 1999, due to reduced
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 contract to
provide a telecommunications system in Benin, Africa. Operating performance for
this segment improved from an operating loss of $458 in the first quarter of
1998 to an operating loss of $203 in the first quarter of 1999, principally due
to increased margins, as well as the winding down from 1998 to 1999 of
significant development efforts.
In the Emerging Technologies and Businesses segment, revenues increased $339
from $1,175 in the first quarter of 1998 to $1,514 in the first quarter of 1999
primarily due to increased shipments of fingerprint digitization systems.
Operating performance improved $379 from an operating loss of $157 in the first
quarter of 1998 to operating income of $222 in the first quarter of 1999. This
improvement primarily resulted from the impact of the increased revenues noted
above.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, Titan used $11,275 of its cash
resources to meet the requirements of its continuing operations, principally
related to increased accounts receivable balances of $17,454 primarily in the
Information Technologies and Software Systems segments. Other significant cash
uses were $7,000 for the Company's acquisition of TNP and $2,605 for
discontinued operations. Cash was provided primarily by the Company's line of
credit on which an additional $16,500 was drawn during the first quarter of
1999.
As of March 31, 1999, 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. The payment plan
agreement provides for an immediate payment by PSN of $1,000, which was received
by the Company in the fourth quarter of 1998, with the remaining balance to be
paid in two installments of $3,907 each, 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 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.
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 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 is reviewing 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 $3 million
to $5 million. Some of the Company's business units may use 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 currently 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.
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.
<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: May 17, 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 March 31, 1999, Registrant filed a
Current Report on Form 8-K dated January 14, 1999, to provide certain
required financial information of the Registrant as of November 30,
1998.
<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 months ended March 31, 1999, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000032258
<NAME> The Titan Corporation
<MULTIPLIER> 1000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 4,383
<SECURITIES> 0
<RECEIVABLES> 105,522
<ALLOWANCES> 0<F1>
<INVENTORY> 8,064
<CURRENT-ASSETS> 130,378
<PP&E> 73,862
<DEPRECIATION> 47,211
<TOTAL-ASSETS> 213,420
<CURRENT-LIABILITIES> 57,963
<BONDS> 83,048
0
695
<COMMON> 372
<OTHER-SE> 53,403
<TOTAL-LIABILITY-AND-EQUITY> 213,420
<SALES> 78,689
<TOTAL-REVENUES> 78,689
<CGS> 61,551
<TOTAL-COSTS> 61,551
<OTHER-EXPENSES> 11,676
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 1,596
<INCOME-PRETAX> 3,873
<INCOME-TAX> 1,161
<INCOME-CONTINUING> 2,712
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,712
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<FN>
<F1> Due to the use of condensed financial statements for interim reporting,
this information is not compiled on a quarterly basis.
</FN>
</TABLE>
