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 September 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 November 5,
1999, was 45,307,738.
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<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 Nine months ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 105,899 $ 78,635 $ 274,059 $ 218,678
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues 81,646 61,007 211,147 168,816
Selling, general and administrative expense 11,713 9,081 32,957 26,936
Research and development expense 1,591 1,052 5,317 4,025
Special acquisition related charges and other -- 3,093 -- 4,553
--------- --------- --------- ---------
Total costs and expenses 94,950 74,233 249,421 204,330
--------- --------- --------- ---------
Operating profit 10,949 4,402 24,638 14,348
Interest expense (2,881) (1,789) (6,712) (5,399)
Interest income 564 73 585 262
--------- --------- --------- ---------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle 8,632 2,686 18,511 9,211
Income tax provision 2,590 738 5,553 3,336
--------- --------- --------- ---------
Income from continuing operations before
cumulative effect of change in accounting principle 6,042 1,948 12,958 5,875
Cumulative effect of change in accounting
principle, net of taxes -- -- -- (19,474)
Loss from discontinued operations, net of taxes -- (5,999) -- (5,617)
--------- --------- --------- ---------
Net income (loss) 6,042 (4,051) 12,958 (19,216)
Dividend requirements on preferred stock (174) (176) (521) (605)
--------- --------- --------- ---------
Net income (loss) applicable to common stock $ 5,868 $ (4,227) $ 12,437 $ (19,821)
========= ========= ========= =========
Basic earnings (loss) per share:
Income from continuing operations before
cumulative effect of change in accounting principle $ 0.14 $ .05 $ 0.33 $ .15
Cumulative effect of change in accounting principle -- -- -- (.56)
Loss from discontinued operations -- (.17) -- (.16)
--------- --------- --------- ---------
Net income (loss) $ 0.14 $ (.12) $ 0.33 $ (.57)
========= ========= ========= =========
Weighted average shares 40,535 35,466 38,076 34,614
========= ========= ========= =========
Diluted earnings (loss) per share:
Income from continuing operations before
cumulative effect of change in accounting principle $ 0.13 $ .05 $ 0.29 $ .15
Cumulative effect of change in accounting principle -- -- -- (.54)
Loss from discontinued operations -- (.14) -- (.16)
--------- --------- --------- ---------
Net income (loss) $ 0.13 $ (.09) $ 0.29 $ (.55)
========= ========= ========= =========
Weighted average shares 46,285 44,572 45,732 36,013
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
2
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<PAGE>
<TABLE>
<CAPTION>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
September 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,207 $ 11,079
Accounts receivable - net 131,787 88,068
Inventories 12,492 8,646
Prepaid expenses and other 8,938 2,176
Deferred income taxes 5,635 10,978
--------- ---------
Total current assets 163,059 120,947
Property and equipment - net 28,476 25,702
Goodwill - net 89,064 38,694
Other assets 11,929 6,579
Net assets of discontinued operations 580 645
--------- ---------
Total assets $ 293,108 $ 192,567
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit $ 6,163 $ 368
Accounts payable 29,598 21,335
Acquisition debt 4,800 3,000
Current portion of long-term debt 2,089 1,581
Accrued compensation and benefits 17,008 12,682
Other accrued liabilities 11,971 11,659
Net liabilities of discontinued operations 39 5,872
--------- ---------
Total current liabilities 71,668 56,497
--------- ---------
Line of credit 110,712 39,632
Long-term debt 7,090 30,659
Other non-current liabilities 16,801 15,068
Stockholders' Equity:
Preferred stock: $1 par value, authorized 2,500,000 shares:
Cumulative convertible, $13,897 liquidation preference:
694,850 and 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: 43,714,755 and 36,650,460 437 367
Capital in excess of par value 98,833 75,157
Retained earnings (deficit) (10,492) (22,929)
Treasury stock (966,398 and 962,530 shares), at cost (2,636) (2,579)
--------- ---------
Total stockholders' equity 86,837 50,711
--------- ---------
Total liabilities and stockholders' equity $ 293,108 $ 192,567
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Nine months ended
September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Income from continuing operations $ 12,958 $ 5,875
Adjustments to reconcile income from continuing
operations to net cash used for operating
activities, net of effects of businesses acquired:
Depreciation and amortization 6,797 5,378
Deferred income taxes and other 5,012 (251)
Poolings of interests -- (109)
Changes in operating assets and liabilities,
net of the effects of businesses acquired:
Accounts receivable (23,954) (17,273)
Inventories (3,706) (1,700)
Prepaid expenses and other assets (10,663) 1,087
Accounts payable 4,992 4,515
Accrued compensation and benefits 2,062 (1,547)
Other liabilities (2,166) (3,773)
-------- --------
Net cash used for continuing operations (8,668) (7,798)
-------- --------
Loss from discontinued operations -- (5,617)
Changes in net assets and liabilities of discontinued operations (5,768) 4,052
-------- --------
Net cash used for discontinued operations (5,768) (1,565)
-------- --------
Net cash used for operating activities (14,436) (9,363)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (5,672) (2,284)
Acquisition of businesses, net of cash acquired (50,896) (11,679)
Proceeds from sale of investments -- 4,499
Other 70 (235)
-------- --------
Net cash used for investing activities (56,498) (9,699)
-------- --------
Cash Flows From Financing Activities:
Additions to debt 76,875 16,520
Retirements of debt (13,776) (1,026)
Redemption of Series B Preferred Stock -- (3,000)
Dividends paid (521) (605)
Proceeds from stock issuances 2,078 684
Other (594) (133)
-------- --------
Net cash provided by financing activities 64,062 12,440
-------- --------
Net decrease in cash and cash equivalents (6,872) (6,622)
Cash and cash equivalents at beginning of period 11,079 11,383
-------- --------
Cash and cash equivalents at end of period $ 4,207 $ 4,761
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
4
</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>
Nine months ended September 30, 1999:
Balances at December 31, 1998 $ 695 $ 367 $ 75,157 $(22,929) $ (2,579) $ 50,711
Conversion of subordinated debentures 63 22,142 22,205
Exercise of stock options and other 7 2,071 (57) 2,021
Shares contributed to employee benefit plan (537) (537)
Dividends on preferred stock -
Cumulative convertible, $.75 per share (521) (521)
Net income 12,958 12,958
-------- -------- -------- -------- -------- --------
Balances at September 30, 1999 $ 695 $ 437 $ 98,833 $(10,492) $ (2,636) $ 86,837
======== ======== ======== ======== ======== ========
Nine months ended September 30, 1998:
Balances at December 31, 1997 $ 695 $ 348 $ 69,332 $ (2,337) $ (2,591) $ 65,447
Conversion of subordinated debentures 15 5,343 5,358
Stock repurchase (1) (752) (753)
Poolings of interests (109) (109)
Exercise of stock options and other 2 332 12 346
Conversion of warrants 1 349 350
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 (19,216) (19,216)
-------- -------- -------- -------- -------- --------
Balances at September 30, 1998 $ 695 $ 365 $ 74,504 $(22,267) $ (2,579) $ 50,718
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
5
</TABLE>
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(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 a pooling of interests the acquisition of Delfin Systems in the
fourth quarter of 1998. The prior year financial statements have also been
restated for operations discontinued in the fourth quarter of 1998 (see Note 3)
and 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 and Joint venture
In September 1999, Cayenta.com, Inc. ("Cayenta.com"), the Company's subsidiary
(formerly known as Titan Software Systems Corporation) comprising the Company's
Software Systems segment, entered into a joint venture named Soliance Networks
with Sempra Energy Information Solutions, a new unit of Sempra Energy, and
modis, Inc., a Modis Professional Services company. The new application service
provider will provide Internet-based information services designed to help
mid-sized utilities adapt to the nation's de-regulating energy marketplace in an
efficient and cost-effective manner.
On July 22, 1999, the Company's wholly owned subsidiary Titan Systems
Corporation ("TSC"), (formerly named Titan Technologies and Information Systems
Corporation) acquired all of the outstanding stock of 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 approximately $18 million, subject to certain
post-closing adjustments, plus potential payments of up to $3 million contingent
upon certain future contract awards. 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 $11.9 million at September 30, 1999. AAEC's results of
operations have been consolidated with the Company's results of operations since
July 23, 1999.
On June 9, 1999, TSC 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 the two year period following the closing date. The transaction was
6
<PAGE>
accounted for as a purchase, and, accordingly, SRC's results of operations have
been consolidated with the Company's results of operations since June 10, 1999.
The purchase agreement provided for a post-closing adjustment to the purchase
price based on the final valuation of the acquired assets and assumed
liabilities, which resulted in an increase of approximately $4.1 million to the
excess of the purchase price over the estimated fair value of the net assets
acquired (goodwill) in the current quarter ended September 30, 1999. The
goodwill, to be amortized on a straight-line basis over 40 years, was
approximately $29.3 million at September 30, 1999.
On January 1, 1999, Cayenta.com acquired certain assets of Transnational
Partners II, LLP ("TNP"), a software services company which provides
infrastructure and electronic business 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
Cayenta.com. 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 $10.5
million at September 30, 1999. TNP's results of operations have been
consolidated with the Company's results of operations since January 2, 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
(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.
Unaudited proforma data giving effect to the purchase of SRC and AAEC as if they
had been acquired at the beginning of 1998 are shown below. Proforma information
related to the TNP and Validity acquisitions is not presented, because the
effect is not significant.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 107,061 $ 97,672 $ 305,385 $ 275,791
Income from continuing operations
before cumulative effect of change
in accounting principle 6,011 1,705 11,428 5,532
Net income (loss) 6,011 (4,294) 11,428 (19,559)
Basic earnings (loss) per share:
Income from continuing operations
before cumulative effect of change
in accounting principle $ 0.14 $ 0.04 $ 0.29 $ 0.14
Net income (loss) 0.14 (0.13) 0.29 (0.58)
Diluted earnings (loss) per share:
Income from continuing operations
before cumulative effect of change
in accounting principle $ 0.13 $ 0.04 $ 0.26 $ 0.14
Net income (loss) 0.13 (0.09) 0.26 (0.56)
</TABLE>
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.
7
<PAGE>
Charges for such costs against these reserves were approximately $1,300 in the
first nine months of 1999.
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 $-0- at September 30, 1999 consist primarily of
accrued liabilities of approximately $4,300 net of approximately the same amount
of current assets (primarily accounts receivable and inventories). 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 $2,900 and $8,400 were made against the accrued
liabilities in the three months and nine months ended September 30, 1999,
respectively. Long-term net assets of discontinued operations are primarily
fixed assets. Management continues to assess the estimated wind-down and and/or
disposal costs associated with the businesses, and may from time to time adjust
the allowance for such costs accordingly.
NOTE (4) DEBT
On September 7, 1999, the Company announced a call for redemption on November 2,
1999, of all of its outstanding 8 1/4% convertible subordinated debentures due
November 1, 2003. At the time of the call, the Company had outstanding 8 1/4%
debentures in the aggregate principal amount of approximately $11.6 million. The
balance outstanding at September 30, 1999, was approximately $5.3 million. Prior
to the close of business on October 25, 1999, holders could convert their 8 1/4%
debentures into shares of Titan common stock at a price of $3.50 per share.
Immediately prior to the call and on September 30, 1999, the New York Stock
Exchange composite closing price of Titan common stock was $11.00 and $14.375,
respectively. Alternatively, holders could have their 8 1/4% debentures redeemed
for 104.125% of the principal amount, plus accrued interest for the period from
May 1, 1999 to November 2, 1999. All except $1 of the debentures were converted
prior to the redemption date. Accordingly, the remaining $1 was redeemed at
November 2, 1999.
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 portion of the acquisition
line, respectively. The $75 million term loan is to be repaid quarterly at .25%
of original principal beginning September 30, 1999 through September 29, 2004
and at 23.75% thereafter until the final payment at maturity on June 9, 2005.
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 September 30, 1999, total borrowings outstanding were $116,875 (the $74,813
million term loan and $42,062 of the acquisition lines) at a weighted average
interest rate of 8.17%. Commitments under letters of credit, which reduce
availability of the working capital line, were $1,772 at September 30, 1999. Of
the total borrowings, $6,163 was short-term. At September 30, 1999, the Company
was in compliance with all financial covenants under its various debt
agreements.
8
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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 and nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Information Technologies $ 85,627 $ 68,969 $ 219,545 $ 188,366
Software Systems 10,470 5,568 29,330 13,242
Medical Sterilization and Food
Pasteurization 3,275 2,400 9,985 8,049
Communications Systems 5,009 619 9,885 6,004
Emerging Technologies and Businesses 1,518 1,079 5,314 3,017
--------- --------- --------- ---------
$ 105,899 $ 78,635 $ 274,059 $ 218,678
========= ========= ========= =========
Operating Profit (Loss):
Information Technologies $ 8,509 $ 6,461 $ 21,604 $ 18,356
Software Systems 2,672 1,465 6,173 3,232
Medical Sterilization and Food
Pasteurization 679 135 1,668 503
Communications Systems 2,050 (1,349) 1,656 (3,057)
Emerging Technologies and Businesses 166 11 732 (235)
--------- --------- --------- ---------
Segment operating profit before Corporate 14,076 6,723 31,833 18,799
Corporate (3,127) (2,321) (7,195) (4,451)
--------- --------- --------- ---------
$ 10,949 $ 4,402 $ 24,638 $ 14,348
========= ========= ========= =========
</TABLE>
The operating profit of the Information Technologies segment for the three and
nine month periods ended September 30, 1998, includes $2,375 and $3,835,
respectively, of special charges primarily representing costs and expenses of
the mergers in those periods. Also, in both the three and nine month periods
ended September 30, 1998, Corporate expenses and the Communications Systems
segment operating loss reflect $275 and $443 of other merger-related expenses
and special charges, respectively.
[THIS SPACE LEFT INTENTIONALLY BLANK]
9
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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 September 30, 1999 Three months ended September 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 $ 6,042 $ 1,948
Less preferred stock dividends (174) (176)
----------- -----------
Basic EPS:
Income from continuing
operations available to
common stockholders 5,868 40,535 $ .14 1,772 35,466 $ .05
Effect of dilutive securities:
Stock options -- 2,135 (.00) -- 1,141 (.00)
Warrants -- -- -- -- -- --
Debentures 28 3,615 (.01) 378 7,965 (.00)
----------- ------------- ---------- ----------- ------------- --------
Diluted EPS:
Income from continuing
operations available to
common stockholders plus
assumed conversions $ 5,896 46,285 $ .13 $ 2,150 44,572 $ .05
=========== ============= ========== =========== ============= ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999 Nine months ended September 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 $ 12,958 $ 5,875
Less preferred stock dividends (521) (605)
----------- -----------
Basic EPS:
Income from continuing
operations available to
common stockholders 12,437 38,076 $ .33 5,270 34,614 $ .15
Effect of dilutive securities:
Stock options -- 1,824 (.02) -- 1,378 (.00)
Warrants -- -- -- -- 21 (.00)
Debentures 769 5,832 (.02) -- -- --
----------- ------------- ---------- ----------- ------------- --------
Diluted EPS:
Income from continuing
operations available to
common stockholders plus
assumed conversions $ 13,206 45,732 $ .29 $ 5,270 36,013 $ .15
=========== ============= ========== =========== ============= ========
</TABLE>
In the nine months ended September 30, 1999, options to purchase approximately
289,000 shares of common stock at prices ranging from $9.50 to $10.63 per share
were not included in the computation of diluted EPS, as the exercise price of
10
<PAGE>
such options was greater than the average market price of the common shares. No
options were anti-dilutive in the three months ended September 30, 1999. In the
three and nine months ended September 30, 1998, respectively, options to
purchase approximately 854,900 and 340,200 shares of common stock at prices
ranging from $5.56 to $9.50 and $6.19 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 nine month period
ended September 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:
September 30, December 31,
1999 1998
------- -------
Inventories:
Materials $ 6,099 $ 3,871
Work-in-process 4,507 1,788
Finished goods 1,886 2,987
------- -------
$12,492 $ 8,646
======= =======
Supplemental disclosure of cash payments is as follows:
Three months ended Nine months ended
September 30, September 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
Interest $1,915 $ 823 $5,812 $4,310
Income taxes 1,916 62 2,279 908
NOTE (6) SUBSEQUENT EVENTS
On November 2, 1999, Cayenta.com acquired JB Systems, Inc., doing business as
Mainsaver Corporation, through a stock purchase for a purchase price of
approximately $11.7 million, subject to certain post-closing adjustments,
consisting of approximately $8.2 million in cash paid at closing, less a $.5
million holdback, a $3.0 million installment which accrues interest at 7.5% per
annum and is fully payable on May 2, 2001, and a $.5 million note due to one of
the former shareholders, bearing interest at 10% per annum and fully payable on
September 1, 2001. The transaction will be accounted for as a purchase.
Mainsaver provides Enterprise Asset Management Software and distributed workflow
management technology to global customers.
On October 26, 1999, the Company received approximately $41.8 million in cash as
a result of the acquisition by Intel Corporation of Ipivot, Inc. ("Ipivot"), a
technology spin-off from Titan. The cash payment to the Company was for its
ownership interest in Ipivot of approximately 8% after the dilutive impact of
Ipivot stock options, warrants and other equity instruments. The transaction
will recorded by the Company in the fourth quarter of 1999.
11
<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.
Information pertaining to prior periods has been restated to reflect this
realignment of the Company's business segments.
Consolidated results:
Revenues for the third quarter of 1999 increased from $78,635 in the third
quarter of 1998 to $105,899. Increased revenues were reported across all
business 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 $6,042 and $12,958 for the third quarter and nine months
of 1999 compared to a net loss of $4,051 and $19,216 for the third quarter and
nine months of 1998. Included in the third quarter and nine months ended
September 30, 1998 is a special pre-tax charge for merger related and other
expenses of $3,093 and $4,553, respectively. Included in the third quarter and
nine months of 1998 are losses from discontinued operations of $5,999 and
$5,617, respectively. 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 third quarter and nine months of 1999
was $6,042 and $12,958, compared to $1,948 and $5,875 in the third quarter and
nine months of 1998. This difference was primarily attributable to the impact of
the increase in revenues noted previously as well as due to the special merger
related and other expenses in 1998.
Selling, general and administrative expense ("SG&A") as a percentage of revenue
decreased slightly from 11.5% in the third quarter of 1998 to 11.1% in the same
period in 1999, and decreased slightly from 12.3% in the nine months of 1998 to
12.0% for the same period in 1999. Research and development costs (R&D)
increased overall from $1,052 in the third quarter of 1998 to $1,591 for the
same period in 1999, and from $4,025 for the nine months in 1998 to $5,317 for
the same period in 1999. These increases were due to the increased level of R&D
spending in the Information Technologies business, specifically related to
imaging products. The Company anticipates that the level of R&D spending will
continue to increase for the remainder of fiscal 1999 and through fiscal 2000.
Net interest expense increased $601 and $990 in the third quarter and nine
months ended September 30, 1999, compared to the comparable periods of 1998,
primarily from interest related to increased borrowings on the Company's credit
facilities, principally on the Company's acquisition line resulting from the
Company's acquisitions of System Resources Corporation ("SRC") and Atlantic
Aerospace Electronics Corporation ("AAEC").
The income tax provision reflects a 30% effective rate in the third quarter and
nine months of 1999 compared to a 27% and 36% effective rate in the third
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quarter and nine months of 1998. The higher rate in 1998 was 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%.
Business Segments:
Three months ended September 30, 1999 and 1998:
In the Information Technologies segment, revenues grew $16,658, from $68,969 in
the third quarter of 1998 to $85,627 in the third quarter of 1999. The increase
in revenues is principally due to the following: revenues of $15,692 generated
by the acquired businesses SRC and AAEC (acquired June 9, 1999 and July 22,
1999, respectively), increased subcontract revenues and to a lesser degree due
to internal revenue growth experienced by several of the information
technologies and systems businesses, partially offset by reduced shipments of
certain defense communications products. Operating income increased $2,048 from
$6,461 in the third quarter of 1998 to $8,509 in the same period in 1999.
Included in the 1998 results are special acquisition related charges of $1,932
and $443 related to costs incurred to file a registration statement with the
Securities and Exchange Commission ("SEC") which was ultimately withdrawn.
Excluding these special charges, operating income decreased $327 from $8,836 in
the third quarter of 1998 to $8,509 in the third quarter of 1999. One time
credits in the third quarter of 1998 resulted in higher than normal operating
profit margins. In addition, a change in product and service revenue mix, an
increase in lower margin subcontract revenue volumes, and increased R&D
expenditures for certain imaging products also resulted in lower operating
margins during the third quarter of 1999. The impact of the change in revenue
mix and increased investment was partially offset by credits related to
favorable determinations from certain government agencies.
Software Systems segment revenues increased $4,902 from $5,568 in the third
quarter of 1998 to $10,470 in the third 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, which was acquired in January 1999. Revenues included sales to
a single federal agency of $1,526 and $3,294 in the third quarter of 1999 and
1998, respectively. Sales to another government customer and to a single utility
customer were $4,322 and $3,265, respectively, in the third quarter of 1999. The
increase in operating income of $1,207 from $1,465 of operating income in the
third quarter of 1998 to $2,672 in the third quarter of 1999 was principally due
to increased revenues.
Revenues in the Medical Sterilization and Food Pasteurization segment increased
$875 from $2,400 in the third quarter of 1998, to $3,275 in the third quarter of
1999. The change in revenues reflects the increased utilization at the Company's
contract sterilization facilities in Denver, San Diego and the Dominican
Republic, and, to a lesser degree, due to revenues recorded on the x-ray
pasteurization system being constructed for Hawaii Pride. Operating income
improved from $135 in the third quarter of 1998 to $679 in the third quarter of
1999. This improvement primarily relates to the impact of the increased
revenues.
Revenues in the Communications Systems segment increased $4,390 from $619 in the
third quarter of 1998 to $5,009 in the third quarter of 1999, due principally to
revenues recorded on the Company's contract to provide a telecommunications
system in Benin, Africa, and to a lesser extent, due to revenues related to the
launching of long distance service in El Salvador and Cameroon. Operating
performance for this segment improved from an operating loss of $1,349 in the
third quarter of 1998 to operating income of $2,050 in the third quarter of
1999. Included in third quarter 1999 revenues and operating income is $1,500 and
$2,108, respectively, reflecting the collection of a portion of receivables from
PSN, for which the Company had previously provided a valuation allowance against
the amounts outstanding. Included in the third quarter 1998 operating loss is
$443 related to costs incurred to file a registration statement with the SEC
which was ultimately withdrawn.
In the Emerging Technologies and Businesses segment, revenues increased $439
from $1,079 in the third quarter of 1998 to $1,518 in the third quarter of 1999
primarily due to increased shipments of fingerprint digitization systems.
13
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Operating income increased $155 from $11 in the third quarter of 1998 to $166 in
the third quarter of 1999. This improvement primarily resulted from the impact
of the increased revenues noted above.
Nine months ended September 30, 1999 and 1998:
In the Information Technologies segment, revenues grew $31,179, from $188,366 in
the nine months ended September 30, 1998 to $219,545 in the nine months ended
September 30, 1999. The increase in revenues is principally due to the
following: revenues of $26,071 generated by the acquired businesses Validity,
SRC and AAEC (acquired March 31, 1998, June 9, 1999 and July 22, 1999,
respectively), increased subcontract revenues and to a lesser degree due to
internal revenue growth experienced by several of the information technologies
and systems businesses, partially offset by reduced shipments of certain defense
communications products. Operating income increased $3,248 from $18,356 in the
nine months ended September 30, 1998 to $21,604 in the same period in 1999.
Included in the 1998 results are special acquisition related charges of $3,392
and $443 related to costs incurred to file a registration statement with the
SEC. Excluding these special charges, operating income decreased $587 from
$22,191 in the nine months ended September 30, 1998 to $21,604 in the same
period in 1999. One time credits in the nine months ended September 30, 1998
resulted in higher than normal operating profit margins. In addition, a change
in product and service revenue mix, an increase in lower margin subcontract
revenue volumes, and increased R&D expenditures for certain imaging and defense
satellite communications products also resulted in lower operating margins
during the nine months ended September 30, 1999. The impact of the change in
revenue mix and increased R&D investment was partially offset by credits related
to favorable determinations from certain government agencies.
Software Systems segment revenues increased $16,088 from $13,242 in the nine
months ended September 30, 1998 to $29,330 in the nine months ended September
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 Transnational Partners II, LLP, which was acquired in January 1999.
Revenues included sales to a single federal agency of $6,461 and $6,555 for the
nine months ended September 30, 1999 and 1998, respectively. Sales to another
government customer and to a single utility customer were $9,823 and $8,119,
respectively, for the nine months ended September 30, 1999. The increase in
operating income of $2,941 from $3,232 of operating income in the nine months
ended September 30, 1998 to $6,173 in the nine months ended September 30, 1999
was principally due to the increased revenues.
Revenues and operating income in the Medical Sterilization and Food
Pasteurization segment increased from $8,049 and $503 in the nine months ended
September 30, 1998, to $9,985 and $1,668 in the nine months ended September 30,
1999, respectively. This improvement primarily relates to the completion of two
medical sterilization systems during the second quarter of 1999, and to
increased utilization at the San Diego, Denver and Dominican Republic contract
medical sterilization facilities.
Revenues and operating performance in the Communications Systems segment
improved from revenues of $6,004 and an operating loss of $3,057 in the nine
months ended September 30, 1998 to revenues of $9,885 and operating income of
$1,656 in the nine months ended September 30, 1999. The increase in revenues was
due principally to revenues recorded on the Company's contract to provide a
telecommunications system in Benin, Africa, and to a lesser extent, due to
revenues related to the launching of long distance service in El Salvador and
Cameroon. Included in the nine months 1999 revenues and operating income is
$1,500 and $2,108, respectively, reflecting the collection of a portion of
receivables from PSN, for which the Company had previously provided a valuation
allowance against the amounts outstanding. Included in the nine months ended
September 30, 1998 operating loss is $443 related to costs incurred to file a
registration statement with the SEC which was ultimately withdrawn.
In the Emerging Technologies and Businesses segment, revenues and operating
income increased from revenues of $3,017 and an operating loss of $235 in the
nine months ended September 30, 1998 to revenues of $5,314 and operating income
of $732 in the nine months ended September 30, 1999. This improvement was due
principally to increased shipments of fingerprint digitization systems.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, Titan used $8,668 for the
operating requirements of continuing operations. Cash of $50,896 was used for
the Company's acquisitions of TNP, SRC and AAEC and cash used for discontinued
operations was $5,768. Cash was provided primarily by the Company's line of
credit of $76,875.
The Company had a receivable of approximately $7,800 from its Indonesian
customer, PSN, under which the Company negotiated a payment plan agreement. This
agreement provided 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 equal installments of $3,907 on September 30, 1999 and September 30,
2000. All outstanding balances accrue interest at 10% per annum. The Company
received the first $3,907 installment during the fiscal 1999 third quarter, plus
approximately $467 in accrued interest. 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 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, specifically the
increased investment required in fiscal 2000 to further grow its commercial
businesses, 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 developed an overall
Year 2000 compliance program aimed at addressing various areas of the business
that may encounter difficulties as a result of the Year 2000 issue. The overall
program identified and assigned responsibility to individuals at each of the
Company's business units to develop and implement compliance plans specific to
each respective business unit.
Part of the program was designed to assess whether the Company's business
unit products and services are Year 2000 compliant. As a result of its ongoing
assessment, 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 and services generally do
not have provisions for extended warranties; as such, the Company does not
expect that it will have to spend any material amounts to make any of its prior
products Year 2000 compliant. The Company continues to assess its products,
particularly those of its recently acquired businesses, and cannot predict
whether any Year 2000 issues will arise.
15
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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 key business functions. Because of its history
of acquisitions, the Company has a number of business units that use different
systems; some of which are known to have Year 2000 issues. Part of the Company's
strategy includes moving 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 ultimately 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's
business units do not separately track the costs incurred of their own employees
on the Year 2000 project. Finally, substantially all the Company's business
units use an accounting package for which the supplier of this package has
provided a software upgrade and certified that the upgrade version is Year 2000
compliant. If any of the business units experience system failures as a result
of the Year 2000 issue, disruptions could occur in certain key business
processes such as labor and other cost accumulation, project management and
billing. If the business units 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.
Most of the Company's customers, in particular the U.S. government, utilize
complex billing and accounting systems to determine the timing and the amounts
that will be paid to 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
continues to develop contingency plans in the event that its internal systems or
third party business associates' systems are not timely corrected or experience
unanticipated failures.
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]
16
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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: November 11, 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)
17
<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 September 30, 1999, Registrant filed the
following:
(1) Current Report on Form 8-K/A, Amendment No. 1, dated August 23,
1999, regarding the acquisition of System Resources Corporation
("SRC") and the amendment to and increase in the Company's credit
facility.
18
<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 nine months ended September 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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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
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