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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

or

o
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
(State or other jurisdiction of incorporation or organization)		   95-2588754
(I.R.S. Employer 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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act). Yes ý    No o

        The number of shares of registrant's common stock outstanding at July 28, 2004, was 84,363,678.


Part I—FINANCIAL INFORMATION

Item 1. Financial Statements


THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

 
   Three months ended
June 30,
   Six months ended
June 30,
  
 
   2004
   2003
   2004
   2003
  
Revenues   $ 514,932   $ 433,934   $ 968,954   $ 808,162  
   
 
 
 
 
Costs and expenses:                          
  Cost of revenues     438,082     362,077     820,354     673,992  
  Selling, general and administrative     38,235     38,316     74,140     76,817  
  Research and development     4,695     2,041     8,113     4,066  
  Merger, investigation and settlement costs (Note 2)     34,332     —     51,911     —  
  Asset impairment charges (Note 3)     22,695           22,695     —  
   
 
 
 
 
    Total costs and expenses     538,039     402,434     977,213     754,875  
   
 
 
 
 
Operating profit (loss)     (23,107 )   31,500     (8,259 )   53,287  
Interest expense     (9,158 )   (8,663 )   (18,274 )   (16,738 )
Interest income     240     819     403     1,431  
Debt extinguishment costs (Note 6)     —     (12,423 )   —     (12,423 )
Net gain on sale of assets (Note 7)     —     —     563     —  
   
 
 
 
 
Income (loss) from continuing operations before income taxes     (32,025 )   11,233     (25,567 )   25,557  
Income tax provision (benefit)     (2,596 )   4,566     241     10,326  
   
 
 
 
 
Income (loss) from continuing operations     (29,429 )   6,667     (25,808 )   15,231  
Loss from discontinued operations, net of tax benefit (Note 5)     (37,123 )   (802 )   (37,685 )   (2,365 )
   
 
 
 
 
Net income (loss)     (66,552 )   5,865     (63,493 )   12,866  
Dividend requirements on preferred stock     —     (172 )   (190 )   (344 )
   
 
 
 
 
Net income (loss) applicable to common stock   $ (66,552 ) $ 5,693   $ (63,683 ) $ 12,522  
   
 
 
 
 
Basic earnings (loss) per share:                          
  Income (loss) from continuing operations   $ (0.35 ) $ 0.08   $ (0.31 ) $ 0.19  
  Loss from discontinued operations, net of tax benefit     (0.44 )   (0.01 )   (0.45 )   (0.03 )
   
 
 
 
 
  Net income (loss)   $ (0.79 ) $ 0.07   $ (0.76 ) $ 0.16  
   
 
 
 
 
  Weighted average shares     83,970     79,258     83,347     78,947  
   
 
 
 
 
Diluted earnings (loss) per share:                          
  Income (loss) from continuing operations   $ (0.35 ) $ 0.08   $ (0.31 ) $ 0.18  
  Loss from discontinued operations, net of tax benefit     (0.44 )   (0.01 )   (0.45 )   (0.03 )
   
 
 
 
 
  Net income (loss)   $ (0.79 ) $ 0.07   $ (0.76 ) $ 0.15  
   
 
 
 
 
  Weighted average shares     83,970     81,372     83,347     81,329  
   
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

1


THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

 
   June 30,
2004
   December 31,
2003
  
 
   (Unaudited)

    
  
Assets              
Current Assets:              
  Cash and cash equivalents   $ 25,427   $ 26,974  
  Accounts receivable—net     435,066     381,265  
  Inventories     21,002     21,430  
  Prepaid expenses and other     31,759     23,702  
  Deferred income taxes     103,630     91,272  
  Current assets of discontinued operations (Note 5)     38,924     69,784  
   
 
 
    Total current assets     655,808     614,427  

Property and equipment—net
 
 
49,472
 
 
52,508
 
Goodwill     462,811     462,909  
Intangible assets     21,944     29,949  
Other assets—net     41,676     36,176  
Deferred income taxes     62,781     62,781  
Non-current assets of discontinued operations (Note 5)     5,304     31,885  
   
 
 
    Total assets   $ 1,299,796   $ 1,290,635  
   
 
 
Liabilities and Stockholders' Equity              
Current Liabilities:              
  Current portion of amounts outstanding under line of credit   $ 3,500   $ 3,500  
  Accounts payable     92,524     90,086  
  Current portion of long-term debt     1,102     863  
  Accrued compensation and benefits     74,899     81,332  
  Other accrued liabilities     116,573     93,129  
  Current liabilities of discontinued operations (Note 5)     21,584     22,681  
   
 
 
  Total current liabilities     310,182     291,591  
   
 
 
Long-term portion of amounts outstanding under line of credit     390,375     341,250  
   
 
 
Senior subordinated notes     200,000     200,000  
   
 
 
Other long-term debt     508     988  
   
 
 
Other non-current liabilities     54,956     50,352  
   
 
 
Non-current liabilities of discontinued operations (Note 5)     31,215     35,045  
   
 
 
Commitments and contingencies (Note 8)              

Stockholders' Equity:
 
 
 
 
 
 
 
  Preferred stock: $1 par value, authorized 5,000,000 shares:              
    Cumulative convertible, $0 and $13,700 liquidation preference, designated 1,068,102 shares: -0-and 686,829 shares issued and outstanding     —     687  
    Series A junior participating: designated 1,000,000 authorized shares: None issued     —     —  
  Common stock: $.01 par value, authorized 200,000,000 shares, issued and outstanding: 84,624,156 and 82,182,250 shares     846     822  
  Capital in excess of par value     675,100     670,733  
  Deferred compensation     (731 )   (1,584 )
  Accumulated deficit     (361,714 )   (298,221 )
  Accumulated other comprehensive income (loss)     —     (215 )
  Treasury stock (271,074 and 265,124 shares), at cost     (941 )   (813 )
   
 
 
    Total stockholders' equity     312,560     371,409  
   
 
 
    Total liabilities and stockholders' equity   $ 1,299,796   $ 1,290,635  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

2


THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)

 
   Six months ended
June 30,
  
 
   2004
   2003
  
Cash Flows from Operating Activities:              
Income (loss) from continuing operations   $ (25,808 ) $ 15,231  
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used for) operating activities, net of effects of net assets and businesses sold:              
  Accrual for estimated settlement charge (Note 2)     25,500     —  
  Asset impairment charges (Note 3)     22,695     —  
  Debt extinguishment costs     —     12,423  
  Depreciation and amortization     7,784     9,332  
  Deferred income taxes and other     1,897     8,961  
  Deferred compensation     853     5,680  
  Changes in operating assets and liabilities, net of the effects of net assets sold:              
    Accounts receivable     (57,160 )   (16,633 )
    Inventories     1,409     684  
    Prepaid expenses and other assets     (12,987 )   (942 )
    Accounts payable     2,606     (9,894 )
    Accrued compensation and benefits     (5,047 )   2,441  
    Other liabilities     1,177     5,598  
   
 
 
Net cash provided by (used for) continuing operations     (37,081 )   32,881  
   
 
 

Loss from discontinued operations
 
 
(37,685
)
 
(2,365
)
Asset impairment charges (Note 5)     43,183     —  
Proceeds from divestiture of businesses (Note 5)     6,000     —  
Holdback payment related to prior year acquisition (Note 7)     —     (2,000 )
Changes in net assets and liabilities of discontinued operations     (9,205 )   (12,303 )
   
 
 
Net cash provided by (used for) discontinued operations     2,293     (16,668 )
   
 
 
Net cash provided by (used for) operating activities     (34,788 )   16,213  
   
 
 
Cash Flows from Investing Activities:              
Capital expenditures     (16,776 )   (5,318 )
Proceeds from sale of investments and net assets     2,880     —  
Earnout payments related to prior year acquisitions (Note 7)     (2,460 )   —  
Other investments     (1,243 )   (93 )
Other     1,103     253  
   
 
 
Net cash used for investing activities     (16,496 )   (5,158 )
   
 
 
Cash Flows from Financing Activities:              
Extinguishment of High Tides and other debt reductions     (241 )   (250,429 )
Issuance of senior subordinated notes and other debt additions     49,125     239,125  
Preferred stock redemption (Note 4)     (12,518 )   —  
Deferred debt issuance costs     —     (7,727 )
Debt extinguishment costs     —     (4,352 )
Decrease in restricted cash     —     394  
Proceeds from exercise of stock options and other     13,566     1,935  
Dividends paid     (190 )   (344 )
Other     (220 )   (122 )
   
 
 
Net cash provided by (used for) financing activities     49,522     (21,520 )
   
 
 
Effect of exchange rate changes on cash     215     (30 )
   
 
 
Net decrease in cash and cash equivalents     (1,547 )   (10,495 )
Cash and cash equivalents at beginning of period     26,974     34,123  
   
 
 
Cash and cash equivalents at end of period   $ 25,427   $ 23,628  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

3


THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands of dollars, except per share data)

 
   Cumulative
Convertible
Preferred
Stock
   Common
Stock
   Capital
In Excess
of Par
Value
   Deferred
Compen-
sation
   Accumulated
Deficit
   Accumulated
Other
Comprehensive
Income (Loss)
   Treasury
Stock
   Total
  
Six Months Ended June 30, 2004                                                  
Balances at December 31, 2003   $ 687   $ 822   $ 670,733   $ (1,584 ) $ (298,221 ) $ (215 ) $ (813 ) $ 371,409  
  Exercise of stock options and other           21     13,673                       (128 )   13,566  
  Redemption of preferred stock (Note 4)     (626 )         (11,892 )                           (12,518 )
  Conversion of preferred stock     (61 )         61                             —  
  Amortization of deferred compensation                       853                       853  
  Foreign currency translation adjustment                                   215           215  
  Shares contributed to employee benefit plans           3     2,715                             2,718  
  Dividends on preferred stock—Cumulative convertible, $.28 per share                 (190 )                           (190 )
  Net loss                             (63,493 )               (63,493 )
   
 
 
 
 
 
 
 
 
Balances at June 30, 2004   $ —   $ 846   $ 675,100   $ (731 ) $ (361,714 ) $ —   $ (941 ) $ 312,560  
   
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2003                                                  
Balances at December 31, 2002   $ 688   $ 783   $ 647,752   $ (8,791 ) $ (327,318 ) $ (132 ) $ (669 ) $ 312,313  
  Exercise of stock options and other           8     2,060                       (133 )   1,935  
  Return of shares related to acquisition (See Note 7)                 (2,000 )                           (2,000 )
  Amortization of deferred compensation                       5,680                       5,680  
  Foreign currency translation adjustment                                   (30 )         (30 )
  Shares contributed to employee benefit plans           6     5,102                             5,108  
  Dividends on preferred stock—Cumulative convertible, $.50 per share                 (344 )                           (344 )
  Net income                             12,866                 12,866  
   
 
 
 
 
 
 
 
 
Balances at June 30, 2003   $ 688   $ 797   $ 652,570   $ (3,111 ) $ (314,452 ) $ (162 ) $ (802 ) $ 335,528  
   
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

4