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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 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
(Address of Principal Executive Offices)
 
92121-1199
(Zip Code)

(858) 552-9500

(Registrant's Telephone Number, Including Area Code)

        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 Exchange Act).    Yes ý    No ý.

        The number of shares of registrant's common stock outstanding at October 22, 2004, was 84,711,802.


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
September 30,
   Nine months ended
September 30,
  
 
   2004
   2003
   2004
   2003
  
Revenues   $ 525,997   $ 468,398   $ 1,494,951   $ 1,276,560  
   
 
 
 
 
Costs and expenses:                          
  Cost of revenues     445,104     393,624     1,265,458     1,067,616  
  Selling, general and administrative     37,960     36,722     112,100     113,539  
  Research and development     3,411     2,963     11,524     7,029  
  Merger, investigation and settlement costs (Note 2)     2,876     750     54,787     750  
  Asset impairment charges (Note 3)     —     —     22,695     —  
   
 
 
 
 
    Total costs and expenses     489,351     434,059     1,466,564     1,188,934  
   
 
 
 
 
Operating profit     36,646     34,339     28,387     87,626  
Interest expense     (9,391 )   (9,105 )   (27,666 )   (25,843 )
Interest income     157     768     560     2,199  
Debt extinguishment costs (Note 6)     —     —     —     (12,423 )
Net gain on sale of assets (Note 7)     —     —     563     —  
   
 
 
 
 
Income from continuing operations before income taxes     27,412     26,002     1,844     51,559  
Income tax provision     10,768     10,430     11,010     20,756  
   
 
 
 
 
Income (loss) from continuing operations     16,644     15,572     (9,166 )   30,803  
Loss from discontinued operations, net of tax benefit (Note 5)     (839 )   (395 )   (38,524 )   (2,760 )
   
 
 
 
 
Net income (loss)     15,805     15,177     (47,690 )   28,043  
Dividend requirements on preferred stock     —     (172 )   (190 )   (516 )
   
 
 
 
 
Net income (loss) applicable to common stock   $ 15,805   $ 15,005   $ (47,880 ) $ 27,527  
   
 
 
 
 
Basic earnings (loss) per share:                          
  Income (loss) from continuing operations   $ 0.20   $ 0.19   $ (0.11 ) $ 0.38  
  Loss from discontinued operations, net of tax benefit     (0.01 )   (0.00 )   (0.46 )   (0.03 )
   
 
 
 
 
  Net income (loss)   $ 0.19   $ 0.19   $ (0.57 ) $ 0.35  
   
 
 
 
 
  Weighted average shares     84,380     80,210     83,698     79,374  
   
 
 
 
 
Diluted earnings (loss) per share:                          
  Income (loss) from continuing operations   $ 0.19   $ 0.18   $ (0.11 ) $ 0.37  
  Loss from discontinued operations, net of tax benefit     (0.01 )   (0.00 )   (0.46 )   (0.03 )
   
 
 
 
 
  Net income (loss)   $ 0.18   $ 0.18   $ (0.57 ) $ 0.34  
   
 
 
 
 
  Weighted average shares     86,167     84,210     83,698     82,296  
   
 
 
 
 

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)

 
   September 30,
2004
   December 31,
2003
  
 
   (Unaudited)

    
  
Assets              
Current Assets:              
  Cash and cash equivalents   $ 30,401   $ 26,974  
  Accounts receivable—net     458,600     381,265  
  Inventories     18,308     21,430  
  Prepaid expenses and other     21,473     23,702  
  Deferred income taxes     93,540     91,272  
  Current assets of discontinued operations (Note 5)     8,646     37,477  
   
 
 
    Total current assets     630,968     582,120  

Property and equipment—net
 
 
48,697
 
 
52,508
 
Goodwill     463,811     462,909  
Intangible assets     21,258     29,949  
Other assets—net     43,160     36,176  
Deferred income taxes     62,781     62,781  
Non-current assets of discontinued operations (Note 5)     34,974     64,192  
   
 
 
    Total assets   $ 1,305,649   $ 1,290,635  
   
 
 
Liabilities and Stockholders' Equity              
Current Liabilities:              
  Current portion of amounts outstanding under line of credit   $ 3,500   $ 3,500  
  Accounts payable     85,005     90,086  
  Current portion of long-term debt     897     863  
  Accrued compensation and benefits     99,511     81,332  
  Other accrued liabilities     119,538     93,129  
  Current liabilities of discontinued operations (Note 5)     19,365     22,681  
   
 
 
    Total current liabilities     327,816     291,591  
   
 
 
Long-term portion of amounts outstanding under line of credit     359,500     341,250  
   
 
 
Senior subordinated notes     200,000     200,000  
   
 
 
Other long-term debt     500     988  
   
 
 
Other non-current liabilities     57,675     50,352  
   
 
 
Non-current liabilities of discontinued operations (Note 5)     31,122     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 shares: None issued and outstanding     —     —  
  Common stock: $.01 par value, authorized 200,000,000 shares: 84,689,056 and 82,182,250 shares issued and outstanding     847     822  
  Capital in excess of par value     675,522     670,733  
  Deferred compensation     (392 )   (1,584 )
  Accumulated deficit     (345,911 )   (298,221 )
  Accumulated other comprehensive income (loss)     —     (215 )
  Treasury stock at cost: 278,652 and 265,124 shares     (1,030 )   (813 )
   
 
 
    Total stockholders' equity     329,036     371,409  
   
 
 
    Total liabilities and stockholders' equity   $ 1,305,649   $ 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)

 
   Nine months ended
September 30,
  
 
   2004
   2003
  
Cash Flows from Operating Activities:              
Income (loss) from continuing operations   $ (9,166 ) $ 30,803  
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     11,441     14,188  
  Deferred income taxes and other     13,113     21,499  
  Deferred compensation     1,192     6,686  
  Changes in operating assets and liabilities, net of the effects of net assets sold:              
    Accounts receivable     (80,694 )   (41,206 )
    Inventories     4,103     2,190  
    Prepaid expenses and other assets     (5,763 )   (4,968 )
    Accounts payable     (4,913 )   (13,450 )
    Accrued compensation and benefits     19,565     27,687  
    Other liabilities     7,295     19,693  
   
 
 
Net cash provided by continuing operations     4,368     75,545  
   
 
 
Loss from discontinued operations     (38,524 )   (2,760 )
Asset impairment charges (Note 5)     43,183     —  
Net proceeds from divestiture of businesses (Note 5)     5,623     2,100  
Holdback payments related to prior year acquisition (Note 7)     —     (2,000 )
Changes in net assets and liabilities of discontinued operations     (11,090 )   (11,532 )
   
 
 
Net cash used for discontinued operations     (808 )   (14,192 )
   
 
 
Net cash provided by operating activities     3,560     61,353  
   
 
 
Cash Flows from Investing Activities:              
Capital expenditures     (19,874 )   (7,439 )
Acquisition of business, net of cash acquired     —     (1,990 )
Proceeds from sale of investments and net assets     2,880     —  
Earnout payment related to prior year acquisition     (2,460 )   —  
Other investments     (1,243 )   (562 )
Other     2,045     74  
   
 
 
Net cash used for investing activities     (18,652 )   (9,917 )
   
 
 
Cash Flows from Financing Activities:              
Extinguishment of High Tides and other debt reductions     (454 )   (252,392 )
Issuance of senior subordinated notes and other debt additions     18,250     200,000  
Preferred stock redemption (Note 4)     (12,518 )   —  
Deferred debt issuance costs     (500 )   (8,814 )
Debt extinguishment costs     —     (4,352 )
Decrease in restricted cash     —     394  
Proceeds from exercise of stock options and other     13,900     11,851  
Dividends paid     (190 )   (516 )
Other     (184 )   58  
   
 
 
Net cash provided by (used for) financing activities     18,304     (53,771 )
   
 
 
Effect of exchange rate changes on cash     215     (53 )
   
 
 
Net increase (decrease) in cash and cash equivalents     3,427     (2,388 )
Cash and cash equivalents at beginning of period     26,974     34,123  
   
 
 
Cash and cash equivalents at end of period   $ 30,401   $ 31,735  
   
 
 

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

3


THE TITAN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(in thousands, 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
  
Nine Months Ended September 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           22     14,095                       (217 )   13,900  
  Redemption of preferred stock (Note 4)     (626 )         (11,892 )                           (12,518 )
  Conversion of preferred stock     (61 )         61                             —  
  Amortization of deferred compensation                       1,192                       1,192  
  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                             (47,690 )               (47,690 )
   
 
 
 
 
 
 
 
 
Balances at September 30, 2004   $ —   $ 847   $ 675,522   $ (392 ) $ (345,911 ) $ —   $ (1,030 ) $ 329,036  
   
 
 
 
 
 
 
 
 
Nine Months Ended September 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           20     11,975                       (144 )   11,851  
  Shares issued for acquisition (See Note 7)           3     3,256                             3,259  
  Return of shares related to acquisition (See Note 7)                 (2,000 )                           (2,000 )
  Amortization of deferred compensation                       6,686                       6,686  
  Foreign currency translation adjustment                                   (53 )         (53 )
  Shares contributed to employee benefit plans           9     6,518                             6,527  
  Dividends on preferred stock—Cumulative convertible, $.50 per share                 (516 )                           (516 )
Net income