<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -------- EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
------------------------------------------------
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
- --------------------------------------------- ---------------------------
(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.
Yes X No
---- ----
The number of shares of registrant's common stock outstanding at August 9,
1996, was 16,061,622.
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,162 $34,307 $ 60,334 $ 64,472
-------- ------- -------- --------
Costs and expenses:
Cost of revenues. . . . . . . . . . . . . . . . . . . . 22,111 25,085 46,966 46,786
Selling, general and administrative
expense. . . . . . . . . . . . . . . . . . . . . . 6,268 6,365 12,219 11,821
Research and development expense. . . . . . . . . . . . 1,155 1,501 2,379 3,475
-------- ------- -------- --------
Total costs and expenses . . . . . . . . . . . . . 29,534 32,951 61,564 62,082
-------- ------- -------- --------
Operating profit(loss) . . . . . . . . . . . . . . . . . . . (372) 1,356 (1,230) 2,390
Interest expense . . . . . . . . . . . . . . . . . . . . . . (730) (264) (1,157) (469)
Interest income. . . . . . . . . . . . . . . . . . . . . . . 3 9 18 43
-------- ------- -------- --------
Income (loss) before income taxes. . . . . . . . . . . . . . (1,099) 1,101 (2,369) 1,964
Income tax provision (benefit) . . . . . . . . . . . . . . . (352) 382 (758) 710
-------- ------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . (747) 719 (1,611) 1,254
Dividend requirements on preferred stock.. . . . . . . . . . 192 173 366 347
-------- ------- -------- --------
Net income (loss) applicable to
common stock. . . . . . . . . . . . . . . . . . . . . . $ (939) $ 546 $ (1,977) $ 907
-------- ------- -------- --------
-------- ------- -------- --------
Average common shares outstanding. . . . . . . . . . . . . . 14,867 13,852 14,418 13,836
-------- ------- -------- --------
-------- ------- -------- --------
Net income (loss) per average common
share . . . . . . . . . . . . . . . . . . . . . . . . . $ (.06) $ .04 $ (.14) $ .07
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 3,586 $ 5,833
Accounts receivable - net . . . . . . . . . . . . . . . 41,519 39,360
Inventories . . . . . . . . . . . . . . . . . . . . . . 13,761 10,399
Prepaid expenses and other. . . . . . . . . . . . . . . 3,708 2,872
Deferred income taxes . . . . . . . . . . . . . . . . . 5,194 4,809
-------- -------
Total current assets . . . . . . . . . . . . . . . 67,768 63,273
Property and equipment - net . . . . . . . . . . . . . . . . 21,022 18,295
Goodwill - net . . . . . . . . . . . . . . . . . . . . . . . 22,728 3,550
Other assets . . . . . . . . . . . . . . . . . . . . . . . 9,966 10,052
-------- -------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 121,484 $ 95,170
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . $ 10,831 $ 10,184
Lines of credit . . . . . . . . . . . . . . . . . . . . 18,586 9,200
Note payable to shareholder . . . . . . . . . . . . . . 1,000 --
Income taxes payable. . . . . . . . . . . . . . . . . . 654 --
Accrued compensation and benefits . . . . . . . . . . . 7,981 9,192
Other accrued liabilities . . . . . . . . . . . . . . . 12,358 13,803
Current portion of long-term debt . . . . . . . . . . . 1,066 1,019
-------- -------
Total current liabilities. . . . . . . . . . . . . 52,476 43,398
-------- -------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 6,634 4,281
Other non-current liabilities. . . . . . . . . . . . . . . . 10,285 8,852
Series B cumulative convertible redeemable
preferred stock, $3,000 liquidation preference,
6% cumulative annual dividend, 500,000 shares
issued and outstanding. . . . . . . . . . . . . . . . . 3,000 --
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: none issued . . . . -- --
Common stock; $.01 par value; authorized
30,000,000 shares; issued and outstanding:
17,115,389 and 15,087,087. . . . . . . . . . . . . 171 151
Capital in excess of par value. . . . . . . . . . . . . 43,328 31,148
Retained earnings . . . . . . . . . . . . . . . . . . . 8,192 10,169
Treasury stock (1,074,884 and 1,161,147 shares),
at cost. . . . . . . . . . . . . . . . . . . . . . (3,297) (3,524)
-------- -------
Total stockholders' equity. . . . . . . . . . 49,089 38,639
-------- -------
Total liabilities and stockholders' equity. . . . . . . $ 121,484 $ 95,170
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) . . . . . . . . . . . . . . . . . . . . . . $ (1,611) $ 1,254
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Depreciation and amortization. . . . . . . . . . . 2,541 2,057
Deferred income taxes and other. . . . . . . . . . (645) 362
Changes in assets and liabilities, net of
effects from businesses acquired:
Accounts receivable . . . . . . . . . . . . . 9,782 35
Inventories . . . . . . . . . . . . . . . . . (3,315) (1,308)
Prepaid expenses and other assets . . . . . . (993) 1,479
Accounts payable. . . . . . . . . . . . . . . (774) (1,929)
Accrued compensation and benefits . . . . . . (2,999) (2,253)
Restructuring activities. . . . . . . . . . . (2,269) --
Other liabilities . . . . . . . . . . . . . . (2,964) (6,105)
---------- --------
Net cash used for operating activities . . . . . . . . . . . (3,247) (6,408)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . (3,006) (3,028)
Capitalized software costs . . . . . . . . . . . . . . . . . (1,389) (804)
Payment for purchase of businesses, net of cash
acquired . . . . . . . . . . . . . . . . . . . . . . . (1,000) --
Other . . . . . . . . . . . . . . . . . . . . . . . 44 --
---------- --------
Net cash used for investing activities . . . . . . . . . . . (5,351) (3,832)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt. . . . . . . . . . . . . . . . . . . . . . 7,961 7,550
Retirements of debt. . . . . . . . . . . . . . . . . . . . . (1,534) (272)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (366) (347)
Proceeds from stock issuances. . . . . . . . . . . . . . . . 290 428
---------- --------
Net cash provided by financing activities. . . . . . . . . . 6,351 7,359
---------- --------
Net decrease in cash and cash equivalents. . . . . . . . . . (2,247) (2,881)
Cash and cash equivalents at beginning of period . . . . . . 5,833 5,129
---------- --------
Cash and cash equivalents at end of period . . . . . . . . . $ 3,586 $ 2,248
---------- --------
---------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Cumulative Capital
Convertible in Excess
Preferred Common of Par Retained Treasury
Stock Stock Value Earnings Stock Total
----------- ------ --------- -------- ---------- ------
Six months ended June 30, 1996
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 695 $ 151 $ 31,148 $ 10,169 $ (3,524) $ 38,639
Stock issuance for acquisition 19 11,510 11,529
Exercise of stock options 1 351 (62) 290
Shares contributed to employee
benefit plans 319 289 608
Dividends on preferred stock -
Cumulative convertible, $.50
per share (347) (347)
Series B, 6% annual (19) (19)
Net loss (1,611) (1,611)
------- ------- ------- ------- ------- -------
Balances at June 30, 1996 $ 695 $ 171 $ 43,328 $ 8,192 $ (3,297) $ 49,089
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Six months ended June 30, 1995
- -------------------------------
Balances at December 31, 1994 $ 695 $ 146 $ 27,860 $ 14,671 $ (4,604) $ 38,768
Exercise of stock options and
other 3 806 (388) 421
Shares contributed to employee
benefit plans 361 361
Dividends on preferred stock -
$.50 per share (347) (347)
Net income 1,254 1,254
------- ------- ------- ------- ------- -------
Balances at June 30, 1995 $ 695 $ 149 $ 28,666 $ 15,578 $ (4,631) $ 40,457
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(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 ("the Company" or "Titan") 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, 1995. 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 and results of operations for the periods presented.
However, these results are not necessarily indicative of results for a full
year. Also, certain prior year amounts have been reclassified to conform to the
1996 presentation.
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) ACQUISITION
On May 24, 1996, the Company completed the acquisition of three privately-held
affiliated businesses -- Eldyne, Inc. ("Eldyne"), Unidyne Corporation
("Unidyne") and Diversified Control Systems, LLC ("DCS"). Eldyne, Unidyne, and
DCS are information technology businesses that provide the Department of Defense
and other government customers with systems research, development and
prototyping, fleet integration, insertion of technology into existing systems,
control systems and life cycle support. The overall transaction consideration
consisted of $1 million cash, 1,921,534 shares of Titan common stock with an
assigned value of $6.00 per share, the issuance of 500,000 shares of a new class
of cumulative convertible redeemable preferred stock (see Note 4), assumption of
indebtedness (see Note 3), and a promissory note for $1 million issued to Jack
Witt, the principal stockholder of the acquired companies. The Company also
entered into a retainer agreement for the services of Mr. Witt, providing for an
annual retainer of $.3 million, payable monthly, for 6 years beginning May 24,
1996. Other direct costs will approximate $3 million. The note is due on March
15, 1997, and interest of 10% per annum is due quarterly and at maturity.
The acquisition has been accounted for as a purchase, and, accordingly, the
Company's consolidated financial statements include the operating results of the
three acquired companies since May 24, 1996. The purchase agreements contain
certain terms that may require contingent payments by the Company or the seller
and/or return of the Company's common stock by the seller. Such payments would
be recorded as an adjustment to the purchase price. The excess of the purchase
price over the estimated fair value of net assets acquired of $19.5 million at
June 30, 1996 is being amortized using a straight-line method over 30 years.
Unaudited proforma data giving effect to the purchase of Eldyne, Unidyne and DCS
as if they had been acquired at the beginning of 1995 are shown below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues $42,126 $46,961 $89,157 $87,038
Net income (loss) (1,188) 986 (3,145) 2,103
Net income (loss)
per share $ (.09) $ .05 $ (.22) $ .11
6
<PAGE>
The proforma net loss for the six months ended June 30, 1996 includes certain
unanticipated operating adjustments made to the Eldyne, Unidyne and DCS
historical financial statements including, but not limited to, long-term
contract earnings revisions, and changes to the carrying value of certain
assets, primarily receivables.
NOTE (3) DEBT
At June 30, 1996 and December 31, 1995, the Company had debt outstanding of
$14,400 and $9,200, respectively, under a $17,000 bank line of credit. The
Company also had commitments under letters of credit at June 30, 1996 of $355
which reduced availability under the line of credit. The line of credit
agreement requires the Company to have annual net income, as defined, prohibits
two consecutive quarterly losses and contains other financial covenants which
require the Company to maintain stipulated levels of tangible net worth, a
minimum interest coverage ratio and a specified quick ratio. As of June 30,
1996, the Company was not in compliance with the covenants relating to
consecutive quarterly losses and ratios of total liabilities to tangible net
worth and minimum interest coverage. This noncompliance was waived by the
Company's bank, subject to the bank's right to secure the outstanding
obligations under the line of credit with the Company's assets, if it so
chooses.
In connection with the acquisition of Eldyne, Unidyne, and DCS, the Company's
Eldyne and Unidyne subsidiaries assumed and renegotiated a credit agreement with
Crestar Bank which provides for a working capital line of credit facility, a
mortgage note and an equipment note. At June 30, 1996, $4,186 was outstanding
under the line of credit at a rate of 8.2%. The agreement allows borrowings on
the line through December 31, 1996 at an interest rate of LIBOR plus 2.75% and
up to an aggregate of $7,000, limited by the sum of various percentages of
billed and unbilled government and commercial receivables. The line is
collateralized by substantially all of the assets of the acquired companies, and
borrowings up to $2,500 under the line have been guaranteed by the Company. The
credit agreement limits the use of advances of the line to Eldyne and Unidyne.
The mortgage note of $1,273 and the equipment note of $158 at June 30, 1996, are
collateralized by real estate and equipment, bear interest at LIBOR plus 2.5%
and require monthly payments through February 15, 2000 and 1999, respectively.
The Crestar credit agreement contains, among other financial covenants,
provisions which require Eldyne and Unidyne to maintain stipulated levels of
tangible net worth, working capital and leverage. At June 30, 1996, the
companies were not in compliance with certain of these covenants. This
noncompliance was waived by the bank.
NOTE (4) CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
In connection with the acquisition of Eldyne, Unidyne and DCS, the Company
issued 500,000 shares of Series B Cumulative Convertible Redeemable Preferred
Stock (the "Series B Preferred Stock"). The Series B Preferred Stock accrues
dividends at a rate of 6% per annum payable quarterly in arrears cumulatively,
has a liquidation preference of $6.00 per share plus accrued and unpaid
dividends (the "Series B Liquidation Preference") and entitles the holder
thereof to one vote per outstanding share, voting together as a class with the
holders of shares of outstanding Common Stock (and any other series or classes
entitled to vote therewith) on all matters submitted for a shareholder vote.
The Series B Preferred Stock is convertible at the holder's option into shares
of the Company's common stock at a conversion price of $9.00 per share (subject
to customary anti-dilution adjustments) on or after November 24, 1996 until
November 24, 1997. The Series B Preferred Stock also is redeemable at the
Series B Liquidation Preference (i) at the holder's option, after May 24, 1998
until May 24, 2001, and (ii) at the Company's option, after May 24, 2001 until
May 24, 2006. The Series B Preferred Stock is not considered a common stock
equivalent for the purpose of earnings per share calculations.
NOTE (5) RESTRUCTURING
In 1995, the Company adopted a formal plan of restructuring that resulted in
charges of approximately $5,431 to provide among other things, disposition of
businesses not central to the Company's long-term strategy, as well as related
severance and other charges. During the first six months of 1996, charges
against restructuring reserves for severance were $607 related to 33 employees
terminated throughout the
7
<PAGE>
Company. At June 30, 1996, approximately $2,650 of the initial charges remained
in other accrued liabilities. This remaining balance was comprised of
approximately $700 for further reductions in personnel and approximately $1,950
for costs associated with the exiting of businesses and the termination of
certain agreements. This group of businesses had revenues of $3,633 and $9,256
and operating profit of $1,366 and $1,898 for the three months and six months
ended June 30, 1996 and 1995, respectively.
NOTE (6) SUBSEQUENT EVENT
On July 26, 1996, the Company sold its Electronics division, which was part of
the Defense Systems segment. The transaction will have no significant impact on
the 1996 results of operations.
NOTE (7) OTHER FINANCIAL DATA
June 30, December 31,
1996 1995
------------- -------------
Inventories:
Materials $ 3,368 $ 3,152
Work-in-process 7,727 4,159
Finished goods 2,666 3,088
------- -------
$ 13,761 $ 10,399
------- -------
------- -------
Supplemental disclosure of cash payments (receipts) is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
------ ------ ------ ------
Interest $ 721 $ 199 $ 1,004 $ 207
Income taxes 112 173 (141) (804)
During the six month periods ended June 30, 1996 and 1995, the Company utilized
treasury stock of $608 and $361, respectively, for benefit plan contributions.
The following tables summarize revenues and operating profit (loss) by industry
segment for the three months and six months ended June 30, 1996 and 1995:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
------ ------- ------ ------
Revenues:
Communications Systems $ 1,207 $ 1,996 $ 1,841 $ 4,076
Software Systems 4,980 8,913 10,680 18,328
Defense Systems 17,948 16,678 36,940 30,372
Emerging Technologies 5,027 6,720 10,873 11,696
------- ------- ------- -------
$ 29,162 $ 34,307 $ 60,334 $ 64,472
------- ------- ------- -------
------- ------- ------- -------
Operating Profit (Loss):
Communications Systems $ (2,015) $ (1,563) $ (4,292) $ (2,834)
Software Systems (626) 2,587 134 5,072
Defense Systems 3,300 1,338 4,727 2,361
Emerging Technologies (569) 190 (267) 282
------- ------- ------- -------
Segment operating profit
before Corporate 90 2,552 302 4,881
Corporate (462) (1,196) (1,532) (2,491)
------- ------- ------- -------
$ (372) $ 1,356 $ (1,230) $ 2,390
------- ------- ------- -------
------- ------- ------- -------
8
<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
Consolidated results:
Revenues for the second quarter of 1996 were $29,162, down 15% from revenues of
$34,307 in the second quarter of 1995. Revenues for the six months ended June
30 were $60,334 and $64,472 in 1996 and 1995, respectively. In both the second
quarter and six months ended June 30, 1996 compared to the corresponding periods
of 1995, revenue decreases were experienced in all segments except Defense
Systems. The Company reported a net loss of $747 and $1,611 for the second
quarter and six months of 1996 compared to net income of $719 and $1,254 for the
second quarter and six months of 1995. These changes were due principally to
the Company's continuing investment in the commercial Communications Systems
segment, the impact of the reduced revenue volume of high-margin business and,
with respect to the second quarter of 1996, additional costs associated with the
negotiated conclusion of certain programs with a major customer in the Software
Systems segment.
Selling, general and administrative expense ("SG&A") remained flat in the second
quarter of 1996 compared to 1995 and increased slightly in the six months of
1996 compared to the same period in 1995. In both comparative periods,
increased sales and marketing costs in the Company's commercial secure
television business were partially offset by decreased administrative costs
resulting from restructuring activities, primarily in the Software Systems
business. Research and development costs (R&D) decreased overall from $1,501 in
the second quarter of 1995 to $1,155 for the same period in 1996, and from
$3,475 for the six months of 1995 to $2,379 for the same period in 1996.
Increased R&D efforts in the Company's commercial secure television business
were more than offset by lower R&D costs in the Defense Systems segment.
Net interest expense increased $472 and $713 in the second quarter and six
months ended June 30, 1996 compared to the comparable periods of 1995, due to
increased borrowings and higher interest rates under the Company's line of
credit, increased interest on the Company's deferred compensation plan and the
loan agreement entered into in December 1995 to finance machinery and equipment
at the Company's new San Diego medical sterilization facility. Average
borrowings on the Company's line of credit were $11,165 and $4,134 at weighted
average interest rates of 7.9% and 7.0% in the six months ended June 30, 1996
and 1995, respectively.
The income tax provision is a 32% effective rate in the second quarter and six
months of 1996 compared to a 35% and 36% effective rate in the second quarter
and six months of 1995, respectively. These effective rates approximate the
expected combined federal and state statutory rates, less expected credits,
primarily R&D credits.
Business Segments:
THREE MONTHS ENDED JUNE 30, 1996 AND 1995:
Revenues in the Communications Systems segment decreased $789 from $1,996 in the
second quarter of 1995 to $1,207 in the second quarter of 1996. This decline
reflects the completion in the first quarter of 1996 of the Company's satellite
communications contract in Thailand, the completion of the initial order in the
secure television business area and delays in follow-on orders. The Company was
awarded a $2.7 million contract in the secure television business area in the
second quarter of 1996 for a system in Thailand, however shipments on the
contract have not yet commenced. The Company made its first shipment on its $10
million rural
9
<PAGE>
telephony contract in the second quarter of 1996. The operating loss for this
segment increased from $1,563 in the second quarter of 1995 to $2,015 in the
second quarter of 1996, principally due to the reduced revenues and the
Company's continued planned investment in the digital television product line,
resulting in increased SG&A and R&D costs in that area.
Software Systems segment revenues decreased $3,933 from $8,913 in the second
quarter of 1995 to $4,980 in the second quarter of 1996, primarily due to a
reduction of revenues of $5,529 from a major telecommunications customer, which
was, however, partially offset by growth of $2,128 in other custom software
business. The reduction of operating income of $3,213 from operating income of
$2,587 in the second quarter of 1995 to a loss of $626 in the second quarter of
1996 was principally due to the impact of the loss of historically high-margin
business, and additional costs associated with a negotiated conclusion of
certain programs with this major customer.
In the Defense Systems segment, revenues grew $1,270, from $16,678 in the second
quarter of 1995 to $17,948 in the second quarter of 1996. Increased revenues
generated from the acquired businesses of Eldyne, Unidyne and DCS of $4,700 and
increased revenues related to the Mini-DAMA satellite terminal production
contract were partially offset by a decline in revenues resulting from the wind-
down of the work subcontracted to the buyer of the Applications Group (sold in
April 1994). Operating income in the segment increased $1,962, from $1,338 in
the second quarter of 1995 to $3,300 in the second quarter of 1996. This
increase is primarily due to non-recurring credits resulting from the
reevaluation of estimates of certain allowable contract costs based upon recent
favorable developments with certain government audit agencies, as well as
changes in the allowances on the carrying value of certain assets being disposed
of. In addition, operating income for the second quarter of 1996 includes $447
of operating income from acquired businesses and increased operating income from
the Mini-DAMA production contract.
In the Emerging Technologies segment, revenues decreased $1,693 from $6,720 in
the second quarter of 1995 to $5,027 in the second quarter of 1996, due to
reduced revenues in the medical sterilization business resulting from the
completion of the Company's contract to provide a turnkey medical device
sterilization system in Austria, and reduced revenues in government funded R&D
business, partially offset by growth in the Company's environmental business.
The operating income decreased $759 from operating income of $190 in the second
quarter of 1995 to a loss of $569 in the second quarter of 1996, primarily due
to the reduced sales volume, and to a lesser extent, due to costs in the
Company's medical sterilization business related to the start-up of the San
Diego facility in 1996.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995:
The revenues for the Communications Systems segment decreased $2,235 from $4,076
in the six months ended June 30, 1995 to $1,841 in the six months ended June 30,
1996, due to the completion of the initial order in the secure television
business area and the satellite communications contract in Thailand. Segment
operating loss increased from $2,834 in the six months ended June 30, 1995 to
$4,292 in the six months ended June 30, 1996, principally due to the reduced
sales volume and the Company's continued planned investment in the digital
television product line, particularly accelerated sales and marketing efforts.
The Software Systems segment revenues decreased $7,648 from $18,328 in the six
months ended June 30, 1995 to $10,680 in the six months ended June 30, 1996,
principally due to a reduction of revenues of $10,738 from a major
telecommunications customer, partially offset by growth of $3,429 in other
custom software business. Operating income decreased $4,938 from $5,072 in the
six months ended June 30, 1995 to $134 in the six months ended June 30, 1996,
resulting from the impact of the reduced sales volume, and the absence of
corresponding decreases in SG&A. Although SG&A costs decreased in dollars due to
cost-control measures implemented as revenues decreased, SG&A costs increased in
relation to revenues due to increased efforts to diversify the business base.
Defense Systems revenues increased $6,568 from $30,372 in the six months ended
June 30, 1995 to $36,940 in the six months ended June 30, 1996. Increased
revenues from
10
<PAGE>
the acquisition of Eldyne, Unidyne and DCS of $4,700, and increased 1996
revenues related to the Mini-DAMA satellite terminal production contract were
partially offset by decreased revenues from the subcontract noted above.
Segment operating income increased $2,366 from $2,361 in the six months ended
June 30, 1995 to $4,727 in the six months ended June 30, 1996. This increase
was due to the impact of the non-recurring credits and the increase in revenues
noted above.
The Emerging Technologies segment revenues decreased $823 from $11,696 in the
six months ended June 30, 1995 to $10,873 in the six months ended June 30, 1996,
due to decreased revenues in the government funded R&D and sterilization
businesses, offset by growth in the environmental business. Segment operating
income decreased $549 from operating income of $282 in the six months ended June
30, 1995 to a loss of $267 in the six months ended June 30, 1996, principally
due to the reduced sales volume and to a lesser extent, due to start-up costs in
the Company's San Diego medical sterilization facility, partially offset by
increased profit in the environmental business.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1996, Titan used $3.2 million cash for
operating requirements. In addition to funding the net loss, other
significant cash uses included an increase in inventories of $3,315 related
principally to government satellite communications and commercial rural
telephony products, funding requirements for certain accrued compensation
obligations of $2,999 and funding of $2,269 of restructuring activities. Cash
was provided primarily by collection of certain large receivables in the
Defense Systems segment during the second quarter of 1996, and in the six
months ended June 30, 1996, by borrowings under the Company's line of credit
and the refinancing of the Company's Denver Scan facility, which provided
$5,214 and $1,773, respectively.
As of June 30, 1996 the Company had debt outstanding of $14,400 under a $17,000
bank line of credit. In addition, the Company had commitments under letters of
credit at June 30, 1996 of $355, which reduced availability under the line of
credit to $2,245. In addition, in July 1996 the Company consummated the sale of
its Electronics division of which the net proceeds were used to reduce
borrowings under this line of credit. As of August 9, 1996, the Company had
debt outstanding of $13,670 under this line of credit with commitments under
letters of credit of $282, which reduced availability under the line of credit
to $3,048. The line of credit agreement requires the Company to have annual net
income, as defined, prohibits two consecutive quarterly losses and contains
other financial covenants which require the Company to maintain stipulated
levels of tangible net worth, a minimum interest coverage ratio and a specified
quick ratio. As of June 30, 1996, the Company was not in compliance with the
covenants relating to consecutive quarterly losses and ratios of total
liabilities to tangible net worth and minimum interest coverage. The Company
has obtained a waiver from the bank for these conditions, subject to the bank's
right to secure the outstanding obligations under the line of credit with the
Company's assets, if it so chooses.
In connection with the Company's acquisition of Eldyne, Unidyne and DCS in May
1996, the Company's Eldyne and Unidyne subsidiaries assumed and renegotiated a
separate credit agreement with Crestar Bank which provides, among other things,
for a working capital line of credit facility of up to $7 million for Eldyne and
Unidyne. The actual borrowing base is limited for each of Eldyne and Unidyne to
the sum of various percentages of billed and unbilled government and commercial
receivables. The line of credit is secured by substantially all of the assets of
Eldyne, Unidyne and DCS. At June 30, 1996, $4,186 was outstanding under this
line of credit. This line of credit agreement contains certain financial
covenants that require each of Eldyne and Unidyne to maintain stipulated levels
of tangible net worth, working capital and leverage. The line of credit requires
that borrowings be used only for Eldyne and Unidyne, and prohibits those
entities from transferring funds to the Company. At June 30, 1996, Eldyne and
Unidyne were not in compliance with certain of these financial covenants and
have obtained a waiver from the bank for these conditions. The Company has
guaranteed up to $2.5 million of indebtedness under this line of credit.
11
<PAGE>
Cash requirements for the remainder of 1996 are expected to continue to be
significant. The Company intends to continue its investment in the further
development of business ventures within the Communications Systems segment. To
finance this investment the Company is investigating a combination of
alternatives that include continued working capital management, utilization of
the remaining bank line of credit, and new debt and equity sources. There can be
no assurance that the Company will be successful in obtaining such additional
funding. In such event, the Company would have to reassess its investment in
its start-up ventures.
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, 1995,
regarding entry into commercial business, reliance on a major software customer,
and dependence on defense spending.
12
<PAGE>
THE TITAN CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) In March 1996, a lawsuit brought by Audrey S. Amato, a former Company
employee, was tried in the United States District Court for the Eastern District
of Virginia. The lawsuit sought monetary damages based upon various counts of
alleged gender discrimination, wrongful termination, constructive discharge and
related claims. At trial, the judge and jury found in favor of the Company on
all counts, except one count on which the jury was unable to reach a verdict.
The case was settled in July 1996 and did not have a material effect on the
financial position or results of operations of the Company.
(b) In April 1996, a lawsuit brought by Celindah J. Grier, a former Company
employee, was tried in the United States District Court for the Eastern District
of Virginia. The lawsuit sought monetary damages based upon various counts of
alleged gender discrimination, wrongful termination, constructive discharge and
related claims. At trial, the jury found for the plaintiff on retaliation and
constructive discharge counts and awarded the plaintiff an aggregate of $360,000
of compensatory damages and $275,000 of punitive damages. The judge and jury
found for the Company on all other counts. In July 1996, the judge vacated the
jury verdict and granted the Company's motion for a new trial. A date for the
retrial has not been set. The Company intends to continue to defend this case
vigorously. While it is not feasible to predict the outcome of this case,
management believes that its ultimate disposition will not have a material
adverse effect on the financial position or results of operations of the
Company.
(c) In July 1996, a lawsuit brought by Joyce Sexton, a former Company
employee, was tried in the United States District Court for the Eastern District
of Virginia. The lawsuit sought monetary damages based upon various counts of
alleged gender discrimination, fraud and related claims. At trial, the jury
found in favor of the Company on all counts. The plaintiff has now filed a
motion for a new trial as to her fraud claim.
(d) The Company is also a party to a lawsuit filed by a male former Company
employee seeking monetary damages due to alleged wrongful termination and
intentional infliction of emotional distress arising out of his termination of
employment in March 1994. At trial in June 1996, the jury found for the
plaintiff and awarded $65,000 in compensatory damages and $350,000 in punitive
damages. The Company's post-trial motions to vacate the verdict and for a new
trial have been denied. The Company intends to appeal the verdict.
ITEM 4. (A) AND (C) SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 16, 1996, the following
matters were submitted and approved by shareholders:
13
<PAGE>
1. Election of Directors. The holders of proxies solicited by the Board cast
the following votes (no other votes were cast):
Affirmative Negative/Abstaining
----------- -------------------
Charles R. Allen 11,972,516 544,498
Joseph F. Caliguiri 12,211,212 305,802
Daniel J. Fink 12,199,387 317,627
Robert E. La Blanc 11,064,322 1,452,691
Thomas G. Pownall 12,202,417 314,596
Gene W. Ray 10,384,782 2,132,232
J. S. Webb 10,372,589 2,144,424
2. Adoption of the 1995 Employee Stock Purchase Plan.
Affirmative Votes 10,835,499
Negative Votes 1,590,768
Abstaining 90,609
3. Adoption of the 1996 Directors' Stock Option and Equity Participation Plan.
Affirmative Votes 10,471,601
Negative Votes 1,914,161
Abstaining 131,113
4. Ratification of Selection of Arthur Andersen LLP as the Company's Auditors.
Affirmative Votes 12,433,286
Negative Votes 52,455
Abstaining 31,272
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)(27) Financial Data Schedule
(b) The Company filed the following:
(1) Current report on Form 8-K dated June 6, 1996 (as amended by
Form 8-K/A dated August 7, 1996), to report the
consummation of the acquisition of Eldyne, Inc.,
Unidyne Corporation and Diversified Control Systems.
14
<PAGE>
THE TITAN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 14, 1996
THE TITAN CORPORATION
/s/ BERNARD M. HIRL
--------------------------
By: Bernard M. Hirl
Senior Vice President and
Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE TITAN CORPORATION'S QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,586
<SECURITIES> 0
<RECEIVABLES> 41,519
<ALLOWANCES> 0<F1>
<INVENTORY> 13,761
<CURRENT-ASSETS> 67,768
<PP&E> 45,715
<DEPRECIATION> 24,693
<TOTAL-ASSETS> 121,484
<CURRENT-LIABILITIES> 52,476
<BONDS> 6,634
0
3,695
<COMMON> 171
<OTHER-SE> 48,223
<TOTAL-LIABILITY-AND-EQUITY> 121,484
<SALES> 60,236
<TOTAL-REVENUES> 60,334
<CGS> 46,966
<TOTAL-COSTS> 46,966
<OTHER-EXPENSES> 14,598
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 1,157
<INCOME-PRETAX> (2,369)
<INCOME-TAX> (758)
<INCOME-CONTINUING> (1,611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,611)
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
<FN>
<F1>DUE TO THE USE OF CONDENSED FINANCIAL STATEMENTS FOR INTERIM REPORTING, THIS
INFORMATION IS NOT COMPILED ON A QUARTERLY BASIS.
</FN>
</TABLE>
