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 March 31, 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 May 3, 1996,
was 14,077,497.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
Three months ended
March 31,
1996 1995
<S> <C> <C>
Revenues........................................... $31,172 $30,165
Costs and expenses:
Cost of revenues................................ 24,855 21,701
Selling, general and administrative
expense...................................... 5,951 5,456
Research and development expense................ 1,224 1,974
Total costs and expenses..................... 32,030 29,131
Operating profit(loss)............................. (858) 1,034
Interest expense................................... (427) (205)
Interest income.................................... 15 34
Income (loss) before income taxes.................. (1,270) 863
Income tax provision(benefit)...................... (406) 328
Net income(loss)................................... (864) 535
Dividend requirement on preferred stock............ 174 174
Net income (loss) applicable to common stock....... $(1,038) $ 361
Average common shares outstanding.................. 13,969 13,820
Net income (loss) per average common share......... $ (.07) $ .03
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<TABLE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
March 31, December 31,
1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................$ 1,380 $ 5,833
Accounts receivable - net....................... 42,170 39,360
Inventories..................................... 10,078 10,399
Prepaid expenses and other...................... 2,731 2,872
Deferred income taxes........................... 4,998 4,809
Total current assets......................... 61,357 63,273
Property and equipment - net....................... 19,079 18,295
Goodwill - net..................................... 3,410 3,550
Other assets....................................... 10,971 10,052
Total assets $ 94,817 $ 95,170
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................$ 8,587 $ 10,184
Line of credit.................................. 14,400 9,200
Current portion of long-term debt............... 895 1,019
Accrued compensation and benefits............... 5,662 9,192
Other accrued liabilities....................... 11,561 13,803
Total current liabilities.................... 41,105 43,398
Long-term debt..................................... 6,057 4,281
Other non-current liabilities...................... 9,537 8,852
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:
15,186,658 and 15,087,087.................... 152 151
Capital in excess of par value.................. 31,613 31,148
Retained earnings............................... 9,131 10,169
Treasury stock (1,132,786 and 1,161,147 shares),
at cost...................................... (3,473) (3,524)
Total stockholders' equity................ 38,118 38,639
Total liabilities and stockholders' equity $ 94,817 $ 95,170
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<TABLE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
Three months ended
March 31,
1996 1995
<S> <C> <C>
Cash Flows From Operating Activities:
Net income(loss).....................................$ (864) $ 535
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Depreciation and amortization.................. 1,146 1,031
Deferred income taxes and other................ (349) 83
Changes in assets and liabilities:
Accounts receivable......................... (2,810) (1,224)
Inventories................................. 321 (861)
Prepaid expenses and other assets........... (335) 651
Accounts payable............................ (1,597) 2,135
Accrued compensation and benefits........... (3,530) (3,560)
Restructuring activities.................... (575) --
Other liabilities........................... (796) (3,924)
Net cash used for operating activities............... (9,389) (5,134)
Cash Flows From Investing Activities:
Capital expenditures................................. (1,760) (1,604)
Capitalized software costs........................... (254) (392)
Other................................................ 11 126
Net cash used for investing activities............... (2,003) (1,870)
Cash Flows From Financing Activities:
Additions to debt.................................... 7,700 4,700
Retirements of debt.................................. (848) (135)
Dividends paid....................................... (174) (174)
Proceeds from stock issuances........................ 261 184
Net cash provided by financing activities............ 6,939 4,575
Net decrease in cash and cash equivalents............ (4,453) (2,429)
Cash and cash equivalents at beginning of period..... 5,833 5,129
Cash and cash equivalents at end of period...........$ 1,380 $ 2,700
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<TABLE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands of dollars, except per share data)
Capital
in Excess
Preferred Common of Par
Retained Treasury
Stock Stock Value
Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Three months ended March 31, 1996
Balances at December 31, 1995 $ 695 $ 151 $ 31,148
$ 10,169 $ (3,524) $ 38,639
Exercise of stock options 1 322
(62) 261
Shares contributed to employee
benefit plans 143
113 256
Dividends on preferred stock -
$.25 per share
(174) (174)
Net loss
(864) (864)
Balances at March 31, 1996 $ 695 $ 152 $ 31,613
$ 9,131 $ (3,473) $ 38,118
Three months ended March 31, 1995
Balances at December 31, 1994 $ 695 $ 146 $ 27,860
$ 14,671 $ (4,604) $ 38,768
Exercise of stock options and other 1 183
(7) 177
Dividends on preferred stock -
$.25 per share
(174) (174)
Net income
535 535
Balances at March 31, 1995 $ 695 $ 147 $ 28,043
$ 15,032 $ (4,611) $ 39,306
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 port 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 ould differ from those estimates.
Note (2) SUBSEQUENT EVENT
On April 19, 1996, the Company entered into definitive agreements to acquire
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 consists of a combination of Titan common stock, a
new class of convertible redeemable preferred stock, cash, a promissory note,
assumption of indebtedness and other consideration valued at approximately
$23.6 million.
The transactions are subject to satisfaction of various closing conditions,
including the expiration of applicable waiting periods under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended, the approval by the
Unidyne shareholders of the agreement with Unidyne and the concurrent closings
of all three transactions. The transactions are expected to be consummated in
late May 1996. There can be no assurance, however, that the transactions will
be consummated. If consummated, the acquisition will be accounted for as a
purchase and, accordingly, the Company's consolidated financial statements will
include the operating results of Eldyne, Unidyne and DCS from the acquisition
date forward.
Combined, unaudited revenues for the three companies for the most recent twelve
month period was approximately $57 million. Proforma information will be
provided following the closing of the transaction.
Note (3) DEBT
At March 31, 1996 and December 31, 1995, the Company had debt outstanding of
$14,400 and $9,200, respectively, under a $17,000 unsecured bank line of credit.
The Company also had commitments under letters of credit at both dates of
$1,070 which reduced availability of 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 debt service coverage ratio and a specified quick ratio. As of March
31, 1996, the Company was not in compliance with the covenants relating to
consecutive quarterly losses and minimum debt service coverage. This
noncompliance was waived by the Company's bank.
Note (4) RESTRUCTURING
In 1995, the Company adopted a formal plan of restructuring that resulted in
charges of approximately $5,413 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 quarter of 1996, charges against
restructuring reserves for severance were $326 related to 10 employees
throughout the Company. At March 31, 1996, approximately $4,400 of the initial
charges remained in other accrued liabilities. This remaining balance was
comprised of approximately $1,300 for further reductions in personnel and
approximately $3,100 for costs associated with the exiting of businesses and
the termination of certain agreements. This group of businesses had revenues
of $5,623 and an operating profit of $532 in the first quarter of 1996.
Note (5) OTHER FINANCIAL DATA
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March 31, December 31,
1996 1995
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Inventories:
Materials $ 2,556 $ 3,152
Work-in-process 5,640 4,159
Finished goods 1,882 3,088
$10,078 $ 10,399
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Supplemental disclosure of cash payments (receipts) is as follows:
<TABLE>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Interest $ 283 $ 8
Income taxes (253) (977)
</TABLE>
During the three month period ended March 31, 1996, the Company utilized
treasury stock of $256 for benefit plan contributions.
The following tables summarize revenues and operating profit (loss) by industry
segment for the three months ended March 31, 1996 and 1995:
<TABLE>
Three Months Ended
March 31,
1996 1995
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Revenues:
Communications Systems $ 634 $ 2,080
Software Systems 5,700 9,415
Defense Systems 18,992 13,694
Emerging Technologies 5,846 4,976
$31,172 $30,165
Operating Profit (Loss):
Communications Systems $(2,277) $(1,271)
Software Systems 760 2,485
Defense Systems 1,427 1,023
Emerging Technologies 302 92
Segment operating profit before
Corporate 212 2,329
Corporate (1,070) (1,295)
$ (858) $ 1,034
</TABLE>
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 first quarter of 1996 increased slightly to $31,172 from
$30,165 in the first quarter of 1995. Lower Software Systems revenues were
more than offset by an increase in Defense Systems revenues. The Company
reported a net loss of $864 for the first quarter of 1996 compared to net income
of $535 for the first quarter of 1995. This was due primarily to the Company's
continuing planned investment in the commercial Communications Systems segment
and to the change in mix from higher-margin commercial software business to
lower-margin defense business.
Selling, general and administrative expense increased $495 or 9% in the first
quarter of 1996 compared to the same period in 1995, primarily as a result of
increased selling costs in the Company's Communications Systems business and in
the Defense Systems segment in support of the shipments to the Taiwan
government. Research and development costs (R&D) decreased overall from
$1,974 in the first quarter of 1995 to $1,224 in 1996, primarily as a result of
particularly concentrated activity in the Company's Linkabit division in 1995.
However, as planned, R&D expense in the Company's secure television business in
the Communications Systems segment increased more than 50% from the prior year.
Net interest expense increased from $171 in the first quarter of 1995 to $412
in 1996, primarily from increased borrowings under the Company's line of credit.
The income tax provision is a 32% effective rate in the first quarter of 1996
versus a 38% effective rate in the first quarter of 1995. Both of these
effective rates approximate the expected combined federal and state statutory
rates, less expected credits, primarily R&D credits.
Business Segments:
In the Defense Systems segment, revenues grew 39% or $5,298, from $13,694 to
$18,992. This growth was reflected across all of the defense systems business
entites. Specific major contributors to the growth were increased revenues
related to the Mini-DAMA satellite terminal production contract and shipments to
the Taiwan government. Operating income in the segment increased 39%, from
$1,023 to $1,427, in line with the increase in revenues.
Software Systems segment revenues declined $3,715, from $9,415 in the first
quarter of 1995 to $5,700 in the first quarter of 1996, primarily due to
reduced demand from a major telecommunications customer which was, however,
partially offset by growth in other custom software business. The reduction in
operating income of $1,725 quarter to quarter from $2,485 to $760 was
principally due to the impact of the reduced sales volume coupled with a change
in contract mix.
Revenues in the Communications Systems segment decreased $1,446 quarter to
quarter, from $2,080 to $634, primarily due to the timing of certain contracts
and the sale of the Company's transceiver manufacturing division in the first
quarter of 1995. The Company completed its commmercial satellite communications
contract in Thailand in the first quarter of 1996. This contract had
contributed substantial revenue in the first quarter of 1995. In 1995, the
Company was awarded a $10 million rural telphony contract in Indonesia. The
Company expects to begin recording revenues from this contract later in 1996.
Segment operating loss was $2,277 in the first quarter of 1996, compared to
$1,271 in the first quarter of 1995. This was as a result of the change in the
segment's revenues and the continued planned investment in the digital
television encryption product line.
In the Emerging Technologies segment, revenues increased $870 from $4,976 in
the first quarter of 1995 to $5,846 in the first quarter of 1996, primarily due
to additional contracts for medical sterilization and growth in the
environmental business. Operating profit grew $210 quarter to quarter,
primarily due to growth in the environmental business.
LIQUIDITY AND CAPITAL RESOURCES
The Company typically experiences higher cash requirements in the first quarter
than in other quarters, and during the first quarter of 1996, Titan used $9.4
million cash for operating requirements. The components of this change
included an increase in accounts receivable of approximately $2.8 million
related to the timing of shipments of certain large production contracts, and a
decrease in accounts payable of $1.6 million related primarily to the payment of
certain subcontract invoices. In addition, the timing of certain compensation
obligations resulted in funding requirements of approximately $3.5 million.
Cash was provided primarily by the Company's line of credit and the refinancing
of the Company's Denver Scan facility, which provided $5,200 and $2,500,
respectively.
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. The
Company also anticipates that the Eldyne/Unidyne/DCS acquisition will require
the use of cash for certain closing and transaction costs. Planned funding
sources are the Company's bank line of credit and the sale of non-core
businesses. At March 31, 1996, the borrowing availability on the Company's bank
line of credit was $1,530. Also, 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 debt
service coverage ratio and a specified quick ratio. As of March 31, 1996, the
Company was not in compliance with the covenants relating to consecutive
quarterly losses and minimum debt service coverage. The Company has obtained a
waiver from the bank for these conditions, which resulted from the loss in the
first quarter of 1996. The Company continues to evaluate its capital
requirements and financing alternatives. Should the Company be unable to
successfully obtain outside financing or generate
the additional funds from operations or divestitures, the investment in the
Company's start-up ventures could change.
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.
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 plaintiff is now pursuing post-trial motions with respect
to various matters on which the Company prevailed at trial. The remaining count
on which the jury did not reach a verdict is scheduled for retrial in June 1996.
(b) In April 1996, a lawsuit brought by Celinda 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. The Company is
now pursuing post-trial motions and intends to appeal the result if necessary.
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 March 5, 1996, to
report a settlement agreement with certain
stockholders of the Company pursuant to which
the Company agreed to dismiss pending
litigation against the stockholders.
(2) Current report on Form 8-K dated April 25, 1996, to
report the execution of definitive agreements
to acquire Eldyne, Inc., Unidyne Corporation
and Diversified Control Systems.
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: May 14, 1996
THE TITAN CORPORATION
/S/ ROGER HAY
By: Roger Hay
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
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<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 three months ended March 31, 1996, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 1,380
<SECURITIES> 0
<RECEIVABLES> 42,170
<ALLOWANCES> 0<F1>
<INVENTORY> 10,078
<CURRENT-ASSETS> 61,357
<PP&E> 37,696
<DEPRECIATION> 18,617
<TOTAL-ASSETS> 94,817
<CURRENT-LIABILITIES> 41,105
<BONDS> 5,300
0
695
<COMMON> 152
<OTHER-SE> 37,271
<TOTAL-LIABILITY-AND-EQUITY> 94,817
<SALES> 31,141
<TOTAL-REVENUES> 31,172
<CGS> 24,855
<TOTAL-COSTS> 24,855
<OTHER-EXPENSES> 7,175
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 427
<INCOME-PRETAX> (1,270)
<INCOME-TAX> (406)
<INCOME-CONTINUING> (864)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (864)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
<FN>
<F1>Due to the use of condensed financial statements for interim reporting, this
information is not compiled on a quarterly basis.
</FN>
</TABLE>
