<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 September 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 November
8, 1996, was 16,168,194.
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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 Nine months ended
September 30, September 30,
----------------------- ------------------------
1996 1995 1996 1995
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues.................................. $ 34,854 $ 34,983 $ 95,188 $ 99,455
------ ------ ------ ------
Costs and Expenses:
Cost of revenues....................... 28,965 27,637 75,931 74,423
Selling, general and administrative
expense............................. 6,923 5,723 19,142 17,544
Research and development expense....... 1,343 1,299 3,722 4,774
Other income, net...................... -- (773) -- (773)
------ ------ ------ ------
Total costs and expenses............ 37,231 33,886 98,795 95,968
------ ------ ------ ------
Operating profit (loss)................... (2,377) 1,097 (3,607) 3,487
Interest expense.......................... (745) (371) (1,902) (840)
Interest income........................... 46 4 64 47
------ ------ ------ ------
Income (loss) before income taxes......... (3,076) 730 (5,445) 2,694
Income tax provision (benefit)............ (1,107) 260 (1,865) 970
------ ------ ------ ------
Net income (loss)......................... (1,969) 470 (3,580) 1,724
Dividend requirements on preferred
stock................................. 219 174 585 521
------ ------ ------ ------
Net income (loss) applicable
to common stock....................... $(2,188) $ 296 $(4,165) $1,203
------ ------ ------ ------
------ ------ ------ ------
Average common shares outstanding......... 16,107 14,214 14,981 13,962
------ ------ ------ ------
------ ------ ------ ------
Net income (loss) per average
common share.......................... $ (.14) $ .02 $ (.28) $ .09
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
September 30, December 31,
1996 1995
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents.......................$ 3,145 $ 5,833
Accounts receivable - net....................... 40,767 39,360
Inventories..................................... 12,489 10,399
Prepaid expenses and other...................... 2,437 2,872
Deferred income taxes........................... 5,864 4,809
------- -------
Total current assets......................... 64,702 63,273
Property and equipment - net....................... 20,163 18,295
Goodwill - net..................................... 22,693 3,550
Other assets....................................... 11,113 10,052
------- -------
Total assets $118,671 $ 95,170
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................$ 9,453 $ 10,184
Lines of credit................................. 22,949 9,200
Note payable to shareholder..................... 1,000 --
Income taxes payable............................ 653 --
Accrued compensation and benefits............... 7,444 9,192
Other accrued liabilities....................... 9,770 13,803
Current portion of long-term debt............... 1,020 1,019
------- -------
Total current liabilities.................... 52,289 43,398
------- -------
Long-term debt..................................... 5,872 4,281
Other non-current liabilities...................... 10,073 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:
17,132,616 and 15,087,087.................... 171 151
Capital in excess of par value.................. 43,529 31,148
Retained earnings............................... 6,004 10,169
Treasury stock (964,768 and 1,161,147 shares),
at cost...................................... (2,962) (3,524)
------- -------
Total stockholders' equity................ 47,437 38,639
------- -------
Total liabilities and stockholders' equity $118,671 $ 95,170
------- -------
------- -------
The accompanying notes are an integral part of these
consolidated financial statements.
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THE TITAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
Nine months ended
September 30,
----------------------
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................$ (3,580) $ 1,724
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Other income................................... -- (773)
Depreciation and amortization.................. 4,220 3,013
Deferred income taxes and other................ (1,690) 663
Changes in assets and liabilities, net of
effects from businesses sold and acquired:
Accounts receivable......................... 10,030 (3,180)
Inventories................................. (4,793) (820)
Prepaid expenses and other assets........... (190) 2,003
Accounts payable............................ (2,378) 793
Accrued compensation and benefits........... (3,659) (2,707)
Restructuring activities.................... (3,817) --
Other liabilities........................... (1,909) (7,603)
------ ------
Net cash used for operating activities............... (7,766) (6,887)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................. (4,330) (6,684)
Capitalized software costs........................... (2,008) (804)
Payment for purchase of businesses, net
of cash acquired.................................. (1,000) --
Proceeds, net of transaction costs, from sale
of businesses..................................... 2,492 252
Other................................................ 245 (874)
------ ------
Net cash used for investing activities............... (4,601) (8,110)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reductions of debt................................... (3,436) (411)
Additions to debt.................................... 13,356 10,400
Dividends paid....................................... (585) (521)
Proceeds from stock issuances........................ 344 3,077
------ ------
Net cash provided by financing activities............ 9,679 12,545
------ ------
Net decrease in cash and cash equivalents............ (2,688) (2,452)
Cash and cash equivalents at beginning of period..... 5,833 5,129
------ ------
Cash and cash equivalents at end of period........... $ 3,145 $ 2,677
------ ------
------ ------
The accompanying notes are an integral part of these
consolidated financial statements.
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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
-------- ------ --------- -------- --------- ------
<S> <C> <C> <S> <C> <C> <C>
Nine months ended September 30, 1996
- ------------------------------------
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 1 405 (62) 344
Shares contributed to employee
benefit plans 466 624 1,090
Dividends on preferred stock -
Cumulative Convertible,
$.75 per share (521) (521)
Series B, 6% annual (64) (64)
Net loss (3,580) (3,580)
----- ------ ------- ------- ------- -------
Balances at September 30, 1996 $ 695 $ 171 $ 43,529 $ 6,004 $ (2,962) $ 47,437
----- ------ ------- ------- ------- -------
----- ------ ------- ------- ------- -------
Nine months ended September 30, 1995
- ------------------------------------
Balances at December 31, 1994 $ 695 $ 146 $ 27,860 $ 14,671 $ (4,604) $ 38,768
Stock issuance 1,413 912 2,325
Exercise of stock options and
other 4 1,136 (388) 752
Shares contributed to employee
benefit plans 458 458
Dividends on preferred stock -
$.75 per share (521) (521)
Net income 1,724 1,724
----- ------ ------- ------- ------- -------
Balances at September 30, 1995 $ 695 $ 150 $ 30,409 $ 15,874 $ (3,622) $ 43,506
----- ------ ------- ------- ------- -------
----- ------ ------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
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THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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. Estimated other direct costs approximate $3 million. The $1 million 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 transactions
would be recorded as adjustments to the purchase price. The excess of the
purchase price over the estimated fair value of net assets acquired of $19.6
million at September 30, 1996 is being amortized using a straight-line method
over 30 years.
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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 Nine Months Ended
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
-------- ------ ------- --------
Revenues $ 34,854 $ 48,304 $ 119,524 $ 135,547
Net income (loss) (1,969) (189) (5,275) 1,836
Net income (loss)
per share $ (.14) $ (.03) $ (.37) $ (.07)
The proforma net loss for the nine months ended September 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 September 30, 1996 and December 31, 1995, the Company had debt outstanding of
$20,055 and $9,200, respectively, under a bank line of credit. The Company also
had commitments under letters of credit at September 30, 1996 of $656 which
reduced availability under the line of credit. In September 1996, the Company
entered into an amendment to the line of credit which increased the maximum
borrowing availability from $17,000 to $22,000. Pursuant to the amendment, the
availability under this line decreased to $14,000 upon the receipt of the
proceeds of the Company's convertible subordinated debt offering in November
1996 (See Note 6 - Subsequent Event). Also under the amendment, the Company and
its wholly owned subsidiary, Titan Information Systems Corporation ("TIS"),
granted the bank a security interest in substantially all of their non-real
property assets, including accounts receivable, inventory, equipment and
patents, and the Company pledged the stock of TIS, Eldyne and Unidyne to the
bank. The amendment also deleted or revised certain financial covenants. The
amended line of credit does, however, contain financial covenants which require
the Company to maintain stipulated levels of net worth, a specified ratio of
total liabilities to tangible net worth and a specified quick ratio. The
Company was in compliance with these covenants as of September 30, 1996.
In connection with the acquisition of Eldyne, Unidyne, and DCS, the Company's
Eldyne and Unidyne subsidiaries assumed and renegotiated a separate credit
agreement with Crestar Bank which provides for a working capital line of credit
facility, a mortgage note and an equipment note. At September 30, 1996, $2,894
was outstanding under the line of credit at a rate of 8.23%. 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 certain unbilled government and commercial
receivables. The line of credit 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 line of credit also requires that
borrowings be used only for Eldyne and Unidyne, and prohibits these entities and
DCS from transferring funds to the Company. The mortgage note of $1,256 and the
equipment note of $137 at September 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.
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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. Eldyne and Unidyne entered
into an amendment with Crestar Bank in September 1996 which revised certain of
these financial covenants. Eldyne and Unidyne were in compliance with these
covenants as of September 30, 1996.
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 for, 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 nine months of 1996,
charges against restructuring reserves for severance were $991, related to 83
employees terminated throughout the Company, and other charges to the reserves,
primarily related to the exiting of businesses, were $2,836. These other
charges reflect the sale on July 26, 1996 of the Company's Electronics division,
which was part of the Defense Systems segment. At September 30, 1996,
approximately $1,140 of the initial restructuring accrual remained in other
accrued liabilities. This remaining balance was comprised of approximately $75
for further reductions in personnel and approximately $1,065 for costs
associated with the exiting of businesses and the termination of certain
agreements. The group of businesses planned to be exited in the restructuring
plan had revenues of $2,312 and $3,926 and an operating loss of $349 and $709
for the three months and revenues of $11,568 and $10,461 and operating profit of
$1,549 and an operating loss of $923 for the nine months ended September 30,
1996 and 1995, respectively.
NOTE (6) SUBSEQUENT EVENT
In November 1996, the Company issued $34,500 of 8.25% convertible subordinated
debentures due 2003. The debentures are convertible into common stock of the
Company at a conversion price of $3.50 per share, subject to adjustment upon the
occurrence of certain events. The debentures are redeemable, on or after
November 2, 1999, initially at 104.125% of principal amount and at decreasing
prices thereafter to 100% of principal amount through maturity, in each case
together with accrued interest. The debentures also may be repaid at the option
of
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the holder upon a change in control, as defined in the indenture governing the
debentures, at 100% plus accrued interest. The net proceeds of the offering
will be used to repay borrowings under the Company's bank lines of credit and
for working capital and general corporate purposes.
NOTE (7) OTHER FINANCIAL DATA
September 30, December 31,
1996 1995
------------- -------------
Inventories:
Materials $ 3,103 $ 3,152
Work-in-process 7,840 4,159
Finished goods 1,546 3,088
------- -------
$ 12,489 $ 10,399
------- -------
------- -------
Supplemental disclosure of cash payments (receipts) is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
-------- ----- -------- -----
Interest $ 471 $ 205 $ 1,475 $ 412
Income taxes (926) 29 (1,067) (775)
During the nine month periods ended September 30, 1996 and 1995, the Company
utilized treasury stock of $1,090 and $458, respectively, for benefit plan
contributions.
The following tables summarize revenues and operating profit (loss) by industry
segment for the three months and nine months ended September 30, 1996 and 1995:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
------ ------- ------ ---------
Revenues:
Communications Systems $ 895 $ 1,698 $ 2,736 $ 5,774
Software Systems 3,306 7,732 13,986 26,060
Defense Systems 25,229 18,665 62,169 49,037
Emerging Technologies 5,424 6,888 16,297 18,584
------- ------- ------- -------
$ 34,854 $ 34,983 $95,188 $99,455
------- ------- ------- -------
------- ------- ------- -------
Operating Profit (Loss):
Communications Systems $ (2,373) $ (1,215) $(6,665) $(4,049)
Software Systems (478) 716 (344) 5,788
Defense Systems 1,656 1,078 6,383 3,439
Emerging Technologies 211 326 (56) 608
------- ------- ------- -------
Segment operating profit
(loss) before
Corporate (984) 905 (682) 5,786
Corporate (1,393) 192 (2,925) (2,299)
------- ------- ------- -------
$ (2,377) $ 1,097 $(3,607) $ 3,487
------- ------- ------- -------
------- ------- ------- -------
Page 9
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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 third quarter of 1996 were $34,854, down slightly from revenues
of $34,983 in the third quarter of 1995. Revenues for the nine months ended
September 30 were $95,188 and $99,455 in 1996 and 1995, respectively. In both
the third quarter and nine months ended September 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 $1,969 and
$3,580 for the third quarter and nine months of 1996 compared to net income of
$470 and $1,724 for the third quarter and nine 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 commercial software business and, with respect to the nine months
ended September 30, 1996, additional costs associated with the negotiated
conclusion of certain programs with a major customer in the Software Systems
segment, partially offset by increased profits in the Defense Systems segment
resulting from the impact of the acquired businesses of Eldyne, Unidyne, and
DCS.
Selling, general and administrative expense ("SG&A") increased in the third
quarter and nine months of 1996 compared to the same periods in 1995. In both
comparative periods, increased sales and marketing costs in the Company's
commercial broadband communications business and increased administrative costs
resulting from the acquired businesses were partially offset by decreased
administrative costs resulting from restructuring activities, primarily in the
Software Systems business. Research and development costs (R&D) increased
overall from $1,299 in the third quarter of 1995 to $1,343 for the same period
in 1996, and decreased from $4,774 for the nine months of 1995 to $3,722 for the
same period in 1996. For the third quarter of 1996, increased R&D efforts in
the Defense Systems segment related to the development of certain compact
terminals and miniaturized satellite modems were partially offset by decreased
R&D expenditures in the Communications Systems segment. For the nine months of
1996, the decline in R&D expenditures in the Defense Systems and Emerging
Technologies segments resulted in the overall decreased R&D costs.
Net interest expense increased $332 and $1,045 in the third quarter and nine
months ended September 30, 1996 compared to the same periods in 1995, due to
increased borrowings 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 $12,248 and $5,703 at weighted average interest rates of 8.03% and
8.31% in the nine months ended September 30, 1996 and 1995, respectively.
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The income tax benefit reflects a 36% and 34% effective rate in the third
quarter and nine months of 1996, respectively, compared to a 36% effective rate
provision in the third quarter and nine months of 1995. These effective rates
approximate the expected combined federal and state statutory rates, less
expected credits, primarily R&D credits.
Business Segments:
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995:
Revenues in the Communications Systems segment decreased $803 from $1,698 in the
third quarter of 1995 to $895 in the third 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
broadband communications business area and delays in follow-on orders. The
Company made the first shipment on its $9.6 million rural telephony contract in
the second quarter of 1996 and the first shipment on its $2.7 million contract
in the broadband communications business area in the third quarter of 1996. The
operating loss for this segment increased from $1,215 in the third quarter of
1995 to $2,373 in the third 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 $4,426 from $7,732 in the third
quarter of 1995 to $3,306 in the third quarter of 1996, primarily due to a
reduction of revenues of $3,613 from a major telecommunications customer, which
was, however, partially offset by growth of $927 in other custom software
business. The reduction of operating income of $1,194 from operating income of
$716 in the third quarter of 1995 to a loss of $478 in the third quarter of 1996
was principally due to the impact of the loss of historically high-margin
business and the absence of corresponding decreases in SG&A costs.
In the Defense Systems segment, revenues grew $6,564, from $18,665 in the third
quarter of 1995 to $25,229 in the third quarter of 1996. Increased revenues
generated from the acquired businesses of Eldyne, Unidyne and DCS of $13,485
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), certain changes in contract estimates, and the impact of the sale of the
Electronics division in July 1996. Operating income in the segment increased
$578, from $1,078 in the third quarter of 1995 to $1,656 in the third quarter of
1996. This increase is primarily due to operating income generated from the
acquired businesses, partially offset by reduced operating income resulting from
reduced revenues.
In the Emerging Technologies segment, revenues decreased $1,464 from $6,888 in
the third quarter of 1995 to $5,424 in the third quarter of 1996, due primarily
to the completion of certain pulsed power systems business contracts with the
French government, and reduced revenues in the government funded R&D business
resulting primarily from the impact of the sale of the shaped-charge munitions
business in September 1995. Segment operating income decreased $115 from $326 in
the third quarter of 1995 to $211 in the third quarter of 1996. The increased
R&D efforts and SG&A costs associated with start-up businesses were the primary
reason for the decline in operating income.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995:
The revenues for the Communications Systems segment decreased $3,038 from $5,774
in the nine months ended September 30, 1995 to $2,736 in the nine months ended
September 30, 1996, due to the completion of the initial order in the broadband
communications business area and the satellite communications contract in
Thailand. Segment operating loss increased from $4,049 in the nine months ended
September 30, 1995 to $6,665 in the nine months ended September 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 $12,074 from $26,060 in the nine
months ended September 30, 1995 to $13,986 in the nine months ended September
30, 1996, principally due to a reduction of revenues of $14,352 from a major
telecommunications customer, partially offset by growth of $2,989 in other
custom software business. Operating income decreased $6,132 from operating
income of $5,788 in the nine months ended September 30, 1995 to a loss of $344
in the nine months ended September 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 $13,132 from $49,037 in the nine months ended
September 30, 1995 to $62,169 in the nine months ended September 30, 1996.
Increased revenues from the acquisition of Eldyne, Unidyne and DCS of $18,189,
and increased 1996 revenues related to the Mini-DAMA satellite terminal
production contract were partially offset by decreased revenues from the
subcontract to the buyer of the Applications Group as noted above. Segment
operating income increased $2,944 from $3,439 in the nine months ended September
30, 1995 to $6,383 in the nine months ended September 30, 1996. This increase
was due primarily to the increased operating income of $1,594 generated from the
acquired businesses, impact of the non-recurring credits recorded as a result of
favorable developments with certain government audit agencies, as well as
changes in the allowances on the carrying value of certain assets being disposed
of.
The Emerging Technologies segment revenues decreased $2,287 from $18,584 in the
nine months ended September 30, 1995 to $16,297 in the nine months ended
September 30, 1996, due to decreased revenues in the government funded R&D and
pulsed power systems businesses, offset by growth in the environmental business.
Segment operating income decreased $664 from operating income of $608 in the
nine months ended September 30, 1995 to a loss of $56 in the nine months ended
September 30, 1996, principally due to the reduced sales volume and due to
increased R&D efforts and SG&A costs associated with start-up businesses.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, Titan used $7,766 cash for
operating requirements. In addition to funding the net loss, other significant
cash uses included an increase in inventories of $4,793 related principally to
government satellite communications and commercial rural telephony products,
funding requirements for certain accrued compensation obligations of $3,659 and
funding of $3,817 of
Page 12
<PAGE>
restructuring activities. Cash was provided primarily by collection of certain
large receivables in the Defense Systems segment and by borrowings under the
Company's line of credit, the refinancing of the Company's Denver Scan facility,
and the sale of the Company's Electronics Division, which provided $10,055,
$1,773 and $2,492, respectively.
Borrowings under the Company's bank line of credit have been a principal source
of funding the Company's operating requirements. As of September 30, 1996 the
Company had debt outstanding of $20,055 under a $22,000 line of credit. In
addition, the Company had commitments under letters of credit at September 30,
1996 of $656, which reduced availability under the line of credit to $1,289. In
September 1996, the Company entered into an amendment to the line of credit
agreement which increased the maximum borrowing availability from $17,000 to
$22,000. The borrowing availability decreased, however, to $14,000 upon the
completion of the issuance of the subordinated debt discussed below. Under the
September 1996 amendment, Titan and its wholly-owned subsidiary, TIS, granted
the bank a security interest in substantially all of their non-real property
assets, including accounts receivable, inventory, equipment and patents. The
amended line of credit agreement contains financial covenants which require the
Company to maintain stipulated levels of net worth, a specified ratio of total
liabilities to tangible net worth and a specified quick ratio. The Company was
in compliance with these covenants as of September 30, 1996. The maturity date
of the line of credit is May 30, 1997.
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 certain unbilled government and
commercial receivables. The line of credit is secured by substantially all of
the assets of Eldyne, Unidyne and DCS. At September 30, 1996, $2,894 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. Eldyne and
Unidyne entered into an amendment with Crestar Bank in September 1996 which
revised certain of these financial covenants. Eldyne and Unidyne were in
compliance with these covenants as of September 30, 1996. The Company has
guaranteed up to $2.5 million of indebtedness under this line of credit. The
maturity date of the line of credit is December 31, 1996. The Company intends
to renegotiate this line of credit with Crestar and/or other banks.
In November 1996, the Company issued $34,500 of 8.25% convertible subordinated
debentures due 2003. The net proceeds of approximately $32,400 were used to
repay the borrowings under the Company's revolving lines of credit. The Company
intends to use the remaining proceeds to fund working capital requirements and
other general purposes, including possible acquisitions and joint ventures.
As of Novemer 12, 1996, the Company had available cash of $6,201, which includes
the remaining net proceeds from the subordinated debt offering, and remaining
availability of $12,725 on the Company's bank line of credit. However, cash
requirements for the remainder of 1996
Page 13
<PAGE>
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 number of alternatives that include continued working capital
management, utilization of the availability under the Company's 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.
Page 14
<PAGE>
THE TITAN CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) 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. In July 1996, the
judge vacated the jury verdict and granted the Company's motions for a new
trial. The retrial date has been set for November 25, 1996. 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.
(b) 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 filed a motion for a
new trial as to her fraud claim and this motion was denied. The time period
during which the plaintiff may file an appeal has expired.
(c) 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 of compensatory damages and $350,000 in punitive
damages. The Company has filed an appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)(27) Financial Data Schedule
Page 15
<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: November 14, 1996
THE TITAN CORPORATION
/S/ BERNARD M. HIRL
---------------------------------
By: Bernard M. Hirl
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted form the
financial statements of The Titan Corporation's Quarterly Report on Form 10-Q
for the nine months ended September 30, 1996, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 3,145
<SECURITIES> 0
<RECEIVABLES> 40,767
<ALLOWANCES> 0
<INVENTORY> 12,489
<CURRENT-ASSETS> 64,702
<PP&E> 42,190
<DEPRECIATION> 22,027
<TOTAL-ASSETS> 118,671
<CURRENT-LIABILITIES> 52,289
<BONDS> 5,872
0
3,695
<COMMON> 171
<OTHER-SE> 46,571
<TOTAL-LIABILITY-AND-EQUITY> 118,671
<SALES> 95,025
<TOTAL-REVENUES> 95,188
<CGS> 75,931
<TOTAL-COSTS> 75,931
<OTHER-EXPENSES> 22,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,902
<INCOME-PRETAX> (5,445)
<INCOME-TAX> (1,865)
<INCOME-CONTINUING> (3,580)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,580)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
