Titan's 1995 Annual Report- Selected Financial Data

Selected Financial Data
(In thousands of dollars, except per share data)
1995 1994 1993 1992 1991 __________________________________________________________________________________________________________ Operating Results: Revenues $ 133,967 $ 136,206 $ 149,414 $ 148,762 $ 146,484 Net income (loss) (3,807) 5,953 (7,906) 3,631 3,359 Net income (loss) per common share (.33) .40 (.73) .26 .25 __________________________________________________________________________________________________________ Financial Position: Cash and cash equivalents 5,833 5,129 5,374 4,344 188 Total assets 95,170 81,903 93,214 90,679 75,644 Long-term debt 4,281 765 -- 9,500 10,500 Stockholders' equity 38,639 38,768 29,321 36,016 30,650 Preferred dividends 695 695 695 695 695 __________________________________________________________________________________________________________

Management's Discussion and Analysis of
Results of Operations and Financial Condition
The following should be read in conjunction with the consolidated financial statements and related notes. Dollar amounts are expressed in thousands.)
COMPANY OVERVIEW
Throughout 1995, Titan pursued its strategy of investing in its emerging commercial businesses. Investment dollars were provided primarily by drawing upon the Company's bank line of credit and through internally generated funds. The investments included, among other things, the construction of the Titan Scan medical device sterilization facility in San Diego, California, hardware and software development related to the secure television business and increased selling, marketing and research and development expenditures. Significant accomplishments achieved by Titan's emerging commercial businesses this year included the award of a $10 million fixed price rural telephony development contract in Indonesia, the completion of a $2 million contract in Thailand to integrate a satellite network, delivery of the first products in the secure television business and the sale of a turnkey medical device sterilization system in Austria. These accomplishments marked significant progress for Titan. However, the need to speed up product development and the commercialization process heightened the challenge of internally funding these start-up activities. As such, management continued the process of critically examining Titan's long-term operating and financing strategy.
In response, the Board of Directors adopted a strategy to reshape the Company in order to make it more attractive to external funding sources within the capital marketplace. A formal plan of restructuring was adopted which redefined Titan's businesses into four business segments: Communications Systems, Software Systems, Defense Systems, and Emerging Technologies. As part of this strategy, management has determined that the restructuring would require dispositions of certain of Titan's businesses as well as significant reorganizations of its Software Systems segment and sterilization business, reductions of personnel, and other actions associated with reorganizing the structure of the Company. A charge of approximately $5.4 million was recorded in 1995 to reflect these restructuring activities. Titan's strategic plan now focuses on the pursuit of various financing alternatives including, but not limited to, public and private offerings of minority interests in certain of its subsidiaries and the sale of non-core businesses, in order to provide additional funding for the development and commercialization of new products and services.
The Company is currently involved in a number of start-up ventures, most notably secure television, commercial satellite communications, and medical device sterilization. Certain investments made in these start-up ventures have been capitalized and are included in the balance sheet, primarily within the captions of Property and Equipment and Other Assets which includes capitalized software costs. At December 31, 1995, these capitalized investments aggregate approximately $12.5 million. These start-up ventures are in various growth stages and have not yet generated sufficient revenues to achieve profitability. Management plans to continue to invest, primarily in the Communications Systems segment, while at the same time carefully monitoring its return on investment from all of its start-up ventures. An essential element of the Company's long-term operating plan is the growth associated with its well established Defense Systems segment. This segment offers a variety of opportunities for Titan. Management intends to grow this segment's businesses relying on Titan's proven technological capabilities and reputation for performance. During 1995, achievements in this segment included a $12 million award for low rate initial production for Mini-DAMA satellite communications terminals, a $5.2 million contract with the U.S. Navy for engineering services in the C3I area, and a $2.8 million production order for satellite communication modems to be installed in Motorola's LST-5 tactical radios.
OPERATING RESULTS
The table below sets forth Titan's consolidated revenues, operating profit (loss), net interest expense, provision for income taxes (benefit) and net income (loss) for each of the three years ended December 31, 1995:

1995 1994 1993 _____________________________________________________________________ Revenues $ 133,967 $ 136,206 $ 149,414 Operating profit (loss) (3,955) 9,635 (14,647) Interest expense, net 1,059 632 1,506 Income tax provision (benefit) (1,207) 3,050 (6,547) Net income (loss) (3,807) 5,953 (7,906)

Titan's consolidated revenues were $133,967, $136,206 and $149,414 in 1995, 1994 and 1993, respectively. Excluding revenues from Titan's Applications Group, which was sold in April 1994, Titan's pro forma 1995-1993 revenues were $133,967, $124,293 and $117,714 reflecting a compound annual growth rate of 6.6%. This revenue growth was achieved primarily in the Communications Systems and Software Systems segments, while the Defense Systems segment, excluding the Applications Group, and Emerging Technologies segment revenues were relatively stable over the three year period.
Titan's consolidated operating profit (loss) has been significantly impacted by a number of factors in each of the three years shown above. Combined selling, marketing, and research and development expenses were $12,008, $9,686 and $7,557 in 1995, 1994 and 1993, respectively, reflecting Titan's efforts to expand commercial applications of its technologies and to continue developing certain defense communication technologies. General and administrative expenses decreased from $18,164 in 1994 to $17,434 in 1995 after having been reduced significantly from the 1993 level of $21,930. The decrease in 1994 resulted from specific actions taken to reduce headcount as well as more selective bid and proposal activity primarily in Titan's Defense Systems segment. Restructuring charges were recorded in both 1995 and 1994 reflecting management's efforts to adapt to both internal and external forces impacting Titan's long-term operating strategy. The 1994 charge was offset by a $12,700 pre-tax gain resulting from the sale of Titan's Applications Group. Lastly, in 1993, operating profit was significantly impacted by the recording of an increase in estimated cost at completion of approximately $9,950 on the Company's Mini-DAMA fixed price development contract with the U.S. Navy.
Net interest expense has fluctuated significantly over the three year period ended December 31, 1995. Generally, the principal component of interest expense is the Company's borrowings under its bank line of credit. Borrowings from this source averaged $6,400, $4,180 and $14,200 at weighted average interest rates of 8.8%, 7.6% and 5.5% during 1995, 1994 and 1993, respectively. Also affecting interest expense is interest on the Company's deferred compensation and retiree medical obligations. Interest expense related to these items was $726, $529 and $441 for 1995, 1994, and 1993, respectively. Interest on the deferred compensation obligation will continue to increase as the total obligation increases, while interest on the retiree medical obligation is expected to decrease.
Income taxes reflect a benefit of $1,207 in 1995 or a 24% effective tax rate. The difference between the actual provision and the expected provision (based on the United States statutory tax rates applicable each year) is due to the alternative minimum tax and to permanent differences between financial statement income and taxable income. The provision for taxes in 1994 was $3,050, or a 34% effective tax rate, while the benefit for taxes in 1993 was $6,547 or a 41% effective rate. The differences between the actual effective rate and the expected rate in both these years was largely due to the effects of research credits and operating loss carryforwards. Also with respect to taxes, in 1993 Titan recorded a $1,700 benefit representing the cumulative effect of a change in accounting principal as a result of the Company's adoption of SFAS No. 109 "Accounting for Income Taxes".
BUSINESS SEGMENTS
Communications Systems: The Communications Systems segment contains two business units, both targeting rapidly growing commercial markets. The first business unit, secure television, specializes in providing complete turnkey security for television delivery systems. The second business unit is satellite communications, which develops, manufactures and sells satellite earth station networks and related subsystems.
Revenues in this segment were $7,490, $6,319 and $6,492 in 1995, 1994 and 1993, respectively. The composition of the revenues was significantly different over the three year period. Revenues in 1995 included approximately $2,400 of secure television revenues from the Company's first contract in this business area. There were no secure television revenues in 1994 or 1993. Revenues in the satellite communications business unit were approximately $5,100 in 1995, $6,000 in 1994 and $6,400 in 1993. However, in early 1995, Titan sold its transceiver manufacturing division which was part of this business unit. On a pro forma basis, excluding the sold division, this segment's revenues were approximately $7,000, $2,500 and $1,300 in 1995, 1994 and 1993, respectively. The increase in pro forma revenues from 1994 to 1995 resulted from obtaining and performing on a contract to develop and integrate a satellite communications network in Thailand as well as from the addition of secure television revenues previously mentioned. The change from 1993 to 1994 was primarily due to increased sales of voice digitizing cards.
The segment's operating loss was $4,488 in 1995 compared to $7,927 in 1994 and $7,413 in 1993. The loss in 1995 reflects the start-up nature of this segment's businesses which require significant selling, marketing and research and development activities disproportionate to the level of revenues generated to date. Management intends to continue investing in these businesses and, as a result, expects that significant losses will also be experienced in 1996. The loss in 1994 includes approximately $5,400 of losses and restructuring charges associated with Titan exiting its transceiver manufacturing business which was primarily responsible for this segment's 1993 operating loss.
Software Systems: The Software Systems segment provides custom and semi-custom software development services to assist customers in moving from older mainframe systems to distributed computing systems utilizing client/server software.
Revenues in this segment were $33,175 for 1995, $28,868 in 1994 and $13,713 in 1993. One customer accounted for approximately $24,000 of this segment's revenue in both 1995 and 1994, and $9,700 in 1993. In the second half of 1995, this segment experienced reduced demand from this customer and management expects this trend to continue in 1996. The 1995 revenue increase was generated from new customers. As shown above, the increase from 1993 to 1994 resulted from increased business with the one significant customer.
Segment income margin (segment operating income as a percentage of segment revenues) was 11.5% in 1995 and 21.6% in 1994. The 1995 decrease was principally due to the effect of restructuring charges for severance and other reorganization costs and the impact of reduced sales volume from the one previously mentioned customer. Segment income margin was 6.7% in 1993. The results for 1993 included losses on certain now completed fixed price contracts which significantly lowered overall segment profitability.
Defense Systems: The Defense Systems segment includes two business units, communications and information systems, which provide information systems solutions primarily to U.S. and allied government and defense customers. The defense communications business develops and produces advanced satellite terminals and associated voice/data processing modems. These products are specifically tailored to meet defense requirements, provide highly secure communications and are produced in relatively small amounts. The defense information systems business supports high priority government programs by providing information systems engineering services as well as development and integration of systems and specialized products.
Revenues in this segment were $67,948, $78,780 and $103,071 for 1995, 1994 and 1993, respectively. However, excluding revenues attributable to the Company's Applications Group, pro forma segment revenues were $67,948, $66,867 and $71,371 for 1995, 1994 and 1993, respectively. The decrease from 1993 to 1994 was due to reduced shipments in the Electronics division. Revenues in 1995 and 1994 included approximately $18,300 and $9,700, respectively, for work subcontracted to the buyer of the Applications Group. There was no operating profit associated with these revenues. This contract is expected to conclude in mid-1996. Furthermore, 1995 revenues and operating profit included approximately $1,400 recovered from a termination for convenience claim with the U.S. Government for work performed in prior years.
Segment income margin for 1995 was 6.6%, compared with 6.0% in 1994. In 1993 there was an operating loss of $2,804. Operating results for 1994 include $2,500 of profit resulting from a favorable settlement and from improved contract performance on the Company's Mini-DAMA fixed price development contract. This profit was offset by a charge of approximately $3,200 for restructuring this segment's Electronics division. The loss in 1993 was primarily the result of recording an increase in estimated costs to complete the Company's Mini-DAMA fixed price development contract which was the subject of a contract dispute with the customer, the U.S. Navy.
Emerging Technologies: Emerging Technologies contains a group of mature businesses generally involved in Department of Defense (DoD) funded research and development contracts and start-up commercial businesses, including medical product sterilization services and systems and environmental consulting services. The Company's strategy is to use the research and development activities as a source of additional DoD and commercial products, systems and services.
Revenues in this segment were $25,354, $22,239 and $26,138 in 1995, 1994 and 1993, respectively. Approximately $7,400 of 1995 revenue was generated by the segment's start-up businesses. Substantially all remaining revenue for all periods presented was derived from the various established business lines. This segment's operating profit (loss) has not been material in relation to Titan's consolidated operating results. Generally losses experienced by the start-up operations have offset profits contributed by the segment's other lines of business.
LIQUIDITY AND CAPITAL RESOURCES
During 1995, the Company used cash for increased operating requirements, investing in its emerging businesses which included significant capital expenditures as well as investments in capitalized software costs, and payment of dividends. The operating cash requirements resulted primarily from an increase in accounts receivable and inventories along with payment of certain compensation obligations and funding of restructuring activities. Cash was provided from a variety of sources. The Company utilized $9,200 of its bank line of credit, obtained $4,600 as a result of secured debt financing for the San Diego Scan facility, received $2,325 through a private placement of common stock and $1,835 from the sale of businesses. In January 1996, the Company obtained $1,784 in cash as a result of the replacement of a maturing secured obligation with a new secured financing transaction.
Cash requirements in 1996 are expected to continue to be significant. Cash generation varies from quarter to quarter and in most years the Company has experienced higher cash requirements in the first quarter than in other quarters. Management expects this pattern to continue in the first quarter of 1996. During 1996, the Company expects to invest up to $11 million primarily in the further development of business ventures within the Communications Systems segment. Funding is planned to be from operations, the bank line of credit, and the sale of non-core businesses. Titan's 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. The Company has obtained a waiver from the bank for the 1995 net loss. In order to provide additional funding for further and/or accelerated growth, the Company continues to explore various other financing alternatives. Should the Company be unable to successfully obtain outside financing, the investment in these 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 below.
Entry Into Commercial Business. Prior to 1992, the Company's revenues had been derived principally from business with the Department of Defense and other government agencies. Since that time, the Company has pursued a strategy of using the technology from its defense business to build commercial businesses. This strategy presents both significant opportunities and significant risks for the Company. Many of the Company's commercial businesses, such as secure television, satellite communications and medical sterilization, remain in an early stage. As such, the Company is subject to all the risks inherent in the operation of a start-up venture, including the need to develop and maintain marketing, sales and customer support capabilities, to secure appropriate third party manufacturing arrangements, to respond to the rapid technological advances inherent in these markets and to secure the necessary financing to support these activities. In addition, many of the opportunities in the secure television and satellite communications businesses are large, international projects which require long lead times in the contract process. The Company's efforts to address these risks have required, and will continue to require, significant expenditures and dedicated management time and other resources. There can be no assurance that the Company will be successful in addressing these risks.
Reliance on Major Software Customer. The Company's Software Systems business is substantially dependent on business from a major telecommunications company to develop and support access carrier client/server software applications. Revenues from this customer totalled approximately $24.5 million, $24.3 million and $9.7 million, or 18%, 18% and 7% of total Company revenues in 1995, 1994 and 1993, respectively. In the second half of 1995, the Company experienced reduced demand from this customer and management expects this trend to continue in 1996. The loss of this customer, or a substantial delay or decrease in the amount of its business, could have a material adverse effect on the Company's results of operations and financial condition.
Dependence on Defense Spending. The Company's Defense Systems segment is dependent upon continued funding of U.S. Department of Defense programs. Titan, like other companies doing business with the U.S. Department of Defense, has been affected by declining defense budgets and has experienced increased competition in certain of its defense business areas. The size and scope of any reductions in future defense budgets is uncertain, and management anticipates that competition in most defense-related areas will continue to be intense.