<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
(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: 0-22000
-------------------------
TITAN HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-2289827
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1020 N.E. Loop 410, Suite 700
San Antonio, Texas 78209
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(210) 824-4546
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 periods 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On November 11, 1996 there were outstanding 9,511,779 shares of Common
Stock, $.01 par value of the registrant.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
<PAGE> 3
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market value
(amortized cost: $142,603 and $112,309) . . . . . . . . . . . . . $ 141,758 $ 112,990
Fixed maturities held to maturity, at amortized cost
(market value: $16,095 and $19,982) . . . . . . . . . . . . . . . 16,175 19,871
Equity securities, at market value (cost: $14,747 and $15,489) . . . . . 14,025 14,679
Short-term investments, at cost which approximates market value . . . . 1,032 4,898
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 2,843 11,008
Premium finance contracts . . . . . . . . . . . . . . . . . . . . . . . 21,087 12,858
Mortgage notes receivable . . . . . . . . . . . . . . . . . . . . . . . 16,043 12,281
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,109 5,273
----------- --------------
Total investments . . . . . . . . . . . . . . . . . . . . . 216,072 193,858
Amounts due from reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . 47,909 42,589
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,764 18,942
Deferred income taxes recoverable . . . . . . . . . . . . . . . . . . . . . . 5,955 4,586
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 16,522 11,083
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . 11,897 10,086
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,675 5,174
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,567 20,769
----------- --------------
$ 351,361 $ 307,087
=========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserve for unpaid losses and loss expenses . . . . . . . . . . . . . . $ 141,291 $ 122,811
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . 53,967 45,178
Notes payable and capitalized lease obligations . . . . . . . . . . . . 22,101 12,319
Note payable - premium finance subsidiary . . . . . . . . . . . . . . . 13,250 7,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 12,822 19,295
----------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 243,431 206,603
----------- --------------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares;
no shares issued or outstanding . . . . . . . . . . . . . . . . . - -
Common stock, $.01 par value. Authorized 40,000,000 shares;
issued and outstanding; 1996 - 9,488,068 shares;
1995 - 9,026,511 shares . . . . . . . . . . . . . . . . . . . . . 95 90
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 61,774 54,274
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 46,936 46,137
Net unrealized loss on investments, net of deferred
tax benefit of $471 and $9 . . . . . . . . . . . . . . . . . . (875) (17)
----------- --------------
Total shareholders' equity . . . . . . . . . . . . . . . . . 107,930 100,484
----------- --------------
$ 351,361 $ 307,087
=========== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(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 and other income:
Premiums written . . . . . . . . . . . . . . . . . $ 41,553 $ 33,540 $ 127,609 $ 102,693
Premiums ceded . . . . . . . . . . . . . . . . . . (2,991) (2,819) (7,885) (8,050)
----------- ---------- ----------- ------------
Net premiums written . . . . . . . . . . . . . . 38,562 30,721 119,724 94,643
Decrease (increase) in unearned premiums . . . . . 474 (709) (8,209) (8,348)
----------- ---------- ----------- ------------
Premiums earned . . . . . . . . . . . . . . . . . 39,036 30,012 111,515 86,295
Fee and ceding commission income . . . . . . . . . 2,113 859 5,674 2,531
Net investment income . . . . . . . . . . . . . . 3,221 2,523 9,401 7,169
Net realized gains on sales of investments . . . . 177 232 650 379
----------- ---------- ----------- ------------
Total revenues and other income . . . . . . . 44,547 33,626 127,240 96,374
----------- ---------- ----------- ------------
Expenses:
Losses and loss expenses . . . . . . . . . . . . . 24,331 18,473 70,171 53,895
Agents' commissions . . . . . . . . . . . . . . . 4,939 4,004 13,719 12,107
Other operating expenses . . . . . . . . . . . . . 10,087 7,279 28,330 19,494
----------- ---------- ----------- ------------
Total expenses . . . . . . . . . . . . . . . . 39,357 29,756 112,220 85,496
----------- ---------- ----------- ------------
Income before income tax expense . . . . . . . 5,190 3,870 15,020 10,878
Income tax expense . . . . . . . . . . . . . . . . . 1,666 1,157 4,718 3,292
----------- ---------- ----------- ------------
Net income . . . . . . . . . . . . . . . . . . $ 3,524 $ 2,713 $ 10,302 $ 7,586
=========== ========== =========== ============
Net income per share . . . . . . . . . . . . . . . . $ .37 $ .35 $ 1.07 $ .98
=========== ========== =========== ============
Weighted average shares outstanding . . . . . . . . . 9,624 7,803 9,595 7,761
=========== ========== =========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,302 $ 7,586
Adjustments to reconcile net income to net cash provided by
operating activities:
Receivables (11,142) (12,966)
Deferred income taxes (905) 35
Deferred policy acquisition costs (1,811) (1,125)
Reserve for unpaid losses and loss expenses 18,480 21,774
Unearned premiums 8,789 9,338
Depreciation and amortization 1,142 802
Other (549) 411
------------- -------------
Net cash provided by operating activities 24,306 25,855
------------- -------------
Cash flows from investing activities:
Purchases of investments (116,243) (123,375)
Proceeds from sales and maturities of investments 84,654 79,116
Payable for securities - (2,648)
Business acquired in purchase transaction and
contingent consideration paid, net of cash acquired (6,832) (3,547)
Net assets acquired in purchase transactions (2,053) (4,202)
Purchases of property and equipment (6,646) (3,258)
Other 615 1,127
------------- -------------
Net cash used by investing activities (46,505) (56,787)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings - premium finance subsidiary 6,250 4,000
Proceeds from borrowings 10,000 21,500
Repayments of borrowings (218) (224)
Proceeds from sale of common stock issued for
exercise of options 117 134
Payment of dividends (2,115) (1,535)
------------- -------------
Net cash provided by financing activities 14,034 23,875
------------- -------------
Net decrease in cash and cash equivalents (8,165) (7,057)
Cash and cash equivalents:
Beginning of the period 11,008 9,449
------------- -------------
End of the period $ 2,843 $ 2,392
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Titan Holdings, Inc. and subsidiaries ("the Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. In management's opinion, all adjustments, consisting of normal
recurring adjustments, which are necessary for a fair presentation of financial
position and results of operations have been made. It is recommended that
these condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and notes related thereto included in the
December 31, 1995 Annual Report on Form 10-K. Certain prior period amounts
have been reclassified for comparative purposes.
(2) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period,
calculated on a daily basis. The weighted average shares outstanding include
common stock equivalents relating to dilutive outstanding stock options and
warrants. On May 13, 1996 the Company effected a 5% stock dividend. Prior
year weighted average shares outstanding and per share amounts have been
restated accordingly.
(3) NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
In July 1996, the Company increased the limits of its credit facility from
$45 million to $55 million. The credit facility includes a $10 million
revolving line of credit that can be utilized by the Company for working
capital purposes until June 30, 2000 (none outstanding), a $20 million term
loan available to the Company's insurance subsidiaries to increase underwriting
capacity ($20,000,000 currently outstanding), and a $25 million revolving
credit facility available to the Company's premium finance operations
($13,250,000 outstanding at September 30, 1996). In August 1996, the Company
borrowed the remaining $10,000,000 under the term loan and utilized the
proceeds to increase the statutory surplus of the Company's insurance
subsidiaries. The credit facility bears interest at various interest rate
options and contains certain financial, affirmative and negative covenants. At
September 30, 1996, the Company was in compliance with the covenants stated in
the credit facility with one exception, for which the Company has received a
waiver.
5
<PAGE> 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Titan Holdings, Inc. ("Holdings") operates property and casualty insurance
companies and related service companies. Holdings' two insurance subsidiaries,
Titan Insurance Company and Titan Indemnity Company, provide private passenger
non-standard automobile insurance (as "Titan Auto") in five states. Through
Titan Indemnity Company, the Company provides property and casualty insurance
for small to medium-sized cities, towns, counties and other public entities
nationwide (as "Titan Public Entity"). Through Westchester Premium Acceptance
Corporation, the Company provides premium financing for commercial accounts.
Earnings per share data for the three and nine months ended September 30,
1995 have been restated for the effects of a 5% stock dividend effective May
13, 1996.
RESULTS OF OPERATIONS
Premiums by Line
The following table presents the dollar amount and percentage of total
premiums written, net premiums written and premiums earned, by principal line
of business for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ -----------------------------------
1996 1995 1996 1995
----------------- ----------------- --------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Titan Auto
Premiums written $ 26,940 64.8% $ 20,737 61.8% $ 77,477 60.7% $ 59,692 58.1%
Net premiums written 25,875 67.1% 19,305 62.8% 74,366 62.1% 55,712 58.9%
Premiums earned 24,124 61.8% 17,933 59.8% 67,945 60.9% 49,861 57.8%
Titan Public Entity
Premiums written $ 13,374 32.2% 11,852 35.3% 46,388 36.4% 40,060 39.0%
Net premiums written 11,596 30.1% 10,521 34.2% 42,318 35.3% 36,292 38.3%
Premiums earned 13,820 35.4% 11,114 37.0% 40,472 36.3% 33,125 38.4%
Total (including miscellaneous lines)
Premiums written $ 41,553 33,540 127,609 102,693
Net premiums written 38,562 30,721 119,724 94,643
Premiums earned 39,036 30,012 111,515 86,295
</TABLE>
Premiums Written
For the three months ended September 30, 1996 and 1995:
During the three month period ended September 30, 1996, the Company
experienced continued growth in premium writings. Total premiums written
increased by 24% to $41.6 million over the comparable period of 1995.
6
<PAGE> 8
Titan Auto's operations continued to expand as non-standard automobile
premiums written for the period increased by 30% over the same period of
1995. Titan Auto's Michigan operations increased premium volume over
the same period of 1995 by 17% to $19.2 million due to the Company's
ongoing independent agent marketing efforts. Titan Auto's Arizona
operation, purchased in September 1994, continued its growth, producing
$5.3 million in premiums written for the period, representing an increase
of 24% over the same period of 1995.
During the third quarter of 1996, Titan Auto commenced underwriting
operations in Texas and Colorado, writing approximately $1 million in
premium in each of the two states through its direct response centers.
Titan Auto's Nevada operation, which commenced during the second quarter
of 1996, contributed approximately $0.4 million in written premiums
during the period.
Titan Public Entity experienced 13% growth in premium writings for the
three months ended September 30, 1996, to $13.4 million. The increase
comes principally from states where additional State Managers (field
marketing representatives) have been deployed, increasing market
coverage.
As an enhancement to the Titan Public Entity program, the Company
initiated a program to offer workers' compensation insurance to its
public entity insureds in Pennsylvania. During the three months ended
September 30, 1996, the Company wrote approximately $0.5 million of
workers' compensation premiums in Pennsylvania. The Company plans to
expand the program to other states in the future. The majority of risk
exposure associated with workers' compensation is currently ceded to
Munich American Reinsurance Company.
For the nine months ended September 30, 1996 and 1995:
Total premiums written for the nine months ended September 30, 1996,
$127.6 million, represents a 24% increase over the comparable period of
1995.
Titan Auto's premium volume for the nine month period increased by 30%
over the same period of 1995. Non- standard automobile premiums written
in Michigan increased by 20% to $59.5 million and premiums written in
Arizona increased by 51% to $15.3 million for the period. Titan Auto's
growth in Arizona is attributable in part to a rate increase implemented
in mid-1995 and to the continued success of marketing through Titan's
direct response centers.
Titan Public Entity also contributed to the growth in total premiums
written during the period, writing $46.4 million, or 16% more than was
written during the same period in 1995.
The Company is currently expanding its non-standard automobile insurance
operations in the states in which it operates as well as in additional states.
During the third quarter of 1996, the Company opened five additional direct
response centers in Texas and initiated centralized call center operations in
San Antonio to support all the locations where Titan Auto currently operates.
To further its expansion plan, the Company formed a strategic relationship
with Tri-West Holdings, Inc. ("Tri-West"), an acquiror and developer of
insurance agency operations. Titan Auto will provide consulting services and
the exclusive right to sell the Company's non-standard auto insurance products
for Tri-West owned agencies.
7
<PAGE> 9
Premiums Ceded
Premiums ceded represent the cost of reinsurance purchased by the Company
which generally is a function of the amount of premiums written and the level
of risk transferred to the reinsurer. Premiums ceded as a percent of premiums
written for the three and nine months ended September 30, 1996 were 7.2% and
6.2%, respectively, down from 8.4% and 7.8% for the corresponding periods of
1995. The decreases in reinsurance costs are attributable to a reduction in
the Michigan Catastrophic Claims Association assessment rate in early 1996
together with a reduction in the Titan Public Entity's reinsurance premium rates
due to the Company increasing its net retentions. At the renewal of the public
entity program's casualty reinsurance contract effective January 1, 1996, the
Company increased its net retention from $500,000 to $750,000 per occurrence for
casualty risks, and effective April 1, 1996, the Company increased its net
retention on public entity property risks from $200,000 to $500,000 per
occurrence.
Premiums Earned
Premiums earned are the result of net premiums written, which are recognized
as income on a pro rata basis over the terms of the respective insurance
policies issued. Premiums earned for both the three and nine months ended
September 30, 1996 increased approximately 29%, to $39.0 million and $111.5
million, respectively, compared to the three and nine months ended September
30, 1995. In the three months ended September 30, 1996 versus the same period
in 1995, Titan Auto earned premium increased $6.2 million (35%) to $24.1
million, and Titan Public Entity earned premium increased $2.7 million (24%) to
$13.8 million. For the nine months ended September 30, 1996 Titan Auto
premiums earned increased $18.1 million (36%) to $67.9 million and Titan Public
Entity earned premium increased by $7.3 million (22%) to $40.5 million,
compared to the same periods of a year earlier. Such increases are primarily
attributable to the increases in premiums written and the overall reduction in
premiums ceded referred to above.
Fee and Ceding Commission Income
The non-standard automobile operations generate certain installment billing
fees and policy fees. Ceding commissions received from reinsurers represent
the reimbursement of policy acquisition expenses or profit commissions based on
loss experience. The increase in fee and ceding commission income, compared to
a year ago, of $1.3 million (146%) to $2.1 million for the three months ended
September 30, 1996 and $3.1 million (124%) to $5.7 million for the nine months
ended September 30, 1996 stems primarily from increased policy fee income
associated with the growth of Titan Auto's operations.
Net Investment Income
For the three months ended September 30, 1996, net investment income
increased $698,000 (28%) to $3.2 million versus $2.5 million for the three
months ended September 30, 1995 and increased $2.2 million (31%) to $9.4
million for the nine months ended September 30, 1996 compared to $7.2 million
for the same period a year ago. This increase in the Company's net investment
income is the result of a larger base of invested assets associated with cash
provided by operations and the proceeds of the Company's stock offering in late
1995. At September 30, 1996 the average tax adjusted yield of the investment
portfolio was 6.95% compared to 6.90% at September 30, 1995. The Company
continues to maintain a relatively short average duration of 3.1 years in its
investment portfolio.
Interest income on premium finance contracts increased to $637,000 and $1.7
million, respectively, for the three and nine month periods ended September 30,
1996 versus $390,000 and $1.1 million for the respective three and nine month
periods ended September 30, 1995. Total premiums financed during the nine
months ended September 30, 1996 of $36.7 million represents an increase of 62%
over the amount financed during the first nine months of 1995. This growth in
the premium finance program is attributed to successful increased marketing
efforts and expansion into new territories.
8
<PAGE> 10
Combined Ratios
The following table sets forth the Company's combined ratio and the
components thereof under generally accepted accounting principles ("GAAP") and
statutory accounting principles ("SAP") for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
GAAP
Loss 62.4 % 61.6 % 62.9 % 62.4 %
Expense* 28.9 31.2 28.7 30.9
---- ---- ---- ----
Combined 91.3 % 92.8 % 91.6 % 93.3 %
==== ==== ==== ====
SAP
Loss 62.4 % 61.2 % 62.9 % 63.0 %
Expense* 29.7 30.7 28.2 29.3
---- ---- ---- ----
Combined 92.1 % 91.9 % 91.1 % 92.3 %
==== ==== ==== ====
</TABLE>
* 1995 Restated to exclude amortization of intangible assets.
For the periods presented, the Company's overall combined ratios have
remained fairly consistent, on both a statutory and GAAP basis, at between
91.1% and 93.3%.
The Company's overall loss ratio for the three months ended September 30,
1996 increased slightly to 62.4%. An increase in the non-standard auto loss
ratio (63.0% in 1996 versus 57.9% in 1995), was mitigated by an improvement in
the public entity loss ratio (57.4% in 1996 versus 63.7% in 1995). Titan Auto's
increased loss ratio in the third quarter of 1996 was primarily attributable to
the growth of business outside of Michigan, which is underwritten at a higher
loss ratio. However, the Company's approach in these states, which includes
certain fee income, allows it to operate at a lower expense ratio relative to
its Michigan business. The improvement in the public entity loss ratio for the
three months ended September 30, 1996 relates to reductions in both frequency
and severity of losses compared to 1995.
For the nine months ended September 30, 1996 the Company's overall loss
ratios remained stable, relative to the same period in 1995, at approximately
63%. Titan Auto's loss ratio for the current period decreased to 59.0% versus
61.2% in 1995, derived from favorable loss experience in the first half of
1996. Public entity's loss ratio for the nine months ended September 30, 1996
increased to 66.6% compared to 62.5% for the comparable period of a year ago
due to adverse development on prior years, experienced in the first half of
1996, as well as property damage losses incurred in the first quarter of 1996
associated with severe winter storms in the Northeast.
Included in the Company's loss ratio for the nine months ended September
30, 1996 are incurred losses of approximately $975,000 related to the surety
line of business which was discontinued early in 1995 and for which there was
no earned premium in 1996.
The Company's statutory expense ratios for both the three and nine months
ended September 30, 1996, compared to the same period of 1995, decreased by
roughly one percentage point due to economies of scale associated with
increased premium volume,together with an increasing proportion of Titan Auto
business written outside the state of Michigan at a lower expense ratio.
9
<PAGE> 11
Agents' Commissions
Commissions paid to independent insurance agents still represent the
Company's most significant policy acquisition cost. For the three and nine
months ended September 30, 1996, agent's commissions were 12.6% and 12.3% of
premiums earned, respectively, versus 13.3% and 14.0% of premiums earned,
respectively, for the comparable periods of 1995. Such decrease is primarily
attributable to the growth of the Company's non-standard automobile direct
response centers which represented 28% and 24% of Titan Auto premium volume for
the three and nine months of 1996 versus 23% and 19% for the same periods last
year.
Other Lines
During the three months ended September 30, 1996, the Company's program to
offer personal lines automobile insurance to educators in the State of
Minnesota wrote approximately $1.2 million in premiums, compared to $800,000
during the same period of 1995. Premiums written for the nine months ended
September 30, 1996 totaled $3.6 million, up from $2.2 million for the first
nine months of 1995. The results of this program were not significant to the
Company's operations.
Amortization of Intangible Assets
In connection with its acquisitions of non-standard automobile insurance
operations, the Company has capitalized intangible assets to be amortized in
future periods. For the three and nine months ended September 30, 1996,
$504,000 and $1.5 million, respectively, of such costs were amortized compared
to $281,000 and $700,000, respectively, which were amortized during the three
and nine month periods ended September 30, 1995. The increase in 1996 compared
to 1995 is attributable to the Company's purchases of non-standard automobile
insurance distribution systems in 1996 and 1995.
Net Income
Net income for the three months ended September 30, 1996 increased $811,000
(30%) to $3.5 million from $2.7 million and net income for the nine months
ended September 30, 1996 increased $2.7 million (36%) to $10.3 million, versus
$7.6 million for the same period a year ago.
Net income per share was $.37 for the three months ended September 30,
1996, up from $.35 per share for the three months ended September 30, 1995.
For the nine months ended September 30, 1996, earnings per share were $1.07, up
from $.98 for the first nine months of 1995. These 1996 increases in earnings
per share are based on 23% and 24% increases in weighted average shares
outstanding over the respective three and nine month periods of 1995, due to
the Company's stock offering completed in November 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries receive substantial cash from premiums
and, to a lesser extent, investment income. The principal cash outflows are
for the payment of claims, reinsurance premiums, policy acquisition costs and
other operating expenses. Holdings' principal source of cash is dividends from
its insurance subsidiaries.
Net cash provided by operating activities was $24.3 million for the nine
months ended September 30, 1996, compared with $25.8 million for the same
period in 1995. This decrease of $1.5 million is primarily attributable to an
elevated level of losses paid during the first nine months of 1996 as compared
to the first nine months of 1995.
The Company's liquidity depends largely on its investment portfolio. At
September 30, 1996, cash and cash equivalents and short-term investments
comprised 2% of total investments, and fixed maturities, excluding
collateralized mortgage obligations, comprised 70% of total investments.
10
<PAGE> 12
For the nine months ended September 30, 1996, the net unrealized loss on
investments increased $858,000 from $17,000 at December 31, 1995 to $875,000 at
September 30, 1996 as interest rates rose. Although a significant portion of
the Company's investment portfolio is considered to be available for sale,
management does not have any present intention to liquidate the fixed maturity
portfolio prior to maturity. At September 30, 1996, the Company maintained
cash and cash equivalents of $2.8 million to meet payment obligations.
Cash used by investing activities during the first nine months of 1996
include the Company's purchase of the assets of non-standard automobile
insurance distribution systems in Texas and Nevada for approximately $2.0
million. Also, Titan Indemnity Company expended approximately $2.4 million
on capital improvements to its home office facilities in San Antonio, Texas
during the nine months ended September 30, 1996. Future capital improvements
to the building and adjacent retail center are not expected to be material to
the working capital of Titan Indemnity Company. A portion of these facilities
are utilized by the Company and the remainder is leased.
In July 1996, the Company and Westchester Premium Acceptance Corporation
renegotiated the existing credit facility, at substantially the same terms, with
Dresdner Bank AG as agent which includes: a $10 million revolving credit
facility which can be utilized until June 30, 2000 for working capital purposes
by the Company (no borrowings currently outstanding), a $20 million term loan
($20 million currently outstanding), and a $25 million revolving credit facility
which can be utilized until August 7, 1997 by Westchester Premium Acceptance
Corporation ($13,250,000 outstanding at September 30, 1996 and $15,750,000
outstanding at November 11, 1996). In August 1996, the Company borrowed the
remaining $10 million available under the term loan to increase the statutory
surplus of the insurance subsidiaries.
The Company's insurance subsidiaries are subject to state insurance laws
that restrict their ability to pay dividends. In 1996, Holdings could have
received up to $5.9 million in dividends from Titan Indemnity Company without
prior regulatory approval. Based upon the current working capital of Holdings
and its $10 million revolving credit facility, Holdings currently does not
anticipate that any payment of dividends in 1996 from the insurance subsidiaries
will be necessary to meet its current liquidity requirements, including its
obligations under the credit facility and to pay any declared dividends to its
shareholders. The Company anticipates that dividends from the insurance
subsidiaries and the availability of the $10 million revolving line of credit
will be sufficient for 1997 liquidity requirements.
11
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company has been told to expect a claim to be filed by the Liquidator
of the estate of Millers National Insurance Company. The dispute arises out of
a 1992 stock purchase agreement under which the Company purchased 773,734
shares (restated for a stock split and a stock dividend) of its own Common
Stock, then held by the Liquidator, from the Liquidator for $3.7 million. The
Liquidator has stated his position to be that the Company intended to make a
public offering of its Common Stock and misled the Liquidator into thinking
that no such offer was under consideration, and that if the Liquidator knew
that a public offering was intended, the Liquidator would have negotiated a
more favorable selling price for the Common Stock in question. The Company has
denied this claim and intends to defend any such proceeding vigorously.
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.3 - Financial Data Schedule - September 30, 1996
(b) During the quarter ended September 30, 1996, there were no current
reports on Form 8-K filed.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITAN HOLDINGS, INC.
(Registrant)
Date November 11, 1996 By: /s/ MARK E. WATSON, JR.
---------------------------------
Mark E. Watson, Jr.
President
Chief Executive Officer
Date November 11, 1996 By: /s/ MICHAEL W. GRANDSTAFF
---------------------------------
Michael W. Grandstaff
Senior Vice President
Chief Financial Officer
13
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 141,758
<DEBT-CARRYING-VALUE> 16,175
<DEBT-MARKET-VALUE> 16,095
<EQUITIES> 14,025
<MORTGAGE> 16,043
<REAL-ESTATE> 0
<TOTAL-INVEST> 216,072
<CASH> 2,843
<RECOVER-REINSURE> 1,735
<DEFERRED-ACQUISITION> 11,897
<TOTAL-ASSETS> 351,361
<POLICY-LOSSES> 141,291
<UNEARNED-PREMIUMS> 53,967
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 35,351
0
0
<COMMON> 95
<OTHER-SE> 107,835
<TOTAL-LIABILITY-AND-EQUITY> 351,361
127,609
<INVESTMENT-INCOME> 9,401
<INVESTMENT-GAINS> 650
<OTHER-INCOME> 0
<BENEFITS> 70,171
<UNDERWRITING-AMORTIZATION> 42,049
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 15,020
<INCOME-TAX> 4,718
<INCOME-CONTINUING> 10,302
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,302
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
