<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, 1997
-------------------------------------------------
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
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TITAN HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Texas 74-2289827
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2700 N.E. Loop 410, Suite 500
San Antonio, Texas 78217
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(Address of principal executive offices)
(Zip Code)
(210)527-2700
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(Registrant's telephone number, including area code)
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(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 12, 1997 there were outstanding 10,074,984 shares of Common
Stock, $.01 par value of the registrant.
<PAGE> 2
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS
Page
----
<S> <C>
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
</TABLE>
<PAGE> 3
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities available for sale, at market value
(amortized cost: $163,606 and $145,990) .................... $ 163,955 $ 145,531
Fixed maturities held to maturity, at amortized cost
(market value: $8,062 and $16,104) ......................... 8,017 16,114
Equity securities, at market value (cost: $14,106 and $17,088) ... 14,171 16,479
Short-term investments, at cost which approximates market value .. 270 270
Cash and cash equivalents ........................................ 6,585 3,682
Premium finance contracts ........................................ 46,159 23,469
Mortgage notes receivable ........................................ 18,444 15,935
Other invested assets ............................................ 2,376 3,313
--------- ---------
Total investments ................................... 259,977 224,793
Amounts due from reinsurers ........................................... 53,765 47,393
Receivables ........................................................... 38,346 26,765
Deferred tax assets, net .............................................. 4,162 4,427
Property and equipment, net ........................................... 22,702 18,852
Deferred policy acquisition costs ..................................... 15,053 12,498
Other assets .......................................................... 8,140 6,032
Goodwill and non-competition agreements ............................... 22,761 21,195
--------- ---------
$ 424,906 $ 361,955
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserve for unpaid losses and loss expenses ...................... $ 161,975 $ 141,871
Unearned premiums ................................................ 67,432 55,333
Notes payable and capitalized lease obligations .................. 24,849 24,024
Notes payable - premium finance subsidiary ....................... 32,721 15,750
Other liabilities ................................................ 16,542 13,109
--------- ---------
Total liabilities ................................... 303,519 250,087
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 5,000 shares;
no shares issued or outstanding .......................... -- --
Common stock, $.01 par value. Authorized 40,000 shares; issued and
outstanding; 1997 - 10,074 shares; 1996 - 9,521 shares ..... 101 95
Additional paid-in capital ....................................... 71,327 62,141
Retained earnings ................................................ 49,418 50,054
Net unrealized gain (loss) on investments, net of deferred
tax benefit (expense) of $291 and ($227) ................... 541 (422)
--------- ---------
Total shareholders' equity ....................................... 121,387 111,868
--------- ---------
$ 424,906 $ 361,955
========= =========
</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,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues and other income:
Premiums written ........................... $ 54,449 $ 41,553 $ 166,518 $ 127,609
Premiums ceded ............................. (3,544) (2,991) (11,626) (7,885)
--------- --------- --------- ---------
Net premiums written ..................... 50,905 38,562 154,892 119,724
Change in unearned premiums ................ 864 474 (11,601) (8,209)
--------- --------- --------- ---------
Premiums earned ............................ 51,769 39,036 143,291 111,515
Fee and ceding commission income ........... 2,944 2,113 9,033 5,674
Net investment income ...................... 4,373 3,221 12,575 9,401
Net realized gains on sales of investments . (4) 177 543 650
--------- --------- --------- ---------
Total revenues and other income ...... 59,082 44,547 165,442 127,240
--------- --------- --------- ---------
Expenses:
Losses and loss expenses ................... 32,634 24,331 92,504 70,171
Agents' commissions ........................ 4,795 4,939 14,873 13,719
Other operating expenses ................... 16,516 10,087 41,924 28,330
Non-recurring expenses:
Merger-related expense reimbursement fee 1,000 -- 1,000 --
Litigation settlement .................. 1,000 -- 1,000 --
--------- --------- --------- ---------
Total expenses ....................... 55,945 39,357 151,301 112,220
--------- --------- --------- ---------
Income before income tax expense ....... 3,137 5,190 14,141 15,020
Income tax expense ............................ 784 1,666 4,250 4,718
--------- --------- --------- ---------
Net income ............................. 2,353 $ 3,524 $ 9,891 $ 10,302
========= ========= ========= =========
Net income per share .......................... $ .22 $ .35 $ .95 $ 1.02
========= ========= ========= =========
Weighted average shares outstanding ........... 10,511 10,105 10,380 10,075
========= ========= ========= =========
</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,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,891 $ 10,302
Adjustments to reconcile net income to net cash provided by
operating activities:
Receivables (17,953) (11,142)
Deferred income taxes (253) (905)
Deferred policy acquisition costs (2,555) (1,811)
Reserve for unpaid losses and loss expenses 20,104 18,480
Unearned premiums 12,099 8,789
Depreciation and amortization 1,798 1,142
Other 2,687 (549)
--------- ---------
Net cash provided by operating activities 25,818 24,306
--------- ---------
Cash flows from investing activities:
Purchases of investments (129,487) (116,243)
Proceeds from sales and maturities of investments, available for sale 104,042 84,654
Proceeds from fixed maturities, held to maturity, called by issuer 7,874 --
Contingent consideration paid, related to 1992
purchase transaction -- (6,832)
Business acquired in purchase transactions (18,701) (2,053)
Purchases of property and equipment (5,820) (6,646)
Other 2,717 615
--------- ---------
Net cash used by investing activities (39,375) (46,505)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings 6,825 10,000
Proceeds from borrowings - premium finance subsidiary 16,971 6,250
Repayments of borrowings (6,000) (218)
Proceeds from sale of common stock issued for exercise of options 1,000 117
Payment of dividends (2,336) (2,115)
--------- ---------
Net cash provided (used) by financing activities 16,460 14,034
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,903 (8,165)
Cash and cash equivalents:
Beginning of the period 3,682 11,008
--------- ---------
End of the period $ 6,585 $ 2,843
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(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 Company's
December 31, 1996 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 dilative outstanding stock options and
warrants. On May 13, 1997 the Company effected a 5% stock dividend. Prior period
weighted average shares outstanding and per share amounts have been restated
accordingly.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS
128 establishes standards for computing and presenting earnings per share (EPS).
FAS 128 replaces primary EPS, as computed under APB No. 15, "Earnings per
Share," with basic EPS and also requires dual presentation of basic EPS and
diluted EPS on the income statement. FAS 128 is effective for financial
statements ending after December 15, 1997 and requires restatement of all
prior-period EPS data. Basic EPS for the three months ended September 30, 1997
and 1996 would have been $.23 and $.35, respectively. Basic EPS for the nine
months ended September 30, 1997 and 1996 would have been $.98 and $1.03,
respectively. Dilutive earnings per share approximate the amounts shown on the
Condensed Consolidated Statements of Income.
(3) MERGER AGREEMENT
On August 7, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement"), by and among the Company, USF&G Corporation ("USF&G")
and United States Fidelity and Guaranty Company, a wholly owned subsidiary of
USF&G ("Purchaser"), pursuant to which, among other things, the Company will
merge with and into the Purchaser (the "Merger").
The Merger Agreement provides that each outstanding share of common stock
of the Company will be converted into the right to receive, at the election of
the holder and subject to the prorations and adjustments described below, (i)
$11.60 in cash (the "Standard Cash Consideration") and 0.46516 (the "Standard
Exchange Ratio") of a share of USF&G common stock, (ii) $23.20 (two times the
Standard Cash Consideration) in cash, or (iii) 0.93032 (two times the Standard
Exchange Ratio) of a share of USF&G common stock. In each case subject to
adjustment and proration. The above exchange ratio is based on a value for the
USF&G common stock of $24.9375 per share (the "Base Share Price") which was the
closing price of the USF&G common stock on July 29, 1997, the day before USF&G
made its original offer to the Company. The Merger is intended to qualify as a
tax-free reorganization under the Internal Revenue Code of 1986, as amended, and
provide tax deferral to the extent the Company's shareholders receive shares of
USF&G common stock in the Merger.
The Merger is expected to be consummated in December, 1997. It is subject
to certain conditions including, among other things, the approval by the
affirmative vote of at least 66 2/3% of the outstanding shares of the Company
common stock entitled to vote, as well as the approval of certain regulatory
agencies. Mark E. Watson, Jr., the Chairman, President and Chief Executive
Officer of the Company, in his capacity as a shareholder of the Company
5
<PAGE> 7
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
who owns or controls approximately 25.6% of the outstanding shares of Titan
common stock, has agreed to vote his shares of Titan common stock for approval
of the Merger Agreement and, until August 7, 1998, against any transaction in
opposition to or inconsistent with the Merger.
(4) NOTE PAYABLE - PREMIUM FINANCE SUBSIDIARY
In February 1997, Westchester Premium Acceptance Corporation ("West-Pac")
executed an agreement to acquire a premium finance Company, Elite Premium
Services, Inc. ("Elite") for approximately $400,000 in cash and additional
consideration to be determined as a function of future amounts financed through
sources provided by Elite. In connection with the purchase, West-Pac increased
the limit of its credit facility to $50 million and increased its borrowings
under the credit facility by approximately $11.5 million for finance contracts
acquired.
(5) NON-RECURRING EXPENSES
On August 12, 1997, the Company paid $1 million to a merchant bank as an
expense reimbursement fee and has recognized this payment as a non-recurring
expense for the three months ended September 30, 1997 in the Condensed
Consolidated Statement of Income. The expense reimbursement fee was payable
pursuant to an agreement with the merchant bank should the Company enter into a
business combination with another party prior to September 16, 1997, see note
(3).
On August 7, 1997 the Company settled a lawsuit for $1 million, filed
against the Company arising out of a 1992 Stock Purchase Agreement. This
settlement has been recognized as a non-recurring expense for the three months
ended September 30, 1997 in the Condensed Consolidated Statement of Income.
6
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Titan Holdings, Inc. ("Holdings" or "the Company") operates specialty
property and casualty insurance companies and related service companies. Through
its insurance subsidiaries (Titan Indemnity Company and Titan Insurance
Company), Holdings provides personal lines nonstandard automobile insurance
primarily in the midwest and southwest and property and casualty insurance for
small to medium-sized cities, towns, counties and other public entities
nationwide. Another wholly-owned subsidiary, Westchester Premium Acceptance
Corporation ("West-Pac"), provides commercial property and casualty premium
financing. The Company refers to its nonstandard automobile insurance program
collectively as "Titan Auto" and the public entity program as "Titan Public
Entity."
Public entity insurance is somewhat seasonal in that public entities tend
to purchase insurance to coincide with the start of their fiscal years
(typically January, July or October). This allows the Public Entity to "lock in"
its insurance expense for the fiscal year consistent with a recently established
budget. Therefore, these months have historically produced the majority of
public entity premiums written. This seasonality has no material effect on
premiums earned. Nonstandard automobile insurance does not tend to be highly
seasonal.
On August 7, 1997, the Company entered into the Merger Agreement, by and
among Holdings, USF&G and Purchaser, pursuant to which, among other things, the
Company will merge with and into the Purchaser. Holdings shareholders may elect
to receive cash, shares of USF&G common stock or a combination of cash and
shares of USF&G common stock in the Merger. See note 3 to the Condensed
Consolidated Financial Statements for a further description of the consideration
to be paid to Titan shareholders in the Merger. The Merger is intended to
qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended, and provide tax deferral to the extent Holdings shareholders receive
shares of USF&G common stock in the Merger. The Merger is expected to be
consummated in December, 1997. It is subject to certain conditions including,
among other things, the approval by the affirmative vote of at least 66 2/3% of
the outstanding shares of Holdings common stock entitled to vote, as well as the
approval of certain regulatory agencies. Mark E. Watson, Jr., the Chairman,
President and Chief Executive Officer of the Company, in his capacity as a
shareholder of the Company who owns or controls approximately 25.6% of the
outstanding shares of Holdings common stock, has agreed to vote his shares of
Holdings common stock for approval of the Merger Agreement and, until August 7,
1998, against any transaction in opposition to or inconsistent with the Merger.
The following section contains forward-looking statements regarding premium
growth and other matters, which involve risks and uncertainties that may affect
the Company's actual results of operations.
The following important factors, among others, could cause actual results
to differ materially from those set forth in the forward-looking statements:
claims frequency, claims severity, severe adverse weather conditions, economics,
competitive pricing and the regulatory environment in which the Company
operates.
RESULTS OF OPERATIONS
Premiums by Line
The following table presents the dollar amount and percentage of total
premiums written and premiums earned, by principal line of business for the
periods indicated.
7
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---------- ----------- ---------- -----------
( IN THOUSANDS )
<S> <C> <C> <C> <C>
TITAN AUTO
Premiums written $37,721 $26,940 $111,152 $77,477
Premiums earned 36,431 24,124 99,848 67,945
TITAN PUBLIC ENTITY
Premiums written 15,048 13,374 50,522 46,388
Premiums earned 15,336 13,820 43,495 40,472
TOTAL (INCLUDING OTHER LINES)
Premiums written 54,449 41,553 166,518 127,609
Premiums earned 51,769 39,036 143,291 111,515
</TABLE>
Premiums Written
For the three and nine month periods ended September 30, 1997, premiums
written were $54.4 million and $166.5 million, which represent increases of
approximately 30% over $41.6 million and $127.6 million of the same periods of
1996. These increases relate primarily to Titan Auto operations, and more
specifically to volume of business rather than price.
Titan Auto premiums written for the third quarter of 1997 increased 40% to
$37.7 million over the same quarter of 1996. For the nine months ended September
30, 1997, Titan Auto's premiums written increased 43% to $111.2 million as
growth was experienced across all distribution channels. Premiums written
through independent agencies and strategic alliances, for the three months ended
September 30, 1997, totaled $23.5 million compared to $19.4 million for the same
period of 1996. This growth was principally the result of further penetration
through independent agents and strategic alliances in Michigan. Premiums written
through the Direct Response Centers ("DRCs") for the three months ended
September 30,1997 were $14.2 million versus $7.6 million in the comparable three
months of 1996. The DRC growth relates primarily to business written in Texas,
Nevada, and Colorado, states in which the Company's premium volume was not
significant during the three months ended September 30, 1996 as these programs
were initiated in the third quarter of 1996. A portion of the growth is also
attributable to DRC business written in New Mexico and Indiana, states that the
Company entered in 1997.
For the nine months ended September 30, 1997 premiums written by
independent agents and strategic alliances totaled $72.1 million and DRCs
accounted for $39.1 million compared to the nine months ended September 30, 1996
of $59.1 million and $18.4 million, respectively. The growth is attributable to
the same factors discussed above.
Titan Public Entity premium writings increased 13% to $15.0 million and 9%
to $50.5 million for the three and nine months ended September 30, 1997,
respectively. Such increases relate primarily to increased marketing efforts in
existing territories and to a lesser extent, to the expansion of the workers
compensation program, for which the majority of risk is ceded to third party
reinsurers.
Premium growth experienced for the first nine months of 1997 of 30% is
consistent with Company expectations and should continue as Titan Auto continues
its expansion through DRCs, independent agencies and strategic alliances in both
existing and new markets. Titan Public Entity's growth is anticipated to
continue at a moderate pace as the Company remains selective with underwriting
decisions in a highly competitive and price sensitive environment.
8
<PAGE> 10
Premiums Earned
Premiums earned for the three months ended September 30, 1997, increased
33% to $51.8 million and for the nine months ended September 30, 1997 increased
28% to $143.3 million versus comparable periods in 1996. Titan Auto premiums
earned for the three months ended September 30, 1997, increased 51% to $36.4
million from $24.1 million of a year ago. For the nine months ended September
30, 1997, Titan Auto premiums earned increased 47% to $99.8 million from $67.9
million for the nine months ended September 30, 1996. Titan Public Entity
premiums earned increased 11% to $15.3 million and 7% to $43.5 million for the
three and nine months ended September 30, 1997 over comparable periods of 1996.
Such increases are attributable to the increases in premiums written.
Fee and Ceding Commission Income
Titan Auto's operations generate policy and billing fee income which
comprise the majority of fee and ceding commission income. Ceding commissions
received from reinsurers represent the reimbursement of policy acquisition
expenses or profit commissions based on loss experience. Fee and ceding
commission income increased 39% to $2.9 million for the three months ended
September 30, 1997 and 59% to $9.0 million for the nine months ended September
30, 1997. Fee income generated by Titan Auto is more significant in states other
than Michigan and, accordingly, fee income increased more than written premium
for both periods in connection with premium growth outside of Michigan.
The Company expects fee income to continue to increase, although not
necessarily at the same rate experienced in the first nine months of 1997, in
conjunction with the growth and expansion of its auto program into additional
states.
Net Investment Income
Net investment income is comprised of income from the investment portfolio
as well as the Company's premium finance contracts. Net investment income
increased 36% to $4.4 million for the three months ended September 30, 1997 and
34% to $12.6 million for the nine month period ended September 30, 1997. The
increases experienced during 1997 relate to growth in the size of the Company's
premium finance operation and, to a lesser extent, an increase in the overall
size of the Company's investment portfolio as a result of cash generated from
operations. In February 1997, West-Pac acquired Elite Premium Services, Inc. and
income on premium finance contracts increased to $1.2 million for the three
months ended September 30, 1997 versus $.5 million for the same period in 1996.
For the nine months ended September 30, 1997, income on premium finance
contracts was $3.1 million compared to $1.4 million for the nine months ended
September 30, 1996.
Interest rate movements have not had a significant impact on investment
income when comparing the results of 1997 to 1996. The Company continues to
maintain a relatively short duration of 3.6 years in its investment portfolio.
Combined Ratio
The following table sets forth the Company's combined ratio and the
components thereof by principal line of business under generally accepted
accounting principles ("GAAP") for the periods indicated.
9
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
--------- ---------- -------- ---------
<S> <C> <C> <C> <C>
TITAN AUTO
Loss 61.1 % 63.0 % 62.4 % 59.0 %
Expense* 30.9 30.3 29.8 30.1
------- ------- ------ ------
Combined 92.0 93.3 92.2 89.1
======= ======= ====== ======
TITAN PUBLIC ENTITY
Loss 66.0 57.4 67.8 66.6
Expense* 34.8 30.4 32.3 29.9
------- ------- ------ ------
Combined 100.8 87.8 100.1 96.5
======= ======= ====== ======
TOTAL (INCLUDING OTHER LINES)
Loss 63.1 62.4 64.6 62.9
Expense* 32.3 30.2 30.1 30.0
------- ------- ------ ------
Combined 95.4 % 92.6 % 94.7 % 92.9 %
======= ======= ====== ======
</TABLE>
*Prior year restated to include amortization of intangible assets.
Current year excludes non-recurring charges.
The Company's overall combined ratio increased for the three months
ended September 30, 1997 to 95.4% from 92.6% due to slight increases in both the
loss ratio and expense ratio components. For the nine months ended September 30,
1997 the overall combined ratio increased to 94.7% from 92.9% due to an increase
in the loss ratio coupled with consistency in the expense ratio.
For the three months ended September 30, 1997, Titan Auto's overall
combined ratio improved to 92.0% from 93.3% compared to the corresponding three
months in 1996. Titan Auto's loss ratio component for the three months ended
September 30, 1997 improved to 61.1% from 63.0% in the comparable quarter of
1996 while the expense ratio remained fairly constant. For the nine months ended
September 30, 1997, Titan Auto's combined ratio increased to 92.2% from 89.1%
for the nine months then ended in 1996 as an increase in the loss ratio was not
entirely offset by the improvement in the expense ratio. The increases in the
loss ratio for the nine months ended September 30, 1997 versus 1996 for Titan
Auto are associated with expansion into states outside of Michigan, which are
underwritten at a higher loss ratio and lower expense ratio than the Michigan
business due to fee income. States which generate more fee income (which serves
as a reduction to expenses) enable the Company to price its product to a higher
loss ratio and maintain the same combined ratio as it experiences in other
states. Consistent with the Company's strategy, Titan Auto's expense ratio
improved to 29.8% for the nine months ended September 30, 1997 from 30.1% for
the comparable nine months of 1996. While the trends in the combined ratio for
Titan Auto differ somewhat comparing the three months of 1997 to the nine months
of 1997, the Company believes that the trends reflected in the nine month
results are more indicative of management expectations.
The Company believes that as Titan Auto expands into additional
markets, which in certain instances will be underwritten at a higher loss ratio
than its Michigan business, the loss ratio should continue to increase slightly
while the expense ratio continues to improve.
Titan Public Entity's overall combined ratio for the third quarter of
1997 increased to 100.8% from 87.8% for the same quarter of 1996, as both the
loss ratio and expense ratio increased. The loss ratio increase is primarily due
to the fact that the third quarter of 1996 reflected the lowest Titan Public
Entity loss ratio of the year due to reductions in both frequency and severity.
The expense ratio for Titan Public Entity increased to 34.8% for the three
10
<PAGE> 12
months ended September 30, 1997 compared to 30.4% for the three months ended
September 30, 1996 principally in connection with higher general and
administrative expenses in support of a somewhat slower-growing book of business
relative to Titan Auto. For the nine months ended September 30, 1997, Titan
Public Entity's combined ratio increased to 100.1% versus 96.5% in the same
period of 1996. The loss ratio for the nine months ended 1997 increased slightly
to 67.8% compared to 66.6% of a year ago while the expense ratio increased to
32.3%.The increase in the loss ratio is principally the result of continued
market pressure on rates. The increase in the expense ratio for the nine month
period is primarily attributable to increased general and administrative
expenses and increased retentions which resulted in lower ceding commissions.
Agents' Commissions
Commissions paid to independent insurance agents currently represent the
Company's most significant policy acquisition cost. For the three and nine
months ended September 30, 1997, agents' commissions were approximately 9.3% and
10.4%of premiums earned, respectively, versus 12.7% and 12.3% of premiums earned
for the comparable periods of 1996. The decrease relates primarily to the
expansion of Titan Auto's DRC operations which are not subject to commission
expense. The decline in agents' commissions, as a percentage of premiums earned,
however, has generally been offset by additional policy acquisition costs
associated with direct response center operations, and the Company expects this
trend to continue in the near term. Over time, however, the Company expects to
realize economies of scale, whereby reductions in agents' commissions are not
fully offset by additional direct response center policy acquisition costs.
Net Income
Net income for the three months ended September 30, 1997 was $2.4 million
versus $3.5 million and net income for the nine months ended September 30, 1997
was $9.9 million versus $10.3 million for the same period a year ago. For the
three and nine months ended September 30, 1997, net income includes
non-recurring charges of approximately $1.3 million (after-tax) for an expense
reimbursement fee paid to a merchant banking group and the settlement of a
lawsuit, see note (5) to the Condensed Consolidated Financial Statements.
Net income was $.22 per share for the three months ended September 30, 1997
and $.35 per share for the three months ended September 30, 1996. For the nine
months ended September 30, 1997, net income was $.95 per share versus $1.02 for
the first nine months of 1996. For the three and nine months ended September 30,
1997, the non-recurring charges noted above reduced net income by $.12 per
share.
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. Net cash provided by operating activities was $25.8 million
for nine months ended September 30, 1997 versus $24.3 million for the same
period in 1996. The increase experienced in 1997 primarily relates to the
increase in premiums written.
Cash of $16.5 million provided by financing activities is basically
attributable to borrowings under West-Pac's line of credit concurrent with its
purchase of Elite Premium Services, Inc. in February 1997. At that time
West-Pac's credit facility was increased to $50 million and its outstanding
borrowings increased by approximately $11.5 million. The line of credit was
extended in July 1997 at substantially the same terms and expires December 15,
1997.
Holdings credit facility consists of a $10 million revolving line of credit
( $7.3 million currently outstanding ) until July 30, 2001 and a $20 million
amortizing term loan ($16 million currently outstanding). Debt service on the
term loan (payable in $4 million increments annually through 2001, when the term
loan will be fully amortized) would be repaid through dividends from the
insurance companies to Holdings. Management will continue to evaluate the
11
<PAGE> 13
insurance companies' underwriting leverage ratio and evaluate whether additional
financing is appropriate to increase underwriting capacity. Subsequent to
September 30, 1997, the Company borrowed $1.2 million on its revolving line of
credit for debt service. The borrowings under the revolving line of credit to
date in 1997 were utilized for the non-recurring charges discussed in note (5)
to the Condensed Consolidated Financial Statements, working capital purposes,
debt service and the acquisition of the net assets of six DRC operations
previously owned by a strategic partner of the Company, Tri-West, LLC. Holdings
purchased the net assets of the six DRC operations previously owned by Tri-West,
LLC for approximately $2.5 million.
The Company's insurance subsidiaries are subject to state insurance laws
that restrict their ability to pay dividends. In 1997 Holdings could receive
approximately $8.0 million in dividends without regulatory approval. To date in
1997, Holdings has received $5.5 million in dividends from the insurance
subsidiaries. Based on the current working capital needs of Holdings and
considering the payment of dividends available without regulatory approval from
the insurance companies, the existing line of credit would be increased to meet
those needs should the Merger (see note (3) to the Condensed Consolidated
Financial Statements) not be consummated as anticipated in December, 1997.
Cash used by investing activities of $39.4 million for the nine months
ended September 30, 1997 includes $15.3 million for West-Pac's purchase of Elite
Premium Services, Inc. as well as the investment of cash provided by operations.
In addition Titan Indemnity expended approximately $5.8 million in EDP
equipment, furniture and fixtures and improvements to its home office building.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 establishes standards for reporting and display of
comprehensive income and its components in general purpose financial statements.
FAS 130 requires that the components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with other financial
statements. FAS 130 is effective for both interim and annual periods beginning
after December 15, 1997. The Company will adopt FAS 130 in the first quarter of
1998.
Also in June 1997, the FASB issued FAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" (FAS 131). FAS 131 replaces existing
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997, however, it need not apply to interim periods in the initial year of
application. The Company does not believe that the new standard will affect its
identification of industry segments, however, certain new disclosures will be
necessary. The Company plans to adopt FAS 131 as of December 31, 1997.
12
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On August 7, 1997 the Chancery Court of Cook County, Illinois, the court
responsible for the oversight of the liquidation of the estate of Millers
National Insurance Company, approved the settlement of the lawsuit filed by the
liquidator against the Company in consideration of the payment of $1.0 million
to the estate. The Company has reflected this settlement as a non-recurring
charge for the three months ended September 30, 1997, see note (5) to the
Condensed Consolidated Financial Statements. The basis for the lawsuit is more
fully described in the Company's December 31, 1996 Annual Report on Form 10-K.
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 - Financial Data Schedule - September 30, 1997
(b) During the quarter ended September 30, 1997, there were no current
reports on Form 8-K filed.
13
<PAGE> 15
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 13, 1997 By: /s/ MARK E. WATSON, JR.
---------------------------------
Mark E. Watson, Jr.
President and
Chief Executive Officer
Date November 13, 1997 By: /s/ MICHAEL W. GRANDSTAFF
----------------------------------
Michael W. Grandstaff
Senior Vice President and
Chief Financial Officer
14
<PAGE> 16
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 163,955
<DEBT-CARRYING-VALUE> 8,017
<DEBT-MARKET-VALUE> 8,062
<EQUITIES> 14,171
<MORTGAGE> 18,444
<REAL-ESTATE> 0
<TOTAL-INVEST> 259,977
<CASH> 6,585
<RECOVER-REINSURE> 1,090
<DEFERRED-ACQUISITION> 15,053
<TOTAL-ASSETS> 424,906
<POLICY-LOSSES> 161,975
<UNEARNED-PREMIUMS> 67,432
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 57,570
0
0
<COMMON> 101
<OTHER-SE> 121,286
<TOTAL-LIABILITY-AND-EQUITY> 424,906
166,518
<INVESTMENT-INCOME> 12,575
<INVESTMENT-GAINS> 543
<OTHER-INCOME> 9,033
<BENEFITS> 92,504
<UNDERWRITING-AMORTIZATION> 41,924
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 14,141
<INCOME-TAX> 4,250
<INCOME-CONTINUING> 9,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,891
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
