<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-22000
TITAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 74-2289827
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 N.E. LOOP 410, SUITE 500
SAN ANTONIO, TEXAS 78217
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (210) 527-2700
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant, based upon the closing sale price of the common stock on March
21, 1997 as reported on the New York Stock Exchange, was approximately $111.3
million. Shares of common stock held by each officer and director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of March 21, 1997, the Registrant had outstanding 9,557,516 shares
of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENT FORM 10-K PART
-------- --------------
<C> <C>
Definitive Proxy Statement for 1997 Annual Part III
Meeting
</TABLE>
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
The Company, through its wholly-owned property and casualty insurance
subsidiaries, underwrites non-standard private passenger automobile insurance
for individuals in Michigan, Arizona, Texas, Colorado, Nevada and New Mexico and
property and casualty insurance for small to medium-sized public entities
nationwide. Non-standard automobile insurance is principally provided to
insureds who are unable to obtain standard insurance coverage because of their
driving record, other underwriting criteria or market conditions for standard
risks. The Company's public entity insurance program covers cities and counties
against unexpected and unintended personal injury and/or property damage as well
as against losses arising out of civil rights claims and workers compensation
coverage. The Company believes that its focus on specialty niche property and
casualty insurance combined with its underwriting and claims handling expertise
has enabled it to operate at an underwriting profit. Through a subsidiary, the
Company also offers premium financing to third-party insureds and, to a lesser
extent, public entities insured by the Company.
The following table sets forth the amounts and percentages of the Company's
insurance premiums written for the years presented by line of business.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT
-------- ------- -------- ------- -------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Non-standard automobile................... $106,394 61.6% $ 80,607 58.2% $ 56,410 51.4%
Public entity............................. 61,208 35.4% 53,655 38.8% 47,423 43.2%
Other lines............................... 5,244 3.0% 4,173 3.0% 5,951 5.4%
-------- ----- -------- ----- -------- -----
Total................................... $172,846 100.0% $138,435 100.0% $109,784 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The Company's operations are conducted primarily through three principal
subsidiaries. Non-standard automobile insurance coverage is underwritten by both
TITAN Insurance Company and TITAN Indemnity Company, and public entity insurance
is underwritten by TITAN Indemnity Company. TITAN Indemnity Company is licensed
in 47 states and the District of Columbia and is rated "A-" by A.M. Best
Company. TITAN Insurance Company is licensed in Michigan and Arizona and is also
rated "A-" by A.M. Best Company. The Company offers premium financing through
Westchester Premium Acceptance Corporation and its subsidiary, which are
eligible to transact business in 37 states.
BUSINESS STRATEGY
The Company's principal strategy is to seek continued growth of its
non-standard automobile programs in existing markets as well as in additional
markets. The Company believes that the most effective and cost efficient way of
entering additional markets is through Direct Response Center (DRC) distribution
in large and mid-size markets, complemented by independent agent distribution
where appropriate. Large market DRC distribution combines aggressive media and
yellow page advertising campaigns and centralized call center sales operations
to generate business. Mid-size market DRC distribution utilizes the same
advertising approach but has sales calls directed to the retail locations rather
than the centralized call center. The Company believes that its DRC distribution
systems, for both large and mid-size markets, can ultimately enable it to
operate at a lower expense ratio with more favorable loss experience, through
"front line" underwriting and exclusive sales representation. A lower expense
ratio will, in turn, allow the Company to more effectively compete with larger
providers of non-standard automobile insurance. In 1996, the Company acquired
existing non-standard auto agencies in Nevada, Colorado and Texas and converted
them to TITAN DRC operations. In early 1997, the Company commenced underwriting
operations in New Mexico, with distribution through Tri-West Holdings, LLC,
("Tri-West"), an independent company that acquires agencies and operates DRCs
under contract with the Company. The Company has an option to purchase
Tri-West's New Mexico agency at a future date. The Company plans to continue its
expansion of the non-standard
<PAGE> 3
automobile program to other states through both large and mid-sized market DRCs,
in some cases through similar arrangements with Tri-West. In addition, the
Company plans to expand its non-standard auto program through independent agent
distribution and strategic alliances with standard or preferred insurers who
choose to place all or a portion of their non-standard risks with TITAN as a
by-product of their core operations.
The Company plans to expand its public entity program through further
penetration of markets currently serviced by the Company, expansion to other
states, expansion of products offered and continuation of the Company's focus on
small to medium-sized public entities as a niche market. In 1996, the Company
expanded its product line to offer workers compensation insurance to its
insureds in Pennsylvania, and has in place the structure to expand the workers
compensation program to additional states in 1997. The Company also initiated
property and liability insurance programs for fire districts and private
schools. Based upon the number of small to medium sized cities, public entities
and other similar type risks not insured by the Company, the Company believes
potential exists for growth in this business.
The Company's plans for expanding its premium financing program include
evaluating acquisition opportunities, acquisitions enhancing marketing efforts
in both current and expansion territories and developing strategic alliances
with "wholesalers" who provide the insurance coverages, typically financed by
the Company. To facilitate its expansion plans, the Company increased the amount
of available credit supporting its premium finance program from $15 million to
$25 million in 1996, and to $50 million upon its acquisition of Elite Premium
Services, Inc. in early 1997.
INSURANCE OPERATIONS
Non-Standard Automobile
Non-standard automobile insurance, written by both TITAN Insurance Company
and TITAN Indemnity Company, is collectively referred to as "TITAN Auto".
In April 1992, the Company acquired Imperial Midwest Insurance Company
("Imperial Midwest") to diversify its business. Imperial Midwest was originally
formed in 1990 to assume the non-standard private passenger automobile insurance
business of the Cadillac Insurance Company, Michigan's largest voluntary
underwriter of such insurance.
In order to diversify geographically, and as a result of its experience
gained in the non-standard automobile business in Michigan, TITAN Auto acquired
an existing five-location insurance agency in September 1994 in Phoenix, Arizona
and began distributing non-standard automobile insurance through these
locations, operating them as DRCs.
In July 1995, TITAN Auto acquired certain assets of Arlans Agency, Inc.
("Arlans"), the Company's largest producing agency in Michigan, which produced
approximately $3.9 million, or 7% of TITAN Auto's total Michigan non-standard
premiums written in 1994. At the time of the acquisition, Arlans had in excess
of 30 selling locations. The Company has since reduced the operation to twelve
locations through consolidation or closure of less profitable stores. TITAN Auto
now operates these locations as DRCs.
During 1996, TITAN Auto expanded its non-standard auto program to three new
states. Non-standard auto agencies were acquired in Nevada, Colorado and Texas.
Additionally, new DRC locations were added to existing TITAN Auto DRC operations
and new "start-up" DRC operations were commenced in San Antonio and several
smaller Texas cities.
In Michigan, TITAN Auto's independent agent and strategic alliance business
is written through approximately 1,600 insurance agencies with approximately
2,600 locations throughout the state. In 1996, the ten largest insurance
agencies were responsible for 27% of total Michigan premiums written by TITAN
Auto, and one agency (CSAC Agency) accounted for more than 5% of such premiums
(5.95%). In Arizona, the Company's independent agent business is written through
roughly 70 insurance agencies. None of the Company's Arizona independent agents
produce in excess of 5% of total Arizona premiums. In Arizona, Michigan, Nevada
and Texas, TITAN Auto employs field marketing representatives who are
responsible for soliciting, training, reviewing and auditing independent
agent-produced business.
2
<PAGE> 4
The following table sets forth the amount and percentages of non-standard
automobile premiums written through independent agencies and strategic alliances
and through DRCs, by state for the past three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT
-------- ------- ------- ------- ------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Through independent
agencies and strategic
alliances:
Michigan............. $ 73,895 69.5% $65,308 81.0% $55,369 98.2%
Arizona.............. 6,172 5.8% 2,808 3.5% -- --
-------- ----- ------- ----- ------- -----
80,067 75.3% 68,116 84.5% 55,369 98.2%
-------- ----- ------- ----- ------- -----
Through DRCs:
Michigan............. 6,421 6.0% 2,077 2.6% -- --
Arizona.............. 14,702 13.8% 10,414 12.9% 1,041 1.8%
Nevada............... 1,280 1.2% -- -- -- --
Texas................ 1,781 1.7% -- -- -- --
Colorado............. 2,143 2.0% -- -- -- --
-------- ----- ------- ----- ------- -----
26,327 24.7% 12,491 15.5% 1,041 1.8%
-------- ----- ------- ----- ------- -----
Total........... $106,394 100.0% $80,607 100.0% $56,410 100.0%
======== ===== ======= ===== ======= =====
</TABLE>
Non-standard risks generally involve the potential for above-average loss
frequency. Exposure for underwriting losses, however, is lessened because
premiums usually are at higher rates than those charged for standard insurance
coverage. Although there are currently no policy limits for Michigan no-fault
personal injury protection, Michigan insurers are reinsured for losses in excess
of $250,000 by the Michigan Catastrophic Claims Association (the "MCCA"), a
state-mandated reinsurance association. Limits for Michigan no-fault personal
property protection are $1,000,000. Optional limits for bodily injury are
$100,000 per individual and $300,000 per accident, although 84% of TITAN Auto's
policies in Michigan are issued at minimum bodily injury limits of $20,000 per
individual and $40,000 per accident. In Arizona, Texas, Nevada and Colorado,
TITAN Auto principally offers the minimum statutory policy limits of $15,000 per
individual and $30,000 per accident. During 1996, TITAN Auto maintained
reinsurance through a commercial reinsurer for losses in any state in excess of
$300,000 per accident for the sum of all personal injury protection, personal
property protection, bodily injury and uninsured motorist claims. This retention
was increased to $500,000 effective January 1, 1997. TITAN Auto is also at risk
for physical damage losses, which typically do not exceed $40,000 and, on a
small number of Michigan and Arizona policies, for an additional $100,000 per
accident for out-of-state personal property damage. See "Reinsurance."
TITAN Auto emphasizes service, rate adequacy, strong claims controls and
the ability to respond quickly with needed rate changes. Rate adjustment
approvals in each state in which the Company writes non-standard automobile
insurance can be obtained at least every six months. TITAN Auto generally
adjusts its rates every 9 to 12 months in each market. See "Regulation."
Due to the purchasing habits of non-standard automobile insureds (for
example, insureds seeking the least expensive insurance which satisfies the
requirements of state laws to register a vehicle), policy renewal rates tend to
be low. The success of the Company's non-standard automobile insurance program,
therefore, depends in part on its ability to replace non-renewing insureds with
new policyholders through aggressive advertising and marketing efforts. TITAN
Auto's experience has been that a significant number of existing policyholders
allow their policies to lapse and then reapply for insurance as new
policyholders.
Since TITAN Auto's inception in 1990, there has been limited competition in
the Michigan private passenger nonstandard automobile market. Currently, the
Company believes that TITAN Auto is the largest non-standard insurer in the
voluntary market, and the Company believes that, although several for-profit
insurers entered the market on a limited basis during 1996, the Michigan Auto
Insurance Placement Facility
3
<PAGE> 5
(the "Facility") is a prospective insured's most likely alternative. The
Facility is the State of Michigan's provider of non-voluntary private passenger
automobile insurance and is, the Company believes, the largest underwriter for
non-standard automobile insurance in Michigan. It is structured as a joint
underwriting association which provides insurance coverage to all drivers who
have been unable to obtain insurance in the voluntary market. The financial
results of the Facility are allocated to all underwriters of automobile
insurance in Michigan based upon premiums written. See "Regulation." The
Facility's policy administration and claims adjustment services are currently
provided by five of Michigan's seven largest automobile insurance underwriters.
According to information obtained from the Automobile Insurance Plan Service
Office ("AIPSO"), the Facility's private passenger non-standard automobile
premiums written were $179 million for its fiscal year ended September 30, 1996.
The Company believes that TITAN Insurance Company competes effectively with the
Facility by offering a higher level of service, streamlining procedures, paying
higher commissions to its agents and offering more attractive payment plans.
Public Entity
The Company's Public Entity business is written by TITAN Indemnity Company
and is referred to as "TITAN Public Entity".
Since 1984, TITAN Public Entity has offered a program to insure public
entities, including municipalities, counties, school districts, housing
authorities, state-run utilities and other governmental entities. Types of
public entity liability insurance coverage provided by TITAN Public Entity
include general liability, automobile, law enforcement liability and public
officials errors and omissions. TITAN Public Entity also writes automobile
physical damage and property insurance coverages. During 1996, the Company began
offering private school and fire district insurance programs and introduced a
workers compensation program for its public entity insureds in Pennsylvania. The
Company plans to extend the workers compensation line of business to other
states in 1997. Also during 1996, the Company introduced its Horizon program,
which simplifies the insurance policy for insureds and streamlines the
underwriting and policy issuance processes. The primary competition for the
public entity program consists of managed pools, which combine several
municipalities under one risk management and insurance program, and other
commercial underwriters who have programs for public entities.
The Company has had a renewal rate of 83% or better since 1992. The Company
attributes its high renewal rates to the level and quality of its customer
service and the specialized claims handling it provides to its insureds.
Additionally, the Company believes that its focus on the smaller rural and more
geographically dispersed insureds and its high level of service makes its public
entity insurance program less sensitive to price than the public entity business
of many of its competitors.
TITAN Public Entity employs 27 state managers who serve as field marketing
representatives and contract with over 1,200 local independent insurance agents
representing public entities. Typically, an independent agent represents only a
single city -- the one in which the agent is located.
While cities with populations under 10,000 have historically represented
the majority of the public entities insured by the Company, the upgrade of TITAN
Indemnity Company's A.M. Best rating to "A-" (Excellent) in November 1993 has
allowed the Company to attract more cities with populations of between 10,000
and 25,000 people. The Company also focuses on smaller counties (between 25,000
and 100,000 people), which have historically represented a large portion of the
Company's public entity program. The Company's public entity insureds also
include some larger cities, as well as schools, utility authorities and other
miscellaneous public entities.
4
<PAGE> 6
The following table sets forth the insurance coverages offered and the
premiums written and the percent of each total for the past three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT
------- ------- ------- ------- ------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Liability lines:
General liability............. $20,452 33.4% $18,913 35.3% $17,217 36.3%
Automobile liability.......... 16,453 26.9% 14,880 27.7% 14,179 29.9%
Law enforcement liability..... 6,333 10.3% 5,307 9.9% 4,471 9.4%
Public officials errors &
omissions.................. 4,698 7.7% 4,197 7.8% 3,731 7.9%
Workers compensation.......... 644 1.1% -- -- -- --
------- ----- ------- ----- ------- -----
Total liability
lines............... 48,580 79.4% 43,297 80.7% 39,598 83.5%
------- ----- ------- ----- ------- -----
Property lines:
Property and inland marine.... 7,373 12.0% 5,917 11.0% 4,153 8.8%
Automobile physical damage.... 5,255 8.6% 4,441 8.3% 3,672 7.7%
------- ----- ------- ----- ------- -----
Total property
lines............... 12,628 20.6% 10,358 19.3% 7,825 16.5%
------- ----- ------- ----- ------- -----
Total................. $61,208 100.0% $53,655 100.0% $47,423 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
In 1996, the Company underwrote public entity insurance in 31 states. The
following table shows the amount and percent of total public entity premiums
written in the eight largest states for 1996 and their corresponding amounts for
the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT
------- ------- ------- ------- ------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
New York........................ $11,236 18.4% $7,965 14.8% $6,438 13.6%
Texas........................... 9,648 15.8% 9,418 17.6% 8,312 17.5%
Mississippi..................... 7,357 12.0% 6,360 11.9% 5,404 11.4%
Pennsylvania.................... 5,715 9.3% 4,177 7.8% 3,034 6.4%
Louisiana....................... 3,849 6.3% 5,655 10.5% 6,314 13.3%
Florida......................... 3,761 6.1% 3,326 6.2% 3,174 6.7%
Alabama......................... 3,676 6.0% 2,504 4.7% 3,300 7.0%
Georgia......................... 3,276 5.4% 2,866 5.3% 2,398 5.1%
</TABLE>
TITAN Public Entity's strategy has been to follow a practice of selective
underwriting during periods of intense competition. The Company believes that
there are few insurers which specialize in offering public entity programs,
especially with respect to small public entities. The Company believes that its
experience in public entity underwriting and claims adjustment enables it to
reduce its losses and loss adjustment expenses ("LAE") and gives it a
competitive advantage over companies that may decide to enter this market. The
Company also seeks to reduce underwriting losses by adherence to certain
underwriting standards. For example, the Company reduces its exposure to
hurricanes and similar risks by limiting total exposures by territory for any
public entity located within 50 miles of any coastline. All public entity
policies underwritten by the Company also include a pollution exclusion.
Additionally, the Company uses deductibles and reinsurance to help control its
loss exposure.
TITAN Public Entity offers primary liability policy limits up to $2,000,000
per occurrence, and excess aggregate limits of an additional $5,000,000 are
available. Most policies are underwritten at limits of either $500,000 or
$1,000,000, and the amount of excess aggregate limit policies underwritten has
not been significant. During 1996, the Company was reinsured for 50% of casualty
losses in excess of $500,000 per occurrence up to $1 million and for 97.5% of
losses in excess of $1 million, up to issued policy limits. Effective January 1,
1997, the Company increased its retention on losses in excess of $1 million to
20%, for such losses
5
<PAGE> 7
occurring under primary $2 million limit policies, with 100% reinsurance
coverage for casualty losses in excess of $2 million, up to issued policy
limits. TITAN Public Entity retains the first $500,000 per occurrence on
property insurance coverages. The Company's workers compensation program is
reinsured under both quota share and excess of loss reinsurance contracts,
resulting in a net retention of $300,000 per occurrence.
Premium Financing
Westchester Premium Acceptance Corporation ("WPAC") has provided premium
financing to TITAN Indemnity Company's public entity insureds since 1987 and to
third-party commercial insureds since 1991. WPAC has grown through acquisition
and by establishing relationships with over 300 agencies around the country,
although approximately 54% of the business in 1996 came from 16 agencies. The
majority of premiums financed for third-party insureds represent Texas business.
Lending operations are supported by WPAC's own capital base and are currently
leveraged through a $50 million bank revolving line of credit.
In February 1997, WPAC acquired 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. Elite
financed approximately $40 million in commercial premiums in 1996.
Premiums for property and casualty insurance are typically payable at the
time a policy is placed in force or renewed. WPAC's premium finance services
allow the insured to pay a portion of the premium when the policy is placed in
force and the balance in monthly installments over the life of the policy. WPAC
retains a contractual right to cancel the insurance policy and to receive the
unearned premium if a premium installment is not paid when due. In the event of
such cancellation, WPAC applies the unearned premium towards the payment
obligation of the insured. As part of its premium financing offered to
commercial third-party insureds, WPAC may advance funds for financed premiums to
independent insurance agencies who represent third-party insurers. If remittance
is not made by the agency to the third-party insurer, advances made by WPAC may
only be recoverable to the extent that the agency's receipt of such advances is
deemed to be received by the third-party insurer. Premium financing, which the
Company offers to its own public entity insureds, does not involve any credit
risk since no funds are advanced to outside parties and WPAC is entitled to
receive the unearned premiums on the financed policies.
The following table sets forth the amount and percentages of premiums
financed by the type of insured for the years presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
PREMIUM PERCENT PREMIUM PERCENT PREMIUM PERCENT
------- ------- ------- ------- ------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Third Party..................... $43,815 84.7% $25,498 82.0% $14,468 75.4%
TITAN Public Entity............. 7,894 15.3% 5,594 18.0% 4,729 24.6%
------- ----- ------- ----- ------- -----
Total................. $51,709 100.0% $31,092 100.0% $19,197 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
Other Lines
Since September 1993, TITAN Indemnity Company has offered a program of
preferred personal lines automobile insurance to educational employees in
Minnesota. Under this program, TITAN Indemnity Company utilizes educators to
sell its insurance products to other educational employees. Premiums written for
the years ended December 31, 1996, 1995 and 1994 were $5.1 million, $3.2 million
and $1.2 million, respectively. In early 1997, the Company plans to execute a
transaction that will transfer existing loss reserves and unearned premiums and
cede 100% of future business, to a reinsurer, of its preferred automobile
insurance program.
TITAN Indemnity Company also had programs for surety and aviation insurance
which were discontinued in 1995 and 1993, respectively.
6
<PAGE> 8
REINSURANCE
Reinsurance involves an insurance company transferring or "ceding" all or a
portion of its exposure on insurance underwritten by it to another insurer (the
"Reinsurer"). The Reinsurer assumes a portion of the exposure in return for a
portion of the premium. The ceding of insurance does not legally discharge the
insurer from its primary liability for the full amount of the policies. If the
Reinsurer fails to meet its obligations under the reinsurance agreement, the
ceding company is still required to pay the loss.
Reinsurance is ceded under separate contracts or "treaties" for the
separate lines of business underwritten. The Company's reinsurance is primarily
ceded under an excess of loss basis, where only losses above a fixed amount are
reinsured. Some treaties allow the Company a participation in the reinsurers'
net profits. The Company's share of such profits is recognized to the extent
currently estimable. The Company also cedes the majority of its workers
compensation business on a quota share basis. The reinsurance programs renew
annually and are placed directly by the Company and through professional
national reinsurance intermediaries. Public entity reinsurance is placed with
Munich American Reinsurance Company (Munich) and General Reinsurance Corporation
(GenRe). Workers compensation reinsurance is placed with Munich and CNA
Reinsurance Company. Non-standard automobile reinsurance is also placed with
Munich, except for personal injury losses in excess of $250,000 per accident in
Michigan, which are reinsured by the MCCA. The MCCA is a state-mandated
association created under the Michigan no-fault law which by statute is funded
through charges to Michigan policyholders. As a result, TITAN Insurance Company
does not incur any net cost with respect to the MCCA other than any associated
loss adjustment expenses (LAE). The MCCA is not an insurance company, does not
file conventional statutory financial statements and is not rated by A.M. Best.
As a result, the Company is unable to fully evaluate the MCCA's ability to pay
reinsurance claims on the same basis as the Company's other reinsurers.
At December 31, 1996, the Company's net retentions per occurrence, after
reinsurance, were as follows for its significant lines of business:
<TABLE>
<CAPTION>
PRIMARY EXCESS
POLICIES POLICIES TOTAL
-------- -------- --------
<S> <C> <C> <C>
Non-standard automobile.............................. $440,000 $ -- $440,000
Public entity:
Property........................................... 500,000 -- 500,000
Liability.......................................... 750,000 150,000 900,000
Workers compensation............................... 300,000 -- 300,000
</TABLE>
At January 1, 1997, retentions for both TITAN Auto and TITAN Public Entity
were increased, as previously discussed.
In addition, the Company purchases reinsurance for exposure to catastrophic
events (e.g., hurricanes, hailstorms, etc.), as well as for judgments in excess
of contractual policy limits.
In formulating reinsurance programs, the Company is selective in its choice
of reinsurers and considers numerous factors, the most important of which is the
financial stability of the reinsurer. At December 31, 1996, reinsurance was in
place with 29 domestic and 23 foreign reinsurers and the total amount
recoverable from such insurers, including prepaid reinsurance premiums, was
approximately $49.7 million. Of the total balance recoverable from reinsurers,
approximately $43.5 million (87.5%) is recoverable from the Michigan
Catastrophic Claims Association (which is not rated by A.M. Best Company), and
approximately $4.2 million (8.5%) is due from Munich American Reinsurance
Company (which is rated A+ by A.M. Best Company) The remaining balance of
approximately $2.0 million is due from 50 other reinsurers, none of which
individually comprise more than 2% of the total balance recoverable from
reinsurers. The remaining balance is primarily attributable to the discontinued
surety and aviation programs.
RESERVES
Reserves for losses and LAE represent estimates of amounts needed in the
future to pay losses and the expenses related to the final settlement of such
losses, with respect to insured events that have occurred prior
7
<PAGE> 9
to the balance sheet date. Insurance regulations and accounting rules require
that reserves be maintained for the payment of losses and LAE with respect to
both reported and incurred but not reported ("IBNR") claims under insurance
policies issued by the Company. Generally, reserves are established through an
evaluation of each individual claim. Reserves on reported losses are determined
by evaluating the type of loss, jurisdiction of the occurrence, knowledge of the
circumstances surrounding the claim, severity of injury or damage, potential for
ultimate exposure, estimate of liability on the part of the insured, past
experience with similar claims and the applicable policy provisions. Reserves
for IBNR losses are determined in part on the basis of statistical information
utilizing the Company's past experience as well as industry experience. The
Company utilizes independent actuaries to help establish its loss and LAE
reserves. The Company does not discount loss reserves for financial statement
purposes. There are no differences in the reserves for losses and LAE
established under generally accepted accounting principles and those established
under statutory accounting principles.
The period of time between the occurrence of an insured event and a final
settlement of a claim may be many years, and during this period it often becomes
necessary to adjust the claim estimates either upward or downward. Among the
classes of public entity insurance underwritten by the Company, the liability
claims historically tend to have longer time lapses between the occurrence of
the event, the reporting of the claim to the Company and the final settlement
than do the property claims. Public entity liability claims often involve third
parties filing suit against the public entity and therefore may result in
litigation. By comparison, non-standard automobile claims tend to be reported in
a relatively shorter period of time and settle in a shorter time frame with less
occurrence of litigation. The reserves with respect to public entity property
claims and non-standard automobile are therefore less likely to be adjusted than
the liability claims of the public entity lines.
The following table sets forth a reconciliation of beginning and ending
reserves as shown in the Company's consolidated financial statements for unpaid
losses and LAE for the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of year, gross.... $122,811 $ 98,405 $ 76,514
Reinsurance balances recoverable........................... (39,787) (32,275) (23,190)
-------- -------- --------
Reserves for losses and LAE at beginning of year, net...... 83,024 66,130 53,324
-------- -------- --------
Add:
Provision for losses and LAE occurring:
Current year.......................................... 90,565 71,278 51,534
Prior years........................................... 4,522 1,165 905
-------- -------- --------
95,087 72,443 52,439
-------- -------- --------
Less:
Loss and LAE payments for claims occurring during:
Current year.......................................... 41,060 27,152 17,015
Prior years........................................... 39,281 28,397 22,618
-------- -------- --------
80,341 55,549 39,633
-------- -------- --------
Reserves for losses and LAE at end of year, net............ 97,770 83,024 66,130
Reinsurance balances recoverable........................... 44,101 39,787 32,275
-------- -------- --------
Reserves for losses and LAE at end of year, gross.......... $141,871 $122,811 $ 98,405
======== ======== ========
</TABLE>
The 1996 provision for losses and loss expenses for prior years related
primarily to discontinued programs, certain public entity lines of business and
Michigan auto personal injury protection coverage. Holdings discontinued its
involvement in an aviation program in 1993 and a contract surety program in
1995. Adverse development from these discontinued programs totaled $1.4 million
in 1996. Public entity experienced adverse development which totaled
approximately $2.1 million on certain liability coverages related to 1994.
Michigan personal injury protection experienced approximately $0.9 million of
adverse development in 1996 on 1995
8
<PAGE> 10
claims, principally in connection with known cases that developed additional
severity. Management of the company has since modified underwriting criteria for
such coverages and adjusted its reserving practices.
The following table summarizes, by net reserves and ceded reserves, and by
reported reserves and IBNR reserves, the ending reserves as shown in the
Company's consolidated financial statements for unpaid losses and LAE for the
years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
IN THOUSANDS
<S> <C> <C> <C>
Reported reserves, net...................................... $ 72,544 $ 62,532 $50,075
IBNR reserves, net.......................................... 25,226 20,492 16,055
-------- -------- -------
Total reserves, net....................................... 97,770 83,024 66,130
-------- -------- -------
Reported reserves, ceded.................................... 22,906 21,503 17,658
IBNR reserves, ceded........................................ 21,195 18,284 14,617
-------- -------- -------
Total reserves, ceded.................................. 44,101 39,787 32,275
-------- -------- -------
Total reserves, gross.................................. $141,871 $122,811 $98,405
======== ======== =======
</TABLE>
The following table presents the development of the net liability for
unpaid losses and LAE for the Company from 1986 until 1996. The top line of the
table shows the estimated net reserves for unpaid losses and LAE at the balance
sheet date for each of the indicated years. These figures represent the
estimated amount of unpaid losses and LAE for claims arising in all prior years
that were unpaid at the balance sheet date, including losses that had been
incurred but not yet reported, net of reinsurance ceded. The portion of the
table labeled "Cumulative paid as of" shows the net cumulative payments for
losses and LAE made in succeeding years for losses incurred prior to the balance
sheet date. The next portion of the table shows the re-estimated amount of the
previously recorded reserves based on experience as of the end of each
succeeding year. The final portion of the table reconciles the net liability for
1994 through 1996 to the gross liability recorded on the Company's consolidated
balance sheet and re-estimates the gross liability for 1994 and 1995 at the end
of 1996. The estimates change as payments are made and more information becomes
known about the frequency and severity of claims for individual years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ----- ----- ----- ----- ----- ----- ----- -----
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability -- end of year........... $ 97.8 $ 83.0 $ 66.1 $53.3 $46.8 $37.3 $38.5 $43.2 $35.6 $13.7 $ 6.3
Cumulative paid as of:
One year later....................... 39.3 28.4 22.4 19.7 12.0 13.0 13.8 7.6 4.3 0.7
Two years later...................... 46.4 37.1 31.1 22.6 20.9 24.4 17.9 6.8 1.6
Three years later.................... 44.6 38.4 27.7 27.5 29.7 24.5 9.8 2.3
Four years later..................... 42.0 29.4 29.9 34.7 27.6 11.8 2.8
Five years later..................... 30.7 31.2 36.2 31.3 12.8 3.4
Six years later...................... 31.9 36.8 28.4 13.4 3.7
Seven years later.................... 37.0 28.7 13.6 4.0
Eight years later.................... 28.9 13.7 4.0
Nine years later..................... 13.8 4.1
Ten years later...................... 4.1
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ----- ----- ----- ----- ----- ----- ----- -----
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Re-estimated net liability as of:
End of year.......................... 97.8 83.0 66.1 53.3 46.8 37.3 38.5 43.2 35.6 13.7 6.3
One year later....................... 87.6 67.3 54.3 47.4 36.6 38.9 42.5 34.3 15.0 5.4
Two years later...................... 72.0 55.6 48.6 34.8 37.2 42.1 35.2 14.1 5.3
Three years later.................... 56.0 48.2 34.5 34.9 40.0 35.1 14.0 4.0
Four years later..................... 48.9 33.2 34.9 38.6 33.6 13.9 3.8
Five years later..................... 33.8 34.0 38.5 33.1 14.0 3.9
Six years later...................... 34.6 38.5 33.1 13.8 3.9
Seven years later.................... 39.0 33.3 13.9 4.1
Eight years later.................... 33.7 14.1 4.1
Nine years later..................... 14.2 4.1
Ten years later...................... 4.1
------ ------ ------ ----- ----- ----- ----- ----- ----- ----- -----
Net cumulative (deficiency)
redundancy........................... $ -- $ (4.6) $ (5.9) $(2.7) $(2.1) $ 3.5 $ 3.9 $ 4.2 $ 1.9 $(0.5) $ 2.2
====== ====== ====== ===== ===== ===== ===== ===== ===== ===== =====
Gross liability -- end of year......... $141.9 $122.8 $ 98.4
Reinsurance recoverable................ 44.1 39.8 32.3
------ ------ ------
Net liability -- end of year........... 97.8 83.0 66.1
====== ------ ------
Gross re-estimated liability........... 121.1 107.9
------ ------
Re-estimated recoverable............... 33.5 35.9
------ ------
Net re-estimated liability............. 87.6 72.0
------ ------
Gross cumulative redundancy
(deficiency)......................... $ 1.7 $ (9.5)
====== ======
</TABLE>
A cumulative redundancy or deficiency represents the aggregate change in
the estimates over all prior years. A deficiency indicates that the latest
estimate of the liability for losses and LAE is higher than the liability that
was originally estimated and a redundancy indicates that such estimate is lower.
It should be emphasized that the table presents a run-off of the liability
rather than accident or policy year loss development. Therefore, each amount in
the table includes the effects of changes in reserves for all prior years.
Conditions and trends that have affected development of liability in the past
may not necessarily occur in the future. Accordingly, it may not be appropriate
to extrapolate future redundancies or deficiencies based on this table.
INVESTMENTS
The Company's investment objectives are to maximize total rate of return
after federal income taxes, but, at the same time, to protect and enhance
statutory policyholders' surplus on a long-term basis and to maintain adequate
liquidity for insurance operations. The Company's current investment policy
prohibits investment in non-investment grade fixed maturities (including
high-yield "junk bonds"), and limits total investments in equity securities and
mortgage notes receivable to 10% and 15%, respectively, of total consolidated
investments. The Company also complies with applicable laws and regulations
which further restrict the type, quality and concentration of investments. In
general, these laws and regulations permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities and real
estate mortgages.
The Company's investment policy is recommended to the Board of Directors by
its Investment Committee and is reviewed on a regular basis. Pursuant to this
investment policy, the Company's investments are currently concentrated in fixed
maturities, which are considered to be either available for sale or held to
maturity, based upon the Company's intent at the time of purchase. Fixed
maturities considered available for sale are marked to market and fixed
maturities held to maturity are carried at amortized cost. As of December 31,
1996, the balance of fixed maturity investments designated as held to maturity
has decreased by $3.8 million to $16.1 million due to the call of certain of
these investments by the issuers during 1996, and to a lesser extent, due to
amortization of the historical cost. The Company does not use any material
swaps, options, futures or forward contracts to hedge or enhance its investment
portfolio.
10
<PAGE> 12
The Company's investment portfolio (other than its mortgage notes
receivable and premium finance contracts) is managed by Lyon Securities, Inc.,
Dallas, Texas, a firm controlled by one of the Company's outside directors, on a
discretionary basis subject to guidelines established by the Company's
investment policy. The Company's mortgage notes receivable portfolio contains
mortgage loans on commercial properties primarily located in Texas. The largest
mortgage note receivable outstanding at December 31, 1996 was approximately
$992,000.
The table below sets forth investment results for the periods indicated.
Average invested assets in the table below represents the average of the
aggregate invested amount at the end of each calendar month during the year.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Average invested assets..................................... $204,891 $159,960 $127,284
Net investment income....................................... 12,866 10,161 7,576
Average yield............................................... 6.3% 6.4% 6.0%
Average tax-equivalent yield................................ 6.8% 6.9% 6.4%
</TABLE>
COMPETITION
The Company operates in a highly competitive industry and faces competition
from domestic and foreign insurers, many of which are larger and have greater
financial resources available than the Company, have higher A.M. Best ratings
and/or offer more diversified insurance coverages. The Company's Michigan non-
standard automobile program faces competition from the Facility, which the
Company believes is the largest underwriter of non-standard automobile insurance
in the state, and a limited number of for-profit insurers who entered the market
in 1996. The Company's non-standard auto programs in Arizona, Texas, Colorado
and Nevada face competition from a number of insurers, most of whom have been in
the market longer than TITAN Auto.
The Company's public entity program faces competition from public entity
pools, which are individual programs whereby public entities typically
self-insure themselves on a collective basis, and other commercial underwriters.
Competition is based on many factors, including overall financial strength of
the insurer, A.M. Best ratings, premiums charged, policy terms and conditions,
services offered, reputation, agent compensation and experience. There can be no
assurance that the Company will not face increased competition from other
insurance companies or that the Company's existing public entity insureds will
not self-insure individually or in pools.
REGULATION
The Company's insurance subsidiaries are subject to regulation, primarily
by the insurance regulatory authorities of the states of their domestication.
TITAN Indemnity Company is domesticated in Texas and TITAN Insurance Company is
domesticated in Michigan. Each of the subsidiaries is also subject to regulation
by other jurisdictions in which it is licensed. The insurance laws and
regulations, as well as the level of supervisory authority that may be exercised
by the various state insurance departments, vary by jurisdiction, but generally
grant broad powers to supervisory agencies or state regulators to examine and
supervise insurance companies and insurance holding companies with respect to
every significant aspect of the conduct of the insurance business, including the
establishment of premium rates. These laws and regulations generally require
insurance companies to maintain minimum standards of business conduct and
solvency, meet certain financial tests (including maximum premium to surplus
ratios), file certain reports with regulatory authorities, including information
concerning their capital structure, ownership and financial condition, and
require prior approval of certain changes in control of domestic insurance
companies and their direct and indirect parents and the payment of extraordinary
dividends and distributions. In addition, these laws and regulations require
approval for certain intercompany transfers of assets and certain transactions
between insurance companies and their direct and indirect parents and
affiliates, and generally require that all such transactions have terms no less
favorable than terms that would result from transactions between parties
negotiating at arm's length.
11
<PAGE> 13
Further, many states have enacted laws which restrict an insurer's underwriting
discretion, such as the ability to terminate policies, terminate agents or
reject insurance coverage applications, and many state regulators have the power
to reduce, or to disallow increases in, premium rates. These laws may adversely
affect the ability of an insurer to earn a profit on its underwriting
operations. In general, such laws and regulations are for the protection of
policyholders.
Most states have insurance laws requiring that rate schedules and other
information be filed with the state's insurance regulatory authority, either
directly or through a rating organization with which the insurer is affiliated.
The regulatory authority may disapprove a rate filing if it finds that the rates
are inadequate, excessive or unfairly discriminatory. Rates, which are not
necessarily uniform for all insurers, vary by class of business, hazard covered,
and size of risk. The Company is permitted to file rates for non-standard
automobile policies which are usually higher than those charged for standard
risks, reflecting the higher probability of loss. Rate changes for the Company's
existing nonstandard automobile programs can be effected at least every six
months. Several states have recently adopted laws or their legislatures are
considering proposed laws which, among other things, limit the ability of
insurance companies to effect rate increases or to cancel, reduce or non-renew
insurance coverage with respect to existing policies, particularly private
passenger automobile insurance. The rates currently filed by the Company for its
public entity program generally allow a plus or minus 25% deviation from the
applicable standard rates.
All insurance companies must file quarterly and annual statements with
certain regulatory agencies and are subject to regular and special examinations
by those agencies. The last regulatory examination of TITAN Indemnity Company
was completed by the Texas Department of Insurance in 1992 covering the two and
one-half year period ended June 30, 1992. The last regulatory examination of
TITAN Insurance Company was completed by the Michigan Insurance Bureau in 1995
covering the four-year period ended December 31, 1994. No material deficiencies
were found during these regulatory examinations. In addition, both insurance
subsidiaries were the subject of a market conduct examination by the Arizona
Department of Insurance for the period 1990 through August 1995 and TITAN
Indemnity Company underwent a market conduct examination for the year 1995. No
material deficiencies were found during the market conduct examination.
In some instances, various states routinely require deposits of assets for
the protection of policyholders either in those states or for all policyholders.
As of December 31, 1996, securities representing approximately $9 million, or 4%
of the carrying value of the Company's total investments, were on deposit with
various state treasurers or custodians. Such deposits must consist of securities
which comply with the standards that the particular state has established.
The Company and its subsidiaries are also subject to state laws regulating
insurance holding company systems. Most states have enacted legislation or
adopted administrative regulations affecting insurance holding companies and the
acquisition of control of insurance companies, as well as transactions between
insurance companies and persons controlling them. The nature and extent of such
legislation and regulations currently in effect vary from state to state.
However, most states require administrative approval of the acquisition of
voting securities of an insurer domiciled in such state or an entity controlling
an insurer domiciled in such state if, as a result of the acquisition such
person would acquire control over the insurer. The acquisition of 10% or more of
the outstanding shares of voting securities is generally presumed to be the
acquisition of "control" for the purpose of the holding company statutes and
requires not only the filing of detailed information concerning the acquiring
parties and the plan of acquisition, but also administrative approval prior to
the acquisition. In many states the insurance authority may find that "control"
in fact does or does not exist in circumstances in which a person owns or
controls either a lesser or a greater amount of securities.
Most states have enacted legislation that requires each insurance company
in a holding company system to register with the insurance regulatory authority
of its state of domicile and furnish financial and other information concerning
the operations of companies within the holding company system. All transactions
within a holding company system affecting insurers must be fair and reasonable
and the insurer's policyholders' surplus following any transaction must be both
reasonable in relation to its outstanding liabilities and adequate for its
needs. Approval of applicable regulators is required prior to the consummation
of certain transactions affecting insurance subsidiaries of the holding company
system.
12
<PAGE> 14
The Company's insurance subsidiaries are authorized to transact business on
an admitted basis in 47 states and the District of Columbia. These jurisdictions
require insurers doing business in the jurisdiction to participate in their
respective guaranty funds. Insurers authorized to transact business in such
jurisdictions are required to cover losses of insolvent insurers and generally
can be assessed from 1% to 2% of premiums written in that jurisdiction each year
to pay the claims of insolvent insurers. Since the likelihood and amount of any
particular assessment cannot be estimated until after an insolvency has
occurred, ultimate liabilities for assessments may not be fully reflected on the
books of the insurers. Insurance companies must also participate in automobile
insurance plans and other specialized insurance coverage plans (windstorm, etc.)
mandated by some states in which they sell insurance. For example, in Michigan,
the Facility is structured as a joint underwriting association which provides
insurance coverage to all drivers who have been unable to obtain insurance in
the voluntary market. The net costs of the Facility are allocated to all
underwriters of automobile insurance in Michigan based upon premiums written.
The Company accrued approximately $1,200,000, $721,000 and $740,000 for the
above funds and plans in 1996, 1995 and 1994, respectively.
In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners (the "NAIC") enacted a model law (the
"Model Law") to implement Risk-Based Capital ("RBC") requirements for insurance
companies. The Model Law became effective with respect to property and casualty
insurance companies as of year-end 1994. The requirements are designed to assess
capital adequacy and to raise the level of protection that statutory surplus
provides for policyholders. The Model Law measures three major areas of risk
facing property and casualty insurers: (i) underwriting risks, which encompass
the risk of adverse loss developments and inadequate pricing; (ii) declines in
asset values arising from credit risk; and (iii) other business risks from
investments. Insurers having less statutory surplus than required by the Model
Law will be subject to varying degrees of regulatory action, depending on the
level of capital inadequacy. The Model Law establishes various levels of
regulatory action. Based upon the 1996 statutory financial statements for the
Company's insurance subsidiaries, each insurance subsidiary's statutory surplus
exceeds all regulatory action levels established by the NAIC.
The extent of regulatory intervention and action increases as the ratio of
an insurer's statutory surplus to its Authorized Control Level ("ACL"), as
calculated under the Model Law, decreases. The first action level, the Company
Action Level, requires an insurer to submit a plan of corrective actions to the
insurance regulators if statutory surplus falls below 200% of the ACL amount.
The second action level, the Regulatory Action Level, requires an insurer to
submit a plan containing corrective actions and permits the insurance regulators
to perform an examination or other analysis and issue a corrective order if
statutory surplus falls below 150% of the ACL amount. The Authorized Control
Level, the third action level, allows the regulators to rehabilitate or
liquidate an insurer in addition to the aforementioned actions if statutory
surplus falls below the ACL amount. The fourth action level is the Mandatory
Control Level which requires the regulators to rehabilitate or liquidate the
insurer if statutory surplus falls below 70% of the ACL amount.
The NAIC has also developed an Insurance Regulatory Information System
("IRIS") to assist state insurance departments in identifying companies which
may be developing performance or solvency problems, as signaled by significant
changes in the companies' operations. Such changes may not necessarily result
from any problems with an insurance company, but may merely indicate changes in
certain ratios outside the ranges defined as normal by the NAIC. When an
insurance company has four or more ratios falling outside "normal ranges", state
regulators may investigate to determine the reasons for the variance and whether
corrective action is warranted. For the year ended December 31, 1996, TITAN
Insurance Company had one test that fell outside of the usual value ranges. This
test regards the change in policyholders' surplus from December 31, 1995 to
December 31, 1996, which test fell higher than the usual value range as a result
of a contribution to surplus made in 1996. For the year ended December 31, 1996,
TITAN Indemnity Company had one test that fell outside the usual value ranges as
well. This test regards the change in net premiums written from 1995 to 1996,
which test fell higher than the usual value ranges because of TITAN Indemnity
Company's growth in the public entity program and non-standard automobile
program for Texas, Colorado and Nevada.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. From time to time, there have been various proposed
federal measures which might have significantly affected the Company's insurance
business,
13
<PAGE> 15
including, among other proposals, the revocation of the antitrust exemption
provided by the McCarran-Ferguson Act. The economic and competitive effects of
any proposals upon the Company would depend upon the final form such legislation
might take.
The principal source of cash available to TITAN Holdings, Inc. is dividends
from its insurance subsidiaries. The payment of dividends to TITAN Holdings,
Inc. by its insurance subsidiaries is subject to state regulation. No state
insurance laws or regulations restrict dividend payments by TITAN Holdings, Inc.
The ability of the Company's insurance subsidiaries to declare dividends is
governed by the insurance laws of both Texas and Michigan. The Michigan
Insurance Code states that absent prior approval of dividends by the state
commissioner, "shareholder dividends shall be declared or paid only from earned
surplus," and limits the amount of dividends that insurance companies can pay in
any twelve month period to the greater of their statutory net income (exclusive
of net realized gains or losses on investments) for the preceding year or 10% of
the insurer's surplus as regards policyholders as of the preceding year end.
Under its certificate of authority, TITAN Insurance Company is not permitted to
pay or declare dividends if its gross premiums written over any twelve month
period exceed 300% of its policyholders' surplus. Dividend payments from TITAN
Indemnity Company are regulated by the insurance laws of the State of Texas.
Under the Texas Insurance Code, an insurer may pay dividends only out of
"surplus profits arising from its business." The Texas Insurance Code limits the
amount of dividends that insurance companies can pay in any twelve-month period,
absent regulatory approval, to the greater of their statutory net income for the
preceding year or 10% of the insurer's surplus as regards policyholders as of
the 31st day of December of the preceding year. Insurance regulators have broad
powers to prevent reduction of policyholders' surplus to inadequate levels, and
there is no assurance that dividends of the maximum amounts calculated under any
applicable formula would be permitted.
The Company's premium financing program is also subject to certain laws
governing the operation of such premium finance companies. These laws pertain to
such matters as books and records that must be kept, forms, licensing, fees and
charges. For example, in Texas, the maximum late payment fee WPAC may charge is
5% of the amount of the overdue payment.
LEGISLATION
From time to time, new regulations and legislation are proposed to limit
damage awards, to control plaintiffs' counsel fees, to bring the industry under
regulation by the federal government, to control premiums, policy terminations
and other policy terms and to impose new taxes and assessments. It is not
possible to predict whether, in what form or in what jurisdictions, any of these
proposals might be adopted, or the effect, if any, on the Company.
The insurance industry is under continuous review by both state and federal
legislatures. From time to time, various regulatory and legislative changes have
been proposed in the insurance industry, some of which could have an effect on
insurers or reinsurers. For example, California adopted Proposition 103, which
was an attempt on the part of that state to limit amounts which may be charged
to insureds for certain categories of property and casualty insurance. Although
Michigan recently considered and rejected a similar proposition, Michigan may
reconsider such proposition and other states may adopt similar propositions.
Other proposals that have in the past been or are at present being considered
are the possible introduction of federal regulation in addition to, or in lieu
of, the current system of state regulation of insurers. Current and proposed
federal measures which may also significantly affect the insurance industry
include minimum solvency requirements and removal of barriers preventing banks
from engaging in the insurance business. The Company is unable to predict
whether any of these proposals will be adopted, the form in which any such
proposals would be adopted or the impact, if any, such adoption would have on
the Company, although such impact could be material.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries had 630 employees
which included 7 executive officers. The Company is not a party to any
collective bargaining agreement and has not
14
<PAGE> 16
experienced work stoppages or strikes as a result of labor disputes. The Company
considers relations with its employees to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark E. Watson, Jr......................... 61 Chairman, Chief Executive Officer and President
Thomas E. Mangold.......................... 41 Executive Vice President, Chief Operating
Officer, and Director
Michael W. Grandstaff...................... 36 Senior Vice President, Treasurer and Chief
Financial Officer
Mark E. Watson, III........................ 32 Senior Vice President, General Counsel and
Secretary and Director
Michael Arledge............................ 45 Senior Vice President, TITAN Indemnity Company
Merle Harris............................... 36 Vice President, Westchester Premium Acceptance
Corporation
B.G. Porter................................ 32 Vice President of Planning & Development
</TABLE>
Mark E. Watson, Jr. founded the company in 1983 and has served as Chairman
of the Board of Directors, Chief Executive Officer and President of the Company
since that time. Mr. Watson received his Bachelor of Science degree in Finance
from the University of Notre Dame.
Thomas E. Mangold has served as a Director of the Company since 1992. He
has served as President of TITAN Insurance Company (formerly known as Imperial
Midwest Insurance Company), since its formation in 1990 and Executive Vice
President and Chief Operating Officer of TITAN Holdings since 1996. From 1987 to
1989, Mr. Mangold served as President of First Security Insurance Group and from
1981 to 1986 as Vice President of Delaney Intermediaries, a reinsurance
intermediary. Mr. Mangold received his Bachelor of Science degree and commission
in the U.S. Naval Reserves from the United States Merchant Marine Academy.
Michael W. Grandstaff has served as Senior Vice President and Chief
Financial Officer of the Company since 1996 and Treasurer of TITAN Insurance
Company since 1992. He was Chief Accounting Officer of the Company from 1995 to
1996. From 1983 to 1990, Mr. Grandstaff, a Certified Public Accountant, served
in various finance-related capacities in both public accounting and the
insurance industry. Mr. Grandstaff received both his Bachelor of Business
Administration in Accounting and Master of Business Administration degrees from
Michigan State University.
Mark E. Watson III has served as Senior Vice President of the Company since
1995 and as a Vice President of the Company from 1991 to 1995. He was elected to
the Company's Board of Directors in February, 1997. He has served as General
Counsel and Secretary of the Company since 1993. From 1989 to 1991, Mr. Watson
was an associate with the law firm of Kroll & Tract, New York, New York. Mr.
Watson received his Bachelor of Business Administration degree in finance from
Southern Methodist University and his Juris Doctor degree from the University of
Texas, School of Law. Mr. Watson is the son of Mark E. Watson, Jr.
Michael Arledge has served as Senior Vice President since 1995 and as Vice
President of TITAN Indemnity Company since 1991. From 1989 to 1991, Mr. Arledge
was Vice President of Public Entity National Company (PENCO). From 1984 to 1989
Mr. Arledge was Vice President -- Underwriting and Marketing for the Company.
Mr. Arledge received his Bachelor of Science degree in Business Administration
from the University of Texas at San Antonio.
Merle Harris has served as Vice President of Westchester Premium Acceptance
Corporation since 1994. From 1992 to 1994, Mr. Harris served as Premium Finance
Manager of Elton George & Co. and from 1990 to
15
<PAGE> 17
1992 as Premium Finance Manager for an affiliate of GAINSCO, Inc. Mr. Harris
attended Dallas Baptist University.
B.G. Porter has served as Vice President of Planning and Development since
joining the Company in 1995. Prior to that time, Mr. Porter was an associate in
the Texas office of McKinsey and Company, Inc, an international management
consulting firm. Mr. Porter received his Bachelor of Arts degree with Honors in
Political Science from Stanford University. He received his Master of Business
Administration degree from Harvard Business School.
ITEM 2. PROPERTIES
In June 1994, the Company acquired a 102,079 square foot office building in
San Antonio, Texas, which serves as its headquarters. The Company presently
occupies approximately one-third of the available office space, with the
remainder leased to third parties. The Company also owns a 27,630 square foot
retail center adjacent to the home office building in San Antonio, Texas. The
majority of this facility is utilized by the Company and the remainder is
leased.
The company leases approximately 30,000 square feet of office space in
Troy, Michigan under a lease expiring in 1998. The Company also leases smaller
facilities for all of its wholly-owned DRCs and its regional offices in Phoenix,
Arizona and St. Louis Park, Minnesota.
ITEM 3. LEGAL PROCEEDINGS
The liquidator of the estate of Millers National Insurance Company filed a
lawsuit against the Company arising out of a 1992 stock purchase agreement under
which the Company purchased 812,421 shares (restated for a stock split and two
stock dividends) of its own Common Stock, then held by the liquidator, from the
liquidator for $3.7 million. The liquidator claims 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 the proceeding vigorously.
The Company is party to numerous lawsuits arising in the normal course of
business. All such lawsuits involve claims under insurance policies underwritten
by the Company, which management believes have been adequately included in its
established reserves for unpaid losses and LAE.
The Company believes the resolution of the above claims and lawsuits will
not have a material adverse effect on its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On March 23, 1994, the Company's common stock commenced trading on the New
York Stock Exchange ("NYSE") under the symbol TH. Prior to such date, the
Company's common stock traded on the NASDAQ National Market System ('NASDAQ")
under the symbol TITN, since the Company's initial public offering on July 8,
1993.
The following table sets forth the high and low sale prices for the common
stock for the indicated periods as reported by the NYSE. The table also
indicates cash dividends as declared by the Company. Common stock prices and
dividends declared have been restated to reflect the Company's 5% stock
dividends to shareholders of record as of May 13, 1996 and June 1, 1995.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
---- --- ---------
<S> <C> <C> <C>
1996
First Quarter............................................... 13 21/64 12 9/64 $0.0714
Second Quarter.............................................. 16 3/8 12 47/64 0.0714
Third Quarter............................................... 15 1/4 13 5/8 0.0800
Fourth quarter.............................................. 16 1/2 14 1/4 0.0800
1995
First Quarter............................................... 9 17/32 8 39/64 0.0635
Second Quarter.............................................. 11 43/64 8 61/64 0.0635
Third Quarter............................................... 15 11 5/16 0.0714
Fourth quarter.............................................. 14 7/8 12 3/8 0.0714
</TABLE>
As of March 21, 1997, there were approximately 1,000 registered holders and
in excess of 2,800 individual holders of the common stock, holding 9,557,516
shares.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Premiums written........................ $172,846 $138,435 $109,784 $94,994 $72,524
Premiums earned......................... 152,452 118,219 90,786 69,407 46,402
Net investment income................... 12,866 10,161 7,576 5,470 4,421
Total revenues and other
income........................ 174,296 131,842 100,661 82,477 56,406
Losses and loss expenses................ 95,087 72,443 52,439 39,822 26,838
Total expenses.......................... 153,597 116,556 87,814 72,350 50,699
Net income.............................. $ 14,181 $ 10,570 $ 9,063 $ 6,734 $ 4,041
-------- -------- -------- ------- -------
Weighted average shares
outstanding(1)....................... 9,613 7,928 7,793 5,928 5,157
Net income per share(1)................. $ 1.48 $ 1.33 $ 1.16 $ 1.13 $ 0.78
-------- -------- -------- ------- -------
Net operating income per share(1) (2)... $ 1.42 $ 1.33 $ 1.18 $ 1.04 $ 0.70
-------- -------- -------- ------- -------
Cash dividends per share(1)............. $ .303 $ .270 $ .240 $ .113 --
Loss ratio.............................. 62.4% 61.3% 57.7% 57.4% 57.8%
GAAP Expense ratio(3)................... 28.8% 30.9% 34.4% 35.0% 39.7%
GAAP Combined ratio(3).................. 91.2% 92.2% 92.1% 92.4% 97.5%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments..................... $224,793 $193,858 $132,479 $125,128 $ 98,214
Total assets.......................... 361,955 307,087 219,898 189,603 144,845
Reserve for unpaid losses and loss
expenses........................... 141,871 122,811 98,405 76,514 60,717
Unearned premiums..................... 55,333 45,178 35,219 32,255 27,428
Notes payable and capitalized lease
obligations........................ 24,024 12,319 2,614 3,193 6,763
Shareholders' equity.................. 111,868 100,484 66,555 66,054 29,833
Book value per share(1)............... $ 11.75 $ 10.60 $ 8.61 $ 8.36 $ 7.22
Statutory policyholders' surplus...... $ 80,325 $ 58,812 $ 41,321 $ 36,891 $ 20,238
Net premiums written to policyholders'
surplus............................ 2.02x 2.16x 2.40x 1.95x 2.74x
</TABLE>
- ---------------
(1) Prior amounts have been restated for the effects of 5% stock dividends
effective May 13, 1996 and June 1, 1995.
(2) Represents net income per share exclusive of net, after-tax realized gains
(losses).
(3) Prior amounts have been restated to exclude amortization of intangible
assets.
18
<PAGE> 20
ITEM 7. 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 non-standard automobile insurance in six states 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, provides commercial property and
casualty premium financing. The Company refers to its non-standard personal
lines 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 the fiscal years (typically
January, July or October). Therefore, these months have historically produced
the most premium volume for the Company. Non-standard automobile insurance does
not tend to be highly seasonal.
All prior period earnings per share data have been restated to reflect 5%
stock dividends effected May 13, 1996 and June 1, 1995.
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 Written
Premium writings for the past two calendar years have increased
approximately 25% annually. For the year ended December 31, 1996 premiums
written totaled $172.8 million versus $138.4 million in 1995 and $109.8 million
in 1994. The increase in premiums written is primarily attributable to TITAN
Auto. For the three years ended December 31, 1996, 1995 and 1994, TITAN Auto
premiums written were $106.4 million, $80.6 million and $56.4 million,
respectively, representing growth of 32% in 1996 and 43% in 1995. TITAN Public
Entity accounted for $61.2 million in premiums written in 1996 versus $53.7
million in 1995 and $47.4 million in 1994 representing increases of 14% and 13%
respectively.
During 1996, TITAN Auto's operations in Michigan and Arizona provided for a
majority of the increase in non-standard automobile premiums written. Michigan
premiums written increased 19% to $80.3 million in 1996 versus a 22% increase in
1995 to $67.4 million from $55.4 million in 1994. Arizona premiums written
totaled $20.9 million in 1996, $13.2 million in 1995 and $1.0 million in 1994.
The Arizona operations commenced in September of 1994 and in two full years of
operation, 1996 versus 1995, premium writings increased by 58%. During 1996,
TITAN Auto began underwriting operations, through acquisitions of independent
insurance agencies which the Company converted into direct response centers, in
Nevada (in the second quarter of 1996), Colorado and Texas (both in the third
quarter of 1996) which accounted for $1.3 million, $2.1 million and $1.8
million, respectively in premiums written. In January 1997, TITAN Auto commenced
underwriting operations in New Mexico through Tri-West Holdings Inc.,
("Tri-West"), an independent company that acquires agencies and operates DRCs
under contract with the Company. Tri-West writes New Mexico business exclusively
for TITAN Auto and TITAN Auto has acquired an option to purchase Tri-West's New
Mexico operation at a future time. TITAN Auto anticipates writing business in
Indiana through Tri-West beginning May 1, 1997 and expects to enter other states
through Tri-West in 1997 and beyond.
The Company attributes the growth in Michigan to an increase in its agency
force to in excess of 1,600 independent licensed agencies. In addition, TITAN
Auto has formed strategic alliances with certain
19
<PAGE> 21
distributors of standard or preferred automobile insurance products in Michigan
in 1996, which collectively contributed $9.0 million in premiums written.
Management believes that TITAN Auto continues to be the largest voluntary writer
of private passenger non-standard automobile insurance in the state of Michigan.
Competition within Michigan has increased and the Company anticipates the
competition to continue, which could negatively impact future growth in
Michigan. The increase in TITAN Auto's Arizona premium writings is primarily
attributable to the continued success of marketing through direct response
centers. The Company anticipates continued growth for TITAN Auto through
increased marketing for existing DRCs, independent agency expansion, new
strategic alliances and future geographic expansion.
TITAN Public Entity's consistent growth continued in 1996 as premiums
written increased 14% to $61.2 million. For the year ended 1995 premiums written
increased 13% to $53.7 million compared to $47.4 million in 1994. The increase
resulted principally from states where additional state managers have been
deployed to expand market coverage. In 1996, a new program, Horizon, was
introduced providing a single, comprehensive package of coverages which
simplifies the insurance policy for insureds and streamlines the underwriting
and policy issuance processes. To further enhance TITAN Public Entity, the
Company, in 1996, began offering a program to private schools and fire districts
throughout the country and workers compensation insurance to its insureds in
Pennsylvania. In 1996, workers compensation premiums written were not material
to the Company and the majority of risk exposure associated with this line of
coverage is ceded to a reinsurer. This workers compensation program will be
expanded in 1997 to other states. TITAN Public Entity anticipates moderate
growth in 1997 as the Company continues to be selective with its underwriting
decisions in a highly competitive and price sensitive market.
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 years ended December 31, 1996, 1995 and 1994 were 6.1%, 8.0% and
9.6%, respectively. The reductions in reinsurance costs are attributable to the
proportional increase in TITAN Auto's operations, which have lower reinsurance
costs due to relatively low policy limits. The reductions in reinsurance costs
are also attributable to a reduction in the Michigan Catastrophic Claims
Association ("MCCA") assessment rate in early 1996 and a reduction in TITAN
Public Entity's reinsurance premium rates associated with continued favorable
experience and the Company increasing its net retentions. At the renewal of the
public entity'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. Reinsurance costs for both TITAN Auto and TITAN Public Entity were
reduced in 1995 compared to 1994 for the same reasons noted above.
The Company expects premiums ceded as a percent of premiums written to
continue to decline because of the growth in Titan Auto, increased retention and
further reductions in the MCCA assessment rate.
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 increased approximately 30% for the second
consecutive year to $152.5 in 1996 compared to $118.2 million in 1995 and $90.8
million in 1994. TITAN Auto earned premium increased to $93.9 million in 1996
versus $69.1 million in 1995 and $47.3 million in 1994. TITAN Public Entity
earned premium for the three years ended 1996, 1995 and 1994 was $54.2 million,
$44.9 million and $39.4 million, respectively. The increase in premiums earned
is attributable to the overall increase in premiums written and reduced amounts
ceded.
Fee and Ceding Commission Income
TITAN Auto's operations generate certain policy and installment billing
fees which comprise the majority of fee and ceding commission income. Ceding
commissions received from reinsurers represent the
20
<PAGE> 22
reimbursement of policy acquisition expenses or profit commissions based on loss
experience. The increase in fee and ceding commission income of approximately
$4.7 million, to $8.1 million in 1996, stems primarily from increased policy fee
income associated with the growth in TITAN Auto's operations. The increase
experienced in 1996 over 1995 is more significant than the increase in 1995 over
1994 due to the expansion of TITAN Auto's operations in 1996 into Arizona,
Nevada, Texas and Colorado, where policy fees are more significant. TITAN Auto
premiums written outside of Michigan exceeded $26 million in 1996 compared to
approximately $13 million in 1995.
The Company expects fee income to continue to increase in conjunction with
the growth and expansion of its auto program into additional states.
Net Investment Income
Net investment income increased 27% in 1996 to $12.9 million from $10.2
million in 1995, versus a 34% increase in 1995 from $7.6 million in 1994. The
increases in investment income for both 1996 and 1995 relate to a larger base of
invested assets associated with cash provided by operations and, in the case of
1995, proceeds from the Company's November 1995 stock offering. The increase in
1995 was also attributable to a slight increase in the average yield of the
Company's investment portfolio. The average yield of the investment portfolio
for 1996, 1995 and 1994, was approximately 6.3%, 6.4% and 6.0%, respectively.
The Company's invested assets are held primarily in fixed maturities and
since 1994 interest rates have not significantly impacted the yield of the fixed
maturity portfolio as a result of its relatively short duration. In 1996 the
duration of the portfolio was 3.5 years compared to 3.0 years in 1995 and 3.3
years in 1994.
Interest income from premium finance contracts increased to $2.5 million in
1996 from $1.6 million in 1995 and $0.9 million in 1994. Such increases are
substantially attributable to increases in the amounts of premiums financed.
During 1996 premiums financed increased 66% to $51.7 million versus $31.1
million in 1995 and $19.2 million in 1994.
Combined Ratio
The combined ratio is a measure of an insurance company's profitability
from underwriting, and it has two components: a loss ratio and an expense ratio.
On a GAAP basis, losses and loss expenses are expressed as a percentage of
premiums earned ("loss ratio") and underwriting expenses are also expressed as a
percentage of premiums earned ("expense ratio"). A combined ratio under 100%
indicates an underwriting profit while a combined ratio over 100% indicates an
underwriting loss.
The Company's overall GAAP combined ratio decreased to 91.2% in 1996 from
92.2% in 1995 and 92.1% in 1994. Overall the loss ratio component has increased
slightly to 62.4% in 1996 from 61.3% in 1995 and 57.7% in 1994 while the overall
expense ratio component has decreased steadily to 28.8% in 1996 from 30.9% in
1995 and 34.4% in 1994.
TITAN Auto's overall GAAP combined ratio increased somewhat for the year
ended December 31, 1996 to 86.5% from 85.7% in 1995 due to an increase in the
expense ratio component in 1996 to 27.8% from 26.9% in 1995. The slight increase
in the expense ratio relates primarily to the development of DRCs and the
associated advertising costs not initially offset by premium volume.
Additionally, an increased proportion of corporate service costs were attributed
to TITAN Auto in 1996 in connection with its extensive strategic development.
TITAN Auto's loss ratio component remained constant in 1996 versus 1995 at
approximately 58.8%. For the year ended 1995, compared to 1994, TITAN Auto's
expense ratio decreased to 26.9% versus 32.1%. Such decrease stems primarily
from the growth of TITAN Auto's Arizona operation. The Arizona operation
generates significant policy fee income, consistent with the market, and this
fee income is reflected as an offset to the expense ratio. Accordingly, the
Arizona business is underwritten at a higher loss ratio relative to the Michigan
market. The 1995 loss ratio increased to 58.8% compared to 56.3% in 1994.
TITAN Public Entity's overall GAAP combined ratio remained fairly constant
in 1996 at 96.4% compared to 96.6% in 1995 as an increase in the loss ratio was
offset by improvement in the expense ratio. TITAN Public Entity's loss ratio in
1996 of 65.8% compared to 61.9% of a year ago was affected by
21
<PAGE> 23
development on prior accident years and the severe winter storms in the
northeast United States in early 1996. The development on prior accident years
relates to certain claims ultimately settled at amounts in excess of established
loss reserves. Such development is limited to select liability lines of coverage
and certain territories within public entity. Management of the Company has
since modified underwriting criteria for such coverages and adjusted its
reserving practices. The improvement in the expense ratio in 1996 to 30.6% from
34.7% in 1995 is due to the realignment of corporate service costs in 1996 and
to reinsured losses incurred in 1995 that reduced the Company's profit
commission from its reinsurer in 1995. During 1995 TITAN Public Entity's loss
ratio increased to 61.9% from 60% in 1994, primarily due to increased claim
frequency.
The Company's strategic plan includes initiatives to further reduce
operating expenses, primarily as they relate to TITAN Auto. Accordingly, the
Company anticipates continued improvement in the expense ratio. This will enable
the Company to underwrite TITAN Auto at a somewhat higher loss ratio and become
more competitive in the marketplace while continuing its focus on profitability.
Agents' Commissions
Commissions paid to independent insurance agents represent the Company's
most significant policy acquisition cost. The Company's trend of reducing this
cost continued in 1996, evidenced by the fact that agents' commissions, as a
percentage of premiums earned decreased to 11.8% in 1996 from 14.1% in 1995 and
17.3% in 1994. Such decreases relate primarily to the expansion of TITAN Auto's
DRC operations which are not subject to commission expense. The Company
anticipates this trend to continue as more direct response centers commence
operations.
Discontinued Programs
The Company discontinued its involvement in an aviation program in 1993
and, effective January 1995, ceased its involvement in a contract surety
program. In 1996, 1995 and 1994, the Company incurred underwriting losses of
approximately $1.4 million, $1.2 million and $1.1 million, respectively, as a
result of adverse development from these programs.
In early 1997, the Company plans to execute a transaction that will
transfer existing loss reserves and unearned premiums and cede 100% of future
business, to a reinsurer, of its preferred automobile insurance program offered
to educators in Minnesota. The educators program was not material to the Company
in 1996, 1995 or 1994 and will not be significant in 1997.
Amortization of Intangibles
During 1996, intangible assets were capitalized as a result of acquisitions
of independent insurance agencies in Texas, Colorado and Nevada. Intangible
assets were also capitalized from 1992 through 1995 in connection with the
Company's acquisition of TITAN Insurance Company and in 1994 and 1995 in
connection with the acquisition of independent insurance agencies in Arizona and
Michigan. Amortization of these amounts was $2.2 million, $1.2 million and
$510,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996 unamortized costs were $21.2 million that relate to these
acquisitions and will be amortized to future periods.
Net Income
Net income increased $3.6 million or 34% to $14.2 million from $10.6
million in 1995, versus a $1.5 million or 16% increase in 1995 over $9.1 million
in 1994. On an operating basis, excluding the effects of net after-tax realized
gains (losses), net operating income increased $3.0 million to $13.6 million
from $10.6 million in 1995 versus a $1.4 million increase over $9.2 million in
1994.
Net income per share in 1996 was $1.48 versus $1.33 in 1995 on
approximately 21% more weighted average shares outstanding in 1996 compared to
1995. Net income per share was $1.16 in 1994 on approximately an equal amount of
shares outstanding compared to 1995.
22
<PAGE> 24
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 $31.0 million
in 1996 versus $36.3 million in 1995 and $22.2 million in 1994. The decrease in
1996 relates primarily to an elevated level of losses paid in 1996 compared to
1995 associated with the growth in TITAN Auto's operations and the
proportionally shorter loss payout period relative to TITAN Public Entity
operations.
Net cash provided by financing activities includes borrowings under the
Company's and WPAC's credit facility. In August of 1996 Holdings borrowed $10
million to increase the statutory surplus of the insurance companies and
borrowed $2 million at various intervals throughout 1996 for working capital
purposes. WPAC increased its outstanding borrowings from $7 million to $15.8
million to support its premium finance operations. Financing activities in 1995
included net proceeds from Holdings common stock offering of $20.7 million
through which $11.5 million of debt was repaid, borrowings under Holdings'
credit facility of $21.5 million ($20 million increased the statutory surplus of
the insurance companies) and $4 million of borrowings under WPAC's facility.
In July 1996, Holdings and WPAC entered into a $55 million credit facility
with a group of banks, increasing the limit of the $45 million credit facility
originally executed in August 1995. The 1996 credit facility includes a $10
million revolving line of credit ($2 million outstanding) until July 30, 2001
for Holdings' working capital purposes, a $20 million term loan ($20 million
outstanding) utilized by the insurance companies to increase underwriting
capacity, and a $25 million revolving credit facility available until July 30,
1997 for WPAC's premium finance operations. Management, in 1997, will evaluate
the insurance companies' underwriting leverage ratio (net to premiums written as
a function of statutory surplus) and evaluate whether additional financing is
required to increase underwriting capacity. During 1997 management expects to
utilize a portion of Holdings' $10 million revolving line of credit as necessary
for working capital purposes. The term loan is payable in $4 million increments
annually through 2001. The debt service in 1997, under the term loan, is
anticipated to be repaid through dividends from the insurance companies to
Holdings. WPAC's facility extends through July 30, 1997 at which time WPAC
intends to renegotiate the line of credit for another year. In February 1997,
WPAC acquired 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. Concurrent with the
purchase, WPAC extended the limit of its facility to $50 million. At the date of
purchase, WPAC increased its borrowings by approximately $11.5 million for
finance contracts acquired from Elite. All other terms remained the same.
The Company's insurance subsidiaries are subject to state insurance laws
that restrict their ability to pay dividends. In 1997 Holdings could receive up
to approximately $8.0 million in dividends without regulatory approval. Based on
the current working capital of Holdings, management anticipates the payment of
the dividends available without regulatory approval from the insurance companies
to help meets its current liquidity needs, including its debt service
obligations under the credit facility.
In 1996, cash used by investing activities included TITAN Auto's purchase
of certain net assets of independent insurance agencies of approximately $2.6
million in addition to approximately $6.7 million in contingent consideration
paid related to the initial purchase of TITAN Insurance Company. The Company
will make one final payment of contingent consideration in 1997 in the amount of
approximately $2.5 million in connection with the purchase of Titan Insurance
Company, which has been accrued for in full. In addition, TITAN Indemnity
Company expended approximately $4.1 million on capital improvements to its home
office building. The Company now occupies approximately one-third of the home
office building, replacing previous facilities which were leased by the Company.
Future capital improvements are anticipated to be insignificant to TITAN
Indemnity Company.
IMPACT OF INFLATION
The Company's operations, like those of other property and casualty
insurers, are susceptible to the effects of inflation, as premiums are
established before the ultimate amount of losses and loss adjustment
23
<PAGE> 25
expenses ("LAE") are known. Although management attempts to consider the
potential effects of inflation while setting premiums, for competitive reasons
such premiums may not fully compensate the Company for the effects of inflation.
Public entity premium rates, by the nature of their derivation, generally
respond to the effects of inflation since they are based in part upon a
municipality's annual budget, which itself is susceptible to the effects of
inflation. The Company also attempts to consider the impact of inflation on the
payment of future losses and LAE when establishing reserves for unpaid losses
and LAE. In addition, inflation may affect the rate of return and the market
value of the Company's investment portfolio.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
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)
and applies to entities with publicly held common stock. FAS 128 simplifies the
computation of earnings per share previously required by APB Opinion No. 15,
"Earnings per Share," replacing primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures. FAS 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. FAS 128 requires
restatement of all prior-period EPS data presented. The Company will adopt FAS
128 in the first quarter of 1997.
24
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
IN THOUSANDS
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market value
(amortized cost: $145,990 and $112,309)................ $145,531 $112,990
Fixed maturities held to maturity, at amortized cost
(market value: $16,104 and $19,982).................... 16,114 19,871
Equity securities available for sale, at market value
(cost: $17,088 and $15,489)........................... 16,479 14,679
Short-term investments, at cost which approximates market
value.................................................. 270 4,898
Cash...................................................... 3,682 11,008
Premium finance contracts................................. 23,469 12,858
Mortgage notes receivable................................. 15,935 12,281
Other invested assets, net................................ 3,313 5,273
-------- --------
Total investments................................. 224,793 193,858
Receivables:
Premiums due from agents and policyholders................ 21,848 15,958
Amounts due from reinsurers............................... 47,393 42,589
Other..................................................... 4,917 2,984
Deferred tax assets, net.................................... 4,427 4,586
Property and equipment, at cost less accumulated
depreciation and amortization of $4,804 and $4,249........ 18,852 11,083
Deferred policy acquisition costs........................... 12,498 10,086
Other assets................................................ 6,032 5,174
Goodwill and non-competition agreements, net................ 21,195 20,769
-------- --------
$361,955 $307,087
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserve for unpaid losses and loss expenses............... $141,871 $122,811
Unearned premiums......................................... 55,333 45,178
Notes payable and capitalized lease obligations........... 24,024 12,319
Note payable -- premium finance subsidiary................ 15,750 7,000
Other liabilities......................................... 13,109 19,295
-------- --------
Total liabilities................................. 250,087 206,603
-------- --------
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: 1996 -- 9,521 shares;
1995 -- 9,027 shares................................... 95 90
Additional paid-in capital................................ 62,141 54,274
Retained earnings......................................... 50,054 46,137
Net unrealized loss on investments, net of deferred tax
benefit of $227 and $9................................. (422) (17)
-------- --------
Total shareholders' equity........................ 111,868 100,484
-------- --------
$361,955 $307,087
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Revenues and other income:
Premiums written......................................... $172,846 $138,435 $109,784
Premiums ceded........................................... (10,595) (11,111) (10,502)
-------- -------- --------
Net premiums written............................. 162,251 127,324 99,282
Increase in unearned premiums............................ (9,799) (9,105) (8,496)
-------- -------- --------
Premiums earned.................................. 152,452 118,219 90,786
Fee and ceding commission income......................... 8,095 3,423 2,546
Net investment income.................................... 12,866 10,161 7,576
Net realized gains (losses).............................. 883 39 (247)
-------- -------- --------
Total revenues and other income.................. 174,296 131,842 100,661
-------- -------- --------
Expenses:
Losses and loss expenses................................. 95,087 72,443 52,439
Agents' commissions...................................... 17,914 16,697 15,694
Other operating expenses................................. 40,596 27,416 19,681
-------- -------- --------
Total expenses................................... 153,597 116,556 87,814
-------- -------- --------
Income before income tax expense................. 20,699 15,286 12,847
-------- -------- --------
Income tax expense (benefit):
Current.................................................. 6,140 4,939 4,566
Deferred................................................. 378 (223) (782)
-------- -------- --------
Total income tax expense......................... 6,518 4,716 3,784
-------- -------- --------
Net income....................................... $ 14,181 $ 10,570 $ 9,063
======== ======== ========
Net income per share....................................... $ 1.48 $ 1.33 $ 1.16
======== ======== ========
Weighted average shares outstanding........................ 9,613 7,928 7,793
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) TOTAL
--------------- PAID-IN RETAINED ON TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS STOCK EQUITY
------ ------ ---------- -------- ----------- -------- -------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993......................... 7,164 $72 $31,212 $34,278 $ 492 $ -- $ 66,054
Net income..................... -- -- -- 9,063 -- -- 9,063
Net unrealized loss............ -- -- -- -- (5,283) -- (5,283)
Dividends ($0.24 per share) to
shareholders................. -- -- -- (1,873) -- -- (1,873)
Purchase of treasury stock, at
cost......................... -- -- -- -- -- (1,406) (1,406)
Retirement of treasury stock... (152) (2) (1,404) -- -- 1,406 --
----- --- ------- ------- ------- ------- --------
Balances at December 31,
1994......................... 7,012 70 29,808 41,468 (4,791) -- 66,555
Effect of stock dividend at
June 1, 1995................. 351 3 3,809 (3,812) -- -- --
Net income..................... -- -- -- 10,570 -- -- 10,570
Net unrealized gain............ -- -- -- -- 4,774 -- 4,774
Common stock issued............ 1,664 17 20,657 -- -- -- 20,674
Dividends ($0.27 per share) to
shareholders................. -- -- -- (2,089) -- -- (2,089)
----- --- ------- ------- ------- ------- --------
Balances at December 31,
1995......................... 9,027 90 54,274 46,137 (17) -- 100,484
Effect of stock dividend at May
13, 1996..................... 451 4 7,384 (7,388) -- -- --
Net income..................... -- -- -- 14,181 -- -- 14,181
Net unrealized loss............ -- -- -- -- (405) -- (405)
Common stock issued............ 43 1 483 -- -- -- 484
Dividends ($0.30 per share) to
shareholders................. -- -- -- (2,876) -- -- (2,876)
----- --- ------- ------- ------- ------- --------
Balances at December 31,
1996......................... 9,521 $95 $62,141 $50,054 $ (422) $ -- $111,868
===== === ======= ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 14,181 $ 10,570 $ 9,063
Adjustments to reconcile net income to net cash provided
by operating activities:
Receivables............................................ (12,627) (10,974) (12,530)
Deferred income taxes.................................. 378 (223) (782)
Deferred policy acquisition costs...................... (2,412) (1,469) (2,209)
Reserve for unpaid losses and loss expenses............ 19,060 24,406 21,891
Unearned premiums...................................... 10,155 9,959 2,964
Depreciation and amortization.......................... 1,329 1,137 776
Other.................................................. 972 2,860 3,012
-------- -------- --------
Net cash provided by operating activities......... 31,036 36,266 22,185
-------- -------- --------
Cash flows from investing activities:
Purchases of fixed maturities, available for sale......... (90,897) (43,152) (27,574)
Purchases of fixed maturities, held to maturity........... -- (20,435) --
Purchases of equity securities............................ (11,193) (12,148) (9,661)
Purchases of short-term investments....................... (6,100) (52,935) (3,722)
Premium finance contracts funded.......................... (51,709) (31,092) (19,197)
Mortgage notes funded..................................... (4,978) (3,622) (5,768)
Proceeds from fixed maturities, available for sale:
Sales before maturity.................................. 43,094 16,867 23,482
At maturity............................................ 13,825 5,970 2,600
Proceeds from fixed maturities, held to maturity, called
by issuer.............................................. 3,500 515 --
Proceeds from sales of equity securities.................. 10,214 11,903 6,539
Proceeds from sales and maturities of short-term
investments............................................ 10,728 49,403 7,557
Principal payments on premium finance contracts........... 41,098 27,233 16,417
Payable for securities.................................... -- (2,967) 2,967
Businesses acquired in purchase transactions net of cash
acquired, and contingent consideration paid............ (9,251) (6,234) (4,232)
Purchases of property and equipment....................... (9,464) (4,125) (5,179)
Other..................................................... 4,708 (2,178) (1,218)
-------- -------- --------
Net cash used by investing activities............. (56,425) (66,997) (16,989)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings.................................. 12,000 21,500 --
Net proceeds from borrowings -- premium finance
subsidiary............................................. 8,750 4,000 2,665
Repayments of borrowings.................................. (295) (11,795) (281)
Proceeds from sale of common stock, net................... 484 20,674 --
Payment of dividends...................................... (2,876) (2,089) (1,873)
Purchase of treasury stock................................ -- -- (1,406)
-------- -------- --------
Net cash provided (used) by financing activities....... 18,063 32,290 (895)
-------- -------- --------
Net (decrease) increase in cash........................ (7,326) 1,559 4,301
Cash:
Beginning of year......................................... 11,008 9,449 5,148
-------- -------- --------
End of year............................................... $ 3,682 $ 11,008 $ 9,449
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. GENERAL
TITAN Holdings, Inc. ("Holdings") operates specialty property and casualty
insurance companies and related service companies. Through its insurance
subsidiaries (TITAN Indemnity Company and TITAN Insurance Company), Holdings,
provides non-standard automobile insurance in six states 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) provides commercial property and casualty premium
financing.
For the year ended December 31, 1996, non-standard automobile and public
entity represented 62% and 35% of total premiums written, respectively. Premium
writings are also concentrated as 76% of non-standard automobile premiums
written are from Michigan and 79% of public entity premiums come from eight
states.
In November 1995, a stock offering was completed for 1,643,600 shares at
$13.50 per share which resulted in net proceeds of $20,449,000 (after offering
expenses). The proceeds of this offering were principally used to increase the
underwriting capacity of TITAN Indemnity Company and TITAN Insurance Company, to
repay debt and for working capital purposes.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Holdings and
the following subsidiaries:
TITAN Indemnity Company:
TITAN Indemnity Company ("TITAN Indemnity"), a wholly-owned subsidiary of
Holdings, is a Texas domiciled property and casualty insurer, admitted as an
insurer in 47 states and the District of Columbia. TITAN Indemnity underwrites
insurance for public entities nationwide and non-standard private passenger
automobile insurance in Texas, Colorado, Nevada and New Mexico.
TITAN Insurance Company:
TITAN Insurance Company ("TITAN Insurance"), a wholly-owned subsidiary of
TITAN Indemnity, is a Michigan domiciled property and casualty insurer, also
admitted as an insurer in Arizona. TITAN Insurance underwrites nonstandard
private passenger automobile insurance in Michigan and Arizona.
Westchester Premium Acceptance Corporation:
Westchester Premium Acceptance Corporation ("WPAC"), a wholly-owned
subsidiary of TITAN Indemnity, is a Texas corporation, eligible to transact
premium finance business in 37 states.
All significant intercompany transactions and balances have been eliminated
in consolidation.
C. INVESTMENTS
Holdings' fixed maturities are considered to be either available for sale
or held to maturity, based upon management's intent at the time of purchase.
Fixed maturities categorized as available for sale are marked to market, with
the resulting adjustments, net of deferred income taxes, reported as a component
of shareholders'
29
<PAGE> 31
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equity until realized. Fixed maturities categorized as held to maturity are
carried at amortized cost without recognition of gains or losses that are deemed
to be temporary because Holdings has both the intent and ability to hold these
investments until they mature. All equity securities are available for sale and
marked to market. Realized gains and losses on investments are credited/charged
to income and are determined on a "first-in, first-out" basis.
Mortgage notes receivable and premium finance contracts are carried at
unpaid balances. Management, considering current information and events
regarding the borrowers' ability to repay their obligations, considers a loan to
be impaired when it is probable that Holdings will be unable to collect all
amounts due according to the original contractual terms of the note agreement.
When a loan, in management's judgment, becomes impaired, interest income is
subsequently recognized only to the extent of cash payments received.
Management maintains allowances for mortgage notes receivable and premium
finance contracts at a level which management believes is adequate to absorb
potential losses in the portfolios. The allowances are based on an evaluation of
the notes, past loss experience, current economic conditions, volume, growth and
other relevant factors.
D. RESERVE FOR UNPAID LOSSES AND LOSS EXPENSES
The reserve for unpaid losses and loss expenses is undiscounted and
represents case-basis estimates of reported losses and estimates based on
certain actuarial assumptions regarding the past experience of unreported
losses. Estimated amounts of salvage and subrogation are deducted from the
reserve for unpaid losses and loss expenses. Management believes that the
reserve for unpaid losses and loss expenses is adequate to cover the ultimate
liability. However, such estimate may be more or less than the amount ultimately
paid when the claims are finally settled.
E. REVENUE RECOGNITION
Insurance premium income is recognized on a pro rata basis over the
respective terms of the policies. Policy acquisition costs net of ceding
commissions are similarly deferred and amortized to income.
Reinsurance arrangements are short-duration prospective contracts for which
prepaid reinsurance premiums are amortized ratably over the related policy terms
based on the estimated ultimate amounts to be paid. Premiums ceded for contracts
with retrospective adjustment features are calculated based upon the related
estimated incurred losses and loss expenses including a provision for unreported
losses.
F. PROPERTY AND EQUIPMENT
Property and equipment stated at cost, less accumulated depreciation,
consist primarily of a home office building and adjacent plaza (purchased in
1994), furniture and equipment. Equipment under capital lease obligations is
stated at the present value of the minimum lease payments at the beginning of
the lease term. Depreciation and amortization is primarily computed using the
straight-line method over the estimated useful lives or lease terms, ranging
from 3 to 10 years for equipment and 39 years for the home office building.
G. INCOME TAXES
Holdings accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
Holdings' financial statements or federal tax returns. In estimating future tax
consequences, Holdings generally considers all expected future events other than
enactments of changes in the tax laws or rates.
30
<PAGE> 32
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. GOODWILL AND NON-COMPETITION AGREEMENTS
The excess of cost over net assets purchased relating to business
acquisitions are being amortized on a straight-line basis over periods ranging
from 7 to 25 years and the amounts capitalized relative to non-competition
agreements are being amortized on a straight-line basis over their respective
terms. The carrying value of goodwill and non-competition agreements is
periodically reviewed by Holdings and based on this review no material
impairment exists at December 31, 1996.
Through its wholly-owned subsidiaries, Holdings has also acquired the net
assets of independent insurance agencies. The results of operations of these
agencies have been included in the accompanying consolidated financial
statements since the date of these acquisitions.
I. CASH EQUIVALENTS
Holdings considers all certificates of deposit, United States government
securities and commercial paper with original maturities of three months or less
to be cash equivalents. At December 31, 1996 and 1995, there were no investments
in cash equivalents.
J. NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents (relating
to stock options and warrants) outstanding during the year, calculated on a
daily basis. The weighted average number of shares outstanding for all periods
presented has been retroactively adjusted for the effects of 5% stock dividends
effected on May 13, 1996 and June 1, 1995.
K. STOCK COMPENSATION PLANS
Holdings adopted Statement of Financial Accounting Standard No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," and has elected to continue
utilizing the intrinsic value method required under provisions of APB Opinion
No. 25 (APB 25) and related Interpretations in measuring stock-based
compensation for employees. In addition, SFAS 123 requires Holdings to make pro
forma disclosures of net income and net income per share as if the fair value
method of accounting for stock based compensation had been applied. See note 14
to the consolidated financial statements. The disclosure provisions of SFAS 123
are effective for options granted in fiscal years beginning in 1995.
L. FINANCIAL STATEMENT PRESENTATION
Certain amounts in the consolidated financial statements for prior years
have been reclassified to conform with the current year's presentation.
31
<PAGE> 33
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENTS
A. INVESTMENT INCOME
Major categories of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- ------
IN THOUSANDS
<S> <C> <C> <C>
Fixed maturities, available for sale................... $ 6,963 $ 5,542 $4,725
Fixed maturities, held to maturity..................... 950 366 --
Equity securities...................................... 949 823 983
Short-term investments and cash and cash equivalents... 696 1,044 510
Premium finance contracts.............................. 2,517 1,551 880
Mortgage notes receivable.............................. 1,785 1,091 680
Other invested assets.................................. 53 111 173
------- ------- ------
Total investment income...................... 13,913 10,528 7,951
Less investment expenses............................... 1,047 367 375
------- ------- ------
Net investment income........................ $12,866 $10,161 $7,576
======= ======= ======
</TABLE>
B. REALIZED AND NET UNREALIZED GAINS AND LOSSES ON INVESTMENTS
Realized gains (losses) and changes in net unrealized losses are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------ -------
IN THOUSANDS
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities, available for sale................... $ 231 $ 42 $ (304)
Fixed maturities, held to maturity (called by
issuer)............................................. (14) (8) --
Equity securities...................................... 643 5 55
------- ------ -------
Net realized gains (losses).................... $ 860 $ 39 $ (249)
======= ====== =======
(Increase) decrease in net unrealized losses:
Fixed maturities, available for sale................... $(1,140) $4,461 $(4,754)
Fixed maturities, held to maturity..................... (121) 111 --
Equity securities and other invested assets............ 516 1,518 (2,101)
------- ------ -------
Total (increase) decrease in net unrealized
losses....................................... $ (745) $6,090 $(6,855)
======= ====== =======
</TABLE>
32
<PAGE> 34
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. SUMMARY OF INVESTMENTS
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Available for Sale
U.S. Government agencies and
authorities........................... $ 92,551 $110 $ 976 $ 91,685
States and political subdivisions........ 39,446 452 132 39,766
Collateralized mortgage obligations...... 9,239 72 35 9,276
Corporate securities..................... 4,754 70 20 4,804
-------- ---- ------ --------
Total fixed maturities, available
for sale....................... $145,990 $704 $1,163 $145,531
======== ==== ====== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government agencies and
authorities............................ $ 4,048 $-- $12 $ 4,036
States and political subdivisions......... 12,066 46 44 12,068
------- --- --- -------
Total fixed maturities, held to
maturity........................ $16,114 $46 $56 $16,104
======= === === =======
</TABLE>
The amortized cost and estimated market values of investments in fixed
maturities, at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Available for Sale
U.S. Government agencies and
authorities........................... $ 60,503 $ 262 $216 $ 60,549
States and political subdivisions........ 38,179 648 150 38,677
Collateralized mortgage obligations...... 6,949 89 94 6,944
Corporate securities..................... 6,678 178 36 6,820
-------- ------ ---- --------
Total fixed maturities, available
for sale....................... $112,309 $1,177 $496 $112,990
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government agencies and
authorities......................... $ 7,565 $ 63 $-- $ 7,628
States and political subdivisions...... 12,306 67 19 12,354
------- ---- --- -------
Total fixed maturities, held to
maturity..................... $19,871 $130 $19 $19,982
======= ==== === =======
</TABLE>
33
<PAGE> 35
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market values of fixed maturities, at
December 31, 1996, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because some borrowers have the right to
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
IN THOUSANDS
<S> <C> <C>
Available for sale
Due in one year or less................................... $ 10,360 $ 10,384
Due after one year through five years..................... 73,007 72,803
Due after five years through ten years.................... 44,368 43,964
Due after ten years....................................... 9,016 9,104
Collateralized mortgage obligations....................... 9,239 9,276
-------- --------
$145,990 $145,531
======== ========
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
IN THOUSANDS
<S> <C> <C>
Held to Maturity
Due in one year or less................................... $ 2,103 $ 2,112
Due after one year through five years..................... 6,444 6,434
Due after five years through ten years.................... 1,451 1,455
Due after ten years....................................... 6,116 6,103
------- -------
$16,114 $16,104
======= =======
</TABLE>
At December 31, 1996, approximately 95% of the fixed maturity portfolio was
rated A- or above by Moody's Investors Services, Inc. or Standard and Poor's
Corporation.
Gross realized gains and losses on sales of fixed maturities, available for
sale, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1996 1995 1994
---- ---- -----
IN THOUSANDS
<S> <C> <C> <C>
Gross realized gains........................................ $284 $296 $ 24
Gross realized losses....................................... 53 254 328
---- ---- -----
Net realized gains (losses)....................... $231 $ 42 $(304)
==== ==== =====
</TABLE>
Gross realized losses on fixed maturities, held to maturity, that were
called by issuers, were $14,000 and $8,000 in 1996 and 1995 respectively.
The cost and estimated market values of investments in equity securities at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Common stocks............................ $ 3,442 $ 71 $426 $ 3,087
Nonredeemable preferred stocks........... 13,646 107 361 13,392
------- ---- ---- -------
Total equity securities........ $17,088 $178 $787 $16,479
======= ==== ==== =======
</TABLE>
34
<PAGE> 36
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost and estimated market values of investments in equity securities at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Common stocks............................ $ 4,935 $ 58 $590 $ 4,403
Nonredeemable preferred stocks........... 10,554 127 405 10,276
------- ---- ---- -------
Total equity securities........ $15,489 $185 $995 $14,679
======= ==== ==== =======
</TABLE>
D. PREMIUM FINANCE CONTRACTS
Premium finance contracts consist of loans made on insurance policies
issued by the following insurers:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
IN THOUSANDS
<S> <C> <C>
Other insurers.............................................. $20,743 $10,437
TITAN Indemnity Company..................................... 2,726 2,421
------- -------
Total premium finance contracts, net.............. $23,469 $12,858
======= =======
</TABLE>
Premium finance contracts are secured by the unearned premium reserve
related to the financed policies. The insured's coverage can be canceled by
contractual right if the insured fails to make timely payments under its premium
finance contract and the proceeds from the canceled policy can be used to pay
off the unpaid balance. At December 31, 1996 and 1995, total premium finance
contracts are net of an allowance for doubtful accounts of approximately
$127,000 and $157,000, respectively.
WPAC offers premium financing to third-party insureds and may advance funds
for financed premiums to independent agents who represent third-party insurers.
If remittance is not made by the agency to the third-party insurer, advances
made by WPAC may only be recoverable to the extent the agent's receipt of such
advances is deemed to be received by the third-party insurer. Premium financing
which WPAC offers to TITAN Indemnity Company's public entity insureds does not
involve any credit risk since no funds are advanced to outside parties and WPAC
is entitled to receive the unearned premiums on the financed policies upon
cancellation.
35
<PAGE> 37
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
E. MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable are principally first liens on commercial
properties. There have been no foreclosures nor are any of the notes subject to
delinquent interest.
A summary of mortgage notes receivable, by location, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
IN THOUSANDS
<S> <C> <C>
Bexar County, Texas......................................... $ 7,534 $ 6,816
Dallas County, Texas........................................ 6,292 5,072
Travis County, Texas........................................ 992 --
Bell County, Texas.......................................... 128 --
Arizona..................................................... 721 --
Colorado.................................................... 388 393
------- -------
Total mortgage notes receivable............................. 16,055 12,281
Loan loss reserve........................................... (120) --
------- -------
Total mortgage notes receivable, net.............. $15,935 $12,281
======= =======
</TABLE>
F. RESTRICTIONS
At December 31, 1996, TITAN Indemnity and TITAN Insurance (the "insurance
companies") had investments with a carrying value of $9,042,000 on deposit with
various state insurance departments as a requirement of doing business in such
states.
3. REINSURANCE
In the ordinary course of business, the insurance companies reinsure
certain risks with other insurance organizations to provide greater
diversification of risk and minimize exposure on larger risks. Although
reinsurance agreements contractually obligate the insurance companies'
reinsurers to reimburse the insurance companies for their proportionate share of
losses, they do not discharge the primary liability of the insurance companies.
The insurance companies are contingently at risk for the ceded amount of
reserves for unpaid losses and loss expenses and unearned premiums in the event
the assuming insurance organizations are unable to meet their contractual
obligations.
The insurance companies are currently reinsured under separate treaties for
their different lines of business, resulting in the following net retentions per
occurrence:
<TABLE>
<CAPTION>
PRIMARY EXCESS
POLICIES POLICIES TOTAL
-------- -------- --------
<S> <C> <C> <C>
Non-standard automobile.............................. $440,000 $ -- $440,000
Public entity:
Property........................................... 500,000 -- 500,000
Liability.......................................... 750,000 150,000 900,000
Workers compensation............................... 300,000 -- 300,000
</TABLE>
TITAN Insurance collects and remits a mandatory statutory assessment from
its Michigan non-standard automobile policyholders in order to obtain
reimbursement for personal injury protection on losses (exclusive of loss
expenses) in excess of $250,000 from the Michigan Catastrophic Claims
Association (the "MCCA").
36
<PAGE> 38
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holdings reflects amounts related to ceded unpaid losses and loss expenses
as amounts due from reinsurers and amounts related to ceded unearned premiums as
prepaid reinsurance premiums in its consolidated financial statements.
The amounts due from reinsurers and prepaid reinsurance premiums at
December 31, 1996 totaled $49,665,000 with two reinsurers (the MCCA and Munich
American Reinsurance Company) accounting for approximately 96% of the balance.
On a continual basis, Holdings conducts a review of its reinsurers considering a
number of factors, the most critical of which is their financial stability. As a
result of such reviews, Holdings reevaluates its position with reinsurers with
respect to existing and future reinsurance.
Amounts due from reinsurers consist of amounts related to the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
IN THOUSANDS
<S> <C> <C>
Paid losses and loss expenses............................... $ 2,697 $ 1,942
Unpaid losses and loss expenses............................. 44,101 39,787
Other....................................................... 595 860
------- -------
Total............................................. $47,393 $42,589
======= =======
</TABLE>
Ceded premiums earned and reinsurance recoveries on losses and loss
expenses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
IN THOUSANDS
<S> <C> <C> <C>
Ceded premiums earned............................... $ 10,240 $ 10,266 $16,022
Reinsurance recoveries on losses and loss
expenses.......................................... 10,488 14,748 18,260
</TABLE>
An analysis of net premiums written is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
IN THOUSANDS
<S> <C> <C> <C>
Direct:
Non-standard automobile........................... $104,613 $ 80,607 $56,410
Public entity..................................... 61,130 53,569 47,316
Other............................................. 5,238 4,173 5,940
Assumed............................................. 1,865 86 118
Ceded:
Non-standard automobile........................... (4,313) (5,531) (5,409)
Public entity..................................... (5,483) (5,092) (4,087)
Other............................................. (799) (488) (1,006)
-------- -------- -------
Net premiums written...................... $162,251 $127,324 $99,282
======== ======== =======
Percentage of premiums assumed to net premiums
written........................................... 1.15% 0.10% 0.10%
======== ======== =======
</TABLE>
37
<PAGE> 39
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Holdings files a consolidated federal income tax return. The differences
between the statutory tax rate and the "effective" tax rate are summarized
below:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate.............................................. 35% 35% 34%
Non-taxable investment income............................... (3) (5) (5)
Other....................................................... (1) 1 --
--- --- ---
Actual "effective" rate........................... 31% 31% 29%
=== === ===
</TABLE>
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
IN THOUSANDS
<S> <C> <C>
Deferred tax assets:
Discounting of reserve for unpaid losses and loss expenses
for tax purposes....................................... $5,665 $4,720
Unearned premium deductions for tax purposes.............. 3,705 2,933
Net unrealized losses on investments...................... 227 9
Other..................................................... 285 564
------ ------
Total deferred tax assets......................... 9,882 8,226
------ ------
Deferred tax liabilities:
Net deferred policy acquisition costs..................... 4,374 3,429
Interest on contingent consideration...................... 919 --
Other..................................................... 162 211
------ ------
Total deferred tax liabilities.................... 5,455 3,640
------ ------
Deferred tax assets, net.......................... $4,427 $4,586
====== ======
</TABLE>
Management of Holdings believes that a valuation allowance with respect to
the realization of the total deferred tax assets is not necessary due to the
reversal of the gross deferred tax liability and the application of the
carryback provisions under the Internal Revenue Code. Holdings has not incurred
a loss for financial reporting purposes or federal income tax purposes since
inception, and management believes the existing net deductible temporary
differences will reverse during periods in which net taxable income is
generated. Accordingly, management believes it is more likely than not that
Holdings will fully realize total deferred tax assets, but management cannot
assure that Holdings will generate net income or any specific level of income in
future years.
Total federal income tax payments of $8,112,000, $4,243,000 and $4,965,000
were made during 1996, 1995 and 1994, respectively.
At December 31, 1996, current income taxes receivable of $1,602,000 are
included in other receivables and at December 31, 1995, current income taxes
payable of $460,000 are included in other liabilities.
5. STATUTORY INSURANCE ACCOUNTING PRINCIPLES
TITAN Indemnity and TITAN Insurance are required to prepare financial
statements with their domiciliary states of Texas and Michigan, respectively, in
accordance with statutory insurance accounting
38
<PAGE> 40
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principles ("SAP") prescribed or permitted by these states. The insurance
companies are not utilizing any material accounting methods that are permitted
by state insurance agencies which are not prescribed statutory accounting
practices. The accounting principles used to prepare statutory basis financial
statements differ from GAAP.
A reconciliation of statutory policyholders' surplus at December 31, 1996
and 1995 and statutory net income for the years ended December 31, 1996, 1995
and 1994 of the insurance companies (as filed with their respective insurance
regulatory authorities) to the amounts shown in the accompanying consolidated
financial statements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
IN THOUSANDS
<S> <C> <C>
Statutory policyholders' surplus............................ $ 80,325 $ 58,812
Assets non-admitted for SAP............................... 17,809 19,545
Deferred policy acquisition costs capitalized for GAAP.... 12,498 10,086
Deferred income taxes recorded for GAAP................... 4,494 4,568
Liabilities required for SAP in excess of those required
for GAAP............................................... 8,439 4,920
-------- --------
Shareholders' equity of insurance company
subsidiaries based on GAAP........................ 123,565 97,931
(Deficit) equity attributable to non-insurance company
parent and subsidiaries, net of consolidating
entries................................................ (11,697) 2,553
-------- --------
Total shareholders' equity per accompanying
consolidated balance sheets..................... $111,868 $100,484
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- ------
IN THOUSANDS
<S> <C> <C> <C>
Statutory net income................................... $13,789 $ 9,882 $6,610
Deferred income taxes recorded for GAAP.............. (287) 284 736
Change in deferred policy acquisition costs
capitalized for GAAP.............................. 2,412 1,469 2,209
Other................................................ 829 760 (95)
------- ------- ------
Combined net income of insurance company subsidiaries
based on GAAP..................................... 16,743 12,395 9,460
Net loss attributable to non-insurance parent and
subsidiaries...................................... (2,562) (1,825) (397)
------- ------- ------
Net income per accompanying consolidated
statements of income......................... $14,181 $10,570 $9,063
======= ======= ======
</TABLE>
TITAN Indemnity is required by the Texas Department of Insurance to
maintain capital and surplus of $2,000,000 and TITAN Insurance is required by
the Michigan Insurance Bureau to maintain capital and surplus in an amount
determined adequate by the commissioner, but not less than $1,000,000.
In 1992, TITAN Indemnity underwent a financial examination by the Texas
Department of Insurance through the period ended June 30, 1992. TITAN Insurance
was examined by the Michigan Insurance Bureau through the period ended December
31, 1994.
Regulations that affect Holdings and the insurance industry are often the
result of the National Association of Insurance Commissioners ("the NAIC"). The
NAIC is an association of state insurance commissioners, regulators and support
staff that acts as a coordinating body for the state insurance regulatory
process. In 1994 the NAIC established new risk-based capital ("RBC")
requirements to assist regulators in
39
<PAGE> 41
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
monitoring the financial strength and stability of property and casualty
insurers. Under the NAIC requirements, each insurer must maintain its total
capital and surplus above a calculated threshold or take corrective measures to
achieve the threshold. The insurance companies have calculated their RBC levels
and have determined that their capital and surplus are in excess of the
threshold requirements.
6. DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new and renewal business, which vary with and are
directly related to the production of such business, have been deferred to the
extent that such costs are deemed recoverable from future unearned premiums and
anticipated investment income. Information related to deferred policy
acquisition costs is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Net asset balance, beginning of period............... $ 10,086 $ 8,617 $ 6,408
Amounts deferred:
Commissions to agents.............................. 21,324 16,373 17,255
Taxes and fees..................................... 3,382 3,607 2,653
Other underwriting costs........................... 16,590 13,695 7,787
-------- -------- --------
41,296 33,675 27,695
Fee and ceding commission income................... (5,007) (3,140) (292)
-------- -------- --------
Net amounts deferred............................ 36,289 30,535 27,403
-------- -------- --------
Net amortization..................................... (33,877) (29,066) (25,194)
-------- -------- --------
Net asset balance, end of period................ $ 12,498 $ 10,086 $ 8,617
======== ======== ========
</TABLE>
7. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
IN THOUSANDS
<S> <C> <C>
Term loan at various interest rates (from 6.76% to 7.2%),
due in installments through October 30, 2001, secured by
the common stock of TITAN Indemnity....................... $20,000 $10,000
$10,000,000 revolving line of credit, at LIBOR plus 110
basis points (6.77%), due July 30, 2001, secured by the
common stock of TITAN Indemnity........................... 2,000 --
Capitalized lease obligation secured by an aircraft......... 1,843 2,014
Capitalized lease obligation secured by property and
equipment................................................. 181 305
------- -------
Total............................................. $24,024 $12,319
======= =======
</TABLE>
40
<PAGE> 42
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note payable -- premium finance subsidiary ($15,750,000 and $7,000,000 at
December 31, 1996 and 1995, respectively) represents WPAC's borrowings under its
revolving line of credit, at LIBOR plus 60 basis points (6.26% at December 31,
1996). The $25 million revolving line of credit is secured by premium finance
contracts and is due July 30, 1997.
Maturities at December 31, 1996 (in thousands) are as follows:
<TABLE>
<S> <C>
1997........................................................ $22,086
1998........................................................ 4,249
1999........................................................ 4,295
2000........................................................ 4,330
2001........................................................ 4,814
Thereafter.................................................. --
-------
Total............................................. $39,774
=======
</TABLE>
Total interest payments of $1,898,000, $1,038,000 and $317,000 were made
during 1996, 1995 and 1994, respectively.
Holdings is committed under various operating lease agreements for office
space, non-standard automobile retail selling locations and property and
equipment. Rent expense and future minimum lease payments under these agreements
are not material to the accompanying consolidated financial statements.
In July 1996, Holdings and WPAC entered into a $55 million credit facility
with a group of banks, increasing the limit of the $45 million credit facility
originally negotiated in August 1995. The 1996 credit facility includes a $10
million revolving line of credit until July 30, 2001 for Holdings' working
capital purposes, a $20 million term loan utilized by the Company's insurance
subsidiaries to increase underwriting capacity, and a $25 million revolving
credit facility available until July 30, 1997 for WPAC's premium finance
operations. WPAC's revolving credit facility was amended in February, 1997,
increasing the amount available for premium finance contracts to $50 million,
concurrent with WPAC's purchase of Elite Premium Services, Inc (see note 18).
This increased the Company's total debt facility to $80 million. The credit
facilities for both Holdings and WPAC bear interest at rates based on LIBOR or
the bank's base rate plus a margin ranging from 0 to 200 basis points, depending
upon the total amount of indebtedness of Holdings, the statutory surplus of
TITAN Indemnity, the term of the loan and other factors. In addition, Holdings
has purchased interest rate swap agreements which fix the interest rate on a
portion of the term loan's principal ($7.5 million at December 31, 1996) at
7.01% through February 11, 1997 and on the remainder of the term loan's
principal at 7.20% through March 30, 1998.
The loan agreements contain certain financial covenants. At December 31,
1996, Holdings was in compliance with the covenants stated in the credit
facility with one exception, for which Holdings has received a waiver.
8. RELATED PARTY TRANSACTIONS
A Director of Holdings owns the company that manages the investments of
Holdings and provides certain investment banking services. For the years ended
December 31, 1996, 1995 and 1994, Holdings incurred $243,000, $212,000 and
$154,000, respectively, for such services.
Holdings has entered into employment agreements with certain executives
which grant the executives the right to receive certain benefits, including base
salary, should such executives be terminated other than for cause.
41
<PAGE> 43
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CONCENTRATIONS OF CREDIT RISK
The insurance companies transact business with independent insurance
agents, who represent their insureds. Public entity and certain other premiums
are due from agents ($5,555,000 and $5,755,000 at December 31, 1996 and 1995,
respectively) and represent unpaid agents' balances, net of an allowance for
doubtful accounts of approximately $160,000 at December 31, 1996 and 1995. Such
agents' balances may be secured by the related unearned premium and the
insured's coverage may be canceled if the insured fails to remit the premium to
the agent. However, if the insured has paid the agent, the balance due to TITAN
Indemnity from the agent is unsecured. Non-standard automobile insurance
balances are due from policyholders ($16,293,000 and $10,203,000 at December 31,
1996 and 1995, respectively) and are secured by the related unearned premium.
The insurance companies require policyholders to remit a minimum down payment at
the policy origination date and subsequent scheduled payments are monitored in
order to prevent coverage beyond the date for which payment has been received.
If subsequent payments are not made timely, the policy is canceled at no loss to
the insurance companies. In the opinion of management, the net amounts carried
on the accompanying consolidated balance sheets are collectible.
10. PARENT COMPANY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- --------
IN THOUSANDS
<S> <C> <C>
BALANCE SHEETS
Investment in subsidiaries, at equity in net assets....... $128,111 $ 99,849
Investments............................................... 2,019 8,952
Federal income taxes receivable........................... 1,238 581
Deferred tax asset........................................ 273 55
Property and equipment, net............................... 1,251 781
Other assets.............................................. 1,102 577
-------- --------
$133,994 $110,795
======== ========
Notes payable............................................. $ 22,000 $ 10,000
Other liabilities......................................... 126 311
Shareholders' equity...................................... 111,868 100,484
-------- --------
$133,994 $110,795
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- ------
IN THOUSANDS
<S> <C> <C> <C>
STATEMENTS OF INCOME
Equity in income of subsidiaries.......................... $15,515 $11,864 $9,331
Net realized gains (losses) on sales...................... 23 (216) 2
Investment income......................................... 184 147 158
------- ------- ------
15,722 11,795 9,491
------- ------- ------
Expenses.................................................. 2,454 1,642 665
Income tax benefit........................................ (913) (417) (237)
------- ------- ------
Net income............................................. $14,181 $10,570 $9,063
======= ======= ======
</TABLE>
Substantially all of Holdings' retained earnings are attributable to the
insurance companies. The Texas Insurance Code limits the amount of dividends
TITAN Indemnity can pay to Holdings in any twelve month period to the greater of
its statutory net income for the preceding year or 10% of policyholders' surplus
as of
42
<PAGE> 44
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the 31st day of December of the preceding year. The Michigan Insurance Code
limits the amount of dividends TITAN Insurance can pay to TITAN Indemnity in any
twelve-month period to the greater of its statutory net income for the preceding
year, excluding realized gains (losses) on sales of investments, or 10% of its
policyholders' surplus as of the preceding year end. In addition, TITAN
Insurance is specifically prohibited from paying or declaring dividends if its
gross premiums written over any twelve month period exceed 300% of its
policyholders' surplus. Considering such restrictions, approximately $8.0
million and $12.1 million is available for distribution by TITAN Indemnity and
TITAN Insurance to their respective parent companies during 1996. In 1995, TITAN
Indemnity paid dividends to Holdings of $750,000. TITAN Insurance paid
$3,500,000, $1,612,000 and $1,297,000 in cash dividends to TITAN Indemnity in
1996, 1995 and 1994, respectively.
11. LINE OF BUSINESS INFORMATION
The following presents information regarding Holdings' operations by major
line of business for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
NON-
STANDARD PUBLIC
AUTOMOBILE ENTITY
---------- -------
IN THOUSANDS
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Premiums written.......................................... $106,394 $61,208
Premiums earned........................................... 93,908 54,203
Fee and ceding commission income.......................... 6,649 1,208
Losses and loss expenses.................................. 55,096 35,678
YEAR ENDED DECEMBER 31, 1995
Premiums written.......................................... 80,607 53,655
Premiums earned.......................................... 69,070 44,896
Fee and ceding commission income......................... 2,923 162
Losses and loss expenses................................. 40,595 27,792
YEAR ENDED DECEMBER 31, 1994
Premiums written.......................................... 56,410 47,423
Premiums earned........................................... 47,333 39,412
Fee and ceding commission income.......................... 720 1,798
Losses and loss expenses.................................. 26,666 23,627
</TABLE>
43
<PAGE> 45
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. LOSSES AND LOSS EXPENSES INCURRED AND PAID
Information regarding the reserve for unpaid losses and loss expenses is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
IN THOUSANDS
<S> <C> <C> <C>
Reserves for losses and loss expenses at
beginning of year, gross.............. $122,811 $ 98,405 $ 76,514
Reinsurance balances recoverable........ (39,787) (32,275) (23,190)
-------- -------- --------
Reserves for losses and loss expenses at
beginning of year, net................ 83,024 66,130 53,324
-------- -------- --------
Add:
Provision for losses and loss expenses
occurring:
Current year....................... 90,565 71,278 51,534
Prior years........................ 4,522 1,165 905
-------- -------- --------
Total......................... 95,087 72,443 52,439
-------- -------- --------
Less:
Loss and loss expense payments for
claims occurring during:
Current year....................... 41,060 27,152 17,015
Prior years........................ 39,281 28,397 22,618
-------- -------- --------
Total......................... 80,341 55,549 39,633
-------- -------- --------
Reserves for losses and loss expenses at
beginning of year, net................ 97,770 83,024 66,130
Reinsurance balances recoverable........ 44,101 39,787 32,275
-------- -------- --------
Reserves for losses and loss expenses at
end of year, gross.................... $141,871 $122,811 $ 98,405
======== ======== ========
</TABLE>
The 1996 provision for losses and loss expenses for prior years related
primarily to discontinued programs, certain public entity lines of business and
Michigan auto personal injury protection coverage. Holdings discontinued its
involvement in an aviation program in 1993 and a contract surety program in
1995. Adverse development from these discontinued programs totaled $1.4 million
in 1996. Public entity experienced adverse development in 1996, which aggregated
approximately $2.1 million on certain liability coverages related to 1994.
Michigan personal injury protection experienced approximately $0.9 million of
adverse development in 1996 on 1995 claims, principally in connection with known
cases that developed additional severity. Management of Holdings has since
modified underwriting criteria for such coverages and adjusted its reserving
practices.
13. EMPLOYEE BENEFIT PLANS
Holdings sponsors defined contribution retirement plans under Section
401(k) of the Internal Revenue Code. These plans cover substantially all
employees who meet specified service requirements. Under these plans, the
Holdings may, at its discretion, match 50% of each employee's contribution up to
10% of the employee's salary. Such matching contributions have not been
material.
14. STOCK OPTIONS AND WARRANTS
At December 31, 1996, Holdings had two stock option plans which are further
described below. Holdings applies the intrinsic value method in accounting for
its plans. Accordingly, no compensation expense has been recognized in the
accompanying consolidated financial statements. Had compensation expense for
Holding's
44
<PAGE> 46
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock option plans been determined using the fair value method, Holding's net
income and net income per share would have been reduced to the pro forma amounts
indicated below. The effects of applying SFAS 123 as calculated below may not be
representative of the effects on reported net income for future years.
<TABLE>
<CAPTION>
1996 1995
-------- --------
IN THOUSANDS, EXCEPT PER
SHARE DATA
<S> <C> <C>
Net income:
As reported............................................... $14,181 $10,570
Pro forma................................................. 13,846 10,453
Net income per share:
As reported............................................... $ 1.48 $ 1.33
Pro forma................................................. 1.44 1.32
</TABLE>
Holdings has two fixed stock option plans. Under the 1993 Stock Option
Plan, Holdings may grant options to employees, directors and consultants of
Holdings for up to 992,250 shares of Common Stock. Holdings may also grant
options to outside directors under the 1993 Directors' Stock Option Plan.
Options issued under both plans were at exercise prices equal to the market
price of Holdings' stock on the date of grant and an option's maximum term is
ten years with vesting ranging from immediate to five years.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free interest rates of 5.4% dividend
yield of 1.9%, expected lives of 10 years for the 1993 Stock Option Plan and 5
years for the 1993 Directors Stock Option Plan; and volatility of 23.3%.
A summary of the status of Holding's two fixed option plans as of December
31, 1996, 1995 and 1994, changes during the years then ended, and the
weighted-average fair value of options granted during 1996 and 1995 is presented
below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year............................... 595,026 $10.71 525,927 $10.52 231,573 $ 9.07
Granted............................ 356,550 13.19 96,075 11.26 304,841 11.59
Exercised.......................... (43,564) 9.04 (20,946) 9.06 -- --
Forfeited.......................... (1,049) 13.10 (6,030) 8.94 (10,487) 9.07
------- ------- -------
Outstanding, at end of year.......... 906,963 11.90 595,026 10.71 525,927 10.53
======= ======= =======
Options exercisable at year-end...... 405,472 307,437 154,023
======= ======= =======
Weighted average fair value of
options granted.................... $ 6.63 $ 4.30
</TABLE>
45
<PAGE> 47
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED
AVERAGE
REMAINING NUMBER OF
EXERCISE NUMBER CONTRACTUAL OPTIONS
PRICES OUTSTANDING LIFE EXERCISABLE
- -------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
$ 8.73............................................ 50,180 7.7 years 41,177
9.07............................................ 184,709 6.8 184,709
9.95............................................ 27,563 9.4 27,563
12.24............................................ 248,061 4.3 99,223
13.10............................................ 18,900 8.9 6,300
13.45............................................ 10,500 3.8 --
14.70............................................ 10,500 3.8 --
12.98............................................ 10,500 9.1 --
12.86............................................ 179,550 9.2 --
13.81............................................ 31,500 9.3 31,500
13.50............................................ 75,000 9.7 15,000
15.50............................................ 60,000 9.9 --
------- -------
906,963 405,472
======= =======
</TABLE>
In addition, during 1993, Holdings issued warrants for 452,025 shares of
common stock at a price of $14.96 per share. Such warrants are adjustable for
any dilution caused by the issuance of additional shares or convertible
securities and the holders are entitled to cumulative dividends ($0.93 per share
at December 31, 1996) upon exercise. All such warrants remained outstanding at
December 31, 1996 at a net effective exercise price of $14.52 and expire in
September 1998.
15. ACQUISITIONS AND CONTINGENT CONSIDERATION
During 1996, Holdings acquired the net assets of independent insurance
agencies in Texas, Nevada and Colorado. These acquisitions together with the
prior year acquisitions of the Michigan non-standard automobile operations and
the net assets of independent insurance agencies in Arizona and Michigan, have
given rise to goodwill and non-competition agreements summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------ -------- ------- -------
GOODWILL NON-COMPETITION AGREEMENTS
-------------------------- ----------------------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Net asset balance, beginning of
period........................... $13,007 $ 5,641 $2,189 $ 7,762 $3,673 $1,497
Additions:
Contingent consideration
accrued....................... -- 4,261 2,511 -- 4,260 2,511
Independent agency
acquisitions.................. 2,502 3,551 1,116 82 625 --
Amortization expense............... (969) (446) (175) (1,189) (796) (335)
------- ------- ------ ------- ------ ------
Net asset balance, end of period... $14,540 $13,007 $5,641 $ 6,655 $7,762 $3,673
======= ======= ====== ======= ====== ======
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Holdings is required to disclose estimated fair values of its financial
instruments. Fair value estimates, methods and assumptions are set forth below.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect a premium or discount that could result from offering
for sale at one time the entire holdings of a particular
46
<PAGE> 48
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial instrument. Fair value estimates are based on judgments regarding
economic conditions, risk characteristics of the financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment, and therefore, cannot be
determined with precision.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Financial Assets -- Fair values for fixed maturities, equity securities and
short-term investments are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. The carrying amounts of cash and cash
equivalents, premium finance contracts and other invested assets approximate
their fair values. The fair value of mortgage notes receivable is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to similar borrowers with similar credit ratings and the same
remaining maturities.
Financial Liabilities -- The fair value of the Company's borrowings are
estimated using discounted cash flow analyses based on Holdings' current
incremental borrowing rates for similar types and maturities of instruments.
The carrying amount and fair value of the Company's financial instruments
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
IN THOUSANDS
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Fixed maturities, available for sale..... $145,531 $145,531 $112,990 $112,990
Fixed maturities, held to maturity....... 16,114 16,104 19,871 19,982
Equity securities, available for sale.... 16,479 16,479 14,679 14,679
Short-term investments................... 270 270 4,898 4,898
Cash..................................... 3,682 3,682 11,008 11,008
Premium finance contracts................ 23,469 23,469 12,858 12,858
Mortgage notes receivable................ 15,935 15,910 12,281 12,311
Other invested assets.................... 3,313 3,313 5,273 5,273
FINANCIAL LIABILITIES:
Notes payable and capitalized lease
obligations........................... 24,024 24,024 12,319 12,319
Note payable -- premium finance
subsidiary............................ 15,750 15,750 7,000 7,000
</TABLE>
47
<PAGE> 49
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited operating results by quarter for 1996, 1995 and 1994 are
summarized below:
<TABLE>
<CAPTION>
TOTAL
REVENUES INCOME NET
AND OTHER BEFORE NET INCOME
INCOME INCOME TAX INCOME PER SHARE
--------- ---------- ------- ---------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
1996:
1st....................................... $ 39,081 $ 4,486 $ 3,086 $ .33
2nd....................................... 43,612 5,344 3,692 .38
3rd....................................... 44,547 5,190 3,524 .37
4th....................................... 47,056 5,679 3,879 .40
-------- ------- ------- -----
Year.............................. $174,296 $20,699 $14,181 $1.48
======== ======= ======= =====
1995:
1st....................................... $ 29,857 $ 3,365 $ 2,393 $ .31
2nd....................................... 32,891 3,643 2,481 .32
3rd....................................... 33,626 3,870 2,713 .35
4th....................................... 35,468 4,408 2,983 .35
-------- ------- ------- -----
Year.............................. $131,842 $15,286 $10,570 $1.33
======== ======= ======= =====
1994:
1st....................................... $ 22,438 $ 2,967 $ 2,017 $ .26
2nd....................................... 24,368 2,985 2,125 .28
3rd....................................... 25,257 3,517 2,407 .30
4th....................................... 28,598 3,378 2,514 .32
-------- ------- ------- -----
Year.............................. $100,661 $12,847 $ 9,063 $1.16
======== ======= ======= =====
</TABLE>
18. SUBSEQUENT EVENT
In February, 1997, WPAC 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
acquisition, WPAC 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 in the acquisition.
19. LEGAL PROCEEDINGS
Holdings is party to numerous lawsuits arising in the normal course of
business. All suits involve claims under insurance policies underwritten by
Holdings, which management believes have been adequately included in its
established reserves for unpaid losses and loss expenses.
48
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
TITAN Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of TITAN
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TITAN
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
February 13, 1997
49
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "1997 Proxy Statement") not later than 120 days after the
end of the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference. Only those sections of the Proxy
Statement which specifically address the items set forth herein are incorporated
by reference. Such incorporation does not include the Compensation Committee
Report, the Stock Option Committee Report or the Performance Graph included in
the 1997 Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's 1997 Proxy Statement.
The information concerning the Company's executive officers required by
this Item is incorporated by reference herein to the section in Part I, Item 1,
entitled "Executive Officers of the Registrant".
The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Company's 1997 Proxy Statement
and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.
50
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements
<TABLE>
<CAPTION>
FORM 10-K
PAGE NUMBERS
------------
<S> <C>
Consolidated Balance Sheets, December 31, 1996 and 1995..... 25
Consolidated Statements of Income, Years Ended December 31,
1996, 1995 and 1994....................................... 26
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1996, 1995 and 1994.......................... 27
Consolidated Statements of Cash Flows, Years Ended December
31, 1996, 1995 and 1994................................... 28
Notes to Consolidated Financial Statements.................. 29-48
Independent Auditors' Report................................ 49
</TABLE>
2. Financial Statement Schedules: The financial statement schedules of the
Company other than the one listed below are omitted because of the absence of
the conditions under which they are required or because the required information
is included in the Consolidated Financial Statements or Notes thereto.
Schedule VII-Mortgage Loans on Real Estate and Interest Earned on
Mortgages.
3. Exhibit Index: The Exhibits listed on the next page are filed as part
of, or incorporated by reference into, this Report.
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
----------- ------------------------- ------------
<C> <S> <C>
3.1 Restated Articles of Incorporation. (1)
3.2 Bylaws of the Registrant, as amended. (1)
3.3 Amended and Restated Articles of Incorporation of the
Registrant.
3.4 Bylaws of the Registrant, as amended.
4.2 Form of Underwriters' Warrant Agreement, including form of
Underwriters' Warrant. (1)
4.3 Specimen of revised certificate representing Common Stock,
$.01 par value, of the Registrant. (4)
4.4 Warrant Agreement dated September 30, 1993 between TITAN
Holdings, Inc. and Thomas E. Mangold as Management
Sellers Representative. (5)
4.5 Warrant Agreement dated September 30, 1993 between TITAN
Holdings, Inc. and Monis Schuster as Seller
Representative. (5)
10.1* TITAN Holdings, Inc. 1993 Stock Option Plan. (1)
10.4 Stock Purchase Agreement dated January 1, 1992, among TITAN
Indemnity Company and the shareholders of VFS, Inc. (1)
10.5 Amendment to Stock Purchase Agreement dated January 31,
1992, among TITAN Indemnity Company and the shareholders
of VFS, Inc. (1)
10.14* Employment Agreement dated January 1, 1993 between TITAN
Holdings, Inc. and Mark E. Watson, Jr. (1)
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
----------- ------------------------- ------------
<C> <S> <C>
10.15* Employment Agreement dated January 1, 1993, between TITAN
Holdings, Inc. and Michael J. Bodayle. (1)
10.17 Loan Agreement dated August 8, 1995 among TITAN Holdings,
Inc., as borrower, and Dresdner Bank AG, New York and
Grand Cayman Branches, First Interstate Bank of Texas,
N.A. and Dresdner Bank AG, New York and Dresdner Bank AG,
New York Branch as agent. (5)
10.18 Pledge Agreement dated as of August 8, 1995 among TITAN
Holdings, Inc. and Dresdner Bank AG, New York and Grand
Cayman Branches, First Interstate Bank to Texas, N.A. and
Dresdner Bank AG, New York Branch as agent. (5)
10.19 Loan Agreement dated August 8, 1995 among Westchester
Premium Acceptance Corporation, as borrower, and Dresdner
Bank AG, New York and Grand Cayman Branches, First
Interstate Bank of Texas, N.A. and Dresdner Bank AG, New
York Branch as agent. (5)
10.20 Pledge and Security Agreement, dated as of August 8, 1995
among Westchester Premium Acceptance Corporation and
Dresdner Bank AG, New York and Grand Cayman Branches,
First Interstate Bank of Texas, N.A. and Dresdner Bank
AG, New York Branch as agent. (5)
10.21* TITAN Holdings, Inc. 1993 Directors' Stock Option Plan. (5)
10.22 Investment Management Agreement dated as of May 8, 1995
between TITAN Holdings, Inc. and Lyon Securities, Inc. (5)
10.47 Office Space Lease Agreement dated October 6, 1986 between
One Oak Park Limited and TITAN Holdings, Inc., as
amended. (1)
10.48 Office Building Lease dated March 9, 1993, between Aetna
Casualty and Surety Company and Imperial Midwest
Insurance Company. (1)
10.52 Letter Agreement dated September 30, 1993 to Stock Purchase
Agreement among TITAN Indemnity Company and the
shareholders of VFS, Inc. (2)
10.53* Amendment to TITAN Holdings, Inc., 1993 Stock Option Plan. (3)
10.59* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Thomas E. Mangold. (4)
10.60* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Michael W. Grandstaff. (4)
10.61* Employment Agreement dated January 1, 1994 between TITAN
Insurance Company and Martin F. Gohr. (4)
10.63 Casualty Excess of Loss Reinsurance Agreement No.
63-2407-1-2-3/CX-392-3 among Munich American Reinsurance
Company, Munich Reinsurance Company, U.S. Branch, TITAN
Indemnity Company and TITAN Insurance Company. (6)
10.64 Loan Agreement dated July 30, 1996 among TITAN Holdings,
Inc. As a borrower, and Dresdner Bank AG, New York and
Grand Cayman Branches, Bank One Texas, N.A., and
NationsBanc of Texas, N.A. and Dresdner Bank, AG, New
York Branch as Agent. (7)
10.65 Pledge Agreement dated as of July 30, 1996 among TITAN
Holdings, Inc. and Dresdner Bank, AG, New York and Grand
Cayman Branches, Bank One Texas, N.A. and Nationsbank of
Texas, N.A. and Dresdner Bank, AG, New York Branch as
Agent. (7)
</TABLE>
52
<PAGE> 54
<TABLE>
<C> <S> <C>
10.66 Loan Agreement dated July 30, 1996 among Westchester Premium Acceptance
Corporation as borrower, and Dresdner Bank AG, New York and Grand Cayman
Branches, Bank One Texas, N.A., and Nationsbank of Texas, N.A. and
Dresdner Bank AG, New York Branch as Agent. (7)
10.67 Pledge and Security Agreement dated as of July 30, 1996 among Westchester
Premium Acceptance Corporation and Dresdner Bank, AG, New York and Grand
Cayman Branches, Bank One Texas, N.A., and Nationsbank of Texas, N.A. and
Dresdner Bank, AG, New York Branch as Agent and Collateral Agent. (6)
10.68* Amendment to TITAN Holdings, Inc. 1993 Stock Option Plan
10.69 Agreement of Amendment dated as of February 21, 1997 among Westchester
Premium Acceptance Corporation and Dresdner Bank AG, New York and Grand
Cayman Branches, Bank One Texas, N.A., and Nationsbank of Texas, N.A. and
Dresdner Bank, AG, New York Branch as Agent and Collateral Agent.
22.4 Subsidiaries of the Registrant. (6)
27.2 Financial Data Schedule, December 31, 1996.
23.2 Consent of KPMG Peat Marwick LLP.
28.5 Schedule P of the 1995 Annual Statement for TITAN Indemnity Company. (6)
28.6 Schedule P of the 1995 Annual Statement for TITAN Insurance Company.(6)
28.7 Schedule P of the 1996 Annual Statement for TITAN Indemnity Company.
28.8 Schedule P of the 1996 Annual Statement for TITAN Insurance Company.
</TABLE>
* Denotes management contract or compensatory plan.
- ---------------
(1) Incorporated by reference herein to the Registration Statement on Form S-1
filed on July 7, 1993, Registration No. 33-62732.
(2) Incorporated by reference herein to Form 10-K for the quarterly period ended
September 30, 1993 filed on November 12, 1993.
(3) Incorporated by reference herein to Form 10-K for the year ended December
31, 1993 filed on March 29, 1994.
(4) Incorporated by reference herein to Form 10-K for the year ended December
31, 1994 filed on March 29, 1995.
(5) Incorporated by reference herein to the Registration Statement on Form S-1
filed on November 20, 1995, Registration No. 33-98224.
(6) Incorporated by reference herein to Form 10-K for the year ended December
31, 1995 filed on March 29, 1996.
(7) Incorporated by reference herein to Form 10-Q for the quarterly period ended
June 30, 1996 filed on August 14, 1996.
(b) Reports on Form 8-K: None
53
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ MARK E. WATSON, JR.
----------------------------------
Mark E. Watson, Jr.
March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK E. WATSON, JR. Chairman of the Board, Chief March 27, 1997
- ----------------------------------------------------- Executive Officer and
Mark E. Watson, Jr. President
/s/ THOMAS E. MANGOLD Executive Vice President, and March 27, 1997
- ----------------------------------------------------- Director
Thomas E. Mangold
/s/ MARK E. WATSON, III Senior Vice President, General March 27, 1997
- ----------------------------------------------------- Counsel and Secretary and
Mark E. Watson, III Director
/s/ MICHAEL W. GRANDSTAFF Senior Vice President, March 27, 1997
- ----------------------------------------------------- Treasurer and Chief Financial
Michael W. Grandstaff Officer (Principle Financial
and Accounting Officer)
/s/ LUCIUS E. BURCH, III Director March 27, 1997
- -----------------------------------------------------
Lucius E. Burch, III
/s/ HECTOR DE LEON Director March 27, 1997
- -----------------------------------------------------
Hector De Leon
/s/ E.B. LYON, III Director March 27, 1997
- -----------------------------------------------------
E.B. Lyon, III
/s/ CHRISTOPHER J. MURPHY, III Director March 27, 1997
- -----------------------------------------------------
Christopher J. Murphy, III
/s/ TOBY S. WILT Director March 27, 1997
- -----------------------------------------------------
Toby S. Wilt
/s/ GARY V. WOODS Director March 27, 1997
- -----------------------------------------------------
Gary V. Woods
</TABLE>
54
<PAGE> 56
SCHEDULE VII: MORTGAGE LOANS ON REAL ESTATE AND INTEREST
EARNED ON MORTGAGES
<TABLE>
<CAPTION>
PART I -- MORTGAGE LOANS ON REAL PART II -- INTEREST EARNED ON
ESTATE AT CLOSE OF PERIOD MORTGAGES
-------------------------------- ------------------------------
AMOUNT OF INTEREST DUE INTEREST
CARRYING PRINCIPAL UNPAID AND ACCRUED INCOME EARNED
AMOUNT ON AT CLOSE OF AT CLOSE OF APPLICABLE TO
MORTGAGE PERIOD PERIOD PERIOD
------------ ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Liens on:
Residential (2 loans)...................... $ 569,110 $ 569,110 $ 8,363 $ 39,256
Apartments and business:
Shopping center.......................... 991,775 991,775 14,909 87,212
Office building.......................... 875,632 875,632 13,168 80,255
Apartment building....................... 875,137 875,137 13,543 44,040
Office building.......................... 770,259 770,259 11,579 52,364
Garden office building................... 750,854 750,854 11,281 68,364
Warehouse................................ 721,289 721,289 10,842 50,402
Distribution center...................... 701,608 701,608 10,389 63,807
Apartment building....................... 694,640 694,640 11,303 68,876
Retail center............................ 633,972 633,972 9,959 59,701
Office building.......................... 599,248 599,248 9,517 16,100
Cold storage warehouse................... 584,978 584,978 8,298 52,672
Distribution center...................... 545,334 545,334 8,860 54,037
Others:
$0 -- 100,000 (2 loans).................. 106,939 106,939 1,798 9,437
100,001 -- 150,000 (2 loans)............. 276,480 276,480 4,523 27,405
150,001 -- 200,000 (5 loans)............. 921,186 921,186 14,369 80,395
200,001 -- 250,000 (4 loans)............. 906,540 906,540 14,892 76,720
250,001 -- 300,000 (5 loans)............. 1,370,509 1,370,509 21,137 124,933
300,001 -- 350,000 (1 loan).............. 320,187 320,187 4,874 29,983
350,001 -- 400,000 (3 loans)............. 1,092,359 1,092,359 18,118 109,234
400,001 -- 450,000 (3 loans)............. 1,280,115 1,280,115 19,768 120,264
450,001 -- 500,000 (1 loan).............. 466,533 466,533 7,208 43,472
----------- ----------- -------- ----------
Sub-total........................ 6,740,848 6,740,848 106,687 621,843
----------- ----------- -------- ----------
Loan loss provision:....................... (120,000) (120,000) 0 0
----------- ----------- -------- ----------
Total............................ $15,934,684 $15,934,684 $248,698 $1,358,929
=========== =========== ======== ==========
</TABLE>
- ---------------
Note:
(1) All mortgages are first liens and there are no mortgages being foreclosed or
subject to delinquent interest.
(2) Carrying amount and principal unpaid by state:
<TABLE>
<S> <C>
Texas....................................................... $14,945,080
Arizona..................................................... 721,289
Colorado.................................................... 388,315
Loan loss reserve........................................... (120,000)
-----------
$15,934,684
===========
</TABLE>
55
<PAGE> 57
(3) Reconciliation:
<TABLE>
<S> <C>
Balance at beginning of period.............................. $12,281,364
Additions during period:
New mortgage loans..................................... 4,981,066
Deductions during period:
Collections of principal............................... (1,207,746)
Loan loss provision......................................... (120,000)
-----------
Balance at close of period.................................. $15,934,684
===========
</TABLE>
56
<PAGE> 58
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
----------- ------------------------- ------------
<C> <S> <C>
3.1 Restated Articles of Incorporation. (1)
3.2 Bylaws of the Registrant, as amended. (1)
3.3 Amended and Restated Articles of Incorporation of the
Registrant.
3.4 Bylaws of the Registrant, as amended.
4.2 Form of Underwriters' Warrant Agreement, including form of
Underwriters' Warrant. (1)
4.3 Specimen of revised certificate representing Common Stock,
$.01 par value, of the Registrant. (4)
4.4 Warrant Agreement dated September 30, 1993 between TITAN
Holdings, Inc. and Thomas E. Mangold as Management
Sellers Representative. (5)
4.5 Warrant Agreement dated September 30, 1993 between TITAN
Holdings, Inc. and Monis Schuster as Seller
Representative. (5)
10.1* TITAN Holdings, Inc. 1993 Stock Option Plan. (1)
10.4 Stock Purchase Agreement dated January 1, 1992, among TITAN
Indemnity Company and the shareholders of VFS, Inc. (1)
10.5 Amendment to Stock Purchase Agreement dated January 31,
1992, among TITAN Indemnity Company and the shareholders
of VFS, Inc. (1)
10.14* Employment Agreement dated January 1, 1993 between TITAN
Holdings, Inc. and Mark E. Watson, Jr. (1)
10.15* Employment Agreement dated January 1, 1993, between TITAN
Holdings, Inc. and Michael J. Bodayle. (1)
10.17 Loan Agreement dated August 8, 1995 among TITAN Holdings,
Inc., as borrower, and Dresdner Bank AG, New York and
Grand Cayman Branches, First Interstate Bank of Texas,
N.A. and Dresdner Bank AG, New York and Dresdner Bank AG,
New York Branch as agent. (5)
10.18 Pledge Agreement dated as of August 8, 1995 among TITAN
Holdings, Inc. and Dresdner Bank AG, New York and Grand
Cayman Branches, First Interstate Bank to Texas, N.A. and
Dresdner Bank AG, New York Branch as agent. (5)
10.19 Loan Agreement dated August 8, 1995 among Westchester
Premium Acceptance Corporation, as borrower, and Dresdner
Bank AG, New York and Grand Cayman Branches, First
Interstate Bank of Texas, N.A. and Dresdner Bank AG, New
York Branch as agent. (5)
10.20 Pledge and Security Agreement, dated as of August 8, 1995
among Westchester Premium Acceptance Corporation and
Dresdner Bank AG, New York and Grand Cayman Branches,
First Interstate Bank of Texas, N.A. and Dresdner Bank
AG, New York Branch as agent. (5)
10.21* TITAN Holdings, Inc. 1993 Directors' Stock Option Plan. (5)
10.22 Investment Management Agreement dated as of May 8, 1995
between TITAN Holdings, Inc. and Lyon Securities, Inc. (5)
10.47 Office Space Lease Agreement dated October 6, 1986 between
One Oak Park Limited and TITAN Holdings, Inc., as
amended. (1)
</TABLE>
<PAGE> 59
<TABLE>
<C> <S> <C>
10.48 Office Building Lease dated March 9, 1993, between Aetna Casualty and Surety
Company and Imperial Midwest Insurance Company. (1)
10.52 Letter Agreement dated September 30, 1993 to Stock Purchase Agreement among
TITAN Indemnity Company and the shareholders of VFS, Inc. (2)
10.53* Amendment to TITAN Holdings, Inc., 1993 Stock Option Plan. (3)
10.59* Employment Agreement dated January 1, 1994 between TITAN Insurance Company
and Thomas E. Mangold. (4)
10.60* Employment Agreement dated January 1, 1994 between TITAN Insurance Company
and Michael W. Grandstaff. (4)
10.61* Employment Agreement dated January 1, 1994 between TITAN Insurance Company
and Martin F. Gohr. (4)
10.63 Casualty Excess of Loss Reinsurance Agreement No. 63-2407-1-2-3/CX-392-3
among Munich American Reinsurance Company, Munich Reinsurance Company,
U.S. Branch, TITAN Indemnity Company and TITAN Insurance Company. (6)
10.64 Loan Agreement dated July 30, 1996 among TITAN Holdings, Inc. As a borrower,
and Dresdner Bank AG, New York and Grand Cayman Branches, Bank One Texas,
N.A., and NationsBanc of Texas, N.A. and Dresdner Bank, AG, New York
Branch as Agent. (7)
10.65 Pledge Agreement dated as of July 30, 1996 among TITAN Holdings, Inc. and
Dresdner Bank, AG, New York and Grand Cayman Branches, Bank One Texas,
N.A. and Nationsbank of Texas, N.A. and Dresdner Bank, AG, New York Branch
as Agent. (7)
10.66 Loan Agreement dated July 30, 1996 among Westchester Premium Acceptance
Corporation as borrower, and Dresdner Bank AG, New York and Grand Cayman
Branches, Bank One Texas, N.A., and Nationsbank of Texas, N.A. and
Dresdner Bank AG, New York Branch as Agent. (7)
10.67 Pledge and Security Agreement dated as of July 30, 1996 among Westchester
Premium Acceptance Corporation and Dresdner Bank, AG, New York and Grand
Cayman Branches, Bank One Texas, N.A., and Nationsbank of Texas, N.A. and
Dresdner Bank, AG, New York Branch as Agent and Collateral Agent. (6)
10.68* Amendment to TITAN Holdings, Inc. 1993 Stock Option Plan
10.69 Agreement of Amendment dated as of February 21, 1997 among Westchester
Premium Acceptance Corporation and Dresdner Bank AG, New York and Grand
Cayman Branches, Bank One Texas, N.A., and Nationsbank of Texas, N.A. and
Dresdner Bank, AG, New York Branch as Agent and Collateral Agent.
22.4 Subsidiaries of the Registrant. (6)
27.2 Financial Data Schedule, December 31, 1996.
23.2 Consent of KPMG Peat Marwick LLP.
28.5 Schedule P of the 1995 Annual Statement for TITAN Indemnity Company. (6)
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT NO. IDENTIFICATION OF EXHIBIT BY REFERENCE
- --------------------------- ----------------------------------------------------------------------------- ---------------
<S> <C> <C>
28.6 Schedule P of the 1995 Annual Statement for TITAN Insurance Company.(6)
28.7 Schedule P of the 1996 Annual Statement for TITAN Indemnity Company.
28.8 Schedule P of the 1996 Annual Statement for TITAN Insurance Company.
</TABLE>
* Denotes management contract or compensatory plan.
- ---------------
(1) Incorporated by reference herein to the Registration Statement on Form S-1
filed on July 7, 1993, Registration No. 33-62732.
(2) Incorporated by reference herein to Form 10-K for the quarterly period ended
September 30, 1993 filed on November 12, 1993.
(3) Incorporated by reference herein to Form 10-K for the year ended December
31, 1993 filed on March 29, 1994.
(4) Incorporated by reference herein to Form 10-K for the year ended December
31, 1994 filed on March 29, 1995.
(5) Incorporated by reference herein to the Registration Statement on Form S-1
filed on November 20, 1995, Registration No. 33-98224.
(6) Incorporated by reference herein to Form 10-K for the year ended December
31, 1995 filed on March 29, 1996.
(7) Incorporated by reference herein to Form 10-Q for the quarterly period ended
June 30, 1996 filed on August 14, 1996.
<PAGE> 1
THE STATE OF TEXAS
SECRETARY OF STATE
CERTIFICATE OF RESTATED ARTICLES
OF INCORPORATION
OF
TITAN HOLDINGS, INC.
CHARTER NO. 679619
The undersigned, as Secretary of State of Texas, hereby certifies that the
attached Restated Articles of Incorporation for the above named corporation
have been received in this office and are found to conform to law.
ACCORDINGLY the undersigned, as Secretary of State, and by virtue of the
authority vested in the Secretary by law, hereby issues this Certificate of
Restated Articles of Incorporation.
Dated: August 1, 1996
Effective: August 1, 1996
[STATE OF TEXAS SEAL]
/s/ ANTONIO O. GARZA, JR.
----------------------------
ANTONIO O. GARZA, JR.
Secretary of State dlm
<PAGE> 2
---------------------------
FILED
In the Office of the
Secretary of State of Texas
AUG 01 1996
Corporations Section
---------------------------
RESTATED ARTICLES OF INCORPORATION
OF
TITAN HOLDINGS, INC.
1. Pursuant to Article 4 of the Texas Business Corporation Act,
Titan Holdings, Inc., a Texas Corporation (the "Company"), adopts these
restated Articles of Incorporation, which accurately copy the Articles of
Incorporation and all amendments thereto that are in effect to date and as
further amended by such Restated Articles of Incorporation as hereinafter set
forth and which contain no other change in any provision thereof.
2. The Articles of Incorporation were amended May 2, 1996 by a vote
of the shareholders at the Company's annual meeting of shareholders. The
purpose of the amendment was to change the number of authorized shares of the
common stock from 10,000,000 shares to 40,000,000. At the meeting 9,025,657
shares were entitled to vote on the amendment. 7,423,185 shares voted for the
amendment and 594,963 voted against the amendment.
3. The shareholders of the Company voted to amend the Articles of
Incorporation by amending Article IV thereof to read as follows:
"ARTICLE IV
The total number of shares of all classes of stock which the
corporation shall be authorized to issue is 45,000,000 shares, divided
into the following: (i) 5,000,000 shares of preferred stock, of the par
value $.01 per share ("Preferred Stock"), and (ii) 40,000,000 shares of
common stock of the par value $.01 per share ("Common Stock")."
4. This amendment has been effected in conformity with the
provisions of the Texas Business Corporation Act.
5. The Articles of Incorporation and all amendments and supplements
thereto are hereby superseded by the following Restated Articles of
Incorporation, which accurately copy the entire text thereof, as amended as set
forth above:
<PAGE> 3
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
TITAN HOLDINGS, INC.
ARTICLE I
The name of the corporation is TITAN HOLDINGS, INC.
ARTICLE II
The period of its duration is perpetual.
ARTICLE III
The corporation is organized to transact any and all lawful business for
which a corporation may be incorporated under the Texas Business
Corporation Act.
ARTICLE IV
The total number of shares of all classes of stock which the corporation
shall be authorized to issue is 45,000,000 shares, divided into the
following: (i) 5,000,000 shares of preferred stock, of the par value
$.01 per share ("Preferred Stock"), and (ii) 40,000,000 shares of common
stock of the par value $.01 per share ("Common Stock").
A description of the respective classes of stock and a statement of the
designations, preferences, limitations and relative rights of such
classes of stock and the limitations on or denial of the voting rights
of the shares of such classes of stock are as follows:
A. Provisions Applicable to Preferred Stock
Preferred Stock may be issued from time to time in one or more series
and in such amounts as may be fixed and determined herein or by the
board of directors. The designations, preferences, limitations and
relative rights, including voting rights, of each series of Preferred
Stock shall be such as are fixed by the board of directors, and stated
and expressed in a resolution or resolutions adopted by the board of
directors providing for the establishment of any such series of
Preferred Stock. The board of directors is hereby expressly authorized
to establish any series of unissued shares of Preferred Stock by fixing
and determining the designations, preferences, limitations and relative
rights, including voting rights, of the shares
2
<PAGE> 4
of any series so established, within the limitations set forth in
Article 2.13 of the Texas Business Corporation Act and herein, and to
increase or decrease the number of shares within each such series;
provided, however, that the board of directors may not decrease the
number of shares within a series below the number of shares within such
series that is then issued.
Except in respect of the particulars fixed by the board of directors for
series established by the board of directors as permitted hereby, all
shares of Preferred Stock shall be of equal rank and shall be identical.
All shares of anyone series of Preferred Stock so designated by the
board of directors shall be alike in every particular, except that
shares of anyone series issued at different times may differ as to the
dates from which dividends thereon shall be cumulative.
B. Provisions Applicable to Common Stock
1. Junior Stock. Common Stock is junior to each series of Preferred
Stock and is subject to all of the rights, privileges and preferences
and priorities of Preferred Stock as herein set forth.
2. Dividends. Subject to all rights of each series of Preferred
Stock, dividends may be paid on Common Stock as and when declared by the
board of directors of the corporation out of any funds of the
corporation legally available for the payment thereof.
3. Liquidation Preference. Subject to all of the rights, privileges
and preferences and priorities of each series of Preferred Stock, after
payment shall have been made in full to the holders of each series of
Preferred Stock in the event of any liquidation, dissolution or winding
up of the corporation, to the extent of the liquidation preferences of
such classes of stock, the remaining assets and funds of the corporation
shall be distributed ratably to the holders of Common Stock according to
their respective shares.
4. Voting. Subject to all of the rights, privileges and preferences
and priorities of each series of Preferred Stock, the holders of shares
of Common Stock shall possess full voting power for the election of
directors and for all other purposes. In the exercise of its voting
power, Common Stock shall be entitled to one vote for each share held.
C. Provisions Applicable to Both Preferred Stock and Common Stock
1. Preemptive Rights. Ownership of shares of any class of the
capital stock of the corporation shall not entitle the holders thereof
to any preemptive right to subscribe for or purchase or have offered to
them for subscription or purchase any additional shares of capital stock
of any class of the corporation or any securities convertible into any
class of capital stock of the corporation, however acquired, issued or
sold by the corporation, it being the purpose and intent hereof that the
board of directors shall have full right, power and authority to offer
for subscription or sell or to make any disposal of any or all unissued
shares of the capital stock of the corporation or any securities
convertible into stock or any or all shares of
3
<PAGE> 5
stock or convertible securities issued and thereafter acquired by the
corporation, for such consideration, not less than the par value
thereof, or, in the case of any class of stock without par value, the
stated value thereof, in money, property or labor, as the board of
directors shall determine.
2. Cumulative Voting. No shareholder of the corporation shall have
the right of cumulative voting at any election of directors or upon any
other matter.
3. Authority to Purchase Own Shares. The corporation shall have the
authority to purchase, directly or indirectly, its own shares to the
extent of the aggregate of unrestricted capital surplus available
therefor."
ARTICLE V
The corporation will not commence business until it has received
consideration of the value of ONE THOUSAND DOLLARS ($1,000.00)
consisting of money, labor done or property actually received, for the
issuance of its shares.
ARTICLE VI
The street address of its present registered office is 1020 NE Loop 410,
Suite 700, San Antonio, Texas 78209, and the name of its initial
registered agent at this address is Mark E. Watson, Jr.
ARTICLE VII
The number of directors constituting the board of directors as of the
date of these Restated Articles of Incorporation is nine, and the names
and addresses of the persons who are to serve as directors until the
next annual meeting of the shareholders, or until their successors are
elected and qualify are:
NAME ADDRESS
Mark E. Watson, Jr. 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
Gary V. Woods 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
E.B. Lyon, III 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
4
<PAGE> 6
Lucius E. Burch, III 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
Michael J. Bodayle 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
Thomas E. Mangold 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
Hector DeLeon 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
Christopher J. Murphy 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
Toby S. Wilt 1020 NE Loop 410, Suite 700
San Antonio, Texas 78209
ARTICLE VIII
A director of the corporation shall not be liable to the corporation or
its shareholders for monetary damages for an act or omission in the
director's capacity as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for any act or omission not in good faith that
constitutes a breach of duty of the director to the corporation or any
act or omission that involves intentional misconduct or a knowing
violation of law, (iii) for any transaction from which the director
received an improper benefit, whether or not the benefit resulted from
an action taken within the scope of the director's office, or (iv) for
any act or omission for which the liability of the director is expressly
provided for by statute. If either the Texas Business Corporation Act,
the Texas Miscellaneous Corporation Laws Act or any other applicable
Texas statute hereafter is amended to authorize the further elimination
or limitation of the liability of directors, then the liability of a
director of the corporation, in addition to the limitation on liability
provided herein, shall be limited to the fullest extent permitted by
such amended act. Any repeal or modification of this Article VIII by
the shareholders of the corporation shall be prospective only, and shall
not adversely affect any limitation on the liability of a director of
the corporation existing at the time of such repeal or modification.
5
<PAGE> 7
ARTICLE IX
The power to alter, amend or repeal the bylaws or adopt new bylaws is
vested in the board of directors, subject to repeal or change by action
of the shareholders.
In witness whereof, I have hereunto set my hand this 2nd day of May,
1996.
TITAN HOLDINGS, INC.
/s/ MARK E. WATSON, III
---------------------------------------------
Mark E. Watson, III
Secretary
6
<PAGE> 1
TITAN HOLDINGS, INC.
BYLAWS
(As Amended and Restated February 13, 1997)
ARTICLE I
OFFICES
1.1 The principal office of the corporation shall be located in San
Antonio, Texas.
1.2 The corporation may also have offices at such other places both
within and without the State of Texas as the board of directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 Meetings of shareholders for any purpose may be held at such time
and place within or without the State of Texas as shall be stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
2.2 The annual meeting of shareholders shall be held annually at such
date and time as shall be designated from time to time by the board of
directors and stated in the notice of meeting.
2.3 Special meetings of the shareholders for any purpose or purposes
may be called by the president and shall be called by the president or
secretary at the request in writing of a majority of the board of directors, or
at the request in writing of shareholders owning one-tenth of all the shares
entitled to vote at the meetings. A request for a special meeting shall state
the purpose of the proposed meeting, and business transacted at any special
meeting of shareholders shall be limited to the purposes stated in the notice.
2.4 Written notice stating the place, day and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten nor more than sixty
days before the date of the meeting, either personally or by mail, by or at the
direction of the president, the secretary, or the officer or persons calling
the meeting, to each shareholder of record entitled to vote at such meeting.
2.5 The holders of a majority of the shares issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the shareholders for the transaction of
business except as otherwise provided by statute or by the articles of
incorporation. If, however, a quorum shall not be present or represented at
any meeting of the
<PAGE> 2
shareholders, the shareholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting, provided a quorum
shall be present or represented thereat, any business may be transacted which
might have been transacted if the meeting had been held in accordance with the
original notice thereof.
2.6 If a quorum is present at any meeting, the vote of the holders of
a majority of the shares entitled to vote, present in person or represented by
proxy, shall decide any question brought before such meeting, unless the
question is one upon which a different vote is required by law or by the
articles of incorporation.
2.7 Each outstanding share having voting power shall be entitled to
such number of votes as shall be specified in the articles of incorporation. A
shareholder may vote either in person or by proxy executed in writing by the
shareholder or by his duly authorized attorney-in-fact.
2.8 Any action required or which may be taken at a meeting of the
shareholders may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all the shareholders entitled to
vote with respect to the subject matter thereof.
2.9 At a meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before the meeting in accordance
with these bylaws. To be properly brought before a meeting, business must be
(a) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the board of directors, (b) otherwise properly brought
before the meeting by or at the direction of the board of directors, or (c)
otherwise (i) properly be requested to be brought before the meeting by a
shareholder of record entitled to vote in the election of directors generally,
and (ii) constitute a proper subject to be brought before such meeting. For
business to be properly brought before a meeting of shareholders, any
shareholder who intends to bring any matter (other than the election of
directors) before a meeting of shareholders and is entitled to vote on such
matter must deliver written notice of such shareholder's intent to bring such
matter before the meeting of shareholders, either by personal delivery or by
United States mail, postage prepaid, to the Secretary of the Corporation. Such
notice must be received by the Secretary not later than the following dates:
(i) with respect to a meeting of shareholders, 60 days in advance of such
meeting if such meeting is to be held on a day which is within 30 days
preceding the anniversary of the previous year's meeting, or 90 days in advance
of such meeting if such meeting is to be held on or after the anniversary of
the previous year's meeting; and (ii) with respect to any other meeting of
shareholders or a special meeting of shareholders, the close of business on the
tenth day following the date of public disclosure of the date of such meeting.
For purposes of this Section 2.9, notice shall be deemed to first be given to
shareholders when disclosure of such date is first made in a press release
reported by the Dow Jones News Services, Associated Press or comparable
national news service or in a document publicly filed by the Corporation with
the Securities and Exchange
<PAGE> 3
Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act
of 1934, as amended.
A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the meeting of shareholders (a)
a brief description of the business desired to be brought before the meeting
and the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the Corporation's books, of the shareholder
intending to propose such business, (c) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the
shareholder, and (d) any material interest of the shareholder in such business.
The chairman of a meeting may, if the facts warrant, determine and declare to
the meeting that the business was not properly brought before the meeting and
in accordance with the provisions hereof and, if the chairman should so
determine, the chairman may so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.
ARTICLE III
DIRECTORS
3.1 The number of directors which shall constitute the whole board of
directors shall be not less than one. Such number of directors shall from time
to time be fixed and determined by the directors and shall be set forth in the
notice of any meeting of shareholders held for the purpose of electing
directors. The directors shall be elected at the annual meeting of
shareholders, except as provided in Section 3.2. Directors need not be
residents of Texas or shareholders of the corporation. The directors shall be
divided into three classes. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
board of directors. At each annual meeting of shareholders, successors to the
class of directors whose term expires at that annual meeting shall be elected
for a three-year term. If the authorized number of directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as possible, and any
additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with
the remaining term of that class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his or her term expires
and until his or her successor shall be elected and shall qualify, subject,
however, to prior death, resignation or removal from office.
The provisions set forth in this Section 3.1 may not be amended,
altered, changed or repealed in any respect, nor may any provision be adopted
which is inconsistent with this Section 3.1 unless such action is approved by
the affirmative vote of the holders of not less than 80% of the votes entitled
to be cast on the matter.
3.2 Any vacancy occurring in the board of directors may be filled by
a majority of the remaining directors though less than a quorum of the board of
directors or by the sole remaining
-3-
<PAGE> 4
director or as provided in Section 3.3. A director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office.
3.3 The number of directors may be increased or decreased from time
to time as provided in these bylaws but no decrease shall have the effect of
shortening the term of any incumbent director. Any directorship to be filled by
reason of an increase in the number of directors may be filled by election at
an annual or special meeting of shareholders.
3.4 Any director elected by the shareholders, or by the board of
directors to fill a vacancy, may be removed only for cause by the affirmative
vote of the holders of not less than 80% of the voting power represented by all
the shares of stock of the Corporation outstanding and entitled to vote for the
election of directors, given at a duly called annual or special meeting of
shareholders.
3.5 Except for directors elected pursuant to the provisions of Section
3.2, only individuals nominated for election to the board of directors pursuant
to and in accordance with the provision of this Section 3.5 may be elected to
and may serve upon the board of directors of the Corporation. Nominations for
the election of directors may be made by the board of directors, a committee
thereof or by any shareholder entitled to vote in the election of directors
generally. Subject to the foregoing, only a shareholder of record entitled to
vote in the election of directors generally may nominate one or more persons
for election as directors at a meeting of shareholders and only if written
notice of such shareholder's intent to make such nomination or nominations has
been given, either by personal delivery or by United States mail, postage
prepaid, to the Secretary of the Corporation and has been received by the
Secretary not later than the following dates: (i) with respect to an election
to be held at an annual meeting of shareholders, 60 days in advance of such
meeting if such meeting is to be held on a day which is within 30 days
preceding the anniversary of the previous year's annual meeting, or 90 days in
advance of such meeting if such meeting is to be held on or after the
anniversary of the previous year's annual meeting; and (ii) with respect to an
election to be held at a special meeting of shareholders for the election of
directors, the close of business on the tenth day following the date on which
notice of such meeting is first given to shareholders. For purposes of this
Section 3.5, notice shall be deemed to first be given to shareholders when
disclosure of such date is first made in a press release reported by the Dow
Jones News Service, Associated Press or comparable national news service or in
a document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act
of 1934, as amended.
Each such notice shall set forth:
(i) the name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated;
-4-
<PAGE> 5
(ii) a representation that the shareholder is a holder of record of stock
of the Corporation entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person or persons specified
in the notice;
(iii) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the shareholder; and
(iv) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the board of directors.
To be effective, each notice of intent to make a nomination given
hereunder shall be accompanied by the written consent of each nominee to serve
as a director of the Corporation if elected.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not properly brought before the
meeting in accordance with the provisions hereof and, if the chairman should so
determine, declare to the meeting that such nomination was not properly brought
before the meeting and shall not be considered.
MEETINGS OF THE BOARD OF DIRECTORS
3.6 Meetings of the board of directors, regular and special, may be
held either within or without the State of Texas.
3.7 Regular meetings of the board of directors may be held upon such
notice, or without notice, and at such time and at such place as shall from
time to time be determined by the board.
3.8 Special meetings of the board of directors may be called by the
chairman of the board of directors or the president and shall be called by the
secretary on the written request of two directors. Notice of each special
meeting of the board of directors shall be given to each director at least 24
hours before the time of the meeting.
3.9 Attendance of a director at any meeting shall constitute a waiver
of notice of such meeting, except where a director attends for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened. Except as may be otherwise
provided by law or by the articles of incorporation or by the bylaws, neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
-5-
<PAGE> 6
3.10 At all meetings of the board of directors a majority of the
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the board of directors, unless otherwise
specifically provided by law, the articles of incorporation or the bylaws. If
a quorum shall not be present at any meeting of directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
3.11 The board of directors, by resolution passed by a majority of
the full board, may from time to time designate a member or members of the
board to constitute committees, including an executive committee, which shall
in each case consist of one or more directors and shall have and may exercise
such powers, as the board may determine and specify in the respective
resolutions appointing them. A majority of all the members of any such
committee may determine its action and fix the time and place of its meetings,
unless the board of directors shall otherwise provide. The board of directors
shall have power at any time to change the number, subject as aforesaid, and
members of any such committee, to fill vacancies and to discharge any such
committee.
3.12 Any action required or permitted to be taken at a meeting of the
board of directors or any committee may be taken without a meeting if a consent
in writing, setting forth the action so taken, is signed by all the members of
the board of directors or committee, as the case may be.
3.13 Members of the board of directors or members of any committee
designated by the board may participate in and hold a meeting of such board or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this provision shall constitute
presence in person at such meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
3.14 By resolution of the board of directors, the directors may be
paid their expenses, if any, of attendance at each meeting of the board of
directors and may be paid a fixed sum for attendance at each meeting of the
board of directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor.
ARTICLE IV
NOTICES
4.1 Any notice to directors or shareholders shall be in writing and
shall be delivered personally or mailed to the directors or shareholders at
their respective addresses appearing on the books of the corporation. Notice
by mail shall be deemed to be given at the time when the same
-6-
<PAGE> 7
shall be deposited in the United States mail, postage prepaid. Notice to
directors may also be given by telegram.
4.2 Whenever any notice is required to be given under the provisions
of the statutes or of the articles of incorporation or of these bylaws, a
waiver thereof in writing signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
ARTICLE V
OFFICERS
5.1 The officers of the corporation shall include a president and a
secretary. The board of directors may appoint such other officers and agents
as it deems necessary or advisable, including, without limitation, a chief
executive officer, a chairman of the board, a vice chairman of the board, a
treasurer, one or more vice presidents (which may be designated executive vice
presidents or senior vice presidents), and one or more assistant vice
presidents, assistant secretaries and assistant treasurers. Any two or more
offices may be held by the same person. Each officer shall exercise such
powers and perform such duties as provided hereinafter or as determined by the
board of directors. No officer shall execute, acknowledge, verify or
countersign any instrument on behalf of the corporation in more than one
capacity, if such instrument is required by law, by these bylaws or by any act
of the corporation to be executed, acknowledged, verified or countersigned by
two or more officers. The chairman and vice chairman of the board shall be
elected from among the directors. With the foregoing exceptions, none of the
other officers need to be a director, and none of the officers need to a
shareholder of the corporation.
5.2 The officers of the corporation shall be elected annually by the
board of directors at its first regular meeting held after the annual meeting
of shareholders or as soon thereafter as conveniently possible. Each officer
shall hold office until his successor shall have been chosen and shall have
qualified or until his death or the effective date of his resignation or
removal, or until he shall cease to be a director in the case of the chairman
and vice chairman.
5.3 Any officer or agent elected or appointed by the board of
directors may be removed without cause by the affirmative vote of a majority of
the board of directors whenever, in its judgment, the best interests of the
corporation shall be served thereby, but such removal shall be without
prejudice to the contractual rights, if any, of the person so removed. Any
officer may resign at any time by giving written notice to the corporation.
Any such resignation shall take effect at the date of the receipt of such
notice or at any later time specified therein, and unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
5.4 Any vacancy occurring in any office of the corporation by death,
resignation, removal or otherwise, may be filled by the board of directors for
the unexpired portion of the term.
-7-
<PAGE> 8
5.5 The salaries of all officers and agents of the corporation shall
be fixed by the board of directors or pursuant to its direction; and no officer
shall be prevented from receiving such salary by reason of his also being a
director.
5.6 The chairman of the board (if such officer is appointed by the
board of directors) shall preside at all meetings of the board of directors or
of the shareholders of the corporation. In the chairman's absence, such duties
shall be attended to by the vice chairman of the board (if such officer is
appointed by the board of directors). The chairman shall formulate and submit
to the board of directors or the executive committee matters of general policy
for the corporation and shall perform such other duties as usually appertain to
the office or as may be prescribed by the board of directors or the executive
committee.
5.7 The chief executive officer (if such officer is appointed by the
board of directors) shall, subject to the control of the board of directors,
supervise and control the business and affairs of the corporation, and shall
see that all orders and resolutions of the board of directors and the executive
committee are carried into effect. He shall have all powers and duties of
supervision and management usually vested in the general manager of a
corporation, including the power to appoint and remove subordinate officers,
agents and employees, except those elected or appointed by the board of
directors. In the absence of the chairman of the board or the vice chairman of
the board (if such officer is appointed by the board of directors), the chief
executive officer shall preside at all meetings of the board of directors and
of the shareholders. He may also preside at any such meeting attended by the
chairman or vice chairman of the board if he is so designated by the chairman,
or in the chairman's absence, by the vice chairman. The chief executive
officer shall keep the board of directors and the executive committee fully
informed and shall consult with them concerning the business of the
corporation. He shall also perform such other duties as may be prescribed by
the shareholders, the board of directors or the executive committee.
5.8 If no chief executive officer is appointed by the board of
directors, the president shall be the chief executive officer of the
corporation. Subject to the control of the board of directors and the chief
executive officer (if such officer is appointed by the board of directors), the
president shall in general supervise and control the business and affairs of
the corporation. In the absence of the chairman of the board, the vie chairman
of the board and the chief executive officer (if such officers are appointed by
the board of directors), the president shall preside at all meetings of the
board of directors and of the shareholders. He may also preside at any such
meeting attended by the chairman or vice chairman of the board or the chief
executive officer if he is so designated by the chairman, or in the chairman's
absence, by the vice chairman, or in the vice chairman's absence, by the chief
executive officer. Subject to the control of the chief executive officer (if
such officer is appointed by the board of directors), the president shall have
the power to appoint and remove subordinate officers, agents and employees,
except those elected or appointed by the board of directors. The president
shall keep the board of directors and the executive committee fully informed
and shall consult with them concerning the business of the corporation. He may
sign with the secretary or any other officer of the corporation thereunto
authorized by the board of directors, certificates for shares
-8-
<PAGE> 9
of the corporation and any deeds, bonds, mortgages, contracts, checks, notes,
drafts or other instruments which the board of directors has authorized to be
executed, except in cases where the signing and execution thereof has been
expressly delegated by these bylaws or by the board of directors to some other
officer or agent of the corporation, or shall be required by law to be
otherwise executed. He shall vote, or give a proxy to any other officer of the
corporation to vote, all shares of stock of any other corporation standing in
the name of the corporation and in general he shall perform all other duties
normally incident to the office of president and such other duties as may be
prescribed by the shareholders, the board of directors or the executive
committee.
5.9 If one or more vice presidents are appointed by the board of
directors, in the absence of the president, or in the event of his inability or
refusal to act, the executive vice president (or in the event there shall be no
vice president designated executive vice president, any vice president
designated by the board of directors) shall perform the duties and exercise the
powers of the president. Any vice president may sign, with the secretary or
assistant secretary, certificates for shares of the corporation. The vice
presidents shall perform such other duties as from time to time may be assigned
to them by the president, the board of directors or the executive committee.
5.10 The secretary shall (a) keep the minutes of the meetings of the
shareholders, the board of directors and committees of directors; (b) see that
all notices are duly given in accordance with the provisions of these bylaws
and as required by law; (c) be custodian of the corporate records and of the
seal of the corporation, and see that the seal of the corporation or a
facsimile thereof is affixed to all certificates for shares prior to the issue
thereof and to all documents, the execution of which on behalf of the
corporation under its seal is duly authorized in accordance with the provisions
of the bylaws; (d) keep or cause to be kept a register of the post office
address of each shareholder which shall be furnished by such shareholder; (e)
sign with the president, or an executive vice president or vice president,
certificates for shares of the corporation, the issue of which shall have been
authorized by resolution of the board of directors; (f) have general charge of
the stock transfer books of the corporation; and (g) in all duties normally
incident to the office of secretary and such other duties as from time to time
may be assigned to him by the president, the board of directors or the
executive committee.
5.11 If a treasurer is appointed by the board of directors, the board
of directors may require that the treasurer give a bond for the faithful
discharge of his duties in such sum and with such surety or sureties as the
board of directors shall determine. He shall (a) have charge and custody of
and be responsible for all funds and securities of the corporation; receive and
give receipts for moneys due and payable to the corporation from any source
whatsoever and deposit all such moneys in the name of the corporation in the
corporation's banks, trust companies or other depositories; (b) prepare, or
cause to be prepared, for submission at each regular meeting of the board of
directors, at each annual meeting of the shareholders, and at such other times
as may be required by the board of directors, the president or the executive
committee, a statement of financial condition of the corporation in such detail
as may be required; and (c) in general, perform all the
-9-
<PAGE> 10
duties incident to the office of the treasurer and such other duties as from
time to time may be assigned to him by the president, the board of directors or
the executive committee.
5.12 The assistant secretaries and assistant treasurers (if such
officers are appointed by the board of directors) shall, in general, perform
such duties as shall be assigned to them by the secretary or the treasurer,
respectively, or by the president, the board of directors or the executive
committee. The assistant secretaries and assistant treasurers shall, in the
absence of the secretary or treasurer, respectively, perform all functions and
duties which such absent officers may delegate, but such delegation shall not
relieve the absent officer from the responsibilities and liabilities of his
office. The assistant secretaries may sign, with the president or a vice
president, certificates for shares of the corporation, the issue of which shall
have been authorized by a resolution of the board of directors. The assistant
treasurers shall respectively, if required by the board of directors, give
bonds for the faithful discharge of their duties in such sums and with such
sureties as the board of directors shall determine.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
6.1 The shares of the corporation shall be represented by
certificates signed by the president or a vice president and the secretary or
an assistant secretary of the corporation, and may be sealed with the seal of
the corporation or a facsimile thereof.
6.2 The signatures of the president or vice president and the
secretary or assistant secretary upon a certificate may be facsimiles if the
certificate is countersigned by a transfer agent, or registered by a registrar,
other than the corporation itself or an employee of the corporation. In case
any officer who has signed or whose facsimile signature has been placed upon
such certificate shall have ceased to be such officer before such certificate
is issued, it may be issued by the corporation with the same effect as if he
were such officer at the date of its issue.
LOST CERTIFICATES
6.3 The board of directors may direct a new certificate to be issued
in place of any certificate theretofore issued by the corporation alleged to
have been lost or destroyed. When authorizing such issue of a new certificate,
the board of directors, in its discretion and as a condition precedent to the
issuance thereof, may prescribe such terms and conditions as its deems
expedient and may require such indemnities as it deems adequate to protect the
corporation from any claim that may be made against it with respect to any such
certificate alleged to have been lost or destroyed.
6.4 Upon surrender to the corporation or the transfer agent of the
corporation of a certificate representing shares duly endorsed or accompanied
by proper evidence of succession, assignment or authority to transfer, a new
certificate shall be issued to the person entitled thereto and the old
certificate canceled and the transaction recorded upon the books of the
corporation.
-10-
<PAGE> 11
RECORD DATES
6.5 For the purpose of determining shareholders entitled to notice of
or to vote at any meeting of shareholders, or any adjournment thereof, or
entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the board of
directors shall fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than sixty
days and, in case of a meeting of shareholders, not less than ten days prior to
the date on which the particular action, requiring such determination of
shareholders, is to be taken. If no record date is fixed for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders,
or shareholders entitled to receive payment of a dividend, the date on which
notice of the meeting is mailed or the date on which the resolution of the
board of directors declaring such dividend is adopted, as the case may be,
shall be the record date for such determination of shareholders. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in this section, such determination shall be applied
to any adjournment thereof.
REGISTERED SHAREHOLDERS
6.6 The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of Texas.
LIST OF SHAREHOLDERS
6.7 The officer or agent having charge of the transfer books for
shares shall make, at least ten days before each meeting of shareholders, a
complete list of the shareholders entitled to vote at such meeting, arranged in
alphabetical order, with the address of each and the number of shares held by
each, which list, for a period of ten days prior to such meeting, shall be kept
on file at the registered office of the corporation and shall be subject to
inspection by any shareholder at any time during usual business hours. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting. The original share ledger or transfer book, or a duplicate
thereof, shall be prima facie evidence as to who are the shareholders entitled
to examine such list or share ledger or transfer book or to vote at any meeting
of the shareholders.
-11-
<PAGE> 12
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
7.1 Subject to the provisions of the articles of incorporation
relating thereto, if any, dividends may be declared by the board of directors,
in its discretion, at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property or in the corporation's own shares,
subject to any provisions of the articles of incorporation.
7.2 Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund for meeting contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
7.3 All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
7.4 The fiscal year of the corporation shall be fixed by resolution
of the board of directors.
SEAL
7.5 The corporate seal shall be in such form as may be prescribed by
the board of directors. The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any manner reproduced.
BOOKS AND RECORDS
7.6 The corporation shall keep correct and complete books and records
of account and shall keep minutes of the proceedings of its shareholders and
board of directors, and shall keep at its registered office or principal place
of business, or at the office of its transfer agent or registrar, a record of
its shareholders, giving the names and addresses of all shareholders and the
number and class of the shares held by each.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act (the "Article")
permits the corporation to indemnify its present and former directors and
officers to the extent and under the circumstances
-12-
<PAGE> 13
set forth therein. In addition, in some instances, indemnification is required
by the Article. The corporation hereby elects to and does hereby indemnify the
following persons to the fullest extent permitted or required by the Article
promptly upon request of any such person making a request for indemnity
hereunder: (a) any person who is or was a director or officer of the
corporation; (b) any person who while a director or officer of the corporation,
is or was serving at the request of the corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise; and (c) any
person who is not or was not a director or officer of the corporation but who
is or was serving at the request of the corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise. Such
obligation to so indemnify and to so make such determinations may be
specifically enforced by resort to any court of competent jurisdiction.
Further, the corporation shall pay or reimburse the reasonable expenses of such
persons covered hereby in advance of the final disposition of any proceeding to
the fullest extent permitted by the Article and subject to the conditions
thereof. If the Texas Business Corporation Act or any other applicable Texas
statute is hereafter amended to authorize a corporation to further indemnify
the above described persons, the corporation shall, in addition to the
indemnification provided herein, indemnify such persons to the fullest extent
permitted or required under such amended act or statute. Any repeal or
modification of this Article VIII by the directors or shareholders of the
corporation shall be prospective only, and shall not adversely affect any
indemnity obligation existing hereunder at the time of such repeal or
modification.
ARTICLE IX
AMENDMENTS
Except as provided in Section 3.1 hereof, these bylaws may be altered,
amended, or repealed or new bylaws may be adopted by (i) a majority of the
whole board of directors at any regular or special meeting or (ii) the
affirmative vote of the holders of not less than 80% of the voting power
represented by all the shares of stock of the Corporation outstanding and
entitled to vote for the election of directors, given at a duly called annual
or special meeting of shareholders.
-13-
<PAGE> 1
TITAN HOLDINGS, INC.
1993 STOCK OPTION PLAN
1. PURPOSE. The 1993 Stock Option Plan (the "Plan") of Titan Holdings, Inc.
(the "Company"), for certain employees, officers and directors, is intended to
advance the best interest of the Company by providing those persons who have
substantial responsibility for its management and growth, with additional
incentive and by increasing their proprietary interest in the success of the
Company -- thereby encouraging them to remain in its employ.
2. ADMINISTRATION. The Plan shall be administered by the Board of Directors
of the Company until such time as the Company may register its Common Stock,
$.01 par value ("Common Stock"), under Section 12 of the Securities Exchange Act
of 1934, as amended. From and after the date of any such registration, the Plan
shall be administered by a committee to be appointed by the Board of Directors
of the Company (the "Committee"). The Committee shall consist of not less than
two members of the Board of Directors, each of whom has not during his service
on the Committee or within one year prior to such service, been granted or
awarded options under the Plan (the "Options"). The Board of Directors of the
Company shall have the power from time to time to add or remove members of the
Committee, and to fill vacancies arising for any reason. All references herein
to the Committee shall refer to the Board of Directors of the Company during the
period the Plan is administered by the Board of Directors of the Company. The
Committee shall designate a chairman from among its members, who shall preside
at all of its meetings, and shall designate a secretary, without regard to
whether that person is a member of the Committee, who shall keep the minutes of
the proceedings and all records, documents, and data pertaining to its
administration of the Plan. Meetings shall be held at any time and place as it
shall choose. A majority of the members of the Committee shall constitute a
quorum for the transaction of business. The vote of a majority of those members
present at any meeting shall decide any question brought before that meeting. In
addition, the Committee may take any action otherwise proper under the Plan by
the affirmative vote, taken without a meeting, of a majority of its members. No
member of the Committee shall be liable for any act or omission of any other
member of the Committee or for any act or omission on his own part, including
but not limited to the exercise of any power or discretion given to him under
the Plan, except those resulting from his own gross negligence or willful
misconduct. All questions of interpretation and application of the Plan, or as
to Options granted under it, shall be subject to the determination of a majority
of the Committee. The Committee in exercising any power or authority granted
under this Plan or in making any determination under this Plan shall perform or
refrain from performing those acts using its sole discretion and judgment. Any
decision made by the Committee or any refraining to act or any act taken by the
Committee in good faith shall be final and binding on all parties. The
Committee's decision shall never be subject to de novo review. When appropriate
the Plan shall be administered in order to qualify certain of the Options
granted under it as "incentive stock options" described in Section 422 of the
Internal Revenue Code of 1986, as amended.
3. OPTION SHARES. The stock subject to the Options and other provisions of
the Plan shall be shares of Common Stock of the Company. The total amount of the
Common Stock with respect to which Options may be granted shall be an aggregate
of 900,000 shares, all of which may be incentive stock options. The class and
aggregate number of shares which may be subject to the Options granted under
this Plan shall be subject to adjustment under Section 18. The shares may be
treasury shares or authorized but unissued shares.
In the event that an outstanding Option shall expire or terminate for any
reason, the shares of Common Stock allocable to the unexercised portion of that
Option may again be subject to an Option under the Plan.
4. AUTHORITY TO GRANT OPTIONS. The Committee may grant the following
options at any time during the term of this Plan to any eligible person that it
chooses:
(a) "Incentive" Stock Options. The Committee may grant to an eligible
employee an Option, or Options, to buy a stated number of shares of Common
Stock under the terms and conditions of the Plan, which Option or Options
would be an "incentive stock option" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended.
<PAGE> 2
(b) "Non-incentive" Stock Options. The Committee may grant to an
eligible person an Option, or Options, to buy a stated number of shares of
Common Stock under the terms and conditions of the Plan, which Option or
Options would not constitute an "incentive stock option" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended.
Each option granted shall be approved by the Committee. Subject only to any
applicable limitations set forth in this Plan, the number of shares of Common
Stock to be covered by an Option shall be as determined by the Committee.
5. ELIGIBILITY. The individuals who shall be eligible to participate in the
Plan shall be those full-time key employees, including officers and directors of
the Company, or of any parent or subsidiary corporation, as the Committee shall
determine during the term of this Plan. Provided, however, no director who is
not also an employee shall be eligible to receive an Option which is an
incentive stock option. However, no employee who owns stock possessing more than
10% of the total combined voting power of all classes of stock of the
corporation employing the employee or of its parent or subsidiary corporation
shall be eligible to receive an Option which is an incentive stock option unless
at the time that the Option is granted the option price is at least 110% of the
fair market value of the Common Stock at the time the Option is granted and the
Option by its own terms is not exercisable after the expiration of five years
from the date the Option is granted. No individual shall be eligible to receive
an Option under the Plan while that individual is a member of the Committee.
An employee will be considered as owning the stock owned, directly or
indirectly, by or for his brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants. Stock owned, directly or
indirectly, by or for a corporation, partnership, estate or trust will be
considered as being owned proportionately by or for its shareholders, partners
or beneficiaries. For all purposes of this Plan, a parent corporation is any
corporation (other than the Company) in an unbroken chain of corporations ending
with the Company if, on the date of grant of the Option in question, each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in that chain; and a subsidiary corporation is any corporation in
an unbroken chain of corporations beginning with the Company if, on the date of
grant of the Option in question, each of the corporations, other than the last
corporation in the chain, owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other corporations
in that chain.
6. OPTION PRICE. The price at which shares may be purchased pursuant to an
Option which is an incentive stock option shall be not less than the fair market
value of the shares of Common Stock on the date the Option is granted. The price
at which shares may be purchased pursuant to an Option which is a non-incentive
stock option shall be determined by the Committee. If an employee owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the corporation employing the employee or of its parent or subsidiary
corporation, the option price at which shares may be purchased under an Option
which is an incentive stock option shall be not less than 110% of the fair
market value of the Common Stock on the date the Option is granted.
7. DURATION OF OPTIONS. No Option which is an incentive stock option shall
be exercisable after the expiration of 10 years from the date the Option is
granted. The Committee in its discretion may provide that the Option shall be
exercisable throughout the 10 year period or during any lesser period of time
commencing on or after the date of grant of the Option and ending upon or before
the expiration of the 10 year period. If an employee owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
corporation employing the employee or of its parent or subsidiary corporation,
no Option which is an incentive stock option shall be exercisable after the
expiration of five years from the date the Option is granted.
8. MAXIMUM VALUE OF STOCK SUBJECT TO OPTIONS WHICH ARE INCENTIVE STOCK
OPTIONS. To the extent that the aggregate fair market value (determined as of
the date the Option is granted) of the stock with respect to which incentive
stock options are exercisable for the first time by the optionee in any calendar
year (under this Plan and any other incentive stock option plan(s) of the
Company and any parent and subsidiary corporation)
2
<PAGE> 3
exceeds $100,000, the Options shall be treated as non-incentive stock options.
In making this determination, Options shall be taken into account in the order
in which they were granted.
9. AMOUNT EXERCISABLE. Each Option may be exercised, so long as it is valid
and outstanding, from time to time in part or as a whole, in the manner and
subject to the conditions that the Committee in its discretion may provide in
the option agreement. However, the Committee in its absolute discretion may
accelerate the time at which any outstanding Option may be exercised.
10. EXERCISE OF OPTIONS. Options shall be exercised by the delivery of
written notice to the Company setting out the number of shares with respect to
which the Option is to be exercised, together with: (a) cash, certified check,
bank draft, or postal or express money order payable to the order of the Company
for an amount equal to the option price of the shares, (b) Common Stock at the
fair market value on the date of exercise, or (c) any other form of payment
which is acceptable to the Committee, and specifying the address to which the
certificates for the shares are to be mailed. As promptly as practicable after
receipt of written notification and payment, the Company shall deliver to the
optionee certificates for the number of shares with respect to which the Option
has been exercised, issued in the optionee's name. Delivery shall be deemed
effective when a stock transfer agent of the Company shall have deposited the
certificates in the United States mail, addressed to the optionee, at the
address specified under this Section.
11. TRANSFERABILITY OF OPTIONS. Options shall not be transferable by the
optionee except by will or under the laws of descent and distribution, and shall
be exercisable, during his lifetime, only by him.
12. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE. Except as may be
otherwise expressly set out in this Plan, Options which are granted to employees
or officers shall normally terminate on the earlier of the date of the
expiration of the Option or the date which is 30 days following the severance of
the employment relationship between the Company and the optionee for any reason,
for or without cause. Whether authorized leave of absence, or absence on
military or government service, shall constitute severance of the employment
relationship between the Company and the optionee shall be determined by the
Committee at the time of the event. But, if before the expiration of the Option
which is granted to employees or officers, the optionee shall be retired in good
standing from the employ of the Company for reasons of age or disability under
the then established rules of the Company, the Option which is granted to
employees or officers shall terminate on the earlier of the date of expiration
of the Option or one day less than three months after the date of retirement. In
addition, if the optionee shall die while in the employ of the Company or during
the three month period after retirement for age or disability and before the
date of expiration of the Option which is granted to employees or officers, the
Option shall terminate on the earlier of the date of expiration or one year
following the date of death. After the death of the optionee, his executors,
administrators or any person or persons to whom his Option, which is granted to
employees or officers, may be transferred by will or by the laws of descent and
distribution, shall have the right, at any time prior to its termination, to
exercise the Option to the extent the optionee could have exercised it had he
lived and remained in the employ of the Company. An employment relationship
between the Company and the optionee shall be deemed to exist during any period
in which the optionee is employed by the Company, by any parent or subsidiary
corporation, by a corporation issuing or assuming a stock option in a
transaction to which Section 424(a) of the Internal Revenue Code of 1986, as
amended, applies, or by a parent or subsidiary corporation of the corporation
issuing or assuming a stock option. For this purpose, the phrase "corporation
issuing or assuming a stock option" shall be substituted for the word "Company"
in the definitions of parent and subsidiary corporations in Section 6 and the
parent-subsidiary relationship shall be determined at the time of the corporate
action described in Section 424(a) of the Internal Revenue Code of 1986, as
amended
13. CHANGE IN CONTROL. Notwithstanding any provision of the Plan to the
contrary, the Committee may provide, at the time an Option is granted or
thereafter, that the Option shall become immediately exercisable upon a Change
in Control. For purposes of the Plan, a "Change in Control" shall be deemed to
occur on the earliest of the existence of one of the following events:
(a) the acquisition, other than from the Company, by any individual, entity
or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either the then outstanding shares of
3
<PAGE> 4
common stock of the Company entitled to vote generally in the election of
directors, but excluding, for this purpose, any such acquisition by the Company
or any of its subsidiaries, or any employee benefit plan (or related trust) of
the Corporation, or any corporation with respect to which, following such
acquisition, more than 50% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the common stock and voting securities of the Company
immediately prior to such acquisition in substantially the same proportion as
their ownership, immediately prior to such acquisition, of the then outstanding
shares of common stock of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors, as the case may be;
(b) individuals who, as of the date hereof, constitute the Board (as of the
date hereof the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in connection
with an actual or threatened "election contest" relating to the election of the
directors of the Company (as such term is used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act); or
(c) approval by the Company's shareholders of a reorganization, merger or
consolidation of the Company, in each case, with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation, beneficially own,
directly and indirectly, more than 50% of, respectively, the then outstanding
shares of common stock or the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such reorganization, merger
or consolidation, or of a complete liquidation or dissolution of the Company or
of the sale or other disposition of all or substantially all of the assets of
the Company.
14. FORFEITURES. Notwithstanding any other provision of this Plan, if the
Committee finds by a majority vote, that (a) the optionee committed fraud,
embezzlement, theft, commission of felony, or proven dishonesty in the course of
his dealings with the Company or any parent or subsidiary corporation (as used
in this Section, "Employer") which conduct damaged the Employer, or for
disclosing trade secrets of the Employer, or (b) the optionee participated,
engaged in or had a financial or other interest (whether as an employee,
officer, director, consultant, contractor, shareholder, owner, or otherwise) in
any commercial endeavor in the United States which is competitive with the
business of the Employer, then any outstanding options which have not been
exercised by optionee will be forfeited. The decision of the Committee as to the
damage done to the Employer and the extent of the optionee's competitive
activity will be final. No decision of the Committee, however, will affect the
finality of any discharge of the optionee by the Employer. In order to provide
the Employer with an opportunity to enforce this Section, no Option may be
exercised without the certification by the Committee that no forbidden action
has been raised for their determination.
15. REQUIREMENTS OF LAW. The Company shall not be required to sell or issue
any shares under any Option if issuing the shares shall constitute a violation
by the optionee or the Company of any provisions of any law or regulation of any
governmental authority. Each Option granted under this Plan shall be subject to
the requirements that, if at any time the Board of Directors of the Company or
the Committee shall determine that the listing, registration or qualification of
the shares upon any securities exchange or under any state or federal law of the
United States or of any other country or governmental subdivision, or the
consent or approval of any governmental regulatory body, or investment or other
representations, are necessary or desirable in connection with the issue or
purchase of shares subject to an Option, that Option shall not be exercised in
whole or in part unless the listing, registration, qualification, consent,
approval or representations shall have been effected or obtained free of any
conditions not acceptable to the Board of Directors. Any determination in this
connection by the Committee shall be final. In the event the shares issuable on
exercise
4
<PAGE> 5
of an Option are not registered under the Securities Act of 1933, the Company
may imprint on the certificate for those shares the following legend or any
other legend which counsel for the Company considers necessary or advisable to
comply with the Securities Act of 1933:
"The shares of stock represented by this certificate have not
been registered under the Securities Act of 1933 or under the
securities laws of any state and may not be sold or transferred
except upon registration or upon receipt by the Corporation of
an opinion of counsel satisfactory to the Corporation, in form
and substance satisfactory to the Corporation, that registration
is not required for a sale or transfer."
The Company may, but shall in no event be obligated to, register any securities
covered by this Plan under the Securities Act of 1933 (as now in effect or as
later amended) and, in the event any shares are registered, the Company may
remove any legend on certificates representing those shares. The Company shall
not be obligated to take any other affirmative action in order to cause the
exercise of an Option or the issuance of shares under the Option to comply with
any law or regulation or any governmental authority.
16. NO RIGHTS AS STOCKHOLDER. No optionee shall have rights as a
stockholder with respect to shares covered by his Option until the date a stock
certificate is issued for the shares. Except as provided in Section 18, no
adjustment for dividends, or other matters shall be made if the record date is
prior to the date the certificate is issued.
17. EMPLOYMENT OBLIGATION. The granting of any Option shall not impose
upon the Company any obligation to employ or continue to employ any optionee.
The right of the Company to terminate the employment of any officer or other
employee shall not be diminished or affected by reason of the fact that an
Option has been granted to him.
18. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Common Stock or the rights of the Common Stock, or the dissolution
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Common Stock outstanding, without
receiving compensation for it in money, services or property, then (a) the
number, class and per share price of shares of stock subject to outstanding
Options under this Plan shall be appropriately adjusted in a manner as to
entitle an optionee to receive upon exercise of an Option, for the same
aggregate cash consideration, the same total number and class or classes of
shares as he would have received had he exercised his Option in full immediately
prior to the event requiring the adjustment; and (b) the number and class of
shares then reserved for issuance under the Plan shall be adjusted by
substituting for the total number and class of shares of stock then reserved for
the number and class or classes of shares of stock that would have been received
by the owner of an equal number of outstanding shares of Common Stock as the
result of the event requiring the adjustment.
If the Company merges or consolidates with another corporation, whether or
not the Company is a surviving corporation, or if the Company is liquidated or
sells or otherwise disposes of substantially all its assets while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clause (c) below, after the effective date of the merger, consolidation,
liquidation, sale or other disposition, as the case may be, each holder of an
outstanding Option shall be entitled, upon exercise of an Option, to receive, in
lieu of shares of Common Stock, the number and class or classes of shares of
stock or other securities or property to which the holder would have been
entitled if, immediately prior to the merger, consolidation, liquidation, sale
or other disposition, the holder had been the holder of record of a number of
shares of Common Stock equal to the number of shares as to which the Option may
be exercised; (b) the Board of Directors may waive any limitations set out in or
imposed pursuant to this Plan so that all Options, from and
5
<PAGE> 6
after a date prior to the effective date of the merger, consolidation,
liquidation, sale or other disposition, as the case may be, specified by the
Board of Directors, shall be exercisable in full; and (c) all outstanding
Options may be canceled by the Board of Directors as of the effective date of
any of the merger, consolidation, liquidation, sale or other disposition.
Except as expressly provided before in this Plan, the issue by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe for shares, or upon
conversion of shares or obligations of the Company convertible into shares or
other securities, shall not affect, and no adjustment by reason of it shall be
made with respect to, the number or price of shares of Common Stock then subject
to outstanding Options.
19. SUBSTITUTION OPTIONS. Options may be granted under this Plan from time
to time in substitution for stock options held by employees of other
corporations who are about to become employees of the Company, or whose employer
is about to become a parent or subsidiary corporation, conditioned in the case
of an incentive stock option upon the employee becoming an employee as the
result of a merger or consolidation of the Company with another corporation, or
the acquisition by the Company of substantially all the assets of another
corporation, or the acquisition by the Company of at least 50% of the issued and
outstanding stock of another corporation as the result of which it becomes a
subsidiary of the Company. The terms and conditions of the substitute Options
granted may vary from the terms and conditions of this Plan to the extent the
Board of Directors of the Company at the time of grant may deem appropriate to
conform, in whole or in part, to the provisions of the stock options in
substitution for which they are granted. But with respect to stock options which
are incentive stock options, no variation shall be made which will affect the
status of any substitute option as an "incentive stock option" under Section 422
of the Internal Revenue Code of 1986, as amended.
20. AMENDMENT OR TERMINATION OF PLAN. The Board of Directors may modify,
revise or terminate this Plan at any time and from time to time. However,
without the further approval of the holders of at least a majority of the
outstanding shares of voting stock, or if the provisions of the corporate
charter, by-laws or applicable state law prescribe a greater degree of
stockholder approval for this action, without the degree of stockholder approval
thus required, the Board of Directors may not (a) change the aggregate number of
shares which may be issued under Options which are incentive stock options,
pursuant to the provisions of this Plan; (b) reduce the Option price permitted
for the incentive stock options; (c) extend the term during which an incentive
stock option may be exercised or the termination date of this Plan; or (d)
change the class of employees eligible to receive incentive stock options. But,
the Board shall have the power to make all changes in the Plan and in the
regulations and administrative provisions under the Plan or in any outstanding
Option as in the opinion of counsel for the Company may be necessary or
appropriate from time to time to enable any Option granted pursuant to the Plan
to qualify as an incentive stock option under Section 422 of the Internal
Revenue Code of 1986, as amended, and the regulations which may be issued under
that Section as in existence from time to time. All Options granted under this
Plan shall be subject to the terms and provisions of this Plan and any
amendment, modification or revision of this Plan shall be deemed to amend,
modify or revise all Options outstanding under this Plan at the time of the
amendment, modification or revision. No amendment, termination or suspension of
the Plan shall alter or impair the rights of optionees with respect to options
previously granted under the Plan without the consent of the holder thereof.
21. WRITTEN AGREEMENT. Each Option granted under this Plan shall be
embodied in a written option agreement, which shall be subject to the terms and
conditions prescribed above, and shall be signed by the optionee and by the
appropriate officer of the Company for and in the name and on behalf of the
Company. Each option agreement shall contain any other provisions that the
Committee in its discretion shall deem advisable.
22. INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS. The
Company will, to the fullest extent permitted by law, indemnify, defend and hold
harmless any person who at any time is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) in any way relating
to or arising out of this Plan or any Option or Options granted under it by
reason of the fact that person is or was at any time a director of the Company
or
6
<PAGE> 7
a member of the Committee against judgments, fines, penalties, settlements and
reasonable expenses (including attorneys' fees) actually incurred by that person
in connection with the action, suit or proceeding. This right of indemnification
will inure to the benefit of the heirs, executors and administrators of each
person to be protected and is in addition to all other rights to which that
person may be entitled by virtue of the by-laws of the Company or as a matter of
law, contract or otherwise.
23. EFFECTIVE DATE OF PLAN. The Plan shall become effective and shall be
deemed to have been adopted on February 19, 1993, if within one year of that
date it has been approved by the holders of at least a majority of the
outstanding shares of voting stock of the Company voting in person or by proxy
at a duly held stockholders' meeting, or if the provisions of the corporate
charter, by-laws or applicable state law prescribe a greater degree of
stockholder approval for this action, the approval by the holders of that
percentage, at a duly held meeting of stockholders. No Options which are
incentive stock options shall be granted pursuant to the Plan after February 18,
2003.
7
<PAGE> 1
AGREEMENT OF AMENDMENT
AGREEMENT OF AMENDMENT ("Amendment") dated as of February 21, 1997
among WESTCHESTER PREMIUM ACCEPTANCE CORPORATION (the "Company"), the banks
listed on the signature pages hereto (the "Banks"), and DRESDNER BANK AG, NEW
YORK BRANCH, as agent for the Banks (the "Agent").
WITNESSETH:
WHEREAS, the Company, the Banks and the Agent are parties to that
certain Loan Agreement dated as of July 30, 1996 (the "Loan Agreement");
WHEREAS, the parties hereto wish to amend the Loan Agreement in
certain respects as hereinafter provided;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the parties hereto hereby agree as follows:
SECTION 1. Defined Terms.
(a) Unless otherwise defined herein, the terms used herein shall
have the meanings assigned to such terms in the Loan Agreement.
(b) As used in this Amendment the term "Amendment Effective Date"
shall mean the first date on which (i) the Agent shall have received fully
executed counterparts to this Amendment and (ii) each of the conditions
precedent set forth in Section 3 hereof have been satisfied or waived by the
parties hereto
Section 2 Amendments to Loan Agreement.
(a) Section 1.1 of the Loan Agreement is amended by adding the
following sentence at the end of the definition of "Borrowing Base":
"Notwithstanding anything to the contrary contained herein, in
no event shall there be included as part of the Outstanding
Balance of any Eligible Receivable (A) unearned interest and
(B) payables to insurance carriers."
<PAGE> 2
(b) Section 1.1 of the Loan Agreement is further amended by adding
the language ", or partnership or other ownership interests in," after the
phrase "capital stock of" in the second line of the definition of "Capital
Stock".
(c) Section 1.1 of the Loan Agreement is further amended by
replacing the definition of "Commitment" set forth therein with the following:
"Commitment" means either (i) when used with reference to a Lender at
the time any determination is to be made, the amount set opposite the
name of such Lender below, as the same may be lowered in accordance
with the terms hereof, or (ii) when used with reference to any Lender,
the commitment of such Lender to make Loans hereunder in an amount
equal to the amount described in the foregoing clause (i), as the
context may require:
<TABLE>
<S> <C>
Dresdner $25,000,000.00
Bank One 18,181,818.18
NationsBank 6,818,181.82
</TABLE>
(d) Section 1.1 of the Loan Agreement is further amended by adding
the language ", the Receivables Purchase Agreements" after the phrase "Finance
Contracts" in the definition of "Program Documents".
(e) Section 1.1 of the Loan Agreement is further amended by adding
the following definition following the definition of "Receivable":
"Receivables Purchase Agreements" means the Receivables Purchase
Agreements, each dated as of February 21, 1997, between the Borrower and
each of Elite Premium Finance Limited and Westchester Premium Acceptance
Corporation of California, as the same may from time to time be
extended, amended, supplemented, waived or modified.
(f) Section 1.1 of the Loan Agreement is further amended by replacing
the definition of "Termination Event" set forth therein with the following:
"Termination Event" shall mean (i) any Reportable Event with respect to
a Plan, as to which the
2
<PAGE> 3
requirements of Section 4043 (a) of ERISA have not been waived by the
PBGC (provided that a failure to meet the minimum funding standard of
Section 302 of ERISA shall be a reportable event regardless of the
issuance of any waivers by the PBGC); (ii) the filing of a notice of
intent to terminate any Plan under Section 4041 of ERISA or any other
event or condition which might constitute grounds under Section 4042 of
ERISA for the termination of, or for the appointment of a trustee to
administer, any Plan; (iii) the complete or partial withdrawal of the
Borrower, any of its Subsidiaries or the Parent from a Multiemployer
Plan or the receipt by the Borrower, any of its Subsidiaries or the
Parent of notice from a Multiemployer Plan that it is in reorganization
or insolvency pursuant to Section 4241 or 4245 of ERISA or that it
intends to terminate or has terminated under Section 4041A of ERISA;
(iv) the institution of a proceeding by a fiduciary of any Multiemployer
Plan against the Borrower, any Subsidiary or the Parent to enforce
Section 515 of ERISA; or (v) any event or circumstance under which the
Borrower, any Subsidiary or the Parent may reasonably be expected to
incur any liability under Title IV of ERISA with respect to any Plan
other than liabilities to make contributions and pay premiums in the
ordinary course.
(g) Articles VII, VIII, IX and X of the Loan Agreement are hereby
amended to read in their entirety as set forth in Exhibit A hereto.
(h) Exhibit E to the Loan Agreement is hereby amended by adding
thereto the form of Premium Finance Agreement set forth in Exhibit B hereto.
SECTION 3. Conditions Precedent to Effectiveness.
The occurrence of the Amendment Effective Date is subject to the
satisfaction of the following conditions precedent:
(a) The representations and warranties of the Company set forth in
Section 4 of this Amendment shall be true and correct as of the Amendment
Effective Date.
3
<PAGE> 4
(b) The Parent shall have made a cash capital contribution in the
amount of $3,000,000 to the Company, and the Agent shall have received evidence
satisfactory to it of the fulfillment of this condition.
(c) The Company shall have paid to the Agent, for the ratable account
of the Lenders, an amendment fee in the amount of $25,000.
(d) The Company shall have consummated its acquisition (the
"Acquisition") of Elite Premium Finance, Limited, a Texas limited partnership
("Elite"), through the acquisition of all the capital stock of its constituent
partners, pursuant to acquisition documentation which shall be in form and
substance reasonably satisfactory to the Agent, and all regulatory approvals
necessary in connection with such acquisition shall have been obtained and each
condition precedent to the consummation of the Acquisition shall have been
satisfied and not waived except with the consent of the Agent and the Lenders,
and the Agent shall have received copies of all documents and opinions as shall
be deemed necessary by it to establish the satisfaction of this condition.
(e) The Lenders shall have completed their review of the assets being
acquired (directly or indirectly) by the Company in the Acquisition, and shall
be satisfied in their sole discretion with the types and quality of the assets
being so acquired.
(f) The Agent and each Lender shall have received audited
consolidated financial statements of E.W. Blanch Holdings ("Blanch"), the
parent of Elite, for the fiscal year ended December 31, 1995 and unaudited
financial statements of Blanch for the nine-month period ended September 30,
1996, each of which shall be satisfactory in form and substance to the Agent
and each Lender.
(g) The Agent shall have received an opinion of counsel to the
Company and the parent, addressed to the Agent and the Lenders, in form and
substance satisfactory to it.
SECTION 4. Representations and Warranties.
The Company hereby represents and warrants as of the date hereof and the
Amendment Effective Date that (i) the representations and warranties of the
Company
4
<PAGE> 5
contained in the Loan Agreement are true and correct in all material respects
at and as of each such date (except to the extent such representations and
warranties expressly relate solely to an earlier date), provided that all
references in such representationS and warranties to the Loan Agreement shall
refer to the Loan Agreement as amended hereby, and (ii) after giving effect to
this Amendment there shall exist no Event of Default.
SECTION 5. Execution in Counterparts.
This Amendment may be executed in any number of counterparts and by
different parties hereto on separate counterparts, each of which counterparts,
when so executed and delivered, shall be deemed to be an original and all of
which counterparts, taken together, shall constitute but one and the same
Amendment.
SECTION 6. Binding Effect.
This Amendment shall be binding upon, and inure to the benefit of, the
parties hereto and their respective successors and assigns.
SECTION 7. Governing Law.
This Amendment shall be governed by and construed in accordance with the
laws of the State of New York.
SECTION 8. Severability of Provisions.
Any provision of this Amendment which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
SECTION 9. Captions.
The captions in this Amendment are for convenience of reference only and
shall not define or limit any of the terms or provisions hereof.
5
<PAGE> 6
SECTION 10. Amendment Effective Date.
This Amendment shall be effective on the Amendment Effective Date.
SECTION 11. Loan Agreement to Remain in Full Force and Effect.
Except as amended hereby, the Loan Agreement shall remain in full force
and effect and is hereby ratified, adopted and confirmed in all respects. All
references in the Loan Agreement to "this Agreement", "hereunder", "hereof",
"herein", or words of like import, and all references to the Loan Agreement in
any other agreement or document, shall hereafter be deemed to refer to the
foregoing agreements as amended hereby.
SECTION 12. Consent of Parent. Titan Holdings, Inc. hereby joins this
Amendment as a consenting party to the amendments effected to the Loan
Agreement hereby, and hereby ratifies and confirms that the Guarantee shall
apply to all obligations of the Company under the Loan Agreement as amended
hereby.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
WESTCHESTER PREMIUM ACCEPTANCE
CORPORATION
By: /s/ MERLE HARRIS
--------------------------------
Title: Vice President
DRESDNER BANK, AG, NEW YORK AND
GRAND CAYMAN BRANCHES,
as Agent and as a Bank
By: /s/ THOMAS J. NADRAMIA
--------------------------------
Title: Vice President
By: /s/ BRIGILLE SOCIR
--------------------------------
Title: Asst Treasurer
BANK ONE TEXAS N.A.
By: /s/ [ILLEGIBLE]
--------------------------------
Title: Senior Vice President
NATIONSBANK OF TEXAS, N.A.
By: /s/ RICHARD HOLT
-------------------------------
Title: Senior Vice President
Consented and Agreed to:
TITAN HOLDINGS, INC
By: /s/ MIKE GRANDSTAFF
--------------------------------
Title: Sr. Vice President, CFO,
Treasurer
7
<PAGE> 8
Exhibit A
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to each Lender on the date hereof
and on each borrowing of a Loan that:
SECTION 7.1 Organization, Powers, etc. The Borrower and each of its
Subsidiaries is a corporation or partnership duly organized, validly existing
and in good standing under the laws of its jurisdiction of organization and is
duly qualified to do business as a foreign corporation in each other
jurisdiction in which the conduct of its business requires such qualification.
The Borrower, and each of its Subsidiaries, has all requisite power (corporate
or otherwise) and authority to conduct its business as contemplated to be
conducted, to own its properties and to execute, deliver, and perform all of
its obligations under this Agreement and the other Program Documents to which
it is a party.
SECTION 7.2 Corporate Authority, etc. The execution, delivery and
performance by the Borrower and each of its Subsidiaries of this Agreement and
the other Program Documents to which it is a party have been duly authorized by
all necessary action (corporate or otherwise), on its part and do not and will
not (i) violate any provision of any Applicable Law or of its certificate of
incorporation, by-laws, partnership agreement or certificate of limited
partnership, as the case may be, (ii) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which it is a party or by which it or any of its
properties are bound, or (iii) result in, or require, the creation or
imposition of any mortgage, deed of trust, assignment, pledge, Lien, security
interest or other charge or encumbrance of any nature upon or with respect to
any of its properties except as otherwise provided by this Agreement and the
Security Agreement; nor is it in violation of any Applicable Law or in default
under any such indenture, agreement, lease or instrument.
SECTION 7.3 Government Approvals. No authorization, consent,
approval, license, exemption of or filing or registration with any Governmental
Authority or other Person, is or will be necessary to the valid execution,
delivery or performance by the Borrower and its
1
<PAGE> 9
Subsidiaries of this Agreement and the other Program Documents to which each is
a party.
SECTION 7.4 Government Regulation. Each of the Borrower and each of
its Subsidiaries is not subject to regulation under the Investment Company Act
of 1940, as amended, or any other federal or state statute or regulation which
limits the ability of the Borrower and its Subsidiaries to incur indebtedness
or the ability of the Borrower and its Subsidiaries to consummate the
transactions contemplated by this Agreement and the other Program Documents.
SECTION 7.5 Valid and Binding Obligations. This Agreement and the
other Program Documents to which the Borrower and its Subsidiaries are parties
are the legal, valid and binding obligations of the Borrower and its
Subsidiaries, as the case may be, and are enforceable against the Borrower and
each Subsidiary in accordance with their terms.
SECTION 7.6 Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any Subsidiary of the Borrower, the business or any property of
any of them, or involving the legality, validity or enforceability of any
Program Document at law or in equity before any Governmental Authority, which,
if adversely determined, could have a material adverse effect on the business,
operations, property or financial or other condition of the Borrower.
SECTION 7.7 Use of Proceeds. No part of the proceeds of any Loan will
be used to purchase or carry any "margin stock" (as defined in Federal Reserve
Regulation U) or to extend credit to others for such purpose. Neither the
Borrower nor any of its Subsidiaries engages in, nor has as one of its
important activities, the business of extending credit for the purpose of
purchasing or carrying any margin stock.
SECTION 7.8 Accuracy of Information. All information, financial or
otherwise, written or verbal, furnished or to be furnished at any time by or on
behalf of the Borrower or any of its Subsidiaries, to any Lender is and will be
true, complete and accurate in all material respects as of its date, and does
not or will not contain
2
<PAGE> 10
any untrue statement of a material fact or omit to state a material fact as of
such date.
SECTION 7.9 Accuracy of Representations and Warranties. The
representations and warranties of the Borrower and each of its Subsidiaries
contained in each Program Document to which it is a party are and will be true
and correct as of the date given.
SECTION 7.10 Financial Position. (a) The consolidated balance sheets
of the Parent and its consolidated Subsidiaries as at December 31, 1995 and the
related statements of income and shareholders' equity of the Parent and its
consolidated Subsidiaries for the fiscal year then ended, audited by its
independent accountants, copies of which have been furnished to the Lenders,
present the consolidated financial position of the Parent and its consolidated
Subsidiaries as at such date and the consolidated results of the operations of
the Parent and its consolidated Subsidiaries for the period ended on such date,
all in accordance with GAAP; and
(b) The unaudited balance sheet of the Borrower at December 31,
1995 and the related statement of income of the Borrower for the fiscal year
then ended, copies of which have been furnished to the Lenders, present the
financial position of the Borrower as at such date and the results of the
operations of the Borrower for the period ended on such date, all in accordance
with GAAP.
SECTION 7.11 Pledge of Collateral. The Collateral Agent on behalf of
each Lender, pursuant to the Security Agreement and the actions taken
thereunder, holds a valid, perfected and first priority security interest in
the Assigned Collateral free and clear of all Liens.
SECTION 7.12 Title to Assigned Collateral. The Borrower has legal
title to all of the Assigned Collateral owned by it on the date hereof, and
will have legal title to all assets included in the Assigned Collateral at any
time subsequent to the date hereof, free and clear of all Liens, except as
contemplated by the Security Agreement.
SECTION 7.13 Tax Returns. Except for taxes being contested in good
faith by appropriate proceedings diligently pursued and for which adequate
reserves have been established, the Borrower and each of its Subsidiaries (i)
has filed all federal tax returns and state tax returns
3
<PAGE> 11
for the state in which it is organized and the state in which it has its
principal place of business, and all other state and local tax returns required
to be filed by it, and (ii) has not failed to pay any taxes, or interest and
penalties relating thereto, on or before the due dates thereof There are no
federal, state or local tax liabilities of the Borrower or any of its
Subsidiaries due or to become due for any tax year ended on or prior to the
date of execution of this Agreement relating to the Borrower, or any of its
Subsidiaries, whether incurred in respect of or measured by the income of the
Borrower or any of its Subsidiaries, which are required to be reflected in
accordance with GAAP in the financial statements delivered pursuant to Section
7.10 and have not been so reflected, and there are no claims pending, proposed
or, to the best of the Borrower's knowledge, threatened against the Borrower or
any of its Subsidiaries for past federal, state or local taxes, except those,
if any, as to which proper reserves in accordance with GAAP are reflected in
such financial statements.
SECTION 7.14 ERISA. Each Plan of the Borrower and each of its
Subsidiaries is in compliance with all of the applicable provisions of ERISA,
and each Plan intended to be qualified under Section 401(a) of the Code is so
qualified. No Plan of the Borrower or any of its subsidiaries has incurred an
"accumulated funding deficiency" (within the meaning of Section 302 of ERISA or
Section 412 of the Code) whether or not waived. Neither the Borrower nor any
ERISA Affiliate (i) has incurred or expect to incur any liability under Title
IV of ERISA with respect to any Plan which could give rise to a Lien in favor
of the PBGC, other than liability for the payment of premiums, all of which
have been timely paid when due in accordance with Section 4007 of ERISA, (ii)
has incurred or expect to incur any withdrawal liability, within the meaning of
Section 4201 of ERISA, (iii) is subject to any Lien under Section 412(n) of the
Code or Sections 302(f) or 4068 of ERISA or arising out of any action brought
under Sections 4070 or 4301 of ERISA, or (iv) is required to provide security
to a Plan under Section 401(a) (29) of the Code. The PBGC has not instituted
proceedings to terminate any Plan or to appoint a trustee or administrator of
any such Plan and no circumstances exist that constitute grounds under Section
4042 of ERISA to commence any such proceedIngs.
SECTION 7.15 No Material Adverse Change. Since September 30, 1996,
there has occurred no event which has or
4
<PAGE> 12
had, or could have, a material adverse effect upon the business, properties,
liabilities, condition (financial or otherwise), results of operations or
prospects of the Borrower, the Parent, or their respective Subsidiaries or upon
the ability of the Borrower, the Parent or their respective Subsidiaries to
perform their respective obligations under this Agreement or the other Program
Documents to which any of them is a party or upon the ability of the Agent or
any Lender to enforce this Agreement or the other Program Documents.
SECTION 7.16 Compliance with Laws. Each of the Parent, the Borrower
and their respective Subsidiaries is in compliance in all material respects
with all Applicable Laws, except in each case where the failure to so comply
would not have a material adverse effect on the Borrower.
SECTION 7.17 Chief Place of Business. The chief place of business and
chief executive office of the Borrower and the office where the Borrower keeps
its records concerning the Receivables are located at San Antonio, Texas.
SECTION 7.18 Lock-Box Banks; Lock-Box Accounts. The account numbers of
all the Lock-Boxes are specified in Schedule III hereto (or as shall have been
notified to Collateral Agent and each Lender pursuant to the Security
Agreement).
SECTION 7.19 Franchises, Licenses. The Borrower and its Subsidiaries
have all franchises, permits, licenses and other authority as are necessary to
enable them to conduct their respective businesses as currently being conducted
and as proposed to be conducted, and none of them is in default under any of
such franchises, permits, licenses or other authority.
SECTION 7.20 No Default. The Borrower and each of its Subsidiaries is
in compliance with all of the terms and provisions contained herein and in the
other Program Documents to which it is a party and no Default or Event of
Default has occurred and is continuing.
SECTION 7.21 Capital Stock. The Parent owns, beneficially and of
record, 100% of the issued and outstanding Capital Stock of the Borrower. The
Borrower owns, directly or indirectly through Subsidiaries, beneficially and of
record, 100% of the issued and outstanding Capital Stock of each of its
subsidiaries.
5
<PAGE> 13
SECTION 7.22 Trade Names, etc. Except as set forth on Schedule 7.22 to
this Agreement, neither the Borrower nor any of its Subsidiaries (a) conducts
or transacts, nor has it ever conducted or transacted, business in any
jurisdiction under any assumed name, fictitious name, trade name, alternate
corporate or partnership name or other like name (each a "Trade Name"), or (b)
has made any filing or application with or otherwise sought the approval of any
Governmental Authority with respect to the use by the Borrower or such
Subsidiaries of a Trade Name in any jurisdiction. Neither the Borrower nor any
of its Subsidiaries has at any time (i) incurred any indebtedness under any
Trade Name, (ii) granted any security interest or permitted or suffered any
Lien to exist against the Borrower or any of its Subsidiaries or any portion of
its or any of its Subsidiaries' assets or property, whether real or personal
(including, without limitation, any of the Assigned Collateral) under any Trade
Name, (iii) executed or filed any financing statement as a debtor under the
Uniform Commercial Code as in effect in any jurisdiction under any Trade Name,
except pursuant to this Agreement or the Security Agreement, or (iv) had any
judgment entered or rendered against it under any Trade Name.
ARTICLE VIII
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with the Agent and each Lender that
from and after the Effective Date and so long as this Agreement shall remain in
effect or any Loans or any other amounts owing under this Agreement or any
Program Document shall be unpaid, it shall:
SECTION 8.1 Payment of Taxes, etc. Pay and discharge, and cause each
of its Subsidiaries to pay and discharge, all taxes imposed upon it or any such
Subsidiary or upon its or any such subsidiary's Income or profits, prior to the
date on which penalties attach thereto, and all lawful claims, which, if
unpaid, might become a Lien or charge upon any of its or any such subsidiary's
assets; provided, however, that neither the Borrower nor any of its
Subsidiaries shall be required to pay or discharge any taxes which are being
contested in good faith by appropriate proceedings diligently pursued and for
which adequate reserves have been established.
6
<PAGE> 14
SECTION 8.2 Preservation of Corporate Existence. Continue to, and cause
each of its Subsidiaries to continue to, engage in business of the same general
type as now conducted; preserve and maintain its existence in the jurisdiction
of its organization, and its rights, franchises and privileges material to the
conduct of its business as now being conducted; and qualify and remain
qualified as a foreign corporation or entity in each jurisdiction in which such
qualification is necessary in view of its business operations or the ownership
of its properties.
SECTION 8.3 Compliance with Laws, etc. Comply, and cause each of its
Subsidiaries to comply, with the requirements of all Applicable Laws of any
Governmental Authority.
SECTION 8.4 Inspection Rights. At any time and from time to time
during normal business hours permit, and cause its Subsidiaries to permit, the
Lenders or any agents or representatives thereof, to examine and make copies of
the Finance Contracts and all records and books of account related to the
Assigned Collateral and the transactions contemplated by the Program Documents
and to visit its properties, and to discuss its affairs, finances and accounts
with any of its, or any its Subsidiaries', authorized agents or officers.
SECTION 8.5 Maintenance of Approvals, Filings and Registrations. At
all times maintain in effect, renew and comply with, and cause each of its
Subsidiaries to maintain in effect, renew and comply with, all the terms and
conditions of all consents, licenses, approvals and authorizations as may be
necessary or appropriate under any Applicable Law (i) for the execution,
delivery and performance of the Program Documents, (ii) to make the Program
Documents legal, valid, binding and enforceable against the Borrower and each
of its Subsidiaries, and (iii) to conduct its business.
SECTION 8.6 Reporting Requirements. Furnish or cause to be furnished
to the Agent with sufficient copies for each Lender:
(a) (1) as soon as available, but, in any event not later than
ninety (90) days after the end of each fiscal year of the Parent, a copy
of the annual audited consolidated financial statements for the Parent
and its Subsidiaries for such year, including therein the consolidated
balance sheets of the Parent and its
7
<PAGE> 15
Subsidiaries as at the end of such year and the related consolidated
statements of income and cash flows of the Parent and its Subsidiaries
for such year, or statements providing substantially similar
information, in each case certified without qualification by an
independent public accountant of recognized national standing as fairly
representing the financial position and results of operation of the
Parent and its Subsidiaries as at and for the year ending on its date
and having been prepared in accordance with GAAP; and
(2) as soon as available, but, in any event not later
than ninety (90) days after the end of each fiscal year of the Borrower,
the unaudited consolidated and consolidating balance sheets of the
Borrower and each of its Subsidiaries as at the end of such year and the
related unaudited consolidated and consolidating statements of income
and cash flows of the Borrower and each of its subsidiaries for such
year, or statements providing substantially similar information,
certified by the chief financial officer of the Borrower as fairly
presenting the financial position and the results of operations of the
Borrower and each of its subsidiaries as at and for the year ending on
its date and as having been prepared in accordance with GAAP;
(b) (1) as soon as available, but in any event not later than
forty-five (45) days after the end of each of the first three quarterly
periods of each fiscal year of the Parent, the unaudited consolidated
balance sheets of the Parent and its Subsidiaries as at the end of each
such quarter and the related unaudited consolidated statements of income
and cash flows of the Parent and its Subsidiaries for such quarter and
the portion of the fiscal year through such date, certified by a
responsible officer of the Parent as fairly presenting the financial
position and the results of operations of the Parent and its
Subsidiaries in all material respects as at and for the quarter ending
on its date and as having been prepared in accordance with GAAP (subject
to normal year-end audit adjustments); and
(2) as soon as available, but in any event not later
than forty-five (45) days after the end of each of the first three
quarterly periods of each fiscal year of the Borrower, the unaudited
consolidated and
8
<PAGE> 16
consolidating balance sheets of the Borrower and each of its
Subsidiaries as at the end of each such quarter and the related
unaudited consolidated and consolidating statements of income and cash
flows of the Borrower and each of its Subsidiaries for such quarter and
the portion of the fiscal year through such date, certified by a
responsible officer of the Borrower as fairly presenting the financial
position and the results of operations of the Borrower and each of its
Subsidiaries as at and for the quarter ending on its date and as having
been prepared in accordance with GAAP (subject to normal year-end audit
adjustments);
(c) concurrently with the delivery of the financial statements
referred to in Sections 8.6(a) and (b) above, a certificate of a duly
authorized officer of the Borrower stating that such officer has
reviewed the terms of this Agreement and the other Program Documents to
which the Borrower is a party and has made, or caused to be made under
his supervision, a review in reasonable detail of the transactions and
condition of the Borrower during the accounting period covered by such
financial statements and that such review has not disclosed the
existence during or at the end of such accounting period, and that such
officer does not have knowledge of the existence as at the date of such
certificate, of any Default or Event of Default except as specified in
such certificate;
(d) promptly and in any event within five (5) Business Days
after the same are publicly available, copies of all regular and
periodic financial information, proxy materials and other information
and reports, if any, which the Parent, the Borrower or any of their
respective Subsidiaries shall file with the Securities and Exchange
Commission or any securities exchange;
(e) within fifteen calendar days after each calendar month and
at such other times as any Lender may require, a Monthly Report prepared
by the Borrower as of such calendar month, or at such time as any Lender
may require, as the case may be; and
(f) such other information respecting the Receivables as the
Lenders may from time to time request, and such other information with
respect to the business, condition or operations of the Borrower, the
9
<PAGE> 17
Parent or any of their respective Subsidiaries, financial or otherwise,
as any Lender may from time to time reasonably request.
SECTION 8.7 Performance of Agreements. Duly and punctually pay and
perform each of its obligations under this Agreement and the other Program
Documents.
SECTION 8.8 Notices. Promptly give notice to the Agent and each Lender:
(a) of the occurrence of any Default or Event of Default;
(b) of any (i) default or event of default under any contractual
obligation of the Borrower, the Parent or any of their respective Subsidiaries
or (ii) litigation, investigation or proceeding to which the Parent, the
Borrowers or any of their respective Subsidiaries is a party, including any
which may exist at any time between the Parent or any of its Subsidiaries and
any Governmental Authority, which in either case, if not cured or if adversely
determined, as the case may be, could have a material adverse effect on the
business, operations, property or financial or other condition of the Borrower
or the Parent or any of their respective Subsidiaries;
(c) of the occurrence of any event which could have a material
adverse effect upon the business, properties, liabilities, condition (financial
or otherwise), results of operations or prospects of the Borrower, the Parent
or any of their respective Subsidiaries, or upon the ability of the Borrower,
the Parent or any of their respective Subsidiaries to perform its respective
obligations under this Agreement or any other Program Document to which it is a
party;
(d) of any change to the Borrower's Credit and Collection Policies
with respect to or affecting a material amount of the Eligible Receivables;
(e) of any notification, whether written or oral, made or caused to
be made by the Borrower or any of its Subsidiaries to any Obligor affecting the
instructions to such Obligor with respect to the address to which such Obligor
is to send, or place where such Obligor is to make, any payment to be made in
respect of the Receivables; and
10
<PAGE> 18
(f) of any notification, whether written or oral, made or caused to
be made by the Borrower or any of its Subsidiaries to any Obligor affecting the
instructions to such Obligor with respect to any matter (other than such matter
specified in (e) above) regarding any payment to be made in respect of a
material amount of the Receivables.
Each notice pursuant to this subsection shall be accompanied by a statement of
a responsible officer setting forth details of the occurrence referred to
therein and stating what action are being taken with respect thereto.
SECTION 8.9 Compliance with Policies and Contracts. Comply, and cause
its Subsidiaries to comply, in all material respects with its Credit and
Collection Policies in regard to each Eligible Receivable and each Finance
Contract related to such Eligible Receivable.
SECTION 8.10 Instructions to Obligors. Instructs and cause each of its
Subsidiaries to instruct, all Obligors to cause all amounts to be paid by any
Person in respect of any Eligible Receivable created after the Effective Date
to be deposited directly into a Lock-Box maintained under the Lock-Box
Agreement
SECTION 8.11 Books and Records. Keep, and cause its Subsidiaries to
keep, adequate records and books of account, in which complete entries are to
be made reflecting their respective businesses and financial transactions in
respect of the Assigned Collateral and their respective performance under the
Program Documents, such entries to be made in accordance with GAAP as in effect
in the United States consistently applied in the case of financial transactions
or as otherwise required by Applicable Laws.
SECTION 8.12 Further Assurances. As from time to time requested by the
Agent or any Lender, at the cost and expense of the Borrower, execute and
deliver, and cause each Subsidiary to execute and deliver, to the Agent and
each Lender all such documents and instruments and do all such other acts and
things as may be reasonably required to enable the Agent and each Lender to
exercise and enforce its rights under this Agreement, and record and file and
re-record and re-file all such documents and instruments, at such time or times,
in such manner and at such place or places, all as may be necessary or
desirable to validate, preserve and protect the position of the Agent or each
Lender under the Program Documents. The Agent and each
11
<PAGE> 19
Lender may, upon any extension of this Agreement, request an opinion of
counsel, selected by the Borrower, and approved by the Agent and the Lenders,
with respect to action required to be taken for the protection of the rights of
the Agent and the Lenders hereunder and under the other Program Documents.
SECTION 8.13 Other Agreements. Comply, and cause each of its
Subsidiaries to comply, in all respects with all indentures, loan or credit
agreements and any other agreement, lease or instrument to which the Borrower
or any such Subsidiary is a party.
SECTION 8.14. Audits. The Borrower shall at the request of the Agent,
at its expense, promptly cause an accounting firm or other firm selected by the
Borrower and reasonably satisfactory to the Majority Lenders to enter the
premises of the Borrower and each of its Subsidiaries and examine and audit the
books, records and accounts relating to the Assigned Collateral and the
Borrower's and each of its Subsidiaries' performance under the Program
Documents, as it relates to the Assigned Collateral, permit such accounting
firm to discuss the Borrower's and each of its Subsidiaries' affairs, finances,
accounts and performance under the Program Documents with the Borrower's and
each of its Subsidiaries' officers, partners, employees and accountants, cause
such firm to provide the Lenders with a certified report in respect of the
foregoing, which shall be in form and scope reasonably satisfactory to Lenders,
and authorize such accounting farm to discuss such affairs, finances, records
and accounts with representatives of the Agent and the Lenders; provided,
however, that for so long no Default or Event of Default shall be continuing,
the Agent shall not request more than four such audits In any calendar year.
ARTICLE IX
NEGATIVE COVENANTS
The Borrower covenants and agrees with the Agent and each Lender that,
from and after the Effective Date and so long as this Agreement shall remain in
effect or Loans or any other amounts owing under this Agreement or any other
Program Documents shall be unpaid, it shall not, directly or indirectly:
12
<PAGE> 20
SECTION 9.1 Use of Proceeds. Use the proceeds of the Loans for any
purpose other than to pay fees and transaction expenses incurred in connection
with the transactions contemplated by the Program Documents and provide funds
for general corporate purposes in accordance with the terms of this Agreement.
SECTION 9.2 Amendments. Amend, or consent to any amendment, waiver,
supplement or modification of any term or condition of any Receivable, any
Finance Agreement related thereto, or any Lock-Box Agreement in any way that
could materially adversely affect the rights of the Agent or Lenders, or permit
any of its Subsidiaries to do any of the foregoing.
SECTION 9.3 Maximum Credits Outstanding. Permit the aggregate
principal amount of outstanding Loans to exceed the lesser of (A) the Borrowing
Base and (B) the Total Commitment.
SECTION 9.4 Prohibition of Fundamental Changes. Wind-up, liquidate or
dissolve its affairs or enter into any transaction of merger or consolidation,
or convey, sell, lease or otherwise dispose of (or agree to do any of the
foregoing at any future time), whether in one or a series of transactions, all
or substantially all of its assets, or permit any of its Subsidiaries to do any
of the foregoing.
SECTION 9.5 Business. Make any change in the character of its
business or operations which could impair the collectibility of any Eligible
Receivable or adversely affect the rights and remedies of the Agent or the
Lenders under the Program Documents, or permit any of its Subsidiaries to do
any of the foregoing.
SECTION 9.6 No Commingling. Deposit or otherwise credit, or cause or
permit to be so deposited or credited, to any Lock-Box cash or cash proceeds
other than payments made by a Person in respect of Assigned Collateral.
SECTION 9.7 Chief Place of Business. The Borrower will not, and will
not permit any of its Subsidiaries to, move its chief executive office or the
place where it maintains the Finance Contracts and other books and records
relating to the Assigned Collateral from the location specified in Section 7.17
or move unless (i) the Borrower or such Subsidiary shall have given to the
Lenders, not less than 45 days prior written notice of its intention to do so,
13
<PAGE> 21
clearly describing the new location, and (ii) the Borrower or such Subsidiary
shall have taken such action, satisfactory to the Agent and the Lenders, to
maintain the security interest of the Agent and the Lenders in the Assigned
Collateral at all times fully perfected and in full force and effect.
SECTION 9.8. Liens. The Borrower will not, and will not permit any of
its Subsidiaries to, contract for, create, incur, assume or suffer to exist any
Lien, security interest, charge or other encumbrance of any nature upon any of
the Assigned Collateral, except in respect of the Existing Agreement and as
provided for in the Security Agreement.
SECTION 9.9. Changes to Credit and Collection Policies. The Borrower
shall not change its Credit and Collection Policies in any manner which could
materially adversely affect the collectibility of the Eligible Receivables.
ARTICLE X
EVENTS OF DEFAULT
SECTION 10.1 Events of Default. In case of the happening of any of the
following events (herein sometimes called "Events of Default")
(a) the principal amount of any Loan or any Note, any interest
payable thereon, the Commitment Fee or any other fees or expenses
related to this Agreement or the transactions contemplated hereby or any
other amount payable under this Agreement shall not be paid in full on
the date due and payable and, in the case of a default in the payment of
interest, Commitment Fee or any other fees and expenses, such default
shall continue unremedied for a period of five days; or
(b) any representation or warranty made or deemed to be made
or reaffirmed by the Borrower, the Parent, their respective Subsidiaries
or any other Person herein or in any Program Document, certificate,
agreement, instrument or statement contemplated by or made or delivered
pursuant to or in connection herewith, shall prove to have been
incorrect when made or deemed made; or
14
<PAGE> 22
(c) (i) the Borrower or any of its Subsidiaries shall fail to
perform or observe any term, covenant or agreement contained in Article
IX of this Agreement, or (ii) the Borrower, the Parent or any of their
respective Subsidiaries shall fail to perform or observe any other term,
covenant or agreement contained in this Agreement or any other Program
Document and not otherwise constituting an Event of Default hereunder,
and such default shall continue unremedied for a period of 30 days; or
(d) any Program Document shall, at any time after its
execution and delivery, for any reason cease to be in full force and
effect (unless such occurrence is in accordance with its terms or after
payment thereof) or shall be declared to be null and void or the
validity or enforceability thereof shall be contested by the Borrower,
the Parent or any of their respective Subsidiaries, or the Borrower, the
Parent or any of their respective Subsidiaries shall deny that it has
any or further liability or obligation thereunder; or
(e) the Borrower or any of its Subsidiaries, the Parent, Titan
Indemnity Company or Titan Insurance Company shall (i) apply for or
consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of itself or of all or a
substantial part of its property, (ii) admit in writing its inability,
or be generally unable, to pay its debts as they become due, (iii) make
a general assignment for the benefit of its creditors, (iv) commence a
voluntary case under the Federal Bankruptcy Code (as now or hereafter in
effect), (v) be adjudicated a bankrupt or insolvent, (vi) commence a
voluntary case under, or file a petition seeking to take advantage, of
any other law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts, (vii) fail to
controvert in a timely and appropriate manner, or acquiesce in writing
to, any allegations, or any petition filed, against it in an involuntary
case under such Federal Bankruptcy Code or other law, or (viii) take any
corporate action for the purpose of effecting any of the foregoing; or
(f) a proceeding or case shall be commenced without the
application or consent of the Borrower or any of its Subsidiaries, the
Parent, Titan Indemnity
15
<PAGE> 23
Company or Titan Insurance Company of any of them in any court of
competent jurisdiction, seeking (i) the liquidation, reorganization,
dissolution or winding-up, or the composition or readjustment of debts,
of any of them, (ii) the appointment of a trustee, receiver, custodian,
liquidator, supervisor or the like of any of them or of all or any
substantial part of their respective assets or (iii) similar relief in
respect of any of them under any law relating to bankruptcy, insolvency,
reorganization, winding-up or composition or adjustment of debts, and
such proceeding or case shall continue undismissed or an order, judgment
or decree approving or ordering any of the foregoing shall be entered
and continue unstayed and in effect, for a period of sixty consecutive
days, or an order for relief against any of them shall be entered in an
involuntary case under the Federal Bankruptcy Code (as now or hereafter
in effect); or any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied in respect of an obligation
(alleged or otherwise) of the Borrower or any of its Subsidiaries, the
Parent, Titan Indemnity Company or Titan Insurance Company against a
substantial part of its respective properties and such judgment, writ,
or similar process shall not be released, vacated, stayed or fully
bonded within thirty days after its issue or levy; or
(g) the Borrower, the Parent or any of their respective
Subsidiaries shall fail to pay when due any amount in respect of any in
excess of $500,000 in the aggregate for money borrowed or for the
deferred purchase price of property created, issued, guaranteed,
incurred or assumed by such Person or any other event shall occur or any
condition shall exist in respect of any such the effect of which is to
cause (or permit any holder thereof or a trustee to cause), without
giving effect to the giving of notice or the lapse of time, or both,
such to become due prior to its stated maturity; or
(h) the Parent shall not directly or indirectly own 100% of
all of the outstanding Capital Stock of the Borrower, or the Borrower
shall not, directly or indirectly, own 100% of all of the outstanding
Capital Stock of its subsidiaries; or
(i) the occurrence of and continuation of an Event of Default
as defined in the Titan Credit Agreement; or
16
<PAGE> 24
(j) the lien of the Security Agreement in favor of the
Collateral Agent shall cease to be a valid assignment of, and valid and
perfected first priority lien upon and security interest in, the
Assigned Collateral, as security for the repayment of the Borrower's
Obligations, or such lien shall cease to be valid as against creditors
of the Borrower; or
(k) a final judgment or judgments for the payment of money in
excess of $500,000 in the aggregate shall be rendered by a court or
courts against the Borrower, the Parent or any of their respective
Subsidiaries, (exclusive of any judgment amount fully covered by
insurance where the insurer has admitted liability in respect of such
judgment amount), and the same shall not be discharged (or provision
shall not be made for such discharge), or a stay of execution thereof
shall not be procured, within thirty (30) days from the date of entry
thereof; or
(l) a Termination Event shall have occurred with respect to a
Plan, resulting in the imposition of liability against the Borrower, the
Parent, or any of their respective Subsidiaries; or
(m) the Guarantee shall cease to be in full force and effect
or the Parent shall so assert;
then, at any time after the occurrence of such event, the Majority Lenders may
direct the Agent to take one or more of the following actions: (i) direct the
Agent to give notice (which may be telephone notice confirmed in writing) to
the Borrower of the occurrence of an Event of Default, and the date of the
giving of such notice shall become the Credit Expiration Date and each Lender's
obligation to make Loans shall be terminated; (ii) direct the Agent to, by
notice to the Borrower (except that in the case of the occurrence of any Event
of Default described in Section 10.1(e) or 10.1(f), no such notice shall be
required and such termination and acceleration shall be automatic) declare the
unpaid principal amount and interest under the Notes, the Loans and all other
amounts payable to the Lenders and the Agent by the Borrower hereunder to be
forthwith due and payable, whereupon such amounts shall become forthwith due
and payable, both as to principal and interest, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived, anything
17
<PAGE> 25
contained herein or in any Note to the contrary notwithstanding; (iii) as
permitted by the Security Agreement, direct the Collateral Agent to deliver a
Lock-Box Notice to the Lock-Box Bank and/or direct to Collateral Agent to
require that all amounts payable by the Borrower and the Parent in respect of
the Borrower's Obligations be remitted directly to the Collateral Account; and
(iv) any and all other and further acts and actions which the Agent or the
Lenders may take pursuant to the Security Agreement or under the UCC or other
Applicable Law.
18
<PAGE> 26
EXHIBIT B
[ELITE PREMIUM FINANCE LTD LOGO]
P.O. BOX 47533, SAN ANTONIO, TEXAS 78265-8020
PHONE (210) 734-1560 -- FAX (210) 734-1532
PREMIUM FINANCE AGREEMENT -- TRUTH IN LENDING DISCLOSURES
Note No. Quote No. Producer No.
---------------- -------------------- ------------
Insured Name Agent Name
SS/Tax ID # Tel # Tel # Fax #
Address Address
City State Zip City State Zip
<TABLE>
<CAPTION>
SCHEDULE OF POLICIES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(1) Full Name of Insurance Company and
Policy Prefix Branch Office Address Policy Policy Taxes
& Number Eff. Date FUND (2) Name & Address of General Agent Type Term & Fees Premium
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TRUTH IN LENDING DISCLOSURES -- PAYMENT SCHEDULE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. TOTAL PREMIUMS 2. CASH DOWN 3. AMOUNT FINANCED 4. FINANCE CHARGE 5. TOTAL OF PAYMENTS 6. DEFERRED
PAYMENT The amount of credit (incl. Initial Service The amount you will PAYMENT PRICE
provided to you on Charge) The dollar have paid after you
your behalf. amount the credit have made the
will cost you. scheduled payments.
- -----------------------------------------------------------------------------------------------------------------------------------
ANNUAL INITIAL SERVICE NUMBER OF AMOUNT OF PAYMENT FIRST
PERCENTAGE RATE CHARGE PAYMENTS EACH PAYMENT DUE DATE PAYMENT DUE
The cost of your (incl. in finance
credit as a yearly charge)
rate.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECURITY: You are giving a security interest in unearned premiums and loss
payments on the insurance policy being purchased.
LATE CHARGE. If any portion of a payment is late 10 days or more, you will be
charged 5 cents for each $1.000 of the original payment amount.
PREPAYMENT. If you pay off early, you may be entitled to a refund of part of the
finance charge, but on loans of $100 or less you will not be entitled to a
refund of any part of the finance charge.
ANY MONEY RECEIVED AFTER NOTICE OF CANCELLATION HAS BEEN SENT SHALL BE APPLIED
TO THE OUTSTANDING INDEBTEDNESS OF THE NOTE BALANCE AND SHALL NOT BE CONSTRUED
AS A REINSTATEMENT OF THE INSURANCE POLICY.
See your agreement provisions for any additional information about nonpayment,
default, any required repayment in full before the scheduled date, and
prepayment refunds and penalties.
POWER OF ATTORNEY
In the event of default by insured and the failure of insured to cure default,
after receiving notice as required by State Law, Insured hereby appoints Elite
Premium Finance, Ltd. (herein referred to as EPF) as its attorney-in-fact to
cancel all of the aforementioned policies, and to receive and receipt for any
unearned or return premium, and either to execute any check or draft therefore
in insured's name or to direct the insurance company/ies to make said check or
draft payable to EPF. NOTICE TO INSURED: 1) Read this agreement, including the
writing on the reverse side (or second page) before you sign, even if advised
otherwise. 2) Do not sign this agreement if it contains blank spaces. 3) If more
than one insured, the party signing hereto, represents that all insureds have
authorized this transaction. WHERE REQUIRED BY STATE LAW, ALL INSUREDS
DESIGNATED IN THE POLICIES MUST SIGN. If insured is a corporation, an authorized
officer must sign. 4) Warrants that if signed by the agent or broker on behalf
of the insured, that they have authorized the agent to sign the agreement on
their behalf and received a copy thereof. 5) You are entitled to a completely
filed-in copy of the agreement at the time you sign. Keep your copy of this
agreement to protect your legal rights. 6) Under the law, you have the right to
pay off in advance the full amount due and under certain conditions to obtain a
partial refund of the service charge. After applying any sums received from an
insurance company to the unpaid balance of the total of payments, the surplus,
if any, shall be paid to the insured. If there remains a balance due, the
insured must pay that amount to EPF.
Date By X
-------------- ---------------------- --------------------------------
Signature of Insured Type or print name
or Broker on Insured's
Behalf
NOTICE: DO NOT SIGN THIS AGREEMENT BEFORE YOU READ THE WRITING ON THE REVERSE
SIDE (or second page) EVEN IF OTHERWISE ADVISED.
PRODUCER REPRESENTATIONS
The undersigned warrants that the insured has received a copy of this
Agreement, that the scheduled policies are in full force and effect and the
premiums and all other dates indicated therefore is correct. The undersigned
recognizes the interests assigned herein and represents that the Insured has
authorized this transaction and that the undersigned agent or broker has been
authorized by the undersigned and agrees to pay unearned commissions to EPF and
unearned premiums when credited.
The undersigned further warrants that ALL COPIES of the "ADDITIONAL
REPRESENTATIONS" portions found on the reverse side of this Agreement has been
completed.
Date By X
-------------- ---------------------- --------------------------------
Signature of Producer Type or print name
1053-E (Rev. 10/95)
Please return signed Pink - Producer Copy
<PAGE> 27
REMAINING PROVISIONS OF YOUR PREMIUM FINANCE AGREEMENT
PREPAYMENT: Insured shall have the right at any time to prepay this note in
full or any one or more installments thereof without penalty, and upon
prepayment in full shall receive a refund of the unearned finance charge
computed according to the sum of the periodic balances method, but on loans
$100 or less no portion of any acquisition charge shall be refunded. If such
prepayment in full occurs before the 1st installment due date Lender shall
retain for each elapsed day from the date the finance charge accrues 1/30th of
the portion of the finance charge which could be retained if the 1st
installment period were 1 month and the loan were prepaid in full on the 1st
installment period due date and the finance charge in excess of such amount
shall be refunded to Insured. No refund of less than $1.00 shall be made.
Cancellation: If Insured fails to make the payments at the time and in the
amount provided or there is any other default under the terms of the Agreement
Lender may cancel the insurance policy(ies) as hereinafter provided. Before
such cancellation occurs, Lender shall first mail a written notice to Insured
of the intent of Lender to cancel the policy(ies) unless the default is cured
within 10 days after the date the written notice is mailed. A copy of such
notice of intent to cancel shall also be mailed to the insurance producer.
After the expiration of the 10 day period given to cure the default, Lender may
cancel the insurance policy(ies) by mailing a notice of cancellation to the
Insurance company and the insurance policy(ies) shall be cancelled as if the
notice of cancellation had been submitted by Insured. Copies of such notice of
cancellation shall also be mailed to Insured at Insured's last known address
and to the insurance producer. When any such insurance policy(ies) is
cancelled, Lender shall receive the return of unearned premiums and loss
payments and credit such amounts on the unpaid balance of this loan and any
surplus of $1.00 or more shall be refunded to Insured. This Agreement, and any
payments hereunder by Insured to Lender, are subject to a security interest
granted by Lender to a financial Institution.
MANNER AND Application OF PAYMENTS: All payments made on this Agreement shall
be credited, to the extent of the amount thereof, in the following manner, (i)
first, against the amount of accrued but unpaid finance charges and all
collectable charges incurred as of the date of such payment; (ii) second,
against all principal due and owing on the Agreement as of the date of such
payment; and (iii) third, as a prepayment of principal not yet due and owing
under the Agreement.
DEFAULT CHARGES. When any portion of a scheduled installment becomes
delinquent 10 days or more, the sum or 5 for each $1,00 of the original
installment may be assessed and collected as an additional charge.
ACCELERATION: Lender, upon Insured's default in any payment or upon any other
act of default under this Agreement is authorized to accelerate and declare due
and payable the entire unpaid balance of this note, less unearned finance
charges. An increase of any premium under any policy listed in this Agreement
and the failure to pay such increased premium within thirty (30) days or
notification of the Insured also constitutes default and may result in
acceleration of the unpaid balance by Lender. Other acts of default for which
the unpaid balance may be accelerated include any check given by Insured for
the down payment or any future payment due under this Agreement which is not
honored when presented in the bank on which drawn, failure of Insured to comply
with any provision of this Agreement, any proceeding in bankruptcy,
receivership, or insolvency being instituted by or against Insured, or if any
insurance company issuing an insurance policy referred to becomes insolvent,
suspends business, or ceases to be qualified to do business. After maturity,
the finance charge shall be computed at the highest rate permitted by
applicable law. Insured hereby waives presentment, protest, and notice of
dishonor.
AMENDMENT: Should additional premium be due as a result of changes in Insured's
policy(ies) or adjustments of the rate classification, Insured hereby grants
Lender the authority to pay the additional premium and to amend this Agreement
accordingly. Such additions shall be accomplished by Lender furnishing Insured
and Insured's producer with a written memorandum of Agreement prior to the 1st
scheduled payment date of the amended transaction.
SECURITY: Until Lender has been paid the full amount owing under this and any
other note between Lender and Insured, Insured hereby (a) grants Lender a
security interest in unearned premiums which may become payable under any and
all policy(ies) and in loss payments or credits under said policy(ies) between
Insured and Lender subject, however, to any mortgagee or loss payee interest;
and Lender shall have the right to offset any amounts due to Lender under any
notes between Lender and Insured with any credit due to Insured under any other
notes; and (b) irrevocably appoints Lender to be Insured's attorney-in-fact
with full power and sole authority to sign or otherwise execute any and all
policies, papers, lost policy releases, and notices necessary to effect
cancellation of the policy(ies) herein described and to collect and receive
unearned premiums which may become payable under said policy(ies).
LENDER'S & AGENT'S STATUS: It is agreed that Lender is not acting as an
insurance carrier, agent or broker and shall have no liability as such. Insured
understands and agrees that Insured's insurance agent or broker is not the
agent of Lender, that the insurance agent has no power of authority to make
agreements or enter into contracts for Lender, and that this Agreement has no
force or effect until accepted in writing by Lender.
NOTIFICATION OF INSURANCE COMPANIES: Insured authorizes Lender, at its option,
to notify any and all insurance companies issuing insurance policies covered by
this Agreement of the terms of this Agreement, and Insured directs said
insurance companies to honor all provisions of this Agreement.
TEXAS LAW TO GOVERN/VENUE IN BEXAR COUNTY/REASONABLE ATTORNEYS' FEES: Insured
and Lender agree that this Agreement is made subject to and shall be governed
by and construed under the applicable laws of the State of Texas and the United
States, and any provision of this Agreement contrary to such laws shall be
ineffective without invalidating the remaining provisions. Venue for the
enforcement or construction of this Agreement shall lie in Bexar County, Texas.
Insured agrees to pay all reasonable costs and expenses of collection,
including reasonable attorneys' fees, if such obligations are collected by or
through an attorney at law. Under no circumstances shall Insured have to pay
more interest than is allowed under applicable law for this type of loan, and
if Lender inadvertently contracts for charges, or receives more interest than
is allowed, Lender will either refund the excess to Insured or apply it to the
unpaid balance of the loan.
ASSIGNMENT. Insured warrants that the insurance policy(ies) set forth, or a
binder for such policy(ies) has been issued to Insured and is in full force and
effect, and that there has been no assignment of any interest in the insurance
policy(ies) except for the assignment to Lender provided herein, and except for
the interests of mortgagees and loss payees, without the written consent of
Lender, but if much approved assignment by Insured is made, this Agreement
shall inure to the benefit of and be binding on such assignee. Insured agrees
that Lender may assign this Agreement, and in such event this Agreement shall
inure to the benefit of and be binding on such assignee.
Insured further agrees that all terms, conditions and provisions of this
premium finance agreement will apply to any rewrite with or without lapse or
renewal of the original policies reflected herein. In the event of cancellation
it is understood and agreed that any loan balance remaining after all unearned
premiums have been applied is the responsibility of the Insured and will be
paid promptly upon notification of the exact balance due.
ADDITIONAL REPRESENTATIONS
1. No audit or reporting form policies or policies subject to retrospective
rating or to minimum earned premium are included in this Agreement
except as indicated: ____________________________________________________
2. If audit or reporting form policies or policies subject to retrospective
rating are included in this Agreement, the deposit or provisional
premiums are not less than the anticipated premiums to be earned for the
full term of the policies.
3. If any policy is subject to a minimum earned premium, the minimum earned
premium is $__________.
4. None of the policies contain provisions which prohibit cancellation
within 10 days either by the insured or by the company except as
indicated: ______________________________.
5. Unearned premiums on the scheduled policies are computed by the standard
short rate or pro rata table, except as indicated: ____________________
6. We have notified EPF of any policies that are subject to the policy
premium being fully earned in the event of loss, and we have notified
the insurer and the insured that EPF is to be named as a loss payee on
any such policies.
7. We are the authorized policy issuing agent of the Insurance companies
placing the coverage directly with the Insurance company of all
aforementioned policies except ______________ written
through:___________
<PAGE> 1
The Board of Directors
Titan Holdings, Inc.:
We consent to incorporation by reference in the Form S-8 of Titan Holdings,
Inc. of our report dated February 13, 1997, relating to the consolidated balance
sheets of Titan Holdings, Inc. and subsidiaries as of December 31, 1996, and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996, annual report on Form 10-K
of Titan Holdings, Inc.
KPMG Peat Marwick LLP
San Antonio, Texas
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 145,531
<DEBT-CARRYING-VALUE> 16,114
<DEBT-MARKET-VALUE> 16,104
<EQUITIES> 16,479
<MORTGAGE> 15,935
<REAL-ESTATE> 0
<TOTAL-INVEST> 224,793
<CASH> 3,682
<RECOVER-REINSURE> 2,697
<DEFERRED-ACQUISITION> 12,498
<TOTAL-ASSETS> 361,955
<POLICY-LOSSES> 141,871
<UNEARNED-PREMIUMS> 55,333
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 39,774
0
0
<COMMON> 95
<OTHER-SE> 111,773
<TOTAL-LIABILITY-AND-EQUITY> 361,955
172,846
<INVESTMENT-INCOME> 12,866
<INVESTMENT-GAINS> 883
<OTHER-INCOME> 0
<BENEFITS> 95,087
<UNDERWRITING-AMORTIZATION> 33,877
<UNDERWRITING-OTHER> 24,633
<INCOME-PRETAX> 20,699
<INCOME-TAX> 6,518
<INCOME-CONTINUING> 14,181
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,181
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.48
<RESERVE-OPEN> 83,024
<PROVISION-CURRENT> 90,565
<PROVISION-PRIOR> 4,522
<PAYMENTS-CURRENT> 41,060
<PAYMENTS-PRIOR> 39,281
<RESERVE-CLOSE> 97,770
<CUMULATIVE-DEFICIENCY> (4,600)
</TABLE>
<PAGE> 1
Form 2
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE TITAN INDEMNITY COMPANY
SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES
Notes to Schedule P
(1) The Parts of Schedule P:
Part 1 - detailed information on losses and loss expenses.
Part 2 - history of incurred losses and allocated expenses.
Part 3 - history of loss and allocated expense payments.
Part 4 - history of bulk and incurred-but-not reported reserves.
Part 5 - history of claims.
Part 6 - history of premiums earned.
Part 7 - history of loss sensitive contracts.
Schedule P Interrogatories
(2) Lines of business A through M, R, and S are groupings of the lines of
business used on the state page.
(3) Reinsurance A, B, C, and D (lines N to Q) are:
Reinsurance A = nonproportional property (1988 and subsequent)
Reinsurance B = nonproportional liability (1988 and subsequent)
Reinsurance C = financial lines (1988 and subsequent)
Reinsurance D = old Schedule O line 30 (1987 and prior)
(4) Parts 2 and 4 are gross of all discounting, including tabular
discounting. Part 1 is gross of only non-tabular discounting,
which is reported in Columns 31 and 32 of Part 1. The tabular
discount, if any, is reported in the Notes to Financial Statements
which will reconcile Part 1 with Parts 2 and 4.
SCHEDULE P - PART 1 - SUMMARY
($000 omitted)
<TABLE>
<CAPTION>
!-------------#-----------------------------------------#-----------------------------#
| | Premiums Earned | |
| 1 |-------------#-------------#-------------|-----------------------------#
| Years | 2 | 3 | 4 | Loss Payments |
| in Which | | | | |
|Premiums Were| | | |--------------#--------------|
| Earned and | Direct | | Net | 5 | 6 |
| Losses Were | and | Ceded | (2 - 3) | Direct | |
| Incurred | Assumed | | | and Assumed | Ceded |
|-------------|-------------|-------------|-------------|--------------|--------------|
| | | | | | |
<S> <C> <C> <C> <C> <C>
| 1. Prior | X X X | X X X | X X X | 48 | 0 |
| 2. 1987 | 46,801 | 28,439 | 18,362 | 9,399 | 1,159 |
| 3. 1988 | 55,531 | 9,642 | 45,889 | 16,703 | 171 |
| 4. 1989 | 29,066 | 2,265 | 26,801 | 10,883 | 572 |
| 5. 1990 | 19,365 | 2,254 | 17,111 | 6,856 | 646 |
| 6. 1991 | 26,424 | 4,193 | 22,231 | 12,346 | 2,989 |
| 7. 1992 | 36,393 | 7,550 | 28,843 | 18,515 | 5,832 |
| 8. 1993 | 53,952 | 13,898 | 40,054 | 25,285 | 10,547 |
| 9. 1994 | 72,990 | 11,060 | 61,930 | 34,889 | 13,171 |
|10. 1995 | 58,943 | 9,763 | 49,180 | 12,353 | 731 |
|11. 1996 | 67,056 | 5,789 | 61,267 | 10,985 | 109 |
|-------------|-------------|-------------|-------------|--------------|--------------|
|12. Totals | X X X | X X X | X X X | 158,262 | 35,927 |
| | | | | | |
!-------------#-----------------------------------------#------------------------------
<CAPTION>
!-------------#--------------------------------------------------------------------------#--------------#
| | Loss and Loss Expense Payments | |
| 1 #-----------------------------#--------------#--------------#--------------| 12 |
| Years | Allocated Loss | 9 | 10 | 11 | |
| in Which | Expense Payments | | | | Number of |
|Premiums Were|--------------#--------------| Salvage | Unallocated | Total | Claims |
| Earned and | 7 | 8 | and | Loss | Net Paid | Reported - |
| Losses Were | Direct | | Subrogation | Expense | (5 - 6 + 7 | Direct and |
| Incurred | and Assumed | Ceded | Received | Payments | - 8 + 10) | Assumed |
|-------------|--------------|--------------|--------------|--------------|--------------|--------------|
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>
| 1. Prior | 13 | 0 | 0 | 2 | 63 | X X X |
| 2. 1987 | 4,926 | 300 | 104 | 1,517 | 14,383 | X X X |
| 3. 1988 | 8,989 | 25 | 166 | 3,060 | 28,556 | X X X |
| 4. 1989 | 6,102 | 7 | 657 | 1,572 | 17,978 | X X X |
| 5. 1990 | 3,020 | 53 | 99 | 1,317 | 10,494 | X X X |
| 6. 1991 | 3,882 | 416 | 4,135 | 1,763 | 14,586 | X X X |
| 7. 1992 | 6,703 | 1,128 | 1,589 | 2,139 | 20,397 | X X X |
| 8. 1993 | 6,544 | 1,224 | 429 | 1,652 | 21,710 | X X X |
| 9. 1994 | 6,127 | 1,053 | 632 | 1,962 | 28,754 | X X X |
|10. 1995 | 2,686 | 18 | 314 | 1,495 | 15,785 | X X X |
|11. 1996 | 949 | 6 | 268 | 1,489 | 13,308 | X X X |
|-------------|--------------|--------------|--------------|--------------|--------------|--------------|
|12. Totals | 49,941 | 4,230 | 8,393 | 17,968 | 186,014 | X X X |
| | | | | | | |
!----------------------------------------------------------------------------------------#--------------#
</TABLE>
<TABLE>
<CAPTION>
!-------------#--------------------------------------------------------#------------------------------#
| | Losses Unpaid |Allocated Loss Expenses Unpaid|
| |---------------------------#----------------------------|----------------------------- #
| | Case Basis | Bulk + IBNR | Case Basis |
| |-------------#-------------|-------------#--------------|--------------#-------------- |
| | 13 | 14 | 15 | 16 | 17 | 18 |
| | Direct | | Direct | | Direct | |
| | and Assumed | Ceded | and Assumed | Ceded | and Assumed | Ceded |
|-------------|-------------|-------------|-------------|--------------|--------------|-------------- |
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>
| 1. Prior | 5 | 0 | 0 | 0 | 34 | 0 |
| 2. 1987 | 410 | 0 | 0 | 0 | 28 | 0 |
| 3. 1988 | 451 | 0 | 0 | 0 | 164 | 0 |
| 4. 1989 | 703 | 0 | 0 | 0 | 116 | 0 |
| 5. 1990 | 384 | (21)| 64 | 34 | 180 | 1 |
| 6. 1991 | (1,123)| (1,211)| 417 | 207 | 420 | 21 |
| 7. 1992 | 1,660 | 89 | 323 | 142 | 677 | 46 |
| 8. 1993 | 3,172 | 183 | 156 | 57 | 1,347 | 66 |
| 9. 1994 | 9,228 | 1,101 | 371 | 45 | 2,905 | 190 |
|10. 1995 | 7,120 | 60 | 3,165 | 553 | 3,511 | 0 |
|11. 1996 | 10,013 | 71 | 8,644 | 796 | 3,459 | 13 |
|-------------|-------------|-------------|-------------|--------------|--------------|-------------- |
|12. Totals | 32,023 | 272 | 13,140 | 1,834 | 12,841 | 337 |
| | | | | | | |
!-------------#-----------------------------------------#----------------------------------------------
<CAPTION>
!-------------#------------------------------#--------------#--------------#--------------#-------------#
| |Allocated Loss Expenses Unpaid| | | | |
| # -----------------------------| 21 | 22 | 23 | 24 |
| | Bulk + IBNR | | | | Number of |
| | --------------#--------------| Salvage | Unallocated | Total | Claims |
| | 19 | 20 | and | Loss | Net Losses |Outstanding -|
| | Direct | | Subrogation | Expenses | and Expenses | Direct |
| | and Assumed | Ceded | Anticipated | Unpaid | Unpaid | and Assumed |
|-------------| --------------|--------------|--------------|--------------|--------------|-------------|
| | | | | | | |
<S> <C> <C> <C> <C> <C>
| 1. Prior | 0 | 0 | 0 | 0 | 39 | X X X |
| 2. 1987 | 0 | 0 | 0 | 7 | 445 | X X X |
| 3. 1988 | 0 | 0 | 0 | 8 | 623 | X X X |
| 4. 1989 | 0 | 0 | 0 | 12 | 831 | X X X |
| 5. 1990 | 0 | 0 | 23 | 7 | 621 | X X X |
| 6. 1991 | 2 | 0 | 1,079 | 14 | 713 | X X X |
| 7. 1992 | 4 | 0 | 76 | 28 | 2,415 | X X X |
| 8. 1993 | 3 | 0 | 129 | 53 | 4,425 | X X X |
| 9. 1994 | 11 | 0 | 1 | 145 | 11,324 | X X X |
|10. 1995 | 995 | 0 | 190 | 176 | 14,354 | X X X |
|11. 1996 | 2,924 | 0 | 0 | 672 | 24,832 | X X X |
|-------------| --------------|--------------|--------------|--------------|--------------|-------------|
|12. Totals | 3,939 | 0 | 1,498 | 1,122 | 60,622 | X X X |
| | | | | | | |
!-------------- -----------------------------------------------------------#--------------#--------------#
</TABLE>
<TABLE>
<CAPTION>
!-------------#-----------------------------------------#--------------------------------------------#
| | Total Losses and | Loss and Loss Expense Percentage |
| | Loss Expenses Incurred | (Incurred/Premiums Earned) |
| |-------------#-------------#-------------|--------------#--------------#--------------|
| | 25 | 26 | 27 | 28 | 29 | 30 |
| | Direct | | | Direct | | |
| | and Assumed | Ceded | Net | and Assumed | Ceded | Net |
|-------------|-------------|-------------|-------------|--------------|--------------|--------------|
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>
| 1. Prior | X X X | X X X | X X X | X X X | X X X | X X X |
| 2. 1987 | 16,287 | 1,459 | 14,828 | 34.8 | 5.1 | 80.8 |
| 3. 1988 | 29,375 | 196 | 29,179 | 52.9 | 2.0 | 63.6 |
| 4. 1989 | 19,388 | 579 | 18,809 | 66.7 | 25.6 | 70.2 |
| 5. 1990 | 11,828 | 713 | 11,115 | 61.1 | 31.6 | 65.0 |
| 6. 1991 | 17,721 | 2,422 | 15,299 | 67.1 | 57.8 | 68.8 |
| 7. 1992 | 30,049 | 7,237 | 22,812 | 82.6 | 95.9 | 79.1 |
| 8. 1993 | 38,212 | 12,077 | 26,135 | 70.8 | 86.9 | 65.2 |
| 9. 1994 | 55,638 | 15,560 | 40,078 | 76.2 | 140.7 | 64.7 |
|10. 1995 | 31,501 | 1,362 | 30,139 | 53.4 | 14.0 | 61.3 |
|11. 1996 | 39,135 | 995 | 38,140 | 58.4 | 17.2 | 62.3 |
|-------------|-------------|-------------|-------------|--------------|--------------|--------------|
|12. Totals | X X X | X X X | X X X | X X X | X X X | X X X |
| | | | | | | |
!-------------#-----------------------------------------#---------------------------------------------
<CAPTION>
!-------------#-----------------------------#--------------#-----------------------------#
| | | | Net Balance Sheet Reserves |
| | Nontabular Discount | 33 | After Discount |
| |--------------#--------------|Inter-Company |--------------#--------------|
| | 31 | 32 | Pooling | 34 | 35 |
| | | Loss |Participation | Losses |Loss Expenses |
| | Loss | Expense | Percentage | Unpaid | Unpaid |
|-------------|--------------|--------------|--------------|--------------|--------------|
| | | | | | |
<S> <C> <C> <C> <C> <C>
| 1. Prior | 0 | 0 | X X X | 5 | 34 |
| 2. 1987 | 0 | 0 | 0.0 | 410 | 35 |
| 3. 1988 | 0 | 0 | 0.0 | 451 | 172 |
| 4. 1989 | 0 | 0 | 0.0 | 703 | 128 |
| 5. 1990 | 0 | 0 | 0.0 | 435 | 186 |
| 6. 1991 | 0 | 0 | 0.0 | 298 | 415 |
| 7. 1992 | 0 | 0 | 0.0 | 1,752 | 663 |
| 8. 1993 | 0 | 0 | 0.0 | 3,088 | 1,337 |
| 9. 1994 | 0 | 0 | 0.0 | 8,453 | 2,871 |
|10. 1995 | 0 | 0 | 0.0 | 9,672 | 4,682 |
|11. 1996 | 0 | 0 | 0.0 | 17,790 | 7,042 |
|-------------|--------------|--------------|--------------|--------------|--------------|
|12. Totals | 0 | 0 | X X X | 43,057 | 17,565 |
| | | | | | |
!-------------------------------------------------------------------------#--------------#
</TABLE>
74
<PAGE> 2
Form 2
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE TITAN INDEMNITY COMPANY
SCHEDULE P - PART 2 - SUMMARY
<TABLE>
<CAPTION>
!-------------------#-----------------------------------------------------------------------------------#
| 1 | Incurred Losses and Allocated Expenses Reported At Year End ($000 omitted) |
| Years in Which |---------------------------#-------------#-------------#-------------#-------------#
| Losses Were | 2 | 3 | 4 | 5 | 6 | 7 |
| Incurred | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 |
|-------------------|-------------|-------------|-------------|-------------|-------------|-------------|
| | | | | | | |
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>
| 1. Prior | 3,854 | 4,003 | 3,100 | 2,866 | 2,928 | 2,923 |
| 2. 1987 | 11,706 | 12,895 | 13,604 | 13,502 | 13,249 | 13,312 |
| 3. 1988 | X X X | 28,114 | 27,511 | 28,180 | 27,891 | 26,240 |
| 4. 1989 | X X X | X X X | 20,553 | 19,961 | 19,502 | 18,318 |
| 5. 1990 | X X X | X X X | X X X | 10,518 | 11,093 | 11,455 |
| 6. 1991 | X X X | X X X | X X X | X X X | 13,107 | 13,672 |
| 7. 1992 | X X X | X X X | X X X | X X X | X X X | 16,859 |
| 8. 1993 | X X X | X X X | X X X | X X X | X X X | X X X |
| 9. 1994 | X X X | X X X | X X X | X X X | X X X | X X X |
| 10. 1995 | X X X | X X X | X X X | X X X | X X X | X X X |
| 11. 1996 | X X X | X X X | X X X | X X X | X X X | X X X |
| | | | | | | |
!-------------------#-----------------------------------------------------------------------------------|
| |
| 12. Totals |
| |
!-------------------#-----------------------------------------------------------------------------------|
<CAPTION>
!-------------------#-------------------------------------------------------#-----------------------------#
| | Incurred Losses and Allocated Expenses | |
| 1 | Reported At Year End ($000 omitted) | Development |
| Years in Which #-------------#-------------#-------------#-------------|--------------#--------------|
| Losses Were | 8 | 9 | 10 | 11 | 12 | 13 |
| Incurred | 1993 | 1994 | 1995 | 1996 | One Year | Two Year |
|-------------------|-------------|-------------|-------------|-------------|--------------|--------------|
| | | | | | | |
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>
| 1. Prior | 3,017 | 3,021 | 3,059 | 3,111 | 52 | 90 |
| 2. 1987 | 12,990 | 13,082 | 13,205 | 13,304 | 99 | 222 |
| 3. 1988 | 25,955 | 25,815 | 25,851 | 26,111 | 260 | 296 |
| 4. 1989 | 17,347 | 17,343 | 17,116 | 17,225 | 109 | (118)|
| 5. 1990 | 10,510 | 10,714 | 9,819 | 9,791 | (28)| (923)|
| 6. 1991 | 14,189 | 13,813 | 13,412 | 13,522 | 110 | (291)|
| 7. 1992 | 17,965 | 19,628 | 20,549 | 20,645 | 96 | 1,017 |
| 8. 1993 | 23,501 | 23,620 | 24,977 | 24,430 | (547)| 810 |
| 9. 1994 | X X X | 33,932 | 33,930 | 37,971 | 4,041 | 4,039 |
| 10. 1995 | X X X | X X X | 29,104 | 28,468 | (636)| X X X |
| 11. 1996 | X X X | X X X | X X X | 35,979 | X X X | X X X |
| | | | | | | |
!---------------------------------------------------------------------------#-----------------------------#
| | | |
| 12. Totals | 3,556 | 5,142 |
| | | |
!---------------------------------------------------------------------------#-----------------------------#
</TABLE>
SCHEDULE P - PART 3 - SUMMARY
<TABLE>
<CAPTION>
!-------------------#-----------------------------------------------------------------------------------#
| | |
| 1 | Cumulative Paid Losses and Allocated Expenses At Year End ($000 omitted) |
| Years in Which |-------------#-------------#-------------#-------------#-------------#-------------#
| Losses Were | 2 | 3 | 4 | 5 | 6 | 7 |
| Incurred | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 |
| | | | | | | |
|-------------------|-------------|-------------|-------------|-------------|-------------|-------------|
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>
| 1. Prior | 000 | 835 | 1,407 | 1,921 | 2,400 | 2,710 |
| 2. 1987 | 3,012 | 6,495 | 8,150 | 10,385 | 11,700 | 12,289 |
| 3. 1988 | X X X | 3,641 | 8,717 | 15,421 | 19,657 | 21,689 |
| 4. 1989 | X X X | X X X | 4,513 | 8,422 | 12,072 | 14,125 |
| 5. 1990 | X X X | X X X | X X X | 874 | 3,117 | 5,590 |
| 6. 1991 | X X X | X X X | X X X | X X X | 1,871 | 5,632 |
| 7. 1992 | X X X | X X X | X X X | X X X | X X X | 2,473 |
| 8. 1993 | X X X | X X X | X X X | X X X | X X X | X X X |
| 9. 1994 | X X X | X X X | X X X | X X X | X X X | X X X |
| 10. 1995 | X X X | X X X | X X X | X X X | X X X | X X X |
| 11. 1996 | X X X | X X X | X X X | X X X | X X X | X X X |
| | | | | | | |
!-------------------#------------------------------------------------------------------------------------
<CAPTION>
!-------------------#-------------------------------------------------------#--------------#--------------#
| | Cumulative Paid Losses and Allocated Expenses | 12 | 13 |
| 1 | At Year End ($000 omitted) | Number of | Number of |
| Years in Which |-------------#-------------#-------------#-------------| Claims | Claims |
| Losses Were | 8 | 9 | 10 | 11 | Closed With | Closed |
| Incurred | 1993 | 1994 | 1995 | 1996 | Loss | Without Loss |
| | | | | | Payment | Payment |
|-------------------|-------------|-------------|-------------|-------------|--------------|--------------|
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>
| 1. Prior | 2,931 | 2,989 | 3,011 | 3,072 | X X X | X X X |
| 2. 1987 | 12,669 | 12,789 | 12,857 | 12,866 | X X X | X X X |
| 3. 1988 | 24,567 | 25,091 | 25,346 | 25,496 | X X X | X X X |
| 4. 1989 | 15,388 | 16,122 | 16,351 | 16,406 | X X X | X X X |
| 5. 1990 | 7,100 | 8,151 | 8,865 | 9,177 | X X X | X X X |
| 6. 1991 | 9,483 | 11,942 | 12,180 | 12,823 | X X X | X X X |
| 7. 1992 | 7,587 | 11,976 | 16,496 | 18,258 | X X X | X X X |
| 8. 1993 | 5,167 | 11,976 | 17,612 | 20,058 | X X X | X X X |
| 9. 1994 | X X X | 9,146 | 20,228 | 26,792 | X X X | X X X |
| 10. 1995 | X X X | X X X | 8,433 | 14,290 | X X X | X X X |
| 11. 1996 | X X X | X X X | X X X | 11,819 | X X X | X X X |
| | | | | | | |
!-------------------#-------------------------------------------------------#-----------------------------#
</TABLE>
SCHEDULE P - PART 4 - SUMMARY
<TABLE>
<CAPTION>
!-------------------#---------------------------------------------------------------------#
| | Bulk and Incurred But Not Reported Reserves on Losses and |
| 1 | Allocated Expenses at Year End ($000 omitted) |
| Years in Which |-------------#-------------#-------------#-------------#-------------#
| Losses | 2 | 3 | 4 | 5 | 6 |
| Were Incurred | 1987 | 1988 | 1989 | 1990 | 1991 |
|-------------------|-------------|-------------|-------------|-------------|-------------|
| | | | | | |
<S> <C> <C> <C> <C> <C>
| 1. Prior | 1,809 | 1,658 | 574 | 309 | 112 |
| 2. 1987 | 4,632 | 3,120 | 1,548 | 881 | 244 |
| 3. 1988 | X X X | 12,752 | 6,283 | 2,765 | 981 |
| 4. 1989 | X X X | X X X | 7,980 | 4,292 | 1,451 |
| 5. 1990 | X X X | X X X | X X X | 5,208 | 1,017 |
| 6. 1991 | X X X | X X X | X X X | X X X | 4,898 |
| 7. 1992 | X X X | X X X | X X X | X X X | X X X |
| 8. 1993 | X X X | X X X | X X X | X X X | X X X |
| 9. 1994 | X X X | X X X | X X X | X X X | X X X |
| 10. 1995 | X X X | X X X | X X X | X X X | X X X |
| 11. 1996 | X X X | X X X | X X X | X X X | X X X |
| | | | | | |
- ------#------------------------------------------------------------------------------------
<CAPTION>
!-------------------#----------------------------------------------------------------------
| | Bulk and Incurred But Not Reported Reserves on Losses and |
| 1 | Allocated Expenses at Year End ($000 omitted) |
| Years in Which #-------------#-------------#-------------#-------------#--------------|
| Losses | 7 | 8 | 9 | 10 | 11 |
| Were Incurred | 1992 | 1993 | 1994 | 1995 | 1996 |
|-------------------|-------------|-------------|-------------|-------------|--------------|
| | | | | | |
<S> <C> <C> <C> <C> <C>
| 1. Prior | 67 | 5 | 0 | 0 | 0 |
| 2. 1987 | 183 | 7 | 4 | 0 | 0 |
| 3. 1988 | 493 | 87 | 26 | 12 | 0 |
| 4. 1989 | 522 | 112 | 59 | 44 | 0 |
| 5. 1990 | 542 | 69 | 205 | 59 | 30 |
| 6. 1991 | 1,134 | 631 | 307 | 178 | 212 |
| 7. 1992 | 7,738 | 2,466 | 561 | 154 | 185 |
| 8. 1993 | X X X | 9,203 | 1,721 | 597 | 102 |
| 9. 1994 | X X X | X X X | 10,027 | 963 | 337 |
| 10. 1995 | X X X | X X X | X X X | 10,114 | 3,607 |
| 11. 1996 | X X X | X X X | X X X | X X X | 10,772 |
| | | | | | |
- ------#---------------------------------------------------------------------#--------------#
</TABLE>
75
<PAGE> 1
Form 2
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE Titan Insurance Company
SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES
Notes to Schedule P
(1) The Parts of Schedule P:
Part 1 - detailed information on losses and loss expenses.
Part 2 - history of incurred losses and allocated expenses.
Part 3 - history of loss and allocated expense payments.
Part 4 - history of bulk and incurred-but-not reported reserves.
Part 5 - history of claims.
Part 6 - history of premiums earned.
Part 7 - history of loss sensitive contracts.
Schedule P Interrogatories
(2) Lines of business A through M, R, and S are groupings of the lines of
business used on the state page.
(3) Reinsurance A, B, C, and D (lines N to Q) are:
Reinsurance A = nonproportional property (1988 and subsequent)
Reinsurance B = nonproportional liability (1988 and subsequent)
Reinsurance C = financial lines (1988 and subsequent)
Reinsurance D = old Schedule O line 30 (1987 and prior)
(4) Parts 2 and 4 are gross of all discounting, including tabular
discounting. Part 1 is gross of only non-tabular discounting,
which is reported in Columns 31 and 32 of Part 1. The tabular
discount, if any, is reported in the Notes to Financial Statements
which will reconcile Part 1 with Parts 2 and 4.
SCHEDULE P - PART 1 - SUMMARY
($000 omitted)
<TABLE>
<CAPTION>
!-------------#-----------------------------------------#-----------------------------#
| | Premiums Earned | |
| 1 |-------------#-------------#-------------|-----------------------------|
| Years | 2 | 3 | 4 | Loss Payments |
| in Which | | | | |
|Premiums Were| | | |--------------#--------------|
| Earned and | Direct | | Net | 5 | 6 |
| Losses Were | and | Ceded | (2 - 3) | Direct | |
| Incurred | Assumed | | | and Assumed | Ceded |
|-------------|-------------|-------------|-------------|--------------|--------------|
<S> <C> <C> <C> <C> <C>
| | | | | | |
| 1. Prior | X X X | X X X | X X X | 0 | 0 |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 |
| 3. 1988 | 0 | 0 | 0 | 0 | 0 |
| 4. 1989 | 15 | 15 | 0 | 0 | 0 |
| 5. 1990 | 7,937 | 1,743 | 6,194 | 3,821 | 1,380 |
| 6. 1991 | 12,186 | 6,936 | 5,250 | 5,578 | 2,640 |
| 7. 1992 | 26,171 | 7,223 | 18,948 | 13,610 | 4,167 |
| 8. 1993 | 30,388 | 3,429 | 26,959 | 12,631 | 1,634 |
| 9. 1994 | 27,064 | 914 | 26,150 | 6,354 | (4,096)|
|10. 1995 | 73,802 | 5,417 | 68,385 | 31,311 | 1,305 |
|11. 1996 | 96,078 | 4,893 | 91,185 | 25,964 | 336 |
|-------------|-------------|-------------|-------------|--------------|--------------|
|12. Totals | X X X | X X X | X X X | 99,269 | 7,366 |
| | | | | | |
!-------------#-----------------------------------------#------------------------------
<CAPTION>
!-------------#--------------------------------------------------------------------------#--------------#
| | Loss and Loss Expense Payments | |
| 1 |-----------------------------#--------------#--------------#--------------| 12 |
| Years | Allocated Loss | 9 | 10 | 11 | |
| in Which | Expense Payments | | | | Number of |
|Premiums Were|--------------#--------------| Salvage | Unallocated | Total | Claims |
| Earned and | 7 | 8 | and | Loss | Net Paid | Reported - |
| Losses Were | Direct | | Subrogation | Expense | (5 - 6 + 7 | Direct and |
| Incurred | and Assumed | Ceded | Received | Payments | - 8 + 10) | Assumed |
|-------------|--------------|--------------|--------------|--------------|--------------|--------------|
<S> <C> <C> <C> <C> <C> <C>
| | | | | | | |
| 1. Prior | 0 | 0 | 0 | 0 | 0 | X X X |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 | X X X |
| 3. 1988 | 0 | 0 | 0 | 0 | 0 | X X X |
| 4. 1989 | 0 | 0 | 0 | 0 | 0 | X X X |
| 5. 1990 | 353 | 45 | 73 | 272 | 3,021 | X X X |
| 6. 1991 | 684 | 316 | 78 | 374 | 3,680 | X X X |
| 7. 1992 | 1,310 | 219 | 276 | 638 | 11,172 | X X X |
| 8. 1993 | 1,473 | 62 | 176 | 1,003 | 13,411 | X X X |
| 9. 1994 | 1,449 | 31 | 433 | 573 | 12,441 | X X X |
|10. 1995 | 1,653 | 30 | 800 | 1,163 | 32,792 | X X X |
|11. 1996 | 821 | 8 | 639 | 1,311 | 27,752 | X X X |
|-------------|--------------|--------------|--------------|--------------|--------------|--------------|
|12. Totals | 7,743 | 711 | 2,475 | 5,334 | 104,269 | X X X |
| | | | | | | |
!-------------#--------------------------------------------------------------------------#--------------#
</TABLE>
<TABLE>
<CAPTION>
!-------------#--------------------------------------------------------#------------------------------#
| | Losses Unpaid |Allocated Loss Expenses Unpaid|
| |---------------------------#----------------------------|----------------------------- #
| | Case Basis | Bulk + IBNR | Case Basis |
| |-------------#-------------|-------------#--------------|--------------#-------------- |
| | 13 | 14 | 15 | 16 | 17 | 18 |
| | Direct | | Direct | | Direct | |
| | and Assumed | Ceded | and Assumed | Ceded | and Assumed | Ceded |
|-------------|-------------|-------------|-------------|--------------|--------------|-------------- |
<S> <C> <C> <C> <C> <C> <C>
| | | | | | | |
| 1. Prior | 0 | 0 | 0 | 0 | 0 | 0 |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 | 0 |
| 3. 1988 | 0 | 0 | 0 | 0 | 0 | 0 |
| 4. 1989 | 0 | 0 | 0 | 0 | 0 | 0 |
| 5. 1990 | 572 | 561 | 0 | 0 | 1 | 1 |
| 6. 1991 | 833 | 848 | 9 | 0 | 9 | 4 |
| 7. 1992 | 5,012 | 4,895 | 39 | 0 | 34 | 6 |
| 8. 1993 | 2,749 | 2,174 | 19 | 0 | 175 | 10 |
| 9. 1994 | 13,719 | 11,367 | 446 | 369 | 611 | 0 |
|10. 1995 | 7,842 | 2,308 | 4,245 | 3,384 | 1,277 | 0 |
|11. 1996 | 14,375 | 192 | 22,159 | 15,606 | 1,269 | 0 |
|-------------|-------------|-------------|-------------|--------------|--------------|-------------- |
|12. Totals | 45,102 | 22,345 | 26,917 | 19,359 | 3,376 | 21 |
| | | | | | | |
!-------------#-----------------------------------------#-------------------------------------------- -
<CAPTION>
!-------------#------------------------------#--------------#--------------#--------------#-------------#
| |Allocated Loss Expenses Unpaid| | | | |
| | -----------------------------| 21 | 22 | 23 | 24 |
| | Bulk + IBNR | | | | Number of |
| | --------------#--------------| Salvage | Unallocated | Total | Claims |
| | 19 | 20 | and | Loss | Net Losses |Outstanding -|
| | Direct | | Subrogation | Expenses | and Expenses | Direct |
| | and Assumed | Ceded | Anticipated | Unpaid | Unpaid | and Assumed |
|-------------| --------------|--------------|--------------|--------------|--------------|-------------|
<S> <C> <C> <C> <C> <C>
| | | | | | | |
| 1. Prior | 0 | 0 | 0 | 0 | 0 | X X X |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 | X X X |
| 3. 1988 | 0 | 0 | 0 | 0 | 0 | X X X |
| 4. 1989 | 0 | 0 | 0 | 0 | 0 | X X X |
| 5. 1990 | 0 | 0 | 0 | 7 | 18 | X X X |
| 6. 1991 | 3 | 0 | 0 | 11 | 13 | X X X |
| 7. 1992 | 16 | 0 | 1 | 23 | 223 | X X X |
| 8. 1993 | 6 | 0 | 0 | 35 | 800 | X X X |
| 9. 1994 | 95 | 0 | 8 | 79 | 3,214 | X X X |
|10. 1995 | 415 | 0 | 70 | 119 | 8,206 | X X X |
|11. 1996 | 1,888 | 0 | 466 | 780 | 24,673 | X X X |
|-------------| --------------|--------------|--------------|--------------|--------------|-------------|
|12. Totals | 2,423 | 0 | 545 | 1,054 | 37,147 | X X X |
| | | | | | | |
!-------------- -----------------------------------------------------------#--------------#-------------#
</TABLE>
<TABLE>
<CAPTION>
!-------------#-----------------------------------------#--------------------------------------------#
| | Total Losses and | Loss and Loss Expense Percentage |
| | Loss Expenses Incurred | (Incurred/Premiums Earned) |
| |-------------#-------------#-------------|--------------#--------------#--------------|
| | 25 | 26 | 27 | 28 | 29 | 30 |
| | Direct | | | Direct | | |
| | and Assumed | Ceded | Net | and Assumed | Ceded | Net |
|-------------|-------------|-------------|-------------|--------------|--------------|--------------|
<S> <C> <C> <C> <C> <C> <C>
| | | | | | | |
| 1. Prior | X X X | X X X | X X X | X X X | X X X | X X X |
| 2. 1987 | 0 | 0 | 0 | 0.0 | 0.0 | 0.0 |
| 3. 1988 | 0 | 0 | 0 | 0.0 | 0.0 | 0.0 |
| 4. 1989 | 0 | 0 | 0 | 0.0 | 0.0 | 0.0 |
| 5. 1990 | 5,026 | 1,987 | 3,039 | 63.3 | 114.0 | 49.1 |
| 6. 1991 | 7,501 | 3,808 | 3,693 | 61.6 | 54.9 | 70.3 |
| 7. 1992 | 20,682 | 9,287 | 11,395 | 79.0 | 128.6 | 60.1 |
| 8. 1993 | 18,091 | 3,880 | 14,211 | 59.5 | 113.2 | 52.7 |
| 9. 1994 | 23,326 | 7,671 | 15,655 | 86.2 | 839.3 | 59.9 |
|10. 1995 | 48,025 | 7,027 | 40,998 | 65.1 | 129.7 | 60.0 |
|11. 1996 | 68,567 | 16,142 | 52,425 | 71.4 | 329.9 | 57.5 |
|-------------|-------------|-------------|-------------|--------------|--------------|--------------|
|12. Totals | X X X | X X X | X X X | X X X | X X X | X X X |
| | | | | | | |
!-------------#-----------------------------------------#---------------------------------------------
<CAPTION>
!-------------#-----------------------------#--------------#-----------------------------#
| | | | Net Balance Sheet Reserves |
| | Nontabular Discount | 33 | After Discount |
| |--------------#--------------|Inter-Company |--------------#--------------|
| | 31 | 32 | Pooling | 34 | 35 |
| | | Loss |Participation | Losses |Loss Expenses |
| | Loss | Expense | Percentage | Unpaid | Unpaid |
|-------------|--------------|--------------|--------------|--------------|--------------|
<S> <C> <C> <C> <C> <C>
| | | | | | |
| 1. Prior | 0 | 0 | X X X | 0 | 0 |
| 2. 1987 | 0 | 0 | 0.0 | 0 | 0 |
| 3. 1988 | 0 | 0 | 0.0 | 0 | 0 |
| 4. 1989 | 0 | 0 | 0.0 | 0 | 0 |
| 5. 1990 | 0 | 0 | 0.0 | 11 | 7 |
| 6. 1991 | 0 | 0 | 0.0 | (6)| 19 |
| 7. 1992 | 0 | 0 | 0.0 | 156 | 67 |
| 8. 1993 | 0 | 0 | 0.0 | 594 | 206 |
| 9. 1994 | 0 | 0 | 0.0 | 2,429 | 785 |
|10. 1995 | 0 | 0 | 0.0 | 6,395 | 1,811 |
|11. 1996 | 0 | 0 | 0.0 | 20,736 | 3,937 |
|-------------|--------------|--------------|--------------|--------------|--------------|
|12. Totals | 0 | 0 | X X X | 30,315 | 6,832 |
| | | | | | |
!-------------------------------------------------------------------------#--------------#
</TABLE>
74
<PAGE> 2
Form 2
ANNUAL STATEMENT FOR THE YEAR 1996 OF THE Titan Insurance Company
SCHEDULE P - PART 2 - SUMMARY
<TABLE>
<CAPTION>
!-------------------#-----------------------------------------------------------------------------------#
| 1 | Incurred Losses and Allocated Expenses Reported At Year End ($000 omitted) |
| Years in Which |---------------------------#-------------#-------------#-------------#-------------#
| Losses Were | 2 | 3 | 4 | 5 | 6 | 7 |
| Incurred | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 |
|-------------------|-------------|-------------|-------------|-------------|-------------|-------------|
| | | | | | | |
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>
| 1. Prior | 0 | 0 | 0 | 0 | 0 | 0 |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 | 0 |
| 3. 1988 | X X X | 0 | 0 | 0 | 0 | 0 |
| 4. 1989 | X X X | X X X | 0 | 0 | 0 | 0 |
| 5. 1990 | X X X | X X X | X X X | 3,395 | 2,742 | 2,798 |
| 6. 1991 | X X X | X X X | X X X | X X X | 3,144 | 3,144 |
| 7. 1992 | X X X | X X X | X X X | X X X | X X X | 9,776 |
| 8. 1993 | X X X | X X X | X X X | X X X | X X X | X X X |
| 9. 1994 | X X X | X X X | X X X | X X X | X X X | X X X |
| 10. 1995 | X X X | X X X | X X X | X X X | X X X | X X X |
| 11. 1996 | X X X | X X X | X X X | X X X | X X X | X X X |
| | | | | | | |
!-------------------#-----------------------------------------------------------------------------------|
| |
| 12. Totals |
| |
!-------------------#-----------------------------------------------------------------------------------#
<CAPTION>
!---------------------------------------------------------------------------#-----------------------------#
| | Incurred Losses and Allocated Expenses Reported | |
| 1 | At Year End ($000 omitted) | Development |
| Years in Which #-------------#-------------#-------------#-------------|--------------#--------------|
| Losses Were | 8 | 9 | 10 | 11 | 12 | 13 |
| Incurred | 1993 | 1994 | 1995 | 1996 | One Year | Two Year |
|-------------------|-------------|-------------|-------------|-------------|--------------|--------------|
| | | | | | | |
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C>|
| 1. Prior | 0 | 0 | 0 | 0 | 0 | 0 |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 | 0 |
| 3. 1988 | 0 | 0 | 0 | 0 | 0 | 0 |
| 4. 1989 | 0 | 0 | 0 | 0 | 0 | 0 |
| 5. 1990 | 2,759 | 2,768 | 2,758 | 2,760 | 2 | (8)|
| 6. 1991 | 3,314 | 3,338 | 3,323 | 3,308 | (15)| (30)|
| 7. 1992 | 10,978 | 10,823 | 10,779 | 10,734 | (45)| (89)|
| 8. 1993 | 13,356 | 12,882 | 13,091 | 13,173 | 82 | 291 |
| 9. 1994 | X X X | 14,975 | 14,820 | 15,003 | 183 | 28 |
| 10. 1995 | X X X | X X X | 39,103 | 39,716 | 613 | X X X |
| 11. 1996 | X X X | X X X | X X X | 50,334 | X X X | X X X |
| | | | | | | |
!---------------------------------------------------------------------------#-----------------------------#
| | | |
| 12. Totals | 820 | 192 |
| | | |
!---------------------------------------------------------------------------#-----------------------------#
</TABLE>
SCHEDULE P - PART 3 - SUMMARY
<TABLE>
<CAPTION>
!-------------------#-----------------------------------------------------------------------------------#
| | |
| 1 | Cumulative Paid Losses and Allocated Expenses At Year End ($000 omitted)
| Years in Which |-------------#-------------#-------------#-------------#-------------#-------------|
| Losses Were | 2 | 3 | 4 | 5 | 6 | 7 |
| Incurred | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 |
| | | | | | | |
|-------------------|-------------|-------------|-------------|-------------|-------------|-------------|
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C
| 1. Prior | 000 | 0 | 0 | 0 | 0 | 0 |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 | 0 |
| 3. 1988 | X X X | 0 | 0 | 0 | 0 | 0 |
| 4. 1989 | X X X | X X X | 0 | 0 | 0 | 0 |
| 5. 1990 | X X X | X X X | X X X | 860 | 2,097 | 2,464 |
| 6. 1991 | X X X | X X X | X X X | X X X | 1,411 | 2,403 |
| 7. 1992 | X X X | X X X | X X X | X X X | X X X | 3,599 |
| 8. 1993 | X X X | X X X | X X X | X X X | X X X | X X X |
| 9. 1994 | X X X | X X X | X X X | X X X | X X X | X X X |
| 10. 1995 | X X X | X X X | X X X | X X X | X X X | X X X |
| 11. 1996 | X X X | X X X | X X X | X X X | X X X | X X X |
| | | | | | | |
!-------------------#-----------------------------------------------------------------------------------#
<CAPTION>
!-------------------#-------------------------------------------------------#--------------#--------------#
| | | 12 | 13 |
| 1 |ar End ($000 omitted) | Number of | Number of |
| Years in Which #-------------#-------------#-------------#-------------| Claims | Claims |
| Losses Were | 8 | 9 | 10 | 11 | Closed With | Closed |
| Incurred | 1993 | 1994 | 1995 | 1996 | Loss | Without Loss |
| | | | | | Payment | Payment |
|-------------------|-------------|-------------|-------------|-------------|--------------|--------------|
| | | | | | | |
<S> <C> <C> <C> <C> <C> <C> |
| 1. Prior | 0 | 0 | 0 | 0 | X X X | X X X |
| 2. 1987 | 0 | 0 | 0 | 0 | X X X | X X X |
| 3. 1988 | 0 | 0 | 0 | 0 | X X X | X X X |
| 4. 1989 | 0 | 0 | 0 | 0 | X X X | X X X |
| 5. 1990 | 2,568 | 2,675 | 2,716 | 2,749 | X X X | X X X |
| 6. 1991 | 2,970 | 3,193 | 3,295 | 3,306 | X X X | X X X |
| 7. 1992 | 7,523 | 9,224 | 10,086 | 10,534 | X X X | X X X |
| 8. 1993 | 5,937 | 9,648 | 11,196 | 12,408 | X X X | X X X |
| 9. 1994 | X X X | 6,263 | 8,283 | 11,868 | X X X | X X X |
| 10. 1995 | X X X | X X X | 16,827 | 31,629 | X X X | X X X |
| 11. 1996 | X X X | X X X | X X X | 26,441 | X X X | X X X |
| | | | | | | |
!---------------------------------------------------------------------------#-----------------------------#
</TABLE>
SCHEDULE P - PART 4 - SUMMARY
<TABLE>
<CAPTION>
!-------------------#---------------------------------------------------------------------#
| | Bulk and Incurred But Not Reported Reserves on Losses and |
| 1 | Allocated Expenses at Year End ($000 omitted) |
| Years in Which |-------------#-------------#-------------#-------------#-------------|
| Losses | 2 | 3 | 4 | 5 | 6 |
| Were Incurred | 1987 | 1988 | 1989 | 1990 | 1991 |
|-------------------|-------------|-------------|-------------|-------------|-------------|
| | | | | | |
<S> <C> <C> <C> <C> <C> <C> |
| 1. Prior | 0 | 0 | 0 | 0 | 0 |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 |
| 3. 1988 | X X X | 0 | 0 | 0 | 0 |
| 4. 1989 | X X X | X X X | 0 | 0 | 0 |
| 5. 1990 | X X X | X X X | X X X | 510 | 91 |
| 6. 1991 | X X X | X X X | X X X | X X X | 272 |
| 7. 1992 | X X X | X X X | X X X | X X X | X X X |
| 8. 1993 | X X X | X X X | X X X | X X X | X X X |
| 9. 1994 | X X X | X X X | X X X | X X X | X X X |
| 10. 1995 | X X X | X X X | X X X | X X X | X X X |
| 11. 1996 | X X X | X X X | X X X | X X X | X X X |
| | | | | | |
- ------#------------------------------------------------------------------------------------
<CAPTION>
!-------------------#----------------------------------------------------------------------#
| | Bulk and Incurred But Not Reported Reserves on Losses and |
| 1 | Allocated Expenses at Year End ($000 omitted) |
| Years in Which #-------------#-------------#-------------#-------------#--------------|
| Losses | 7 | 8 | 9 | 10 | 11 |
| Were Incurred | 1992 | 1993 | 1994 | 1995 | 1996 |
|-------------------|-------------|-------------|-------------|-------------|--------------|
| | | | | | |
<S> <C> <C> <C> <C> <C> |
| 1. Prior | 0 | 0 | 0 | 0 | 0 |
| 2. 1987 | 0 | 0 | 0 | 0 | 0 |
| 3. 1988 | 0 | 0 | 0 | 0 | 0 |
| 4. 1989 | 0 | 0 | 0 | 0 | 0 |
| 5. 1990 | 14 | 7 | 0 | 0 | 0 |
| 6. 1991 | 111 | 22 | 9 | 9 | 12 |
| 7. 1992 | 1,221 | 312 | 169 | 81 | 55 |
| 8. 1993 | X X X | 1,992 | 518 | 262 | 25 |
| 9. 1994 | X X X | X X X | 2,449 | 1,111 | 172 |
| 10. 1995 | X X X | X X X | X X X | 6,908 | 1,276 |
| 11. 1996 | X X X | X X X | X X X | X X X | 8,441 |
| | | | | | |
- ------#---------------------------------------------------------------------#--------------#
</TABLE>
75
