<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
TITAN HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[Titan LOGO]
TITAN HOLDINGS, INC.
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS -- MAY 1, 1997
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
-------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS OF
TITAN HOLDINGS, INC. AND SUBSIDIARIES
<PAGE> 3
[Titan LOGO]
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Notice of Annual Meeting.................................... (i)
Proxy Statement
Solicitation of Proxy, Revocability and Voting............ 1
Information Regarding the Board of Directors and
Committees of the Board of Directors................... 1
Section 16(a) Beneficial Owners Reporting Compliance...... 2
Election of Directors (Item 1 on Proxy Card).............. 3
Security Ownership of Certain Beneficial Owners and
Management............................................. 5
Compensation of Executive Officers........................ 7
Employment Agreements..................................... 9
Compensation Committee Report on Executive Compensation... 10
Compensation Committee Interlocks and Insider
Participation.......................................... 11
Performance Graph......................................... 12
Transaction with Management and Others.................... 13
Approval of Independent Auditors (Item 2 on Proxy Card)... 13
Other Business............................................ 13
Miscellaneous............................................. 14
Vote of Proxies........................................... 14
Appendices:
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... A-1
Annual Financial Statements:
Consolidated Balance Sheets............................ B-1
Consolidated Statements of Income...................... B-2
Consolidated Statements of Shareholders' Equity........ B-3
Consolidated Statements of Cash Flows.................. B-4
Notes to Consolidated Financial Statements............. B-5
Independent Auditors' Report........................... B-25
</TABLE>
<PAGE> 4
[Titan LOGO]
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TITAN HOLDINGS, INC.
2700 N.E. LOOP 410, SUITE 500
SAN ANTONIO, TEXAS 78217
Notice of Annual Meeting of Shareholders -- May 1, 1997
To the Shareholders:
The annual meeting of the shareholders of Titan Holdings, Inc., a Texas
corporation (the "Company"), will be held on Thursday, May 1, 1997, at 10:00
a.m., at the Company's Corporate Headquarters, located at 2700 N.E. Loop 410,
San Antonio, Texas for the following purposes:
1. To elect three Class I Directors to serve until the annual meeting in
1998; to elect three Class II Directors to serve until the annual
meeting in 1999; to elect three Class III Directors to serve until the
annual meeting in 2000.
2. To ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for 1997.
3. To transact such other business as may properly be brought before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on Friday, March 21,
1997 will be entitled to vote at this meeting.
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE RETURN ENVELOPE
FURNISHED FOR THAT PURPOSE, AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING. IF YOU LATER DESIRE TO REVOKE YOUR PROXY FOR ANY REASON, YOU
MAY DO SO IN THE MANNER DESCRIBED IN THE ATTACHED PROXY STATEMENT. FOR FURTHER
INFORMATION CONCERNING THE INDIVIDUALS NOMINATED AS DIRECTORS, USE OF THE PROXY
AND OTHER RELATED MATTERS, YOU ARE URGED TO READ THE PROXY STATEMENT ON THE
FOLLOWING PAGES.
By Order of the Board of Directors
Mark E. Watson III
Secretary
San Antonio, Texas
March 27, 1997
- --------------------------------------------------------------------------------
(i)
<PAGE> 5
TITAN HOLDINGS, INC.
2700 N.E. LOOP 410, SUITE 500
SAN ANTONIO, TEXAS 78217
-------------------------------
PROXY STATEMENT
-------------------------------
SOLICITATION OF PROXY, REVOCABILITY AND VOTING
The enclosed proxy is solicited on behalf of the Board of Directors (the
"Board") of Titan Holdings, Inc., a Texas corporation (the "Company"), for use
at the annual meeting of shareholders to be held on May 1, 1997. It is expected
that the solicitation of proxies will be made by mail, and the Company will bear
the cost of such solicitation. This Proxy Statement is accompanied by the
Company's 1996 Annual Report to Shareholders. Any person giving a proxy has the
power to revoke it at any time before its exercise by filing with the Secretary
of the Company an instrument of revocation or by the presentation at the meeting
of a duly executed proxy bearing a later date. It also may be revoked by
attendance at the meeting and election to vote in person. The approximate date
on which this Proxy Statement and the accompanying proxy are first being sent to
the shareholders is March 27, 1997.
Only holders of record of common stock, $.01 par value ("Common Stock"), of
the Company at the close of business on March 21, 1997 will be entitled to vote
at the meeting. On March 21, 1997 the Company had 9,557,516 shares of Common
Stock issued and outstanding. Each share of Common Stock is entitled to one
vote.
INFORMATION REGARDING THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD OF DIRECTORS
BOARD OF DIRECTORS
The business of the Company is managed by or under the direction of the
Board of Directors and its committees. The Board establishes corporate policies,
approves major business decisions and monitors the performance of the Company's
management. The Board has established five standing committees as further
described in this Proxy Statement: the Executive Committee, the Audit Committee,
the Compensation Committee, the Investment Committee and the Nominating
Committee. The day-to-day management functions and operating activities of the
Company are performed by the Company's full-time officers and employees. The
Board of Directors met four times in 1996.
EXECUTIVE COMMITTEE
Except as limited by applicable law, the Executive Committee exercises the
power and authority of the Board during intervals between meetings of the Board.
Actions taken by the Executive Committee do not require ratification by the
Board to be legally effective. The current members of the Executive Committee
are Mark E. Watson, Jr. (Chairman), Lucius E. Burch III, E.B. Lyon III,
Christopher J. Murphy III, Toby S. Wilt and Gary V. Woods. The Executive
Committee met once during 1996.
AUDIT COMMITTEE
The Audit Committee recommends the selection of the Company's independent
auditors and confers with them regarding the scope and adequacy of annual
audits. The members of the Audit Committee are independent members of the Board.
The Audit Committee reviews reports from and meets with both the Company's
internal auditors and the independent auditors. The Audit Committee also meets
with the Company's financial personnel to review the adequacy of the Company's
accounting and financial reporting policies and internal controls and
procedures. The current members of the Audit Committee are Gary V. Woods
(Chairman), Hector De Leon, Lucius E. Burch III and Christopher J. Murphy III.
The Audit Committee met once in 1996.
<PAGE> 6
COMPENSATION COMMITTEE
The Compensation Committee reviews the Company's compensation philosophy
and programs, and exercises authority with respect to the payment of direct
salaries and incentive compensation to executive officers of the Company. The
Compensation Committee has the authority to determine all terms and provisions
under which options may be granted under the Company's 1993 Stock Option Plan,
as amended (the "Stock Option Plan"), including but not limited to the
individuals to whom such options may be granted, the exercise price and the
number of shares subject to each option, the time or times during which all or a
portion of each option may be exercised and certain other provisions of each
option. The current members of the Compensation Committee are Hector De Leon
(Chairman), Gary V. Woods and Christopher J. Murphy III. The Compensation
Committee met five times in 1996.
INVESTMENT COMMITTEE
The Investment Committee reviews and makes recommendations to management
regarding the Company's overall investment policy and, in accordance with such
policy, approves certain investment transactions. The current members of the
Investment Committee are Lucius E. Burch III (Chairman), Gary V. Woods and Toby
S. Wilt. The Investment Committee met three times in 1996.
NOMINATING COMMITTEE
The Nominating Committee evaluates policy on the size and composition of
the Board and criteria and procedures for director nominations. It reviews
possible director candidates and recommends to the full Board nominees for
election by the shareholders. The Nominating Committee will consider nominations
made by shareholders if made sufficiently prior to the annual meeting. The
Nominating Committee also reviews potential candidates to fill vacancies on the
Company's Board of Directors. The current members of the Nominating Committee
are Mark E. Watson, Jr. (Chairman), Toby S. Wilt, Christopher J. Murphy III and
Gary V. Woods. The Nominating Committee did not meet in 1996.
ATTENDANCE AT MEETINGS
All directors attended at least 75 percent of the meetings with the
exception of Lucius E. Burch III who attended less than 75 percent of the
meetings because of previously scheduled engagements.
COMPENSATION OF DIRECTORS
Each non-employee director of the Company receives an annual fee of $7,500,
and an additional $2,000 for each Board meeting attended. Each director is
reimbursed for expenses of meeting attendance. Each non-employee director
receives $200 for each committee meeting attended that is not on the same day as
a Board meeting. Each non-employee director also receives an annual grant of
5,000 stock options pursuant to the Directors' Stock Option Plan.
SECTION 16(a) BENEFICIAL OWNERS REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
holders of more than 10% of the Company's Common Stock to file with the
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. The Company believes that for the year ended December
31, 1996, its directors, executive officers and holders of more than 10% of the
Company's Common Stock complied on a timely basis with Section 16(a) filing
requirements.
2
<PAGE> 7
ELECTION OF DIRECTORS
(ITEM NO. 1 ON PROXY CARD)
At the Board of Directors meeting held on February 13, 1997, the Board
amended the Bylaws of the Company with respect to the way in which Directors are
elected by shareholders. Previously, the Bylaws provided that all directors were
to be elected annually for a term of one year. The amended Bylaws provide that
the Board will be divided into three classes of directors, each class to be as
nearly equal in number of directors as possible. The Board of Directors of the
Company is divided into three classes, each consisting of three members, as set
forth below. Each class serves three years, with the terms of office of the
respective classes expiring in successive years. The term of office of directors
in Class I expires at the 1998 annual meeting. The term of office of directors
in Class II expires at the 1999 annual meeting. The term of office of directors
in Class III expires at the 2000 annual meeting. Any new director elected to
fill a vacancy on the Board will serve for the remainder of the full term of the
class in which the vacancy occurred, rather than until the next election of
directors. All of the nominees, except for Mark E. Watson III, who became a
director in February 1997, have served as directors since the last annual
meeting.
The Board of Directors amended the Bylaws of the Company to ensure
continuity and stability in the future by extending the time required to elect a
majority of a classified board. As a result the majority of directors at any
given time will have prior experience as members of the Board. Under the Board
classification provisions of the amended Bylaws, at least two annual shareholder
meetings, instead of one, will be required to effect a change in the majority
control of the Board. The longer time required to elect a majority of a
classified board also may deter certain mergers, tender offers or other future
takeover attempts which some or a majority of holders of common stock may deem
to be in their best interests. The proposed Board classification provisions will
apply to every election of directors, whether or not a change in the Board would
be beneficial to the Company and its shareholders and whether or not a majority
of the Company's shareholders believe that such a change would be desirable.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF
THESE NOMINEES AS DIRECTORS OF THE COMPANY.
The election of directors will be determined by a plurality of the shares
present in person or by proxy at the meeting, provided that the total shares
present at the meeting constitute a quorum. If any nominee should be unavailable
as a candidate at the time of the meeting, the number of directors constituting
the full Board will be appropriately reduced to eliminate the vacancy. The Board
has no reason to believe that any current nominee will be unable to serve.
INFORMATION CONCERNING NOMINEES
Biographical summaries and ages as of March 21, 1997 of individuals
nominated by the Board of Directors for election as directors follow. Data with
respect to the number of shares of the Company's Common Stock beneficially owned
by each of them as of March 21, 1997, appears under the caption "Security
Ownership of Certain Beneficial Owners and Management" in this Proxy Statement.
CLASS I DIRECTORS STANDING FOR ELECTION (TERM EXPIRES AT 1998 ANNUAL MEETING)
LUCIUS E. BURCH III, age 55, has served as a Director of the Company since
1993. Mr. Burch is an owner and has served as President of the Massey Burch
Investment Group, a venture capital firm, since 1981 and has been its Chairman
since 1990. Mr. Burch currently serves as a Director of Physicians Resource
Group, Inc., QMS, Inc., and Norrell Corporation.
THOMAS E. MANGOLD, age 41, has served as a Director of the Company since
1992. He has served as President of a subsidiary, Titan Insurance Company
(formerly known as Imperial Midwest Insurance Company) since its formation in
1990. 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
3
<PAGE> 8
intermediary. Mr. Mangold received his Bachelor of Science degree and commission
in the U.S. Naval Reserves from the United States Merchant Marine Academy.
MARK E. WATSON III, age 32, has served as a Director of the Company since
February 1997. Mr. Watson has also served as a Senior Vice President of the
Company since 1995 and as a Vice President of the Company from 1991 to 1995. In
addition, Mr. Watson has also 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 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., the Company's Chairman, President and Chief Executive
Officer.
CLASS II DIRECTORS STANDING FOR ELECTION (TERM EXPIRES AT 1999 ANNUAL MEETING)
HECTOR DE LEON, age 50, has served as a Director of the Company since 1992.
Mr. De Leon has served as President and majority shareholder of the law firm of
De Leon, Boggins & Icenogle, P.C. since 1977. From 1974 to 1977, Mr. De Leon
served as General Counsel to the Texas Department of Insurance.
CHRISTOPHER J. MURPHY III, age 50, has served as a Director of the Company
since 1995. Mr. Murphy is President and Director of 1st Source Corporation, 1st
Source Bank and 1st Source Capital Corporation. Mr. Murphy is also Chairman and
a Director of both 1st Source Insurance, Inc. and Trustcorp Mortgage Company,
Inc. Mr. Murphy is also a Director of Comair Holdings, Inc. and Quality Dining,
Inc. Mr. Murphy received his Bachelor of Arts degree from the University of
Notre Dame, his Juris Doctor degree from the University of Virginia Law School
and his Masters of Business Administration from Harvard University.
TOBY S. WILT, age 52, has served as a Director of the Company since 1994.
Mr. Wilt is the owner and Chairman of both The Christie Cookie Company, a
manufacturer of gourmet cookies, since 1989 and TSW Investment Company, a
private investment holding company, since 1987. Mr. Wilt currently serves as a
Director of Volunteer Capital Corporation and First American Corporation.
CLASS III DIRECTORS STANDING FOR ELECTION (TERM EXPIRES AT 2000 ANNUAL MEETING)
MARK E. WATSON, JR., age 61, founded Titan Holdings, Inc. in 1983 and has
served as Chairman of the Board of Directors, President and Chief Executive
Officer of the Company since that time. Mr. Watson received his Bachelor of
Science degree in Finance from the University of Notre Dame.
E. B. LYON III, age 57, has served as a Director of the Company since 1990.
Mr. Lyon is the owner and President of Stonegate Securities, Inc., a securities
firm, and Lyon Securities, Inc., an investment banking company primarily
involved in oil and gas, real estate and venture capital investments, since
1971.
GARY V. WOODS, age 53, has served as a Director of the Company since 1988.
Since 1979, Mr. Woods has served as President of McCombs Enterprises, an
organization which invests in automobile dealerships, ranching operations, oil
and gas ventures, restaurants and other businesses. Mr. Woods also served as
President of the San Antonio Spurs, a professional basketball team, from 1988 to
1993.
4
<PAGE> 9
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning any person who owned
of record, or was known by the Company to be the beneficial owner of, 5% or more
of the Company's outstanding Common Stock as of March 21, 1997, unless otherwise
indicated. The table also shows information concerning beneficial ownership by
all directors and nominees, by each of the executive officers named in the
Summary Compensation Table on page seven and by all executive officers and
directors as a group. The number of shares beneficially owned by each executive
officer or director is determined under rules of the Commission, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting power or investment power and also any
shares which the individual has the right to acquire within 60 days of March 21,
1997 through the exercise of any stock option or other right. Unless otherwise
indicated, each person has the sole investment and voting power (or shares such
powers with his or her spouse) with respect to the shares set forth in the
following table. All share amounts have been adjusted for 5% stock dividends
effected on May 13, 1996 and June 1, 1995.
<TABLE>
<CAPTION>
AMOUNT OF
BENEFICIAL PERCENT
OWNERSHIP OF CLASS
---------- --------
<S> <C> <C>
Mark E. Watson, Jr.(1)(2)................................... 2,457,778 25.7%
Thomas E. Mangold(3)........................................ 136,622 1.4%
E.B. Lyon III(4)............................................ 111,703 1.2%
Toby S. Wilt(5)............................................. 54,861 *
Lucius E. Burch III(6)...................................... 44,387 *
Martin F. Gohr(7)........................................... 15,678 *
Gary V. Woods(8)............................................ 32,811 *
Michael W. Grandstaff(9).................................... 36,547 *
Hector De Leon(5)........................................... 17,376 *
Christopher J. Murphy III(10)............................... 11,798 *
Mark E. Watson III(8)....................................... 42,807 *
All executive officers and directors as a group (14
persons)(2)(4)(6)(11)..................................... 2,962,368 31.0%
</TABLE>
- ---------------
* Less than 1.0%
(1) Address is 2700 N.E. Loop 410, Suite 500, San Antonio, Texas 78217.
(2) Includes 244,000 shares held by the MEW Family Limited Partnership, of
which Mr. Watson serves as general partner.
(3) Includes 120,802 shares issuable upon the exercise of options and 10,308
shares issuable upon the exercise of a warrant.
(4) Includes 16,537 shares held by Stonegate Securities, Inc. of which Mr. Lyon
is the owner; 19,677 shares held by Stonegate Securities, Inc. Profit
Sharing Plan, of which Mr. Lyon serves as the trustee; and 22,220 shares
held by the LBL Family Partnership of which Mr. Lyon is the general
partner; and 551 shares held in IRA account of Laura Lee Lyon, Mr. Lyon's
spouse; and 4,987 shares held in the E.B. Lyon, Jr. residuary trust of
which Mr. Lyon is executor and beneficiary. As a result of these
relationships, Mr. Lyon may be deemed to be a beneficial owner of these
shares. Also includes 38,324 shares issuable upon the exercise of options.
(5) Includes 16,274 shares issuable upon the exercise of options.
(6) Includes 32,811 shares issuable upon the exercise of options and 7,875
shares owned by Burch House L.P. of which Mr. Burch is General Partner.
(7) Includes 8,036 shares issuable upon the exercise of options and 4,642
shares issuable upon the exercise of a warrant. Mr. Gohr's employment with
the Company was terminated effective March 2, 1997.
(8) Consists of shares issuable upon the exercise of options.
5
<PAGE> 10
(9) Includes 31,421 shares issuable upon the exercise of options and 2,370
shares issuable upon the exercise of a warrant.
(10) Includes 5,250 shares issuable upon the exercise of options and 1,448
shares held by members of Mr. Murphy's immediate family.
(11) Includes 336,774 shares issuable upon the exercise of options granted to
certain executive officers and directors and 17,320 shares of issuable upon
the exercise of a warrant issued to certain executive officers.
6
<PAGE> 11
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation earned by the Company's
Chief Executive Officer and the five other most highly compensated executive
officers of the Company (collectively the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
OTHER
ANNUAL OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS#(2) ALL OTHER
--------------------------- ---- -------- -------- ------------ ------------ COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Mark E. Watson, Jr......................... 1996 $450,000 -- -- -- $55,998(3)
Chairman, President and Chief 1995 450,000 -- -- -- 55,024
Executive Officer 1994 450,000 -- $50,027 -- 71,268
Thomas E. Mangold.......................... 1996 $250,561 120,000 -- 179,550 $ 4,750(4)
Executive Vice President and President 1995 175,000 150,000 -- -- 477,769
of Titan Insurance Company 1994 156,250 150,000 5,625 132,300 147,562
Michael J. Bodayle(7)...................... 1996 $ 94,998 -- -- -- $52,635(5)
Former Executive Vice President, 1995 128,897 -- -- 2,625 3,792
Treasurer and Chief Financial Officer 1994 128,925 -- 3,750 -- 20,711
Martin F. Gohr(8).......................... 1996 $125,401 100,000(6) -- -- $ 4,750(5)
Senior Vice President of Titan 1995 125,000 100,000 -- -- 218,089
Insurance Company 1994 125,000 100,000 -- 63,394 69,175
Michael W. Grandstaff...................... 1996 $100,320 75,000(6) -- -- $ 4,750(5)
Senior Vice President, Chief 1995 100,000 75,000 -- -- 113,861
Financial Officer and Treasurer 1994 100,000 75,000 -- 52,369 37,607
Mark E. Watson III......................... 1996 $116,574 30,000 -- 85,000 $ 4,750(4)
Senior Vice President, General 1995 97,008 5,000 -- 27,562 12,432
Counsel and Secretary 1994 85,395 -- -- -- 15,880
</TABLE>
- ---------------
(1) The Company does not currently have a bonus plan for its executive officers
other than Messrs. Grandstaff and Gohr through their employment contracts
with Titan Insurance Company. The Compensation Committee does, however, have
discretion to declare merit bonuses for executive officers on an annual
basis.
(2) Amounts have been adjusted for five percent (5%) stock dividends effected on
May 13, 1996 and June 1, 1995.
(3) Represents life insurance premiums.
(4) Represents amounts allocated to the named individuals for contributions by
the Company under a 401(k) plan.
(5) Includes amounts paid pursuant to a non-compete agreement and an amount
allocated to the named individual for contributions by the Company under a
401(k) plan.
(6) Represents a profit-based formula bonus earned under employment agreements.
(7) Mr. Bodayle resigned from the Company on September 13, 1996.
(8) Mr. Gohr's employment with the Company was terminated effective March 2,
1997.
7
<PAGE> 12
The following tables set forth information concerning stock options issued
in 1996 to the Named Executive Officers under the Company's Stock Option Plan as
well as certain information about stock options held by the Named Executive
Officers at December 31, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -----------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE PRESENT VALUE($)*
---- ------------ ------------ ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C>
Thomas E. Mangold.............. 179,550 52.2% 12.86 4/1/06 1,290,425
Mark E. Watson III............. 25,000 7.7% 13.50 12/31/05 171,375
Mark E. Watson III............. 60,000 18.5% 15.50 12/12/06 380,400
</TABLE>
- ---------------
* A variation of the Black-Scholes option pricing model was used to determine
grant date present value. This model is designed to value publicly traded
options. Options issued under the Company's option plans are not freely
traded, and the exercise of such options is subject to substantial
restrictions. The Black-Scholes model does not give effect to either risk of
forfeiture or lack of transferability. The estimated values under the
Black-Scholes model are based on assumptions as to variables such as interest
rates, stock price volatility and future dividend yield. The grant date
present values presented in this table were calculated using an expected
average option term of ten years, risk-free rates of return of 5.45%, an
average stock price volatility of 23.3% and a dividend yield of 1.9% expressed
as a percentage of the market values of the Common Stock on the grant dates.
The actual value of stock options depends upon the actual future performance
of the Common Stock, the continued employment of the option holder throughout
the vesting period and the timing of the exercise of the option. Accordingly,
the values set forth in this table may not be achieved.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBERS OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS/SARS AT FISCAL MONEY OPTIONS AT FISCAL
SHARES YEAR-END(#) YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Mark E. Watson, Jr....... -0- -0- -0- -0- -0- -0-
Michael J. Bodayle....... 20,727 116,754 -0- -0- -0- -0-
Thomas E. Mangold........ -0- -0- 58,432 258,930 266,393 991,721
Martin F. Gohr........... -0- -0- 25,358 38,036 108,025 162,033
Michael W. Grandstaff.... -0- -0- 20,948 31,421 89,238 133,853
Mark E. Watson III....... -0- -0- 42,807 80,000 295,906 120,000
</TABLE>
- ---------------
(1) As reported by the New York Stock Exchange the closing price of the
Company's Common Stock on December 31, 1996 was $16.50 per share.
8
<PAGE> 13
EMPLOYMENT AGREEMENTS
MARK E. WATSON, JR. is a party to an employment agreement with the Company
for a five-year term that is automatically renewed for an additional five-year
term on January 1st of each year. If the agreement is terminated other than for
cause, such termination is not effective until the expiration of the then
existing unexpired five-year term of the agreement. The employment agreement
provides for a current annual base salary of $450,000. The agreement contains a
non-disclosure covenant and provides that for a period of one year after
termination of employment, Mr. Watson agrees not to solicit customers or
employees of the Company.
MICHAEL J. BODAYLE was a party to an employment agreement with the Company
for a three-year term which expired in February 1996 and was renewed for a one
year period. Mr. Bodayle's annual base salary was $124,008. The agreement
contained non-disclosure covenants and provided that for a period of two years
after termination of employment, Mr. Bodayle will not solicit customers or
employees of the Company. If the agreement was terminated other than for cause,
the Company was required to pay to Mr. Bodayle a severance payment equal to one
year's base salary. Mr. Bodayle resigned from the Company on September 13, 1997.
THOMAS E. MANGOLD is a party to an annual employment agreement with the
Company that automatically renews for additional one-year terms. The employment
agreement provides for an annual base salary of $250,000. If employment is
terminated other than for cause or as a result of a change in control of the
Company, the Company is required to pay to Mr. Mangold an amount equal to one
year's base salary plus an additional amount equal to the previous year's bonus,
as well as full-vesting of all outstanding stock options. The employment
agreement also contains certain non-disclosure covenants.
MARTIN F. GOHR and MICHAEL W. GRANDSTAFF were each parties to annual
employment agreements with Titan Insurance Company that automatically renewed
for additional one-year terms. The employment agreements provided for annual
base salaries as follows: Mr. Gohr -- $125,000 and Mr. Grandstaff -- $100,000.
The employment agreements also provided that the Company will pay each of them a
profit-based formula bonus equal to a percentage of the amount of adjusted net
(after-tax) income of the Company's current year non-standard automobile
insurance operations in excess of a prescribed 15% return on equity subject to a
total maximum of $325,000 as follows: Mr. Gohr -- 6% and Mr. Grandstaff -- 5%.
If employment was terminated other than for cause or as a result of a change in
control of the Company, Titan Insurance Company was required to pay to the
respective individual an amount equal to one year's base salary plus the above
described bonus determined through the date of termination. These employment
agreements also contain certain nondisclosure covenants. On March 2, 1997, Mr.
Gohr's employment with Titan Insurance Company was terminated, and Mr. Gohr was
paid one year's base salary of $125,000 pursuant to his employment agreement.
Mr. Grandstaff is now an employee of the Company, and he and the Company are in
the process of negotiating a new employment agreement, the terms of which are
expected to be substantially similar to his previous employment agreement.
MARK E. WATSON III was a party to an employment agreement with the Company
for a three-year term which expired in February 1996. The agreement contained
non-disclosure covenants and provided that for a period of two years after
termination of employment, Mr. Watson agreed not to solicit customers or
employees of the Company. If the agreement was terminated other than for cause,
the Company was required to pay to Mr. Watson a severance payment equal to one
year's base salary. Mr. Watson and the Company are in the process of negotiating
a new employment agreement.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act that might incorporate future filings, including this Proxy Statement, in
whole or in part, the following reports and the Performance Graph on page twelve
shall not be incorporated by reference into any such filings.
9
<PAGE> 14
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Company's executive compensation programs are administered by the
Compensation Committee (the "Committee") of the Company's Board of Directors.
The Committee is comprised of three non-employee directors who are ineligible to
receive grants of options under the 1993 Stock Option Plan while serving as
members of the Committee. The Committee recommends actions to the Board
regarding the annual compensation to be paid to the Chief Executive Officer
("CEO") and the other executive officers of the Company. The Committee seeks to
establish competitive levels of compensation that reflect the performance of the
Company which should relate to generating shareholder value. The following is a
report submitted by the Committee addressing the Company's compensation policy
as it relates to the Named Executive Officers for 1996.
BASE SALARY
Compensation for 1996, including that of the CEO, was proposed by the CEO
and ratified by the Compensation Committee. The factors considered by the CEO
were subjective, such as his perception of the individual's performance and any
planned change in functional responsibility. In reviewing the compensation
proposed by the CEO, the Compensation Committee considered (i) the effects of
inflation since the last salary determination, (ii) the performance of the
executive officers in question and (iii) compensation levels at other similar
insurance companies.
The base salaries of executive officers are established on an individual
basis. The CEO's salary was established prior to the Company's Initial Public
Offering in 1993, and the CEO has not received an increase since that time,
notwithstanding the Company's continued strong performance.
BONUSES
In 1996, Messrs. Gohr and Grandstaff were each party to an annual
employment agreement that paid each of them a profit-based formula bonus based
upon the net (after-tax) income of the Company's non-standard automobile
insurance operations.
The Committee believes that performance-based compensation is an incentive
for management to increase shareholder value. Similar programs are utilized by
the Company to provide incentives for non-executive officers responsible for the
Company's other profit-centers. In this regard, the Committee is considering a
profit-based formula bonus plan for 1997 which covers all executive officers.
STOCK OPTIONS
Under the Company's 1993 Stock Option Plan, previously approved by the
Company's shareholders, the Committee may grant stock options to executive
officers. The plan authorizes grants of options of Common Stock which vest over
a period determined by the Committee. As with incentive bonuses, discretion is
retained by the Committee to ultimately determine if any award should be made.
Stock options are granted on an individual basis; and in 1996, Messrs. Mangold
and Watson III received grants of 179,550 shares and 85,000 (25,000 plus 60,000)
shares, respectively. The award and vesting of these options are not contingent
on achievement of any specified performance targets, and provide a benefit to
the executive only to the extent that there is appreciation in the market price
of the Common Stock during the option period.
TAX POLICY
The Committee is aware of the fact that federal income tax regulations
limit the deductibility of certain executive compensation in excess of
$1,000,000 per annum. Although no current executive officer's annual
compensation exceeds this threshold, the Committee considers this factor in
establishing executive compensation.
10
<PAGE> 15
The foregoing report has been approved by the members of the Compensation
Committee of the Board of Directors.
Hector De Leon, Chairman
Christopher J. Murphy III
Gary V. Woods
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following non-employee directors comprised the Compensation Committee
of the Board of Directors during 1996: Hector De Leon (Chairman), Gary V. Woods
and Christopher J. Murphy III. Mr. De Leon is President and majority shareholder
of the law firm of De Leon, Boggins & Icenogle, P.C., which represents the
Company in Texas regulatory matters. Mr. Murphy is the President and Director of
1st Source Leasing, Inc. which provides a Capitalized Lease to Holdings. See
"TRANSACTIONS WITH MANAGEMENT AND OTHERS."
11
<PAGE> 16
PERFORMANCE GRAPH
The following performance graph compares the performance of the Company's
Common Stock to the S&P 500 Composite Index and to the S&P Property/Casualty
Insurance Index. The graph assumes that the value of the investment in the
Company's Common Stock and each index was $100 at July 8, 1993 (date of the
Company's Initial Public Offering) and that all dividends were reinvested. The
Company's Common Stock was listed on the New York Stock Exchange on March 23,
1994 and prior to that date was quoted on the NASDAQ/NMS.
<TABLE>
<CAPTION>
Measurement Period Titan Holdings, S&P
(Fiscal Year Covered) Inc. S&P 500 Property/Casualty
<S> <C> <C> <C>
July 8, 1993 100 100 100
Dec. 31, 1993 110 104 91
Dec. 31, 1994 101 102 93
Dec. 31, 1995 161 137 124
Dec. 31, 1996 198 164 148
</TABLE>
Note: The stock price performance shown on the graph above is not necessarily
indicative of future price performance.
12
<PAGE> 17
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During 1996, there were certain transactions which occurred between the
Company and certain executive officers and directors which are reported below.
With respect to each transaction, the Company has determined that the terms of
each arrangement were as fair as could have been obtained from unaffiliated
persons.
INVESTMENT MANAGEMENT SERVICES
E.B. Lyon, III, a Director of the Company, is the owner and President of
Lyon Securities, Inc. ("LSI") and Stonegate Securities, Inc. ("Stonegate"). LSI
manages certain portfolio investment assets of the Company pursuant to an
Investment Management Agreement dated effective January 1, 1997 (the "Management
Agreement"), between LSI and the Company. The Management Agreement is renewable
annually for a fee equal to ten basis points (.1%) of the market value of the
investments managed. During 1996, the Company accrued LSI aggregate fees of
$165,412. LSI has also provided certain other investment banking services to the
Company for which the Company paid LSI $60,000 in 1996. The Company also paid
Stonegate $17,767 in 1996, as brokerage commissions for security trades executed
on behalf of the Company. Mr. Lyon is also a principal of Tri-West Holdings, LLC
("Tri-West"), a company that acquires agencies and operates Direct Response
Centers under contract with the Company. The Company has the option to purchase
Tri-West's New Mexico agency at a future date.
CAPITAL LEASE OBLIGATION
Christopher J. Murphy III, a Director of the Company, is the President and
Director of 1st Source Leasing, Inc. ("1st Source"), a company to which Holdings
has a capitalized lease obligation, which is secured by an aircraft. During 1996
the Company paid 1st Source $388,000 in principal and interest. The capital
lease obligation equaled $1.8 million at December 31, 1996.
APPROVAL OF INDEPENDENT AUDITORS
(ITEM NO. 2 ON PROXY CARD)
The Board of Directors desires to obtain the shareholders' ratification of
the Audit Committee of the Board of Directors' appointment of KPMG Peat Marwick
LLP as the Company's independent auditors to audit the consolidated financial
statements of the Company for the year ending December 31, 1997. KPMG Peat
Marwick LLP has been serving the Company in this capacity for the past twelve
years. Representatives of KPMG Peat Marwick LLP will be present at the meeting
to respond to appropriate questions from shareholders and will be given the
opportunity to make a statement should they desire to do so. The proposal will
be ratified if approved by the vote of a majority of the shares present in
person or by proxy at the meeting, provided that the total shares present at the
meeting constitute a quorum.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S
INDEPENDENT AUDITORS.
OTHER BUSINESS
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Shareholders of the Company may submit proposals which they believe should
be voted upon by the shareholders. The Commission has adopted regulations which
govern the inclusion of such proposals in the Company's annual proxy materials.
All such proposals must be submitted to the Secretary of the Company no later
than November 25, 1997 in order to be considered for inclusion in the Company's
1998 proxy materials.
13
<PAGE> 18
MISCELLANEOUS
The Board is not aware of any matters to come before the meeting other than
the election of directors and to approve the appointment of KPMG Peat Marwick
LLP as the Company's independent auditors for the succeeding year. If any other
matter should come before the meeting, then the persons named in the enclosed
form of proxy will have discretionary authority to vote all proxies with respect
thereto in accordance with their judgment.
The Company's Annual Report to Shareholders for the year ended December 31,
1996 is being furnished with this Proxy Statement to shareholders of record on
March 21, 1997. The 1996 Annual Report to Shareholders does not constitute a
part of the proxy soliciting material.
The Company's Annual Report on Form 10-K, including the consolidated
financial statements, required to be filed with the Commission pursuant to Rule
13a-1 of the Exchange Act, for fiscal year ended December 31, 1996 will be
furnished without charge to any shareholder upon written request. A copy may be
requested by writing to Ms. Anne Robertson, Investor Relations, Titan Holdings,
Inc., P.O. Box 65100, San Antonio, Texas 78265.
VOTE OF PROXIES
All shares represented by duly executed proxies will be voted FOR the
election of the nominees named as directors unless authority to vote for the
proposed slate of directors or any individual director has been withheld. If for
any unforeseen reason any of such nominees should not be available as a
candidate for director, the proxies will be voted in accordance with the
authority conferred in the proxy for such other candidate or candidates as may
be nominated by the Board of Directors. With respect to the proposal to approve
KPMG Peat Marwick LLP as the Company's independent auditors all such shares will
be voted FOR or AGAINST, or not voted, as specified on each proxy. If no choice
is indicated, a proxy will be voted FOR the proposal to approve KPMG Peat
Marwick LLP as the Company's independent auditors.
By Order of the Board of Directors,
Mark E. Watson III
Secretary
Dated: March 27, 1997
14
<PAGE> 19
TITAN HOLDINGS, INC. AND SUBSIDIARIES
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.
A-1
<PAGE> 20
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 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
A-2
<PAGE> 21
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 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
A-3
<PAGE> 22
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.
A-4
<PAGE> 23
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
A-5
<PAGE> 24
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.
A-6
<PAGE> 25
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.
B-1
<PAGE> 26
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.
B-2
<PAGE> 27
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.
B-3
<PAGE> 28
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.
B-4
<PAGE> 29
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'
B-5
<PAGE> 30
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.
B-6
<PAGE> 31
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.
B-7
<PAGE> 32
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>
B-8
<PAGE> 33
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>
B-9
<PAGE> 34
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>
B-10
<PAGE> 35
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.
B-11
<PAGE> 36
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").
B-12
<PAGE> 37
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>
B-13
<PAGE> 38
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
B-14
<PAGE> 39
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
B-15
<PAGE> 40
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>
B-16
<PAGE> 41
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.
B-17
<PAGE> 42
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
B-18
<PAGE> 43
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>
B-19
<PAGE> 44
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
B-20
<PAGE> 45
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>
B-21
<PAGE> 46
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
B-22
<PAGE> 47
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>
B-23
<PAGE> 48
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.
B-24
<PAGE> 49
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
B-25
<PAGE> 50
P R O X Y
TITAN HOLDINGS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
MAY 1, 1997
THIS PROXY IS SOLICITED ON BEHALF OF TITAN HOLDINGS, INC.'S BOARD OF DIRECTORS
The undersigned hereby appoints Mark E. Watson, Jr. and Mark E. Watson
III, and each of them proxies for the undersigned with full power of
substitution, to vote all shares of Titan Holdings, Inc.'s Common Stock which
the undersigned may be entitled to vote at the Annual meeting of Shareholders
of Titan Holdings, Inc., a Texas corporation (the "Company"), to be held on
Thursday, May 1, 1997, at 10:00 a.m., at the Company's Corporate Headquarters,
located at 2700 N.E. Loop 410, San Antonio, Texas, or at any adjournment
thereof, upon the matters set forth on the reverse side and described in the
accompanying Proxy Statement and upon such other business as may properly come
before the meeting or any adjournment thereof.
PLEASE MARK THIS PROXY AS INDICATED ON THE REVERSE SIDE TO VOTE ON ANY ITEM. IF
YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS,
PLEASE SIGN THE REVERSE SIDE, NO BOXES NEED TO BE CHECKED.
- ------------------------------------------------
|
|
|
COMMENTS/ADDRESS CHANGE: PLEASE MARK |
COMMENT/ADDRESS |
BOX ON REVERSE SIDE |
|
| (Continued and to be
| signed on other side)
|
|
|
FOLD AND DETACH HERE
<PAGE> 51
The Board of Directors recommends Please mark your votes as
a vote FOR Items 1 and 2 indicated in this example [X]
Item 1- TO ELECT THREE CLASS I FOR [ ] WITHHELD [ ]
DIRECTORS TO SERVE FOR ALL
UNTIL THE ANNUAL
MEETING IN 1998; TO
ELECT THREE CLASS II
DIRECTORS TO SERVE UNTIL
THE ANNUAL MEETING IN
1999; TO ELECT THREE
CLASS III DIRECTORS
TO SERVE UNTIL THE
ANNUAL MEETING IN
2000.
Class I - Lucius E. Burch III, Thomas E. Mangold, Mark E. Watson III
Class II - Hector De Leon, Christopher J. Murphy III, Toby S. Wilt
Class III - Mark E. Watson, Jr., E. B. Lyon III, Gary V. Woods
WITHHELD FOR: (Write that nominee's name in the space provided below).
----------------------------------------------------------------------------
Item 2 - TO RATIFY THE APPOINTMENT OF KPMG FOR AGAINST ABSTAIN
PEAT MARWICK LLP AS THE COMPANY'S [ ] [ ] [ ]
INDEPENDENT AUDITORS FOR 1997.
Item 3 - TO TRANSACT SUCH OTHER BUSINESS AS
MAY PROPERLY BE BROUGHT BEFORE THE
MEETING OR ANY ADJOURNMENT THEREOF.
I PLAN TO ATTEND MEETING [ ]
COMMENTS/ADDRESS CHANGE [ ]
Please mark this box if
you have written comments/address
change on the reverse side.
Only shareholders of record at the close of business on
Friday, March 21, 1997 will be entitled to vote at the meeting.
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY
IN THE RETURN ENVELOPE FURNISHED FOR THAT PURPOSE,
AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN
TO ATTEND THE MEETING. IF YOU LATER DESIRE TO
REVOKE YOUR PROXY FOR ANY REASON, YOU MAY DO SO
IN THE MANNER DESCRIBED IN THE ATTACHED PROXY
STATEMENT. FOR FURTHER INFORMATION CONCERNING
THE INDIVIDUALS NOMINATED AS DIRECTORS, USE
OF THE PROXY AND OTHER RELATED MATTERS, YOU
ARE URGED TO READ THE PROXY STATEMENT ON THE
FOLLOWING PAGES.
Signature(s) Date
------------------------------------- -------------------
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
FOLD AND DETACH HERE
