-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F+9HhmVIorT3/Qe3U7mtLHV8qkVmipRJr42MDuUoQZ//un9iNYBH/Sk6Ydt2S6UO hXAVQRbt7CxYW1+k7OrqNw== 0000950170-98-001884.txt : 19980918 0000950170-98-001884.hdr.sgml : 19980918 ACCESSION NUMBER: 0000950170-98-001884 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980917 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 21ST CENTURY HOLDING CO CENTRAL INDEX KEY: 0001069996 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 650248866 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-63623 FILM NUMBER: 98711078 BUSINESS ADDRESS: STREET 1: 4161 N W 5TH STREET CITY: PLANTATION STATE: FL ZIP: 33317 BUSINESS PHONE: 9545819993 MAIL ADDRESS: STREET 1: 4161 N W 5TH STREET CITY: PLANTATION STATE: FL ZIP: 33317 SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1998 REGISTRATION STATEMENT NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- 21ST CENTURY HOLDING COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) FLORIDA 6331 65-0248866 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
-------------- EDWARD J. LAWSON PRESIDENT AND CHIEF EXECUTIVE OFFICER 21ST CENTURY HOLDING COMPANY 4161 N.W. 5TH STREET PLANTATION, FLORIDA 33317 (954) 581-9993 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- COPIES OF COMMUNICATIONS TO: DALE S. BERGMAN, P.A. ANDREW HULSH, ESQ. BROAD AND CASSEL BAKER & MCKENZIE 201 SOUTH BISCAYNE BOULEVARD 1200 BRICKELL AVENUE MIAMI CENTER, SUITE 3000 19TH FLOOR MIAMI, FLORIDA 33131 MIAMI, FLORIDA 33131 TELEPHONE: (305) 373-9454 TELEPHONE: (305) 789-8900 TELECOPIER: (305) 373-9443 TELECOPIER: (305) 789-8953
-------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. -------------- If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box: [x] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [x] CALCULATION OF REGISTRATION FEE
======================================================================================================================= PROPOSED MAXIMUM PROPOSED TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value per share..... 1,437,500(2) $ 8.00 $11,500,000 $3,393 - ----------------------------------------------------------------------------------------------------------------------- Representative's Warrants to Purchase Common Stock ............................. 125,000 -- -- (3) - ----------------------------------------------------------------------------------------------------------------------- Common Stock underlying the Representative's Warrants(4) ............. 125,000 $ 9.60 1,200,000 $ 354 - ----------------------------------------------------------------------------------------------------------------------- Total Registration Fee .................... $3,747 =======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act. (2) Includes 187,500 shares of Common Stock which may be issued upon exercise of a 45-day option granted to the Underwriters solely to cover over-allotments, if any. (3) No fee required pursuant to Rule 457(g) under the Securities Act. (4) Pursuant to Rule 416 under the Securities Act, this Registration Statement also covers such additional shares as may become issuable as a result of the anti-dilution provisions contained in the Representative's Warrants. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A), OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. ================================================================================ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1998 PROSPECTUS 1,250,000 SHARES [COMPANY LOGO] COMMON STOCK ---------------- 21st Century Holding Company (the "Company") hereby offers 1,250,000 shares of common stock, par value $.01 per share (the "Common Stock"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock and there can be no assurance that such a market will develop after completion of this Offering, or if developed, that it will be sustained. It is presently anticipated that the initial public offering price of the Common Stock will be between $7.00 and $8.00 per share. For information regarding the factors considered in determining the initial public offering price of the Common Stock, see "Risk Factors" and "Underwriting." The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "TCHC." SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=================================================================== PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNTS(1) COMPANY(2) - ------------------------------------------------------------------- Per Share ......... $ $ $ - ------------------------------------------------------------------- Total(3) .......... $ $ $ ===================================================================
(1) Does not include compensation payable to Gilford Securities Incorporated, the representative of the several underwriters (the "Representative"), in the form of a non-accountable expense allowance. In addition, see "Underwriting" for information concerning indemnification and contribution arrangements with and other compensation payable to the Representative. (2) Before deducting expenses estimated to be $ , including the Representative's non-accountable expense allowance. (3) The Company has granted to the Underwriters an option (the "Over-Allotment Option"), exercisable for a period of 45 days after the date of this Prospectus, to purchase up to 187,500 additional shares of Common Stock upon the same terms and conditions set forth above, solely to cover over-allotments, if any. If the Over-Allotment Option is exercised in full, the total Price to Public, Underwriting Discounts and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ---------------- The Common Stock is being offered by the Underwriters subject to prior sale when, as and if delivered to and accepted by the Underwriters, and subject to approval of certain legal matters by their counsel and to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify this Offering and to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock offered hereby will be made against payment at the offices of Gilford Securities Incorporated, New York, New York, on or about , 1998. ---------------- GILFORD SECURITIES INCORPORATED The date of this Prospectus is , 1998 [GRAPHIC OMITTED] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING TRANSACTIONS. SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION; (II) ASSUMES NO EXERCISE OF THE WARRANTS TO BE ISSUED BY THE COMPANY TO THE REPRESENTATIVE TO PURCHASE UP TO 125,000 SHARES OF COMMON STOCK (THE "REPRESENTATIVE'S WARRANTS"); (III) DOES NOT GIVE EFFECT TO 282,400 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF OUTSTANDING OPTIONS GRANTED UNDER THE COMPANY'S 1998 STOCK OPTION PLAN (THE "1998 PLAN"); (IV) GIVES EFFECT TO THE 1.8-FOR-ONE, 1.2-FOR-ONE AND 926.33-FOR-ONE STOCK SPLITS EFFECTED IN NOVEMBER 1996, JANUARY 1997 AND SEPTEMBER 1998, RESPECTIVELY; AND (IV) GIVES EFFECT TO THE CONSOLIDATION OF THE COMPANY'S OPERATIONS EFFECTED IN JANUARY 1997 AND JANUARY AND FEBRUARY 1998. SEE "GLOSSARY OF SELECTED TERMS" FOR DEFINITIONS OF CERTAIN INSURANCE-RELATED TERMS USED IN THIS PROSPECTUS. THE COMPANY GENERAL The Company is a vertically integrated insurance holding company which, through its subsidiaries, controls substantially all aspects of the insurance underwriting, distribution and claims process. The Company underwrites nonstandard and standard personal automobile insurance and mobile home property and casualty insurance in the State of Florida through its subsidiary, Federated National Insurance Company ("Federated National"). Through a wholly-owned managing general agent, Assurance Managing General Agents, Inc. ("Assurance MGA") and a wholly-owned claims adjusting company, Superior Adjusting, Inc. ("Superior"), the Company has underwriting and claims authority for third-party insurance companies. The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium"), and through its wholly-owned subsidiary, Florida State Discount Auto Title Loans, Inc. ("Florida Auto Title") offers auto title loans and other ancillary services. The Company markets and distributes Federated National's and third-party insurers' products and its other services primarily in South Florida, through a network of 15 Company-owned agencies and approximately 300 active independent agents. The Company believes that it can be distinguished from its competitors because it generates revenue from substantially all aspects of the insurance underwriting, distribution and claims process. The Company provides quality service to both its agents and insureds by utilizing an integrated computer system which links the Company's insurance and service entities. The Company's computer and software systems allow for rapid automated premium quotation, policy issuance, billing and payment and claims processing and enable the Company to continuously monitor all aspects of its business. These systems enable the Company's agents to access a customer's driving record, quote a premium, offer premium financing and, if requested, generate a policy on-site. The Company believes that these systems have facilitated its ability to market and underwrite insurance products on a cost-efficient basis, and that they will enhance the Company's ability to expand to other regions in Florida and to other states. The Company's primary product is nonstandard personal automobile insurance, which is principally provided to insureds who are unable to obtain preferred or standard insurance coverage because of their payment history, driving record, age, vehicle type or other factors, including market conditions for preferred or standard risks. Underwriting standards for preferred or standard insurance coverage have become more restrictive, thereby requiring more drivers to seek coverage in the nonstandard automobile insurance market. These factors have contributed to an increase in the size of the nonstandard personal automobile insurance market. Based on information provided by A.M. Best Company, Inc. ("A.M. Best"), a rating agency for the insurance industry, from 1993 to 1997, the 3 nonstandard personal automobile insurance market in the United States grew from approximately $14.2 billion to approximately $22.0 billion of annual premium volume and from approximately 15.1% to 19.2% of the total personal automobile insurance market. Also, according to A.M. Best, annual premium volume in the nonstandard personal automobile insurance market in Florida grew from approximately $1.5 billion in 1993 to approximately $2.6 billion in 1997 and from 27.8% to 35.6% of the total personal automobile insurance market in Florida. BUSINESS STRATEGY The Company's strategy is to seek continued growth of its business by capitalizing on the efficiencies of its vertical integration and /bullet/ selectively expanding the Company's product offerings by underwriting additional insurance products and programs such as standard automobile insurance, which the Company commenced offering in August 1998, commercial vehicle insurance and homeowners' insurance, and marketing these products and programs through its distribution network; /bullet/ further penetrating the Florida market by acquiring additional insurance agencies and establishing relationships with additional independent agents in order to expand the Company's distribution network to and market its products and services in other regions of Florida; /bullet/ expanding direct marketing of insurance products to customers through mailings, media advertising and the Internet; /bullet/ maintaining a commitment to provide quality service to its agents and insureds by emphasizing customer service; /bullet/ encouraging agents to place a high volume of quality business with the Company by providing them with attractive commission structures tied to premium levels and loss ratios; /bullet/ identifying and reviewing opportunities to acquire additional insurers; and /bullet/ using the model established in Florida to ultimately expand to other selected states. The Company is continually exploring various acquisition opportunities, but does not currently have any understandings, commitments, arrangements or agreements with respect to any acquisition. BACKGROUND The Company commenced operations in November 1983 when Edward J. Lawson and Michele V. Lawson, the Company's co-founders, opened an independent insurance agency in South Florida to sell private passenger automobile insurance. Through internal growth and acquisitions, the number of Company-owned agencies has expanded to 15, located principally in South Florida. In September 1987, Mr. and Mrs. Lawson organized Federated Premium to offer premium financing services. The Company was incorporated in the State of Florida in March 1991 for the purpose of functioning as a holding company for Federated National, which commenced underwriting operations in 1992. In January 1997, the Company acquired all of the outstanding capital stock of Assurance MGA, Federated Premium and Superior and in January and February 1998, acquired those insurance agencies and other affiliated companies not previously owned by the holding company (collectively, the "Consolidation"). Unless the context requires otherwise, all references herein to the "Company" refer to 21st Century Holding Company and its subsidiaries and their respective businesses as presently conducted and as historically conducted prior to the Consolidation. 4 The Company's executive offices are located at 4161 N.W. 5th Street, Plantation, Florida 33317, and its telephone number is (954) 581-9993. THE OFFERING Common Stock offered by the Company................... 1,250,000 shares Common Stock outstanding before the Offering.............. 2,100,000 shares Common Stock outstanding after the Offering............... 3,350,000 shares Use of Proceeds................... Contribution to Federated National's capital to increase its underwriting capacity, repayment of a portion of the outstanding balance under the Company's $4.0 million revolving line of credit and term loan agreement (the "Credit Facility"), financing of acquisitions and working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol..................... TCHC 5 SUMMARY CONSOLIDATED AND COMBINED FINANCIAL DATA (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) The following summary consolidated and combined financial data of the Company under the caption "Statement of Income Data" for the years ended December 31, 1997 and 1996 are derived from the Company's consolidated and combined financial statements, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The following summary consolidated and combined financial data of the Company under the caption "Statement of Income Data" for the six months ended June 30, 1998 and 1997 and the "Balance Sheet Data" under the caption "Actual" as of June 30, 1998 are derived from unaudited interim consolidated and combined financial statements contained elsewhere herein and includes all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position and the results of operations of the Company as of and for these periods. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. This summary consolidated and combined financial data should be read in conjunction with the consolidated and combined financial statements, the unaudited interim consolidated and combined financial statements and the notes thereto and the other financial information appearing elsewhere in this Prospectus.
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31 ------------------------- ------------------------- 1998 1997 1997 1996 ------------ ---------- ---------- ------------ (UNAUDITED) STATEMENT OF INCOME DATA: Revenue: Gross premiums written ...................... $ 12,169 $8,842 $17,675 $ 14,850 Net Premiums written ........................ 8,397 6,802 13,016 9,248 Net premiums earned ......................... 6,678 4,978 10,924 9,643 Commission income ........................... 2,185 2,104 3,328 2,936 Net investment income ....................... 506 453 1,047 850 Net realized gains (losses) ................. 390 (34) (19) 155 Other income ................................ 1,550 553 1,737 2,117 -------- ------ ------- -------- Total revenue ............................... 11,309 8,054 17,017 15,701 Expenses: Losses and LAE .............................. 4,681 3,272 7,414 7,660 Operating and underwriting expenses ......... 2,106 1,484 3,306 3,513 Other expenses .............................. 2,743 2,528 4,945 3,824 -------- ------ ------- -------- Total expenses .............................. 9,530 7,284 15,665 14,997 -------- ------ ------- -------- Net income .................................. 1,112 641 1,070 626 Net income per share ........................ $ 0.53 $ 0.31 $ 0.51 $ 0.30 Weighted average shares outstanding ......... 2,100 2,100 2,100 2,100 STATUTORY OPERATING RATIOS: Loss ratio .................................. 77% 73% 75% 85% Expense ratio ............................... 23% 32% 24% 32% -------- ------- ------- -------- SAP Combined ratio .......................... 100% 105% 99% 108% ======== ======= ======= ========
6
JUNE 30, 1998 ------------------------------ ACTUAL AS ADJUSTED(1) ------------ --------------- (UNAUDITED) BALANCE SHEET DATA: Total investments .................... $ 17,839 $ 17,839 Finance contract receivables ......... 4,943 4,943 Total assets ......................... 33,883 40,139 Unpaid losses and LAE ................ 7,623 7,623 Unearned premiums .................... 10,100 10,100 Revolving credit outstanding ......... 3,850 2,350 Shareholders' equity ................. 6,865 14,621 Book value per share ................. 3.27 4.36
- ---------------- (1) Adjusted to reflect the sale of 1,250,000 shares of Common Stock by the Company in this Offering at an assumed initial public offering price of $7.50 per share and the application of the net proceeds therefrom. See "Use of Proceeds." 7 RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. This Prospectus contains in addition to historical information, forward-looking statements that involve risks and uncertainties. The words "expect," "estimate," "anticipate," "believe," "intend," "plan" and similar expressions and variations thereof are intended to identify forward--looking statements. The Company's actual results could differ materially from those set forth in or implied by any forward--looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below as well as those discussed elsewhere in this Prospectus. NATURE OF THE COMPANY'S BUSINESS Factors affecting the sectors of the insurance industry in which the Company operates may subject the Company to significant fluctuations in operating results. These factors include competition, catastrophe losses and general economic conditions, including interest rate changes, as well as legislative initiatives, the frequency of litigation, the size of judgments and severe weather conditions. Specifically, the nonstandard automobile insurance market, which comprises the bulk of the Company's current operations, is influenced by many factors, including state and Federal insurance laws, market conditions for automobile insurance and state assigned risk and residual market plans. Additionally, an economic downturn in Florida could result in fewer car sales and less demand for automobile insurance. Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns of soft markets followed by hard markets. Although an individual insurance company's financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern. The Company has grown rapidly over the last few years. The Company believes that a substantial portion of its future growth will depend on its ability, among other things, to successfully implement its business strategy, including expanding the Company's product offering by underwriting and marketing additional insurance products and programs through its distribution network and further penetrating the Florida market by acquiring additional insurance agencies and establishing relationships with additional independent agents in order to expand its distribution network. Any future growth is contingent on various factors, including the availability of adequate capital, the Company's ability to hire and train additional personnel, regulatory requirements and rating agency considerations. There is no assurance that the Company will be successful in expanding its business, that the existing infrastructure will be able to support additional expansion or that any new business will be profitable. Moreover, as the Company expands its insurance products and programs and the Company's mix of business changes, there can be no assurance that the Company will be able to maintain its profit margins or other operating results. There can also be no assurance that the Company will be able to obtain the required regulatory approvals to offer additional insurance products or expand into states other than Florida. Moreover, pursuant to a Consent Order issued in conjunction with the Company's authorization to underwrite mobile home insurance (the "Consent Order"), the Company's growth is subject to regulatory limits on the amount of premiums it can underwrite. In 1998, Federated National may only underwrite $21.0 million in gross premiums written and $14.0 million in total net premiums written. In 1999, these limits increase to $24.0 million and $15.0 million, respectively. Federated National also is required to maintain a minimum capital surplus to support its underwriting program. In 1998 and 1999, Federated National is required to have capital surplus of $4.7 million and $5.9 million, respectively. The premium limits and capital surplus requirements impact Federated National's potential growth. Federated National's ability to exceed these limitations will be subject to the prior approval of the Florida Department of Insurance. The Florida Department of Insurance has indicated in writing its willingness to modify the Consent Order and increase Federated National's underwriting authority, subject to the completion of this Offering. There can be no assurance that Federated National will be 8 able to obtain the required regulatory approvals, and the failure to do so could have a material adverse effect on the Company's ability to expand its business. See "Business--Regulation." REINSURANCE CONSIDERATIONS Federated National follows the customary industry practice of reinsuring a portion of its risks and paying for that protection based upon premiums received on all policies subject to reinsurance. The Company's business is dependent upon Federated National's ability to transfer or "cede" significant amounts of the risk insured by it. The amount, availability and cost of reinsurance are subject to prevailing market conditions which are beyond Federated National's control, and they affect Federated National's level of business and profitability. Reinsurance makes the assuming reinsurer liable to the extent of the risk ceded. Federated National's reinsurance is primarily ceded with Transatlantic Reinsurance Corporation ("Transatlantic Re"). Federated National, however, is subject to credit risk with respect to its current and future reinsurers, as the ceding of risk to its reinsurers does not relieve Federated National of its liability to its insureds. The insolvency of Transatlantic Re or any other of Federated National's reinsurer's or their inability to make payments could have a material adverse effect on the Company's business, results of operations or financial condition. There can be no assurance that reinsurance will continue to be available to Federated National to the same extent, and at the same cost, as it has in the past. See "Business--Reinsurance." DEPENDENCE ON INVESTMENT INCOME Federated National, similar to other property and casualty insurance companies, depends on income from its investment portfolio for a substantial portion of its earnings. A significant decline in investment yields in Federated National's investment portfolio could have a material adverse effect on the Company's business, results of operations or financial condition. See "Business--Investments." ADEQUACY OF UNPAID LOSS AND LAE LIABILITY Federated National is directly liable for loss and loss adjustment expenses ("LAE") under the terms of the insurance policies it underwrites. Federated National establishes a liability for unpaid losses and LAE for the ultimate payment of all loss and LAE incurred. The liability for unpaid losses and LAE is based on historical data and estimates of future events, and are imprecise. Ultimate loss and LAE may vary from the established liability. Furthermore, factors such as future inflation, claims settlement patterns, legislative activity and litigation trends, all of which are difficult to predict, may have a substantial impact on Federated National's future loss experience. Accordingly, there can be no assurance that Federated National's liability for unpaid losses and LAE will be adequate to cover its ultimate losses. If Federated National's liability for unpaid losses and LAE should prove to be inadequate, Federated National will be required to increase the liability for unpaid losses and LAE with a corresponding reduction in Federated National's net income in the period in which the deficiency is identified. Future loss experience substantially in excess of Federated National's established liability for unpaid losses and LAE could have a material adverse effect on the Company's business, results of operations or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Liability for Unpaid Losses and LAE." REGULATION The Company is subject to the laws and regulations in Florida, its state of domicile and will be subject to the laws of any state in which it conducts business in the future. The regulations cover all aspects of its business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of shareholders. Such regulations relate to authorized lines of business, capital surplus requirements, allowable rates and forms, investment parameters, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, market conduct, maximum amount allowable for premium financing service charges, maximum amount of interest allowable for title loans and a variety of other financial and non-financial components of the Company's business. The failure of 9 the Company to comply with the provisions of applicable insurance laws and regulations or to have new insurance programs approved could have a material adverse effect on the Company's business, results of operations and financial condition. Prior to conducting insurance business in any states other than Florida, the Company will need to obtain a certificate of authority to conduct insurance business in such states. There can be no assurance that the Company will be able to obtain a certificate of authority in any additional states, and the failure to do so would limit the Company's ability to expand geographically. In addition, any changes in laws and regulations including the adoption of consumer initiatives regarding rates charged for automobile or other insurance coverage, could materially adversely affect the Company's business, results of operations and financial condition. The National Association of Insurance Commissioners ("NAIC") has adopted a system of assessing the financial condition and stability of insurance companies, known as "IRIS ratios," and a system to test the adequacy of statutory capital, known as "risk-based capital," each of which applies to Federated National. The IRIS ratios consist of 11 ratios that are compiled annually from an insurance company's statutory financial reports and then compared against the NAIC-established "usual range" for each ratio. As of December 31, 1997, the Florida Department of Insurance found that Federated National was outside the usual range with respect to four IRIS tests. Due to not reporting its underwriting results related to the Florida Joint Underwriting Association ("FJUA"), an assigned risk pool for automobile insurance drivers, Federated National fell outside the usual range with respect to two of the IRIS tests. Federated National's participation in this pool was not reported in its statutory financial statements in 1994 or 1995. The full results since inception of Federated National's FJUA participation were reported in the 1996 underwriting year. If the FJUA results are not considered, Federated National still falls outside the usual range with respect to two IRIS tests. Despite the fact that the Florida Department of Insurance found that Federated National was outside the usual range with respect to the four IRIS tests no regulatory action has been taken to date. The risk--based capital rules establish statutory capital requirements based on levels of risk retained by an insurance company. Federated National's adjusted capital at December 31, 1997 exceeded the applicable risk--based standards as established by the NAIC. Federated National's ratio of statutory surplus to its Authorized Control Level ("ACL") was 261.3% at December 31, 1997 and 290.6% at December 31, 1996. Regulatory action is triggered if surplus falls below 200% of the ACL amount. There is no assurance that Federated National will be able to maintain the required capital levels or IRIS ratios. Failure to maintain risk--based capital at the required levels, or IRIS ratios within the NAIC's usual range, could adversely affect Federated National's ability to secure regulatory approvals as necessary or appropriate and would materially adversely affect the Company's business, results of operations and financial condition. See "Business-- Regulation." RISKS RELATING TO INSURANCE AGENTS The Company's insurance programs are managed by Assurance MGA, its managing general agent, which has underwriting authority on behalf of Federated National and third-party insurance companies which it represents. The Company markets Federated National's and third-party insurer's products and its other services through a network of 15 Company-owned agencies and approximately 300 active independent agents. Both Company-employed and independent agents may under certain circumstances have the ability to bind the Company. Since many of the agents are independent, the Company has only limited ability to exercise control over these agents. In the event that an independent agent exceeds its authority by binding the Company on a risk which does not comply with the Company's underwriting guidelines, the Company is at risk for that policy until it receives the application and effects a cancellation. Although the Company has not experienced a material loss from improper use of binding authority of its agents, improper use of such authority may result in losses which could have a material adverse effect on the Company's business, results of operations or financial condition. See "Business--Insurance Operations." 10 LIMITED EXPERIENCE IN THE INSURANCE INDUSTRY Although the Company has been operating since 1983 and certain of its executive officers and directors have substantial experience in the insurance industry, Federated National only commenced underwriting nonstandard automobile insurance in 1992, mobile home property and casualty insurance in 1997 and standard automobile insurance in August 1998. Accordingly, Federated National has relatively limited experience in the automobile insurance and mobile home property and casualty insurance businesses. In addition, Federated National will have limited or no experience in the additional insurance products which Federated National plans on introducing as part of its business strategy. There is no assurance that the Company's lack of experience will not have a material adverse effect on the Company's business, results of operations or financial condition. COMPETITION The Company operates in a highly competitive market and faces competition from both national and regional insurance companies, many of whom are larger and have greater financial resources available than the Company, have favorable A.M. Best ratings and/or offer more diversified insurance coverages. The Company's competitors include other companies which market their products through agents, as well as companies which sell insurance directly to customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and, potentially, reduced policy acquisition costs. The Company may also face competition from new or temporary entrants into its niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below that of the Company. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and high quality service to its agents and insureds. The Company competes with respect to personal automobile insurance in Florida with more than 100 companies which underwrite personal automobile insurance. Companies of comparable or smaller size, which compete with the Company in the nonstandard automobile insurance business include Fortune Insurance Company, U.S. Security Insurance Company, United Automobile Insurance Company, Direct General Insurance Company, and Security National Insurance Company, as well as major insurers such as Progressive Casualty Insurance Company. Competition could have a material adverse effect on the Company's business, results of operations or financial condition. See "Business--Competition." IMPORTANCE OF RATINGS BY INDUSTRY SERVICES Insurers compete for business on the basis of a number of factors, including the letter ratings assigned by A.M. Best and ratings issued by other entities including Standard and Poor's Corporation and Demotech, Inc. A.M. Best's letter ratings for the industry currently range from "A++" (Superior) to "C-" (Fair) and some companies are not rated. These letter ratings are continually monitored and subject to adjustment by A.M. Best. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its reserves and the experience and competency of its management. Federated National has yet to receive an A.M. Best letter rating due to its limited operating history and there is no assurance that the letter rating will be obtained, and if obtained, that it will be a favorable one. Although Federated National has not yet received a letter rating from A.M. Best, A.M. Best has issued a Financial Performance Rating ("FPR") of "3 out of 9 (below average)" to Federated National. An FPR reflects A.M. Best's opinion of the financial strength and operating performance of property and casualty insurance companies that it reports on, that have not been assigned a letter rating due to, among other factors, insufficient operating history. If the letter rating when obtained is poor, it could adversely affect the Company. The Company expects Federated National to receive its rating in 1999. Federated National is rated "BBB" (Adequate and Secure) by Standard and Poor's Corporation and is rated "A" (Strong) by Demotech, Inc. If Federated National does receive a favorable A.M. Best letter 11 rating (as to which there can be no assurance) and, if that rating or other available ratings were subsequently downgraded, the Company could also be adversely affected. See "Business--Regulation." CATASTROPHE LOSSES Property and casualty insurance companies are subject to claims arising from catastrophes which may have a significant impact on their business, results of operations and financial condition. Catastrophe losses can be caused by a wide variety of events, including hurricanes, tropical storms, tornadoes, wind, hail, fires, riots and explosions, and their incidence and severity are inherently unpredictable. The extent of losses from a catastrophe is a function of two factors: the total amount of the insurance company's exposure in the area affected by the event and the severity of the event. Federated National's policyholders are currently concentrated in South Florida, which is periodically subject to adverse weather conditions such as hurricanes and tropical storms. Accordingly, the occurrence of a catastrophe in South Florida could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business". RELIANCE ON KEY PERSONNEL The Company depends, and will continue to depend, on the services of its co--founders and principal shareholders, Edward J. Lawson, the Company's President and Chief Executive Officer and Michele Lawson, its Vice President-Agency Operations and Treasurer. The Company will also be dependent on the services of other key personnel in the areas of administration, underwriting, claims and marketing. The ability of the Company to underwrite, market and distribute its insurance products is partially dependent upon its ability to retain these key personnel. The Company has entered into an employment agreement with each of Mr. and Mrs. Lawson, however, no assurances can be given that the Company can retain Mr. or Mrs. Lawson or its other key employees. The loss of Mr. or Mrs. Lawson or one or more of its other key employees could have a material adverse effect on the Company's business. The Company will be the sole beneficiary of key man life insurance policies in the amount of $1.0 million which it will maintain on each of Mr. and Mrs. Lawson effective upon consummation of this Offering. See "Management." CONCENTRATION OF COMMON STOCK OWNERSHIP After giving effect to the sale of the 1,250,000 shares offered hereby, Edward J. Lawson and Michele V. Lawson will beneficially own approximately 37.8% of the issued and outstanding shares of Common Stock. As the largest shareholders, they are likely to have the power to influence significantly the election of the Company's directors and to effectively control the outcome of substantially all matters submitted to a vote of the Company's shareholders. See "Principal Shareholders." DILUTION Purchasers of the shares of Common Stock offered hereby will experience immediate dilution of $3.56 per share (assuming an initial public offering price of $7.50 per share) in the net tangible book value of their shares. See "Dilution." ABSENCE OF PRIOR PUBLIC MARKET Prior to this Offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or continue after this Offering. The initial public offering price has been determined by negotiations between the Company and the Representative and may not be indicative of the market price for the Common Stock after this Offering. The market price of the Common Stock is subject to significant fluctuations in response to variations in quarterly and yearly operating results, general trends in the Company's industry actions taken by competitors, the overall performance of the stock market and other factors. See "Underwriting." 12 POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 3,350,000 shares of Common Stock outstanding. The 1,250,000 shares of Common Stock sold in this Offering will be freely tradable without restriction under the Securities Act, except any shares which may be acquired by an "affiliate" of the Company. The holders of all 2,100,000 currently outstanding shares have agreed not to offer, sell or otherwise dispose of their shares for 13 months after the date of this Prospectus without the prior written consent of the Representative. After this period, all of the shares subject to this restriction will be eligible for sale in the public market pursuant to Rule 144 under the Securities Act subject to the volume limitations and other restrictions contained in Rule 144. Future sales of the shares of Common Stock held by existing shareholders, or the perception that such sales may occur, could have an adverse effect on the price of the Common Stock. See "Shares Eligible for Future Sale." AUTHORIZATION OF PREFERRED STOCK The Company's Amended and Restated Articles of Incorporation (the "Articles") authorize the issuance of preferred stock with designations, rights and preferences determined from time to time by its Board of Directors. Accordingly, the Company's Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Common Stock. In the event of issuance, the preferred stock could be used, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of its preferred stock, there can be no assurance that it will not do so in the future. See "Description of Capital Stock." ANTITAKEOVER EFFECTS OF CERTAIN ARTICLES AND BYLAW PROVISIONS AND CERTAIN PROVISIONS OF FLORIDA LAW Certain provisions of the Articles and the Company's Bylaws may be deemed to have antitakeover effects and may delay, defer or prevent a hostile takeover of the Company, including: a classified Board of Directors, prohibition of shareholder action by written consent and advance notice requirements for shareholder proposals and director nominations. In addition, Florida has enacted legislation that may deter or frustrate takeovers of Florida corporations. The Florida Control Share Act generally provides that shares acquired in a "control share acquisition" will not possess any voting rights unless such voting rights are approved by a majority of the corporation's disinterested shareholders. A "control share acquisition" is an acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding "control shares" of a publicly held Florida corporation. "Control shares" are shares, which, except for the Florida Control Share Act, would have voting power that, when added to all other shares owned by a person or in respect to which such person may exercise or direct the exercise of voting power, would entitle such person, immediately after acquisition of such shares, directly or indirectly, alone or as a part of a group, to exercise or direct the exercise of voting power in the election of directors within any of the following ranges: (a) at least 20% but less than 331/3% of all voting power, (b) at least 331/3% but less than a majority of all voting power; or (c) a majority or more of all voting power. The Florida Affiliated Transactions Act generally requires supermajority approval by disinterested shareholders of certain specified transactions between a public corporation and holders of more than 10% of the outstanding voting shares of the corporation (or their affiliates). See "Description of Capital Stock." NO DIVIDENDS The Company has not paid any dividends on its Common Stock and anticipates that for the foreseeable future all earnings, if any, will be retained for the operation and expansion of the Company's business. Moreover, the ability of the Company to pay dividends, if and when its Board of Directors determines to do so, may be restricted by regulatory limits on the amount of dividends which Federated National is permitted to pay to the Company. See "Dividend Policy" and "Business--Regulation." 13 YEAR 2000 ISSUE The Company has evaluated its internal systems, both hardware and software, facilities, and interactions with business partners in relation to year 2000 issues. In 1996, the Company began converting its computer systems to be year 2000 compliant. As of December 31, 1997, the Company believes that it has completed its efforts to bring the systems into compliance. The Company will continue to contact its business partners (including agents, banks, motor vehicle departments and rating agencies) to determine the status of their compliance and to assess the impact of noncompliance on the Company. The Company believes that it is taking the necessary measures to mitigate issues that may arise relating to the year 2000. However, there can be no assurance that significant year 2000-related computer operating problems or expenses will not arise with the Company's computer systems and software or in the computer systems and software of the Company's business partners and have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Matters." 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,250,000 shares of Common Stock being offered hereby at an assumed initial public offering price of $7.50 per share are estimated to be approximately $7,756,250 ($8,979,688 if the Over-Allotment Option is exercised in full) after deducting the underwriting discount, the non-accountable expense allowance and other estimated offering expenses payable by the Company. The net proceeds are expected to be used as follows:
APPROXIMATE APPROXIMATE AMOUNT PERCENTAGE ------------- ------------ Contribution to the capital of Federated National .................. $2,500,000 32.2% Repayment of a portion of the amount outstanding under the Company's Credit Facility(1) ................................................ 1,500,000 19.4 Financing of Acquisitions(2) ....................................... 2,500,000 32.2 Working capital and general corporate purposes ..................... 1,256,250 16.2 ---------- ----- Total .............................................................. $7,756,250 100.0% ========== =====
- ---------------- (1) The Company intends to repay a portion of the amount outstanding under the Credit Facility and to borrow under the Credit Facility in the future as the need arises. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." (2) The Company is continually exploring various acquisition opportunities, but does not currently have any understandings, commitments, arrangements or agreements with respect to any acquisition. The amounts and timing of the above expenditures may vary and will depend on numerous factors. The net proceeds from the exercise of the Over-Allotment Option, if any, will be used for working capital and general corporate purposes. The Company believes that the net proceeds of this Offering, when combined with its current capital resources, will be sufficient to support current operations and expected growth for at least 24 months from completion of this Offering. Pending use of the proceeds as described above, the net proceeds will be invested in bank deposits and short--term, investment grade securities, including government obligations and money market instruments. DIVIDEND POLICY The Company has not paid dividends on its Common Stock and anticipates that for the foreseeable future all earnings, if any, will be retained for the operation and expansion of the Company's business. Moreover, the ability of the Company to pay dividends if and when its Board of Directors determines to do so, may be restricted by regulatory limits on the amount of dividends which Federated National is permitted to pay to the Company. See "Business--Regulation." 15 DILUTION As of June 30, 1998, the net tangible book value of the Company was $5,459,176 or $2.60 per share. Net tangible book value represents the amount of total assets including deferred policy acquisition costs, less any intangible assets and total liabilities. After giving effect to the sale of 1,250,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $7.50 per share) and after deducting the underwriting discount, the non--accountable expense allowance and other estimated expenses of this Offering, the pro forma net tangible book value as of June 30, 1998 would have been $13,215,426 or $3.94 per share. This represents an immediate increase in net tangible book value of $1.35 per share to existing shareholders and an immediate dilution of $3.56 per share to investors in the Offering. The following table illustrates this per share dilution: Assumed public offering price .......................................... $ 7.50 Net tangible book value per share at June 30, 1998 ................... $ 2.60 Increase attributable to new investors ............................... 1.34 ------- Pro forma net tangible book value per share after the offering ......... 3.94 ------- Dilution to new investors .............................................. $ 3.56 =======
If the Over-Allotment Option is exercised in full, the pro forma net tangible book value per share of Common Stock after the Offering would be $4.08, which would result in dilution to new investors in this Offering of $3.42 per share of Common Stock. The following table shows, at June 30, 1998, a comparison of the total number of shares of Common Stock purchased from the Company, the total consideration paid and the average price paid per share by existing shareholders and to be paid by investors who purchase shares of Common Stock in the Offering (at an assumed initial public offering price of $7.50 per share):
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- -------------------------- AVERAGE PRICE NUMBER PERCENT DOLLARS PERCENT PER SHARE ----------- --------- -------------- --------- -------------- Existing Shareholders ......... 2,100,000 62.7% $ 4,584,445 32.8% $ 2.18 New Investors ................. 1,250,000 37.3 9,375,000 67.2 $ 7.50 --------- ----- ----------- ----- ------ Total ....................... 3,350,000 100.0% $13,959,445 100.0% ========= ===== =========== =====
16 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of June 30, 1998 and as adjusted to give effect to the sale of 1,250,000 shares of Common Stock offered hereby by the Company (at an assumed initial public offering price at of $7.50 per share) and the receipt of the net proceeds therefrom. This table should be read in conjunction with the Company's consolidated and combined financial statements and the notes thereto included elsewhere in this Prospectus.
JUNE 30, 1998 ------------------------- ACTUAL AS ADJUSTED ---------- ------------ (DOLLARS IN THOUSANDS) (UNAUDITED) Current maturities of debt .............................................. $4,250 $ 2,750 ====== ======= Total debt excluding current maturities ................................. -- -- Shareholders' equity: ................................................... Preferred Stock, $.01 par value, authorized 1,000,000 shares, issued and outstanding no shares ................................................ -- -- Common Stock, $.01 par value. Authorized 25,000,000 shares, issued and outstanding 2,100,000 shares (3,350,000 as adjusted) ................. 21 34 Additional paid--in capital ............................................ 4,564 12,307 Accumulated other comprehensive income ................................. (109) (109) Retained earnings ...................................................... 2,389 2,389 Total shareholders' equity ............................................ 6,865 14,621 ------ ------- Total capitalization .................................................. $6,865 $14,621 ====== =======
17 SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) The following selected consolidated and combined financial data of the Company under the caption "Statement of Income Data" for the years ended December 31, 1997, and 1996 and under the caption "Balance Sheet Data" as of December 31, 1997 are derived from the Company's consolidated and combined financial statements, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The following selected consolidated and combined financial data of the Company under the caption "Statement of Income Data" for the six months ended June 30, 1998 and 1997 and under the caption "Balance Sheet Data" as of June 30, 1998 are derived from unaudited interim consolidated and combined financial statements contained elsewhere herein and includes all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position and the results of operations as of and for these periods. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. This selected consolidated and combined financial data should be read in conjunction with the consolidated and combined financial statements, the unaudited interim consolidated and combined financial statements and the notes thereto and the other financial information appearing elsewhere in this Prospectus.
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31 ------------------------- ------------------------- 1998 1997 1997 1996 ------------ ---------- ---------- ------------ (UNAUDITED) STATEMENT OF INCOME DATA: Revenue: Gross premiums written ...................... $ 12,169 $8,842 $17,675 $ 14,850 Net premiums written ........................ 8,397 6,802 13,016 9,248 Net premiums earned ......................... 6,678 4,978 10,924 9,643 Commission income ........................... 2,185 2,104 3,328 2,936 Net investment income ....................... 506 453 1,047 850 Net realized gains (losses) ................. 390 (34) (19) 155 Other income ................................ 1,550 553 1,737 2,117 -------- ------ ------- -------- Total revenue ............................... 11,309 8,054 17,017 15,701 Expenses: Losses and LAE .............................. 4,681 3,272 7,414 7,660 Operating and underwriting expenses ......... 2,106 1,484 3,306 3,513 Other expenses .............................. 2,743 2,528 4,945 3,824 -------- ------ ------- -------- Total expenses .............................. 9,530 7,284 15,665 14,997 -------- ------ ------- -------- Net income .................................. 1,112 641 1,070 626 Net income per share ........................ $ 0.53 $ 0.31 $ 0.51 $ 0.30 Weighted average shares outstanding ......... 2,100 2,100 2,100 2,100 STATUTORY OPERATING RATIOS: Loss ratio .................................. 77% 73% 75% 85% Expense ratio ............................... 23% 32% 24% 32% -------- ------- ------- -------- SAP Combined ratio .......................... 100% 105% 99% 108% ======== ======= ======= ========
18
JUNE 30, 1998 DECEMBER 31, 1997 --------------- ------------------- (UNAUDITED) BALANCE SHEET DATA: Total investments .................... $ 17,839 $ 15,760 Finance contract receivables ......... 4,943 2,344 Total assets ......................... 33,883 25,677 Unpaid losses and LAE ................ 7,623 6,726 Unearned premiums .................... 10,100 7,500 Revolving credit outstanding ......... 3,850 1,594 Shareholders' equity ................. 6,865 5,102 Book value per share ................. 3.27 2.43
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company, through its subsidiaries, is engaged in the insurance underwriting, distribution and claims business. Federated National, the Company's insurance subsidiary, generates revenues from the collection and investment of premiums. The Company's agency operations generate income from policy fees, commissions, premium financing referral fees, auto tag agency fees and the marketing of ancillary services. Federated Premium generates revenue from premium financing provided to Company and third party insureds. Assurance MGA, the Company's managing general agent, generates revenue through policy fee income and other administrative fees from the marketing of third parties insurance products through the Company's distribution network. The Company's business, results of operations and financial condition are subject to fluctuations due to a variety of factors. Abnormally high severity or frequency of claims in any period could have a material adverse effect on the Company's business, results of operations or financial condition. Also, if Federated National's liabilities for unpaid losses and LAE should prove to be inadequate, Federated National will be required to increase reserves with a corresponding reduction in Federated national's net income in the period in which the deficiency is identified. The Company operates in a highly competitive market and faces competition from both national and regional insurance companies, many of whom are larger and have greater financial resources available than the Company, have favorable A.M. Best ratings and/or offer more diversified insurance coverages. The Company's competitors include other companies which market their products through agents, as well as companies which sell insurance directly to customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and, potentially, reduced acquisition costs. The Company may also face competition from new or temporary entrants into its niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below that of the Company. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and superior service to its agents and insureds. The Company competes with respect to automobile insurance in Florida with more than 100 companies which underwrite personal automobile insurance. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 GROSS PREMIUMS WRITTEN. Gross premiums written increased 38.6% to $12.2 million for the six month period ended June 30, 1998 from $8.8 million for the same period in 1997. The increase in gross premiums written is primarily attributable to an increase in the number of independent agents from 1997 to 1998. Marketing efforts also contributed to the increase in the amount of premiums written through independent agents to approximately 40.9% or $9.3 million for the six month period ended June 30, 1998 from $6.6 million for the same period in 1997. The increase in gross premiums written was also attributable to an increase in premiums written by Company owned agencies of approximately 31.8% to $2.9 million in 1998 from $2.2 million in 1997. NET PREMIUMS WRITTEN. Net premiums written increased 23.5% to $8.4 million for the six month period ended June 30, 1998 from $6.8 million for the same period in 1997. The difference in growth rates for gross and net premiums written reflects the impact of reinsurance since $3.8 million or 31.1% of premiums written were ceded to a reinsurer for the six month period ended June 30, 1998 as compared to $2.0 million or 22.7% for the same period in 1997. Net premiums written grew at a faster rate than gross premiums written as a result of the April 1997 modification of a reinsurance agreement 20 wherein the percentage of future premiums written ceded was reduced to 30.0% from 50.0%. This modification resulted in $1.2 million of gross premiums previously ceded being refunded to the Company from the reinsurer. NET PREMIUMS EARNED. Net premiums earned increased 34.0% to $6.7 million for the six month period ended June 30, 1998 from $5.0 million for the same period in 1997. COMMISSION INCOME. Commission income increased 4.8% to $2.2 million for the six month period ended June 30, 1998 from $2.1 million for the same period in 1997. Commission income consists of fees earned by the Company-owned agencies placing business with third party insurers and third party premium finance companies, as well as, commissions from reinsurance ceded. Company-owned agency fees decreased 37.5% or $600,000 to $1.0 million for the six month period ended June 30, 1998, from $1.6 million for the same period in 1997. During 1997, premium financing was placed almost exclusively with third party companies for which commissions were received as compared to 1998, where premium financing was placed substantially with Federated Premium for which no commissions are paid. Commissions from reinsurance ceded by Federated National increased to $1.2 million for the six month period ended June 30, 1998 from $500,000 for the same period in 1997. This increase is primarily the result of the modification of the reinsurance agreement in April 1997 which resulted in a refund to the reinsurer for $375,000 of commissions. Additional commissions were generated from the increase in gross premiums written in 1998. FINANCE REVENUES. Finance revenues increased to $716,000 for the six month period ended June 30, 1998 from approximately $22,000 for the same period in 1997. The increase was attributable to an increase in the number of premium contracts financed to 10,129 for the six month period ended June 30, 1998 from zero for the same period in 1997 by Federated Premium. In order to terminate a premium finance funding arrangement which was not favorable to the Company's overall growth strategy, Federated Premium ceased all new premium financing with its customers in July 1996 and subsequently terminated the premium finance lending arrangement with its lender in early 1997. In September 1997, a new premium finance lending arrangement was established and the Company recommenced its premium financing activities. INVESTMENT INCOME. Investment income consists of net investment income and net realized gains (losses). Investment income increased 113.6% to $895,000 for the six month period ended June 30, 1998 from $419,000 for the same period in 1997. The Company experienced realized gains of $390,000 for the six month period ended June 30, 1998 compared to realized losses of $34,000 for the same period in 1997. OTHER INCOME. Other income increased 57.3% to $835,000 for the six month period ended June 30, 1998 from $531,000 for the same period in 1997. Other income is comprised mainly of the managing general agent's policy fee income on all new and renewal insurance policies, and revenue on auto tag products. LOSSES AND LAE. The Company's Loss Ratio, in accordance with GAAP, for the six month period ended June 30, 1998 was 70.0% compared with 66.0% for the same period in 1997. Losses and LAE incurred increased 42.4% to $4.7 million for the six month period ended June 30, 1998 from $3.3 million for the same period in 1997 as compared to net premium earned which increased by 34.0% to $6.7 million for the six month period ended June 30, 1998 from $5.0 million for the same period in 1997. Losses and LAE, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. Losses and LAE are influenced by loss severity and frequency. Because the Loss Ratio is dependent on net premiums earned and the fact that the ratio of net premiums earned over gross premiums written decreased to 54.9% for the six month period ended June 30, 1998 from 56.8% for the same period in 1997, the Loss Ratio increased by a nominal amount compared to the decrease in the ratio of net premiums earned to gross premiums written. The Company believes that the severity and frequency of claims remained stable for the periods under comparison. 21 OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting expenses increased 40.0% to $2.1 million for the six month period ended June 30, 1998 from $1.5 million for the same period in 1997. This increase is primarily due to the increase in interest expense of $412,000 for the six month period ended June 30, 1998 from 1997. This increase is attributed to the initiation of the premium finance funding arrangement between Federated Premium and a lender in September 1997. SALARIES AND WAGES. Salaries and wages remained relatively constant at approximately $1.6 million for the six month periods ended June 30, 1998 and 1997. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred policy acquisition costs increased 6.0% to $1.0 million for the six month period ended June 30, 1998 from $943,000 for the same period in 1997. The amount deferred increased 27.3% to $1.4 million at June 30, 1998 from $1.1 million at June 30, 1997. This increase is attributable to the premiums written by independent agencies which increased by 40.9% to $9.3 million for the six month period ended June 30, 1998 from $6.6 million for the same period in 1997. INCOME TAX EXPENSE. The Company's estimated effective income tax rate was 37.5% for 1998 compared with 16.7% for 1997. This increase is primarily the result of the January and February 1998 acquisition by the Company of certain insurance agencies and other affiliated companies which prior to their acquisition were S Corporations for Federal income tax purposes. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 GROSS PREMIUMS WRITTEN. Gross premiums written increased 18.8% to $17.7 million in 1997 from $14.9 million in 1996. The increase in premiums written is primarily attributable to an increase in the number of independent agents from 1996 to 1997. Marketing efforts also contributed to the increase in the amount of gross premiums written through independent agents by $2.9 million to $12.8 million in 1997 from $9.9 million in 1996. The increase in gross premiums written was partially offset by a nominal decrease in gross premiums written by Company-owned agencies of $200,000. The increase in gross written premiums can also be attributed to an increase in the average price of non-standard automobile insurance in the South Florida area. NET PREMIUMS WRITTEN. Net premiums written increased 41.3% to $13.0 million in 1997 from $9.2 million in 1996. The difference in growth rates for gross and net premiums written reflects the impact of reinsurance since $4.7 million or 26.6% of premiums written were ceded to a reinsurer in 1997 as compared to $5.6 million or 37.6% in 1996. Net premiums written grew at a slower rate than gross premiums written as a result of the April 1997 modification of a reinsurance agreement. On December 31, 1996, the Company modified the reinsurance agreement to increase the percentage of future written premiums ceded from 30.0% to 50.0%. This modification resulted in an additional $1.2 million of premiums written being ceded to the reinsurer. Effective April 1, 1997, the Company again modified the reinsurance agreement to reduce the percentage of future premiums written ceded to the original 30.0%. This modification resulted in $1.2 million of premiums ceded being refunded to the Company from the reinsurer. NET PREMIUMS EARNED. Net premiums earned increased 13.5% to $10.9 million in 1997 from $9.6 million in 1996. COMMISSION INCOME. Commission income increased 13.8% to $3.3 million in 1997 from $2.9 million in 1996. The increase in Company-owned agency fees of 40% or $600,000 to $2.1 million in 1997 from $1.5 million in 1996 was attributable to an increase in the number of Company-owned agencies to 12 in 1997 from 11 in 1996. Offsetting this increase was a decrease in commissions earned from reinsurance ceded by Federated National to $1.3 million in 1997 from $1.4 million in 1996. The net decrease in commissions ceded is primarily the result of the return of $375,000 of commissions to the reinsurer related to the refund of premiums ceded to the Company based on the reinsurance modification in April 1997. This was offset by the increase in additional ceding commissions related to the increase in premiums written earned in 1997. 22 FINANCE REVENUES. Finance revenues decreased 77.6% to $220,000 in 1997 from approximately $982,000 in 1996. The decrease was attributable to a decrease in the number of premium contracts financed by Federated Premium of 57.7% to 4,497 in 1997 from 10,634 in 1996. In order to terminate a premium finance funding arrangement which was not favorable to the Company's overall growth strategy, Federated Premium ceased all new premium financing with its customers in July 1996 and subsequently terminated the premium finance lending arrangement with its lender in early 1997. In September 1997, a new premium finance funding arrangement was established and the Company recommenced its premium financing activities. Revenue earned in the fourth quarter of 1997 represented nearly all of the $220,000 in finance revenue earned for the year. INVESTMENT INCOME. Investment income remained relatively constant at $1.0 million for the years ended December 31, 1997 and 1996. This was primarily the result of a decrease in the average investment yield as lower yielding securities were sold or matured and reinvestments were made at lower market rates offset by an increase in total amounts invested. The Company experienced realized losses of $19,000 in 1997 compared to realized gains of $155,000 in 1996. OTHER INCOME. Other income increased 36.4% to $1.5 million in 1997 from $1.1 million in 1996. Other income is comprised mainly of the managing general agent's policy fee income on all new and renewal insurance policies and revenue on auto tag products. LOSSES AND LAE. The Company's Loss Ratio, in accordance with GAAP, for 1997 was 68.0% compared with 79.0% in the previous year. The loss and LAE decreased 3.9% to $7.4 million in 1997 from $7.7 million in 1996 as compared to net premium earned which increased by 13.5% to $10.9 million in 1997 from $9.6 million in 1996. The lower Loss Ratio in 1997 was primarily attributable to the hiring of an experienced manager and key personnel, improvement on the claims evaluation process implementing a strategy to minimize legal expenses and introducing revised claims evaluation procedures. In addition, the Loss Ratio related to the mobile home product was below that of non-standard automobile products and the introduction of this product in 1997 reduced the Loss Ratio in 1997. Non-standard automobile insurance rates increased in the South Florida area in 1997, further contributing to the decrease in the Loss Ratio. OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting expenses decreased 5.7% to $3.3 million in 1997 from $3.5 million in 1996. This decrease is primarily due to the decrease in interest expense of $412,000 in 1997 from 1996. This is attributed to the termination of the premium finance funding arrangement between the Company's Federated Premium subsidiary and a lender in early 1997. This decrease was offset by the costs of expanded marketing and advertising expenses. SALARIES AND WAGES. Salaries and wages increased 24.0% to $3.1 in 1997, from $2.5 million in 1996. The $600,000 increase is primarily a result of the hiring of six key management executives in 1997 and the latter half of 1996 and the increase in personnel required to manage the increased volume in underwriting and claims, as well as, the increase in the number of affiliated agencies to 12 in 1997 from 11 in 1996. The Company's employee count increased approximately 21.7% to 129 at year end 1997 from 106 at year end 1996. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred policy acquisition costs increased 38.5% to $1.8 million in 1997 from $1.3 million in 1996. The amount deferred increased 35.7% to $1.9 million at December 31, 1997 from $1.4 million at December 31, 1996. This increase is attributed to the premiums written by independent agencies which increased by 31.8% to $11.2 million in 1997 from $8.5 million in 1996. INCOME TAX EXPENSE. The Company's estimated effective income tax rate was 20.9% for 1997 compared with 8.9% for 1996. This increase in the effective tax rate is primarily the result of the January 1997 acquisition by the Company of Assurance MGA, Federated Premium and Superior which prior to their acquisition were S Corporations for Federal income tax purposes. 23 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are revenues generated from operations, gains on investments and borrowings under credit facilities. As the Company is a holding company, it is largely dependent upon dividends from its subsidiaries for cash flow. In September 1997, Federated Premium entered into the Credit Facility, as amended, which is used to fund its operations. The amount of an advance is subject to availability under a borrowing base calculation based upon a percentage of eligible accounts receivable, with maximum advances outstanding not to exceed the maximum credit commitment of $4.0 million. The annual interest rate on the loan is the prime rate plus 1.50%. The Credit Facility contains various operating and financial covenants and is collateralized by a first lien and assignment of all of Federated Premium's finance contracts receivable. Federated Premium was in compliance with all covenants under the Credit Facility as of June 30, 1998. The Credit Facility expires on September 30, 2000. The Company is also party to a $400,000 line of credit which expires on December 30, 1998. The line of credit has an annual interest rate at 1.25% over the lender's variable base rate. The line was fully utilized and outstanding at December 31, 1997 and June 30, 1998. The funds were used for a November 1997 acquisition of an unaffiliated agency. For the 30-month period ended June 30, 1998, operations generated operating cash flow of $9.8 million, and operating cash flow is expected to be positive in both the short-term and reasonably foreseeable future. In addition, the Company's investment portfolio is highly liquid as it consists almost entirely of readily marketable securities. The Company believes that the net proceeds of this Offering, when combined with its current capital resources, will be sufficient to support current operations and expected growth for at least 24 months from the completion of this Offering. In October 1996, Federated National purchased land in Plantation, Florida to construct a headquarters building. In August 1998, the facility was completed and the Company consolidated its executive offices and administrative operations in the facility, which consists of approximately 14,000 square feet. The cost of the project is currently estimated at $1.5 million and approximately $925,000 has been paid as of June 30, 1998. To retain its certificate of authority, the Florida insurance laws and regulations require that Federated National maintain capital surplus equal to the greater of 10.0% of its liabilities or the 1997 statutory minimum capital and surplus requirement of $2.1 million as defined in the Florida Insurance Code. The Company is also required to adhere to prescribed premium-to-capital surplus ratios. The Company is in compliance with these requirements. The maximum amount of dividends which can be paid by Florida insurance companies without prior approval of the Florida Commissioner is subject to restrictions relating to statutory surplus. The maximum dividend that may be paid in 1998 by the Company without prior approval is limited to the lesser of statutory net income from operations of the preceding calendar year or 10.0% of statutory unassigned capital surplus as of the preceding December 31 and amounted to $0 at December 31, 1997. The Company is party to the Consent Order which limits the amount of premiums it can underwrite in 1998 and 1999. See "Business-Regulation." The Company is required to comply with the NAIC's Risk-Based Capital requirements ("RBC"). RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC's RBC standards are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of June 30, 1998, based on calculations using the appropriate NAIC formula, the Company's total adjusted capital is in excess of ratios which would require any form of regulatory action. GAAP differs in some respects from reporting practices prescribed or permitted by the Florida Department of Insurance. Federated National's statutory capital and surplus was approximately 24 $4,112,265 as of December 31, 1997 and $4,708,291 as of June 30, 1998. Statutory net income was $493,089 for the year ended December 31, 1997 and $700,783 for the six months ended June 30, 1998. IMPACT OF INFLATION AND CHANGING PRICES The consolidated and combined financial statements and related data presented herein have been prepared in accordance with GAAP which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE. Insurance premiums are established before the Company knows the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, the Company attempts to anticipate the future impact of inflation when establishing rate levels. While the Company attempts to charge adequate rates, the Company may be limited in raising its premium levels for competitive and regulatory reasons. Inflation also affects the market value of the Company's investment portfolio and the investment rate of return. Any future economic changes which result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements. YEAR 2000 MATTERS In 1996, the Company began converting its computer systems to be year 2000 compliant. The Company has evaluated its internal systems, both hardware and software, facilities, and interactions with business partners in relation to year 2000 issues. As of December 31, 1997, the Company had completed its efforts to bring the systems in compliance. The total cost incurred during the year ended December 31, 1997 to modify these existing systems, which include both internal and external costs of programming, coding and testing, was not material. The Company continually evaluates computer hardware and software upgrades and, therefore, many of the costs to replace existing items with year 2000 compliant upgrades are not likely to be incremental costs to the Company. During 1998, the Company will continue to contact its business partners (including agents, banks, motor vehicle departments and rating agencies) to determine the status of their compliance and to assess the impact of noncompliance on the Company. The Company believes that it is taking the necessary measures to mitigate issues that may arise relating to the year 2000. To the extent that any additional issues arise, the Company will evaluate the impact on its business, results of operations and financial condition and, if material, make the necessary disclosures and take appropriate remedial action. 25 BUSINESS GENERAL The Company is a vertically integrated insurance holding company which, through its subsidiaries, controls substantially all aspects of the insurance underwriting, distribution and claims process. The Company underwrites nonstandard and standard personal automobile insurance and mobile home property and casualty insurance in the State of Florida through its subsidiary, Federated National. Through a wholly-owned managing general agent, Assurance MGA and a wholly-owned claims adjusting company, Superior, the Company has underwriting and claims authority for third-party insurance companies. The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium, and through its wholly-owned subsidiary, Florida Auto Title, offers auto title loans and other ancillary services. The Company markets and distributes Federated National's and third-party insurers' products and its other services primarily in South Florida, through a network of 15 Company-owned agencies and approximately 300 active independent agents. The Company believes that it can be distinguished from its competitors because it generates revenue from substantially all aspects of the insurance underwriting, distribution and claims process. The Company provides quality service to both its agents and insureds by utilizing an integrated computer system which links the Company's insurance and service entities. The Company's computer and software systems allow for rapid automated premium quotation, policy issuance, billing and payment and claims processing and enable the Company to continuously monitor all aspects of its business. These systems enable the Company's agents to access a customer's driving record, quote a premium, offer premium financing and, if requested, generate a policy on-site. The Company believes that these systems have facilitated its ability to market and underwrite insurance products on a cost-efficient basis, and that they will enhance the Company's ability to expand to other regions in Florida and to other states. The Company's primary product is nonstandard personal automobile insurance, which is principally provided to insureds who are unable to obtain preferred or standard insurance coverage because of their payment history, driving record, age, vehicle type or other factors, including market conditions for preferred or standard risks. Underwriting standards for preferred or standard insurance coverage have become more restrictive, thereby requiring more drivers to seek coverage in the nonstandard automobile insurance market. These factors have contributed to an increase in the size of the nonstandard personal automobile insurance market. Based on information provided by A.M. Best, a rating agency for the insurance industry, from 1993 to 1997, the nonstandard personal automobile insurance market in the United States grew from approximately $14.2 billion to approximately $22.0 billion of annual premium volume and from approximately 15.1% to 19.2% of the total personal automobile insurance market. Also, according to A.M. Best, annual premium volume in the nonstandard personal automobile insurance market in Florida grew from approximately $1.5 billion in 1993 to approximately $2.6 billion in 1997 and from 27.8% to 35.6% of the total personal automobile insurance market in Florida. BUSINESS STRATEGY The Company's strategy is to seek continued growth of its business by capitalizing on the efficiencies of its vertical integration and /bullet/ selectively expanding the Company's product offerings by underwriting additional insurance products and programs such as standard automobile insurance, which the Company commenced offering in August 1998, commercial vehicle insurance and homeowners' insurance, and marketing these products and programs through its distribution network; 26 /bullet/ further penetrating the Florida market by acquiring additional insurance agencies and establishing relationships with additional independent agents in order to expand the Company's distribution network to and market its products and services in other regions of Florida; /bullet/ expanding direct marketing of insurance products to customers through mailings, media advertising and the Internet; /bullet/ maintaining a commitment to provide quality service to its agents and insureds by emphasizing customer service; /bullet/ encouraging agents to place a high volume of quality business with the Company by providing them with attractive commission structures tied to premium levels and loss ratios; identifying and reviewing opportunities to acquire additional insurers; and using the model established in Florida to ultimately expand to other selected states. The Company is continually exploring various acquisition opportunities, but does not currently have any understandings, commitments, arrangements or agreements with respect to any acquisition. BACKGROUND The Company commenced operations in November 1983 when Edward J. Lawson and Michele V. Lawson, the Company's co-founders, opened an independent insurance agency in South Florida to sell private passenger automobile insurance. Through internal growth and acquisitions, the number of Company-owned agencies has expanded to 15, located principally in South Florida. In September 1987, Mr. and Mrs. Lawson organized Federated Premium to offer premium financing services. In January 1992, Federated National was established to underwrite private passenger automobile insurance and enhance operating margins. In October 1994, Assurance MGA was formed to manage underwriting, policy administration, marketing, accounting and financial services and to participate in the negotiation of reinsurance contracts for the Company. Additional corporations were subsequently formed or acquired to handle the Company's insurance claims internally in order to reduce ultimate loss payments, lower LAE and improve customer service, manage the Company's agencies and to provide customers with short-term auto title loans. In January 1997 and January and February 1998, the Company effected the Consolidation in which the Company became the holding company for all of the Company's operating subsidiaries. INSURANCE OPERATIONS UNDERWRITING GENERAL. The Company underwrites its nonstandard and standard personal automobile insurance and mobile home property and casualty insurance through Federated National. Federated National is only licensed to conduct business in Florida. From 1992 when Federated National commenced operations as an insurer, to 1997, gross written premiums grew at a 34% compound annual rate from $4.1 million to $17.7 million. Pursuant to the Consent Order, Federated National's growth is subject to regulatory limits on the amount of premiums it can underwrite. In 1998, Federated National may only underwrite $21.0 million in gross premiums written and $14.0 million in total net premiums written. In 1999, this limit increases to $24.0 million and $15.0 million, respectively, in these business measures. Federated National also is required to maintain a minimum capital surplus to support its underwriting program. In 1998 and 1999, Federated National is required to have capital surplus of $4.7 million and $5.9 million, respectively. The premium limits and capital surplus requirements impact Federated National's potential growth. Federated National's ability to exceed these limitations will be subject to 27 the prior approval of the Florida Department of Insurance. The Florida Department of Insurance has indicated in writing its willingness to modify the Consent Order and increase Federated National's underwriting authority, subject to the completion of this Offering. The Company believes that as a result of the capital generated by this Offering, Federated National will have capital surplus significantly in excess of the required minimum surplus. Accordingly, the Company believes it will be able to substantially increase the amount of premiums Federated National may underwrite. There can be no assurance that the Company will obtain the approval of the Florida Department of Insurance to exceed the underwriting limitations or that it will not be subject to other regulatory limits on the amount of premiums it can underwrite. The following tables set forth the amount and percentages of Federated National's gross premiums written and premiums ceded to reinsurers and net premiums written by line of business for the periods indicated.
SIX MONTHS ENDED JUNE 30, --------------------------------------------------- 1998 1997 ----------------------- ------------------------- PREMIUM PERCENT PREMIUM PERCENT ----------- --------- ----------- ----------- (DOLLARS IN THOUSANDS) Written: Nonstandard Automobile ......... $ 11,043 90.7% $ 8,842 100.0% Mobile Home .................... 1,126 9.3 -- -- -------- ----- -------- ----- Total Written ................. 12,169 100.0% 8,842 100.0% Ceded: Nonstandard Automobile ......... (3,308) 87.7% (2,040) 100.0% Mobile Home .................... (464) 12.3 -- -- -------- ----- -------- ----- Total Ceded ................... (3,772) 100.0% (2,040) 100.0% Net: Nonstandard Automobile ......... 7,735 92.1% 6,802 100.0% Mobile Home .................... 662 7.9 -- -- -------- ----- -------- ----- Total Net ..................... $ 8,397 100.0% $ 6,802 100.0% ======== ===== ======== =====
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 ----------------------- ------------------------- PREMIUM PERCENT PREMIUM PERCENT ----------- --------- ----------- ----------- (DOLLARS IN THOUSANDS) Written: Nonstandard Automobile ......... $ 17,332 98.1% $ 14,851 100.0% Mobile Home .................... 343 1.9 -- -- -------- ----- -------- ----- Total Written ................. 17,675 100.0% 14,851 100.0% Ceded: Nonstandard Automobile ......... (4,536) 97.4% (5,603) 100.0% Mobile Home .................... (123) 2.6 -- -- -------- ----- -------- ----- Total Ceded ................... (4,659) 100.0% (5,603) 100.0% Net: Nonstandard Automobile ......... 12,796 98.3% 9,248 100.0% Mobile Home .................... 220 1.7 -- -- -------- ----- -------- ----- Total Net ..................... $ 13,016 100.0% $ 9,248 100.0% ======== ===== ======== =====
Following completion of this Offering, the Company intends to expand its business by identifying and reviewing opportunities to acquire additional insurers. The Company is continually exploring various acquisition opportunities, but does not currently have any understandings, commitments, arrangements or agreements with respect to any acquisition. 28 NONSTANDARD AUTOMOBILE. Nonstandard personal automobile insurance is principally provided to insureds who are unable to obtain standard insurance coverage because of their payment history, driving record, age, vehicle type or other factors, including market conditions. Underwriting standards for preferred and standard coverage have become more restrictive, thereby requiring more insureds to seek nonstandard coverage and contributing to increase in the size of the nonstandard automobile market. Nonstandard automobile insurance, however, generally involves the potential for increased risk exposure and higher claims experience. Loss exposure is limited because premiums usually are at higher rates than those charged for standard insurance coverage and because approximately 32.0% of the policies issued by Federated National are at the minimum limits required of the policyholder by statute and with no bodily injury coverage. Federated National currently underwrites nonstandard personal automobile insurance in Florida, where the minimum limits are $10,000 per individual and $20,000 per accident for bodily injury and $10,000 per accident for property damage and comprehensive and collision up to $50,000. The average annual premium on policies currently in force is approximately $650. Federated National underwrites this coverage on an annual and semi-annual basis. Due to the purchasing habits of nonstandard automobile insureds (for example, insureds seeking the least expensive insurance required of the policyholder by statute which satisfies the requirements of state laws to register a vehicle), policy renewal rates tend to be low compared to standard policies. Federated National's experience has been that a significant number of existing policyholders allow their policies to lapse and then reapply for insurance as new policyholders. The success of Federated National's nonstandard automobile insurance program, therefore, depends in part on its ability to replace non-renewing insureds with new policyholders through marketing efforts. The Company markets Federated National's nonstandard personal automobile coverage primarily through its network of Company-owned agencies and independent agents. The Company also markets its insurance on a limited basis directly to insureds through direct mail and media advertising. The Company emphasizes customer service to both its agents and insureds by utilizing an integrated computer system which links all of the Company's insurance and service entities. The Company's computer and software systems allow for rapid automated premium quotation, policy issuance, billing and payment and claims processing and enable the Company to monitor all aspects of its business. This system enables the Company's agent's to rapidly access the customer's driving record, quote a premium and, if requested, generate the policy on-site. Following the completion of this Offering, the Company intends to focus its efforts on further penetrating the Florida nonstandard personal automobile insurance market. Ultimately, the Company intends to expand to other selected states. The Company will select states for expansion based on a number of criteria, including the size of the personal automobile insurance market, statewide loss results, competition and the regulatory climate. The Company's ability to expand into other states will be subject to the prior regulatory approval of each state. Certain states impose seasoning requirements upon licensee applicants, which, due to the Company's limited operating history, may impose burdens on the Company's ability to obtain a license to conduct insurance business in those other states. There can be no assurance that the Company will be able to obtain the required licenses, and the failure to do so would limit the Company's ability to expand geographically. STANDARD AUTOMOBILE. Standard personal automobile insurance is principally provided to insureds that present an average risk profile in terms of payment history, driving record, vehicle type and other factors. As part of its expansion strategy, Federated National in August 1998 commenced underwriting standard personal automobile insurance. Limits on standard personal automobile insurance are generally significantly higher than those for nonstandard coverage, but typically provide for deductibles and other restrictive terms. Federated National is initially underwriting standard personal automobile insurance policies at limits no higher than $100,000 per individual and $300,000 per accident for bodily injury and $50,000 per accident for property damage and comprehensive and collision up to $50,000 per accident, with deductibles ranging from $200 to $1,000. The Company is marketing Federated National's standard personal automobile insurance through its network of Company-owned agencies and independent agents. 29 MOBILE HOME. In 1997, Federated National commenced underwriting homeowners insurance for mobile homes, principally in Central and Northern Florida, where the Company believes that the risk of catastrophe loss from hurricanes is less than in other areas of the state. Homeowners insurance generally protects an owner of real or personal property against covered causes of loss to that property. Homeowners insurance for mobile homes generally involves the potential for above-average loss exposure. In the absence of major catastrophe losses, loss exposure is limited because premiums usually are at higher rates than those charged for non-mobile home property and casualty insurance. Additionally, Federated National's property lines typically provide maximum coverage in the amount of $75,000, with the average policy limit being approximately $31,000. In addition, the Company presently intends to limit its mobile home coverage to no more than 10.0% of its underwriting exposure. The average annual premium on policies currently in force is approximately $379 and the typical deductible is $500. As the Company-owned agencies are located primarily in South Florida, the Company markets Federated National's mobile home property and casualty insurance through independent agents in Central and Northern Florida. FUTURE PRODUCTS. The Company intends to expand its product offerings by underwriting additional insurance products and programs and marketing them through its distribution network. Within one year after completion of this Offering, the Company intends to expand its product offerings to include homeowners' insurance and increase its current limited offering of commercial vehicle insurance. There can be no assurance that the Company can successfully underwrite and profitably market and distribute any of these products. Pursuant to the Consent Order, Federated National's growth is subject to regulatory limits on the amount of premiums it can underwrite. In 1998, Federated National only may underwrite $21.0 million in gross premiums written and $14.0 million in total net premiums written. In 1999, Federated National is limited to $24.0 million and $15.0 million, respectively. Federated National also is required to maintain a minimum capital surplus to support its underwriting program. In 1998 and 1999, Federated National is required to have capital surplus of $4.7 million and $5.9 million, respectively. The premium limits and capital surplus requirements impact Federated National's potential growth. Federated National's ability to exceed these limitations will be subject to the prior approval of the Florida Department of Insurance. The Florida Department of Insurance has indicated in writing its willingness to modify the Consent Order and increase Federated National's underwriting authority, subject to the completion of this Offering. The Company believes that as a result of the capital generated by this Offering, Federated National will have significantly in excess of the required minimum capital surplus. Accordingly, the Company believes that it will be able to substantially increase the amount of premiums Federated National may underwrite. There can be no assurance that Federated National will obtain the prior approval of the Florida Department of Insurance to exceed the underwriting limitations or that it will not be subject to other regulatory limits on the amount of premiums it can underwrite. See "Regulation." ASSURANCE MGA Assurance MGA acts as Federated National's managing general agent. Assurance MGA currently provides all underwriting policy administration, marketing, accounting and financial services to Federated National and the Company's agencies and participates in the negotiation of reinsurance contracts. Assurance MGA has established a relationship with and has underwriting authority for Gainsco, Inc. for commercial property and casualty lines and Lloyds of London for various other insurance products. Assurance MGA also generates revenue through policy fee income and other administrative fees from the marketing of these companies' products through the Company's distribution network. Assurance MGA plans to establish relationships with additional carriers and add additional insurance products and products. SUPERIOR The Company internally processes claims made by Federated National's insureds through Superior. The Company-owned agencies and independent agents have no authority to settle claims or otherwise 30 exercise control over the claims process. Management believes that the employment of salaried claims personnel, as opposed to independent adjusters, results in reduced ultimate loss payments, lower LAE and improved customer service. The Company only retains independent appraisers and adjusters on an as needed basis. Claims settlement authority levels are established for each adjuster or manager based on the employee's ability and level of experience. Upon receipt, each claim is reviewed and assigned to an adjuster based on the type and severity of the claim. All claim-related litigation is monitored by Company personnel. The claims policy of the Company emphasizes prompt and fair settlement of meritorious claims and the establishment of appropriate liability for claims. The Company believes that the internal processing of claims enables it to provide quality customer service while controlling claims adjustment expenses. FEDERATED PREMIUM Federated Premium provides premium financing to both Federated National's insureds and to third-party insureds. Premium financing is marketed through the Company's distribution network of Company-owned agencies and independent agents. Lending operations are supported by Federated Premium's own capital base and are currently leveraged through the Credit Facility. Premiums for property and casualty insurance are typically payable at the time a policy is placed in force or renewed. Federated Premium's services allow the insured to pay a portion of the premium when the policy is placed in force and the balance in monthly installments over the life of the policy. As security, Federated Premium retains a contractual right, if a premium installment is not paid when due, to cancel the insurance policy and to receive the unearned premium from the insurer (or in the event of insolvency of an insurer, from the Florida Guarantee Association, subject to a $100 per policy deductible). In the event of cancellation, Federated Premium applies the unearned premium towards the payment obligation of the insured. As part of its premium financing offered to third-party insureds, Federated Premium may advance funds for financed premiums to independent insurance agencies who represent third-party insurers. If remittance is not made by the agency to the third-party insurer, advances made by Federated Premium may only be recoverable to the extent that the agency's receipt of such advances is received by the third-party insurer. Premium financing which the Company offers to its own insureds involves limited credit risk. The following table sets forth the amount and percentages of premiums financed for Federated National and other insurers for the periods indicated:
SIX MONTHS ENDED JUNE 30, ---------------------------------------------- 1998 1997(1) ---------------------- --------------------- PREMIUMS PERCENT PREMIUMS PERCENT ---------- --------- ---------- -------- (DOLLARS IN THOUSANDS) Federated National ......... $ 5,460 62.1% -- -- Other insurers ............. 3,334 37.9 -- -- ------- ----- -- -- Total .................... $ 8,794 100.0% -- -- ======= ===== == ==
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1997 1996 ---------------------- ----------------------- PREMIUMS PERCENT PREMIUMS PERCENT ---------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) Federated National ......... $ 1,972 51.4% $ 3,973 40.2% Other insurers ............. 1,865 48.6 5,908 59.8 ------- ----- ------- ----- Total .................... $ 3,837 100.0% $ 9,881 100.0% ======= ===== ======= =====
- ---------------- (1) In July 1996 the Company ceased all new premium financing because of an unfavorable premium finance funding arrangement. In early 1997, the premium finance funding arrangement was terminated and in September 1997 a new premium finance funding arrangement was established and the Company recommended premium financing activities. 31 AUTO TITLE LOANS AND ANCILLARY SERVICES In 1998, the Company began offering auto title loans which are short-term (30-day) loans secured by free and clear automobile titles. These loans bear interest rates which by law may range from 5.0% to 22.0% per month and, in the Company's case, average 7.0% per month. The criteria for a loan is that the borrower must show proof that he or she is currently employed and has utility (telephone and electricity) accounts. If a borrower qualifies, he or she may obtain a loan for up to 50.0% of the wholesale book value of the automobile. Insurance is required and a lien is taken out on the title for security. The Company offers ancillary automobile services at most of its Company-owned agencies such as the issuance of license tags and renewals. Auto title loan and ancillary services are presently offered exclusively through the 15 Company-owned agencies, although the Company intends to offer these services throughout its entire distribution network in the future. MARKETING AND DISTRIBUTION The Company markets and distributes Federated National's and third-party insurers' products and its other services primarily in South Florida, through a network of 15 Company-owned agencies and approximately 300 active independent agents. The Company's agencies are located in Miami-Dade, Broward and Polk Counties, Florida, and its network of independent agents are located primarily in South Florida. The Company supports its agency network by advertising in various media. Company-employed and independent agents have the authority to sell and bind insurance coverages in accordance with procedures established by Assurance MGA. Assurance MGA reviews all coverages bound by the agents promptly and generally accepts all coverages which fall within stated underwriting criteria. Assurance MGA also has the right within a period of 60 days from a policy's inception to cancel any policy upon 45 days notice, even if the risk falls within its underwriting criteria. The Company believes that it provides its independent agents with attractive commission structures. The Company compensates its agents by paying a commission based on a percentage of premiums produced. The Company also offers its agents a contingent commission based on premium levels and loss ratios, which is intended to encourage the agents to place an increased portion of their profitable business with the Company. The Company believes that its integrated computer system, which allows for rapid automated premium quotation and policy issuance by its agents, is a key element in providing quality service to both its agents and insureds. For example, upon entering a customer's basic personal information, the customer's driving record is accessed and a premium rate is quoted. If the customer chooses to purchase the insurance, the system generates the policy on-site. The Company believes that its distribution system will ultimately enable it to lower its expense ratio and operate with more favorable loss experience. A lower expense ratio will, in turn, allow the Company to more effectively compete with larger providers of nonstandard automobile insurance and other forms of insurance. 32 The following table sets forth the amount and percentages of insurance premiums written through Company-owned agencies and independent agents for the periods indicated:
SIX MONTHS ENDED JUNE 30, ------------------------------------------------ 1998 1997 ---------------------- ----------------------- PREMIUMS PERCENT PREMIUMS PERCENT ---------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) Through Company-owned agencies ......... $ 2,908 23.9% $2,223 25.1% Through independent agents ............. 9,262 76.1 6,619 74.9 ------- ----- ------ ----- Total ................................ $12,170 100.0% $8,842 100.0% ======= ===== ====== =====
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1997 1996 ---------------------- ----------------------- PREMIUMS PERCENT PREMIUMS PERCENT ---------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) Through Company-owned agencies ......... $ 4,518 26.1% $ 4,950 33.3% Through independent agents ............. 13,157 73.9 9,900 67.6 ------- ----- ------- ----- Total ................................ $17,675 100.0% $14,850 100.0% ======= ===== ======= =====
Following completion of this Offering, the Company will seek to expand its distribution network and market its products and services in other regions of Florida by acquiring additional insurance agencies and establishing relationships with additional independent agents. Ultimately, as the Company expands its insurance operation into other states, the Company will seek to replicate its distribution network in those states. There can be no assurance that the Company will be able to obtain the required regulatory approvals to offer additional insurance products or expand into states other than Florida. Moreover, pursuant to the Consent Order, the Company's growth in Florida is currently subject to limits on the amount of premiums it can underwrite. See "Regulation." In addition to its agency network, the Company currently markets its insurance products on a limited basis directly to customers. Such marketing efforts are concentrated in geographic areas of Florida where the Company does not have an extensive network of agents. Following completion of this Offering, the Company intends to expand its direct marketing efforts through additional media and Internet advertising, as well as direct mail promotions. REINSURANCE Federated National follows the customary industry practice of reinsuring a portion of its risks and paying for that protection based upon premiums received on all policies subject to such reinsurance. Reinsurance involves an insurance company transferring or "ceding" all or a portion of its exposure on insurance underwritten by it to another insurer (the "reinsurer"). The reinsurer assumes a portion of the exposure in return for a portion, or quota share, of the premium. The ceding of insurance does not legally discharge the insurer from its primary liability for the full amount of the policies. If the reinsurer fails to meet its obligations under the reinsurance agreement, the ceding company is still required to pay the loss. Reinsurance is ceded under separate contracts or "treaties" for the separate lines of business underwritten. Federated National's reinsurance is primarily ceded with Transatlantic Re, an A++ rated reinsurance company on a 30.0% quota share basis for automobile insurance. Federated National maintains a 40.0% quota share basis for mobile home insurance with A-rated reinsurers including Transatlantic Re. The reinsurance program renews annually, although the Company continually reviews the program and may elect to change it more frequently. Reinsurance is placed directly by the Company and through national reinsurance intermediaries. The Company is selective in choosing a reinsurer and considers numerous factors, the most important of which is the financial stability of the reinsurer, its history of responding to claims and its 33 overall reputation. In an effort to minimize its exposure to the insolvency of a reinsurer, the Company evaluates the acceptability and reviews the financial condition of the reinsurer at least annually. The Company's current policy is to use only reinsurers that have an A.M. Best rating of "A (Excellent)" or better. LIABILITY FOR UNPAID LOSSES AND LAE The Company is directly liable for loss and LAE payments under the terms of the insurance policies that it writes. In many cases, several years may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the Company's payment of that loss. As required by insurance regulations and accounting rules, the Company reflects its liability for the ultimate payment of all incurred losses and LAE by establishing a liability for those unpaid losses and LAE for both reported and unreported claims, which represent estimates of future amounts needed to pay claims and related expenses. When a claim involving a probable loss is reported, the Company establishes a liability for the estimated amount of the Company's ultimate loss and LAE payments. The estimate of the amount of the ultimate loss is based upon such factors as the type of loss, jurisdiction of the occurrence, knowledge of the circumstances surrounding the claim, severity of injury or damage, potential for ultimate exposure, estimate of liability on the part of the insured, past experience with similar claims and the applicable policy provisions. All newly reported claims received with respect to nonstandard personal automobile policies are set up with an initial average liability. The average liability for these claims are determined every quarter by dividing the number of closed claims into the total amount paid during the three month period. If a claim is open more than 30 days, that open case liability is evaluated and the liability is adjusted upward or downward according to the facts and damages of that particular claim. The Company anticipates that it will adopt a similar policy with respect to standard automobile policies. In addition, management provides for a liability on an aggregate basis to provide for IBNR. The Company utilizes independent actuaries to help establish its liability for unpaid losses and LAE. The Company does not discount the liability for unpaid losses and LAE for financial statement purposes. There are no differences in the liability for unpaid losses and LAE established under GAAP and those established under SAP. The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, the Company reviews historical data and considers various factors, including known and anticipated legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates. Among the classes of insurance underwritten by the Company, the automobile and mobile home liability claims historically tend to have longer time lapses between the occurrence of the event, the reporting of the claim to the Company and the final settlement than do automobile physical damage and mobile home property claims. Liability claims often involve parties filing suit and therefore may result in litigation. By comparison, property damage claims tend to be reported in a relatively shorter period of time and settle in a shorter time frame with less occurrence of litigation. There can be no assurance that the Company's liability for unpaid losses and LAE will be adequate to cover actual losses. If the Company's liability for unpaid losses and LAE proves to be inadequate, the Company will be required to increase the liability with a corresponding reduction in the Company's net income in the period in which the deficiency is identified. Future loss experience substantially in excess 34 of established liability for unpaid losses and LAE could have a material adverse effect on the Company's business, results of operations and financial condition. The following table sets forth a reconciliation of beginning and ending liability as shown in the Company's consolidated and combined financial statements for unpaid losses and LAE for the periods indicated.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, --------------------------- ------------------------ 1998 1997 1997 1996 ------------- ----------- ----------- ---------- (DOLLARS IN THOUSANDS) (UNAUDITED) Balance at January 1 ................... $ 6,726 $ 6,234 $ 6,234 $ 4,756 Less reinsurance recoverables ......... (2,091) (1,702) (1,702) (1,068) -------- -------- -------- -------- Net balance at January 1 ............. $ 4,635 $ 4,532 $ 4,532 $ 3,688 ======== ======== ======== ======== Incurred related to: Current year .......................... $ 4,686 $ 3,582 $ 7,612 $ 7,598 Prior years ........................... (5) (311) (198) 62 ---------- -------- -------- -------- Total incurred ....................... $ 4,681 $ 3,271 $ 7,414 $ 7,660 ========= ======== ======== ======== Paid related to: Current year .......................... $ 2,038 $ 1,564 $ 4,359 $ 4,178 Prior years ........................... 1,895 2,267 2,952 2,638 --------- -------- -------- -------- Total paid ........................... $ 3,933 $ 3,831 $ 7,311 $ 6,816 ========= ======== ======== ======== Net balance at period ending ........... $ 5,383 $ 3,972 $ 4,635 $ 4,532 Plus reinsurance recoverables ......... 2,240 1,774 2,091 1,702 --------- -------- -------- -------- Balance at period ending ............. $ 7,623 $ 5,746 $ 6,726 $ 6,234 ========= ======== ======== ========
Based upon consultations with the Company's independent actuarial consultants and their statement of opinion on losses and LAE, the Company believes that the liability for unpaid losses and LAE is adequate to cover all claims and related expenses which may arise from incidents reported and IBNR. The following table presents total unpaid loss and LAE, net and total reinsurance recoverables shown in the Company's consolidated and combined financial statements for the periods indicated.
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, --------------------- --------------------- 1998 1997 1997 1996 --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Loss and LAE, net ........................ $ 3,325 $2,712 $3,383 $3,166 IBNR, net ................................ 2,058 1,260 1,252 1,366 ------- ------ ------ ------ Total unpaid loss and LAE, net ......... $ 5,383 $3,972 $4,635 $4,532 ======= ====== ====== ====== Reinsurance recoverable .................. 1,373 1,176 1,267 1,045 IBNR recoverable ......................... 867 598 824 657 ------- ------ ------ ------ Total reinsurance recoverable .......... $ 2,240 $1,774 $2,091 $1,702 ======= ====== ====== ======
35 The following table presents the liability for unpaid losses and LAE for the Company for the years ended December 31, 1997 and 1996. The top line of the table shows the estimated net liabilities for unpaid losses and LAE at the balance sheet date for each of the periods indicated. These figures represent the estimated amount of unpaid losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The portion of the table labeled "Cumulative paid as of" shows the net cumulative payments for losses and LAE made in succeeding years for losses incurred prior to the balance sheet date. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year.
YEARS ENDED DECEMBER 31, --------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Balance Sheet Liability .................... $ 4,635 $ 4,532 Cumulative paid as of: One year later ............................ -- 2,952 Two years later ........................... -- -- Three years later ......................... -- -- Re-estimated net liability as of: End of year ............................... $ 4,635 $ 4,532 One year later ............................ -- 4,334 Two years later ........................... -- Three years later ......................... -- Cumulative redundancy (deficiency) ......... -- $ 198
The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. A deficiency indicates that the latest estimate of the liability for losses and LAE is higher than the liability that was originally estimated and a redundancy indicates that such estimate is lower. It should be emphasized that the table presents a run-off of balance sheet liability for the periods indicated rather than accident or policy loss development for those periods. Therefore, each amount in the table includes the cumulative effects of changes in liability for all prior periods. Conditions and trends that have affected liabilities in the past may not necessarily occur in the future. 36 Underwriting results of insurance companies are frequently measured by their Combined Ratios. However, investment income, Federal income taxes and other non-underwriting income or expense are not reflected in the Combined Ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are considered profitable when the Combined Ratio is under 100% and unprofitable when the Combined Ratio is over 100%. The following table sets forth Loss Ratios, Expense Ratios and Combined Ratios for the periods indicated for the nonstandard automobile insurance business of the Company. The Ratios shown in the table below are computed based upon GAAP.
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, ------------------- ----------------- 1998 1997 1997 1996 -------- -------- ------ -------- Loss Ratio ............. 77% 73% 68% 79% Expense Ratio .......... 23 32 22 23 -- -- -- -- Combined Ratio ......... 100% 105% 90% 102% === === == ===
INVESTMENTS The Company's investment policy is to maximize total rate of return after Federal income taxes while maintaining liquidity and minimizing risk. The Company's current investment policy limits investment in non-investment grade fixed maturity securities (including high-yield "junk bonds"), and limits total investments in equity securities and mortgage notes receivable to 20.0% and 5.0%, respectively, of total consolidated investments. The Company also complies with applicable laws and regulations which further restrict the type, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in Federal, state and municipal obligations, corporate bonds, preferred and common equity securities and real estate mortgages. The Company's investment policy is established by the Board of Directors and is reviewed on a regular basis. Pursuant to this investment policy as of June 30, 1998, approximately 89.8% of the Company's investments are currently concentrated in investment-grade fixed income securities and short-term investments, which are considered to be either available for sale or held to maturity, based upon the Company's intent at the time of purchase. Fixed maturities are considered available for sale and are marked to market. The Company may in the future also consider fixed maturities held to maturity and carried at amortized cost. The Company does not use any material swaps, options, futures or forward contracts to hedge or enhance its investment portfolio. The Company's investment portfolio is managed by the Company's Investment Committee consisting of the Company's President, the President of Federated National and one outside advisor, in accordance with guidelines established by the Florida Department of Insurance. 37 The table below sets forth investment results for the periods indicated.
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, ---------------------- -------------------- 1998 1997 1997 1996 ---------- --------- ---------- ------- (DOLLARS IN THOUSANDS) Interest on fixed maturities ............... $439 $ 391 $ 817 $ 601 Dividends on equity securities ............. 49 31 147 105 Interest on short-term investments ......... 19 24 38 132 Other ...................................... (1) 7 64 25 ------ ----- ------ ----- Total investment income .................... 506 453 1,066 863 Investment expense ......................... -- -- (19) (13) Net investment income ...................... $506 $ 453 $1,047 $ 850 ===== ===== ====== ===== Net realized gain (losses) ................. $390 $ (34) $ (19) $ 155 ===== ===== ====== =====
The following table summarizes, by type, the investments of the Company as of June 30, 1998.
CARRYING PERCENT OF AMOUNT TOTAL ---------- ----------- (DOLLARS IN THOUSANDS) Fixed maturities, at market: U.S. government agencies and authorities ................. $ 2,013 11.3% Obligations of states and political subdivisions ......... 11,453 64.2 Corporate securities ..................................... 2,083 11.7 Collateralized mortgage obligations ...................... 462 2.6 -------- ---- Total fixed maturities .................................. 16,011 89.8 -------- ---- Equity securities, at market ............................. 1,647 9.2 Mortgage notes receivable ................................ 181 1.0 -------- ---- Total investments ....................................... $ 17,839 100% ======== ====
Fixed maturities are carried on the Company's balance sheet at market. At June 30, 1998, fixed maturities had the following quality ratings (by Moody's Investors Service, Inc. and for securities not assigned a rating by Moody's, by Standard and Poor's Corporation):
CARRYING PERCENT OF AMOUNT TOTAL ---------- ----------- (DOLLARS IN THOUSANDS) AAA .......... $ 4,959 31.0% AA ........... 3,801 23.7 A ............ 2,222 13.9 BBB .......... 5,029 31.4 BB++ ......... -- -- -------- ----- $ 16,011 100.0% ======== =====
38 The following table summarizes, by maturity, the fixed maturities of the Company as of June 30, 1998.
CARRYING PERCENT OF AMOUNT TOTAL ---------- ----------- (DOLLARS IN THOUSANDS) Matures In: One year or less ................. $ 309 1.9% One year to five years ........... 676 4.2 Five years to 10 years ........... 4,499 28.1 More than 10 years ............... 10,527 65.8 -------- ----- Total fixed maturities ......... $ 16,011 100.0% ======== =====
At June 30, 1998, the average maturity of the fixed maturities portfolio was 13 years. COMPETITION The Company operates in a highly competitive market and faces competition from both national regional insurance companies, many of whom are larger and have greater financial resources available than the Company, have favorable A.M. Best ratings and/or offer more diversified insurance coverages. The Company's competitors include other companies which market their products through agents, as well as companies which sell insurance directly to customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and, potentially, reduced policy acquisition costs. The Company may also face competition from new or temporary entrants into its niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below that of the Company. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and superior service to its agents and insureds. The Company competes with respect to automobile insurance in Florida with more than 100 companies which underwrite personal automobile insurance. Companies of comparable or smaller size which compete with the Company in the nonstandard automobile insurance industry include Fortune Insurance Company, U.S. Security Insurance Company, United Automobile Insurance Company, Direct General Insurance Company and Security National, as well as major insurers such as Progressive Casualty Insurance Company. Competition could have a material adverse effect on the Company. REGULATION GENERAL The Company is subject to the laws and regulations in Florida and will be subject to the laws and regulations of any other states in which it seeks to conduct business in the future. The regulations cover all aspects of its business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of shareholders. Such regulations relate to authorized lines of business, capital and surplus requirements, allowable rates and forms (particularly for the nonstandard auto segment), investment parameters, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, market conduct, maximum amount allowable for premium financing service charges, maximum amount of interest allowable for title loans and a variety of other financial and non-financial components of the Company's business. Pursuant to the Consent Order, Federated National's growth is subject to regulatory limits on the amount of premiums it can underwrite. In 1998, Federated National only may underwrite $21.0 million in gross premiums written and $14.0 million in total net premiums written. In 1999, Federated National is limited to $24.0 million and $15.0 million, respectively. Federated National also is required to maintain a minimum capital surplus to support its underwriting program. In 1998 and 1999, Federated National is required to have capital surplus of $4.7 39 million and $5.9 million, respectively. The premium limits and capital surplus requirements impact Federated National's potential growth. Federated National's ability to exceed these limitations will be subject to the prior approval of the Florida Department of Insurance. The Florida Department of Insurance has indicated in writing its willingness to modify the Consent Order and increase Federated National's underwriting authority, subject to the completion of this Offering. The Company believes that as a result of the capital generated by this Offering, Federated National will have significantly in excess of the required minimum capital surplus. Accordingly, the Company believes that it will be able to substantially increase the amount of premiums it can underwrite. There can be no assurance that the Company will obtain the prior approval of the Florida Department of Insurance to exceed the underwriting limitations or that it will not be subject to other regulatory limits on the amount of premiums Federated underwrite. The failure of the Company to comply with certain provisions of applicable insurance laws and regulations could have a material adverse effect on the Company's business, results of operations or financial condition. In addition, any changes in such laws and regulations including the adoption of consumer initiatives regarding rates charged for automobile or other insurance coverage, could materially adversely affect the operations of the Company's, ability to expand its operations. Many states have also enacted laws which restrict an insurer's underwriting discretion, such as the ability to terminate policies, terminate agents or reject insurance coverage applications, and many state regulators have the power to reduce, or to disallow increases in, premium rates. These laws may adversely affect the ability of an insurer to earn a profit on its underwriting operations. Most states have insurance laws requiring that rate schedules and other information be filed with the state's insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers, vary by class of business, hazard covered, and size of risk. The Company is permitted to file rates for nonstandard policies which are usually higher than those charged for standard risks, reflecting the higher probability of loss. Florida and several states have recently adopted laws or their legislatures are considering proposed laws which, among other things, limit the ability of insurance companies to effect rate increases or to cancel, reduce or non-renew insurance coverage with respect to existing policies, particularly private passenger automobile insurance. Most states require licensure or regulatory approval prior to the marketing of new insurance products. Typically, licensure review is comprehensive and includes a review of a company's business plan, solvency, reinsurance, character of its officers and directors, rates, forms and other financial and non-financial aspects of the Company. The regulatory authorities may not allow entry into a new market by withholding approval or not granting a license which, in turn, would have a material adverse effect on the Company's ability to expand its operations. All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. The last regulatory examination of Federated National covered the three-year period ended on December 31, 1995. No material deficiencies were found during this regulatory examination. In some instances, various states routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As of December 31, 1997, securities representing $250,000 or 1.5% of the carrying value of the Company's total investments, were on deposit with the State of Florida. INSURANCE HOLDING COMPANY REGULATION The Company is subject to laws governing insurance holding companies in Florida where Federated National is domiciled. These laws, among other things, (i) require the Company to file periodic information with the Florida Department of Insurance, including information concerning its 40 capital structure, ownership, financial condition and general business operations, (ii) regulate certain transactions between the Company and its affiliates, including the amount of dividends and other distributions and the terms of surplus notes and (iii) restrict the ability of any one person to acquire certain levels of the Company's voting securities without prior regulatory approval. Any purchaser of 5% or more of the outstanding shares of Common Stock of the Company will be presumed to have acquired control of Federated National unless the Florida Insurance Commissioner, upon application, has determined otherwise. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida Department of Insurance if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10.0% of capital surplus or (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department of Insurance (i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer's capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policyholder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the department at least ten business days prior to the dividend payment or distribution and (iv)) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115.0% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department of Insurance or (ii) 30 days after the Florida Department of Insurance has received notice of such dividend or distribution and has not disapproved it within such time. Under these laws, Federated National is not permitted to pay dividends to the Company in 1998 without prior regulatory approval. Although the Company believes that amounts required for it to meet its financial and operating obligations will be available, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida Department of Insurance will allow any dividends to be paid by Federated National in the future. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs. While the non-insurance company subsidiaries are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount which a subsidiary within the holding company system may charge any of the insurance companies for service (e.g., management fees and commissions). In order to enhance the regulation of insurer solvency, the NAIC enacted a model law (the "Model Law") to implement its RBC requirements for insurance companies. The Model Law became effective with respect to property and casualty insurance companies as of year-end 1994. The requirements are 41 designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The Model Law measures three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from investments. Insurers having less statutory surplus than required by the Model Law will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The Model Law establishes various levels of regulatory action. Based upon the 1997 statutory financial statements for Federated National, the Company's insurance subsidiary, Federated National's statutory surplus exceeds all regulatory action levels established by the NAIC. The extent of regulatory intervention and action increases as the ratio of an insurer's statutory surplus to its Authorized Control Level ("ACL"), as calculated under the Model Law, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The Authorized Control Level, the third action level, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. Federated National's ratio of statutory surplus to its ACL, as calculated under the Model Law, was 261.3% at December 31, 1997 and 290.6% at December 31, 1996. Regulatory action is triggered if surplus falls below 200.0% of the ACL amount. The NAIC has also developed IRIS to assist state insurance departments in identifying companies which may be developing performance or solvency problems, as signaled by significant changes in the companies' operations. Such changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling outside "normal ranges", state regulators may investigate to determine the reasons for the variance and whether corrective action is warranted. As of December 31, 1997, the Florida Department of Insurance found that Federated National was outside the usual range with respect to four IRIS tests. Due to not reporting its underwriting results related to the FJUA, Federated National fell outside the usual range with respect to two of the IRIS tests. Federated National's participation in this pool was not reported in its statutory financial statements in 1994 or 1995. The full results since inception of Federated National's FJUA participation were reported in the 1996 underwriting year. If the FJUA results are not considered, Federated National still falls outside the usual range with respect to two IRIS tests. Despite the fact that the Florida Department of Insurance found that Federated National was outside the usual range with respect to the four IRIS tests no regulatory action has been taken to date. The Company's premium financing program is also subject to certain laws governing the operation of premium finance companies. These laws pertain to such matters as books and records that must be kept, forms, licensing, fees and charges. For example, in Florida, the maximum late payment fee Federated Premium may charge is the greater of $10 per month or 5% of the amount of the overdue payment. UNDERWRITING AND MARKETING RESTRICTIONS During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv)) limitations upon or decreases in rates permitted to be charged. 42 LEGISLATION From time to time, new regulations and legislation are proposed to limit damage awards, to control plaintiffs' counsel fees, to bring the industry under regulation by the Federal government, to control premiums, policy terminations and other policy terms and to impose new taxes and assessments. It is not possible to predict whether, in what form or in what jurisdictions, any of these proposals might be adopted, or the effect, if any, on the Company. INDUSTRY RATINGS SERVICES Federated National does not qualify for a letter rating by A.M. Best because of insufficient operating history. Typically, A.M. Best requires a company to have a five-year operating history before issuing ratings. Such period may be extended by management or operational changes such as the Consolidation. Federated National expects to receive an A.M. Best letter rating in 1999. Although Federated National has not yet received a letter rating from A.M. Best, A.M. Best has issued a FPR of "3 out of 9 (below average)" to Federated National. An FPR reflects A.M. Best's opinion of the financial strength and operating performance of property/casualty companies that it reports on, but have not been assigned a letter rating due to, among other factors, insufficient operating history. A.M. Best's ratings are based upon factors of concern to agents, reinsurers and policyholders are not primarily directed toward the protection of investors. Federated National is rated "BBB" (Adequate and Secure) by Standard and Poor's Corporation and is rated "A" (Strong) by Demotech, Inc. EMPLOYEES As of June 30, 1998, the Company and its subsidiaries had 128 employees which included three executive officers. The Company is not a party to any collective bargaining agreement and has not experienced work stoppages or strikes as a result of labor disputes. The Company considers relations with its employees to be satisfactory. FACILITIES In August 1998, the Company consolidated its executive offices and administrative operations into a 14,000 square foot facility built to its specifications in Plantation, Florida. The facility is owned by the Company. Prior to such consolidation, these operations were housed in four locations in the Fort Lauderdale area. See "Certain Transactions." The Company's agencies are located in leased locations pursuant to leases expiring at various times through February 2004. The aggregate annual rental for the facilities is approximately $422,000. See "Certain Transactions." LEGAL PROCEEDINGS The Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these lawsuits will not have a material adverse effect on its business, financial condition or results of operations. The Company provides for a liability for both the amount of estimated damages attributable to these lawsuits and the estimated costs of litigation. 43 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information concerning the directors and executive officers of the Company:
NAME AGE POSITION - ---------------------------------- ----- --------------------------------------------------- Edward J. Lawson(1) .............. 48 President and Chief Executive Officer and Director Michele V. Lawson ................ 40 Vice President--Agency Operations, Treasurer and Director Ronald A. Raymond ................ 53 President, Federated National and Director Patrick D. Doyle(1)(2) ........... 38 Secretary and Director Joseph A. Epstein(1)(2) .......... 43 Director Carla L. Leonard ................. 36 Director Bruce Simberg(2) ................. 50 Director
- ---------------- (1) Member of Compensation Committee. (2) Member of Audit Committee. EDWARD J. LAWSON co-founded the Company and has served as its President and Chief Executive Officer since inception. Mr. Lawson has over 15 years experience in the insurance industry commencing with the founding of the Company's initial insurance agency in 1983. MICHELE V. LAWSON, co-founded the Company and has served as a director and executive officer since inception. Mrs. Lawson is currently the Company's Vice President--Agency Operations, and Treasurer. Mrs. Lawson has 15 years experience in the insurance industry commencing with the founding of the Company's initial insurance agency in 1983 and also holds a property and casualty license in Florida. RONALD A. RAYMOND has served as a director of the Company and as Federated National's President since June 1995. Mr. Raymond has over 25 years insurance experience, most recently as owner and president of Raymond/Patterson Agency, Inc., a managing general agency, since May 1970, and as an owner of Gulfstream Insurance Group, Inc., a multi-lines insurance agency, since May 1992, both in Fort Lauderdale, Florida. Mr. Raymond holds general lines, surplus lines, and life insurance licenses in Florida and is a past President of the Independent Insurance Agents of Broward County. PATRICK D. DOYLE has served as Secretary and a director of the Company since April 1998. Since April 1990, Mr. Doyle has been Chief Financial Officer of Efjohn North America Limited, a lessor and manager of cruise ships. From May 1982 to April 1990, Mr. Doyle was employed by KPMG Peat Marwick LLP, most recently as a Senior Manager focusing on the emerging growth business sector. Mr. Doyle is a certified public accountant. Mr. Doyle is also currently a director of a subsidiary of Silja OY AB, a Finish company. JOSEPH A. EPSTEIN has served as a director of the Company since April 1998. Since January 1998, Mr. Epstein has been the Chief Financial Officer at the Center for English Studies, Inc., a provider of language services. From November 1996 to January 1998, Mr. Epstein was a partner at the accounting firm of Mallah, Furman & Company, P.A. From May 1989 to October 1996, Mr. Epstein was a shareholder of the accounting firm of Rachlin, Cohen & Holtz. CARLA L. LEONARD has served as a director of the Company since its inception. Since September 1983, Ms. Leonard has also owned and operated Statewide Insurance and Auto Tag Agency, Inc., an independent insurance agency. BRUCE SIMBERG has served as a director of the Company since January 28, 1998. Mr. Simberg has been a practicing attorney for the last 22 years, most recently as managing partner of Conroy, Simberg & Ganon, a law firm in Fort Lauderdale, Florida since October 1979. 44 Edward J. Lawson and Michele V. Lawson are husband and wife. There are no other family relationships among the Company's directors and executive officers. The Company's Articles provide that the Board of Directors is divided into three classes and directors serve staggered three-year terms. Joseph A. Epstein and Carla L. Leonard will hold office until the annual meeting of shareholders scheduled to be held in 1999, Bruce Simberg and Patrick Doyle will hold office until the 2000 annual meeting, and Edward J. Lawson, Michele V. Lawson and Ronald A. Raymond will hold office until the 2001 annual meeting. The Company has also agreed, for a three-year period following the effective date of the Registration Statement, to elect one designee of the Representative to the Company's Board of Directors. In the event the Representative does not designate a person for election to the Company's Board of Directors, the Representative is entitled to information and observer rights with respect to meetings of the Company's Board of Directors and executive committees, if any. No designee has been chosen as of the date of this Prospectus. See "Underwriting." Officers of the Company serve at the pleasure of the Board of Directors and until the first meeting of the Board of Directors following the next annual meeting of the Company's shareholders and until their successors have been chosen and qualified. The Company is actively seeking to secure the services of a Chief Financial Officer. DIRECTOR COMPENSATION The Company has historically paid fees to all of its directors. Such fees were paid at the rate of $6,000 per annum during 1996 and 1997 and at rates ranging from $12,000 to $25,000 per annum since January 1, 1998. In addition, directors of Federated National are paid directors fees at the rate of $2,000 per annum. Effective September 1, 1998, the Company will no longer compensate employee directors for their services as directors of either the Company or Federated National. Non-employee directors will receive a fee of $500 per meeting of the Board of Directors or committee thereof attended, and will receive annual grants of stock options under the 1998 Plan to purchase 3,000 shares of Common Stock. All directors will, however, also be reimbursed for travel and lodging expenses in connection with their attendance at meetings. In September 1998, each of Ms. Leonard and Messrs. Doyle, Epstein and Simberg were granted ten-year options under the 1998 Plan to purchase 3,000 shares of Common Stock at an exercise price of $10.00 per share. Such options will vest over a four-year period commencing September 1999. Mr. Doyle has also been granted additional options under the 1998 Plan. See "1998 Stock Option Plan." INDEMNIFICATION AGREEMENTS The Company has entered into an indemnification agreement with each of its directors and executive officers. Each indemnification agreement provides that the Company will indemnify such person against certain liabilities (including settlements) and expenses actually and reasonably incurred by him or her in connection with any threatened or pending legal action, proceeding or investigation (other than actions brought by or in the right of the Company) to which he or she is, or is threatened to be, made a party by reason of his or her status as a director, officer or agent of the Company, provided that such director or executive officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interest of the Company and, with respect to any criminal proceedings, had no reasonable cause to believe his or her conduct was unlawful. With respect to any action brought by or in the right of the Company, a director or executive officer will also be indemnified, to the extent not prohibited by applicable law, against expenses and amounts paid in settlement, and certain liabilities if so determined by a court of competent jurisdiction, actually and reasonably incurred by him or her in connection with such action if he or she acted in good faith and in 45 a manner he or she reasonably believed to be in or not opposed to the best interest of the Company. The Company also intends to secure $3.0 million in directors' and officers' liability insurance, effective upon consummation of this Offering. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning compensation for 1997 received by the Chief Executive Officer (the "CEO") and for the other executive officers whose annual salary and bonus exceeded $100,000 for 1997 (collectively, with the CEO, the "Named Executive Officers").
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------- ------------- SECURITIES ALL OTHER SALARY BONUS UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($) OPTION(#) ($)(1) - ------------------------------- ------------ --------- ------- ------------- ------------- Edward J. Lawson 1997 290,936 -- -- 3,000 President and CEO Michele V. Lawson 1997 192,991 -- -- 2,000 Vice President--Agency Operations and Treasurer Ronald A. Raymond 1997 106,000 -- -- 5,000 President, Federated National
- ---------------- (1) Represents $3,000 in contributions for Mr. Lawson and Mr. Raymond to the Company's 401(k) Plan and $2,000 in directors fees for Ms. Lawson and Mr. Raymond. EMPLOYMENT AGREEMENTS Effective September 1, 1998, the Company entered into employment agreements with each of Edward J. Lawson, the Company's President and Chief Executive Officer and Michele V. Lawson, the Company's Vice President--Agency Operations and Treasurer. Each employment agreement has a "rolling" two-year term, so that at all times the remaining term of the agreement is two years. The employment agreements provide for annual salaries initially set at $156,000 for Mr. Lawson, and $78,000 for Mrs. Lawson, and such bonuses and increases as may be awarded by the Board of Directors. Each employment agreement provides that the executive officer will continue to receive his salary for a period of two years after termination of employment, if his or her employment is terminated by the Company for any reason other than death, disability or Cause (as defined in the employment agreement), or for a period of 24 months after termination of the agreement as a result of his or her disability and a bonus equal to twice the amount paid to the executive officer during the 12 months preceding the termination, and the executive officer's estate will receive a lump sum payment equal to two year's salary plus a bonus equal to twice the amount paid to the executive officer during the 12 months preceding the termination by reason of his death. Each employment agreement also prohibits the executive officer from directly or indirectly competing with the Company for one year after termination for any reason except a termination without Cause. If a Change of Control (as defined in the employment agreement) occurs, the employment agreement provides for the continued employment of the executive officer for a period of two years following the Change of Control. In addition, following the Change of Control, if the executive officer's employment is terminated by the Company other than for Cause or by reason of his death or disability, or by the executive officer for certain specified reasons (such as a reduction of compensation or a diminution of duties), he or she will receive a lump sum cash payment equal to 299% of the cash compensation received by him or her during the 12 calendar months prior to such termination. 46 OPTION GRANTS IN LAST FISCAL YEAR The Company did not grant any options during 1997. 1998 STOCK OPTION PLAN Under the 1998 Plan, as amended, an aggregate of 350,000 shares of Common Stock are reserved for issuance upon exercise of options ("1998 Plan Options"). 1998 Plan Options are designed to serve as incentives for retaining qualified and competent directors, employees, consultants and independent contractors of the Company. The Company's Board of Directors, or a committee thereof, administers and interprets the 1998 Plan and is authorized to grant 1998 Plan Options thereunder to all eligible employees of the Company, including directors (whether or not employees) and executive officers of the Company, as well as consultants and independent contractors hired by the Company. The 1998 Plan provides for the granting of both "incentive stock options" (as defined in Section 422 of the Internal Revenue Code of 1986, as amended) and nonstatutory stock options. Incentive stock options may only be granted, however, to employees. 1998 Plan Options can be granted on such terms and at such prices as determined by the Board, or a committee thereof, except that the per share exercise price of incentive 1998 Plan Options will not be less than the fair market value of the Common Stock on the date of grant and, in the case of an incentive 1998 Plan Option granted to a 10% shareholder, the per share exercise price will not be less than 110% of such fair market value as defined in the 1998 Plan. In accordance with the Internal Revenue Service Code, options granted under the 1998 Plan that would otherwise qualify as incentive stock options will not be treated as incentive stock options to the extent that the aggregate fair market value of the shares covered by the incentive stock options which are exercisable for the first time by any individual during any calendar year exceeds $100,000. 1998 Plan Options will be exercisable after the period or periods specified in the option agreement, provided, however, that incentive 1998 Plan Options vest in three annual installments commencing one year from the date of grant. 1998 Plan Options granted are not exercisable after the expiration of ten years from the date of grant and are not transferable other than by will or by the laws of descent and distribution. Adjustments in the number of shares subject to 1998 Plan Options can be made by the Board of Directors or the appropriate committee in the event of a stock dividend or recapitalization resulting in a stock split-up, combination or exchange of shares. Under the 1998 Plan, options may become immediately exercisable in the event of a change in control or approval by stockholders of the Company of a merger, Consolidation, liquidation, dissolution or disposition of all or substantially all of the assets of the Company. The 1998 Plan also authorizes the Company to make loans to optionees to enable them to exercise their options. As of the date of this Prospectus, the Company has 1998 Plan Options outstanding to purchase an aggregate of 282,400 shares of Common Stock at an exercise price of $10.00 per share, including options to purchase 16,000, 10,000, 10,000 and 10,000 shares outstanding to Mr. Lawson, Mrs. Lawson, Mr. Raymond and Mr. Doyle, respectively. All such options vest over a four-year period commencing one year from the date of grant and expire ten years from the date of grant. Of these options, 169,400 are incentive stock options and 113,000 are non-statutory stock options. 47 CERTAIN TRANSACTIONS SALES AND REDEMPTION OF COMMON STOCK In June 1997, the Company redeemed 33,348 shares of Common Stock held by Carla Leonard for cash consideration of $120,000. In December 1997, the Company sold 33,348 shares of Common Stock to Bruce Simberg in a private transaction for cash consideration of $120,000. THE CONSOLIDATION In January 1997, the Company acquired all of the issued and outstanding capital stock of each of Assurance MGA, Federated Premium and Superior for cash consideration of $65,000, $42,500 and $2,500, respectively. Edward J. Lawson, Michele V. Lawson and Ronald A. Raymond were principal shareholders of Assurance MGA, Federated Premium and Superior. In January 1998, the Company acquired all of the issued and outstanding capital stock of eight affiliated corporations, principally the Company's insurance agencies, in exchange for the issuance of 954,124 shares of Common Stock to eight persons. Included in such shares were 377,481 shares of Common Stock issued to each of Edward J. Lawson and Michele V. Lawson, who were principal shareholders of seven of such corporations and 18,526 shares of common Stock issued to Ronald A. Raymond, who was the principal shareholder of the eighth corporation. In February 1998, the Company acquired all of the issued and outstanding capital stock of one additional insurance agency in exchange for the issuance of 27,792 shares of Common Stock to five persons, including 6,948 shares of Common Stock issued to each of Edward J. Lawson and Michele V. Lawson, who were principal shareholders of the agency. REAL ESTATE TRANSACTIONS In October 1997, the Company sold an office property housing one of its agencies to Edward J. Lawson and Michele V. Lawson for $255,000. In connection with the sale, the Company lent the Lawsons the sum of $200,000. Such loan is evidenced by a promissory note which matures in October 2002, bearing interest at the rate of 8.0% per annum and providing for monthly payments of principal and interest. The outstanding balance of the promissory note at December 31, 1997 was $197,278. The promissory note is secured by a first mortgage lien on the property. The Company leases the property from the Lawsons at a rental of $3,000 per month, pursuant to a lease expiring in May 2001. The Company also leases a second insurance agency location from Edward J. Lawson and Michele V. Lawson at a rental of $3,500 per month pursuant to a lease expiring in May 2001. Prior to the Company's consolidation of its executive offices and administrative operations, the Company leased a location from Ronald A. Raymond at a rental of $2,650 per month and two other locations from Edward J. Lawson and Michele V. Lawson at a rental of $6,500 per month. The Company believes that its arrangements with Edward J. Lawson, Michele V. Lawson and Ronald A. Raymond are on terms at least as favorable as those the Company could secure from a non-affiliated third party. OTHER TRANSACTIONS Bruce F. Simberg, a director of the Company, is a partner of the Fort Lauderdale, Florida law firm of Conroy, Simberg & Ganon, which renders legal services to the Company. The Company has paid legal fees to Conroy, Simberg & Ganon for services rendered. 48 From November 1996 to January 1998, Joseph A. Epstein, a director of the Company, was a partner of the accounting firm of Mallah, Furman & Company, P.A., which rendered accounting services to the Company. The Company has paid accounting fees to Mallah, Furman & Company, P.A. for services rendered. APPROVAL OF AFFILIATED TRANSACTIONS No further transactions between the Company and its executive officers, directors, principal shareholders or their affiliates are currently contemplated. The Company has adopted a policy that any transactions between the Company and its executive officers, directors, principal shareholders or their affiliates take place on an arms-length basis and require the approval of a majority of the independent directors of the Company. 49 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of the date of this Prospectus and as adjusted to reflect the sale of 1,250,000 shares offered hereby the Company (i) each of the shareholders of the Company owning more than 5% of the outstanding shares of Common Stock; (ii) each director of the Company; (iii) each of the Named Executive Officers; and (iv)) all directors and executive officers of the Company as a group:
PERCENTAGE OF CLASS NUMBER OF SHARES ----------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BEFORE OFFERING AFTER OFFERING - ----------------------------------------------- ---------------------- ----------------- --------------- Edward J. Lawson(3) ........................... 1,269,078 60.4% 37.9% Michele V. Lawson(4) .......................... 1,269,078 60.4 37.9 Ronald A. Raymond ............................. 318,659 15.2 9.5 Patrick D. Doyle .............................. -- -- -- Joseph A. Epstein ............................. -- -- -- Carla L. Leonard .............................. 166,740 7.9 5.0 Bruce Simberg ................................. 33,348 1.6 1.0 All directors and executive officers as a group (seven persons) ............................. 1,787,825 85.1% 53.4%
- ---------------- * Less than 1% (1) Except as indicated, the address of each person named in the table is c/o 21st Century Holding Company, 4161 N.W. 5th Street, Plantation, Florida 33317. (2) Except as otherwise indicated, the persons named in this table have sole voting and investment power with respect to all shares of Common Stock listed, which include shares of Common Stock that such persons have the right to acquire a beneficial interest within 60 days from the date of this Prospectus. (3) Includes 634,539 shares of Common Stock held of record by Mrs. Lawson. (4) Includes 634,539 shares of Common Stock held of record by Mr. Lawson. DESCRIPTION OF CAPITAL STOCK After this offering, the authorized capital stock of the Company will consist of (i) 25,000,000 shares of Common Stock, par value $.01 per share, 3,350,000 shares of which will be outstanding and (ii) 1,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), none of which are outstanding. COMMON STOCK Subject to the rights of the holders of any Preferred Stock that may be outstanding, each holder of Common Stock on the applicable record date is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor, and , in the event of liquidation, to share pro rata in any distribution of the Company's assets after payment of providing for the payment of liabilities and the liquidation preference of any outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote for each share held of record on the applicable record date on all matters presented to a vote of shareholders, including the election of director. Holders of Common Stock have no cumulative voting rights or preemptive rights to purchase or subscribe for any stock or other securities, and there are no conversion rights or redemption or sinking fund provisions with respect to such stock. All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, when issued, fully paid and nonassessable. PREFERRED STOCK The Company's Board of Directors has the authority to issue 1,000,000 shares of Preferred Stock in one or more series and to fix, by resolution, conditional, full, limited or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, if any, and the 50 qualifications, limitations or restrictions thereof, if any, including the number of shares in such series (which the Board may increase or decrease as permitted by Florida law), liquidation preferences, dividend rates, conversion or exchange rights, redemption provisions of the shares constituting any series and such other special rights and protective provisions with respect to any class or series as the Board may deem advisable without any further vote or action by the shareholders. Any shares of Preferred Stock so issued would have priority over the Common Stock with respect to dividend or liquidation rights or both and could have voting and other rights of shareholders. The Company has no present plans to issue shares of Preferred Stock. CERTAIN FLORIDA LEGISLATION Florida has enacted legislation that may deter or frustrate takeovers of Florida corporations. The Florida Control Share Act generally provides that shares acquired in a "control share acquisition" will not possess any voting rights unless such voting rights are approved by a majority of the corporation's disinterested shareholders. A "control share acquisition" is an acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding "control shares" of a publicly held Florida corporation. "Control shares" are shares, which, except for the Florida Control Share Act, would have voting power that, when added to all other shares owned by a person or in respect to which such person may exercise or direct the exercise of voting power, would entitle such person, immediately after acquisition of such shares, directly or indirectly, alone or as a part of a group, to exercise or direct the exercise of voting power in the election of directors within any of the following ranges: (i) at least 20% but less than 331/3% of all voting power; (ii) at least 331/3% but less than a majority of all voting power; or (iii) a majority or more of all voting power. The Florida Affiliated Transactions Act generally requires supermajority approval by disinterested shareholders of certain specified transactions between a public corporation and holders of more than 10% of the outstanding voting shares of the corporation (or their affiliates). Florida law and the Company's Articles and Bylaws also authorize the Company to indemnify the Company's directors, officers, employees and agents. In addition, the Company's Articles and Florida law presently limit the personal liability of corporate directors for monetary damages, except where the directors (i) breach their fiduciary duties, and (ii) such breach constitutes or includes certain violations of criminal law, a transaction from which the directors derived an improper personal benefit, certain unlawful distributions or certain other reckless, wanton or willful acts or misconduct. ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE ARTICLES AND BYLAWS Certain provision of Articles and Bylaws of the Company may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt, including attempts that might result in a premium being paid over the market price for the shares held by shareholders. The following provisions may not be amended in the Company's Articles or Bylaws without the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock. CLASSIFIED BOARD OF DIRECTORS. The Articles and Bylaws provide for the Board of Directors to be divided into three classes serving staggered terms. As a result, approximately one-third of the Board of Directors will be elected each year. The Articles and Bylaws also provide that directors may only be removed for cause and only upon the affirmative vote of the holders of at least two-thirds of the outstanding shares of capital stock entitled to vote. These provisions, when coupled with the provision of the Articles and Bylaws authorizing only the Board of Directors to fill vacant directorships or increase the size of the Board, may deter a shareholder from removing incumbent directors and simultaneously gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. SPECIAL MEETINGS OF SHAREHOLDERS; PROHIBITION OF ACTION BY WRITTEN CONSENT. The Articles and Bylaws prohibit the taking of shareholder action by written consent without a meeting and provide that special meetings of shareholders of the Company be called only by a majority of the Board of Directors, the Company's Chief Executive Officer or holders of not less than one-third of the Company's outstanding voting stock. 51 ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The Bylaws provide that shareholders seeking to bring business before an annual meeting of shareholders, or to nominate candidates for election as directors at an annual or special meeting of shareholders, must provide timely notice thereof in writing. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder, to be timely, must be received no later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever is first. The Bylaws also specify certain requirements as to the content and form of a shareholder's notice. These provisions may preclude shareholders from bringing matters before the shareholders at an annual or special meeting or from making nomination for directors at an annual or special meeting. AMENDMENT OF BYLAWS. Except for the provisions identified above requiring a two-thirds vote of the outstanding shares to alter, amend or repeal, the Bylaws may only be altered, amended or repealed by the Board or the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the Company. TRANSFER AGENT The transfer agent for the Common Stock is Continental Stock Transfer & Trust Company, New York, New York. REPORTS TO SHAREHOLDERS The Company intends to furnish registered holders with annual reports containing financial statements audited by its independent accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. 52 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 3,350,000 shares of Common Stock outstanding. Of these shares, 1,250,000 shares of Common Stock sold in this offering will be freely tradeable without restriction under the Securities Act, except for any such shares which may be acquired by an "affiliate" of the Company as that term is defined in Rule 144 under the Securities Act (an "Affiliate"), which shares generally may be sold publicly without registration under the Securities Act only in compliance with Rule 144. In general, under Rule 144 as currently in effect, if a period of at least one year has elapsed since the later of the date the "restricted shares" (as that phrase is defined in Rule 144) were acquired from the Company and the date they were acquired from an Affiliate, then the holder of such restricted shares (including an Affiliate) is entitled to sell a number of shares within any three-month period that does not exceed the greater of 1% of the then outstanding shares of the Common Stock or the average weekly reported volume of trading of the Common Stock on The Nasdaq National Market during the four calendar weeks preceding such sale. The holder may only sell such shares through unsolicited brokers' transactions or directly to market makers. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning the Company. Affiliates may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other requirements but without regard to the one-year holding period. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted shares were acquired from the Company and the date they were acquired from an Affiliate, as applicable, a holder of such restricted shares who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. Shareholders who collectively own all 2,100,000 currently outstanding shares of Common Stock have agreed that they will not directly or indirectly, sell, offer, contract to sell, make a short sale, pledge or otherwise dispose of any shares of Common Stock (or any securities convertible into or exchangeable or exercisable for any other rights to purchase or acquire Common Stock other than shares of Common Stock issuable upon exercise of outstanding options) owned by them, for a period of 13 months after the effective date of this Prospectus, without the prior written consent of the Representative. After the one year period, all of such shares subject to the sale restriction will be eligible for sale in the public market pursuant to Rule 144 under the Securities Act, subject to the volume limitations and other restrictions contained in Rule 144. Prior to this Offering, there has been no market for the Common Stock of the Company. The Company can make no predictions as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Common Stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. 53 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement between the Company and the Representative (the "Underwriting Agreement"), the Underwriters below have severally agreed to purchase from the Company, and the Company has agreed to sell to the several Underwriters, the number shares of Common Stock set forth opposite their names below:
NUMBER NAME OF UNDERWRITER OF SHARES - -------------------------------------------- ---------- Gilford Securities Incorporated ......... Total ................................. 1,250,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligation is such that they are committed to purchase and pay for all of the above shares offered hereby if any are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the offering price set forth on the cover page of this Prospectus, and at such price less a concession not in excess of $ per share to certain securities dealers, of which a concession not in excess of $ per share may be reallowed to certain other securities dealers. After this offering, the public offering price and other selling terms may be changed by the Underwriters. The Underwriters have been granted a 45-day over-allotment option to purchase from the Company up to an aggregate of 187,500 additional shares of Common Stock exercisable at the public offering price less the underwriting discount. If the Underwriters exercise such over-allotment option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares to be purchased by it bears to the total number of shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. Upon consummation of this Offering, the Company has agreed to sell to the Representative, for nominal consideration, the Representative's Warrants to purchase from the Company 125,000 shares of Common Stock. The Representative's Warrants are initially exercisable at a price per share equal to 120.0% of the initial public offering price for a period of four years commencing one year after the date of this Prospectus and are restricted from sale, transfer, assignment or hypothecation for a period of 12 months form the date hereof, except to officers of the Representative. The Representative's Warrants also provide for adjustment in the number of shares of Common Stock issuable upon the exercise thereof as a result of certain subdivisions and combinations of the common Stock. The Representative's Warrants grant to the holders there of certain rights of registration for the securities issuable upon exercise of the Representative's Warrants. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to certain payments that the Underwriters may be required to make in respect thereof. The Company has also agreed to pay the Representative an expense allowance on a non-accountable basis equal to three percent of the gross proceeds of this Offering, of which $50,000 has been paid to date. The Company has also agreed, for a three-year period following the effective date of the Registration Statement of which this Prospectus forms a part, to elect one designee of the Underwriter to the Company's Board of Directors. In the event the Underwriter does not designate a person for 54 election to the Company's Board of Directors, the Underwriter is entitled to information and observer rights with respect to meetings of the Company's Board of Directors and executive committees, if any. No designee has been chosen as of the date of this Prospectus. The holders of all 2,100,000 currently outstanding shares have agreed that for a period of 13 months from the date of this Prospectus they will not offer for sale, sell, or otherwise dispose of the shares of Common Stock beneficially owned by them, without the prior written consent of the Representative. Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock has been determined by negotiations between the Company and the Underwriters and is not necessarily related to the Company's asset value, net worth or other established criteria of value. The factors considered in such negotiations, in addition to prevailing market conditions, included the history of and prospects for the industry in which the Company competes, an assessment of the Company's management, the prospects of the Company, its capital structure and certain other factors as were deemed relevant. In connection with this Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the offering than they are committed to purchase from the Company and in such a case may purchase Common Stock in the open market following completion of the offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 187,500 shares of Common Stock, by exercising the over-allotment option. In addition, the Representative may impose "penalty bids" under contractual arrangements with the Underwriters, whereby it may reclaim from an Underwriter (or dealer participating in the offering) for the account of other Underwriters, the selling concession with respect to Common Stock that is distributed in any offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. In connection with this offering, the Underwriters and selling group members (if any) or their respective affiliates intend to engage in passive market making transactions in the Common Stock of the Company on the Nasdaq National Market in accordance with Regulation M under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), during the two business day period before commencement of offers or sales of the shares of Common Stock offered hereby. The passive market making transactions must be identified as such and comply with applicable volume and price limits. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. LEGAL MATTERS The validity of the Common Stock offered hereby is being passed upon for the Company by Broad and Cassel, a partnership including professional associations, Miami, Florida. Certain legal matters relating to the offering will be passed upon for the Underwriters by Baker & McKenzie, Miami, Florida. EXPERTS The consolidated and combined financial statements of the Company as of December 31, 1997 and for the years ended December 31, 1997 and 1996 are included herein and in the Registration Statement 55 in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission (the "Commission") at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates and may also be obtained from the website that the Commission maintains at http://www.sec.gov. The Company has filed with the Commission a Registration Statement (of which this Prospectus is a part and which term shall encompass any amendments thereto) on Form SB-2 pursuant to the Securities Act with respect to the Common Stock being offered in this offering. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits thereto, certain portions of which are omitted as permitted by the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete; with respect to any such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the mater involved, and each such statement shall be deemed qualified in its entirety by reference to the Registration Statement and to the financial statements, schedules and exhibits filed as a part thereof. 56 GLOSSARY OF SELECTED TERMS CEDE.............................. To transfer to an insurer or reinsurer all or a part of the insurance written by an insurance entity. CEDING COMMISSION................. A payment by a reinsurer to the ceding company, generally on a proportional basis, to compensate the ceding company for its policy acquisition costs. EXPENSE RATIO..................... Under SAP, the ratio of underwriting expenses to net written premiums. On a GAAP basis, the ratio of underwriting expenses (excluding interest expense) to net premiums earned. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP").............. Accounting practices and principles, as defined principally by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, and the Commission. GAAP is the method of accounting typically used by the Company for reporting to persons or entities other than insurance regulatory authorities. GROSS PREMIUMS WRITTEN............ The total of premiums received or to be received for insurance written by an insurer during a specific period of time without any reduction for reinsurance ceded. HARD MARKET....................... The portion of the market cycle of the property and casualty insurance industry characterized by constricted industry capital and underwriting capacity, increasing premium rates and, typically, enhanced underwriting performance. INCURRED BUT NOT REPORTED LOSSES ("INBR").................. The estimated liability of an insurer, at a given point in time, with respect to losses that have been incurred but not yet reported to the insurer, and for potential future developments on reported claims. INSURANCE REGULATORY INFORMATION SYSTEM ("IRIS")...... A system of ratio analysis developed by the NAIC primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies. LOSS ADJUSTMENT EXPENSE ("LAE")... The expenses of investigating and settling claims, including legal fees, outside adjustment expenses and other general expenses of administering the claims adjustment process. 57 LOSS RATIO........................ For SAP and GAAP, net losses and LAE incurred, divided by net premiums earned, expressed as a percentage. LOSS RESERVES..................... The estimated liability of an insurer, at a given point in time, with respect to unpaid incurred losses, including losses which are INBR and related LAE. LOSSES INCURRED................... The total of all policy losses sustained by an insurance company during a period, whether paid or unpaid. Incurred losses include a provision for claims that have occurred but have not yet been reported to the insurer. MODEL LAW......................... A Model Law to implement RBC requirements for insurance companies. The Model Law became effective with respect to property and casualty insurance companies as of year-end 1994. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS ("NAIC")........... A voluntary organization of state insurance officials that promulgates model laws regulating the insurance industry, values securities owned by insurers, develops and modifies insurer financial reporting statements and insurer performance criteria and performs other services with respect to the insurance industry. NET PREMIUMS EARNED............... The amount of net premiums written allocable to the expired period of an insurance policy or policies. NET PREMIUMS WRITTEN.............. The gross premiums written during a specific period of time, less the portion of such premiums ceded to (reinsured by) other insurers. NONSTANDARD....................... Risks that generally have been found unacceptable by standard lines insurers for various underwriting reasons. REINSURANCE....................... A procedure whereby a primary insurer transfers (or "cedes") a portion of its risk to a reinsurer in consideration of a payment of premiums by the primary insurer to the reinsurer for their assumption of such portion of the risk. Reinsurance can be effected by a treaty or individual risk basis. Reinsurance does not legally discharge the primary insurer from its liabilities with respect to its obligations to the insured. REINSURERS........................ Insurers (known as the reinsurer or assuming company) who agree to indemnify another insurer (known as the reinsured or ceding company) against all or part of a loss which the latter may incur under a policy or policies it has issued. 58 RISK-BASED CAPITAL REQUIREMENTS ("RBC")............. Capital requirements for property and casualty insurance companies adopted by the NAIC to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. SOFT MARKET....................... The portion of the market cycle of the property and casualty insurance industry characterized by heightened premium rate competition among insurers, increased underwriting capacity and, typically, depressed underwriting performance. STANDARD AUTOMOBILE INSURANCE..... Personal automobile insurance written for those individuals presenting an average risk profile in terms of loss history, driving record, type of vehicle driven and other factors. STATUTORY ACCOUNTING PRACTICES ("SAP")................ Those accounting principles and practices which provide the framework for the preparation of financial statements, and the recording of transactions, in accordance with the rules and procedures adopted by regulatory authorities, generally emphasizing solvency considerations rather than a going concern concept of accounting. The principal differences between SAP and GAAP are as follows: (a) under SAP, certain assets (non-admitted assets) are eliminated from the balance sheet; (b) under SAP, policy acquisition costs are expensed upon policy inception, while under GAAP they are deferred and amortized over the term of the policies; (c) under SAP, no provision is made for deferred income taxes; and (d) under SAP, certain reserves are recognized which are not recognized under GAAP. UNDERWRITING...................... The process whereby an underwriter reviews applications submitted for insurance coverage and determines whether it will provide all or part of the coverage being requested, and the price of such premiums. Underwriting also includes an ongoing review of existing policies and their pricing. UNDERWRITING EXPENSE.............. The aggregate of policy acquisition costs, including that portion of general and administrative expenses attributable to underwriting operations. UNEARNED PREMIUMS................. The portion of premiums written representing unexpired policy terms as of a certain date. 59 21ST CENTURY HOLDING COMPANY INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
PAGE ----- Report of Independent Certified Public Accountants .................... F-2 Consolidated and Combined Balance Sheets as of June 30, 1998 and December 31, 1997 ............................ F-3 Consolidated and Combined Statements of Income For the six months ended June 30, 1998 and 1997 (unaudited) and for the years ended December 31, 1997 and 1996 ................... F-4 Consolidated and Combined Statements of Changes in Stockholders' Equity For the six months ended June 30, 1998 and 1997 (unaudited) and for the years ended December 31, 1997 and 1996 ................... F-5 Consolidated and Combined Statements of Cash Flows For the six months ended June 30, 1998 and 1997 (unaudited) and for the years ended December 31, 1997 and 1996 ................... F-6 Notes to Consolidated and Combined Financial Statements ............... F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors 21st Century Holding Company: We have audited the accompanying consolidated and combined balance sheet of 21st Century Holding Company (the "Company") as of December 31, 1997, and the related consolidated and combined statements of income, changes in shareholders' equity, and cash flows for the years ended December 31, 1997 and 1996. These consolidated and combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated and combined 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 and combined financial statements referred to above present fairly, in all material respects, the financial position of 21st Century Holding Company as of December 31, 1997 , and the results of their operations and their cash flows for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP August 31, 1998 F-2 21ST CENTURY HOLDING COMPANY CONSOLIDATED AND COMBINED BALANCE SHEETS JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
JUNE 30, DECEMBER 31, 1998 1997 -------------- ------------- (UNAUDITED) ASSETS Available for sale at fair value: Investments Fixed maturities .............................................. $16,010,879 13,267,284 Equity securities ............................................. 1,647,128 2,208,594 Mortgage loan .................................................. 180,562 283,712 ----------- ---------- Total investments .......................................... 17,838,569 15,759,590 ----------- ---------- Cash and cash equivalents ...................................... 1,416,768 1,684,450 Finance contracts receivable, net of allowance for credit losses of $34,390 and $36,980, respectively .......................... 4,942,987 2,343,851 Prepaid reinsurance premiums ................................... 3,099,169 2,217,664 Due from reinsurers ............................................ 1,002,360 1,024,512 Deferred acquisition costs ..................................... 1,110,827 761,472 Deferred income taxes .......................................... 1,016,645 518,322 Other assets ................................................... 2,049,854 890,929 Goodwill ....................................................... 1,405,441 476,006 ----------- ---------- Total assets ............................................... $33,882,620 $25,676,796 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Unpaid losses and loss adjustment expenses ..................... $ 7,623,147 6,726,462 Unearned premiums .............................................. 10,100,136 7,499,742 Premium deposit ................................................ 642,724 1,844,556 Revolving credit outstanding ................................... 3,850,465 1,593,752 Bank overdraft ................................................. 1,519,032 730,289 Unearned commissions ........................................... 604,113 645,594 Accounts payable and accrued expenses .......................... 1,947,519 654,883 Notes payable .................................................. 400,000 552,625 Drafts payable to insurance companies .......................... 304,617 269,160 Due to shareholders ............................................ 26,250 57,250 ----------- ----------- Total liabilities .......................................... 27,018,003 20,574,313 ----------- ----------- Shareholders' equity: Common stock of $0.01 par value. Authorized 25,000,000 shares, issued and outstanding 2,100,000 and 1,042,121 shares, respectively ................................................ 21,000 10,421 Common stock of $1 par value. Authorized, issued and and outstanding 840 shares ...................................... -- 840 Additional paid-in capital .................................... 4,563,445 4,304,758 Accumulated other comprehensive income ........................ (108,655) 124,677 Retained earnings ............................................. 2,388,827 661,787 ----------- ----------- Total shareholders' equity ................................. 6,864,617 5,102,483 Commitments and contingencies .................................. Total liabilities and shareholders' equity ................. $33,882,620 25,676,796 =========== ===========
See accompanying notes to consolidated and combined financial statements. F-3 21ST CENTURY HOLDING COMPANY CONSOLIDATED AND COMBINED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
SIX MONTHS ENDED JUNE 30, DECEMBER 31, -------------------------------- ------------------------------- 1998 1997 1997 1996 -------------- --------------- -------------- -------------- (UNAUDITED) Revenue: Gross premiums written ............................. $ 12,169,337 $ 8,842,004 $ 17,675,375 $ 14,850,484 Gross premiums ceded ............................... (3,772,747) (2,039,621) (4,659,378) (5,602,538) ------------ ------------ ------------ ------------ Net premiums written ............................ 8,396,590 6,802,383 13,015,997 9,247,946 Increase (decrease) in unearned premiums, net of prepaid reinsurance premiums .................... (1,718,888) (1,824,071) (2,091,718) 395,310 ------------ ------------ ------------ ------------ Net premiums earned ............................. 6,677,701 4,978,312 10,924,279 9,643,256 Commission income ................................... 2,185,357 2,103,919 3,328,001 2,935,962 Finance revenue ..................................... 715,927 22,167 220,433 982,438 Net investment income ............................... 505,647 452,517 1,047,348 850,262 Net realized (losses) gains ......................... 389,541 (33,661) (19,395) 154,616 Other income ........................................ 835,173 530,698 1,515,999 1,134,479 ------------ ------------ ------------ ------------ Total revenue ................................... 11,309,346 8,053,952 17,016,665 15,701,013 ------------ ------------ ------------ ------------ Expenses: Losses and loss adjustment expenses ................ 4,681,226 3,271,674 7,414,151 7,660,298 Operating and underwriting expenses ................ 2,105,963 1,483,982 3,306,491 3,512,895 Salaries and wages ................................. 1,626,969 1,572,604 3,148,558 2,553,017 Amortization of deferred acquisition costs ......... 1,009,914 942,832 1,757,540 1,251,188 Amortization of goodwill ........................... 106,279 13,308 38,102 19,294 ------------ ------------ ------------ ------------ Total expenses .................................. 9,530,351 7,284,400 15,664,842 14,996,692 ------------ ------------ ------------ ------------ Income before provision for income tax expense .................................. 1,778,995 769,552 1,351,823 704,321 Provision for income tax expense .................... 667,257 128,558 282,187 78,662 ------------ ------------ ------------ ------------ Net income ...................................... $ 1,111,738 $ 640,994 $ 1,069,636 $ 625,659 ============ ============ ============ ============ Net income per share ............................ $ 0.53 $ 0.31 $ 0.51 $ 0.30 ============ ============ ============ ============ Net income per share-- assuming dilution ............................ $ 0.53 $ 0.31 $ 0.51 $ 0.30 ============ ============ ============ ============ Pro forma information: Historical income before minority interests in net income and income taxes ................... -- 769,552 1,351,283 704,321 Pro forma income tax expense ....................... -- 262,661 466,861 277,231 Pro forma net income ............................... -- 506,891 884,962 427,000 Pro forma net income per share (basic) ............. -- 0.24 0.42 0.20 Pro forma net income per share (diluted) ........... -- 0.24 0.42 0.20 Weighted average shares outstanding (basic) .......................................... -- 2,100,000 2,100,000 2,100,000 Weighted average shares outstanding (diluted) ........................................ -- 2,100,000 2,100,000 2,100,000
See accompanying notes to the consolidated and combined financial statements. F-4 21ST CENTURY HOLDING COMPANY CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' DESCRIPTION STOCK CAPITAL INCOME EARNINGS EQUITY - ------------------------------------------- ------------ -------------- --------------- -------------- -------------- Balance as of December 31, 1995 ........... $ 24,528 $3,961,100 $ (35,242) $ (270,503) $3,679,883 Issuance of stock ........................ 2,402 637,495 -- -- 639,897 Distributions to affiliated corporations' shareholders ............. -- -- -- (680,520) (680,520) Net appreciation on investments, net of tax ............................. -- -- 14,521 -- 14,521 Net income ............................... -- -- -- 625,659 625,659 --------- ---------- ---------- ---------- ---------- Balance as of December 31, 1996 ........... 26,930 4,598,595 (20,721) (325,364) 4,279,440 Capital contributions .................... -- 222,500 -- -- 222,500 Acquisition and consolidation of affiliates previously combined ......... (15,669) (359,399) -- 375,068 -- Distributions to affiliated corporations' shareholders ............. -- -- -- (457,553) (457,553) Distributions to shareholders ............ -- (156,938) -- -- (156,938) Net appreciation on investments, net of tax ............................. -- -- 145,398 -- 145,398 Net income ............................... -- -- -- 1,069,636 1,069,636 --------- ---------- ---------- ---------- ---------- Balance as of December 31, 1997 ........... 11,261 4,304,758 124,677 661,787 5,102,483 Acquisition and consolidation of affiliates previously combined ......... 9,739 358,687 -- 615,302 983,728 Distributions to shareholders ............ -- (100,000) -- -- (100,000) Net appreciation on investments, net of tax ............................. -- -- (233,332) -- (233,332) Net income ............................... -- -- -- 1,111,738 1,111,738 --------- ---------- ---------- ---------- ---------- Balance as of June 30, 1998 (unaudited) .............................. $ 21,000 $4,563,445 $ (108,655) $2,388,827 $6,864,617 ========= ========== ========== ========== ==========
See accompanying notes to consolidated and combined financial statements. F-5 21ST CENTURY HOLDING COMPANY CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
SIX MONTHS ENDED JUNE 30, -------------------------------- 1998 1997 ---------------- --------------- (UNAUDITED) Cash flow from operating activities: Net income ......................................................... $ 1,111,738 $ 640,994 Adjustments to reconcile net income to net cash flow used in operating activities: Amortization of investment premiums .............................. 6,300 -- Depreciation and amortization .................................... 9,926 13,281 Amortization of goodwill ......................................... 106,279 13,308 Deferred income tax expense ...................................... (393,565) (270,434) Loss (gain) on sale of investment securities ..................... (389,541) 33,661 Gain on sale of property and equipment ........................... -- (7,903) Provision for credit losses ...................................... 2,590 (74,346) Changes in operating assets and liabilities: Finance contracts receivables ................................... (2,601,726) 547,022 Prepaid reinsurance premiums .................................... (881,505) 891,964 Due from reinsurers ............................................. 22,152 (750,872) Deferred acquisition costs ...................................... (349,355) (121,437) Other assets .................................................... (453,350) 38,554 Unpaid losses and loss adjustment expenses ...................... 896,685 (487,026) Unearned premiums ............................................... 2,600,394 846,952 Premium deposit ................................................. (1,201,832) 344,030 Revolving credit outstanding .................................... 2,256,713 52,711 Unearned commissions ............................................ (41,481) 9,016 Accounts payable and accrued expenses ........................... 1,292,636 315,037 Drafts payable to insurance companies ........................... 35,457 -- -------------- ------------- Net cash flow provided by operating activities ................. 2,028,515 2,034,512 -------------- ------------- Cash flow from investing activities: Proceeds from sale of investment securities available for sale ..... 28,673,773 5,989,473 Purchases of investment securities available for sale .............. (30,764,738) (7,449,288) Cost of mortgage loan .............................................. -- (155,000) Sale of mortgage loan .............................................. 103,150 147,546 Acquisition of affiliates previously combined ...................... (198,000) (191,357) Purchases of property and equipment ................................ (715,501) (111,894) Proceeds from sale of property and equipment ....................... -- 267,504 -------------- ------------- Net cash flow used in investing activities ..................... (2,901,316) (1,503,016) -------------- ------------- Cash flow from financing activities: Bank overdraft ..................................................... 788,743 517,967 Capital contribution ............................................... -- -- Distributions to shareholders ...................................... -- (456,489) Borrowings from bank ............................................... -- 177,500 Repayment of indebtedness .......................................... (183,625) (616,969) -------------- ------------- Net cash flow (used in) provided by financing activities ....... 605,118 (377,991) -------------- ------------- Net increase in cash and cash equivalents ...................... (267,683) 153,505 Cash and cash equivalents at beginning of year ...................... 1,684,451 1,231,636 -------------- ------------- Cash and cash equivalents at end of year ............................ $ 1,416,768 $ 1,385,141 ============== ============= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest .......................................................... $ 143,224 $ -- ============== ============= Income taxes ...................................................... $ -- $ -- ============== ============= Cash received during the year from: Income taxes ...................................................... $ -- $ -- ============== ============= DECEMBER 31, --------------------------------- 1997 1996 ---------------- ---------------- Cash flow from operating activities: Net income ......................................................... $ 1,069,636 $ 625,659 Adjustments to reconcile net income to net cash flow used in operating activities: Amortization of investment premiums .............................. 1,175 4,750 Depreciation and amortization .................................... 50,935 51,776 Amortization of goodwill ......................................... 38,102 19,294 Deferred income tax expense ...................................... 48,110 78,662 Loss (gain) on sale of investment securities ..................... 19,395 (154,616) Gain on sale of property and equipment ........................... (11,433) (18,747) Provision for credit losses ...................................... 38,362 239,408 Changes in operating assets and liabilities: Finance contracts receivables ................................... (1,792,048) 4,337,341 Prepaid reinsurance premiums .................................... 707,320 (746,739) Due from reinsurers ............................................. (484,134) (542,443) Deferred acquisition costs ...................................... (186,246) (149,802) Other assets .................................................... (319,626) (217,746) Unpaid losses and loss adjustment expenses ...................... 492,502 1,478,249 Unearned premiums ............................................... 1,255,201 1,122,154 Premium deposit ................................................. 901,826 2,576,586 Revolving credit outstanding .................................... 1,593,752 (3,550,594) Unearned commissions ............................................ 37,700 160,396 Accounts payable and accrued expenses ........................... 384,954 (201,090) Drafts payable to insurance companies ........................... 269,160 (1,434,275) -------------- -------------- Net cash flow provided by operating activities ................. 4,114,643 3,678,223 -------------- -------------- Cash flow from investing activities: Proceeds from sale of investment securities available for sale ..... 21,088,211 6,440,189 Purchases of investment securities available for sale .............. (24,469,367) (10,455,079) Cost of mortgage loan .............................................. (200,000) 9,606 Sale of mortgage loan .............................................. 89,421 -- Acquisition of affiliates previously combined ...................... (80,175) (120,000) Purchases of property and equipment ................................ (102,073) (192,151) Proceeds from sale of property and equipment ....................... 314,874 77,603 -------------- -------------- Net cash flow used in investing activities ..................... (3,359,109) (4,239,832) -------------- -------------- Cash flow from financing activities: Bank overdraft ..................................................... 211,477 513,600 Capital contribution ............................................... 222,500 500,000 Distributions to shareholders ...................................... (457,153) (680,520) Borrowings from bank ............................................... 431,000 495,560 Repayment of indebtedness .......................................... (710,146) -- -------------- -------------- Net cash flow (used in) provided by financing activities ....... (302,322) 828,640 -------------- -------------- Net increase in cash and cash equivalents ...................... 453,212 267,031 Cash and cash equivalents at beginning of year ...................... 1,231,638 964,607 -------------- -------------- Cash and cash equivalents at end of year ............................ $ 1,684,850 $ 1,231,638 ============== ============== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest .......................................................... $ 21,758 $ 465,970 ============== ============== Income taxes ...................................................... $ 26,211 $ 66,237 ============== ============== Cash received during the year from: Income taxes ...................................................... $ 61,000 $ -- ============== ==============
See note 2(a) regarding non-cash financing and investing activities. See accompanying notes to consolidated financial statements F-6 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (1) ORGANIZATION AND BUSINESS The accompanying consolidated and combined financial statements include the accounts of 21st Century Holding Company and its wholly owned subsidiaries and those entities which are under common control through common ownership (collectively referred to as the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The Company is a vertically integrated insurance holding company performing all aspects of the insurance underwriting, distribution and claims process. The Company's Federated National Insurance Company ("Federated National") subsidiary underwrites nonstandard and standard personal automobile insurance and mobile home property and casualty insurance in the State of Florida. Through a wholly-owned managing general agent, Assurance Managing General Agents, Inc. ("Assurance MGA"), the Company has underwriting and claims authority for third-party insurance companies. The Company also offers premium financing, auto title loans and other ancillary services to its customers. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) BASIS OF ACCOUNTING In January 1997, the Company acquired all of the issued and outstanding capital stock of Assurance MGA, Federated Premium Finance, Inc. and Superior Adjusting, Inc., the Company's claims processing subsidiary, for cash consideration. Principal shareholders of the Company were also principal shareholders of Assurance MGA, Federated Premium Finance, Inc. and Superior Adjusting, Inc. The Company has accounted for the acquisitions at historical cost in a manner similar to that in pooling of interests accounting due to the entities being under the common control of the owners of 21st Century Holding Company. The cash paid to individuals of the control group for their shares in these entities was recorded as a distribution in the statement of changes in shareholders' equity. In addition, the Company purchased the assets of two independent agencies for cash consideration of $540,000. These transactions were accounted for by the purchase method of accounting, generating goodwill amounting to approximately $533,000. In January 1998, the Company acquired all of the issued and outstanding capital stock of eight affiliated corporations, principally the Company's insurance agencies, in exchange for the issuance of shares of common stocks. The financial statements of these entities have been presented in the combined statements of the Company based on the common control of ownership interest. The minority interest relative to the ownership of the affiliated corporations, whose results are combined prior to their acquisition on January 1, 1998, was accounted for as a component of equity of the Company. This treatment was applied because the minority interest was in a deficit position due to distributions to shareholders in excess of basis and deemed uncollectible from the unaffiliated shareholders. The acquisition of the minority interest in the affiliated corporations was accounted for by the purchase method. The acquisition had an excess of fair value over book basis creating goodwill of approximately $1,035,000 and eliminated the minority interest deficit of approximately $113,000. The acquisition of the net retained deficit of the affiliated corporations which are presented on a combined basis and the elimination of their common stock resulted in the net credit to the equity of the Company of approximately $984,000. The issuance of $100,000 to individuals of the control group for their shares in these entities was recorded as a distribution in the statement of changes in shareholders' equity. F-7 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) (B) CASH AND CASH EQUIVALENTS The Company considers all short-term highly liquid investments with original maturities of three months or less to be cash equivalents. (C) INVESTMENTS AVAILABLE FOR SALE All of the Company's investment securities have been classified as available-for-sale in as much as, all of the Company's securities are available to be sold in response to the Company's liquidity needs, changes in market interest rates and asset-liability management strategies, among other reasons. Investments available-for-sale on the balance sheet are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as a separate component of shareholders' equity, net of related deferred income taxes. A decline in the fair value of an available-for-sale security below cost that is deemed other than temporary results in a charge to income, resulting in the establishment of a new cost basis for the security. All declines in fair values of the Company's investment securities in 1997 and 1996 were deemed to be temporary. Premiums and discounts are amortized or accreted, respectively, over the life of the related fixed maturity security as an adjustment to yield using a method that approximates yield to maturity. Dividends and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific-identification method for determining the cost of securities sold. (D) PREMIUM REVENUE Premium revenue on property and casualty insurance is earned on a pro rata basis over the life of the policies. Unearned premiums represent the portion of the premium related to the unexpired policy terms. (E) DEFERRED ACQUISITION COSTS Deferred acquisition costs represent commissions paid to the Company's agents at the time of policy issuance (to the extent they are recoverable from future premium income) and are amortized over the life of the related policy in relation to the amount of premiums earned. F-8 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) An analysis of deferred acquisition costs follows:
JUNE 30, DECEMBER 31, ------------------------------- --------------------------------- 1998 1997 1997 1996 --------------- ------------- --------------- --------------- (UNAUDITED) Balance, beginning of period ......... $ 761,472 $ 575,226 $ 575,226 $ 425,734 Acquisition costs deferred ........... 1,359,269 1,064,569 1,943,786 1,400,680 Amortized to expense during the period .......................... (1,009,914) (942,832) (1,757,540) (1,251,188) ------------ ---------- ------------ ------------ Balance, end of period ............... $ 1,110,827 $ 696,963 $ 761,472 $ 575,226 ============ ========== ============ ============
(F) PREMIUM DEPOSITS Premium deposits represent premium received on policies not yet written. The Company takes approximately 35 working days to write the policy from the date the cash and policy application are received. (G) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Unpaid losses and loss adjustment expenses are provided for through the establishment of liabilities in amounts estimated to cover incurred losses and loss adjustment expenses. Such liabilities are determined based upon the Company's assessment of claims pending and the development of prior years' loss liability. These amounts include liabilities based upon individual case estimates for reported losses and loss adjustment expenses and estimates of such amounts that are incurred but not reported ("IBNR"). Changes in the estimated liability are charged or credited to operations as the estimates are revised. Unpaid losses and loss adjustment expenses are reported net of estimates for salvage and subrogation recoveries which totaled $338,320, net of reinsurance, at June 30, 1998 and $341,118, net of reinsurance, at December 31, 1997. (H) FINANCE REVENUE Interest and service income, resulting from the financing of insurance premiums, is recognized using a method which approximates the interest method. Late charges are recognized as income when chargeable. (I) CREDIT LOSSES Provisions for credit losses are charged to operations in amounts sufficient to maintain the allowance at a level considered adequate to cover anticipated losses in the existing finance contracts receivables. (J) POLICY FEES Policy fees are non-refundable and are recognized as income when charged and are included in other income. F-9 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) (K) REINSURANCE The Company recognizes the income and expense on reinsurance contracts principally on a pro-rata basis over the life of the policies covered under the reinsurance agreements. The Company is reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company continually monitors its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company only cedes risks to reinsurers whom the Company believes to be financially sound. The Company's reinsurance is primarily ceded to Transatlantic Re, an A++ rated reinsurance company on a quota share basis. At June 30, 1998, all reinsurance recoverables are considered collectible. (L) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Most of the combining affiliates of the Company have elected S corporation status. Accordingly, all income tax liabilities, as long as the S corporation status is effective, are the responsibility of the individual shareholders. Pro forma income taxes represent the total of historical income taxes that would have been reported had the respective entities filed income tax returns as taxable C corporation for each of the years presented. (M) CONTINGENT REINSURANCE COMMISSION The Company's reinsurance contracts provide ceding commissions for premiums written which are subject to adjustment. The amount of ceding commissions is determined by the loss experience for the reinsurance agreement term. The reinsurer provides commissions on a sliding scale with maximum and minimum achievable levels. The reinsurer provides the Company with the provisional commissions. The Company has recognized the commissions based on the current loss experience for the policy year premiums. This results in establishing a contingent liability, included in due from reinsurers, for the excess of provisional commissions retained compared to amounts recognized which is subject to variation until the ultimate loss experience is determinable. (N) CONCENTRATION OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of premiums receivable and amounts due from reinsurers on unpaid losses. The Company has F-10 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) not experienced significant losses related to premiums receivable from individual policyholders or groups of policyholders in a particular industry or geographic area. Management believes no credit risk beyond the amounts provided for collection losses is inherent in the Company's premiums receivable. In order to reduce credit risk for amounts due from reinsurers, the Company seeks to do business with financially sound reinsurance companies and regularly reviews the financial strength of all reinsurers used. (O) DUE FROM FLORIDA JOINT UNDERWRITING ASSOCIATION (THE "ASSOCIATION") PARTICIPATION The amount recorded as a component of other assets represents the Company's proportionate share of the net assets of the Association. The Company's proportionate share of premiums, losses, loss expenses, and other related items is recorded and presented in their respective accounts in the accompanying consolidated and combined financial statements. (P) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted FAS No. 130, "Reporting Comprehensive Income." Comprehensive income presents a measure of all changes in shareholders' equity except for changes resulting from transactions with shareholders in their capacity as shareholders. The Company's total comprehensive income presently consists of net unrealized holding gains (losses) on investments available for sale. Total comprehensive income was $(233,332) and $31,758 for the six months ended June 30, 1998 and 1997, respectively; and $219,648 and $22,002 for the years ended December 31, 1997 and 1996, respectively. The Statement also requires the separate presentation of the accumulated balance of comprehensive income other than net earnings in the consolidated and combined balance sheets. (Q) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, ("SFAS 131"), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 is effective for periods beginning after December 15, 1997. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments, based on how the enterprise defines such segments. The Company will report operating segment information, to the extent such segments are defined, beginning with the year ended December 31, 1998. (R) USE OF ESTIMATES The preparation of the consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported financial statement balances as well as the disclosure of contingent assets and liabilities. Actual results could differ materially from those estimates used. Similar to other property and casualty insurers, the Company's liability for unpaid losses and loss adjustment expenses, although supported by actuarial projections and other data is ultimately based on management's reasoned expectations of future events. Although considerable variability is inherent in these estimates, management believes that this liability is adequate. Estimates are reviewed regularly F-11 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) and adjusted as necessary. Such adjustments are reflected in current operations. In addition, the realization of the Company's deferred income tax assets is dependent on generating sufficient future taxable income. It is reasonably possible that the expectations associated with these accounts could change in the near term and that the effect of such changes could be material to the consolidated and combined financial statements. (S) NATURE OF OPERATION The following is a description of the most significant risks facing the Company and how it mitigates those risks: (I) LEGAL/REGULATORY RISKS--the risk that changes in the regulatory environment in which insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits, restrict underwriting practices and risk classifications, mandate rate reductions and refunds, and new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the financial statements. The Company attempts to mitigate this risk by monitoring proposed regulatory legislation and by assessing the impact of new laws. As the Company writes business only in the state of Florida, it is more exposed to this risk than some of its more geographically balanced competitors. (II) CREDIT RISK--the risk that issuers of securities owned by the Company will default or that other parties, including reinsurers to whom business is ceded, which owe the Company money, will not pay. The Company attempts to minimize this risk by adhering to a conservative investment strategy and by maintaining sound reinsurance agreements with a number of reinsurers, and by providing for any amounts deemed uncollectible. (III) INTEREST RATE RISK--the risk that interest rates will change and cause a decrease in the value of an insurer's investments. To the extent that liabilities come due more quickly than assets mature, an insurer might have to sell assets prior to maturity and potentially recognize a gain or a loss. The Company attempts to mitigate this risk by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. (T) FAIR VALUE The fair value of the Company's investments are estimated based on bid prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on December 31, 1997. Changes in interest rates subsequent to June 30, 1998 may affect the fair value of the Company's investments. The carrying amounts for the following financial instrument categories approximate their fair values at June 30, 1998 and December 31, 1997 because of their short-term nature: cash and cash equivalents, finance contracts receivable, due from reinsurers, prepaid reinsurance premiums, unearned premiums, finance contracts payable and notes payable. F-12 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) The fair value of mortgage loans is estimated using the present value of future cash flows based on the market rate for similar types of loans. Carrying value approximates market value as rates used are commensurate with market rate. (U) GOODWILL Goodwill, representing the excess of cost over the fair value of assets acquired and the cost of a purchased book of business, is amortized on a straight-line basis over seven years. The carrying value of goodwill is periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the related item. Based upon its most recent analysis, the Company believes that no material impairment of goodwill exists at June 30, 1998. (V) 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 outstanding during each year. A reconciliation of the numerators and denominators of the "income per share" and "income per share-assuming dilution" computations for income before cumulative effect of change in accounting method' are presented below:
INCOME SHARE PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ------------- --------------- ---------- For the six months ended June 30, 1998 (unaudited): Income per share ................................. $1,111,738 $2,100,000 $ 0.53 ---------- ---------- ------ Income per share assuming dilution ............... $1,111,738 $2,100,000 $ 0.53 ========== ========== ====== For the six months ended June 30, 1997 (unaudited): Income per share ................................. $ 640,994 $2,100,000 $ 0.31 ---------- ---------- ------ Income per share assuming dilution ............... $ 640,994 $2,100,000 $ 0.31 ========== ========== ====== For the year ended December 31, 1997: Income per share ................................. $1,069,636 $2,100,000 $ 0.51 ---------- ---------- ------ Income per share assuming dilution ............... $1,069,636 $2,100,000 $ 0.51 ========== ========== ====== For the year ended December 31, 1996: ............. Income per share ................................. $ 625,659 $2,100,000 $ 0.30 ---------- ---------- ------ Income per share assuming dilution ............... $ 625,659 $2,100,000 $ 0.30 ========== ========== ======
The weighted average shares outstanding gives effect to a 1.8-for-one, 1.2-for-one and 926.33-for-one stock splits effected in November 1996, January 1997 and September 1998, respectively; and gives effect to the consolidation of the Company effected in January 1997 and January 1998 and February 1998. The Company's par value of $.01 per share remained unchanged. All historical share and per share amounts have been restated to retroactively reflect the stock splits. F-13 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) (W) PRO FORMA NET INCOME Pro forma net income represents the results of operations for the six months ended June 30, 1997 (unaudited) and for the years ended December 31, 1997 and 1996, adjusted to reflect a provision for income tax on historical income before income taxes which gives effect to the change in the affiliated corporation's income tax status to C corporations. (3) INVESTMENTS (A) FIXED MATURITIES AND EQUITY SECURITIES A summary of the amortized cost, estimated fair value, gross unrealized gains and gross unrealized losses of fixed maturities and equity securities at June 30, 1998 (unaudited) and December 31, 1997 is as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ------------- ------------ ------------ ------------- JUNE 30, 1998 (UNAUDITED) Fixed Maturities: U.S. treasury securities and obligations of U.S. government corporations and agencies ......................... $ 2,004,867 $ 9,854 $ 1,523 $ 2,013,198 Mortgage-backed securities ............. 466,774 -- 5,053 461,721 Obligations of states and political subdivisions ......................... 11,548,834 35,984 132,301 11,452,517 Corporate securities ................... 2,070,464 34,842 21,863 2,083,443 ----------- -------- -------- ----------- $16,090,939 $ 80,680 $160,740 $16,010,879 =========== ======== ======== =========== Equity Securities: Preferred stocks ....................... $ 76,750 $ -- $ 1,250 $ 75,500 Common stocks .......................... 1,649,305 -- 77,677 1,571,628 ----------- -------- -------- ----------- $ 1,726,055 $ -- $ 78,927 $ 1,647,128 =========== ======== ======== =========== DECEMBER 31, 1997 Fixed Maturities: U.S. treasury securities and obligations of U.S. government corporations and agencies ......................... $ 7,291,936 $105,335 $ 3,135 $ 7,394,136 Mortgage-backed securities ............. 519,439 -- 3,473 515,966 Obligations of states and political subdivisions ......................... 4,422,736 109,601 -- 4,532,337 Corporate securities ................... 804,420 21,029 604 824,845 ----------- -------- -------- ----------- $13,038,531 $235,965 $ 7,212 $13,267,284 =========== ======== ======== =========== Equity Securities: Preferred stocks ....................... $ 1,089,268 $ 10,613 $ 2,749 $ 1,097,132 Common stocks .......................... 1,159,826 3,706 52,070 1,111,462 ----------- -------- -------- ----------- $ 2,249,094 $ 14,319 $ 54,819 $ 2,208,594 =========== ======== ======== ===========
F-14 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (3) INVESTMENTS--(CONTINUED) A summary of fixed maturities available for sale at June 30, 1998 (unaudited) and December 31, 1997 are shown below by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
JUNE 30, 1998 DECEMBER 31, 1997 ------------------------------ ------------------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE ------------- -------------- -------------- -------------- (UNAUDITED) Due in one year or less ......... $ 311,744 $ 308,879 $ 275,850 $ 275,358 Due after one year through five years ..................... 650,489 676,128 2,200,570 2,229,280 Due after five years through ten years .......................... 4,505,258 4,498,879 5,491,936 5,592,622 Due after ten years ............. 10,623,448 10,526,993 5,070,175 5,170,024 ----------- ----------- ----------- ----------- $16,090,939 $16,010,879 $13,038,531 $13,267,284 =========== =========== =========== ===========
A summary of the sources of net investment income follows:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------- --------------------------- 1998 1997 1997 1996 ----------- ----------- ------------- ----------- (UNAUDITED) Fixed maturities .................. $439,460 $390,652 $ 816,904 $ 601,143 Equity securities ................. 48,661 30,598 146,942 105,348 Cash and cash equivalents ......... 19,376 23,588 38,463 132,309 Other ............................. (1,850) 7,679 63,726 24,387 -------- -------- ---------- --------- Total investment income ......... 505,647 452,517 1,066,035 863,187 Less investment expenses .......... -- -- (18,687) (12,925) -------- -------- ---------- --------- Net investment income ........... $505,647 $452,517 $1,047,348 $ 850,262 ======== ======== ========== =========
Proceeds on sales of fixed maturities and equity securities for the six months ending June 30, 1998 and 1997 (unaudited) are $28,673,773 and $5,984,473, respectively, and for the years ending December 31, 1997 and 1996 are $21,088,211 and $6,440,189, respectively. F-15 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (3) INVESTMENTS--(CONTINUED) Realized gains and increases (decreases) in net unrealized gains (losses) follow:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------------ --------------------------- 1998 1997 1997 1996 -------------- ------------- ------------ ------------ (UNAUDITED) Net realized gains (losses): Fixed maturities ...................... $ 224,563 $ (49,188) $ 18,891 $ 26,831 Equity securities ..................... 164,978 2,793 (33,798) 127,785 Other ................................. -- 12,734 -- -- Cash and cash equivalents ............. -- -- (4,488) -- ---------- --------- --------- -------- Total ............................... $ 389,541 $ (33,661) $ (19,395) $154,616 ========== ========= ========= ======== Change in net unrealized gains (losses): Fixed maturities ...................... $ (194,903) $ 12,884 $ 203,504 $ 29,296 Equity securities ..................... (38,429) 18,874 16,144 (7,294) ---------- --------- --------- -------- Total ............................... $ (233,332) $ 31,758 $ 219,648 $ 22,002 ========== ========= ========= ========
(B) MORTGAGE LOANS The amount represents outstanding balances from related party transactions. Refer to note 11 for details. (4) REINSURANCE The Company reinsures (cedes) a portion of its written premiums on a quota-share basis to nonaffiliated insurance companies in order to limit its loss exposure. The Company also maintains coverages to limit losses from large exposures, which the Company believes are adequate for its current volume. To the extent that reinsuring companies are unable to meet their obligations assumed under the reinsurance agreements, the Company remains primarily liable to its policyholders. F-16 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (4) REINSURANCE--(CONTINUED) The impact of reinsurance on the financial statements is as follows:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------------- -------------------------------- 1998 1997 1997 1996 -------------- --------------- --------------- -------------- (UNAUDITED) Premiums written: Direct .................... $ 12,169,337 $ 8,842,004 $ 17,675,375 $ 14,850,484 Ceded ..................... (3,772,747) (2,039,621) (4,659,378) (5,602,538) ------------ ------------ ------------ ------------ $ 8,396,590 $ 6,802,383 $ 13,015,997 $ 9,247,946 ============ ============ ============ ============ Premiums earned: Direct .................... $ 9,568,942 $ 7,995,051 $ 16,420,172 $ 13,728,328 Ceded ..................... (2,891,241) (3,016,739) (5,495,893) (4,085,072) ------------ ------------ ------------ ------------ $ 6,677,701 $ 4,978,312 $ 10,924,279 $ 9,643,256 ============ ============ ============ ============ Losses and loss adjustment expenses incurred: ......... Direct .................... $ 6,528,741 $ 5,277,437 $ 11,241,218 $ 10,832,411 Ceded ..................... (1,847,515) (2,005,763) (3,827,067) (3,172,113) ------------ ------------ ------------ ------------ $ 4,681,226 $ 3,271,674 $ 7,414,151 $ 7,660,298 ============ ============ ============ ============
AS OF AS OF JUNE 30, DECEMBER 31, 1998 1997 --------------- --------------- (UNAUDITED) Unpaid losses and loss adjustment expenses: Direct .................................. $ 7,623,147 $ 6,726,462 Ceded ................................... (2,239,775) (2,090,998) ------------ ------------ $ 5,383,372 $ 4,635,464 ============ ============ Unearned premiums: Direct .................................. $ 10,100,136 $ 7,499,742 Ceded ................................... (3,099,169) (2,217,664) ------------ ------------ $ 7,000,967 $ 5,282,078 ============ ============
The Company received approximately $1.2 million and $548,000 in commissions on premiums ceded during the six months ended June 30, 1998 and 1997 (unaudited) and approximately $1.4 million and $1.3 million in commissions on premiums ceded during the years ended December 31, 1997 and 1996, respectively. Had all of the Company's reinsurance agreements been canceled at June 30, 1998, the Company would have returned a total of approximately $595,000 in contingent reinsurance commissions to its reinsurers; in turn, its reinsurers would have returned approximately $3.1 million in unearned premiums to the Company. F-17 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (4) REINSURANCE--(CONTINUED) At June 30, 1998 (unaudited) and December 31, 1997, the Company had an unsecured aggregate recoverable for losses paid, unpaid losses and loss adjustment expenses including IBNR and unearned premiums with the following companies:
JUNE 30, DECEMBER 31, 1998 1997 --------------- --------------- (UNAUDITED) Transatlantic Reinsurance Company (A++A.M. Best Rated): Unearned premiums ........................................ $ 2,722,823 $ 2,119,819 Reinsurance recoverable on loss payments ................. 1,177,448 717,569 Unpaid losses and loss adjustment liability .............. 2,239,775 2,090,998 ------------ ------------ 6,140,046 4,928,386 Other: Unearned premium ......................................... 376,346 97,845 ------------ ------------ $ 6,516,392 $ 5,026,231 ============ ============ Amounts due from reinsurers consisted of amounts related to: Unpaid losses and loss adjustment expense ................ $ 2,239,775 $ 2,090,998 Paid losses and loss adjustment expense .................. 1,177,448 717,569 Reinsurance payable ...................................... (1,820,291) (1,114,520) Contingent ceded payable ................................. (594,572) (669,535) ------------ ------------ $ 1,002,360 $ 1,024,512 ============ ============
(5) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The liability for unpaid losses and loss adjustment expenses is determined on an individual-case basis for all incidents reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR. F-18 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (5) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES--(CONTINUED) Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
JUNE 30, DECEMBER 31, --------------------------------- --------------------------------- 1998 1997 1997 1996 --------------- --------------- --------------- --------------- (UNAUDITED) Balance at January 1 ................... $ 6,726,462 $ 6,233,962 $ 6,233,962 $ 4,756,273 Less reinsurance recoverables ......... (2,090,998) (1,701,685) (1,701,685) (1,068,560) ------------ ------------ ------------ ------------ Net balance at January 1 ............ $ 4,635,464 $ 4,532,277 $ 4,532,277 $ 3,687,713 ============ ============ ============ ============ Incurred related to: Current year .......................... $ 4,685,733 $ 3,582,493 $ 7,612,167 $ 7,597,874 Prior years ........................... (4,507) (310,819) (198,016) 62,424 ------------ ------------ ------------ ------------ Total incurred ...................... $ 4,681,226 $ 3,271,674 $ 7,414,151 $ 7,660,298 ============ ============ ============ ============ Paid related to: Current year .......................... $ 2,038,296 $ 1,563,920 $ 4,358,545 $ 4,178,043 Prior years ........................... 1,895,022 2,267,390 2,952,419 2,637,691 ------------ ------------ ------------ ------------ Total paid .......................... $ 3,933,318 $ 3,831,310 $ 7,310,964 $ 6,815,734 ============ ============ ============ ============ Net balance at period ending ........... $ 5,383,372 $ 3,972,641 $ 4,635,464 $ 4,532,277 Plus reinsurance recoverables ......... 2,239,775 1,774,295 2,090,998 1,701,685 ------------ ------------ ------------ ------------ Balance at period ending ............ $ 7,623,147 $ 5,746,936 $ 6,726,462 $ 6,233,962 ============ ============ ============ ============
Based upon consultations with the Company's independent actuarial consultants and their statement of opinion on losses and loss adjustment expenses, the Company believes that the liability for unpaid losses and loss adjustment expenses is adequate to cover all claims and related expenses which may arise from incidents reported. (6) NOTES PAYABLE The following is a summary of outstanding debt at June 30, 1998 (unaudited) and for the year ended December 31, 1997:
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------- (UNAUDITED) Notes payable: Line of credit, expiration date December 30, 1998, interest only at 1.25% over bank's variable base rate is due monthly (bank's base rate at December 31, 1997 was 10%). Line is collateralized by all assets of 21st Century Holding Company .................... $400,000 $400,000 Bank loan, principal and interest due February 1998, interest at 18.00%. Note is collateralized by finance contracts receivables of Federated Premium Finance, Inc. .................................. -- 152,625 -------- -------- $400,000 $552,625 ======== ========
F-19 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (7) REVOLVING CREDIT OUTSTANDING On September 24, 1997, the Company, through Federated Premium Finance, Inc. entered into a revolving loan agreement ("Revolving Agreement") with Flaitron Funding Company LLC. Under the Revolving Agreement, the Company can borrow up to the maximum credit commitment of $4 million. The amount of an advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on the loan is the prime rate plus 1.75 percent which amounted to 10.25 percent at June 30, 1998 (unaudited) and December 31, 1997. The Revolving Agreement contains various operating and financial covenants and is collateralized by a first lien and assignment of all of the Company's assigned finance contracts receivables. The Revolving Agreement expires on September 30, 2000. The balance of this account as of June 30, 1998 (unaudited) and December 31, 1997 amounted to $3,850,465 and $1,593,752, respectively, and interest expense for the six months ended June 30, 1998 (unaudited) and for the year ended December 31, 1997 totaled $126,113 and $12,702, respectively. At June 30, 1998 (unaudited) and December 31, 1997, the Company is in compliance with all revolving loan agreement covenants. (8) INCOME TAXES A summary of the provision (benefit) for income tax expense for the six months ended June 30, 1998 and 1997 (unaudited) and for the years ended December 31, 1997 and 1996 is as follows:
JUNE 30, DECEMBER 31, ----------------------------- ----------------------- 1998 1997 1997 1996 ------------- ------------- ----------- --------- (UNAUDITED) Federal: Current .......... $ 900,975 $ 340,675 $195,623 $ -- Deferred ......... (355,600) (230,907) 42,422 70,945 ---------- ---------- -------- ------- 545,375 109,768 238,045 70,945 ---------- ---------- -------- ------- State: Current .......... 159,847 58,317 38,454 -- Deferred ......... (37,965) (39,527) 5,688 7,717 ---------- ---------- -------- ------- 121,882 18,790 44,142 7,717 ---------- ---------- -------- ------- $ 667,257 $ 128,558 $282,187 $78,662 ========== ========== ======== =======
F-20 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (8) INCOME TAXES--(CONTINUED) The actual income tax expense differs from the "expected" income tax expense for the six months ended June 30, 1998 and 1997 (unaudited) and years ended December 31, 1997 and 1996 (computed by applying U.S. federal tax rate of 34 percent to income before provision for income tax expense) as follows:
JUNE 30, DECEMBER 31, --------------------------- ---------------------------- 1998 1997 1997 1996 ----------- ------------- ------------- ------------ (UNAUDITED) Computed "expected" tax expense, at federal rate ........................ $ 580,744 $ 238,574 $ 454,929 $ 236,884 Effect of S corporation income .......... -- (134,103) (184,674) (198,569) State tax expense ....................... 62,003 25,471 32,260 7,796 Tax-free interest ....................... (44,951) -- (40,000) -- Goodwill ................................ 66,681 -- 10,035 -- Other, net .............................. 2,780 (1,384) 9,637 32,551 --------- ---------- ---------- ---------- Income tax expense, as reported ......... $ 667,257 $ 128,558 $ 282,187 $ 78,662 ========= ========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax assets and liabilities as of June 30, 1998 (unaudited) and December 31, 1997 are as follows:
JUNE 30, DECEMBER 31, 1998 1997 ------------- ------------- (UNAUDITED) Deferred tax assets: Unpaid losses and loss adjustment expenses ................ $ 222,834 $191,876 Unearned premiums ......................................... 760,136 397,529 Unrealized loss on investments available for sale ......... 33,675 -- ---------- -------- Total gross deferred tax assets ......................... 1,016,645 589,405 Less valuation allowance ................................ -- -- ---------- -------- Net deferred tax assets ................................. 1,016,645 589,405 ---------- -------- Deferred tax liabilities: Unrealized gain on investments available for sale ......... -- 71,083 ---------- -------- Total gross deferred tax liabilities .................... -- 71,083 ---------- -------- Net deferred tax asset .................................. $1,016,645 $518,322 ========== ========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At June 30, 1998 (unaudited) and December 31, 1997, based upon the level of historical F-21 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (8) INCOME TAXES--(CONTINUED) taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. (9) REGULATORY REQUIREMENTS AND RESTRICTIONS To retain its certificate of authority, the Florida Insurance Code (the "Code") requires that Federated National maintain capital and surplus equal to the greater of 10 percent of its liabilities or the 1997 statutory minimum capital and surplus requirement of $2,100,000 as defined in the Code or $2,100,000. The Company is also required to adhere to prescribed premium-to-surplus ratios. The Company is in compliance with these requirements as of December 31, 1997. As of December 31, 1997, to meet regulatory requirements, the Company had fixed maturities with a par value of $250,000 pledged to the Insurance Commissioner of the State of Florida (the "Commissioner"). Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida Department of Insurance if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10 percent of capital surplus (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10 percent of capital surplus with dividends payable constrained to unassigned funds minus 25 percent of unrealized capital gains of (iii) the lesser of (a) 10 percent of capital surplus or (b) net investment income plus a three-year carryfoward with dividends payable constrained to unassigned funds minus 25 percent of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department of Insurance (i) if the dividend is equal to or less than the greater of (a) 10 percent of the insurer's capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policyholder capital surplus equal to or exceeding 115 percent of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the department at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115 percent of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department of Insurance of (ii) 30 days after the Florida Department of Insurance has received notice of such dividend or distribution and has not disapproved it within such time. No dividends were declared or paid in 1997. Under these laws, Federated National is not permitted to pay dividends to the Company in 1998 without prior regulatory approval. Although the Company believes that amounts required for it to meet its financial and operating obligations will be available, there can be no assurance in this regard. Further, there can be no assurance that, if requested, that the Florida Department of Insurance will allow any dividends to be paid by Federated National. The Company is required to comply with NAIC risk-based capital ("RBC") requirements. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its F-22 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (9) REGULATORY REQUIREMENTS AND RESTRICTIONS--(CONTINUED) overall business operations in light of its size and risk profile. NAIC RBC standards are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of June 30, 1998, based on calculations using the appropriate NAIC formula, The Company's total adjusted capital is in excess of ratios which would require any form of regulatory action. Pursuant to a Consent Order issued in conjunction with the Company's authorization to underwrite mobile home insurance (the "Consent Order"), the Company's growth is subject to regulatory limits on the amount of premiums it can underwrite. In 1998, Federated National may only underwrite $21 million in direct written premiums and $14 million in total net written premiums. In 1999, Federated National is limited to $24 million and $15 million, respectively. Federated National also is required to maintain a minimum capital surplus to support its underwriting program. In 1998 and 1999, Federated National is required to have capital surplus of $4.7 million and $5.9 million, respectively. The premium limits and capital surplus requirements impact Federated National's potential growth. Federated National's ability to exceed these limitations will be subject to the prior approval of the Florida Department of Insurance. Although correspondence from the Department of Insurance has indicated it is agreeable to modifications of the Current Consent Order due to the improved financial condition of the Company., there can be no assurance that Federated National will be able to obtain the required regulatory approvals, and the failure to do so could have a material adverse effect on the Company's business, results of operations or financial condition. Generally accepted accounting principles differ in some respects from reporting practices prescribed or permitted by the Department of Insurance of the State of Florida. Federated National's statutory capital and surplus was $4,708,291 and $4,112,265 as of June 30, 1998 and December 31, 1997, respectively. The Company's statutory net income was $700,783 and $493,089 for the six months ended June 30, 1998 and for the year ended December 31, 1997, respectively. (10) COMMITMENTS AND CONTINGENCIES The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. In October 1996, the Company purchased land in Plantation, Florida to construct facilities to accommodate executive offices and administration. In August 1998, the facility was completed and the Company consolidated its executive offices and administrative operations in the facility, which consists of approximately 14,000 square feet of space. The cost of the project is estimated at $1.5 million and approximately $223,000 has been paid as of December 31, 1997 and approximately $925,000 has been paid as of June 30, 1998. (11) RELATED PARTY TRANSACTIONS In October 1997, the Company sold an office property to a group of officers and shareholders. The sale price of the property was $255,000 which generated a profit of approximately $13,000. In F-23 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND 1996 (11) RELATED PARTY TRANSACTIONS--(CONTINUED) connection with the sale, the Company provided seller-financing in an amount of $200,000. The note bears interest at 8.00 percent per annum with monthly payments of principal and interest. The note matures on October 31, 2002. The outstanding principal balance of the note at June 30, 1998 and December 31, 1997 was $180,561 and $197,278, respectively. The Company also leases a second insurance agency location from principal shareholders at a rental of $3,500 per month pursuant to a lease expiring in May 2001. Prior to the Company's consolidation of its executive offices and administrative operations, the Company leased two locations at a rental of $9,150 per month from principle shareholders. The Company believes these arrangements are on terms at least as favorable as those the Company could secure from a nonaffiliated third party. (12) SUBSEQUENT EVENTS (UNAUDITED) In January and February 1998, the Company acquired certain insurance agencies and other affiliated companies as mentioned in 2(a). The Company intends to conduct an initial public offering by filing a registration statement on Form SB-2 for 1,250,000 shares of common stock, par value $.01 per share. Concurrently, the Company intends to adopt a stock option plan reserving 350,000 shares of common stock. The Company's Board of Directors now has the authority to issue 1,000,000 shares of preferred stock with any terms as the Board may deem advisable. F-24 ================================================================================ NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR SINCE THE DATES AS OF WHICH INFORMATION IS SET FORTH HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. ----------------------------------- TABLE OF CONTENTS
PAGE ----- Prospectus Summary ....................... Risk Factors ............................. Use of Proceeds .......................... Dividend Policy .......................... Dilution ................................. Capitalization ........................... Selected Consolidated and Combined Financial Data ........................ Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... Business ................................. Management ............................... Certain Transactions ..................... Principal Shareholders ................... Shares Eligible for Future Sale .......... Underwriting ............................. Legal Matters ............................ Experts .................................. Available Information .................... Glossary of Selected Terms ...............
----------------------------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ================================================================================ ================================================================================ 1,250,000 SHARES [COMPANY LOGO] COMMON STOCK ----------------------------------- PROSPECTUS ----------------------------------- GILFORD SECURITIES INCORPORATED , 1998 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant has authority under Section 607.0850 of the Florida Business Corporations Act to indemnify its directors and officers to the extent provided for in such statute. The Registrant's Amended and Restated Articles of Incorporation and Bylaws provide that the Registrant may insure, shall indemnify and shall advance expenses on behalf of its officers and directors to the fullest extent not prohibited by law. The Company is also a party to indemnification agreements with each of its directors and officers. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Registrant estimates that expenses payable by the Registrant in connection with the offering described in this registration statement (other than underwriting discounts and commissions) will be as follows: Securities and Exchange Commission Registration fee ......... $ 3,747 NASD filing fee ............................................. 1,770 Nasdaq listing fee .......................................... 41,750 Printing and engraving expenses ............................. * Accounting fees and expenses ................................ * Legal fees and expenses ..................................... * Blue Sky fees and expenses .................................. 7,500 Transfer Agent's fees and expenses .......................... * Miscellaneous ............................................... * ------- Total ....................................................... $ *
- ---------------- * To be filed by amendment All amounts except the Securities and Exchange Commission registration fee, the NASD filing fee, and the Nasdaq listing fee are estimated. ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES. The following sets forth the Registrant's sale of its securities within the last three years, which securities were not registered under the Securities Act of 1933, as amended: 1. In November 1996, the Company sold 111,160 shares of Common Stock to four individuals in a private transaction for cash consideration of $500,000. 2. In December 1997, the Company sold 33,348 shares of Common Stock to Bruce Simberg in a private transaction for cash consideration of $120,000. 3. In January 1998, the Company acquired all of the issued and outstanding capital stock of eight affiliated corporations, principally the Company's insurance agencies, in exchange for the issuance of 954,124 shares of Common Stock to eight persons. Included in such shares were 377,481 shares of Common Stock issued to each of Edward J. Lawson and Michele V. Lawson, who were principal shareholders of seven of such corporations and 18,526 shares of Common Stock issued to Ronald A. Raymond, who was the principal shareholder of the eighth corporation. 4. In February 1998, the Company acquired all of the issued and outstanding capital stock of an affiliated insurance agency in exchange for the issuance of 27,792 shares of Common Stock, II-1 including 6,948 shares of Common Stock issued to each of Edward J. Lawson and Michele V. Lawson, who were principal shareholders of the agency. 5. In April 1998, the Company acquired all of the issued and outstanding capital stock of a non-affiliated insurance agency in exchange for the issuance of 6,484 shares of Common Stock to one person. 6. In February 1998, the Company sold 38,906 shares of Common Stock to one person in a private transaction. The above securities were also issued without registration under the Securities Act, by reason of the exemption from registration afforded by the provisions of section 4(2) thereof, as transactions by an issuer not involving a public offering. All information in this Item with respect to shares of Common Stock has been adjusted to give effect to the 1.8-for-one, 1.2-for-one, and 926.33-for-one stock splits implemented in November 1996, January 1997 and September 1998, respectively. ITEM 27. EXHIBITS. (A) EXHIBITS
EXHIBIT DESCRIPTION - --------- -------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 3.1 Form of Registrant's Amended and Restated Articles of Incorporation 3.2 Form of Registrant's Amended and Restated Bylaws 4.1 Specimen of Common Stock Certificate(1) 4.2 Representative's Warrant Agreement including form of Representative's Warrant(1) 5.1 Opinion of Broad and Cassel(1) 10.1 Form of Stock Option Plan* 10.2 Employment Agreement between the Registrant and Edward J. Lawson* 10.3 Employment Agreement between the Registrant and Michele V. Lawson* 10.4 Form of Indemnification Agreement between the Registrant and its directors and executive officers* 10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding Company, LLC and FPF, Inc.(1) 10.6 Sale and Assignment Agreement between Federated Premium and FPF, Inc.(1) 21.1 Subsidiaries of the Registrant 23.1 Consent of Broad and Cassel (included in its opinion filed as Exhibit 5.1(1) 23.2 Consent of KPMG Peat Marwick LLP 25.1 Power of Attorney (included on the signature page of the Registration Statement)
- ---------------- * Management Compensation Plan or Arrangement (1) To be filed by amendment. ITEM 28. UNDERTAKINGS. B. The Registrant hereby undertakes: (1) To file during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or II-2 together, represent a fundamental change in the information set forth in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time will be the initial bona fide offer. (3) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (4) To provide to the Underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other that the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (6) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon rule 430A and contained in a form of prospectus filed by the registrant pursuant to rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (7) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registrant Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Plantation, State of Florida, on September 17, 1998. 21ST CENTURY HOLDING COMPANY By /s/ Edward J. Lawson ------------------------------------- Edward J. Lawson, Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Edward J. Lawson and Michele V. Lawson, or any one of them, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him or her and in his or her name, place and stead in any and all capacities to execute in the name of each such person who is then an officer or director of the Registrant any and all amendments (including post-effective amendments) to this Registration Statement, and any registration statement relating to the offering hereunder pursuant to Rule 462 under the Securities Act of 1933, as amended, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing required or necessary to be done in and about the premises as fully as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE - ----------------------------- ------------------------------- ------------------- /s/ Edward J. Lawson Chairman of the Board September 17, 1998 - ----------------------------- President, Chief Executive Edward J. Lawson Officer (principal executive, financial and accounting officer) /s/ Michele V. Lawson Vice President-Agency September 17, 1998 - ----------------------------- Operations, Treasurer and Michele V. Lawson Director /s/ Ronald A. Raymond President, Federated National September 17, 1998 - ----------------------------- and Director Ronald A. Raymond /s/ Patrick Doyle Director September 17, 1998 - ----------------------------- Patrich Coyle /s/ Joseph A. Epstein Director September 17, 1998 - ----------------------------- Joseph A. Epstein /s/ Carla L. Leonard Director September 17, 1998 - ----------------------------- Carla L. Leonard /s/ Bruce Simberg Director September 17, 1998 - ----------------------------- Bruce Simberg
II-4 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- ------------------------------------------------------------------------------- ------------- 1.1 Form of Underwriting Agreement 3.1 Form of Registrant's Amended and Restated Articles of Incorporation 3.2 Form of Registrant's Amended and Restated Bylaws 10.1 Form of Stock Option Plan 10.2 Employment Agreement between the Registrant and Edward J. Lawson 10.3 Employment Agreement between the Registrant and Michele V. Lawson 10.4 Form of Indemnification Agreement between the Registrant and its directors and executive officers 21.1 Subsidiaries of the Registrant 23.2 Consent of KPMG Peat Marwick LLP
EX-1.1 2 EXHIBIT 1.1 1,250,000 SHARES OF COMMON STOCK 21ST CENTURY HOLDING COMPANY UNDERWRITING AGREEMENT New York, New York _____________, 1998 Gilford Securities Incorporated As Representative of the Several Underwriters listed on Schedule A hereto 850 Third Avenue New York, New York 10022 Ladies and Gentlemen: 21st Century Holding Company, a Florida corporation (the "Company") confirms its agreement with Gilford Securities Incorporated ("Gilford") and each of the several underwriters named in Schedule A hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 11) for whom Gilford is acting as representative (in such capacity, Gilford shall hereinafter be referred to as "you" or the "Representative"), with respect to the sale by the Company and the purchase by the Representative of 1,250,000 shares of the Company's common stock, $.01 par value per share ("Common Stock"). Such shares of Common Stock are hereinafter referred to as the "Firm Shares." Upon the Representative's request, as provided in Section 2(b) of this Agreement, the Company shall also sell to the Underwriters up to an additional 187,500 shares of Common Stock for the purpose of covering over-allotments, if any (the "Option Shares"). The Firm Shares and the Option Shares are sometimes hereinafter referred to as the "Shares." The Company also proposes to issue and sell to the Representative warrants (the "Representative's Warrants") pursuant to the Representative's Warrant Agreement (the "Representative's Warrant Agreement") for the purchase of an additional 125,000 shares of Common Stock. The shares of Common Stock issuable upon exercise of the Representative's Warrants are hereinafter referred to as the "Representative's Shares." The Firm Shares, the Option Shares, the Representative's Warrants and the Representative's Shares (collectively, hereinafter referred to as the "Securities") are more fully described in the Registration Statement and the Prospectus referred to below. 1. REPRESENTATIONS AND WARRANTIES. (a) The Company represents and warrants to, and agrees with, the Representative as of the date hereof, and as of the Closing Date (hereinafter defined) and the Option Closing Date (hereinafter defined), if any, as follows: (i) The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement, and an amendment or amendments thereto, on Form SB-2 (No. 333-_____), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Firm Shares and the Option Shares under the Securities Act of 1933, as amended (the "Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the rules and regulations (the "Regulations") of the Commission under the Act. The Company will promptly file a further amendment to said registration statement in the form heretofore delivered to the Representative and will not file any other amendment thereto to which the Representative shall have objected in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein (including, but not limited to those documents or information incorporated by reference therein) and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration Statement," and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the "Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and regulations adopted by the Commission under either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable. (ii) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus, the Registration Statement or the Prospectus or any part of any thereof and no proceedings for a stop order suspending the effectiveness of the Registration Statement or any of the Company's securities have been instituted or are pending or to the Company's knowledge, threatened. Each of the Preliminary Prospectus, Registration Statement and Prospectus at the time of filing thereof conformed with the requirements of the Act and the Rules and Regulations, and none of the Preliminary Prospectus, Registration Statement or Prospectus at the time of filing thereof contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein and necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements made in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of the Underwriters expressly for use in such Preliminary Prospectus, Registration Statement or Prospectus. (iii) When the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Date and each Option Closing Date, if any, 2 and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, the Registration Statement and the Prospectus will contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations, and will conform to the requirements of the Act and the Rules and Regulations; neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of any Underwriters expressly for use in the Preliminary Prospectus, Registration Statement or Prospectus or any amendment thereof or supplement thereto. (iv) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the state of its incorporation. The Company does not own an interest in any corporation, partnership, trust, joint venture or other business entity. The Company is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing. The Company has all requisite corporate power and authority, and the Company has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; the Company is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, state and local laws, rules and regulations; and the Company has not received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, position, prospects, value, operation, properties, business or results of operations of the Company. The disclosures in the Registration Statement concerning the effects of federal, state and local laws, rules and regulations on the Company's business as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. (v) The Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus, under "Capitalization" and "Description of Capital Stock" and will have the adjusted capitalization set forth therein on the Closing Date and the Option Closing Date, if any, based upon the assumptions set forth therein, and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Representative's Warrant Agreement and as described in the Prospectus. The Securities and all other securities issued or issuable by 3 the Company conform or, when issued and paid for, will conform, in all respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable and the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The Securities are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and will conform to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities has been duly and validly taken; and the certificates representing the Securities will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Securities to be sold by the Company hereunder, the Underwriters will acquire good and marketable title to such Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever. (vi) The financial statements, including the related notes and schedules thereto, included in the Registration Statement, each Preliminary Prospectus and the Prospectus fairly present the financial position, income, changes in cash flow, changes in shareholders' equity, and the results of operations of the Company at the respective dates and for the respective periods to which they apply and the pro forma financial information included in the Registration Statement and Prospectus presents fairly on a basis consistent with that of the audited financial statements included therein, what the Company's pro forma (as adjusted) capitalization would have been for the respective periods and as of the respective dates to which they apply after giving effect to the adjustments described therein. Such financial statements have been prepared in conformity with generally accepted accounting principles and the Rules and Regulations, consistently applied throughout the periods involved. There has been no adverse change or development involving a material prospective change in the condition, financial or otherwise, or in the earnings, position, prospects, value, operation, properties, business, or results of operations of the Company whether or not arising in the ordinary course of business, since the date of the financial statements included in the Registration Statement and the Prospectus and the outstanding debt, the property, both tangible and intangible, and the business of the Company conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. Financial information set forth in the Prospectus under the headings "Summary Consolidated and Combined Financial Data," "Selected Consolidated and Combined Financial Data," "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," fairly present, on the basis stated in the Prospectus, the information set forth therein, and has been derived from or compiled on a basis consistent with that of the audited financial statements included in the Prospectus. 4 (vii) The Company (i) has paid all federal, state, local, and foreign taxes for which it is liable, including, but not limited to, withholding taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of 1986 (the "Code"), and has furnished all information returns it is required to furnish pursuant to the Code, (ii) has established adequate reserves for such taxes which are not due and payable, and (iii) does not have any tax deficiency or claims outstanding, proposed or assessed against it. (viii) No transfer tax, stamp duty or other similar tax is payable by or on behalf of the Underwriters in connection with (i) the issuance by the Company of the Securities, (ii) the purchase by the Underwriters of the Securities from the Company, (iii) the consummation by the Company of any of its obligations under this Agreement or the Representative's Warrant Agreement, or (iv) resales of the Shares in connection with the distribution contemplated hereby. (ix) The Company maintains insurance policies, including, but not limited to, general liability and property insurance, which insures the Company and its employees, against such losses and risks generally insured against by comparable businesses. The Company (A) has not failed to give notice or present any insurance claim with respect to any matter, including but not limited to the Company's business, property or employees, under the insurance policy or surety bond in a due and timely manner, (B) does not have any disputes or claims against any underwriter of such insurance policies or surety bonds or has not failed to pay any premiums due and payable thereunder, or (C) has not failed to comply with all conditions contained in such insurance policies and surety bonds. There are no facts or circumstances under any such insurance policy or surety bond which would relieve any insurer of its obligation to satisfy in full any valid claim of the Company. (x) There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or business of, the Company which (i) questions the validity of the capital stock of the Company, this Agreement or the Representative's Warrant Agreement or of any action taken or to be taken by the Company pursuant to or in connection with this Agreement or the Representative's Warrant Agreement, (ii) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects), or (iii) might materially and adversely affect the condition, financial or otherwise, or the earnings, position, prospects, shareholders' equity, value, operation, properties, business or results of operations of the Company. (xi) The Company has full legal right, power and authority to authorize, issue, deliver and sell the Securities, enter into this Agreement and the Representative's Warrant Agreement and to consummate the transactions provided for in such agreements; and this Agreement and the Representative's Warrant Agreement have each been duly and properly authorized, executed and delivered by the Company. Each 5 of this Agreement and the Representative's Warrant Agreement constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except (i) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification or contribution provisions may be limited under applicable laws or the public policies underlying such laws and (iii) that the remedies of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceedings may be brought. None of the Company's issue and sale of the Securities, execution or delivery of this Agreement or the Representative's Warrant Agreement, its performance hereunder and thereunder, its consummation of the transactions contemplated herein and therein, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of, (i) the Articles of Incorporation or by-laws of the Company, (ii) any license, contract, indenture, mortgage, deed of trust, voting trust agreement, shareholders agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which it is or may be bound or to which any of its properties or assets (tangible or intangible) is or may be subject, or any indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation applicable to the Company of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its activities or properties. (xii) Except as described in the Prospectus, no consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance of the Shares pursuant to the Prospectus and the Registration Statement, the issuance of the Representative's Warrants, the performance of this Agreement and the Representative's Warrant Agreement and the transactions contemplated hereby and thereby, including without limitation, any waiver of any preemptive, first refusal or other rights that any entity or person may have for the issue and/or sale of any of the Shares, or the Representative's Warrants, except such as have been or may be obtained under the Act or may be required under state securities or Blue Sky laws in connection with the Representative's purchase and distribution of the Shares, and the Representative's Warrants to be sold by the Company hereunder. (xiii) All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which the Company is a party or by which it may be bound or to which any of its assets, properties or business may be subject have been duly and validly authorized, executed and delivered by the Company, and constitute the legal, valid and binding agreements of the Company, enforceable against the Company, in 6 accordance with their respective terms. The descriptions in the Registration Statement of agreements, contracts and other documents are accurate in all material respects and fairly present the information required to be shown with respect thereto by Form SB-2, and there are no contracts or other documents which are required by the Act to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are in all material respects complete and correct copies of the documents of which they purport to be copies. (xiv) Subsequent to the respective dates as of which information is set forth in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has not (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, (ii) entered into any transaction other than in the ordinary course of business, or (iii) declared or paid any dividend or made any other distribution on or in respect of its capital stock of any class, and there has not been any change in the capital stock, or any material change in the debt (long or short term) or liabilities or material adverse change in or affecting the general affairs, management, financial operations, shareholders' equity or results of operations of the Company. (xv) No default exists in the due performance and observance of any term, covenant or condition of any license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, shareholders agreement, partnership agreement, note, loan or credit agreement, purchase order, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which the property or assets (tangible or intangible) of the Company is subject or affected. (xvi) The Company has generally enjoyed a satisfactory employer-employee relationship with its employees and is in compliance with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. There are no pending investigations involving the Company by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state, local, or foreign laws and regulations. There is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or involving the Company or any predecessor entity, and none has ever occurred. No representation question exists respecting the employees of the Company, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company. No labor dispute with the employees of the Company exists, or is imminent. (xvii) Except as described in the Prospectus, the Company does not maintain, sponsor or contribute to any program or arrangement that is an "employee 7 pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code, which could subject the Company to any tax penalty on prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401(a), stating that such ERISA Plan and the attendant trust are qualified thereunder. The Company has never completely or partially withdrawn from a "multiemployer plan." (xviii) Neither the Company nor any of its employees, directors, shareholders, partners, or affiliates (within the meaning of the Rules and Regulations) of any of the foregoing has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or otherwise. (xix) Except as otherwise disclosed in the Prospectus, none of the patents, patent applications, trademarks, service marks, service names, trade names and copyrights and none of the licenses and rights to the foregoing presently owned or held by the Company are in dispute or are in any conflict with the right of any other person or entity. The Company (i) owns or has the right to use, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, all patents, patent applications, trademarks, service marks, service names, trade names and copyrights, technology and licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing and (ii) is not obligated or under any liability whatsoever to make any payment by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, patent application, trademark, service mark, service names, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental or other proceeding, domestic or foreign, pending or threatened (or circumstances that may give rise to the same) against the Company which challenges the exclusive rights of the Company with respect to any trademarks, trade names, service marks, service names, copyrights, patents, patent applications or licenses or rights to the foregoing used in the conduct of its business, or which challenge the right of the Company to use any technology presently used or contemplated to be used in the conduct of its business. 8 (xx) The Company owns and has the unrestricted right to use all trade secrets, know-how (including all other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, technology, designs, processes, works of authorship, computer programs and technical data and information (collectively herein "intellectual property") that are material to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company, free and clear of and without violating any right, lien, or claim of others, including without limitation, former employers of its employees; provided, however, that the possibility exists that other persons or entities, completely independently of the Company, or its employees or agents, could have developed trade secrets or items of technical information similar or identical to those of the Company. The Company is not aware of any such development of similar or identical trade secrets or technical information by others. (xxi) The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus, to be owned or leased by it free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable. (xxii) KPMG Peat Marwick LLP, whose report is filed with the Commission as a part of the Registration Statement, are independent certified public accountants as required by the Act and the Rules and Regulations. (xxiii) The Company has caused to be duly executed legally binding and enforceable agreements pursuant to which all of the officers and directors of the Company, all holders of the Common Stock and holders of securities exchangeable or exercisable for or convertible into shares of Common Stock have agreed not to, directly or indirectly, offer to sell, sell, grant any option for the sale of, assign, transfer, pledge, hypothecate, distribute or otherwise encumber or dispose of any shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) or dispose of any beneficial interest therein for a period of not less than thirteen (13) months following the effective date of the Registration Statement (except for publicly held shares of Common Stock of the Company acquired after the effective date of the Registration Statement in the open market and sold through Gilford) without the prior written consent of the Representative and the Company. The Company will cause the Transfer Agent, as defined below, to mark an appropriate legend on the face of stock certificates representing all of such securities and to place "stop transfer" orders on the Company's stock ledgers. (xxiv) Except as described in the Prospectus under "Underwriting," there are no claims, payments, issuances, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or any other arrangements, agreements, understandings, payments or issuance with respect to the Company or any of its officers, directors, 9 shareholders, partners, employees or affiliates that may affect the Underwriters' compensation, as determined by the National Association of Securities Dealers, Inc. ("NASD"). (xxv) The Common Stock has been approved for quotation on the Nasdaq National Market ("NNM"). (xxvi) Neither the Company nor any of its officers, employees, agents, or any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency (domestic or foreign) or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist the Company in connection with any actual or proposed transaction) which (a) might subject the Company, or any other such person to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign), (b) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company, or (c) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company's internal accounting controls are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as amended. (xxvii) Except as set forth in the Prospectus, no officer, director or stockholder of the Company, or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Rules and Regulations) of any of the foregoing persons or entities has, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficial interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Transactions," there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company and any officer, director, or Principal Stockholder (as such term is defined in the Prospectus) of the Company or any partner, affiliate or associate of any of the foregoing persons or entities. (xxviii) Any certificate signed by any officer of the Company, and delivered to the Representative or to Underwriters' Counsel (as defined herein) shall be deemed a representation and warranty by the Company to the Representative as to the matters covered thereby. (xxix) The minute books of the Company have been made available to the Representative and contain a complete summary of all meetings and actions of the directors, shareholders, audit committee, compensation committee and any other 10 committee of the Board of Directors of the Company, respectively, since the time of its incorporation, and reflects all transactions referred to in such minutes accurately in all material respects. (xxx) Except and to the extent described in the Prospectus, no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company. (xxxi) The Company has as of the effective date of the Registration Statement (i) entered into an employment agreement with each of Edward J. Lawson and Michele V. Lawson, in the form filed as Exhibits to the Registration Statement and (ii) purchased term key-man insurance on the life of each of Edward J. Lawson and Michele V. Lawson in the amount of $1,000,000, which policy names the Company as the sole beneficiary thereof. 2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES AND REPRESENTATIVE'S WARRANTS. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter agrees to purchase from the Company at a price of $____ per share [90% of the initial public offering price] of Common Stock, that number of Firm Shares set forth in Schedule A opposite the name of such Underwriter, subject to adjustment as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional shares, plus any additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) In addition, on the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters to purchase all or any part of an additional 187,500 shares of Common Stock at a price of $___ per share of Common Stock [90% of the initial public offering price]. The option granted hereby will expire 45 days after (i) the date the Registration Statement becomes effective, if the Company has elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Rules and Regulations, and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Firm Shares upon notice by the Representative to the Company setting forth the number of Option Shares as to which Representative is then exercising the option and the time and date of payment and delivery for any such Option Shares. Any such time and date of delivery (an "Option Closing Date") shall be determined by the Representative, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Date, as hereinafter defined, unless otherwise agreed upon by the Representative and the Company. Nothing herein contained shall obligate the Underwriters to make any over-allotments. No Option Shares shall be delivered 11 unless the Firm Shares shall be simultaneously delivered or shall theretofore have been delivered as herein provided. (c) Payment of the purchase price for, and delivery of certificates for, the Firm Shares shall be made at the offices of Gilford Securities Incorporated at 850 Third Avenue, New York, New York 10022, or at such other place as shall be agreed upon by the Representative and the Company. Such delivery and payment shall be made at 10:00 a.m. (New York City time) on __________, 1998 or at such other time and date as shall be agreed upon by the Representative and the Company, but not less than three (3) nor more than seven (7) full business days after the effective date of the Registration Statement (such time and date of payment and delivery being herein called "Closing Date"). In addition, in the event that any or all of the Option Shares are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Shares shall be made at the above-mentioned office of the Representative or at such other place as shall be agreed upon by the Representative and the Company on each Option Closing Date as specified in the notice from the Representative to the Company. Delivery of the certificates for the Firm Shares and the Option Shares, if any, shall be made to the Underwriters against payment by the Underwriters of the purchase price for the Firm Shares and the Option Shares, if any, to the order of the Company for the Firm Shares and the Option Shares, if any, by New York Clearing House funds. Certificates for the Firm Shares and the Option Shares, if any, shall be in definitive, fully registered form, shall bear no restrictive legends and shall be in such denominations and registered in such names as the Representative may request in writing at least two (2) business days prior to the Closing Date or the relevant Option Closing Date, as the case may be. The certificates for the Firm Shares and the Option Shares, if any, shall be made available to the Representative at such office or such other place as the Representative may designate for inspection, checking and packaging no later than 9:30 a.m. on the last business day prior to Closing Date or the relevant Option Closing Date, as the case may be. (d) On the Closing Date, the Company shall issue and sell to the Representative, Representative's Warrants at a purchase price of $[___] per warrant, which warrants shall entitle the holders thereof to purchase an aggregate of 125,000 shares of Common Stock. The Representative's Warrants shall be exercisable for a period of four years commencing one year from the effective date of the Registration Statement at a price equaling one hundred twenty percent (120%) of the initial public offering price of the shares of Common Stock. The Representative's Warrant Agreement and form of Warrant Certificate shall be substantially in the form filed as Exhibit __ to the Registration Statement. Payment for the Representative's Warrants shall be made on the Closing Date. 3. PUBLIC OFFERING OF THE SHARES. As soon after the Registration Statement becomes effective as the Representative deems advisable, the Underwriters shall make a public offering of the Shares (other than to residents of or in any jurisdiction in which qualification of the Shares is required and has not become effective) at the price and upon the other terms set forth in the Prospectus. The Representative may from time to time increase or decrease the public offering price after distribution of the Shares has been completed to such extent as the Representative, in its discretion deems advisable. The Underwriters may enter into one of more agreements as the Underwriters, in each of their sole discretion, deem advisable with one or more broker-dealers who shall act as dealers in connection with such public offering. 12 4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and agrees with each of the Underwriters as follows: (a) The Company shall use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as practicable and will not at any time, whether before or after the effective date of the Registration Statement, file any amendment to the Registration Statement or supplement to the Prospectus or file any document under the Act or Exchange Act before termination of the offering of the Shares by the Underwriters of which the Representative shall not previously have been advised and furnished with a copy, or to which the Representative shall have objected or which is not in compliance with the Act, the Exchange Act or the Rules and Regulations. (b) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Representative and confirm the notice in writing, (i) when the Registration Statement, as amended, becomes effective, if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A and when any post-effective amendment to the Registration Statement becomes effective, (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding, suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of the Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or the institution of proceedings for that purpose, (iii) of the issuance by the Commission or by any state securities commission of any proceedings for the suspension of the qualification of any of the Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the receipt of any comments from the Commission; and (v) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. If the Commission or any state securities commission authority shall enter a stop order or suspend such qualification at any time, the Company will make every effort to obtain promptly the lifting of such order. (c) The Company shall file the Prospectus (in form and substance satisfactory to the Representative) or transmit the Prospectus by a means reasonably calculated to result in filing with the Commission pursuant to Rule 424(b)(1) (or, if applicable and if consented to by the Representative, pursuant to Rule 424(b)(4)) not later than the Commission's close of business on the earlier of (i) the second business day following the execution and delivery of this Agreement and (ii) the fifteenth business day after the effective date of the Registration Statement. (d) The Company will give the Representative notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Representative in connection with the offering of the Securities which differs from the corresponding prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will furnish the Representative with copies of any such amendment or supplement a reasonable amount of time 13 prior to such proposed filing or use, as the case may be, and will not file any such prospectus to which the Representative or Baker & McKenzie ("Underwriters' Counsel"), shall object. (e) The Company shall endeavor in good faith, in cooperation with the Representative, at or prior to the time the Registration Statement becomes effective, to qualify the Securities for offering and sale under the securities laws of such jurisdictions as the Representative may designate to permit the continuance of sales and dealings therein for as long as may be necessary to complete the distribution, and shall make such applications, file such documents and furnish such information as may be required for such purpose; provided, however, the Company shall not be required to qualify as a foreign corporation or file a general or limited consent to service of process in any such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Representative agrees that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction to continue such qualification. (f) During the time when a prospectus is required to be delivered under the Act, the Company shall use all reasonable efforts to comply with all requirements imposed upon it by the Act and the Exchange Act, as now and hereafter amended and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and the Prospectus, or any amendments or supplements thereto. If at any time when a prospectus relating to the Securities or the Representative's Shares is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Representative promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act, each such amendment or supplement to be satisfactory to Underwriters' Counsel, and the Company will furnish to the Representative copies of such amendment or supplement as soon as available and in such quantities as the Representative may request. (g) As soon as practicable, but in any event not later than 45 days after the end of the 12-month period beginning on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statement occurs (90 days in the event that the end of such fiscal quarter is the end of the Company's fiscal year), the Company shall make generally available to its security holders, in the manner specified in Rule 158(b) of the Rules and Regulations, and to the Representative, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement need not be audited unless required by the Act, covering a period of at least 12 consecutive months after the effective date of the Registration Statement. (h) During a period of seven years after the date hereof, the Company will furnish to its shareholders, as soon as practicable, annual reports (including financial statements 14 audited by independent public accountants) and unaudited quarterly reports of earnings, and will deliver to the Representative: (i) concurrently with furnishing such quarterly reports to its shareholders, statements of income of the Company for each quarter in the form furnished to the Company's shareholders and certified by the Company's principal financial or accounting officer; (ii) concurrently with furnishing such annual reports to its shareholders, a balance sheet of the Company as at the end of the preceding fiscal year, together with statements of operations, shareholders' equity, and cash flows of the Company for such fiscal year, accompanied by a copy of the certificate thereon of independent certified public accountants; (iii) as soon as they are available, copies of all reports (financial or other) mailed to shareholders; (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; (v) every press release and every material news item or article of interest to the financial community in respect of the Company, or its affairs which was released or prepared by or on behalf of the Company; (vi) any additional information of a public nature concerning the Company (and any future subsidiary) or its businesses which the Representative may request; and (vii) During such seven-year period, if the Company has an active subsidiary, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its subsidiary are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (i) The Company will maintain a Transfer Agent and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for its Common Stock. (j) The Company will furnish to the Representative or on Representative's order, without charge, at such place as the Representative may designate, copies of each Preliminary Prospectus, the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Representative may request. 15 (k) On or before the effective date of the Registration Statement, the Company shall provide the Representative with true copies of duly executed, legally binding and enforceable agreements pursuant to which for a period of thirteen (13) months from the effective date of the Registration Statement, the officers and directors of the Company, holders of all shares of Common Stock and holders of securities exchangeable or exercisable for or convertible into shares of Common Stock, agree that it or he or she will not directly or indirectly, issue, offer to sell, sell, grant an option for the sale of, assign, transfer, pledge, hypothecate, distribute or otherwise encumber or dispose of any shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) or dispose of any beneficial interest therein without the prior written consent of the Representative and the Company (collectively, the "Lock-up Agreements"). On or before the Closing Date, the Company shall deliver instructions to the Transfer Agent authorizing it to place appropriate legends on the certificates representing the securities subject to the Lock-up Agreements and to place appropriate stop transfer orders on the Company's ledgers. (l) Neither the Company, nor any of its officers, directors, shareholders, nor any of their respective affiliates (within the meaning of the Rules and Regulations) will take, directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company. (m) The Company shall apply the net proceeds from the sale of the Securities in the manner, and subject to the conditions, set forth under "Use of Proceeds" in the Prospectus. No portion of the net proceeds will be used, directly or indirectly, to acquire any securities issued by the Company. (n) The Company shall timely file all such reports, forms or other documents as may be required from time to time, under the Act, the Exchange Act, and the Rules and Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Rules and Regulations. (o) The Company shall furnish to the Representative as early as practicable prior to each of the date hereof, the Closing Date and each Option Closing Date, if any, but no later than two (2) full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company (which in no event shall be as of a date more than thirty (30) days prior to the date of the Registration Statement) which have been read by the Company's independent public accountants, as stated in its letter to be furnished pursuant to Section 6(j) hereof. (p) The Company shall use cause the Common Stock to be quoted on NNM and for a period of seven (7) years from the date hereof, use its best efforts to maintain the NNM quotation of the Common Stock to the extent outstanding. (q) For a period of five (5) years from the Closing Date, the Company shall furnish to the Representative at the Representative's request and at the Company's sole expense, 16 (i) daily consolidated transfer sheets relating to the Common Stock (ii) the list of holders of all of the Company's securities and (iii) a Blue Sky "Trading Survey" for secondary sales of the Company's securities prepared by counsel to the Company. (r) As soon as practicable, (i) but in no event more than 5 business days before the effective date of the Registration Statement, file a Form 8-A with the Commission providing for the registration under the Exchange Act of the Securities and (ii) but in no event more than 30 days from the effective date of the Registration Statement, take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual and to continue such inclusion for a period of not less than seven (7) years. (s) The Company hereby agrees that it will not for a period of twenty-four (24) months from the effective date of the Registration Statement, adopt, propose to adopt or otherwise permit to exist any employee, officer, director, consultant or compensation plan or arrangement permitting the grant, issue or sale of any shares of Common Stock or other securities of the Company (i) in an amount greater than an aggregate of 350,000 shares, (ii) at an exercise or sale price per share less than the greater of (a) the initial public offering price of the Shares set forth herein and (b) the fair market value of the Common Stock on the date of grant or sale, (iii) to any direct or indirect beneficial holder on the date hereof of more than 10% of the issued and outstanding shares of Common Stock, (iv) with the payment for such securities with any form of consideration other than cash, (v) upon payment of less than the full purchase or exercise price for such shares of Common Stock or other securities of the Company on the date of grant or issuance, or (vi) permitting the existence of stock appreciation rights, phantom options or similar arrangements. (t) Until the completion of the distribution of the Shares, the Company shall not without the prior written consent of the Representative and Underwriters' Counsel, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in the ordinary course of the Company's business consistent with past practices with respect to the Company's operations. (u) For a period equal to the lesser of (i) seven (7) years from the date hereof, and (ii) the sale to the public of the Representative's Shares, the Company will not take any action or actions which may prevent or disqualify the Company's use of Form SB-2 or Form S-1 (or other appropriate form) for the registration under the Act of the Representative's Shares. (v) For a period of five (5) years after the effective date of the Registration Statement, the Representative shall have the right to designate for election one (1) individual to the Company's Board of Directors (the "Board"). In the event the Representative elects not to exercise such right, then it may designate one (1) individual to attend meetings of the Company's Board. The Company shall notify the Representative of each meeting of the Board and the Company shall send to such individual all notices and other correspondence and communications sent by the Company to members of the Board. Such individual shall be reimbursed for all out-of-pocket expenses incurred in connection with his attendance of meetings of the Board. 17 (w) For a period of twenty four (24) months after the effective date of the Registration Statement, the Company shall not restate, amend or alter any term of any written employment, consulting or similar agreement entered into between the Company and any officer, director or key employee as of the effective date of the Registration Statement in a manner which is more favorable to such officer, director or key employee, without the prior written consent of the Representative. 5. PAYMENT OF EXPENSES. (a) The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date (to the extent not paid at the Closing Date) all expenses and fees (other than fees of Underwriters' Counsel, except as provided in (iv) below) incident to the performance of the obligations of the Company under this Agreement and the Representative's Warrant Agreement, including, without limitation, (i) the fees and expenses of accountants and counsel for the Company, (ii) all costs and expenses incurred in connection with the preparation, duplication, printing, (including mailing and handling charges) filing, delivery and mailing (including the payment of postage with respect thereto) of the Registration Statement and the Prospectus and any amendments and supplements thereto and the printing, mailing (including the payment of postage with respect thereto) and delivery of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreements, and related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus and any amendments thereof or supplements thereto supplied to the Underwriters and such dealers as the Underwriters may request, in quantities as hereinabove stated, (iii) the printing, engraving, issuance and delivery of the Securities including, but not limited to, (x) the purchase by the Underwriters of the Shares and the purchase by the Representative of the Representative's Warrants from the Company, (y) the consummation by the Company of any of its obligations under this Agreement and the Representative's Warrant Agreement, and (z) resale of the Shares by the Underwriters in connection with the distribution contemplated hereby, (iv) the qualification of the Securities under state or foreign securities or "Blue Sky" laws and determination of the status of such securities under legal investment laws, including the costs of printing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments Survey," if any, and disbursements and fees of counsel in connection therewith, (v) advertising costs and expenses, including but not limited to costs and expenses in connection with the "road show," information meetings and presentations, bound volumes and prospectus memorabilia and "tomb-stone" advertisement expenses, (vi) costs and expenses in connection with due diligence investigations, including but not limited to the fees of any independent counsel or consultant retained, (vii) fees and expenses of the transfer agent and registrar, (viii) applications for assignments of a rating of the Securities by qualified rating agencies, (ix) the fees payable to the Commission and the NASD, and (x) the fees and expenses incurred in connection with the quotation of the Securities on NNM and any other exchange. (b) If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 6 or Section 10, (i) the Company shall reimburse and indemnify the Representative for all of its actual out-of-pocket expenses, including the fees and disbursements of Underwriters' Counsel, less any amounts already paid pursuant to Section 5(c) hereof. 18 (c) The Company further agrees that, in addition to the expenses payable pursuant to subsection (a) of this Section 5, it will pay to the Representative on the Closing Date by certified or bank cashier's check or, at the election of the Representative, by deduction from the proceeds of the offering contemplated herein a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Firm Shares, [$50,000] of which has been paid to date. In the event the Representative elects to exercise the over-allotment option described in Section 2(b) hereof, the Company agrees to pay to the Representative on the Option Closing Date (by certified or bank cashier's check or, at the Representative's election, by deduction from the proceeds of the Option Shares) a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Option Shares. 6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company herein as of the date hereof and as of the Closing Date and each Option Closing Date, if any, with respect to the Company as if it had been made on and as of the Closing Date or each Option Closing Date, as the case may be; the accuracy on and as of the Closing Date or Option Closing Date, if any, of the statements of the officers of the Company made pursuant to the provisions hereof; and the performance by the Company on and as of the Closing Date and each Option Closing Date, if any, of its covenants and obligations hereunder and to the following further conditions: (a) The Registration Statement shall have become effective not later than 12:00 Noon, New York time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Representative, and, at Closing Date and each Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, the price of the Shares and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time period, and prior to Closing Date the Company shall have provided evidence satisfactory to the Representative of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. (b) The Representative shall not have advised the Company that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Representative's opinion, is material, or omits to state a fact which, in the Representative's opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Representative's opinion, is material, or omits to state a fact which, in the Representative's opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 19 (c) On or prior to the Closing Date, the Representative shall have received from Underwriters' Counsel, such opinion or opinions with respect to the organization of the Company, the validity of the Securities, the Representative's Warrants, the Registration Statement, the Prospectus and other related matters as the Representative may request and Underwriters' Counsel shall have received such papers and information as they request to enable them to pass upon such matters. (d) At Closing Date, the Underwriter shall have received the favorable opinion of Broad & Cassel, counsel to the Company, dated the Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) the Company (A) has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction, (B) is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing, and (C) has all requisite corporate power and authority; and the Company has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; the Company is and has been doing business in material compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, state and local laws, rules and regulations; the Company has not received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially adversely affect the business, operations, condition, financial or otherwise, or the earnings, business affairs, position, prospects, value, operation, properties, business or results of operations of the Company. The disclosures in the Registration Statement concerning the effects of federal, state and local laws, rules and regulations on the Company's business as currently conducted and as contemplated are correct in all material respects and do not omit to state a fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made; (ii) to the best of such counsel's knowledge, the Company does not own an interest in any other corporation, partnership, joint venture, trust or other business entity; (iii) the Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus, and any amendment or supplement thereto, under "Capitalization" and "Description of Securities," and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Representative's Warrant Agreement and as described in the Prospectus. The Securities, and all other securities issued or issuable by the Company conform in all material respects to all statements with respect thereto contained in the Registration Statement and 20 the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. The Shares, the Representative's Warrants and the Representative's Shares to be sold by the Company hereunder and under the Representative's Warrant Agreement are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and conform to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Shares, the Representative's Warrants and the Representative's Shares has been duly and validly taken; and the certificates representing the Shares and the Representative's Warrants are in due and proper form. The Representative's Warrants constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby. Upon the issuance and delivery pursuant to this Agreement and the Representative's Warrant Agreement of the Shares and the Representative's Warrants, respectively, to be sold by the Company, the Representative and the Representative, respectively, will acquire good and marketable title to the Shares and Representative's Warrants free and clear of any pledge, lien, charge, claim, encumbrance, pledge, security interest, or other restriction or equity of any kind whatsoever. No transfer tax is payable by or on behalf of the Underwriters in connection with (A) the issuance by the Company of the Shares, (B) the purchase by the Underwriters of the Shares and the Representative's Warrants, respectively, from the Company, (C) the consummation by the Company of any of its obligations under this Agreement or the Representative's Warrant Agreement, or (D) resales of the Shares in connection with the distribution contemplated hereby; (iv) the Registration Statement is effective under the Act, and, if applicable, filing of all pricing information has been timely made in the appropriate form under Rule 430A, and no stop order suspending the use of the Preliminary Prospectus, the Registration Statement or Prospectus or any part of any thereof or suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the best of such counsel's knowledge, threatened or contemplated under the Act; (v) each of the Preliminary Prospectus, the Registration Statement, and the Prospectus and any amendments or supplements thereto (other than the financial statements and other financial and statistical data included therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Rules and Regulations; (vi) to the best of such counsel's knowledge, (A) there are no agreements, contracts or other documents required by the Act to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration Statement (or required to be filed 21 under the Exchange Act if upon such filing they would be incorporated, in whole or in part, by reference therein) and the Prospectus and filed as exhibits thereto, and the exhibits which have been filed are correct copies of the documents of which they purport to be copies; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of contracts and other documents to which the Company is a party or by which it is bound, including any document to which the Company is a party or by which it is bound, incorporated by reference into the Prospectus and any supplement or amendment thereto, are accurate in all material respects and fairly represent the information required to be shown by Form SB-2; (C) there is not pending or threatened against the Company any action, arbitration, suit, proceeding, inquiry, investigation, litigation, governmental or other proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or business of the Company which (x) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects), (y) questions the validity of the capital stock of the Company or this Agreement or the Representative's Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with any of the foregoing; (D) no statute or regulation or legal or governmental proceeding required to be described in the Prospectus is not described as required; and (E) there is no action, suit or proceeding pending, or threatened, against or affecting the Company before any court or arbitrator or governmental body, agency or official (or any basis thereof known to such counsel) in which there is a reasonable possibility of an adverse decision which may result in a material adverse change in the condition, financial or otherwise, or the earnings, position, prospects, shareholders' equity, value, operation, properties, business or results of operations of the Company, which could adversely affect the present or prospective ability of the Company to perform its obligations under this Agreement or the Representative's Warrant Agreement or which in any manner draws into question the validity or enforceability of this Agreement or the Representative's Warrant Agreement; (vii) the Company has full legal right, power and authority to enter into each of this Agreement and the Representative's Warrant Agreement and to consummate the transactions provided for herein and therein; and each of this Agreement and the Representative's Warrant Agreement has been duly authorized, executed and delivered by the Company. Each of this Agreement and the Representative's Warrant Agreement, assuming due authorization, execution and delivery by each other party thereto constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law), and none of the Company's execution or delivery of this Agreement and the Representative's Warrant Agreement, its performance hereunder or thereunder, its consummation of the transactions contemplated herein or therein, or the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or 22 will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of, (A) the certificate of incorporation or by-laws of the Company, (B) any license, contract, indenture, mortgage, deed of trust, voting trust agreement, shareholders agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which it is or may be bound or to which any of its respective properties or assets (tangible or intangible) is or may be subject, or any indebtedness, or (C) any statute, judgment, decree, order, rule or regulation applicable to the Company of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its activities or properties; (viii) except as described in the Prospectus, no consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body (other than such as may be required under Blue Sky laws, as to which no opinion need be rendered) is required in connection with the issuance of the Shares pursuant to the Prospectus, the issuance of the Representative's Warrants, and the Registration Statement, the performance of this Agreement and the Representative's Warrant Agreement, and the transactions contemplated hereby and thereby; (ix) the properties and business of the Company conform in all material respects to the description thereof contained in the Registration Statement and the Prospectus; and the Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus to be owned or leased by it, in each case free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable; (x) to the best knowledge of such counsel, the Company is not in breach of, or in default under, any term or provision of any license, contract, indenture, mortgage, installment sale agreement, deed of trust, lease, voting trust agreement, shareholders' agreement, partnership agreement, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company is a party or by which the Company may be bound or to which the property or assets (tangible or intangible) of the Company is subject or affected; and the Company is not in violation of any term or provision of its certificate of incorporation by-laws, or in violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation; (xi) the statements in the Prospectus under "BUSINESS," "MANAGEMENT," "PRINCIPAL SHAREHOLDERS," "CERTAIN TRANSACTIONS," "DESCRIPTION OF CAPITAL STOCK," and "SHARES 23 ELIGIBLE FOR FUTURE SALE" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects; (xii) the Shares have been accepted for quotation on NNM; (xiii) the persons listed under the caption "PRINCIPAL SHAREHOLDERS" in the Prospectus are the respective "beneficial owners" (as such phrase is defined in regulation 13d-3 under the Exchange Act) of the securities set forth opposite their respective names thereunder as and to the extent set forth therein; (xiv) except as described in the Prospectus, no person, corporation, trust, partnership, association or other entity has the right to include and/or register any securities of the Company in the Registration Statement, require the Company to file any registration statement or, if filed, to include any security in such registration statement; (xv) except as described in the Prospectus, there are no claims, payments, issuances, arrangements or understandings for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or financial consulting arrangement or any other arrangements, agreements, understandings, payments or issuances that may affect the Underwriters' compensation, as determined by the NASD; (xvi) assuming due execution by the parties thereto other than the Company, the Lock-up Agreements are legal, valid and binding obligations of parties thereto, enforceable against the party and any subsequent holder of the securities subject thereto in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law); and (xvii) except as described in the Prospectus, the Company does not (A) maintain, sponsor or contribute to any ERISA Plans, (B) maintain or contribute, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA, and (C) has never completely or partially withdrawn from a "multiemployer plan." Such counsel shall also state that such counsel has participated in conferences with officers and other representatives of the Company and representatives of the independent public accountants for the Company at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Preliminary Prospectus, the Registration Statement, the Prospectus, and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Preliminary Prospectus, the Registration Statement and Prospectus, on the basis of the foregoing, no facts have come to the attention of such counsel which lead them to believe that either the Registration Statement or any amendment thereto, at the time such Registration Statement or amendment became effective or 24 the Preliminary Prospectus or Prospectus or amendment or supplement thereto as of the date of such opinion contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Preliminary Prospectus, the Registration Statement or Prospectus). Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991), or any comparable State bar accord. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance satisfactory to Underwriters' Counsel) of other counsel acceptable to Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. The opinion shall also state that the Underwriters' Counsel is entitled to rely thereon. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and that the Underwriters and they are justified in relying thereon. (e) At each Option Closing Date, if any, the Underwriters shall have received the favorable opinion of Broad & Cassel, counsel to the Company, Broad & Cassel, dated the Option Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel confirming as of Option Closing Date the statements made by Broad & Cassel, in its opinion delivered on the Closing Date. (f) On or prior to each of the Closing Date and the Option Closing Date, if any, Underwriters' Counsel shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in subsection (c) of this Section 6, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions of the Company, or herein contained. (g) Prior to each of the Closing Date and each Option Closing Date, if any, (i) there shall have been no material adverse change nor development involving a prospective change in the condition, financial or otherwise, prospects, shareholders' equity or the business activities of the Company, whether or not in the ordinary course of business, from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company, from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is materially adverse to the Company; (iii) the 25 Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness; (iv) the Company shall not have issued any securities (other than the Securities); the Company shall not have declared or paid any dividend or made any distribution in respect of its capital stock of any class; and there has not been any change in the capital stock of the Company, or any material change in the debt (long or short term) or liabilities or obligations of the Company (contingent or otherwise); (v) no material amount of the assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; (vi) no action, suit or proceeding, at law or in equity, shall have been pending or threatened (or circumstances giving rise to same) against the Company, or affecting any of its properties or business before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement and Prospectus; and (vii) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated, threatened or contemplated by the Commission. (h) At each of the Closing Date and each Option Closing Date, if any, the Underwriters shall have received a certificate of the Company signed by the principal executive officer and by the chief financial or chief accounting officer of the Company, dated the Closing Date or Option Closing Date, as the case may be, to the effect that each of such persons has carefully examined the Registration Statement, the Prospectus and this Agreement, and that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to such Closing Date or Option Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of each of such person's knowledge, after due inquiry are contemplated or threatened under the Act; (iii) The Registration Statement and the Prospectus and, if any, each amendment and each supplement thereto, contain all statements and information required to be included therein, and none of the Registration Statement, the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and neither the Preliminary Prospectus or any supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (a) the Company has not incurred up to and including the Closing Date or the Option Closing Date, as the case may be, other than 26 in the ordinary course of its business, any material liabilities or obligations, direct or contingent; (b) the Company has not paid or declared any dividends or other distributions on its capital stock; (c) the Company has not entered into any transactions not in the ordinary course of business; (d) there has not been any change in the capital stock of the Company or any material change in the debt (long or short-term) of the Company; (e) the Company has not sustained any material loss or damage to its property or assets, whether or not insured; (g) there is no litigation which is pending or threatened (or circumstances giving rise to same) against the Company, or any affiliated party of any of the foregoing which is required to be set forth in an amended or supplemented Prospectus which has not been set forth; and (h) there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been set forth. References to the Registration Statement and the Prospectus in this subsection (g) are to such documents as amended and supplemented at the date of such certificate. (i) By the Closing Date, the Underwriters will have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriters, as described in the Registration Statement. (j) At the time this Agreement is executed, the Underwriters shall have received a letter, dated such date, addressed to the Underwriters in form and substance satisfactory (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) in all respects to the Underwriters and Underwriters' Counsel, from KPMG Peat Marwick LLP; (i) confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable Rules and Regulations; (ii) stating that it is their opinion that the financial statements and supporting schedules of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations thereunder and that the Underwriters may rely upon the opinion of KPMG Peat Marwick LLP with respect to such financial statements and supporting schedules included in the Registration Statement; (iii) stating that, on the basis of a limited review which included a reading of the latest available unaudited interim financial statements of the Company, a reading of the latest available minutes of the shareholders and board of directors and the various committees of the boards of directors of the Company, consultations with officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (A) the pro forma financial information contained in the Registration Statement and Prospectus does not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or is not fairly presented in conformity with generally accepted accounting principles applied on a basis consistent with that of the audited financial statements of the Company 27 or the unaudited pro forma financial information included in the Registration Statement, (B) the unaudited financial statements and supporting schedules of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of the Company included in the Registration Statement, or (C) at a specified date not more than five (5) days prior to the effective date of the Registration Statement, there has been any change in the capital stock of the Company, any change in the long-term debt of the Company, or any decrease in the shareholders' equity of the Company or any decrease in the net current assets or net assets of the Company as compared with amounts shown in the June 30, 1998 balance sheets included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any change or decrease, setting forth the amount of such change or decrease, and (D) during the period from June 30, 1998 to a specified date not more than five (5) days prior to the effective date of the Registration Statement, there was any decrease in net revenues or net earnings of the Company or increase in net earnings per common share of the Company, in each case as compared with the corresponding period beginning June 30, 1997 other than as set forth in or contemplated by the Registration Statement, or, if there was any such decrease, setting forth the amount of such decrease; (iv) setting forth, at a date not later than five (5) days prior to the date of the Registration Statement, the amount of liabilities of the Company (including a break-down of commercial paper and notes payable to banks); (v) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and (vi) statements as to such other matters incident to the transaction contemplated hereby as the Underwriters may request. (k) At the Closing Date and each Option Closing Date, if any, the Underwriters shall have received from KPMG Peat Marwick LLP a letter, dated as of the Closing Date or the Option Closing Date, as the case may be, to the effect that they reaffirm the statements made in the letter furnished pursuant to SUBSECTION (j) of this Section hereof except that the specified date referred to shall be a date not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, and, if the Company has elected to rely on Rule 430A of the Rules and Regulations, to the further effect that they have carried out 28 procedures as specified in clause (v) of SUBSECTION (j) of this Section with respect to certain amounts, percentages and financial information as specified by the Underwriters and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (v). (l) The Company shall have delivered to the Representative a letter from KPMG Peat Marwick LLP addressed to the Company stating that they have not during the immediately preceding two year period brought to the attention of the Company's management any "weakness" as defined in Statement of Auditing Standards No. 60 "Communication of Internal Control Structure Related Matters Noted in an Audit," in any of the Company's internal controls. (m) On each of the Closing Date and Option Closing Date, if any, there shall be duly tendered to the Underwriters the appropriate number of Securities. (n) No order suspending the sale of the Securities in any jurisdiction designated by the Underwriters pursuant to subsection (e) of Section 4 hereof shall have been issued on either the Closing Date or the Option Closing Date, if any, and no proceedings for that purpose shall have been instituted or shall be contemplated. (o) On or before the Closing Date, the Company shall have executed and delivered to the Representative, (i) the Representative's Warrant Agreement substantially in the form filed as Exhibit __ to the Registration Statement in final form and substance satisfactory to the Representative, and (ii) the Representative's Warrants in such denominations and to such designees as shall have been provided to the Company. (p) On or before the Closing Date, the Shares shall have been duly approved for quotation on NNM, subject to official notice of issuance. (q) On or before the Closing Date, there shall have been delivered to the Representative all of the Lock-up Agreements, in form and substance satisfactory to Representative's Counsel. If any condition to the Representative's obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Representative may terminate this Agreement or, if the Representative so elects, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 7. INDEMNIFICATION. (a) The Company, agrees to indemnify and hold harmless each of the Underwriters (for purposes of this Section 7 "Underwriters" shall include the officers, directors, partners, employees, agents and counsel of the Underwriters, including specifically each person who may be substituted for an Underwriter as provided in Section 11 hereof), and each person, if any, who controls the Underwriter ("controlling person") within the meaning of Section 15 of the 29 Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions, proceedings, investigations, inquiries, and suits in respect thereof), whatsoever (including but not limited to any and all costs and expenses whatsoever reasonably incurred in investigating, preparing or defending against such action, proceeding, investigation, inquiry or suit, commenced or threatened, or any claim whatsoever), as such are incurred, to which the Underwriter or such controlling person may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon (A) any untrue statement or alleged untrue statement of a material fact contained (i) in any Preliminary Prospectus, the Registration Statement or the Prospectus (as from time to time amended and supplemented); (ii) in any post-effective amendment or amendments or any new registration statement and prospectus in which is included securities of the Company issued or issuable upon exercise of the Securities; or (iii) in any application or other document or written communication (in this Section 7 collectively called "application") executed by the Company or based upon written information furnished by the Company filed, delivered or used in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, NNM or any other securities exchange, (B) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in the light of the circumstances under which they were made), or (C) any breach of any representation, warranty, covenant or agreement of the Company contained herein or in any certificate by or on behalf of the Company or any of its officers delivered pursuant hereto unless, in the case of clause (A) or (B) above, such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to any Underwriter by or on behalf of such Underwriters expressly for use in any Preliminary Prospectus, the Registration Statement or any Prospectus, or any amendment thereof or supplement thereto, or in any application, as the case may be. The indemnity agreement in this subsection (a) shall be in addition to any liability which the Company may have at common law or otherwise. (b) Each of the Underwriters agrees severally, but not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each other person, if any, who controls the Company within the meaning of the Act, to the same extent as the foregoing indemnity from the Company to the Underwriter but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any application made in reliance upon, and in strict conformity with, written information furnished to the Company with respect to any Underwriter by such Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any such application, provided that such written information or omissions only pertain to disclosures in the Preliminary Prospectus, the Registration Statement or Prospectus directly relating to the transactions effected by the Underwriters in connection with this Offering. The Company acknowledges that the statements with respect to the public offering of the Securities set forth under the heading "Underwriting" and the stabilization legend in the Prospectus have been furnished by the Underwriter expressly for use therein and constitute the only information furnished in writing by or on behalf of the Underwriters for inclusion in the Prospectus. 30 (c) The indemnity agreement in this subsection (b) shall be in addition to any liability which the Underwriters may have at common law or otherwise. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, suit or proceeding, such indemnified party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 7, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 7 except to the extent that it has been prejudiced in any material respect by such failure or from any liability which it may have otherwise). In case any such action, investigation, inquiry, suit or proceeding is brought against any indemnified party, and it notifies an indemnifying party or parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action at the expense of the indemnifying party, (ii) the indemnifying parties shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action, investigation, inquiry, suit or proceeding on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action, investigation, inquiry, suit or proceeding or separate but similar or related actions, investigations, inquiries, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 7 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. An indemnifying party will not, without the prior written consent of the indemnified parties, settle compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, investigation, inquiry, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party form all liability arising out of such claim, action, suit or proceeding and (ii) doe snot include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. 31 (d) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 7, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or actions, investigations, inquiries, suits or proceedings in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified on the other hand, from the offering of the Securities or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In any case where the Company is the contributing party and the Underwriters are the indemnified party, the relative benefits received by the Company on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses) bear to the total underwriting discounts received by the Underwriters hereunder, in each case as set forth in the table on the Cover Page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, or by the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions, investigations, inquiries, suits or proceedings in respect thereof) referred to above in this subdivision (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, claim, investigation, inquiry, suit or proceeding. Notwithstanding the provisions of this subdivision (d) the Underwriters shall not be required to contribute any amount in excess of the underwriting discount applicable to the Securities purchased by the Underwriters hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls the Company within the meaning of the Act, each officer of the Company who has signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company, subject in each case to this subparagraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit, inquiry, investigation or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this subparagraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this subparagraph (d), or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set 32 forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties and agreements contained in this Agreement or contained in certificates of officers of the Company submitted pursuant hereto, shall be deemed to be representations, warranties and agreements at the Closing Date and the Option Closing Date, as the case may be, and such representations, warranties and agreements of the Company and the indemnity agreements contained in Section 7 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter, the Company, any controlling person of any Underwriter or the Company, and shall survive termination of this Agreement or the issuance and delivery of the Securities to the Underwriters. 9. EFFECTIVE DATE. (a) This Agreement shall become effective at 10:00 a.m., New York City time, on the next full business day following the date hereof, or at such earlier time after the Registration Statement becomes effective as the Representative, in its discretion, shall release the Shares for sale to the public; provided, however, that the provisions of Sections 5, 7 and 10 of this Agreement shall at all times be effective. For purposes of this Section 9, the Shares to be purchased hereunder shall be deemed to have been so released upon the earlier of dispatch by the Representative of telegrams to securities dealers releasing such shares for offering or the release by the Representative for publication of the first newspaper advertisement which is subsequently published relating to the Shares. 10. TERMINATION. (a) Subject to subsection (b) of this Section 10, the Representative shall have the right to terminate this Agreement, after the date hereof, (i) if any domestic or international event or act or occurrence has materially disrupted, or in the Representative's opinion will in the immediate future materially adversely disrupt the financial markets; or (ii) any material adverse change in the financial markets shall have occurred; or (iii) if trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Boston Stock Exchange, the Chicago Board of Trade, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Commission or any other government authority having jurisdiction; or (iv) if trading of any of the securities of the Company shall have been suspended, or any of the securities of the Company shall have been delisted, on any exchange or in any over-the-counter market; or (v) if the United States shall have become involved in a war or major hostilities, or if there shall have been an escalation in an existing war or major hostilities or a national emergency shall have been declared in the United States; or (vi) if a banking moratorium has been declared by a state or federal authority; or (vii) if a moratorium in foreign exchange trading has been declared; or (viii) if the Company shall have sustained a loss material or substantial to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative's opinion, make it inadvisable to proceed with the delivery of 33 the Securities; or (ix) if there shall have occurred any outbreak or escalation of hostilities or any calamity or crisis or there shall have been such a material adverse change in the conditions or prospects of the Company, or such material adverse change in the general market, political or economic conditions, in the United States or elsewhere as in the Representative's judgment would make it inadvisable to proceed with the offering, sale and/or delivery of the Securities. (b) If this Agreement is terminated by the Representative in accordance with the provisions of Section 10(a) the Company shall promptly reimburse and indemnify the Representative for all of its actual out-of-pocket expenses, including the fees and disbursements of counsel for the Underwriters (less amounts previously paid pursuant to Section 5(c) above). Notwithstanding any contrary provision contained in this Agreement, if this Agreement shall not be carried out within the time specified herein, or any extension thereof granted to the Representative, by reason of any failure on the part of the Company to perform any undertaking or satisfy any condition of this Agreement by it to be performed or satisfied (including, without limitation, pursuant to Section 6 or Section 12) then, the Company shall promptly reimburse and indemnify the Underwriter for all of their actual out-of-pocket expenses, including the fees and disbursements of counsel for the Underwriter (less amounts previously paid pursuant to Section 5(c) above). In addition, the Company shall remain liable for all Blue Sky counsel fees and expenses and filing fees. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including, without limitation, pursuant to Sections 6, 10 and 12 hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 5 and Section 7 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 11. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the Underwriters shall fail otherwise than for a reason sufficient to justify the termination of this Agreement (under the provisions of Section 6, Section 10 or Section 12 hereof) to purchase the Securities which it or they are obligated to purchase on such date under this Agreement (the "Defaulted Securities"), the Representative shall have the right, within 24 hours thereafter, to make arrangement for one or more of the non-defaulting Underwriters, or any other Underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the total number of Firm Shares to be purchased on such date, the non-defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the total number of Firm Shares, this Agreement shall terminate without liability on the part of any non-defaulting Underwriters. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of any default by such Underwriter under this Agreement. 34 In the event of any such default which does not result in a termination of this Agreement, the Representative shall have the right to postpone the Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. 12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing Date or at any Option Closing Date, as applicable, to sell and deliver the number of Shares which it is obligated to sell hereunder on such date, then this Agreement shall terminate (or, if such default shall occur with respect to any Option Shares to be purchased on an Option Closing Date, the Underwriters may at their option, by notice from the Underwriters or the Representative to the Company, terminate the Underwriters' obligation to purchase Option Shares from the Company on such date) without any liability on the part of any non-defaulting party other than pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. 13. NOTICES. All notices and communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Representative shall be directed to the Representative at 805 third Avenue, New York, New York 10022, Attention: Robert A. Maley, with a copy to Baker & McKenzie, 1200 Brickell Avenue, Miami, Florida 33131, Attention: Andrew Hulsh, Esq. Notices to the Company shall be directed to the Company at 4161 N.W. 5th Street, Plantation, Florida 33317, Attention: Edward J. Lawson, with a copy to Broad & Cassel, 201 South Biscayne Blvd., Miami, Florida 33131, Attention: Dale S. Bergman, P.A. 14. PARTIES. This Agreement shall inure solely to the benefit of and shall be binding upon, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 7 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Securities from the Underwriters shall be deemed to be a successor by reason merely of such purchase. 15. CONSTRUCTION. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the choice of law or conflict of laws principles. 16. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to be one and the same instrument. 17. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Representative's Warrant Agreement constitute the entire agreement of the parties hereto and supersede all prior written or oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may not be amended except in a writing, signed by the Representative and the Company. 35 If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, 21ST CENTURY HOLDING COMPANY By: _________________________________________ Name: Edward J. Lawson Title: President Confirmed and accepted as of the date first above written. GILFORD SECURITIES INCORPORATED By:___________________________________ Name: Title: 36 SCHEDULE A UNDERWRITER NUMBER OF FIRM SHARES - ----------- --------------------- Gilford Securities Incorporated TOTAL 1,250,000 37 EX-3.1 3 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF 21ST CENTURY HOLDING COMPANY ARTICLE I - NAME The name of the Company is 21st CENTURY HOLDING COMPANY (hereinafter called the "Company"). ARTICLE II - MAILING ADDRESS The current mailing address of the principal place of business of the Company is 4164 N.W. 5th Street, Plantation, Florida 33317. ARTICLE III - CAPITAL STOCK The aggregate number of shares of all classes of capital stock which the Company shall have the authority to issue is 26,000,000, consisting of (i) 25,000,000 shares of common stock, par value $.01 per share (the "Common Stock"); and (ii) 1,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). A. PROVISIONS RELATING TO THE COMMON STOCK. 1. VOTING RIGHTS. Except as otherwise required by law or as may be provided by the resolutions of the Board of Directors authorizing the issuance of any class or series of the Preferred Stock, as herein provided, all rights to vote and all voting power shall be vested exclusively in the holders of the Common Stock with each share of Common Stock entitled to one vote. 2. DIVIDENDS. Subject to the rights of the holders of the Preferred Stock, the holders of the Common Stock shall be entitled to receive when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends and other distributions payable in cash, property, stock (including shares of any class or series of the Company, whether or not shares of such class or series are already outstanding) or otherwise. 3. LIQUIDATING DISTRIBUTIONS. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, and after the holders of the Preferred Stock shall have been paid in full the amounts to which they shall be entitled, if any, or a sum sufficient for such payment in full shall have been set aside, the remaining net assets of the Company, if any, shall be distributed pro rata to the holders of Common Stock in accordance with their respective rights and rests to the exclusion of the holders of Preferred Stock. B. PROVISIONS RELATING TO PREFERRED STOCK 1. GENERAL. The Preferred Stock may be issued from time to time, in one or more classes or series, the shares of each class or series to have such designations powers, preferences and rights, and qualifications, limitations and restrictions thereof as are stated and expressed herein and in the resolution or resolutions providing for the issuance of such class or series adopted by the Board of Directors as hereinafter prescribed. 2. PREFERENCES. Subject to the rights of the holders of the Company's Common Stock, authority is hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the Preferred Stock from time to time, in one or more classes or series, to determine and take necessary proceedings fully to effect the issuance conversion and redemption of any such Preferred Stock, and, with respect to each class or series of Preferred Stock, to fix and state by the resolution or resolutions from time to time adopted providing for the issuance thereof the following: (a) whether or not the class or series is to have voting rights, special or conditional, full or limited, or is to be without voting rights; (b) the number of shares to constitute the class or series and the designations thereof; (c) the preferences and relative, participating, optional or other special rights, if any, and the qualifications, limitations or restrictions thereof, if any, with respect to any class or series; (d) whether or not the shares of any class or series shall be redeemable and if redeemable the redemption price or prices, and the time or times at which and the terms and conditions upon which, such shares shall be redeemable and the manner of redemption; (e) whether or not the shares of a class or series shall be subject to the operation of retirement or sinking funds to be applied to the purchase or redemption of such shares for retirement, and if such retirement or sinking fund or funds be established, the periodic amount thereof and the terms and provisions relative to the operation thereof; (f) the dividend rate, whether dividends are payable in cash, stock or other property of the Company, the conditions upon which and the times when such dividends are payable, the preference to or the relation to the payment of the dividends payable, on any other class or classes or series of stock, whether or not such dividend shall be cumulative or noncumulative, and if cumulative, the date or dates from which such dividends shall accumulate; (g) the preferences, if any, and the amounts thereof that the holders of any class or series thereof shall be entitled to receive upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Company; 2 (h) whether or not the shares of any class or series shall be convertible into, or exchangeable for, the shares of any other class or classes or of any other series of the same or any other class or classes of the Company and the conversion price or prices or ratio or ratios or the rate or rates at which such conversion or exchange may be made, with such adjustments, if any, as shall be stated and expressed or provided for in such resolution or resolutions; and (i) such other special rights and protective provisions with respect to any class or series as the Board of Directors may deem advisable. The shares of each class or series of the Preferred Stock may vary from the shares of any other class or series thereof in any or all of the foregoing respects. The Board of Directors may increase the number of shares of Preferred Stock designated for any existing class or series by a resolution adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any other class or series. The Board of Directors may decrease the number of shares of the Preferred Stock designated for any existing class or series by a resolution, subtracting from such series unissued shares of the Preferred Stock designated for such class, or series, and the shares so subtracted shall become authorized, unissued and undesignated shares of the Preferred Stock. ARTICLE IV - REGISTERED AGENT The street address of the Company's registered office is 201 South Biscayne Boulevard, Suite 3000, Miami, Florida 33131. The name of the Company's registered agent at that address is B&C Corporate Services, Inc. ARTICLE V - BOARD OF DIRECTORS A. NUMBER OF DIRECTORS. The number of directors constituting the Company's Board of Directors shall not be less than three nor more than 15, and the exact number of Directors shall be fixed from time to time in the manner provided in the Company's Bylaws. B. TERM OF OFFICE. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. The number of directors in each class shall be determined by the Board of Directors and shall consist of as nearly equal a number of directors as practicable. The term of the Class I directors initially shall expire at the next ensuing annual meeting of shareholders; the term of Class II directors initially shall expire at the annual meeting of shareholders held one year thereafter; and the term of Class III directors initially shall expire at the annual meeting of shareholders held one year thereafter. In the case of each class, the directors shall serve until their respective successors are duly elected and qualified or until his or her earlier resignation, death, incapacity or removal from office. At each annual meeting of shareholders, directors of the respective class whose term expires shall be elected, and the directors chosen to succeed those whose terms shall have expired shall be elected to hold office for a term to expire at the third ensuing annual meeting of shareholders after their election, and until their respective successors are elected and qualified or until their earlier resignation, death, incapacity or removal from office. 3 C. VACANCIES. A director may resign at any time by giving written notice to the Company, the Board of Directors or the Chairman of the Board of Directors. Such resignation shall take effect when the notice is delivered unless the notice specifies a later effective date, in which event the Board of Directors may fill the pending vacancy before the effective date if they provide that the successor does not take office until the effective date. Any vacancy occurring in the Board of Directors due to death, resignation, retirement, disqualification, removal and any directorship to be filled by reason of an increase in the size of the Board of Directors shall be filled by the affirmative vote of a majority of the current directors though less than a quorum of the Board of Directors, or may be filled by an election at an annual or special meeting of the shareholders called for that purpose, unless otherwise provided by law. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, or until the next election of one or more directors by shareholders if the vacancy is caused by an increase in the number of directors. D. REMOVAL. A director may be removed from office prior to the expiration of his or her term: (i) only for cause; and (ii) only upon the affirmative vote of at least two-thirds of outstanding shares of capital stock of the Company entitled to vote for the election of directors. E. AMENDMENTS. Notwithstanding anything contained in these Articles of Incorporation to the contrary, this Article V shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote for the election of directors. ARTICLE VI - LIMITATION ON DIRECTOR LIABILITY A director shall not be personally liable to the Company or the holders of shares of capital stock for monetary damages for breach of fiduciary duty as a director, except (i) for any breach of the duty of loyalty of such director to the Company or such holders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 607.0831 of the Florida Business Company Act (the "FBCA"), or (iv) for any transaction from which such director derives an improper personal benefit. This Article VI shall be read to authorize the limitation of liability to the fullest extent permitted under Florida law. If the FBCA is hereafter amended to authorize the further or broader elimination or limitation of the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by the FBCA, as so amended. No repeal or modification of this Article VI shall adversely affect any right of or protection afforded to a director of the Company existing immediately prior to such repeal or modification. ARTICLE VII - SPECIAL MEETINGS OF SHAREHOLDERS Except as otherwise required by law and subject to the rights of the holders of the Preferred Stock, special meetings of shareholders of the Company may be called only by (i) the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, (ii) the Company's Chief Executive Officer or (iii) the holders of at least one-third of the outstanding shares of capital stock of the Company. Notwithstanding anything contained in these Amended 4 and Restated Articles of Incorporation to the contrary, this Article VII shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. ARTICLE VIII - NO SHAREHOLDER ACTION WITHOUT A MEETING Any action required or permitted to be taken by the shareholders of the Company shall be taken at a duly called annual or special meeting of such holders and may not be taken by any consent in writing by such holders. Notwithstanding anything contained in these Amended and Restated Articles of Incorporation to the contrary, this Article VIII shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. ARTICLE IX - INDEMNIFICATION The Company shall indemnify and advance expenses to, and may purchase and maintain insurance on behalf of, its officers and directors to the fullest extent permitted by law as now or hereafter in effect. Without limiting the generality of the foregoing, the Company's Bylaws (the "Bylaws") may provide for indemnification and advancement of expenses to officers, directors, employees and agents on such terms and conditions as the Board of Directors may from time to time deem appropriate or advisable. ARTICLE X - BYLAWS The Board of Directors shall have the power to adopt, amend or repeal the Bylaws or any part hereof. Certain provisions of the Bylaws, as stated therein, may not be altered, amended or repealed except by the affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Except for such provisions requiring a two-thirds vote to alter, amend or repeal, the Bylaws may be altered, amended or repealed, and new bylaws may be adopted, by the shareholders upon the affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Notwithstanding anything contained in these Amended and Restated Articles of Incorporation to the contrary, this Article X shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. ARTICLE XI - AMENDMENT Except as provided herein, these Amended and Restated Articles of Incorporation may be altered, amended or repealed by the shareholders of the Company in accordance with Florida law. 5 IN WITNESS WHEREOF, the undersigned, for the purpose of amending and restating the Company's Article of Incorporation pursuant to laws of the State of Florida, has executed these Amended and Restated Articles of Incorporation as of August, 1998. 21ST CENTURY HOLDING COMPANY By: -------------------------------------- Edward J. Lawson, Chairman and Chief Executive Officer EX-3.2 4 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF 21ST CENTURY HOLDING COMPANY ARTICLE I OFFICES SECTION 1. NAME. The name of the company is 21st Century Holding Company, a Florida Corporation (the "Company"). SECTION 2. OTHER OFFICES. The location of the registered office of the Company shall be as stated in the Articles of Incorporation, which location may be changed from time to time by the Company's Board of Directors (the "Board of Directors"). The Company may also have offices at such other places, either within or without the State of Florida, as the Board of Directors may from time to time determine or as the business of the Company may require. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. ANNUAL MEETINGS. All annual meetings of the shareholders of the Company for the election of directors and for such other business as may properly come before the meeting shall be held (i) on the fourth Friday of May of each calendar year at 10:00 a.m., Eastern time, or on such other date or at such other time as may be fixed, from time to time, by the Board of Directors, and (ii) at such place, within or without the State of Florida, as may be designated by or on behalf of the Board of Directors and stated in the notice of meeting or in a duly executed waiver of notice thereof. SECTION 2. SPECIAL MEETINGS. Except as otherwise required by law and subject to the rights of the holders of the Preferred Stock, special meetings of shareholders of the Company may be called only by (i) the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, (ii) the Company's Chief Executive Officer or (iii) the holders of at least one-third of the outstanding shares of capital stock of the Company. Special meetings of shareholders may be held at such time and date, and at such place, within or without the State of Florida, as shall be designated by the Board of Directors and set forth in the notice of meeting required pursuant to Section 3 of this Article. Notwithstanding anything contained in these Bylaws to the contrary, this Article II, Section 2 shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Only such business as is set forth in the notice of a special meeting may be transacted at such Special Meeting. SECTION 3. NOTICE. A written notice of each meeting of shareholders shall be given to each shareholder entitled to vote at the meeting, at the address as it appears on the stock transfer records of the Company, not less than ten nor more than 60 days before the date of the meeting, by or at the direction of the President, the Secretary or the officer or persons calling the meeting. The notice so given shall state the date, time and place of meeting and, in the case of a special shareholders' meeting, the purpose or purposes for which the meeting is called. SECTION 4. WAIVER OF NOTICE. Shareholders may waive notice of any meeting before or after the date and time specified in the written notice of meeting. Any such waiver of notice must be in writing, be signed by the shareholder entitled to the notice and be delivered to the Company for inclusion in the appropriate corporate records. Neither the business to be transacted at, nor the purpose of, any shareholders' meeting need be specified in any written waiver of notice. Attendance of a person at a shareholders' meeting shall constitute a waiver of notice of such meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. SECTION 5. RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at a shareholders' meeting, to demand a special meeting, to act by written consent or to take any other action, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 70 days nor, in the case of a shareholders' meeting, less than ten days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice or to vote at a shareholders' meeting, then the record date for such shall be the close of business on the day before the first notice is delivered to shareholders. SECTION 6. QUORUM. A majority of the shares entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum for action on that matter at a meeting of shareholders. If a quorum is not present or represented at a meeting of shareholders, the holders of a majority of the shares represented, and who would be entitled to vote at a meeting if a quorum were present, may adjourn the meeting from time to time and to another place, without notice other than announcement at the meeting, until a quorum shall be present or represented. Once a quorum has been established at a shareholders' meeting, the subsequent withdrawal of shareholders, so as to reduce the number of shares entitled to vote at the meeting below the number required for a quorum, shall not affect the validity of any action taken at the meeting or any adjournment thereof. SECTION 7. VOTING. If a quorum is present, action on a matter, other than the election of directors, shall be approved if the votes cast by the shareholders represented at the meeting and entitled to vote on the subject matter favoring the action exceeds the votes cast opposing the action, unless a greater number of affirmative votes or voting by classes is required by Florida law or by the Articles of Incorporation. Directors shall be elected by plurality vote in accordance with Article III, Section 3 of these Bylaws. Each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, unless otherwise provided under the Articles of Incorporation (or any resolution authorizing any class or series of Preferred Stock) or under Florida law. SECTION 8. PROXIES. A shareholder entitled to vote at any meeting of shareholders or any adjournment thereof may vote in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for him by signing an appointment form, either personally or by his attorney-in- 2 fact. An appointment of proxy is effective when received by the Secretary or other officer or agent authorized to tabulate votes. SECTION 9. NO SHAREHOLDER ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the shareholders of the Company shall be taken at a duly called annual or special meeting of such holders and may not be taken by any consent in writing by such holders. Notwithstanding anything contained in these Bylaws to the contrary, this Article II, Section 9 shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. SECTION 10. ADVANCE NOTICE OF SHAREHOLDER PROPOSED BUSINESS AT ANNUAL MEETING. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Company, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class and number of shares of the Company which are beneficially owned by the shareholder, and (iv) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Article II, Section 10; provided, however, that nothing in this Article II, Section 10, shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting in accordance with said procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article II, Section 10, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 3 Notwithstanding anything contained in the Bylaws to the contrary, this Article II, Section 10 shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote thereon. ARTICLE III DIRECTORS SECTION 1. POWERS. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Board of Directors. Directors must be natural persons who are at least 18 years of age but need not be residents of Florida or shareholders of the Company. SECTION 2. COMPENSATION. Directors of the Company who also serve as officers or members of management ("Employee Directors") shall serve as directors without compensation. Non-employee directors of the Company shall be entitled to receive such compensation and benefits as is from time to time determined by the Board of Directors. The Employee Directors may be paid their expenses, if any, and the non-employee directors may be paid a fee and expenses, if any, of attendance at each meeting of the Board of Directors or of any committee. No such payments shall preclude any director from serving in any other capacity and receiving compensation therefor. SECTION 3. NUMBER, ELECTION & TERM. The Company's Board of Directors shall consist of not less than three nor more than 15 members, with the exact number to be fixed from time to time in accordance with a resolution adopted by a majority of the entire Board of Directors. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. The number of directors in each class shall be as nearly equal in number as practicable. The term of the Class I directors shall expire at the next ensuing annual meeting of shareholders; the term of the Class II directors shall expire at the annual meeting of shareholders held one year thereafter; and the term of the Class III directors shall expire at the annual meeting of shareholders held one year thereafter, in each case until his or her successor is duly elected and qualified or until his or her earlier resignation, death, incapacity or removal from office. Upon the expiration of the initial terms of office for each class of directors, the successor directors of each class shall be elected for a full term of three years, to serve until their successors are duly elected and qualified or until their earlier resignation, death, incapacity or removal from office. The Board of Directors shall apportion any increase or decrease in the number of directors among the classes as nearly equal in number as possible. SECTION 4. VACANCIES. Whenever any vacancy on the Board of Directors shall occur due to death, resignation, retirement, disqualification, removal, increase in the number of directors, or otherwise, a majority of the remaining directors in office, although less than a quorum of the Board of Directors, may fill the vacancy for the balance of the unexpired term, at which time a successor or successors shall be duly elected by the shareholders and qualified. Notwithstanding the provisions of any other Article hereof, only the remaining directors of the Company shall have the authority, in accordance with the procedure stated herein, to fill any vacancy that arises on the Board of Directors. 4 SECTION 5. REMOVAL OF DIRECTORS. A director may be removed from office prior to the expiration of his or her term: (i) only for cause; and (ii) only upon the affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote for the election of directors. SECTION 6. QUORUM AND VOTING. A majority of the number of directors fixed by or in accordance with these Bylaws shall constitute a quorum for the transaction of business at any meeting of directors. If a quorum is present when a vote is taken, the affirmative vote of a majority of the directors present shall be the act of the Board of Directors. SECTION 7. DEEMED ASSENT. A director who is present at a meeting of the Board of Directors or a committee of the Board of Directors when corporate action is taken is deemed to have assented to the action taken unless (i) the director objects at the beginning of the meeting (or promptly upon his arrival) to the holding of the meeting or transacting specified business at the meeting, or (ii) the director votes against or abstains from the action taken. SECTION 8. COMMITTEES. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an executive committee, a compensation committee, an audit committee and one or more other committees each of which must have at least two members and, to the extend provided in the designating resolution, shall have and may exercise all the authority of the Board of Directors, except such authority as may be reserved to the Board of Directors under Florida law. (a) EXECUTIVE COMMITTEE. The Board of Directors by resolution may designate one or more directors to constitute an executive committee, which committee, to the extent provided in such resolution, shall have and may exercise all powers and authority of the Board of Directors in the management of the business and affairs of the Company, except where action of the Board of Directors is required by statute. (b) OTHER COMMITTEES. The Board of Directors may by resolution create other committees for such terms and with such powers and duties as the Board of Directors shall deem appropriate. (c) ORGANIZATION OF COMMITTEES. The chairman of all committees of the Board of Directors shall be chosen by the members thereof. Each committee shall elect a secretary, who shall be either a member of the committee or the secretary of the Company. The chairman of each committee shall preside at all meetings of such committee. (d) MEETINGS. Regular meetings of each committee may be held without the giving of notice if a day of the week, a time, and a place shall have been established by the committee for such meetings. Special meetings (and, if the requirements of the preceding sentence have not been met, regular meetings) shall be called as provided in Section 9 with respect to notices of special meetings of the Board of Directors. 5 (e) QUORUM AND MANNER OF ACTING. A majority of the members of each committee shall be present either in person or by telephone, radio, television, or similar means of communication through which all persons participating may simultaneously hear each other at all times, at each meeting of such committee in order to constitute a quorum for the transaction of business. The act of a majority of the members so present at a meeting at which a quorum is present shall be the act of such committee. The members of each committee shall act only as a committee, and shall have no power or authority, as such, by virtue of their membership on the committee. (f) RECORD OF COMMITTEE ACTION; REPORTS. Each committee shall maintain a record, which need not be in the form of complete minutes, of the action taken by it at each meeting, which record shall include the date, time and place of the meeting, the names of the members present and absent, the action considered, and the number of votes cast for and against the adoption of the action considered. All action by each committee shall be reported to the Board of Directors at its meeting next succeeding such action, such report to be in sufficient detail as to enable the Board of Directors to be informed of the conduct of the Company's business and affairs since the last meeting of the board. (g) REMOVAL. Any member of any committee may be removed from such committee, either with or without cause, at any time by resolution adopted by a majority of the whole Board of Directors at any meeting of the board. (h) VACANCIES. Any vacancy in any committee shall be filled by the Board of Directors in the manner prescribed by these Bylaws. SECTION 9. MEETINGS. Regular and special meetings of the Board of Directors shall be held at the principal place of business of the Company or at any other place, within or without the State of Florida, designated by the person or persons entitled to give notice of or otherwise call the meeting. Meetings of the Board of Directors may be called by the President or by any two directors. Members of the Board of Directors (and any committee of the Board of Directors) may participate in a meeting of the Board of Directors (or any committee of the Board of Directors) by means of a conference telephone or similar communications equipment through which all persons participating may simultaneously hear each other during the meeting; participation by these means constitutes presence in person at the meeting. SECTION 10. NOTICE OF MEETINGS. Regular meetings of the Board of Directors may be held without notice of the date, time, place or purpose of the meeting, so long as the date, time and place of such meetings are fixed generally by the Board of Directors. Special meetings of the Board of Directors must be preceded by at least two days' written notice of the date, time and place of the meeting. The notice need not describe either the business to be transacted at or the purpose of the special meeting. SECTION 11. WAIVER OF NOTICE. Notice of a meeting of the Board of Directors need not be given to a director who signs a waiver of notice either before or after the meeting. Attendance of a director at a meeting shall constitute a waiver of notice of that meeting and a waiver of any and all objections to the place of the meeting, the time of the meeting and the manner in which it has 6 been called or convened, except when a director states, at the beginning of the meeting or promptly upon arrival at the meeting, any objection to the transaction of business because the meeting is not lawfully called or convened. The waiver of notice need not describe either the business to be transacted at or the purpose of the special meeting. SECTION 12. DIRECTOR ACTION WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the Board of Directors (or a committee of the board) may be taken without a meeting if the action is taken by the written consent of all members of the Board of Directors (or of the committee of the Board of Directors). The action must be evidenced by one or more written consents describing the action to be taken and signed by each director (or committee member), which consent(s) shall be filed in the minutes of the proceedings of the Board of Directors. The action taken shall be deemed effective when the last director signs the consent, unless the consent specifies otherwise. SECTION 13. SHAREHOLDER NOMINATIONS FOR DIRECTOR CANDIDATES. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Company may be made at a meeting of shareholders by or at the direction of the Board of Directors by any nominating committee or person appointed by the Board of Directors or by any shareholder of the Company entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Article III, Section 13. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Company. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made whichever first occurs. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the persons, (iii) the class and number of shares of capital stock of the Company which are beneficially owned by the person, (iv) the consent of each nominee to serve as a director of the Company if so elected, and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice, (i) the name and record address of shareholder, and (ii) the class and number of shares of capital stock of the Company which are beneficially owned by the shareholder. The Company may require any proposed nominee to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as director of the Company. No person shall be eligible for election as a director of the Company unless nominated in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he 7 should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 14. AMENDMENTS. Notwithstanding anything contained in the Bylaws to the contrary, this Article III shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote thereon. ARTICLE IV OFFICERS SECTION 1. OFFICERS. The officers of the Company shall consist of a President, one or more Vice Presidents and Secretaries and a Treasurer and if elected by the Board of Directors by resolution, a Chairman. Such other officers and assistant officers and agents as may be deemed necessary or desirable may be appointed by the Board of Directors. Any two or more offices may be held by the same person. SECTION 2. DUTIES. The officers of the Company shall have the following duties: The CHIEF EXECUTIVE OFFICER shall have general and active management of the business and affairs of the Company subject to the direction of the Board of Directors. The Chief Executive Officer shall see to it that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board of Directors or in the event the Board of Directors shall not have designated a Chairman of the Board of Directors, the Chief Executive Officer shall preside at all meetings of the Board of Directors and shareholders. The PRESIDENT shall have such powers and perform such duties as the Board of Directors shall from time to time designate. In the absence or disability of the Chief Executive Officer, the President shall have the powers and shall exercise the duties of the Chief Executive Officer. Each VICE PRESIDENT, if any, shall have such powers and perform such duties as the Board of Directors shall from time to time designate. In the absence or disability of the President, a Vice President specifically designated by the vote of the Board of Directors shall have the powers and shall exercise the duties of the President. The SECRETARY shall have custody of and shall maintain all of the corporate records (except the financial records), shall record the minutes of all meetings of the shareholders and the Board of Directors, shall authenticate records of the Company, shall send all notices of meetings and shall perform such other duties as are prescribed by the Board of Directors or the President, under whose supervision he shall be. The TREASURER shall have custody of all corporate funds, securities and financial records, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all monies and other valuable effects in the name and to the credit of the Company in such depositaries as may be designated by the Board of Directors. He shall 8 disburse the funds of the Company as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render an account of all his transactions as treasurer and of the financial condition of the Company at regular meetings of the Board of Directors or when the Board of Directors so requests. The Treasurer shall also perform such other duties as are prescribed by the Board of Directors. Each ASSISTANT SECRETARY and ASSISTANT TREASURER, if any, shall be appointed by the Board of Directors and shall have such powers and shall perform such duties as shall be assigned to them by the Board of Directors. SECTION 3. RESIGNATION OF OFFICER. An officer may resign at any time by delivering notice to the Company. The resignation shall be effective upon receipt, unless the notice specifies a later effective date acceptable to the Board of Directors. If the resignation is effective at a later date and the Company accepts the future effective date, the Board of Directors may fill the pending vacancy before the effective date provided the Board of Directors provides that the successor officer does not take office until the future effective date. SECTION 4. REMOVAL OF OFFICER. The Board of Directors may remove any officer at any time with or without cause. SECTION 5. COMPENSATION. The compensation of officers shall be fixed from time to time at the discretion of the Board of Directors. The Board of Directors may enter into employment agreements with any officer of the Company. ARTICLE V STOCK CERTIFICATES SECTION 1. ISSUANCE. Every holder of shares in this Company shall be entitled to have a certificate representing all shares to which he is entitled. No certificate shall be issued for any share until the consideration therefor has been fully paid. SECTION 2. FORM. Certificates representing shares in this Company shall be signed by the President and the Secretary of the Company, or any other officer so designated by the Board of Directors. SECTION 3. LEGENDS FOR PREFERENCES AND RESTRICTIONS ON TRANSFER. If the Company shall be authorized to issue more than one class of stock or more them one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Company shall issue to represent such class or series of stock, provided that, except as otherwise provided by law, in lieu of the foregoing requirements, there be set forth on the face or back of the certificate which the Company shall issue to represent such class or series of stock, a statement that the Company will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of 9 each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. A written restriction on the transfer or registration of transfer of a security of the Company, if permitted by law and noted conspicuously on the certificate representing the security may be enforced against the holder of the restricted security or any successor or transferee of the holder including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate representing the security, a restriction, even though permitted by law, is ineffective except against a person with actual knowledge of the restriction. If the Company issues any shares that are not registered under the Securities Act of 1933, as amended, and registered or qualified under the applicable state securities laws, the transfer of any such shares shall be restricted substantially in accordance with the following legend, or in such other form as the Board of Directors may provide from time to time: "THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AT HOLDER'S EXPENSE, AN OPINION (SATISFACTORY TO THE COMPANY) OF COUNSEL (SATISFACTORY TO THE COMPANY) THAT REGISTRATION IS NOT REQUIRED." SECTION 4. FACSIMILE SIGNATURES. Any and all signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer, transfer agent or registrar at the date of the issue. SECTION 5. REGISTERED SHAREHOLDERS. The Company shall be entitled to treat the holder of record of shares as the holder in fact and, except as otherwise provided by the laws of Florida, shall not be bound to recognize any equitable or other claim to or interest in the shares. SECTION 6. TRANSFER OF SHARES. Shares of the Company shall be transferred on its books only after the surrender to the Company or the transfer agent of the share certificates duly endorsed by the holder of record or attorney-in-fact. If the surrendered certificates are canceled, new certificates shall be issued to the person entitled to them, and the transaction recorded on the books of the Company. SECTION 7. LOST, STOLEN OR DESTROYED CERTIFICATES. If a shareholder claims to have lost or destroyed a certificate of shares issued by the Company, a new certificate shall be issued upon delivery to the Company of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed, and, at the discretion of the Board of Directors, upon the deposit of a bond or other indemnity as the Board of Directors reasonably requires. 10 ARTICLE VI DISTRIBUTIONS The Board of Directors may, in its sole judgment and discretion, from time to time authorize and declare, and the Company may pay, distributions on its outstanding shares in cash, property or its own shares, unless the distribution, after giving it effect, would result in (i) the Company being unable to pay its debts as they become due in the usual course of business, or (ii) a violation of applicable law. ARTICLE VII CORPORATE RECORDS The Company shall keep as permanent records minutes of all meetings of its shareholders and Board of Directors, a record of all actions taken by the Board of Directors without a meeting, and a record of all actions taken by a committee of the Board of Directors in place of the Board of Directors on behalf of the Company. The Company shall also maintain accurate accounting records and a record of its shareholders in a form that permits preparation of a list of the names and addresses of all shareholders in alphabetical order by class of shares showing the number and series of shares held by each. ARTICLE VIII INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS SECTION 1. INDEMNIFICATION. The Company shall, and does hereby, indemnify and hold harmless to the fullest extent permitted or authorized by current or future legislation or current or future judicial or administrative decisions (but, in the case of any such future legislation or decisions, only to the extent that it permits the Company to provide broader indemnification rights than permitted prior to such legislation or decisions), each person (including here and hereinafter, the heirs, executors, administrators, personal representatives or estate of such person) who was or is a party, or is threatened to be made a party, or was or is a witness, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), from, against and in respect of any liability (which for purposes of this Article shall include any judgment, settlement penalty or fine) or cost, charge or expense (including attorneys' fees and expenses) asserted against him or incurred by him by reason of the fact that such indemnified person (1) is or was a director or officer of the Company or (2) is or was an employee or agent of the Company as to whom the Company has agreed in writing to grant such indemnity or (3) is or was serving, at the request of the Company, as a director, officer, employee or trustee of another Company, partnership, joint venture, trust or other enterprise (including serving as a fiduciary of an employee benefit plan) or is or was serving as an agent of such other Company, partnership, joint venture, trust or other enterprise in each case, as to whom the Company has agreed in writing to grant such indemnity. Each director, officer, employee or agent of the Company as to whom indemnification rights have been granted under this Section 1 of this Article shall be referred to as an "Indemnified Person". 11 Notwithstanding the foregoing, except as specified in Section 3 of this Article, the Company shall not be required to indemnify an Indemnified Person in connection with a Proceeding (or any part thereof) initiated by such Indemnified Person unless the authorization for such Proceeding (or any part thereof) was not cleared by the Board of Directors of the Company within 60 days after receipt of notice thereof from such Indemnified Person stating his intent to initiate such Proceeding and only then upon such terms and conditions as the Board of Directors may deem appropriate. SECTION 2. ADVANCE OF COSTS, CHARGES AND EXPENSES. Costs, charges and expenses (including attorneys' fees and expenses) incurred by an officer or director who is an Indemnified Person in defending a Proceeding shall be paid by the Company, to the fullest extent permitted or authorized by current or future legislation or current of future judicial or administrative decisions (but, in the case of any such future legislation or decisions, only to the extent that it permits the Company to provide broader rights to advance costs, charges and expenses than permitted prior to such legislation or decisions), in advance of the final disposition of such Proceeding, upon receipt of an undertaking by or on behalf of the Indemnified Person to repay all amounts so advanced in the event that it shall ultimately be determined that such person is not entitled to be indemnified by the Company as authorized in this Article. The Company may, upon approval of the Indemnified Person, authorize the Company's counsel to represent such person in any Proceeding, whether or not the Company is a party to such Proceeding. Such authorization may be made by the Chairman of the Board, unless he is a party to such Proceeding, or by the Board of Directors by majority vote, including directors who are parties to such Proceeding. SECTION 3. PROCEDURE FOR INDEMNIFICATION. Any indemnification or advance under this Article shall be made promptly and in any event within 45 days upon the written request of the Indemnified Person. The right to indemnification or advances as granted by this Article shall be enforceable by the Indemnified Person in any court of competent jurisdiction, if the Company denies such request under this Article, in whole or in part, or if no disposition thereof is made within 45 days. Such Indemnified Person's costs and expenses incurred in connection with successfully establishing his right to indemnification or advances, in whole or in part, in any such action shall also be indemnified by the Company. It shall be a defense to any such action that the claimant has not met the standard of conduct, if any, required by current or future legislation or by current or future judicial or administrative decisions for Indemnification (but, in the case of any such future legislation or decisions, only to the extent that it does not impose a more stringent standard of conduct than permitted prior to such legislation or decision), but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors or any committee thereof, its independent legal counsel, and its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct, if any, nor the fact that there has been an actual determination by the Company (including its Board of Directors or any committee thereof, its independent legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 12 SECTION 4. RIGHTS NOT EXCLUSIVE; CONTRACT RIGHTS; SURVIVAL. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any agreement, vote of shareholders or disinterested directors or otherwise, both as to actions in such person's official capacity and as to actions in another capacity while holding such office, and shall continue as to an Indemnified Person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, administrators, personal representatives and estate of such person. All rights to indemnification and advances under this Article shall be deemed to be a contract between the Company and each Indemnified Person who serves or served in such capacity at any time while this Article is in effect and, as such, are enforceable against the Company. Any repeal or modification of this Article or any repeal or modification of relevant provisions of Florida's Company law or any other applicable laws shall not in any way diminish these rights to indemnification of or advances to such Indemnified Person, or the obligations of the Company arising hereunder, for claims relating to matters occurring prior to such repeals or modification. SECTION 5. INSURANCE. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee or agent of another Company partnership, joint venture, trust or other enterprise (including serving as a fiduciary of an employee benefit plan), with respect to any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of this Article or the applicable provisions of Florida law. SECTION 6. SAVINGS CLAUSE. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and hold harmless, and make advances to, each Indemnified Person as to costs, charges and expenses (including attorneys' fees), liabilities, judgments, fines and amounts paid in settlement with respect to any Proceeding, including any action by or in the right of the Company, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated and as otherwise permitted by applicable law. ARTICLE IX MISCELLANEOUS SECTION 1. CORPORATE SEAL. The corporate seal of the Company shall be circular in form and shall include the name and jurisdiction of incorporation of the Company. SECTION 2. FISCAL YEAR. The fiscal year of the Company shall end on December 31 of each calendar year, unless otherwise fixed by resolution of the Board of Directors. SECTION 3. CHECKS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Company shall be signed by the President, the Treasurer or such other officer(s) or agent(s) of the Company as shall be determined from time to time by resolution of the Board of Directors. 13 ARTICLE X AMENDMENT The Board of Directors shall have the power to adopt, amend or repeal the Bylaws or any part hereof. Certain provisions of the Bylaws, as stated herein, may not be altered, amended or repealed except by the affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Except for such provisions requiring a two-thirds vote to alter, amend or repeal, the Bylaws may be altered, amended or repealed, and new bylaws may be adopted, by the shareholders upon the affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Notwithstanding anything contained in these Bylaws to the contrary, this Article X shall not be altered, amended or repealed except by an affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. 14 EX-10.1 5 EXHIBIT 10.1 -------------------------------------- 21ST CENTURY HOLDING COMPANY 1998 STOCK OPTION PLAN -------------------------------------- 1. PURPOSE. The purpose of this Plan is to advance the interests of 21ST CENTURY HOLDING COMPANY, a Florida corporation (the "Company"), by providing an additional incentive to attract, retain and motivate highly qualified and competent persons who are key to the Company, including key employees, consultants, independent contractors, Officers and Directors, and upon whose efforts and judgment the success of the Company and its Subsidiaries is largely dependent, by authorizing the grant of options to purchase Common Stock of the Company to persons who are eligible to participate hereunder, thereby encouraging stock ownership in the Company by such persons, all upon and subject to the terms and conditions of this Plan. 2. DEFINITIONS. As used herein, the following terms shall have the meanings indicated: (a) "Board" shall mean the Board of Directors of the Company. (b) "Cause" shall mean any of the following: (i) a determination by the Company that there has been a willful, reckless or grossly negligent failure by the Optionee to perform his or her duties as an employee of the Company; (ii) a determination by the Company that there has been a willful breach by the Optionee of any of the material terms or provisions of any employment agreement between such Optionee and the Company; (iii) any conduct by the Optionee that either results in his or her conviction of a felony under the laws of the United States of America or any state thereof, or of an equivalent crime under the laws of any other jurisdiction; (iv) a determination by the Company that the Optionee has committed an act or acts involving fraud, embezzlement, misappropriation, theft, breach of fiduciary duty or material dishonesty against the Company, its properties or personnel; (v) any act by the Optionee that the Company determines to be in willful or wanton disregard of the Company's best interests, or which results, or is intended to result, directly or indirectly, in improper gain or personal enrichment of the Optionee at the expense of the Company; (vi) a determination by the Company that there has been a willful, reckless or grossly negligent failure by the Optionee to comply with any rules, regulations, policies or procedures of the Company, or that the Optionee has engaged in any act, behavior or conduct demonstrating a deliberate and material violation or disregard of standards of behavior that the Company has a right to expect of its employees; or (vii) if the Optionee, while employed by the Company and for two years thereafter, violates a confidentiality and/or noncompete agreement with the Company, or fails to safeguard, divulges, communicates, uses to the detriment of the Company or for the benefit of any person or persons, or misuses in any way, any Confidential Information; PROVIDED, HOWEVER, that, if the Optionee has entered into a written employment agreement with the Company which remains effective and which expressly provides for a termination of such Optionee's employment for "cause", the term "Cause" as used herein shall have the meaning as set forth in the Optionee's employment agreement in lieu of the definition of "Cause" set forth in this Section 2(b). (c) "Change of Control" shall mean the acquisition by any person or group (as that term is defined in the Exchange Act, and the rules promulgated pursuant to that act) in a single transaction or a series of transactions of thirty percent (30%) or more in voting power of the outstanding stock of the Company and a change of the composition of the Board of Directors so that, within two years after the acquisition took place, a majority of the members of the Board of Directors of the Company, or of any corporation with which the Company may be consolidated or merged, are persons who were not directors or officers of the Company or one of its Subsidiaries immediately prior to the acquisition, or to the first of a series of transactions which resulted in the acquisition of thirty percent (30%) or more in voting power of the outstanding stock of the Company. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) "Committee" shall mean the stock option committee appointed by the Board or, if not appointed, the Board. (f) "Common Stock" shall mean the Company's Common Stock, par value $.01 per share. (g) "Director" shall mean a member of the Board. (h) "Employee" shall mean any person, including officers, directors, consultants and independent contractors employed by the Company or any parent or Subsidiary of the Company within the meaning of Section 3401(c) of the regulators promulgated thereunder. (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (j) "Fair Market Value" of a Share on any date of reference shall be the Closing Price of a share of Common Stock on the business day immediately preceding such date, unless the Committee in its sole discretion shall determine otherwise in a fair and uniform manner. For this purpose, the "Closing Price" of the Common Stock on any business day shall be (i) if the Common Stock is listed or admitted for trading on any United States national 2 securities exchange, or if actual transactions are otherwise reported on a consolidated transaction reporting system, the last reported sale price of the Common Stock on such exchange or reporting system, as reported in any newspaper of general circulation, (ii) if the Common Stock is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for such day of the Common Stock on such system, or (iii) if neither clause (i) nor (ii) is applicable, the mean between the high bid and low asked quotations for the Common Stock as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for the Common Stock on at least five of the 10 preceding days. If the information set forth in clauses (i) through (iii) above is unavailable or inapplicable to the Company (e.g., if the Company's Common Stock is not then publicly traded or quoted), then the "Fair Market Value" of a Share shall be the fair market value (i.e., the price at which a willing seller would sell a Share to a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of all relevant facts) of a share of the Common Stock on the business day immediately preceding such date as the Committee in its sole and absolute discretion shall determine in a fair and uniform manner. (k) "Incentive Stock Option" shall mean an incentive stock option as defined in Section 422 of the Code. (l) "Non-Statutory Stock Option" or "Nonqualified Stock Option" shall mean an Option which is not an Incentive Stock Option. (m) "Officer" shall mean the Company's chairman, president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of the Company in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the Company. Officers of Subsidiaries shall be deemed Officers of the Company if they perform such policy-making functions for the Company. As used in this paragraph, the phrase "policy-making function" does not include policy-making functions that are not significant. Unless specified otherwise in a resolution by the Board, an "executive officer" pursuant to Item 401(b) of Regulation S-K (17 C.F.R. section 229.401(b)) shall be only such person designated as an "Officer" pursuant to the foregoing provisions of this paragraph. (n) "Option" (when capitalized) shall mean any stock option granted under this Plan. (o) "Optionee" shall mean a person to whom an Option is granted under this Plan or any person who succeeds to the rights of such person under this Plan by reason of the death of such person. (p) "Plan" shall mean this 1998 Stock Option Plan of the Company, which Plan shall be effective upon approval by the Board, subject to approval, within 12 months of the 3 date thereof by holders of a majority of the Company's issued and outstanding Common Stock of the Company. (q) "Share" or "Shares" shall mean a share or shares, as the case may be, of the Common Stock, as adjusted in accordance with Section 10 of this Plan. (r) "Subsidiary" shall mean any corporation (other than the Company) in any unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. SHARES AND OPTIONS. Subject to adjustment in accordance with Section 10 hereof, the Company may grant to Optionees from time to time Options to purchase an aggregate of up to Three Hundred and Fifty Thousand (350,000) Shares from Shares held in the Company's treasury or from authorized and unissued Shares. If any Option granted under this Plan shall terminate, expire, or be canceled, forfeited or surrendered as to any Shares, the Shares relating to such lapsed Option shall be available for issuance pursuant to new Options subsequently granted under this Plan. Upon the grant of any Option hereunder, the authorized and unissued Shares to which such Option relates shall be reserved for issuance to permit exercise under this Plan. Subject to the provisions of Section 14 hereof, an Option granted hereunder shall be either an Incentive Stock Option or a Non-Statutory Stock Option as determined by the Committee at the time of grant of such Option and shall clearly state whether it is an Incentive Stock Option or Non-Statutory Stock Option. All Incentive Stock Options shall be granted within 10 years from the effective date of this Plan. 4. LIMITATIONS. Options otherwise qualifying as Incentive Stock Options hereunder will not be treated as Incentive Stock Options to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the Shares, with respect to which Options meeting the requirements of Code Section 422(b) are exercisable for the first time by any individual during any calendar year (under all stock option or similar plans of the Company and any Subsidiary), exceeds $100,000. 5. CONDITIONS FOR GRANT OF OPTIONS. (a) Each Option shall be evidenced by an option agreement that may contain any term deemed necessary or desirable by the Committee, provided such terms are not inconsistent with this Plan or any applicable law. Optionees shall be those persons selected by the Committee from the class of all regular Employees of the Company or its Subsidiaries, including Employee directors and officers who are regular or former regular employees of the Company, Directors who are not regular employees of the Company, as well as consultants to the Company. Any person who files with the Committee, in a form satisfactory to the Committee, a written waiver of eligibility to receive any Option under this Plan shall not be eligible to receive any Option under this Plan for the duration of such waiver. 4 (b) In granting Options, the Committee shall take into consideration the contribution the person has made, or is expected to make, to the success of the Company or its Subsidiaries and such other factors as the Committee shall determine. The Committee shall also have the authority to consult with and receive recommendations from Officers and other personnel of the Company and its Subsidiaries with regard to these matters. The Committee may from time to time in granting Options under this Plan prescribe such terms and conditions concerning such Options as it deems appropriate, including, without limitation, (i) the exercise price or prices of the Option or any installments thereof, (ii) prescribing the date or dates on which the Option becomes and/or remains exercisable, (iii) providing that the Option vests or becomes exercisable in installments over a period of time, and/or upon the attainment of certain stated standards, specifications or goals, (iv) relating an Option to the continued employment of the Optionee for a specified period of time, or (v) conditions or termination events with respect to the exercisability of any Option, provided that such terms and conditions are not more favorable to an Optionee than those expressly permitted herein; provided, however, that to the extent not cancelled pursuant to Section 9(b) hereof, upon a Change in Control, any Options that have not yet vested, may, in the sole discretion of the Committee, vest upon such Change in Control. (c) The Options granted to employees under this Plan shall be in addition to regular salaries, pension, life insurance or other benefits related to their employment with the Company or its Subsidiaries. Neither this Plan nor any Option granted under this Plan shall confer upon any person any right to employment or continuance of employment (or related salary and benefits) by the Company or its Subsidiaries. 6. EXERCISE PRICE. The exercise price per Share of any Option shall be any price determined by the Committee but shall not be less than the par value per Share; provided, however, that in no event shall the exercise price per Share of any Incentive Stock Option be less than the Fair Market Value of the Shares underlying such Option on the date such Option is granted and, in the case of an Incentive Stock Option granted to a 10% shareholder, the per Share exercise price will not be less than 110% of the Fair Market Value in accordance with Section 14 of this Plan. Re-granted Options, or Options which are canceled and then re-granted covering such canceled Options, will, for purposes of this Section 6, be deemed to have been granted on the date of the re-granting. 7. EXERCISE OF OPTIONS. (a) An Option shall be deemed exercised when (i) the Company has received written notice of such exercise in accordance with the terms of the Option, (ii) full payment of the aggregate option price of the Shares as to which the Option is exercised has been made, (iii) the Optionee has agreed to be bound by the terms, provisions and conditions of any applicable shareholders' agreement, and (iv) arrangements that are satisfactory to the Committee in its sole discretion have been made for the Optionee's payment to the Company of the amount that is necessary for the Company or the Subsidiary employing the Optionee to withhold in accordance with applicable Federal or state tax withholding requirements. Unless further limited by the Committee in any Option, the exercise price of any Shares purchased pursuant to the exercise of such Option shall be paid in cash, by certified or official bank check, by money order, 5 with Shares or by a combination of the above; provided, however, that the Committee in its sole discretion may accept a personal check in full or partial payment of any Shares. If the exercise price is paid in whole or in part with Shares, the value of the Shares surrendered shall be their Fair Market Value on the date the Option is exercised. The Company in its sole discretion may, on an individual basis or pursuant to a general program established by the Committee in connection with this Plan, lend money to an Optionee to exercise all or a portion of the Option granted hereunder. If the exercise price is paid in whole or part with the Optionee's promissory note, such note shall (i) provide for full recourse to the maker, (ii) be collateralized by the pledge of the Shares that the Optionee purchases upon exercise of such Option, (iii) bear interest at a rate no less than the rate of interest payable by the Company to its principal lender, and (iv) contain such other terms as the Committee in its sole discretion shall require. No Optionee shall be deemed to be a holder of any shares subject to an Option unless and until a stock certificate or certificates for such shares are issued to the person(s) under the terms of this Plan. No adjustments shall be made for dividends (ordinary or extraordinary, whether in cash, securities or property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Section 10 hereof. (b) No Optionee shall be deemed to be a holder of any Shares subject to an Option unless and until a stock certificate or certificates for such Shares are issued to such person(s) under the terms of this Plan. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Section 10 hereof. 8. EXERCISABILITY OF OPTIONS. Any Option shall become exercisable in such amounts, at such intervals, upon such events or occurrences and upon such other terms and conditions as shall be provided in an individual Option agreement evidencing such Option, except as otherwise provided in Section 5(b) or this Section 8. (a) The expiration date(s) of an Option shall be determined by the Committee at the time of grant, but in no event shall an Option be exercisable after the expiration of 10 years from the date of grant of the Option. (b) Unless otherwise expressly provided in any Option as approved by the Committee, notwithstanding the exercise schedule set forth in any Option, each outstanding Option, may, in the sole discretion of the Committee, become fully exercisable upon the date of the occurrence of any Change of Control, but, unless otherwise expressly provided in any Option, no earlier than six months after the date of grant, and if and only if Optionee is in the employ of the Company on such date. (c) The Committee may in its sole discretion accelerate the date on which any Option may be exercised and may accelerate the vesting of any Shares subject to any Option or previously acquired by the exercise of any Option. 6 9. TERMINATION OF OPTION PERIOD. (a) Unless otherwise expressly provided in any Option, the unexercised portion of any Option shall automatically and without notice immediately terminate and become forfeited, null and void at the time of the earliest to occur of the following: (i) three months after the date on which the Optionee's employment is terminated for any reason other than by reason of (A) Cause, (B) the termination of the Optionee's employment with the Company by such Optionee following less than 60 days' prior written notice to the Company of such termination (an "Improper Termination"), (C) a mental or physical disability (within the meaning of Section 22(e) of the Code) as determined by a medical doctor satisfactory to the Committee, or (D) death; (ii) immediately upon (A) the termination by the Company of the Optionee's employment for Cause, or (B) an Improper Termination; (iii) one year after the date on which the Optionee's employment is terminated by reason of a mental or physical disability (within the meaning of Code Section 22(e)) as determined by a medical doctor satisfactory to the Committee or the later of three months after the date on which the Optionee shall die if such death shall occur during the one-year period specified herein; or (iv) one year after the date of termination of the Optionee's employment by reason of death of the employee; (b) The Committee in its sole discretion may, by giving written notice ("cancellation notice"), cancel effective upon the date of the consummation of any corporate transaction described in Subsection 10(d) hereof, any Option that remains unexercised on such date. Such cancellation notice shall be given a reasonable period of time prior to the proposed date of such cancellation and may be given either before or after approval of such corporate transaction. (c) Upon Optionee's termination of employment as described in this Section 9, or otherwise, any Option (or portion thereof) not previously vested or not yet exercisable pursuant to Section 8 of this Plan or the vesting schedule set forth in such Option shall be immediately canceled. 10. ADJUSTMENT OF SHARES. (a) If at any time while this Plan is in effect or unexercised Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding Shares through the declaration of a stock dividend or through any recapitalization resulting in a stock split, combination or exchange of Shares (other than any such exchange or issuance of Shares through which Shares are issued to effect an acquisition of another business or entity or the Company's purchase of Shares to exercise a "call" purchase option), then and in such event: 7 (i) appropriate adjustment shall be made in the maximum number of Shares available for grant under this Plan, so that the same percentage of the Company's issued and outstanding Shares shall continue to be subject to being so optioned; (ii) appropriate adjustment shall be made in the number of Shares and the exercise price per Share thereof then subject to any outstanding Option, so that the same percentage of the Company's issued and outstanding Shares shall remain subject to purchase at the same aggregate exercise price; and (iii) such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. (b) Subject to the specific terms of any Option, the Committee may change the terms of Options outstanding under this Plan, with respect to the option price or the number of Shares subject to the Options, or both, when, in the Committee's sole discretion, such adjustments become appropriate by reason of a corporate transaction described in Subsection 10(d) hereof, or otherwise. (c) Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into or exchangeable for shares of its capital stock of any class, either in connection with a direct or unwritten sale or upon the exercise of rights or warrants to subscribe therefor or purchase such Shares, or upon conversion of shares of obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to the number of or exercise price of Shares then subject to outstanding Options granted under this Plan. (d) Without limiting the generality of the foregoing, the existence of outstanding Options granted under this Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate (i) any or all adjustments, reclassifications, recapitalizations, reorganizations or other changes in the Company's capital structure or its business; (ii) any merger or consolidation of the Company or to which the Company is a party; (iii) any issuance by the Company of debt securities, or preferred or preference stock that would rank senior to or above the Shares subject to outstanding Options; (iv) any purchase or issuance by the Company of Shares or other classes of common stock or common equity securities; (v) the dissolution or liquidation of the Company; (vi) any sale, transfer, encumbrance, pledge or assignment of all or any part of the assets or business of the Company; or (vii) any other corporate act or proceeding, whether of a similar character or otherwise. (e) The Optionee shall receive written notice within a reasonable time prior to the consummation of such action advising the Optionee of any of the foregoing. The Committee may, in the exercise of its sole discretion, in such instances declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option. 8 11. TRANSFERABILITY OF OPTIONS. No Option granted hereunder shall be sold, pledged, assigned, hypothecated, disposed or otherwise transferred by the Optionee other than by will or the laws of descent and distribution, unless otherwise authorized by the Board, and no Option shall be exercisable during the Optionee's lifetime by any person other than the Optionee. 12. ISSUANCE OF SHARES. As a condition of any sale or issuance of Shares upon exercise of any Option, the Committee may require such agreements or undertakings, if any, as the Committee may deem necessary or advisable to assure compliance with any such law or regulation including, but not limited to, the following: (i) a representation and warranty by the Optionee to the Company, at the time any Option is exercised, that he is acquiring the Shares to be issued to him for investment and not with a view to, or for sale in connection with, the distribution of any such Shares; and (ii) (A)an agreement and undertaking to comply with all of the terms, restrictions and provisions set forth in any then applicable shareholders' agreement relating to the Shares, including, without limitation, any restrictions on transferability, any rights of first refusal and any option of the Company to "call" or purchase such Shares under then applicable agreements, and (B) any restrictive legend or legends, to be embossed or imprinted on Share certificates, that are, in the discretion of the Committee, necessary or appropriate to comply with the provisions of any securities law or other restriction applicable to the issuance of the Shares. 13. ADMINISTRATION OF THIS PLAN. (a) This Plan shall be administered by the Committee, which shall consist of not less than two Directors. The Committee shall have all of the powers of the Board with respect to this Plan. Any member of the Committee may be removed at any time, with or without cause, by resolution of the Board and any vacancy occurring in the membership of the Committee may be filled by appointment by the Board. (b) Subject to the provisions of this Plan, the Committee shall have the authority, in its sole discretion, to: (i) grant Options, (ii) determine the exercise price per Share at which Options may be exercised, (iii) determine the Optionees to whom, and time or times at which, Options shall be granted, (iv) determine the number of Shares to be represented by each Option, (v) determine the terms, conditions and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option, (vi) defer (with the consent of the Optionee) or accelerate the exercise date of any Option, and (vii) make all other determinations deemed necessary or advisable for the administration of this Plan, including re-pricing, canceling and regranting Options. (c) The Committee, from time to time, may adopt rules and regulations for carrying out the purposes of this Plan. The Committee's determinations and its interpretation 9 and construction of any provision of this Plan shall be final, conclusive and binding upon all Optionees and any holders of any Options granted under this Plan. (d) Any and all decisions or determinations of the Committee shall be made either (i) by a majority vote of the members of the Committee at a meeting of the Committee or (ii) without a meeting by the unanimous written approval of the members of the Committee. (e) No member of the Committee, or any Officer or Director of the Company or its Subsidiaries, shall be personally liable for any act or omission made in good faith in connection with this Plan. 14. INCENTIVE OPTIONS FOR 10% SHAREHOLDERS. Notwithstanding any other provisions of this Plan to the contrary, an Incentive Stock Option shall not be granted to any person owning directly or indirectly (through attribution under Section 424(d) of the Code) at the date of grant, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or of its Subsidiary) at the date of grant unless the exercise price of such Option is at least 110% of the Fair Market Value of the Shares subject to such Option on the date the Option is granted, and such Option by its terms is not exercisable after the expiration of 10 years from the date such Option is granted. 15. INTERPRETATION. (a) This Plan shall be administered and interpreted so that all Incentive Stock Options granted under this Plan will qualify as Incentive Stock Options under Section 422 of the Code. If any provision of this Plan should be held invalid for the granting of Incentive Stock Options or illegal for any reason, such determination shall not affect the remaining provisions hereof, and this Plan shall be construed and enforced as if such provision had never been included in this Plan. (b) This Plan shall be governed by the laws of the State of Florida. (c) Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan or affect the meaning or interpretation of any part of this Plan. (d) Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. (e) Time shall be of the essence with respect to all time periods specified for the giving of notices to the company hereunder, as well as all time periods for the expiration and termination of Options in accordance with Section 9 hereof (or as otherwise set forth in an option agreement). 16. AMENDMENT AND DISCONTINUATION OF THIS PLAN. Either the Board or the Committee may from time to time amend this Plan or any Option without the consent or approval of the shareholders of the Company; provided, however, that, except to the extent provided in Section 10 9, no amendment or suspension of this Plan or any Option issued hereunder shall substantially impair any Option previously granted to any Optionee without the consent of such Optionee. 17. TERMINATION DATE. This Plan shall terminate ten years after the date of adoption by the Board of Directors. 11 EX-10.2 6 EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 1st day of September, 1998 by and between 21ST CENTURY HOLDING COMPANY, a Florida corporation with its principal office at 4161 N.W. 5th Street, Plantation, Florida 33317 (the "Company"), and EDWARD J. LAWSON, whose residence address is 12731 N.W. 1st Street, Plantation, Florida 33325 (the "Executive"). RECITALS 1. The Executive is currently Chairman of the Board of Directors and Chief Executive Officer of the Company. 2. The Executive possesses intimate knowledge of the business and affairs of the Company, its policies, methods and personnel. 3. The Board of Directors (the "Board") of the Company recognizes that the Executive's contribution, as Chairman of the Board and Chief Executive Officer of the Company, to the growth and success of the Company has been and will be substantial and desires to assure the Company of the Executive's present and continued employment in an executive capacity and to compensate him therefor. 4. The Board has determined that this Agreement will reinforce and encourage the Executive's continued attention and dedication to the Company. 5. The Executive is willing to make his services available to the Company on the terms and conditions hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties hereby agree as follows: 1. Employment. 1.1 EMPLOYMENT AND TERM. The Company shall continue to employ the Executive and the Executive shall continue to serve the Company, on the terms and conditions set forth herein, for the period (the "Term") effective as of September 1, 1998 (the "Commencement Date") and expiring on the second anniversary of the Commencement Date, unless sooner terminated as hereinafter set forth; provided, however, that the Term of this Agreement shall automatically be extended so that at all times, the balance of the Term shall not be less than two years. 1.2 DUTIES OF EXECUTIVE. The Executive shall serve as Chairman of the Board and Chief Executive Officer of the Company and shall perform the duties of an executive commensurate with such position, shall diligently perform all services as may be reasonably designated by the Board and shall exercise such power and authority as is necessary and customary to the performance of such duties and services. The Executive shall devote such time as he deems necessary to the business and affairs of the Company. 1.3 PLACE OF PERFORMANCE. In connection with his employment by the Company, the Executive shall be based at the Company's principal executive offices in Boca Raton, Florida except for required travel on the Company's business to an extent substantially consistent with his present travel obligations. 2. COMPENSATION. 2.1 BASE SALARY. During the Term, the Executive shall receive a base salary at the annual rate of $156,000, subject to adjustment in accordance with this Paragraph 2.1 (the "Base Salary"). The Base Salary shall be payable in substantially equal installments consistent with the Company's normal payroll schedule, subject to applicable withholding and other taxes. Commencing on the first anniversary of the Commencement Date, and each anniversary of the Commencement Date thereafter during the Term, the Base Salary shall be increased, but shall not be decreased, by that percentage by which the Consumer Price Index (All Items Less Shelter), Urban Wage Earners and Clerical Workers, for the Miami, Florida area published by the United States Government (the "Index") for the immediately preceding calendar year exceeds such index for the next preceding calendar year. If publication of the Index is discontinued, the parties hereto shall accept comparable statistics on the cost of living for the Miami, Florida area as computed and published by an agency of the United States government or, if no such agency computes and publishes such statistics, by any regularly published national periodical that does compute and publish such statistics. 2.2 ADDITIONAL CASH COMPENSATION. Executive shall also be entitled to receive such increments in base salary and performance or merit bonuses (collectively, "Bonus") as shall be determined from time to time during the term by the Board. 3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS. 3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon the submission of supporting documentation by the Executive, and in accordance with Company policies for its executives, shall reimburse the Executive for all expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment. 3.2 OTHER BENEFITS. The Company shall obtain or shall continue in force comprehensive major medical and hospitalization insurance coverages, including dental coverages, either group or individual, for the Executive and his dependents, and shall obtain or shall continue in force disability and life insurance for the Executive (collectively, the "Policies"), which Policies the Company shall keep in effect at its sole expense throughout the Term. The Policies to be provided by the Company shall be on terms as determined by the Board. Within 30 days following any termination of this Agreement, at the Executive's option, the Company shall assign to the executive all insurance policies on the life of the Executive then owned by the Company in consideration of the payment by the Executive of the cash surrender 2 value, if any, and the Executive's agreement to assume the Company liability to pay any premiums accruing thereon after the date of such termination. 3.3 WORKING FACILITIES. The Company shall furnish the Executive with an office, a secretary and such other facilities and services suitable to his position and adequate for the performance of his duties hereunder. 3.4 AUTOMOBILE ALLOWANCE. Throughout the Term of this Agreement, the Company will pay Executive an automobile allowance in the amount of $300 per month. Such automobile allowance shall be for no more than one automobile and shall include all expenses related thereto, including, without limitation, lease expenses, maintenance and insurance. 3.5 VACATION. Executive shall be entitled to reasonable vacations during each year of the Term, the time and duration thereof to be determined by mutual agreement between Executive and the Company. 4. TERMINATION. 4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated by the Company for Cause. As used in this Agreement "Cause" shall only mean (i) subject to the following sentences, any action or omission of the Executive which constitutes a willful and material breach of this Agreement which is not cured or as to which diligent attempts to cure have not commenced within 20 business days after receipt by Executive of notice of same, (ii) fraud, embezzlement or misappropriation as against the Company, or (iii) the conviction (from which no appeal can be taken) of Executive for any criminal act which is a felony. Upon any determination by the Company's Board of Directors that Cause exists under clause (i) of the preceding sentence, the Company shall cause a special meeting of the Board to be called and held at a time mutually convenient to the Board and Executive, but in no event later than 10 business days after Executive's receipt of the notice contemplated by clause (i). Executive shall have the right to appear before such special meeting of the Board with legal counsel of his choosing to refute any determination of Cause specified in such notice, and any termination of Executive's employment by reason of such Cause determination shall not be effective until Executive is afforded such opportunity to appear. Any termination for Cause pursuant to clause (ii) or (iii) of this Paragraph 4.1 shall be made in writing to Executive, which notice shall set forth in detail all acts or omissions upon which the Company is relying for such termination. Upon any termination pursuant to this Paragraph 4.1, the Company shall pay to the Executive any unpaid Base Salary accrued through the effective date of termination specified in such notice. In addition, the Company shall pay any benefits, if any, owed to Executive under any plan provided for Executive under Paragraph 3 hereof in accordance with the terms of such plan as in effect on the date of termination of employment under this Paragraph 4.1. Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however to the provisions of Paragraph 3.1 hereof). 4.2 DISABILITY. Notwithstanding anything to the contrary contained in this Agreement if, during the term hereof the Executive suffers a disability (as defined below) the Company shall, subject to the provisions of Paragraph 4.3 hereof continue to pay Executive the 3 compensation provided in Paragraphs 2.1 and 2.2 hereof during the period of his disability; provided, however, that, in the event Executive is disabled for a period of more than 180 days in any 12 month period (the "Disability Period"), the Company may, at its election, by a vote of 75% of the members of the Board within 90 days from the end of the Disability Period, terminate this agreement. In the event of such termination, (a) payment of the Executive's Base Salary at the rate prevailing on the date of termination of the Executive and fringe benefits (to the extent permissible by applicable law) shall be continued for a period of 24 months after such termination and (b) Executive shall receive a bonus, payable in two annual installments, equal to twice the amount of bonus paid to the Executive during the 12 months preceding the date of termination of the Executive. As used in this Agreement, the term "disability" shall mean the complete inability of Executive to perform his duties under this Agreement as determined by an independent physician selected with the approval of the Company and the Executive. Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination subject, however, to the provisions of Paragraph 3.1 hereof). 4.3 DEATH. In the event of the death of Executive during the Term of this Agreement, the Company shall pay to Executive's legal representative, any unpaid Base Salary accrued through the date of his death, as well as a lump sum payment equal to (a) 24 months' Base Salary at the rate prevailing on the date of the death of the Executive and (b) a bonus in an amount equal to twice the amount of bonus paid in the 12 months preceding the date of death of the Executive. Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of the Executive's death, subject, however to the provisions of Paragraph 3.1 hereof). 5. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. 6. CHANGE OF CONTROL. (a) For the purposes of this Agreement, a "Change of Control" shall be deemed to have taken place if: (i) any person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes the owner or beneficial owner of Company securities, after the date of this Agreement, having 20% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company, or open market purchases approved by the Board, as long as the majority of the Board approving the purchases is the majority at the time the purchases are made), or (ii) the persons who were directors of the Company before such transactions shall cease to constitute a majority of the Board, or any successor to the Company, as the direct or indirect result of or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions. 4 (b) The Company and Executive hereby agree that, if Executive is affiliated with the Company on the date on which a Change of Control occurs (the "Change of Control Date"), the Company (or, if Executive is affiliated with a subsidiary, the subsidiary) will continue to retain Executive and Executive will remain affiliated with the Company (or subsidiary), for the period commencing on the Change of Control Date and ending on the second anniversary of such date, to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the Change of Control Date. If after a Change of Control Executive is requested and, in his sole and absolute discretion, consents to change his principal business location, the Company will reimburse the Executive for his reasonable relocation expenses, including without limitation, moving expenses, temporary living and travel expenses for a reasonable time while arranging to move his residence to the changed location, closing costs, if any, associated with the sale of his existing residence and the purchase of a replacement residence at the changed location, plus an additional amount representing a gross-up of any state or federal taxes payable by Executive as a result of any such reimbursements. If the Executive shall not consent to change his business location, the Executive may continue to provide the services required of him hereunder from his then residence and/or business address, and the Company shall continue to maintain an office for Executive at that location commensurate with the Company's office prior to the Change of Control Date. (c) During the remaining term hereof after the Change of Control Date, the Company (or subsidiary) will (i) continue to pay Executive a salary at not less than the level applicable to Executive on the Change of Control Date, (ii) pay Executive bonuses in amounts not less in amount than those paid during the 12 month period preceding the Change of Control Date, and (iii) continue employee benefit programs as to Executive at levels in effect on the Change of Control Date (but subject to such reductions as may be required to maintain such plans in compliance with applicable federal law regulating employee benefit programs). (d) If during the remaining term hereof after the Change of Control Date (i) Executive's employment is terminated by the Company (or subsidiary), or (ii) there shall have occurred a material reduction in Executive's compensation or employment related benefits, or a material change in Executive's status, working conditions, management responsibilities or titles, and Executive voluntarily terminates his relationship with the Company within 60 days of any such occurrence, or the last in a series of occurrences, then Executive shall be entitled to receive, subject to the provisions of subparagraphs (e) and (f) below, a lump sum payment equal to 299% of Executive's "base period income" as determined under (e) below. Such amount will be paid to Executive within 15 business days after his termination of affiliation with the Company. (e) The Executive's "base period income" shall be his Base Salary and Bonuses paid or payable to him during or with respect to the 12 month period preceding the date of his termination of affiliation. If Executive has not been affiliated for 12 months at the time of his termination of affiliation, his "base period income" shall be his annualized base salary at the rate then in effect and any annual incentive Bonus paid to Executive prior to the date of his termination of affiliation or payable to Executive with respect to his period of affiliation. (f) The amounts payable to Executive under any other compensation arrangement maintained by the Company (or a subsidiary) which became payable after payment 5 of the lump sum provided for in (d), upon or as a result of the exercise by Executive of rights which are contingent on a Change of Control (and would be considered a "parachute payment" under Internal Revenue Code Section 280G and regulations thereunder), shall be increased by an additional amount representing a gross-up of any federal income tax liability arising from an excess parachute payment or otherwise. If Executive has not been affiliated with the Company (or a subsidiary of the Company) during one or more calendar years immediately preceding the Change of Control Date, this paragraph (f) shall not apply. (g) In the event of a proposed Change in Control, the Company will allow Executive to participate in all meetings and negotiations related thereto. 7. RESTRICTIVE COVENANTS. 7.1 NON-COMPETITION. During the Term and for a period of one year following the termination (other than without Cause, as defined in Paragraph 4.1) of the Executive's employment by the Company, Executive shall not, directly or indirectly engage in or have any interest in, directly or indirectly, any sole proprietorship, partnership, corporation, business or any other person or entity (whether as an employee, officer, director, partner, agent, security holder, creditor, consultant or otherwise) that, directly or indirectly, engages primarily in the development, marketing, distribution, underwriting or sale of products and services competitive with the Company's and/or any subsidiary's products and services in any and all states in which the Company and/or any subsidiary conducts its business during the Term or at the time Executive's employment with the Company is terminated (the "Territory"); provided, however, that Executive may hold Company securities and/or acquire, solely as an investment, shares of capital stock or other equity securities of any such company, so long as Executive does not control acquire a controlling interest in or become a member of a group which exercises direct or indirect control of, more than five percent of any class of capital stock of such corporation. 7.2 NONDISCLOSURE. During the Term and following termination of the Executive's employment with the Company, Executive shall not divulge, communicate, use to the detriment of the Company or for the benefit of any other person or persons, or misuse in any way, any Confidential Information (as hereinafter defined) pertaining to the business of the Company. Any Confidential Information or data now or hereafter acquired by the Executive with respect to the business of the Company (which shall include, but not be limited to, information concerning the Company's financial condition, prospects, technology, customers, methods of doing business and marketing, distribution, underwriting or sale of the Company's products and services) shall be deemed a valuable, special and unique asset of the Company that is received by the Executive in confidence and as a fiduciary. For purposes of this Agreement "Confidential Information" means information disclosed to the Executive or known by the Executive as a consequence of or through his employment by the Company (including information conceived, originated, discovered or developed by the Executive) prior to or after the date hereof and not generally known or in the public domain, about the Company or its business. Notwithstanding the foregoing, nothing herein shall be deemed to restrict the Executive from disclosing Confidential Information to the extent required by law. 7.3 NONSOLICITATION OF EMPLOYEES. During the Term and for a period of one year following termination of the Executive's employment with the Company, Executive shall 6 not directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company, unless such employee or former employee has not been employed by the Company for a period in excess of six months. 7.4 BOOKS AND RECORDS. All books, records, accounts and similar repositories of Confidential Information of the Company, whether prepared by the Executive or otherwise coming into the Executive's possession, shall be the exclusive property of the Company and shall be returned immediately to the Company on termination of this Agreement or on the Board's request at any time. 8. INJUNCTION. It is recognized and hereby acknowledged by the parties hereto that a breach by the Executive of any of the covenants contained in Paragraph 7 of this Agreement will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, the Executive recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in Paragraph 7 of this Agreement by the Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess. 9. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation which assumes this Agreement, and all obligations of the Company hereunder, in writing. Upon such consolidation, merger, or transfer of assets and assumption, the term "the Company" as used herein, shall mean such other corporation and this Agreement shall continue in full force and effect, subject to the provisions of Paragraph 6 hereof. 10. BINDING EFFECT. Except as herein otherwise provided, this Agreement shall inure to the benefit of and shall be binding upon the parties hereto, their personal representatives, successors, heirs and assigns. 11. TERMINOLOGY. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and vice versa. Titles of Paragraphs are for convenience only, and neither limit nor amplify the provisions of the Agreement itself. 12. FURTHER ASSURANCES. At any time, and from time to time, each party will take such action as may be reasonably requested by the other party to carry out the intent and purposes of this Agreement. 13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. It supersedes all prior negotiations, letters and understandings relating to the subject matter hereof. 7 14. AMENDMENT. This Agreement may not be amended, supplemented or modified in whole or in part except by an instrument in writing signed by the party or parties against whom enforcement of any such amendment, supplement or modification is sought. 15. ASSIGNMENT. This Agreement may not be assigned by any party hereto without the prior written consent of the other party and except as provided in Paragraph 9 hereof. 16. CHOICE OF LAW. This Agreement will be interpreted, construed and enforced in accordance with the laws of the State of Florida, without giving effect to the application of the principles pertaining to conflicts of laws. 17. EFFECT OF WAIVER. The failure of any party at any time or times to require performance of any provision of this Agreement will in no manner affect the right to enforce the same. The waiver by any party of any breach of any provision of this Agreement will not be construed to be a waiver by any such party of any succeeding breach of that provision or a waiver by such party of any breach of any other provision. 18. CONSTRUCTION. The parties hereto and their respective legal counsel participated in the preparation of this Agreement; therefore, this Agreement shall be construed neither against nor in favor of any of the parties hereto, but rather in accordance with the fair meaning thereof. 19. SEVERABILITY. The invalidity, illegality or unenforceability of any provision or provisions of this Agreement will not affect any other provision of this Agreement, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Agreement affect the balance of such provision. In the event that any one or more of the provisions contained in this Agreement or any portion thereof shall for any reason be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be reformed, construed and enforced as if such invalid, illegal or unenforceable provision had never been contained herein. 20. ENFORCEMENT. Should it become necessary for any party to institute legal action to enforce the terms and conditions of this Agreement, the successful party will be awarded reasonable attorneys' fees at all trial and appellate levels, expenses and costs. Any suit, action or proceeding with respect to this Agreement shall be brought in the courts of Broward County in the State of Florida or in the U.S. District Court for the Southern District of Florida. The parties hereto hereby accept the exclusive jurisdiction of those courts for the purpose of any such suit, action or proceeding. Venue for any such action, in addition to any other venue permitted by statute, will be Broward County, Florida. The parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any judgment entered by any court in respect thereof brought in Broward County, Florida, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Broward County, Florida, has been brought in an inconvenient forum. The parties hereto acknowledge and agree that any party's remedy at law for a breach or threatened breach of any of the provisions of this Agreement would be inadequate and such 8 breach or threatened breach shall be per se deemed as causing irreparable harm to such party. Therefore, in the event of such breach or threatened breach, the parties hereto agree that, in addition to any available remedy at law, including but not limited to monetary damages, an aggrieved party, without posting any bond, shall be entitled to obtain, and the offending party agrees not to oppose the aggrieved party's request for, equitable relief in the form of specific enforcement, temporary restraining order, temporary or permanent injunction, or any other equitable remedy that may then be available to the aggrieved party. 21. BINDING NATURE. This Agreement will be binding upon and will inure to the benefit of any successor or successors of the parties hereto. 22. NO THIRD-PARTY BENEFICIARIES. No person shall be deemed to possess any third-party beneficiary right pursuant to this Agreement. It is the intent of the parties hereto that no direct benefit to any third party is intended or implied by the execution of this Agreement. 23. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original. 24. NOTICE. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when sent by facsimile with receipt confirmed or when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or by overnight courier, addressed to the parties at the addresses first stated herein, or to such other address as either party hereto shall from time to time designate to the other party by notice in writing as provided herein. IN WITNESS WHEREOF, this Agreement has been duly signed by the parties hereto on the day and year first above written. 21ST CENTURY HOLDING COMPANY By:_________________________________ Name:____________________________ Title:___________________________ ____________________________________ EDWARD J. LAWSON 9 EX-10.3 7 EXHIBIT 10.3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 1st day of September, 1998 by and between 21ST CENTURY HOLDING COMPANY, a Florida corporation with its principal office at 4161 N.W. 5th Street, Plantation, Florida 33317 (the "Company"), and MICHELE V. LAWSON, whose residence address is 12731 N.W. 1st Street, Plantation, Florida 33325 (the "Executive"). RECITALS 1. The Executive is currently a Director and Vice President-Operations- Treasurer of the Company. 2. The Executive possesses intimate knowledge of the business and affairs of the Company, its policies, methods and personnel. 3. The Board of Directors (the "Board") of the Company recognizes that the Executive's contribution, as Chairman of the Board and Chief Executive Officer of the Company, to the growth and success of the Company has been and will be substantial and desires to assure the Company of the Executive's present and continued employment in an executive capacity and to compensate her therefor. 4. The Board has determined that this Agreement will reinforce and encourage the Executive's continued attention and dedication to the Company. 5. The Executive is willing to make her services available to the Company on the terms and conditions hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties hereby agree as follows: 1. Employment. 1.1 EMPLOYMENT AND TERM. The Company shall continue to employ the Executive and the Executive shall continue to serve the Company, on the terms and conditions set forth herein, for the period (the "Term") effective as of September 1, 1998 (the "Commencement Date") and expiring on the second anniversary of the Commencement Date, unless sooner terminated as hereinafter set forth; provided, however, that the Term of this Agreement shall automatically be extended so that at all times, the balance of the Term shall not be less than two years. 1.2 DUTIES OF EXECUTIVE. The Executive shall serve as a Director and Vice President-Operations-Treasurer of the Company and shall perform the duties of an executive commensurate with such position, shall diligently perform all services as may be reasonably designated by the Board and shall exercise such power and authority as is necessary and customary to the performance of such duties and services. The Executive shall devote such time as she deems necessary to the business and affairs of the Company. 1.3 PLACE OF PERFORMANCE. In connection with her employment by the Company, the Executive shall be based at the Company's principal executive offices in Boca Raton, Florida except for required travel on the Company's business to an extent substantially consistent with her present travel obligations. 2. COMPENSATION. 2.1 BASE SALARY. During the Term, the Executive shall receive a base salary at the annual rate of $78,000, subject to adjustment in accordance with this Paragraph 2.1 (the "Base Salary"). The Base Salary shall be payable in substantially equal installments consistent with the Company's normal payroll schedule, subject to applicable withholding and other taxes. Commencing on the first anniversary of the Commencement Date, and each anniversary of the Commencement Date thereafter during the Term, the Base Salary shall be increased, but shall not be decreased, by that percentage by which the Consumer Price Index (All Items Less Shelter), Urban Wage Earners and Clerical Workers, for the Miami, Florida area published by the United States Government (the "Index") for the immediately preceding calendar year exceeds such index for the next preceding calendar year. If publication of the Index is discontinued, the parties hereto shall accept comparable statistics on the cost of living for the Miami, Florida area as computed and published by an agency of the United States government or, if no such agency computes and publishes such statistics, by any regularly published national periodical that does compute and publish such statistics. 2.2 ADDITIONAL CASH COMPENSATION. Executive shall also be entitled to receive such increments in base salary and performance or merit bonuses (collectively, "Bonus") as shall be determined from time to time during the term by the Board. 3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS. 3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon the submission of supporting documentation by the Executive, and in accordance with Company policies for its executives, shall reimburse the Executive for all expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment. 3.2 OTHER BENEFITS. The Company shall obtain or shall continue in force comprehensive major medical and hospitalization insurance coverages, including dental coverages, either group or individual, for the Executive and her dependents, and shall obtain or shall continue in force disability and life insurance for the Executive (collectively, the "Policies"), which Policies the Company shall keep in effect at its sole expense throughout the Term. The Policies to be provided by the Company shall be on terms as determined by the Board. Within 30 days following any termination of this Agreement, at the Executive's option, the Company shall assign to the executive all insurance policies on the life of the Executive then owned by the Company in consideration of the payment by the Executive of the cash surrender 2 value, if any, and the Executive's agreement to assume the Company liability to pay any premiums accruing thereon after the date of such termination. 3.3 WORKING FACILITIES. The Company shall furnish the Executive with an office, a secretary and such other facilities and services suitable to his position and adequate for the performance of her duties hereunder. 3.4 AUTOMOBILE ALLOWANCE. Throughout the Term of this Agreement, the Company will pay Executive an automobile allowance in the amount of $300 per month. Such automobile allowance shall be for no more than one automobile and shall include all expenses related thereto, including, without limitation, lease expenses, maintenance and insurance. 3.5 VACATION. Executive shall be entitled to reasonable vacations during each year of the Term, the time and duration thereof to be determined by mutual agreement between Executive and the Company. 4. TERMINATION. 4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated by the Company for Cause. As used in this Agreement "Cause" shall only mean (i) subject to the following sentences, any action or omission of the Executive which constitutes a willful and material breach of this Agreement which is not cured or as to which diligent attempts to cure have not commenced within 20 business days after receipt by Executive of notice of same, (ii) fraud, embezzlement or misappropriation as against the Company, or (iii) the conviction (from which no appeal can be taken) of Executive for any criminal act which is a felony. Upon any determination by the Company's Board of Directors that Cause exists under clause (i) of the preceding sentence, the Company shall cause a special meeting of the Board to be called and held at a time mutually convenient to the Board and Executive, but in no event later than 10 business days after Executive's receipt of the notice contemplated by clause (i). Executive shall have the right to appear before such special meeting of the Board with legal counsel of his choosing to refute any determination of Cause specified in such notice, and any termination of Executive's employment by reason of such Cause determination shall not be effective until Executive is afforded such opportunity to appear. Any termination for Cause pursuant to clause (ii) or (iii) of this Paragraph 4.1 shall be made in writing to Executive, which notice shall set forth in detail all acts or omissions upon which the Company is relying for such termination. Upon any termination pursuant to this Paragraph 4.1, the Company shall pay to the Executive any unpaid Base Salary accrued through the effective date of termination specified in such notice. In addition, the Company shall pay any benefits, if any, owed to Executive under any plan provided for Executive under Paragraph 3 hereof in accordance with the terms of such plan as in effect on the date of termination of employment under this Paragraph 4.1. Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however to the provisions of Paragraph 3.1 hereof). 4.2 DISABILITY. Notwithstanding anything to the contrary contained in this Agreement if, during the term hereof the Executive suffers a disability (as defined below) the Company shall, subject to the provisions of Paragraph 4.3 hereof continue to pay Executive the 3 compensation provided in Paragraphs 2.1 and 2.2 hereof during the period of her disability; provided, however, that, in the event Executive is disabled for a period of more than 180 days in any 12 month period (the "Disability Period"), the Company may, at its election, by a vote of 75% of the members of the Board within 90 days from the end of the Disability Period, terminate this agreement. In the event of such termination, (a) payment of the Executive's Base Salary at the rate prevailing on the date of termination of the Executive and fringe benefits (to the extent permissible by applicable law) shall be continued for a period of 24 months after such termination and (b) Executive shall receive a bonus, payable in two annual installments, equal to twice the amount of bonus paid to the Executive during the 12 months preceding the date of termination of the Executive. As used in this Agreement, the term "disability" shall mean the complete inability of Executive to perform her duties under this Agreement as determined by an independent physician selected with the approval of the Company and the Executive. Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination subject, however, to the provisions of Paragraph 3.1 hereof). 4.3 DEATH. In the event of the death of Executive during the Term of this Agreement, the Company shall pay to Executive's legal representative, any unpaid Base Salary accrued through the date of her death, as well as a lump sum payment equal to (a) 24 months' Base Salary at the rate prevailing on the date of the death of the Executive and (b) a bonus in an amount equal to twice the amount of bonus paid in the 12 months preceding the date of death of the Executive. Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of the Executive's death, subject, however to the provisions of Paragraph 3.1 hereof). 5. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. 6. CHANGE OF CONTROL. (a) For the purposes of this Agreement, a "Change of Control" shall be deemed to have taken place if: (i) any person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes the owner or beneficial owner of Company securities, after the date of this Agreement, having 20% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company, or open market purchases approved by the Board, as long as the majority of the Board approving the purchases is the majority at the time the purchases are made), or (ii) the persons who were directors of the Company before such transactions shall cease to constitute a majority of the Board, or any successor to the Company, as the direct or indirect result of or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions. 4 (b) The Company and Executive hereby agree that, if Executive is affiliated with the Company on the date on which a Change of Control occurs (the "Change of Control Date"), the Company (or, if Executive is affiliated with a subsidiary, the subsidiary) will continue to retain Executive and Executive will remain affiliated with the Company (or subsidiary), for the period commencing on the Change of Control Date and ending on the second anniversary of such date, to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the Change of Control Date. If after a Change of Control Executive is requested and, in her sole and absolute discretion, consents to change her principal business location, the Company will reimburse the Executive for his reasonable relocation expenses, including without limitation, moving expenses, temporary living and travel expenses for a reasonable time while arranging to move her residence to the changed location, closing costs, if any, associated with the sale of her existing residence and the purchase of a replacement residence at the changed location, plus an additional amount representing a gross-up of any state or federal taxes payable by Executive as a result of any such reimbursements. If the Executive shall not consent to change her business location, the Executive may continue to provide the services required of her hereunder from her then residence and/or business address, and the Company shall continue to maintain an office for Executive at that location commensurate with the Company's office prior to the Change of Control Date. (c) During the remaining term hereof after the Change of Control Date, the Company (or subsidiary) will (i) continue to pay Executive a salary at not less than the level applicable to Executive on the Change of Control Date, (ii) pay Executive bonuses in amounts not less in amount than those paid during the 12 month period preceding the Change of Control Date, and (iii) continue employee benefit programs as to Executive at levels in effect on the Change of Control Date (but subject to such reductions as may be required to maintain such plans in compliance with applicable federal law regulating employee benefit programs). (d) If during the remaining term hereof after the Change of Control Date (i) Executive's employment is terminated by the Company (or subsidiary), or (ii) there shall have occurred a material reduction in Executive's compensation or employment related benefits, or a material change in Executive's status, working conditions, management responsibilities or titles, and Executive voluntarily terminates her relationship with the Company within 60 days of any such occurrence, or the last in a series of occurrences, then Executive shall be entitled to receive, subject to the provisions of subparagraphs (e) and (f) below, a lump sum payment equal to 299% of Executive's "base period income" as determined under (e) below. Such amount will be paid to Executive within 15 business days after her termination of affiliation with the Company. (e) The Executive's "base period income" shall be her Base Salary and Bonuses paid or payable to her during or with respect to the 12 month period preceding the date of her termination of affiliation. If Executive has not been affiliated for 12 months at the time of her termination of affiliation, her "base period income" shall be her annualized base salary at the rate then in effect and any annual incentive Bonus paid to Executive prior to the date of her termination of affiliation or payable to Executive with respect to her period of affiliation. (f) The amounts payable to Executive under any other compensation arrangement maintained by the Company (or a subsidiary) which became payable after payment 5 of the lump sum provided for in (d), upon or as a result of the exercise by Executive of rights which are contingent on a Change of Control (and would be considered a "parachute payment" under Internal Revenue Code Section 280G and regulations thereunder), shall be increased by an additional amount representing a gross-up of any federal income tax liability arising from an excess parachute payment or otherwise. If Executive has not been affiliated with the Company (or a subsidiary of the Company) during one or more calendar years immediately preceding the Change of Control Date, this paragraph (f) shall not apply. (g) In the event of a proposed Change in Control, the Company will allow Executive to participate in all meetings and negotiations related thereto. 7. RESTRICTIVE COVENANTS. 7.1 NON-COMPETITION. During the Term and for a period of one year following the termination (other than without Cause, as defined in Paragraph 4.1) of the Executive's employment by the Company, Executive shall not, directly or indirectly engage in or have any interest in, directly or indirectly, any sole proprietorship, partnership, corporation, business or any other person or entity (whether as an employee, officer, director, partner, agent, security holder, creditor, consultant or otherwise) that, directly or indirectly, engages primarily in the development, marketing, distribution, underwriting or sale of products and services competitive with the Company's and/or any subsidiary's products and services in any and all states in which the Company and/or any subsidiary conducts its business during the Term or at the time Executive's employment with the Company is terminated (the "Territory"); provided, however, that Executive may hold Company securities and/or acquire, solely as an investment, shares of capital stock or other equity securities of any such company, so long as Executive does not control acquire a controlling interest in or become a member of a group which exercises direct or indirect control of, more than five percent of any class of capital stock of such corporation. 7.2 NONDISCLOSURE. During the Term and following termination of the Executive's employment with the Company, Executive shall not divulge, communicate, use to the detriment of the Company or for the benefit of any other person or persons, or misuse in any way, any Confidential Information (as hereinafter defined) pertaining to the business of the Company. Any Confidential Information or data now or hereafter acquired by the Executive with respect to the business of the Company (which shall include, but not be limited to, information concerning the Company's financial condition, prospects, technology, customers, methods of doing business and marketing, distribution, underwriting or sale of the Company's products and services) shall be deemed a valuable, special and unique asset of the Company that is received by the Executive in confidence and as a fiduciary. For purposes of this Agreement "Confidential Information" means information disclosed to the Executive or known by the Executive as a consequence of or through his employment by the Company (including information conceived, originated, discovered or developed by the Executive) prior to or after the date hereof and not generally known or in the public domain, about the Company or its business. Notwithstanding the foregoing, nothing herein shall be deemed to restrict the Executive from disclosing Confidential Information to the extent required by law. 7.3 NONSOLICITATION OF EMPLOYEES. During the Term and for a period of one year following termination of the Executive's employment with the Company, Executive shall 6 not directly or indirectly, for herself or for any other person, firm, corporation, partnership, association or other entity, attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company, unless such employee or former employee has not been employed by the Company for a period in excess of six months. 7.4 BOOKS AND RECORDS. All books, records, accounts and similar repositories of Confidential Information of the Company, whether prepared by the Executive or otherwise coming into the Executive's possession, shall be the exclusive property of the Company and shall be returned immediately to the Company on termination of this Agreement or on the Board's request at any time. 8. INJUNCTION. It is recognized and hereby acknowledged by the parties hereto that a breach by the Executive of any of the covenants contained in Paragraph 7 of this Agreement will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, the Executive recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in Paragraph 7 of this Agreement by the Executive or any of her affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess. 9. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation which assumes this Agreement, and all obligations of the Company hereunder, in writing. Upon such consolidation, merger, or transfer of assets and assumption, the term "the Company" as used herein, shall mean such other corporation and this Agreement shall continue in full force and effect, subject to the provisions of Paragraph 6 hereof. 10. BINDING EFFECT. Except as herein otherwise provided, this Agreement shall inure to the benefit of and shall be binding upon the parties hereto, their personal representatives, successors, heirs and assigns. 11. TERMINOLOGY. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and vice versa. Titles of Paragraphs are for convenience only, and neither limit nor amplify the provisions of the Agreement itself. 12. FURTHER ASSURANCES. At any time, and from time to time, each party will take such action as may be reasonably requested by the other party to carry out the intent and purposes of this Agreement. 13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. It supersedes all prior negotiations, letters and understandings relating to the subject matter hereof. 7 14. AMENDMENT. This Agreement may not be amended, supplemented or modified in whole or in part except by an instrument in writing signed by the party or parties against whom enforcement of any such amendment, supplement or modification is sought. 15. ASSIGNMENT. This Agreement may not be assigned by any party hereto without the prior written consent of the other party and except as provided in Paragraph 9 hereof. 16. CHOICE OF LAW. This Agreement will be interpreted, construed and enforced in accordance with the laws of the State of Florida, without giving effect to the application of the principles pertaining to conflicts of laws. 17. EFFECT OF WAIVER. The failure of any party at any time or times to require performance of any provision of this Agreement will in no manner affect the right to enforce the same. The waiver by any party of any breach of any provision of this Agreement will not be construed to be a waiver by any such party of any succeeding breach of that provision or a waiver by such party of any breach of any other provision. 18. CONSTRUCTION. The parties hereto and their respective legal counsel participated in the preparation of this Agreement; therefore, this Agreement shall be construed neither against nor in favor of any of the parties hereto, but rather in accordance with the fair meaning thereof. 19. SEVERABILITY. The invalidity, illegality or unenforceability of any provision or provisions of this Agreement will not affect any other provision of this Agreement, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Agreement affect the balance of such provision. In the event that any one or more of the provisions contained in this Agreement or any portion thereof shall for any reason be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be reformed, construed and enforced as if such invalid, illegal or unenforceable provision had never been contained herein. 20. ENFORCEMENT. Should it become necessary for any party to institute legal action to enforce the terms and conditions of this Agreement, the successful party will be awarded reasonable attorneys' fees at all trial and appellate levels, expenses and costs. Any suit, action or proceeding with respect to this Agreement shall be brought in the courts of Broward County in the State of Florida or in the U.S. District Court for the Southern District of Florida. The parties hereto hereby accept the exclusive jurisdiction of those courts for the purpose of any such suit, action or proceeding. Venue for any such action, in addition to any other venue permitted by statute, will be Broward County, Florida. The parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any judgment entered by any court in respect thereof brought in Broward County, Florida, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Broward County, Florida, has been brought in an inconvenient forum. The parties hereto acknowledge and agree that any party's remedy at law for a breach or threatened breach of any of the provisions of this Agreement would be inadequate and such 8 breach or threatened breach shall be per se deemed as causing irreparable harm to such party. Therefore, in the event of such breach or threatened breach, the parties hereto agree that, in addition to any available remedy at law, including but not limited to monetary damages, an aggrieved party, without posting any bond, shall be entitled to obtain, and the offending party agrees not to oppose the aggrieved party's request for, equitable relief in the form of specific enforcement, temporary restraining order, temporary or permanent injunction, or any other equitable remedy that may then be available to the aggrieved party. 21. BINDING NATURE. This Agreement will be binding upon and will inure to the benefit of any successor or successors of the parties hereto. 22. NO THIRD-PARTY BENEFICIARIES. No person shall be deemed to possess any third-party beneficiary right pursuant to this Agreement. It is the intent of the parties hereto that no direct benefit to any third party is intended or implied by the execution of this Agreement. 23. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original. 24. NOTICE. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when sent by facsimile with receipt confirmed or when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or by overnight courier, addressed to the parties at the addresses first stated herein, or to such other address as either party hereto shall from time to time designate to the other party by notice in writing as provided herein. IN WITNESS WHEREOF, this Agreement has been duly signed by the parties hereto on the day and year first above written. 21ST CENTURY HOLDING COMPANY By:_____________________________ Name:________________________ Title:_______________________ ________________________________ MICHELE V. LAWSON 9 EX-10.4 8 EXHIBIT 10.4 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "Agreement") is dated as of September __, 1998, by and between 21ST CENTURY HOLDING COMPANY, a Florida corporation (the "Company"), with its principal office located at 4161 N.W. 5th Street, Plantation, Florida 33317, and ____________________________, whose residence is _____________________________ (the "Indemnitee"). RECITALS 1. The substantial increase in corporate litigation subjects directors and officers of corporations and others to expensive litigation risks at the same time that the availability of competent and qualified directors, officers, employees, consultants, advisers and agents has been greatly reduced, and the coverage offered by directors' and officers' liability insurance has been severely limited; 2. The Company's Restated and Amended Articles of Incorporation (the "Articles of Incorporation") and By-Laws (the "By-Laws") requires the Company to indemnify and advance expenses to its directors and officers to the fullest extent permitted by law and the Indemnitee has been serving and continues to serve as a director or officer of the Company in part in reliance on such Articles of Incorporation; 3. In recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner and Indemnitee's reliance on the Articles of Incorporation and By-Laws, and in part to provide Indemnitee with specific contractual assurance that the protection promised by the Articles of Incorporation and By-Laws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such or any change in the composition of the Company's Board of Directors (the "Board") or acquisition transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of, and the advancing of expenses to, Indemnitee to the fullest extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies; 4. As a condition to the Indemnitee's agreement to continue to serve as a director of the Company, the Indemnitee requires that he be indemnified from liability to the fullest extent permitted by law; and 5. The Company is willing to indemnify the Indemnitee to the fullest extent permitted by law in order to retain the services of the Indemnitee. NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties hereby agree as follows: 1. MANDATORY INDEMNIFICATION IN PROCEEDINGS OTHER THAN THOSE BY OR IN THE RIGHT OF THE COMPANY. Subject to Section 5 hereof, the Company shall indemnify and hold harmless the Indemnitee from and against any and all claims, damages, expenses (including attorneys' fees), judgments, penalties, fines (including excise taxes assessed with respect to an employee benefit plan), settlements, and all other liabilities incurred or paid by him in connection with the investigation, defense, prosecution, settlement or appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) and to which the Indemnitee was or is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an officer, director, shareholder, employee, consultant adviser or agent of the Company, or is or was serving at the request of the Company as an officer, director, partner, trustee, employee, adviser or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of anything done or not done by the Indemnitee in any such capacity or capacities, provided that the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. 2. MANDATORY INDEMNIFICATION IN PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Subject to Section 5 hereof the Company shall indemnify and hold harmless the Indemnitee from and against any and all expenses (including attorneys' fees) and amounts actually and reasonably incurred or paid by him in connection with the investigation, defense, prosecution, settlement or appeal of any threatened, pending or completed action, suit or proceeding by or in the right of the Company to procure a judgment in its favor, whether civil, criminal, administrative or investigative, and to which the Indemnitee was or is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an officer, director, shareholder, employee, consultant, adviser or agent of the Company, or is or was serving at the request of the Company as an officer, director, partner, trustee, employee, adviser or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of anything done or not done by the Indemnitee in any such capacity or capacities, provided that (i) the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and (ii) no indemnification shall be made under this Section 2 in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Company for misconduct in the performance of his duty to the Company unless, and only to the extent that, the court in which such proceeding was brought (or any other court of competent jurisdiction) shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. 3. MANDATORY INDEMNIFICATION AGAINST EXPENSES INCURRED WHILE TESTIFYING. Subject to Section 5 hereof, the Company shall indemnify the Indemnitee against expenses (including attorney's fees) incurred or paid by the Indemnitee as a result of providing testimony in any proceeding, whether civil, criminal, administrative or investigative (including but not limited to any action or suit by or in the right of the Company to procure judgment in its favor), by reason of the fact that the Indemnitee is or was an officer, director, shareholder, employee, consultant, adviser or agent of the Company, or is or was serving at the request of the Company as an officer, director, partner, trustee, employee, adviser or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. 2 4. REIMBURSEMENT OF EXPENSES FOLLOWING ADJUDICATION OF NEGLIGENCE. The Company shall reimburse the Indemnitee for any expenses (including attorney's fees) and amounts actually and reasonably incurred or paid by him in connection with the investigation, defense, settlement or appeal of any action or suit described in Section 2 hereof that results in an adjudication that the Indemnitee was liable for negligence, gross negligence or recklessness (but not willful misconduct) in the performance of his duty to the Company; provided, however, that the Indemnitee acted in good faith and in a manner he believed to be in or not opposed to the best interests of the Company. 5. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under Sections 1, 2 and 3 hereof (unless ordered by a court) and any reimbursement made under Section 4 hereof shall be made by the Company only as authorized in the specific case upon a determination (the "Determination") that indemnification or reimbursement of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable requirements set forth in Sections 1, 2, 3 and 4 hereof, as the case may be. Subject to Sections 6.6, 6.7 and 9 of this Agreement, the Determination shall be made in the following order of preference: (a) first, by the Board by a majority vote or consent of a quorum, in each case consisting of directors who are not, at the time of the Determination, named parties to such action, suit or proceeding ("Disinterested Directors"); or (b) next, if such a quorum of Disinterested Directors cannot be obtained, by majority vote or consent of a committee duly designated by the Board (in which designation all directors, whether or not Disinterested Directors, may participate) consisting solely of two or more Disinterested Directors; or (c) next, if such a committee cannot be designated, by any independent legal counsel (who may be any outside counsel regularly employed by the Company) in a written opinion; or (d) next, if such legal counsel determination cannot be obtained, by vote or consent of the holders of a majority of the Company's Common Stock. 5.1 NO PRESUMPTIONS. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not act in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 5.2 BENEFIT PLAN CONDUCT. The Indemnitee's conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in and beneficiaries of the plan shall be deemed to be conduct that the Indemnitee reasonably believed to be not opposed to the best interests of the Company. 5.3 RELIANCE AS SAFE HARBOR. For purposes of any Determination hereunder, the Indemnitee shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal 3 action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on (i) the records or books of account of the Company or another enterprise, including financial statements, (ii) information supplied to him by the officers of the Company or another enterprise in the course of their duties, (iii) the advice of legal counsel for the Company or another enterprise, or (iv) information or records given or reports made to the Company or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Company or another enterprise. The term "another enterprise" as used in this Section 5.3 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which the Indemnitee is or was serving at the request of the Company as an officer, director, partner, trustee, employee, adviser or agent. The provisions of this Section 5.3 shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in Sections 1, 2 or 4 hereof, as the case may be. 5.4 SUCCESS ON MERITS OR OTHERWISE. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding described in Sections 1 or 2 hereof, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal thereof. For purposes of this Section 5.4, the term "successful on the merits or otherwise' shall include, but not be limited to, (i) any termination, withdrawal, or dismissal (with or without prejudice) of any claim, action, suit or proceeding against the Indemnitee without any express finding of liability or guilt against him, and (ii) the expiration of 120 days after the making of any claim or threat of an action, suit or proceeding without the institution of the same and without any promise or payment made to induce a settlement. 5.5 PARTIAL INDEMNIFICATION OR REIMBURSEMENT. If the Indemnitee is entitled under any provision of this Agreement to indemnification and/or reimbursement by the Company for some or a portion of the claims, damages, expenses (including attorneys' fees), judgments, penalties, fines or amounts paid in settlement by the Indemnitee in connection with the investigation of, defense of, settlement of, appeal of or testimony provided with respect to any action specified in Sections 1, 2, 3 or 4 hereof, but not, however, for the total amount thereof, the Company shall nevertheless indemnify and/or reimburse the Indemnitee for the portion thereof to which the Indemnitee is entitled. The party or parties making the Determination shall determine the portion (if less than all) of such claims, damages, expenses (including attorneys' fees), judgments, penalties, fines or amounts paid in settlement for which the Indemnitee is entitled to indemnification and/or reimbursement under this Agreement. 6. PROCEDURES FOR DETERMINATION OF WHETHER STANDARDS HAVE BEEN SATISFIED. 6.1 COSTS. All costs of making the Determination required by Section 6 hereof shall be borne solely by the Company, including, but not limited to, the costs of legal counsel, proxy solicitations and judicial determinations. The Company shall also be solely responsible for paying (i) all reasonable expenses incurred by the Indemnitee to enforce this Agreement, including, but not limited to, the costs incurred by the Indemnitee to obtain court-ordered indemnification pursuant to Section 9 hereof regardless of the outcome of any such application 4 or proceeding, and (ii) all costs of defending any suits or proceedings challenging payments to the Indemnitee under this Agreement. 6.2 TIMING OF THE DETERMINATION. The Company shall use its best efforts to make the Determination contemplated by Section 5 hereof promptly. In addition, the Company agrees: (a) if the Determination is to be made by the Board or a committee thereof, such Determination shall be made not later than 15 days after a written request for a Determination (a "Request") is delivered to the Company by the Indemnitee; (b) if the Determination is to be made by independent legal counsel, such Determination shall be made not later than 30 days after a Request is delivered to the Company by the Indemnitee; and (c) if the Determination is to be made by the shareholders of the Company, such Determination shall be made not later than 90 days after a Request is delivered to the Company by the Indemnitee. The failure to make a Determination within the above-specified time period shall constitute a Determination approving full indemnification or reimbursement of the Indemnitee. Notwithstanding anything herein to the contrary, a Determination may be made in advance of (i) the Indemnitee's payment (or incurring) of expenses with respect to which indemnification or reimbursement is sought, and/or (ii) final disposition of the action, suit or proceeding with respect to which indemnification or reimbursement is sought. 6.3 REASONABLENESS OF EXPENSES. The evaluation and finding as to the reasonableness of expenses incurred by the Indemnitee for purposes of this Agreement shall be made (in the following order of preference) within 15 days of the Indemnitee's delivery to the Company of a Request that includes a reasonable accounting of expenses incurred: (a) first, by the Board by a majority vote or consent of a quorum consisting of Disinterested Directors; or (b) next, if a quorum cannot be obtained under subdivision (a), by majority vote or consent of a committee duly designated by the Board (in which designation all directors, whether or not Disinterested Directors, may participate), consisting solely of two or more Disinterested Directors; or (c) next, if a finding cannot be obtained under either subdivision (a) or (b), by vote or consent of the holders of a majority of the Company's Common Stock. 5 All expenses shall be considered reasonable for purposes of this Agreement if the finding contemplated by this Section 6.3 is not made within the prescribed time. The finding required by this Section 6.3 may be made in advance of the payment (or incurring) of the expenses for which indemnification or reimbursement is sought. 6.4 PAYMENT OF INDEMNIFIED AMOUNT. Immediately following a Determination that the Indemnitee has met the applicable requirements set forth in Sections 1, 2, 3 or 4 hereof, as the case may be, and the finding of reasonableness of expenses contemplated by Section 6.3 hereof, or the passage of time prescribed for making such determination(s), the Company shall pay to the Indemnitee in cash the amount to which the Indemnitee is entitled to be indemnified and/or reimbursed, as the case may be, without further authorization or action by the Board; provided, however, that the expenses for which indemnification or reimbursement is sought have actually been incurred by the Indemnitee. 6.5 SHAREHOLDER VOTE ON DETERMINATION. Notwithstanding the provisions of the Florida statutes, if the Indemnitee is a shareholder of the Company, the Indemnitee and any other shareholder who is a party to the proceeding for which indemnification or reimbursement is sought shall be entitled to vote on any Determination to be made by the Company's shareholders, including a Determination made pursuant to Section 6.3 hereof. In addition, in connection with each meeting at which a shareholder Determination will be made, the Company shall solicit proxies that expressly include a proposal to indemnify or reimburse the Indemnitee. The Company proxy statement relating to the proposal to indemnify or reimburse the Indemnitee shall not include a recommendation against indemnification or reimbursement. 6.6 SELECTION OF INDEPENDENT LEGAL COUNSEL. If the Determination required under Section 5 is to be made by independent legal counsel, such counsel shall be selected by the Indemnitee with the approval of the Board, which approval shall not be unreasonably withheld. The fees and expenses incurred by counsel in making any Determination (including Determinations pursuant to Section 6.8 hereof) shall be borne solely by the Company regardless of the results of any Determination and, if requested by counsel, the Company shall give such counsel an appropriate written agreement with respect to the payment of their fees and expenses and such other matters as may be reasonably requested by counsel. 6.7 RIGHT OF INDEMNITEE TO APPEAL AN ADVERSE DETERMINATION BY BOARD. If a Determination is made by the Board or a committee thereof that the Indemnitee did not meet the requirements set forth in Sections 1, 2, 3 or 4 hereof upon the written request of the Indemnitee and the Indemnitee's delivery of $500 to the Company, the Company shall cause a new Determination to be made by the Company's shareholders at the next regular or special meeting of shareholders. Subject to Section 9 hereof, such Determination by the Company's shareholders shall be binding and conclusive for all purposes of this Agreement. 6.8 RIGHT OF INDEMNITEE TO SELECT FORUM FOR DETERMINATION. If, at any time subsequent to the date of this Agreement, "Continuing Directors" do not constitute a majority of 6 the members of the Board, or there is otherwise a change in control of the Company (as contemplated by Item 403(c) of Regulation S-K), then upon the request of the Indemnitee, the Company shall cause the Determination required by Section 5 hereof to be made by independent legal counsel selected by the Indemnitee and approved by the Board (which approval shall not be unreasonably withheld), which counsel shall be deemed to satisfy the requirements of clause (3) of Section 5 hereof. If none of the legal counsel selected by the Indemnitee are willing and/or able to make the Determination, then the Company shall cause the Determination to be made by a majority vote or consent of a Board committee consisting solely of Continuing Directors. For purposes of this Agreement, a "Continuing Director" means either a member of the Board at the date of this Agreement or a person nominated to serve as a member of the Board by a majority of the then Continuing Directors. 6.9 ACCESS BY INDEMNITEE TO DETERMINATION. The Company shall afford to the Indemnitee and his representatives ample opportunity to present evidence of the facts upon which the Indemnitee relies for indemnification or reimbursement, together with other information relating to any requested Determination. The Company shall also afford the Indemnitee the reasonable opportunity to include such evidence and information in any Company proxy statement relating to a shareholder Determination. 6.10 JUDICIAL DETERMINATIONS IN DERIVATIVE SUITS. In each action or suit described in Section 2 hereof, the Company shall cause its counsel to use its best efforts to obtain from the Court in which such action or suit was brought (i) an express adjudication whether the Indemnitee is liable for negligence or misconduct in the performance of his duty to the Company, and, if the Indemnitee is so liable, (ii) a determination whether and to what extent, despite the adjudication of liability but in view of all the circumstances of the case (including this Agreement), the Indemnitee is fairly and reasonably entitled to indemnification. 7. SCOPE OF INDEMNITY. The actions, suits and proceedings described in Sections 1 and 2 hereof shall include, for purposes of this Agreement, any actions that involve, directly or indirectly, activities of the Indemnitee both in his capacities as a Company director, officer, adviser or agent and actions taken in another capacity while serving as director, officer, adviser or agent, including, but not limited to, actions or proceedings involving (i) compensation paid to the Indemnitee by the Company, (ii) activities by the Indemnitee on behalf of the Company, including actions in which the Indemnitee is plaintiff, (iii) actions alleging a misappropriation of a "corporate opportunity," (iv) responses to a takeover attempt or threatened takeover attempt of the Company, (v) transactions by the Indemnitee in Company securities, and (vi) the Indemnitee's preparation for and appearance (or potential appearance) as a witness in any proceeding relating, directly or indirectly, to the Company. In addition, the Company agrees that, for purposes of this Agreement, all services performed by the Indemnitee on behalf of, in connection with or related to any subsidiary of the Company, any employee benefit plan established for the benefit of employees of the Company or any subsidiary, any corporation or partnership or other entity in which the Company or any subsidiary has a 5% ownership interest, or any other affiliate shall be deemed to be at the request of the Company. 7 8. ADVANCE FOR EXPENSES. 8.1 MANDATORY ADVANCE. Expenses (including attorneys' fees) incurred by the Indemnitee in investigating, defending, settling or appealing any action, suit or proceeding described in Sections 1 or 2 hereof shall be paid by the Company in advance of the final disposition of such action, suit or proceeding. The Company shall promptly pay the amount of such expenses to the Indemnitee, but in no event later than 10 days following the Indemnitee's delivery to the Company of a written request for an advance pursuant to this Section 8, together with a reasonable accounting of such expenses. 8.2 UNDERTAKING TO REPAY. The Indemnitee hereby undertakes and agrees to repay to the Company any advances made pursuant to this Section 8 if and to the extent that it shall ultimately be found (by final judicial determination from which there is no further right to appeal) that the Indemnitee is not entitled to be indemnified by the Company for such amounts. 8.3 MISCELLANEOUS. The Company shall make the advances contemplated by this Section 8 regardless of the Indemnitee's financial ability to make repayment, and regardless whether indemnification of the Indemnitee by the Company will ultimately be required. Any advances and undertakings to repay pursuant to this Section 8 shall be unsecured and interest-free. 9. COURT-ORDERED INDEMNIFICATION. 9.1 Regardless of whether the Indemnitee has met the requirements set forth in Sections 1, 2, 3 or 4 hereof, as the case may be, and notwithstanding the presence or absence of any Determination whether such standards have been satisfied, the Indemnitee may apply for indemnification (and/or reimbursement pursuant to Sections 4 or 13 hereto) to the court conducting any proceeding to which the Indemnitee is a party or to any other court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court considers necessary, may order indemnification (and/or reimbursement) if it determines the Indemnitee is fairly and reasonably entitled to indemnification (and/or reimbursement) in view of all the relevant circumstances (including this Agreement). 9.2 The right to indemnification and advances as provided by this Agreement shall be enforceable by Indemnitee in an action in any court of competent jurisdiction. In such an action, the burden of proving that indemnification is not required hereunder shall be on the Company. Neither the failure of the Company (including its Board and independent legal counsel) to have made a Determination prior to the commencement of such an action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual Determination by the Company (including its Board and independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to such an action or create a presumption that Indemnitee has not met the applicable standard of conduct. Indemnitee's expenses reasonably incurred in connection with establishing his right to indemnification, in whole or in part, in connection with any proceeding shall also be indemnified by the Company. 8 10. NONDISCLOSURE OF PAYMENTS. Except as expressly required by federal securities laws, neither party shall disclose any payments under this Agreement unless prior approval of the other party is obtained. Any payments to the Indemnitee that must be disclosed shall, unless otherwise required by law, be described only in the Company's proxy or information statements relating to special and/or annual meetings of the Company's shareholders, and the Company shall afford the Indemnitee the reasonable opportunity to review all such disclosures and, if requested, to explain in such statement any mitigating circumstances regarding the events reported. 11. COVENANT NOT TO SUE, LIMITATION OF ACTIONS AND RELEASE OF CLAIMS. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company (or any of its subsidiaries) against the Indemnitee, his spouse, heirs, executors, personal representatives or administrators after the expiration of 2 years from the date the Indemnitee ceases (for any reason) to serve as either an officer, director, adviser or agent of the Company, and any claim or cause of action of the Company (or any of its subsidiaries) shall be extinguished and deemed released unless asserted by filing of a legal action within such 2-year period. 12. INDEMNIFICATION OF INDEMNITEE'S ESTATE. Notwithstanding any other provision of this Agreement, if the Indemnitee is deceased, and indemnification of the Indemnitee would be permitted and/or required under this Agreement, the Company shall indemnify and hold harmless the Indemnitee's estate, spouse, heirs, administrators, personal representatives and executors (collectively the "Indemnitee's Estate") against, and the Company shall assume, any and all claims, damages, expenses (including attorneys' fees), penalties, judgments, fines and amounts paid in settlement actually incurred by the Indemnitee or the Indemnitee's Estate in connection with the investigation, defense, settlement or appeal of any action described in Sections 1, 2 or 4 hereof. 13. MISCELLANEOUS. 13.1 NOTICE. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when sent by facsimile with receipt confirmed or deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or by overnight courier addressed to the parties at the addresses first stated herein, or to such other address as either party hereto shall from time to time designate to the other party by notice in writing as provided herein. 13.2 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between the parties hereto with respect to the subject matter hereof. It supercedes all prior negotiations, letters and understandings relating to the subject matter hereof. 13.3 NON-EXCLUSIVITY. The rights of indemnification and reimbursement provided in this Agreement shall be in addition to any rights to which the Indemnitee may otherwise be entitled under the Company's Articles of Incorporation or By-Laws or any statute, agreement, vote of shareholders or otherwise. 9 13.4 SEVERABILITY. The invalidity, illegality or unenforceability of any provision or provisions of this Agreement will not affect any other provision of this Agreement, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Agreement affect the balance of such provision. In the event that any one or more of the provisions contained in this Agreement or any portion thereof shall for any reason be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be reformed, construed and enforced as if such invalid, illegal or unenforceable provision had never been contained herein. 13.5 SAVING CLAUSE. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify Indemnitee as to expenses, judgments, fines and penalties with respect to any proceeding to the full extent permitted by any applicable portion of Agreement that shall not have been invalidated or by any applicable law. 13.6 COOPERATION AND INTENT. The Company shall cooperate in good faith with the Indemnitee and use its best efforts to ensure that the Indemnitee is indemnified and/or reimbursed for liabilities described herein to the fullest extent permitted by law. 13.7 SECURITY. To the fullest extent permitted by applicable law, the Company may from time to time, but shall not be required to, provide such insurance, collateral, letters of credit or other security devices as its Board may deem appropriate to support or secure the Company's obligations under this Agreement. 13.8 CHOICE OF LAW. This Agreement will be interpreted, construed and enforced in accordance with the laws of the State of Florida, without giving effect to the application of the principles pertaining to conflicts of laws. 13.9 AMENDMENT. This Agreement may not be amended, supplemented or modified in whole or in part except by an instrument in writing signed by the party or parties against whom enforcement of any such amendment, supplement or modification is sought. 13.10 BINDING EFFECT. The obligations of the Company to the Indemnitee hereunder shall survive and continue as to the Indemnitee even if the Indemnitee ceases to be a director, officer, employee, adviser and/or agent of the Company. Each and all of the covenants, terms and provisions of this Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and, upon the death of the Indemnitee, to the benefit of the estate, heirs, executors, administrators and personal representatives of the Indemnitee. 13.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original. 10 13.12 EFFECTIVE DATE. The provisions of this Agreement shall cover claims, actions, suits and proceedings whether now pending or hereafter commenced and shall be retroactive to cover acts or omissions or alleged acts or omissions which heretofore have taken place. 13.13 EFFECT OF WAIVER. The failure of any party at any time or times to require performance of any provision of this Agreement will in no manner affect the right to enforce the same. The waiver by any party of any breach of any provision of this Agreement will not be construed to be a waiver by any such party of any succeeding breach of that provision or a waiver by such party of any breach of any other provision. 13.14 ENFORCEMENT. Should it become necessary for any party to institute legal action to enforce the terms and conditions of this Agreement, the successful party will be awarded reasonable attorneys' fees at all trial and appellate levels, expenses and costs. Any suit, action or proceeding with respect to this Agreement shall be brought in the courts of Broward County in the State of Florida or in the U.S. District Court for the Southern District of Florida. The parties hereto hereby accept the exclusive jurisdiction of those courts for the purpose of any such suit, action or proceeding. Venue for any such action, in addition to any other venue permitted by statute, will be Broward County, Florida. The parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any judgment entered by any court in respect thereof brought in Broward County, Florida, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Broward County, Florida, has been brought in an inconvenient forum. The parties hereto acknowledge and agree that any party's remedy at law for a breach or threatened breach of any of the provisions of this Agreement would be inadequate and such breach or threatened breach shall be per se deemed as causing irreparable harm to such party. Therefore, in the event of such breach or threatened breach, the parties hereto agree that, in addition to any available remedy at law, including but not limited to monetary damages, an aggrieved party, without posting any bond, shall be entitled to obtain, and the offending party agrees not to oppose the aggrieved party's request for, equitable relief in the form of specific enforcement, temporary restraining order, temporary or permanent injunction, or any other equitable remedy that may then be available to the aggrieved party. 11 IN WITNESS WHEREOF, this Agreement has been duly signed by the parties hereto on the day and year first above written. 21ST CENTURY HOLDING COMPANY By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- THE INDEMNITEE: ----------------------------------------------- EDWARD J. LAWSON 12 EX-21.1 9 EXHIBIT 21.1 LIST OF SUBSIDIARIES Superior Adjusting, Inc. Assurance Managing General Agents, Inc. Federated National Insurance Company Federated Premium Finance, Inc. Federated Agency Group, Inc. LB VII, Inc. Oakland Park Insurance and Auto Tags, Inc. Sunrise-Nobhill Insurance and Auto Tags, Inc. Weston-Bonaventure Insurance Auto Tags, Inc. Florida State Discount Insurance and Auto Tags at Margate, Inc. Florida State Discount Insurance and Auto Tags at Coral Springs, Inc. RSPL, Inc. Florida State Discount Auto Title Loans, Inc. EX-23.2 10 EXHIBIT 23.2 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors 21st Century Holding Company We consent to the use of our report dated August 31, 1998 on the consolidated and combined balance sheet of 21st Century Holding Company as of December 31, 1997 and the related consolidated and combined statements of income, shareholders' equity, and cash flows for the years ended December 31, 1997 and 1996 included herein and to the reference to our firm under the heading "Experts", "Summary Consolidated and Combined Financial Data" and "Selected Consolidated and Combined Financial Data" in the prospectus. KPMG PEAT MARWICK LLP -----END PRIVACY-ENHANCED MESSAGE-----