-----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, TqIIqNdC52dZ4SS4XRqrLp3QtWt+HSlpv5AJJWUa8pDO1OzihTayVlG1r1O1wWGP FlFCCXVlAnIGI5lCQ5wCtg== 0000950170-98-001960.txt : 19981008 0000950170-98-001960.hdr.sgml : 19981008 ACCESSION NUMBER: 0000950170-98-001960 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19981007 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 21ST CENTURY HOLDING CO CENTRAL INDEX KEY: 0001069996 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 650248866 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-63623 FILM NUMBER: 98722180 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/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1998 REGISTRATION STATEMENT NO. 333-63623 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 1 TO 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] -------------- 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 OCTOBER 7, 1998 PROSPECTUS 1,250,000 SHARES 21ST CENTURY HOLDING COMPANY 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 8 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 $745,000, 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 (V) 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"). The Company has underwriting authority for third-party insurance companies which it represents through a wholly-owned managing general agent, Assurance Managing General Agents, Inc. ("Assurance MGA"). The Company internally processes claims made by Federated National's insureds through a wholly-owned claims adjusting company, Superior Adjusting, Inc. ("Superior"). 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 offers auto title loans and other ancillary services through its wholly-owned subsidiary, Florida State Discount Auto Title Loans, Inc. ("Florida Auto Title"). 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 substantially all aspects of its business. Using these systems, the Company's agents can 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 3 Company, Inc. ("A.M. Best"), a leading 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 approximately 19.2% of the total personal automobile insurance market. Also according to A.M. Best, from 1993 to 1997, annual premium volume in the nonstandard personal automobile insurance market in Florida grew from approximately $1.5 billion to approximately $2.6 billion and from approximately 27.8% to approximately 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, the Company acquired all other 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 4 "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. 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 ........................... 979 1,567 2,358 1,535 Net investment income ....................... 506 453 1,047 850 Net realized gains (losses) ................. 389 (34) (19) 155 Other income ................................ 1,551 553 1,439 2,117 -------- ------ ------- -------- Total revenue ............................... 10,103 7,517 15,749 14,300 Expenses: Losses and LAE .............................. 4,681 3,272 7,414 7,660 Operating and underwriting expenses ......... 2,106 1,495 3,301 3,513 Other expenses .............................. 1,537 1,980 3,682 2,423 -------- ------ ------- -------- Total expenses .............................. 8,324 6,747 14,397 13,596 -------- ------ ------- -------- 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% 23% -------- ------- ------- -------- 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. However, there can be no assurance that Federated National 8 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 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 with respect to the portion of the risk which has been reinsured, in the event of the reinsurers' failure to pay for any reason. 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 and 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 and 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 expected payment of all incurred losses and LAE. The liability for unpaid losses and LAE is an estimate based on historical data and anticipated future events. Actual losses and LAE may vary significantly from the established liability. Furthermore, factors such as 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 actual loss experience. Accordingly, there can be no assurance that Federated National's liability for unpaid losses and LAE will be adequate to cover its actual losses. If Federated National's liability for unpaid losses and LAE is less than actual losses and LAE, 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 and 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 of Florida, its state of domicile, and will be subject to the laws of any state in which it conducts business in the future. These laws and regulations cover all aspects of its business and are generally designed to protect the interests of insurance policyholders. Such laws and regulations relate to authorized lines of business, capital surplus requirements, allowable rates and forms, investment parameters, underwriting limitations, restrictions upon transactions with affiliates, dividend limitations, changes in control, market conduct, limitations on premium financing service charges and interest for title loans and a variety of other financial and 9 non-financial aspects of the Company's business. The failure of the Company to comply with 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. Federated National fell outside the usual range with respect to two of the 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, in its statutory financial statements prior to 1996. The full results since Federated National's inception of its 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. Although 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 can be 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 and 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 can be no assurance that the Company's lack of experience will not have a material adverse effect on the Company's business, results of operations and 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 and other resources than the Company, have favorable A.M. Best ratings and offer more diversified insurance coverage. The Company's competitors include other companies which market their products through agents, as well as companies which sell insurance directly to their customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and reduced policy acquisition costs. The Company may also face competition from new or temporary entrants in 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 and 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 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 favorable. 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 on which it reports, that have not been assigned a letter rating due to, among other factors, insufficient operating history. A poor letter rating 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 rating (as to which there can be no assurance) and, if 11 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 assurance 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 Company's 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 and substantial 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 annual 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 for shares which are 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, subject to the volume limitations and other restrictions contained in Rule 144 under the Securities Act. 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 (the "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 had 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 this 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 this 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 (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 ........................... 979 1,567 2,358 1,535 Net investment income ....................... 506 453 1,047 850 Net realized gains (losses) ................. 389 (34) (19) 155 Other income ................................ 1,551 553 1,439 2,117 -------- ------ ------- -------- Total revenue ............................... 10,103 7,517 15,749 14,300 Expenses: Losses and LAE .............................. 4,681 3,272 7,414 7,660 Operating and underwriting expenses ......... 2,106 1,495 3,301 3,513 Other expenses .............................. 1,537 1,980 3,682 2,423 -------- ------ ------- -------- Total expenses .............................. 8,324 6,747 14,397 13,596 -------- ------ ------- -------- 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% 23% -------- ------- ------- -------- 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 and financial condition. Also, if Federated National's estimated liabilities for unpaid losses and LAE is less than actual losses and LAE, 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 and other resources than the Company, have favorable A.M. Best ratings and offer more diversified insurance coverage. 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 reduced acquisition costs. The Company may also face competition from new or temporary entrants in 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 working with the Company 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, because $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 decreased 37.5% to $1.0 million for the six month period ended June 30, 1998 from $1.6 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. The decrease is partially attributable to a $300,000 decrease in commissions earned on business placed with third party insurers. The remainder of the decrease is attributable to the fact that 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. 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 by Federated Premium to 10,129 for the six month period ended June 30, 1998 from zero for the same period in 1997. In order to terminate a premium finance lending 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, as determined in accordance with GAAP, for the six month period ended June 30, 1998 was 77.0% compared with 73.0% 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 premiums 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. 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 attributable to the increase in costs associated with supporting the growth of the Company's operations. This increase is also due to the increase in interest expense of $150,000 for the six month period 21 ended June 30, 1998 from $0 for the same period in 1997. This increase is attributable 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 decreased to $(197,000) for the six month period ended June 30, 1998 from $395,000 for the same period in 1997. Amortization of deferred policy acquisition costs consists of the actual amortization of deferred policy acquisition costs less commissions earned on reinsurance ceded. The decrease in the amortization of deferred policy acquisition costs is attributable to the increase in commissions from reinsurance ceded by Federated National of 140.0% to $1.2 million for the six month period ended June 30, 1998 from $550,000 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. The decrease in the amortization of deferred policy acquisition costs was partially offset by the increase of the actual amortization of deferred policy acquisition costs of 11.1% to $1.0 million at June 30, 1998 from $943,000 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 the six months ended June 30, 1998 compared with an estimated effective income tax rate of 16.7% for the same period in 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, because $4.7 million or 26.6% of premiums written were ceded to a reinsurer in 1997 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 60.0% to $2.4 million in 1997 from $1.5 million in 1996. The increase in commission income is primarily attributable to the increase in 22 Company-owned agency fees of 40.0% to $2.1 million in 1997 from $1.5 million in 1996 which was due to an increase in the number of Company-owned agencies to 12 in 1997 from 11 in 1996. The increase in commission income was also attributable to an increase of $300,000 in premium financing commissions due to the fact that during 1997, premium financing was placed almost exclusively with third party premium finance companies for which commissions were received, as compared to 1996, where premium financing was placed substantially with Federated Premium for which no commissions are paid. FINANCE REVENUES. Finance revenues decreased 77.6% to $220,000 in 1997 from $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 lending 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. Nearly all of the $220,000 in finance revenue earned for the year was earned in the fourth quarter of 1997. INVESTMENT INCOME. Investment income remained relatively constant at $1.0 million in 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 9.1% to $1.2 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, as determined in accordance with GAAP, for 1997 was 75.0% compared with 85.0% in 1996. 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 $410,000 to $50,000 in 1997 from $460,000 in 1996. This is attributable 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 to $496,000 in 1997 from $(149,000) in 1996. The increase is attributable to the increase in the actual amortization of deferred policy acquisition costs of 38.5% to $1.8 million in 23 1997 from $1.3 million in 1996. This increase is attributable to the premiums written by independent agencies which increased by 31.8% to $11.2 million in 1997 from $8.5 million in 1996. This increase was also attributable to 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. 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. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are revenues generated from operations, investment income and borrowings under credit facilities. Because 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. Each 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 borrowings under the Credit Facility is the prime rate plus 1.75%. 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 June 30, 1998. These 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 building was completed and the Company consolidated its executive offices and administrative operations in the building, 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 24 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. The NAIC's risk-based capital requirements are 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 risk-based capital 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 surplus was approximately $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 believes that it 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. The Company has underwriting authority for third-party insurance companies which it represents through a wholly-owned managing general agent, Assurance MGA. The Company internally processes claims made by Federated National's insureds through a wholly-owned claims adjusting company, Superior. The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium, and offers auto title loans and other ancillary services through its wholly-owned subsidiary, Florida Auto Title. 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 substantially all aspects of its business. Using these systems, the Company's agents can 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 leading 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 approximately 19.2% of the total personal automobile insurance market. Also according to A.M. Best, from 1993 to 1997 annual premium volume in the nonstandard personal automobile insurance market in Florida grew from approximately $1.5 billion to approximately $2.6 billion and from approximately 27.8% to approximately 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; /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. 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 licensed to conduct business only in Florida. From 1992 when Federated National commenced operations as an insurer, to 1997, gross written premiums grew at a 34.0% 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. Federated National is also required to maintain a minimum capital surplus to support its underwriting program. In 1998 and 1999, Federated National is also 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 limits are subject to the prior approval of the Florida 27 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. Accordingly, the Company believes it will be able to substantially increase the amount of premiums Federated National may underwrite. However, 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, agencies, and other related businesses. 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 loss 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 provide the minimum coverage required of the policyholder by statute and provide 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 substantially 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, in August 1998 Federated National 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 providing coverage 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 capital surplus significantly in excess of the required minimum. 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 lending arrangement. In early 1997 the premium finance lending arrangement was terminated and in September 1997 a new premium finance lending 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 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 operations to 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, known as a "reinsurer." The reinsurer assumes a portion of the exposure in return for a portion, or quota share, of the premium, and pays the ceding company a commission based upon the amount of insurance ceded. 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 for automobile insurance is primarily ceded with Transatlantic Re, an A++ rated reinsurance company. Federated National cedes 30.0% of automobile premiums written to Transatlantic Re. Federated National maintains reinsurance contracts for mobile home insurance with A-rated reinsurers including Transatlantic Re. Federated National cedes 40.0% of mobile home premiums written to various reinsurers. 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. 33 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 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 34 income in the period in which the deficiency is identified. Future loss experience substantially in excess 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 for unpaid losses and LAE as shown in the Company's consolidated and combined financial statements 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 $ 4,459 $ 4,178 Prior years ........................... 1,895 2,267 2,852 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, 1996, 1995, 1994, 1993 and 1992. 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,(1) ------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- ------- (DOLLARS IN THOUSANDS) Balance Sheet Liability .................... $ 4,635 $ 4,532 $3,688 $3,355 $2,507 $611 Cumulative paid as of: One year later ............................ 2,852 2,638 2,449 1,964 499 Two years later ........................... 2,658 2,792 2,426 554 Three years later ......................... 3,018 2,449 585 Four years later .......................... 2,529 580 Five years later .......................... 583 Re-estimated net liability as of: End of year ............................... $ 4,635 $ 4,532 $3,688 $3,355 $2,507 $611 One year later ............................ 4,334 3,750 3,570 2,566 628 Two years later ........................... 3,252 3,231 2,780 586 Three years later ......................... 3,305 2,596 593 Four years later .......................... 2,619 580 Five years later .......................... 583 Cumulative redundancy (deficiency) ......... -- $ 198 $ 436 $ 50 $ (112) $ 28
- ---------------- (1) To evaluate the information in the table properly it should be noted that, although the Company recorded its participation in the FJUA from 1992 until 1995 in its 1996 statutory financial statements, this table properly reflects the Company's participation in the FJUA in the corresponding years. 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% 75% 85% Expense Ratio .......... 18 29 27 23 -- -- -- -- Combined Ratio ......... 95% 102% 102% 108% == === === ===
INVESTMENTS The Company's investment objective 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 bonds), and limits total investments in equity securities and mortgage notes receivable to approximately 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 were 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. ("Moody's") 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 and other resources than the Company, have favorable A.M. Best ratings and offer more diversified insurance coverage. The Company's competitors include other companies which market their products through agents, as well as companies which sell insurance directly to their customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and reduced policy acquisition costs. The Company may also face competition from new or temporary entrants in 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's business, results of operations and financial condition. 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 39 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 capital surplus significantly in excess of the required minimum. 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 National may 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 40 periodic information with the Florida Department of Insurance, including information concerning its 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 risk-based capital requirements for insurance companies. The Model Law 41 became effective with respect to property and casualty insurance companies as of year-end 1994. The requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The Model Law measures three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from investments. Insurers having less statutory surplus than required by the Model Law will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The Model Law establishes various levels of regulatory action. Based upon the 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. Federated National fell outside the usual range with respect to two of the IRIS tests due to not reporting its underwriting results related to the FJUA in its statutory financial statements prior to 1996. The full results since Federated National's inception of its 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. Although 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 and casualty insurance companies on which it reports, that 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, including 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 based in four locations in Fort Lauderdale, Florida. 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, 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. From May 1970 to the present date, Mr. Raymond has been a shareholder and president of Raymond/Patterson Agency, Inc., a managing general agency, in Ft. Lauderdale, Florida. From May 1992 to the present date, Mr. Raymond has been a shareholder of Gulfstream Insurance Group, Inc., a multi-lines insurance agency, 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. 44 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. 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 45 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 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 46 (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. 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, of (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 directors. 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 of Directors 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 of Directors 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 the Articles and Bylaws 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 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 of Directors, 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 may 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 of Directors 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 such shares which are 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 under the Securities Act, subject to the volume limitations and other restrictions contained in Rule 144 under the Securities Act. 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 thereof 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. 55 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 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 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 Shareholders' 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 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 .................... (1,718,889) (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 ................................... 978,575 1,566,707 2,357,579 1,535,329 Finance revenue ..................................... 715,927 22,167 220,434 982,438 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 1,218,895 1,134,479 ------------ ------------ ------------ ------------ Total revenue ................................... 10,102,564 7,516,740 15,749,140 14,300,380 ------------ ------------ ------------ ------------ 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 1,494,798 3,300,713 3,512,895 Salaries and wages ................................. 1,626,969 1,572,604 3,148,558 2,553,017 Amortization of deferred acquisition costs ......... (196,868) 394,804 495,793 (149,445) Amortization of goodwill ........................... 106,279 13,308 38,102 19,294 ------------ ------------ ------------ ------------ Total expenses .................................. 8,323,569 6,747,188 14,397,317 13,596,059 ------------ ------------ ------------ ------------ 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 provisions for income tax expense ............................... -- 769,552 1,351,823 704,321 Pro forma income tax expense ....................... -- 262,661 466,861 277,231 Pro forma net income ............................... -- 506,891 884,962 427,090 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 corporations' 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 $ 4,458,527 $ 4,178,043 Prior years ........................... 1,895,022 2,267,390 2,852,437 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'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. 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 ....................... 3 Risk Factors ............................. 8 Use of Proceeds .......................... 15 Dividend Policy .......................... 15 Dilution ................................. 16 Capitalization ........................... 17 Selected Consolidated and Combined Financial Data ........................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 20 Business ................................. 26 Management ............................... 44 Certain Transactions ..................... 48 Principal Shareholders ................... 50 Description of Capital Stock ............. 50 Shares Eligible for Future Sale .......... 53 Underwriting ............................. 54 Legal Matters ............................ 55 Experts .................................. 56 Available Information .................... 56 Glossary of Selected Terms ............... 57
----------------------------------- 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 21ST CENTURY HOLDING COMPANY 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 .......................................... 53,750 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(1) 3.1 Form of Registrant's Amended and Restated Articles of Incorporation(1) 3.2 Form of Registrant's Amended and Restated Bylaws(1) 4.1 Specimen of Common Stock Certificate(3) 4.2 Representative's Warrant Agreement including form of Representative's Warrant(2) 5.1 Opinion of Broad and Cassel(3) 10.1 Form of Stock Option Plan(1)* 10.2 Employment Agreement between the Registrant and Edward J. Lawson(1)* 10.3 Employment Agreement between the Registrant and Michele V. Lawson(1)* 10.4 Form of Indemnification Agreement between the Registrant and its directors and executive officers(1)* 10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding Company, LLC and FPF, Inc., as amended(2) 10.6 Sale and Assignment Agreement between Federated Premium and FPF, Inc., as amended(2) 21.1 Subsidiaries of the Registrant(1) 23.1 Consent of Broad and Cassel (included in its opinion filed as Exhibit 5.1)(3) 23.2 Consent of KPMG Peat Marwick LLP(2) 25.1 Power of Attorney (included on the signature page of the Registration Statement)(1)
- ---------------- * Management Compensation Plan or Arrangement (1) Previously filed. (2) Filed herewith. (3) 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 October 7, 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 October 7, 1998 - --------------------------- President, Chief Executive Edward J. Lawson Officer (principal executive, financial and accounting officer) /s/ Michele V. Lawson Vice President-Agency Operations, October 7, 1998 - --------------------------- Treasurer and Director Michele V. Lawson /s/ Ronald A. Raymond President, Federated National October 7, 1998 - --------------------------- and Director Ronald A. Raymond /s/ Patrick D. Doyle Director October 7, 1998 - --------------------------- Patrick D. Doyle /s/ Joseph A. Epstein Director October 7, 1998 - --------------------------- Joseph A. Epstein /s/ Carla L. Leonard Director October 7, 1998 - --------------------------- Carla L. Leonard /s/ Bruce Simberg Director October 7, 1998 - --------------------------- Bruce Simberg
II-4 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.2 Representative's Warrant Agreement including form of Representative's Warrant 10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding Company, LLC and FPF, Inc., as amended 10.6 Sale and Assignment Agreement between Federated Premium and FPF, Inc., as amended 23.2 Consent of KPMG Peat Marwick LLP
EX-4.2 2 EXHIBIT 4.2 WARRANT AGREEMENT dated as of ________ __, 1998 between 21st Century Holding Company, a Florida corporation (the "Company"), and Gilford Securities Incorporated (hereinafter referred to as "Gilford"). W I T N E S S E T H: WHEREAS, the Company proposes to issue to Gilford warrants ("Warrants") to purchase up to 125,000 shares (the "Shares") of common stock of the Company, par value $.01 per share (the "Common Stock"); and WHEREAS, Gilford (the "Underwriter") has entered into an underwriting agreement (the "Underwriting Agreement") dated _____________ __, 1998 between the Underwriter as representative of the several underwriters named in Schedule 1 to the Underwriting Agreement, and the Company in connection with the Company's proposed public offering (the "Public Offering") of 1,250,000 shares of Common Stock, at a price of $____ per share; and WHEREAS, the Warrants issued pursuant to this Agreement are being issued by the Company to Gilford or officers and partners of Gilford and members of the selling group and/or their officers or partners, in consideration for, and as part of Gilford's compensation in connection with, the Underwriter acting as representative of several underwriters named in Schedule 1 to the Underwriting Agreement; NOW, THEREFORE, in consideration of the premises, the payment by the Underwriter or its designees to the Company of TWELVE DOLLARS AND FIFTY CENTS ($12.50), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. GRANT. Gilford, and/or its designees are hereby granted the right to purchase, at any time from _________________, 1999 until 5:00 P.M., New York time, on _______________, 2003 (the "Warrant Exercise Term"), up to 125,000 fully-paid and non assessable Shares at an initial exercise price (subject to adjustment as provided in Article 8 hereof) of $_____ per share, representing 120% of the initial offering price of the Common Stock in the Public Offering. 2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be in the form set forth in Exhibit A attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. EXERCISE OF WARRANT. The Warrants initially are exercisable at a price of $______ per share of Common Stock purchased, payable in cash or by check to the order of the Company, or any combination of cash or check, subject to adjustment as provided in Article 8 hereof. Upon surrender of the Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the Shares purchased, at the Company's principal offices in Florida (currently located at 4161 N.W. 5th Street, Plantation, Florida 33317) the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the Shares so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder hereof, in whole or in part (but not as to fractional Shares). In the case of the purchase of less than all the Shares purchasable under 2 any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares purchasable thereunder. 4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the issuance of certificates for the Shares shall be made forthwith (and in any event within three business days thereafter) without charge to the Holder thereof including, without limitation, any transfer tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Article 5 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates representing the Shares shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. 3 Upon exercise, in part or in whole, of the Warrants, certificates representing the Shares (the "Warrant Securities"), shall bear a legend substantially similar to the following: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), nor any state securities laws and may not be offered or sold except (i) pursuant to an effective registration statement under the Act and applicable state securities laws, (ii) to the extent applicable, pursuant to Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) upon the delivery by the holder to the Company of an opinion of counsel, reasonably satisfactory to counsel to the issuer, stating that an exemption from registration under such Act or applicable state securities laws is available." 5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant Certificate, by its acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof, and that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the effective date of the registration statement filed in connection with the Public Offering, except to officers and partners of Gilford or to any member of the selling group participating in the distribution to the public of the shares of Common Stock and/or their respective officers or partners. 6. PRICE. 6.1 INITIAL AND ADJUSTED EXERCISE PRICES. The initial exercise price of each Warrant shall be $______ per share. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Article 8 hereof. 4 6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. REGISTRATION RIGHTS. 7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. Neither the Warrants nor the Shares have been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Securities Act"). 7.2 REGISTRABLE SECURITIES. As used herein the term "Registrable Security" means the Shares and any shares of Common Stock issued upon any stock split or stock dividend in respect of such Shares; PROVIDED, HOWEVER, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act and disposed of pursuant thereto, (ii) registration under the Securities Act is no longer required for subsequent public distribution of such security pursuant to Rule 144 under the Securities Act (or any successor provision), or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Article 7. 7.3 PIGGYBACK REGISTRATION. If, at any time during the seven years following the closing of the Public Offering, the Company proposes to prepare and file any new registration statement or post-effective amendments thereto covering equity or debt securities of the 5 Company, or any such securities of the Company held by its shareholders (in any such case, other than pursuant to Form S-4 or Form S-8 or successor form) (for purposes of this Article 7, collectively, the "Registration Statement"), it will give written notice of its intention to do so by registered mail ("Notice"), at least twenty (20) business days prior to the filing of each such Registration Statement, to all Holders of the Warrants and the Registrable Securities. Upon the written request of such a Holder (a "Requesting Holder"), made within ten (10) business days after receipt of the Notice, that the Company include any of the Requesting Holder's Registrable Securities in the proposed Registration Statement, the Company shall, as to each such Requesting Holder, effect the registration under the Securities Act of the Registrable Securities which it has been so requested to register ("Piggyback Registration"), at the Company's sole cost and expense and at no cost or expense to the Requesting Holders other than underwriting discounts and commissions, and fees and expenses of the Holder's counsel; provided, however, that if, in the written opinion of the Company's managing underwriter, if any, for such offering, the inclusion of all or a portion of the Registrable Securities requested to be registered, when added to the securities being registered by the Company or the selling shareholder(s), will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially adversely affecting the entire offering, then the Company may exclude from such offering all or a portion of the Registrable Securities which it has been requested to register. If securities are proposed to be offered for sale pursuant to such Registration Statement by other security holders of the Company and the total number of securities to be offered by the Requesting Holders and such other selling security holders is required to be reduced pursuant to a 6 request from the managing underwriter (which request shall be made only for the reasons and in the manner set forth above) the aggregate number of Registrable Securities to be offered by Requesting Holders pursuant to such Registration Statement shall equal the number which bears the same ratio to the maximum number of securities that the underwriter believes may be included for all the selling security holders (including the Requesting Holders) as the original number of Registrable Securities proposed to be sold by the Requesting Holders bears to the total original number of securities proposed to be offered by the Requesting Holders and the other selling security holders. 7.4 DEMAND REGISTRATION. (a) For a period of five (5) years from the closing of the Public Offering, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of the Registrable Securities shall have the right (which right is in addition to the piggyback registration rights provided for under Section 7.3 hereof), exercisable by written notice to the Company (the "Demand Registration Request"), to have the Company prepare and file with the Securities and Exchange Commission (the "Commission") on one occasion, at the sole expense of the Company (excluding fees and expenses of the Majority Holder's counsel and any underwriting or selling commissions), a Registration Statement and such other documents, including a prospectus, as may be necessary (in the opinion of both counsel for the Company and counsel for such Majority Holder) in order to comply with the provisions of the Securities Act, so as to permit a public offering and sale of the Registrable Securities by the Holders thereof for nine (9) consecutive months. (b) The Company covenants and agrees to give written notice of any Demand Registration Request to all Holders of the Registrable Securities within ten (10) days 7 from the date of the Company's receipt of any such Demand Registration Request. After receiving notice from the Company as provided in this Section 7.4(b), Holders of Registrable Securities may request the Company to include their Registrable Securities in the Registration Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company of their decision to have such securities included within ten (10) days of their receipt of the Company's notice. (c) In addition to the registration rights provided for under Section 7.3 hereof and subsection (a) of this Section 7.4, for a period of five (5) years from the closing of the Public Offering, any Holder of Registrable Securities shall have the right, exercisable by written request to the Company, to have the Company prepare and file with the Commission, on one occasion in respect of such Holders of Registrable Securities, a Registration Statement so as to permit a public offering and sale of such Registrable Securities for nine (9) consecutive months, provided, however, that all costs incident thereto shall be at the expense of the Holders of the Registrable Securities included in such Registration Statement. If a Holder of Registrable Securities shall give notice to the Company at any time of its or their desire to exercise the registration right granted pursuant to this Section 7.4(c), then within ten (10) days after the Company's receipt of such notice, the Company shall give notice to the other Holders of Registrable Securities advising them that the Company is proceeding with such registration and offering to include therein the Registrable Securities of such Holders, provided they furnish the Company with such appropriate information in connection therewith as the Company shall reasonably request in writing. The Registration Statement filed pursuant to this Section 7.4(c) may include other securities of the Company which are held by officers or directors of the 8 Company, or which are held by persons who, by virtue of agreements with the Company, are entitled to include their securities in such Registration Statement. (d) The term "Majority Holder" as used in Section 7.4 hereof shall mean any Holder or any combination of Holders of Registrable Securities, if included in such Holders' Registrable Securities are that aggregate number of shares of Common Stock (including Shares already issued and Shares issuable pursuant to the exercise of outstanding Warrants) as would constitute a majority of the aggregate number of shares of Common Stock (including Shares already issued and Shares issuable pursuant to the exercise of outstanding Warrants) included in all the Registrable Securities. (e) Notwithstanding the foregoing, if the Company shall inform the Holders requesting the filing of a registration statement pursuant to this Section 7.4 that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Registration Statement to be filed and it is therefore essential to defer the filing of such Registration Statement, then the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the initiating Holders; PROVIDED, HOWEVER, that the Company may not utilize this right more than once in any twelve (12) month period. 7.5 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. The Company covenants and agrees as follows: (a) In connection with any registration under Section 7.4 hereof, the Company shall file the Registration Statement as expeditiously as possible, but in any event no later than twenty (20) business days following receipt of any demand therefor, shall use its best 9 efforts to have any such Registration Statement declared effective at the earliest possible time, and shall furnish each Holder of Registrable Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs, fees and expenses in connection with all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses; provided, however, that the Holders of Registerable Securities shall pay any underwriting discounts or expenses applicable to the sale of the Registerable Securities sold by such Holders pursuant to the Registration Statement and the fees and expenses of any counsel retained by them. The Holders of Registrable Securities included in any Registration Statement filed pursuant to Section 7.4(c) hereof will pay all costs, fees and expenses in connection with such Registration Statement. (c) The Company will take all necessary action which may be required in qualifying or registering the Registrable Securities included in a Registration Statement, for offering and sale under the securities or blue sky laws of such states as are requested by the Holders of such securities, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (d) The Company shall indemnify any Holder of the Registrable Securities to be sold pursuant to any Registration Statement and any underwriter or person deemed to be an underwriter under the Securities Act and each person, if any, who controls such Holder or underwriter or person deemed to be an underwriter within the meaning of Section 15 of 10 the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter and to provide for just and equitable contribution as set forth in Section 7 of the Underwriting Agreement. (e) INFORMATION BY THE HOLDERS. Each of the Holders holding securities included in any registration, shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 7.4. (f) Any Holder of Registrable Securities to be sold pursuant to a registration statement, and its successors and assigns, shall severally, and not jointly, indemnify, the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holder, or its successors or assigns, for specific inclusion in such 11 Registration Statement to the same extent and with the same effect as the provisions pursuant to which the Underwriter has agreed to indemnify the Company and to provide for just and equitable contribution as set forth in Section 7 of the Underwriting Agreement. (g) Nothing contained in this Agreement shall be construed as requiring any Holder to exercise his Warrants prior to the initial filing of any registration statement or the effectiveness thereof. 8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SECURITIES. The following adjustments apply to the Exercise Price of the Warrants with respect to the Shares and the number of Shares purchasable upon exercise of the Warrants. 8.1 COMPUTATION OF ADJUSTED PRICE. Except as hereinafter provided, in case the Company shall at any time after the date hereof issue or sell any shares of Common Stock (other than the issuances or sales referred to in Section 8.6 hereof), including shares held in the Company's treasury and shares of Common Stock issued upon the exercise of any options, rights or warrants to subscribe for shares of Common Stock (other than the issuance or sales of Common Stock pursuant to rights to subscribe for such Common Stock distributed to all the shareholders of the Company and Holders of Warrants pursuant to section 8.8 hereof) and shares of Common Stock issued upon the direct or indirect conversion or exchange shares of Common Stock, for a consideration per share less than the Current Market Price (as defined below), the Exercise Price shall (until another such issuance or sale) be adjusted to equal the product of the Exercise Price and the quotient obtained by dividing: (A) an amount equal to the sum of (X) the product of 12 (a) the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, multiplied by (b) the Current Market Price, plus, (Y) the aggregate amount of all consideration, if any, received by the Company upon such issuance or sale, by (B) the product of (i) total number of shares of Common Stock outstanding immediately after such issuance or sale and (ii) the Current Market Price. For purposes of this Section 8.1, the "Current Market Price" at the time of any issuance or sale of Common Stock shall mean the Exercise Price, as adjusted pursuant to this Section 8. For the purposes of any computation to be made in accordance with this Section 8.1, the following provisions shall be applicable: (i) In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Company for such shares (or, if shares of Common Stock are offered by the Company for subscription, the subscription price, or, if such securities shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. (ii) In case of the issuance or sale (otherwise than as a dividend or other distribution on any stock of the Company) of shares of Common Stock for a consideration, part or all of which shall be other than cash, the amount of the consideration 13 therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Company. (iii) Shares of Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (iv) The reclassification of securities of the Company other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined as provided in subsection (ii) of this Section 8.1. (v) The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable upon the exercise of options, rights, warrants and upon the conversion or exchange of convertible or exchangeable securities. 8.2 OPTIONS, RIGHTS, WARRANTS AND CONVERTIBLE AND EXCHANGEABLE SECURITIES. Except in the case of the Company issuing rights to subscribe for shares of Common Stock distributed to all the shareholders of the Company and Holders of Warrants pursuant to Section 8.8 hereof and in the case of the Company issuing employee stock options pursuant to a stock option plan at an option price no less than 80% of the fair market value of the underlying 14 Common Stock on the date of grant, if the Company shall at any time after the date hereof issue options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock, (i) for a consideration per share less than the Exercise Price in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities or (ii) without consideration, the Exercise Price in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities, as the case may be, shall be reduced to a price determined by making a computation in accordance with the provisions of Section 8.1 hereof, provided that: (a) The aggregate maximum number of shares of Common Stock, as the case may be, issuable under all the outstanding options, rights or warrants shall be deemed to be issued and outstanding at the time all the outstanding options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in the options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issuance or sale of shares in accordance with the terms of the Warrants), if any, received by the Company for the options, rights or warrants, and if no minimum price is provided in the options, rights or warrants, then the consideration shall be equal to zero; provided, however, that upon the expiration or other termination of the options, rights or warrants, if any thereof shall not have been exercised, the number of shares of Common Stock deemed to be issued and outstanding pursuant to this subsection (a) (and for the purposes of subsection (v) of Section 8.1 hereof) shall be reduced by such number of shares as to which options, warrants and/or rights shall have expired or terminated unexercised, and such number of shares shall no longer be deemed to be issued and outstanding, and the Exercise Price then in 15 effect shall forthwith be readjusted and thereafter be the price which it would have been had adjustment been made on the basis of the issuance only of shares actually issued or issuable upon the exercise of those options, rights or warrants as to which the exercise rights shall not have expired or terminated unexercised. (b) The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of the Warrants) received by the Company for such securities, plus the minimum consideration, if any, receivable by the Company upon the conversion or exchange thereof; provided, however, that upon the termination of the right to convert or exchange such convertible or exchangeable securities (whether by reason of redemption or otherwise), the number of shares deemed to be issued and outstanding pursuant to this subsection (b) (and for the purpose of subsection (v) of Section 8.1 hereof) shall be reduced by such number of shares as to which the conversion or exchange rights shall have expired or terminated unexercised, and such number of shares shall no longer be deemed to be issued and outstanding and the Exercise Price then in effect shall forthwith be readjusted and thereafter be the price which it would have been had adjustment been made on the basis of the issuance only of the shares actually issued or issuable upon the conversion or exchange of those convertible or exchangeable securities as to which the conversion or exchange rights shall not have expired or terminated unexercised. 16 (c) If any change shall occur in the price per share provided for in any of the options, rights or warrants referred to in subsection (a) of this Section 8.2, or in the price per share at which the securities referred to in subsection (b) of this Section 8.2 are convertible or exchangeable, the options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued pursuant to the exercise or conversion or exchange thereof, and the Company shall be deemed to have issued upon such date new options, rights or warrants or convertible or exchangeable securities at the new price in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. 8.3 SUBDIVISION AND COMBINATION. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 8.4 ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment of the Exercise Price pursuant to the provisions of this Article 8, the number of securities issuable upon the exercise of each Warrant shall be adjusted to the nearest full number by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of securities issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 8.5 RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the 17 case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holders shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holders were the owners of the Shares underlying the Warrants immediately prior to any such events, at a price equal to the product of (x) the number of shares of Common Stock issuable upon exercise of the Warrants and (y) the Exercise Price in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holders had exercised the Warrants. 8.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. Notwithstanding anything herein to the contrary, no adjustment of the Exercise Price shall be made: (a) Upon the issuance or sale of the Warrants or the shares of Common Stock issuable upon the exercise of the Warrants; or (b) Upon the issuance or sale of the shares of Common Stock issued pursuant to the Public Offering; (c) Upon the issuance of options pursuant to the Company's employee stock option plan in effect on the date hereof or the issuance or sale by 18 the Company of any shares of Common Stock pursuant to the exercise of any such options; or (d) If the amount of said adjustment shall be less than one cents (1(cent)) per security, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least one cents (1(cent)) per security. 8.7 DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO OUTSTANDING SECURITIES. In the event that the Company shall at any time prior to the exercise of all Warrants declare a dividend (other than a dividend consisting solely of shares of Common Stock or a cash dividend or distribution payable out of current or retained earnings) or otherwise distribute to its shareholders any monies, assets, property, rights, evidences of indebtedness, securities (other than shares of Common Stock), whether issued by the Company or by another person or entity, or any other thing of value, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same monies, property, assets, rights, evidences of indebtedness, securities or any other thing of value that they would have been entitled to receive at the time of such dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Subsection 8.7. 19 8.8 SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OR OTHER SECURITIES. In the case that the Company or an affiliate of the Company shall at any time after the date hereof and prior to the exercise of all the Warrants issue any rights to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company, the Holders of the unexercised Warrants shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Warrants, to receive such rights at the time such rights are distributed to the other shareholders of the Company. 9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant Certificate is exchangeable without expense, upon the surrender hereof by the registered Holder at the principal executive office of the Company, for a new Warrant certificate of like tenor and date representing in the aggregate the right to purchase the same number of securities in such denominations as shall be designated by the Holder thereof at the time of such surrender. 20 Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of Shares. 11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all Shares issuable upon such exercise shall be duly and validly issued, fully paid, nonassessable and not subject to the preemptive rights of any shareholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed on the Nasdaq National Market. 12. NOTICES TO WARRANT HOLDERS. 21 Nothing contained in this Agreement shall be construed as conferring upon the Holder or Holders the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice to the Holder or Holders of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, options or warrants, or 22 entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend or distribution, or the issuance of any convertible or exchangeable securities or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to a registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth in Section 3 of this Agreement or to such other address as the Company may designate by notice to the Holders. 14. SUPPLEMENTS AND AMENDMENTS. The Company and Gilford may from time to time supplement or amend this Agreement without the approval of any Holders of the Warrants and/or Warrant Securities in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and Gilford may deem necessary or desirable and 23 which the Company and Gilford deem not to adversely affect the interests of the Holders of Warrant Certificates. 15. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company and the Holders inure to the benefit of their respective successors and assigns hereunder. 16. GOVERNING LAW. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State. 17. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and Gilford and any other registered Holder or Holders of the Warrant Certificates or Warrant Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and Gilford and any other Holder or Holders of the Warrant Certificates or Warrant Securities. 18. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the date first above written. 21st CENTURY HOLDING COMPANY By:________________________________________ Name: Title: Attest: ________________________________ GILFORD SECURITIES INCORPORATED By:________________________________________ Name: Title: 25 EXHIBIT A THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") NOR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD EXCEPT (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, (II) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (III) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR APPLICALBE STATE SECURITIES LAWS IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE COMMENCING ________________ ___, 1999, THROUGH 5:00 P.M., NEW YORK TIME, ____________ ___, 2003 NO. W-1 125,000 WARRANTS WARRANT CERTIFICATE This Warrant Certificate certifies that Gilford Securities Incorporated or its registered assigns, is the registered holder of Warrants to purchase, at any time from ___________ __, 1999 until 5:00 P.M. New York City time on __________ __, 2003 ("Expiration Date"), up to 125,000 fully-paid and non-assessable shares of common stock, $.01 par value ("Common Stock"), of 21st Century Holding Company, a Florida corporation (the "Company"), at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $_____ per share of Common Stock upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the Warrant Agreement dated as of ___________ ___, 1998 between the Company and Gilford Securities Incorporated (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination of cash or check. 26 No Warrant may be exercised after 5:00 P.M, New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. 27 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: __________ __, 1998 21st CENTURY HOLIDNG COMPANY By:_______________________________________ Name: Title: Attest: ____________________________________ 28 FORM OF ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase ______ shares of Common Stock and herewith tenders in payment for such securities cash or a certified or official bank check payable in New York Clearing House Funds to the order of 21st Century Holding Company in the amount of $____________, all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be registered in the name of ___________________________, whose address is ____________________________________________, and that such Certificate be delivered to _______________________________________, whose address is _________________________________________________. Dated: Signature:__________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) _______________________________________ _______________________________________ (Insert Social Security or Other Identifying Number of Holder) 29 FORM OF ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE WARRANT CERTIFICATE.) FOR VALUE RECEIVED hereby sells, assigns and transfers unto__________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint , Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Signature:__________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) _________________________________ _________________________________ (Insert Social Security or Other Identifying Number of Assignee) 30 EX-10.5 3 EXHIBIT 10.5 REVOLVING CREDIT AND TERM LOAN AGREEMENT BETWEEN FLATIRON FUNDING COMPANY, LLC AND FPF, INC. DATED AS OF SEPTEMBER ___, 1997 FEDERATED PREMIUM FINANCE, INC.
TABLE OF CONTENTS PAGE ---- ARTICLE I AMOUNTS AND TERMS OF THE ADVANCES Section 1.01. Advances................................................................................... 1 Section 1.02. Making the Advances........................................................................ 1 Section 1.03. Fees....................................................................................... 1 Section 1.04. Reduction of the Maximum Credit Commitment................................................. 2 Section 1.05. Interest and Repayment..................................................................... 2 Section 1.06. Optional Prepayments....................................................................... 2 Section 1.07. Mandatory Prepayments...................................................................... 2 Section 1.08. Payments and Computations.................................................................. 3 Section 1.09. Due Dates for Obligations.................................................................. 3 Section 1.10. Access..................................................................................... 3 ARTICLE II CONDITIONS OF LENDING Section 2.01. Condition Precedent to Initial Advance..................................................... 4 Section 2.02. Conditions Precedent to All Advances....................................................... 4 Section 2.03. Reserves................................................................................... 5 ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01. Representations and Warranties of FPF...................................................... 5 ARTICLE IV COVENANTS AND OTHER AGREEMENTS OF THE PARTIES Section 4.01. Affirmative Covenants...................................................................... 6 Section 4.02. Loan Deposit Account and Collection Account................................................ 8 Section 4.03. Certain Powers of Lender................................................................... 9 Section 4.04. Lender Appointed Authorized Agent and Attorney-in-Fact..................................... 10 1 Section 4.05. Information Regarding Collateral........................................................... 11 Section 4.06. FPF Covenants.............................................................................. 11 Section 4.07. Agreement Not to Institute Bankruptcy Proceedings.......................................... 14 Section 4.08. Further Assurances......................................................................... 14 ARTICLE V AMORTIZATION EVENTS Section 5.01. Amortization Events........................................................................ 14 ARTICLE VI MISCELLANEOUS Section 6.01. Amendments................................................................................. 16 Section 6.02. Notices.................................................................................... 16 Section 6.03. Waivers.................................................................................... 16 Section 6.04. Costs, Expenses and Taxes.................................................................. 16 Section 6.05. Limited Right of Set-off................................................................... 17 Section 6.06. Binding Effect............................................................................. 17 Section 6.07. Representations............................................................................ 18 Section 6.08. Governing Law.............................................................................. 18 Section 6.09. JURISDICTION............................................................................... 18 Section 6.10. WAIVER OF JURY TRIAL....................................................................... 18 Section 6.11. Severability of Provisions................................................................. 18 Section 6.12. Counterparts............................................................................... 19 Section 6.13. Captions................................................................................... 19 Section 6.14. Legal Holidays............................................................................. 19 Section 6.15. Advice from Independent Counsel............................................................ 19 Section 6.16. Judicial Interpretation.................................................................... 19 Exhibit A--Promissory Note A-1 Exhibit B--Security Agreement B-1 Exhibit C--Concentration Test C-1 Exhibit D--Request for Advance D-1 Exhibit E--Representations and Warranties E-1 Exhibit F--Closing Documents F-1 Exhibit G--Power of Attorney G-1
2 REVOLVING CREDIT AND TERM LOAN AGREEMENT This REVOLVING CREDIT AND TERM LOAN AGREEMENT (the "Agreement") is made as of September __, 1997 by and between FPF, INC., a Colorado corporation ("FPF"), and FLATIRON FUNDING COMPANY, LLC, a Delaware limited liability company (the "Lender"). As used in this Agreement, capitalized terms not otherwise defined herein are used with the respective meanings set forth in that certain Agreement of Definitions, dated as of the date of this Agreement, among the Lender, FPF, the Originator, the Residual Interest Holder and Flatiron. ARTICLE I AMOUNTS AND TERMS OF THE ADVANCES Section 1.01. ADVANCES. The Lender agrees to make advances of funds (the "Advances") to FPF under the terms and conditions of this Agreement. 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. So long as Availability exists and subject to compliance with the provisions hereof, FPF may receive Advances pursuant to this Agreement. The Lender agrees, subject to the provisions hereof, to continuously provide Advances during a period beginning on the date hereof and ending the earlier of September 30, 2000 or upon the occurrence of an Amortization Event (such period the "Revolving Period" and such termination date the "Revolving Period Termination Date"); provided, that the Lender may, in its sole discretion, extend the Revolving Period for an additional period of up to 24 months upon written notice by the Lender to FPF made not later than 120 days prior to the Revolving Period Termination Date setting forth the terms of such extension; provided, further, that upon delivery of written acceptance of such terms by FPF not later than 90 days prior to the Revolving Period Termination Date, and upon FPF's acceptance of such extension, the terms "Revolving Period Termination Date" and "Revolving Period" shall be deemed automatically amended to reflect such extension. Following the Revolving Period Termination Date, Availability under this Agreement shall be zero. FPF shall consult with Originator and shall only agree to such extension with the prior written consent of Originator. Section 1.02. MAKING THE ADVANCES. Each Advance shall require written notice in the form included as Exhibit D hereto, given not later than 12:00 noon (Denver, Colorado time) on a Business Day which is not less than one Business Day prior to the date of the proposed Advance, by FPF to the Lender. Not later than 2:00 p.m. (Denver, Colorado time) on the date of such Advance, subject to fulfillment of the applicable conditions precedent set forth in Article II, the Lender shall make such Advance available to FPF or, if so directed by FPF, the Originator, by initiating a same day funds transfer pursuant to written instructions provided to the Lender by FPF. Section 1.03. FEES. 1 (a) In consideration for the loan commitment pursuant to the provisions hereof, FPF agrees to pay to the Lender the unpaid balance of the Closing Fee, payable immediately upon the execution of this Agreement by FPF. FPF's obligation to pay the Closing Fee shall be subject to and payable solely from funds to be disbursed pursuant to Section 2.06 of the Sale and Assignment Agreement. The Closing Fee is fully earned and non-refundable as of the date hereof. (b) FPF agrees to pay to the Lender the Commitment Fee, monthly in arrears on the second Business Day of each calendar month occurring during the Revolving Period. FPF's obligation to pay such Commitment Fee shall be subject to and payable solely from funds received pursuant to Section 2.02(a)(ii) of the Residual Agreement, which funds shall be pledged and assigned to the Lender pursuant to the Security Agreement. Section 1.04. REDUCTION OF THE MAXIMUM CREDIT COMMITMENT. If at any time FPF receives notice from the Residual Interest Holder that it intends to reduce its funding commitment under the Residual Agreement, FPF shall have the right, upon at least 60 days' notice to the Lender (and, except as provided in Section 2.04(a) of the Residual Agreement, payment to the Lender of the applicable Purchase Reduction Fee), to terminate in whole, or reduce in part, the Maximum Credit Commitment; provided, that each partial reduction shall be in the minimum amount of $250,000 provided, further, that if the Maximum Credit Commitment shall be less than $250,000, the reduction must be in whole only. FPF's obligation to pay such Yield Maintenance Payment shall be subject to and payable solely from funds received pursuant to Section 2.04 of the Residual Agreement, which funds shall be pledged and assigned to the Lender pursuant to the Security Agreement. Section 1.05. INTEREST AND REPAYMENT. FPF shall pay interest on the aggregate unpaid principal amount of all Advances in accordance with a non-recourse promissory note of FPF, in substantially the form of Exhibit A hereto (the "Note"), evidencing the indebtedness resulting from such Advances and delivered to the Lender pursuant to Section 2.01. The Note shall be payable solely from the Collateral pledged with respect thereto. Section 1.06. OPTIONAL PREPAYMENTS. FPF may, upon at least 60 days' notice to the Lender stating the proposed date and principal amount of the prepayment, and if such notice is given FPF shall, prepay the outstanding principal amounts of the Advances from amounts other than collections from Pledged Premium Receivables in whole only, together with (a) accrued interest to the date of such prepayment on the amount prepaid and (b) the applicable Yield Maintenance Payment, if any. Section 1.07. MANDATORY PREPAYMENTS. If, at any time, the then outstanding aggregate amount of all Advances shall exceed the lesser of the then existing Maximum Credit Commitment or the Borrowing Base, FPF shall cause to be prepaid on demand, solely from amounts received with respect thereto under the Residual Agreement, the outstanding principal amount of the Advances in an aggregate amount equal to such excess. 2 Section 1.08. PAYMENTS AND COMPUTATIONS. FPF shall make each payment hereunder and under the Note not later than 2:00 p.m. (Denver, Colorado time) on the day when due in same day funds of U.S. dollars to the Lender at its address referred to in Section 6.02, or pursuant to such other instructions as the Lender may from time to time provide to FPF. FPF hereby authorizes the Lender, if and to the extent payment is not made when due hereunder or under the Note, to make Advances directly to itself for any such amount so due; provided, however, that any such Advances made by the Lender shall not be deemed a waiver of any payment default by FPF. All computations of interest, commitment fees and other fees due hereunder shall be made by the Lender on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, commitment fees or other fees are payable. Each determination by the Lender of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. Section 1.09. DUE DATES FOR OBLIGATIONS. Subject to the provisions hereof, the Obligations shall be payable as follows: (a) principal (applied daily) and interest payments on the Advances and other Obligations shall be due and payable monthly in arrears on the fourth Business Day of each month, commencing on the fourth Business Day of the month immediately succeeding the date hereof, (b) except as otherwise provided in Section 1.03, payment of all fees and reimbursable expenses owing by FPF to the Lender hereunder or under any other Borrowing Document shall be due no later than the fourth Business day of the month immediately following the date on which such fees or reimbursable expenses are incurred, (c) all other Obligations (including, without limitation, the mandatory prepayment obligation set forth in Section 1.07) shall be either payable as provided in the Borrowing Documents evidencing or describing such Obligations or, if not so provided therein, shall be due upon demand and payable on or before the tenth day after such demand, (d) to the extent not sooner paid, all Obligations shall be due and payable in full on the Scheduled Maturity Date, and (e) if any payment becomes due and payable on a day other than a Business Day, then such payment shall be due and payable on the next succeeding Business Day. Notwithstanding the above, the parties hereto agree that the Obligations shall be non-recourse to FPF except to the extent expressly provided herein and in the Security Agreement. Section 1.10. ACCESS. Upon written request in writing by the Lender to FPF, FPF shall provide the Lender or any representative or designee of Lender (including, without limitation, the Lender's Funding Source) with full and complete access to all books, records, financial statements and documents requested by Lender to inspect the Collateral and to inspect, audit and make extracts from all of FPF's records, financial statements, files and books of account in support of the above. The Lender or any representative or designee of the Lender shall have such access right, exercisable as frequently as the Lender or any representative or designee of the Lender determines to be appropriate, during normal business hours. Upon written request of the Lender or any representative or designee of the Lender to FPF, FPF shall instruct its bank and other financial institutions to make available to the Lender or any representative or designee of the Lender such information and materials as the Lender or any representative or designee of the Lender may request. 3 ARTICLE II CONDITIONS OF LENDING Section 2.01. CONDITION PRECEDENT TO INITIAL ADVANCE. The obligation of the Lender to make its initial Advance is subject to the condition precedent that the Lender shall have received on or before the day of such Advance the Closing Documents listed on Exhibit F, each dated prior to or as of the date of the initial Advance, in form and substance satisfactory to the Lender. Section 2.02. CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of the Lender to make each Advance (including the initial Advance) shall be subject to the further conditions precedent that on the date of such Advance the following statements shall be true (and each of the giving of the applicable notice requesting such Advance and the acceptance by FPF of the proceeds of such Advance shall constitute a representation and warranty by FPF that on the date of such Advance such statements are true): (a) The representations and warranties of FPF contained in the Borrowing Documents are correct on and as of the date of such Advance, before and after giving effect to such Advance and to the application of the proceeds therefrom, as though made on and as of such date. (b) No event has occurred and is continuing, or would result from such Advance or from the application of the proceeds therefrom, which constitutes an Amortization Event or would constitute an Amortization Event but for the requirement that notice be given or time elapse or both. (c) The Lender shall be satisfied, in its sole discretion, with the examinations, including sampling and testing procedures of the Premium Receivables Portfolio, performed pursuant to Section 1.10 hereof. (d) FPF shall have taken any and all steps and made any and all filings that are deemed reasonable, convenient, necessary, or advisable by the Lender to protect and perfect the security interest of the Lender or the Trustee on behalf of the Lender under the Security Agreement with respect to all of the Collateral. (e) The Lender shall have received payment of all amounts then due and payable to the Lender under the Borrowing Documents. (f) The Lender shall have received such other approvals, opinions or documents as the Lender may reasonably request. (g) The Lender shall have determined, in its sole discretion, that the aggregate amount of Advances outstanding, after giving effect to such Advance, does not exceed the lesser of the then existing Maximum Credit Commitment or the Borrowing Base calculated as of the date of such Advance. (h) The Lender shall have determined, in its sole discretion, that funds are available from Lender's Funding Source sufficient for the Lender to fund such Advance. 4 (i) FPF shall have received the Residual Advance with respect to such Advance from the Residual Interest Holder in accordance with the Residual Agreement. (j) The Lender shall have received evidence that all transactions contemplated by (i) the Sale and Assignment Agreement with respect to Sales of the related Premium Receivables thereunder and (ii) the Residual Agreement with respect to Residual Advances thereunder, have been consummated on the date of such Advance, and all conditions precedent to each such transaction have been satisfied. Section 2.03. RESERVES. The Lender shall have a continuing right to deduct reserves ("Reserves") in determining the Borrowing Base, and to increase and decrease such Reserves from time to time, if and to the extent that, in the Lender's sole judgment, such Reserves are necessary to protect the Lender against any state of facts which does, or could, with notice or passage of time or both, constitute an Amortization Event or have an adverse effect on any Collateral. The Lender may, at its option, implement Reserves by designating as ineligible a sufficient amount of Premium Receivables which Premium Receivables would otherwise be Eligible Premium Receivables so as to reduce the Borrowing Base by the amount of the intended Reserve. Without in any way limiting the generality of the foregoing, the Lender may implement Reserves in such amounts as the Lender deems appropriate in the event any Premium Receivables shall not be in Return Premium Parity and amounts by which any Premium Receivables exceed maximum amounts specified in the Concentration Test. If the Lender implements any Reserve, the Lender shall provide FPF with timely written notice thereof and the amount and basis for such Reserve. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01. REPRESENTATIONS AND WARRANTIES OF FPF. FPF represents and warrants to Lender that each of the representations and warranties of FPF set forth in Sections 1 and 2 of Exhibit E hereto is true and complete as of the date of this Agreement and as of the date of each Advance hereunder, except as FPF has otherwise notified the Lender and its assignees (including, without limitation, the Lender's Funding Source) in writing and the Lender and such assignee(s), if applicable, have each, in its absolute discretion, consented in writing to such exception(s). ARTICLE IV COVENANTS AND OTHER AGREEMENTS OF THE PARTIES Section 4.01. AFFIRMATIVE COVENANTS. So long as the Note shall remain unpaid or until the Revolving Period Termination Date, unless the Lender or its assignee(s), as applicable, shall otherwise consent in writing: (a) COMPLIANCE WITH LAWS, ETC. FPF shall comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, 5 without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent contested in good faith. (b) REPRESENTATIONS AND WARRANTIES CORRECT. The Representations and Warranties of FPF in Sections 1 and 2 of Exhibit C hereto shall remain true and correct. (c) INDEMNIFICATION AND RELEASE BY FPF. FPF shall indemnify, defend and save and hold harmless Lender, its Affiliates, each of the Lender's Funding Sources or other assignee of the Lender and the respective directors, officers, agents, attorneys and employees of each (collectively, the "Indemnitees") from and against, and shall promptly pay any and all losses, liabilities, damages, costs, expenses and charges (including the reasonable fees, charges and disbursements of legal counsel) incurred by any Indemnitee as a result of (i) any failure of FPF to perform any of its obligations under any Borrowing Document, (ii) any failure of any representation by FPF to be correct in all respects when made, and (iii) any claim, demand or cause of action, or any individual proceeding, whether meritorious or not, brought or asserted against any Indemnitee which relates to or arises out of the Borrowing Documents, the Maximum Credit Commitment, the Collateral or any transaction contemplated by, or the relationship between FPF and the Lender, or any action or actions by the Lender under, the Borrowing Documents; provided, that no Indemnitee shall be entitled to indemnification under this Section for matters caused solely by Indemnitee's gross negligence or willful misconduct. FPF hereby releases and exculpates each of the Indemnitees from any liability arising from any acts under this Agreement or in furtherance thereof, whether as agent, attorney-in-fact or otherwise, whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact, except for willful misconduct. In no event will any Indemnitee have any liability to FPF for lost profits or other special or consequential damages. (d) NOTICE OF DEFAULT. Immediately upon becoming aware of the existence of any condition or event which constitutes a default by any Loan Party under the Borrowing Documents or a breach by FPF of any representation or warranty under Section 3.02 of the Sale and Assignment Agreement, a written notice from FPF to the Lender and each other Loan Party shall be furnished describing its nature and the period of existence and what action FPF or such defaulting Loan Party, as applicable, is taking or proposes to take with respect thereto. (e) REPORTING REQUIREMENTS. FPF shall furnish to the Lender or its designee: (i) within 45 days after the end of each fiscal quarter of FPF (commencing with the quarter ending September 30, 1997, an unaudited balance sheet and income statement (prepared in accordance with GAAP) for FPF covering the preceding quarter, in each case certified by a Responsible Officer of FPF to be true, accurate and complete copies of such financial statements; 6 (ii) on the earlier of (A) fifteen days after delivery by an Independent Public Accountant, if any, to FPF or (B) March 15 of each year beginning March 15, 1998 a balance sheet and income statement (prepared in accordance with GAAP) for FPF covering such preceding fiscal year prepared by FPF or its accountants, in each case certified by a Responsible Officer of FPF to be true, accurate and complete copies of such financial statements; (iii) promptly after the filing or receiving thereof, copies of all reports and notices, if any, which FPF files under ERISA with the Internal Revenue Service or PBGC or the U.S. Department of Labor or which FPF receives from any such Person; (iv) promptly after filing thereof, copies of all federal and state tax returns filed by, or on behalf of, FPF; and (v) such other information respecting the condition or operations, financial or otherwise, of FPF as the Lender may from time to time reasonably request. (f) REPORT ON PROCEEDINGS. Promptly upon (but in no event more than three Business Days following) FPF becoming aware of: (i) any pending investigation of it, the Originator, the Residual Interest Holder or any of their respective employees by any governmental authority or agency; (ii) any court or administrative proceeding which may involve the possibility of materially and adversely affecting the properties, business, prospects, profits, management, financial position, results of operation or general condition of it, the Originator or the Residual Interest Holder; or (iii) an event or development (including, without limitation, a change in any relevant law or regulation) which in the reasonable judgment of FPF could have a material adverse impact on the properties, business, prospects, profits, management, financial position, results of operations or general condition of it, the Originator or the Residual Interest Holder; such information shall be provided by FPF to the Lender or its designee. Section 4.02. LOAN DEPOSIT ACCOUNT AND COLLECTION ACCOUNT. (a) FPF shall maintain or cause to be maintained with the Lender or Lender's designee a deposit account subject to a first priority perfected security interest in favor of the Lender and its assignees (the "Loan Deposit Account") into which FPF or the Servicer on its behalf shall deposit or cause to be deposited all payments received from Obligors with respect to the Premium Receivables serviced by the Servicer. On a daily 7 basis, FPF shall deposit or shall cause the Servicer to deposit, or any of its Affiliates, officers, employees, agents or other Persons acting for or in concert with FPF shall deposit or cause to be deposited into the Loan Deposit Account, on or before the first Business Day following receipt thereof, all payments and receipts as provided in the Premium Receivable Servicing Agreement. Until deposited, all such payments and receipts held by the Servicer, FPF or any such Affiliates, employees, officers, agents or other Persons shall be held in trust for the Lender, separate or apart from any other funds or assets of FPF, Servicer or any such Affiliate, officer, employee, agent or other Person. The Lender shall periodically transfer or cause to be transferred all amounts on deposit in the Loan Deposit Account into one or more collateral or collection accounts maintained by or for the benefit of the Lender and its assignees (collectively, the "Collection Account"). (b) Not later than the first Business Day following verification by the Lender of amounts deposited into the Collection Account, the Lender shall take the following actions: (i) credit against the principal balance of outstanding Advances all deposits representing Principal Collections; and (ii) calculate the amount of any deposits representing downpayments by Obligors or other amounts not required to be applied against amounts due under this Agreement, and such amounts shall be returned timely to FPF or its designee. (c) On the fourth Business Day of each calendar month, amounts on deposit in the Collection Account equal to total Collections from the prior month less amounts described in (b) above ("Total Available Collections") shall be applied in the following manner: (i) (A) first, to the payment of all accrued and unpaid fees payable by FPF to the Lender under any Borrowing Document (including, without limitation, the Closing Fee, the Commitment Fee, and the Yield Maintenance Payment and any indemnification payments), (B) second, to the payment of any indemnification obligation (C) third, to accrued and unpaid interest owing under the Note. (ii) upon the occurrence of an Amortization Event, all remaining amounts to pay down the principal balance of outstanding Advances; (iii) to the Servicer, all accrued and unpaid Premium Receivable Servicing Fees as of the end of the immediately preceding Reporting Period; and (iv) in the event that the Lender has implemented Reserves pursuant to Section 2.03 hereof and such Reserves have not been fully satisfied through the designating as ineligible otherwise Eligible Premium Receivables, to the Lender, the amount necessary, if any, to satisfy such Reserves; and (v) all other Obligations and reimbursable expenses due and payable by FPF to Lender under any Borrowing Document and any indemnification payment due and payable not provided for in 4.02(c)(i) above, which obligations, expenses and indemnity payments shall not exceed $3,000 in the aggregate for any calendar year; and (vi) so long as no Amortization Event has occurred and is continuing, the amount by which Total Available Collections exceed payments made pursuant to 4.02(c)(i) through (v) shall be paid to the Residual Interest Holder pursuant to the Residual Agreement not later than the sixth Business Day of each calendar month; and (d) Monies in the Collection Account may be invested as determined by the Lender in accordance with the Premium Receivable Servicing Agreement, and the earnings of which shall inure to the benefit of the Lender. (e) If an Amortization Event has occurred and is continuing, FPF irrevocably waives the right to direct the application of any and all payments at any time or times hereafter received by the Lender from or on behalf of FPF and FPF irrevocably agrees that the Lender shall continue to have the exclusive right to apply any and all such payments as provided in this Section 4.02; provided, that upon payment of all such Obligations, all such remaining payments shall be applied pursuant to the Residual Agreement. Section 4.03. CERTAIN POWERS OF LENDER. The Lender may, at any time, whether or not an Amortization Event has occurred: (a) notify any Obligor, insurance company, Agent or other account debtor that the Premium Receivables have been conveyed by the Originator to FPF and that the Collateral which includes a monetary obligation has been assigned to the Lender by FPF and following an Event of Servicer Default that payment thereof is to be made to the order of and directly to the Lender; (b) send, or cause to be sent by its designee, requests (which may identify the sender by a pseudonym) for verification of Premium Receivables and other Collateral directly to any debtor, insurance company, Agent or any other obligor or any bailee with respect thereto; and (c) demand, collect or enforce payment to any Premium Receivables or such other Collateral, upon the failure of the Servicer to do so as described in the Premium Finance Servicing Agreement but without any duty to do so, and the Lender shall not be liable for any failure to collect or enforce payment thereof. At the Lender's request, all invoices and statements sent to any Obligor, other obligor, the Lender or its designee, 9 Issuing Insurance Company, Agent or other bailee, shall state that the Premium Receivables and other Collateral have been conveyed by the Originator to FPF, that the Premium Receivables and other Collateral have been assigned by FPF to the Lender or the Trustee on behalf of the Lender and are payable directly and only to the Lender, subject to the terms of this Agreement. Section 4.04. LENDER APPOINTED AUTHORIZED AGENT AND ATTORNEY-IN-FACT. FPF hereby appoints the Lender and any designee of the Lender as FPF's authorized agent and attorney-in-fact and authorizes the Lender or such designee, at FPF's sole expense, to exercise at any times in the Lender's or such designee's discretion all or any of the following powers, which powers of attorney, being coupled with an interest, shall be irrevocable until all Obligations have been paid in full: (a) receive, take, endorse, assign, deliver, accept and deposit, in the name of the Lender or FPF, any and all cash, checks, commercial paper, drafts, remittances and other instruments and documents relating to the Collateral; (b) transmit to Obligors, Issuing Insurance Companies, Agents, other obligors or any bailees (including the Lender or its designee) notice of the interest of the Lender in the Collateral or request from account Obligors, Issuing Insurance Companies, Agents or such other obligors or bailees at any time, in the name of FPF or the Lender or any designee of the Lender, information concerning the Collateral and any amounts owing with respect thereto; (c) notify Obligors, Issuing Insurance Companies, Agents or other obligors to make payment directly to the Lender, or notify bailee (including the Lender or its designee) as to the disposition of Collateral; (d) take or bring, in the name of the Lender or FPF, all steps, actions, suits or proceedings deemed by the Lender or its designee necessary or desirable to direct collection of or other realization upon the accounts and other Collateral or to otherwise enforce the rights of the Lender or its designee with respect to any of the Collateral; (e) after an Amortization Event, change the address for delivery of mail to FPF and to receive and open mail addressed to FPF; (f) after an Amortization Event, extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the Obligors or other obligor, without affecting any of the Obligations; and (g) execute in the name of FPF and file against FPF in favor of the Lender and its assignees financing statements or amendments with respect to the Collateral. In furtherance of the foregoing and prior to the initial Advance hereunder, FPF shall execute and deliver to the Lender a power of attorney in the form of Exhibit G attached hereto. 10 Section 4.05. INFORMATION REGARDING COLLATERAL. On each Business Day, FPF shall electronically transmit to the Lender, in the manner specified by the Lender, information regarding the origination and payment status of the Premium Receivables which it has received from the Servicer. All such information shall be, to the knowledge of FPF, true and correct as of the time of transmittal and such electronic transmission shall constitute certification to such effect. At the Lender's request, FPF shall deliver written material and reports relating to the Premium Receivables to the Lender. Section 4.06. FPF COVENANTS. So long as the Note shall remain unpaid or prior to the Revolving Period Termination Date, without the written consent of the Lender or its assignee, as applicable: (a) FPF shall not engage in any business or activity other than in connection with the acquisition of Premium Receivables and the activities contemplated hereby and in the other Borrowing Documents, and in connection with the issuance of additional notes and loan agreements substantially similar to this Agreement and the other Borrowing Documents. (b) FPF shall not consolidate or merge with or into any other Person (other than Flatiron) or convey or transfer its properties and assets substantially as an entirety to any Person. (c) The funds and other assets of FPF shall not be commingled with those of any other Person. (d) FPF shall not be, become or hold itself out as being liable for the debts of any other Person. (e) FPF shall not form, or cause to be formed, any subsidiaries. (f) FPF shall act solely in its own name and through its duly authorized officers or agents in the conduct of its business, and shall conduct its business so as not to mislead others as to the identity of the Person with which they are concerned. (g) FPF shall maintain its records and books of account and shall not commingle its records and books of account with the records and books of account of any other Person. The books of FPF may be kept (subject to any provision of applicable law) inside or outside the State of Colorado at such place or places as may be designated from time to time by the board of directors or in the bylaws of FPF. (h) All actions of FPF shall be taken by a duly authorized officer of FPF. (i) FPF shall not amend, alter, change or repeal any provision contained in this Section 4.06. (j) FPF shall not amend its articles of incorporation. 11 (k) FPF shall not amend, modify, extend or waive any term of, or any requirement, in any material respect, under any Loan Document or Borrowing Document except with respect to any Premium Receivable which may be amended, modified, extended or waived in accordance with the Premium Receivable Servicing Agreement. (l) All audited financial statements of FPF that are consolidated with those of Flatiron or any Affiliate thereof will contain detailed notes clearly stating that (i) all of FPF's assets are owned by FPF and not available to satisfy the claims of creditors of any other Person, and (ii) FPF is a separate Person with creditors who have received ownership and/or security interests in FPF's assets. (m) FPF shall strictly observe legal formalities in its dealings with Flatiron, any Affiliate thereof or any other Person, and funds or other assets of FPF shall not be commingled with those of Flatiron, any Affiliate thereof or any other Person. FPF shall not maintain joint bank accounts or other depository accounts to which Flatiron, any Affiliate thereof or any other Person has independent access except as otherwise provided or contemplated herein. FPF's funds shall not at any time be pooled with any funds of Flatiron, any Affiliate thereof or any other Person. (n) FPF shall pay to Flatiron (or any Affiliate thereof) the marginal increase (or, in the absence of such increase, the market amount of its portion) of the premium payable with respect to any insurance policy that covers FPF and Flatiron (or any Affiliate thereof), but FPF shall not, directly or indirectly, be named or enter into an agreement to be named, as a direct or contingent beneficiary or loss payee, under any such insurance policy, with respect to any amounts payable due to occurrences or events related to Flatiron (or any Affiliate thereof); provided, however, that FPF shall maintain, at its own expense, a blanket fidelity bond and an errors and omissions insurance policy, each in form and content acceptable to the Lender and its assignee(s), in the amount of (i) with respect to such fidelity bond, $500,000 and (ii) with respect to errors and omissions insurance, which may be combined with a directors and officers errors and omissions insurance policy, $1,000,000, and pursuant to which the Lender has been named as an additional loss payee or beneficiary of each such fidelity bond and errors and omissions insurance policy; provided, further, that FPF shall be deemed to have complied with this provision if one of its Affiliates has such fidelity bond and errors and omissions policy coverage and, by the terms of such fidelity bond and errors and omission policy, the coverage afforded thereunder extends to FPF; and provided, further, that any such fidelity bond and errors and omissions insurance policy shall not be cancelled or modified without the prior written consent of the Lender and its assignee(s), if applicable. (o) FPF shall maintain arm's length relationships with Flatiron (and any Affiliate thereof). Any Person that renders or otherwise furnishes services to FPF shall be compensated by FPF at market rates for such services it renders or otherwise furnishes to FPF. FPF shall not hold itself out to be responsible for the debts of Flatiron or the decisions or actions respecting the daily business and affairs of Flatiron. 12 (p) At all times, except in the event of a temporary vacancy, at least one of the directors of FPF shall not be a director, officer, employee or greater than 5% shareholder of any direct or ultimate parent, or Affiliate of the parent, of FPF; provided, however, that such independent director may serve in similar capacities for other "special purpose entities" formed by FPF's Affiliates, and there shall not be allowed a fundamental change to the articles of incorporation of FPF without the unanimous consent of all directors thereof and written consent of the Lender or its assignee(s), as applicable. In the event of the resignation of the director of FPF whose service satisfies the foregoing requirement, the directors of FPF, as may be appropriate, shall accept as a director an individual to fill such vacancy who meets the criteria set out in the foregoing sentence. (q) FPF shall (i) observe all statutory formalities, (ii) conduct its operations so as not to be substantively consolidated with any other Person or to have its separate existence disregarded in any state or federal proceeding, (iii) keep in full effect its existence, rights and franchises as a corporation under the laws of Colorado and obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of its activities in all respects and to protect the validity and enforceability of this Agreement, and (iv) incur no debt except as otherwise provided herein and in its articles of incorporation. (r) FPF shall engage in only (i) the acquisition, ownership, servicing, selling and pledging of the property Sold to FPF pursuant to this Agreement, the other Borrowing Documents and similar agreements with other originators of Premium Receivables, (ii) the exercise of any powers permitted of corporations under the corporate law of the State of Colorado which are incidental to the foregoing or necessary, suitable or convenient to accomplish the foregoing, and (iii) the exercise of any other powers permitted under its articles of incorporation. FPF shall not (A) dissolve or liquidate in whole or in part, (B) own any subsidiary corporation or, except as provided in the Borrowing Documents, lend or advance any moneys to, or make an investment in, any Person, (C) (1) commence any case, proceeding or other action under any existing or future bankruptcy, insolvency or similar law seeking to have an order for relief entered with respect to it, or seeking reorganization, arrangement, adjustment, wind-up, liquidation, dissolution, composition or other relief with respect to it or its debts, (2) seek appointment of a receiver, trustee, custodian or other similar official for it or any part of its assets, (3) make a general assignment for the benefit of creditors, or (4) take any action in furtherance of, or consenting to, or acquiescing in, any of the foregoing, or (D) guarantee (directly or indirectly), endorse or otherwise become contingently liable (directly or indirectly) for the obligations of, or own or purchase any stock, obligations or securities of or any other interest in, or make any capital contribution to, any other Person. (s) FPF shall be licensed as a premium insurance finance company under the laws of any state where such licensing is required so as not to adversely affect (i) its 13 ability to conduct operations in each such state as contemplated under this Agreement and the other Borrowing Documents and (ii) the Collateral. Section 4.07. AGREEMENT NOT TO INSTITUTE BANKRUPTCY PROCEEDINGS. For a period of one year and one day following the later to occur of (a) the date on which the Note is paid in full or (b) the Revolving Period Termination Date, FPF shall not voluntarily institute any proceedings to adjudicate FPF or the Lender bankrupt or insolvent, consent to the institution of bankruptcy or insolvency proceedings against FPF or the Lender, file a petition seeking or consenting to reorganization or relief under any applicable federal or state law relating to bankruptcy, consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of FPF or the Lender or a substantial part of its or their property or admit its or their inability to pay its or their debts generally as they become due or authorize any of the foregoing to be done or taken on behalf of FPF or the Lender. This Section 4.07 shall survive the termination of this Agreement. Section 4.08. FURTHER ASSURANCES. In addition to all other Obligations, FPF agrees to execute such other documents (including additional promissory notes evidencing the Advances (provided, that FPF's aggregate liability for the Obligations is not increased thereby)) and to otherwise provide its reasonable cooperation as requested from time to time by the Lender in order (a) to evidence, secure and perfect the Obligations and the security interests securing payment and performance of the same and (b) to assist the Lender in a securitization of the Obligations and the Borrowing Documents, or any portion thereof. ARTICLE V AMORTIZATION EVENTS Section 5.01. AMORTIZATION EVENTS. If any of the following events (each, an "Amortization Event") shall occur and be continuing: (a) FPF shall fail to pay any principal of, or interest on, the Note when the same becomes due and payable; or (b) Any representation, warranty or statement made by FPF in any of the Borrowing Documents shall prove to be incorrect in any material respect as of the date made; or (c) Failure on the part of FPF duly to observe or perform any covenant or agreement of FPF set forth in any of the Borrowing Documents; or (d) Any petition or application for any relief under the bankruptcy laws of the United States now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed by or against FPF or any guarantor; or 14 (e) The assignment or attempted assignment by FPF of any of the Borrowing Documents, except as expressly permitted thereunder, or the Granting by FPF of any Lien on any Collateral to other than the Lender or its assignee(s); or (f) A judgment of any competent court or tribunal in the United States of America for the payment of money in an amount of $100,000 or more shall be rendered against FPF and shall remain unsatisfied and undischarged for a period of 30 days without the issuance of a stay of execution with respect thereto; or (g) Any provision under the Security Agreement after delivery thereof pursuant to Section 2.01 shall for any reasons cease to be valid and binding on FPF or FPF shall so state in writing; or (h) The Security Agreement or the Borrowing Documents after delivery thereof pursuant to Section 2.01 shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected first priority security interest in any of the Collateral purported to be covered thereby; or (i) FPF is dissolved or fails to maintain its corporate existence in good standing, or the usual business of FPF ceases or is suspended; or (j) An event or development (including, without limitation, a change in any relevant law or regulation) shall occur which could reasonably be expected by the Lender to have a material adverse impact on (i) the value or collectibility of the Collateral or (ii) FPF's ability to perform its obligations under the Borrowing Documents; or (k) The Loss Amount Trigger shall be exceeded; or (l) The Fixed Charge Coverage Test shall fail to be met; or (m) An Event of Servicing Default shall have occurred; or (n) An Originator Trigger Event shall have occurred; or (o) A Residual Agreement Default shall have occurred; then, the Lender may, by notice to FPF, (A) declare its obligation to make Advances to be terminated, whereupon the same shall forthwith terminate, (B) declare the Revolving Period to be terminated pursuant to Section 1.01 hereof whereupon the Note, all such interest and all such amounts shall become payable in accordance with Section 4.02(e) hereof, and (C) exercise any and all other rights, powers and remedies available to the Lender under the Borrowing Documents or at law or in equity; provided, however, that in the event of any petition, application or filing for relief with respect to FPF under the Bankruptcy Code, (x) the obligation of the Lender to make Advances shall automatically be terminated and (y) the Advances, the Note, all such interest and all such amounts evidenced by the Note shall automatically become and be immediately due and payable, without presentment, demand, protest or any notice of any 15 kind, all of which are hereby expressly waived by FPF. Notwithstanding anything herein to the contrary, Originator is irrevocably appointed attorney-in-fact for FPF to perform any and all obligations necessary to cure the Amortization Event as specified in Section 5.01(a)(b)(c)(e)(g)(h)(j)(l)(m)(n) and (o) and the amounts expended by Originator to cure such Amortization Event shall be immediately paid by FPF to Originator upon demand. Originator shall have a reasonable time not to exceed the cure periods specified therein or, if not specified, 30 days following receipt of written notice to cure any such Amortization Event. ARTICLE VI MISCELLANEOUS Section 6.01. AMENDMENTS. This Agreement and the Note may be amended from time to time by a written amendment duly executed and delivered by FPF and the Lender with the prior written consent of the Lender assignee(s), if any, as the case may be, and no waiver of any of the terms hereof or thereof shall be effective unless it is in writing and signed by the party or parties whose rights are being waived and the Lender's assignee, if any. Section 6.02. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered personally or mailed by first-class registered or certified mail, postage prepaid, or by telephonic facsimile transmission, electronic mail and overnight delivery service, postage prepaid, to the parties to this Agreement; provided, that notices shall be effective upon receipt, and in any case addressed as follows: if to FPF, at 1801 California Street, Suite 3920, Denver, Colorado 80202, Attention: Mr. Robert A. Pinkerton; and if to the Lender, at 1801 California Street, Suite 3920, Denver, Colorado 80202, Attention: Kathleen McCarty; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. Section 6.03. WAIVERS. No failure or delay on the part of the Lender or any assignee of the Lender in exercising any power, right or remedy under this Agreement, the Note or any other Borrowing Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy. No such waiver shall extend to any subsequent or other default or impair any rights consequent thereon, except to the extent expressly so waived. Each of the rights, powers and remedies described in this Agreement and the other Borrowing Documents is cumulative and not exclusive of, and shall not prejudice, any other right, power or remedy provided in this Agreement, the other Borrowing Documents or by law. Each such right, power and remedy may be exercised from time to time as deemed necessary by the Lender or the Lender's assignee(s), as applicable, and in such order and manner as the Lender or the Lender's assignee(s), as applicable, may determine. FPF hereby acknowledges and agrees that, with respect to a violation or breach by FPF or an Affiliate of FPF, of any representation, warranty, covenant or other term or provision of this Agreement or any of the other Borrowing Documents, it shall be FPF's obligation to prepare and obtain a written waiver for such breaches or violations from the Lender or the Lender's assignee(s), as applicable. The Lender or the Lender's assignee(s), as applicable, may grant or deny any such requested waiver in its sole and absolute 16 discretion. At no time may FPF infer a course of dealing among the parties that would negate the requirement to obtain a written waiver from the Lender or the Lender's assignee(s), as applicable. Section 6.04. COSTS, EXPENSES AND TAXES. FPF agrees to pay on demand all costs and expenses in connection with the preparation, execution, delivery, filing, recording, administration, modification and amendment of this Agreement, the Note and the other Borrowing Documents, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Lender with respect thereto and with respect to advising the Lender as to its rights and responsibilities under this Agreement. FPF further agrees to pay on demand all costs and expenses, if any (including reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Note and the other Borrowing Documents, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 6.04. In addition, FPF agrees to pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement, the Note and the other Borrowing Documents, and agrees to hold the Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. Section 6.05. LIMITED RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Amortization Event, the Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of FPF against any and all of the Obligations now or hereafter existing under this Agreement, the Note or the other Borrowing Documents, whether or not the Lender shall have made any demand under this Agreement or the Note or the other Borrowing Documents and although such obligations may be unmatured. The Lender agrees promptly to notify FPF after any such set-off and application; provided, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have. Notwithstanding the foregoing, the Lender shall have no right to set off and apply any other funds or deposits held by the Lender with respect to any other loan to or indebtedness of FPF. Section 6.06. BINDING EFFECT; ASSIGNMENTS. (a) This Agreement shall be binding upon and inure to the benefit of FPF and the Lender and their respective successors and assigns, except that FPF shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lender or its assignee(s), as applicable. (b) Notwithstanding any other provision set forth in this Agreement, the Lender may at any time create a security interest in or assign all or any portion of its rights under this Agreement and the other Borrowing Documents (including, without 17 limitation, the Advances owing to it and the Note held by it) in favor of any other Person. Without limiting the generality of the foregoing, all representations, covenants and agreements in this Agreement which expressly confer rights upon the Lender shall be for the benefit of and run directly to each of the Lender's assignees or designees and each such assignee or designee shall be entitled to rely on and enforce such representations, covenants and agreements to the same extent as if it were a party hereto. Section 6.07. REPRESENTATIONS. The respective agreements, representations, warranties and other statements by FPF and the Lender set forth in or made pursuant to this Agreement shall remain in full force and effect and will survive each Advance. Section 6.08. GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS. Section 6.09. JURISDICTION. THE PARTIES HERETO HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTE AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF COPIES OF SUCH PROCESS TO THEM AT THEIR RESPECTIVE ADDRESSES AS SPECIFIED IN SECTION 6.02. THE PARTIES HEREBY AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION 6.09 SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT OR THE NOTE TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. Section 6.10. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTE. 18 Section 6.11. SEVERABILITY OF PROVISIONS. Any part, provision, agreement, representation, warranty or covenant of this Agreement or the Note which is prohibited or unenforceable or is held to be void or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties waive any provision of law which prohibits or renders void or unenforceable any provision hereof. If the invalidity of any part, provision, agreement, representation, warranty or covenant of this Agreement or the Note shall deprive any party of the economic benefit intended to be conferred by this Agreement or the Note, the parties shall negotiate in good faith to develop a structure the economic effect of which is as nearly as possible the same as the economic effect of the transactions contemplated hereunder without regard to such invalidity. Section 6.12. COUNTERPARTS. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 6.13. CAPTIONS. The article, paragraph and other headings contained in this Agreement and the Note are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement or the Note. Section 6.14. LEGAL HOLIDAYS. In the case where the date on which any action required to be taken, document required to be delivered or payment required to be made is not a Business Day in New York, New York or Denver, Colorado, such action, delivery or payment need not be made on that date, but may be made on the next succeeding Business Day. Section 6.15. ADVICE FROM INDEPENDENT COUNSEL. The parties understand that this Agreement and the other Borrowing Documents are legally binding agreements that may affect such party's rights. Each party represents to the other that it has received legal advice from counsel of its choice regarding the meaning and legal significance of this Agreement and the other Borrowing Documents and that it is satisfied with its legal counsel and the advice received from it. Section 6.16. JUDICIAL INTERPRETATION. Should any provision of this Agreement or the other Borrowing Documents require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof or thereof shall be more strictly construed against any Person by reason of the rule of construction that a document is to be construed more strictly against the Person who itself or through its agent prepared the same, it being agreed that each party has participated in the preparation of this Agreement and the other Borrowing Documents. (SIGNATURE PAGE FOLLOWS) 19 IN WITNESS WHEREOF, the parties hereto have caused this Revolving Credit and Term Loan Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. FPF, INC. Bruce I. Lundy Executive Vice President FLATIRON FUNDING COMPANY, LLC Name: ------------------------------------- Title: ------------------------------------ 20 EXHIBIT A PROMISSORY NOTE $3,000,000 Dated: September ___, 1997 FOR VALUE RECEIVED, the undersigned, FPF, INC., a Colorado corporation ("FPF"), HEREBY PROMISES TO PAY to the order of FLATIRON FUNDING COMPANY, LLC, a Delaware limited liability company, or order, (the "Lender") the principal amount of Three Million Dollars or, if less, the aggregate principal amount of all Advances made by the Lender to FPF pursuant to the Revolving Loan Agreement (as hereinafter defined, capitalized terms used herein and not otherwise defined herein being used with the meanings set forth in the Revolving Loan Agreement, as hereafter defined) outstanding hereunder, in monthly installments of principal on the third Business Day of each calendar month commencing with October 4, 2000, each in an amount equal to the amount determined pursuant to Section 4.02 of the Revolving Loan Agreement. If not sooner paid, the principal of this Note and all accrued and unpaid interest thereon is scheduled to be due and payable in full on July 31, 2001 (the "Scheduled Maturity Date"). FPF shall pay interest on the principal amount hereof from time to time outstanding from the date hereof until such principal amount is paid in full, payable monthly on the second Business Day of each calendar month, commencing with October 2, 1997, during the term hereof and on the final day when such principal amount becomes due at a fluctuating interest rate per annum in effect from time to time equal to the Prime Rate (as defined below) plus one and three-quarter percent (1.75%), with each change in such rate taking effect simultaneously with the corresponding change in the Prime Rate. Any principal of or accrued interest on this Note not paid when due shall, from and after the date when due until the date such principal or interest is paid, bear interest at the Default Rate (as defined below). Both principal and interest are payable in lawful money of the United States of America to the Lender at 1801 California Street, Suite 3920, Denver, CO 80202, in same day funds. As used herein, the following terms have the following meanings: "Prime Rate" means the base commercial prime rate on corporate loans at large U.S. money centers for any given Business Day as published in the "Money Rates" column of THE WALL STREET JOURNAL. If more than one rate is shown, then the highest rate shown shall be the applicable rate. "Default Rate" means a fluctuating rate of interest per annum in effect from time to time equal to the Prime Rate plus eight percent (8%). 1 This Promissory Note is the Note referred to in, and is entitled to the benefits of, the Revolving Credit and Term Loan Agreement dated as of September __, 1997 (the "Revolving Loan Agreement") between FPF and the Lender and is secured by the Security Agreement and other Borrowing Documents. The Revolving Loan Agreement, among other things, (a) provides for the making of Advances by the Lender to FPF from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of FPF resulting from each such Advance being evidenced by this Promissory Note, and (b) contains provisions for acceleration of the Revolving Period upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS. FPF HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE AND FPF HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS. FPF HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF COPIES OF SUCH PROCESS TO IT AT ITS ADDRESS SPECIFIED IN SECTION 6.02 OF THE REVOLVING LOAN AGREEMENT. FPF HEREBY AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS PROVISION SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS NOTE TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. FPF HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS NOTE. (SIGNATURE PAGE FOLLOWS) 2 Bruce I. Lundy Executive Vice President 3 EXHIBIT B SECURITY AGREEMENT SECURITY AGREEMENT, dated as of September __, 1997 (this "Agreement"), by and among FPF, INC., a Colorado corporation ("FPF"), FLATIRON FUNDING COMPANY, LLC, a Delaware limited liability company (the "Lender") and NORWEST BANK COLORADO, N.A., a national banking association, as trustee on behalf of the Lender (the "Trustee"). PRELIMINARY STATEMENTS WHEREAS, the Lender and FPF have entered into that certain Revolving Credit and Term Loan Agreement, dated as of September__, 1997 (said Agreement, as it may hereafter be amended or otherwise modified from time to time, being the "Revolving Loan Agreement," the terms defined therein and not otherwise defined herein being used herein as therein defined); and WHEREAS, it is a condition precedent to the making of Advances by the Lender under the Revolving Loan Agreement that FPF shall have granted the security interest contemplated by this Agreement; NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to make Advances under the Revolving Loan Agreement, FPF hereby agrees as follows: Section 1. GRANT OF SECURITY. (a) FPF hereby assigns and pledges to the Trustee on behalf on the Lender, and hereby grants to such Trustee a security interest in all of FPF's right, title and interest in, to and under the following, whether now owned or hereafter acquired (the "Trustee Collateral"): (i) all Premium Receivables and the related Premium Finance Agreements acquired by FPF from the Originator pursuant to the Sale and Assignment Agreement; (ii) all rights, interests and benefits (but not any obligations) of FPF to such Premium Receivables and the related Premium Finance Agreements; and (iii) all payments and proceeds of any and all of the foregoing. (b) FPF hereby assigns and pledges to the Lender, and hereby grants to the Lender a security interest in, all of FPF's right, title and interest in, to and under the following, whether now owned or hereafter acquired (the "Lender Collateral" and together with the Trustee Collateral, the "Collateral"): 1 (i) all other Conveyed Property other than the Trustee Collateral acquired by FPF from the Originator pursuant to the Sale and Assignment Agreement including, without limitation, all accounts, contract rights, chattel paper, instruments, documents, deposit accounts, general intangibles and other rights to payment of money of any kind evidencing or relating to any Conveyed Property, now or hereafter existing, and all rights now or hereafter existing in and to all security agreements, insurance policies (and rights to payment, refund or rebate thereunder), leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, deposit accounts, general intangibles or other rights to payment of money (any and all such accounts, contract rights, chattel paper, instruments, documents, deposit accounts, general intangibles and other rights to payment of money being the "Receivables") and any and all such leases, security agreements, insurance policies (and rights to payment, refund or rebate thereunder); (ii) the Purchase Commitment Fee, the Purchase Fee, the Purchase Reduction Fee and the Capital Availability Payment payable to FPF by the Residual Interest Holder pursuant to the Residual Agreement; (iii) all rights, interests and benefits (but not any obligations) of FPF under the Borrowing Documents, including, without limitation, all rights, interests and benefits of FPF to the Pledged Collateral under the Residual Agreement; and (iv) all proceeds and products of any and all of the foregoing Collateral (including, without limitation, proceeds which constitute property of the types described in clauses (i) through (iii) of this Section 1(b)) and, to the extent not otherwise included, all (A) payments under insurance (whether or not the Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral and (B) cash. Section 2. SECURITY FOR OBLIGATIONS. This Agreement secures the payment of all loans, Advances, debts, liabilities and obligations for monetary amounts (whether or not such amounts are liquidated or determinable) owing by FPF to the Lender, and all covenants and duties regarding such amounts, of any kind or nature, present or future, whether or not evidenced by a binding note, agreement or other instrument, arising under the Revolving Loan Agreement and the other Borrowing Documents and includes, without limitation, all principal, interest, commitment fees, administrative fees, expenses, attorneys' fees and expenses, consultants' and advisors' fees and expenses or otherwise, which expenses and fees shall not exceed $3,000 in the aggregate for any calendar year of calculation as provided in the Revolving Loan Agreement (all such obligations of FPF being the "Obligations"). Without limiting the generality of the foregoing, this Agreement secures the payment of all amounts which constitute part of the Obligations and would be owed by FPF to the Lender under the Revolving Loan Agreement and the other Borrowing Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving FPF. 2 Notwithstanding anything herein to the contrary, the Collateral shall only secure those obligations of FPF to Lender and in the amounts set forth in Section 4.02(c) of the Revolving Loan Agreement and, upon the sale of any Collateral following an Amortization Event, the proceeds of the Collateral shall be applied in accordance with the provisions of Section 4.02(c) of the Revolving Loan Agreement. Section 3. FPF REMAINS LIABLE; USE OF COLLATERAL. Anything herein to the contrary notwithstanding, (a) FPF shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender or the Trustee, as applicable, of any of the rights hereunder shall not release FPF from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) neither the Lender nor the Trustee shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Lender or the Trustee be obligated to perform any of the obligations or duties of FPF thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. So long as no Amortization Event has occurred and is continuing and subject to the rights and interests of the Lender and the Trustee, as applicable, in the Collateral granted hereby, FPF shall have the right to use the Collateral in connection with the normal conduct of its business. Section 4. REPRESENTATIONS AND WARRANTIES. FPF represents and warrants as follows: (a) The chief place of business and chief executive office of FPF and the office where FPF keeps its records concerning the Receivables, and the originals of all instruments, documents and chattel paper that evidence the Receivables, are located at its address at 1801 California Street, Suite 3920, Denver, Colorado 80202. The originals of all Loan Documents have been delivered to the Lender or its designee. (b) FPF is the legal and beneficial owner of the Collateral free and clear of any Lien except for the security interest created by this Agreement. No effective financing statement or other document similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Lender, the Trustee or the Lender's assignee(s) relating to this Agreement. (c) This Agreement creates a valid first priority security interest in the Collateral, securing the payment of the Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. (d) No consent of any other Person and no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required (i) for the grant by FPF of the security interest granted hereby or for the execution, delivery or performance of this Agreement by FPF, (ii) for the perfection or maintenance of the security interest created hereby (including the first priority nature of such security interest) or (iii) for the exercise by the Lender and the Trustee of their respective rights and remedies hereunder. 3 Section 5. FURTHER ASSURANCES. (a) FPF agrees that from time to time, at the expense of FPF, FPF shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Lender or the Trustee may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Lender and the Trustee to exercise and enforce their respective rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, FPF shall: (i) mark conspicuously each Premium Finance Agreement and each of its records pertaining to the Collateral with the Assignment Stamp; and (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Lender may request, in order to perfect and preserve the security interest granted or purported to be granted hereby. (b) FPF hereby authorizes the Lender and the Trustee to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of FPF where permitted by law. A photocopy or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) FPF shall furnish to the Lender and the Trustee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Lender or the Trustee may reasonably request, all in reasonable detail. Section 6. AS TO RECEIVABLES. (a) FPF shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Receivables at the location therefor specified in Section 4(a) or, upon 30 days' prior written notice to the Lender and the Trustee, at any other locations in a jurisdiction where all action required by Section 5 shall have been taken with respect to the Receivables. FPF and the Trustee, hold and preserve such records and shall permit representatives of the Lender and the Trustee, at any time during normal business hours to inspect and make abstracts from such records. (b) Except as otherwise provided in this subsection (b), FPF shall continue to collect, or shall cause the collection of, all amounts due or to become due to FPF under the Receivables. In connection with such collections, FPF may take (and, at the Lender's direction, shall take) such action as FPF or the Lender may deem necessary or advisable to enforce collection of the Receivables; provided, however, that upon the occurrence of an Amortization Event, the Lender and the Trustee shall have the right at any time, upon written notice to FPF of its intention to do so, to notify the account debtors or obligors under the Receivables of the assignment of such Receivables to the Lender or the Trustee, as the case may be, and to direct such account debtors or obligors to make payment of all 4 amounts due or to become due to FPF thereunder directly to the Lender or the Trustee, as the case may be, and, upon such notification and at the expense of FPF, to enforce collection of any such Receivables, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as FPF might have done. After receipt by FPF of the notice from the Lender referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including instruments) received by FPF in respect of the Receivables shall be received in trust for the benefit of the Lender hereunder, shall be segregated from other funds of FPF and shall be forthwith paid over to the Lender or the Trustee on behalf of the Lender in the same form as so received (with any necessary endorsement) to be held as cash collateral and either (A) released to FPF so long as no Amortization Event shall have occurred and be continuing or (B) if any Amortization Event shall have occurred and be continuing, applied as provided by Section 11(b), and (ii) FPF shall not adjust, settle or compromise the amount or payment of any Receivable, release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. Section 7. TRANSFERS AND OTHER LIENS. FPF shall not (a) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (b) create or permit to exist any Lien upon or with respect to any of the Collateral, except for the security interest under this Agreement. Section 8. LENDER AND TRUSTEE APPOINTED AUTHORIZED AGENT AND ATTORNEY-IN-FACT. FPF hereby irrevocably appoints each of the Lender and the Trustee as FPF's authorized agent and attorney-in-fact, with full authority in the place and stead of FPF, at the option of the Lender or the Trustee at any time after the occurrence and during the continuance of any Amortization Event, and in the name of FPF, the Lender or the Trustee, as applicable, or otherwise, from time to time in the Lender's and the Trustee's respective discretion, to take any action and to execute any instrument which the Lender may deem necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of FPF under Section 6), including, without limitation: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in connection with the Collateral; (b) to receive, endorse and collect any drafts or other instruments, documents and chattel paper, in connection therewith; and (c) to file any claims or take any action or institute any proceedings which the Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Lender and the Trustee with respect to any of the Collateral. Section 9. LENDER AND TRUSTEE MAY PERFORM. If FPF fails to perform any agreement contained herein, the Lender and the Trustee may perform, or cause performance of, such 5 agreement, and the expenses of the Lender and the Trustee incurred in connection therewith shall be payable by FPF under Section 12(b). Section 10. THE LENDER'S AND THE TRUSTEE'S DUTIES. The powers conferred on the Lender and the Trustee hereunder are solely to protect the Lender's interest in the Collateral and shall not impose any duty upon either the Trustee or the Lender to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, neither the Lender nor the Trustee shall have a duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Lender and the Trustee shall each be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Lender or the Trustee, as applicable, accords its own property. Section 11. REMEDIES. If any Amortization Event occurs as a result of the bankruptcy or insolvency of FPF: (a) The Lender and the Trustee may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC in the applicable jurisdictions at that time (whether or not the UCC applies to the affected Collateral), and also may (i) require FPF to, and FPF hereby agrees that it shall at its expense and upon request of the Lender or the Trustee forthwith, assemble all or part of the Collateral as directed by the Lender or the Trustee and make it available to the Lender or the Trustee at a place to be designated by the Lender or the Trustee which is reasonably convenient to such parties and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Lender's or the Trustee's offices, as applicable, or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Lender or the Trustee, as applicable, may deem commercially reasonable. FPF agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to FPF of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Neither the Lender nor the Trustee shall be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender and the Trustee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) Any cash held by the Lender or the Trustee as Collateral and all cash proceeds received by the Lender or the Trustee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Lender or the Trustee, be held by the Lender as collateral for, and/or then or at any time thereafter be applied (after payment of any amounts payable to the Lender and the Trustee pursuant to Section 11(a)) in whole or in part by the Lender or the Trustee against, all or any part of the Obligations in the order provided in Section 4.02(c) of the 6 Revolving Loan Agreement. Any surplus of such cash or cash proceeds held by the Lender and the Trustee and remaining after payment in full of all the Obligations shall be paid over to FPF for use in payment of the obligations under the Residual Agreement, or to whomsoever may be lawfully entitled to receive such surplus by order of a court of competent jurisdiction. Section 12. INDEMNITY AND EXPENSES. (a) FPF agrees to indemnify the Lender, its assignee(s), the Trustee and their respective directors, officers, agents, attorneys and employees from and against any and all claims, losses and liabilities (including reasonable attorneys' fees actually incurred) growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses or liabilities resulting from such Person's gross negligence or willful misconduct. (b) FPF shall upon demand pay to the Lender and the Trustee the amount of any and all reasonable expenses, including the reasonable fees and expenses of their respective counsel and of any experts and agents, which the Lender or the Trustee may incur in connection with (i) the preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (ii) the exercise or enforcement of any of the rights of the Lender or the Trustee hereunder or (iii) the failure by FPF to perform or observe any of the provisions hereof. Section 13. CONTINUING SECURITY INTEREST; ASSIGNMENTS UNDER REVOLVING LOAN AGREEMENT. This Agreement shall create a continuing assignment of and security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Obligations and all other amounts payable under this Agreement, (b) be binding upon FPF, its successors and assigns and (c) inure to the benefit of, and be enforceable by, the Lender, the Trustee and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), the Lender may assign or otherwise transfer all or any portion of its rights and obligations under the Revolving Loan Agreement (including, without limitation, all or any portion of the Note) to any other Person and such other Person or entity shall thereupon become vested with all the benefits in respect thereof granted to the Lender herein or otherwise. Upon the payment in full of the Obligations and all other amounts payable under this Agreement, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to FPF. Upon any such termination, the Lender and the Trustee, as applicable, shall, at FPF's expense, execute and deliver to FPF such documents as FPF shall reasonably request to evidence such termination. Section 14. ESTOPPEL CERTIFICATES AND NOTICES. Upon Lender's request, FPF shall use its best efforts to obtain from obligors under any Collateral such estoppel certificates as the Lender may reasonably request from time to time. FPF shall further give prompt written notice to the Lender and the Trustee of any payment default or any other material breach or default under any Collateral, and shall provide the Lender and the Trustee with such other information relating to the Collateral as the Lender or the Trustee may reasonably request from time to time. The 7 Lender and the Trustee are authorized at any time and from time to time to directly contact any such obligor to verify any information provided by FPF or for any other purpose relating to the Collateral. Section 15. TERMS. Unless otherwise defined herein or in the Revolving Loan Agreement, terms used in Article 9 of the UCC are used herein as therein defined. Section 16. AMENDMENTS. This Agreement may be amended from time to time by a written amendment duly executed and delivered by FPF, the Lender and the Trustee with the prior written consent of the Lender assignee(s), if any, as the case may be, and the Originator and no waiver of any of the terms hereof or thereof shall be effective unless it is in writing and signed by the party or parties whose rights are being waived and the Lender's assignee, if any, and Originator. Section 17. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered personally or mailed by first-class registered or certified mail, postage prepaid, or by telephonic facsimile transmission, electronic mail and overnight delivery service, postage prepaid, to the parties to this Agreement; provided, that notices shall be effective upon receipt, and in any case addressed as follows: if to FPF, at 1801 California Street, Suite 3920, Denver, Colorado 80202, Attention: Mr. Robert A. Pinkerton; if to the Lender, at 1801 California Street, Suite 3920, Denver, Colorado 80202, Attention: Kathleen McCarty; and if to the Trustee, at 1740 Broadway, Denver, Colorado 82074-8693, Attention: Corporate Trust Department; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. Section 18. WAIVERS. No failure or delay on the part of the Lender, the Trustee or any assignee of the Lender in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy. No such waiver shall extend to any subsequent or other default or impair any rights consequent thereon, except to the extent expressly so waived. Each of the rights, powers and remedies described in this Agreement is cumulative and not exclusive of, and shall not prejudice, any other right, power or remedy provided in this Agreement or by law. Each such right, power and remedy may be exercised from time to time as deemed necessary by the Lender, the Trustee or the Lender's assignee(s), as applicable and in such order and manner as the Lender, the Trustee or the Lender's assignee(s), as applicable, may determine. FPF hereby acknowledges and agrees that, with respect to a violation or breach by FPF of any representation, warranty, covenant or other term or provision of this Agreement, it shall by FPF's obligation to prepare and obtain a written waiver for such breaches or violations from the Lender, the Trustee or the Lender's assignee(s), as applicable may grant or deny any such requested waiver in its sole and absolute discretion. At no time may FPF infer a course of dealing among the parties that would negate the requirement to obtain a written waiver from the Lender, the Trustee or the Lender's assignee(s), as applicable. 8 Section 19. THIRD PARTY BENEFICIARIES. Notwithstanding any other provision set forth in this Agreement, the Lender may at any time create a security interest in or assign all or any portion of its rights under this Agreement (including, without limitation, the Collateral) in favor of any other Person. Without limiting the generality of the foregoing, all representations, covenants and agreements in this Agreement which expressly confer rights upon the Lender shall be for the benefit of and run directly to each of the Lender's assignees or designees and each such assignee or designee shall be entitled to rely on and enforce such representations, covenants and agreements to the same extent as if it were a party hereto. Section 20. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS. Section 21. JURISDICTION. THE PARTIES HERETO HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF COPIES OF SUCH PROCESS TO THEM AT THEIR RESPECTIVE ADDRESSES AS SPECIFIED IN SECTION 17. THE PARTIES HEREBY AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION 21 SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. Section 22. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT. Section 23. SEVERABILITY OF PROVISIONS. Any part, provision, agreement, representation, warranty or covenant of this Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render 9 unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties waive any provision of law which prohibits or renders void or unenforceable any provision hereof. Section 24. COUNTERPARTS. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 25. CAPTIONS. The article, paragraph and other headings contained in this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. Section 26. LEGAL HOLIDAYS. In the case where the date on which any action required to be taken, document required to be delivered or payment required to be made is not a Business Day in New York, New York or Denver, Colorado, such action, delivery or payment need not be made on that date, but may be made on the next succeeding Business Day. Section 27. ADVICE FROM INDEPENDENT COUNSEL. The parties understand that this Agreement is a legally binding agreement that may affect such party's rights. Each party represents to the others that it has received legal advice from counsel of its choice regarding the meaning and legal significance of this Agreement and that it is satisfied with its legal counsel and the advice received from it. Section 28. JUDICIAL INTERPRETATION. Should any provision of this Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any Person by reason of the rule of construction that a document is to be construed more strictly against the Person who itself or through its agent prepared the same, it being agreed that each party has participated in the preparation of this Agreement. (SIGNATURE PAGE FOLLOWS) 10 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. FPF, INC. Bruce I. Lundy Executive Vice President FLATIRON FUNDING COMPANY, LLC Name: ------------------------------------- Title: ------------------------------------ Acknowledged and accepted: NORWEST BANK COLORADO, N.A., as Trustee By ----------------------- Name: --------------------- Title: -------------------- 11 EXHIBIT C CONCENTRATION TEST No more than a specified percentage of the Premium Receivables on the basis of the principal amount thereof shall, as of any date of determination, relate to any insurance company, as follows: The Reserves calculated under the Borrowing Base as contemplated by Section 2.03 of the Revolving Loan Agreement shall include amounts by which Eligible Premium Loans exceed the following limits. A. Insurance Company Diversification Requirements 1. For Eligible Insurance Companies covered by the Florida Insurance Guaranty Association ("FIGA") the following allocations shall apply: Insurance Company's Maximum % of Eligible A.M. Contracts Best Rating per Carrier "A" or better No Limit "B++" or "B+" 12.5% "B" or "B-" 10.0% ALL OTHERS* 3.50% *NOTE: "All others" above, "C," "D," "E," "F," "NR-4," "N/F" and "S" are not eligible. PER CARRIER EXCEPTIONS: a. Up to 75% of Originator's portfolio of eligible contracts purchased by FPF may relate to policies issued by Federated National Insurance Company. b. Up to 15% of Originator's eligible contracts purchased by FPF may relate to a single insurance company, selected from time to time by Originator and approved by Flatiron which carries a B-, NR-1, NR-2 or NR-3 rating by A.M. Best. ALL PER CARRIER EXCEPTIONS ARE SUBJECT TO ADJUSTMENT BY FPF IN ITS SOLE DISCRETION. 1 2. For companies not covered by the FIGA, the following allocations shall apply: No more than 15% of the pool may represent "non-admitted insurance carriers" (including U.S. syndicates of Lloyds of London) with per carrier and maximum pool limits as set forth below: Insurance Company's Maximum % of A.M. Eligible Contracts Best Rating per Carrier "A" or better 7.5% B++, B+ or B 1.0% US Syndicates of 1.0% Lloyd's of London B. Insurance Agent Diversification Requirements. Except for insurance agencies which are Affiliates of Originator the outstanding balance of Eligible Premium Receivables sourced from one agency may not exceed 17.5% of the pool and the next largest agent concentration may not exceed 15%. 2 EXHIBIT D REQUEST FOR ADVANCE FPF, Inc. Request For Advance Dated _____________________ The undersigned hereby requests of Flatiron Funding Company, LLC ("Flatiron") an advance under the Revolving Credit and Term Loan Agreement (the "Revolving Loan Agreement") as shown below, and in requesting such advance, certifies as follows: A. All conditions precedent described in Section 2.01 and 2.02 of the Revolving Loan Agreement have been satisfied. B. All representations and warranties set forth by FPF in the Revolving Loan Agreement are true and correct as of the date hereof. C. All representations and warranties set forth by the Originator in the Sale and Assignment Agreement are true and correct as of the date hereof. D. All information set forth herein and on all supporting schedules attached hereto is true, correct and complete in all respects as of the date hereof. Therefore, pursuant to the Revolving Loan Agreement and based on the Borrowing Base and Availability Calculation attached hereto as Annex 1: 1. Total Advance requested $ 2. Date Advance to be funded (at least ___ business days from today) ----- Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Revolving Loam Agreement. RESPONSIBLE OFFICER: NAME: ------------------- SIGNATURE: -------------- 1 ANNEX I TO EXHIBIT D FORM OF BORROWING BASE AND AVAILABILITY CALCULATION Account Number: Date of Funding ------------ Portfolio Principal Amount: [DATE] $_________ Less Adjustments to Eligible Premium Loans: Below minimum APR Below minimum down payment Above maximum number of payments more than 120 Days Amounts Cancelled - Due from Insureds Parity Adjustment
Eligibles Out of Parity $___________ _________% ____________ Greater of Total Negative Parity or Adjusted Eligible Out of Parity Loans not meeting Reps and Warranties Policy fee adjustment Ineligible Amounts before Diversification test
Less Amounts exceeding Concentration Limits: Amounts in excess of per carrier limits Amounts in excess of per agent limits Total Amounts in excess of limits Total Ineligible Amounts Portfolio Adjusted Balance [DATE] Advance Percent Rate Borrowing Base Outstanding Principal Balance [DATE] Subsequent Gross Advance Adjusted Principal Balance 1 Commitment Amount Availability for Advance Request Amount approved/requested to be advanced Borrower authorized by amount Amount of Advance Fee (____%) Actual amount wired to Funding Account [Date] New Outstanding Balance $ 2 EXHIBIT E REPRESENTATIONS AND WARRANTIES Section 1. REPRESENTATIONS AND WARRANTIES OF FPF WITH RESPECT TO SECTIONS 3.01 AND 4.01 OF THE REVOLVING LOAN AGREEMENT. (a) POWER AND AUTHORITY. FPF has the power and authority to execute and deliver the Borrowing Documents, to which it is a party, and to carry out their respective terms; there are no injunctions, writs, restraining orders or any other order of any nature which adversely affects FPF's performance of the Borrowing Documents, to which it is a party, any other related agreement to which FPF is a party or any transactions contemplated thereby; and no consent, approval or authorization which has not been obtained is required for the consummation by FPF of the transactions contemplated by the Borrowing Documents. (b) NO VIOLATION. The consummation of the transactions contemplated by the Borrowing Documents, to which FPF is a party, and the fulfillment of the terms thereof do not conflict with, result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of FPF, or any indenture, agreement or other instrument to which FPF is a party or by which it or its properties is bound; nor result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than pursuant to the Borrowing Documents); nor violate any applicable laws, rules, regulations or orders regarding the conduct of FPF's business or the ownership of its properties; nor violate any law or any order, rule or regulation applicable to FPF of any court or of any federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over FPF or its properties except, in each case, for such violations, conflicts, breaches, Liens and defaults which could not, in the reasonable judgment of FPF, have an adverse effect on the condition (financial or otherwise) of FPF, any Collateral or FPF's obligations under the Borrowing Documents, to which it is a party. (c) ABILITY TO PERFORM. There has been no impairment in the ability of FPF to perform its obligations under the Borrowing Documents, to which it is a party. (d) FINANCIAL STATEMENTS. FPF's financial statements delivered, or to be delivered, pursuant to Section 4.01 of the Revolving Loan Agreement, present or will present fairly, in all material respects, the information presented therein, and no material adverse change has occurred in FPF's financial status since the date thereof. (e) NO MATERIAL LIABILITIES. FPF does not have material liabilities or obligations other than those disclosed in the financial statements referred to in subparagraph (d) above or for which adequate reserves are reflected in such financials. 1 (f) NO MATERIAL MISSTATEMENTS OR OMISSIONS. No information, certificate of an officer, statement furnished in writing or report delivered to the Lender by FPF contains any untrue statement of a material fact or omits a material fact necessary to make such information, certificate, statement or report not misleading. (g) NO UNPAID TAXES. All tax returns required to be filed by FPF in any jurisdiction have in fact been filed, and all taxes, assessments, fees, claims and other governmental charges upon it or any subsidiary or upon any of their respective properties, income or franchises (including, without limitation, any taxes required to be paid by FPF relating to all payroll, FICA, unemployment and other taxes, assessments, fees, claims and other charges relating to the employees of FPF), shown to be due and payable on such returns have been paid; provided, that FPF shall not be required to pay or discharge any such tax, assessment, fee, claim or other charge which is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained in accordance with GAAP. To the best of FPF's knowledge, all such tax returns were true and correct and it does not know of any contemplated or proposed additional tax assessment against it in any material amount or of any basis therefor. (h) ADEQUATE PROVISIONS FOR TAXES. The provisions for taxes on FPF's books are in accordance with GAAP. (i) ERISA. No contribution failure by FPF has occurred with respect to any Pension Plan (as defined in the Sale and Assignment Agreement) sufficient to give rise to a lien under Section 302(f) of ERISA and no notice of intent to terminate a Pension Plan has been filed, nor has any Pension Plan been terminated under Section 4041(e) of ERISA, nor has the PBGC instituted proceedings to terminate, or appoint a trustee to administer, a Pension Plan, and no event has occurred or condition exists which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan. (j) FPF INFORMATION. The information with respect to FPF and the Premium Receivables provided to the Lender does not, as of its date, contain any untrue statement of a material fact with respect to the Premium Receivables, FPF, its business or the transactions contemplated hereby or by the other Borrowing Documents or omit a material fact necessary to make the statements contained herein or therein not misleading. There is no fact peculiar to FPF or any Affiliate of FPF or, to its knowledge, any Premium Receivable or Obligor, which it has not disclosed to the Lender in writing which could adversely affect or, so far as FPF can now reasonably foresee, could adversely affect FPF's ability to perform the transactions contemplated by the Borrowing Documents. (k) SOLVENCY. The fair salable value of the assets on a going concern basis of FPF, as of the time of each Grant of the Collateral under the Revolving Loan Agreement is in excess of the total amount of its liabilities. With respect to the date of each 2 Advance, at the close of the immediately preceding fiscal quarter of FPF, FPF had a positive net worth. (l) PRINCIPAL EXECUTIVE OFFICE. The principal executive office of FPF is, and for a period of not less than four months preceding the date of the initial Advance has been, the notice address set forth in Section 6.02 of the Revolving Loan Agreement. (m) LEGAL NAMES. FPF, Inc. is the only legal name under which FPF currently is operating its business. FPF has not changed its name in the last six (6) years (or such shorter period of time during which FPF was in existence) and does not have any other tradenames, fictitious names, assumed names or "doing business as" names other than "FPF Finance, Inc." (n) VALID BUSINESS REASONS; NO FRAUDULENT TRANSFERS. The transactions contemplated by the Sale and Assignment Agreement are in the ordinary course of FPF's business and FPF has valid business reasons for acquiring the related Conveyed Property rather than participating in a secured loan with the related Conveyed Property as collateral. At the time of each Sale: (i) FPF acquired the related Conveyed Property from the Originator, without any intent to hinder, delay or defraud any current or future creditor of the Originator; (ii) FPF was not insolvent or did not become insolvent as a result of any transfer; (iii) FPF was not engaged and was not about to engage in any business or transaction for which any property remaining with FPF was an unreasonably small capital or for which the remaining assets of FPF are unreasonably small in relation to the business of FPF or the transaction; (iv) FPF did not intend to incur, and did not believe or reasonably should not have believed, that it would incur, debts beyond its ability to pay as they become due; and (v) the consideration paid by FPF to the Originator for the related Conveyed Property was equivalent to the fair market value of such related Conveyed Property. (o) FINANCIAL STATEMENT DISCLOSURE. FPF has been advised that from and after the date of each Sale under the Sale and Assignment Agreement, the financial statements of the Originator will disclose that, under generally accepted accounting principles, on each respective Sale, FPF acquired ownership of the Premium Receivables. (p) OTHER AGREEMENTS. FPF is not a party to any indenture, loan or credit agreement, lease or other instrument or agreement which is likely to have an adverse effect on the business, properties, assets, operations or operation, financial or otherwise, of FPF or the ability of FPF to perform its obligations under this Agreement or any other Borrowing Document to which it is a party. (q) NO MATERIAL ADVERSE CHANGE. No material adverse change has occurred in the business, properties, operating results, prospects, assets, Premium Receivables Portfolio, operations or condition, financial or otherwise, of FPF from the Closing Date or the date of the immediately preceding Advance, as the case may be. 3 Section 2. GENERAL REPRESENTATIONS AND WARRANTIES OF FPF WITH RESPECT TO SECTIONS 3.01 AND 4.01 OF THE REVOLVING LOAN AGREEMENT. (a) ORGANIZATION, ETC. FPF is duly organized and is validly existing as a corporation in good standing under the laws of the State of Colorado, with full power and authority to execute and deliver, to the extent that FPF is a party thereto, the Borrowing Documents and to perform the terms and provisions thereof. (b) DUE QUALIFICATION. FPF is duly qualified to do business as a foreign corporation in good standing, and has obtained all required licenses and approvals, if any, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualifications except those jurisdictions in which failure to be so qualified would not have an adverse effect on the business or operations of FPF or the Collateral. (c) DUE AUTHORIZATION. The execution, delivery and performance by FPF of the Borrowing Documents, to which it is a party, have been duly authorized by all necessary action of FPF, do not require any approval or consent of any governmental agency or authority, do not and will not conflict with any provision of its articles of incorporation or bylaws, and do not and will not conflict with or result in a breach which would constitute (with or without notice or lapse of time) a default under any agreement binding upon or applicable to it or its property, or any law or governmental regulation or court decree applicable to it or its property. (d) NO LITIGATION. No litigation or administrative proceeding of or before any court, tribunal or governmental body is presently pending, or threatened, against FPF or its properties or, to the extent that FPF is a party thereto, with respect to the Borrowing Documents, which, if adversely determined could, in the reasonable opinion of FPF, have an adverse effect on the transactions contemplated by the Borrowing Documents. (e) ENFORCEABILITY. The Borrowing Documents to which FPF is a party constitute valid, legal and binding obligations of FPF, enforceable against FPF in accordance with the terms hereof, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of creditor's rights generally and to general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. Section 3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in this Exhibit E shall survive the date of the respective Borrowing Document. Upon discovery by the Lender or FPF of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice to the other parties to the Borrowing Documents; provided, however, that failure to give such notice shall not affect the rights of such other parties with respect to such breach. 4 EXHIBIT F CLOSING DOCUMENTS The following Closing Documents, each in form and substance satisfactory to the Lender, are to be delivered by FPF to the Lender in satisfaction of the requirements in Section 2.01 of the Revolving Loan Agreement: (a) The Note; (b) Payment of the Closing Fee, the Commitment Fee and any Advance Fee payable under Section 1.03 of the Revolving Loan Agreement; (c) A Security Agreement, duly executed by FPF, in the form of Exhibit B to the Revolving Loan Agreement, together with: (i) acknowledgment copies or stamped receipt copies of proper financing statements, duly filed under the UCC of all jurisdictions that the Lender may deem necessary or desirable in order to perfect the security interests created by the Security Agreement; (ii) completed requests for information, listing the financing statements referred to in paragraph (i) above and all other effective financing statements filed in the jurisdictions referred to in paragraph (i) above that name FPF as debtor, together with copies of such other financing statements (none of which cover the collateral purported to be covered by the Security Agreement, unless consented to in writing by the Lender); (iii) evidence of the completion of all recordings and filings of or with respect to the Security Agreement that the Lender may deem necessary or desirable in order to perfect the security interests created by the Security Agreement; (iv) evidence of the delivery of notices to the Obligors under the Premium Receivables and the Issuing Insurance Companies relating to such Premium Receivables advising such Obligors and Issuing Insurance Companies of the Sale to FPF of the Premium Receivables pursuant to the Sale and Assignment Agreement, and the Grant to the Lender of the Premium Receivables pursuant to the Security Agreement; and (v) evidence that all other actions necessary or, in the opinion of the Lender, desirable to perfect and protect the security interests created by the Security Agreement have been taken; 1 (d) Evidence that all documents required to be delivered to the Lender or its designee pursuant to the Borrowing Documents have been so executed and delivered; (e) Opinions of counsel to FPF addressing such matters as the Lender shall reasonably request; (f) A certificate executed by the Secretary or Assistant Secretary of FPF, certifying as to the following, which shall be attached to such certificate (i) a copy of the articles of incorporation of FPF, (ii) a copy of the bylaws of FPF, (iii) a copy of the resolutions of the Board of Directors of FPF authorizing the execution, delivery and performance by FPF of the Borrowing Documents and the transactions contemplated thereunder, and (iv) the names and true signatures of the officers authorized on its behalf to sign the Borrowing Documents; (g) A good standing certificate (or its equivalent) for FPF issued by (i) the Secretary of State of its state of incorporation, and (ii) the Secretary of State of each state in which it does business or is purchasing or servicing Premium Receivables, to the extent that such activities require qualification to do business in such states; (h) The income statements and balance sheets of FPF as described in, and together with the certificate of a Responsible Officer of FPF required under, Section 4.01 of the Revolving Loan Agreement; and (i) The power of attorney attached as Exhibit G to the Revolving Loan Agreement. 2 EXHIBIT G POWER OF ATTORNEY FPF, INC., a corporation organized and existing under the laws of the State of Colorado ("FPF"), hereby grants to FLATIRON FUNDING COMPANY, LLC (the "Lender") or the Lender's designee pursuant to that certain Revolving Credit and Term Loan Agreement, dated as of September__, 1997 between FPF and the Lender, as the same may be amended or otherwise modified from time to time (the "Loan Agreement"), and to Norwest Bank Colorado, N.A. (the "Trustee") pursuant to that certain Security Agreement, dated as of September __, 1997 among FPF, the Lender and the Trustee, an irrevocable power of attorney until all Obligations are paid in full, with full power of substitution, coupled with an interest, to take any and all of the following actions, which the Lender, its designee or the Trustee, as applicable, determines are necessary: (a) receive, take, endorse, assign, deliver, accept and deposit, in the name of the Lender, the Trustee or FPF, any and all cash, checks, commercial paper, drafts, remittances and other instruments and documents relating to the Collateral; (b) transmit to Obligors, Issuing Insurance Companies, Agents, other obligors or any bailees (including the Lender, its designee or the Trustee) notice of the interest of the Lender and the Trustee in the Collateral or request from account Obligors, Issuing Insurance Companies, Agents or such other obligors or bailees at any time, in the name of FPF, the Trustee or the Lender or any designee of the Lender, information concerning the Collateral and any amounts owing with respect thereto; (c) notify Obligors, Issuing Insurance Companies, Agents or other obligors to make payment directly to the Lender or the Trustee on behalf of the Lender, or notify bailee (including the Lender, its designee or the Trustee) as to the disposition of Collateral; (d) take or bring, in the name of the Lender, the Trustee or FPF, all steps, actions, suits or proceedings deemed by the Lender or its designee necessary or desirable to direct collection of or other realization upon the accounts and other Collateral or to otherwise enforce the rights of the Lender, its designee or the Trustee with respect to any of the Collateral; (e) after an Amortization Event, change the address for delivery of mail to FPF and to receive and open mail addressed to FPF; (f) after an Amortization Event, extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the Obligors or other obligor, without affecting any of the Obligations; and (g) execute in the name of FPF and file against FPF in favor of the Trustee, the Lender and its assignees financing statements or amendments with respect to the Collateral. Capitalized terms used and not otherwise defined herein shall have the meaning ascribed to such terms in the Loan Agreement. 1 IN WITNESS WHEREOF, the undersigned a duly authorized officer of FPF, Inc. hereunto sets his hand this _______ day of September, 1997. FPF, INC. Bruce I. Lundy Executive Vice President STATE OF COLORADO ) ) ss.: COUNTY OF DENVER ) BE IT REMEMBERED, that on this ___ day of September, 1997, before me the undersigned, a Notary Public in and for the County and State aforesaid, came Bruce I. Lundy, Executive Vice President of FPF, Inc., a corporation duly organized, incorporated and existing under and by virtue of the laws of Colorado, who is personally known to me to be such officer, and who is personally known to me to be the same person who executed, as such officer, the within instrument on behalf of said corporation, and such person duly acknowledged the execution of the same to be the act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, the day and year last above written. Notary Public My commission expires: - --------------------------- 2 MODIFICATION AGREEMENT This MODIFICATION AGREEMENT ("Modification") is entered into as of May 1, 1998 by and among FPF, INC., a Colorado corporation ("FPF"), FEDERATED PREMIUM FINANCE, INC., a Florida corporation, as originator (the "Originator"), FLATIRON FUNDING COMPANY, LLC, a Delaware limited liability company (the "Lender"), FEDERATED FUNDING CORPORATION, a Florida corporation (the "Residual Interest Holder") and FLATIRON CREDIT COMPANY, INC. ("Flatiron"). WITNESSETH; WHEREAS, pursuant to that certain Revolving Credit and Term Loan Agreement dated as of September 24, 1997 by and among the Lender and FPF (the "Loan Agreement"), the Lender has loaned and will loan to FPF, subject to the conditions thereof, funds for the acquisition by FPF of certain Premium Loans originated by the Originator pursuant to that certain Sale and Assignment Agreement dated as of September 24, 1997 by and between FPF, as purchaser, and the Originator, as seller (the "Sale and Assignment Agreement") and contingent upon certain advances by the Residual Interest Holder under the Residual Purchase and Funding Agreement dated September 24, 1997 (the "Residual Agreement"); and WHEREAS, the Agreement has definitions contained therein to which reference is made to that certain Agreement of Definitions by and among the parties to this Modification dated as of September 24, 1997 (the "Agreement of Definitions"); and WHEREAS, the Loan Agreement, Sale and Assignment Agreement, the Residual Agreement and the Agreement of Definitions and all exhibits to said documents are collectively referred to herein as the "Documents"; and WHEREAS, all capitalized terms used herein and not otherwise defined in the Documents shall have the meaning set forth herein; and WHEREAS, the parties desire to modify and amend the Documents as hereinafter set forth. NOW THEREFORE, in consideration of the covenants, conditions and agreements contained in the Documents, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend the Agreement of Definitions and all other Documents as follows: 1. AMENDED AND RESTATED PROMISSORY NOTE. All recitations and references to the Note in the Agreement of Definitions and in Section 1.05 of the Loan Agreement shall refer to that certain Amended and Restated Promissory Note in the face principal amount of $4,000,000 dated as of the date hereof, executed by FPF in favor of Lender (the "Amended Note"). The Amended Note constitutes an amendment and restatement of the Promissory Note dated September 24, 1997 in the face principal amount of $3,000,000 executed by the FPF in favor of the Lender pursuant to the Loan Agreement (the "Original Note") and supersedes and replaces the Original Note. The Amended Note provides for a reduction in the interest rate as compared to the Original Note. 2. The PURCHASE COMMITMENT FEE as described in Section 2.02 (c) (ii) of the Residual Agreement shall be waived through June 30, 1998. 3. MAXIMUM CREDIT COMMITMENT as described in the Agreement of Definitions shall mean $4,000,000. 4. DOCUMENT RATIFICATION. All terms, conditions and covenants of the Documents, not otherwise modified hereby, are hereby ratified and confirmed and this Agreement, when executed by the parties hereto, shall become a part of the Documents and shall have the same force and effect as if the terms and conditions hereof were originally incorporated in the Documents prior to the execution thereof. [SIGNATURE PAGE FOLLOWS] 2 IN WITNESS WHEREOF, the parties hereto have caused this Modification Agreement to be executed by their respective officers thereunder duly authorized as of the date and year first above written. FLATIRON FUNDING COMPANY, LLC By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- FPF, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- FEDERATED PREMIUM FINANCE, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- FEDERATED FUNDING CORPORATION By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- FLATIRON CREDIT COMPANY, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- 3 EX-10.6 4 EXHIBIT 10.6 SALE AND ASSIGNMENT AGREEMENT BETWEEN FEDERATED PREMIUM FINANCE, INC., AS ORIGINATOR, AND FPF, INC. DATED AS OF SEPTEMBER __, 1997 TABLE OF CONTENTS PAGE ---- ARTICLE I CERTAIN DEFINITIONS.......................................... 2 ARTICLE II PURCHASE, SALE AND CONTRIBUTION OF PREMIUM RECEIVABLES Section 2.01. Purchase and Sale of Eligible Premium Receivables........... 2 Section 2.02. Additional Sales of Premium Receivables..................... 3 Section 2.03. The Acquisition Date Closings............................... 5 Section 2.04. Characterization of Assignment; Financing Statements........ 5 Section 2.05. Ownership of Servicer Documents............................. 6 Section 2.06. Fees........................................................ 6 ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01. Representations and Warranties of the Originator............ 6 ARTICLE IV CONDITIONS Section 4.01. Conditions to Obligation of FPF............................. 7 Section 4.02. Conditions to Obligation of the Originator.................. 9 ARTICLE V COVENANTS OF THE ORIGINATOR Section 5.01. Protection of Right, Title and Interest..................... 9 Section 5.02. Other Liens or Interests.................................... 10 Section 5.03. Principal Executive Office.................................. 10 Section 5.04. Costs and Expenses.......................................... 10 Section 5.05. Notice to Obligors; Notice to Insurance Companies........... 10 Section 5.06. Additional Sales of Premium Receivables..................... 11 1 Section 5.07. No Impairment of Premium Receivables; Payments to Obligors.. 11 Section 5.08. INTENTIONALLY LEFT BLANK.................................... 11 Section 5.09. Activities of Originator.................................... 12 Section 5.10. Agreement Not to Institute Bankruptcy Proceedings........... 12 Section 5.11. Additional Affirmative Covenants............................ 12 ARTICLE VI PROVIDING OF NOTICE.......................................... 14 ARTICLE VII INDEMNIFICATION.............................................. 14 ARTICLE VIII MISCELLANEOUS PROVISIONS Section 8.01. Obligations of Originator................................... 15 Section 8.02. Reacquisition Events........................................ 15 Section 8.03. FPF's Assignment of Reacquired Premium Receivables.......... 16 Section 8.04. Assignment to Trustee; Further Cooperation.................. 16 Section 8.05. Amendment................................................... 17 Section 8.06. Waivers..................................................... 17 Section 8.07. Notices..................................................... 17 Section 8.08. Costs and Expenses.......................................... 17 Section 8.09. Representations............................................. 18 Section 8.10. Third Party Beneficiaries................................... 18 Section 8.11. Lender to Receive Reports................................... 18 Section 8.12. Governing Law............................................... 18 Section 8.13. Jurisdiction................................................ 18 Section 8.14. Waiver of Jury Trial........................................ 19 Section 8.15. Severability of Provisions.................................. 19 Section 8.16. Counterparts................................................ 19 Section 8.17. Captions.................................................... 19 Section 8.18. Legal Holidays.............................................. 19 Section 8.19. Advice from Independent Counsel............................. 19 Section 8.20. Judicial Interpretation..................................... 20 Section 8.21. Confidentiality............................................. 20 EXHIBIT A--Assignment..................................................... A-1 EXHIBIT B--Schedule of Premium Receivables................................ B-1 EXHIBIT C--Form of Notice to Insurers..................................... C-1 EXHIBIT D--Sample Premium Finance Agreement............................... D-1 2 EXHIBIT E--Form of Notice to Obligor...................................... E-1 EXHIBIT F--Representations and Warranties................................. F-1 3 SALE AND ASSIGNMENT AGREEMENT This SALE AND ASSIGNMENT AGREEMENT is made as of September __, 1997, by and between FEDERATED PREMIUM FINANCE, INC., a Florida corporation having its principal place of business at 735 E. Oakland Park Blvd., Oakland Park, Florida 33334 (the "Originator"), and FPF, INC., a Colorado corporation, having its principal place of business at 1801 California Street, Suite 3920, Denver, Colorado 80202 ("FPF"). WHEREAS, the Originator has (a) originated Premium Receivables to finance payments by Obligors of premiums for the purchase of personal lines insurance policies, and (b) entered into the Premium Finance Agreements which evidence such Premium Receivables; and WHEREAS, in connection with origination of the Premium Receivables, the Originator, in the ordinary course of its business, obtains a security interest arising under statutory authority or otherwise in the unearned premiums, dividends and loss payments with respect to the insurance policies, and also obtains a security interest arising under statutory authority or otherwise in state or industry guaranty funds for the reimbursement of unearned premiums from failed insurance carriers; and WHEREAS, pursuant to the terms of this Agreement, the Originator desires to Sell all of its right, title and interest in, to and under such Premium Receivables to FPF; and WHEREAS, pursuant to the terms of a Revolving Loan Agreement, Flatiron Funding Company, LLC (the "Lender") has set forth the terms pursuant to which it will loan funds to FPF, which loan or loans will be secured by the Premium Receivables acquired by FPF pursuant to this Agreement and pledged and assigned by FPF to the Lender pursuant to such Revolving Loan Agreement; and WHEREAS, pursuant to the terms of this Agreement, FPF and the Originator have set forth the terms pursuant to which (a) the Originator will Sell all of its right, title and interest in, to and under the Premium Receivables identified as described herein to FPF, and (b) during the term of the Revolving Loan Agreement, additional Premium Receivables shall from time to time be Sold by the Originator to FPF; and WHEREAS, pursuant to the Premium Receivable Servicing Agreement, the Originator has agreed to service the Conveyed Property on behalf of FPF, Flatiron, the Lender and the Lender's Funding Source; and WHEREAS, the Lender may from time to time pledge and assign its interests in the Premium Receivables and the other Conveyed Property to the Lender's Funding Source, a trust, trustee or other financing entity. NOW, THEREFORE, in consideration of the foregoing, other good and valuable consideration, and the mutual terms and covenants contained herein, the parties hereto agree as follows: 1 ARTICLE I CERTAIN DEFINITIONS Capitalized terms used but not otherwise defined in this Agreement shall have the meaning set forth in the Agreement of Definitions, dated as of the date hereof, by and among the Originator, FPF, Flatiron, the Residual Interest Holder and the Lender. "AGREEMENT" means this Sale and Assignment Agreement and all amendments hereof and supplements hereto. "STATE" means the State of Florida. ARTICLE II PURCHASE, SALE AND CONTRIBUTION OF PREMIUM RECEIVABLES Section 2.01. PURCHASE AND SALE OF ELIGIBLE PREMIUM RECEIVABLES. On or prior to the Closing Date and on any subsequent Acquisition Date, subject to the terms and conditions of this Agreement, the Originator agrees to Sell to FPF, and FPF agrees to purchase from the Originator, all Eligible Premium Receivables originated and then owned by the Originator; provided, however, there shall be a $5,000 minimum purchase on each Closing Date or subsequent Acquisition Date, as the case may be. The Eligible Premium Receivables to be Sold and purchased hereunder on the Closing Date shall be identified on a Schedule of Premium Receivables attached to an Assignment. For purposes of this Agreement, Endorsement Additions purchased hereunder shall constitute Acquisition Date Premium Receivables on the Acquisition Date immediately following the date of the Endorsement Addition. (a) INITIAL SALE OF ELIGIBLE PREMIUM RECEIVABLES. On or prior to the Closing Date and simultaneously with the transactions contemplated pursuant to the Revolving Loan Agreement, the Residual Agreement and this Agreement, the Originator shall Sell to FPF, without recourse, except as specifically provided herein, a 100% interest in all right, title and interest of the Originator in, to and under the Closing Date Premium Receivables identified on the Schedule of Premium Receivables delivered in connection with such Sale (the "Closing Date Conveyed Property"). The consideration for the Closing Date Premium Receivables shall be the Acquisition Price. (b) CLOSING DATE PREMIUM RECEIVABLES' ACQUISITION PRICE. In consideration for the Closing Date Conveyed Property, FPF shall, on the Closing Date, pay from its own funds or cause the Lender to pay to the Originator the Acquisition Price in such manner as may be agreed to between the Originator and FPF; provided, however, that the Acquisition Price to be paid on the Closing Date by, or on behalf of, FPF to the Originator shall be net of the Residual Advance, which FPF hereby agrees to direct the Residual Interest Holder to pay directly to the Originator pursuant to Section 2.02 of the Residual Agreement unless, at the direction of FPF pursuant to Section 2.02 of the Residual Agreement, such Residual Advance has been paid to FPF for payment to be 2 made to the Originator pursuant to this Section 2.01(b). The Originator acknowledges and agrees that if any funds to be used by FPF to purchase such Closing Date Premium Receivables (i) are to be funded by the Lender, such funds shall be disbursed by the Lender pursuant to Section 1.02 of the Revolving Loan Agreement and/or (ii) are to be funded by the Residual Interest Holder, such funds shall be disbursed by the Residual Interest Holder pursuant to Section 2.02 of the Residual Agreement. The Originator further acknowledges that, notwithstanding the source of funds for the Acquisition Price, all such Sales shall be deemed Sales by the Originator to FPF. (c) SALES OF ELIGIBLE PREMIUM RECEIVABLES DURING LOAN TERM. On each Acquisition Date during the term of the Revolving Loan Agreement, the Originator shall Sell to FPF, without recourse, except as specifically provided herein, and FPF shall purchase from the Originator, a 100% interest in all right, title and interest of the Originator in, to and under the Acquisition Date Premium Receivables identified on a Schedule of Premium Receivables delivered in connection with such Sale (collectively, the "Acquisition Date Conveyed Property"). (d) ACQUISITION DATE PREMIUM RECEIVABLES' ACQUISITION PRICE. In consideration for the Acquisition Date Conveyed Property, upon two Business Days' prior notice given by the Originator to FPF, FPF shall, on each Acquisition Date, pay from its own funds or cause the Lender to pay to the Originator the Acquisition Price in such manner as may be agreed to between the Originator and FPF; provided, however, that the Acquisition Price to be paid on each such Acquisition Date by, or on behalf of, FPF to the Originator shall be net of the Residual Advance, which FPF hereby agrees to direct the Residual Interest Holder to pay directly to the Originator pursuant to Section 2.02 of the Residual Agreement unless, at the direction of FPF pursuant to Section 2.02 of the Residual Agreement, such Residual Advance has been paid to FPF for payment to be made to the Originator pursuant to this Section 2.01(d). The Originator acknowledges and agrees that if any funds to be used by FPF to purchase such Acquisition Date Premium Receivables (i) are to be funded by the Lender, such funds shall be disbursed by the Lender pursuant to Section 1.02 of the Revolving Loan Agreement and/or (ii) are to be funded by the Residual Interest Holder, such funds shall be disbursed by the Residual Interest Holder pursuant to Section 2.02 of the Residual Agreement. The Originator further acknowledges that, notwithstanding the source of funds for the Acquisition Price, all such Sales shall be deemed Sales by the Originator to FPF. Section 2.02. ADDITIONAL SALES OF PREMIUM RECEIVABLES. On or prior to the Closing Date, subject to the terms and conditions of this Agreement, the Originator agrees to Sell to FPF, and FPF agrees to purchase from the Originator, all remaining Premium Receivables originated or acquired and then owned by the Originator or its Affiliates (except (i) those Eligible Premium Receivables to be sold pursuant to Section 2.01 and (ii) any Premium Receivable which, as of the Closing Date, was not originated or acquired in accordance, or does not comply, with all requirements of applicable federal, state and local laws and all regulations thereunder) (the "Additional Premium Receivables"). It is intended that the Additional Premium Receivables to be Sold pursuant to this Section 2.02 will not be Eligible Premium Receivables. Such Additional 3 Premium Receivables to be Sold and purchased hereunder on the Closing Date shall be identified on a Schedule of Premium Receivables attached to an Assignment. For purposes of this Agreement, Endorsement Additions Sold hereunder shall constitute Acquisition Date Premium Receivables on the Acquisition Date immediately following the date of the Endorsement Addition. (a) INITIAL SALE OF ADDITIONAL PREMIUM RECEIVABLES. On or prior to the Closing Date and simultaneously with the transactions contemplated pursuant to the Revolving Loan Agreement and hereunder, the Originator shall Sell to FPF, without recourse, except as specifically provided herein, a 100% interest in all right, title and interest of the Originator in, to and under the Additional Premium Receivables identified on the Schedule of Premium Receivables delivered in connection with such Sale (the "Closing Date Additional Conveyed Property"). (b) CLOSING DATE ADDITIONAL PREMIUM RECEIVABLES' ACQUISITION PRICE. In consideration for the Closing Date Additional Conveyed Property, FPF shall, on the Closing Date, pay from its own funds to the Originator the Acquisition Price in such manner as may be agreed to between the Originator and FPF; provided, however, that the Acquisition Price to be paid on the Closing Date by FPF to the Originator shall be net of the Residual Advance, which FPF hereby agrees to direct the Residual Interest Holder to pay directly to the Originator pursuant to Section 2.02 of the Residual Agreement. The Originator hereby acknowledges and agrees that if any funds to be used by FPF to purchase such Additional Premium Receivables on the Closing Date are to be funded by the Residual Interest Holder, such funds shall be disbursed by the Residual Interest Holder pursuant to Section 2.02 of the Residual Agreement. The Originator further acknowledges that, notwithstanding the source of funds for the Acquisition Price, all such Sales shall be deemed Sales by the Originator to FPF. (c) SALES OF ADDITIONAL PREMIUM RECEIVABLES DURING LOAN TERM. On each Acquisition Date during the term of the Revolving Loan Agreement, the Originator shall Sell to FPF, without recourse, except as specifically provided herein, and FPF shall purchase from the Originator, a 100% interest in all right, title and interest of the Originator in, to and under the Acquisition Date Additional Premium Receivables identified on a Schedule of Premium Receivables delivered in connection with such Sale (collectively, the "Acquisition Date Additional Conveyed Property"). (d) ACQUISITION DATE ADDITIONAL PREMIUM RECEIVABLES' ACQUISITION PRICE. In consideration for the Acquisition Date Additional Conveyed Property, upon two Business Days' prior notice given by the Originator to FPF, FPF shall, on each Acquisition Date, pay from its own funds to the Originator the Acquisition Price in such manner as may be agreed to between the Originator and FPF; provided, however, that the Acquisition Price to be paid on each Acquisition Date by FPF to the Originator shall be net of the Residual Advance, which FPF hereby agrees to direct the Residual Interest Holder to pay directly to the Originator pursuant to Section 2.02 of the Residual Agreement. The Originator hereby acknowledges and agrees that if any funds to be used by FPF to purchase such 4 Additional Premium Receivables on any Acquisition Date are to be funded by the Residual Interest Holder, such funds shall be disbursed by the Residual Interest Holder pursuant to Section 2.02 of the Residual Agreement. The Originator further acknowledges that, notwithstanding the source of funds for the Acquisition Price, all such Sales shall be deemed Sales by the Originator to FPF. Section 2.03. THE ACQUISITION DATE CLOSINGS. The Sale and purchase of the Acquisition Date Premium Receivables on each Acquisition Date during the term of the Revolving Loan Agreement shall take place at the offices of the Originator specified on page 1 hereof or such other location as FPF and the Originator may reasonably agree. Section 2.04. CHARACTERIZATION OF ASSIGNMENT; FINANCING STATEMENTS. (a) The Originator and FPF intend that each purchase and Sale under Section 2.01 and Section 2.02 be treated as a true and absolute Sale of all of the Originator's right, title and interest in, to and under the Premium Receivables identified on the Schedule of Premium Receivables delivered in connection with each such Sale, together with all of the Loan Documents and Servicer Documents, all proceeds of the foregoing and all of the Originator's rights to any payment from the Obligors and any and all rights against any Obligor with respect to such Premium Receivables and other related property and all collateral and guaranties with respect to such Premium Receivables and other related property (collectively, the "Conveyed Property"), and not a transfer intended as a security interest. However, if, notwithstanding such intention, a determination is made by a court with appropriate jurisdiction over the matter that such transfer shall not be treated as a true and absolute Sale, this Agreement shall be deemed to constitute a security agreement and the transactions effected hereby shall be deemed to constitute a secured financing, and the Originator hereby pledges and grants to FPF a first priority Lien on, and security interest in, to and under, all of Originator's right, title and interest in, to and under the Premium Receivables and any other related Conveyed Property as collateral for and as security for all amounts paid and to be paid by FPF to the Originator and any obligations created by or owing to the Originator pursuant to this Agreement. (b) On the Closing Date with respect to the Closing Date Premium Receivables and, only with respect to clause (i) below, on each Acquisition Date with respect to the related Acquisition Date Premium Receivables, (i) the Originator shall record and file, at FPF's sole expense, appropriate UCC-3 termination statements with respect to any previous Liens on the Conveyed Property being Sold hereunder (but not with respect to any UCC-1s filed to perfect the Sale of any Conveyed Property to the Originator or any prior transferor) and (ii) the Originator shall record and file, at FPF's sole expense, a UCC-1 financing statement in each jurisdiction in which required by applicable law, executed by the Originator, as seller or debtor, and naming FPF, as purchaser or secured party, identifying the Conveyed Property as collateral, meeting the requirements of the laws of each such jurisdiction and in such manner as is necessary to perfect the Sale of the Conveyed Property to FPF as of such date. The Originator shall 5 deliver file-stamped copies, or other evidence satisfactory to FPF of such filings, to FPF on the Closing Date or Acquisition Date, as the case may be. Section 2.05. OWNERSHIP OF SERVICER DOCUMENTS. The Originator agrees that if it retains possession of Servicer Documents with respect to its activities as Servicer under the Premium Receivable Servicing Agreement, that such Servicer Documents will remain the property of FPF and will be held in trust by the Originator, as Servicer, for the benefit of FPF hereunder, for the benefit of the Lender pursuant to the Revolving Loan Agreement and for the benefit of the Lender's Funding Source or any other financing Person. Section 2.06. FEES. In consideration of the purchase commitment pursuant to the provisions hereof, the Originator agrees to pay, on behalf of FPF, to the Lender the unpaid balance of the Closing Fee, in satisfaction of Section 1.03(a) of the Revolving Loan Agreement, payable immediately upon the execution of this Agreement by the Originator. The Closing Fee is fully earned and non-refundable as of the date hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01. REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR. (a) The Originator hereby represents and warrants to FPF as of the Closing Date and each subsequent Acquisition Date, each of the representations and warranties contained in Sections 1 and 2 of Exhibit F hereto. (b) The Originator hereby represents and warrants to FPF as of the Closing Date and each subsequent Acquisition Date and, with respect to Eligible Premium Receivables as of any date of determination, each of the representations and warranties contained in (i) Section 3 of Exhibit F hereto as to each of the Eligible Premium Receivable and (ii) Section 4 of Exhibit F hereto as to each of the Additional Premium Receivables, and which is Sold to FPF hereunder on such date, on which FPF relies in accepting such Premium Receivable. (c) The representations and warranties made by the Originator in Section 3.01(a) and (b), subject to Section 8.02 hereof, shall survive the Sale of each such Premium Receivable to FPF, the Grant of each such Premium Receivable to the Lender and the subsequent Grant or pledge to the Lender's Funding Source or other financing Person pursuant to the provisions of the Revolving Loan Agreement. 6 ARTICLE IV CONDITIONS Section 4.01. CONDITIONS TO OBLIGATION OF FPF. The obligation of FPF to purchase the Conveyed Property on the Closing Date or any Acquisition Date is subject to the satisfaction of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties of the Originator hereunder shall be true, correct and complete on the Closing Date or Acquisition Date, as the case may be, with the same effect as if then made, and the Originator shall have performed all obligations to be performed by it hereunder on or prior to the Closing Date or Acquisition Date, as the case may be. (b) NO BREACH OF COVENANTS. As of the Closing Date or Acquisition Date, as the case may be, the Originator shall be in compliance with all covenants made by the Originator hereunder. (c) NO DEFAULTS. As of the Closing Date or Acquisition Date, as the case may be, no Amortization Event has occurred and is continuing. (d) FILES MARKED; FILES AND RECORDS OWNED BY FPF. The Originator shall, at its own expense, on or prior to the Closing Date or Acquisition Date, as the case may be, indicate in its files and its Servicer Documents that the Conveyed Property Sold on such date has been Sold to FPF pursuant to this Agreement, and Granted by FPF to the Lender, and the Originator shall deliver to FPF, and the Lender or its designee on the Closing Date or such Acquisition Date, as the case may be, a Schedule of Premium Receivables certified by the Chairman, the President, the Vice President or the Treasurer of the Originator to be true, correct and complete. Further, the Originator hereby agrees that the Servicer Documents, computer files and other physical records of the Premium Receivables maintained by the Originator as Servicer or subservicer will bear an indication reflecting that the Premium Receivables have been Sold to FPF pursuant to this Agreement, and Granted by FPF to the Lender and its assignees (including, without limitation, the Lender's Funding Source), and that all documents relating thereto held by the Originator as Servicer pursuant to the Servicing Agreement or otherwise are owned by FPF and have been Granted to the Lender. (e) DOCUMENTS TO BE DELIVERED BY THE ORIGINATOR TO FPF ON THE CLOSING DATE AND EACH ACQUISITION DATE. (i) THE ASSIGNMENT. On the Closing Date with respect to the Closing Date Premium Receivables and on each Acquisition Date with respect to the related Acquisition Date Premium Receivables, the Originator shall execute and deliver an Assignment and a Schedule of Premium Receivables with respect to the Conveyed Property being Sold hereunder on such date. (ii) EVIDENCE OF UCC FILINGS. On the Closing Date with respect to the Closing Date Premium Receivables and on each Acquisition Date with respect to the related Acquisition Date Premium Receivables, the Originator shall (A) 7 provide evidence satisfactory to FPF that any previous Liens on the Conveyed Property have been released and (B) deliver to FPF file-stamped copies, or other evidence, satisfactory to FPF of the UCC filings required pursuant to Section 2.04(b) hereof. (iii) LOAN DOCUMENTS. The Lender or its designee, as custodian for FPF, shall retain possession of the Loan Documents, including, without limitation, the original Premium Finance Agreements, evidencing the Premium Receivables being Sold on such date; provided, that all such original Premium Finance Agreements shall be stamped with the Assignment Stamp. (f) SPECIAL CONDITIONS FOR CLOSING DATE. With respect to FPF's obligations to purchase or acquire Premium Receivables on the Closing Date: (i) UCC AND TAX LIEN SEARCH. The delivery to FPF of a UCC and tax lien search of the Originator satisfactory to FPF. (ii) OPINIONS. Receipt by counsel to FPF of such opinions of counsel to the Originator as FPF shall reasonably request, in form and substance satisfactory to FPF. (iii) SECRETARY'S CERTIFICATE. A certificate executed by the Secretary or Assistant Secretary of the Originator, certifying as to the following, which shall be attached to such certificate (A) a copy of the certificate of incorporation or other charter document of the Originator, (B) a copy of the bylaws of the Originator, (C) a copy of the resolutions of the Board of Directors of the Originator authorizing the execution, delivery and performance by the Originator of this Agreement, the Premium Receivable Servicing Agreement and the Agreement of Definitions (collectively, the "Originator Documents") and the transactions contemplated hereunder and thereunder, (D) a copy of each insurance premium finance license held by the Originator together with a certification by the Originator that no other licenses are required to conduct its business in accordance with all applicable laws, rules and regulations, and (E) the names and true signatures of the officers authorized on its behalf to sign the Originator Documents, all in form and substance satisfactory to FPF. (iv) GOOD STANDING CERTIFICATES. A good standing certificate (or its equivalent) for the Originator issued by (A) the Secretary of State of its state of formation, and (B) the Secretary of State of each state in which it does business or is purchasing or servicing Premium Receivables, to the extent that such activities require qualification to do business in such states. (v) PAYMENT OF CLOSING FEE. The Originator shall have paid, on behalf of FPF, to the Lender or its designee, the Closing Fee then due pursuant to Section 2.06. 8 (g) OTHER TRANSACTIONS. The transactions contemplated by (i) the Revolving Loan Agreement with respect to Advances thereunder and (ii) the Residual Agreement with respect to Residual Advances thereunder, shall each have been consummated on the Closing Date or Acquisition Date, as the case may be. (h) Originator shall provide to FPF evidence of Originator's error and omissions insurance coverage in an amount not less than $500,000 with a deductible of not more than $10,000 per occurrence, written by an insurance company and under policy language as may be directed by or approved by FPF, naming both FPF and Lender as a named insured and loss payee. Section 4.02. CONDITIONS TO OBLIGATION OF THE ORIGINATOR. The obligation of the Originator to Sell the Conveyed Property to FPF on the Closing Date and on each Acquisition Date is subject to the satisfaction of all obligations to be performed by FPF hereunder on or prior to the Closing Date or such Acquisition Date, as the case may be. ARTICLE V COVENANTS OF THE ORIGINATOR Section 5.01. PROTECTION OF RIGHT, TITLE AND INTEREST. (a) FILINGS. The Originator shall cause all termination statements, or partial releases, as the case may be, with respect to prior Liens, financing statements and continuation statements and any other necessary documents covering the right, title and interest of FPF, the Lender and the Lender's assignee(s), if any, in, to and under the Conveyed Property to be promptly executed and filed, and at all times to be kept recorded, registered and filed, all in such manner and in such places as may be required by law fully to preserve and protect the right, title and interest of FPF hereunder and the Lender or its assignee(s) under the Revolving Credit and Term Loan Agreement to the Conveyed Property. The Originator shall deliver to FPF or its designee file-stamped, complete copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available but in any event within 30 days following such recordation, registration or filing. FPF shall cooperate with the Originator in connection with the obligations set forth above and shall execute any and all documents reasonably required to fulfill the intent of this Section 5.01(a). (b) CORPORATE CHANGE. At least 30 days prior to the Originator making any change in its name, identity or organizational structure which would make any termination statement, financing statement or continuation statement filed in accordance with Section 5.01(a) seriously misleading within the applicable provisions of the UCC or any title statute, the Originator shall give FPF and the Lender notice of any such change and shall execute and file such termination statements, financing statements or amendments as may be necessary or reasonably required by FPF, the Lender or the 9 Lender's assignee(s) to continue the perfection of the respective interests of FPF, the Lender and the Lender's assignee(s), if any, in the Conveyed Property. Section 5.02. OTHER LIENS OR INTERESTS. Except for the Sale hereunder or as specified herein, the Originator shall not Sell to any other Person, or Grant, incur, assume or suffer to exist any Lien on the Conveyed Property Sold hereunder or on any interest therein, and the Originator shall defend the right, title and interest of FPF and the Lender in, to and under such Conveyed Property against all claims of third parties claiming through or under the Originator. Section 5.03. PRINCIPAL EXECUTIVE OFFICE. The Originator shall maintain, from the date of this Agreement, its principal executive office in the State. The Originator shall not change the location of its sole place of business or principal executive office, or change its name, identity or corporate or other structure, unless (A) it has first given to FPF, the Servicer and the Lender at least 30 days prior written notice of such change and (B) before such change becomes effective, it takes all action required by Section 5.01(b) as a result of such change. Section 5.04. COSTS AND EXPENSES. The Originator agrees to pay all reasonable costs and disbursements in connection with the perfection, as against all third parties, of the Sale to FPF of the Originator's right, title and interest in, to and under the Conveyed Property. Section 5.05. NOTICE TO OBLIGORS; NOTICE TO INSURANCE COMPANIES. (a) The Originator shall at FPF's expense, either (i) send or cause to be sent, within 15 days after the Closing Date or the related Acquisition Date, as the case may be, by first class mail, postage prepaid, written notice to each Obligor, or (ii) provide written notice in the related Premium Finance Agreement, each substantially similar in form and substance to Exhibit E attached hereto, to the effect that the Premium Receivable has been Sold by the Originator to FPF pursuant to this Sale and Assignment Agreement and Granted by FPF to the Lender pursuant to the Revolving Loan Agreement and that all payments with respect to such Premium Receivable are required to be made payable as specified in such notice. Evidence satisfactory to Flatiron shall be delivered to Flatiron, on or before the thirtieth day following the Closing Date or Acquisition Date, as the case may be, indicating that the written notice described in the immediately preceding sentence was timely mailed or delivered to each Obligor. (b) With respect to all Premium Receivables, the Originator shall deliver at FPF's expense or cause to be delivered within 15 days after the Closing Date or Acquisition Date, as the case may be, by first class mail, postage prepaid, written notice substantially in the form of Exhibit C attached hereto to each insurer, that the Originator has provided financing to the Obligor, that the Obligor's Premium Receivable has been Sold by the Originator to FPF, and Granted by FPF to the Lender, and that all payments with respect to such Premium Receivable are required to be paid, on and after the date of receipt of such notice, to the Servicer as specified in such notice. Evidence satisfactory to Flatiron shall be delivered to Flatiron, on or before the thirtieth day following the Closing 10 Date or Acquisition Date, as the case may be, indicating that the written notice described in the immediately preceding sentence was timely mailed to each insurer. (c) The Originator shall promptly respond to reasonable inquiries from FPF or third parties confirming the Sale of the Conveyed Property hereunder and the Grant of the Conveyed Property to the Lender. Section 5.06. ADDITIONAL SALES OF PREMIUM RECEIVABLES. Subject to Availability and the terms of the Revolving Loan Agreement, the Originator shall Sell to FPF and FPF shall purchase subject to the terms and conditions hereof on each Acquisition Date during the term of the Revolving Loan Agreement, all Premium Receivables originated or acquired and then owned by the Originator or its Affiliates except for those Premium Receivables that were not originated or acquired in accordance, or do not comply, with all requirements of applicable federal, state and local laws and all regulations thereunder. Such Sale shall occur within 45 days of origination or acquisition by the Originator or at such later date as may be mutually agreed to, from time to time, by FPF and Originator. This covenant and agreement shall be for the benefit of FPF, the Lender, the Lender's Funding Source and the trustee for the benefit of any investors in any pool of loans containing the loan contemplated by the Revolving Loan Agreement, and any such Person may enforce its legal or equitable rights, remedies or claims hereunder. Section 5.07. NO IMPAIRMENT OF PREMIUM RECEIVABLES; PAYMENTS TO OBLIGORS. (a) The Originator shall not do anything to impair FPF's or the Lender's rights in and to any of the Conveyed Property Sold and purchased hereunder or Granted under the Revolving Loan Agreement. (b) The Originator shall make all payments to any Obligor necessary to prevent such Obligor from offsetting any earlier overpayment to the Originator, as the case may be, against any amounts any such Obligor owes on the Conveyed Property. Section 5.08. INTENTIONALLY LEFT BLANK. Section 5.09. ACTIVITIES OF ORIGINATOR. The Originator and any Affiliate, other than the Residual Interest Holder, thereof shall (i) maintain its books and records and assets separate from the books and records of those of the Residual Interest Holder, (ii) maintain separate bank accounts such that no funds of the Originator or any Affiliate thereof shall be commingled with funds of the Residual Interest Holder, (iii) conduct its businesses in separately defined office space from that of the Residual Interest Holder with separate stationery from that of the Residual Interest Holder, (iv) pay all of its own expenses, (v) observe all statutory formalities, (vi) conduct its operations so as not to be substantively consolidated with any other Person or to have its separate existence disregarded in any state or federal proceeding, and (vii) keep in full effect its existence, rights and franchises as a corporation under the laws of its state of organization and obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of its activities in all material respects. Neither the Originator nor any Affiliate thereof shall guarantee the 11 indebtedness of, or make loans to, the Residual Interest Holder. All audited financial statements of the Originator or any Affiliate thereof that are consolidated with those of the Residual Interest Holder will contain detailed notes clearly stating that (i) all of the Residual Interest Holder's assets are owned by the Residual Interest Holder and not available to satisfy the claims of creditors of any other Person, and (ii) the Residual Interest Holder is a separate Person with creditors who have received ownership and/or security interests in the Residual Interest Holder's assets. The Originator and any Affiliate thereof shall maintain arm's length relationships with the Residual Interest Holder. Neither the Originator nor any Affiliate thereof shall hold itself out to be responsible for the debts of the Residual Interest Holder or the decisions or actions respecting the daily business and affairs of the Residual Interest Holder. Section 5.10. AGREEMENT NOT TO INSTITUTE BANKRUPTCY PROCEEDINGS. The Originator shall not voluntarily institute any proceedings to adjudicate FPF, the Lender or the Residual Interest Holder bankrupt or insolvent, consent to the institution of bankruptcy or insolvency proceedings against FPF, the Lender or the Residual Interest Holder, file a petition seeking or consenting to reorganization or relief under any applicable federal or state law relating to bankruptcy, consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of FPF, the Lender, the Residual Interest Holder or a substantial part of its or their property or admit its or their inability to pay its or their debts generally as they become due or authorize any of the foregoing to be done or taken on behalf of FPF, the Lender or the Residual Interest Holder. Section 5.11. ADDITIONAL AFFIRMATIVE COVENANTS. (a) COMPLIANCE WITH LAWS, ETC. The Originator shall comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent contested in good faith. (b) TANGIBLE NET WORTH AND CAPITAL ADEQUACY/NO OTHER INDEBTEDNESS. The Originator shall maintain in common or preferred equity or a combination equity and unsecured subordinated debt (the "Subordinated Debt"), not less than that amount which is equal to the greater of (i) 7.5% of the principal balance of all Premium Receivables purchased by FPF hereunder, or (ii) the total of 100% of the outstanding balance of all Premium Receivables purchased by FPF hereunder that are not Eligible Premium Receivables. The terms and conditions of any Subordinated Debt shall be satisfactory to FPF and Lender in their sole discretion and any Subordinated Debt lender shall have entered into a subordination and standby agreement with FPF containing terms and conditions satisfactory to FPF. For purposes of this Section 5.11(b), tangible equity means stockholders equity less intercompany or Affiliate receivables. (c) REPORTING REQUIREMENTS. The Originator shall furnish to FPF and to the Lender or its designee: 12 (i) within 45 days after the end of each fiscal quarter of the Originator (commencing with the quarter ending June 30, 1997), an unaudited balance sheet and income statement (prepared in accordance with GAAP without accompanying notes) for the Originator and its subsidiaries covering the preceding quarter, in each case certified by a principal financial officer of the Originator to be true, accurate and complete copies of such financial statements; (ii) on the earlier of (A) fifteen days after delivery by an Independent Public Accountant, if any, to the Originator or (B) March 15 of each year beginning March 15, 1998 a balance sheet and income statement (prepared in accordance with GAAP) for the Originator and its subsidiaries covering such preceding fiscal year prepared by the Originator or its accountants, in each case certified by a principal financial officer of the Originator to be true, accurate and complete copies of such financial statements; (iii) promptly after the filing or receiving thereof, copies of all reports and notices, if any, which the Originator or any subsidiary files under ERISA with the Internal Revenue Service or PBGC or the U.S. Department of Labor or which the Originator or any subsidiary receives from any such Person; (iv) promptly after filing thereof, copies of all federal and state tax returns filed by, or on behalf of, the Originator; and (v) such other information respecting the condition or operations, financial or otherwise, of the Originator or any of its subsidiaries as FPF may from time to time reasonably request. (d) REPORT ON PROCEEDINGS. Promptly upon (but in no event more than five Business Days following) the Originator becoming aware of: (i) any pending investigation of the Originator, any of its Affiliates or their respective employees, including, without limitation, the Residual Interest Holder, by any governmental authority or agency; (ii) any court or administrative proceeding which involves the possibility of materially and adversely affecting the properties, business, prospects, profits, management, financial position, results of operation or general condition of the Originator or any of its Affiliates; or (iii) an event or development (including, without limitation, a change in any relevant law or regulation) which could have a material adverse impact on the properties, business, prospects, profits, management, financial position, results of operations or general condition of the Originator or any of its Affiliates, including, without limitation, the Residual Interest Holder; such information shall be provided by the Originator to FPF. 13 (e) CHANGE IN CONTROL. The Originator shall provide prompt written notice to FPF if (i) more than ten percent (10%) of the ownership interest in the Originator is changed after the Closing Date, (ii) any Person which is a corporation, partnership, trust or other entity owning more than ten percent (10%) interest in the Originator is dissolved or liquidated or merged with or into any other Person or for any period of more than 10 days ceases to exist in its present form and (where applicable) in good standing and duly qualified under the laws of the jurisdiction of its incorporation or formation and any jurisdiction in which such standing or qualification is necessary or advisable in connection with the conduct of business or (iii) the Originator commences a sale of all or substantially all of its assets, except for the Sale of the Conveyed Property by the Originator to FPF under this Agreement. (f) CAPITAL EXPENDITURES/OTHER INDEBTEDNESS. The Originator agrees not to incur any other indebtedness after the Closing Date without the prior written consent of FPF; provided, however, this prohibition shall not apply to the 21st Century Company or its Affiliates. Notwithstanding the above prohibition, if (i) Originator is in compliance with its obligations under the Borrowing Documents and (ii) Flatiron denies a written request by Originator to increase the Maximum Credit Commitment to $5,000,000, then FPF shall not unreasonably withhold their consent to Originator incurring additional indebtedness so long as FPF's and Lender's interests under any of the Borrowing Documents are not impaired thereby and so long as FPF continues to enjoy a first priority interest in all of Originator's Premium Receivables. (g) MAINTENANCE OF EXISTENCE. The Originator shall not dissolve or liquidate in whole or in part. ARTICLE VI PROVIDING OF NOTICE The Originator, upon learning of any failure on the part of the Originator or FPF to observe or perform in any material respect any covenant, representation or warranty of the Originator or FPF set forth in this Agreement, the Revolving Loan Agreement, the Residual Agreement or the Premium Receivable Servicing Agreement, as applicable, shall promptly notify FPF and the Lender of such failure. ARTICLE VII INDEMNIFICATION (a) The Originator shall indemnify FPF, the Lender, its assignees (including, without limitation, the Lender's Funding Source) and all of their respective officers, directors, employees, agents and any trustee having an interest in the Conveyed Property 14 (collectively, the "Originator Indemnified Parties") for any loss, cost, liability or expense as a result of any material breach of any of its representations and warranties contained herein or arising from the fraudulent acts of Originator. These indemnity obligations shall be in addition to any obligation that the Originator may otherwise have. (b) The Originator hereby agrees to indemnify each of the Originator Indemnified Parties for, and to hold each of them harmless against, any loss, cost, liability or expense incurred without negligence or bad faith on such Originator Indemnified Party's part, arising out of, or in connection with, the Originator's failure to carry out its duties under this Agreement or as a result of its fraudulent acts and for breach of any representation or warranty made by the Originator hereunder or arising from the fraudulent acts of Originator, including, without limitation, the costs and expenses of defending itself against any claim in connection therewith. (c) The parties agree that the Originator Indemnified Parties, as a group, shall be entitled to counsel separate from the Originator to the extent the Originator's interests are adverse in any manner to the interests of the Originator Indemnified Parties or to the extent that the Originator Indemnified Parties have defenses available to it that are not available to the Originator. (d) Such payment obligations and indemnification shall survive the termination of this Agreement and the Revolving Loan Agreement and payment of all obligations thereunder. ARTICLE VIII MISCELLANEOUS PROVISIONS Section 8.01. OBLIGATIONS OF ORIGINATOR. The obligations of the Originator under this Agreement shall not be affected by reason of any invalidity, illegality or irregularity of any Premium Receivable or Conveyed Property. Section 8.02. REACQUISITION EVENTS. (a) The Originator hereby covenants and agrees to deliver to FPF, the Residual Interest Holder and the Lender prompt written notice of the occurrence of a breach of any of the Originator's representations and warranties contained in Section 3 of Exhibit F hereof with respect to any Eligible Premium Receivable Sold hereunder which materially adversely affects the interests of FPF, the Lender or the holder of any interest in any such Premium Receivable and which is not cured within five Business Days of discovery or receipt of notice thereof (any such breach, which has not been cured within such five-day cure period, in accordance with this Section 8.02 shall constitute a "Reacquisition Event"). Immediately upon the occurrence of any Reacquisition Event, FPF shall, upon notice by FPF to the Originator and the Residual Interest Holder, deem the related Premium Receivable as not being an Eligible Premium Receivable and shall require the Originator to repurchase such Premium Receivable and the other Conveyed 15 Property related thereto at the Reacquisition Amount, unless, so long as the related Premium Receivable at the time of such Reacquisition Event was originated or acquired in accordance, and complied, with all requirements of applicable federal, state and local laws and all regulations thereunder, the Residual Interest Holder elects to make a Supplemental Residual Advance pursuant to the Residual Agreement. In the event that a Supplemental Residual Advance is made hereunder, the related Premium Receivable shall thereafter be deemed an Additional Premium Receivable for purposes of this Agreement. In connection with the foregoing, FPF shall require (i) the Originator to remit any such Reacquisition Amount or (ii) the Residual Interest Holder to remit any such Supplemental Residual Advance, as the case may be, to the Servicer not later than five Business Days after the occurrence of such Reacquisition Event; provided, however, that, in the event that the Originator is to repurchase such Residual Advance, FPF may instead deduct the Reacquisition Amount from the Acquisition Price payable to the Originator on any Acquisition Date occurring within five Business Days after the occurrence of a Reacquisition Event. The reacquisition obligation of the Originator pursuant to this Section 8.02 shall be a full recourse obligation of the Originator. (b) 21st Century Holding Corp. as an Affiliate of Originator, hereby agrees to repurchase (i) the Premium Receivables referred to in Section 8.02(a) upon the failure of (A) the Originator to do so or (B) the Residual Interest Holder to elect to make a Supplemental Residual Advance, each as provided therein, and (ii) any Premium Receivables originated by the Originator in a fraudulent manner. Edward J. Lawson, Michele V. Lawson and Ronald A. Raymond hereby jointly and severally agree that, only if 21st Century Holding Corp. at any time ceases to own 100% of the ownership interest in Originator or otherwise has become insolvent, commenced any bankruptcy proceedings, had a receiver appointed over any of its properties or is generally not paying its debts as the same become due and payable, then they shall be obligated to repurchase (i) the Premium Receivables referred to in Section 8.02(a) upon the failure of (A) the Originator to do so or (B) the Residual Interest Holder to elect to make a Supplemental Residual Advance, each as provided therein, and (ii) any Premium Receivables originated by the Originator in a fraudulent manner. Section 8.03. FPF'S ASSIGNMENT OF REACQUIRED PREMIUM RECEIVABLES. With respect to all Reacquired Premium Receivables, FPF shall assign and shall cause the Lender to assign, without recourse, except as specified herein, representation or warranty, to the Originator all of FPF's and the Lender's right, title and interest in, to and under such Reacquired Premium Receivables, and all security and documents relating thereto. Section 8.04. ASSIGNMENT TO TRUSTEE; FURTHER COOPERATION. The Originator and FPF acknowledge that all or a portion of FPF's right, title and interest in the Conveyed Property and this Agreement may be Granted or assigned by FPF to the Lender and by the Lender to any designee of the Lender, including, without limitation, the Lender's Funding Source, or to a financing Person or a trustee, for the benefit of investors acquiring an interest in the Conveyed Property. The Originator and FPF consent to such Grant by the Lender or any designee of the Lender to the Lender's Funding Source or any such Person or trustee and agree that the Lender's 16 Funding Source or any such Person or trustee, for the benefit of such investors, or such investors shall be entitled to enforce the terms of this Agreement and the rights, benefits and responsibilities of FPF and the Lender hereunder directly against the Originator, whether or not a Residual Agreement Default or an Amortization Event or an Event of Servicing Default shall have occurred, and that each of the representations, warranties and agreements contained in this Agreement and the rights of FPF created hereunder are intended for the benefit of such designee, Person, trustee and investors. Upon notice having been given to the Originator or FPF by the Lender of its intention to pledge, assign, grant or sell its interest in any advance under the Revolving Loan Agreement, the Originator agrees, at its expense, to cooperate and provide such documentation and certificates as the Lender may reasonably request with respect to such pledge, assignment, grant or sale consistent with the indemnification, covenants, representations and warranties contained herein. Section 8.05. AMENDMENT. This Agreement may be amended from time to time by a written amendment duly executed and delivered by the Originator and FPF with the prior written consent of the Lender or the Lender's designees, as the case may be, and no waiver of any of the terms hereof shall be effective unless it is in writing and signed by the party or parties whose rights are being waived and the Lender or the Lender's designee, as the case may be. Section 8.06. WAIVERS. No failure or delay on the part of FPF, the Lender or any designee of the Lender in exercising any power, right or remedy under this Agreement or any other Borrowing Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy; provided, however, if FPF, Lender or its designee has knowingly and consistently waived any right or remedy under this Agreement as to any act of omission made by Originator for a period of twelve months or more, then such entity may not claim that such act or omission constitutes a default under this Agreement entitling FPF, Lender or such designee to exercise the right or remedy that would otherwise have been available under this Agreement. No such waiver shall extend to any subsequent or other default or impair any rights consequent thereon, except to the extent expressly so waived. Each of the rights, powers and remedies described in this Agreement and the other Borrowing Documents is cumulative and not exclusive of, and shall not prejudice, any other right, power or remedy provided in this Agreement, the other Borrowing Documents or by law. Each such right, power and remedy may be exercised from time to time as deemed necessary by FPF, the Lender or the Lender's assignee(s), as applicable, and in such order and manner as such applicable party may determine. The Originator hereby acknowledges and agrees that, with respect to a violation or breach by the Originator of any representation, warranty, covenant or other term or provision of this Agreement or any of the other Borrowing Documents to which it is a party, it shall be the Originator's obligation to prepare and obtain a written waiver for such breaches or violations from FPF. FPF may grant or deny any such requested waiver in its sole and absolute discretion. At no time may the Originator infer a course of dealing among the parties that would negate the requirement to obtain a written waiver from FPF. 17 Section 8.07. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered personally or mailed by first-class registered or certified mail, postage prepaid, or by telephonic facsimile transmission, electronic mail and overnight delivery service, postage prepaid, to the parties to this Agreement; provided, that notices shall be effective upon receipt, and in any case addressed as provided in the first paragraph of this Agreement or in the Revolving Loan Agreement. Section 8.08. COSTS AND EXPENSES. The Originator shall pay all expenses incident to the performance of its obligations under this Agreement and the Originator agrees to pay all reasonable out-of-pocket costs and expenses of FPF and the Lender, including fees and expenses of counsel, in connection with the perfection as against third parties of the Sale to FPF of the Originator's right, title and interest in, to and under the Conveyed Property, and the enforcement of any obligation of the Originator hereunder and of the Grant of the Conveyed Property to the Lender. Section 8.09. REPRESENTATIONS. The respective agreements, representations, warranties and other statements by the Originator and FPF set forth in or made pursuant to this Agreement shall remain in full force and effect and will survive the Closing Date or Acquisition Date, as the case may be. Section 8.10. THIRD PARTY BENEFICIARIES. This Agreement shall inure to the benefit of the Lender and, after the Lender's assignment thereof, each assignee (including, without limitation, the Lender's Funding Source), designee, trustee and each investor acquiring an interest in any advance made under the Revolving Loan Agreement and any trustee with respect thereto and their respective successors and assigns. Without limiting the generality of the foregoing, all representations, covenants and agreements in this Agreement which expressly confer rights upon the Lender or FPF shall be for the benefit of and run directly to each assignee, designee, investor and trustee, and the Lender, each such investor, trustee, assignee or designee shall be entitled to rely on and enforce such representations, covenants and agreements to the same extent as if it were a party hereto. Section 8.11. LENDER TO RECEIVE REPORTS. Copies of all reports and notices to be provided hereunder shall be simultaneously sent to the Lender and its designee(s) at such address(es) as the Lender may designate. Section 8.12. GOVERNING LAW. THIS AGREEMENT AND THE ASSIGNMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF COLORADO WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS. Section 8.13. JURISDICTION. THE PARTIES HERETO HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF COLORADO AND THE UNITED STATES DISTRICT COURT OF COLORADO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY ASSIGNMENT AND THE PARTIES HEREBY 18 IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS. THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING AND IRREVOCABLY CONSENT TO THE SERVICE OF ANY SUMMONS AND COMPLAINT AND ANY OTHER PROCESS BY THE MAILING OF COPIES OF SUCH PROCESS TO THEM AT THEIR RESPECTIVE ADDRESSES AS SPECIFIED IN SECTION 8.07. THE PARTIES HEREBY AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION 8.13 SHALL AFFECT THE RIGHT OF FPF TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT OR ANY ASSIGNMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. Section 8.14. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY ASSIGNMENT. Section 8.15. SEVERABILITY OF PROVISIONS. Any part, provision, agreement, representation, warranty or covenant of this Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties waive any provision of law which prohibits or renders void or unenforceable any provision hereof. If the invalidity of any part, provision, agreement, representation, warranty or covenant of this Agreement shall deprive any party of the economic benefit intended to be conferred by this Agreement, the parties shall negotiate in good faith to develop a structure the economic effect of which is as nearly as possible the same as the economic effect of the transactions contemplated hereunder without regard to such invalidity. Section 8.16. COUNTERPARTS. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 8.17. CAPTIONS. The article, paragraph and other headings contained in this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 19 Section 8.18. LEGAL HOLIDAYS. In the case where the date on which any action required to be taken, document required to be delivered or payment required to be made is not a Business Day in New York, New York or Denver, Colorado, such action, delivery or payment need not be made on that date, but may be made on the next succeeding Business Day. Section 8.19. ADVICE FROM INDEPENDENT COUNSEL. The parties understand that this Agreement is a legally binding agreement that may affect such party's rights. Each party represents to the other that it has received legal advice from counsel of its choice regarding the meaning and legal significance of this Agreement and that it is satisfied with its legal counsel and the advice received from it. Section 8.20. JUDICIAL INTERPRETATION. Should any provision of this Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any Person by reason of the rule of construction that a document is to be construed more strictly against the Person who itself or through its agent prepared the same, it being agreed that each party has participated in the preparation of this Agreement. Section 8.21. CONFIDENTIALITY. FPF and Flatiron have provided and may from time to time in the future provide the Originator with certain Flatiron Information. In consideration for being furnished with the Flatiron Information, the Originator agrees that the Flatiron Information shall be kept confidential by the Originator and shall not, without Flatiron's or FPF's prior written consent, be disclosed or used by the Originator, in any manner whatsoever, in whole or in part, and shall not be used or disclosed by the Originator other than in connection with the transactions contemplated under the Borrowing Documents. Notwithstanding the foregoing, nothing herein shall prohibit the Originator from disclosing the Flatiron Information if required by law or regulation or to any of its agents, Affiliates, employees, officers, directors, attorneys, accountants or advisors; provided, that the Originator shall use its best efforts to cause each such recipient to keep such Flatiron Information confidential. (SIGNATURE PAGE FOLLOWS) 20 IN WITNESS WHEREOF, the parties hereto have caused this Sale and Assignment Agreement to be executed by their respective officers thereunto duly authorized as of the date and year first above written. FEDERATED PREMIUM FINANCE, INC. FPF, INC. Bruce I. Lundy, Executive Vice President Agreed to with respect to Section 8.02(b): By _______________________ Edward J. Lawson By _______________________ Michele V. Lawson By _______________________ Ronald A. Raymond 21st CENTURY HOLDING CORP. By _______________________ Name: ____________________ Title: ___________________ 21 EXHIBIT A ASSIGNMENT For value received, in accordance with the Sale and Assignment Agreement dated as of September __, 1997 (the "Agreement") by and between the undersigned (the "Originator") and FPF, Inc. ("FPF"), the undersigned does hereby Sell unto FPF, without recourse, except as may otherwise expressly be provided in the Agreement, all right, title and interest of the undersigned in, to and under the Premium Receivables identified on the Schedule of Premium Receivables attached hereto as Exhibit B. This Assignment is made pursuant to and upon the representations, warranties and agreements on the part of the undersigned contained in the Agreement, each of which the undersigned hereby restates and reaffirms, and is to be governed by the Agreement. The undersigned hereby certifies that to his actual knowledge after reasonable inquiry (a) the Schedule of Premium Receivables attached hereto as Exhibit B is true, correct and complete as of the date hereof and (b) all conditions precedent in accordance with Section 4.01 of the Agreement have been satisfied as of the date hereof. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Agreement. IN WITNESS WHEREOF, the undersigned has caused this Assignment to be duly executed as of September __, 1997. FEDERATED PREMIUM FINANCE, INC. 1
EXHIBIT B SCHEDULE OF PREMIUM RECEIVABLES [CLOSING DATE] [ACQUISITION DATE] , 199 INSURANCE CUT-OFF NAME AND POLICY ENDORSEMENT DATE ORIGINAL CURRENT LOAN ADDRESS OF INSURANCE INSURANCE MATURITY ADDITIONS PRINCIPAL PRINCIPAL PRINCIPAL NUMBER OBLIGOR COMPANY POLICY NUMBER DATE Y/N BALANCE BALANCE BALANCE ------ ------- ------- ------------- ---- --- ------- ------- ------- Page 1 of 2
1
AMOUNT OF AMOUNT OF PREMIUM AMOUNT OF DRAFT LOAN RETURN PREMIUM LENDER'S CURRENT SCHEDULED NEXT PAYMENT RECEIVABLE TO INSURANCE DRAFT DATE OF NUMBER PARITY ADVANCE APR PAYMENT DUE DATE MATURITY DATE COMPANY NUMBER DRAFT - ------ ------ ------- --- ------- -------- ------------- ------- ------ ----- Page 2 of 2 NOTICE SENT TO INSURANCE NOTICE SENT TO COMPANY Y/N OBLIGOR Y/N ----------- ----------- Page 2 of 2
2 EXHIBIT C FORM OF NOTICE TO INSURERS [Co Name] [Co Address] [Co City], [Co State] [Co Zip] [Date of Sale] To whom it may concern: WE ARE PROVIDING THE FOLLOWING NOTICE TO YOU FOR INFORMATIONAL PURPOSES ONLY. IT IS IMPORTANT FOR YOU TO REALIZE THAT THIS NOTICE DOES NOT AFFECT THE INSURANCE COVERAGE YOUR COMPANY PROVIDES IN ANY WAY. IT IS SOLELY TO NOTIFY YOU THAT FEDERATED PREMIUM FINANCE, INC. ("FEDERATED") THE PREMIUM FINANCE COMPANY WHICH FINANCES A PORTION OF YOUR INSUREDS' PREMIUMS, HAS SOLD CERTAIN PREMIUM FINANCE LOANS TO A THIRD PARTY WHO HAS OBTAINED A CORPORATE LOAN FROM FLATIRON FUNDING COMPANY, LLC ("FFC"), AND THE RELATED LOAN DOCUMENTS REQUIRE THAT WE NOTIFY YOU OF THAT FACT. You are hereby notified that Federated has provided premium financing to each insured named on the attached list of insureds with corresponding policy number (each a "Policy") and contract pursuant to a premium finance agreement (the "Premium Finance Agreement") between Federated and such insured. As of the date set forth above, Federated will have absolutely sold, assigned, transferred and conveyed all of its right, title and interest in, to and under each Premium Finance Agreement and its rights thereunder and all of its rights and interests under the corresponding Policy and payments of any kind made under the Policy to FPF, Inc. ("FPF"), which will pledge the Premium Finance Agreement and its rights thereunder and all of its rights and interests under the corresponding Policy and payments of any kind made under the Policy to Norwest Bank Colorado, N.A., as trustee on behalf of FFC, and FFC will pledge the Premium Finance Agreement and its rights thereunder and all of its rights and interests under the corresponding Policy and payments of any kind made under the Policy to Norwest Bank Colorado, N.A, as trustee or custodian under the applicable trust or custodial agreement (the "Trustee"). Federated will continue to service the Premium Finance Agreement on behalf of FPF, FFC and the Trustee, as their interests may appear, until further notice. All inquiries regarding this notice may be made in writing to: Flatiron Credit Company, Inc., P.O. Box 46166, Denver, Colorado 80202. [Name] 1 EXHIBIT D SAMPLE PREMIUM FINANCE AGREEMENT 1 EXHIBIT E FORM OF NOTICE TO OBLIGOR (EITHER BY LETTER OR BY INCLUSION OF PARAGRAPH NOTICE IN PREMIUM FINANCE AGREEMENT) - -------------------------------------------------------------------------------- THIS IS A NOTICE, FOR INFORMATIONAL PURPOSES ONLY. DO NOT MAKE ANY CHANGES TO YOUR PAYMENT PROCESS OR PAYMENT AMOUNTS. ESTO ES SOLAMENTE UN AVISO, PARA INFORMACION UNICAMENTE, POR FAVOR, NO COMBIEN EL MODO DE PROCESO O PAGO DE CANTIDAD DE DINERO. - -------------------------------------------------------------------------------- [Date] [Name] [Address] [City], [State] [Zip] Re: Insurance Policy Number: [CONTRACT] Dear Insured: FEDERATED PREMIUM FINANCE, INC. ("FEDERATED") IS THE COMPANY WHICH FINANCED YOUR INSURANCE PREMIUM(S). FEDERATED IS PROVIDING THE FOLLOWING NOTICE TO YOU FOR INFORMATIONAL PURPOSES ONLY. THE NOTICE IS SIMPLY TO LET YOU KNOW THAT FEDERATED PREMIUM FINANCE, INC. HAS SOLD THE INTEREST IN YOUR PREMIUM LOAN TO A THIRD PARTY WHO HAS OBTAINED A CORPORATE LOAN. WE ARE REQUIRED TO NOTIFY YOU OF THAT FACT. IT IS VERY IMPORTANT FOR YOU TO REALIZE THAT: 1. FEDERATED PREMIUM FINANCE, INC. WILL CONTINUE TO SERVICE YOUR PREMIUM LOAN ON BEHALF ON THE FINANCE COMPANY (AS DEFINED BELOW) AND THE TRUSTEE (AS DEFINED BELOW). 2. THIS NOTICE DOES NOT AFFECT YOUR INSURANCE COVERAGE IN ANY WAY. 3. YOU SHOULD CONTINUE MAKING YOUR MONTHLY PAYMENTS IN THE SAME AMOUNTS, USING YOUR CURRENT COUPONS, AND MAILING THEM TO THE SAME ADDRESS YOU HAVE USED IN THE PAST. 4. THE TERMS OF YOUR PREMIUM FINANCE AGREEMENT DO NOT CHANGE IN ANY WAY AS A RESULT OF THIS NOTICE. You are hereby notified that Federated Premium Finance, Inc. ("Federated") has sold the entire interest in the above-referenced premium finance agreement (the "Loan") and all of its rights and interests under the corresponding insurance policy (the "Policy") and payments of any kind made under the Policy to FPF, Inc. (the "Finance Company"), and that concurrently with such sale, the Finance Company has pledged the Loan and such rights and interests of Federated in the Policy and payments of any kind made under the Policy to Norwest Bank Colorado, N.A., as trustee (the "Trustee"), as security for a loan. Please continue to direct all payments to: Federated Premium Finance, Inc. 735 E. Oakland Park Blvd., Oakland Park, Florida 33334. Any 1 inquiries regarding this notice may be made in writing to: Flatiron Credit Company, Inc., P.O. Box 46166, Denver, Colorado 80202. Federated Premium Finance, Inc. Mr. Ted Lawson, President - -------------------------------------------------------------------------------- THIS IS A NOTICE ONLY, FOR INFORMATIONAL PURPOSES ONLY. DO NOT MAKE ANY CHANGES TO YOUR PAYMENT PROCESS OR PAYMENT AMOUNTS. - -------------------------------------------------------------------------------- 2 EXHIBIT F REPRESENTATIONS AND WARRANTIES Section 1. GENERAL REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR WITH RESPECT TO SECTION 3.01(A) OF THE SALE AND ASSIGNMENT AGREEMENT. (a) ORGANIZATION, ETC. The Originator is duly organized and is validly existing as a corporation in good standing under the laws of the state of its organization with full power and authority to execute and deliver, to the extent that the Originator is a party thereto, the Borrowing Documents and to perform the terms and provisions thereof. (b) DUE QUALIFICATION. The Originator is duly qualified to do business as a foreign business entity in good standing, and has obtained all required licenses and approvals, if any, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualifications (except those jurisdictions in which failure to be so qualified would not have an adverse effect on the business or operations of the Originator or any Conveyed Property), and has complied with all federal, state and local laws and regulations in connection with the origination of the Premium Receivables and the Sale thereof under the Sale and Assignment Agreement. (c) DUE AUTHORIZATION. The execution, delivery and performance by the Originator of the Borrowing Documents to which it is a party have been duly authorized by all necessary action of the Originator, do not and will not conflict with any provision of its constituent documents, and do not and will not conflict with or result in a breach which would constitute (with or without notice or lapse of time) a default under any agreement binding upon or applicable to it or its property, and to its actual knowledge with reasonable inquiry do not require any approval or consent of any governmental agency or authority and do not conflict with any law or governmental regulation or court decree applicable to it or its property. (d) NO LITIGATION. No litigation or administrative proceeding of or before any court, tribunal or governmental body is presently pending, or threatened, against the Originator or its properties or, to the extent that the Originator is a party thereto, with respect to the Borrowing Documents, which, if adversely determined could, in the reasonable opinion of the Originator, have an adverse effect on the transactions contemplated by the Borrowing Documents or on the Originator's ability to perform any of its obligations thereunder. (e) ENFORCEABILITY. The Borrowing Documents to which the Originator is a party constitute valid, legal and binding obligations of the Originator, enforceable against the Originator in accordance with the terms thereof, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of 1 creditor's rights generally and to general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. Section 2. REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR WITH RESPECT TO SECTION 3.01(A) OF THE SALE AND ASSIGNMENT AGREEMENT. (a) POWER AND AUTHORITY. The Originator, without further consent, approval or authorization, has the power and authority to execute and deliver the Borrowing Documents to which it is a party and to carry out their respective terms; the Originator has full power and authority to Sell the Conveyed Property and other property from time to time Sold to FPF under the Sale and Assignment Agreement; and there are no injunctions, writs, restraining orders or any other order of any nature which adversely affects the Originator's performance of the Borrowing Documents, any other related agreement to which the Originator is a party or any transactions contemplated thereby. (b) NO VIOLATION. The consummation of the transactions contemplated by the Borrowing Documents to which the Originator is a party and the fulfillment of the terms thereof do not conflict with, result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of the Originator, or any indenture, agreement or other instrument to which the Originator is a party or by which it or its properties is bound; nor result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than the Sale and Assignment Agreement); nor to the actual knowledge of Originator with reasonable inquiry, violate any applicable laws, rules, regulations or orders regarding the conduct of the Originator's business or the ownership of its properties; nor to the actual knowledge of Originator with reasonable inquiry, violate any law or any order, rule or regulation applicable to the Originator of any court or of any federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Originator or its properties except, in each case, for such violations, conflicts, breaches, Liens and defaults which could not, in the reasonable judgment of the Originator, have an adverse effect on the condition (financial or otherwise) of the Originator, any Conveyed Property or the Originator's obligations under the Borrowing Documents to which it is a party. (c) ABILITY TO PERFORM. There has been no impairment in the ability of Originator to perform its obligations under the Borrowing Documents to which it is a party. (d) NO MATERIAL LIABILITIES. The Originator does not have material liabilities or obligations other than those previously disclosed in writing to FPF. (e) NO MATERIAL MISSTATEMENTS OR OMISSIONS. No information, certificate of an officer or statement furnished in writing or report delivered to FPF or the Lender by 2 the Originator contains any untrue statement of a material fact or omits a material fact necessary to make such information, certificate, statement or report not misleading. There is no fact peculiar to the Originator or any Affiliate of the Originator or, to its actual knowledge after reasonable inquiry, any Premium Receivable or Obligor, which it has not disclosed to FPF in writing which could materially adversely affect the Originator's ability to perform the transactions contemplated by the Borrowing Documents to which the Originator is a party. (f) NO UNPAID TAXES. All tax returns required to be filed by the Originator in any jurisdiction have in fact been filed, and all taxes, assessments, fees, claims and other governmental charges upon it or any subsidiary or upon any of their respective properties, income or franchises (including, without limitation, any taxes required to be paid by the Originator relating to all payroll, FICA, unemployment and other taxes, assessments, fees, claims and other charges relating to the employees of the Originator), shown to be due and payable on such returns have been paid; provided, that the Originator shall not be required to pay or discharge any such tax, assessment, fee, claim or other charge which is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained in accordance with GAAP. To the best of the Originator's knowledge, all such tax returns were true and correct and neither it nor any subsidiary knows of any contemplated or proposed additional tax assessment against it in any material amount or of any basis therefor. (g) ADEQUATE PROVISIONS FOR TAXES. The provisions for taxes on the Originator's books are in accordance with GAAP. (h) ERISA. No contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a lien under Section 302(f) of ERISA and no notice of intent to terminate a Pension Plan has been filed, nor has any Pension Plan been terminated under Section 4041(e) of ERISA, nor has the PBGC instituted proceedings to terminate, or appoint a trustee to administer, a Pension Plan, and no event has occurred or condition exists which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan. (i) SOLVENCY. The fair salable value of the assets on a going concern basis of the Originator and its subsidiaries, on an undivided and a consolidated basis, as of the time of, and after giving effect to, each Sale of the Premium Receivables under the Sale and Assignment Agreement, is in excess of the total amount of their respective liabilities. With respect to the Closing Date and any Acquisition Date, as the case may be, at the close of the immediately preceding fiscal quarter of the Originator, the Originator had a positive net worth. (j) PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the Originator is, and for a period of not less than four months preceding the Closing Date 3 has been, the notice address in the opening paragraph of the Sale and Assignment Agreement. (k) LEGAL NAMES. "Federated Premium Finance, Inc." is the only legal name under which the Originator currently is operating its business. The Originator has not changed its name in the last six (6) years (or such shorter period of time during which the Originator was in existence) and does not have any other trade names, fictitious names, assumed names or "doing business as" names. (l) VALID BUSINESS REASONS; NO FRAUDULENT TRANSFERS. The transactions contemplated by the Sale and Assignment Agreement are in the ordinary course of the Originator's business and the Originator has valid business reasons for selling the related Conveyed Property rather than obtaining a secured loan with the Conveyed Property as collateral. At the time of each Sale: (i) the Originator Sold the related Conveyed Property to FPF without any intent to hinder, delay, or defraud any current or future creditor of the Originator; (ii) the Originator was not insolvent or did not become insolvent as a result of any Sale; (iii) the Originator was not engaged and was not about to engage in any business or transaction for which any property remaining with the Originator would constitute unreasonably small capital or for which the remaining assets of the Originator are unreasonably small in relation to the business of the Originator or the transaction; (iv) the Originator did not intend to incur, and did not believe or reasonably should not have believed, that it would incur, debts beyond its ability to pay as they become due; and (v) the consideration paid by FPF to the Originator for the related Conveyed Property was equivalent to the fair market value of such related Conveyed Property. (m) FINANCIAL STATEMENT DISCLOSURE. The Originator has been advised that from and after the date of each Sale, the financial statements of the Originator will disclose that, under GAAP, on each respective Sale the Originator Sold ownership of the Premium Receivables. (n) OTHER AGREEMENTS. The Originator is not a party to any indenture, loan or credit agreement, lease or other instrument or agreement which is likely to have a material adverse effect on the business, properties, assets, operations or operation, financial or otherwise, of the Originator or the ability of the Originator to perform its obligations under any Borrowing Document to which it is a party. (o) NO MATERIAL ADVERSE CHANGE. No material adverse change has occurred in the business, properties, operating results, prospects, assets, Premium Receivables Portfolio, operations or condition, financial or otherwise, of the Originator from the Closing Date or the immediately preceding Acquisition Date, as the case may be. (p) INTENT. The Sale and Assignment Agreement and all related documents describe each transfer of the Premium Receivables by the Originator to FPF as a Sale and 4 evidence the clear intention by the Originator to effectuate a Sale of such Premium Receivables. (q) CONSIDERATION. The consideration received by the Originator for the Premium Receivables is or will be paid in full to the Originator immediately upon each Sale of the Premium Receivables to FPF, and no provision exists whereby the consideration will be modified after the date of such Sale. (r) CONTROL. After each Sale, the Originator will have relinquished all powers and rights with respect to the Premium Receivables, other than the Servicer's powers and rights as Servicer under the Premium Receivables Servicing Agreement. (s) RECOURSE. Neither FPF nor any other Person has any recourse or right of chargeback to the Originator with respect to the Premium Receivables, other than the repurchase obligation described in paragraph (v) below. (t) REPURCHASES. The Originator has no obligation to repurchase any Premium Receivables except to repurchase a Premium Receivable in the event of a breach of its representations and warranties with respect thereto in the Sale and Assignment Agreement. The representations and warranties of the Originator in the Sale and Assignment Agreement describe the authority of the Originator to sell the Premium Receivables and the characteristics of the Premium Receivables, including those pertaining to the origination and performance of the Premium Receivables before the Sale. They do not include any representation or warranty of collectibility or future performance of the Premium Receivables. (u) SERVICING FEE. The Originator, as Servicer, will act as a servicer of the Premium Receivables under the Premium Receivable Servicing Agreement. Any servicing fee payable to the Servicer will not exceed the normal and customary servicing fee that an unaffiliated third Person would normally expect to receive in connection with servicing premium finance receivables having characteristics similar to the Premium Receivables. (v) SERVICING ARRANGEMENTS. The servicing arrangements among FPF, Flatiron, the Lender and the Servicer are of the type of arrangements standard in the premium finance receivables industry between unaffiliated Persons and do not give the Servicer greater rights, or impose greater obligations or liabilities, with respect to, or any greater interest in, Premium Receivables than those enjoyed by servicers of similar receivables under servicing arrangements negotiated at arm's length between unaffiliated Persons. Section 3. REPRESENTATIONS AND WARRANTIES WITH RESPECT TO SECTION 3.01(B)(I) OF THE SALE AND ASSIGNMENT AGREEMENT. 5 (a) PREMIUM RECEIVABLES. Each Premium Receivable Sold and purchased under the Sale and Assignment Agreement, and on any other date of determination, in order to be an Eligible Premium Receivable shall have all of the following characteristics as of the Closing Date or any Acquisition Date on which such Premium Receivables are Sold and purchased under the Sale and Assignment Agreement, or on any other date of determination as the case may be: (i) Each Premium Receivable represents the genuine, legal, valid and binding payment obligation in writing of the Obligor thereon, enforceable by the holder thereof in accordance with its terms. (ii) Each Premium Receivable has been fully and effectively Sold by the Originator to FPF pursuant to the Sale and Assignment Agreement and (A) vests in FPF a valid, perfected, subsisting and enforceable ownership interest in favor of FPF in such Premium Receivable and (B) in the event that, notwithstanding the Originator's and FPF's contrary intention, a court with appropriate jurisdiction over the matter determines that such transfer is not a Sale, vests in FPF a valid, perfected, subsisting and enforceable first priority security interest in favor of FPF in such Premium Receivable. (iii) Each Premium Finance Agreement contains customary and enforceable provisions such that the rights and remedies of the holder thereof are adequate to enforce the Realization Provisions (and the Lender shall be entitled to enforce all such rights under the Premium Finance Agreement) and no Premium Receivable is subject to any proceedings or investigations pending, or threatened, before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Originator or its properties: (A) asserting the invalidity of such Premium Receivable; (B) seeking to prevent the enforcement of such Premium Receivable; or (C) seeking any determination or ruling that may adversely affect the payment on or enforceability of such Premium Receivable. (iv) Each Premium Receivable was originated in a state where the Originator is licensed (if required to be licensed) to do business as an insurance premium finance company, and the Originator is acting in accordance with, and each Premium Receivable does not (and did not at the time of origination) contravene, any federal, state or local laws, rules or regulations applicable thereto or contract between the Originator and FPF applicable thereto, and no party to any such contract is in contravention of any such law, rule or regulation. (v) Each Premium Receivable was originated in the United States of America by the Originator or purchased by the Originator from another premium finance company in the ordinary course of the Originator's business of financing insurance premiums written through independent insurance agents and brokers or 6 insurance companies directly, in either case, through the application of and consistent with the Originator's standard procedures in a fashion not less stringent taken as a whole than those other Premium Receivables owned by the Originator, and are in conformity with the Originator's underwriting standards. (vi) Each Premium Receivable is payable in U.S. Dollars. (vii) Each Premium Receivable is evidenced by only one written contract, in the form of a Premium Finance Agreement, properly completed and executed without variations, which Premium Finance Agreement has been or will be delivered to the Lender or its agent, with notation of the Sale and subsequent Grant thereof, on or before the Closing Date or Acquisition Date, as the case may be. (viii) Each Premium Receivable provides, according to its original or modified terms, that the amount payable thereunder will be paid in level payments that fully amortize such Premium Receivable by its stated term and which amount will be due in a maximum of ten consecutive equal monthly payments (if financing an annual policy), and a maximum of four consecutive equal monthly payments (if financing a six-month policy) with the first payment due not later than 34 days following the inception date of the related insurance policy. (ix) No Premium Receivable is payable by an Obligor which is the United States or any agency or state thereof or which Obligor is located (within the meaning of the UCC as enacted in the state of origination) in any jurisdiction outside of the United States of America. (x) No Premium Receivable has terms which have been extended or modified other than through Endorsement Additions, the originals of which have been included in the Loan Documents delivered to the Lender or its agent. (xi) No Premium Receivable or related Premium Finance Agreement has been satisfied, cancelled, is more than 45 days past due or is subject to a right of rescission, setoff, counterclaim, subordination, recoupment or defense which has been asserted or threatened with respect to such Premium Receivable, nor have the Realization Provisions securing such Premium Receivable been released from the Lien granted by the Obligor. (xii) No Premium Receivable has any Liens or claims which have been filed or claimed that would be Liens prior to, or equal or subordinate with, the Realization Provisions granted by the Obligor pursuant to such Premium Receivable. (xiii) No Premium Receivable is a Defaulted Premium Receivable. 7 (xiv) Except with respect to assignments or pledges of security interests to lenders with respect to financing obtained by the Originator, which interests has been released prior to the Sale of the Premium Receivables to FPF, no Premium Receivable has been Sold or pledged by the Originator to any Person other than FPF; immediately prior to the Sale contemplated by the Sale and Assignment Agreement, the Originator had good title to such Premium Receivable free and clear of all Liens and, immediately upon the Sale of the Premium Receivables contemplated by the Sale and Assignment Agreement, FPF will have good title to the Premium Receivables, free and clear of all Liens. (xv) As of the Closing Date or the Acquisition Date, as the case may be, the Obligor with respect to each Premium Receivable is not subject to any bankruptcy or insolvency proceeding. (xvi) Each Premium Receivable relates to an insurance policy issued by an Eligible Insurance Company and as evidenced by a policy number, or in the absence of a policy, number, a binder number. (xvii) No Premium Receivable relates to an insurance policy which is deemed fully earned in the case of a claim. (xviii) Each Premium Receivable is evidenced by proof of payment to the insurance agent or the Issuing Insurance Company equal to an amount not less than the original principal amount of such Premium Receivable and any amount remaining due on the related insurance policy to the applicable insurance agent or Issuing Insurance Company has been paid in full by, or on behalf of, the related Obligor. (xix) No Premium Receivable has been originated in, nor is subject to the laws of, any jurisdiction under which the Sale of such Premium Receivable would be unlawful, void or voidable. (b) SCHEDULE OF PREMIUM RECEIVABLES. The information set forth in each Schedule of Premium Receivables is true and correct in all material respects as of the opening of business on the Closing Date or Acquisition Date, as the case may be, and no selection procedures believed to be adverse to FPF or the Lender have been utilized in selecting the Premium Receivables for inclusion therein. (c) TITLE. It is the intention of the Originator that the Sale from the Originator to FPF contemplated by the Sale and Assignment Agreement constitutes a true Sale of the Conveyed Property to FPF and that the Conveyed Property not be part of the Originator's property for any purpose under state or federal law. The Sale and Assignment Agreement constitutes a valid Sale to FPF of all of the Originator's right, title and interest in and to the Conveyed Property. 8 (d) ALL FILINGS MADE. Without in any way limiting the intention of the Originator and FPF to treat all transfers hereunder as Sales, all filings (including, without limitation, UCC filings) necessary in any jurisdiction to give FPF a first priority perfected ownership interest in the Conveyed Property have been made not later than the Closing Date and the respective Acquisition Date, as the case may be, and copies of the filed stamped financing statements shall be delivered to FPF within five Business Days of receipt by the Originator or its agent from the appropriate secretary of state but not later than 30 days after the Closing Date or the Acquisition Date, as the case may be. (e) SALES NOT SUBJECT TO BULK TRANSFER ACT. Each Sale of Conveyed Property by the Originator pursuant to the Sale and Assignment Agreement is not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction. (f) INTENTIONALLY LEFT BLANK (g) FAIR CONSIDERATION. The consideration to be received by the Originator in exchange for each Sale of Conveyed Property (including the right to receive all payments due or to become due thereunder) is fair consideration having value equivalent to or in excess of the value of the assets being Sold by it. Section 4. REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR WITH RESPECT TO SECTION 3.01(B)(II) OF THE SALE AND ASSIGNMENT AGREEMENT. The Originator makes each of the representations and warranties with respect to the Premium Receivables specified in Sections 3(b), 3(c), 3(d), 3(e), 3(f) and 3(g) of this Exhibit F. Section 5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Without limitation of Section 3.01(c) of the Sale and Assignment Agreement, the representations and warranties set forth in this Exhibit F shall survive the date of the respective Borrowing Documents. Upon discovery by the Originator or FPF of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice to the other parties to the Borrowing Documents; provided, however, that failure to give such notice shall not affect the rights of such other parties with respect to such breach. 9 EX-23.2 5 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-----