-----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, AIGL9Nz5TynpJmIgYn2mWlYHaee2HJKlaa6guAqFPN34Z3na4lK+a5rnB4SDDLGs VGGISVU1hMIKvstx/xWLnA== 0001042910-99-000538.txt : 19990511 0001042910-99-000538.hdr.sgml : 19990511 ACCESSION NUMBER: 0001042910-99-000538 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990510 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-25001 FILM NUMBER: 99615307 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 10QSB 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO _________________. Commission file number 0-2500111 21st Century Holding Company ---------------------------- (Exact name of registrant as specified in its charter) FL 65-0248866 -------------------------------------------------------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 4161 N.W. 5th Street, Plantation, FL 33317 ------------------------------------------ (Address of principal executive offices) (Zip Code) 954-581-9993 ------------ (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) CHECK WHETHER THE REGISTRANT (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE: COMMON STOCK PAR VALUE $.01 PER SHARE - 3,390,000 SHARES OUTSTANDING AS OF MAY 7, 1999. 1 21ST CENTURY HOLDING COMPANY INDEX PART I: FINANCIAL INFORMATION PAGE - ----------------------------- ---- ITEM 1: Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and December 31, 1998 (Audited)....................................... 3 Consolidated Statements of Income for the three months ended March 31, 1999 (Unaudited) and 1998 (Unaudited).................................................. 4 Consolidated Cash Flow Statements for the three months ended March 31, 1999 (Unaudited) and 1998 (Unaudited).................................................. 5 Notes to Consolidated Financial Statements................................. 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 9 PART II: OTHER INFORMATION Other Information.......................................................... 13 Signature.................................................................. 14 2 PART I ITEM I. FINANCIAL INFORMATION 21ST CENTURY HOLDING COMPANY CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
MARCH 31, 1999 DECEMBER 31,1998 ASSETS Available for sale at fair value: Investments Fixed maturities $ 14,401,115 $ 14,605,582 Equity securities 2,736,527 2,936,520 Mortgage loan 0 163,164 ------------ ------------ Total investments 17,137,642 17,705,266 ------------ ------------ Cash and cash equivalents 1,257,019 2,250,061 Finance contracts receivable and auto title loans receivable, net of allowances for credit losses of $200,736 and $195,883 respectively 8,392,354 7,093,593 Prepaid reinsurance premiums 2,995,436 2,648,098 Due from reinsurers 1,680,527 1,926,736 Deferred acquisition costs 68,375 89,524 Deferred income taxes 1,070,285 1,085,255 Property, Plant and Equipment net 2,358,660 1,763,254 Other assets 1,145,705 866,335 Goodwill 3,064,358 2,748,281 ------------ ------------ TOTAL ASSETS $ 39,170,361 $ 38,176,403 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 7,227,965 $ 7,603,460 Unearned premiums 9,613,791 8,534,320 Premium deposit 14,139 492,422 Revolving credit outstanding 3,001,563 2,062,948 Bank overdraft 937,976 1,199,941 Unearned commissions 743,613 586,592 Accounts payable and accrued expenses 1,133,523 1,932,950 Notes payable 500,000 500,000 Drafts payable to insurance companies 365,830 295,947 ------------ ------------ TOTAL LIABILITIES $ 23,538,400 $ 23,208,580 ============ ============ Shareholders' equity: Common stock of $.01 par value Authorized 25,000,000 shares issued and outstanding 3,390,000 and 2,100,000 shares, 33,900 33,500 respectively Additional paid in capital 12,739,887 12,460,287 Accumulated other comprehensive income (482,815) (257,227) Retained earnings 3,340,989 2,731,263 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 15,631,961 14,967,823 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 39,170,361 $ 38,176,403 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
THREE MONTHS ENDED MARCH 31, 1999 1998 REVENUES: Gross premiums written 6,061,463 6,108,719 Gross premiums ceded (1,915,380) (1,714,099) ---------- ---------- Net premiums written 4,146,083 4,394,620 Increase in unearned premiums, net of prepaid reinsurance premiums (732,134) (765,633) ---------- ---------- Net premiums earned 3,413,949 3,628,987 Commission income 905,606 404,122 Finance revenue 794,822 289,134 Net investment income 227,885 302,605 Net realized (losses) gains 173,066 318,529 Other income 513,683 371,897 ---------- ---------- Total revenue 6,029,011 5,315,274 ---------- ---------- Expenses: Losses and loss adjustment expenses 1,937,529 2,467,486 Operating and underwriting expenses 1,461,419 969,145 Salaries and wages 1,613,835 831,793 Amortization of deferred acquisition costs (73,257) 50,275 Amortization of goodwill 124,472 51,172 ---------- ---------- Total expenses 5,063,998 4,369,871 ---------- ---------- Income before provision for income tax expense (benefit) 965,013 945,403 Provision for income tax expense 355,287 354,526 ---------- ---------- Net income 609,726 590,877 ========== ========== Net income per share 0.18 0.28 ========== ========== Net income per share- assuming dilution 0.18 0.28 ========== ========== Weighted average number of common shares outstanding 3,390,000 2,100,000 Weighted average number of common shares outstanding 3,390,000 2,100,000 (assuming dilution)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 21ST CENTURY HOLDING COMPANY CONSOLIDATED CASH FLOW STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
THREE MONTHS ENDED MARCH 31, 1999 1998 Cash flow from operating activities: Net income $ 609,726 $ 590,877 ============ ============ Adjustments to reconcile net income to net cash flow used in operating activities: Amortization of investment premiums 395 3,863 Depreciation and amortization 25,706 5,157 Amortization of goodwill 124,473 51,172 Deferred income tax expense 14,970 672,896 Loss (gain) on sale of investment securities (173,066) (318,529) Provision for credit losses 119,852 0 Changes in operating assets and liabilities: Finance contracts receivable and auto title loan receivable (1,418,613) (1,550,541) Prepaid reinsurance premiums (347,338) (340,502) Due from reinsurers 246,209 (172,866) Deferred acquisition costs 21,149 (15,150) Other assets (279,368) (239,185) Unpaid loss and loss adjustment expenses (375,495) 391,548 Unearned premiums 1,079,471 1,106,136 Premium deposit (478,283) (13,898) Revolving credit outstanding 938,615 1,300,744 Unearned commissions 157,021 (14,055) Accounts payable and accrued expenses (799,427) (73,591) Drafts payable to insurance companies 69,883 (131,399) ------------ ------------ Net cash flow (used in) provided by operating activities (464,120) 1,252,677 ------------ ------------ Cash flow from investing activities: Proceeds from sale of investment securities available for sale 7,977,683 14,897,417 Purchases of investment securities available for sale (7,626,141) (14,901,307) Cost of mortgage loan 0 (119,481) Sale of mortgage loan 163,164 9,698 Purchases of property and equipment (621,112) (203,595) Acquisition of agencies (160,551) 0 ------------ ------------ Net cash flow used in investing activities (266,957) (317,268) ------------ ------------ Cash flows from financing activities Bank overdraft (261,965) (730,289) Borrowing from bank 0 11,000 ------------ ------------ Net cash flow used in financing activities (261,965) (719,289) ------------ ------------ Net increase decrease in cash & cash equivalents (993,042) 216,120 Cash & cash equivalents at beginning of year 2,250,061 1,684,451 ------------ ------------ Cash & cash equivalents at end of year $ 1,257,019 $ 1,900,571 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 51,044 $ 54,869 ============ ============ Income taxes $ 950,000 $ 0 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS The accompanying unaudited consolidated financial statements of 21st Century Holding Company (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. These consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of the Company for the year ended December 31, 1998 included in the 1998 Annual Report, Form 10-KSB filing. 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'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 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 stock. 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 aggregate acquisition price was allocated to the portion of the net identifiable assets pertaining to the minority interest based on their fair value. The allocation of the acquisition price to the minority interest's net identifiable assets had an excess of fair value over the new adjusted 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 $995,000. 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. In November 1998, the company consummated an initial public offering (the "IPO") of 1,250,000 shares of its Common Stock at a price of $7.50 per share. Proceeds from the IPO, which were approximately $7.9 million net of underwriting costs and expenses of the offering, have been and are being used for contributions to Federated National's capital, repayment of debt under the Company's credit facility (the "Credit Facility"), the financing of acquisitions, working capital and other general corporate purposes. In December 1998, the Company consummated an asset acquisition of 18 agencies in exchange for $1.1 million in cash and a $500,000 note payable. The aggregate acquisition price was allocated to the net identifiable assets based on their fair value. The allocation of acquisition price to net identifiable assets had an excess of fair value over the new adjusted book basis creating goodwill of approximately $1.4 million. In January 1999, the company consummated an asset acquisition of 2 agencies in exchange for $176,000 in cash and 40,000 shares of common stock. The aggregate acquisition price was allocated to the net identifiable assets based on their fair value. The allocation of acquisition price to net identifiable assets had an excess of fair value over the new adjusted book basis creating goodwill of approximately $456,000. 6 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) (B) 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 income adjusted for the change in net unrealized holding gains (losses) on investments available for sale. The net change in net unrealized holding gains (losses) on investments available for sale was ($225,588) and ($312,764) for three months ended March 31, 1999 and 1998, respectively. Total comprehensive income was $384,138 and $278,113 for the three months ended March 31, 1999 and 1998, respectively. (C) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivatives to be recognized at fair value as either assets or liabilities on the balance sheet. Any gain or loss resulting from changes in such fair value is required to be recognized in earnings, to the extent the derivatives are not effective as hedges. This statement is effective for fiscal years beginning after June 15, 1999, and is effective for interim periods in the initial year of adoption. Adoption of this statement is not expected to have a material impact on the Company's results of operations or financial position. (D) ACCOUNTING CHANGES Effective January 1, 1999, the Company adopted Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", which requires entities to recognize liabilities for insurance related assessments when such assessments are probable and the amount of the assessments can be reasonably estimated. Adoption of this statement did not impact the Company's results of operations of financial position. (3) REVOLVING CREDIT OUTSTANDING On September 24, 1997, the Company, through Federated Premium Finance, Inc. entered into a revolving loan agreement ("Revolving Agreement") with Flatiron Funding Company LLC. Under the Revolving Agreement, the Company can borrow up to the maximum credit commitment of $4.0 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. In January 1999, the maximum credit commitment was increased to $5.0 million and the annual interest rate was changed to the prime rate plus .75 percent. (4) RELATED PARTY TRANSACTIONS In January 1999, the Company purchased two office properties from officers, which have been utilized for agencies' operations. One of the properties had previously been sold to the officers at the same sales price, resulting in no gain or loss to the officer. Consideration for both acquisitions was cash of $442,000 and satisfaction of mortgage loan receivable of $163,000. (5) SEGMENT INFORMATION The Company and its subsidiaries operate principally in two business segments consisting of insurance and financing. The insurance segment consist of underwriting through Federated National, managing general agent through Assurance MGA, claims processing through Superior Adjusting and marketing and distribution through Federated Agency Group. The insurance segment sells primarily nonstandard personal automobile insurance and includes substantially all aspects of the insurance, distribution and claims process. The financing segment consists of premium financing through Federated Premium Finance and auto title loans through Florida State Discount Auto Title Loans. The financing segment provides premium financing to both Federated National's insureds and to third-party insureds and short-term auto title loans and is marketed through the Company's distribution network of Company-owned agencies (Federated Agency Group) and independent agents. 7 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED) (5) SEGMENT INFORMATION (CONTINUED) The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates its business segments based on GAAP pretax operating earnings. Corporate overhead expenses are not allocated to business segments. Operating segments that are not individually reportable are included in the "All Other" category, which includes the operations of 21st Century (holding company). Information regarding components of operations for the three month period ending March 31, 1999 and 1998 follows: 1999 1998 ---- ----- Total Revenue Insurance Segment Earned Premiums 3,413,949 3,628,986 Investment Income 425,905 621,134 Adjusting Income 227,045 214,887 MGA Fee Income 250,677 265,800 Commission Income 1,445,553 724,504 Miscellaneous Income 243,507 24,564 ------------ ------------ Total Insurance Revenue 6,006,636 5,479,875 ============ ============ Financing Segment: Premium Finance Income 685,572 289,134 Title Loan Interest 109,250 0 Investment Income 0 0 Miscellaneous Income 0 0 ------------ ------------ Total Financing Revenues 794,822 289,134 ============ ============ All Other Total All Other 418,420 93,000 ============ ============ Total Operating Segments 7,219,878 5,862,009 Intercompany Eliminations (1,190,867) (546,735) ------------ ------------ Total Revenues $ 6,029,011 $ 5,315,274 ============ ============ Earnings Before Income Taxes Insurance Segment 905,737 937,790 Financing Segment 314,801 111,437 All Other (262,633) (103,824) ------------ ------------ Total Operating Segments 957,905 945,403 Intercompany Eliminations 7,108 0 ------------ ------------ Total Earnings before Income Taxes $ 965,013 $ 945,403 ============ ============ Total Assets Insurance Segment $ 28,201,402 $ 23,629,552 Finance Segment 8,506,007 3,906,534 All Others 5,865,125 1,364,168 ------------ ------------ Total Operating Segments 42,572,534 28,900,254 Intercompany Eliminations (3,403,173) (695,496) ------------ ------------ Total Assets $ 39,170,361 $ 28,204,758 ============ ============ 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 21st Century Holding Company (the "Company") cautions readers that certain important factors may affect the Company's actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this report or which are otherwise made by or on behalf of the Company. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "intend", "could", "would", "estimate", or "continue" or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. Factors which may affect the Company's results include, but are not limited to, risks related to the nature of the Company's business; the limit on the Company's ability to expand due to a consent order entered into with the Florida Department of Insurance reinsurance; dependence on investment income; the adequacy of its liability for loss and loss adjustment expense ("LAE"); regulation; insurance agents; claims experience; limited experience in the insurance industry; competition; ratings by industry services; catastrophe losses; reliance on key personnel and other risks discussed elsewhere in this Report and in the Company's other filing with the Securities and Exchange Commission. OVERVIEW The Company, through its subsidiaries, is engaged in the insurance underwriting, distribution and claims business. Federated National Insurance Company ("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 Finance, Inc. ("Federated Premium") generates revenue from premium financing provided to Company and third party insureds. Assurance Managing General Agents, Inc. ("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. 9 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 GROSS PREMIUMS WRITTEN. Gross premiums written, inclusive of the Company's participation in the "Florida Joint Underwriting Association" (FJUA), remained relatively constant at approximately $6.1 million for the three month period ended March 31, 1999 and 1998. Gross premiums written, excluding the Company's participation in the FJUA increased 8.9% to $6.1 million in the first three months of 1999 from $5.6 million for the same period in 1998. Participation in the FJUA for the first three months in 1999 was ($91,000) compared to $498,000 for the same period in 1998. Increase in gross premiums written by the Company was mainly due to the increase in the number of company-owned agencies which increased to 36 from 14 for the same period last year. NET PREMIUMS WRITTEN. Net premiums written, inclusive of FJUA, decreased 6.82% to $4.1 million for the three-month period ended March 31, 1999 from $4.4 million for the same period in 1998. Net premiums written, excluding FJUA, increased 7.69% to $4.2 million in the first three months of 1999 from $3.9 million for the same period in 1998. Net written premiums for FJUA for the first three months in 1999 were ($91,000) compared to $498,000 for the same period in 1998. Increase in net premiums written by the Company was mainly due to the increase in the number of company-owned agencies. NET PREMIUMS EARNED. Net premiums earned, inclusive of FJUA, decreased 5.55% to $3.4 million for the three-month period ended March 31, 1999 from $3.6 million for the same period in 1998. Net premiums earned, excluding FJUA, increased 12.9% to $3.5 million for the first three months of 1999 from $3.1 million for the same period in 1998. Net earned premiums for FJUA for the first three months in 1999 was ($63,000) compared to $453,000 for the same period in 1998. Increase in net premiums written by the Company was mainly due to the increase in the number of company-owned agencies. COMMISSION INCOME. Commission income increased 124.0% to $905,000 for the three-month period ended March 31, 1999 from $404,000 for the same period in 1998. Commission income consists of fees earned by the Company-owned agencies placing business with third party insurers and third party premium finance companies. The increase is attributable to the increase in Company-owned agencies, which amounted to 36 owned during the first quarter of 1999, compared to 14 agencies for the same period in 1998. FINANCE REVENUES. Finance revenues increased 175.08% to $795,000 for the three-month period ended March 31, 1999 from approximately $289,000 for the same period in 1998. The increase was attributable to an increase in the number of premium contracts financed by Federated Premium. INVESTMENT INCOME. Investment income consists of net investment income and net realized gains (losses). Investment income decreased 35.4% to $401,000 for the three-month period ended March 31, 1999 from $621,000 for the same period in 1998. The Company experienced realized gains of $173,000 for the three-month period ended March 31, 1999 compared to realized gains of $319,000 for the same period in 1998. OTHER INCOME. Other income increased 38.2% to $514,000 for the three-month period ended March 31, 1999 from $372,000 for the same period in 1998. Other income is comprised mainly of the managing general agent's policy fee income on all new and renewal insurance policies, income tax preparation, and revenue on auto tag products. Income tax preparation was implemented during 1999. Total income derived under this product during the three-month period of 1999 was $148,000. LOSSES AND LAE. The Company's loss ratio, as determined in accordance with Generally Accepted Accounting Principles ("GAAP"), for the three month period ended March 31, 1999 was 56.8% compared with 68% for the same period in 1998. Losses and LAE incurred decreased 24% to $1.9 million for the three-month period ended March 31, 1999 from $2.5 million for the same period in 1998. 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. An increase in the net earned premiums relating to the mobile home program and a decrease in the loss ratio, 7.86% at March 31, 1999 compared to 81.24% for the same period last year contributed to the decrease in the Company's loss ratio for this period. In addition, the automobile program experienced a decrease of 5.72% in the loss ratio, caused mainly by the increase in company-owned policies sold, which historically has experienced a lower loss ratio. OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting expenses increased 54.8% to $1.5 million for the three-month period ended March 31, 1999 from $969,000 for the same period in 1998. The increase is due to the increase in Company-owned agencies from 14 during the first quarter of 1998 to 36 in 1999. During the last quarter of 1998 and first quarter of 1999, the Company acquired 22 agencies. The increase in the number of company-owned agencies had an impact in the total operating expenses during the first quarter of 1999. 10 SALARIES AND WAGES. Salaries and wages increased 92.3% to $1.6 million for the three months ended March 31, 1999 from $832,000 for the same period in 1998. The increase is due to the increase in the number of Company-owned agencies from 14 during the first quarter of 1998 to 36 in 1999. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred policy acquisition costs decreased to ($73,000) for the three-month period ended March 31, 1999 from $50,000 for the same period in 1998. Amortization of deferred policy acquisition costs consists of the actual amortization of deferred policy acquisition costs less commissions earned on reinsurance ceded. The decrease is partly due to an increase in premiums written by the Company-owned agencies to $2.5 million of premiums written for the three-month period ended in March 31, 1999 from $1.5 million for the same period in 1998. INCOME TAX EXPENSE. The Company's estimated effective income tax rate was 37% amounting to $355,000, for the three months ended March 31, 1999 compared to 37.5% amounting to $355,000 for the same period in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are revenues generated from operations, the net proceeds of its initial public offering, investment income and borrowings under the credit facility. Because the Company is a holding company, it is largely dependent upon dividends from its subsidiaries for cash flow. In November 1998, the company generated net proceeds of approximately $7.9 million from the IPO in which it sold 1,250,000 shares of Common Stock at a price of $7.50 per share. The net proceeds of the IPO have been and are being used for contributions to Federated National's capital, repayment of debt under the Credit Facility, the finance of acquisitions and working capital and other general corporate purposes. Federated Premium is party to the credit facility (the "Credit Facility"), 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 which is currently $5.0 million, increased from $4.0 million pursuant to a modification effective January 25, 1999. The outstanding balance of the Credit Facility as of March 31, 1999 was $3.0 million. The annual interest rate on borrowings under the Credit Facility is currently the prime rate plus .75%,decreased from the prime rate plus 1.75% due to the January 1999 modification. 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 March 31, 1999. The Credit Facility expires on September 30, 2000 at which time it is anticipated that a new agreement will be negotiated. 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 was approximately $1.4 million. 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 1998 statutory minimum capital and surplus requirement of $2.25 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 Company is party to the consent order which limits the amount of premiums it can underwrite in 1998 and 1999. 11 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 March 31, 1999, the Company believes that it has completed its efforts to bring the systems in compliance. The total cost incurred during the year ended December 31, 1998 and quarter ended March 31, 1999 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 1999, the Company continues 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. 12 PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None. ITEM 2 CHANGES IN SECURITIES None. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5 OTHER INFORMATION None. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Financial Data Schedule: Ex. 27 (SEC use only) (b) None 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. 21ST CENTURY HOLDING COMPANY DATE: MAY 7, 1999 By: /s/ Edward J. Lawson ------------------------ Title: President 14 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,257,019 17,137,642 10,273,617 (200,736) 0 33,747,342 2,651,847 (293,187) 39,170,361 23,538,400 14,401,115 0 0 33,900 15,598,061 39,170,361 0 6,029,011 0 3,398,948 1,612,140 0 52,910 965,013 355,287 0 0 0 0 609,726 .18 .18
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