-----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, N/n3PeWurXfG9nQPamc5Lr0CoPq1Gw/9tL4U4N16sBsb7EIrFryYkIyHwOXaXBfb Dgx6PXGS8NbB2I0X4cDKEg== 0001042910-00-000953.txt : 20000522 0001042910-00-000953.hdr.sgml : 20000522 ACCESSION NUMBER: 0001042910-00-000953 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000519 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: 640141 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, 2000, 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 [ ] NO [X] 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 - 3,385,000 SHARES OUTSTANDING AS OF MAY 15, 2000. 21ST CENTURY HOLDING COMPANY INDEX
PART I: FINANCIAL INFORMATION PAGE ---- ITEM 1: Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and December 31, 1999 (Audited)..................................................................... 3 Consolidated Statements of Income for the three months ended March 31, 2000 (Unaudited) and 1999 (Unaudited)................................................................................ 4 Consolidated Cash Flow Statements for the three months ended March 31, 2000 (Unaudited) and 1999 (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, 2000 DECEMBER 31,1999 (UNAUDITED) ASSETS Available for sale at fair value: Investments Fixed maturities $ 16,228,336 $ 11,170,035 Equity securities 2,283,556 2,627,232 Mortgage loan 118,243 119,304 ------------ ------------ Total investments 18,630,135 13,916,571 ------------ ------------ Cash and cash equivalents 4,907,304 923,175 Finance contracts, consumer loans and pay advances receivable, net of allowances for credit losses of $259,900 and $272,192, respectively 11,272,257 9,642,163 Prepaid reinsurance premiums 1,640,847 2,604,607 Premiums receivable, net of allowance of $100,000 and $50,000, respectively 1,322,450 1,256,485 Due from reinsurers, net 673,218 1,670,849 Deferred acquisition costs, net 815,443 (10,243) Deferred income taxes 1,884,482 1,785,514 Property, Plant and Equipment net 2,513,947 2,514,505 Other assets 1,106,161 980,375 Goodwill 3,247,102 3,402,403 ------------ ------------ TOTAL ASSETS $ 48,013,346 $ 38,686,404 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 6,777,128 $ 6,314,307 Unearned premiums 11,942,031 8,394,269 Revolving credit outstanding 5,185,816 4,650,026 Bank overdraft 2,233,529 1,528,736 Unearned commissions 824,857 802,757 Due to third party insurers 1,369,757 0 Accounts payable and accrued expenses 1,343,080 511,997 Notes payable 291,293 417,773 Drafts payable to insurance companies 1,651,869 312,651 ------------ ------------ TOTAL LIABILITIES $ 31,619,360 $ 22,932,516 ------------ ------------ Commitments and contingencies -- -- Shareholders' equity: Common stock of $.01 par value. Authorized 25,000,000 shares issued 3,390,000 and 3,370,000 shares, and outstanding 3,385,000 33,900 33,700 and 3,365,000, respectively Additional paid in capital 12,789,887 12,690,087 Accumulated other comprehensive income (1,245,961) (1,244,830) Retained earnings 4,839,223 4,297,994 Treasury stock, 5,000 shares, at cost (23,063) (23,063) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 16,393,986 15,753,888 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,013,346 $ 38,686,404 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 Revenues: Gross premiums written $ 8,954,703 $ 6,061,463 Gross premiums ceded 247,184 (1,915,380) ----------- ----------- Net premiums written 9,201,887 4,146,083 Increase in unearned premiums, net of prepaid reinsurance premiums (4,898,487) (732,134) ----------- ----------- Net premiums earned 4,303,400 3,413,949 Commission income 1,254,184 905,606 Finance revenue 1,209,581 794,822 Net investment income 220,160 227,885 Net realized investment gains 462,173 173,066 Other income 1,580,633 513,683 ------------ ------------ Total revenue 9,030,131 6,029,011 ----------- ----------- Expenses: Losses and loss adjustment expenses 2,998,076 1,937,529 Operating and underwriting expenses 2,328,091 1,461,419 Salaries and wages 2,277,979 1,613,835 Amortization of deferred acquisition costs 449,432 (73,257) Amortization of goodwill 155,301 124,472 ----------- ----------- Total expenses 8,208,879 5,063,998 ----------- ----------- Income before provision for income tax expense (benefit) 821,252 965,013 Provision for income tax expense 280,023 355,287 ----------- ----------- Net income $ 541,229 $ 609,726 =========== =========== Net income per share and net income per share- assuming dilution $ 0.16 $ 0.18 =========== =========== Weighted average number of common shares outstanding and Weighted average number of common shares outstanding 3,385,222 3,390,000 (assuming dilution) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 Cash flow from operating activities: Net income $ 541,229 $ 609,726 ------------ ------------ Adjustments to reconcile net income to net cash flow used in operating activities: Amortization of investment premiums 2,486 395 Depreciation and amortization 49,264 25,706 Amortization of goodwill 155,301 124,473 Deferred income tax expense (98,285) 14,970 Net realized investment gains (462,173) (173,066) Amortization of deferred acquisition costs, net 449,432 (73,257) Provision for credit losses 300,696 119,852 Provision for uncollectible premiums receivable 50,000 -- Stock issued to employees 100,000 -- Changes in operating assets and liabilities: Premiums receivable (115,965) -- Prepaid reinsurance premiums 963,760 (347,338) Due from reinsurers 997,631 246,209 Deferred acquisition costs, net (1,275,118) 94,406 Other assets (125,786) (279,368) Unpaid loss and loss adjustment expenses 462,821 (375,495) Unearned premiums 3,547,762 601,188 Unearned commissions 22,100 157,021 Accounts payable and accrued expenses 831,083 (799,427) Due to third party insurers 1,369,757 -- Drafts payable to insurance companies 1,339,218 69,883 ------------ ------------ Net cash flow provided by operating activities 9,105,213 15,878 ------------ ------------ Cash flow from investing activities: Proceeds from sale of investment securities available for sale 14,852,897 7,977,683 Purchases of investment securities available for sale (19,109,649) (7,626,141) Finance contracts receivables, consumer loans and pay advances receivable (1,930,790) (1,418,613) Sale of and collection of mortgage loans 1,061 163,164 Purchases of property and equipment (48,706) (621,112) Acquisition of agencies -- (160,551) Net cash flow used in investing activities (6,235,187) (1,685,570) ------------ ------------ Cash flows from financing activities Increase (decrease) in bank overdraft 704,793 (261,965) Repayment of notes payable (126,480) -- Increase in revolving credit outstanding 535,790 938,615 ------------ ------------ Net cash flow provided by financing activities 1,114,103 676,650 ------------ ------------ Net increase (decrease) in cash & cash equivalents 3,984,129 (993,042) Cash & cash equivalents at beginning of year 923,175 2,250,061 ------------ ------------ Cash & cash equivalents at end of period $ 4,907,304 $ 1,257,019 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ $107,124 $ 51,044 ============= ============ Income taxes $ $120,000 $ 950,000 ============= ============
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 and with the instructions for Form 10-QSB and Rule 10-01 of Regulation S-X. These financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 1999. The December 31, 1999 year end balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The financial information furnished reflects all adjustments, consisting only of normal recurring accruals which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations are not necessarily indicative of results of operations which may be achieved in the future. 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, pay advances, tax preparation and other ancillary services to its customers. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 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. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of SFAS No. 133" issued in June 1999, defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. Adoption of this statement is not expected to have a material impact on the Company's results of operations or financial position. (B) COMPREHENSIVE INCOME (DEFICIT) On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income (deficit) 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 (deficit) presently consists of net income adjusted for the change in net unrealized holding gains (losses) on debt investments available for sale and equity investments. The net change in net unrealized holding losses on debt investments available for sale and equity investments was ($1,131) and ($225,588) for three months ended March 31, 2000 and 1999, respectively. Total comprehensive income was $540,098 and $384,138 for the three months ended March 31, 2000 and 1999, respectively. (C) RECLASSIFICATIONS Certain amounts in 1999 financial statements have been reclassified to conform with 2000 presentation. (D) EARNINGS PER SHARE Basic earnings per share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding during each period presented. Diluted earnings per share ("Diluted EPS") is computed by dividing net income by the weighted average number of common stock and common stock equivalents during the period presented; outstanding warrants and stock options are considered common stock equivalents and are included in the calculation using the treasury stock method. Diluted EPS excluded the impact of warrants and stock options as such amounts are anti-dilutive. 6 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 $5.0 million. The Revolving Agreement contains various operating and financial covenants and is collateralized by a first lien and assignment of all of the Company's eligible finance contracts receivable. 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 2000, the maximum credit commitment was increased to $7.0 million and the annual interest rate was changed to the prime rate plus additional interest varying from .75 percent to prime only based on the prior month's average outstanding balance. (4) 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. (5) ORGANIZATION OF NEW BANK In September 1999, the Company filed applications with the Office of Thrift Supervision for approval to charter a new federal savings bank (the "Proposed Bank") and to become a savings and loan holding company. Such applications remain pending as of the date of this report and the Office of Thrift Supervision has indicated to the Company that the final approval or disapproval could likely take an additional year. The Company is pursuing several alternatives to capitalize the bank including a private placement of common stock and/or convertible debt as well as internal funding through the utilization of Federated Premium Finance's unused line of credit and an investment in the Proposed Bank by Federated National. The actual terms of the sale of any stock or debt will be negotiated and will likely not be registered under the Securities Act of 1933. There can be no assurance that the regulatory authorities will approve the applications or that the Company will be able to obtain the financing required to capitalize the Proposed Bank. (6) SUBSEQUENT EVENT The Company has decided to discontinue making consumer loans and let the portfolio run off. This process should take approximately one year. Additionally, the Company is seeking a buyer to purchase its pay advance business. The Company has determined that its customers who utilize these products are not the customers that the Company targets for its insurance, premium finance, tax preparation and bank services. (7) 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 consumer loans through RPA Financial Corporation, and pay advances through FedFirst Corp 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 (7) 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 Generally Accepted Accounting Principles ("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, 2000 and 1999 follows: 2000 1999 ---- ----- Total Revenue Insurance Segment Earned Premiums $ 4,303,400 $ 3,413,949 Investment Income 638,961 425,905 Adjusting Income 33,781 227,045 MGA Fee Income 725,638 250,677 Commission Income 1,341,465 1,445,553 Miscellaneous Income 281,403 243,507 ------------ ------------ Total Insurance Revenue 7,324,648 6,006,636 ------------ ------------ Financing Segment: Premium Finance Income 847,539 685,572 Consumer Loan Interest 111,184 109,250 Pay Advance Fees 193,312 0 Other Income 57,546 0 Total Financing Revenues 1,209,581 794,822 ------------ ------------ All Other 816,998 418,420 ------------ ------------ Total Operating Segments 9,351,227 7,219,878 Intercompany Eliminations (321,096) (1,190,867) ------------ ------------ Total Revenues $ 9,030,131 $ 6,029,011 ============ ============ Earnings Before Income Taxes Insurance Segment $ 429,604 $ 905,737 Financing Segment 440,225 314,801 All Other (390,702) (262,633) ------------ ------------ Total Operating Segments 479,127 957,905 Intercompany Eliminations 342,125 7,108 ------------ ------------ Total Earnings before Income Taxes $ 821,252 $ 965,013 ============ ============ Total Assets Insurance Segment $ 24,691,223 $ 28,201,402 Finance Segment 12,045,753 8,506,007 All Others 6,369,340 5,865,125 ------------ ------------ Total Operating Segments 48,887,025 42,572,534 Intercompany Eliminations (873,679) (3,402,173) ------------ ------------ Total Assets $ 48,013,346 $ 39,170,361 ============ ============ 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; 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 filings with the Securities and Exchange Commission. OVERVIEW 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 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 consumer loans through its wholly-owned subsidiary, RPA Financial Corporation ("RPA Financial"), and pay advances through FedFirst Corp ("FedFirst"). 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, the Company's management 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. The Company also intends to significantly expand the financial products and services it offers by establishing a newly chartered federal savings bank, FedFirst Bank, FSB (the "Proposed Bank"), which is intended to operate as a wholly-owned subsidiary of the Company. There can be no assurance that the Company will be able to obtain the required regulatory approvals to operate the Proposed Bank. The Company has decided to discontinue making consumer loans and let the portfolio run off. This process should take approximately one year. Additionally, the Company is seeking a buyer to purchase its pay advance business. The Company has determined that its customers who utilize these products are not the customers that the Company targets for its insurance, premium finance, tax preparation and bank services. 9 ANALYSIS OF FINANCIAL CONDITION AS OF MARCH 31, 2000 AS COMPARED TO DECEMBER 31, 1999 Investments. Investments increased $4.7 million to $18.6 million as of March 31, 2000 as compared to $13.9 million as of December 31,1999. This increase in investments is due to the investing of cash generated by the increase in revenues during the first quarter. Cash and cash equivalents. Cash and cash equivalents were $4.9 million as of March 31, 2000, as compared to $923,000 as of December 31,1999. This increase of $4.0 million is due primarily to cash flow from increased revenues during the quarter. Finance contracts, consumer loans receivable and pay advance receivable. Finance contracts receivable, consumer loans and pay advance receivable increased $1.6 million from $9.6 million at December 31, 1999 to $11.3 million at March 31, 2000. This increase is due primarily to an increase in premium finance receivables which are the result of the increase in premiums written during the quarter. Prepaid reinsurance premiums. Prepaid reinsurance premiums decreased $1.0 million to $1.6 million as of March 31, 2000 from $2.6 million as of December 31,1999 because the Company reduced its reinsurance on automobile insurance from 30% of premiums to 15%, effective January 1, 2000. In addition, the Company reduced its reinsurance on mobile homes from 40% to 0% effective January1, 2000. The Company is in the process of negotiating catastrophe reinsurance for its mobile home and homeowners insurance to be effective June 1, 2000, in conjunction with the official start of the hurricane season in the Atlantic Ocean. There can be no assurance that the Company will be able to secure catastrophe coverage at reasonable prices. Due from Reinsurers. Due from reinsurers decreased $1.0 million to $673,000 as of March 31, 2000 from $1.7 million as of December 31,1999. This decrease is the result of the reduction of reinsurance discussed above. Deferred Acquisition Costs, net. Deferred acquisition costs increased from a credit of $10,000 as of December 31, 1999 to a debit of $815,000 as of March 31, 2000. Included in the December 31,1999 balance were deferred commissions of $746,000 offset by unearned ceded commissions of $756,000. As of March 31, 2000, deferred commissions were $1.3 million offset by deferred ceded commissions of $458,000. The increase in deferred commissions is related to the increase in premiums written discussed below, and the decrease in unearned ceded commissions is due to the reduction in reinsurance discussed above. Unearned Premiums. Unearned premiums increased $3.5 million to $11.9 million as of March 31, 2000 from $8.4 million as of December 31, 1999. This increase is the result of the increase in written premiums discussed below. Revolving Credit Outstanding. The outstanding borrowings under the Company's Credit Facility increased $536,000 to $5.2 million as of March 31, 2000 from $4.7 million as of December 31, 1999 primarily to fund the increase in finance contracts receivables. Bank Overdraft. Bank Overdraft is the result of the cash management techniques employed by the Company. The overdraft was $2.2 million as of March 31, 2000, a $705,000 increase from $1.5 million as of December 31, 1999. This increase is due to increased business activity driven by the increase in revenues. Due to Third Party Insurers. This represents amounts owed an insurance company, including amounts due for reinsurance, for which the Company acts as managing general agent and processes claims. This arrangement became effective January 1,2000, and therefore, there was no such liability as of December 31,1999. Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $831,000 from $512,000 as of December 31, 1999 to $1.3 million as of March 31, 2000 primarily due to an increase in income taxes payable of $258,000, an increase in taxes and licenses payable of $109,000, and an overall increase in expenses generally. Drafts Payable to Insurance Companies. Drafts payable to insurance companies increased from $313,000 as of December 31, 1999 to $1.6 million as of March 31, 2000, principally due to new finance contracts receivable. 10 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 Gross Premiums Written. Gross premiums written increased $2.9 million, or 47.8% to $9.0 million for the three months ended March 31, 2000 as compared to $6.1 million for the comparable period in 1999. This increase is attributable to an increase in pricing by two major competitors effective December 1, 1999. Prior to December 1999, these two competitors pricing was below the Company's pricing. After the price increase, the Company became more competitive with respect to pricing, hence a substantial increase in written premiums. The Company currently anticipates a rate increase for itself effective June 1, 2000 to slow the growth in premiums written. Net Premiums Written. Net premiums written increased 122% to $9.2 million for the three-month period ended March 31, 2000 from $4.1 million for the same period in 1999. The increase in gross premium written, discussed above, was further enhanced by a decrease in the amount of premiums ceded from $1.9 million to a debit of $247,000 due to the reduction in automobile reinsurance and the cessation of reinsurance for mobile home policies. Net Premiums Earned. Net premiums earned increased 26.0% to $4.3 million for the three-month period ended March 31, 2000 from $3.4 million for the same period in 1999. The increase in net premiums written discussed above was partially offset by the increase in the deferral of premiums over the life of the policies. Commission Income. Commission income increased 38.5% to $1.3 million for the three-month period ended March 31, 2000 from $906,000 for the same period in 1999. Commission income consists of fees earned by Company-owned agencies placing business with third party insurers and third party premium finance companies. The increase is primarily attributable to an increase in the number of Company owned agencies from 36 in the first quarter in 1999 to 40 in 2000 and also due to a successful third party insurer program that the Company acts as managing general agent. Finance Revenues. Finance revenues increased 52.2% to $1.2 million for the three-month period ended March 31, 2000 from approximately $795,000 for the same period in 1999. The increase was attributable to an increase in the number of premium contracts financed by Federated Premium, as well as income generated from advance pay of $193,000 which began operations in third quarter 1999. Net Realized Investment Gains. The Company experienced realized gains of $462,000 for the three-month period ended March 31, 2000 compared to realized gains of $173,000 for the same period in 1999, as the Company was able to take advantage of a favorable equity market. There can be no assurance that the Company will record gains in the future. Other Income. Other income increased 208% to $1.6 million for the three-month period ended March 31, 2000 from $514,000 for the same period in 1999. This increase is attributable to increase tax preparation fees of $691,000 compared with $148,000 in 1999. In addition, the Company generated additional fee income from the third party insurer and other new business. Losses and LAE. The Company's loss ratio, as determined in accordance with GAAP, for the three month period ended March 31, 2000 was 69.7% compared with 57% for the same period in 1999. Losses and LAE incurred increased 55% to $3.0 million for the three-month period ended March 31, 2000 from $1.9 million for the same period in 1999. 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. The Company believes the increase in its loss ratio is a function of increased claims on certain newly issued policies, as well increased losses on claims that were being disputed. Operating and Underwriting Expenses. Operating and underwriting expenses increased 59.2% to $2.3 million for the three-month period ended March 31, 2000 from $1.5 million for the same period in 1999. The increase is due to a 50% increase in revenues and is expected to continue in the near future. In addition, the Company increased it advertising expenses from $266,000 in the first quarter of 1999 to $536,000 in the same quarter in 2000. Salaries and Wages. Salaries and wages increased 41.2% to $2.3 million for the three months ended March 31, 2000 from $1.6 million for the same period in 1999. The increase is related to the increase in the volume of business during the quarter. 11 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 (CONTINUED) Amortization of Deferred Policy Acquisition Costs. Amortization of deferred policy acquisition costs increased from ($73,000) for the three-month period ended March 31, 1999 to $449,000 for the same period in 2000. Amortization of deferred policy acquisition costs consists of the actual amortization of deferred policy acquisition costs less commissions earned on reinsurance ceded. The increase is due to an increase in premiums earned, as well as the reduction of commissions earned on reinsurance ceded. Income Tax Expense. The Company's estimated effective income tax rate was 34.1% for the three months ended March 31, 2000 compared to 36.8% for the same period in 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are revenues generated from operations, 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. Federated Premium is party to the Credit Facility, which is used to fund its operations. Under the Credit Facility, Federated Premium can borrow up to the maximum credit commitment of $7.0 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. The annual interest rate on advances under the Credit Facility varies based on the average outstanding balance from the previous month, between prime and .75% above prime. The Credit Facility contains various operating and financial covenants and is collateralized by a first lien and assignment of all of the Company's assigned finance contracts receivable. The Credit Facility expires on September 30, 2000. Outstanding borrowings under the Credit Facility as of March 31, 2000 and December 31,1999 were approximately $5.2 million and $4.7 million, respectively. At March 31, 2000 and December 31,1999, the Company was in compliance with all covenants under the Revolving Agreement. For the three months ended March 31,2000, operations generated operating cash flow of $9.1 million which was primarily attributable to the increase in unearned premiums and amounts due third party insurers. Operating cash flow is expected to be positive in both the short-term and the reasonably foreseeable future due to a recent increase in insurance policies written. In addition, the Company's investment portfolio is highly liquid as it consists almost entirely of readily marketable securities. Cash deficit from investing activities was $6.2 million for the quarter ended March 31, 2000. The Company expects a continued cash flow deficit from investing activities as the Company intends to invest cash from operations and financing activities. Cash flow provided by financing activities was $1.1 million for the quarter ended March 31, 2000, which was derived primarily from borrowings under the Revolving Credit Agreement and from an increase in bank overdrafts. The Company believes that its current capital resources, together with cash flow from its operations and financing activities will be sufficient to meet its anticipated working capital requirements through at least 2000. There can be no assurances, however, that such will be the case. 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% of its liabilities or the 1999 statutory minimum capital and surplus requirement of $2.5 million as defined in the Florida Insurance Code. The Company is also required to adhere to prescribed premium-to-capital surplus ratios. The Company is in compliance with these requirements. The maximum amount of dividends, which can be paid by Florida insurance companies without prior approval of the Florida Commissioner, is subject to restrictions relating to statutory surplus. The maximum dividend that may be paid in 2000, by the Company without prior approval, is limited to the lesser of statutory net income from operations of the preceding calendar year or 10% of statutory unassigned capital surplus as of the preceding December 31. No dividends were paid during 1999 or 2000. The Company is required to comply with the risk-based capital requirements of the National Association of Insurance Commissioners ("NAIC"). 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 March 31, 2000, based on calculations using the appropriate NAIC formula, the Company's total adjusted capital is in excess of ratios that would require 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 $6.8 million as of March 31, 2000. Statutory net loss was $1.0 million for the quarter ended March 31, 2000. 12 IMPACT OF INFLATION AND CHANGING PRICES The consolidated 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. PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None. ITEM 2 CHANGES IN SECURITIES During the quarter ending March 31, 2000, the Company issued 20,000 shares of common stock to two employees representing a portion of their bonus for 2000 in accordance with each of their respective employment contracts. In addition the Company reached an agreement with Carla Leonard, a former director, where by the company will issue 20,667 shares of the Company's common stock and pay $172,000 in full settlement of a note payable having a balance of $276,950 plus accrued interest. The foregoing shares were issued without registration pursuant to the exemption afforded by Section 4 (2) of the Securities of 1933. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5 OTHER INFORMATION None. 13 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Financial Data Schedule: Ex. 27 (b) None 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 19, 2000 By: /s/ Samuel A. Milne ----------------------- Title: Chief Financial Officer 14 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule 15 EX-27 2 FDS --
7 3-MOS DEC-31-2000 JAN-1-2000 MAR-31-2000 16,228,336 0 0 2,283,556 118,243 0 18,630,135 4,907,304 673,218 815,443 48,013,346 6,777,128 11,942,031 0 0 291,293 0 0 33,900 16,360,086 48,013,086 4,303,400 220,160 462,173 1,580,633 2,998,076 449,432 2,328,091 821,252 280,023 541,229 0 0 0 541,229 0.16 0.16 6,314,307 1,675,570 1,047,852 511,118 1,749,483 6,777,128 0
-----END PRIVACY-ENHANCED MESSAGE-----