10QSB 1 0001.txt 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 SEPTEMBER 30, 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) 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 - 3,362,667 SHARES OUTSTANDING AS OF NOVEMBER 9, 2000. 21ST CENTURY HOLDING COMPANY INDEX
PART I: FINANCIAL INFORMATION PAGE ---- ITEM 1: Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and December 31, 1999 (Audited)..................................................................... 3 Consolidated Statements of Income for the three and nine months ended September 30, 2000 (Unaudited) and 1999 (Unaudited)................................................................................ 4 Consolidated Cash Flow Statements for the nine months ended September 30, 2000 (Unaudited) and 1999 (Unaudited)................................................................................ 5 Condensed Notes to Consolidated Financial Statements..................................................... 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 10 PART II: OTHER INFORMATION Other Information........................................................................................ 16 Signature................................................................................................ 17
2 PART I ITEM I. FINANCIAL INFORMATION 21ST CENTURY HOLDING COMPANY CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 DECEMBER 31,1999 (UNAUDITED) ASSETS Available for sale at fair value: Investments Fixed maturities $ 20,556,610 $ 11,170,035 Equity securities 2,937,293 2,627,232 Mortgage loans 275,119 119,304 ------------ ------------ Total investments 23,769,022 13,916,571 ------------ ------------ Cash and cash equivalents 1,732,865 923,175 Finance contracts, consumer loans and pay advances receivable, net of allowances for credit losses of $632,410 and $272,192, respectively 15,140,204 9,642,163 Prepaid reinsurance premiums 1,527,960 2,604,607 Premiums receivable, net of allowance of $225,000 and $50,000, respectively 1,617,550 1,256,485 Due from reinsurers, net 1,646,741 1,670,849 Deferred acquisition costs, net 1,128,415 (10,243) Deferred income taxes 2,914,783 1,785,514 Property, plant and equipment net 3,469,272 2,514,505 Other assets 956,536 980,375 Goodwill 2,947,412 3,402,403 ------------ ------------ TOTAL ASSETS $ 56,850,760 $ 38,686,404 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 8,252,090 $ 6,314,307 Unearned premiums 14,196,001 8,394,269 Revolving credit outstanding 6,853,589 4,650,026 Bank overdraft 3,938,650 1,528,736 Unearned commissions 1,726,739 802,757 Due to third party insurers 2,262,088 -- Accounts payable and accrued expenses 1,699,665 511,997 Notes payable -- 417,773 Drafts payable to insurance companies 924,919 312,651 ------------ ------------ TOTAL LIABILITIES 39,853,741 22,932,516 ------------ ------------ Commitments and contingencies -- -- Shareholders' equity: Common stock of $.01 par value. Authorized 25,000,000 shares issued 3,410,667 and 3,370,000 shares, and outstanding 3,362,967 and 3,365,000 shares, respectively 34,107 33,700 Additional paid-in capital 12,894,630 12,690,087 Accumulated other comprehensive income (1,434,699) (1,244,830) Retained earnings 5,720,581 4,297,994 Treasury stock, 47,700 and 5,000 shares, at cost, respectively (217,600) (23,063) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 16,997,019 15,753,888 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 56,850,760 $ 38,686,404 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 Revenues: Gross premiums written $ 7,455,722 $ 3,691,802 $ 25,617,159 $ 15,529,597 Gross premiums ceded (1,310,725) (1,215,394) (1,974,812) (4,930,729) ------------ ------------ ------------ ------------ Net premiums written 6,144,997 2,476,408 23,642,347 10,598,868 Increase in unearned premiums, net of prepaid reinsurance premiums 143,714 918,752 (7,152,456) (224,213) ------------ ------------ ------------ ------------ Net premiums earned 6,288,711 3,395,160 16,489,891 10,374,655 Commission income 556,177 1,174,465 2,289,268 3,228,962 Managing general agent fees 2,821,019 217,111 5,406,910 723,917 Finance revenue 1,522,939 958,075 4,222,657 2,589,997 Net investment income 365,005 184,118 900,267 656,107 Net realized investment (losses) gains 613,295 87,707 1,026,142 566,805 Other income 503,738 212,637 1,742,218 732,590 ------------ ------------ ------------ ------------ Total revenue 12,670,884 6,229,273 32,077,353 18,873,033 ------------ ------------ ------------ ------------ Expenses: Losses and loss adjustment expenses 4,306,663 2,069,023 11,681,939 5,970,362 Operating and underwriting expenses 2,773,066 1,710,495 7,723,858 4,909,764 Salaries and wages 2,495,599 1,856,105 6,982,942 5,344,314 Policy acquisition costs 1,993,185 123,296 2,970,673 (82,709) Amortization of goodwill 144,390 131,828 454,991 385,893 ------------ ------------ ------------ ------------ Total expenses 11,712,903 5,890,747 29,814,403 16,527,624 ------------ ------------ ------------ ------------ Income before provision for income tax expense 957,981 338,526 2,262,950 2,345,409 Provision for income tax expense 344,132 102,391 773,103 786,658 ------------ ------------ ------------ ------------ Net income $ 613,849 $ 236,135 $ 1,489,847 $ 1,558,751 ============ ============ ============ ============ Net income per share and net income per share- assuming dilution $ 0.18 $ 0.07 $ 0.44 $ 0.46 ============ ============ ============ ============ Weighted average number of common shares outstanding and weighted average number of common shares outstanding 3,376,434 3,380,000 3,385,241 3,386,667 (assuming dilution)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 Cash flow from operating activities: Net income $ 1,489,847 $ 1,558,751 Adjustments to reconcile net income to net cash flow used in operating activities: Accretion of investment discounts (9,075) (1,959) Depreciation and amortization 194,250 93,230 Amortization of goodwill 454,991 385,893 Deferred income tax expense (1,129,269) (2,520) Net realized investment gains (1,026,142) (566,805) Amortization of deferred acquisition costs, net 1,204,316 (82,709) Provision for credit losses 1,076,647 334,449 Provision for uncollectible premiums receivable 175,000 -- Stock issued to employees 100,000 -- Changes in operating assets and liabilities: Premiums receivable (536,065) (1,187,367) Prepaid reinsurance premiums 1,076,647 (176,722) Due from reinsurers 24,108 388,884 Deferred acquisition costs, net (2,342,974) 64,508 Other assets 23,839 95,068 Unpaid loss and loss adjustment expenses 1,937,783 (1,456,483) Unearned premiums 5,801,732 22,591 Unearned commissions 923,982 215,701 Accounts payable and accrued expenses 1,120,408 (1,560,463) Due to third party insurers 2,262,088 -- Drafts payable to insurance companies 612,268 24,618 ------------ ------------ Net cash flow provided by operating activities 13,531,877 (1,851,335) ------------ ------------ Cash flow from investing activities: Proceeds from sale of investment securities available for sale 39,199,209 26,244,237 Purchases of investment securities available for sale (48,050,497) (24,112,923) Finance contracts, consumer loans and pay advances receivable (6,672,184) (1,566,776) Mortgage loans (155,815) 43,164 Purchases of property and equipment (1,149,017) (852,420) Acquisition of agencies -- (425,725) ------------ ------------ Net cash flow used in investing activities (16,828,304) (669,813) ------------ ------------ Cash flows from financing activities Increase (decrease) in bank overdraft 2,409,914 96,728 Repayment of notes payable (312,823) (296,371) Increase in revolving credit outstanding 2,203,563 2,573,144 Purchase of common stock (194,537) (200,000) ------------ ------------ Net cash flow provided by financing activities 4,106,117 2,173,501 ------------ ------------ Net increase (decrease) in cash and cash equivalents 809,690 (348,277) Cash and cash equivalents at beginning of year 923,175 2,250,061 ------------ ------------ Cash and cash equivalents at end of period $ 1,732,865 $ 1,901,784 ============ ============ Supplemental disclosure of cash flow information: Non-cash investing and financing activities: Shares issued for settlement of note payable $ 104,950 -- ============ Shares issued for acquisition of agency and majority owned subsidiary -- $ 415,000 ============ Notes payable issued for agency acquisition -- $ 360,000 ============ Accrued dividend payable 67,260 ============ Cash paid during the year for: Interest 453,643 $ 237,675 ============ ============ Income taxes $ 1,529,690 $ 1,788,550 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 21ST CENTURY HOLDING COMPANY CONDENSED 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 ("GAAP") for interim financial information and with the instructions for Form 10-QSB and Item 310 of Regulation S-B. These financial statements do not include all information and notes required by GAAP 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 GAAP. 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 underwrites nonstandard and standard personal automobile insurance as well as homeowners 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 Agent ("Assurance MGA"). The Company processes claims made by Federated National's insureds and for third-party insurance companies 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"), tax preparation software through its 80% owned subsidiary Express Tax Service, Inc. and pay advances through FedFirst Corp ("FedFirst"). These products are offered through the Company's 38 agencies operated by the Company's wholly owned subsidiary Federated Agency Group, Inc. as well as agencies owned by third parties. In May 2000, the Company decided to discontinue making consumer loans and to 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. (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), net of income taxes 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 $323,737 and ($426,670) for the three months ended September 30, 2000 and 1999, respectively and ($189,869) and ($890,544) for nine months ended September 30, 2000 and 1999, respectively. Total comprehensive income (loss) was $937,586 and $(190,535) for the three months ended September 30, 2000 and 1999 respectively, and $1,299,978 and $668,207 for the nine months ended September 30, 2000 and 1999, respectively. (C) RECLASSIFICATIONS Certain amounts in the Company's 1999 financial statements have been reclassified to conform with the 2000 presentation. 6 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) (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. (E) MANAGING GENERAL AGENT FEES Managing general agent fees and the related commission expense are recognized at the time the policy is underwritten and are net of estimated cancellations. (3) REVOLVING CREDIT OUTSTANDING On September 24, 1997, the Company, through Federated Premium, 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 on 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. Effective October 31, 2000, the maximum credit commitment was increased to $9.0 million. (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. In June 2000, a lawsuit was filed against the Company and its directors and executive officers seeking compensatory damages on the basis of allegations that the Company's amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which the Company recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit was filed in the United States District Court for the Southern District of New York and seeks class action status. The plaintiff class purportedly includes purchasers of the Company's common stock between November 5, 1998 and August 13, 1999. The Company believes that the lawsuit is without merit and intends to vigorously defend such action. On November 1, 2000, the Company filed a motion to dismiss this lawsuit. The Company is currently negotiating with its reinsurer to increase reinsurance on automobile policies to 30% retroactive to January 1, 2000. The impact to the Company's net income balance sheet, if any, is not yet determinable. 7 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) SEGMENT INFORMATION The Company and its subsidiaries operate principally in two business segments, insurance and financing. The insurance segment consists of underwriting through Federated National, managing general agent activities 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 processing. The financing segment consists of premium financing through Federated Premium , 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. 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 the parent company, 21st Century Holding Company. Information regarding components of operations for the three month and nine month periods ending September 30, 2000 and 1999 follows:
Three months ended September 30, Nine months ended September 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Total Revenue Insurance Segment: Earned Premiums $ 6,288,711 $ 3,395,160 $ 16,489,891 $ 10,374,655 Investment Income 353,720 252,574 1,217,176 1,198,279 Adjusting Income 547,147 222,252 1,251,357 684,247 MGA Fee Income 2,927,552 217,111 5,431,076 723,917 Commission Income 2,180,466 1,405,832 6,442,843 4,447,313 Miscellaneous Income 17,026 224,578 507,455 689,328 ------------ ------------ ------------ ------------ Total Insurance Revenues 12,314,622 5,717,507 31,339,798 18,117,739 ------------ ------------ ------------ ------------ Financing Segment: Premium Finance Income 1,265,424 693,928 3,311,981 2,079,802 Consumer Loan Interest 17,968 283,922 308,050 527,844 Pay Advance Fees 196,873 -- 579,653 -- Other Income 42,674 -- 22,973 9,330 ------------ ------------ ------------ ------------ Total Financing Revenues 1,522,939 977,850 4,222,657 2,616,976 All Other 655,556 597,527 1,176,574 1,605,927 ------------ ------------ ------------ ------------ Total Operating Segments 14,493,117 7,292,884 36,739,029 22,340,642 Intercompany Eliminations (1,822,233) (1,063,611) (4,661,676) (3,467,609) ------------ ------------ ------------ ------------ Total Revenues $ 12,670,884 $ 6,229,273 $ 32,077,353 $ 18,873,033 ============ ============ ============ ============ Earnings Before Income Taxes Insurance Segment $ 380,331 $ (50,476) $ 1,212,241 $ 1,690,170 Financing Segment 397,996 494,195 1,249,094 1,202,575 All Other 179,654 (136,466) (198,385) (584,093) ------------ ------------ ------------ ------------ Total Operating Segments 957,981 307,253 2,262,950 2,308,652 Intercompany Eliminations -- 31,275 -- 36,757 ------------ ------------ ------------ ------------ Total Earnings before Income Taxes $ 957,981 $ 338,528 $ 2,262,950 $ 2,345,409 ============ ============ ============ ============
8 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) SEGMENT INFORMATION Information regarding components of the balance sheets for September 30, 2000 and December 31, 1999 follows: Total Assets September 30, 2000 December 31, 1999 ------------------ ----------------- Insurance Segment $ 34,620,185 $ 24,895,860 Finance Segment 16,540,858 10,779,524 All Other 8,531,836 4,972,955 ------------ ------------ Total Operating Segments 59,692,879 40,648,339 Intercompany Eliminations (2,842,119) (1,961,935) ------------ ------------ Total Assets $ 56,850,760 $ 38,686,404 ============ ============ 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 or 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 as well as homeowners 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 processes claims made by Federated National's insureds and for third-party insurance companies 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, tax preparation software through its 80% owned subsidiary Express Tax Service, Inc. and pay advances through FedFirst. These products are offered through the Company's 38 agencies operated by the Company's wholly owned subsidiary Federated Agency Group, Inc. as well as agencies owned by third parties. Prior to May 2000, the Company offered consumer loans through its wholly owned subsidiary, RPA Financial Corporation. 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, that market their products through agents, as well as companies, that 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. 10 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. In May 2000, the Company 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. ANALYSIS OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2000 AS COMPARED TO DECEMBER 31, 1999 Investments. Investments increased $9.8 million to $23.8 million as of September 30, 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 gross premiums written and amounts due third-party insurers in 2000. Cash and cash equivalents. Cash and cash equivalents were $1.7 million as of September 30, 2000, as compared to $923,000 as of December 31, 1999. This increase of $810,000 is due primarily to cash flow from increased revenues during the quarter. Finance contracts, consumer loans and pay advance receivables. Finance contracts, consumer loans and pay advance receivables increased $5.5 million from $9.6 million at December 31, 1999 to $15.1 million at September 30, 2000. This increase is due to an increase in premium finance receivables, which are the result of the increase in premiums written during the quarter as well as premiums underwritten for third-party insurers by Assurance MGA. Prepaid reinsurance premiums. Prepaid reinsurance premiums decreased $1.1million to $1.5 million as of September 30, 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 January 1, 2000. Effective July 1, 2000, the Company obtained catastrophe reinsurance coverage for its mobile home and homeowners insurance to cover losses in excess of $2.5 million. This reinsurance, together with the Florida Hurricane Catastrophe Fund, will cover losses up to approximately $22 million, the equivalent of estimated losses in a once-every-125-year storm. Deferred acquisition costs, net. Deferred acquisition costs increased from a credit of $10,000 as of December 31, 1999 to a debit of $1.1 million as of September 30, 2000. Included in the December 31, 1999 balance were deferred commissions of $746,000 offset by unearned ceded commissions of $756,000. As of September 30, 2000, deferred commissions were $1.6 million offset by unearned ceded commissions of $484,000. 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. Property, plant and equipment, net. Property, plant and equipment increased $954,000 to $3.5 million as of September 30, 2000, from $2.5 million as of December 31, 1999 primarily as a result of the purchase of approximately 8 acres of vacant land for $600,000. The Company has entered into a contract to purchase a building adjacent to this property for $2.15 million. The Company intends to use the building as its headquarters and a portion of the vacant land for parking. Unpaid loss and loss adjustment expenses. Unpaid loss and loss adjustment expenses increased $2.0 million to $8.3 million as of September 30, 2000, as compared to $6.3 million as of December 31, 1999. This increase is related to the increase in net premiums earned discussed below. Unearned Premiums. Unearned premiums increased $5.8 million to $14.2 million as of September 30, 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 Revolving Agreement increased $2.2 million to $6.9 million as of September 30, 2000 from $4.7 million as of December 31, 1999 primarily to fund the increase in finance contracts receivables. 11 Bank Overdraft. Bank overdraft is the result of the cash management techniques employed by the Company. The overdraft was $3.9 million as of September 30, 2000, a $2.4 million 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 insurance companies for which the Company acts as managing general agent and processes claims. This arrangement became effective in 2000, and, therefore, there was no such liability as of December 31, 1999. Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $1.2 million from $512,000 as of December 31, 1999 to $1.7 million as of September 30, 2000 primarily due to 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 $925,000 as of September 30, 2000, principally due to new finance contracts receivable. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 Gross premiums written. Gross premiums written increased $3.8 million, or 102% to $7.5 million for the three months ended September 30, 2000 as compared to $3.7 million for the comparable period in 1999. This increase is attributable to an increase in pricing by major competitors in the Company's market. The Company's pricing during the quarter was unchanged from a year ago. Consequently, the Company is more price competitive and was able to write more policies. Net premiums earned. Net premiums earned increased 85.3% to $6.3 million for the three-month period ended September 30, 2000 from $3.4 million for the same period in 1999. The increase is related to the increase in gross premiums written discussed above for three months and below for nine months. Commission income. Commission income decreased 52.6% to $556,000 for the three-month period ended September 30, 2000 from $1.2 million 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 decrease is attributable to a higher percentage of commissions from Federated National and Assurance MGA, which are eliminated in consolidation. Managing general agent fees. Managing general agent fees increased from $217,000 for the three-month period ended September 30, 1999 to $2.8 million for the same period in 2000. This increase is because Assurance MGA began writing policies for two third-party insurance companies in the past year. Prior to July 1999, substantially all policies were written for Federated National Insurance Company for which Assurance MGA retained $25 per policy. Finance revenues. Finance revenues increased 59.0% to $1.5 million for the three-month period ended September 30, 2000 from $958,000 for the same period in 1999. The increase was attributable to an increase in the number of premium contracts financed by Federated Premium. Net realized investment gains (losses). The Company experienced realized gains of $613,000 for the three-month period ended September 30, 2000 compared to $87,000 for the same period in 1999, as the Company was able to take advantage of favorable developments in the equity market. There can be no assurances as to whether the Company will record gains or losses in the future. Other income. Other income increased 137% to $504,000 for the three-month period ended September 30, 2000 from $213,000 for the same period in 1999. This increase is primarily attributable to adjustment fee income of $287,000 for the three-month period ended September 30, 2000 compared to no outside adjustment fee income in 1999. Losses and LAE. The Company's loss ratio, as determined in accordance with GAAP, for the three-month period ended September 30, 2000 was 68.5% compared with 57.5% for the same period in 1999. Losses and LAE incurred increased 108% to $4.3 million for the three-month period ended September 30, 2000 from $2.1 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. Operating and underwriting expenses. Operating and underwriting expenses increased 62.0% to $2.8 million for the three-month period ended September 30, 2000 from $1.7 million for the same period in 1999. The increase is related to the increase in revenues and is expected to continue in the near future. Federated National's expense and combined ratios were 37.1% and 105.6%, respectively, for the three-month period ended September 30, 2000 compared with 38.2% and 95.7% in the same period for 1999. The increases in the combined ratio is primarily due to loss ratio discussed above. Salaries and wages. Salaries and wages increased 34.5% to $2.5 million for the three months ended September 30, 2000 from $1.9 million for the same period in 1999. The increase is related to the increase in the volume of business during the quarter. 12 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 (CONTINUED) Policy acquisition costs. Policy acquisition costs increased from a $123,000 for the three-month period ended September 30, 1999 to $2.0 million for the same period in 2000. Policy acquisition costs consists of commission expense paid to third-party agencies less commissions earned on reinsurance ceded. The increase is due to policy acquisition costs paid by Assurance Managing General Agents for third party insurers' policies of $1.6 million in 2000 and zero in 1999 and is also related to the increase in premiums earned. Income tax expense. The Company's estimated effective income tax rate was 35.9 % for the three months ended September 30, 2000 compared to 30.2% for the same period in 1999. The increase in this rate is because tax-free investment revenue is a smaller portion of pretax income in 2000 than in 1999. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 Gross premiums written. Gross premiums written increased $10.1 million, or 65.0% to $25.6 million for the nine months ended September 30, 2000 as compared to $15.5 million for the same period in 1999. This increase is attributable to an increase in pricing by the Company's major competitors, as well as a 10% rate reduction by the Company, all effective December 1, 1999. Prior to December 1999, these two competitors' pricing was below the Company's pricing. After the price changes, the Company became more competitive with respect to pricing, resulting in a substantial increase in written premiums. The Company reversed its 10% rate reduction effective June 1, 2000 to slow the growth in premiums written. Gross premiums ceded. Gross premiums ceded declined $2.9 million to $2.0 million for the nine-month period ended September 30, 2000 from $4.9 million for the same period in 1999. The decrease in gross premiums ceded is due to the reduction in quota-share reinsurance on automobile policies from 30% in 1999 to 15% in 2000 and on mobile home policies from 40% in 1999 to zero in 2000. Instead of quota-share reinsurance, the Company now carries catastrophe reinsurance on mobile and homeowners. Net premiums earned. Net premiums earned increased 58.9% to $16.5 million for the nine-month period ended September 30, 2000 from $10.4 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 decreased 29.1% to $2.3 million for the nine-month period ended September 30, 2000 from $3.2 million 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 decrease is attributable to a higher percentage of commissions from Federated National and Assurance MGA, which are eliminated in consolidation. Managing general agent fees. Managing general agent fees increased from $724,000 for the nine-month period ended September 30, 1999 to $5.4 million for the same period in 2000. This increase is because Assurance MGA began writing policies for two third-party insurance companies in the past year. Prior to July 1999, substantially all policies were written for Federated National for which Assurance MGA retained $25 per policy. Finance revenues. Finance revenues increased 63.0% to $4.2 million for the nine-month period ended September 30, 2000 from approximately $2.6 million 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 pay advances, which began operations in the third quarter 1999. Other income. Other income increased $1.0 million to $1.7 million for the nine-month period ended September 30, 2000 from $733,000 for the same period in 1999. This increase is primarily attributable to increased tax preparation fees of $790,000 and adjusting fee income of $358,000 for the nine-month period ended September 30, 2000 compared to $216,000 and zero, respectively, in 1999. 13 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 (CONTINUED) Losses and LAE. The Company's loss ratio, as determined in accordance with GAAP, for the nine-month period ended September 30, 2000 was 70.8% compared with 57.5 % for the same period in 1999. Losses and LAE incurred increased $5.7million to $11.7 million for the nine-month period ended September 30, 2000 from $6.0 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 a 10% price reduction on policies written from December 1, 1999 to May 31, 2000 coupled with increased claims on policies issued during that period. Operating and underwriting expenses. Operating and underwriting expenses increased $2.8 million to $7.7 million for the nine-month period ended September 30, 2000 from $4.9 million for the same period in 1999. The increase is due to the 70.0% increase in revenues and is expected to continue in the near future. Federated National's expense and combined ratios were 46.7% and 117.5%, respectively, for the nine-month period ended September 30, 2000 compared with 36.2% and 93.7% in the same period for 1999. The increases in these ratios are primarily due to a 10% price reduction on policies written from December 1, 1999 to May 31, 2000. Included in operating and underwriting expenses are the provision for credit losses and the provision for uncollectible premiums receivables. The provision for credit losses increased to $1,174,000 for the nine months ended September 30, 2000 from $334,000 for the same period in 1999. The provision for uncollectible premiums receivable increased to $175,000 for the nine months ended September 30, 2000 from zero in 1999. Both of these increases are due to volume growth in the related receivables. Salaries and wages. Salaries and wages increased 30.7% to $7.0 million for the nine months ended September 30, 2000 from $5.3 million for the same period in 1999. The increase is related to the increase in the volume of business during the period. Policy acquisition costs. Policy acquisition costs increased from a credit of $83,000 for the nine-month period ended September 30, 1999 to a debit of $2.9 million for the same period in 2000. Policy acquisition costs consists of commission expense paid to third-party agencies less commissions earned on reinsurance ceded. The increase is due to policy acquisition costs paid by Assurance Managing General Agents for third party insurers' policies of $1.8 million in 2000 and zero in 1999 and is also related to the increase in premiums earned. Income tax expense. The Company's estimated effective income tax rate was 34.2 % for the nine months ended September 30, 2000 compared to 33.5% 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 Revolving Agreement, which is used to fund its operations. Under the Revolving Agreement, Federated Premium can borrow up to the maximum credit commitment of $9.0 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 Revolving Agreement varies based on the average outstanding balance from the previous month, between prime and .75% above prime. The Revolving Agreement contains various operating and financial covenants and is collateralized by a first lien on and assignment of all of the Company's finance contracts receivable. The Revolving Agreement expires on September 30, 2001. Outstanding borrowings under the Credit Facility as of September 30, 2000 and December 31, 1999 were approximately $6.9 million and $4.7 million, respectively. At September 30, 2000 and December 31, 1999, the Company was in compliance with all covenants under the Revolving Agreement. The Company currently anticipates that the Revolving Agreement will be increased and extended prior to its expiration date. However, there can be no assurances that the Company will be able to increase or extend this agreement. 14 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) For the nine months ended September 30, 2000, operations generated operating cash flow of $13.5 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 $16.8 million for the nine months ended September 30, 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 $4.1 million for the nine months ended September 30, 2000, which was derived primarily from borrowings under the Revolving 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. On September 27, 2000, the Company announced a dividend on the Company's common stock of $.02 per share, payable on December 1, 2000 to shareholders of record as of November 8, 2000. This dividend, of approximately $67,000, was accrued as of September 30, 2000. The Company currently intends to pay a dividend of $.02 per share on a quarterly basis, subject to compliance with applicable capital requirements and the Company's working capital needs. 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 in compliance with these requirements. The Company is also required to adhere to prescribed premium-to-capital surplus ratios on an annual basis. The Company believes it will be in compliance with this requirement, but there can be no assurance that this will be the case. 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 December 31 of the preceding year. No dividends were paid during 1999 or through September 30, 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 September 30, 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 $7.1 million as of September 30, 2000. Statutory net loss was $867,000 for the nine months ended September 30, 2000. 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. 15 PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS In June 2000, a lawsuit was filed against the Company and its directors and executive officers seeking compensatory damages on the basis of allegations that the Company's amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which the Company recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit was filed in the United States District Court for the Southern District of New York and seeks class action status. The plaintiff class purportedly includes purchasers of the Company's common stock between November 5,1998 and August 13, 1999. The Company believes that the lawsuit is without merit and intends to vigorously defend such action. On November 1, 2000, the Company filed a motion to dismiss this lawsuit. 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 (b) Reports on Form 8-K: None. 16 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: November 10, 2000 By: /s/ Samuel A. Milne ----------------------- Title: Chief Financial Officer 17 EXHIBIT INDEX EXHIBIT DESCRIPTION ------- ----------- 27 Financial Data Schedule 17