-----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, JcUNE22Fc1g151t1ltxxM40Ky00TyJF10qw/IbxD4ARQH1/M3OxA98vyeWvKrUg8 TH8ZFLGV07aHPjGQxZSKFQ== 0001116502-01-501343.txt : 20020410 0001116502-01-501343.hdr.sgml : 20020410 ACCESSION NUMBER: 0001116502-01-501343 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25001 FILM NUMBER: 1782841 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 10-Q 1 centuryholding10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001, 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) Indicate by check mark whether the registrant (1) has 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value - 3,039,201 shares outstanding as of November 9, 2001. 21ST CENTURY HOLDING COMPANY INDEX PART I: FINANCIAL INFORMATION PAGE ---- ITEM 1: Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and December 31, 2000................................................. 3 Consolidated Statements of Operations for the three and nine months ended September 30, 2001 (Unaudited) and 2000 (Unaudited).................................................. 4 Consolidated Cash Flow Statements for the nine months ended September 30, 2001 (Unaudited) and 2000 (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.......................................................... 15 Signature.................................................................. 16 2 PART I ITEM I. FINANCIAL INFORMATION 21ST CENTURY HOLDING COMPANY CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 (UNAUDITED) DECEMBER 31, 2000 ------------------ ----------------- ASSETS Investments Fixed maturities, available for sale at fair value $ 17,481,548 $ 15,691,147 Equity securities, available for sale at fair value 286,116 2,889,627 Mortgage loans 777,908 385,024 ------------ ------------ Total investments 18,545,572 18,965,798 Cash and cash equivalents 1,712,281 2,627,041 Finance contracts, consumer loans and pay advances receivable, net of allowances for credit losses of $832,832 and $832,231, respectively 11,710,436 13,792,791 Prepaid reinsurance premiums 4,947,591 3,076,017 Premiums receivable, net of allowance of $97,153 and $325,000, respectively 1,762,034 246,787 Due from reinsurers, net 7,654,605 2,797,648 Deferred acquisition costs, net 627,276 1,192,260 Deferred income taxes 2,197,111 2,915,894 Property and equipment, net 5,191,134 5,381,780 Other assets 1,966,855 1,275,701 Goodwill 1,957,094 2,795,750 ------------ ------------ TOTAL ASSETS $ 58,271,989 $ 55,067,467 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 11,424,103 $ 9,765,848 Unearned premiums 14,292,343 13,038,417 Revolving credit outstanding 7,956,101 8,091,034 Bank overdraft 4,344,423 3,212,962 Unearned commissions 2,863,123 2,505,690 Due to third party insurers -- 368,399 Accounts payable and accrued expenses 1,803,947 1,960,187 Premium deposits 300,733 382,058 Drafts payable to insurance companies 1,243,309 786,875 ------------ ------------ TOTAL LIABILITIES 44,228,082 40,111,470 ------------ ------------ Commitments and contingencies -- -- Shareholders' equity: Common stock of $.01 par value. Authorized 25,000,000 shares, issued 3,410,667 shares, and outstanding 3,029,201 and 3,330,367, respectively 34,107 34,107 Additional paid in capital 12,830,058 12,894,630 Accumulated other comprehensive income (287,677) (1,300,404) Retained earnings 2,313,185 3,642,066 Treasury stock, 381,466 and 80,300 shares, respectively, at cost (845,766) (314,402) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 14,043,907 14,955,997 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,271,989 $ 55,067,467 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues: Gross premiums written $ 6,250,643 $ 7,455,722 $ 25,449,702 $ 25,617,159 Gross premiums ceded (2,136,008) (1,310,725) (8,952,322) (1,974,812) ------------ ------------ ------------ ------------ Net premiums written 4,114,635 6,144,997 16,497,380 23,642,347 Decrease (increase) in unearned premiums, net of prepaid reinsurance premiums 1,158,598 143,714 (1,349,054) (7,152,456) ------------ ------------ ------------ ------------ Net premiums earned 5,273,233 6,288,711 15,148,326 16,489,891 Commission income 743,245 556,177 2,232,027 2,289,268 Finance revenue 1,327,607 1,522,939 4,132,308 4,222,657 MGA fees 1,534,936 2,821,019 4,542,094 5,406,910 Net investment income 288,236 365,005 787,169 900,267 Net securities gains (losses) (1,134,846) 613,295 (3,017,888) 1,026,142 Other income 641,553 503,738 2,561,108 1,742,218 ------------ ------------ ------------ ------------ Total revenue 8,673,964 12,670,884 26,385,144 32,077,353 ------------ ------------ ------------ ------------ Expenses: Losses and loss adjustment expenses 3,620,297 4,306,663 12,208,912 11,681,939 Operating and underwriting expenses 3,688,304 2,773,066 9,131,648 7,723,858 Salaries and wages 1,925,304 2,495,599 6,425,467 6,982,942 Amortization of deferred acquisition costs 632,649 1,993,185 1,182,088 2,970,673 Amortization of goodwill 130,054 144,390 416,548 454,991 ------------ ------------ ------------ ------------ Total expenses 9,996,608 11,712,903 29,364,663 29,814,403 ------------ ------------ ------------ ------------ Income (loss) before provision (credit) for income tax expense and extraordinary gain (1,322,644) 957,981 (2,979,519) 2,262,950 Provision (credit) for income tax expense 12,133 344,132 (653,817) 773,103 ------------ ------------ ------------ ------------ Net income (loss) before extraordinary gain (1,344,777) 613,849 (2,325,702) 1,489,847 Extraordinary gain (Note 7) 1,185,895 -- 1,185,895 -- ------------ ------------ ------------ ------------ Net income (loss) $ (148,882) $ 613,849 $ (1,139,807) $ 1,489,847 ============ ============ ============ ============ Earnings (loss) per share and earnings (loss) per share assuming dilution Net income (loss) before extraordinary gain $ (0.43) $ 0.18 $ (0.73) $ 0.44 Extraordinary gain (Note 7) 0.38 -- 0.37 -- ------------ ------------ ------------ ------------ Net income (loss) $ (0.05) $ 0.18 $ (0.36) $ 0.44 Weighted average number of common shares outstanding and weighted average number of common shares outstanding (assuming dilution) 3,114,634 3,376,434 3,193,920 3,385,241
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------------ ------------ Cash flow from operating activities: Net income (loss) $ (1,139,807) $ 1,489,847 Adjustments to reconcile net income to net cash flow used in operating activities: Accretion of investment discounts (40,199) (9,075) Depreciation and amortization 296,547 194,250 Amortization of goodwill 416,548 454,991 Deferred income tax benefit (expense) (77,219) (1,129,269) Net securities (gains) losses 3,017,888 (1,026,142) Amortization of deferred acquisition costs, net 1,182,088 1,204,316 Provision for credit losses 2,149,314 1,076,647 Provision for uncollectible premiums receivable 306,658 175,000 Net loss on sale of agencies 13,198 -- Extraordinary gain (1,185,895) -- Changes in operating assets and liabilities: Premiums receivable (1,821,905) (898,529) Prepaid reinsurance premiums (1,871,574) 1,076,647 Due from reinsurers (4,856,957) 24,108 Deferred acquisition costs, net (617,104) (2,342,974) Other assets (303,314) 23,839 Unpaid loss and loss adjustment expenses 1,554,886 1,937,783 Unearned premiums 1,253,926 5,801,732 Unearned commissions 357,433 923,982 Accounts payable and accrued expenses (422,282) 1,220,408 Due to third party insurers (368,399) 2,262,088 Premium deposits (81,325) 362,464 Drafts payable to insurance companies 456,434 612,268 ------------ ------------ Net cash flow provided by (used in) operating activities (1,771,818) 13,531,877 ------------ ------------ Cash flow from investing activities: Proceeds from sale of securities 58,473,671 39,199,209 Purchases of securities (56,816,723) (48,050,497) Finance contracts, consumer loans and pay advances receivable (66,959) (6,672,184) Collection of mortgage loans 7,901 4,185 Purchases of property and equipment (127,377) (1,149,017) Net cash used to acquire American Vehicle Insurance Company (301,330) -- Origination of mortgage loans (400,785) (160,000) ------------ ------------ Net cash flow provided by (used in) investing activities 768,398 (16,828,304) ------------ ------------ Cash flows from financing activities Increase in bank overdraft 1,131,461 2,409,914 Repayment of notes payable -- (312,823) Dividends paid (189,074) -- Purchases of treasury stock (718,794) (194,537) Increase (decrease) in revolving credit outstanding (134,933) 2,203,563 ------------ ------------ Net cash flow provided by financing activities 88,660 4,106,117 ------------ ------------ Net increase (decrease) in cash & cash equivalents (914,760) 809,690 Cash & cash equivalents at beginning of year 2,627,041 923,175 ------------ ------------ Cash & cash equivalents at end of period $ 1,712,281 $ 1,732,865 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 468,120 $ 453,643 ============ ============ Income taxes $ -- $ 1,529,690 ============ ============ Non-cash investing and financing activities Dividends accrued $ 60,852 $ 67,260 ============ ============ Stock received for sale of agency $ 41,484 $ -- ============ ============ Stock issued for employees' bonus $ 155,100 $ 100,000 ============ ============ Stock issued for settlement of note payable $ -- $ 104,950 ============ ============ Notes receivable for sale of agencies, net of unrealized gains $ 388,902 $ -- ============ ============
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-Q 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, 2000. The December 31, 2000 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 underwrites nonstandard and standard personal automobile insurance and 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 Agents, Inc. ("Assurance MGA"). The Company internally processes claims made by Federated National's and third-party 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 pay advances through Fed First Corp. ("Fed First"). The Company, through its wholly owned subsidiary, FedUSA, Inc. ("FedUSA"), franchises insurance agencies under the FedUSA name. The Company markets and distributes Federated National's and third-party insurers' products and its other services primarily in Central and South Florida, through a network of 22 agencies owned by its subsidiary, Federated Agency Group, Inc., 18 FedUSA franchised agencies, and approximately 400 active independent agents. In August, 2001, the Company acquired American Vehicle Insurance Company ("American Vehicle"). The Company intends to underwrite nonstandard and standard personal automobile insurance in the State of Florida through American Vehicle. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Intangible Assets, which becomes effective for fiscal years beginning after December 15, 2001. This statement addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition. This statement also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Upon adoption of this standard, the Company will cease to amortize goodwill and the remaining unamortized balance will be periodically tested for impairment. (B) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITY On January 1, 2001, the Company adopted 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 are recognized in earnings, to the extent the derivatives are not effective as hedges. Adoption of this statement did not have a material impact on the Company's results of operations or financial position. (C) CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES Effective January 1, 2001, the Company adopted the Codification of Statutory Accounting Principles guidance (the "Codification") issued by the National Association of Insurance Commissioners ("NAIC"). The Codification provides guidance for areas where statutory accounting has been silent and changes current accounting in some areas. The adoption of the Codification did not have a material effect on the Company's results of operations or financial position. 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) RECLASSIFICATIONS Certain amounts in 2000 financial statements have been reclassified to conform with 2001 presentation. (3) REVOLVING CREDIT OUTSTANDING The Company, through its wholly owned subsidiary, Federated Premium is a party to a revolving loan agreement ("Revolving Agreement") with Flatiron Funding Company LLC ("Flatiron"). The Revolving Agreement, which was amended and revised in October 2001, is structured as a sale of contracts receivable under a sale and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of Flatiron), which gives FPF, Inc. the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings. The Revolving Agreement allows for a maximum credit commitment of $7.0 million plus an initial additional amount of $700,000 for the transition from September 30, 2001 when the previous agreement expired. This initial additional amount declines by $100,000 each month beginning November 1, 2001. 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 is the prime rate plus additional interest varying from 1.25% to 2.75% based on the prior month's ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or worse to total contracts receivable. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at September 30, 2001. The Revolving Agreement, as amended, expires September 30, 2004. (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 September 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. The Plaintiffs recently filed their first amended complaint and the court has not yet set a deadline for the Company to file a response. In June 2001, a lawsuit was filed against Federated National by Virtual Insurance Processing Systems ("Virtual"), a software vendor, alleging that Federated National breached a software vending contract and misappropriated trade secrets. The case was settled with Federated National paying $20,000 to Virtual and agreeing to reinstate the software vending contract. 7 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) COMPREHENSIVE INCOME (DEFICIT) For the three and nine months ended September 30, 2001 and 2000, comprehensive income consisted of the following:
Three months ended September 30, Nine months ended September 30, 2001 2000 2001 2000 --------- -------- ----------- ---------- Net income (loss) $(148,882) $613,849 $(1,139,807) $1,489,847 Change in net unrealized losses on investments held for sale, net of income taxes 98,671 323,737 1,012,727 (189,869) --------- -------- ----------- ---------- Comprehensive income (loss) $ (50,211) $937,586 $ (127,080) $1,299,978 ========= ======== =========== ==========
(6) SEGMENT INFORMATION The Company and its subsidiaries operate principally in two business segments consisting of insurance and financing. The insurance segment consists of underwriting through Federated National, managing general agent operations through Assurance MGA, claims processing through Superior, marketing and distribution through Federated Agency Group and franchise operations through FedUSA. 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, consumer loans through RPA Financial Corporation, and pay advances through FedFirst. The financing segment provides premium financing to both Federated National's insureds and to third-party insureds, consumer loans and pay advances, 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 and practices. The Company evaluates its business segments based on GAAP pretax operating earnings. Corporate overhead expenses are not allocated to business segments. Transactions between reportable segments are accounted for at fair value. Operating segments that are not individually reportable are included in the "All Other" category, which includes the operations of 21st Century Holding Company and income tax return preparation. Information regarding components of operations for the three months and nine months ended September 30, 2001 and 2000 follows:
Three months ended September 30, Nine months ended September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Total Revenue Insurance Segment $ 8,011,569 $ 12,314,622 $ 24,858,756 $ 31,339,798 Financing Segment 1,246,354 1,522,939 4,016,141 4,222,657 All Other 857,338 655,556 3,456,149 1,176,574 ------------ ------------ ------------ ------------ Total Operating Segments 10,115,261 14,493,117 32,331,046 36,739,029 Intercompany Eliminations (1,441,297) (1,822,233) (5,945,902) (4,661,676) ------------ ------------ ------------ ------------ Total Revenues $ 8,673,964 $ 12,670,884 $ 26,385,144 $ 32,077,353 ============ ============ ============ ============ Earnings (Loss) Before Income Taxes And Extraordinary Gain Insurance Segment $ (1,132,161) $ 380,331 $ (4,579,020) $ 1,212,241 Financing Segment (355,983) 397,996 383,530 1,249,094 All Other 165,500 179,654 1,215,971 (198,385) ------------ ------------ ------------ ------------ Total Earnings (Loss) Before Income Taxes And Extraordinary Gain $ (1,322,644) $ 957,981 $ (2,979,519) $ 2,262,950 ============ ============ ============ ============
Information regarding total assets as of September 30, 2001 and December 31, 2000 follows:
2001 2000 ------------ ------------ Total Assets Insurance Segment $ 41,456,467 $ 35,503,710 Finance Segment 12,268,613 14,570,175 All Other 4,537,493 7,072,230 ------------ ------------ Total Operating Segments 58,262,573 57,146,115 Intercompany Eliminations 9,416 (2,078,648) ----------- ------------ Total Assets $ 58,271,989 $ 55,067,467 ============ ============
8 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) ACQUISITION In August 2001, the Company purchased all of the outstanding stock and all of the outstanding surplus notes of American Vehicle for $500,000 in cash. In addition, the Company agreed to pay two executives of American Vehicle a finders' fee of $400,000 over a period of three years. Income and expenses of American Vehicle beginning September 1, 2001 are included in the Company's Consolidated Statements of Operations. The fair value of the net assets (which consisted primarily of marketable securities) of American Vehicle at the date of acquisition was approximately $2.1 million. In accordance with SFAS No. 141, Business Combinations, the excess of the fair value of the net assets purchased over the purchase price has been reported as an extraordinary gain in the accompanying Consolidated Statements of Operations. American Vehicle was organized and incorporated as a multi-line property and casualty insurance company and primarily wrote nonstandard private passenger automobile liability and physical damage coverage. Pursuant to a January 8, 1998, consent order entered into with the Florida Department of Insurance (the "Department"), American Vehicle ceased writing new or renewal business and pursuant to an additional consent order, the Company had been placed in Administrative Supervision effective March 2, 2001. Pursuant to a third consent order as of August 30, 2001, the two previous consent orders were vacated and the Department approved this acquisition. Also, pursuant to the third consent order, American Vehicle is not allowed to pay dividends for three years without Department approval and all contracts with affiliates must also be approved by the Department. The Consolidated Balance Sheet at September 30, 2001 includes the balance sheet of American Vehicle. The Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and the Consolidated Statement of Cash Flow for the nine months ended September 30, 2001 include American Vehicle from the acquisition date (August 30, 2001) through September 30, 2001. Unaudited pro forma results of operations giving effect to the acquisition as of the beginning of each period presented are as follows:
Three months ended September 30, Nine months ended September 30, 2001 2000 2001 2000 ----------- ------------ ------------ ------------ Revenue $ 8,691,839 $ 12,753,202 $ 26,452,054 $ 32,291,185 Income before extraordinary gain (1,284,981) 712,290 (2,419,067) 1,275,340 Extraordinary gain 1,185,895 1,185,895 1,185,895 1,185,895 Net income (99,086) 1,898,185 (1,233,172) 2,461,235 Earnings (loss) per share and earnings (loss) per share assuming dilution Net income (loss) before extraordinary gain $ (0.41) $ 0.21 $ (0.76) $ 0.38 Extraordinary gain 0.38 0.35 0.37 0.35 Net income (loss) (0.03) 0.56 (0.39) 0.73
The above pro forma information is not necessarily indicative of the results of operations that would have had occurred had the acquisition taken place as of the beginning of each period reported, or of results, which may occur in the future. 9 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 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 internally processes claims made by Federated National's and third-party insureds through a wholly-owned claims adjusting company, Superior. The Company also offers premium financing to its own and third-party insureds through its wholly owned subsidiary, Federated Premium, and pay advances through Fed First. The Company, through its wholly owned subsidiary, FedUSA, franchises insurance agencies under the FedUSA name. The Company markets and distributes Federated National's and third-party insurers' products and its other services primarily in South Florida, through a network of 22 agencies owned by its subsidiary, Federated Agency Group, Inc., 18 FedUSA franchised agencies, and approximately 400 active independent agents. In August, 2001, the Company acquired American Vehicle Insurance Company. The Company intends to underwrite nonstandard and standard personal automobile insurance in the State of Florida through American Vehicle. 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 ratings from A. M. Best, a leading rating agency for the insurance industry, 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. During the nine months ended September 30, 2001, the Company sold, in eleven separate transactions, 13 agencies. The aggregate consideration received by the Company was approximately $1.1 million in notes receivable and 13,828 shares of 21st Century common stock. In accounting for these sales, the Company has recorded a deferred gain of $567,000, which represents the difference in consideration received and the net book value of the assets sold (primarily fixed assets and goodwill). No gain or interest income on the notes will be recognized until the book value is recovered. 10 ANALYSIS OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2001 AS COMPARED TO DECEMBER 31, 2000 Finance Contracts, Consumer Loans and Pay Advances Receivable. Finance contracts, consumer loans and pay advances receivable decreased $2.1 million from $13.8 million as of December 31, 2000 to $11.7 million as of September 30, 2001 primarily because, in 2001, the Company's Revolving Credit Line, which funds finance contracts, was reduced effective September 30, 2001. Consequently, the Company only finances contracts from Company owned agencies and Company franchised agencies and will no longer finance contracts by originated by third party agencies. Prepaid Reinsurance Premiums. Prepaid reinsurance premiums increased $1.8 million to $4.9 million as of September 30, 2001 from $3.1 million as of December 31, 2000 because the Company increased its quota-share reinsurance on automobile insurance from 30% of premiums to 50%, effective January 1, 2001. Premiums Receivable. Premiums receivable were $1.8 million as of September 30, 2001, an increase of $1.5 million as compared to $247,000 outstanding as of December 31, 2000. This increase is the result of added emphasis placed on direct bill premium financing by Federated National. Due from Reinsurers. Due from reinsurers increased $4.9 million to $7.7 million as of September 30, 2001 from $2.8 million as of December 31, 2000. This increase is the result of the increase of reinsurance discussed above. Deferred Acquisition Costs, net. Deferred acquisition costs decreased from $1.2 million as of December 31, 2000 to $627,000 as of September 30, 2001. Included in the December 31, 2000 balance were deferred commissions of $2.1 million offset by unearned ceded commissions of $877,000. As of September 30, 2000, deferred commissions were $2.1 million offset by unearned ceded commissions of $1.4 million. The increase in unearned ceded commissions is related to the increase in reinsurance discussed above. Unpaid Losses and Loss Adjustment Expenses. Unpaid loss and loss adjustment expenses increased $1.6 million, from $9.8 million at December 31, 2000 to $11.4 million as of September 30, 2001. This increase is primarily due to an increase in losses the Company has recorded recently. Bank Overdraft. Bank overdraft is the result of the cash management techniques employed by the Company. The overdraft was $4.3 million as of September 30, 2001, a $1.1 million increase from $3.2 million as of December 31, 2000. This increase is primarily related to the timing of the issuance of refund and claim checks. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Gross Premiums Written. Gross premiums written decreased $1.2 million, or 16.2% to $6.3 million for the three months ended September 30, 2001 as compared to $7.5 million for the comparable period in 2000. This decrease is due primarily to a decrease in automobile insurance written which has decreased since a rate increase took effect July 1, 2001. Net Premiums Earned. Net premiums earned decreased $1.0 million, or 16.1%, from $6.3 million for the three months ended September 30, 2000, to $5.3 million for the three months ended September 30, 2001. This decrease is because the Company had 15% automobile quota-share reinsurance in 2000 as compared to 50% automobile quota-share reinsurance in 2001. MGA Fees. MGA fees decreased $1.3 million to $1.5 million for the three-month period ended September 30, 2001 from approximately $2.8 million for the same period in 2000. The decrease is because, in 2001, the Company ceased underwriting for one nonaffiliated insurance company and price increases by the remaining insurance companies has slowed the number of policies underwritten by Assurance MGA. Net Securities Gains (Losses). The Company experienced net losses of $1.1 million for the three-month period ended September 30, 2001 compared to net gains of $613,000 for the same period in 2000. Realized gains or losses are primarily a function of the equity markets. In August 2001, the Company divested itself of its investments in common stocks and will no longer invest in common stocks. 11 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED) Losses and LAE. The Company's loss ratio, as determined in accordance with GAAP, for the three-month period ended September 30, 2001 was 68.7% compared with 68.5% for the same period in 2000. Losses and LAE incurred decreased $686,000, or 15.9%, to $3.6 million for the three-month period ended September 30, 2001 from $4.3 million for the same period in 2000. 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 15.9% decrease in losses is related to the 16.2% decrease in premiums earned. Operating and Underwriting Expenses. Operating and underwriting expenses increased $915,000, or 33.0%, to $3.7 million for the three months ended September 30, 2001 from $2.8 million for the same period in 2000. This increase is due to an increase in bad debts as the Company accelerated write-offs while maintaining reserves during the 2001 third quarter. Salaries and Wages. Salaries and wages decreased $570,000, or 22.8%, from $2.5 million in the third quarter of 2000 to $1.9 million in the same quarter in 2001. This decrease is due to a decrease in the number employees of Federated Agency Group caused by a decrease in the number of Company owned agencies from 38 in 2000 to 22 currently and due to a decrease in employees of Assurance MGA caused by a decline in policies underwritten. Amortization of Deferred Acquisition Costs. Amortization of deferred policy acquisition costs decreased to $633,000 for the three-month period ended September 30, 2001 from $2.0 million 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 decrease is due to an increase in commissions earned on reinsurance ceded, as the Company increased its automobile quota-share reinsurance from 15% in 2000 to 50% in 2001. Provision (Benefit) for Income Taxes. The provision for income taxes for the three months ended September 30, 2001 was $12,000 compared to $344,000 for the three months ended September 30, 2000. The decrease is because the Company recorded a loss before provision for income taxes and extraordinary gain of $1.3 million for the three months ended September 30, 2001 compared to pretax income of $958,000 for the same period in 2000. In the third quarter of 2001, the Company was unable to benefit the net securities loss of $1.1 million . Extraordinary Gain. In August 2001, the Company recorded an extraordinary gain of $1.2 million which represents the excess of the fair value of the net assets purchased over the purchase price when the Company acquired American Vehicle. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Gross Premiums Ceded. Gross premiums ceded increased from $2.0 million for the nine months ended September 30, 2000, to $9.0 million for the nine months ended September 30, 2001. In 2000, the Company had 15% automobile quota-share reinsurance as compared to 50% automobile quota-share reinsurance in 2001. Decrease (Increase) in Unearned Premiums, net of Prepaid Reinsurance Premiums. The decrease in unearned premiums, net of prepaid reinsurance premiums, was $1.3 million for the nine months ended September 30, 2001 compared to $7.2 million for the nine months ended September 30, 2000. This decrease is due primarily to the change in quota-share reinsurance discussed above. MGA Fees. MGA fees decreased $865,000 to $4.5 million for the nine-month period ended September 30, 2001 from $5.4 million for the same period in 2000. The decrease is because, in 2001, the Company ceased underwriting for one nonaffiliated insurance company and price increases by the remaining insurance companies has slowed the number of policies underwritten by Assurance MGA. Net Securities Gains (Losses). The Company experienced net losses of $3.0 million for the nine-month period ended September 30, 2001 compared to net gains of $1.0 million for the same period in 2000. Realized gains or losses are primarily a function of the equity markets. In August 2001, the Company divested itself of its investments in common stocks and will no longer invest in common stocks. 12 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED) Other Income. Other income increased $819,000 to $2.6 million for the nine-month period ended September 30, 2001 from $1.7 million for the same period in 2000. This increase is primarily attributable to an increase in adjusting fees due to the addition in 2000 of two nonaffiliated insurance companies as claims adjusting customers. Losses and LAE. The Company's loss ratio, as determined in accordance with GAAP, for the nine-month period ended September 30, 2001 was 80.6% compared with 70.8% for the same period in 2000. Losses and LAE incurred increased $527,000 to $12.2 million for the nine-month period ended September 30, 2001 from $11.7 million for the same period in 2000. 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. In 2001, the Company experienced a significant increase in lawsuits relating to automobile claims. Management believes this increase in lawsuits is in anticipation of the effective date of recent legislation passed by the Florida legislature. This legislation, which becomes effective October 1, 2001, includes the establishment of a pre-suit notice requirement for no fault claims, fee schedules for certain medical procedures, the licensing of health care clinics, and toughened criminal sanctions for fraud. Operating and Underwriting Expenses. Operating and underwriting expenses increased $1.4 million to $9.1 million for the nine-month period ended September 30, 2001 from $7.7 million for the same period in 2000. This increase is primarily due to an increase in bad debts as the Company accelerated write-offs while maintaining reserves during the 2001 third quarter. Amortization of Deferred Policy Acquisition Costs. Amortization of deferred policy acquisition costs decreased to $1.2 millionfor the nine-month period ended September 30, 2001 from $3.0 million 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 decrease is due to an increase in commissions earned on reinsurance ceded, as the Company increased its automobile quota-share reinsurance from 15% in 2000 to 50% in 2001. Extraordinary Gain. In August 2001, the Company recorded an extraordinary gain of $1.2 million which represents the excess of the fair value of the net assets purchased over the purchase price, when the Company acquired American Vehicle. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are revenues generated from operations, investment income and borrowings under the Revolving Agreement. Because the Company is a holding company, it is largely dependent upon dividends and fees from its subsidiaries for cash flow. Federated Premium is a party to the Revolving Agreement, which is used to fund its operations. The Revolving Agreement, which was amended and revised in October 2001, allows for a maximum credit commitment of $7.0 million plus an initial additional amount of $700,000 for the transition from September 30, 2001 when the previous agreement expired. This initial additional amount declines by $100,000 each month beginning November 1, 2001. 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 is the prime rate plus additional interest varying from 1.25% to 2.75% based on the prior month's ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or worse to total contracts receivable. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at September 30, 2001. The Revolving Agreement, as amended, expires September 30, 2004. For the nine months ended September 30, 2001, $1.8 million of cash was used in operations. Operating cash flow is expected to continue to be negative in the next three to six months as the Company raised prices on automobile insurance effective July 1, 2001, which has slowed the volume of premiums written. In the long-term, the price increase should generate cash when related automobile insurance expenditures slow. The short-term short fall in cash flow is expected to be funded by the Company's trading and investment portfolios, which is highly liquid as it consists almost entirely of readily marketable securities. Cash flow provided by investing activities was $768,000 for the nine months ended September 30, 2001, and was generated primarily from the sale of securities. Cash flow provided from financing activities was $89,000 for the nine months ended September 30, 2001, which was derived primarily from increases in the bank overdraft. The Company believes that its current capital resources will be sufficient to meet its anticipated working capital requirements through at least 2002. There can be no assurances, however, that such will be the case. 13 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) To retain its certificate of authority, the Florida insurance laws and regulations require that Federated National and American Vehicle maintain capital surplus equal to the greater of 10% of each company's liabilities or the 2000 statutory minimum capital and surplus requirement of $2.75 million as defined in the Florida Insurance Code. Federated National and American Vehicle are also required to adhere to prescribed premium-to-capital surplus ratios. Federated National and American Vehicle are required to comply with the risk-based capital requirements of the 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 that show signs of weak or deteriorating condition. As of September 30, 2001, based on calculations using the appropriate NAIC formula, Federated National's and American Vehicle's total adjusted capital are 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 $5.3 million as of September 30, 2001 and its statutory net loss was $2.5 million for the nine months ended September 30, 2001. American Vehicle's statutory capital surplus was approximately $2.9 million as of September 30, 2001 and its statutory net income was $16,000 for the nine months ended September 30, 2001. The maximum amount of dividends that 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 2001, by Federated National 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. Federated National paid no dividends during 2001 or 2000. By consent letter, American Vehicle may not pay dividends without prior approval through August 2004. 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. 14 PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS In September 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. The Plaintiffs recently filed their first amended complaint and the court has not yet set a deadline for the Company to file a response. In June 2001, a lawsuit was filed against Federated National by Virtual Insurance Processing Systems ("Virtual"), a software vendor, alleging that Federated National breached a software vending contract and misappropriated trade secrets. The case was settled with Federated National paying $20,000 to Virtual and agreeing to reinstate the software vending contract. 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 None. 15 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 12, 2001 By: /s/ Samuel A. Milne ----------------------- Title: Chief Financial Officer (Principal Accounting and Financial Officer) 16 -----END PRIVACY-ENHANCED MESSAGE-----