-----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, TSDitja4uo3PgeNdnB74e3pkIr9/gZv2OthGZjO6V/JUgmm6EQrUatetJF61YtRI y6VcdPb+H/oMeMFWaG3Ohg== 0001116502-02-001122.txt : 20020814 0001116502-02-001122.hdr.sgml : 20020814 20020814144801 ACCESSION NUMBER: 0001116502-02-001122 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02735054 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 twenty-first10q.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 JUNE 30, 2002 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 - 2,991,201 shares outstanding as of August 12, 2002. 21ST CENTURY HOLDING COMPANY INDEX PART I: FINANCIAL INFORMATION PAGE ---- ITEM 1: Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31, 2001 (Audited)..................................... 3 Consolidated Statements of Operations for the three and six months ended June 30, 2002 (Unaudited) and 2001 (Unaudited)................................................ 4 Consolidated Cash Flow Statements for the six months ended June 30, 2002 (Unaudited) and 2001 (Unaudited)................................................ 5 Notes to Consolidated Financial Statements............................... 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 10 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk............... 14 PART II: OTHER INFORMATION ITEM 1 Legal Proceedings........................................................ 16 ITEM 2 Changes in Securities.................................................... 16 ITEM 3 Defaults upon Senior Securities.......................................... 16 ITEM 4 Submission of Matters to a Vote of Security Holders...................... 16 ITEM 5 Other Information........................................................ 17 ITEM 6 Exhibits and Reports on Form 8-K......................................... 17 Signatures............................................................... 18 2 PART I ITEM I. FINANCIAL INFORMATION 21ST CENTURY HOLDING COMPANY CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 DECEMBER 31, 2001 ------------- ----------------- (UNAUDITED) ASSETS Investments Fixed maturities, available for sale at fair value $ 20,961,307 $ 16,713,321 Equity securities, at fair value 192,550 192,500 Mortgage loans 156,931 601,601 ------------ ------------ Total investments 21,310,788 17,507,422 Cash and cash equivalents 1,016,061 775,699 Finance contracts and pay advances receivable, net of allowances for credit losses of $690,905 and $723,756, respectively 13,366,005 10,813,881 Prepaid reinsurance premiums 10,789,319 5,559,909 Premiums receivable, net of allowance of $182,000 and $235,000, respectively 4,691,220 1,560,914 Reinsurance recoverable, net 7,517,356 7,053,329 Deferred acquisition costs, net (974,995) 11,952 Deferred income taxes 1,510,504 2,252,176 Property, plant and equipment, net 4,906,150 5,086,884 Other assets 1,243,288 2,442,092 Goodwill 1,789,353 1,789,353 ------------ ------------ TOTAL ASSETS $67,165,049 $54,853,611 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $13,154,617 $11,005,337 Unearned premiums 25,689,898 14,951,228 Revolving credit outstanding 6,383,581 6,676,817 Bank overdraft 2,035,168 2,147,546 Unearned commissions 1,466,304 2,098,808 Accounts payable and accrued expenses 2,452,207 2,030,015 Premium deposits 1,397,992 1,133,977 Drafts payable to insurance companies 831,739 600,752 ----------- ----------- TOTAL LIABILITIES 53,411,506 40,644,480 ----------- ----------- Commitments and contingencies -- -- Shareholders' equity: Common stock of $.01 par value. Authorized 25,000,000 shares, issued 3,410,667 shares, and outstanding 3,011,201 and 3,030,001 shares, respectively 34,107 34,107 Additional paid in capital 12,845,450 12,833,146 Accumulated other comprehensive income (1,454,828) (218,137) Retained earnings 3,303,135 2,400,301 Treasury stock, 399,466 and 380,666 shares, respectively, at cost (974,321) (840,286) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 13,753,543 14,209,131 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $67,165,049 $54,853,611 =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 ---- ---- ---- ---- Revenues: Gross premiums written $17,736,724 $11,594,744 $30,811,709 $19,199,059 Gross premiums ceded (7,497,560) (3,707,402) (13,390,990) (6,816,314) ------------ ------------ ------------ ------------ Net premiums written 10,239,164 7,887,342 17,420,719 12,382,745 Increase (decrease) in unearned premiums, net of prepaid reinsurance premiums (3,753,201) (2,695,973) (5,500,262) (2,507,652) ------------ ------------ ------------ ------------ Net premiums earned 6,485,963 5,191,369 11,920,457 9,875,093 Commission income 650,071 600,744 1,078,417 1,488,782 Finance revenue 1,192,221 1,401,830 2,253,652 2,804,701 MGA fees 799,702 1,717,626 1,758,702 3,007,158 Net investment income 362,909 262,381 697,531 498,933 Net securities gains (losses) (1,513,517) (1,809,009) (1,459,736) (1,883,042) Other income 639,504 798,089 1,874,830 1,919,555 ------------ ------------ ------------ ------------ Total revenue 8,616,853 8,163,030 18,123,853 17,711,180 ------------ ------------ ------------ ------------ Expenses: Losses and loss adjustment expenses 3,330,196 5,257,370 6,514,827 8,588,615 Operating and underwriting expenses 2,571,109 2,695,672 5,416,634 5,443,344 Salaries and wages 1,943,354 2,020,679 3,946,244 4,500,163 Amortization of deferred acquisition costs (151,197) 469,779 (221,479) 549,439 Amortization of goodwill -- 142,494 -- 286,494 ------------ ------------ ------------ ------------ Total expenses 7,693,462 10,585,994 15,656,226 19,368,055 ------------ ------------ ------------ ------------ Income (loss) before provision (credit) for income tax expense 923,391 (2,422,964) 2,467,627 (1,656,875) Provision (credit) for income tax expense 891,350 (933,293) 1,444,216 (665,950) ------------ ------------ ------------ ------------ Net income (loss) $32,041 $(1,489,671) $1,023,411 $(990,925) ============ ============ ========== ========== Net income (loss) per share and net income per share-assuming dilution $0.01 $(0.47) $0.34 $(0.31) ============ ============ ========== ========== Weighted average number of common shares outstanding 3,017,526 3,163,801 3,023,226 3,233,563 Weighted average number of common and common equivalent shares outstanding 3,020,126 3,163,801 3,023,226 3,233,563
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 2001 ---- ---- Cash flow from operating activities: Net income $ 1,023,411 $ (990,925) Adjustments to reconcile net income to net cash flow used in operating activities: Accretion of investment discounts (43,290) (13,201) Depreciation and amortization 172,164 198,380 Amortization of goodwill -- 286,494 Deferred income tax expense (credit) 741,672 (1,218,912) Net realized investment losses 1,459,736 1,883,042 Amortization of deferred acquisition costs, net (221,479) 549,439 Provision for credit losses 795,440 969,453 Provision for uncollectible premiums 103,854 6,479 Gain on sale of agency -- 13,198 Stock option expense 12,304 -- Changes in operating assets and liabilities: Premiums receivable (3,234,160) (1,046,090) Prepaid reinsurance premiums (5,229,410) (2,525,818) Due from reinsurers (464,027) (2,493,976) Deferred acquisition costs, net 1,208,426 (133,008) Other assets 1,198,804 820,782 Unpaid loss and loss adjustment expenses 2,149,280 2,782,208 Unearned premiums 10,738,670 3,255,430 Unearned commissions (632,504) 685,366 Accounts payable and accrued expenses 422,792 (755,430) Due to third party insurers -- 1,023,333 Premium deposits 264,015 258,781 Drafts payable to insurance companies 230,987 316,710 ------------ ------------ Net cash flow provided by operating activities 10,696,685 3,871,735 ------------ ------------ Cash flow from investing activities: Proceeds from sale of investment securities available for sale 9,871,793 47,730,368 Purchases of investment securities available for sale (16,836,867) (46,647,053) Finance contracts receivables, consumer loans and pay advances receivable (3,347,564) (2,000,251) Collection of mortgage loans 454,429 7,192 Purchases of property and equipment (127,216) (137,005) Proceeds from sale of property and equipment 199,687 -- Mortgage loans (9,759) (198,078) ------------ ------------ Net cash flow provided by (used in) investing activities (9,795,497) (1,244,827) ------------ ------------ Cash flows from financing activities Decrease in bank overdraft (112,378) (166,273) Dividends paid (121,177) (133,854) Purchases of treasury stock (134,035) (519,197) Increase (decrease) in revolving credit outstanding (293,236) 1,266,649 ------------ ------------ Net cash flow used in financing activities (660,826) 447,325 ------------ ------------ Net increase in cash & cash equivalents 240,362 3,074,233 Cash & cash equivalents at beginning of year 775,699 1,192,487 ------------ ------------ Cash & cash equivalents at end of period $ 1,016,061 $ 4,266,720 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 198,371 $ 326,197 ============ ============ Income taxes $ 1,150,258 $ -- ============ ============ Non-cash investing and financing activities Dividends accrued $ 60,309 $ 63,222 ============ ============ Stock received for sale of agency $ -- $ 41,484 ============ ============ Stock issued for employees' bonus $ 7,800 $ 155,100 ============ ============ Notes receivable for sale of agencies, net of unrealized gains $ -- $ 572,275 ============ ============
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-K for the year ended December 31, 2001. The December 31, 2001 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 wholly-owned subsidiaries, Federated National Insurance Company ("Federated National") and American Vehicle Insurance Company ("American Vehicle"). 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, American Vehicle and 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"). In the first quarter of 2002, the Company decided to discontinue offering pay advances through its wholly-owned subsidiary, FedFirst Corp. ("FedFirst"), due to declining profits in this line of business. The Company markets and distributes Federated National's, American Vehicle's and third-party insurers' products and its other services primarily in South Florida, through a network of 23 agencies, owned by the Company's wholly-owned subsidiary Federated Agency Group, Inc. ("Federated Agency Group"), 29 franchised agencies and approximately 125 active independent agents. The Company, through its wholly-owned subsidiary, FedUSA, Inc. ("FedUSA"), franchises agencies under the FedUSA name. In December 2000, the Company sold its first franchised agency, which began operations on January 1, 2001. The Company intends to focus its future expansion efforts on franchised agencies. The Company offers income tax preparation software and services through its 80%-owned subsidiary, Express Tax Service Company ("Express Tax"). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates associated with management's evaluation of the determination of liability for unpaid losses and loss adjustment expense and the recoverability of goodwill. In addition, significant estimates form the bases for the Company's reserves with respect to finance contracts, consumer loans, pay advances receivable, premiums receivable, deferred income taxes and loss contingencies. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, as well as current and expected economic conditions. Management constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. 6 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) (B) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). This statement addresses how goodwill should be accounted for after it has initially been recognized in the financial statements. The provisions of SFAS No. 142 no longer allow the amortization of goodwill but require that impairment be tested at least annually. The Company adopted SFAS No. 142 effective January 1, 2002. The initial application of SFAS No. 142 did not result in the need to recognize any impairment losses for goodwill resulting from the transitional impairment test. Had SFAS No. 142 been effective in 2001, the impact to reported net income and earnings per share would be as follows:
Three months ended June 30, Six months ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Reported net income $ 32,041 $(1,489,671) $ 1,023,411 $ (990,925) Adjustments: Goodwill amortization expense -- 142,494 -- 286,494 Income taxes -- (38,402) -- (75,771) ---------- ----------- ------------- ----------- Adjusted net income: $ 32,041 $(1,385,579) $ 1,023,411 $ (780,202) ========== =========== ============= =========== Net income (loss) per share and net income per share-assuming dilution: Reported $ 0.01 $ (0.47) $ 0.34 $ (0.31) Adjusted $ 0.01 $ (0.44) $ 0.34 $ (0.24)
(C) 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 for all periods presented in this Report except for the three months ended June 30, 2002, excluded the impact of warrants and stock options as such amounts are anti-dilutive. For the three months ended June 30, 2002, an additional 2,600 shares were added to the average shares outstanding representing the dilutive effect of options and warrants outstanding during the period. (D) RECLASSIFICATIONS Certain amounts in 2001 financial statements have been reclassified to conform with 2002 presentation. (3) REVOLVING CREDIT OUTSTANDING The Company, through its subsidiary, Federated Premium, is a party to a revolving loan agreement ("Revolving Agreement") with Flatiron Funding Company LLC ("Flatiron"). The Revolving Agreement 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, which was amended and revised in September 2001, allows for a maximum credit commitment of $7.0 million. The amount of an advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the 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 June 30, 2002. The Revolving Agreement, as amended, expires September 30, 2004. 7 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 is vigorously defending such action. The Company is currently awaiting the Court's ruling on its Motion to Dismiss the plaintiff's First Amended Complaint. Prior to its acquisition, American Vehicle was involved in litigation with a former officer and director of American Vehicle. The litigation was adjudicated and American Vehicle, among others, was found liable and paid the final judgment. There remained one outstanding issue, which was the assessment of attorney's fees and costs. On July 31, 2002, the Court issued a judgment of $1.1 million for such fees and costs. In accordance with the acquisition agreement, the previous owners of American Vehicle have indemnified the Company from such judgment, and over $700,000 is in escrow pending settlement. Consequently, no liability for these fees and costs has been recorded. (5) COMPREHENSIVE INCOME For the three and six months ended June 30, 2002 and 2001, comprehensive income consisted of the following:
Three months ended June 30, Six months ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net income $ 32,041 $(1,489,671) $ 1,023,411 $(990,925) Change in net unrealized losses on investments held for sale, net of income taxes (692,765) 1,379,491 (1,236,691) 914,056 --------- ----------- ----------- -------- Comprehensive income (loss) $(660,724) $ (110,180) $ (213,280) $(76,869) ========= =========== =========== ========
(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, and marketing and distribution through Federated Agency Group. The insurance segment sells personal automobile and homeowner insurance and includes substantially all aspects of the insurance, distribution and claims process. The financing segment consists of premium financing through Federated and pay advances through FedFirst. The financing segment provides premium financing to both Federated National's insureds and to third-party insureds, and prior to the first quarter of 2002, pay advances, and is marketed through the Company's distribution network of Company-owned agencies and franchised 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 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, franchise operations and income tax return preparation. 8 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) SEGMENT INFORMATION (CONTINUED) Information regarding components of operations for the three months and six months ended June 30, 2002 and 2001 follows:
Three months ended June 30, Six months ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Total Revenue Insurance Segment $7,788,138 $ 8,298,527 $15,975,503 $16,847,187 Financing Segment 1,075,743 1,389,037 2,076,507 2,769,787 All Other 410,610 1,712,262 1,624,062 2,598,811 ---------- ----------- ----------- ----------- Total Operating Segments $9,274,491 11,399,826 19,676,072 22,215,785 Intercompany Eliminations (657,638) (3,236,796) (1,552,219) (4,504,605) ---------- ----------- ----------- ----------- Total Revenues $8,616,853 $ 8,163,030 $18,123,853 $17,711,180 ========== =========== =========== =========== Earnings Before Income Taxes Insurance Segment $ 236,465 $(3,177,072) $ 637,879 $(3,446,859) Financing Segment 411,065 458,629 570,299 739,513 All Other 275,861 295,479 1,259,449 1,050,471 ---------- ----------- ----------- ----------- Total Earnings before Income Taxes $ 923,391 $(2,422,964) $ 2,467,627 $(1,656,875) ========== =========== =========== ===========
Information regarding total assets as of June 30, 2002 and December 31, 2001 follows: 2002 2001 ---- ---- Total Assets Insurance Segment $54,083,689 $40,503,331 Finance Segment 10,987,196 10,697,865 All Other 2,078,738 3,630,319 --------- --------- Total Operating Segments 67,149,623 54,831,515 Intercompany Eliminations 15,426 22,096 ----------- ----------- Total Assets $67,165,049 $54,853,611 =========== =========== (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. American Vehicle was organized and incorporated as a multi-line property and casualty insurance company and primarily writes nonstandard private passenger automobile liability and physical damage coverage. The Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 include the balance sheets of American Vehicle. The Consolidated Statements of Operations for the three and six months ended June 30, 2002 and the Consolidated Statement of Cash Flow for the six months ended June 30, 2002 include American Vehicle. Unaudited pro forma results of operations for the three and six months ended June 30, 2001 giving effect to the acquisition at the beginning of each period is as follows:
Three months Six months ------------ ---------- Revenue $8,639,952 $18,172,888 Income (loss) before extraordinary gain (38,069) 876,863 Extraordinary gain 1,185,895 1,185,895 Net income 1,147,826 2,062,758 Earnings (loss) per share and earnings (loss) per share assuming dilution Net income (loss) before extraordinary gain $(0.01) $0.29 Extraordinary gain 0.39 0.39 Net income (loss) 0.38 0.68
The above pro forma information is not necessarily indicative of the results of operations that would have occurred had the acquisition taken place as of January 1, 2001, or of results that 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 and the composition of the Company's investment portfolio; 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 wholly-owned subsidiaries, Federated National and American Vehicle. 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, American Vehicle and 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. In the first quarter of 2002, the Company decided to discontinue offering pay advances through its wholly-owned subsidiary, FedFirst, due to declining profits in this line of business. The Company markets and distributes Federated National's, American Vehicle's and third-party insurers' products and its other services primarily in South Florida, through a network of 23 agencies owned by the Company's wholly-owned subsidiary Federated Agency Group, Inc. ("Federated Agency Group"), 29 franchised agencies and approximately 125 active independent agents. The Company, through its wholly-owned subsidiary, FedUSA, franchises agencies under the FedUSA name. In December 2000, the Company sold its first franchised agency, which began operations on January 1, 2001. The Company intends to focus its future expansion efforts on franchised agencies. The Company offers income tax preparation software and services through its 80% owned subsidiary, Express Tax. 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 the Company's estimated liabilities for unpaid losses and LAE is less than actual losses and LAE, the Company will be required to increase reserves with a corresponding reduction in the Company'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, which market their products through agents, as well as companies, which sell insurance directly to customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and reduced acquisition costs. The Company may also face competition from new or temporary entrants in its niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below that of the Company. Although, the Company's pricing is inevitably influenced to some degree by that of its competitors, the Company's management believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and superior service to its agents and insureds. The Company competes with respect to automobile insurance in Florida with more than 100 companies which underwrite personal automobile insurance. 10 ANALYSIS OF FINANCIAL CONDITION AS OF MARCH 31, 2002 AS COMPARED TO DECEMBER 31, 2001 INVESTMENTS. Investments increased $3.8 million, or 21.7%, to $21.3.3 million as of June 30, 2002 as compared to $17.5 million as of December 31, 2001. This increase in investments is the result of an increase in premiums written discussed below. FINANCE CONTRACTS AND PAY ADVANCES RECEIVABLE. Finance contracts and pay advances receivable increased $2.6 million, or 23.6%, to $13.4 million as of June 30, 2002 from $10.8 as of December 31, 2001. This increase is also the result of the increase in premiums written discussed below. PREPAID REINSURANCE PREMIUMS. Prepaid reinsurance premiums increased $5.2 million to $10.8 million as of June 30, 2002 from $5.6 million as of December 31, 2001 This increase is also the result of the increase in premiums written, partially offset by a decrease in Federated National's quota-share reinsurance on automobile insurance from 50% of premiums written in 2001 to 40% for premiums written in 2002. American Vehicle reinsures 80% of its premiums written and began operations in November 2001. PREMIUMS RECEIVABLE. Premiums receivable increased $3.1 million from $1.6 million as of December 31, 2001 to $4.7 million as of June 30, 2002. This increase is the result of the increase in premiums written plus added emphasis on payment plan automobile insurance policies. DEFERRED ACQUISITION COSTS, NET. Deferred acquisition costs decreased from $11,000 as of December 31, 2001 to a credit of $975,000 as of June 30, 2002. Included in the December 31, 2001 balance were deferred commissions of $1.7 million offset by unearned ceded commissions of $1.7 million. As of June 30, 2002, deferred commissions were $2.1 million offset by unearned ceded commissions of $3.1 million. The increase in unearned ceded commissions is related to American Vehicle, which is 80% reinsured and began operations in November 2001. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid losses and loss adjustment expenses increased $2.2 million to $13.2 million as of June 30, 2002 from $11.0 million as of December 31, 2001. This increase is primarily related to accrued losses of American Vehicle. UNEARNED PREMIUMS. Unearned premiums increased $10.7 million to $25.7 million as of June 30, 2002 from $15.0 million as of December 31, 2001. This increase is the result of the increase in premiums written primarily through American Vehicle. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 GROSS PREMIUMS WRITTEN. Gross premiums written increased $6.1 million, or 53.0%, to $17.7 million for the three months ended June 30, 2002 as compared to $11.6 million for the comparable period in 2001. $4.9 million of this increase is attributable to American Vehicle, which was acquired in August 2001. Federated National's written automobile premiums increased $1.7 million primarily because a number of the Company's competitors are currently no longer writing new automobile insurance policies in Florida. GROSS PREMIUMS CEDED. Gross premiums ceded increased $3.8 million to $7.5 million for the three months ended June 30, 2002, from $3.7 million for the three months ended June 30, 2001. This increase is primarily due to American Vehicle, which cedes 80% of its premium. Federated National decreased its quota-share reinsurance on automobile insurance from 50% of premiums written in 2001 to 40% for premiums written in 2002. INCREASE (DECREASE) IN UNEARNED PREMIUMS, NET OF PREPAID REINSURANCE PREMIUMS. The increase (decrease) in unearned premiums, net of prepaid reinsurance premiums was a negative $3.8 million for the three months ended June 30, 2002 compared to a negative $2.7 million for the three months ended June 30, 2001. This change is due primarily to the increase in premiums written and premiums ceded discussed above. MGA FEES. MGA fees declined $918,000 to $800,000 for the three-month period ended June 30, 2002 from $1.7 million for the same period in 2001. The decrease is because the Company ceased underwriting for a non-affiliated insurance client in the fourth quarter of 2001. NET SECURITIES GAINS (LOSSES). The Company experienced net losses of $1.5 million for the six-month period ended June 30, 2002 compared to net losses of $1.8 million for the same period in 2001. In June 2002, the Company recorded a loss of $1.5 million on its $2.5 million investment in WorldCom bonds. In the second quarter of 2001, the Company recorded losses on its common stock portfolio, which was liquidated in the third quarter of 2001. For additional information regarding the investment portfolio see "Quantitative and Qualitative Disclosures About Market Risk" below. 11 RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 (CONTINUED) LOSSES AND LAE. The Company's loss ratio, as determined in accordance with GAAP, for the three-month period ended June 30, 2002 was 51.4% compared with 101.3% for the same period in 2001. Losses and LAE incurred decreased $1.9 million to $3.3 million for the three-month period ended June 30, 2002 from $5.3 million for the same period in 2001. 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 attributes the decrease in the loss ratio to a number of factors, including premium increases in July 2001, management changes to its claims adjusting subsidiary in June 2001, a decrease in premiums written in Miami-Dade County, Florida, the cancellation of independent agents that write high loss business and a new law in Florida that 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. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred policy acquisition costs decreased from $470,000 for the three-month period ended June 30, 2001 to a credit $151,000 for the same period in 2002. 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 because American Vehicle, which was acquired in August 2001, reinsures 80% of its premiums written. AMORTIZATION OF GOODWILL. Amortization of goodwill was discontinued effective January 1, 2002 in accordance with SFAS No. 142. See Note 2 (B) above. PROVISION (CREDIT) FOR INCOME TAX EXPENSE. Income tax expense has been provided at a rate of 96.5% for the three months ended June 30, 2002 compared with 38.5% for the same period in 2001. The rate in 2002 is higher than in 2001 because the Company can no longer benefit capital losses. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 GROSS PREMIUMS WRITTEN. Gross premiums written increased $11.6 million, or 60.4%, to $30.8 million for the six months ended June 30, 2002 as compared to $19.2 million for the comparable period in 2001. American Vehicle, which began operations in November 2001, wrote $8.8 million of this increase. The remaining increase, which was written by Federated National, is due to a decrease in competition in Florida auto insurance market as several competitors are no longer writing new policies in Florida. GROSS PREMIUMS CEDED. Gross premiums ceded increased from $6.8 million for the six months ended June 30, 2001, to $13.4 million for the six months ended June 30, 2002. For 2002, Federated National currently reinsures through a quota-share agreement 40% of its automobile premiums and American Vehicle reinsures 80% of its written premiums. In 2001, Federated National reinsured 50% of automobile premiums. The amount of quota share reinsurance maintained by Federated National is determined by management based on estimated annual written premiums and estimated year-end surplus in order to comply with insurance regulations. American Vehicle maintains high quota share reinsurance to minimize risk. INCREASE (DECREASE) IN UNEARNED PREMIUMS, NET OF PREPAID REINSURANCE PREMIUMS. The decrease in unearned premiums, net of prepaid reinsurance premiums, was $5.5 million for the six months ended June 30, 2002 compared to $2.5 million for the six months ended June 30, 2001. This increase is due primarily to the change in premiums written and premiums ceded discussed above. COMMISSION INCOME. Commission income decreased $410,000 to $1.1 million for the six-month period ended June 30, 2002 from $1.5 for the same period in 2001. Commission income consists of fees earned by Company-owned agencies placing business with third party insurers. This decrease reflects the Company's sale or closure of 15 agencies in 2001. MGA FEES. MGA fees declined $1.2 million to $1.8 million for the six-month period ended June 30, 2002 from $3.0 million for the same period in 2001. The decrease is because the Company ceased underwriting for a non-affiliated insurance client in the fourth quarter of 2001. NET SECURITIES GAINS (LOSSES). The Company experienced net losses of $1.5 million for the six-month period ended June 30, 2002 compared to net losses of $1.9 million for the same period in 2001. In June 2002, the Company recorded a loss of $1.5 million on its $2.5 million investment in Worldcom bonds. In the second quarter of 2001, the Company recorded losses on its common stock portfolio, which was liquidated in the third quarter of 2001. For additional information regarding the investment portfolio see "Quantitative and Qualitative Disclosures About Market Risk" below. 12 RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 (CONTINUED) LOSSES AND LAE. The Company's loss ratio, as determined in accordance with GAAP, for the six-month period ended June 30, 2002 was 55% compared with 87% for the same period in 2001. Losses and LAE incurred decreased $2.1 million to $6.5 million for the six-month period ended June 30, 2002 from $8.6 million for the same period in 2001. 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 attributes the decrease in the loss ratio to a number of factors, including premium increases in July 2001, management changes to its claims adjusting subsidiary in June 2001, a decrease in premiums written in Miami-Dade County, Florida, the cancellation of independent agents that write high loss business and a new law in Florida that 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. SALARIES AND WAGES. Salaries and wages decreased $554,000 to $3.9 million for the six-month period ended June 30, 2002 from $4.5 million for the same period in 2001. This decrease is related primarily to the reduction in the number of Company-owned agencies from 38 to 23 through sale and closures. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred policy acquisition costs decreased from $549,000 for the six-month period ended June 30, 2001 to a credit $221,000 for the same period in 2002. 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 because American Vehicle, which was acquired in August 2001, reinsures 80% of its premiums written. AMORTIZATION OF GOODWILL. Amortization of goodwill was discontinued effective January 1, 2002 in accordance with SFAS No. 142. See Note 2 (B) above. PROVISION (CREDIT) FOR INCOME TAX EXPENSE. Income tax expense has been provided at a rate of 58.5% for the six months ended June 30, 2002 compared with 40.2% for the same period in 2001. The rate in 2002 is higher than in 2001 because the Company can no longer benefit capital losses. 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 September 2001, allows for a maximum credit commitment of $7.0 million. The amount of an advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the 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, as amended, expires September 30, 2004. Outstanding borrowings under the Revolving Agreement as of June 30, 2002 and December 31, 2001 were approximately $6.4 million and $6.7 million, respectively. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at June 30, 2002. For the six months ended June 30, 2002, operations generated operating cash flow of $10.7 million, which was primarily attributable to the increase in premiums written. Operating cash flow is currently expected to be positive in both the short-term and the reasonably foreseeable future. In addition, the Company's investment portfolio is highly liquid as it consists almost entirely of readily marketable securities. Cash flow used in investing activities was $9.8 million for the six months ended June 30, 2002 as the Company invested the cash flow from operating activities. To the extent that operations continue to generate cash, the Company expects cash flow deficits from investing activities, as cash from operations is invested. Cash deficit from financing activities was $660,000 for the six months ended June 30, 2002, as the Company reduced its bank overdraft, purchased treasury stock, paid dividends and reduced the amount outstanding under its Revolving Agreement. The Company believes that its current capital resources, together with cash flow from its operations, will be sufficient to meet its currently anticipated working capital requirements. There can be no assurances, however, that such will be the case. 13 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) To retain its certificate of authority, Florida insurance laws and regulations require that Federated National and American Vehicle maintain capital surplus equal to the greater of 10% of its liabilities or the 2002 statutory minimum capital and surplus requirement of $3.0 million as defined in the Florida Insurance Code. The insurance companies are also required to adhere to prescribed premium-to-capital surplus ratios. In 2000 and 2001, Federated National violated these ratios and received a $1,000 fine for 2000 and has not received notice of any penalties for the 2001 violation. Through June 30, 2002, net premiums written to date are close to exceeding the maximum allowed for the year. To slow the amount of premiums written, the Company has ceased to write new homeowner's policies and is writing six-month automobile policies. However, the Florida Department of Insurance may deem these steps inadequate and require further restrictive actions. The maximum amount of dividends that can be paid by Florida insurance companies without prior approval of the Florida Department of Insurance, is subject to restrictions relating to statutory surplus. The maximum dividend that may be paid in 2002 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. American Vehicle may not pay dividends in 2002. No dividends were paid by either company during 2002 or 2001. Insurance companies 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 who show signs of weak or deteriorating condition. As of June 30, 2002, 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 and American Vehicle's statutory capital surplus levels as of June 30, 2002 were approximately $4.4 million and $3.3 million, respectively, and statutory net income for the six months ended June 30, 2002 was $76,000 for Federated National and a net loss of $85,000 for American Vehicle. Included in statutory net income (loss) was a pretax and after tax write down of WorldCom bonds of $1.2 million for Federated National and $300,000 for American Vehicle. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information related to quantitative and qualitative disclosures about market risk was included under Item 7a, "Quantitative and Qualitative Disclosures about Market Risk" in the Company's Annual Report on Form 10-K as of December 31, 2001. No material changes have occurred in market risk since this information was disclosed except as discussed below. The Company's fixed maturity investment portfolio is available for sale and is carried at fair value. Gains, that represent securities with a fair value in excess of amortized cost, and losses (amortized cost is in excess of fair value) that are deemed temporary by management are recorded in shareholders' equity in accumulated other comprehensive income. Losses that are deemed other than temporary by management are recorded as securities losses in the consolidated statement of operations. In June 2002, the Company recorded a $1.5 million securities loss for its $2.5 million investment in WorldCom bonds leaving an amortized cost for such bonds of $1.0 million. 14 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED). A summary of the fixed maturity investment portfolio as of June 30, 2002 follows:
Amortized Cost Fair Value Gain (Loss) -------------- ---------- ----------- Corporate Securities Communications Industry $ 7,224,547 $ 5,821,115 $(1,403,432) Financial Industry 2,194,382 2,139,523 (54,859) Other Industries 2,094,856 2,042,359 (52,497) ----------- ----------- ----------- Total Corporate Securities 11,513,785 10,002,997 (1,510,788) Obligations of State and Municipal Subdivisions 6,117,920 6,126,467 8,547 U. S. Government and Government Agencies 4,784,430 4,831,843 47,413 ----------- ----------- ----------- Total Fixed Maturities $22,416,135 $20,961,307 $(1,454,828) =========== =========== ===========
As shown in the table above, the Company had investments with a fair value of $5.8 million and amortized cost of $7.2 million in the communications industry. At the time these investments were made, the Company believed that these were prudent and would enhance the yield on the investment portfolio. Since the disclosure by WorldCom of its accounting fraud, the Company has limited its investment purchases to U. S. Government bonds. In addition, the Company has decided to seek outside professional management for its portfolio. 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 is vigorously defending such action. The Company is currently awaiting the Court's ruling on its Motion to Dismiss the plaintiff's First Amended Complaint. Prior to its acquisition, American Vehicle was involved in litigation with a former officer and director of American Vehicle. The litigation was adjudicated and American Vehicle, among others, was found liable and paid the final judgment. There remained one outstanding issue, which was the assessment of attorney's fees and costs. On July 31, 2002, the Court issued a judgment of $1.1 million for such fees and costs. In accordance with the acquisition agreement, the previous owners of American Vehicle have indemnified the Company from such judgment, and over $700,000 is in escrow pending settlement. Consequently, no liability for these fees and costs has been recorded. ITEM 2 CHANGES IN SECURITIES During the quarter ended June 30, 2002, the Company issued 2,600 shares of common stock to an officer and director representing his bonus in accordance with his employment contract. The foregoing shares were issued without registration pursuant to the exemption afforded by Section4(2) of the Securities Act of 1933. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 4, 2002, the Company held its Annual Meeting of Shareholders (the "Meeting"). At the Meeting, the shareholders reelected Carl Dorf and Charles B. Hart, Jr. to the Board of Directors and voted upon the adoption of the 2002 Stock Option Plan in which 1,200,000 shares of the Company's common stock, $.01 par value per share, would be issuable to employees, consultants, independent contractors, officers and directors. With respect to the 2002 Option Plan, 1,412,441 shares were voted in favor, 36,095 shares were voted against and 1,756,808 shares abstained. There were no broker non-votes. ITEM 5 OTHER INFORMATION In August, Samuel A. Milne, the Company's Chief Financial Officer resigned to take a position with a de novo bank in Miami. The Company has appointed J. G. Jennings, III as the new Chief Financial Officer. Mr. Jennings has been the Company's Controller since May 2000 and from September 1990 to May 2000 was Controller of American Vehicle Insurance Company. 16 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K Exhibit 99.1 - Statements Required by 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 17 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: August 14, 2002 By: /s/ J. G. Jennings, III --------------------------- Title: Chief Financial Officer 18 EX-99.1 3 exh99-1.txt STATEMENTS REQUIRED EXHIBIT 99.1 STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of 21st Century Holding Company (the "Company") for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward J. Lawson, Chief Executive Officer of the Company, certify that - the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edward J. Lawson - -------------------- Edward J. Lawson August 14, 2002 In connection with the Quarterly Report on Form 10-Q of 21st Century Holding Company (the "Company") for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. G. Jennings, III, Chief Financial Officer of the Company, certify that - the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ J. G. Jennings, III - ----------------------- J. G. Jennings, III August 14, 2002 In connection with the Quarterly Report on Form 10-Q of 21st Century Holding Company (the "Company") for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Samuel A. Milne, former Chief Financial Officer of the Company, certify that - the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Samuel A. Milne - ------------------- Samuel A. Milne August 14, 2002 The foregoing certificates are made solely for the purpose of 18 U. S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. -----END PRIVACY-ENHANCED MESSAGE-----