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 MARCH 31, 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 - 3,165,201 shares outstanding as of May 10, 2001.
21ST CENTURY HOLDING COMPANY
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
ITEM 1:
Consolidated Balance Sheets
as of March 31, 2001 (Unaudited)
and December 31, 2000 (Audited)..................................... 3
Consolidated Statements of Operations
for the three months ended March 31, 2001 (Unaudited)
and 2000 (Unaudited)................................................ 4
Consolidated Cash Flow Statements
for the three months ended March 31, 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........................................................ 13
Signature................................................................ 14
2
PART I
ITEM I. FINANCIAL INFORMATION
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 DECEMBER 31, 2000
(UNAUDITED)
ASSETS
Investments
Fixed maturities, available for sale at fair value $ 12,878,580 $ 15,691,147
Equity securities, at fair value 1,751,947 2,889,627
Mortgage loans 488,274 385,024
------------ ------------
Total investments 15,118,801 18,965,798
Cash and cash equivalents 7,111,557 2,627,041
Finance contracts, consumer loans and pay advances receivable, net of allowances for
credit losses of $719,935 and $832,231, respectively 13,695,879 13,792,791
Prepaid reinsurance premiums 5,094,813 3,076,017
Premiums receivable, net of allowance of $199,866 and $325,000, respectively 244,835 246,787
Due from reinsurers, net 3,142,730 2,797,648
Deferred acquisition costs, net 612,750 1,192,260
Deferred income taxes 3,414,845 2,915,894
Property, Plant and Equipment net 5,368,708 5,381,780
Other assets 748,325 1,275,701
Goodwill 2,630,341 2,795,750
------------ ------------
TOTAL ASSETS $ 57,183,584 $ 55,067,467
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 10,318,550 $ 9,765,848
Unearned premiums 12,938,930 13,038,417
Revolving credit outstanding 8,342,984 8,091,034
Bank overdraft 2,403,207 3,212,962
Unearned commissions 2,708,905 2,505,690
Due to third party insurers 2,618,417 368,399
Accounts payable and accrued expenses 1,612,440 1,960,187
Premium deposits 895,939 382,058
Drafts payable to insurance companies 796,293 786,875
------------ ------------
TOTAL LIABILITIES 42,635,665 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 3,172,739
and 3,330,367, respectively 34,107 34,107
Additional paid in capital 12,820,816 12,894,630
Accumulated other comprehensive income (1,765,839) (1,300,404)
Retained earnings 4,075,085 3,642,066
Treasury stock, 237,928 and 80,300 shares, respectively, at cost (616,250) (314,402)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 14,547,919 14,955,997
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,183,584 $ 55,067,467
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2001 2000
Revenues:
Gross premiums written $ 7,604,315 $ 8,954,703
Gross premiums ceded (3,108,912) 247,184
----------- -----------
Net premiums written 4,495,403 9,201,887
Increase (decrease) in unearned premiums, net
of prepaid reinsurance premiums 188,321 (4,898,487)
----------- -----------
Net premiums earned 4,683,724 4,303,400
Commission income 888,038 1,254,184
Finance revenue 1,402,871 1,209,581
MGA fees 1,289,532 725,836
Net investment income 236,552 220,160
Net realized investment gains (losses) (74,033) 462,173
Other income 1,121,466 854,797
----------- -----------
Total revenue 9,548,150 9,030,131
----------- -----------
Expenses:
Losses and loss adjustment expenses 3,331,245 2,998,076
Operating and underwriting expenses 2,747,672 2,328,091
Salaries and wages 2,479,484 2,277,979
Amortization of deferred acquisition costs 79,660 449,432
Amortization of goodwill 144,000 155,301
----------- -----------
Total expenses 8,782,061 8,208,879
----------- -----------
Income before provision for income
tax expense 766,089 821,252
Provision for income tax expense 267,343 280,023
----------- -----------
Net income $ 498,746 $ 541,229
=========== ===========
Net income per share and net income per share-
assuming dilution $ 0.15 $ 0.16
=========== ===========
Weighted average number of common shares outstanding and
Weighted average number of common shares outstanding 3,303,324 3,385,222
(assuming dilution)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2001 2000
Cash flow from operating activities:
Net income $ 498,746 $ 541,229
Adjustments to reconcile net income to net cash flow used
in operating activities:
Amortization (accretion) of investment premiums (discounts) (1,809) 2,486
Depreciation and amortization 83,775 49,264
Amortization of goodwill 144,000 155,301
Deferred income tax expense (218,136) (98,285)
Net realized investment (gains) losses 74,033 (462,173)
Amortization of deferred acquisition costs, net 79,660 449,432
Provision for credit losses 402,367 350,696
Gain on sale of agency (16,075) --
Changes in operating assets and liabilities:
Premiums receivable 127,220 (205,755)
Prepaid reinsurance premiums (2,018,796) 963,760
Due from reinsurers (345,082) 997,631
Deferred acquisition costs, net 499,850 (1,275,118)
Other assets 523,376 (125,786)
Unpaid loss and loss adjustment expenses 552,702 462,821
Unearned premiums (99,487) 3,547,762
Unearned commissions 203,215 22,100
Accounts payable and accrued expenses (192,580) 931,083
Due to third party insurers 2,250,018 1,369,757
Premium deposits 513,881 89,790
Drafts payable to insurance companies 9,418 1,339,218
------------ ------------
Net cash flow provided by operating activities 3,070,296 9,105,213
------------ ------------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale 11,051,126 14,852,897
Purchases of investment securities available for sale (7,919,353) (19,109,649)
Finance contracts receivables, consumer loans and pay advances receivable (430,723) (1,930,790)
Collection of mortgage loans 3,559 1,061
Purchases of property and equipment (70,703) (48,706)
Mortgage Loans (106,809) --
------------ ------------
Net cash flow provided by (used in) investing activities 2,527,097 (6,235,187)
------------ ------------
Cash flows from financing activities
Increase (decrease) in bank overdraft (809,755) 704,793
Repayment of notes payable -- (126,480)
Dividends paid (65,794) --
Purchases of treasury stock (489,278) --
Increase in revolving credit outstanding 251,950 535,790
------------ ------------
Net cash flow provided by financing activities (1,112,877) 1,114,103
------------ ------------
Net increase in cash & cash equivalents 4,484,516 3,984,129
Cash & cash equivalents at beginning of year 2,627,041 923,175
------------ ------------
Cash & cash equivalents at end of period $ 7,111,557 $ 4,907,304
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 168,091 $ 107,124
============ ============
Income taxes $ -- $ 120,000
============ ============
Non-cash investing and financing activities
Dividends accrued $ 65,727 $ --
============ ============
Stock received for sale of agency $ 41,484 $ --
============ ============
Stock issued for employees' bonus $ 155,100 $ 100,000
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
The accompanying unaudited consolidated financial statements of 21st
Century Holding Company ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-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 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 29 Company-owned agencies, 10 FedUSA franchised
agencies, and approximately 500 active independent agents. The Company intends
to sell approximately 25 of its Company-owned agencies to individual
employees/managers and convert them to franchised operations. As of April 30,
2001, six such agencies had been converted to franchised operations. The Company
intends to focus its future expansion efforts on franchised agencies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 2001, the FASB expects to finalize its exposure draft,
Business, Combinations and Intangible Assets - Accounting for Goodwill, which
will become effective almost immediately. The key elements of the exposure draft
are (1) the elimination of the pooling-of-interest method for business
combinations, (2) the elimination of amortization of goodwill for both new and
previous acquisitions, (3) intangible assets must be recognized separately from
goodwill, (4) the impairment of goodwill must be tested whenever events or
circumstances warrant, and (5) pro forma disclosures for all past periods
presented to reflect the amount of amortization which would have been reversed
had the standard been applied retroactively. Upon adoption of this proposed
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
Finance, Inc. ("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
expires September 30, 2001 and allows for a maximum credit commitment of $9.8
million, including $800,000 of overline availability for collateral not
delivered. 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 .75% to prime
only based on the prior month's average outstanding balance. Interest on the
overline availability is at the default rate of 17.5%. The Revolving Agreement
contains various operating and financial covenants, which the Company was in
compliance with at March 31, 2001.
(4) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
In June 2000, a lawsuit was filed against the Company and its directors
and executive officers seeking compensatory damages on the basis of allegations
that the Company's amended registration statement dated November 4, 1998 was
inaccurate and misleading concerning the manner in which the Company recognized
ceded insurance commission income, in violation of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. The lawsuit was filed in the United States District Court for the
Southern District of New York and seeks class action status. The plaintiff class
purportedly includes purchasers of the Company's common stock between November
5, 1998 and August 13, 1999. The Company believes that the lawsuit is without
merit and intends to vigorously defend such action. On November 1, 2000, the
Company filed a motion to dismiss this lawsuit and is awaiting a decision from
the district court.
(5) COMPREHENSIVE INCOME (DEFICIT)
For the three months ended March 31, 2001 and 2000, comprehensive
income consisted of the following:
2001 2000
---- ----
Net income $ 498,746 $541,229
Change in net unrealized losses on investments
held for sale, net of income taxes (465,435) (1,131)
-------- --------
Comprehensive income $ 33,311 $540,098
======= ========
7
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Adjusting, 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 Corporation. 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-month
period ending March 31, 2001 and 2000 follows:
2001 2000
---- ----
Total Revenue
Insurance Segment $ 8,566,104 $ 7,324,648
Financing Segment 1,380,750 1,209,581
All Other 869,105 816,998
------------ ------------
Total Operating Segments 10,815,959 9,351,227
Intercompany Eliminations (1,267,809) (321,096)
------------ ------------
Total Revenues $ 9,548,150 $ 9,030,131
============ ============
Earnings Before Income Taxes
Insurance Segment $ (289,545) $ (28,517)
Financing Segment 280,884 326,431
All Other 774,750 523,338
------------ ------------
Total Earnings before Income Taxes $ 766,089 $ 821,252
============ ============
Information regarding total assets as of March 31, 2001 and December
31,2000 follows:
2001 2000
---- ----
Total Assets
Insurance Segment $ 36,438,361 $ 35,503,710
Finance Segment 14,499,456 14,570,175
All Other 8,074,741 7,072,230
------------ ------------
Total Operating Segments 59,012,558 57,146,115
Intercompany Eliminations (1,828,974) (2,078,648)
------------ ------------
Total Assets $ 57,183,584 $ 55,067,467
============ ============
(7) PENDING ACQUISITION
In March 2001, the Company agreed to purchase all of the outstanding
stock and all of the outstanding surplus notes of American Vehicle Insurance
Company ("American Vehicle") for $500,000 in cash. In addition, the Company has
agreed to pay two executives of American Vehicle a finders' fee of $400,000 over
a period of three years. The purchase is subject to approval by the Florida
Department of Insurance, and the Company anticipates that as part of that
approval, the Company will have to contribute approximately $800,000 to American
Vehicle to bring its statutory surplus to $2.75 million. For statutory purposes,
the surplus notes are considered statutory surplus. The acquisition will be
accounted for under the purchase method of accounting and is expected to create
negative goodwill.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
21st Century Holding Company (the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this report or which are otherwise made
by or on behalf of the Company. For this purpose, any statements contained in
this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "would", "estimate", or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors which may affect the Company's results include, but are not
limited to, risks related to the nature of the Company's business; dependence on
investment income; the adequacy of its liability for loss and loss adjustment
expense ("LAE"); regulation; insurance agents; claims experience; limited
experience in the insurance industry; competition; ratings by industry services;
catastrophe losses; reliance on key personnel and other risks discussed
elsewhere in this Report and in the Company's other filings with the Securities
and Exchange Commission.
OVERVIEW
The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and claims process. The Company underwrites
nonstandard and standard personal automobile insurance and 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 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 29 Company-owned agencies, 12 FedUSA franchised
agencies, and approximately 500 active independent agents. The Company intends
to sell approximately 25 of its Company-owned agencies to individual
employees/managers and convert them to franchised operations. As of April 30,
2001, six agencies had been converted to franchises. The Company intends to
focus its future expansion efforts on franchised agencies.
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, 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.
9
ANALYSIS OF FINANCIAL CONDITION
AS OF MARCH 31, 2001 AS COMPARED TO DECEMBER 31, 2000
Investments. Investments decreased $3.8 million to $15.1 million as of
March 31, 2001 as compared to $18.9 million as of December 31, 2000. This
decrease in investments is primarily because the Company had an additional $3.4
million invested in cash equivalents as of March 31, 2001.
Cash and Cash Equivalents. Cash and cash equivalents were $7.1 million
as of March 31, 2001, as compared to $2.6 million as of December 31, 2000. This
increase of $4.5 million is due primarily to an additional investment in a
short-term money market account of $3.4 million as of March 31, 2001.
Prepaid Reinsurance Premiums. Prepaid reinsurance premiums increased
$2.0 million to $5.1 million as of March 31, 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.
Due from Reinsurers. Due from reinsurers increased $345,000 to $3.1
million as of March 31, 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 $613,000 as of March 31, 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 March 31, 2000,
deferred commissions were $2.1 million offset by unearned ceded commissions of
$1.5 million. The increase in unearned ceded commissions is related to the
increase in reinsurance discussed above.
Bank Overdraft. Bank Overdraft is the result of the cash management
techniques employed by the Company. The overdraft was $2.4 million as of March
31, 2001, a $810,000 decrease from $3.2 million as of December 31, 2000. This
decrease is primarily related to the timing of the issuance of refund and claim
checks..
Due to Third Party Insurers. Due to third party insurers increased form
$368,000 as of December 31, 2000 to $2.6 million as of March 31, 2001. This
increase is primarily related to the amount of third party insurance
underwritten by Assurance MGA in March compared to December. Typically, the
number of policies underwritten in December is low compared to other months.
Premium Deposits. Premium deposits increased $514,000 to $896,000 as of
March 31, 2001 from $382,000 as of December 31, 2000. This increase is related
to the timing of the issuance policy refund checks as well as the amount of
polidies in process of being underwritten.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Gross Premiums Written. Gross premiums written decreased $1.4 million,
or 15.1% to $7.6 million for the three months ended March 31, 2000 as compared
to $9.0 million for the comparable period in 2000. This decrease is attributable
to three price increases instituted in the period from June 2000 to March 2001.
Gross Premiums Ceded. Gross premiums ceded went from a positive
$247,000 for the three months ended March 31, 2000, to a negative $3.1 million
for the three months ended March 31,2001. In the first quarter of 2000, the
Company had 15% quota-share reinsurance as compared to 50% automobile
quota-share reinsurance in the first quarter of 2001.
Increase (Decrease) in Unearned Premiums, net of Prepaid Reinsurance
Premiums. The increase (decrease) in unearned premiums, net of prepaid
reinsurance premiums was a positive $188,000 for the three months ended March
31, 2001 compared to a negative $4.9 million for the three months ended March
31, 2000. In the first quarter of 2000, premiums written were increasing by
approximately 50%, consequently, the change in unearned premiums was increasing.
In the first quarter of 2001, premiums written were relatively unchanged,
consequently the change in unearned premiums was small.
Commission Income. Commission income decreased $366,000 to $888,000 for
the three-month period ended March 31, 2001 from $1.3 million for the same
period in 2000. Commission income consists of fees earned by Company-owned
agencies placing business with third party insurers and this decrease is due to
agencies writing more Company business and less third party business.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2000 (CONTINUED)
Finance Revenue. Finance revenue increased $197,000 to $1.4 million for
the three-month period ended March 31, 2001 as compared to $1.2 million for the
same period in 2000 due to higher receivable balances.
MGA Fees. MGA fees increased $564,000 to $1.3 million for the
three-month period ended March 31, 2001 from approximately $726,000 for the same
period in 2000. The increase is because the Company began underwriting for its
largest non-affiliated insurance client in the first quarter of 2000.
Net Realized Investment Gains. The Company experienced net realized
losses of $74,000 for the three-month period ended March 31, 2001 compared to
realized gains of $462,000 for the same period in 2000, Realized gains or losses
are primarily a function of the equity markets. There can be no assurance that
the Company will record gains in the future.
Other Income. Other income increased $267,000 to $1.1 million for the
three-month period ended March 31, 2001 from $855,000 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 insurance companies.
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the three-month period ended March 31, 2001 was 71.1% compared
with 69.7% for the same period in 2000. Losses and LAE incurred increased
$334,000 to $3.3 million for the three-month period ended March 31, 2001 from
$3.0 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.
Operating and Underwriting Expenses. Operating and underwriting
expenses increased $420,000 to $2.7 million for the three-month period ended
March 31, 2001 from $2.3 million for the same period in 2000. This increase is
related primarily to underwriting costs for third party insurers.
Salaries and Wages. Salaries and wages increased $201,000 to $2.5
million for the three-month period ended March 31, 2001 from $2.3 million for
the same period in 2000. This increase is related primarily to underwriting
wages for third party insurers.
Amortization of Deferred Policy Acquisition Costs. Amortization of
deferred policy acquisition costs decreased from $449,000 for the three-month
period ended March 31, 2000 to $80,000 for the same period in 2001. 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 the
first quarter of 2000 to 50% in the first quarter of 2001.
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 allows for a maximum credit
commitment of $9.8 million, including $800,000 of overline availability for
collateral not delivered and expires September 30, 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 .75% to prime only based on the prior
month's average outstanding balance. Interest on the overline availability is at
the default rate of 17.5%. Outstanding borrowings under the Revolving Agreement
as of March 31, 2001 and December 31, 2000 were approximately $8.3 million and
$8.1 million, respectively. The Revolving Agreement contains various operating
and financial covenants, which the Company was in compliance with at March 31,
2000. The Company believes that the Revolving Agreement will be renewed upon
maturity or alternative financing will be obtained. However, there can be no
assurances that the Revolving Agreement will be renewed or that the Company will
be able to refinance the Credit Facility at reasonable terms.
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
For the three months ended March 31, 2001, operations generated
operating cash flow of $3.1million, which was primarily attributable to the
increase in amounts due third party insurers. Operating cash flow is 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 from investing
activities was $2.5 million for the quarter ended March 31, 2001 due primarily
to the sale of securities. In the future, the Company expects a cash flow
deficit from investing activities as the Company intends to invest cash from
operations. Cash deficit from financing activities was $1.1 million for the
quarter ended March 31, 2001, which was derived primarily from purchases of
treasury stock and a reduction in the bank overdraft. The Company believes that
its current capital resources, together with cash flow from its operations will
be sufficient to meet its anticipated working capital requirements through at
least 2001. There can be no assurances, however, that such will be the case.
To retain its certificate of authority, the Florida insurance laws and
regulations require that Federated National maintain capital surplus equal to
the greater of 10% of its liabilities or the 2000 statutory minimum capital and
surplus requirement of $2.75 million as defined in the Florida Insurance Code.
The Company is also required to adhere to prescribed premium-to-capital surplus
ratios.
The maximum amount of dividends, which can be paid by Florida insurance
companies without prior approval of the Florida Commissioner, is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid in 2001, by the Company without prior approval, is limited to the lesser of
statutory net income from operations of the preceding calendar year or 10% of
statutory unassigned capital surplus as of the preceding December 31. No
dividends were paid during 2001 or 2000.
The Company is 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 March 31, 2001, based on calculations using the
appropriate NAIC formula, the Company's total adjusted capital is in excess of
ratios that would require regulatory action. GAAP differs in some respects from
reporting practices prescribed or permitted by the Florida Department of
Insurance. Federated National's statutory capital surplus was approximately $6.2
million as of March 31, 2001. Statutory net income was $577,000 for the quarter
ended March 31, 2001.
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.
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PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
In June 2000, a lawsuit was filed against the Company and its directors
and executive officers seeking compensatory damages on the basis of allegations
that the Company's amended registration statement dated November 4, 1998 was
inaccurate and misleading concerning the manner in which the Company recognized
ceded insurance commission income, in violation of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. The lawsuit was filed in the United States District Court for the
Southern District of New York and seeks class action status. The plaintiff class
purportedly includes purchasers of the Company's common stock between November
5, 1998 and August 13, 1999. The Company believes that the lawsuit is without
merit and intends to vigorously defend such action. On November 1, 2000, the
Company filed a motion to dismiss this lawsuit and is awaiting a decision from
the district court.
ITEM 2
CHANGES IN SECURITIES
During the quarter ending March 31, 2001, the Company issued 51,700
shares of common stock to four employees representing their bonus in accordance
with each of their respective employment contracts. The foregoing shares were
issued without registration pursuant to the exemption afforded by Section 4 (2)
of the Securities of 1933.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
None.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
21ST CENTURY HOLDING COMPANY
DATE: MAY 14, 2001 By: /s/ Samuel A. Milne
-----------------------
Title: Chief Financial Officer
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