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, 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
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
4161 N.W. 5th Street, Plantation, FL 33317
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(Address of principal executive offices) (Zip Code)
954-581-9993
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(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 - 3,160,701 shares outstanding as of
August 10, 2001.
21ST CENTURY HOLDING COMPANY
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
ITEM 1:
Consolidated Balance Sheets
as of June 30, 2001 (Unaudited)
and December 31, 2000................................................. 3
Consolidated Statements of Operations
for the three and six months ended June 30, 2001 (Unaudited)
and 2000 (Unaudited).................................................. 4
Consolidated Cash Flow Statements
for the six months ended June 30, 2001 (Unaudited)
and 2000 (Unaudited).................................................. 5
Notes to Consolidated Financial Statements................................. 6
ITEM 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations...................... 9
PART II: OTHER INFORMATION
Other Information.......................................................... 15
Signature.................................................................. 17
2
PART I
ITEM I. FINANCIAL INFORMATION
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001
(UNAUDITED) DECEMBER 31, 2000
------------ -----------------
ASSETS
Investments
Fixed maturities, available for sale at fair value $ 14,469,243 $ 15,691,147
Equity securities, available for sale at fair value 1,483,164 2,889,627
Trading securities, at fair value 1,140,750 --
Mortgage loans 575,910 385,024
------------ ------------
Total investments 17,669,067 18,965,798
Cash and cash equivalents 7,436,030 2,627,041
Finance contracts, consumer loans and pay advances receivable, net of
allowances for credit losses of $771,588 and $832,231, respectively 14,823,589 13,792,791
Prepaid reinsurance premiums 5,601,835 3,076,017
Premiums receivable, net of allowance of $100,000 and $325,000, respectively 1,286,398 246,787
Due from reinsurers, net 5,291,624 2,797,648
Deferred acquisition costs, net 775,829 1,192,260
Deferred income taxes 3,583,323 2,915,894
Property and equipment, net 5,263,723 5,381,780
Other assets 1,027,194 1,275,701
Goodwill 1,938,981 2,795,750
------------ ------------
TOTAL ASSETS $ 64,697,593 $ 55,067,467
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 12,548,056 $ 9,765,848
Unearned premiums 16,293,847 13,038,417
Revolving credit outstanding 9,357,683 8,091,034
Bank overdraft 4,781,445 3,212,962
Unearned commissions 3,191,056 2,505,690
Due to third party insurers 1,391,732 368,399
Accounts payable and accrued expenses 1,049,657 1,960,187
Premium deposits 640,839 382,058
Drafts payable to insurance companies 1,103,585 786,875
------------ ------------
TOTAL LIABILITIES 50,357,900 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 3,161,101
and 3,330,367, respectively 34,107 34,107
Additional paid in capital 12,820,816 12,894,630
Accumulated other comprehensive income (386,348) (1,300,404)
Retained earnings 2,517,287 3,642,066
Treasury stock, 249,566 and 80,300 shares, respectively, at cost (646,169) (314,402)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 14,339,693 14,955,997
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 64,697,593 $ 55,067,467
============ ============
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,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Gross premiums written $ 11,594,744 $ 9,206,734 $ 19,199,059 $ 18,161,437
Gross premiums ceded (3,707,402) (911,271) (6,816,314) (664,087)
------------ ------------ ------------ ------------
Net premiums written 7,887,342 8,295,463 12,382,745 17,497,350
Increase (decrease) in unearned premiums, net
of prepaid reinsurance premiums (2,695,973) (2,397,683) (2,507,652) (7,296,170)
------------ ------------ ------------ ------------
Net premiums earned 5,191,369 5,897,780 9,875,093 10,201,180
Commission income 600,744 478,907 1,488,782 1,733,091
Finance revenue 1,401,830 1,490,137 2,804,701 2,699,718
MGA fees 1,717,626 1,860,253 3,007,158 2,585,891
Net investment income 262,381 315,102 498,933 535,262
Net securities gains (losses) (1,809,009) (49,326) (1,883,042) 412,847
Other income 798,089 383,485 1,919,555 1,238,480
------------ ------------ ------------ ------------
Total revenue 8,163,030 10,376,338 17,711,180 19,406,469
------------ ------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses 5,257,370 4,377,200 8,588,615 7,375,276
Operating and underwriting expenses 2,695,672 2,622,701 5,443,344 4,950,792
Salaries and wages 2,020,679 2,209,364 4,500,163 4,487,343
Amortization of deferred acquisition costs 469,779 528,056 549,439 977,488
Amortization of goodwill 142,494 155,300 286,494 310,601
------------ ------------ ------------ ------------
Total expenses 10,585,994 9,892,621 19,368,055 18,101,500
------------ ------------ ------------ ------------
Income (loss) before provision (credit) for
income tax expense (2,422,964) 483,717 (1,656,875) 1,304,969
Provision (credit) for income tax expense (933,293) 148,948 (665,950) 428,971
------------ ------------ ------------ ------------
Net income (loss) $ (1,489,671) $ 334,769 $ (990,925) $ 875,998
============ ============ ============ ============
Net income (loss) per share and net income (loss)
per share-assuming dilution $ (0.47) $ 0.10 $ (0.31) $ 0.26
============ ============ ============ ============
Weighted average number of common shares outstanding and
weighted average number of common shares outstanding 3,163,801 3,405,667 3,233,563 3,395,445
(assuming dilution)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2001 2000
------------ ------------
Cash flow from operating activities:
Net income (loss) $ (990,925) $ 875,998
Adjustments to reconcile net income to net cash flow used
in operating activities:
Accretion of investment discounts (13,201) (6,323)
Depreciation and amortization 198,380 111,555
Amortization of goodwill 286,494 310,601
Deferred income tax benefit (expense) 574,165 (500,697)
Net securities (gains) losses (1,883,042) (412,847)
Amortization of deferred acquisition costs, net 549,439 977,488
Provision for credit losses 969,453 707,209
Provision for uncollectible premiums receivable 6,479 125,000
Net loss on sale of agencies 13,198 --
Changes in operating assets and liabilities:
Premiums receivable (1,046,090) (119,311)
Prepaid reinsurance premiums (2,525,818) 886,539
Due from reinsurers (2,493,976) 80,539
Deferred acquisition costs, net (133,008) (1,651,312)
Other assets 820,782 14,482
Unpaid loss and loss adjustment expenses 2,782,208 2,201,586
Unearned premiums 3,255,430 7,853,943
Unearned commissions 685,366 293,568
Accounts payable and accrued expenses (755,430) 933,610
Due to third party insurers 1,023,333 3,979,444
Premium deposits 258,781 19,343
Drafts payable to insurance companies 316,710 2,677,532
------------ ------------
Net cash flow provided by operating activities 3,871,736 19,357,947
------------ ------------
Cash flow from investing activities:
Proceeds from sale of securities 47,730,367 21,792,982
Purchases of securities (46,647,053) (31,332,778)
Finance contracts, consumer loans and pay advances receivable (2,000,251) (5,390,545)
Collection of mortgage loans 7,192 2,144
Purchases of property and equipment (137,005) (823,899)
Origination of mortgage loans (198,078) (160,000)
------------ ------------
Net cash flow used in investing activities (1,244,828) (15,912,096)
------------ ------------
Cash flows from financing activities
Increase in bank overdraft 1,568,483 1,369,976
Repayment of notes payable -- (312,823)
Dividends paid (133,854) --
Purchases of treasury stock (519,197) (67,465)
Increase in revolving credit outstanding 1,266,649 1,179,846
Net cash flow provided by financing activities 2,182,081 2,169,534
------------ ------------
Net increase in cash & cash equivalents 4,808,989 5,615,385
Cash & cash equivalents at beginning of year 2,627,041 923,175
------------ ------------
Cash & cash equivalents at end of period $ 7,436,030 $ 6,538,560
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 326,197 $ 290,015
============ ============
Income taxes $ -- $ 500,000
============ ============
Non-cash investing and financing activities
Dividends accrued $ 63,222 $ --
============ ============
Stock received for sale of agency $ 41,484 $ --
============ ============
Stock issued for employees' bonus $ 155,100 $ 100,000
============ ============
Stock issued for settlement of note payable $ -- $ 104,950
============ ============
Notes receivable for sale of agencies, net of unrealized gains $ 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-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 Central and
South Florida, through a network of 20 agencies owned by its subsidiary,
Federated Agency Group, 19 FedUSA franchised agencies, and approximately 400
active independent agents.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS
No. 142 Goodwill and Intangible Assets, which become effective for fiscal years
beginning after December 15, 2001. The key elements of these statements 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 annually at a reporting unit
level, 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 standard, the Company will cease to
amortize goodwill and the remaining unamortized balance will be periodically
tested for impairment.
(B) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITY
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires all derivatives
to be recognized at fair value as either assets or liabilities on the balance
sheet. Any gain or loss resulting from changes in such fair value are recognized
in earnings, to the extent the derivatives are not effective as hedges. Adoption
of this statement did not have a material impact on the Company's results of
operations or financial position.
(C) CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
Effective January 1, 2001, the Company adopted the Codification of
Statutory Accounting Principles guidance (the "Codification") issued by the
National Association of Insurance Commissioners ("NAIC"). The Codification
provides guidance for areas where statutory accounting has been silent and
changes current accounting in some areas. The adoption of the Codification did
not have a material effect on the Company's results of operations or financial
position.
6
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(D) Earnings per share
Basic earnings per share ("Basic EPS") is computed by dividing net
income by the weighted average number of common shares outstanding during each
period presented. Diluted earnings per share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common stock and common
stock equivalents during the period presented; outstanding warrants and stock
options are considered common stock equivalents and are included in the
calculation using the treasury stock method. Diluted EPS excluded the impact of
warrants and stock options as such amounts are anti-dilutive.
(E) RECLASSIFICATIONS
Certain amounts in 2000 financial statements have been reclassified to
conform with 2001 presentation.
(3) REVOLVING CREDIT OUTSTANDING
The Company, through its wholly owned subsidiary, Federated Premium is
a party to a revolving loan agreement ("Revolving Agreement") with Flatiron
Funding Company LLC ("Flatiron"). The Revolving Agreement is structured as a
sale of contracts receivable under a sale and assignment agreement with FPF,
Inc. (a wholly-owned subsidiary of Flatiron), which gives FPF Inc. the right to
sell or assign these contracts receivable. Federated Premium, which services
these contracts, has recorded transactions under the Revolving Agreement as
secured borrowings. The Revolving Agreement allows for a maximum credit
commitment of $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, with
which the Company was in compliance at June 30, 2001. The Revolving Agreement
expires September 30, 2001 and the Company believes it will be renewed or
alternative financing will be obtained.
(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. On August 6, 2001, the district
court granted the Company's motion to dismiss, in part, and allowed the
plaintiffs 30 days to file an amended complaint.
In June 2001, a lawsuit was filed against Federated National by Virtual
Insurance Processing Systems, a software vendor, alleging that Federated
National breached a software vending contract and misappropriated trade secrets.
The case is pending in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida and seeks both money damages and injunctive relief. The
Company believes that the lawsuit is without merit and intends to vigorously
defend such action.
7
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) COMPREHENSIVE INCOME (DEFICIT)
For the three and six months ended June 30, 2001 and 2000,
comprehensive income consisted of the following:
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $(1,489,671) $ 334,769 $ (990,925) $ 875,998
Change in net unrealized losses on investments
held for sale, net of income taxes 1,379,491 (512,475) 914,056 (513,606)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (110,180) $ (177,706) $ (76,869) $ 362,392
=========== =========== =========== ===========
(6) SEGMENT INFORMATION
The Company and its subsidiaries operate principally in two business
segments consisting of insurance and financing. The insurance segment consists
of underwriting through Federated National, managing general agent operations
through Assurance MGA, claims processing through Superior, marketing and
distribution through Federated Agency Group and franchise operations through
FedUSA. The insurance segment sells primarily nonstandard personal automobile
insurance and includes substantially all aspects of the insurance, distribution
and claims process. The financing segment consists of premium financing through
Federated Premium Finance, consumer loans through RPA Financial Corporation, and
pay advances through FedFirst. The financing segment provides premium financing
to both Federated National's insureds and to third-party insureds, consumer
loans and pay advances, and is marketed through the Company's distribution
network of Company-owned agencies (Federated Agency Group) and independent
agents.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies and practices. The Company
evaluates its business segments based on GAAP pretax operating earnings.
Corporate overhead expenses are not allocated to business segments. Transactions
between reportable segments are accounted for at fair value.
Operating segments that are not individually reportable are included in
the "All Other" category, which includes the operations of 21st Century Holding
Company and income tax return preparation.
Information regarding components of operations for the three months and
six months ended June 30, 2001 and 2000 follows:
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Total Revenue
Insurance Segment $ 8,298,527 $ 8,446,047 $ 16,847,187 $ 15,524,294
Financing Segment 1,389,037 1,460,137 2,769,787 2,669,718
All Other 1,712,262 1,157,242 2,598,811 2,940,240
------------ ------------ ------------ ------------
Total Operating Segments 11,399,826 11,063,426 22,215,785 21,134,252
Intercompany Eliminations (3,236,796) (687,088) (4,504,605) (1,727,783)
------------ ------------ ------------ ------------
Total Revenues $ 8,163,030 $ 10,376,338 $ 17,711,180 $ 19,406,469
============ ============ ============ ============
Earnings Before Income Taxes
Insurance Segment $ (3,177,072) $ 1,035,658 $ (3,446,859) $ 1,890,442
Financing Segment 458,629 412,392 739,513 769,562
All Other 295,479 (964,333) 1,050,471 (1,355,035)
------------ ------------ ------------ ------------
Total Earnings before Income Taxes $ (2,422,964) $ 483,717 $ (1,656,875) $ 1,304,969
============ ============ ============ ============
Information regarding total assets as of June 30, 2001 and December 31,
2000 follows:
2001 2000
------------ ------------
Total Assets
Insurance Segment $ 44,656,176 $ 35,503,710
Finance Segment 15,609,854 14,570,175
All Other 5,728,778 7,072,230
------------ ------------
Total Operating Segments 65,994,808 57,146,115
Intercompany Eliminations (1,297,215) (2,078,648)
------------ ------------
Total Assets $ 64,697,593 $ 55,067,467
============ ============
8
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $1,000,000 to
American Vehicle to bring its statutory surplus to $2.75 million. The
acquisition will be accounted for under the purchase method of accounting and is
expected to create negative goodwill.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
21st Century Holding Company (the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this report or which are otherwise made
by or on behalf of the Company. For this purpose, any statements contained in
this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "would", "estimate", or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors which may affect the Company's results include, but are not
limited to, risks related to the nature of the Company's business; dependence on
investment income; the adequacy of its liability for loss and loss adjustment
expense ("LAE"); regulation; insurance agents; claims experience; limited
experience in the insurance industry; competition; ratings by industry services;
catastrophe losses; reliance on key personnel and other risks discussed
elsewhere in this Report and in the Company's other filings with the Securities
and Exchange Commission.
OVERVIEW
The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and claims process. The Company underwrites
nonstandard and standard personal automobile insurance and homeowners and mobile
home property and casualty insurance in the State of Florida through its
subsidiary, Federated National. The Company has underwriting authority for
third-party insurance companies, which it represents through a wholly owned
managing general agent, Assurance MGA. The Company internally processes claims
made by Federated National's and third-party insureds through a wholly-owned
claims adjusting company, Superior. The Company also offers premium financing to
its own and third-party insureds through its wholly owned subsidiary, Federated
Premium, and pay advances through Fed First. The Company, through its wholly
owned subsidiary, FedUSA, franchises 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 20
agencies owned by its subsidiary, Federated Agency Group, 19 FedUSA franchised
agencies, and approximately 400 active independent agents.
The Company's business, results of operations and financial condition
are subject to fluctuations due to a variety of factors. Abnormally high
severity or frequency of claims in any period could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, if Federated National's estimated liabilities for unpaid losses and LAE is
less than actual losses and LAE, Federated National will be required to increase
reserves with a corresponding reduction in Federated National's net income in
the period in which the deficiency is identified. The Company operates in a
highly competitive market and faces competition from both national and regional
insurance companies, many of whom are larger and have greater financial and
other resources than the Company, have favorable ratings from A. M. Best, a
leading rating agency for the insurance industry, and offer more diversified
insurance coverage. The Company's competitors include other companies that
market their products through agents, as well as companies that sell insurance
directly to customers.
Large national writers may have certain competitive advantages over
agency writers, including increased name recognition, increased loyalty of their
customer base and reduced acquisition costs. The Company may also face
competition from new or temporary entrants in its niche markets. In some cases,
such entrants may, because of inexperience, desire for new business or other
reasons, price their insurance below that of the Company. Although, the
Company's pricing is inevitably influenced to some degree by that of its
competitors, the Company's management believes that it is generally not in the
Company's best interest to compete solely on price, choosing instead to compete
on the basis of underwriting criteria, its distribution network and superior
service to its agents and insureds. The Company competes with respect to
automobile insurance in Florida with more than 100 companies which underwrite
personal automobile insurance.
During the six months ended June 30, 2001, the Company sold, in eleven
separate transactions, 13 agencies. The aggregate consideration received by the
Company was approximately $1.1 million in notes receivable and 13,828 shares of
21st Century common stock. In accounting for these sales, the Company has
recorded a deferred gain of $567,000, which represents the difference in
consideration received and the net book value of the assets sold (primarily
fixed assets and goodwill). No gain or interest income on the notes will be
recognized until the book value is recovered.
10
ANALYSIS OF FINANCIAL CONDITION
AS OF JUNE 30, 2001 AS COMPARED TO DECEMBER 31, 2000
Investments. Investments decreased $2.5 million to $16.5million as of
June 30, 2001 as compared to $19.0 million as of December 31, 2000. This
decrease in investments is primarily because the Company invested $1.1 million
in trading securities and an additional $3.5 million in cash equivalents as of
June 30, 2001.
Cash and Cash Equivalents. Cash and cash equivalents were $7.4 million
as of June 30, 2001, as compared to $2.6 million as of December 31, 2000. This
increase of $4.8 million is due primarily to an additional investment in a
short-term money market account of $3.5 million as of June 30, 2001.
Trading Securities. Beginning April 1, 2001, the Company began
classifying certain equity security purchases as trading securities. As of June
30, 2001, the Company had $1.1 million of trading securities as compared to none
at December 31, 2000.
Finance Contracts, Consumer Loans and Pay Advances Receivable. Finance
contracts, consumer loans and pay advances receivable increased $1.0 million
from $13.8 million as of December 31, 2000 to $14.8 million as of June 30,2001
primarily because, in 2001, the Company began requiring agencies to place
financing with the Company on all policies underwritten by the Company.
Prepaid Reinsurance Premiums. Prepaid reinsurance premiums increased
$2.5 million to $5.6 million as of June 30, 2001 from $3.1 million as of
December 31, 2000 because the Company increased its quota-share reinsurance on
automobile insurance from 30% of premiums to 50%, effective January 1, 2001.
Premiums Receivable. Premiums receivable were $1.3 million as of June
30, 2001, an increase of $1.0 million as compared to $247,000 outstanding as of
December 31, 2000. This increase is the result of added emphasis placed on
direct bill premium financing by Federated National.
Due from Reinsurers. Due from reinsurers increased $2.5 million to $5.3
million as of June 30, 2001 from $2.8 million as of December 31, 2000. This
increase is the result of the increase of reinsurance discussed above.
Deferred Acquisition Costs, net. Deferred acquisition costs decreased
from $1.2 million as of December 31, 2000 to $776,000 as of June 30, 2001.
Included in the December 31, 2000 balance were deferred commissions of $2.1
million offset by unearned ceded commissions of $877,000. As of June 30, 2000,
deferred commissions were $2.5 million offset by unearned ceded commissions of
$1.7 million. The increase in unearned ceded commissions is related to the
increase in reinsurance discussed above.
Unpaid Losses and Loss Adjustment Expenses. Unpaid loss and loss
adjustment expenses increased $2.7 million, from $9.8 million at December 31,
2000 to $12.5 million as of June 30, 2001. This increase is primarily due to an
increase in losses the Company has recorded recently.
Revolving Credit Outstanding. The amount borrowed under the Revolving
Agreement increased $1.3 million to $9.4 million outstanding as of June 30, 2001
from $8.1 million as of December 31, 2000. This increase is related to the
increase in finance contracts receivable discussed above.
Bank Overdraft. Bank overdraft is the result of the cash management
techniques employed by the Company. The overdraft was $4.7 million as of June
30, 2001, a $1.5 million increase from $3.2 million as of December 31, 2000.
This increase is primarily related to the timing of the issuance of refund and
claim checks.
Due to Third Party Insurers. Due to third party insurers increased from
$368,000 as of December 31, 2000 to $1.4 million as of June 30, 2001. This
increase is primarily related to the amount of third party insurance
underwritten by Assurance MGA in June compared to December. Typically, the
number of policies underwritten in December is low compared to other months.
Accounts Payable and Accrued Expenses. Accounts payable and accrued
expenses declined $910,000 from $2.0 million as of December 31, 2000 to $1.1
million as of June 30, 2000 due primarily to payment of year-end accruals in
2001.
Premium Deposits. Premium deposits increased $259,000 to $641,000 as of
June 30, 2001 from $382,000 as of December 31, 2000. This increase is related to
the timing of the issuance of policy refund checks as well as the amount of
policies in process of being underwritten.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Gross Premiums Written. Gross premiums written increased $2.4 million,
or 25.9% to $11.6 million for the three months ended June 30, 2001 as compared
to $9.2 million for the comparable period in 2000. $825,000 of the increase was
attributable to automobile insurance and $1.6 million was attributable to
homeowners insurance. In the year 2000, the Company expanded its homeowner line
from only mobile homes to single-family homes as well.
Gross Premiums Ceded. Gross premiums ceded increased from $911,000 for
the three months ended June 30, 2000, to $3.7 million for the three months ended
June 30, 2001. In 2000, the Company had 15% automobile quota-share reinsurance
as compared to 50% automobile quota-share reinsurance in the first quarter of
2001.
MGA Fees. MGA fees decreased $142,000 to $1.7 million for the
three-month period ended June 30, 2001 from approximately $1.9 million for the
same period in 2000. The decrease is because in 2001, the Company ceased
underwriting for one nonaffiliated insurance Company.
Net Securities Gains (Losses). The Company experienced net losses of
$1.8 million for the three-month period ended June 30, 2001 compared to $49,000
for the same period in 2000. Realized gains or losses are primarily a function
of the equity markets, and therefore it is not possible to predict whether the
Company will record gains or losses in the future.
Other Income. Other income increased $415,000 to $798,000 for the
three-month period ended June 30, 2001 from $383,000 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 nonaffiliated insurance companies as claim
adjusting customers.
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the three-month period ended June 30, 2001 was 101% compared with
74% for the same period in 2000. Losses and LAE incurred increased $880,000 to
$5.3 million for the three-month period ended June 30, 2001 from $4.4 million
for the same period in 2000. Losses and LAE, the Company's most significant
expense, represent actual payments made and changes in estimated future payments
to be made to or on behalf of its policyholders, including expenses required to
settle claims and losses. In the second quarter of 2001, the Company experienced
a significant increase in lawsuits relating to automobile claims. Management
believes this increase in lawsuits is in anticipation of the effective date of
recent legislation passed by the Florida legislature. This legislation, which
becomes effective October 1, 2001, includes the establishment of a pre-suit
notice requirement for no fault claims, fee schedules for certain medical
procedures, the licensing of health care clinics, and toughened criminal
sanctions for fraud.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Gross Premiums Written. Gross premiums written increased $1.0 million,
or 5.7% to $19.2 million for the six months ended June 30, 2001 as compared to
$18.2 million for the comparable period in 2000. Homeowners insurance, which was
expanded in 2000 as discussed above, increased $1.8 million and automobile
insurance decreased $771,000 due to three rate increases since January 1, 2000.
Gross Premiums Ceded. Gross premiums ceded increased from $664,000 for
the six months ended June 30, 2000, to $6.8 million for the six months ended
June 30, 2001. In the second quarter of 2000, the Company had 15% automobile
quota-share reinsurance as compared to 50% automobile quota-share reinsurance in
the second quarter of 2001.
Increase (Decrease) in Unearned Premiums, net of Prepaid Reinsurance
Premiums. The decrease in unearned premiums, net of prepaid reinsurance
premiums, was $2.5 million for the six months ended June 30, 2001 compared to
$7.3 million for the six months ended June 30, 2000. This decrease is due
primarily to the change in quota-share reinsurance discussed above.
Commission Income. Commission income decreased $244,000 to $1.5 million
for the six-month period ended June 30, 2001 from $1.7 million for the same
period in 2000. Commission income consists of fees earned by Company-owned
agencies placing business with third party insurers. This decrease is due to
agencies writing more Company business and less third party business.
MGA Fees. MGA fees increased $421,000 to $3.0 million for the six-month
period ended June 30, 2001 from $2.6 million for the same period in 2000. The
increase is because the Company began underwriting for its largest
non-affiliated insurance client in the first half of 2000.
12
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
(CONTINUED)
Net Securities Gains (Losses). The Company experienced net losses of
$1.9 million for the six-month period ended June 30, 2001 compared to net gains
of $413,000 for the same period in 2000. Realized gains or losses are primarily
a function of the equity markets and therefore it is not possible to predict
whether the Company will record gains or losses in the future.
Other Income. Other income increased $681,000 to $1.9 million for the
six-month period ended June 30, 2001 from $1.2 million for the same period in
2000. This increase is primarily attributable to an increase in adjusting fees
due to the addition in 2000 of two nonaffiliated insurance companies as claims
adjusting customers.
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the six-month period ended June 30, 2001 was 87% compared with
72% for the same period in 2000. Losses and LAE incurred increased $1.2 million
to $8.6 million for the six-month period ended June 30, 2001 from $7.4 million
for the same period in 2000. Losses and LAE, the Company's most significant
expense, represent actual payments made and changes in estimated future payments
to be made to or on behalf of its policyholders, including expenses required to
settle claims and losses. In the second quarter of 2001, the Company experienced
a significant increase in lawsuits relating to automobile claims. Management
believes this increase in lawsuits is in anticipation of the effective date of
recent legislation passed by the Florida legislature. This legislation, which
becomes effective October 1, 2001, includes the establishment of a pre-suit
notice requirement for no fault claims, fee schedules for certain medical
procedures, the licensing of health care clinics, and toughened criminal
sanctions for fraud.
Operating and Underwriting Expenses. Operating and underwriting
expenses increased $493,000 to $5.4 million for the six-month period ended June
30, 2001 from $4.9 million for the same period in 2000. This increase is related
primarily to underwriting costs for third party insurers.
Amortization of Deferred Policy Acquisition Costs. Amortization of
deferred policy acquisition costs decreased to $549,000 for the six-month period
ended June 30, 2001 from $977,000 for the same period in 2000. Amortization of
deferred policy acquisition costs consists of the actual amortization of
deferred policy acquisition costs less commissions earned on reinsurance ceded.
The 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 half of 2000 to 50% in the first half 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 June 30, 2001 and December 31, 2000 were approximately $9.4 million and
$8.1 million, respectively. The Revolving Agreement contains various operating
and financial covenants, with which the Company was in compliance at June 30,
2001. 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 Revolving Agreement at reasonable terms.
For the six months ended June 30, 2001, operations generated operating
cash flow of $3.9 million. Operating cash flow is expected to be negative in the
short-term as the Company raised prices on automobile insurance effective July
1, 2001, which has slowed the volume of premiums written. In the long-term, the
price increase should generate cash when related automobile insurance
expenditures slow. The short-term short fall in cash flow is expected to be
funded by the Company's trading and investment portfolios, which is highly
liquid as it consists almost entirely of readily marketable securities. Cash
flow used in investing activities was $1.2 million for the six months ended June
30, 2001 due primarily to the purchase of securities. Cash flow from financing
activities was $2.2 million for the six months ended June 30, 2001, which was
derived primarily from increases in the Revolving Agreement and the bank
overdraft. The Company believes that its current capital resources 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.
13
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
Federated National is also required to adhere to prescribed premium-to-capital
surplus ratios.
Federated National 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 that show signs of weak or
deteriorating condition. As of June 30, 2001, based on calculations using the
appropriate NAIC formula, Federated National'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 $5.5 million as of June 30, 2001. Statutory net loss was $401,000
for the six months ended June 30, 2001.
The maximum amount of dividends that can be paid by Florida insurance
companies without prior approval of the Florida Commissioner, is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid in 2001, by Federated National without prior approval, is limited to the
lesser of statutory net income from operations of the preceding calendar year or
10% of statutory unassigned capital surplus as of the preceding December 31.
Federated National paid no dividends during 2001 or 2000.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with GAAP which requires the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of the general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the cost of paying losses and LAE.
Insurance premiums are established before the Company knows the amount
of loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the Company's
investment portfolio and the investment rate of return. Any future economic
changes which result in prolonged and increasing levels of inflation could cause
increases in the dollar amount of incurred loss and LAE and thereby materially
adversely affect future liability requirements.
14
PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
In 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. On August 6, 2001, the district
court granted the Company's motion to dismiss, in part, and allowed the
plaintiffs 30 days to file an amended complaint.
In June 2001, a lawsuit was filed against Federated National by Virtual
Insurance Processing Systems, a software vendor, alleging that Federated
National breached a software vending contract and misappropriated trade secrets.
The case is pending in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida and seeks both money damages and injunctive relief. The
Company believes that the lawsuit is without merit and intends to vigorously
defend such action.
ITEM 2
CHANGES IN SECURITIES
None.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 5, 2001, the Company held its Annual Meeting of Shareholders
(the "Meeting"). At the Meeting, the following matters were voted upon:
(i) Election of Directors
The following table sets forth the name of each nominee and
the voting with respect to each nominee for director who will
hold office until the annual meeting of shareholders to be
held in 2004:
Withhold
--------
Name For Authority
---- --- ---------
Edward J. Lawson 2,844,740 9,600
Michele V. Lawson 2,844,635 9,705
(ii) Adoption of the Franchise Stock Option Plan
Adoption of a Franchise Stock Option Plan in which 659,000 shares of
the Company's common stock, $.01 par value per share, would be issuable to
specified individuals purchasing company owned agencies, which are then to be
converted to franchised agencies.
With respect to the foregoing matter, 1,639,665 shares were voted in
favor, 80,500 shares were voted against and 1,100 shares abstained. There were
no broker non-votes.
15
ITEM 5
OTHER INFORMATION
None.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
On May 8, 2001, the Company filed a Report on Form 8-K to reflect
changes to the beneficial ownership of the common stock, par value, $0.01 to
reflect recent sales by certain former 10% beneficial stockholders. These sales
effectively increased the number of shares in the "public float" and thereby
increased the "market value of public float" as defined by the Nasdaq National
Market. In order for the Company to maintain its listing on the Nasdaq National
Market, the Company is required to maintain a "market value of public float" of
$5.0 million or more.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
21ST CENTURY HOLDING COMPANY
DATE: August 10, 2001 By: /s/ Samuel A. Milne
-----------------------
Title: Chief Financial Officer
17