SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________.
Commission file number 0-2500111
21st Century Holding Company
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(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
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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 - 3,039,201 shares outstanding as
of November 9, 2001.
21ST CENTURY HOLDING COMPANY
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
ITEM 1:
Consolidated Balance Sheets
as of September 30, 2001 (Unaudited)
and December 31, 2000................................................. 3
Consolidated Statements of Operations
for the three and nine months ended September 30, 2001 (Unaudited)
and 2000 (Unaudited).................................................. 4
Consolidated Cash Flow Statements
for the nine months ended September 30, 2001 (Unaudited)
and 2000 (Unaudited).................................................. 5
Notes to Consolidated Financial Statements................................. 6
ITEM 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations...................... 9
PART II: OTHER INFORMATION
Other Information.......................................................... 15
Signature.................................................................. 16
2
PART I
ITEM I. FINANCIAL INFORMATION
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001
(UNAUDITED) DECEMBER 31, 2000
------------------ -----------------
ASSETS
Investments
Fixed maturities, available for sale at fair value $ 17,481,548 $ 15,691,147
Equity securities, available for sale at fair value 286,116 2,889,627
Mortgage loans 777,908 385,024
------------ ------------
Total investments 18,545,572 18,965,798
Cash and cash equivalents 1,712,281 2,627,041
Finance contracts, consumer loans and pay advances receivable,
net of allowances for credit losses of $832,832 and $832,231,
respectively 11,710,436 13,792,791
Prepaid reinsurance premiums 4,947,591 3,076,017
Premiums receivable, net of allowance of $97,153 and $325,000, respectively 1,762,034 246,787
Due from reinsurers, net 7,654,605 2,797,648
Deferred acquisition costs, net 627,276 1,192,260
Deferred income taxes 2,197,111 2,915,894
Property and equipment, net 5,191,134 5,381,780
Other assets 1,966,855 1,275,701
Goodwill 1,957,094 2,795,750
------------ ------------
TOTAL ASSETS $ 58,271,989 $ 55,067,467
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 11,424,103 $ 9,765,848
Unearned premiums 14,292,343 13,038,417
Revolving credit outstanding 7,956,101 8,091,034
Bank overdraft 4,344,423 3,212,962
Unearned commissions 2,863,123 2,505,690
Due to third party insurers -- 368,399
Accounts payable and accrued expenses 1,803,947 1,960,187
Premium deposits 300,733 382,058
Drafts payable to insurance companies 1,243,309 786,875
------------ ------------
TOTAL LIABILITIES 44,228,082 40,111,470
------------ ------------
Commitments and contingencies -- --
Shareholders' equity:
Common stock of $.01 par value. Authorized 25,000,000 shares,
issued 3,410,667 shares, and outstanding 3,029,201
and 3,330,367, respectively 34,107 34,107
Additional paid in capital 12,830,058 12,894,630
Accumulated other comprehensive income (287,677) (1,300,404)
Retained earnings 2,313,185 3,642,066
Treasury stock, 381,466 and 80,300 shares, respectively, at cost (845,766) (314,402)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 14,043,907 14,955,997
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,271,989 $ 55,067,467
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Gross premiums written $ 6,250,643 $ 7,455,722 $ 25,449,702 $ 25,617,159
Gross premiums ceded (2,136,008) (1,310,725) (8,952,322) (1,974,812)
------------ ------------ ------------ ------------
Net premiums written 4,114,635 6,144,997 16,497,380 23,642,347
Decrease (increase) in unearned premiums, net
of prepaid reinsurance premiums 1,158,598 143,714 (1,349,054) (7,152,456)
------------ ------------ ------------ ------------
Net premiums earned 5,273,233 6,288,711 15,148,326 16,489,891
Commission income 743,245 556,177 2,232,027 2,289,268
Finance revenue 1,327,607 1,522,939 4,132,308 4,222,657
MGA fees 1,534,936 2,821,019 4,542,094 5,406,910
Net investment income 288,236 365,005 787,169 900,267
Net securities gains (losses) (1,134,846) 613,295 (3,017,888) 1,026,142
Other income 641,553 503,738 2,561,108 1,742,218
------------ ------------ ------------ ------------
Total revenue 8,673,964 12,670,884 26,385,144 32,077,353
------------ ------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses 3,620,297 4,306,663 12,208,912 11,681,939
Operating and underwriting expenses 3,688,304 2,773,066 9,131,648 7,723,858
Salaries and wages 1,925,304 2,495,599 6,425,467 6,982,942
Amortization of deferred acquisition costs 632,649 1,993,185 1,182,088 2,970,673
Amortization of goodwill 130,054 144,390 416,548 454,991
------------ ------------ ------------ ------------
Total expenses 9,996,608 11,712,903 29,364,663 29,814,403
------------ ------------ ------------ ------------
Income (loss) before provision (credit) for
income tax expense and extraordinary gain (1,322,644) 957,981 (2,979,519) 2,262,950
Provision (credit) for income tax expense 12,133 344,132 (653,817) 773,103
------------ ------------ ------------ ------------
Net income (loss) before extraordinary
gain (1,344,777) 613,849 (2,325,702) 1,489,847
Extraordinary gain (Note 7) 1,185,895 -- 1,185,895 --
------------ ------------ ------------ ------------
Net income (loss) $ (148,882) $ 613,849 $ (1,139,807) $ 1,489,847
============ ============ ============ ============
Earnings (loss) per share and earnings (loss) per
share assuming dilution
Net income (loss) before extraordinary
gain $ (0.43) $ 0.18 $ (0.73) $ 0.44
Extraordinary gain (Note 7) 0.38 -- 0.37 --
------------ ------------ ------------ ------------
Net income (loss) $ (0.05) $ 0.18 $ (0.36) $ 0.44
Weighted average number of common shares outstanding
and weighted average number of common shares
outstanding (assuming dilution) 3,114,634 3,376,434 3,193,920 3,385,241
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
------------ ------------
Cash flow from operating activities:
Net income (loss) $ (1,139,807) $ 1,489,847
Adjustments to reconcile net income to net cash flow used
in operating activities:
Accretion of investment discounts (40,199) (9,075)
Depreciation and amortization 296,547 194,250
Amortization of goodwill 416,548 454,991
Deferred income tax benefit (expense) (77,219) (1,129,269)
Net securities (gains) losses 3,017,888 (1,026,142)
Amortization of deferred acquisition costs, net 1,182,088 1,204,316
Provision for credit losses 2,149,314 1,076,647
Provision for uncollectible premiums receivable 306,658 175,000
Net loss on sale of agencies 13,198 --
Extraordinary gain (1,185,895) --
Changes in operating assets and liabilities:
Premiums receivable (1,821,905) (898,529)
Prepaid reinsurance premiums (1,871,574) 1,076,647
Due from reinsurers (4,856,957) 24,108
Deferred acquisition costs, net (617,104) (2,342,974)
Other assets (303,314) 23,839
Unpaid loss and loss adjustment expenses 1,554,886 1,937,783
Unearned premiums 1,253,926 5,801,732
Unearned commissions 357,433 923,982
Accounts payable and accrued expenses (422,282) 1,220,408
Due to third party insurers (368,399) 2,262,088
Premium deposits (81,325) 362,464
Drafts payable to insurance companies 456,434 612,268
------------ ------------
Net cash flow provided by (used in) operating activities (1,771,818) 13,531,877
------------ ------------
Cash flow from investing activities:
Proceeds from sale of securities 58,473,671 39,199,209
Purchases of securities (56,816,723) (48,050,497)
Finance contracts, consumer loans and pay advances receivable (66,959) (6,672,184)
Collection of mortgage loans 7,901 4,185
Purchases of property and equipment (127,377) (1,149,017)
Net cash used to acquire American Vehicle Insurance Company (301,330) --
Origination of mortgage loans (400,785) (160,000)
------------ ------------
Net cash flow provided by (used in) investing activities 768,398 (16,828,304)
------------ ------------
Cash flows from financing activities
Increase in bank overdraft 1,131,461 2,409,914
Repayment of notes payable -- (312,823)
Dividends paid (189,074) --
Purchases of treasury stock (718,794) (194,537)
Increase (decrease) in revolving credit outstanding (134,933) 2,203,563
------------ ------------
Net cash flow provided by financing activities 88,660 4,106,117
------------ ------------
Net increase (decrease) in cash & cash equivalents (914,760) 809,690
Cash & cash equivalents at beginning of year 2,627,041 923,175
------------ ------------
Cash & cash equivalents at end of period $ 1,712,281 $ 1,732,865
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 468,120 $ 453,643
============ ============
Income taxes $ -- $ 1,529,690
============ ============
Non-cash investing and financing activities
Dividends accrued $ 60,852 $ 67,260
============ ============
Stock received for sale of agency $ 41,484 $ --
============ ============
Stock issued for employees' bonus $ 155,100 $ 100,000
============ ============
Stock issued for settlement of note payable $ -- $ 104,950
============ ============
Notes receivable for sale of agencies, net of unrealized gains $ 388,902 $ --
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
The accompanying unaudited consolidated financial statements of 21st
Century Holding Company (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. These
financial statements do not include all information and notes required by
generally accepted accounting principles for complete financial statements, and
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 2000. The December 31, 2000 year end balance sheet data
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The financial
information furnished reflects all adjustments, consisting only of normal
recurring accruals, which are, in the opinion of management, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented. The results of operations are not necessarily
indicative of results of operations, which may be achieved in the future.
The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and claims process. The Company underwrites
nonstandard and standard personal automobile insurance and homeowners and mobile
home property and casualty insurance in the State of Florida through its
subsidiary, Federated National Insurance Company ("Federated National"). The
Company has underwriting authority for third-party insurance companies, which it
represents through a wholly owned managing general agent, Assurance Managing
General Agents, Inc. ("Assurance MGA"). The Company internally processes claims
made by Federated National's and third-party insureds through a wholly-owned
claims adjusting company, Superior Adjusting, Inc. ("Superior"). The Company
also offers premium financing to its own and third-party insureds through its
wholly owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium"),
and pay advances through Fed First Corp. ("Fed First"). The Company, through its
wholly owned subsidiary, FedUSA, Inc. ("FedUSA"), franchises insurance agencies
under the FedUSA name. The Company markets and distributes Federated National's
and third-party insurers' products and its other services primarily in Central
and South Florida, through a network of 22 agencies owned by its subsidiary,
Federated Agency Group, Inc., 18 FedUSA franchised agencies, and approximately
400 active independent agents. In August, 2001, the Company acquired American
Vehicle Insurance Company ("American Vehicle"). The Company intends to
underwrite nonstandard and standard personal automobile insurance in the State
of Florida through American Vehicle.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Intangible
Assets, which becomes effective for fiscal years beginning after December 15,
2001. This statement addresses financial accounting and reporting for intangible
assets acquired individually or with a group of other assets (but not those
acquired in a business combination) at acquisition. This statement also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. Upon adoption of this standard, the
Company will cease to amortize goodwill and the remaining unamortized balance
will be periodically tested for impairment.
(B) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITY
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires all derivatives
to be recognized at fair value as either assets or liabilities on the balance
sheet. Any gain or loss resulting from changes in such fair value are recognized
in earnings, to the extent the derivatives are not effective as hedges. Adoption
of this statement did not have a material impact on the Company's results of
operations or financial position.
(C) CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
Effective January 1, 2001, the Company adopted the Codification of
Statutory Accounting Principles guidance (the "Codification") issued by the
National Association of Insurance Commissioners ("NAIC"). The Codification
provides guidance for areas where statutory accounting has been silent and
changes current accounting in some areas. The adoption of the Codification did
not have a material effect on the Company's results of operations or financial
position.
6
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(D) Earnings per share
Basic earnings per share ("Basic EPS") is computed by dividing net
income by the weighted average number of common shares outstanding during each
period presented. Diluted earnings per share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common stock and common
stock equivalents during the period presented; outstanding warrants and stock
options are considered common stock equivalents and are included in the
calculation using the treasury stock method. Diluted EPS excluded the impact of
warrants and stock options as such amounts are anti-dilutive.
(E) RECLASSIFICATIONS
Certain amounts in 2000 financial statements have been reclassified to
conform with 2001 presentation.
(3) REVOLVING CREDIT OUTSTANDING
The Company, through its wholly owned subsidiary, Federated Premium is
a party to a revolving loan agreement ("Revolving Agreement") with Flatiron
Funding Company LLC ("Flatiron"). The Revolving Agreement, which was amended and
revised in October 2001, is structured as a sale of contracts receivable under a
sale and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of
Flatiron), which gives FPF, Inc. the right to sell or assign these contracts
receivable. Federated Premium, which services these contracts, has recorded
transactions under the Revolving Agreement as secured borrowings. The Revolving
Agreement allows for a maximum credit commitment of $7.0 million plus an initial
additional amount of $700,000 for the transition from September 30, 2001 when
the previous agreement expired. This initial additional amount declines by
$100,000 each month beginning November 1, 2001. The amount of an advance is
subject to availability under a borrowing base calculation, with maximum
advances outstanding not to exceed the maximum credit commitment. The annual
interest rate on advances under the Revolving Agreement is the prime rate plus
additional interest varying from 1.25% to 2.75% based on the prior month's ratio
of contracts receivable related to insurance companies with an A. M. Best rating
of B or worse to total contracts receivable. The Revolving Agreement contains
various operating and financial covenants, with which the Company was in
compliance at September 30, 2001. The Revolving Agreement, as amended, expires
September 30, 2004.
(4) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
In September 2000, a lawsuit was filed against the Company and its
directors and executive officers seeking compensatory damages on the basis of
allegations that the Company's amended registration statement dated November 4,
1998 was inaccurate and misleading concerning the manner in which the Company
recognized ceded insurance commission income, in violation of Sections 11 and 15
of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The lawsuit was filed in the United States District Court
for the Southern District of New York and seeks class action status. The
plaintiff class purportedly includes purchasers of the Company's common stock
between November 5, 1998 and August 13, 1999. The Company believes that the
lawsuit is without merit and intends to vigorously defend such action. The
Plaintiffs recently filed their first amended complaint and the court has not
yet set a deadline for the Company to file a response.
In June 2001, a lawsuit was filed against Federated National by Virtual
Insurance Processing Systems ("Virtual"), a software vendor, alleging that
Federated National breached a software vending contract and misappropriated
trade secrets. The case was settled with Federated National paying $20,000 to
Virtual and agreeing to reinstate the software vending contract.
7
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) COMPREHENSIVE INCOME (DEFICIT)
For the three and nine months ended September 30, 2001 and 2000,
comprehensive income consisted of the following:
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
--------- -------- ----------- ----------
Net income (loss) $(148,882) $613,849 $(1,139,807) $1,489,847
Change in net unrealized losses on investments
held for sale, net of income taxes 98,671 323,737 1,012,727 (189,869)
--------- -------- ----------- ----------
Comprehensive income (loss) $ (50,211) $937,586 $ (127,080) $1,299,978
========= ======== =========== ==========
(6) SEGMENT INFORMATION
The Company and its subsidiaries operate principally in two business
segments consisting of insurance and financing. The insurance segment consists
of underwriting through Federated National, managing general agent operations
through Assurance MGA, claims processing through Superior, marketing and
distribution through Federated Agency Group and franchise operations through
FedUSA. The insurance segment sells primarily nonstandard personal automobile
insurance and includes substantially all aspects of the insurance, distribution
and claims process. The financing segment consists of premium financing through
Federated Premium Finance, consumer loans through RPA Financial Corporation, and
pay advances through FedFirst. The financing segment provides premium financing
to both Federated National's insureds and to third-party insureds, consumer
loans and pay advances, and is marketed through the Company's distribution
network of Company-owned agencies (Federated Agency Group) and independent
agents.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies and practices. The Company
evaluates its business segments based on GAAP pretax operating earnings.
Corporate overhead expenses are not allocated to business segments. Transactions
between reportable segments are accounted for at fair value.
Operating segments that are not individually reportable are included in
the "All Other" category, which includes the operations of 21st Century Holding
Company and income tax return preparation.
Information regarding components of operations for the three months and
nine months ended September 30, 2001 and 2000 follows:
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Total Revenue
Insurance Segment $ 8,011,569 $ 12,314,622 $ 24,858,756 $ 31,339,798
Financing Segment 1,246,354 1,522,939 4,016,141 4,222,657
All Other 857,338 655,556 3,456,149 1,176,574
------------ ------------ ------------ ------------
Total Operating Segments 10,115,261 14,493,117 32,331,046 36,739,029
Intercompany Eliminations (1,441,297) (1,822,233) (5,945,902) (4,661,676)
------------ ------------ ------------ ------------
Total Revenues $ 8,673,964 $ 12,670,884 $ 26,385,144 $ 32,077,353
============ ============ ============ ============
Earnings (Loss) Before Income Taxes And
Extraordinary Gain
Insurance Segment $ (1,132,161) $ 380,331 $ (4,579,020) $ 1,212,241
Financing Segment (355,983) 397,996 383,530 1,249,094
All Other 165,500 179,654 1,215,971 (198,385)
------------ ------------ ------------ ------------
Total Earnings (Loss) Before Income
Taxes And Extraordinary Gain $ (1,322,644) $ 957,981 $ (2,979,519) $ 2,262,950
============ ============ ============ ============
Information regarding total assets as of September 30, 2001 and December
31, 2000 follows:
2001 2000
------------ ------------
Total Assets
Insurance Segment $ 41,456,467 $ 35,503,710
Finance Segment 12,268,613 14,570,175
All Other 4,537,493 7,072,230
------------ ------------
Total Operating Segments 58,262,573 57,146,115
Intercompany Eliminations 9,416 (2,078,648)
----------- ------------
Total Assets $ 58,271,989 $ 55,067,467
============ ============
8
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) ACQUISITION
In August 2001, the Company purchased all of the outstanding stock and
all of the outstanding surplus notes of American Vehicle for $500,000 in cash.
In addition, the Company agreed to pay two executives of American Vehicle a
finders' fee of $400,000 over a period of three years. Income and expenses of
American Vehicle beginning September 1, 2001 are included in the Company's
Consolidated Statements of Operations. The fair value of the net assets (which
consisted primarily of marketable securities) of American Vehicle at the date of
acquisition was approximately $2.1 million. In accordance with SFAS No. 141,
Business Combinations, the excess of the fair value of the net assets purchased
over the purchase price has been reported as an extraordinary gain in the
accompanying Consolidated Statements of Operations.
American Vehicle was organized and incorporated as a multi-line
property and casualty insurance company and primarily wrote nonstandard private
passenger automobile liability and physical damage coverage. Pursuant to a
January 8, 1998, consent order entered into with the Florida Department of
Insurance (the "Department"), American Vehicle ceased writing new or renewal
business and pursuant to an additional consent order, the Company had been
placed in Administrative Supervision effective March 2, 2001. Pursuant to a
third consent order as of August 30, 2001, the two previous consent orders were
vacated and the Department approved this acquisition. Also, pursuant to the
third consent order, American Vehicle is not allowed to pay dividends for three
years without Department approval and all contracts with affiliates must also be
approved by the Department.
The Consolidated Balance Sheet at September 30, 2001 includes the
balance sheet of American Vehicle. The Consolidated Statements of Operations for
the three and nine months ended September 30, 2001 and the Consolidated
Statement of Cash Flow for the nine months ended September 30, 2001 include
American Vehicle from the acquisition date (August 30, 2001) through September
30, 2001.
Unaudited pro forma results of operations giving effect to the
acquisition as of the beginning of each period presented are as follows:
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
----------- ------------ ------------ ------------
Revenue $ 8,691,839 $ 12,753,202 $ 26,452,054 $ 32,291,185
Income before extraordinary gain (1,284,981) 712,290 (2,419,067) 1,275,340
Extraordinary gain 1,185,895 1,185,895 1,185,895 1,185,895
Net income (99,086) 1,898,185 (1,233,172) 2,461,235
Earnings (loss) per share and earnings
(loss) per share assuming dilution
Net income (loss) before
extraordinary gain $ (0.41) $ 0.21 $ (0.76) $ 0.38
Extraordinary gain 0.38 0.35 0.37 0.35
Net income (loss) (0.03) 0.56 (0.39) 0.73
The above pro forma information is not necessarily indicative of the
results of operations that would have had occurred had the acquisition taken
place as of the beginning of each period reported, or of results, which may
occur in the future.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
21st Century Holding Company (the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this report or which are otherwise made
by or on behalf of the Company. For this purpose, any statements contained in
this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "would", "estimate", or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors which may affect the Company's results include, but are not
limited to, risks related to the nature of the Company's business; dependence on
investment income; the adequacy of its liability for loss and loss adjustment
expense ("LAE"); regulation; insurance agents; claims experience; limited
experience in the insurance industry; competition; ratings by industry services;
catastrophe losses; reliance on key personnel and other risks discussed
elsewhere in this Report and in the Company's other filings with the Securities
and Exchange Commission.
OVERVIEW
The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and claims process. The Company underwrites
nonstandard and standard personal automobile insurance and homeowners and mobile
home property and casualty insurance in the State of Florida through its
subsidiary, Federated National. The Company has underwriting authority for
third-party insurance companies, which it represents through a wholly owned
managing general agent, Assurance MGA. The Company internally processes claims
made by Federated National's and third-party insureds through a wholly-owned
claims adjusting company, Superior. The Company also offers premium financing to
its own and third-party insureds through its wholly owned subsidiary, Federated
Premium, and pay advances through Fed First. The Company, through its wholly
owned subsidiary, FedUSA, franchises insurance agencies under the FedUSA name.
The Company markets and distributes Federated National's and third-party
insurers' products and its other services primarily in South Florida, through a
network of 22 agencies owned by its subsidiary, Federated Agency Group, Inc., 18
FedUSA franchised agencies, and approximately 400 active independent agents. In
August, 2001, the Company acquired American Vehicle Insurance Company. The
Company intends to underwrite nonstandard and standard personal automobile
insurance in the State of Florida through American Vehicle.
The Company's business, results of operations and financial condition
are subject to fluctuations due to a variety of factors. Abnormally high
severity or frequency of claims in any period could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, if Federated National's estimated liabilities for unpaid losses and LAE is
less than actual losses and LAE, Federated National will be required to increase
reserves with a corresponding reduction in Federated National's net income in
the period in which the deficiency is identified. The Company operates in a
highly competitive market and faces competition from both national and regional
insurance companies, many of whom are larger and have greater financial and
other resources than the Company, have favorable ratings from A. M. Best, a
leading rating agency for the insurance industry, and offer more diversified
insurance coverage. The Company's competitors include other companies that
market their products through agents, as well as companies that sell insurance
directly to customers.
Large national writers may have certain competitive advantages over
agency writers, including increased name recognition, increased loyalty of their
customer base and reduced acquisition costs. The Company may also face
competition from new or temporary entrants in its niche markets. In some cases,
such entrants may, because of inexperience, desire for new business or other
reasons, price their insurance below that of the Company. Although, the
Company's pricing is inevitably influenced to some degree by that of its
competitors, the Company's management believes that it is generally not in the
Company's best interest to compete solely on price, choosing instead to compete
on the basis of underwriting criteria, its distribution network and superior
service to its agents and insureds. The Company competes with respect to
automobile insurance in Florida with more than 100 companies which underwrite
personal automobile insurance.
During the nine months ended September 30, 2001, the Company sold, in
eleven separate transactions, 13 agencies. The aggregate consideration received
by the Company was approximately $1.1 million in notes receivable and 13,828
shares of 21st Century common stock. In accounting for these sales, the Company
has recorded a deferred gain of $567,000, which represents the difference in
consideration received and the net book value of the assets sold (primarily
fixed assets and goodwill). No gain or interest income on the notes will be
recognized until the book value is recovered.
10
ANALYSIS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 2001 AS COMPARED TO DECEMBER 31, 2000
Finance Contracts, Consumer Loans and Pay Advances Receivable. Finance
contracts, consumer loans and pay advances receivable decreased $2.1 million
from $13.8 million as of December 31, 2000 to $11.7 million as of September 30,
2001 primarily because, in 2001, the Company's Revolving Credit Line, which
funds finance contracts, was reduced effective September 30, 2001. Consequently,
the Company only finances contracts from Company owned agencies and Company
franchised agencies and will no longer finance contracts by originated by third
party agencies.
Prepaid Reinsurance Premiums. Prepaid reinsurance premiums increased
$1.8 million to $4.9 million as of September 30, 2001 from $3.1 million as of
December 31, 2000 because the Company increased its quota-share reinsurance on
automobile insurance from 30% of premiums to 50%, effective January 1, 2001.
Premiums Receivable. Premiums receivable were $1.8 million as of
September 30, 2001, an increase of $1.5 million as compared to $247,000
outstanding as of December 31, 2000. This increase is the result of added
emphasis placed on direct bill premium financing by Federated National.
Due from Reinsurers. Due from reinsurers increased $4.9 million to $7.7
million as of September 30, 2001 from $2.8 million as of December 31, 2000. This
increase is the result of the increase of reinsurance discussed above.
Deferred Acquisition Costs, net. Deferred acquisition costs decreased
from $1.2 million as of December 31, 2000 to $627,000 as of September 30, 2001.
Included in the December 31, 2000 balance were deferred commissions of $2.1
million offset by unearned ceded commissions of $877,000. As of September 30,
2000, deferred commissions were $2.1 million offset by unearned ceded
commissions of $1.4 million. The increase in unearned ceded commissions is
related to the increase in reinsurance discussed above.
Unpaid Losses and Loss Adjustment Expenses. Unpaid loss and loss
adjustment expenses increased $1.6 million, from $9.8 million at December 31,
2000 to $11.4 million as of September 30, 2001. This increase is primarily due
to an increase in losses the Company has recorded recently.
Bank Overdraft. Bank overdraft is the result of the cash management
techniques employed by the Company. The overdraft was $4.3 million as of
September 30, 2001, a $1.1 million increase from $3.2 million as of December 31,
2000. This increase is primarily related to the timing of the issuance of refund
and claim checks.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Gross Premiums Written. Gross premiums written decreased $1.2 million,
or 16.2% to $6.3 million for the three months ended September 30, 2001 as
compared to $7.5 million for the comparable period in 2000. This decrease is due
primarily to a decrease in automobile insurance written which has decreased
since a rate increase took effect July 1, 2001.
Net Premiums Earned. Net premiums earned decreased $1.0 million, or
16.1%, from $6.3 million for the three months ended September 30, 2000, to $5.3
million for the three months ended September 30, 2001. This decrease is because
the Company had 15% automobile quota-share reinsurance in 2000 as compared to
50% automobile quota-share reinsurance in 2001.
MGA Fees. MGA fees decreased $1.3 million to $1.5 million for the
three-month period ended September 30, 2001 from approximately $2.8 million for
the same period in 2000. The decrease is because, in 2001, the Company ceased
underwriting for one nonaffiliated insurance company and price increases by the
remaining insurance companies has slowed the number of policies underwritten by
Assurance MGA.
Net Securities Gains (Losses). The Company experienced net losses of
$1.1 million for the three-month period ended September 30, 2001 compared to net
gains of $613,000 for the same period in 2000. Realized gains or losses are
primarily a function of the equity markets. In August 2001, the Company divested
itself of its investments in common stocks and will no longer invest in common
stocks.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000 (CONTINUED)
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the three-month period ended September 30, 2001 was 68.7%
compared with 68.5% for the same period in 2000. Losses and LAE incurred
decreased $686,000, or 15.9%, to $3.6 million for the three-month period ended
September 30, 2001 from $4.3 million for the same period in 2000. Losses and
LAE, the Company's most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. The
15.9% decrease in losses is related to the 16.2% decrease in premiums earned.
Operating and Underwriting Expenses. Operating and underwriting
expenses increased $915,000, or 33.0%, to $3.7 million for the three months
ended September 30, 2001 from $2.8 million for the same period in 2000. This
increase is due to an increase in bad debts as the Company accelerated
write-offs while maintaining reserves during the 2001 third quarter.
Salaries and Wages. Salaries and wages decreased $570,000, or 22.8%,
from $2.5 million in the third quarter of 2000 to $1.9 million in the same
quarter in 2001. This decrease is due to a decrease in the number employees of
Federated Agency Group caused by a decrease in the number of Company owned
agencies from 38 in 2000 to 22 currently and due to a decrease in employees of
Assurance MGA caused by a decline in policies underwritten.
Amortization of Deferred Acquisition Costs. Amortization of deferred
policy acquisition costs decreased to $633,000 for the three-month period ended
September 30, 2001 from $2.0 million for the same period in 2000. Amortization
of deferred policy acquisition costs consists of the actual amortization of
deferred policy acquisition costs less commissions earned on reinsurance ceded.
The decrease is due to an increase in commissions earned on reinsurance ceded,
as the Company increased its automobile quota-share reinsurance from 15% in 2000
to 50% in 2001.
Provision (Benefit) for Income Taxes. The provision for income taxes
for the three months ended September 30, 2001 was $12,000 compared to $344,000
for the three months ended September 30, 2000. The decrease is because the
Company recorded a loss before provision for income taxes and extraordinary gain
of $1.3 million for the three months ended September 30, 2001 compared to pretax
income of $958,000 for the same period in 2000. In the third quarter of 2001,
the Company was unable to benefit the net securities loss of $1.1 million .
Extraordinary Gain. In August 2001, the Company recorded an
extraordinary gain of $1.2 million which represents the excess of the fair value
of the net assets purchased over the purchase price when the Company acquired
American Vehicle.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Gross Premiums Ceded. Gross premiums ceded increased from $2.0 million
for the nine months ended September 30, 2000, to $9.0 million for the nine
months ended September 30, 2001. In 2000, the Company had 15% automobile
quota-share reinsurance as compared to 50% automobile quota-share reinsurance in
2001.
Decrease (Increase) in Unearned Premiums, net of Prepaid Reinsurance
Premiums. The decrease in unearned premiums, net of prepaid reinsurance
premiums, was $1.3 million for the nine months ended September 30, 2001 compared
to $7.2 million for the nine months ended September 30, 2000. This decrease is
due primarily to the change in quota-share reinsurance discussed above.
MGA Fees. MGA fees decreased $865,000 to $4.5 million for the
nine-month period ended September 30, 2001 from $5.4 million for the same period
in 2000. The decrease is because, in 2001, the Company ceased underwriting for
one nonaffiliated insurance company and price increases by the remaining
insurance companies has slowed the number of policies underwritten by Assurance
MGA.
Net Securities Gains (Losses). The Company experienced net losses of
$3.0 million for the nine-month period ended September 30, 2001 compared to net
gains of $1.0 million for the same period in 2000. Realized gains or losses are
primarily a function of the equity markets. In August 2001, the Company divested
itself of its investments in common stocks and will no longer invest in common
stocks.
12
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000 (CONTINUED)
Other Income. Other income increased $819,000 to $2.6 million for the
nine-month period ended September 30, 2001 from $1.7 million for the same period
in 2000. This increase is primarily attributable to an increase in adjusting
fees due to the addition in 2000 of two nonaffiliated insurance companies as
claims adjusting customers.
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the nine-month period ended September 30, 2001 was 80.6% compared
with 70.8% for the same period in 2000. Losses and LAE incurred increased
$527,000 to $12.2 million for the nine-month period ended September 30, 2001
from $11.7 million for the same period in 2000. Losses and LAE, the Company's
most significant expense, represent actual payments made and changes in
estimated future payments to be made to or on behalf of its policyholders,
including expenses required to settle claims and losses. In 2001, the Company
experienced a significant increase in lawsuits relating to automobile claims.
Management believes this increase in lawsuits is in anticipation of the
effective date of recent legislation passed by the Florida legislature. This
legislation, which becomes effective October 1, 2001, includes the establishment
of a pre-suit notice requirement for no fault claims, fee schedules for certain
medical procedures, the licensing of health care clinics, and toughened criminal
sanctions for fraud.
Operating and Underwriting Expenses. Operating and underwriting
expenses increased $1.4 million to $9.1 million for the nine-month period ended
September 30, 2001 from $7.7 million for the same period in 2000. This increase
is primarily due to an increase in bad debts as the Company accelerated
write-offs while maintaining reserves during the 2001 third quarter.
Amortization of Deferred Policy Acquisition Costs. Amortization of
deferred policy acquisition costs decreased to $1.2 millionfor the nine-month
period ended September 30, 2001 from $3.0 million for the same period in 2000.
Amortization of deferred policy acquisition costs consists of the actual
amortization of deferred policy acquisition costs less commissions earned on
reinsurance ceded. The decrease is due to an increase in commissions earned on
reinsurance ceded, as the Company increased its automobile quota-share
reinsurance from 15% in 2000 to 50% in 2001.
Extraordinary Gain. In August 2001, the Company recorded an
extraordinary gain of $1.2 million which represents the excess of the fair value
of the net assets purchased over the purchase price, when the Company acquired
American Vehicle.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are revenues generated from
operations, investment income and borrowings under the Revolving Agreement.
Because the Company is a holding company, it is largely dependent upon dividends
and fees from its subsidiaries for cash flow.
Federated Premium is a party to the Revolving Agreement, which is used
to fund its operations. The Revolving Agreement, which was amended and revised
in October 2001, allows for a maximum credit commitment of $7.0 million plus an
initial additional amount of $700,000 for the transition from September 30, 2001
when the previous agreement expired. This initial additional amount declines by
$100,000 each month beginning November 1, 2001. The amount of an advance is
subject to availability under a borrowing base calculation, with maximum
advances outstanding not to exceed the maximum credit commitment. The annual
interest rate on advances under the Revolving Agreement is the prime rate plus
additional interest varying from 1.25% to 2.75% based on the prior month's ratio
of contracts receivable related to insurance companies with an A. M. Best rating
of B or worse to total contracts receivable. The Revolving Agreement contains
various operating and financial covenants, with which the Company was in
compliance at September 30, 2001. The Revolving Agreement, as amended, expires
September 30, 2004.
For the nine months ended September 30, 2001, $1.8 million of cash was
used in operations. Operating cash flow is expected to continue to be negative
in the next three to six months as the Company raised prices on automobile
insurance effective July 1, 2001, which has slowed the volume of premiums
written. In the long-term, the price increase should generate cash when related
automobile insurance expenditures slow. The short-term short fall in cash flow
is expected to be funded by the Company's trading and investment portfolios,
which is highly liquid as it consists almost entirely of readily marketable
securities. Cash flow provided by investing activities was $768,000 for the nine
months ended September 30, 2001, and was generated primarily from the sale of
securities. Cash flow provided from financing activities was $89,000 for the
nine months ended September 30, 2001, which was derived primarily from increases
in the bank overdraft. The Company believes that its current capital resources
will be sufficient to meet its anticipated working capital requirements through
at least 2002. There can be no assurances, however, that such will be the case.
13
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
To retain its certificate of authority, the Florida insurance laws and
regulations require that Federated National and American Vehicle maintain
capital surplus equal to the greater of 10% of each company's liabilities or the
2000 statutory minimum capital and surplus requirement of $2.75 million as
defined in the Florida Insurance Code. Federated National and American Vehicle
are also required to adhere to prescribed premium-to-capital surplus ratios.
Federated National and American Vehicle are required to comply with the
risk-based capital requirements of the NAIC. The NAIC's risk-based capital
requirements are a method of measuring the amount of capital appropriate for an
insurance company to support its overall business operations in light of its
size and risk profile. NAIC's risk-based capital standards are used by
regulators to determine appropriate regulatory actions relating to insurers that
show signs of weak or deteriorating condition. As of September 30, 2001, based
on calculations using the appropriate NAIC formula, Federated National's and
American Vehicle's total adjusted capital are in excess of ratios that would
require regulatory action. GAAP differs in some respects from reporting
practices prescribed or permitted by the Florida Department of Insurance.
Federated National's statutory capital surplus was approximately $5.3 million as
of September 30, 2001 and its statutory net loss was $2.5 million for the nine
months ended September 30, 2001. American Vehicle's statutory capital surplus
was approximately $2.9 million as of September 30, 2001 and its statutory net
income was $16,000 for the nine months ended September 30, 2001.
The maximum amount of dividends that can be paid by Florida insurance
companies without prior approval of the Florida Commissioner, is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid in 2001, by Federated National without prior approval, is limited to the
lesser of statutory net income from operations of the preceding calendar year or
10% of statutory unassigned capital surplus as of the preceding December 31.
Federated National paid no dividends during 2001 or 2000. By consent letter,
American Vehicle may not pay dividends without prior approval through August
2004.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with GAAP which requires the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of the general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the cost of paying losses and LAE.
Insurance premiums are established before the Company knows the amount
of loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the Company's
investment portfolio and the investment rate of return. Any future economic
changes which result in prolonged and increasing levels of inflation could cause
increases in the dollar amount of incurred loss and LAE and thereby materially
adversely affect future liability requirements.
14
PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
In September 2000, a lawsuit was filed against the Company and its
directors and executive officers seeking compensatory damages on the basis of
allegations that the Company's amended registration statement dated November 4,
1998 was inaccurate and misleading concerning the manner in which the Company
recognized ceded insurance commission income, in violation of Sections 11 and 15
of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The lawsuit was filed in the United States District Court
for the Southern District of New York and seeks class action status. The
plaintiff class purportedly includes purchasers of the Company's common stock
between November 5, 1998 and August 13, 1999. The Company believes that the
lawsuit is without merit and intends to vigorously defend such action. The
Plaintiffs recently filed their first amended complaint and the court has not
yet set a deadline for the Company to file a response.
In June 2001, a lawsuit was filed against Federated National by Virtual
Insurance Processing Systems ("Virtual"), a software vendor, alleging that
Federated National breached a software vending contract and misappropriated
trade secrets. The case was settled with Federated National paying $20,000 to
Virtual and agreeing to reinstate the software vending contract.
ITEM 2
CHANGES IN SECURITIES
None.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
None.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
21ST CENTURY HOLDING COMPANY
DATE: November 12, 2001 By: /s/ Samuel A. Milne
-----------------------
Title: Chief Financial Officer
(Principal Accounting and
Financial Officer)
16