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, 2005
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)
Florida 65-0248866
- ----------------------------------- ----------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida 33313
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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)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
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 - 6,374,716 outstanding as of August 8, 2005.
1
21ST CENTURY HOLDING COMPANY
INDEX
PART I: FINANCIAL INFORMATION PAGE
ITEM 1
Financial Statements (Unaudited)
Consolidated Balance Sheets
as of June 30, 2005 and December 31, 2004........................... 4
Consolidated Statements of Operations
for the six months ended June 30, 2005 and 2004..................... 5
Consolidated Cash Flow Statements
for the six months ended June 30, 2005 and 2004..................... 6
Notes to Consolidated Financial Statements.............................. 8
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations................... 20
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk............. 34
ITEM 4
Controls and Procedures ................................................35
PART II: OTHER INFORMATION
ITEM 1
Legal Proceedings...................................................... 36
ITEM 5
Other Information.......................................................36
ITEM 6
Exhibits ...............................................................36
Signatures..............................................................37
2
Exhibits
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the
SARBANES-OXLEY Act............................................... 38
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the
SARBANES-OXLEY Act............................................... 39
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the
SARBANES-OXLEY Act............................................... 40
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the
SARBANES-OXLEY Act............................................... 41
3
PART I: FINANCIAL INFORMATION
ITEM 1
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2005 2004
------------- -------------
ASSETS
Investments
Fixed maturities, available for sale,
at fair value $ 66,711,072 $ 69,587,030
Equity securities 17,304,835 14,795,143
------------- -------------
Total investments 84,015,907 84,382,173
------------- -------------
Cash and cash equivalents 18,625,828 6,127,706
Finance contracts, net of allowance for credit
losses of $494,520 in 2005 and $475,788 in
2004, and net of unearned finance charges of
$447,188 in 2005 and $453,487 in 2004 8,678,524 8,289,356
Prepaid reinsurance premiums -- 5,510,379
Premiums receivable, net of allowance for credit
losses of $78,645 and $541,851, respectively 7,059,546 6,024,913
Reinsurance recoverable, net 22,203,384 25,488,956
Deferred policy acquisition costs 8,638,282 6,957,168
Income taxes recoverable 1,763,657 7,915,424
Deferred income taxes 2,915,824 3,656,076
Property, plant and equipment, net 4,062,389 4,272,733
Goodwill, net -- 153,546
Other assets 4,345,517 4,822,942
------------- -------------
Total assets $ 162,308,858 $ 163,601,372
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and LAE $ 26,025,816 $ 46,570,679
Unearned premiums 60,423,793 50,152,711
Premiums deposits 3,109,509 1,871,683
Revolving credit outstanding 585,972 2,148,542
Bank overdraft 18,541,980 14,832,698
Subordinated debt 13,541,666 16,875,000
Deferred income from sale of agency operations 2,500,000 2,500,000
Accounts payable and accrued expenses 2,061,823 3,673,324
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Total liabilities 126,790,559 138,624,637
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Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value. Authorized
37,500,000 shares; issued 7,052,665 and
6,744,791 shares, respectively; Outstanding
6,355,816 and 6,047,942, respectively 70,527 67,448
Additional paid-in capital 29,448,954 26,310,147
Accumulated other comprehensive income
(deficit) (678,821) (504,972)
Retained earnings 8,457,284 883,757
Treasury stock, 696,849 shares, at cost (1,779,645) (1,779,645)
------------- -------------
Total shareholders' equity 35,518,299 24,976,735
------------- -------------
Total liabilities and shareholders' equity $ 162,308,858 $ 163,601,372
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue:
Gross premiums written $ 31,362,908 $ 31,810,045 $ 61,459,952 $ 49,627,771
Gross premiums ceded (2,053,152) (473,333) (4,954,443) (560,183)
------------ ------------ ------------ ------------
Net premiums written 29,309,756 31,336,712 56,505,509 49,067,588
------------ ------------ ------------ ------------
Decrease in prepaid reinsurance premiums (2,835,083) (2,327,592) (5,510,378) (6,095,744)
(Increase) in unearned premiums (4,585,523) (12,770,311) (10,271,083) (14,499,217)
------------ ------------ ------------ ------------
Net change in prepaid reinsurance premiums
and unearned premiums (7,420,606) (15,097,903) (15,781,461) (20,594,961)
------------ ------------ ------------ ------------
Net premiums earned 21,889,150 16,238,809 40,724,048 28,472,627
Finance revenue 937,681 949,164 2,042,211 2,039,984
Managing general agent fees 620,378 539,822 1,252,693 987,180
Net investment income 910,925 773,921 1,803,796 1,302,045
Net realized investment gains 125,510 58,508 285,033 180,427
Other income 161,913 115,569 404,381 390,705
------------ ------------ ------------ ------------
Total revenue 24,645,557 18,675,793 46,512,162 33,372,968
------------ ------------ ------------ ------------
Expenses:
Loss and LAE 12,308,775 7,618,159 19,218,772 14,092,992
Operating and underwriting expenses 2,206,281 1,968,291 3,788,812 3,916,863
Salaries and wages 1,580,120 1,345,058 3,158,701 2,768,171
Interest expense 379,787 213,841 809,931 444,922
Policy acquisition costs, net of amortization 3,222,441 1,682,440 7,048,042 2,124,168
------------ ------------ ------------ ------------
Total expenses 19,697,404 12,827,789 34,024,258 23,347,116
Income from continuing operations before provision
for income tax expense 4,948,153 5,848,004 12,487,904 10,025,852
Provision for income tax expense 1,924,612 2,113,049 4,678,687 3,659,866
------------ ------------ ------------ ------------
Net income from continuing operations 3,023,541 3,734,955 7,809,217 6,365,986
Discontinued operations:
Income (loss) from discontinued operations
(including gain on disposal of $1,630,000
and $0, respectively) -- (98,583) 1,630,000 366,639
Provision for income tax expense -- (38,406) 595,396 133,839
------------ ------------ ------------ ------------
Income (loss) from discontinued operations -- (60,177) 1,034,604 232,800
------------ ------------ ------------ ------------
Net income $ 3,023,541 $ 3,674,778 $ 8,843,821 $ 6,598,786
============ ============ ============ ============
Basic net income per share from continuing
operations $ 0.48 $ 0.64 $ 1.27 $ 1.11
============ ============ ============ ============
Basic net income per share from discontinued
operations $ -- $ (0.01) $ 0.16 $ 0.04
============ ============ ============ ============
Basic net income per share $ 0.48 $ 0.63 $ 1.43 $ 1.15
============ ============ ============ ============
Fully diluted net income per share from
continuing operations $ 0.46 $ 0.61 $ 1.19 $ 1.05
============ ============ ============ ============
Fully diluted net income per share from
discontinued operations $ -- $ (0.01) $ 0.16 $ 0.03
============ ============ ============ ============
Fully diluted net income per share $ 0.46 $ 0.60 $ 1.35 $ 1.08
============ ============ ============ ============
Weighted average number of common shares
outstanding 6,349,182 5,794,893 6,171,134 5,718,104
============ ============ ============ ============
Weighted average number of common shares
outstanding (assuming dilution) 6,620,510 6,083,916 6,550,789 6,088,098
============ ============ ============ ============
Dividends declared per share $ 0.08 $ 0.08 $ 0.08 $ 0.08
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
2005 2004
------------ ------------
Cash flow from operating activities:
Net income $ 8,843,821 $ 6,598,786
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of investment (discount)
premium, net (56,786) 124,962
Depreciation and amortization of property
plant and equipment, net 240,073 256,704
Gain from sale of discontinued operations (1,630,000)
Net realized investment gains (loss) 179,744 (180,427)
Common Stock issued for interest on Notes 315,625 196,875
Provision for credit losses, net 495,881 634,736
Provision for uncollectible premiums
receivable (370,887) 195,845
Recognition of deferred income from sale
of franchises -- (110,638)
Sale of equity in subsidiary (255,080) --
Changes in operating assets and liabilities:
Premiums receivable (663,746) 134,554
Prepaid reinsurance premiums 5,510,379 6,095,744
Due from reinsurers, net 3,285,572 3,852,106
Income taxes recoverable 6,151,767 824,787
Deferred income tax expense 740,252 (807,433)
Policy acquisition costs, net of
amortization (1,681,114) (4,415,825)
Goodwill 153,546 --
Finance contracts receivable (885,049) 111,848
Other assets 472,530 268,847
Unpaid losses and loss adjustment expenses (20,544,863) (3,385,021)
Unearned premiums 10,271,082 14,499,217
Premium deposits 1,237,826 (174,216)
Income taxes payable -- 1,119,047
Bank overdraft 3,709,282
Accounts payable and accrued expenses (1,611,501) (94,471)
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Net cash provided by operating activities 13,908,354 25,746,027
------------ ------------
Cash flow provided by (used in) investing
activities:
Proceeds from sale of investment securities
available for sale 31,747,952 34,275,107
Purchases of investment securities available
for sale (31,624,260) (66,948,234)
Receivable for investments sold -- 2,118,595
Collection of mortgage loans -- 137,571
Purchases of property and equipment (138,196) (157,936)
Proceeds from sale of discontinued operations 1,630,000 --
Proceeds from sale of assets 59,129 --
------------ ------------
Net cash provided by (used in) investing
activities 1,674,625 (30,574,897)
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Cash flow (used in) provided by financing
activities:
Subordinated debt (1,894,792)
Exercised stock options 1,387,719 2,263,417
Dividends paid (1,015,214) (920,776)
Purchases of treasury stock -- (2,197)
Revolving credit outstanding (1,562,570) (1,241,093)
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Net cash (used in) provided by financing
activities (3,084,857) 99,351
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Net increase (decrease) in cash and cash
equivalents 12,498,122 (4,729,519)
Cash and cash equivalents at beginning of period 6,127,706 6,770,169
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Cash and cash equivalents at end of period $ 18,625,828 $ 2,040,650
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
(continued) 2005 2004
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 292,338 $ 113,626
============ ============
Income taxes $ -- $ 2,095,000
============ ============
Non-cash investing and finance activities:
Accrued dividends payable $ 446,579 $ 436,229
============ ============
Retirement of subordinated debt by Common
Stock issuance $ 1,666,667 $ 1,250,000
============ ============
Stock issued to pay interest on
subordinated debt $ 315,625 $ 196,875
============ ============
Notes receivable, net of deferred gains,
received for sale of agencies $ -- $ 214,220
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
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 ("GAAP") 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 GAAP for complete financial statements, and should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K/A (Amendments No. 1 and No.
2) for the year ended December 31, 2004. The December 31, 2004 year-end balance
sheet data was derived from audited financial statements but does not include
all disclosures required by GAAP. 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 the results of
operations that may be achieved in the future.
We are an insurance holding company, which, through our subsidiaries and
our contractual relationships with our independent agents, control substantially
all aspects of the insurance underwriting, distribution and claims process. We
are authorized to underwrite personal automobile insurance, commercial general
liability insurance, homeowners' property and casualty insurance and mobile home
property and casualty insurance in various states with various lines of
authority through our wholly owned subsidiaries, Federated National Insurance
Company ("Federated National") and American Vehicle Insurance Company ("American
Vehicle").
Federated National is authorized to underwrite personal automobile
insurance, homeowners' property and casualty insurance and mobile home property
and casualty insurance in Florida as an admitted carrier. American Vehicle is
authorized to underwrite personal automobile insurance and commercial general
liability insurance in Florida as an admitted carrier. American Vehicle is also
authorized to underwrite homeowners' property and casualty insurance and
commercial general liability insurance in Louisiana as an admitted carrier. In
addition, American Vehicle is authorized to underwrite commercial general
liability insurance in Georgia and Kentucky as a surplus lines carrier and in
Texas and Alabama as an admitted carrier. We anticipate that underwriting will
begin in Kentucky and Alabama in the near future. American Vehicle operations in
Florida, Georgia and Louisiana are on going. American Vehicle operations in
Texas, Alabama and Kentucky are expected to begin this year. American Vehicle
has pending applications, in various stages of approval, to be authorized as a
surplus lines carrier in the states of California and Virginia.
During the six months ended June 30, 2005, 59.8%, 20.9%, 18.8% and 0.5% of
the policies we underwrote were for homeowners' property and casualty insurance,
personal automobile insurance, commercial general liability insurance, and
mobile home property and casualty insurance, respectively. During the six months
ended June 30, 2004, 61.7%, 23.7%, 12.8% and 1.8% of the policies we underwrote
were for homeowners' property and casualty insurance, personal automobile
insurance, commercial general liability insurance, and mobile home property and
casualty insurance, respectively. We internally process claims made by our own
and third-party insureds through our wholly owned claims adjusting company,
Superior Adjusting, Inc. ("Superior"). We also offer premium financing to our
own and third-party insureds through our wholly owned subsidiary, Federated
Premium Finance, Inc. ("Federated Premium").
We market and distribute our own and third-party insurers' products and
our other services primarily in Florida, through contractual relationships with
a network of approximately 1,500 independent agents and a select number of
general agents.
Assurance Managing General Agents, Inc. ("Assurance MGA"), a wholly owned
subsidiary, acts as Federated National's and American Vehicle's exclusive
managing general agent. Assurance MGA currently provides all underwriting policy
administration, marketing, accounting and financial services to Federated
National and American Vehicle, and participates in the negotiation of
reinsurance contracts. Assurance MGA generates revenue through a 6% commission
fee from the insurance companies' net written premium, policy fee income of $25
per policy and other administrative fees from the marketing of other companies'
products through the Company's distribution network. The 6% commission fee from
Federated National and American Vehicle was made effective January 1, 2005.
Assurance MGA plans to establish relationships with additional carriers and add
additional insurance products in the future.
8
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.
The most significant accounting estimates inherent in the preparation of
our financial statements include estimates associated with our evaluation of the
determination of liability for unpaid losses and loss adjustment expenses (LAE).
In addition, significant estimates form the basis for our reserves with respect
to finance contracts, premiums receivable, deferred income taxes, deferred
policy acquisition costs and loss contingencies. Various assumptions and other
factors underlie the determination of these significant estimates. The process
of determining significant estimates is fact specific and takes into account
factors such as historical experience, as well as current and expected economic
conditions. We periodically re-evaluate these significant factors and make
adjustments where facts and circumstances dictate.
(B) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
revised SFAS No. 123, Share-Based Payments ("SFAS No. 123R"). This statement
eliminates the option to apply the intrinsic value measurement provisions of APB
No. 25 to stock compensation awards issued to employees. Rather, SFAS No. 123R
requires companies to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value of the
award. That cost will be recognized over the period during which an employee is
required to provide services in exchange for the award - the requisite service
period (usually the vesting period). SFAS No. 123R will also require companies
to measure the cost of employee services received in exchange for employee stock
purchase plan awards. SFAS No. 123R will be effective for the Company's fiscal
year beginning January 1, 2006 as subsequently extended by the SEC pursuant to
its April 13, 2005 announcement. We have not yet determined the effect on us of
the adoption of SFAS No. 123R.
(C) STOCK OPTIONS
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by APB Opinion No. 25, under which no
compensation cost for stock options is recognized for stock option awards
granted to employees at or above fair market value. Had compensation expense for
the Company's stock compensation plans been determined based upon fair values at
the grant dates for awards under the plan in accordance with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below.
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net Income as reported $ 3,023,541 $ 3,674,778 $ 8,843,821 $ 6,598,786
Compensation, net of tax effect 145,768 329,851 799,699 542,558
------------- ------------- ------------- -------------
Pro forma net income $ 2,877,773 $ 3,344,927 $ 8,044,122 $ 6,056,228
============= ============= ============= =============
Net income per share
As reported - Basic $ 0.48 $ 0.63 $ 1.43 $ 1.15
As reported - Diluted $ 0.46 $ 0.60 $ 1.35 $ 1.08
Pro forma - Basic $ 0.45 $ 0.58 $ 1.30 $ 1.06
Pro forma - Diluted $ 0.43 $ 0.55 $ 1.23 $ 0.99
Additional stock option awards are anticipated in future years.
9
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value for new options granted during the six
months ending June 30, 2005, estimated on the date of grant using the
Black-Scholes option-pricing model was $20.00. In connection with the sale of
Express Tax Service, Inc. and EXPRESSTAX Franchise Corporation on January 1,
2005, 105,000 Incentive Stock Options under the 2002 Stock Option plan were
cancelled and reissued as Non-Qualified Stock Options. The weighted average fair
value of options granted during 2004 as estimated on the date of grant using the
Black-Scholes option-pricing model was $6.13 to $18.26 in 2004. The fair value
of options granted is estimated on the date of grant using the following
assumptions:
June 30, 2005 June 30, 2004
------------- -------------
Dividend yield 2.33% to 2.43% 2.24%
Expected volatility 61.76% to 96.76% 100.98%
Risk-free interest rate 3.34% to 3.86% 3.25% - 3.33%
Expected life (in years) 2.59 to 2.63 3.44
(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 shares of common stock and common
stock equivalents outstanding 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. Additionally, when applicable,
we include in our computation of the weighted average number of common shares
outstanding all common stock issued in connection with the repayment of our
Subordinated debt.
(E) RECLASSIFICATIONS
Certain amounts in 2004 financial statements have been reclassified to
conform to the 2005 presentation.
(3) REVOLVING CREDIT OUTSTANDING
Federated Premium's operations are funded by 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 Westchester Premium Acceptance Corporation
("WPAC") (a wholly-owned subsidiary of FlatIron), which gives WPAC 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.
During September 2004, we negotiated a new revolving loan agreement in
which the maximum credit commitment available to us was reduced at our request
to $2.0 million with built-in options to incrementally increase the maximum
credit commitment up to $4.0 million over the next three years. Our lender could
decide to change our available credit based on a number of factors, including
the A.M. Best ratings of Federated National and American Vehicle. Pursuant to
our loan agreement, if the A.M. Best rating of Federated National falls below a
"C," or if the financial condition of American Vehicle, as determined by our
lender (in its sole and absolute discretion) suffers a material adverse change,
then under the terms of our loan agreement, policies written by that subsidiary
will no longer be eligible collateral, causing our available credit to be
reduced if we do not have other collateral qualifying as eligible collateral. As
of December 31, 2004, policies written by Federated National were not considered
by our lender to be eligible collateral. In March 2005, our lender agreed to
permit policies written by Federated National to be eligible collateral and
agreed to increase our total available credit by $0.5 million from $2.0 million
to $2.5 million. We currently believe that this higher available credit limit
will be sufficient based on our current operations. If policies written by our
insurance subsidiaries again do not qualify as eligible collateral under our
loan agreement and we are not able to obtain working capital from our operations
or other sources, then we would have to restrict our growth and, possibly, our
operations.
10
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts of WPAC's advances are 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 equals the prime rate plus additional interest varying from
1.25% to 3.25% based on the prior month's ratio of contracts receivable related
to insurance companies with an A. M. Best rating of B or lower to total
contracts receivable. The effective interest rate on this line of credit, based
on our average outstanding borrowings under the Revolving Agreement, was 9.39%
and 5.97% for the six months ended June 30, 2005 and 2004, respectively.
Outstanding borrowings under the Revolving Agreement as of June 30, 2005
were approximately $0.6 million. Outstanding borrowings as of December 31, 2004
were approximately $2.1. Outstanding borrowings in excess of the $2.0 million
credit limits totaled $148,542 as of December 31, 2004. The excess amount was
permissible by reason of a compensating cash balance of $156,095 for December
31, 2004 that was held for the benefit of WPAC and was included in other assets.
Interest expense on this revolving credit line for the six months ended June 30,
2005 and June 30, 2004 totaled approximately $64,000 and $104,000, respectively.
(4) COMMITMENTS AND CONTINGENCIES
We are 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 our
consolidated financial position, results of operations, or liquidity.
In June 2000, a lawsuit was filed against us, our directors and our
executive officers seeking compensatory damages in an undisclosed amount on the
basis of allegations that our amended registration statement dated November 4,
1998 was inaccurate and misleading concerning the manner in which we 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. The plaintiff class purportedly includes
purchasers of our common stock between November 5, 1998 and August 13, 1999. The
Court granted the plaintiffs class status.
Specifically, the plaintiffs alleged that we recognized ceded commission
income on a written basis, rather than amortized on a pro rata basis. The
plaintiffs alleged that this was contrary to the Statement of Financial
Accounting Concepts Nos. 1, 2 and 5. We believe, however, that the lawsuit was
without merit and we have vigorously defended the action, because we reasonably
relied upon outside subject matter experts to make these determinations at the
time. We have also since accounted for ceded commission on a pro rata basis and
have done so since these matters were brought to our attention in 1998.
Nevertheless, we have also continued to actively participate in settlement
negotiations with the plaintiffs and have agreed to settle the case for
$525,000. The Court has issued a Preliminary Order approving the settlement and
the full amount was funded in February 2005. Notices have been sent to class
members and the Court conducted the Final Settlement Hearing on July 26, 2005,
and approved the settlement. We anticipate our active involvement with this
matter to be concluded. We reserved and charged against fourth quarter 2003
earnings $600,000 for the potential settlement and associated costs.
In 2000 and 2001 respectively, two class action lawsuits were filed
against an unaffiliated insurance company for which our subsidiary, Assurance
MGA, was the managing general agent. These lawsuits were seeking compensatory
damages in an undisclosed amount based on allegations of unfair practices
involving the computation of interest due the policyholder in connection with
automobile premium refunds. The unaffiliated company has contested these
lawsuits over the last several years. Negotiations relative to this matter have
been ongoing and in July 2005 the parties reached an agreement wherein we have
agreed in principle to pay $240,000 to resolve the underlying actions in these
suits subject to our contractual duties with respect to the unaffiliated
company. We believe that we will be successful in our efforts to enjoin others
to participate in this settlement; however we are unable to quantify the
participation of others at this time. Accordingly, we have charged against
second quarter 2005 earnings $240,000 for this action.
As an admitted carrier in the State of Florida, we are required to
participate in certain insurer solvency pools under Florida Statutes Section
631.57(3) (a). Participation in these pools is based on our written premiums by
line of business to total premiums written statewide by all insurers.
Participation may result in assessments against us. No related assessments have
been incurred by either insurance company through the date of this 10-Q.
Federated National and American Vehicle are also required to participate
in an insurance apportionment plan under Florida Statutes Section 627.351, which
is referred to as a Joint Underwriting Association Plan ("JUA Plan"). The JUA
Plan provides for the equitable apportionment of any profits realized, or losses
and expenses incurred, among participating motor vehicle insurers. In the event
of an underwriting deficit incurred by the JUA Plan which is not recovered
through the policyholders in the JUA Plan, such deficit shall be recovered from
the companies participating in the JUA Plan in the proportion that the net
direct written premiums of each such member during the preceding calendar year
bear to the aggregate net direct premiums written in this state by all members
of the JUA Plan. Federated National and American Vehicle were assessed $44,350
and $1,615, respectively by the JUA Plan based on its July 2005 Cash Activity
Report. No accrual for this assessment was recorded for the period ending June
30, 2005.
11
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) COMPREHENSIVE INCOME
For the three and six months ended June 30, 2005 and 2004, comprehensive
income consisted of the following:
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income $ 3,023,541 $ 3,674,778 $ 8,843,821 $ 6,598,786
Change in net unrealized gain (loss) on
investments available for sale 458,828 (2,751,268) (278,738) (1,941,719)
----------- ----------- ----------- -----------
Comprehensive income, before tax 3,482,369 923,510 8,565,083 4,657,067
Income tax benefit (expense) related to
items of other comprehensive income (172,835) 1,036,371 104,889 730,669
----------- ----------- ----------- -----------
Comprehensive income $ 3,309,534 $ 1,959,881 $ 8,669,972 $ 5,387,736
=========== =========== =========== ===========
(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 and American Vehicle, managing
general agent operations through Assurance MGA and claims processing through
Superior. The insurance segment sells personal automobile, homeowner's property
and casualty, and commercial general liability lines of insurance products and
includes substantially all aspects of the insurance and claims process. The
financing segment consists of premium financing through Federated Premium. The
financing segment provides premium financing to the Company's insureds and is
marketed through the Company's relationship with its network of non-affiliated
agencies.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies and practices. The Company
evaluates its business segments based on GAAP pretax operating earnings.
Corporate overhead expenses are allocated to business segments. Transactions
between reportable segments are accounted for at fair value.
Operating segments that are not individually reportable, based on the
extent of the current operations in such segments, are included in the "All
Other" category. The "All Other" category currently includes the operations of
21st Century Holding Company, the parent company.
Information regarding components of operations for the three and six
months ended June 30, 2005 and 2004 follows:
12
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Total revenue
Insurance segment $ 26,579,336 $ 19,215,170 $ 48,818,407 $ 33,838,248
Financing segment 717,153 727,331 1,586,866 1,524,192
All other segments 345,878 816,531 809,254 2,012,542
------------ ------------ ------------ ------------
Total operating segments 27,642,367 20,759,032 51,214,527 37,374,982
Intercompany eliminations (2,996,810) (2,083,239) (4,702,365) (4,002,014)
------------ ------------ ------------ ------------
Total revenues $ 24,645,557 $ 18,675,793 $ 46,512,162 $ 33,372,968
============ ============ ============ ============
Earnings before income taxes
Insurance segment $ 5,726,366 $ 5,649,484 $ 13,708,705 $ 9,357,361
Financing segment 356,638 448,840 575,450 586,761
All other segments (1,134,852) (250,320) (1,796,252) 81,730
------------ ------------ ------------ ------------
Total earnings before income taxes $ 4,948,152 $ 5,848,004 $ 12,487,903 $ 10,025,852
============ ============ ============ ============
Information regarding total assets as of June 30, 2005 and December 31,
2004 as follows:
June 30, December 31,
2005 2004
------------ ------------
Total assets
Insurance segment $133,698,253 $134,894,764
Financing segment 8,877,889 8,536,786
All other segments 7,870,303 15,460,463
------------ ------------
Total operating segments 150,446,445 158,892,013
Intercompany eliminations 11,862,413 4,709,359
------------ ------------
Total assets $162,308,858 $163,601,372
============ ============
(7) REINSURANCE AGREEMENTS
We follow industry practice of reinsuring a portion of our risks and
paying for that protection based upon premiums received on all policies subject
to such reinsurance. Reinsurance involves an insurance company transferring or
"ceding" all or a portion of its exposure on insurance underwritten by it to
another insurer, known as a "reinsurer." The ceding of insurance does not
legally discharge the insurer from its primary liability for the full amount of
the policies. If the reinsurer fails to meet its obligations under the
reinsurance agreement, the ceding company is still required to pay the loss.
For the 2005-2006 hurricane season, the excess of loss treaties will
insure us for approximately $64.0 million, with the Company retaining the first
$3.0 million of loss and LAE. The treaties have provisions which, for a prepaid
premium, will provide an automatic reinstatement of another $64.0 million of
loss and LAE for a second occurrence, with the Company retaining the first $3.0
million in loss and LAE. Unused coverage from the first two events carries
forward to events beyond the second, in conjunction with a lowered attachment
point (as explained below) afforded by the Florida Hurricane Catastrophe Fund
("FHCF").
In addition to the excess of loss reinsurance policies (described above),
we continue to participate in the FHCF to protect our interest in the insurable
risks associated with our homeowner and mobile home owner insurance products.
For the first two events, FHCF coverage begins after the Company's retention of
$3.0 million and its excess of loss reinsures retention of $40.0 million.
Maximum coverage afforded from the combined policies of our FHCF and
excess of loss policies in effect for varying dates from June 1, 2005 to June
30, 2006 total approximately $209.0 million. FHCF will retain approximately
$145.0 million, our excess of loss reinsurance policies will retain $64.0
million, and the Company will retain the first $3 million of insurable losses
for two events. For events beyond the second largest, FHCF coverage attaches
after the Company and its excess of loss reinsures collective retention of
approximately $15.0 million. Additionally, unused coverage from our excess of
loss reinsurance treaties may be carried forward.
13
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the loss and LAE incurred in connection with Hurricane
Dennis on July 10, 2005, the Company does not expect to exhaust its recoveries
of $48 million under the terms of the 2005-2006 treaties.
For the 2004-2005 hurricane season, the excess of loss treaty insured us
for $24 million, while the Company retained the first $10 million of loss and
LAE. The treaty had a provision which, for a prepaid premium, insured us for
another $24 million of loss and LAE for subsequent occurrences while the Company
retained the first $10 million in loss and LAE. As a result of the loss and LAE
incurred in connection with the Hurricanes Charles and Frances the Company
exhausted its recoveries of $48 million under the terms of this treaty.
Maximum coverage afforded from the combined policies of our FHCF and
excess of loss policies in effect for varying dates from June 1, 2004 to June
30, 2005 totaled approximately $200.0 million, during which time we retained the
first $10 million of insurable losses on each event. However, loss and LAE
incurred for Hurricanes Ivan and Jeanne and any subsequent catastrophic events
through June 30, 2005, up to $34 million each, are the responsibility of the
Company as illustrated in the accompanying table.
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
---------- ---------- ----------
(Dollars in Millions)
Charley (August 13, 2004) $ 57.1 $ 47.1 $ 10.0
Frances (September 3, 2004) 47.8 37.8 10.0
Ivan (September 14, 2004) 17.8 -- 17.8
Jeanne (September 25, 2004) 12.4 -- 12.4
---------- ---------- ----------
Total Loss Estimate $ 135.1 $ 84.9 $ 50.2
========== ========== ==========
No catastrophic events occurred subsequent to Hurricane Jeanne and through
June 30, 2005. Furthermore, as a result of the 2004 hurricanes, we incurred a
net reinstatement reinsurance premium of $3.0 million that is amortized through
operations from the reinstatement date of August 13, 2004 to June 30, 2005.
In August and September 2004, the State of Florida experienced four
hurricanes, Charley, Frances, Ivan and Jeanne. One of our subsidiaries,
Federated National, incurred significant losses relative to its homeowners' and
mobile homeowners' insurance lines of business. Approximately 8,900
policyholders have filed hurricane-related claims totaling an estimated $135.0
million, of which we estimate that our share of the costs associated with these
hurricanes will be approximately $50.2 million, net of reinsurance recoveries
and amortized reinstatement premiums.
The excess of loss treaty also insured us for an additional $34 million in
excess of the Company's $10 million retention plus the next $24 million as
described above. Accordingly, loss and LAE incurred for Hurricanes Ivan and
Jeanne and any subsequent catastrophic events through June 30, 2005, up to $34
million each, are the responsibility of the Company, as illustrated in the
accompanying table.
Reinsurance is ceded under separate contracts or "treaties" for the
separate lines of business underwritten and terms of coverage. The Company
collectively ceded $5.0 million and $0.6 million in premiums written for the six
months ended June 30, 2005 and 2004, respectively. During the six months ended
June 30, 2005 and 2004, respectively, we primarily reinsured Federated
National's homeowners' insurance lines of business. The Company's reinsurance
for homeowners' insurance is with several participants, all of which are AM Best
rated "A" or better.
Our amount of reinsurance coverage was determined by subjecting our
homeowner and mobile homeowner exposures to statistical forecasting models that
are designed to quantify a catastrophic event in terms of the frequency of a
storm occurring once in every "n" years. Our reinsurance coverage contemplated a
catastrophic event occurring once every 100 years.
14
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are selective in choosing a reinsurer and consider numerous factors,
the most important of which are the financial stability of the reinsurer, their
history of responding to claims and their overall reputation. In an effort to
minimize our exposure to the insolvency of a reinsurer, we evaluate the
acceptability and review the financial condition of the reinsurer at least
annually. Our current policy is to use only reinsurers that have an A.M. Best
rating of "A" (Excellent) or better.
During 2004 and through the date of this report, Federated National and
American Vehicle have not reinsured any of its automobile insurance.
(8) STOCK COMPENSATION PLANS
We implemented a stock option plan in November 1998 that provides for the
granting of stock options to directors, officers, key employees and consultants.
The objectives of this plan include attracting and retaining the best personnel,
providing for additional performance incentives, and promoting our success by
providing employees the opportunity to acquire common stock. Options outstanding
under this plan have been granted at prices which are either equal to or above
the market value of the stock on the date of grant, vest over a four-year
period, and expire ten years after the grant date. Under this plan, we are
authorized to grant options to purchase up to 900,000 common shares, and, as of
June 30, 2005 and December 31, 2004, we had outstanding exercisable options to
purchase 128,400 and 198,275 shares, respectively.
In 2001, we implemented a franchisee stock option plan that provides for
the granting of stock options to individuals purchasing Company owned agencies
which are then converted to franchised agencies. The purpose of the plan is to
advance our interests by providing an additional incentive to encourage managers
of Company owned agencies to purchase the agencies and convert them to
franchises. Options outstanding under the plan have been granted at prices which
are above the market value of the stock on the date of grant, vest over a
ten-year period, and expire ten years after the grant date. Under this plan, we
are authorized to grant options to purchase up to 988,500 common shares, though
in connection with our sale of our franchise operations we do not anticipate
additional options to be granted under this plan. As of June 30, 2005 and
December 31, 2004, we had outstanding exercisable options to purchase 15,000
shares.
In 2002, we implemented the 2002 Option Plan. The purpose of this Plan is
to advance our interests by providing an additional incentive to attract, retain
and motivate highly qualified and competent persons who are key to the Company,
including key employees, consultants, independent contractors, and Officers and
Directors, upon whose efforts and judgment our success is largely dependent, by
authorizing the grant of options to purchase Common Stock to persons who are
eligible to participate hereunder, thereby encouraging stock ownership by such
persons, all upon and subject to the terms and conditions of the Plan. Options
outstanding under the plan have been granted at prices which are above the
market value of the stock on the date of grant, vest over a five-year period,
and expire six years after the grant date. Under this plan, the Company is
authorized to grant options to purchase up to 1,800,000 common shares, and, as
of June 30, 2005 and December 31, 2004, we had outstanding exercisable options
to purchase 789,658 and 906,300 shares, respectively.
Activity in the Company's stock option plans for the period from January
1, 2003 to June 30, 2005, is summarized below:
15
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 Plan 2001 Franchisee Plan 2002 Plan
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at January 1, 2004 408,530 $ 6.67 39,960 $ 7.61 938,100 $ 9.20
Granted -- -- 178,750 $ 17.83
Exercised (193,755) $ 6.67 (24,960) $ 6.67 (136,300) $ 9.16
Cancelled (16,500) $ 6.67 -- (74,250) $ 10.50
---------- ---------- ----------
Outstanding at December 31, 2004 198,275 $ 6.67 15,000 $ 9.17 906,300 $ 10.80
Granted -- -- 115,000 $ 10.11
Exercised (69,875) $ 6.67 -- (78,592) $ 9.22
Cancelled -- -- (153,050) $ 10.76
---------- ---------- ----------
Outstanding at June 30, 2005 128,400 $ 6.67 15,000 $ 9.17 789,658 $ 10.86
========== ========== ==========
Options outstanding as of June 30, 2005 are exercisable as follows:
1998 Plan 2001 Franchisee Plan 2002 Plan
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Options Exercisable at:
June 30, 2005 100,650 $ 6.67 15,000 $ 6.67 520,258 $ 9.22
December 31, 2005 -- -- 13,600 $ 9.22
December 31, 2006 27,750 $ 6.67 -- 88,650 $ 9.22
December 31, 2007 -- -- 88,650 $ 9.22
December 31, 2008 -- -- 44,400 $ 9.22
December 31, 2009 -- -- 32,100 $ 9.22
Thereafter -- -- 2,000 $ 9.22
---------- ---------- ----------
Total options exercisible 128,400 15,000 789,658
========== ========== ==========
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by APB Opinion No. 25, under which no
compensation cost for stock options is recognized for stock option awards
granted to employees at or above fair market value. Had compensation expense for
the Company's stock compensation plans been determined based upon fair values at
the grant dates for awards under the plan in accordance with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below.
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net Income as reported $ 3,023,541 $ 3,674,778 $ 8,843,821 $ 6,598,786
Compensation, net of tax effect 145,768 329,851 799,699 542,558
------------- ------------- ------------- -------------
Pro forma net income $ 2,877,773 $ 3,344,927 $ 8,044,122 $ 6,056,228
============= ============= ============= =============
Net income per share
As reported - Basic $ 0.48 $ 0.63 $ 1.43 $ 1.15
As reported - Diluted $ 0.46 $ 0.60 $ 1.53 $ 1.08
Pro forma - Basic $ 0.45 $ 0.58 $ 1.30 $ 1.06
Pro forma - Diluted $ 0.43 $ 0.55 $ 1.23 $ 0.99
Additional stock option awards are anticipated in future years.
The weighted average fair value for new options granted during the six
months ending June 30, 2005, estimated on the date of grant using the
Black-Scholes option-pricing model was $20.00. In connection with the sale of
Express Tax Service, Inc. and EXPRESSTAX Franchise Corporation on January 1,
2005, 105,000 Incentive Stock Options under the 2002 Stock Option plan were
cancelled and reissued as Non-Qualified Stock Options. The weighted average fair
value of options granted during 2004 as estimated on the date of grant using the
Black-Scholes option-pricing model was $6.13 to $18.26 in 2004. The fair value
of options granted is estimated on the date of grant using the following
assumptions:
16
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005 June 30, 2004
------------- -------------
Dividend yield 2.33% to 2.43% 2.24%
Expected volatility 61.76% to 96.76% 100.98%
Risk-free interest rate 3.34% to 3.86% 3.25% - 3.33%
Expected life (in years) 2.59 to 2.63 3.44
Summary information about the Company's stock options outstanding at June
30, 2005:
Weighted Average Weighted
Range of Outstanding at Contractual Average Exercisable at
Exercise Price June 30, 2005 Periods in Years Exercise Price June 30, 2005
-------------- ------------- ---------------- -------------- -------------
1998 Plan $6.67 128,400 2.7 $6.67 100,650
2001 Franchise Plan $6.67 to $9.17 15,000 3.21 $9.17 15,000
2002 Plan $8.33 - $20.00 789,658 2.59 $10.86 520,258
(9) SUBORDINATED DEBT
On July 31, 2003, we completed a private placement of our 6% Senior
Subordinated Notes (the "July 2003 Notes"), which were offered and sold to
accredited investors as units consisting of one July 2003 Note with a principal
amount of $1,000 and warrants (the "2003 Warrants") to purchase shares of our
Common Stock. We sold an aggregate of $7.5 million of July 2003 Notes in this
placement, which resulted in proceeds to us (net of placement agent fees of
$450,724 and offering expenses of $110,778) of $6,938,498.
The July 2003 Notes pay interest at the annual rate of 6%, are
subordinated to senior debt of the Company, and mature on July 31, 2006.
Quarterly payments of principal and interest due on the July 2003 Notes may be
made in cash or, at our option, in shares of our Common Stock. If paid in shares
of Common Stock, the number of shares to be issued shall be determined by
dividing the payment due by 95% of the weighted-average volume price for the
Common Stock on Nasdaq as reported by Bloomberg for the 20 consecutive trading
days preceding the payment date.
The 2003 Warrants issued in this placement to the purchasers of the July
2003 Notes and to the placement agent in the offering, J. Giordano Securities
Group ("J. Giordano"), each entitle the holder to purchase 3/4 of one share of
our Common Stock at an exercise price of $12.74 per whole share (as adjusted for
the Company's three-for-two stock split) until July 31, 2006. The total number
of shares issuable upon exercise of 2003 Warrants issued to the purchasers of
the July 2003 Notes and to J. Giordano totaled 594,421. GAAP requires that
detachable warrants be valued separately from debt and included in paid-in
capital. Based on the terms of the purchase agreement with the investors in the
private placement, management believes that the July 2003 Warrants had zero
value at the date of issuance.
On September 30, 2004, we completed a private placement of 6% Senior
Subordinated Notes due September 30, 2007 (the "September 2004 Notes"). These
notes were offered and sold to accredited investors as units consisting of one
September 2004 Note with a principal amount of $1,000 and warrants to purchase
shares of our Common Stock (the "2004 Warrants"), the terms of which are similar
to our July 2003 Notes and 2003 Warrants, except as described below. We sold an
aggregate of $12.5 million of units in this placement, which resulted in
proceeds (net of placement agent fees of $700,000 and offering expenses of
$32,500) to us of $11,767,500.
17
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The September 2004 Notes pay interest at the annual rate of 6%, mature on
September 30, 2007, and rank pari passu in terms of payment and priority to the
July 2003 Notes. Quarterly payments of principal and interest due on the
September 2004 Notes, like the July 2003 Notes, may be made in cash or, at our
option, in shares of our Common Stock. If paid in shares of Common Stock, the
number of shares to be issued shall be determined by dividing the payment due by
95% of the weighted-average volume price for the Common Stock on Nasdaq as
reported by Bloomberg for the 20 consecutive trading days preceding the payment
date.
The 2004 Warrants issued to the purchasers of the September 2004 Notes and
to the placement agent in the offering, J. Giordano, each entitle the holder to
purchase one share of our Common Stock at an exercise price of $12.75 per share
and will be exercisable until September 30, 2007. The number of shares issuable
upon exercise of the 2004 Warrants issued to purchasers equaled $12.5 million
divided by the exercise price of the warrants, and totaled 980,392. The total
number of shares issuable upon exercise of 2004 Warrants issued to the
purchasers of the September 2004 Notes and to J. Giordano totaled 1,019,608.
GAAP requires that detachable warrants be valued separately from debt and
included in paid-in capital. Based on the terms of the purchase agreement with
the investors in the private placement, management believes that the September
2004 Warrants had zero value at the date of issuance.
The terms of the 2004 Warrants provide for adjustment of the exercise
price and the number of shares issuable thereunder upon the occurrence of
certain events typical for private offerings of this type.
As indicated on the table below, we paid, pursuant to the terms of the
July 2003 Notes and in accordance with the contractual computations, the
quarterly payments of principal and interest due in shares of our Common Stock.
Quarterly payment due date 2005 2004
- -------------------------- ---- ----
January 31, 55,537 54,014
April 30, -- 53,729
July 31, -- 49,965
October 31, -- 69,200
------- -------
Total common stock issued 55,537 226,908
======= =======
As indicated on the table below, we paid, pursuant to the terms of the
September 2004 Notes and in accordance with the contractual computations, the
quarterly payments of principal and interest due in shares of our Common Stock.
Quarterly payment due date 2005
- -------------------------- ----
January 31, 103,870
April 30, --
July 31, --
October 31, --
-------
Total common stock issued 103,870
=======
For the July 2003 Notes, the quarterly principal and interest payments
totaling approximately $0.7 million per payment are due quarterly for three
years with the last installment due on July 31, 2006. The scheduled principal
loan payments for the next three years are as follows:
For the period
--------------
Six months ending December 31, 2005 $ 1,250,000
Year ending December 31, 2006 1,875,000
-----------
Total $ 3,125,000
===========
18
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the September 2004 Notes, the quarterly principal and interest
payments, totaling approximately $1.2 million per payment, are due quarterly for
three years with the last installment due on September 30, 2007. The scheduled
principal loan payments for the next three years are as follows:
For the period
--------------
Six months ending December 31, 2005 $ 2,083,334
Year ending December 31, 2006 4,166,668
Year ending December 31, 2007 4,166,664
------------
Total $ 10,416,666
============
The Company retains the privilege of repaying these notes in cash or by
the issuance of common stock. Through our January 31, 2005 payment, we made our
quarterly installment payments by issuing common stock. Our April 30, 2005
scheduled payment of principal and interest was made in cash, as was our next
regularly scheduled payment due July 31, 2005.
(10) DISCONTINUED OPERATIONS
The Company completed the transaction contemplated by the Stock Purchase
and Redemption Agreement dated January 3, 2005 with Express Tax Service, Inc.
("Express Tax"), Robert J. Kluba and Robert H. Taylor. The Company was the
beneficial and record owner of 80% of the issued and outstanding stock of
Express Tax, which in turn owned 100% of the issued and outstanding stock of
EXPRESSTAX Franchise Corporation ("EXPRESSTAX"). Mr. Kluba was the President and
a director of Express Tax and EXPRESSTAX, and the owner of the remaining 20% of
the issued and outstanding stock of Express Tax. The sale of the assets closed
on January 13, 2005 with an effective date of January 1, 2005.
The Company received at closing a cash payment of $311,351, which
reflected the purchase price of $660,000 for all of the Company's common stock
in Express Tax, less $348,649 representing intercompany receivables owed to
Express Tax by the Company. The Company also received a payment of $1,200,000 in
exchange for the Company's agreement not to compete with the current business of
Express Tax and EXPRESSTAX for five years following the closing. The Company's
investment in its subsidiary totaled $230,000.
In connection with the transaction, the Company has extended the
expiration dates for the 75,000 outstanding stock options previously granted to
Mr. Kluba and the 30,000 outstanding stock options previously granted to Mr.
Kluba's wife, such that 80% of such stock options shall expire, if not
exercised, on the first anniversary date of the closing and the remaining 20% of
such stock options shall expire on the second anniversary date of the closing;
none of these options shall be exercisable for the six-month period following
the closing.
19
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General information about 21st Century Holding Company can be found at
www.21stcenturyholding.com. We make our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports filed or furnished pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 available free of charge on our web site, as soon as
reasonably practicable after they are electronically filed with the SEC.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements in this report or in documents that are incorporated by
reference that are not historical fact are forward-looking statements that are
subject to certain risks and uncertainties that could cause actual events and
results to differ materially from those discussed herein. 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. The risks and uncertainties include,
without limitation, uncertainties related to estimates, assumptions and
projections generally; inflation and other changes in economic conditions
(including changes in interest rates and financial markets); pricing competition
and other initiatives by competitors; ability to obtain regulatory approval for
requested rate changes and the timing thereof; legislative and regulatory
developments; the outcome of litigation pending against us, including the terms
of any settlements; risks related to the nature of our business; dependence on
investment income and the composition of our investment portfolio; the adequacy
of our liability for loss and loss adjustment expense; insurance agents; claims
experience; ratings by industry services; catastrophe losses; reliance on key
personnel; weather conditions (including the severity and frequency of storms,
hurricanes, tornadoes and hail); changes in driving patterns and loss trends;
acts of war and terrorist activities; court decisions and trends in litigation
and health care and auto repair costs; and other matters described from time to
time by us in this report, and our other filings with the SEC.
You are cautioned not to place reliance on these forward-looking
statements, which are valid only as of the date they were made. The Company
undertakes no obligation to update or revise any forward-looking statements to
reflect new information or the occurrence of unanticipated events or otherwise.
In addition, readers should be aware that GAAP prescribes when a company may
reserve for particular risks, including litigation exposures. Accordingly,
results for a given reporting period could be significantly affected if and when
a reserve is established for a major contingency. Reported results may therefore
appear to be volatile in certain accounting periods.
OVERVIEW
We are an insurance holding company, which, through our subsidiaries and
our contractual relationships with our independent agents, control substantially
all aspects of the insurance underwriting, distribution and claims process. We
are authorized to underwrite personal automobile insurance, commercial general
liability insurance, homeowners' property and casualty insurance and mobile home
property and casualty insurance in various states with various lines of
authority through our wholly owned subsidiaries, Federated National and American
Vehicle.
Federated National is authorized to underwrite personal automobile
insurance, homeowners' property and casualty insurance and mobile home property
and casualty insurance in Florida as an admitted carrier. American Vehicle is
authorized to underwrite personal automobile insurance and commercial general
liability insurance in Florida as an admitted carrier. American Vehicle is also
authorized to underwrite homeowners' property and casualty insurance and
commercial general liability insurance in Louisiana as an admitted carrier. In
addition, American Vehicle is authorized to underwrite commercial general
liability insurance in Georgia and Kentucky as a surplus lines carrier and in
Texas and Alabama as an admitted carrier. We anticipate that underwriting will
begin in Kentucky and Alabama in the near future. American Vehicle operations in
Florida, Georgia and Louisiana are on going. American Vehicle operations in
Texas, Alabama and Kentucky are expected to begin this year. American Vehicle
has pending applications, in various stages of approval, to be authorized as a
surplus lines carrier in the states of California and Virginia.
During the six months ended June 30, 2005, 59.8%, 20.9%, 18.8% and 0.5% of
the policies we underwrote were for homeowners' property and casualty insurance,
personal automobile insurance, commercial general liability insurance, and
mobile home property and casualty insurance, respectively. During the year ended
December 31, 2004, 62.0%, 24.1%, 12.4 % and 1.5% of the policies we underwrote
were for homeowners' property and casualty insurance, personal automobile
insurance, commercial general liability insurance, and mobile home property and
casualty insurance, respectively. We internally process claims made by our own
and third-party insureds through our wholly owned claims adjusting company,
Superior Adjusting, Inc. ("Superior"). We also offer premium financing to our
own and third-party insureds through our wholly owned subsidiary, Federated
Premium Finance, Inc. ("Federated Premium").
20
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We market and distribute our own and third-party insurers' products and
our other services primarily in Florida, through contractual relationships with
a network of approximately 1,500 independent agents and a select number of
general agents.
Assurance MGA, a wholly owned subsidiary, acts as Federated National's and
American Vehicle's exclusive managing general agent. Assurance MGA currently
provides all underwriting policy administration, marketing, accounting and
financial services to Federated National and American Vehicle, and participates
in the negotiation of reinsurance contracts. Assurance MGA generates revenue
through a 6% commission fee from the insurance companies' net written premium,
policy fee income of $25 per policy and other administrative fees from the
marketing of other companies' products through the Company's distribution
network. The 6% commission fee from Federated National and American Vehicle was
made effective January 1, 2005. Assurance MGA plans to establish relationships
with additional carriers and add additional insurance products in the future.
Our 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 our business,
results of operations and financial condition. Also, if our estimated
liabilities for unpaid losses and LAE are less than actual losses and LAE, we
will be required to increase reserves with a corresponding reduction in our net
income in the period in which the deficiency is identified.
We operate in a highly competitive market and face competition from both
national and regional insurance companies, many of whom are larger and have
greater financial and other resources, have better A.M. Best ratings and offer
more diversified insurance coverage. Our competitors include other companies
which market their products through agents, as well as companies which sell
insurance directly to their customers. Large national writers may have certain
competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and reduced policy
acquisition costs. We may also face competition from new or temporary entrants
in our niche markets. In some cases, such entrants may, because of inexperience,
desire for new business or other reasons, price their insurance below ours.
Although our pricing is inevitably influenced to some degree by that of our
competitors, we believe that it is generally not in our best interest to compete
solely on price. We instead tend to compete on the basis of underwriting
criteria, our distribution network and superior service to our independent
agents and insureds. We compete with respect to automobile insurance in Florida
with more than 100 companies, which underwrite personal automobile insurance.
Comparable companies which compete with us in the personal automobile insurance
market include U.S. Security Insurance Company, United Automobile Insurance
Company, Direct General Insurance Company and Security National Insurance
Company, as well as major insurers such as Progressive Casualty Insurance
Company. Comparable companies which compete with us in the homeowners' market
include Florida Family Insurance Company, Florida Select Insurance Company,
Atlantic Preferred Insurance Company and Vanguard Insurance Company. Comparable
companies which compete with us in the commercial general liability insurance
market include Century Surety Insurance Company, Atlantic Casualty Insurance
Company, Colony Insurance Company, Nautilus Insurance Company and
Burlington/First Financial Insurance Companies. Competition could have a
material adverse effect on our business, results of operations and financial
condition.
Our executive offices are located at 3661 West Oakland Park Boulevard,
Suite 300, Lauderdale Lakes, Florida and our telephone number is (954) 581-9993.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.
21
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The most significant accounting estimates inherent in the preparation of
our financial statements include estimates associated with our evaluation of the
determination of liability for unpaid losses and loss adjustment expenses
("LAE"). In addition, significant estimates form the basis for our reserves with
respect to finance contracts, premiums receivable, deferred income taxes,
deferred acquisition costs and loss contingencies. Various assumptions and other
factors underlie the determination of these significant estimates. The process
of determining significant estimates is fact specific and takes into account
factors such as historical experience, as well as current and expected economic
conditions. We periodically re-evaluate these significant factors and make
adjustments where facts and circumstances dictate.
Using the various complex actuarial methods and different underlying
assumptions, our actuaries produce a number of point estimates for each class of
business. After reviewing the appropriateness of the underlying assumptions,
management selects the carried reserve for each class of business. We do not
calculate a range of loss reserve estimates. Ranges are not a true reflection of
the potential volatility between carried loss reserves and the ultimate
settlement amount of losses incurred prior to the balance sheet date. This is
due to the fact that ranges are developed based on known events as of the
valuation date whereas the ultimate disposition of losses is subject to the
outcome of events and circumstances that were unknown as of the valuation date.
Among the numerous factors that contribute to the inherent uncertainty in
the process of establishing loss reserves are the following:
o Changes in the market and inflation rate for goods and services
related to covered damages such as medical care and home repair
costs,
o Changes in the judicial environment regarding the interpretation of
policy provisions relating to the determination of coverage,
o Changes in the general attitude of juries in the determination of
liability and damages,
o Legislative actions,
o Changes in our estimates of the number and/or severity of claims
that have been incurred but not reported as of the date of the
financial statements,
o Changes in our underwriting standards, and
o Any changes in our claim handling procedures.
We establish and evaluate unpaid loss reserves using recognized standard
statistical loss development methods and techniques. Each component of loss
reserves is affected by the expected frequency and average severity of claims.
Such amounts are analyzed using statistical techniques on historical claims data
and adjusted when appropriate to reflect perceived changes in loss patterns.
Data is analyzed by policy coverage, jurisdiction of loss, reporting date and
occurrence date, among other factors. A brief discussion of each component
follows.
Average reserve amounts are established for automobile claims prior to the
development of an individual case reserve. Average reserve amounts are driven by
the estimated average severity per claim and the number of new claims opened.
For other than automobile lines, claims adjusters generally establish
individual claim case loss and loss adjustment expense reserve estimates as soon
as the specific facts and merits of each claim can be evaluated. Case reserves
represent the amounts that in the judgment of the adjusters are reasonably
expected to be paid in the future to completely settle the claim, including
expenses. Individual case reserves are revised as more information becomes
known.
For unreported claims, incurred but not reported ("IBNR") reserve
estimates are calculated by first projecting the ultimate number of claims
expected (reported and unreported) for each significant coverage by using
historical quarterly and monthly claim counts, to develop age-to-age projections
of the ultimate counts by accident quarter. Reported claims are subtracted from
the ultimate claim projections to produce an estimate of the number of
unreported claims. The number of unreported claims is multiplied by an estimate
of the average cost per unreported claim to produce the IBNR reserve amount.
Actuarial techniques are difficult to apply reliably in certain situations, such
as to new legal precedents, class action suits, long-term claimants from
personal injury protection coverages or recent catastrophes. Consequently,
supplemental IBNR reserves for these types of events may be established.
22
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NEW ACCOUNTING PRONOUNCEMENTS
The material set forth in Item 1, Part I, "Financial Statements - Note 2 -
Summary of Significant Accounting Policies and Practices" of this Form 10-Q is
incorporated herein by reference.
RECENT EVENTS
On June 7 and July 10, 2005 the Gulf Coast of Florida was affected by two
storms, Hurricanes Arlene and Dennis. As of the date of this report, we have
begun determining the extent of claims made and likely to be made under our
homeowners' and mobile homeowners' policies in the affected areas. We expect
claims from Hurricane Arlene to be insignificant. The claims from Hurricane
Dennis are expected to be no more than three million dollars, net of reinsurance
recoveries. State-wide, we have approximately three hundred claims in connection
with Hurricane Dennis as of the date of this report.
23
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
AS OF JUNE 30, 2005 AS COMPARED TO DECEMBER 31, 2004
As of June 30, 2005, our shareholders equity was $35.5 million compared to
$25.0 million as of December 31, 2004. The increase in our shareholder's equity
is primarily attributable to the changes discussed below.
TOTAL INVESTMENTS
Total Investments decreased $0.4 million, or 0.4%, to $84.0 million as of
June 30, 2005, as compared to $84.4 million as of December 31, 2004. The modest
decrease is associated with the settlement of hurricane related claims, net of
reinsurance participation.
Financial Accounting Standards ("SFAS") No. 115 addresses accounting and
reporting for (a) investments in equity securities that have readily
determinable fair values and (b) all investments in debt securities. FAS 115
requires that these securities be classified in three categories and given
specific accounting treatment as follows:
Classification | Accounting Treatment
|
Held-to-maturity (Fixed | Amortized cost
maturities) Debt securities |
with the intent and ability | Fair value, with unrealized
to hold to maturity | holding gains and losses
| included in operations
Trading securities (Corporate |
securities) Debt and equity |
securities bought and held | Fair value, with unrealized
primarily for sale in the | holding gains and losses
near term | excluded from earnings and
| reported as a separate
Available-for-sale (Equity | component of shareholders'
securities) Debt and equity | equity, namely "Other
securities not classified as | Comprehensive Income"
held-to-maturity or trading |
securities |
24
21ST CENTURY HOLDING COMPANY
Below is a summary of unrealized gains and (losses) at June 30, 2005 and
December 31, 2004 by category.
Unrealized Gains and (Losses)
-------------------------------
June 30, December 31,
2005 2004
-------------- --------------
Fixed maturities:
U.S. government obligations and agencies $ (236,349) $ (582,310)
Obligations of states and political
subdivisions (34,476) (4,501)
-------------- --------------
(270,825) (586,811)
-------------- --------------
Corporate securities:
Communications 13,673 23,299
Financial (97,043) (11,220)
Other 6,910 64,377
-------------- --------------
(76,460) 76,456
-------------- --------------
Equity securities:
Preferred stocks -- --
Common stocks (754,218) (312,410)
-------------- --------------
(754,218) (312,410)
-------------- --------------
Total unrealized gains and (losses) $ (1,101,503) $ (822,765)
============== ==============
For further detail, see "Liquidity and Capital Resources," below and
"Quantitative and Qualitative Disclosure about Market Risk" under Item 3 below.
PREPAID REINSURANCE PREMIUMS
Prepaid reinsurance premiums decreased $5.5 million, or 100%, to $0 as of
June 30, 2005, as compared to $5.5 million as of December 31, 2004. The decline
is due to the amortization of prepaid reinsurance premiums associated with our
homeowner's book of business, wherein the underlying policy term expired on June
30, 2005.
PREMIUMS RECEIVABLE, NET OF ALLOWANCE FOR CREDIT LOSSES
Premiums receivable, net of allowance for credit losses, increased $1.0
million, or 17.2%, to $7.0 million as of June 30, 2005, as compared to $6.0
million as of December 31, 2004. The largest component of the increase relates
to our expanding commercial general liability insurance business for which
premiums receivable increased $1.8 million, or 827%, to $2.0 million as of June
30, 2005, as compared to $.2 million as of December 31, 2004.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs increased $1.6 million, or 24.2%, to $8.6
million as of June 30, 2005, as compared to $7.0 as of December 31, 2004. For
the six months ending June 30, 2005, commission expense, were approximately $7.6
million and expenses connected with the writing of premiums such as salaries and
premium taxes, net of policy fees, totaled approximately $1.0 million. Deferred
policy acquisition costs, increased primarily due to a $1.5 million increase in
deferred commission expenses and $0.1 million increase in deferred other costs.
Contributing to the increased acquisition costs is the 2004 sale of our captive
agencies, wherein our cost of acquiring policies from those agencies will no
longer be eliminated under the principles of consolidation.
INCOME TAXES RECOVERABLE
Income taxes recoverable decreased $6.2 million, or 77.8%, to $1.8 million
as of June 30, 2005, as compared to $7.9 million as of December 31, 2004. The
decline is primarily due to the utilization of operating loss carry-forwards and
current profitable operations.
25
21ST CENTURY HOLDING COMPANY
UNPAID LOSSES AND LAE
Unpaid losses and LAE decreased $20.6 million, or 44.1%, to $26.0 million
as of June 30, 2005, as compared to $46.6 million as of December 31, 2004. The
decline in unpaid losses and LAE relates to our payment patterns relative to the
settling of hurricane related claims. Case reserves totaled $12.2 million and
$31.2 million, and IBNR reserves totaled $13.8 million and $15.4 million as of
June 30, 2005 and December 31, 2004, respectively.
Factors that affect unpaid losses and LAE include the estimates made on a
claim-by-claim basis known as "case reserves" coupled with bulk estimates known
as "incurred but not reported" (IBNR). Periodic estimates by management of the
ultimate costs required to settle all claim files are based on the Company's
analysis of historical data and estimations of the impact of numerous factors
such as (i) per claim information; (ii) company and industry historical loss
experience; (iii) legislative enactments, judicial decisions, legal developments
in the awarding of damages, and changes in political attitudes; and (iv) trends
in general economic conditions, including the effects of inflation. Management
revises its estimates based on the results of its analysis. This process assumes
that past experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple factors. For further
discussion, see "Loss and LAE" below.
UNEARNED PREMIUMS
Unearned premiums increased by $10.3 million, or 20.5%, to $60.4 million
as of June 30, 2005, as compared to $50.1 million as of December 31, 2004. The
increase was due to a $7.2 million increase in unearned homeowner's insurance
premiums, a ($0.3) million decrease in unearned mobile-home insurance premiums,
a $0.2 million increase in unearned automobile premiums, and a $3.2 million
increase in unearned commercial general liability premiums. These changes
reflect our continued growth along our homeowner's and commercial liability
lines of business.
BANK OVERDRAFT
Bank overdraft increased by $3.7 million, or 25.0%, to $18.5 million as of
June 30, 2005, as compared to $14.8 million as of December 31, 2004. Bank
overdraft relates to hurricane-related loss and LAE disbursements paid but not
yet presented for payment by the policyholder or vendor. The increase relates to
our payment patterns in relationship to the rate at which those cash
disbursements are presented to the bank for payment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
GROSS PREMIUMS WRITTEN
Gross premiums written decreased $0.4 million, or 1.4%, to $31.4 million
for the three months ended June 30, 2005, as compared to $31.8 million for the
comparable period in 2004. The following table denotes gross premiums written by
major product line.
Three months ended June 30,
----------------------------------------------------
2005 2004
Automobile $ 3,829,250 12.21% $ 3,489,678 10.97%
Homeowners' 21,100,443 67.28% 24,044,220 75.59%
Commercial liability 6,370,408 20.31% 3,815,356 11.99%
Mobile home owners' 62,807 0.20% 460,791 1.45%
----------- ------ ----------- ------
Gross written premiums $31,362,908 100.00% $31,810,045 100.00%
=========== ====== =========== ======
26
21ST CENTURY HOLDING COMPANY
As noted above, the Company's efforts to expand to lines of insurance products
other than automobile insurance are coming to fruition.
GROSS PREMIUMS CEDED
Gross premiums ceded increased $3.0 million to a debit balance of ($2.0)
million for the three months ended June 30, 2005, as compared to a credit
balance of $1.0 million for the three months ended June 30, 2004. The change is
associated with our increased homeowner's premium volume.
The gross premiums ceded for the three months ended June 30, 2004 reflects
a reclassification of $0.7 million of reinsurance costs that were previously
classified as other operating and underwriting expenses.
DECREASE IN PREPAID REINSURANCE PREMIUMS
The decrease in prepaid reinsurance premiums was ($2.8) million for the
three months ended June 30, 2005, as compared to ($2.3) million for the three
months ended June 30, 2004. The increased charge against written premium is
primarily associated with the cost of reinsurance in connection with our home
owners' and mobile home owners' line of property and casualty insurance.
(INCREASE) IN UNEARNED PREMIUMS
The (increase) in unearned premiums was ($4.6) million as of June 30,
2005, as compared to ($12.8) million as of June 30, 2004. The (increase) in
unearned premiums of ($4.6) million as of June 30, 2005 was due to a ($5.7)
million (increase) in unearned homeowner's insurance premiums, a $0.2 million
decrease in mobile home owner's insurance premiums, a $2.6 million decrease in
unearned automobile premiums, and a ($1.7) million (increase) in unearned
commercial liability premiums. These changes reflect our continued growth along
our homeowner's and commercial liability lines of business. For further
discussion, see "Unearned Premiums" above.
NET INVESTMENT INCOME
Net investment income increased by $0.1 million, or 17.7%, to $0.9 million
for the three months ended June 30, 2005, as compared to $0.8 million for the
same three-month period ended June 30, 2004. The increase in investment income
is primarily a result of the additional amounts of invested assets. Also
affecting our net investment income was a modest increase in overall yield to
4.44% for the three months ended June 30, 2005 as compared to a yield of 4.36%
for the three months ending June 30, 2004.
NET REALIZED INVESTMENT GAINS
Net realized investment gains increased by $0.06 million, or 115% to $0.13
million for the three months ended June 30, 2005, as compared to $0.06 million
for the three months ended June 30, 2004. The table below depicts the gains by
investment category.
27
21ST CENTURY HOLDING COMPANY
Net Realized Gains (Losses)
Three Months Ended June 30,
---------------------------
2005 2004
-------- --------
Fixed maturities:
U.S. government obligations and agencies $ -- $ 27,464
Obligations of states and political subdivisions -- (16)
-------- --------
-- 27,448
-------- --------
Corporate securities:
Other 21,525 --
-------- --------
21,525 --
-------- --------
Equity securities:
Preferred stocks --
Common stocks 103,985 31,060
-------- --------
103,985 31,060
-------- --------
Total net realized gains $125,510 $ 58,508
======== ========
LOSS AND LAE
Loss and LAE increased by $4.7 million, or 61.6%, to $12.3 million for the
three months ended June 30, 2005, as compared to $7.6 million as of June 30,
2004. The increase is due, in part, to a charge to the second quarter 2005
earnings of $5.2 million, net of reinsurance recoveries of $12.7 million,
stemming from the four hurricanes that occurred in August and September of 2004
that was partially offset by the impact of the improved automobile loss
experience. Management continues to revise our estimates of the ultimate
financial impact of these storms. The revisions to our estimates are based on
our analysis of subsequent information that we receive regarding various
factors, including: (i) per claim information; (ii) company and industry
historical loss experience; (iii) legislative enactments, judicial decisions,
legal developments in the awarding of damages, and changes in political
attitudes; and (iv) trends in general economic conditions, including the effects
of inflation. Management revises its estimates based on the results of its
analysis. This process assumes that past experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate basis for
estimating the ultimate settlement of all claims. There is no precise method for
subsequently evaluating the impact of any specific factor on the adequacy of the
reserves, because the eventual redundancy or deficiency is affected by multiple
factors.
The table below reflects a charge to the second quarter 2005 earnings of
$5.2 million, net of reinsurance recoveries of $12.7 million, stemming from the
four hurricanes that occurred in August and September of 2004.
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
- --------- ------ ---------- ------
(in millions)
Charley (August 13) $ 6.2 $ 6.2 $ --
Frances (September 3) 6.5 6.5 --
Ivan (September 14) 3.6 -- 3.6
Jeanne (September 25) 1.6 -- 1.6
----- ----- -----
Total Loss Estimate $17.9 $12.7 $ 5.2
===== ===== =====
Our loss ratio, as determined in accordance with GAAP, for the three-month
period ended June 30, 2005 was 56.23% compared with 46.91% for the same period
in 2004. The table below reflects the loss ratios by product line.
28
21ST CENTURY HOLDING COMPANY
Three months ended June 30,
---------------------------
2005 2004
------- -------
Automobile 72.85% 79.05%
Homeowners' 61.57% 28.02%
Commercial liability 20.79% 25.45%
All lines 56.23% 46.91%
Losses and LAE, our most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of our
policyholders, including expenses required to settle claims and losses.
Management revises its estimates based on the results of its analysis of
estimated future payments to be made. This process assumes that past experience,
adjusted for the effects of current developments and anticipated trends, is an
appropriate basis for predicting future events. We attribute the "Homeowners"
and the "All Lines" increase in loss ratios primarily to the development
incurred in connection with our adverse experience associated with the four
hurricanes that occurred in August and September of 2004.
For further discussion, see the Note 7 to the Consolidated Financial
Statements included under Part I, Item 1, of this Report.
SALARIES AND WAGES
Salaries and wages increased $0.3 million, or 17.5%, to $1.6 million for
the three months ended June 30, 2005, as compared to $1.3 million for the three
months ended June 30, 2004. Management believes that the increase in salaries
and wages is consistent with retaining quality management and increased premium
production.
DEFERRED POLICY ACQUISITION COSTS, NET OF AMORTIZATION
Amortization of deferred policy acquisition costs increased by $1.5
million, or 91.5%, to $3.2 million for the three months ended June 30, 2005, as
compared to $1.7 million as of June 30, 2004. Amortization of deferred policy
acquisition costs consists of the actual policy acquisition costs, including
commissions, payroll and premium taxes, less commissions earned on reinsurance
ceded and policy fees earned.
The increase in amortization of deferred policy acquisition costs is
primarily attributable to the sale of our captive agencies in December of 2004,
wherein our cost of acquiring policies from those agencies will no longer be
eliminated under the principles of consolidation.
PROVISION FOR INCOME TAX EXPENSE
The provision for income tax expense decreased by $.2 million, or 7.2%, to
$1.9 million for the three months ended June 30, 2005, as compared to $2.1
million for the three months ended June 30, 2004. The effective rate for income
tax expense is 38.9% for the three months ended June 30, 2005, as compared to
36.13% for the same three-month period in 2004. The decrease in the estimated
income tax provision is primarily associated with the modest decrease in pre-tax
income.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
GROSS PREMIUMS WRITTEN
Gross premiums written increased $11.8 million, or 23.8%, to $61.5 million
for the six months ended June 30, 2005, as compared to $49.6 million for the
comparable period in 2004. The following table denotes gross premiums written by
major product line.
29
21ST CENTURY HOLDING COMPANY
Six months ended June 30,
----------------------------------------------
2005 2004
---- ----
Automobile $12,847,495 20.90% $11,778,327 23.73%
Homeowners' 36,758,679 59.82% 30,567,544 61.60%
Commercial liability 11,526,170 18.75% 6,373,915 12.84%
Mobile home owners' 327,608 0.53% 907,985 1.83%
----------- -------- ----------- -------
Gross written premiums $61,459,952 100.00% $49,627,771 100.00%
=========== ======== =========== =======
As noted above, the Company's efforts to expand Homeowners' and Commercial
liability lines of insurance products are coming to fruition, while maintaining
Automobile production subsequent to the sale of our captive agents and our
intentional decline in the Mobile home market.
GROSS PREMIUMS CEDED
Gross premiums ceded increased $4.4 million, or 784.4%, to ($5.0) million
for the six months ended June 30, 2005, as compared to ($0.6) million for the
six months ended June 30, 2004. The change is associated with our increased
homeowner's insurance premium volume.
The gross premiums ceded for the six months ended June 30, 2004 reflects a
reclassification of $1.5 million of reinsurance costs that were previously
classified as other operating and underwriting expenses.
DECREASE IN PREPAID REINSURANCE PREMIUMS
The decrease in prepaid reinsurance premiums was $0.6 million, or 9.6%, to
($5.5) for the six months ended June 30, 2005, as compared to ($6.1) million for
the six months ended June 30, 2004. The decreased charge against written premium
is primarily associated with the cost of reinsurance in connection with our home
owners' and mobile home owners' line of property and casualty insurance.
(INCREASE) IN UNEARNED PREMIUMS
The (increase) in unearned premiums was ($10.3) million as of June 30,
2005, as compared to ($14.5) million as of June 30, 2004. The increase was due
to a $7.2 million increase in unearned homeowner's insurance premiums, a ($0.3)
million decrease in unearned mobile-home insurance premiums, a $0.2 million
increase in unearned automobile premiums, and a $3.2 million increase in
unearned commercial general liability premiums. These changes reflect our
continued growth along our homeowner's and commercial liability lines of
business.
NET INVESTMENT INCOME
Net investment income increased by $0.5 million, or 38.5%, to $1.8 million
for the six months ended June 30, 2005, as compared to $1.3 million for the same
six-month period ended June 30, 2004. The increase in investment income is
primarily a result of the additional amounts of invested assets. Also affecting
our net investment income was a modest increase in overall yield to 4.28% for
the six months ended June 30, 2005 as compared to a yield of 4.13% for the six
months ending June 30, 2004.
NET REALIZED INVESTMENT GAINS
Net realized investment gains increased by $0.1 million, or 58.0% to $0.29
million for the six months ended June 30, 2005, as compared to $0.18 million for
the six months ended June 30, 2004. The table below depicts the gains by
investment category.
30
21ST CENTURY HOLDING COMPANY
Net Realized Gains (Losses)
Six Months Ended June 30,
---------------------------
2005 2004
--------- ---------
Fixed maturities:
U.S. government obligations and agencies $(131,066) $ 62,513
Obligations of states and political subdivisions (43) (116)
--------- ---------
(131,109) 62,397
--------- ---------
Corporate securities:
Financial -- (219)
Other 31,521 --
--------- ---------
31,521 (219)
--------- ---------
Equity securities:
Common stocks 384,621 118,249
--------- ---------
384,621 118,249
--------- ---------
Total net realized gains $ 285,033 $ 180,427
========= =========
LOSS AND LAE
Loss and LAE increased by $5.1 million, or 36.4%, to $19.2 million for the
six months ended June 30, 2005, as compared to $14.1 million as of June 30,
2004. The increase is due primarily to a charge to current year earnings of $6.7
million, net of reinsurance recoveries of $23.0 million, stemming from the four
hurricanes that occurred in August and September of 2004 that was partially
offset by the impact of the improved automobile loss experience. Management
continues to revise our estimates of the ultimate financial impact of these
storms. The revisions to our estimates are based on our analysis of subsequent
information that we receive regarding various factors, including: (i) per claim
information; (ii) company and industry historical loss experience; (iii)
legislative enactments, judicial decisions, legal developments in the awarding
of damages, and changes in political attitudes; and (iv) trends in general
economic conditions, including the effects of inflation. Management revises its
estimates based on the results of its analysis. This process assumes that past
experience, adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for estimating the ultimate settlement of all
claims. There is no precise method for subsequently evaluating the impact of any
specific factor on the adequacy of the reserves, because the eventual redundancy
or deficiency is affected by multiple factors.
The table below reflects a charge to current year earnings of $6.7
million, net of reinsurance recoveries of $23.0 million, stemming from the four
hurricanes that occurred in August and September of 2004.
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
- --------- ------ ---------- ------
(in millions)
Charley (August 13) $12.9 $12.9 $ --
Frances (September 3) 10.1 10.1 --
Ivan (September 14) 4.1 -- 4.1
Jeanne (September 25) 2.6 -- 2.6
----- ----- -----
Total Loss Estimate $29.7 $23.0 $ 6.7
===== ===== =====
Our loss ratio, as determined in accordance with GAAP, for the six-month
period ended June 30, 2005 was 47.19% compared with 49.50% for the same period
in 2004. The table below reflects the loss ratios by product line.
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21ST CENTURY HOLDING COMPANY
Six months ended June 30,
-------------------------
2005 2004
------- -------
Automobile 63.26% 81.76%
Homeowners' 47.07% 26.08%
Commercial liability 23.04% 22.80%
All lines 47.19% 49.50%
Losses and LAE, our most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of our
policyholders, including expenses required to settle claims and losses.
Management revises its estimates based on the results of its analysis of
estimated future payments to be made. This process assumes that past experience,
adjusted for the effects of current developments and anticipated trends, is an
appropriate basis for predicting future events. We attribute the increased
Homeowners' loss ratio primarily to the development incurred in connection with
our adverse experience associated with the four hurricanes that occurred in
August and September of 2004.
For further discussion, see the Note 7 to the Consolidated Financial
Statements included under Part I, Item 1, of this Report.
SALARIES AND WAGES
Salaries and wages increased $0.4 million, or 14.11%, to $3.2 million for
the six months ended June 30, 2005, as compared to $2.8 million for the six
months ended June 30, 2004. Management believes that the increase in salaries
and wages is consistent with retaining quality management and increased premium
production.
INTEREST EXPENSE
Interest expense increased by $0.4 million, or 82.0%, to $0.8 million for
the six months ended June 30, 2005, as compared to $0.4 million for the six
months ended June 30, 2004. The increase in interest expense is attributed to
the September 30, 2004 "Notes".
DEFERRED POLICY ACQUISITION COSTS, NET OF AMORTIZATION
Amortization of deferred policy acquisition costs increased by $4.9
million, or 231.80%, to $7.0 million for the six months ended June 30, 2005, as
compared to $2.1 million as of June 30, 2004. Amortization of deferred policy
acquisition costs consists of the actual policy acquisition costs, including
commissions, payroll and premium taxes, less commissions earned on reinsurance
ceded and policy fees earned.
The increase in amortization of deferred policy acquisition costs is
primarily attributable to the sale of our captive agencies in December of 2004,
wherein our cost of acquiring policies from those agencies will no longer be
eliminated under the principles of consolidation.
PROVISION FOR INCOME TAX EXPENSE
The provision for income tax expense increased by $1.0 million, or 27.8%,
to $4.7 million for the six months ended June 30, 2005, as compared to $3.7
million for the six months ended June 30, 2004. The effective rate for income
tax expense is 37.5% for the six months ended June 30, 2005, as compared to
36.5% for the same six-month period in 2004. The increase in the estimated
income tax provision is primarily associated with the increase in pre-tax
income.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of capital during the six months ended June 30, 2005
were revenues generated from operations, including our investment income and net
realized investment gains from our portfolios, sale of our interests in Express
Tax and EXPRESSTAX, receipt of income taxes recoverable, and borrowings under
the Revolving Agreement, as described below. Because we are a holding company,
we are largely dependent upon fees from our subsidiaries for cash flow.
For the six months ended June 30, 2005 and 2004, operations generated net
operating cash flow of $13.9 million and $7.3 million, respectively. During the
six months ended June 30, 2005, gross cash flow from operations generated
approximately $41.6 million, due to a $10.3 million increase in unearned
premiums; a $6.2 million decrease in income taxes recoverable; a $5.5 million
decrease in prepaid reinsurance premiums; a $3.3 million decrease in due from
reinsurers, net; a $1.2 million increase in premium deposits; a $0.7 million
decrease in deferred income tax expense; a $0.5 million increase in the
provision for credit losses, net; $0.3 million of common stock issued for
interest on debt; $0.2 million in net realized investment gains; $0.2 million in
goodwill; a $0.5 million decrease in other assets; a $3.7 million increase in
bank overdrafts; and $0.2 million in depreciation and amortization; all in
conjunction with net income of $8.8 million.
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21ST CENTURY HOLDING COMPANY
Operations for the three months ended June 30, 2005 used $27.7 million of
gross cash flow primarily due to a $20.5 million decrease in unpaid losses and
LAE; a $0.9 million increase to finance contracts receivable; a $0.7 million
increase in premiums receivable; $1.6 million in connection with our sale of
discontinued operations; a $1.6 million decrease in accounts payable and accrued
expenses; a $1.7 million increase to policy acquisition costs, net of
amortization; a $0.4 million decrease to the provision for uncollectible
premiums receivable; a $0.2 million decrease in the equity of the subsidiary
sold; and $0.1 million in amortization of investment premiums, net.
Subject to catastrophic occurrences, net operating cash flow is currently
expected to be positive in both the short-term and the reasonably foreseeable
future.
In addition, our investment portfolio is highly liquid as it consists
almost entirely of readily marketable securities. Cash flow provided by net
investing activities was $1.7 million for the six months ended June 30, 2005, as
we generated $31.7 million and used $31.6 million from the maturity several
times over of our very short municipal portfolio, and generated $1.6 million in
connection with our sale of discontinued operations.
Net cash used for financing activities was $3.1 million for the six months
ended June 30, 2005. The uses of cash for financing activities were primarily
$1.0 million paid in dividends, $1.6 million used to reduce revolving credit
outstanding, and $1.9 million used to reduce subordinated debt. Cash provided by
financing activities includes $1.4 million from exercised stock options.
Federated Premium's operations are funded by the Revolving Agreement with
FlatIron. The Revolving Agreement is structured as a sale of contracts
receivable under a sale and assignment agreement with WPAC (a wholly-owned
subsidiary of FlatIron), which gives WPAC 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.
During September 2004, we negotiated a new revolving loan agreement in which the
maximum credit commitment available to us was reduced at our request to $2.0
million with built-in options to incrementally increase the maximum credit
commitment up $4.0 million over the next three years. Pursuant to our loan
agreement, if the A.M. Best rating of Federated National falls below a "C," or
if the financial condition of American Vehicle, as determined by our lender (in
its sole and absolute discretion) suffers a material adverse change, then under
the terms of our loan agreement, policies written by that subsidiary will no
longer be eligible collateral, causing our available credit to be reduced if we
do not have other collateral qualifying as eligible collateral. As of December
31, 2004, policies written by Federated National were not considered by our
lender to be eligible collateral. In March 2005, our lender agreed to permit
policies written by Federated National to be eligible collateral and agreed to
increase our total available credit by $0.5 million from $2.0 million to $2.5
million. We currently believe that this higher available credit limit will be
sufficient based on our current operations. If policies written by our insurance
subsidiaries again do not qualify as eligible collateral under our loan
agreement and we are not able to obtain working capital from our operations or
other sources, then we would have to restrict our growth and, possibly, our
operations. We believe that this available credit is sufficient based on our
current operations.
The amounts of WPAC's advances are 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 3.25% based on the prior month's ratio of contracts receivable related
to insurance companies with an A. M. Best rating of B or lower, to total
contracts receivable. For the six months ended June 30, 2005, our effective
interest rate was 9.39% as compared to 5.97% as of June 30, 2004.
Outstanding borrowings under the Revolving Agreement as of June 30, 2005
were approximately $0.6 million. Outstanding borrowings as of December 31, 2004
were approximately $2.1. Outstanding borrowings in excess of the $2.0 million
credit limits totaled $148,542 as of December 31, 2004. The excess amount was
permissible by reason of a compensating cash balance of $156,095 for December 31
2004 that was held for the benefit of WPAC and was included in other assets.
Interest expense on this revolving credit line for the six months ended June 30,
2005 and June 30, 2004 totaled approximately $64,000 and $104,000, respectively.
33
21ST CENTURY HOLDING COMPANY
As an alternative to premium finance, we offer direct billing in
connection with our automobile program, where the insurance company accepts from
the insured, as a receivable, a promise to pay the premium, as opposed to
requiring the full amount of the policy, either directly from the insured or
from a premium finance company. The advantage of direct billing a policyholder
by the insurance company is that we are not reliant on our credit facility, but
remain able to charge and collect interest from the policyholder.
We believe that our current capital resources, including the net proceeds
from the Express Tax sale, together with cash flow from operations, will be
sufficient to meet currently anticipated working capital requirements. There can
be no assurances, however, that such will be the case.
Federated National's and American Vehicle's statutory capital surplus
levels as of June 30, 2005 were approximately $13.4 million and $17.6 million,
respectively, and their statutory net income for the six months ended June 30,
2005 were $5.0 million and $0.6 million, respectively.
As of June 30, 2005 and December 31, 2004, we did not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as "structured finance" or "special purpose"
entities, which were established for the purpose of facilitating
off-balance-sheet arrangements or other contractually narrow or limited
purposes. As such, management believes that we currently are not exposed to any
financing, liquidity, market or credit risks that could arise if we had engaged
in transactions of that type requiring disclosure herein.
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 general levels of inflation. Interest
rates do not necessarily move in the same direction or with the same magnitude
as the inflationary effect on 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, we attempt to anticipate the future impact of inflation when
establishing rate levels. While we attempt to charge adequate premiums, we may
be limited in raising its premium levels for competitive and regulatory reasons.
Inflation also affects the market value of our investment portfolio and the
investment rate of return. Any future economic changes which result in prolonged
and increased levels of inflation could cause increases in the dollar amount of
incurred loss and LAE and thereby materially adversely affect future liability
requirements.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to quantitative and qualitative disclosures about
market risk was included under Item 7a, "Quantitative and Qualitative
Disclosures about Market Risk", in our Annual Report on Form 10-K/A (Amendments
No. 1 and No. 2) for the year ended December 31, 2004. No material changes have
occurred in market risk since this information was disclosed except as discussed
below.
Our investment portfolio is available for sale and is carried at fair
value. Gains that represent securities with a fair value in excess of amortized
cost, and losses (amortized cost is in excess of fair value) that are deemed
temporary by management are recorded in shareholders' equity in accumulated
other comprehensive income. Losses that are deemed other than temporary by
management are recorded as net realized losses in the consolidated statement of
operations. A summary of the investment portfolio as of June 30, 2005 follows:
34
21ST CENTURY HOLDING COMPANY
Unrealized
Amortized Cost Fair Value Gain (Loss)
-------------- ---------- -----------
Fixed maturities:
U.S. government obligations and agencies $53,620,259 63.00% $53,383,910 63.55% $ (236,349)
Obligations of states and political subdivisions 7,772,606 9.13% 7,738,130 9.20% (34,476)
----------- -------- ----------- ------- -----------
61,392,865 72.13% 61,122,040 72.75% (270,825)
----------- -------- ----------- ------- -----------
Corporate securities:
Communications 639,208 0.75% 652,881 0.78% 13,673
Financial 4,040,813 4.75% 3,943,770 4.69% (97,043)
Other 3,960,471 4.65% 3,967,381 4.72% 6,910
----------- -------- ----------- ------- -----------
8,640,492 10.15% 8,564,032 10.19% (76,460)
----------- -------- ----------- ------- -----------
Equity securities:
Preferred stocks 5,650,000 6.64% 5,650,000 6.73% --
Common stocks 9,434,053 11.08% 8,679,835 10.33% (754,218)
----------- -------- ----------- ------- -----------
15,084,053 17.72% 14,329,835 17.06% (754,218)
----------- -------- ----------- ------- -----------
Total fixed, corporate and equity securities $85,117,410 100.00% $84,015,907 100.00% $(1,101,503)
=========== ======== =========== ======= ===========
As of June 30, 2005, there were no concentrations greater than 5% of total
investments in any single investment other than United States government
obligations.
ITEM 4
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
We carried out an evaluation required by the 1934 Act, under the
supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934
Act, as of the end of the period covered by this report. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective in
providing reasonable assurance that material information required to be included
in our periodic SEC reports is made known to them in a timely manner. Management
does not expect that our disclosure controls and procedures will prevent or
detect all error and fraud. Any control system, no matter how well designed and
operated, is based upon certain assumptions and can provide only reasonable, not
absolute, assurance that its objectives will be met. Further, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud
will not occur or that all control issues and instances of fraud, if any, within
the Company have been detected.
CHANGES IN INTERNAL CONTROLS.
There have not been any changes in our internal control over financial
reporting during our fiscal quarter ended June 30, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II: OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
We are 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 our
consolidated financial position, results of operations, or liquidity. For a
description of all legal proceedings, please see Note 4 to the Consolidated
Financial Statements included under Part 1, Item 1 of this Report.
35
21ST CENTURY HOLDING COMPANY
ITEM 5
OTHER INFORMATION
ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
Effective as of August 9, 2005 the Company's Independent Directors
Committee (the "Committee") executed a written consent amending the
compensation of Richard A. Widdicombe, the Company's Chief Executive Officer.
Mr. Widdicombe's compensation is contained in this employment agreement with
the Company dated June 10, 2003. The amendment increases Mr. Widdicombe's base
salary on an annual basis to $156,000 per year compared to $137,800 per year,
effective as of August 9, 2005. The Committee has also authorized an annual
bonus payment to be made to Mr. Widdicombe based on the Company's performance.
The criteria for determination of the bonus payable to Mr. Widdicombe shall be
based upon the Company's yearend financial statements. Upon determination that
the Company has met its projected earnings per share, Mr. Widdicombe shall
receive a bonus of $25,000. Mr. Widdicombe shall receive an additional $50,000
if the Company's yearend earnings are determined to exceed the projection by at
lease 20% per share. Any such bonus payment will be payable through the
Company's payroll and subject to applicable withholding and other taxes.
OTHER EVENTS
Effective March 1, 2005, Federated National sold its interest in the
Lauderdale Lakes property to the Company at the property's net-book value of
approximately $2.9 million.
36
21ST CENTURY HOLDING COMPANY
ITEM 6
EXHIBITS
31.1. Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.
ITEMS 2, 3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
37
21ST CENTURY HOLDING COMPANY
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
By: /s/ Richard A. Widdicombe
------------------------------------------
Richard A. Widdicombe,
Chief Executive Officer
/s/ James G. Jennings, III
------------------------------------------
James G. Jennings III
Chief Financial Officer
Date: August 15, 2005
38