-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DCeYtVs7w+Q78w+DqlOzOl7APzxTg1wd4Mk6uz94hMwcYhwpB/rIFKAIDMOVPMb7 l5k8iei8CywP7voJyFGbfA== 0001042910-99-001517.txt : 19991117 0001042910-99-001517.hdr.sgml : 19991117 ACCESSION NUMBER: 0001042910-99-001517 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 21ST CENTURY HOLDING CO CENTRAL INDEX KEY: 0001069996 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 650248866 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25001 FILM NUMBER: 99753621 BUSINESS ADDRESS: STREET 1: 4161 N W 5TH STREET CITY: PLANTATION STATE: FL ZIP: 33317 BUSINESS PHONE: 9545819993 MAIL ADDRESS: STREET 1: 4161 N W 5TH STREET CITY: PLANTATION STATE: FL ZIP: 33317 10QSB 1 QUARTERLY PERIOD SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-QSB [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO _________________. Commission file number 0-2500111 21ST CENTURY HOLDING COMPANY ---------------------------- (Exact name of registrant as specified in its charter) FL 65-0248866 -- ---------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 4161 N.W. 5TH STREET, PLANTATION, FL 33317 ------------------------------------------ (Address of principal executive offices) (Zip Code) 954-581-9993 ------------ (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) CHECK WHETHER THE REGISTRANT (1) 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 SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X ] NO [ ] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE: COMMON STOCK PAR VALUE $.01 PER SHARE - 3,370,000 SHARES OUTSTANDING AS OF NOVEMBER 10, 1999.
21ST CENTURY HOLDING COMPANY INDEX PART I: FINANCIAL INFORMATION PAGE ---- ITEM 1: Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 (Unaudited)................................................................... 3 Consolidated Statements of Income for the three and nine months ended September 30, 1999 and 1998 (Unaudited)................................................................................ 4 Consolidated Cash Flow Statements for the nine months ended September 30, 1999 and 1998 (Unaudited)................................................................................ 5 Notes to Consolidated Financial Statements (Unaudited)................................................... 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 10 PART II: OTHER INFORMATION Other Information........................................................................................ 16 Signature................................................................................................ 17
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PART I ITEM I. FINANCIAL INFORMATION 21ST CENTURY HOLDING COMPANY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 SEPTEMBER 30, 1999 DECEMBER 31,1998 ASSETS (UNAUDITED) Investments Fixed maturities, available for sale, at fair value $ 13,055,011 $ 14,605,582 Equity securities 1,323,264 2,936,520 Mortgage loan 120,000 163,164 ------------ ------------ Total investments 14,498,275 17,705,266 ------------ ------------ Cash and cash equivalents 1,901,784 2,250,061 Finance contracts receivable and consumer loans receivable, net of allowances for credit losses of $54,000 and $195,000, respectively 8,660,369 7,093,593 Prepaid reinsurance premiums 2,824,820 2,648,098 Premiums receivable 1,187,367 0 Due from reinsurers 1,537,852 1,926,736 Deferred acquisition costs, net 107,725 89,524 Deferred income taxes 1,567,804 1,085,255 Property, plant and equipment, net 2,522,444 1,763,254 Other assets 771,267 866,335 Goodwill, net 3,459,368 2,748,281 ------------ ------------ TOTAL ASSETS $ 39,039,075 $ 38,176,403 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 6,146,977 $ 7,603,460 Unearned premiums 8,885,760 8,534,320 Premium deposits 163,573 492,422 Revolving credit outstanding 4,636,092 2,062,948 Bank overdraft 1,296,669 1,199,941 Unearned commissions 802,293 586,592 Accounts payable and accrued expenses 372,487 1,932,950 Notes payable 563,629 500,000 Drafts payable to insurance companies 320,565 295,947 ------------ ------------ TOTAL LIABILITIES $ 23,188,045 $ 23,208,580 ============ ============ Shareholders' equity: Common stock of $.01 par value. Authorized 25,000,000 shares, issued and outstanding 3,370,000 and 3,350,000 shares, respectively 33,700 33,500 Additional paid in capital 12,675,087 12,460,287 Accumulated other comprehensive deficit (1,147,771) (257,227) Retained earnings 4,290,014 2,731,263 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 15,851,030 14,967,823 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 39,039,075 $ 38,176,403 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3
21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 (Restated) Revenues: Gross premiums written $ 3,691,802 $ 4,452,847 $ 15,529,597 $ 16,622,184 Gross premiums ceded (1,215,394) (1,367,888) (4,930,729) (5,140,635) ------------ ------------ ------------ ------------ Net premiums written 2,476,408 3,084,959 10,598,868 11,481,549 Decrease (increase) in unearned premiums, net of prepaid reinsurance premiums 918,752 511,468 (224,213) (1,207,421) ------------ ------------ ------------ ------------ Net premiums earned 3,395,160 3,596,427 10,374,655 10,274,128 Commission income 1,174,465 512,217 3,228,962 1,490,792 Finance revenue 958,075 526,955 2,589,997 1,289,779 Net investment income 184,118 264,880 656,107 770,527 Net realized gains (losses) 87,707 (17,304) 566,805 372,237 Other income 429,748 310,904 1,456,507 1,099,180 ------------ ------------ ------------ ------------ Total revenue 6,229,273 5,194,079 18,873,033 15,296,643 ------------ ------------ ------------ ------------ Expenses: Losses and loss adjustment expenses 2,069,023 2,242,483 5,970,362 6,923,709 Operating and underwriting expenses 1,710,495 1,007,475 4,909,764 3,113,438 Salaries and wages 1,856,105 963,498 5,344,314 2,590,467 Amortization of deferred acquisition costs, net 123,296 (11,416) (82,709) 29,007 Amortization of goodwill 131,828 52,720 385,893 158,999 ------------ ------------ ------------ ------------ Total expenses 5,890,747 4,254,760 16,527,624 12,815,620 ------------ ------------ ------------ ------------ Income before provision for income tax expense 338,526 939,319 2,345,409 2,481,023 Provision for income tax expense 102,391 354,947 786,658 933,086 ------------ ------------ ------------ ------------ Net income $ 236,135 $ 584,372 $ 1,558,751 $ 1,547,937 ============ ============ ============ ============ Net income per share $ 0.07 $ 0.28 $ 0.46 $ 0.74 ============ ============ ============ ============ Net income per share- assuming dilution $ 0.07 $ 0.28 $ 0.46 $ 0.74 ============ ============ ============ ============ Weighted average number of common shares outstanding 3,380,000 2,100,000 3,386,667 2,100,000 Weighted average number of common shares outstanding (assuming dilution) 3,380,000 2,100,000 3,386,667 2,100,000
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
21ST CENTURY HOLDING COMPANY CONSOLIDATED CASH FLOW STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 Cash flow from operating activities: Net income $ 1,558,751 $ 1,547,937 Adjustments to reconcile net income to net cash flow used in operating activities: Amortization of investment premium (1,959) 6,418 Depreciation and amortization of property, plant and equipment 93,230 22,469 Amortization of goodwill 385,893 158,998 Deferred income tax expense (2,520) (315,849) Gain on sale of investment securities (566,805) (372,237) Provision for credit losses 334,449 0 Changes in operating assets and liabilities: Finance contracts receivable and consumer loans receivable (1,566,776) (2,811,397) Prepaid reinsurance premiums (176,722) (668,714) Premiums receivable (1,187,367) 0 Due from reinsurers 388,884 (547,363) Deferred acquisition costs (18,201) (98,422) Other assets 95,068 (1,789,659) Unpaid loss and loss adjustment expenses (1,456,483) 847,141 Unearned premiums 351,440 1,876,136 Premium deposits (328,849) (1,058,806) Unearned commissions 215,701 (141,518) Accounts payable and accrued expenses (1,560,463) 1,392,779 Drafts payable to insurance companies 24,618 688,855 ------------ ------------ Net cash flow used in operating activities (3,418,111) (1,263,232) ------------ ------------ Cash flow from investing activities: Proceeds from sale of investment securities available for sale 26,244,237 36,207,427 Purchases of investment securities available for sale (24,112,923) (37,386,504) Repayment of mortgage loan 163,164 111,763 Purchase of mortgage loan (120,000) 0 Purchases of property, plant and equipment (852,420) (1,144,534) Acquisition of affiliates previously combined 0 189,103 Acquisition of agencies and majority owned subsidiary (425,725) 0 ------------ ------------ Net cash flow used in investing activities 896,333 (2,022,745) ------------ ------------ Cash flows from financing activities Bank overdraft 96,728 1,068 Acquisition of common stock (200,000) 0 Revolving credit outstanding 2,573,144 1,872,014 Capital contribution 0 394,470 Repayment of indebtedness (296,371) (183,626) ------------ ------------ Net cash flow provided by financing activities 2,173,501 2,083,926 ------------ ------------ Net decrease in cash & cash equivalents (348,277) (1,202,051) Cash & cash equivalents at beginning of period 2,250,061 1,684,451 ------------ ------------ Cash & cash equivalents at end of period $ 1,901,784 $ 482,400 ------------ ------------ Supplemental disclosure of cash flow information: Non-cash investing activities: Shares issued for acquisition of agency and majority owned subsidiary $ 415,000 0 ------------ ------------ Notes payable issued for agency acquisitions $ 360,000 0 ------------ ------------ Cash paid during the period for: Interest $ 237,675 $ 267,103 ------------ ------------ Income taxes $ 1,788,550 $ 202,620 ------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION AND BUSINESS The accompanying unaudited consolidated financial statements of 21st Century Holding Company (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly they do not include all of the information and notes required by generally accepted accounting principles ("GAAP") for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. These consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-KSB. The Company is a vertically integrated insurance holding company, which, through its subsidiaries controls substantially all aspects of the insurance underwriting, distribution and claims process. Federated National Insurance Company ("Federated National"), a wholly-owned subsidiary, underwrites nonstandard and standard personal automobile insurance and mobile home property and casualty insurance in the State of Florida. Through a wholly owned managing general agent, Assurance Managing General Agents, Inc. ("Assurance MGA"), the Company has underwriting and claims authority for third-party insurance companies. The Company also offers premium financing, consumer loans and other ancillary services to its customers. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) BASIS OF ACCOUNTING In January 1998, the Company acquired all of the issued and outstanding capital stock of eight affiliated corporations, principally the Company's insurance agencies, in exchange for the issuance of shares of common stock. The minority interest relative to the ownership of the affiliated corporations, whose results were combined prior to their acquisition on January 1, 1998, was accounted for as a component of equity of the Company. This treatment was applied because the minority interest was in a deficit position due to distributions to shareholders in excess of basis and deemed uncollectible from the unaffiliated shareholders. The acquisition of the minority interest in the affiliated corporations was accounted for by the purchase method. The aggregate acquisition price was allocated to the portion of the net identifiable assets pertaining to the minority interest based on their fair value. The allocation of the acquisition price to the minority interest's net identifiable assets had an excess of fair value over the new adjusted book basis creating goodwill of approximately $1,035,000 and eliminated the minority interest deficit of approximately $113,000. The acquisition of the net retained deficit of the affiliated corporations, and the elimination of their common stock resulted in the net credit to the equity of the Company of approximately $995,000. In November 1998, the Company consummated an initial public offering (the "IPO") of 1,250,000 shares of its Common Stock at a price of $7.50 per share. Proceeds from the IPO, which were approximately $7.9 million net of underwriting costs and expenses of the offering, have been and are being used for contributions to Federated National's capital, repayment of debt under the Company's credit facility (the "Credit Facility"), the financing of acquisitions, working capital and other general corporate purposes. In December 1998, the Company consummated an asset acquisition of 18 agencies in exchange for $1.1 million in cash and a $500,000 note payable. The aggregate acquisition price was allocated to the net identifiable assets based on their fair value. The allocation of acquisition price to net identifiable assets had an excess of fair value over the new adjusted book basis creating goodwill of approximately $1.4 million. In January 1999, the Company consummated an asset acquisition of two agencies in exchange for $176,000 in cash and 40,000 shares of common stock. The aggregate acquisition price was allocated to the net identifiable assets based on their fair value. The allocation of acquisition price to net identifiable assets had an excess of fair value over the new adjusted book basis creating goodwill of approximately $456,000. In June 1999, the Company consummated an asset acquisition of three agencies in exchange for $130,000 in cash and a note payable in the amount of $300,000. The aggregate acquisition price was allocated to the net identifiable assets based on their fair value. The allocation of acquisition price to net identifiable assets had an excess of fair value over the new adjusted book basis creating goodwill of approximately $430,000. In July 1999, the Company repurchased 40,000 shares of its outstanding common stock for $200,000. 6 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (A) BASIS OF ACCOUNTING--(CONTINUED) In August 1999, the Company acquired 80% of the outstanding stock of Express Tax and Insurance Service, Inc., a licensor of tax return preparation software, in exchange for $100,000 in cash and 20,000 shares of common stock. The aggregate acquisition price was allocated to the net identifiable assets based on their fair value. The allocation of acquisition price to net identifiable assets had an excess of fair value over the new adjusted book basis creating goodwill of approximately $215,000. (B) COMPREHENSIVE INCOME (DEFICIT) On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income (deficit) presents a measure of all changes in shareholders' equity except for changes resulting from transactions with shareholders in their capacity as shareholders. The Company's total comprehensive income (deficit) presently consists of net income adjusted for the change in net unrealized holding gains (losses) on debt investments available for sale and equity investments. The net change in net unrealized holding losses on debt investments available for sale and equity investments was ($890,544) and ($410,457) for nine months ended September 30, 1999 and 1998, respectively. Total comprehensive income was $668,207 and $1,137,480 for the nine months ended September 30, 1999 and 1998, respectively. (C) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivatives to be recognized at fair value as either assets or liabilities on the balance sheet. Any gain or loss resulting from changes in such fair value is required to be recognized in earnings, to the extent the derivatives are not effective as hedges. SFAS No. 137. "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133" issued in June 1999 defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15 of 2000. Adoption of this statement is not expected to have a material impact on the Company's results of operations or financial position. (D) ACCOUNTING CHANGES Effective January 1, 1999, the Company adopted Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", which requires entities to recognize liabilities for insurance related assessments when such assessments are probable and the amount of the assessments can be reasonably estimated. Adoption of this statement did not impact the Company's results of operations or financial position. (E) RECLASSIFICATIONS Certain 1998 financial statement amounts have been reclassified to conform with 1999 presentation. (3) RESTATEMENT The Company's consolidated statement of income for the three months ended September 30, 1998 has been restated from the amounts reported in the 10-QSB filing to reflect the effect of recording unearned ceding commissions for ceded premiums. Previously, the Company had recognized ceding commissions on a written basis. The Company's ceding commissions are now amortized over the life of the related policy. The effect of the restatement was as follows:
THREE MONTHS ENDED SEPTEMBER 30, 1998 ------------------ (UNAUDITED) AS REPORTED STATEMENT OF INCOME: IN 10-QSB FILING AS RESTATED ---------------- ----------- Amortization of deferred acquisition costs, net $ 85,529 (11,416) Provision for income taxes $318,599 354,947 Net income $523,775 584,372 Net income per share $0.25 $0.28
7 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (4) REVOLVING CREDIT OUTSTANDING In September 1997, the Company, through its subsidiary, Federated Premium Finance, Inc. entered into a revolving loan agreement ("Revolving Agreement") with Flatiron Funding Company LLC. Under the Revolving Agreement, the Company can borrow up to the maximum credit commitment of $4.0 million. The amount of an advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. In January 1999, the maximum credit commitment was increased to $5.0 million and the annual interest rate was changed to the prime rate plus .75 percent. (5) RELATED PARTY TRANSACTIONS In January 1999, the Company purchased two office properties from officers of the Company, which have been utilized for agencies' operations. One of the properties had previously been sold to the officers at the same sales price, resulting in no gain or loss to the officer. Consideration for the acquisitions was cash in the amount of $605,000. (6) SEGMENT INFORMATION The Company and its subsidiaries operate principally in two business segments consisting of insurance and financing. The insurance segment consists of underwriting through Federated National, managing general agent services through Assurance MGA, claims processing through its subsidiary, Superior Adjusting Inc. and marketing and distribution through Company-owned agencies (Federated Agency Group). The insurance segment sells primarily nonstandard personal automobile insurance and includes substantially all aspects of the insurance, distribution and claims process. The financing segment consists of premium financing through Federated Premium Finance and consumer loans through RPA Financial Corporation. The financing segment provides premium financing to both Federated National's insureds and to third-party insureds and short-term consumer loans and is marketed through the Company's distribution network of Company-owned agencies (Federated Agency Group) and independent agents. Operating segments that are not individually reportable are included in the "All Other" category. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates its business segments based on GAAP pretax operating earnings. Corporate overhead expenses are not allocated to business segments. Information regarding components of pre-income tax operations for the three-month and nine-month periods ending September 30, 1999 and 1998 follows:
THREE-MONTHS ENDED SEPTEMBER 30, NINE-MONTHS ENDED SEPTEMBER 30 TOTAL REVENUE 1999 1998 1999 1998 ---- ---- ---- ---- Insurance Segment Earned Premiums $ 3,395,160 $ 3,596,427 $ 10,374,655 $ 10,274,128 Investment Income 252,574 247,576 1,198,279 1,142,764 Adjusting Income 222,252 230,825 684,247 667,949 MGA Fee Income 217,111 214,177 723,917 784,531 Commission Income 1,405,832 801,627 4,447,313 2,190,740 Miscellaneous Income 224,578 96,494 689,328 314,319 ------------ ------------ ------------ ------------ Total Insurance Revenue 5,717,507 5,187,126 18,117,739 15,374,431 ------------ ------------ ------------ ------------ Financing Segment: Premium Finance Income 693,928 451,538 2,079,802 1,167,562 Interest and Fees on Loans 283,922 75,320 527,844 122,217 Investment Income 0 0 0 0 Miscellaneous Income 0 330 9.330 330 ------------ ------------ ------------ ------------ Total Financing Revenues 977,850 527,188 2,616,976 1,290,109 ------------ ------------ ------------ ------------ All Other Total All Other 597,527 120,000 1,605,927 360,000 ------------ ------------ ------------ ------------ Total Operating Segments 7,292,884 5,834,314 22,340,642 17,024,540 Intercompany Eliminations (1,063,611) (640,235) (3,467,609) (1,727,897) ------------ ------------ ------------ ------------ Total Revenues $ 6,229,273 $ 5,194,079 $ 18,873,033 $ 15,296,643 ============ ============ ============ ============
8 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (6) SEGMENT INFORMATION (CONTINUED)
EARNINGS BEFORE INCOME TAXES Insurance Segment (50,476) 880,236 1,690,170 2,375,201 Financing Segment 494,195 180,866 1,202,575 458,967 All Other (136,466) (121,778) (584,093) (350,288) ----------- ----------- ----------- ----------- Total Operating Segments 307,253 939,324 2,308,652 2,483,880 Intercompany Eliminations 31,275 (5) 36,757 (2,857) ----------- ----------- ----------- ----------- Total Earnings before Income Taxes $ 338,528 $ 939,319 $ 2,345,409 $ 2,481,023 =========== =========== =========== ===========
Information regarding components of the balance sheets for September 30, 1999 and December 31, 1998:
TOTAL ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- Insurance Segment $ 25,303,615 $ 28,706,376 Financing Segment 9,604,032 7,076,524 All Others 4,752,631 4,523,632 ------------ ------------ Total Operating Segments 39,660,278 40,306,532 Intercompany Eliminations (621,203) (2,130,129) ------------ ------------ TOTAL ASSETS $ 39,039,075 $ 38,176,403 ============ ============
(7) ORGANIZATION OF NEW BANK In September 1999, the Company filed applications with the Office of Thrift Supervision for approval to charter a new federal savings bank and to become a savings and loan holding company. In October 1999, the Company filed with the Federal Deposit Insurance Corporation for deposit insurance coverage. All such applications remain pending as of the date of this report. (8) PRIVATE PLACEMENT The Company is seeking to raise between $5.0 to $10.0 million in a private offering of subordinated convertible debt in an offering exempt from the Securities Act of 1933. The actual terms of the debt will be negotiated and the proceeds of the offering will be used to capitalize the Bank and other general corporate purposes. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 21st Century Holding Company (the "Company") cautions readers that certain important factors may affect the Company's actual annual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this report or which are otherwise made by or on behalf of the Company. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "intend", "could", "would", "estimate", or "continue" or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. Factors which may affect the Company's results include, but are not limited to, risks related to the nature of the Company's business; the limit on the Company's ability to manage growth; reinsurance considerations; dependence on investment income; the adequacy of its liability for loss and loss adjustment expense ("LAE"); regulation; insurance agents; claims experience; limited experience in the insurance industry; insurance industry competition; ratings by industry services; catastrophe losses; reliance on key personnel; risks related to its proposed bank and other risks discussed elsewhere in this Report and in the Company's other filings with the Securities and Exchange Commission. OVERVIEW The Company, through its subsidiaries, is engaged in the insurance underwriting, distribution and claims business. Federated National Insurance Company ("Federated National"), the Company's insurance subsidiary, generates revenues from the collection and investment of premiums. The Company's agency operations generate income from policy fees, commissions, premium financing referral fees, auto tag agency fees and the marketing of ancillary services. Federated Premium Finance, Inc. ("Federated Premium") generates revenue from premium financing provided to Company and third party insureds. Assurance Managing General Agents, Inc. ("Assurance MGA"), the Company's managing general agent, generates revenue through policy fee income and other administrative fees from the marketing of third parties' insurance products through the Company's distribution network. The Company's business, results of operations and financial condition are subject to fluctuations due to a variety of factors. Abnormally high severity or frequency of claims in any period could have a material adverse effect on the Company's business, results of operations and financial condition. Also, if Federated National's estimated liabilities for unpaid losses and LAE is less than actual losses and LAE, Federated National will be required to increase reserves with a corresponding reduction in Federated National's net income in the period in which a deficiency is identified. The Company operates in a highly competitive market and faces competition from both national and regional insurance companies, many of whom are larger and have greater financial and other resources than the Company, have more favorable A.M. Best ratings and offer more diversified insurance coverage. The Company's competitors include other companies, which market their products through agents, as well as companies, which sell insurance directly to customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and reduced acquisition costs. The Company may also face competition from new or temporary entrants in its niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance products below that of the Company. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and superior service to its agents and insureds. The Company competes with respect to automobile insurance in Florida with more than 100 companies, which underwrite personal automobile insurance. The Company is seeking to become a diversified financial services company by offering other financial products and services including payday advances, short-term consumer loans, as well as tax return preparation and electronic filing and ancillary services. The Company also intends to significantly expand the financial products and services it offers by establishing a newly chartered federal savings bank, FedFirst Bank, FSB (the "Bank"), which will be a wholly-owned subsidiary of the Company. 10 FINANCIAL CONDITION AS OF SEPTEMBER 30, 1999 AS COMPARED TO DECEMBER 31, 1998 Investments decreased $3.2 million to $14.5 million as of September 30, 1999 as compared to $17.7 million as of December 31,1998. This decrease in investments is because of a decline in market value of investments of approximately $1.0 million and payment of accrued taxes of $1.7 million. Cash and cash equivalents were $1.9 million as of September 30, 1999, as compared to $2.3 million as of December 31,1998. This decrease of $348,000 is due primarily to payment of income taxes and the related reduction in accounts payable and accrued expenses. Finance contracts receivable and consumer loans receivable increased $1.6 million from $7.1 million at December 31, 1998 to $8.7 million at September 30, 1999. This increase is due to the continued development and emphasis on this product. Prepaid reinsurance premiums were $2.8 million as of September 30, 1999 as compared to $2.6 million as of December 31,1998, an increase of $177,000. The increase is the result of more efficient processing of insurance policies and, consequently, the faster ceding of premiums to reinsurance companies. At September 30, 1999, the Company had $1.2 million in premiums receivable compared to none at December 31, 1998. Prior to 1999, the Company did not write policies unless the premium was paid in cash. Beginning in 1999, the Company revised its policy and began billing premiums for certain customers. Due from reinsurers decreased $389,000 to $1.5 million as of September 30, 1999 from $1.9 million as of December 31,1998. This decrease is the result of the Company's effort to process insurance policies more quickly and, consequently, the faster ceding of policies to reinsurance companies and quicker collection from reinsurers. The increase of $483,000 in the deferred income taxes from $1.1 million as of December 31, 1998 to $1.6 million as of September 30, 1999 is due primarily to the deferred tax asset associated with the unrealized loss on investments available for sale. The increase in property, plant and equipment of $759,000 to $2.5 million as of September 30, 1999 from $1.8 million as of December 31, 1998 is due primarily to the purchase of two office properties for $605,000. Goodwill increased to $3.5 million as of September 30, 1999 from $2.7 million as of December 31, 1998 due to the purchase of 7 agencies and Express Insurance and Tax Services, Inc. Unpaid losses and LAE decreased $1.5 million from $7.6 million as of December 31, 1998 to $6.1 million as of September 30, 1999 due primarily to an improvement in loss experience in 1999 as well as an effort by the Company to expedite the processing of claims. Unearned premiums increased $351,000 to $8.9 million as of September 30, 1999 from $8.5 million as of December 31, 1998. This increase is the result of the Company's effort to process insurance policies more quickly. The outstanding borrowings under the Company's Credit Facility (the "Credit Facility") increased $2.5 million to $4.6 million as of September 30, 1999 from $2.1 million as of December 31, 1998 primarily to fund the increase of $1.6 million in finance contracts receivables and consumer loans receivable. In addition, approximately $1.2 million was used to reduce an intercompany note to Federated National, which in turn was used to reduce accounts payable and accrued expenses. Accounts payable and accrued expenses declined $1.5 million from $1.9 million as of December 31, 1998 to $373,000 as of September 30, 1999 due primarily to the payment of 1998 income taxes of $1.7 million. Accumulated other comprehensive deficit increased $891,000 to $1.1 million as of September 30, 1999 from $257,000 as of December 31, 1998 primarily because the loss on the available for sale investment portfolio increased $1.3 million. The increase in the loss on the available for sale investment portfolio was principally due to the recent increases in interest rates. 11 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 Net income per share and net income per share assuming dilution decreased from $.28 for the quarter ended September 30, 1998 to $.07 for the third quarter of 1999. Net income, as discussed below, decreased $348,000, and the weighted average number common shares outstanding increased from 2.1 million during the third quarter of 1998 to 3.4 million during the third quarter of 1999 due primarily to the issuance of 1,250,000 shares in an initial public offering (the "IPO") completed in November 1998. Net income decreased $348,000, or 59.6%, from $584,000 for the three months ended September 30, 1998, to $236,000 for the three months ended September 30,1999. This decrease resulted from an increase in total expenses of $1.6 million, which was partially offset by an increase in total revenue of $1.0 million and a decrease in income taxes of $252,000. The increase in total expenses, as well as, the increase in total revenue are primarily the result of an increase in Company owned agencies from 15 in the third quarter of 1998 to 38 in the third quarter of 1999. The increase in revenue and expenses is discussed in more detail below. Total revenue increased $1.0 million, or 19.2%, from $5.2 million for the quarter ended September 30,1998 to $6.2 million for the quarter ended September 30,1999. This increase is primarily due to increases in commission income of $662,000 and finance revenue of $431,000, net realized gains of $105,000, and other income of $119,000, partially offset by a decrease in net premiums earned of $201,000 and investment income of $81,000 Net premiums earned decreased 5.6% to $3.4 million for the three-month period ended September 30, 1999 from $3.6 million for the same period in 1998. Despite the increase in the number of Company owned agencies, net premiums written declined mainly because the Company, in order to remain profitable, maintained its price structure in a highly competitive market with decreasing prices. Commission income increased 129.3% to $1.2 million for the three-month period ended September 30, 1999 from $512,000 for the same period in 1998. Commission income consists of fees earned by the Company-owned agencies placing business with third party insurers and third party premium finance companies. The increase is attributable to the increase in Company-owned agencies. During the last quarter of 1998, the Company acquired 18 agencies, two agencies were acquired during the first quarter of 1999 and five agencies were acquired during the second quarter of 1999. (Two of the purchased agencies were consolidated with existing agencies). Finance revenues increased 81.8% to $958,000 for the three-month period ended September 30, 1999 from approximately $527,000 for the same period in 1998. The increase was attributable to an increase in the number of premium contracts financed by Federated Premium. Net investment income decreased 30.6% to $184,000 for the three-month period ended September 30, 1999 from $265,000 for the same period in 1998 due to a decline in investments as well as overall lower interest rates on investments held during the period. Other income increased 38.3% to $430,000 for the three-month period ended September 30, 1999 from $311,000 for the same period in 1998. Other income is comprised mainly of the managing general agent's policy fee income on all new and renewal insurance policies, income tax preparation, and revenue on auto tag products. Total expenses increased $1.6 million, or 37.2%, from $4.3 million for the three-month period ended September 30, 1998 to $5.9 million for three-month period ended September 30, 1999. This increase is primarily due to increases in operating and underwriting expenses of $703,000, salaries and wages of $893,000, amortization of goodwill of $79,000 and amortization of deferred acquisition costs of $135,000 partially offset by decreases in losses and LAE of $173,000. The Company's loss ratio, for the three-month period ended September 30, 1999 was 60.9% compared with 62.4% for the same period in 1998. Losses and LAE incurred decreased 7.7% to $2.1 million for the three-month period ended September 30, 1999 from $2.2 million for the same period in 1998. Losses and LAE, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. Losses and LAE are influenced by loss severity and frequency. The decrease in the loss ratio is attributable to the increase in Company-owned agencies, which historically have produced a lower loss ratio. In addition, the loss ratio in the three-month period ended September 30, 1999 reflects a reduction of the incurred loss and LAE in the amount of $132,000 relating to prior periods. This reduction is principally the result of the Company's efforts to settle claims more quickly and better than anticipated results on settled claims. 12 Operating and underwriting expenses increased 70.0% to $1.7 million for the three-month period ended September 30, 1999 from $1.0 million for the same period in 1998. The increase is due to the increase in Company-owned agencies from 15 during the third quarter of 1998, to 38 in the third quarter of 1999. Salaries and wages increased 97.3% to $1.9 million for the three-month period ended September 30, 1999 from $963,000 for the same period in 1998, the increase is due to the increase in Company-owned agencies. Amortization of deferred policy acquisition costs increased to $123,000 for the three-month period ended September 30, 1999 from ($11,416) for the same period in 1998. Amortization of deferred policy acquisition costs consists of the actual amortization of deferred policy acquisition costs less commissions earned on reinsurance ceded. This increase is due to a decrease in premiums written by independent agencies. The decrease in income tax expense is due to the decrease in pretax income. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Net income per share and net income per share assuming dilution decreased from $.74 for the nine-month period ended September 30, 1998 to $.46 for the nine-month period ended September 30, 1999. Net income, as discussed below, was relatively stable, but net income per share was reduced by an increase in the weighted average number common shares outstanding during 1999 due primarily to the issuance of 1,250,000 shares in the IPO in November 1998. Net income was $1,559,000 for the nine-month period ended September 30, 1999, compared to $1,548,000 for the nine- months ended September 30, 1998. Total revenues and total expenses increased by $3.6 million and $3.7 million, respectively. The increase in total revenues and the increase in total expenses are primarily the result of an increase in Company owned agencies from 15 as of September 30, 1998 to 38 at September 30, 1999. The increase in revenue and expenses is discussed in more detail below. Total revenue increased $3.6 million, or 23.5%, from $15.3 million for the nine-month period ended September 30,1998 to $18.9 million for the nine-month period ended September 30, 1999. This increase is primarily due to increases in commission income of $1.7 million, finance revenue of $1.3 million, net realized gains of $195,000 and other income of $357,000. Net premiums earned were comparable for the nine-month periods ended September 30, 1999 and 1998. While the Company had more Company owned agencies and was offering mobile home policies, premiums earned did not increase because the company chose not to lower premiums in order to maintain its margin, in a highly competitive market with declining prices. Commission income increased 113.3% to $3.2 million for the nine-month period ended September 30, 1999 from $1.5 million for the same period in 1998. Commission income consists of fees earned by the Company-owned agencies placing business with third party insurers and third party premium finance companies. The increase is attributable to the increase in Company-owned agencies. Finance revenues increased 100% to $2.6 million for the nine-month period ended September 30, 1999 from approximately $1.3 million for the same period in 1998. The increase was attributable to an increase in the number of premium contracts financed by Federated Premium. Net investment income decreased 14.9% to $656,000 for the nine-month period ended September 30, 1999 from $771,000 for the same period in 1998 due primarily to a decrease in investments. The Company experienced net realized gains of $567,000 for the nine-month period ended September 30, 1999 compared to realized gains of $372,000 for the same period in 1998. Other income increased 36.4% to $1.5 million for the nine-month period ended September 30, 1999 from $1.1 million for the same period in 1998. Other income is comprised mainly of the managing general agent's policy fee income on all new and renewal insurance policies, income tax preparation, and revenue on auto tag products. Income tax preparation was implemented during 1999. Total income derived under this product during the nine-month period of 1999 was $172,000. Total expenses increased $3.7 million, or 28.9%, from $12.8 million for the nine-month period ended September 30, 1998 to $16.5 million for nine-month period ended September 30, 1999. This increase is primarily due to increases in operating and underwriting expenses of $1.8 million, salaries and wages of $2.8 million and amortization of goodwill of $227,000 partially offset by decreases in losses and LAE of $1.0 million and amortization of deferred acquisition costs of $112,000. Following is a more detail discussion of these increases and decreases in expenses. 13 The Company's loss ratio for the nine-month period ended September 30, 1999 was 57.6% compared with 67.4% for the same period in 1998. Losses and LAE incurred decreased 13.0% to $6.0 million for the nine-month period ended September 30, 1999 from $6.9 million for the same period in 1998. Losses and LAE, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. Losses and LAE are influenced by loss severity and frequency. The automobile program experienced a decrease in the loss ratio, caused mainly by the increase in policies sold by Company-owned agencies, which historically has experienced a lower loss ratio. In addition, the loss ratio reflects a reduction of the incurred loss and LAE expense $834,000 relating to prior years. This reduction is principally the result of the Company's effort to settle claims more quickly and better than anticipated results on settled claims. Operating and underwriting expenses increased 58.1% to $4.9 million for the nine-month period ended September 30, 1999 from $3.1 million for the same period in 1998. The increase is due to the increase in Company-owned agencies from 15 during the 1998 to 38 in 1999. During the last quarter of 1998 and first and second quarter of 1999, the Company acquired a total of 23 agencies. Salaries and wages increased 103.9% to $5.3 million for the nine months ended September 30, 1999 from $2.6 million for the same period in 1998, primarily due to the increase in Company-owned agencies. Amortization of deferred policy acquisition costs decreased to a credit of $83,000 for the nine-month period ended September 30, 1999 from $29,000 for the same period in 1998. Amortization of deferred policy acquisition costs consists of the actual amortization of deferred policy acquisition costs less commissions earned on reinsurance ceded. The decrease is due to a decrease in premiums written by independent agencies. The Company's estimated effective income tax rate was 33.5% for the nine months ended September 30, 1999 compared to 37.6% for the same period in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are revenues generated from operations, the net proceeds of the IPO, investment income and borrowings under the Credit Facility. Because the Company is a holding company, it is largely dependent upon dividends from its subsidiaries for cash flow. Federated National is restricted under the Florida Statutes as to the amount of dividends it can declare and pay. The maximum amount of dividends that Federated National is allowed to pay, without approval of the State of Florida Department of Insurance is $1.4 million for the year ended December 31, 1999. In November 1998, the Company generated net proceeds of approximately $7.9 million from the IPO in which it sold 1,250,000 shares of Common Stock at a price of $7.50 per share. The net proceeds of the IPO were used for contributions to Federated National's capital, repayment of debt under the Credit Facility, the finance of acquisitions and working capital and other general corporate purposes. The Company is seeking to raise between $5.0 to $10.0 million in a private offering of subordinated convertible debt in an offering exempt from the Securities Act of 1933. The actual terms of the debt will be negotiated and the proceeds of the offering will be used to capitalize the Bank and other general corporate purposes. Federated Premium is a party to the Credit Facility, which is used to fund its operations. Each advance is subject to availability under a borrowing base calculation based upon a percentage of eligible accounts receivable, with maximum advances outstanding not to exceed the maximum credit commitment which is currently $5.0 million, increased from $4.0 million pursuant to a modification effective January 25, 1999. The outstanding balance of the Credit Facility as of September 30, 1999 was $4.6 million. The annual interest rate on borrowings under the Credit Facility is currently the prime rate plus .75%, decreased from the prime rate plus 1.75% due to the January 1999 modification. The Credit Facility contains various operating and financial covenants and is collateralized by a first lien and assignment of all of Federated Premium's finance contracts receivable. Federated Premium was in compliance with all covenants under the Credit Facility as of September 30, 1999. The Credit Facility expires on September 30, 2000 at which time management intends to negotiate a new agreement. In October 1996, Federated National purchased land in Plantation, Florida to construct a headquarters building. In August 1998, the building was completed and the Company consolidated its executive offices and administrative operations in the building, which consists of approximately 14,000 square feet. The cost of the project was approximately $1.4 million. 14 To retain its certificate of authority, the Florida insurance laws and regulations require that Federated National maintain capital surplus equal to the greater of 10.0% of its liabilities or the 1998 statutory minimum capital and surplus requirement of $2.25 million as defined in the Florida Insurance Code. The Company is also required to adhere to prescribed premium-to-capital surplus ratios. The Company is in compliance with these requirements. The Company is party to a consent order with the Florida Department of Insurance which limits the amount of premiums the Company can underwrite in 1998 and 1999. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE. Insurance premiums are established before the Company knows the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, the Company attempts to anticipate the future impact of inflation when establishing rate levels. While the Company attempts to charge adequate rates, the Company may be limited in raising its premium levels for competitive and regulatory reasons. Inflation also affects the market value of the Company's investment portfolio and the investment rate of return. Any future economic changes which result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements. YEAR 2000 MATTERS In 1996, the Company began converting its computer systems to be year 2000 compliant. The Company has evaluated its internal systems, both hardware and software, facilities, and interactions with business partners in relation to year 2000 issues. As of September 30, 1999, the Company believes that it has completed its efforts to bring the systems in compliance. The total cost incurred during the year ended December 31, 1998 and quarter ended September 30, 1999 to modify these existing systems, which include both internal and external costs of programming, coding and testing, was not material. The Company continually evaluates computer hardware and software upgrades and, therefore, many of the costs to replace existing items with year 2000 compliant upgrades are not likely to be incremental costs to the Company. During 1999, the Company continues to contact its business partners (including agents, banks, motor vehicle departments and rating agencies) to determine the status of their compliance and to assess the impact of noncompliance on the Company. The Company believes that it is taking the necessary measures to mitigate issues that may arise relating to the year 2000. To the extent that any additional issues arise, the Company will evaluate the impact on its business, results of operations and financial condition and, if material, make the necessary disclosures and take appropriate remedial action. 15 PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None. ITEM 2 CHANGES IN SECURITIES (a) Changes in Securities In August 1999, the Company purchased 80% of Express Tax and Insurance Service, Inc., a licensor of tax return preparation software, for $100,000 cash and 20,000 shares of common stock for a total consideration of $230,000. These shares of common stock were all issued without registration under the Securities Act of 1933, as amended, by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, as transactions by an issuer not involving a public offering, each recipient of shares having delivered appropriate investment representations to the Company with respect thereto and having consented to the imposition of restrictive legends upon the certificates evidencing such shares. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5 OTHER INFORMATION None. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Financial Data Schedule: Ex. 27 (b) None 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. 21ST CENTURY HOLDING COMPANY DATE: NOVEMBER 15, 1999 BY: /S/ SAMUEL A. MILNE ----------------------- Title: Chief Financial Officer 17 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule 18 EX-27 2 FDS --
7 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 13,055,011 0 0 1,323,264 120,000 0 14,498,275 1,901,784 1,537,852 107,725 39,039,075 6,146,977 8,885,760 0 163,573 563,629 0 0 33,700 15,817,330 39,039,075 10,374,655 656,107 566,805 1,456,507 5,970,362 (82,709) 4,909,764 2,345,409 786,659 1,558,750 0 0 0 1,558,751 0.46 0.46 7,603,460 9,766,927 (1,140,214) 5,698,386 4,384,811 6,146,977 (834,000)
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