-----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, PgZqbcvfdZsHWEuikak4G2FAGOKR5ozb3hZ0tN5PgNARgrUWUg6UvybTE1mn34vb Duc2ephj5fQQJ2IWxX16Cw== 0001116502-03-001522.txt : 20030814 0001116502-03-001522.hdr.sgml : 20030814 20030814165828 ACCESSION NUMBER: 0001116502-03-001522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25001 FILM NUMBER: 03848559 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 10-Q 1 twentyfirst-10q.txt QUARTERLY REPORT 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO _________________. Commission file number 0-2500111 21st Century Holding Company ---------------------------- (Exact name of registrant as specified in its charter) FL 65-0248866 - ------------------------------ ---------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 4161 N.W. 5th Street, Plantation, FL 33317 ------------------------------------------ (Address of principal executive offices) (Zip Code) 954-581-9993 ------------ (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value - 3,124,955 outstanding as of August 12, 2003. 21ST CENTURY HOLDING COMPANY INDEX PART I: FINANCIAL INFORMATION PAGE ---- ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002................................................ 3 Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002............................................................. 4 Consolidated Cash Flow Statements for the six months ended June 30, 2003 and 2002............................................................. 5 Notes to Consolidated Financial Statements................................ 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 13 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk................ 22 ITEM 4 Controls and Procedures................................................... 23 PART II: OTHER INFORMATION ITEM 1 Legal Proceedings......................................................... 23 ITEM 2 Changes in Securities..................................................... 24 ITEM 3 Defaults upon Senior Securities........................................... 25 ITEM 4 Submission of Matters to a Vote of Security Holders....................... 25 ITEM 5 Other Information......................................................... 25 ITEM 6 Exhibits and Reports on Form 8-K.......................................... 26 Signatures................................................................ 27 2 PART I ITEM I. FINANCIAL INFORMATION 21ST CENTURY HOLDING COMPANY CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002 Unaudited (See Note 1) ------------ ------------ ASSETS Investments Fixed maturities, available for sale, at fair value $ 31,975,949 $ 24,693,047 Equity securities 4,248,423 539,706 Mortgage loans 140,506 145,043 ------------ ------------ Total investments 36,364,878 25,377,796 ------------ ------------ Cash and cash equivalents 4,662,430 4,478,383 Finance contracts, net of allowance for credit losses of $383,481 in 2003 and $404,356 in 2002 4,886,007 7,217,873 Prepaid reinsurance premiums 8,733,522 11,251,193 Premiums receivable, net of allowance for credit losses of $257,000 and $210,000, respectively 8,411,807 8,373,104 Reinsurance recoverable, net 12,081,875 7,856,972 Deferred acquisition costs, net 829,042 7,721 Deferred income taxes 2,256,445 2,691,309 Property, plant and equipment, net 4,876,547 4,819,617 Goodwill, net 1,739,715 1,789,353 Other assets 1,346,008 1,454,690 ------------ ------------ Total assets $ 86,188,276 $ 75,318,011 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 24,127,582 $ 16,983,756 Unearned premiums 28,998,579 28,934,486 Premiums deposits 977,393 655,713 Revolving credit outstanding 3,765,476 4,312,420 Bank overdraft 906,895 844,947 Income taxes payable 1,064,067 1,676,020 Accounts payable and accrued expenses 2,787,733 3,764,751 Drafts payable to insurance companies 48,310 48,254 ------------ ------------ Total liabilities 62,676,035 57,220,347 ------------ ------------ Commitments and contingencies Shareholders' equity: Common stock of $0.01 par value. Authorized 25,000,000 shares; issued 3,535,371 and 3,411,667 shares, respectively; Outstanding 3,113,905 and 2,990,201 shares, respectively 35,354 34,117 Additional paid-in capital 14,127,047 12,855,543 Accumulated other comprehensive income (deficit) (4,642) (227,091) Retained earnings 10,452,256 6,521,027 Treasury stock, 421,466 and 421,466 shares, respectively, at cost (1,097,774) (1,085,932) ------------ ------------ Total shareholders' equity 23,512,241 18,097,664 ------------ ------------ Total liabilities and shareholders' equity $ 86,188,276 $ 75,318,011 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Revenue: Gross premiums written $ 17,578,594 $ 17,736,724 $ 34,190,574 $ 30,811,709 Gross premiums ceded (5,803,990) (7,497,560) (10,202,865) (13,390,990) ------------ ------------ ------------ ------------ Net premiums written 11,774,604 10,239,164 23,987,709 17,420,719 Decrease in unearned premiums, net of prepaid reinsurance premiums (825,603) (3,753,201) (2,581,764) (5,500,262) ------------ ------------ ------------ ------------ Net premiums earned 10,949,001 6,485,963 21,405,945 11,920,457 Commission income 315,478 650,071 748,517 1,078,417 Finance revenue 1,135,203 1,192,221 2,263,029 2,253,652 Managing general agent fees 621,316 536,578 1,253,863 879,202 Net investment income 350,465 362,909 715,670 697,531 Net realized investments gains (losses) 1,068,818 (1,513,517) 1,419,700 (1,459,736) Other income 504,498 639,504 2,000,065 1,874,830 ------------ ------------ ------------ ------------ Total revenue 14,944,779 8,353,729 29,806,789 17,244,353 Expenses: Loss and loss adjustment expenses 7,493,747 3,330,196 14,281,456 6,514,827 Operating and underwriting expenses 2,767,863 2,571,109 5,449,141 5,416,634 Salaries and wages 2,211,484 1,943,354 4,357,819 3,946,244 Amortization of deferred acquisition costs, net (677,311) (414,321) (1,037,492) (1,100,979) ------------ ------------ ------------ ------------ Total expenses 11,795,783 7,430,338 23,050,924 14,776,726 Income before provision for income tax expense 3,148,996 923,391 6,755,865 2,467,627 Provision for income tax expense 1,035,062 891,350 2,333,530 1,444,216 ------------ ------------ ------------ ------------ Net income $ 2,113,934 $ 32,041 $ 4,422,335 $ 1,023,411 ============ ============ ============ ============ Basic net income per share $ 0.69 $ 0.01 $ 1.46 $ 0.34 ============ ============ ============ ============ Weighted average number of common shares outstanding 3,063,105 3,017,526 3,034,220 3,023,226 ============ ============ ============ ============ Fully diluted net income per share $ 0.66 $ 0.01 $ 1.41 $ 0.34 ============ ============ ============ ============ Weighted average number of common shares outstanding (assuming dilution) 3,194,747 3,020,126 3,125,479 3,023,226 ============ ============ ============ ============ Dividends declared per share $ 0.09 $ 0.02 $ 0.16 $ 0.04 ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 21ST CENTURY HOLDING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDING JUNE 30, 2003 2002 ------------- ------------- Cash flow from operating activities: Net income (loss) $ 4,422,335 $ 1,023,411 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization (accretion) of investment premium (discount), net 105,772 (43,290) Depreciation and amortization of property plant and equipment 8,442 172,164 Amortization of goodwill Deferred income tax expense 434,864 741,672 Net realized investment (gains) losses (1,419,700) 1,459,736 Amortization of deferred acquisition costs, net (1,037,492) (221,479) Provision for credit losses, net 487,246 795,440 Provision for uncollectible premiums receivable 22,627 103,854 Extraordinary gain Exercised stock options 1,272,741 12,304 Changes in operating assets and liabilities: Premiums receivable (61,330) (3,234,160) Prepaid reinsurance premiums 2,517,671 (5,229,410) Reinsurance recoverable, net (4,224,903) (464,027) Deferred acquisition costs, net 216,171 1,208,426 Goodwill (220,362) -- Finance contracts receivable, consumer loans and pay advances receivable 1,844,620 (3,347,564) Other assets 108,682 1,198,804 Unpaid losses and loss adjusting expenses 7,143,826 2,149,280 Unearned premiums 64,093 10,738,670 Premium deposits 321,680 264,015 Unearned commissions -- (632,504) Income taxes payable (611,953) -- Accounts payable and accrued expenses (958,297) 422,792 Drafts payable to insurance companies 56 230,987 ------------- ------------- Net cash provided by operating activities 10,436,789 7,349,121 ------------- ------------- Cash flow from investing activities: Proceeds from sale of investment securities available for sale 115,612,596 9,871,793 Purchases of investment securities available for sale (125,067,838) (16,836,867) Mortgage loans Sale of and collection of mortgage loans 4,537 444,670 Purchases of property and equipment (262,277) (127,216) Net cash used in acquisitions Proceeds from sale of assets 270,000 199,687 ------------- ------------- Net cash used in investing activities (9,442,982) (6,447,933) ------------- ------------- Cash flow from financing activities: Bank overdraft 61,948 (112,378) Dividends paid (491,106) (121,177) Purchases of treasury stock (11,842) (134,035) Revolving credit outstanding (546,944) (293,236) ------------- ------------- Net cash used in financing activities (987,944) (660,826) ------------- ------------- Net (decrease) increase in cash and cash equivalents 5,863 240,362 Cash and cash equivalents at beginning of period 4,478,383 775,699 ------------- ------------- Cash and cash equivalents at end of period $ 4,484,246 $ 1,016,061 ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 109,884 $ 198,371 ============= ============= Income taxes $ 2,450,000 $ 1,150,258 ============= ============= Non-cash investing and financing activities: Accrued dividends payable $ 279,527 $ 60,309 ============= ============= Stock issued to employees $ -- $ -- ============= ============= Stock received for sale of agency Notes receivable, net of deferred gains, received for sale of agencies $ 14,304 -- ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS The accompanying unaudited consolidated financial statements of 21st Century Holding Company (the "Company") have been prepared in accordance with generally accepted accounting principles ("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 generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002. The December 31, 2002 year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The financial information furnished reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations are not necessarily indicative of results of operations, which may be achieved in the future. The Company is a vertically integrated insurance holding company, which, through its subsidiaries, controls substantially all aspects of the insurance underwriting, distribution and the claims process. The Company underwrites personal automobile insurance, homeowners insurance, general liability (as of June 2003), and mobile home property and casualty insurance in the State of Florida through its wholly-owned subsidiaries, Federated National Insurance Company ("Federated National") and American Vehicle Insurance Company ("American Vehicle"). The Company internally processes claims made by its own and third party insureds through a wholly-owned claims adjusting company, Superior Adjusting, Inc. ("Superior"). The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium"). The Company markets and distributes its own and third-party insurers' products and its other services primarily in South Florida, through a network of 23 agencies, owned by Federated Agency Group, Inc. ("Federated Agency Group"), a wholly-owned subsidiary, 42 franchised agencies and approximately 125 independent agents. The Company, through its wholly-owned subsidiary, FedUSA, Inc. ("FedUSA"), franchises agencies under the FedUSA name. As of June 30, 2003, franchises were granted for 42 Fed USA agencies, of which 36 were operating. The Company intends to focus its future expansion efforts for its agency network on franchised agencies. The Company offers electronic tax filing services through Express Tax Service, Inc., ("EXPRESSTAX"), an 80%-owned subsidiary, as well as franchise opportunities for these services. As of June 30, 2003 there were 141 EXPRESSTAX franchises granted in ten states. Revenue is generated through franchise sales, collection of royalties on tax preparation fees, incentives from business partners as well as fees from the preparation of income tax returns and bank related products. In addition, EXPRESSTAX offers tax preparation services through more than 500 licensees nationwide, acting as sales representatives of EXPRESSTAX. (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 management 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 the Company's financial statements include estimates associated with management's evaluation of the determination of liability for unpaid losses and loss adjustment expense and the recoverability of goodwill. In addition, significant estimates form the 6 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) (A) CRITICAL ACCOUNTING POLICIES (CONTINUED) bases for the Company's reserves with respect to finance contracts, premiums receivable, deferred income taxes and the related valuation allowance, 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. Management periodically re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. (B) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No.146, "Accounting for Costs Associated with Exit or Disposal Activities." Statement of Financial Accounting Standard No. 146 supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Statement of Financial Accounting Standard No. 146 requires that, in certain instances, costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. Statement of Financial Accounting Standard No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of Statement of Financial Accounting Standard No. 146 has no effect on the Company's financial statements. In October 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 147, "Acquisitions of Certain Financial Institutions," which clarifies the accounting treatment for acquisitions of financial institutions. In addition, this Statement amends Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. Statement of Financial Accounting Standard No. 147 is effective on October 1, 2002. The adoption of Statement of Financial Accounting Standard No. 147 has no effect on the Company's financial statements. In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amended Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation." The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of Statement of Financial Accounting Standard No. 123 to require prominent disclosures in the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. In compliance with Statement of Financial Accounting Standard No. 148, the Company has elected to continue to follow the intrinsic value method in accounting for the Company's stock-based employee compensation arrangement as defined by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." (C) EARNINGS PER SHARE Basic earnings per share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding during each period presented. Diluted earnings per share ("Diluted EPS") is computed by dividing net income by the weighted average number of common stock and common stock equivalents during the period presented; outstanding warrants and stock options are considered common stock equivalents and are included in the calculation using the treasury stock method. Diluted EPS for the year ended December 31, 2002 7 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (C) EARNINGS PER SHARE (CONTINUED) excluded the impact of warrants and stock options as their effect would have been anti-dilutive. (D) RECLASSIFICATIONS Certain amounts in 2002 financial statements have been reclassified to conform with 2003 presentation. (3) REVOLVING CREDIT OUTSTANDING Federated Premium's operations are funded by a revolving loan agreement ("Revolving Agreement"). The Revolving Agreement is structured as a sale of contracts receivable under a sale and assignment agreement with the lender, which gives the lender the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings. The Revolving Agreement, which was amended and revised in September 2001, allowed for a maximum credit commitment of $7.0 million plus an initial additional amount of $700,000 for the transition from September 30, 2001 when the previous agreement expired. The line declined by $100,000 each month beginning November 1, 2001. In September 2002 the line was amended and revised allowing for a maximum credit commitment of $4.0 million. The decline in the required credit commitment is due primarily to Federated National's and American Vehicle's newly developed direct bill program. Direct billing is 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 amount of the lender's advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the Revolving Agreement is the prime rate plus additional interest varying from 1.25% to 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 worse to total contracts receivable. The Company's effective interest rate on this line of credit, based on the Company's average outstanding borrowings under the Revolving Agreement, was 6.23% and 7.84% for the years ended December 31, 2002 and 2001, respectively. Currently, the effective rate of interest for this arrangement is approximately 5.5%. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at June 30, 2003 and December 31, 2002. The Revolving Agreement, as amended, expires September 30, 2004. Outstanding borrowings under the Revolving Agreement as of June 30, 2003 and December 31, 2002 were approximately $3.8 million and $4.3 million, respectively. Outstanding borrowings in excess of the $4.0 million commitment totaled $312,420 for December 31, 2002 and are permissible by reason of a compensating cash balance held for the benefit of the lender. Interest expense on this revolving credit line for the six months ending June 30, 2003 and the year ended December 31, 2002 totaled approximately $110,000 and $342,000, respectively. (4) COMMITMENTS AND CONTINGENCIES The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. In June 2000, a lawsuit was filed against the Company and its directors and executive officers seeking compensatory damages in an undisclosed amount on the basis of allegations that the Company's amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which the Company recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Specifically, the plaintiffs allege that the Company recognized ceded commission income on a written basis, rather than amortized on a pro rata basis. The plaintiffs allege that this was contrary to the Statement of Financial Accounting Concepts Nos. 1, 2 and 5. The Company has since accounted for ceded commission on a pro rata basis and has done so since these matters were brought to the Company's attention in 1998. Nevertheless, the Company believes that the lawsuit is without merit and is vigorously defending the action, as the Company reasonably relied upon outside subject matter experts to 8 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) COMMITMENTS AND CONTINGENCIES (CONTINUED) make these determinations at the time. The lawsuit was filed in the United States District Court for the Southern District of New York and seeks class action status. The plaintiff class purportedly includes purchasers of the Company's common stock between November 5, 1998 and August 13, 1999. The Court recently denied the Company's Motion to Dismiss the plaintiffs' First Amended Complaint and the Company filed an Answer and Affirmative Defenses. Prior to its acquisition by the Company in 2001, American Vehicle was involved in litigation with a former officer and director. The litigation was adjudicated and American Vehicle, among others, was found liable and paid the final judgment. A petition was filed seeking costs of $136,000 and appellate attorneys fees in excess of $2.0 million. To secure this obligation, American Vehicle's previous owners have agreed to indemnify the Company against any award of fees and costsand the $500,000 purchase price for American Vehicle was placed in escrow. On February 26, 2003, the 11th Judicial Circuit in Miami, Florida entered an amended final judgment awarding the plaintiffs $1,140,387 in attorney fees and costs. Both parties are appealing this judgment. Management anticipates that there will be no costs associated with the resolution of this case, consequently, no liability for fees and costs has been accrued. The Company, as a direct premium writer in the State of Florida, is required to participate in certain insurer solvency pools under Florida Statutes Section 631.57(3)(a). Participation in these pools is based on the Company's written premiums by line of business to total premiums written statewide by all insurers. Participation may result in assessments against the Company. The Company was assessed $258,000 and $203,000 for the years ended December 31, 2002 and 2001, respectively. Should there be a 2003 assessment, the Company is generally notified in December. During 2002, the Company recovered $180,000 of the 2001 assessment and is entitled to recover all of these assessments as permitted by the State of Florida through policy surcharges in 2003. During the first six months of 2003, the Company has recovered the balance of the 2001 assessment and has recovered $92,000 of the 2002 assessment. Federated National and American Vehicle are also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351 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 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 joint underwriting JUA Plan. No assessments by have been incurred by either insurance company through the date of issuance of this report. (5) COMPREHENSIVE INCOME For the three and six months ended June 30, 2003 and 2002, comprehensive income consisted of the following:
Three months ended June 30, Six months ended June 30, 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net income $ 2,113,934 $ 32,041 $ 4,422,335 $ 1,023,411 Change in net unrealized losses on investments held for resale (373,706) $(1,655,708) 159,461 $(2,126,397) ----------- ----------- ----------- ----------- Other comprehensive income, before tax 1,740,228 $(1,623,667) 4,581,796 $(1,102,986) Income tax expense related to items of other comprehensive income 94,030 $ 962,943 (62,987) $ 889,706 ----------- ----------- ----------- ----------- Comprehensive income (loss) $ 1,834,258 $ (660,724) $ 4,518,809 $ (213,280) =========== =========== =========== ===========
9 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) SEGMENT INFORMATION The Company and its subsidiaries operate principally in two business segments consisting of insurance and financing. The insurance segment consists of underwriting through Federated National and American Vehicle, managing general agent operations through Assurance MGA, claims processing through Superior, and marketing and distribution through Federated Agency Group. The insurance segment sells personal automobile, general liability and homeowner insurance and includes substantially all aspects of the insurance, distribution 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 distribution network of Company-owned agencies and franchised agents. The accounting policies of the segments are the same as those described in the summary of significant accounting policies and practices. The Company evaluates its business segments based on GAAP pretax operating earnings. Corporate overhead expenses are 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, franchise operations and income tax return preparation. Information regarding components of operations for the three months and six months ended June 30, 2003 and 2002 follows:
Three months ended June 30, Six months ended June 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Total revenue Insurance segments $ 14,264,666 $ 7,525,014 $ 29,714,031 $ 15,096,003 Financing segment 600,427 1,075,743 1,280,241 2,076,507 All other segments 2,306,362 410,610 3,491,122 1,624,062 ------------ ------------ ------------ ------------ Total operating segments 17,171,455 9,011,367 34,485,394 18,796,572 Intercompany eliminations (2,226,676) (657,638) (4,678,605) (1,552,219) ------------ ------------ ------------ ------------ Total revenues $ 14,944,779 $ 8,353,729 $ 29,806,789 $ 17,244,353 ============ ============ ============ ============ Earnings before income taxes Insurance segments $ 2,061,813 $ 236,465 $ 5,183,083 $ 637,879 Financing segments 72,176 411,065 270,849 570,299 All other segments 1,015,007 275,861 1,301,933 1,259,449 ------------ ------------ ------------ ------------ Total earnings before income taxes $ 3,148,996 $ 923,391 $ 6,755,865 $ 2,467,627 ============ ============ ============ ============
Information regarding total assets as of June 30, 2003 and December 31, 2002:
2003 2002 ------------ ------------ Total assets Insurance segments $ 79,335,230 $ 66,663,775 Financing segment 6,392,136 7,548,841 All other segments 2,156,370 3,003,827 ------------ ------------ Total operating segments 87,883,736 77,216,443 Intercompany eliminations (1,695,460) (1,898,432) ------------ ------------ Total assets $ 86,188,276 $ 75,318,011
10 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) REINSURANCE AGREEMENTS The quota-share reinsurance treaties include loss corridors with varying layers of coverage based on ultimate incurred loss ratio results. Additionally, the most current of these treaties contain conversion features that may diminish the Company's ability to collect for loss experience at the election of the reinsurer for loss experience between 66% and 86%. Despite the conversion features, the reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance contracts and it is reasonably possible that the reinsurer may realize a significant loss from the transaction. The Company also participates in the Florida Hurricane Catastrophe Fund to protect its interest in insurable risks associated with its homeowner and mobile home owner policies against catastrophic losses. Additionally, the Company has purchased "Excess of Loss" insurance to further protect itself from potential catastrophic events. (8) STOCK COMPENSATION PLANS On December 1998, the Company issued warrants to two employees to purchase 62,500 shares of common stock of the Company at $9.00 per share. The warrants vested immediately and are exercisable between December 1999 and December 2004, at which time if they have not been exercised, they will be canceled. The estimated fair value of these warrants at the date issued was approximately $226,000 using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options as described below. During the six months ended June 30, 2003 exercised warrants totaled 19,700 at an average price of approximately $15.00 per share. As of December 31, 2002, no warrants were exercised. The Company implemented a stock option plan in November 1998 that provides for the granting of stock options to officers, key employees and consultants. The objectives of this plan include attracting and retaining the best personnel, providing for additional performance incentives, and promoting the success of the Company 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, the Company is authorized to grant options to purchase up to 600,000 common shares, and, as of June 30, 2003 and December 31, 2002, the Company had granted options (net of options granted, exercised and cancelled) to purchase 444,841 and 534,338 shares, respectively. In 2001, the Company 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 the interests of the Company 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 that 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, the Company is authorized to grant options to purchase up to 689,000 common shares, and as of June 30, 2003 and December 31, 2002, the Company had granted options (net of options granted, exercised and cancelled) to purchase 53,278 and 78,155 shares, respectively. In 2002, the Company implemented its 2002 Option Plan. The purpose of this Plan is to advance the interests of the Company 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, officers and directors, upon whose efforts and judgment the success of the Company and its subsidiaries is largely dependent, by authorizing the grant of options to purchase Common Stock of the Company to persons who are eligible to participate hereunder, thereby encouraging stock ownership in the Company 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 that 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 1,200,000 common shares, and, as of June 30, 2003 and December 31, 2002, the Company had granted options (net of options granted, exercised and cancelled) to purchase 751,000 and 727,000 shares, respectively. 11 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) STOCK COMPENSATION PLANS (CONTINUED) Activity in the Company's stock option plans for the period from January 1, 2000 to June 30, 2003, is summarized below:
------------------------- -------------------------- ------------------------ 1998 PLAN 2001 FRANCHISEE PLAN 2002 PLAN ------------------------- -------------------------- ------------------------ Weighted Weighted Weighted Number of Average Option Number of Average Option Number of Average Option Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding at December 31, 2000 487,971 $ 10.00 -- Granted 20,000 $ 10.00 83,830 $ 10.00 Exercised -- Cancelled (95,399) $ 10.00 -- ------- ------ Outstanding at December 31, 2001 412,572 $ 10.00 83,830 $ 10.00 -- Granted 228,265 $ 10.00 783,000 $ 13.35 Exercised (1,000) -- -- Cancelled (105,499) $ 10.00 (5,675) (56,000) $ 13.35 ------- ------ ------- Outstanding at December 31, 2002 534,338 $ 10.00 78,155 $ 10.00 727,000 $ 13.35 Granted -- $ 10.00 10,000 $ 10.00 61,000 $ 14.08 Exercised (71,097) $ 10.00 (34,877) $ 10.00 -- Cancelled (18,400) $ 10.00 -- (37,000) $ 13.85 ------- ------ ------- Outstanding at June 30, 2003 444,841 $ 10.00 53,278 $ 10.00 751,000 $ 13.38 ======= ====== =======
Options outstanding as of June 30, 2003 are exercisable as follows:
------------------------- -------------------------- ------------------------ 1998 PLAN 2001 FRANCHISEE PLAN 2002 PLAN ------------------------- -------------------------- ------------------------ Weighted Weighted Weighted Number of Average Option Number of Average Option Number of Average Option Options Exercisable At: Shares Exercise Price Shares Exercise Price Shares Exercise Price - ----------------------- ------ -------------- ------ -------------- ------ -------------- June 30, 2003 271,403 $ 10.00 14,842 $ 10.00 127,800 $ 13.35 December 31, 2003 19,000 $ 10.00 29,617 $ 10.00 7,300 $ 13.35 December 31, 2004 63,305 $ 10.00 378 $ 10.00 149,800 $ 13.35 December 31, 2005 47,316 $ 10.00 378 $ 10.00 149,800 $ 13.35 December 31, 2006 43,817 $ 10.00 378 $ 10.00 149,800 $ 13.35 December 31, 2007 -- 378 $ 10.00 149,800 $ 13.35 Thereafter -- 7,307 $ 10.00 16,700 $ 14.08
The Company continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board 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 (loss) and net income (loss) per share would have been reduced (increased) to the pro forma amounts indicated below. Additional stock option awards are anticipated in future years.
Net income (loss) June 30, 2003 December 31, 2002 December 31, 2001 ------------- ----------------- ----------------- As reported $ 4,422,335 $ 4,570,201 $ (992,090) Pro forma $ 4,161,775 $ 2,819,673 $ (1,181,855 Net income (loss) per share As reported - Basic $ 1.46 $ 1.52 $ (0.31) As reported - Diluted $ 1.41 $ 1.52 $ (0.31) Pro forma - Basic $ 1.37 $ 0.94 $ (0.37) Pro forma - Diluted $ 1.33 $ 0.94 $ (0.37)
The weighted average fair value of options granted during 2002, 2001 and 2000 estimated on the date of grant using the Black-Scholes option-pricing model was $2.17 to $8.06 in 2002; $2.38 to $2.92 in 2001; and $2.79 to $6.23 in 2000. The fair value of options granted is estimated on the date of grant using the following assumptions: 12 21ST CENTURY HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) STOCK COMPENSATION PLANS (CONTINUED)
June 30, 2003 December 31, 2002 December 31, 2001 ------------- ----------------- ----------------- Dividend yield 1.38%-2.25% .073%-3.5% 2.68%-3.20% Expected volatility 112.73% 120.22% 136%-152% Risk-free interest rate 5.62% 4.49%-5.82% 4.89%-5.29% Expected life (in years) 4.14-6.50 4.83-7.02 10
Summary information about the Company's stock options outstanding at June 30, 2003:
Weighted Average Weighted Range of Outstanding Contractual Average Exercisable Exercise Price at 06/30/03 Periods in Years Exercise Price at 06/30/03 -------------- ----------- ---------------- -------------- ----------- 1998 Plan $10.00 444,841 4.1 $10.00 271,403 2001 Franchise Plan $10.00 53,278 6.5 $10.00 14,842 2002 Plan $12.50-$13.75 751,000 4.5 $13.35 127,800
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ITEM 2: FORWARD-LOOKING STATEMENTS Statements in this report 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 other 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 the Company; risks related to the nature of the Company's business; dependence on investment income and the composition of the Company's investment portfolio; the adequacy of its liability for loss and loss adjustment expense ("LAE"); 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; courts decisions and trends in litigation and health care and auto repair costs; and other matters described from time to time by the Company in this report and its other filings with the SEC. 13 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FORWARD-LOOKING STATEMENTS (CONTINUED) 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 generally accepted accounting principles prescribe 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 The Company is a vertically integrated insurance holding company, which, through its subsidiaries, controls substantially all aspects of the insurance underwriting, distribution and the claims process. The Company underwrites general liability, personal automobile insurance, homeowners insurance and mobile home property and casualty insurance in the State of Florida through its wholly-owned subsidiaries, Federated National and American Vehicle. The Company internally processes claims made by its own and third party insureds through a wholly-owned claims adjusting company, Superior. The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium. The Company markets and distributes its own and third-party insurers' products and its other services primarily in South Florida, through a network of 23 agencies, owned by Federated Agency Group, a wholly-owned subsidiary, 42 franchised agencies and approximately 125 independent agents. The Company, through its wholly-owned subsidiary, FedUSA, franchises agencies under the FedUSA name. As of June 30, 2003, franchises were granted for 42 Fed USA agencies, of which 36 were operating. The Company intends to focus its future expansion efforts for its agency network on franchised agencies. The Company offers electronic tax filing services through Express Tax Service, Inc., ("EXPRESSTAX"), an 80%-owned subsidiary, as well as franchise opportunities for these services. As of June 30, 2003 there were 141 EXPRESSTAX franchises granted in ten states. Revenue is generated through franchise sales, collection of royalty on tax preparation fees, incentives from business partners as well as fees from the preparation of income tax returns and bank related products. In addition, EXPRESSTAX offers Tax Preparation services through more than 500 licensees nationwide, acting as sales representatives of EXPRESSTAX. The Company believes that it can be distinguished from its competitors because it generates revenue from substantially all aspects of the insurance underwriting, distribution and claims process. The Company provides quality service to both its agents and insureds by utilizing an integrated computer system, which links the Company's insurance and service entities. The Company's computer and software systems allow for automated premium quotation, policy issuance, billing, payment and claims processing and enables the Company to continuously monitor substantially all aspects of its business. Using these systems, the Company's agents can access a customer's driving record, quote a premium, offer premium financing and, if requested, generate a policy on-site. The Company believes that these systems have facilitated its ability to market and underwrite insurance products on a cost-efficient basis, allow Company-owned and franchised agencies to be a "one stop" shop for insurance, tax preparation and other services, and enhance the Company's ability to expand in Florida and to other states. The Company's primary products are standard and nonstandard personal automobile insurance. The former is principally provided to insureds who present an average risk profile in terms of payment history, driving record, vehicle and other factors. The latter is principally provided to insureds who are unable to obtain preferred or standard insurance coverage because of their payment history, driving record, age, vehicle type or other factors, including market conditions for preferred or standard risks. The Company's experience has been that Underwriting 14 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW (CONTINUED) criteria in the industry generally for standard insurance coverage have become more restrictive, thereby requiring more drivers to seek coverage in the nonstandard automobile insurance market. The Company believes that these factors have contributed to an increase in the size of the nonstandard personal automobile insurance market. Additionally other insurance products offered include property insurance for the home and mobile home and, in June of 2003, American Vehicle has launched a new general liability insurance product designed for the small artisan. The Company currently underwrites and sells insurance only in Florida; however, the Company intends to expand to other selected states. American Vehicle has applied to obtain a license to underwrite and sell personal automobile insurance in Alabama. The Company will select additional states for expansion based on a number of criteria, including the size of the personal automobile insurance market, statewide loss results, competition and the regulatory climate. The Company's ability to expand into other states will be subject to the prior regulatory approval of each state. Certain states impose operating requirements upon licensee applicants, which may impose burdens on the Company's ability to obtain a license to conduct insurance business in those other states. There can be no assurance that the Company will be able to obtain the required licenses, and the failure to do so would limit the Company's ability to expand geographically. The Company's executive offices are located at 4161 N.W. Fifth Street, Plantation, Florida and its telephone number is (954) 581-9993. ANALYSIS OF FINANCIAL CONDITION AS OF JUNE 30, 2003 AS COMPARED TO DECEMBER 31, 2002 INVESTMENTS. Investments increased $11.0 million, or 43.3.7%, to $36.4 million as of June 30, 2003 as compared to $25.4 million as of December 31, 2002. Cash generated from operations provided $10.6 million during the six months ended June 30, 2003. For further detail, see the section titled ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. FINANCE CONTRACTS AND PAY ADVANCES RECEIVABLE. Finance contracts decreased $2.3 million, or 32.3%, to $4.9 million as of June 30, 2003. The continued decrease is due to the direct-bill feature offered by the insurance companies wherein the policyholder can renew and pay premiums directly to the insurance companies. PREPAID REINSURANCE PREMIUMS. Prepaid reinsurance premiums decreased $2.5 million, or 22.4%, to $8.7 million as of June 30, 2003 from $11.3 million as of December 31, 2002. The decrease is the result a decrease in American Vehicle ceded quota-share reinsurance from 70% of its premiums written to 40% effective November 1, 2002. Federated National's ceded quota-share reinsurance changed from 40% of automobile premiums written in 2002 to 30% for automobile premiums written in the first quarter of 2003. Subsequent to the first quarter of 2003, the cession for Federated National was changed to 40%. REINSURANCE RECOVERABLE. Reinsurance recoverable increased $4.2 million to $12.1 million as of June 30, 2003 from $7.9 million as of December 31, 2002. This increase is the result of the increase in loss and loss adjustment expenses incurred and, to a lesser extent, the timing of settlements between the Company and its reinsurer. All amounts are considered current. DEFERRED ACQUISITION COSTS, NET. Deferred acquisition costs increased from $7,721 as of December 31, 2002 to $829,042 as of June 30, 2003. The December 31, 2002 balance was composed of commission expense offset by ceded commissions income of approximately $(422,920) and other expenses connected with the writing of premiums such as salaries, payroll taxes and premium taxes, and offset by policy fees of $430,641. At June 30, 2003, commission expense and commissions income, net were $ 417,351 and expenses connected with the writing of premiums such as salaries and premium taxes, net of policy fees totalled $411,691. Deferred policy acquisition costs, net, increased primarily due to the decrease in ceded unearned commissions. The decrease in ceded unearned 15 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION DEFERRED ACQUISITION COSTS, NET (CONTINUED) commissions relates to the decline in the decreased reliance of quota-share reinsurance associated with the insurance company's automobile premiums. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid losses and loss adjustment expenses increased $7.1 million from $17.0 million as of December 31, 2002 to $24.1 June 30, 2003. The increase is associated with an increase in frequency and severity of claims activity associated with our automobile business. Federated National's reserves increased by $3.1 million and represent 44.19% of the total reserve increase. American Vehicle's reserves increased by $4.0 million and represent 55.81% of the total reserve increase. Factors that affect unpaid losses and loss adjustment expenses 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). Interim estimates of the ultimate costs required to settle all claim files are based on all available information encompassing prior loss trends and current payment patterns. PREMIUM DEPOSITS. Premium deposits represent premiums collected in advance of the policy's effective date of coverage and are generally associated with the Company's home and mobile home insurance policies. Premium deposits increased from $656,000 as of December 31, 2002 to $1.0 million as of June 30, 2003 primarily due to the additional home owners' policies written. ACCOUNTS PAYABLE AND ACCRUED EXPENSES. Accounts payable and accrued expenses decreased by $ 1.0 million primarily due to the Company's payment of its premium taxes and to a lesser extent a scheduled payment of contingent commissions. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 GROSS PREMIUMS WRITTEN. Gross premiums written decreased $158,000, or 0.9%, to $17.6 million for the three months ended June 30, 2003, as compared to $17.7 million for the comparable period in 2002. The following table denotes gross premiums written by major product line.
Three months ended June 30, 2003 2002 ------------------------ ------------------------ Automobile $12,189,273 69.4% $13,944,967 78.7% Homeowners 4,891,436 27.8% 3,253,480 18.3% Mobile home owners 497,885 2.8% 538,277 3.0% ----------- ----- ----------- ----- Gross written premiums $17,578,594 100.0% $17,736,724 100.0% =========== ===== =========== =====
GROSS PREMIUMS CEDED. Gross premiums ceded decreased $1.7 million to $5.8 million for the three months ended June 30, 2003, from $7.5 million for the three months ended June 30, 2002. The decrease is primarily due to the decline in the Company's ceded quota-share reinsurance associated with its automobile insurance. DECREASE IN UNEARNED PREMIUMS, NET OF PREPAID REINSURANCE PREMIUMS. The decrease in unearned premiums, net of prepaid reinsurance premiums, was $0.8 million for the three months ended June 30, 2003 compared to $3.8 million for the three months ended June 30, 2002. The decrease is due primarily to American Vehicle having its first full twelve consecutive months of business . NET REALIZED INVESTMENTS GAINS (LOSSES). The Company experienced net gains of $1.1 million for the three-month period ended June 30, 2003 compared to net losses of $1.5 million for the same period in 2002. Realized gains for the quarter ending June 30, 2003 totaled $1.2 million and realized losses for the same period were $0.1 million. In June 2002, the Company recorded an other-than-temporary loss of $1.5 million on its $2.5 million investment in WorldCom bonds. 16 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 (CONTINUED) LOSSES AND LAE. The Company's loss ratio, as determined in accordance with GAAP, for the three-month period ended June 30, 2003 was 68.4% compared with 49.5% for the same period in 2002. Losses and LAE incurred increased $4.2 million to $7.5 million for the three-month period ended June 30, 2003 from $3.2 million for the same period in 2002. The table below reflects the loss ratios by product line. Three months ending June 30, 2003 2002 ---- ---- Automobile 86.96% 73.73% Home owners 15.83% 9.89% Mobile home owners 19.98% 9.94% Totals 68.44% 49.48% Losses and LAE, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. The Company attributes the overall increase in the loss ratio primarily to its liability lines of insurance associated with automobile claims and the related estimates of the costs necessary to settle the claim files. The estimated cost to close all claim files, for accident years other than the current year and net of reinsurance recoveries, has increased by a total of $1.2 million over the ultimate estimates made as of December 31, 2002 primarily due to an increase of claim frequency and claim severity. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred policy acquisition costs decreased from a credit of $1,031,000 for the three-month period ended June 30, 2002 to a credit of $677,000 for the same period in 2003. 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 decline is attributable to the decrease in ceded unearned commissions. The decrease in ceded unearned commissions relates to the decline in the decreased reliance of quota-share reinsurance associated with the Company's automobile premiums. PROVISION FOR INCOME TAX EXPENSE. Effective rate for the income tax expense is 32.1% for the three months ended June 30, 2003, compared with 96.5% for the same period in 2002. The decreased rate reflects the Company's ability to absorb its capital losses recognized in prior years. The rate recognized in the comparable period last year was due to the Company's inclusion of a valuation allowance for its deferred tax asset. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 GROSS PREMIUMS WRITTEN. Gross premiums written increased $3.4 million, or 11%, to $34.1 million for the six months ended June 30, 2003, as compared to $30.8 million for the comparable period in 2002. The increase is primarily due to additional marketing of its home owners' insurance product. The following table denotes gross premiums written by major product line.
Six months ended June 30, 2003 2002 ------------------------ ------------------------ Automobile $25,954,630 75.9% $24,854,334 80.6% Homeowners 7,258,461 21.2% 4,917,591 16.0% Mobile home owners 977,483 2.9% 1,039,784 3.4% ----------- ----- ----------- ----- Gross written premiums $34,190,574 100.0% $30,811,709 100.0% =========== ===== =========== =====
17 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 (CONTINUED) GROSS PREMIUMS CEDED. Gross premiums ceded decreased from $13.4 million for the six months ended June 30, 2002, to $10.2 million for the six months ended June 30, 2003. For 2002, Federated National reinsured through a quota-share agreement 40% of its automobile premiums and American Vehicle reinsured 70% of its written premiums. In 2003, Federated National and American Vehicle reinsure 40% of its automobile premiums. The amount of quota share reinsurance maintained by Federated National is determined by management, based on estimated annual written premiums and estimated year-end surplus, in order to comply with insurance regulations. DECREASE IN UNEARNED PREMIUMS, NET OF PREPAID REINSURANCE PREMIUMS. The decrease in unearned premiums, net of prepaid reinsurance premiums, was $2.6 million for the six months ended June 30, 2003 compared to $5.5 million for the six months ended June 30, 2002. This change relates primarily to the increase in written premiums offset by the reduction of ceded premiums to the Company's reinsurer COMMISSION INCOME. Commission income is generated from the sale of other insurance company products by our captive agents. The decline in commission income is primarily due to the Company's emphasis on selling its own insurance products. MANAGING GENERAL AGENT FEES. MGA fees increased $374,000 to $1.3 million for the six-month period ended June 30, 2003 from $879,000 for the same period in 2002. The increase can be attributed to increased volume in the American Vehicle's automobile program and Federated National's homeowner program as compared to the same period last year. NET SECURITIES GAINS (LOSSES). The Company experienced net losses of $1.5 million for the six-month period ended June 30, 2002 compared to net gains of $1.4 million for the same period in 2003. Realized gains for the six months ending June 30, 2003 totaled $1.6 million and realized losses for the same period were $0.2 million. In June 2002, the Company recorded a loss of $1.5 million on its $2.5 million investment in WorldCom bonds. LOSSES AND LAE. The Company's loss ratio, as determined in accordance with GAAP, for the six-month period ended June 30, 2003 was 66.7% compared with 54.7% for the same period in 2002. Losses and LAE incurred increased $7.8 million to $14.3 million for the six-month period ended June 30, 2003 from $6.5 million for the same period in 2002. The Company attributes the overall increase in the loss ratio primarily to its liability lines of insurance associated with automobile claims and the related estimates of the costs necessary to settle the claim files. The estimated cost to close all claim files, for accident years other than the current year and net of reinsurance recoveries has increased by a total of $2.3 million over the ultimate estimates made as of December 31, 2002 primarily due to an increase in claim frequency and claim severity. The table below reflects the loss ratios by product line. Six months ending June 30, 2003 2002 ---- ---- Automobile 83.77% 79.38% Home owners 14.64% 20.12% Mobile home owners 27.39% 11.80% Totals 66.72% 54.65% 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. 18 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 (CONTINUED) AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred policy acquisition costs decreased from a credit of $1.1 million for the six-month period ended June 30, 2002 to a credit $1.0 million for the same period in 2003. 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 decline is attributable to the decrease in ceded unearned commissions. The decrease in ceded unearned commissions relates to the decline in the decreased reliance of quota-share reinsurance associated with the insurance company's automobile premiums. PROVISION FOR INCOME TAX EXPENSE. Effective rate for income tax expense is 33.5% for the six months ended June 30, 2003 compared with 58.5% for the same period in 2002. The change to the effective rate reflects the Company's ability to generate realized gains and the benefit of netting capital losses incurred in 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are revenues generated from operations, sales of debt securities, investment income and borrowings under the Revolving Agreement, described below. Because the Company is a holding company, it is largely dependent upon dividends and fees from its subsidiaries for cash flow. Federated Premium's operations are funded by a revolving loan agreement ("Revolving Agreement"). The Revolving Agreement is structured as a sale of contracts receivable under a sale and assignment agreement with the Lender, which gives the Lender the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings. The Revolving Agreement, which was amended and revised in September 2001, allowed for a maximum credit commitment of $7.0 million plus an initial additional amount of $700,000 for the transition from September 30, 2001 when the previous agreement expired. The line declined by $100,000 each month beginning November 1, 2001. In September 2002 the line was amended and revised allowing for a maximum credit commitment of $4.0 million. The decline in the required credit commitment is due primarily to Federated National and American Vehicle's newly developed direct bill program. Direct billing is 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 amount of the Lender's advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the Revolving Agreement is the prime rate plus additional interest varying from 1.25% to 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 worse to total contracts receivable. The Company's effective interest rate on this line of credit, based on the Company's average outstanding borrowings under the Revolving Agreement, was 6.23% and 7.84% for the years ended December 31, 2002 and 2001, respectively. Currently the effective rate of interest for this arrangement is approximately 5.5%. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at June 30, 2003 and December 31, 2002. The Revolving Agreement, as amended, expires September 30, 2004. Outstanding borrowings under the Revolving Agreement as of June 30, 2003 and December 31, 2002 were approximately $3.8 million and $4.3 million, respectively. Outstanding borrowings in excess of the $4.0 million commitment totaled $312,420 for December 31, 2002 and are permissible by reason of a compensating cash balance held for the benefit of FPF, Inc. Interest expense on this revolving credit line for the six months ending June 30, 2003 and the year ended December 31, 2002 totaled approximately $110,000 and $342,000, respectively. On July 31, 2003, the Company completed a private placement of its 6% Senior Subordinated Notes (the "Notes"), which were offered and sold to accredited investors as units consisting of one Note with a principal 19 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) amount of $1,000 and one warrant (a "Warrant") to purchase one-half of one share of the Company's Common Stock. The Company sold an aggregate of $7.5 million of Notes in this placement, which resulted in proceeds to the Company (net of placement agent fees of $450,723.83 and offering expenses of $110,778.10) of $6,938,498.07. The 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 Notes may be made in cash or, at the Company's option, in shares of the Company's 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 Financial Markets ("Bloomberg") for the 20 consecutive trading days preceding the payment date. The Company issued Warrants to purchase shares of the Company's Common Stock to the purchasers of the Notes and to the placement agent in the offering, J. Giordano Securities Group ("J. Giordano"), . Each Warrant entitles the holder to purchase one-half of one share of the Company's Common Stock. The total number of shares issuable upon exercise of Warrants issued to the purchasers of the Notes and to J. Giordano shall be determined after the expiration of 60 consecutive trading days following July 31, 2003, which was the date of closing of the offering. The number of shares issuable upon exercise of the Warrants issued to purchasers shall equal $7.5 million divided by the exercise price of the Warrants. The number of shares issuable upon exercise of the Warrants issued to J. Giordano shall equal $300,000 divided by the exercise price of the Warrants. The exercise price of the Warrants shall equal 115% of the weighted-average volume price of the Common Stock on Nasdaq as reported by Bloomberg for the 60 consecutive trading days following July 31, 2003, with a maximum of $25.00 per share and a minimum of $15.00 per share. The terms of the 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. The Warrants will be exercisable until July 31, 2006. The Company will not issue shares in payment of principal or interest on the Notes, nor will it issue shares upon exercise of the Warrants, and the Warrant exercise price will not be adjusted, if any of the foregoing would cause the Company to issue shares of Common Stock exceeding the number of shares that the Company could then issue in compliance with Section 4350(i) of the rules and regulations of Nasdaq, or any successor rule or regulation (the "Nasdaq Rule"). Under the Nasdaq Rule, a company may not issue shares, and may not issue securities convertible into shares, where the shares issued could in the aggregate equal 20% or more of the voting power of the shares outstanding, without obtaining shareholder approval. The Company has agreed to include a proposal for the issuance of the foregoing shares in the proxy statement for its 2004 annual meeting of shareholders. If, because the Company has not obtained the requisite shareholder approval and the Warrant exercise price and number of shares issuable upon exercise cannot be adjusted under the anti-dilution provisions of the Warrants as a result of specified issuances of Common Stock at less than fair market value, then the exercise price of the Warrants will be reduced to the issuance price of the Common Stock that triggered the anti-dilution adjustment. For the six months ended June 30, 2003, operations generated operating cash flow of $10.6 million, which was primarily attributable to the increase in unpaid loss and LAE ($7.1 million), the decline of outstanding finance contracts receivable ($1.8 million) and the exercise of stock options ($1.3 million). Uses of cash include $4.2 million for the settlement of claims subject to reimbursement from the Company's reinsurer, $1.0 million to reduce accounts payable and $1.0 million for policy acquisition. The other uses of cash were offset by other provisions of cash, including $2.5 million for the collection of premiums that are subject to reinsurance. Operating cash flow is currently expected to be positive in both the short-term and the reasonably foreseeable future. In addition, the Company's investment portfolio is highly liquid as it consists almost entirely of easily marketable securities. Cash flow used in net investing activities was $9.4 million for the six months ended June 30, 2003 as the Company invested the cash flow from operating activities. In the future, the Company expects a continued cash flow deficit from investing activities as the Company invests cash from operations. Cash deficit from 20 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) financing activities was $1.0 million for the six months ended June 30, 2003, as the Company paid $0.5 million in dividends and reduced the amount outstanding under its Revolving Agreement by $0.5 million. The Company believes that its current capital resources, including the net proceeds from the sales of its Notes described above, together with cash flow from the Company's operations, will be sufficient to meet its currently anticipated working capital requirements. There can be no assurances, however, that such will be the case. To retain its certificate of authority, Florida insurance laws and regulations require that Federated National and American Vehicle maintain capital surplus equal to the greater of 10% of its liabilities or the 2002 statutory minimum capital and surplus requirement of $3.25 million as defined in the Florida Insurance Code. The insurance companies are also required to adhere to prescribed premium-to-capital surplus ratios. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida Department of Financial Services if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department of Financial Services (i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer's capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the Florida Department of Financial Services at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department of Financial Services or (ii) 30 days after the Florida Department of Financial Services has received notice of such dividend or distribution and has not disapproved it within such time. Under these laws, Federated National would be permitted to pay dividends of approximately $207,000 to the Company in 2003, and American Vehicle would be permitted to pay $73,000 in dividends in 2003. Although the Company believes that amounts required for it to meet its financial and operating obligations will be available from sources other than dividends from insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida Department of Financial Services will allow any dividends in excess of the amount available, to be paid by Federated National or American Vehicle to the Company in the future. No dividends were paid by Federated National or American Vehicle in 2002, 2001 or 2000, and none are anticipated in 2003. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs. 21 21ST CENTURY HOLDING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Insurance companies are required to comply with the risk-based capital requirements of the NAIC. The NAIC's risk-based capital requirements are a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC's risk-based capital standards are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of March 31, 2003, based on calculations using the appropriate NAIC formula, the Company's total adjusted capital is in excess of ratios that would require regulatory action. GAAP differs in some respects from reporting practices prescribed or permitted by the Florida Department of Financial Services. Federated National's and American Vehicle's statutory capital surplus levels as of June 30, 2003 were approximately $10.4 million and $6.0 million, respectively, and their statutory net income for the six months ended June 30, 2003 was $1.4 million and $0.8 million, respectively. During 2002, Federated National entered into a 10% quota-share agreement with its affiliate American Vehicle. The agreement ceded 10% of its premium and losses on all policies with an effective date of 2002. For presentation purposes and in accordance with the principles of consolidation, the agreement between the two affiliated insurance companies has been eliminated. 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 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. 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 the Company's Annual Report on Form 10-K as of December 31, 2002. No material changes have occurred in market risk since this information was disclosed except as discussed below. The Company's 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. 22 21ST CENTURY HOLDING COMPANY ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED) A summary of the investment portfolio as of June 30, 2003 follows:
Unrealized Amortized cost Fair value Gain (Loss) ---------------------- --------------------- ----------- Corporate securities Communications industry $ 1,177,031 3.23% $ 1,451,223 3.99% $ 274,192 Financial industry 3,814,797 10.47% 3,867,057 10.63% 52,260 All other industries 3,492,847 9.59% 3,651,354 10.04% 158,507 ----------- ------ ----------- ------ ----------- Total corporate securities 8,484,675 23.29% 8,969,634 24.67% 484,959 Obligations of state and municipal subdivisions 6,559,538 18.00% 6,568,904 18.06% 9,366 United States government and agencies 16,924,909 46.45% 16,437,411 45.20% (487,498) ----------- ------ ----------- ------ ----------- Total fixed maturities 31,969,122 87.74% 31,975,949 87.93% 6,827 ----------- ------ ----------- ------ ----------- Common stocks 4,327,858 11.88% 4,248,423 11.68% (79,435) Mortgage loan 140,506 0.39% 140,506 0.39% -- ----------- ------ ----------- ------ ----------- Total investments $36,437,486 100.00% $36,364,878 100.00% $ (72,608) =========== ====== =========== ====== ===========
As of June 30, 2003, 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. An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures within 90 days of this report was carried out by the Company under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Nevertheless, the controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. CHANGES IN INTERNAL CONTROLS. Subsequent to the date of the most recent evaluation of the Company's internal controls, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS In June 2000, a lawsuit was filed against the Company and its directors and executive officers seeking compensatory damages in an undisclosed amount on the basis of allegations that the Company's amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which the Company recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Specifically, the plaintiffs allege that the Company 23 21ST CENTURY HOLDING COMPANY OTHER INFORMATION LEGAL PROCEEDINGS (CONTINUED) recognized ceded commission income on a written basis, rather than amortized on a pro rata basis. The plaintiffs allege that this was contrary to the Statement of Financial Accounting Concepts Nos. 1, 2 and 5. The Company has since accounted for ceded commission on a pro rata basis and has done so since these matters were brought to the Company's attention in 1998. Nevertheless, the Company believes that the lawsuit is without merit and is vigorously defending the action, as the Company reasonably relied upon outside subject matter experts to make these determinations at the time. The lawsuit was filed in the United States District Court for the Southern District of New York and seeks class action status. The plaintiff class purportedly includes purchasers of the Company's common stock between November 5, 1998 and August 13, 1999. The Court recently denied the Company's Motion to Dismiss the plaintiffs' First Amended Complaint and the Company filed an Answer and Affirmative Defenses. Prior to its acquisition by the Company in 2001, American Vehicle was involved in litigation with a former officer and director. The litigation was adjudicated and American Vehicle, among others, was found liable and paid the final judgment. A petition was filed seeking costs of $136,000 and appellate attorneys fees in excess of $2.0 million. To secure this obligation, American Vehicle's previous owners have agreed to indemnify the Company against any award of fees and costs and the $500,000 purchase price for American Vehicle was placed in escrow. On February 26, 2003, the 11th Judicial Circuit in Miami, Florida entered an amended final judgment awarding the plaintiffs $1,140,387 in attorney fees and costs. Both parties are appealing this judgment. Management anticipates that there will be no costs associated with the resolution of this case, consequently, no liability for fees and costs has been accrued. ITEM 2 CHANGES IN SECURITIES During the quarter ended June 30, 2003, the Company issued 2,000 shares of Common Stock to an officer representing their bonus in accordance with his employment contract. The foregoing shares were issued without registration pursuant to the exemption afforded by Section 4(2) of the Securities Act of 1933. On July 31, 2003, the Company completed a private placement of its Notes, which were offered and sold to accredited investors as units consisting of one Note with a principal amount of $1,000 and one Warrant to purchase one-half of one share of the Company's Common Stock. The Company sold an aggregate of $7.5 million of Notes in this placement, which resulted in proceeds to the Company (net of placement agent fees of $450,723.83 and offering expenses of $110,778.10) of $6,938,498.07. The 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 Notes may be made in cash or, at the Company's option, in shares of the Company's 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 Company issued Warrants to purchase shares of the Company's Common Stock to the purchasers of the Notes and to the placement agent in the offering, J. Giordano. Each Warrant entitles the holder to purchase one-half of one share of the Company's Common Stock. The total number of shares issuable upon exercise of Warrants issued to the purchasers of the Notes and to J. Giordano shall be determined after the expiration of 60 consecutive trading days following July 31, 2003, which was the date of closing of the offering. The number of shares issuable upon exercise of the Warrants issued to purchasers shall equal $7.5 million divided by the exercise price of the Warrants. The number of shares issuable upon exercise of the Warrants issued to J. Giordano shall equal $300,000 divided by the exercise price of the Warrants. The exercise price of the Warrants shall equal 115% of the weighted-average volume price of the Common Stock on Nasdaq as reported by Bloomberg for the 60 consecutive trading 24 21ST CENTURY HOLDING COMPANY OTHER INFORMATION CHANGES IN SECURITIES (CONTINUED) days following July 31, 2003, with a maximum of $25.00 per share and a minimum of $15.00 per share. The terms of the 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. The Warrants will be exercisable until July 31, 2006. The Company will not issue shares in payment of principal or interest on the Notes, nor will it issue shares upon exercise of the Warrants, and the Warrant exercise price will not be adjusted, if any of the foregoing would cause the Company to issue shares of Common Stock exceeding the number of shares that the Company could then issue in compliance with Section 4350(i) of the rules and regulations of Nasdaq, or any successor rule or regulation (the "Nasdaq Rule"). Under theNasdaq Rule, a company may not issue shares, and may not issue securities convertible into shares, where the shares issued could in the aggregate equal 20% or more of the voting power of the shares outstanding, without obtaining shareholder approval. The Company has agreed to include a proposal for the issuance of the foregoing shares in the proxy statement for its 2004 annual meeting of shareholders. If, because the Company has not obtained the requisite shareholder approval and the Warrant exercise price and number of shares issuable upon exercise cannot be adjusted under the anti-dilution provisions of the Warrants as a result of specified issuances of Common Stock at less than fair market value, then the exercise price of the Warrants will be reduced to the issuance price of the Common Stock that triggered the anti-dilution adjustment. ITEM 3 DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 10, 2003, the Company held its Annual Meeting of Shareholders (the "Meeting"). At the Meeting, the shareholders elected Bruce F. Simberg (incumbent), Richard W. Wilcox, and James DePelisi to the Board of Directors. For Mr. Simberg, there were 2,811,699 votes in favor, 42,051 votes withheld, and 161,051 abstentions. For Messrs. Wilcox and DePelisi there were 2,817,300 votes in favor, 36,400 votes withheld, and 161,051 abstentions. There were 52,099 broker non-votes. Directors whose terms of office continued after the meeting were: Edward J. Lawson, Richard Widdicombe, Charles Hart, and Carl Dorf. ITEM 5 OTHER INFORMATION None 25 21ST CENTURY HOLDING COMPANY OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.1 Form of 6% Senior Subordinated Note due July 31, 2006. 4.2 Form of Redeemable Warrant dated July 31, 2006 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. (b) Reports on Form 8-K. Form 8-K filed on August 4, 2003, filing as Exhibit 99.1 thereto the press release of the Company, dated August 4, 2003, reporting the Company's financial results for the second quarter of 2003. 26 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 12, 2003 27 EX-4.1 3 sr-subnote.txt SENIOR SUBORDINATED NOTE EXHIBIT 4.1 21ST CENTURY HOLDING COMPANY 6% SENIOR SUBORDINATED NOTE DUE JULY 31, 2006 No. ______ July 31, 2003 $__________ FOR VALUE RECEIVED, the undersigned, 21ST CENTURY HOLDING COMPANY (herein called the "Company"), a corporation organized and existing under the laws of the State of Florida , hereby promises to pay to [_____________________] or registered assigns, the principal sum of [______________] DOLLARS with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6% per annum from the date hereof, payable quarterly beginning on October 31, 2003. This Note is one of a series of Senior Subordinated Notes (herein called the "Notes") issued pursuant to the Unit Purchase Agreement, dated as of July 31, 2003 (as from time to time amended, supplemented or modified, the "Unit Purchase Agreement"), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Unit Purchase Agreement and (ii) to have made the representations set forth in Section 6 of the Unit Purchase Agreement. Payments of principal of and interest on this Note are to be made, at the Company's option, in lawful money of the United States of America or, in whole or in part, by the issuance to the holder hereof of Interest Shares, as defined in and in accordance with the Unit Purchase Agreement. This Note is a registered Note and, as provided in the Unit Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Unit Purchase Agreement. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Unit Purchase Agreement, but not otherwise. If an Event of Default, as defined in the Unit Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price and with the effect provided in the Unit Purchase Agreement. Pursuant to the Subsidiary Guarantee dated as of July 31, 2003 (the "Subsidiary Guarantee"), certain subsidiaries of the Company have absolutely and unconditionally guaranteed payment in full of the principal of, and interest on this Note and the performance by the Company of all of its obligations contained in the Unit Purchase Agreement all as more fully set forth in said Subsidiary Guarantee. This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder hereof shall be governed by, the law of the State of Florida, excluding the choice-of-law principles of such state that would require the application of the laws of a jurisdiction other than such state. 21ST CENTURY HOLDING COMPANY By: -------------------------- Richard A. Widdicombe, CEO EX-4.2 4 redeemablewarrant.txt FORM OF REDEEMABLE WARRANT EXHIBT 4.2 21ST CENTURY HOLDING COMPANY THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES REPRESENTED HEREBY ARE RESTRICTED AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL, ACCEPTABLE TO THE COMPANY, IS OBTAINED STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION. Dated as of _________, 2003 No. W- 21ST CENTURY HOLDING COMPANY (INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA) REDEEMABLE WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK ------------------------------------------------------------- FOR VALUE RECEIVED, 21st Century Holding Company, a Florida corporation (the "Company"), hereby certifies that ______________________, his (her/its) successors and assigns (the "Holder"), is the owner of such number of warrants (the "Warrants") as set forth in Section 1 hereof. Each Warrant initially entitles the Holder, subject to the provisions hereof, to purchase from the Company at any time and from time to time on and after the date hereof until 5:00 p.m. Florida local time on the Expiration Date (as described in Section 3 herein), one-half fully paid and non-assessable share of Common Stock (as defined below) at the Exercise Price per share of Common Stock (as described in Section 2 herein) on the terms and conditions hereinafter set forth. The term "Common Stock" means the Common Stock, par value $0.01 per share, of the Company as constituted on the date hereof (the "Base Date"). The number of shares of Common Stock to be received upon the exercise of this warrant certificate may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter referred to as "Warrant Shares." The term "Other Securities" means any other equity or debt securities that may be issued by the Company in addition thereto or in substitution for the Warrant Shares. The term "Company" means and includes the corporation named above as well as any immediate successor corporation resulting from a reorganization. Upon receipt by the Company of documentation reasonably satisfactory to it of the loss, theft, destruction or mutilation of this warrant certificate, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this warrant certificate, if mutilated, the Company shall execute and deliver a new warrant certificate of like tenor and date. Any such new warrant certificate executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this warrant certificate so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. The Holder agrees with the Company that this warrant certificate is issued, and all the rights hereunder shall be held subject to, all of the conditions, limitations and provisions set forth herein. 1. NUMBER OF WARRANTS. The Holder is the owner of a number of warrants equal to two times the quotient of the aggregate principal amount of the 6% Senior Subordinated Notes the Holder has purchased pursuant to the terms of the Unit Purchase Agreement (as hereinafter defined) and the Exercise Price. 2. EXERCISE PRICE. The Exercise Price shall equal 115% of the weighted-average volume price for the Common Stock on Nasdaq as reported by Bloomberg Financial Markets ("Bloomberg") for the 60 consecutive trading days after the date of the Closing as set forth in the Unit Purchase Agreement; provided, however, that in no event shall the Exercise Price be greater than $25.00 per share nor lower than $15.00 per share. No later than 15 business days after the expiration date of the 60-day period set forth above, the Company shall mail a notice to the Holder, first class, postage prepaid, at such Holder's latest address as shall appear on the records of the Company or the Company's Warrant Agent (as hereinafter defined), if any, setting forth the Exercise Price and the number of Warrants determined in accordance with Sections 1 and 2 hereof. 3. EXERCISE OF WARRANT. This warrant certificate may be exercised in whole or in part, at any time, or from time to time during the period commencing on the date hereof and expiring three years after the date hereof (the "Expiration Date"). The Warrants must be exercised so as to purchase one full Warrant Share. 4. NOTICE OF EXERCISE. Exercise of the Warrants shall be effected in any such case by presentation and surrender of this warrant certificate to the Company at its principal office, at the office of its stock transfer agent or any other warrant agent designated by the Company (the "Warrant Agent") if any, with the Warrant Exercise Form, a form of which is attached hereto as Exhibit A, duly executed and accompanied by payment (either in cash or by certified or official bank check, payable to the order of the Company) of the Exercise Price for the number of Warrant Shares specified in such form and instruments of transfer, if appropriate, duly executed by the Holder or its duly authorized attorney. If this warrant certificate should be exercised in part only, the Company shall, upon surrender of this warrant certificate for cancellation, execute and deliver a new warrant certificate evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this warrant certificate, together with the Exercise Price, at its office, or by the Warrant Agent at its office, in proper form for exercise, the Holder shall be deemed to be the Holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. The Company shall pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on exercise of this warrant certificate, but in no event shall the Company be responsible or liable for income taxes or transfer taxes upon the issuance or transfer of the Warrants or the Warrant Shares. 5. REDEMPTION RIGHTS. The Warrants may be redeemed, in whole or in part, at any time or from time to time, at the Company's sole option, commencing a year from the date hereof at a redemption price of $0.01 per Warrant Shares; provided, however, that before any such call for redemption of the Warrants the weighted-average volume price for the Company's Common Stock quoted on the Nasdaq National Market ("Nasdaq") shall have for 20 consecutive trading days ending not more than 10 days prior to the notice of redemption been in excess of 150% of the Exercise Price, as such may be adjusted from time to time. Redemption of the Warrants may only occur upon 30 days' prior written notice to the Holder, such notice to include certification of the trading price of the Company's Common Stock on Nasdaq as reported by Bloomberg. If the Company exercises its right to redeem the Warrants, in whole or in part, it shall mail a notice of redemption to the Holder, first class, postage prepaid, not later than the 30th day before the date fixed for redemption, at such Holder's last address as shall appear on the records of the Company or the Company's Warrant Agent, if any. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. The notice of redemption shall specify the redemption price, the date fixed for redemption, the place where the warrant certificate shall be delivered and the redemption price shall be paid, and that the right to exercise the Warrants shall terminate at 5:00 p.m. Florida local time on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrants shall be the Redemption Date. Any right to exercise a Warrant shall terminate at 5:00 p.m. Florida local time on the business day immediately preceding the Redemption Date. On and after the Redemption Date, the Holder shall have no further rights except to receive, upon surrender of a certificate evidencing Warrants duly endorsed or accompanied by a written instrument or instruments of redemption in form satisfactory to the Company, the redemption price of $0.01, without interest, per Warrant Shares. 6. RESERVATION OF SHARES. The Company will at all times reserve for issuance and delivery upon exercise of this warrant certificate all shares of Common Stock or other shares of capital stock of the Company (and Other Securities) from time to time receivable upon exercise of this warrant certificate. All such shares (and Other Securities) shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and non-assessable and free of all preemptive rights. 7. FRACTIONAL SHARES. No fractional shares or script representing fractional shares shall be issued upon the exercise of the Warrants, but the Company shall pay the Holder an amount equal to the fair market value of such fractional share of Common Stock in lieu of each fraction of a share otherwise called for upon any exercise of the Warrants, as determined by the Board of Directors of the Company. 8. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This warrant certificate is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its Warrant Agent, if any, for other warrant certificates of different denominations, entitling the Holder to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Upon surrender of this warrant certificate to the Company or at the office of its Warrant Agent, if any, with an appropriate form of assignment duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new warrant certificate in the name of the assignee named in such instrument of assignment and this warrant certificate shall promptly be canceled. This warrant certificate may be divided or combined with other warrant certificates that carry the same rights upon presentation hereof at the office of the Company or at the office of its Warrant Agent, if any, together with a written notice specifying the names and denominations in which new warrant certificates are to be issued and signed by the Holder hereof. 9. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights as a shareholder in the Company, either at law or in equity, and the rights of the Holder are limited to those expressed in this warrant certificate. 10. ANTI-DILUTION PROVISIONS. 10.1 ADJUSTMENT FOR RECAPITALIZATION. If the Company shall at any time subdivide its outstanding shares of Common Stock (or Other Securities at the time receivable upon the exercise of the Warrants) by recapitalization, reclassification or split-up thereof, or if the Company shall declare a stock dividend or distribute shares of Common Stock to its shareholders, the number of shares of Common Stock subject to this warrant certificate immediately prior to such subdivision shall be proportionately increased and the Exercise Price shall be proportionately decreased, and if the Company shall at any time combine the outstanding shares of Common Stock by recapitalization, reclassification or combination thereof, the number of shares of Common Stock or Other Securities subject to this warrant certificate immediately prior to such combination shall be proportionately decreased and the Exercise Price shall be proportionately increased. Any such adjustments pursuant to this Section 10.1 shall be effective at the close of business on the effective date of such subdivision or combination or if any adjustment is the result of a stock dividend or distribution then the effective date of such adjustment based thereon shall be the record date therefor. 10.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In the case of a reorganization of the Company after the Base Date, the Holder, upon the exercise thereof as provided in Section 1, at any time after the consummation of such reorganization, shall be entitled to receive, in lieu of the securities and property receivable upon the exercise of this warrant certificate prior to such consummation, the securities or property to which such Holder would have been entitled upon such consummation if such Holder had exercised this warrant certificate immediately prior thereto; in each such case, the terms of this warrant certificate shall be applicable to the securities or property receivable upon the exercise of this warrant certificate after such consummation. 10.3 ISSUANCES BELOW EXERCISE PRICE. Except in the case of the issuance of Common Stock issued (i) pursuant to any employee benefit plan of the Company now existing or to be implemented in the future, (ii) for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination, (iii) in connection with any transaction referred to in, or contemplated by, this Section 10 hereof, (iv) pursuant to any equipment leasing or loan arrangement, or debt financing from a bank or similar financial or lending institution, (v) issued by the Company pursuant to a registration statement filed under the Securities Act, or (v) issued in connection with strategic transactions involving the Company and other entities, including (a) joint ventures, manufacturing, marketing or distribution arrangements or (b) technology transfer or development arrangements, if the Company at any time while the Warrants are outstanding, shall issue shares of Common Stock at a price per share (an "Issuance Price") less than the Exercise Price (or in the case of an issuance of Common Stock in a private placement at less than 80% of the Exercise Price), then the Exercise Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such Common Stock plus the number of shares of Common Stock which the price paid for such shares of Common Stock would purchase at the Exercise Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock so issued or issuable. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 10.2, the number of Warrant Shares issuable upon the exercise of each Warrant shall be adjusted by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of the Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 10.4 NOTICES OF RECORD DATE, ETC. In case: (a) the Company shall take a record of the holders of its Common Stock (or Other Securities at the time receivable upon the exercise of the Warrants) for the purpose of entitling them to receive any dividend (other than a cash dividend at the same rate as the rate of the last cash dividend theretofore paid) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, or any consolidation or merger of the Company with or into another corporation; then, and in each such case, the Company shall mail or cause to be mailed to the Holder at the time outstanding a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation or merger is to take place, and the time, if any, is to be fixed, as to which the holders of record of Common Stock (or such Other Securities at the time receivable upon the exercise of the Warrants) shall be entitled to exchange their shares of Common Stock (or such Other Securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation or merger. Such notice shall be mailed at least 20 days prior to the date therein specified and the Warrants may be exercised prior to said date during the term of the Warrants. 10.5 LIMITATION ON ANTI-DILUTION ADJUSTMENTS. Notwithstanding anything to the contrary contained herein, the Company shall not adjust the number of Warrant Shares as provided in this Section 10, if such adjustment would, either individually or together with one or more other adjustments or together with one or more issuances of Transaction Shares (as defined in the Unit Purchase Agreement dated as of ___________, 2003 (the "Unit Purchase Agreement") among the Company and the Purchasers named therein), cause the issuance of shares of Common Stock to exceed the number of shares that the Company could then issue under Section 4350(i) of the rules and regulations of Nasdaq (the "Nasdaq Rules") or any successor rule or regulation. Under Section 4350(i) of the Nasdaq Rules, a company may not issue shares, and may not issue securities convertible into shares, where the shares issued could in the aggregate equal 20% or more of the voting power of the shares outstanding, without obtaining shareholder approval. The foregoing limitation shall only apply until such time as the Company obtains the requisite approval of its shareholders for the issuance of the Transaction Shares, as required by Section 4350(i) of the Nasdaq Rules or any successor rule or regulation. The Company covenants and agrees that it shall include a proposal for the approval of the issuance of the Transaction Shares in the Company's proxy statement for its 2004 annual meeting of shareholders, which the Company currently anticipates shall take place in June 2004. If, due to the foregoing limitation, the Company cannot adjust the Warrant Shares as provided in Section 10.3 above, then, subject to NASD approval, the Company agrees that the Exercise Price hereof shall be reduced to equal the Issuance Price(s) of the shares of Common Stock that triggered the adjustment pursuant to Section 10.3. 11. TRANSFER TO COMPLY WITH THE SECURITIES ACT. The Warrants and any Warrant Shares or Other Securities may not be sold, transferred, pledged, hypothecated or otherwise disposed of unless registered under the Securities Act and any applicable state securities laws or pursuant to available exemptions from such registration, provided that the transferor delivers to the Company an opinion of counsel satisfactory to the Company confirming the availability of such exemption. 12. REGISTRATION RIGHTS. The Warrants and the Warrant Shares issuable upon exercise of the Warrants shall be subject to certain registration rights as provided in the registration rights agreement (the "Registration Rights Agreement") among the Company and the initial holders of the Warrants. If the Company fails to comply with the terms of the Registration Rights Agreement, the Exercise Price shall be reduced by 10% for each full period of 30 consecutive days of such non-compliance (and there shall be no pro rata reduction of the Exercise Price if a period of non-compliance is not a full 30-day period). 13. LEGEND. Unless the Warrant Shares or Other Securities have been registered under the Securities Act, upon exercise of any of the Warrants and the issuance of any of the Warrant Shares or Other Securities, all certificates representing such securities shall bear on the face thereof substantially the following legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or under applicable state securities laws and may not be sold, offered for sale, assigned, transferred or otherwise disposed of, unless registered pursuant to the provisions of the Act and any applicable state securities laws or unless an opinion of counsel to the Company is obtained stating that such disposition is in compliance with an available exemption from such registration." 14. NOTICES. All notices required hereunder shall be in writing and shall be deemed given when sent by facsimile, delivered personally or within two days after mailing when mailed by certified or registered mail, return receipt requested, to the Company at its principal office, or to the Holder at the address set forth on the record books of the Company, or at such other address of which the Company or the Holder has been advised by notice hereunder. 15. APPLICABLE LAW. The Warrants are issued under and shall for all purposes be governed by and construed in accordance with the laws of the State of Florida, without giving effect to the choice of law rules thereof. IN WITNESS WHEREOF, the Company has caused this warrant certificate to be signed on its behalf, in its corporate name, by its duly authorized officer, all as of the day and year first above written. 21ST CENTURY HOLDING COMPANY, a Florida corporation By:_________________________________ Name:__________________________ Title:_________________________ EXHIBIT A WARRANT EXERCISE FORM (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To 21st Century Holding Company: In accordance with the warrant certificate enclosed with this Warrant Exercise Form, the undersigned hereby irrevocably elects to purchase________ shares of Common Stock, $0.01 par value per share ("Common Stock"), of 21st Century Holding Company and, encloses herewith $__________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Warrant Exercise Form relates, together with any applicable taxes payable by the undersigned pursuant to the warrant certificate. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of: PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER --------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock that the undersigned is entitled to purchase in accordance with the enclosed warrant certificate, the undersigned requests that a new warrant certificate evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated:_________________________ ______________________________________________ (Print name of holder) By:___________________________________________ Name:_________________________________________ Title:________________________________________ (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) EX-31.1 5 cerwiddicombe-ceo.txt CERTIFICATION EXHIBIT 31.1 21ST CENTURY HOLDING COMPANY CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Richard A. Widdicombe, certify that: 1. I have reviewed this quarterly report on Form 10-Q of 21st Century Holding Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 12, 2003. /s/ Richard A. Widdicombe Chief Executive Officer EX-31.2 6 cer-jenningscfo.txt CERTIFICATION EXHIBIT 31.2 21ST CENTURY HOLDING COMPANY CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, James G. Jennings III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of 21st Century Holding Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 12, 2003. /s/ J. G. Jennings, III Chief Financial Officer EX-32.1 7 cer-widdicombeceo.txt CERTIFICATION EXHIBIT 32.1 21ST CENTURY HOLDING COMPANY CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT In connection with the Quarterly Report of Form 10-Q of 21st Century Holding Company for the quarter ended June 30, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Richard A. Widdicombe, Chief Executive Officer of 21st Century Holding Company hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of 21st Century Holding Company. By: /s/ Richard A. Widdicombe - ----------------------------------------------- Richard A. Widdicombe, Chief Executive Officer EX-32.2 8 cerjennings-cfo.txt EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT In connection with the Quarterly Report of Form 10-Q of 21st Century Holding Company for the quarter ended June 30, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, James G. Jennings, III, Chief Financial Officer of 21st Century Holding Company hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (3) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of 21st Century Holding Company. By: /s/ James G. Jennings, III - ------------------------------------------------ James G. Jennings, III, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----