SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998,
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
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(Address of principal executive offices) (Zip Code)
954-581-9993
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(Registrant's telephone number, including area code)
-------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
CHECK WHETHER THE REGISTRANT (1) FILED ALL REPORTS REQUIRED TO BE FILED
BY SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES [ ] NO [X]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE:
COMMON STOCK PAR VALUE $.01 PER SHARE - 3,350,000 SHARES OUTSTANDING AS
OF DECEMBER 15, 1998.
<PAGE>
21ST CENTURY HOLDING COMPANY
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
ITEM 1:
Consolidated and Combined Balance Sheet
as of September 30, 1998 (Unaudited)
and December 31, 1997 (Restated)................................. 3
Consolidated and Combined Statement of Income
for the three and nine months ended September 30, 1998 (Unaudited)
and 1997 (Restated).............................................. 4
Consolidated and Combined Cash Flow Statement
for the nine months ended September 30, 1998 (Unaudited)
and 1997 (Restated).............................................. 5
Notes to Consolidated and Combined Financial Statements............. 6
ITEM 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations................. 19
PART II: OTHER INFORMATION
Other Information................................................... 28
Signature........................................................... 29
2
<PAGE>
<TABLE>
<CAPTION>
PART I
ITEM I. FINANCIAL INFORMATION
21ST CENTURY HOLDING COMPANY
CONSOLIDATED AND COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (RESTATED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
(RESTATED)
------------------ ---------------
<S> <C> <C>
ASSETS
Available for sale at fair value:
Investments
Fixed maturities $15,410,445 $13,267,284
Equity securities 1,158,053 2,208,594
Mortgage loan 171,949 283,712
------------------ ---------------
Total investments 16,740,447 15,759,590
------------------ ---------------
Cash and cash equivalents 482,400 1,684,450
Finance contracts receivable, net of allowances for credit losses
of $58,900 and $36,980 respectively 5,155,248 2,343,851
Prepaid reinsurance premiums 2,886,378 2,217,664
Due from reinsurers 1,571,875 1,024,512
Deferred acquisition costs 259,367 160,934
Deferred income taxes 1,390,986 744,030
Other assets 2,783,534 890,929
Goodwill 1,352,721 476,006
------------------ ---------------
TOTAL ASSETS $32,622,956 $25,301,966
================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $7,573,603 $6,726,462
Unearned premiums 9,375,878 7,499,742
Premium deposit 785,750 1,844,556
Revolving credit outstanding 3,465,766 1,593,752
Bank overdraft 731,357 730,289
Unearned commissions 504,076 645,594
Accounts payable and accrued expenses 2,047,662 654,883
Notes payable 400,000 552,625
Drafts payable to insurance companies 958,015 269,160
Due to shareholders 26,250 57,250
------------------ ---------------
TOTAL LIABILITIES $25,868,357 $20,574,313
================== ===============
Shareholders' equity:
Common stock of $.01 par value. Authorized 25,000,000 shares
issued and outstanding 2,100,000 and 1,042,121 shares, 21,000 10,421
respectively
Common stock of $1 par value. Authorized, issued and
outstanding 840 shares - 840
Additional paid in capital 4,563,446 4,304,758
Accumulated other comprehensive income (285,780) 124,677
Retained earnings 2,455,933 286,957
------------------ ---------------
TOTAL SHAREHOLDERS' EQUITY 6,754,699 4,727,653
------------------ ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $32,622,956 $25,301,966
================== ================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED AND COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (RESTATED) AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
(RESTATED) (RESTATED)
----------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Gross premiums written 4,452,847 3,522,501 $16,622,184 $12,364,505
Gross premiums ceded (1,367,888) (1,027,609) (5,140,635) (3,067,230)
----------------------------------------- -------------------------------------
Net premiums written 3,084,959 2,494,892 11,481,549 9,297,275
(Increase) decrease in unearned premiums, net
of prepaid reinsurance premiums 511,468 325,693 (1,207,421) (1,498,378)
----------------------------------------- -------------------------------------
Net premiums earned 3,596,427 2,820,585 10,274,128 7,798,897
Commission income 512,217 575,789 1,490,792 2,142,496
Finance revenue 451,635 66,222 1,167,562 88,389
Net investment income 264,880 275,688 770,527 728,205
Net realized (losses) gains (17,304) 12,120 372,237 (21,541)
Other income 386,224 284,935 1,221,397 815,633
----------------------------------------- -------------------------------------
Total revenue 5,194,079 4,035,339 15,296,643 11,552,079
----------------------------------------- -------------------------------------
Expenses:
Losses and loss adjustment expenses 2,242,483 2,046,128 6,923,709 5,317,802
Operating and underwriting expenses 1,007,475 1,031,223 3,113,438 2,526,021
Salaries and wages 963,498 760,876 2,590,467 2,333,480
Amortization of deferred acquisition costs 85,529 125,670 29,007 205,305
Amortization of goodwill 52,720 6,653 158,999 19,961
----------------------------------------- -------------------------------------
Total expenses 4,351,705 3,970,550 12,815,620 10,402,569
----------------------------------------- -------------------------------------
Income before provision for income
tax expense (benefit) 842,374 64,789 2,481,023 1,149,510
Provision for income tax expense 318,599 (35,711) 933,086 211,351
----------------------------------------- -------------------------------------
Net income 523,775 100,500 1,547,937 938,159
========================================= =====================================
Net income per share 0.25 0.05 0.74 0.45
========================================= =====================================
Net income per share-
assuming dilution 0.25 0.05 0.74 0.45
========================================= =====================================
Pro forma information:
Historical income before provisions for
income tax expense - 64,789 - 1,149,510
Proforma income tax (benefit) expense - (12,180) - 226,442
Pro forma net income - 76,969 - 923,068
Pro forma net income per share (basic) - 0.04 - 0.44
Pro forma net income per share (diluted) - 0.04 - 0.44
Weighted average shares outstanding
(basic) - 2,100,000 - 2,100,000
Weighted average shares outstanding
(diluted) - 2,100,000 - 2,100,000
Supplemental information:
Weighted average shares outstanding
subsequent to Initial Public Offering - 3,350,000 - 3,350,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED AND COMBINED CASH FLOW STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (RESTATED)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
(RESTATED)
-------------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $1,547,937 $938,159
===========================================
Adjustments to reconcile net income to net cash flow used
in operating activities:
Amortization of investment premiums 6,418 4,659
Depreciation and amortization 22,469 18,175
Amortization of goodwill 158,998 19,961
Deferred income tax expense (315,849) (213,648)
Loss (gain) on sale of investment securities (372,237) 21,541
Gain on sale of property and equipment 0 (19,041)
Provision for credit losses 0 0
Changes in operating asets and liabilities:
Finance contracts receivable (2,811,397) (48)
Prepaid reinsurance premiums (668,714) (3,800,210)
Due from reinsurers (547,363) (121,010)
Deferred acquisition costs (98,422) (181,065)
Other assets (1,789,659) (136,829)
Unpaid loss and loss adjustment expenses 847,141 (162,062)
Unearned premiums 1,876,136 3,429,851
Premium deposit (1,058,806) 1,101,641
Revolving credit outstanding 1,872,014 0
Unearned commissions (141,518) 59,752
Accounts payable and accrued expenes 1,392,779 1,859,652
Drafts payable to insurance companies 688,855 0
-------------------------------------------
Net cash flow provided by operating activities 608,782 2,819,478
-------------------------------------------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale 36,207,427 8,588,590
Purchases of investment securities available for sale (37,386,504) (10,673,557)
Cost of mortgage loan 0 (155,000)
Sale of mortgage loan 111,763 185,901
Acquisition of Affiliates Previously Combined 189,103 (191,357)
Purchases of property and equipment (1,144,534) (259,443)
Proceeds from sale of property and equipment 0 636,271
-------------------------------------------
Net cash flow used in investing activities (2,022,745) (1,868,595)
-------------------------------------------
Cash flows from financing activities
Bank overdraft 1,068 483,430
Capital contribution 394,470 185,500
Distribution to shareholders 0 (477,812)
Borrowing from bank 0 (710,146)
Repayment of indebtness (183,626) (1,500)
-------------------------------------------
Net cash flow (used in) provided by financing activities 211,912 (520,528)
-------------------------------------------
Net increase decrease in cash & cash equivalents (1,202,051) 430,355
Cash & cash equivalents at beginning of year 1,684,451 1,231,638
-------------------------------------------
Cash & cash equivalents at end of year $482,400 $1,661,993
===========================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $267,103 $0
===========================================
Income taxes $202,620 $0
===========================================
Cash received during the year from:
Income taxes $0 $0
===========================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
5
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
The accompanying unaudited consolidated and combined financial
statements of 21st Century Holding Company (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. These consolidated and combined financial statements
and notes should be read in conjunction with the financial statements and notes
included in the audited consolidated and combined financial statements of the
Company for the year ended December 31, 1997 included in its Registration
Statement on Form SB-2 (File No. 333-63623).
The Company is a vertically integrated insurance holding company which,
through its subsidiaries controls substantially all aspects of the insurance
underwriting, distribution and claims process. The Company's Federated National
Insurance Company ("Federated National") subsidiary underwrites nonstandard and
standard personal automobile insurance and mobile home property and casualty
insurance in the State of Florida. Through a wholly-owned managing general
agent, Assurance Managing General Agents, Inc. ("Assurance MGA"), the Company
has underwriting and claims authority for third-party insurance companies. The
Company also offers premium financing, auto title loans and other ancillary
services to its customers.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BASIS OF ACCOUNTING
In January 1997, the Company acquired all of the issued and outstanding
capital stock of Assurance MGA, Federated Premium Finance, Inc. and Superior
Adjusting, Inc., the Company's claims processing subsidiary, for cash
consideration. Principal shareholders of the Company were also principal
shareholders of Assurance MGA, Federated Premium Finance, Inc. and Superior
Adjusting, Inc. The Company has accounted for the acquisitions at historical
cost in a manner similar to that in pooling of interests accounting due to the
entities being under the common control of the owners of 21st Century Holding
Company. The cash paid to individuals of the control group for their shares in
these entities was recorded as a distribution in the statement of changes in
shareholders' equity. In addition, the Company purchased the assets of two
independent agencies for cash consideration of $540,000. These transactions were
accounted for by the purchase method of accounting, generating goodwill
amounting to approximately $533,000.
6
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
In January 1998, the Company acquired all of the issued and outstanding
capital stock of eight affiliated corporations, principally the Company's
insurance agencies, in exchange for the issuance of shares of common stock. The
financial statements of these entities have been presented in the combined
statements of the Company based on the common control of ownership interest. The
minority interest relative to the ownership of the affiliated corporations,
whose results are combined prior to their acquisition on January 1, 1998, was
accounted for as a component of equity of the Company. This treatment was
applied because the minority interest was in a deficit position due to
distributions to shareholders in excess of basis and deemed uncollectible from
the unaffiliated shareholders. The acquisition of the minority interest in the
affiliated corporations was accounted for by the purchase method. The aggregate
acquisition price was allocated to the portion of the net identifiable assets
pertaining to the minority interest based on their fair value. The allocation of
the acquisition price to the minority interest's net identifiable assets had an
excess of fair value over the new adjusted book basis creating goodwill of
approximately $1,035,000 and eliminated the minority interest deficit of
approximately $113,000. The acquisition of the net retained deficit of the
affiliated corporations which are presented on a combined basis and the
elimination of their common stock resulted in the net credit to the equity of
the Company of approximately $984,000. The issuance of $100,000 to individuals
of the control group for their shares in these entities was recorded as a
distribution in the statement of changes in shareholders' equity.
7
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
(B) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income." Comprehensive income presents a measure of all changes in
shareholders' equity except for changes resulting from transactions with
shareholders in their capacity as shareholders. The Company's total
comprehensive income presently consists of net income adjusted for the change in
net unrealized holding gains (losses) on investments available for sale. The net
change in net unrealized holding gains (losses) on investments available for
sale was $(192,223) and $58,711 for three months ended September 30, 1998 and
1997, respectively; and $(504,887) and $89,672 for the nine months ended
September 30, 1998 and 1997, respectively. Total comprehensive income was
$331,552 and $159,211 for the three months ended September 30, 1998 and 1997,
respectively; and $1,043,050 and $1,027,831 for the nine months ended September
30, 1998 and 1997, respectively. The Statement also requires the separate
presentation of the accumulated balance of comprehensive income other than net
earnings in the consolidated and combined balance sheets.
(C) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, ("SFAS 131"), "Disclosures about segments of an enterprise
and related information." SFAS 131 is effective for periods beginning after
December 15, 1997. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments, based on how
the enterprise defines such segments. The Company will report operating segment
information, to the extent such segments are defined, beginning with the year
ended December 31, 1998.
(D) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the periods presented.
8
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
(D) NET INCOME PER SHARE (CONTINUED)
A reconciliation of the numerators and denominators of the "income per
share" and "income per share-assuming dilution" computations for income before
cumulative effect of change in accounting method are presented below:
<TABLE>
<CAPTION>
INCOME SHARE PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
For the three months ended September 30, 1998:
Income per share $523,775 2,100,000 $0.25
--------------------------------------------
Income per share assuming dilution $523,775 2,100,000 $0.25
============================================
For the three months ended September 30, 1997 (RESTATED):
Income per share $100,500 2,100,000 $0.05
---------------------------------------------
Income per share assuming dilution $100,500 2,100,000 $0.05
============================================
For the nine months ended September 30, 1998:
Income per share $1,547,937 2,100,000 $0.74
---------------------------------------------
Income per share assuming dilution $1,547,937 2,100,000 $0.74
============================================
For the nine months ended September 30, 1997 (RESTATED):
Income per share $938,159 2,100,000 $0.45
---------------------------------------------
Income per share assuming dilution $938,159 2,100,000 $0.45
============================================
</TABLE>
The weighted average shares outstanding gives effect to a 1.8-for-one,
1.2-for-one and 926.33-for-one stock splits effected in November 1996, January
1997 and September 1998, respectively; and gives effect to the consolidation of
the Company effected in January 1997 and January 1998 and February 1998. The
Company's Common Stock par value of $.01 per share remained unchanged. All
historical share and per share amounts have been restated to retroactively
reflect the stock splits.
The Company issued 1,250,000 shares in connection with its initial
public offering consummated in November 1998. As such, weighted average
shares outstanding subsequent to the offering would amount to 3,250,000.
(E) PRO FORMA NET INCOME
Pro forma net income represents the results of operations for the three
months ended September 30, 1997 and for the nine months ended September 30,
1997, adjusted to reflect a provision for income tax on historical income before
income taxes which gives effect to the change in the affiliated corporations'
income tax status to C corporations.
9
<PAGE>
(F) RESTATEMENT
The Company's financial statements as of December 31, 1997 and for the
three months and nine months ended September 30, 1997 have been restated to
reflect the effect of recording unearned ceding commissions for ceded premiums.
Previously, the Company had earned the ceding commissions on a written basis.
The Company's ceding commissions are now amortized over the life of the related
policy. The effect of the restatement is as follows:
DECEMBER 31, 1997
-----------------
AS
PREVIOUSLY
REPORTED RESTATED
---------- --------
BALANCE SHEETS:
Deferred acquisition costs $761,472 160,934
Deferred income taxes 518,322 744,030
Retained earnings $661,787 286,957
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
AS AS
PREVIOUSLY PREVIOUSLY
STATEMENTS OF INCOME: REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
Amortization of deferred
acquisition costs $ (97,669) 125,670 297,135 205,305
Provision for income
taxes 48,265 (35,711) 176,823 211,351
Net income 239,863 100,500 880,857 938,159
Net income per share $ 0.16 0.05 0.42 0.45
10
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(3) INVESTMENTS
(A) FIXED MATURITIES AND EQUITY SECURITIES
A summary of the amortized cost, estimated fair value, gross unrealized
gains and gross unrealized losses of fixed maturities and equity securities at
September 30, 1998 and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gross Unrealized Estimated Fair Value
Gains Losses
<S> <C> <C> <C> <S>
SEPTEMBER 30, 1998
Fixed Maturities:
US Treasury securities & obligations $ 508,574 $ 1,191 $ 509,765
Mortgage backed securities 426,539 3,947 422,592
Obligations of states and political 12,070,773 183,302 13,489 12,240,586
Corporate Securities 2,260,637 20,189 43,324 2,237,502
-------------- ---------------- ----------------- ---------------------
TOTAL FIXED MATURITIES $15,266,523 $ 204,682 $ 60,760 $ 15,410,445
============== ================ ================= =====================
EQUITY SECURITIES:
Preferred Stocks $ 76,750 $ 0 $ 4,250 $ 72,500
Common Stocks 1,658,224 0 572,671 1,085,553
-------------- ---------------- ----------------- ---------------------
TOTAL EQUITY SECURITIES $ 1,734,974 $ 0 $ 576,921 $ 1,158,053
============== ================ ================= =====================
DECEMBER 31, 1997
Fixed Maturities:
US Treasury securities & obligations $ 7,291,936 $ 105,335 $ 3,135 $ 7,394,136
Mortgage backed securities 519,439 0 3,473 515,966
Obligations of states and political 4,422,736 109,601 0 4,532,337
Corporate Securities 804,420 21,029 604 824,845
-------------- ---------------- ----------------- ---------------------
TOTAL FIXED MATURITIES $13,038,531 $ 235,965 $ 7,212 $ 13,267,284
============== ================ ================= =====================
EQUITY SECURITIES:
Preferred Stocks $ 1,089,268 $ 10,613 $ 2,749 $ 1,097,132
Common Stocks 1,159,826 3,706 52,070 1,111,462
-------------- ---------------- ----------------- ---------------------
TOTAL EQUITY SECURITIES $ 2,249,094 $ 14,319 $ 54,819 $ 2,208,594
============== ================ ================= =====================
</TABLE>
11
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(A) FIXED MATURITIES AND EQUITY SECURITIES (CONTINUED)
A summary of fixed maturities available for sale at September 30, 1998
and December 31, 1997 are shown below by contractual or expected maturity
periods. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
AMORTIZED COST ESTIMATED FAIR AMORTIZED COST ESTIMATED FAIR
VALUE VALUE
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $0 $0 $275,850 $275,358
Due after one year through
five years 400,449 428,088 2,200,570 2,229,280
Due after five years through
ten years 3,099,100 3,132,595 5,491,936 5,592,622
Due after ten years 11,766,974 11,849,762 5,070,175 5,170,024
-----------------------------------------------------------------
Total $15,266,523 $15,410,445 $13,038,531 $13,267,284
=================================================================
</TABLE>
A summary of the sources of net investment income follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Fixed maturities $226,223 $218,262 $665,683 $608,914
Equity securities 18,767 34,927 67,428 65,525
Cash and cash equivalents 17,861 17,151 37,237 40,739
Other 2,029 5,348 179 13,027
----------------------------------------------------------------
Total Investment Income 264,880 275,688 770,527 728,205
Less investment expenses 0 0 0 0
----------------------------------------------------------------
NET INVESTMENT INCOME $264,880 $275,688 $770,527 $728,205
================================================================
</TABLE>
Proceeds from sales of fixed maturities and equity securities for the
nine months ended September 30, 1998 and 1997 were $36,207,427 and $8,588,590
respectively.
12
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(3) INVESTMENTS (CONTINUED)
A summary of realized gains (losses) and increases (decreases) in net
unrealized gains (losses) follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REALIZED GAINS (LOSSES)
Fixed maturities $ 4,561 $ 46,912 $229,124 ($2,276)
Equity securities (21,865) (34,792) 143,113 (31,999)
Other 0 0 0 12,734
Cash and Cash equivalents 0 0 0 0
---------------------------------------------------------------
TOTAL ($17,304) $ 12,120 $372,237 ($21,541)
===============================================================
Change in net unrealized
gains(losses)
Fixed maturities $172,161 $ 58,129 ($22,742) $ 71,013
Equity securitie (315,611) 45,979 (354,040) 64,853
---------------------------------------------------------------
TOTAL ($143,450) $104,108 ($376,782) $135,866
===============================================================
</TABLE>
(4) REINSURANCE
The Company reinsures (cedes) a portion of its written premiums on a
quota-share basis to nonaffiliated insurance companies in order to limit its
loss exposure. The Company also maintains coverages to limit losses from large
exposures, which the Company believes are adequate for its current volume. To
the extent that reinsuring companies are unable to meet their obligations
assumed under the reinsurance agreements, the Company remains primarily liable
to its policyholders.
13
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(4) REINSURANCE (CONTINUED)
The impact of reinsurance on the financial statements is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
PREMIUMS WRITTEN:
Direct $ 4,452,847 $ 3,522,501 $ 16,622,184 $12,364,505
Ceded (1,367,888) (1,027,609) (5,140,635) (3,067,230)
-----------------------------------------------------------------
NET PREMIUMS WRITTEN $ 3,084,959 $ 2,494,892 $11,481,549 $9,297,275
=================================================================
PREMIUM EARNED:
Direct $ 5,177,105 $ 3,993,782 $14,746,047 $11,988,833
Ceded (1,580,678) (1,173,197) (4,471,919) (4,189,936)
-----------------------------------------------------------------
NET PREMIUMS EARNED $ 3,596,427 $ 2,820,585 $10,274,128 $7,798,897
=================================================================
LOSSES AND LOSS ADJUSTMENT
EXPENSES INCURRED:
Direct $ 3,232,764 $ 2,879,410 $ 9,761,505 $8,156,847
Ceded (990,281) (833,282) (2,837,796) (2,839,045)
-----------------------------------------------------------------
NET LOSS/LAE INCURRED $ 2,242,483 $ 2,046,128 $ 6,923,709 $5,317,802
=================================================================
AS OF AS OF
SEPTEMBER 30 DECEMBER 31
UNPAID LOSSES AND LAE 1998 1997
----------------------------------
Direct $ 7,573,603 $6,726,462
Ceded (2,252,393) (2,090,998)
----------------------------------
NET UNPAID LOSS/LAE $ 5,321,210 $4,635,464
==================================
UNEARNED PREMIUMS
Direct $ 9,375,878 $7,499,742
Ceded (2,886,378) (2,217,664)
----------------------------------
NET UNEARNED PREMIUMS $ 6,489,500 $5,282,078
==================================
</TABLE>
14
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(4) REINSURANCE (CONTINUED)
The Company received approximately $374,000 and $277,000 in commissions
on premiums ceded during the three months ended September 30, 1998 and 1997,
respectively; and approximately $1.4 million and $825,000 in commissions on
premiums ceded during the nine months ended September 30, 1998 and 1997,
respectively. Had all of the Company's reinsurance agreements been canceled at
September 30, 1998, the Company would have returned a total of approximately
$631,000 in contingent reinsurance commissions and 722,000 in unearned ceded
commissions to its reinsurers; in turn, its reinsurers would have returned
approximately $2.9 million in unearned premiums to the Company.
At September 30, 1998 and December 31, 1997, the Company had an
unsecured aggregate recoverable for losses paid, unpaid losses and loss
adjustment expenses including IBNR and unearned premiums with the following
companies:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
TRANSATLANTIC REINSURANCE COMPANY
(A++A.M.BEST RATED):
<S> <C> <C>
Unearned Premiums $2,540,830 $2,119,819
Reinsurance recoverable on loss payments 594,734 717,569
Unpaid losses & LAE liability 2,199,123 2,090,998
------------------------------------
$5,334,687 $4,928,386
====================================
Other:
Unearned premium 345,548 97,845
------------------------------------
$5,680,235 $5,026,231
====================================
AMOUNTS DUE FROM REINSURER CONSISTED OF
AMOUNTS RELATED TO:
Unpaid losses & loss adjustment expense $2,252,393 $2,090,998
Paid losses & loss adjustment expense 621,821 717,569
Reinsurance payable (671,714) (1,114,520)
Contingent ceded payable (630,625) (669,535)
-----------------------------------
$1,571,875 $1,024,512
====================================
</TABLE>
15
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(5) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses is
determined on an individual-case basis for all incidents reported. The liability
also includes amounts for unallocated expenses, anticipated future claim
development and IBNR.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
Balance at January 1 $6,726,462 $6,233,962
Less Reinsurance recoverable (2,090,998) (1,701,685)
-------------------------------------------
Net balance at January 1 $4,635,464 $4,532,277
===========================================
Incurred related to:
Current year $6,981,484 $7,612,167
Prior year (57,775) (198,016)
-------------------------------------------
Total Incurred $6,923,709 $7,414,151
===========================================
Paid related to:
Current year $3,883,710 $4,458,527
Prior year 2,354,252 2,852,437
-------------------------------------------
Total Paid $6,237,962 $7,310,964
===========================================
Net balance at period ending $5,321,211 $4,635,464
Plus reinsurance recoverables 2,252,392 2,090,998
-------------------------------------------
Balance at period ending $7,573,603 $6,726,462
===========================================
</TABLE>
Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and loss adjustment
expenses, the Company believes that the liability for unpaid losses and loss
adjustment expenses is adequate to cover all claims and related expenses which
may arise from incidents reported.
(6) REVOLVING CREDIT OUTSTANDING
On September 24, 1997, the Company, through Federated Premium Finance,
Inc. entered into a revolving loan agreement ("Revolving Agreement") with
Flatiron Funding Company LLC. Under the Revolving Agreement, the Company can
borrow up to the maximum credit commitment of $4 million. The amount of an
advance is subject to availability under a borrowing base calculation, with
maximum advances outstanding not to exceed the maximum credit commitment. The
annual interest rate on advances under the Revolving Agreement loan is
16
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(6) REVOLVING CREDIT OUTSTANDING (CONTINUED)
the prime rate plus 1.75 percent which amounted to 10.25 percent at September
30, 1998 and December 31, 1997. The Revolving Agreement contains various
operating and financial covenants and is collateralized by a first lien and
assignment of all of the Company's assigned finance contracts receivables. The
Revolving Agreement expires on September 30, 2000. Outstanding borrowings under
the Revolving Agreement as of September 30, 1998 and December 31, 1997 were
$3,465,766 and $1,593,752, respectively, and interest expense for the three
months ended September 30, 1998 and 1997 totaled $88,098 and $0, respectively;
and for the nine months ended September 30, 1998 and 1997 totaled $214,211 and
$0, respectively. At September 30, 1998, the Company was in compliance with all
covenants under the Revolving Agreement.
(7) COMMITMENTS AND CONTINGENCIES
In October 1996, the Company purchased land in Plantation, Florida to
construct facilities to accommodate executive offices and administration. In
August 1998, the facility was completed and the Company consolidated its
executive offices and administrative operations in the facility during the
fourth quarter 1998, which consists of approximately 14,000 square feet of
space. The cost of the project is estimated at $1.5 million and approximately
$223,000 has been paid as of December 31, 1997 and approximately $1,294,412 has
been paid as of September 30, 1998.
(8) RELATED PARTY TRANSACTIONS
In October 1997, the Company sold an office property to a group of
officers and shareholders. The sale price of the property was $255,000 which
generated a profit of approximately $13,000. In connection with the sale, the
Company provided seller-financing in an amount of $200,000. The note bears
interest at 8.00 percent per annum with monthly payments of principal and
interest. The note matures on October 31, 2002. The outstanding principal
balance of the note at September 30, 1998 and December 31, 1997 was $171,949 and
$197,278, respectively.
The Company also leases a second insurance agency location from
principal shareholders at a rental of $3,500 per month pursuant to a lease
expiring in May 2001. Prior to the Company's consolidation of its executive
offices and administrative operations, the Company leased two locations at a
rental of $9,150 per month from principle shareholders.
The Company believes these arrangements are on terms at least as
favorable as those the Company could secure from a nonaffiliated third party.
17
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(9) SUBSEQUENT EVENTS
The Company's Board of Directors now has the authority to issue
1,000,000 shares of preferred stock with any terms as the Board may deem
advisable.
In connection with the initial public offering consummated on November
10, 1998, the Company issued 1,250,000 shares of common stock at $7.50 per
share, generating $9,375,000 in gross proceeds before deducting the
underwriting discount, the non-accountable expense allowance and other estimated
offering expenses payable by the Company.
During the third quarter of 1998, the Board of Directors of the
Company established and approved the 1998 Stock Option Plan (the "Plan") for its
directors, officers and key employees responsible for the direction and
management of the Company and to non-employee consultants and independent
contractors. The Plan authorizes the issuance of options to purchase up to an
aggregate of 350,000 shares of common stock with vesting periods of up to four
years and maximum option terms of ten years. During the fourth quarter, options
to purchase approximately 296,600 shares of common stock were granted to
individuals defined by the Plan.
Effective November 18, 1998 the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options. In addition, the Company is aware of the pro forma information
regarding net income and earnings per share required by the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" and will include appropriate disclosure in the financial
statements for the year ended December 31, 1998.
18
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
21st Century Holding Company (the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this report or which are otherwise made
by or on behalf of the Company. For this purpose, any statements contained in
this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "would", "estimate", or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors which may affect the Company's results include, but are not
limited to, risks related to the nature of the Company's business; the limit on
the Company's ability to expand due to a consent order entered into with the
Florida Department of Insurance reinsurance; dependence on investment income;
the adequacy of its liability for loss and loss adjustment expense ("LAE");
regulation; insurance agents; claims experience; limited experience in the
insurance industry; competition; ratings by industry services; catastrophe
losses; reliance on key personnel and other risks discussed elsewhere in this
Report and in the Company's other filing with the Securities and Exchange
Commission.
OVERVIEW
The Company, through its subsidiaries, is engaged in the insurance
underwriting, distribution and claims business. Federated National Insurance
Company ("Federated National"), the Company's insurance subsidiary, generates
revenues from the collection and investment of premiums. The Company's agency
operations generate income from policy fees, commissions, premium financing
referral fees, auto tag agency fees and the marketing of ancillary services.
Federated Premium Finance, Inc. ("Federated Premium") generates revenue from
premium financing provided to Company and third party insureds. Assurance
Managing General Agents, Inc. ("Assurance MGA"), the Company's managing general
agent, generates revenue through policy fee income and other administrative fees
from the marketing of third parties' insurance products through the Company's
distribution network.
The Company's business, results of operations and financial condition
are subject to fluctuations due to a variety of factors. Abnormally high
severity or frequency of claims in any period could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, if Federated National's estimated liabilities for unpaid losses and LAE is
less than actual losses and LAE, Federated National will be required to increase
reserves with a corresponding reduction in Federated National's net income in
the period in which the deficiency is identified. The Company operates in a
highly competitive market and faces competition from both national and regional
insurance companies, many of whom are larger and have greater financial and
other resources than the Company, have favorable A.M. Best ratings and offer
more diversified insurance coverage. The Company's competitors include other
companies which market their products through agents, as well as companies which
sell insurance directly to customers.
Large national writers may have certain competitive advantages over
agency writers, including increased name recognition, increased loyalty of their
customer base and reduced acquisition costs. The Company may also face
competition from new or temporary entrants in its niche markets. In some cases,
such entrants may, because of inexperience, desire for new business or other
reasons, price their insurance below that of the Company. Although the Company's
pricing is inevitably influenced to some degree by that of its competitors,
management of the Company believes that it is generally not in the Company's
best interest to compete solely on price, choosing instead to compete on the
basis of underwriting criteria, its distribution network and superior service to
its agents and insureds. The Company competes with respect to automobile
insurance in Florida with more than 100 companies which underwrite personal
automobile insurance.
19
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
GROSS PREMIUMS WRITTEN. Gross premiums written increased 28.6% to $4.5
million for the three month period ended September 30, 1998 from $3.5 million
for the same period in 1997. The increase was mainly due to an increase in
premium volume by our Company-owned agencies of approximately $726,000 or 65.8%
from the same period in 1997. The remaining increase was due to the increase
the number of independent agents generating premiums for the Company.
NET PREMIUMS WRITTEN. Net premiums written increased 24.0% to $3.1
million for the three month period ended September 30, 1998 from $2.5 million
for the same period in 1997. The difference in growth rates for gross and net
premiums written reflects the impact of reinsurance, as $1.4 million or
31.1% of premiums written were ceded to a reinsurer for the three month period
ended September 30, 1998 compared to $1.0 million or 28.5% for the same
period in 1997.
NET PREMIUMS EARNED. Net premiums earned increased 28.6% to $3.6
million for the three month period ended September 30, 1998 from $2.8 million
for the same period in 1997.
COMMISSION INCOME. Commission income decreased 11.1% to $512,000 for
the three month period ended September 30, 1998 from $575,000 for the same
period in 1997. Commission income consists of fees earned by the Company-owned
agencies placing business with third party insurers and third party premium
finance companies. The decrease is attributable to the fact that during 1997,
premium financing was placed almost exclusively with third party companies for
which commissions were received, as compared to 1998, where premium financing
was placed substantially with Federated Premium for which no commissions are
paid.
FINANCE REVENUES. Finance revenues increased to $452,000 for the three
month period ended September 30, 1998 from approximately $66,000 for the same
period in 1997. The increase was attributable to an increase in the number of
premium contracts financed by Federated Premium. In order to terminate a premium
finance lending arrangement which was not favorable to the Company's overall
growth strategy, Federated Premium ceased all new premium financing with its
customers in July 1996 and subsequently terminated the premium finance lending
arrangement with its lender in early 1997. In September 1997, a new premium
finance lending arrangement was established and the Company recommenced its
premium financing activities.
INVESTMENT INCOME. Investment income consists of net investment income
and net realized gains (losses). Investment income decreased 13.9% to $248,000
for the three month period ended September 30, 1998 from $288,000 for the same
period in 1997. The Company experienced realized losses of ($17,000) for the
three month period ended September 30, 1998 compared to realized gains of
$12,000 for the same period in 1997.
20
<PAGE>
OTHER INCOME. Other income increased 35.4% to $386,000 for the three
month period ended September 30, 1998 from $285,000 for the same period in 1997.
Other income is comprised mainly of the managing general agent's policy fee
income on all new and renewal insurance policies, and revenue on auto tag
products.
LOSSES AND LAE. The Company's loss ratio, as determined in accordance
with Generally Accepted Accounting Principles ("GAAP"), for the three month
period ended September 30, 1998 was 62.4% compared with 72.5% for the same
period in 1997. Losses and LAE incurred increased 10.0% to $2.2 million for the
three month period ended September 30, 1998 from $2.0 million for the same
period in 1997 as compared to net premiums earned which increased by 28.6% to
$3.6 million for the three month period ended September 30, 1998 from $2.8
million for the same period in 1997. Losses and LAE, the Company's most
significant expense, represent actual payments made and changes in estimated
future payments to be made to or on behalf of its policyholders, including
expenses required to settle claims and losses. Losses and LAE are influenced by
loss severity and frequency.
OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting
expenses remained relatively constant at approximately $1.0 million for the
three month period ended September 30, 1998 and 1997.
SALARIES AND WAGES. Salaries and wages increased 26.5% to $963,000 for
the three months ended September 30, 1998 from $761,000 for the same period in
1997.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of
deferred policy acquisition costs decreased to $86,000 for the three month
period ended September 30, 1998 from $126,000 for the same period in 1997.
Amortization of deferred policy acquisition costs consists of the actual
amortization of deferred policy acquisition costs less commissions earned on
reinsurance ceded. The decrease is partly due to an increase in the ceding
commission rate provided by the reinsurer.
INCOME TAX EXPENSE. The Company's estimated effective income tax rate
was 37.8% amounting to $319,000 for the three months ended September 30, 1998
compared with an income tax benefit of $36,000 for the same period in 1997. This
increase is primarily the result of the January and February 1998 acquisitions
by the Company of certain insurance agencies and other affiliated companies
whose financial results were reported in the combined financial statements which
prior to their acquisition were S Corporations for Federal income tax purposes.
The S corporations were not taxed at the corporate level.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
GROSS PREMIUMS WRITTEN. Gross premiums written increased 33.9% to $16.6
million for the nine month period ended September 30, 1998 from $12.4 million
for the same period in 1997. The increase in gross premiums written is primarily
attributable to an increase in the number of independent agents working with the
Company from 1997 to 1998. Marketing efforts also contributed to the increase
in the amount of premiums written through independent agents to
21
<PAGE>
approximately 31.1% to $11.8 million for the nine month period ended September
30, 1998 from $9.0 million for the same period in 1997. The increase in gross
premiums written was also attributable to an increase in premiums written by
Company-owned agencies of approximately 42.4% to $4.7 million in 1998 from $3.3
million in 1997.
Net Premiums Written. Net premiums written increased 23.7% to $11.5
million for the nine month period ended September 30, 1998 from $9.3 million for
the same period in 1997. The difference in growth rates for gross and net
premiums written reflects the impact of reinsurance, as $5.1 million or
30.7% of premiums written were ceded to a reinsurer for the nine month period
ended September 30, 1998, compared to $3.1 million or 25.0% for the same
period in 1997. Net premiums written grew at a faster rate than gross premiums
written as a result of the April 1997 modification of a reinsurance agreement
wherein the percentage of future premiums written ceded was reduced to 30.0%
from 50.0%. This modification resulted in $1.3 million of gross premiums
previously ceded being refunded to the Company from the reinsurer. The refund
represented
22
<PAGE>
the 20% reduction in the ceding rate of the unearned portion of existing policy
terms. There was no effect on the net premiums earned or loss and loss
adjustment expense incurred as a result of the modification.
Net Premiums Earned. Net premiums earned increased 32.1% to $10.3
million for the nine month period ended September 30, 1998 from $7.8 million for
the same period in 1997.
Commission Income. Commission income decreased 28.6% to $1.5 million for
the nine month period ended September 30, 1998 from $2.1 million for the same
period in 1997. Commission income consists of fees earned by the Company-owned
agencies placing business with third party insurers and third party premium
finance companies. The decrease is partially attributable to a $300,000 decrease
in commissions earned on business placed with third party insurers. The
remainder of the decrease is attributable to the fact that during 1997, premium
financing was placed almost exclusively with third party companies for which
commissions were received, as compared to 1998, where premium financing was
placed substantially with Federated Premium for which no commissions are paid.
Finance Revenues. Finance revenues increased to $1,168,000 for the nine
month period ended September 30, 1998 from approximately $88,000 for the same
period in 1997. In order to terminate a premium finance lending arrangement
which was not favorable to the Company's overall growth strategy, Federated
Premium ceased all new premium financing with its customers in July 1996 and
subsequently terminated the premium finance lending arrangement with its lender
in early 1997. In September 1997, a new premium finance lending arrangement was
established and the Company recommenced its premium financing activities.
Investment Income. Investment income consists of net investment income
and net realized gains (losses). Investment income increased 61.7% to $1,143,000
for the nine month period ended September 30, 1998 from $707,000 for the same
period in 1997. The Company experienced realized gains of $372,000 for the nine
month period ended September 30, 1998 compared to realized losses of ($22,000)
for the same period in 1997.
Other Income. Other income increased 49.6% to $1,221,000 for the nine
month period ended September 30, 1998 from $816,000 for the same period in 1997.
Other income is comprised mainly of the managing general agent's policy fee
income on all new and renewal insurance policies, and revenue on auto tag
products. Policy fee income increased 38.9% to $785,000 from $ 565,000 in 1997.
In addition, auto tag income increased 240.0% to $357,000 from $105,000 in 1997.
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the nine month period ended September 30, 1998 was 67.4% compared
with 68.2% for the same period in 1997. Losses and LAE incurred increased 30.2%
to $6.9 million for the nine month period ended September 30, 1998 from $5.3
million for the same period in 1997 as compared to net premiums earned which
increased by 32.1% to $10.3 million for the nine month period ended September
30, 1998 from $7.8 million for the same period in 1997. Losses and LAE, the
Company's most significant expense, represent actual payments made and changes
in estimated future payments to be made to or on behalf of its policyholders,
including expenses required to settle claims and losses. Losses and LAE are
influenced by loss severity and frequency.
Operating and Underwriting Expenses. Operating and underwriting expenses
increased 24.0% to $3.1 million for the nine month period ended September 30,
23
<PAGE>
1998 from $2.5 million for the same period in 1997. This increase is primarily
attributable to the increase in costs associated with supporting the growth of
the Company's operations. This increase is also due to the increase in interest
expense of $267,000 for the nine month period ended September 30, 1998. This
increase is attributable to the initiation of the premium finance funding
arrangement between Federated Premium and a lender in September 1997.
Salaries and Wages. Salaries and wages increased 13.0% to $2.6 million
for the nine months ended September 30, 1998 from $2.3 million for the same
period in 1997.
Amortization of Deferred Policy Acquisition Costs. Amortization of
deferred policy acquisition costs decreased to $29,000 for the nine month period
ended September 30, 1998 from $205,305 for the same period in 1997. Amortization
of deferred policy acquisition costs consists of the actual amortization of
deferred policy acquisition costs less commissions earned on reinsurance ceded.
The decrease in the amortization of deferred policy acquisition costs is
attributable to the increase in commissions from reinsurance ceded and is also
the result of the modification of the reinsurance agreement in April 1997. Also,
contributing to the decrease was a settlement with the reinsurer on the ceding
commissions for the 1995 and 1996 underwriting years, resulting in additional
ceding commissions of $223,000.
Income Tax Expense. The Company's estimated effective income tax rate
was 37.6% for the nine months ended September 30, 1998 compared with an
estimated effective income tax rate of 18.4% for the same period in 1997. This
increase is primarily the result of the January and February 1998 acquisitions
by the Company of certain insurance agencies and other affiliated companies
whose financial results, were reported in the combined financial statements
which prior to their acquisition were S Corporations for Federal income tax
purposes. The S corporations were not taxed at the corporate level.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are revenues generated from
operations, investment income, borrowings under credit facilities and the net
proceeds of its initial public offering, consummated in November 1998. Because
the Company is a holding company, it is largely dependent upon dividends from
its subsidiaries for cash flow.
In September 1997, Federated Premium entered into the Credit Facility,
as amended, which is used to fund its operations. Each advance is subject to
availability under a borrowing base calculation based upon a percentage of
eligible accounts receivable, with maximum advances outstanding not to exceed
the maximum credit commitment of $4.0 million. The outstanding balance of the
Credit Facility as of September 30, 1998 was $3,465,766. The annual interest
rate on borrowings under the Credit Facility is the prime rate plus 1.75%. The
Credit Facility contains various operating and financial covenants and is
collateralized by a first lien and assignment of all of Federated Premium's
finance contracts receivable. Federated Premium was in compliance with all
covenants under the Credit Facility as of September 30, 1998. The Credit
Facility expires on September 30, 2000.
The Company is also party to a $400,000 line of credit which expires on
December 30, 1998. The line of credit has an annual interest rate at 1.25% over
the lender's variable base rate. The line was fully utilized and outstanding at
September 30, 1998. These funds were used for a November 1997 acquisition of an
unaffiliated agency. This line of credit was repaid in full with a portion of
the proceeds of the Company's November 1998 initial public offering.
For the 9-month period ended September 30, 1998, operations generated
operating cash flow of $609,000, and operating cash flow is expected to be
positive in both the short-term and reasonably foreseeable future. In addition,
the Company's investment portfolio is highly liquid as it consists almost
entirely of readily marketable securities.
In November 1998, the Company consummated an initial public offering of
1,250,000 shares of Common Stock at $7.50 per share, generating $9.375 million
in gross proceeds before deducting the underwriting discounts, the
non-accountable expense allowance and other estimated offering expenses payable
by the Company.
The Company believes that its current capital resources, will be
sufficient to support current operations and expected growth through at least
the year 2000.
In October 1996, Federated National purchased land in Plantation,
Florida to construct a headquarters building. In August 1998, the building was
completed and the Company consolidated its executive offices and administrative
operations in the building during the fourth quarter 1998, which consists of
approximately 14,000 square feet. The cost of the project was approximately $1.5
million of which approximately $1,294,412 has been paid as of September 30,
1998.
25
<PAGE>
To retain its certificate of authority, the Florida insurance laws and
regulations require that Federated National maintain capital surplus equal to
the greater of 10.0% of its liabilities or the 1997 statutory minimum capital
and surplus requirement of $2.1 million as defined in the Florida Insurance
Code. The Company is also required to adhere to prescribed premium-to-capital
surplus ratios. The Company is in compliance with these requirements.
The maximum amount of dividends which can be paid by Florida insurance
companies without prior approval of the Florida Insurance Commissioner is
subject to restrictions relating to statutory surplus. The maximum dividend that
may be paid in 1998 by the Company without prior approval is limited to the
lesser of statutory net income from operations of the preceding calendar year or
10.0% of statutory unassigned capital surplus as of the preceding December 31,
and amounted to $0 at December 31, 1997.
The Company is party to a consent order with the Florida Department of
Insurance which limits the amount of premiums it can underwrite in 1998 and
1999.
The Company is required to comply with the risk-based capital
requirements of the National Association of Insurance Commissioners ("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
September 30, 1998, based on calculations using the appropriate NAIC formula,
the Company's total adjusted capital is in excess of ratios which would require
any form of regulatory action. GAAP differs in some respects from reporting
practices prescribed or permitted by the Florida Department of Insurance.
Federated National's statutory capital surplus was approximately $4,112,265 as
of December 31, 1997 and $4,514,071 as of September 30, 1998. Statutory net
income was $493,089 for the year ended December 31, 1997 and $1,006,964 for the
nine months ended September 30, 1998.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated and combined financial statements and related data
presented herein have been prepared in accordance with GAAP which requires the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The primary assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a more significant
impact on the Company's performance than the effects of the general levels of
inflation. Interest rates do not necessarily move in the same direction or with
the same magnitude as the cost of paying losses and LAE.
Insurance premiums are established before the Company knows the amount
of loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the
26
<PAGE>
Company's investment portfolio and the investment rate of return. Any future
economic changes which result in prolonged and increasing levels of inflation
could cause increases in the dollar amount of incurred loss and LAE and thereby
materially adversely affect future liability requirements.
YEAR 2000 MATTERS
In 1996, the Company began converting its computer systems to be year
2000 compliant. The Company has evaluated its internal systems, both hardware
and software, facilities, and interactions with business partners in relation to
year 2000 issues. As of December 31, 1997, the Company believes that it had
completed its efforts to bring the systems in compliance. The total cost
incurred during the year ended December 31, 1997 to modify these existing
systems, which include both internal and external costs of programming, coding
and testing, was not material. The Company continually evaluates computer
hardware and software upgrades and, therefore, many of the costs to replace
existing items with year 2000 compliant upgrades are not likely to be
incremental costs to the Company. During 1998, the Company will continue to
contact its business partners (including agents, banks, motor vehicle
departments and rating agencies) to determine the status of their compliance and
to assess the impact of noncompliance on the Company. The Company believes that
it is taking the necessary measures to mitigate issues that may arise relating
to the year 2000. Contingency plans are being developed in the event that any
significant suppliers, customers or internal systems are not compliant. To the
extent that any additional issues arise, the Company will evaluate the impact
on its business, results of operations and financial condition and, if
material, make the necessary disclosures and take appropriate remedial action.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
None.
ITEM 2
CHANGES IN SECURITIES
(a) Use of Proceeds
On November 5, 1998, the U.S. Securities and Exchange Commission
declared effective the Company's Registration Statement on Form SB-2 (SEC File
Number 333-63623). The offering of the securities (the "IPO") registered
pursuant to the Registration Statement also commenced on November 5, 1998. The
IPO terminated after the sale of 1,250,000 shares of the Company's Common Stock
for $7.50 per share. The managing underwriter for the IPO was Gilford
Securities Incorporated.
The Company incurred expenses of $1.5 million in connection with the
IPO. These expenses represented direct payments to others and not direct or
indirect payments to directors or officers of the Company or to persons owning
more than 10% of any class of securities of the Company. Net proceeds from the
IPO were $7.9 million and are being used for a contribution to Federated
National's capital, a repayment of the Credit Facility, to finance acquisitions
and the remainder for working capital and general corporate purposes. None of
the payments from the use of proceeds were made to officers, directors or
persons owning more than 10% of any class of securities of the Company.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
None.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Financial Data Schedule: Ex. 27
(b) None
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
21ST CENTURY HOLDING COMPANY
DATE: DECEMBER 21, 1998 By: /s/ Edward J. Lawson
---------------------------------
Title: President
29
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 482,400
<SECURITIES> 16,568,498
<RECEIVABLES> 6,786,023
<ALLOWANCES> (58,900)
<INVENTORY> 0
<CURRENT-ASSETS> 31,551,511
<PP&E> 1,772,087
<DEPRECIATION> (249,991)
<TOTAL-ASSETS> 33,073,607
<CURRENT-LIABILITIES> 25,944,178
<BONDS> 15,410,445
0
72,500
<COMMON> 1,085,553
<OTHER-SE> 7,129,429
<TOTAL-LIABILITY-AND-EQUITY> 33,073,607
<SALES> 0
<TOTAL-REVENUES> 15,246,643
<CGS> 0
<TOTAL-COSTS> 10,108,655
<OTHER-EXPENSES> 2,656,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 267,023
<INCOME-PRETAX> 2,481,023
<INCOME-TAX> 933,086
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,547,937
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
