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 MARCH 31, 1999,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________.
Commission file number 0-2500111
21st Century Holding Company
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(Exact name of registrant as specified in its charter)
FL 65-0248866
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(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 [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE:
COMMON STOCK PAR VALUE $.01 PER SHARE - 3,390,000 SHARES OUTSTANDING AS OF MAY
7, 1999.
1
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21ST CENTURY HOLDING COMPANY
INDEX
PART I: FINANCIAL INFORMATION PAGE
- ----------------------------- ----
ITEM 1:
Consolidated Balance Sheets
as of March 31, 1999 (Unaudited)
and December 31, 1998 (Audited)....................................... 3
Consolidated Statements of Income
for the three months ended March 31, 1999 (Unaudited)
and 1998 (Unaudited).................................................. 4
Consolidated Cash Flow Statements
for the three months ended March 31, 1999 (Unaudited)
and 1998 (Unaudited).................................................. 5
Notes to Consolidated Financial Statements................................. 6
ITEM 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations..................... 9
PART II: OTHER INFORMATION
Other Information.......................................................... 13
Signature.................................................................. 14
2
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PART I
ITEM I. FINANCIAL INFORMATION
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31,1998
<S> <C> <C>
ASSETS
Available for sale at fair value:
Investments
Fixed maturities $ 14,401,115 $ 14,605,582
Equity securities 2,736,527 2,936,520
Mortgage loan 0 163,164
------------ ------------
Total investments 17,137,642 17,705,266
------------ ------------
Cash and cash equivalents 1,257,019 2,250,061
Finance contracts receivable
and auto title
loans receivable, net of
allowances for credit losses of $200,736
and $195,883 respectively 8,392,354 7,093,593
Prepaid reinsurance premiums 2,995,436 2,648,098
Due from reinsurers 1,680,527 1,926,736
Deferred acquisition costs 68,375 89,524
Deferred income taxes 1,070,285 1,085,255
Property, Plant and Equipment net 2,358,660 1,763,254
Other assets 1,145,705 866,335
Goodwill 3,064,358 2,748,281
------------ ------------
TOTAL ASSETS $ 39,170,361 $ 38,176,403
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 7,227,965 $ 7,603,460
Unearned premiums 9,613,791 8,534,320
Premium deposit 14,139 492,422
Revolving credit outstanding 3,001,563 2,062,948
Bank overdraft 937,976 1,199,941
Unearned commissions 743,613 586,592
Accounts payable and accrued expenses 1,133,523 1,932,950
Notes payable 500,000 500,000
Drafts payable to insurance companies 365,830 295,947
------------ ------------
TOTAL LIABILITIES $ 23,538,400 $ 23,208,580
============ ============
Shareholders' equity:
Common stock of $.01 par value
Authorized 25,000,000 shares
issued and outstanding 3,390,000
and 2,100,000 shares, 33,900 33,500
respectively
Additional paid in capital 12,739,887 12,460,287
Accumulated other comprehensive income (482,815) (257,227)
Retained earnings 3,340,989 2,731,263
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 15,631,961 14,967,823
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 39,170,361 $ 38,176,403
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
<S> <C> <C>
REVENUES:
Gross premiums written 6,061,463 6,108,719
Gross premiums ceded (1,915,380) (1,714,099)
---------- ----------
Net premiums written 4,146,083 4,394,620
Increase in unearned premiums, net
of prepaid reinsurance premiums (732,134) (765,633)
---------- ----------
Net premiums earned 3,413,949 3,628,987
Commission income 905,606 404,122
Finance revenue 794,822 289,134
Net investment income 227,885 302,605
Net realized (losses) gains 173,066 318,529
Other income 513,683 371,897
---------- ----------
Total revenue 6,029,011 5,315,274
---------- ----------
Expenses:
Losses and loss adjustment expenses 1,937,529 2,467,486
Operating and underwriting expenses 1,461,419 969,145
Salaries and wages 1,613,835 831,793
Amortization of deferred acquisition costs (73,257) 50,275
Amortization of goodwill 124,472 51,172
---------- ----------
Total expenses 5,063,998 4,369,871
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Income before provision for income
tax expense (benefit) 965,013 945,403
Provision for income tax expense 355,287 354,526
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Net income 609,726 590,877
========== ==========
Net income per share 0.18 0.28
========== ==========
Net income per share-
assuming dilution 0.18 0.28
========== ==========
Weighted average number of
common shares outstanding 3,390,000 2,100,000
Weighted average number of
common shares outstanding 3,390,000 2,100,000
(assuming dilution)
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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21ST CENTURY HOLDING COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
<S> <C> <C>
Cash flow from operating activities:
Net income $ 609,726 $ 590,877
============ ============
Adjustments to reconcile net income to
net cash flow used in operating activities:
Amortization of investment premiums 395 3,863
Depreciation and amortization 25,706 5,157
Amortization of goodwill 124,473 51,172
Deferred income tax expense 14,970 672,896
Loss (gain) on sale of investment securities (173,066) (318,529)
Provision for credit losses 119,852 0
Changes in operating assets and liabilities:
Finance contracts receivable and auto
title loan receivable (1,418,613) (1,550,541)
Prepaid reinsurance premiums (347,338) (340,502)
Due from reinsurers 246,209 (172,866)
Deferred acquisition costs 21,149 (15,150)
Other assets (279,368) (239,185)
Unpaid loss and loss adjustment expenses (375,495) 391,548
Unearned premiums 1,079,471 1,106,136
Premium deposit (478,283) (13,898)
Revolving credit outstanding 938,615 1,300,744
Unearned commissions 157,021 (14,055)
Accounts payable and accrued expenses (799,427) (73,591)
Drafts payable to insurance companies 69,883 (131,399)
------------ ------------
Net cash flow (used in) provided by
operating activities (464,120) 1,252,677
------------ ------------
Cash flow from investing activities:
Proceeds from sale of investment
securities available for sale 7,977,683 14,897,417
Purchases of investment securities
available for sale (7,626,141) (14,901,307)
Cost of mortgage loan 0 (119,481)
Sale of mortgage loan 163,164 9,698
Purchases of property and equipment (621,112) (203,595)
Acquisition of agencies (160,551) 0
------------ ------------
Net cash flow used in
investing activities (266,957) (317,268)
------------ ------------
Cash flows from financing activities
Bank overdraft (261,965) (730,289)
Borrowing from bank 0 11,000
------------ ------------
Net cash flow used in
financing activities (261,965) (719,289)
------------ ------------
Net increase decrease in
cash & cash equivalents (993,042) 216,120
Cash & cash equivalents at beginning of year 2,250,061 1,684,451
------------ ------------
Cash & cash equivalents at end of year $ 1,257,019 $ 1,900,571
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest $ 51,044 $ 54,869
============ ============
Income taxes $ 950,000 $ 0
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
The accompanying unaudited consolidated financial statements of 21st
Century Holding Company (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
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 three-month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. These consolidated financial statements and notes should be
read in conjunction with the financial statements and notes included in the
audited consolidated financial statements of the Company for the year ended
December 31, 1998 included in the 1998 Annual Report, Form 10-KSB filing.
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 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 $995,000. 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.
In November 1998, the company consummated an initial public offering
(the "IPO") of 1,250,000 shares of its Common Stock at a price of $7.50 per
share. Proceeds from the IPO, which were approximately $7.9 million net of
underwriting costs and expenses of the offering, have been and are being used
for contributions to Federated National's capital, repayment of debt under the
Company's credit facility (the "Credit Facility"), the financing of
acquisitions, working capital and other general corporate purposes.
In December 1998, the Company consummated an asset acquisition of 18
agencies in exchange for $1.1 million in cash and a $500,000 note payable. The
aggregate acquisition price was allocated to the net identifiable assets based
on their fair value. The allocation of acquisition price to net identifiable
assets had an excess of fair value over the new adjusted book basis creating
goodwill of approximately $1.4 million.
In January 1999, the company consummated an asset acquisition of 2
agencies in exchange for $176,000 in cash and 40,000 shares of common stock. The
aggregate acquisition price was allocated to the net identifiable assets based
on their fair value. The allocation of acquisition price to net identifiable
assets had an excess of fair value over the new adjusted book basis creating
goodwill of approximately $456,000.
6
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED 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 ($225,588) and ($312,764) for three months ended March 31, 1999 and
1998, respectively. Total comprehensive income was $384,138 and $278,113 for the
three months ended March 31, 1999 and 1998, respectively.
(C) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires all derivatives to be recognized at fair value as either assets or
liabilities on the balance sheet. Any gain or loss resulting from changes in
such fair value is required to be recognized in earnings, to the extent the
derivatives are not effective as hedges. This statement is effective for fiscal
years beginning after June 15, 1999, and is effective for interim periods in the
initial year of adoption. Adoption of this statement is not expected to have a
material impact on the Company's results of operations or financial position.
(D) ACCOUNTING CHANGES
Effective January 1, 1999, the Company adopted Statement of Position
97-3, "Accounting by Insurance and Other Enterprises for Insurance Related
Assessments", which requires entities to recognize liabilities for insurance
related assessments when such assessments are probable and the amount of the
assessments can be reasonably estimated. Adoption of this statement did not
impact the Company's results of operations of financial position.
(3) 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 $4.0 million. The amount of an
advance is subject to availability under a borrowing base calculation, with
maximum advances outstanding not to exceed the maximum credit commitment. In
January 1999, the maximum credit commitment was increased to $5.0 million and
the annual interest rate was changed to the prime rate plus .75 percent.
(4) RELATED PARTY TRANSACTIONS
In January 1999, the Company purchased two office properties from
officers, which have been utilized for agencies' operations. One of the
properties had previously been sold to the officers at the same sales price,
resulting in no gain or loss to the officer. Consideration for both acquisitions
was cash of $442,000 and satisfaction of mortgage loan receivable of $163,000.
(5) SEGMENT INFORMATION
The Company and its subsidiaries operate principally in two business
segments consisting of insurance and financing. The insurance segment consist of
underwriting through Federated National, managing general agent through
Assurance MGA, claims processing through Superior Adjusting and marketing and
distribution through Federated Agency Group. The insurance segment sells
primarily nonstandard personal automobile insurance and includes substantially
all aspects of the insurance, distribution and claims process. The financing
segment consists of premium financing through Federated Premium Finance and auto
title loans through Florida State Discount Auto Title Loans. The financing
segment provides premium financing to both Federated National's insureds and to
third-party insureds and short-term auto title loans and is marketed through the
Company's distribution network of Company-owned agencies (Federated Agency
Group) and independent agents.
7
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
(5) SEGMENT INFORMATION (CONTINUED)
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates its
business segments based on GAAP pretax operating earnings.
Corporate overhead expenses are not allocated to business segments.
Operating segments that are not individually reportable are included in
the "All Other" category, which includes the operations of 21st Century (holding
company).
Information regarding components of operations for the three month period ending
March 31, 1999 and 1998 follows:
1999 1998
---- -----
Total Revenue
Insurance Segment
Earned Premiums 3,413,949 3,628,986
Investment Income 425,905 621,134
Adjusting Income 227,045 214,887
MGA Fee Income 250,677 265,800
Commission Income 1,445,553 724,504
Miscellaneous Income 243,507 24,564
------------ ------------
Total Insurance Revenue 6,006,636 5,479,875
============ ============
Financing Segment:
Premium Finance Income 685,572 289,134
Title Loan Interest 109,250 0
Investment Income 0 0
Miscellaneous Income 0 0
------------ ------------
Total Financing Revenues 794,822 289,134
============ ============
All Other
Total All Other 418,420 93,000
============ ============
Total Operating Segments 7,219,878 5,862,009
Intercompany Eliminations (1,190,867) (546,735)
------------ ------------
Total Revenues $ 6,029,011 $ 5,315,274
============ ============
Earnings Before Income Taxes
Insurance Segment 905,737 937,790
Financing Segment 314,801 111,437
All Other (262,633) (103,824)
------------ ------------
Total Operating Segments 957,905 945,403
Intercompany Eliminations 7,108 0
------------ ------------
Total Earnings before Income Taxes $ 965,013 $ 945,403
============ ============
Total Assets
Insurance Segment $ 28,201,402 $ 23,629,552
Finance Segment 8,506,007 3,906,534
All Others 5,865,125 1,364,168
------------ ------------
Total Operating Segments 42,572,534 28,900,254
Intercompany Eliminations (3,403,173) (695,496)
------------ ------------
Total Assets $ 39,170,361 $ 28,204,758
============ ============
8
<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.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
GROSS PREMIUMS WRITTEN. Gross premiums written, inclusive of the Company's
participation in the "Florida Joint Underwriting Association" (FJUA), remained
relatively constant at approximately $6.1 million for the three month period
ended March 31, 1999 and 1998. Gross premiums written, excluding the Company's
participation in the FJUA increased 8.9% to $6.1 million in the first three
months of 1999 from $5.6 million for the same period in 1998. Participation in
the FJUA for the first three months in 1999 was ($91,000) compared to $498,000
for the same period in 1998. Increase in gross premiums written by the Company
was mainly due to the increase in the number of company-owned agencies which
increased to 36 from 14 for the same period last year.
NET PREMIUMS WRITTEN. Net premiums written, inclusive of FJUA, decreased 6.82%
to $4.1 million for the three-month period ended March 31, 1999 from $4.4
million for the same period in 1998. Net premiums written, excluding FJUA,
increased 7.69% to $4.2 million in the first three months of 1999 from $3.9
million for the same period in 1998. Net written premiums for FJUA for the first
three months in 1999 were ($91,000) compared to $498,000 for the same period in
1998. Increase in net premiums written by the Company was mainly due to the
increase in the number of company-owned agencies.
NET PREMIUMS EARNED. Net premiums earned, inclusive of FJUA, decreased 5.55% to
$3.4 million for the three-month period ended March 31, 1999 from $3.6 million
for the same period in 1998. Net premiums earned, excluding FJUA, increased
12.9% to $3.5 million for the first three months of 1999 from $3.1 million for
the same period in 1998. Net earned premiums for FJUA for the first three months
in 1999 was ($63,000) compared to $453,000 for the same period in 1998. Increase
in net premiums written by the Company was mainly due to the increase in the
number of company-owned agencies.
COMMISSION INCOME. Commission income increased 124.0% to $905,000 for the
three-month period ended March 31, 1999 from $404,000 for the same period in
1998. Commission income consists of fees earned by the Company-owned agencies
placing business with third party insurers and third party premium finance
companies. The increase is attributable to the increase in Company-owned
agencies, which amounted to 36 owned during the first quarter of 1999, compared
to 14 agencies for the same period in 1998.
FINANCE REVENUES. Finance revenues increased 175.08% to $795,000 for the
three-month period ended March 31, 1999 from approximately $289,000 for the same
period in 1998. The increase was attributable to an increase in the number of
premium contracts financed by Federated Premium.
INVESTMENT INCOME. Investment income consists of net investment income and net
realized gains (losses). Investment income decreased 35.4% to $401,000 for the
three-month period ended March 31, 1999 from $621,000 for the same period in
1998. The Company experienced realized gains of $173,000 for the three-month
period ended March 31, 1999 compared to realized gains of $319,000 for the same
period in 1998.
OTHER INCOME. Other income increased 38.2% to $514,000 for the three-month
period ended March 31, 1999 from $372,000 for the same period in 1998. Other
income is comprised mainly of the managing general agent's policy fee income on
all new and renewal insurance policies, income tax preparation, and revenue on
auto tag products. Income tax preparation was implemented during 1999. Total
income derived under this product during the three-month period of 1999 was
$148,000.
LOSSES AND LAE. The Company's loss ratio, as determined in accordance with
Generally Accepted Accounting Principles ("GAAP"), for the three month period
ended March 31, 1999 was 56.8% compared with 68% for the same period in 1998.
Losses and LAE incurred decreased 24% to $1.9 million for the three-month period
ended March 31, 1999 from $2.5 million for the same period in 1998. Losses and
LAE, the Company's most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. Losses
and LAE are influenced by loss severity and frequency. An increase in the net
earned premiums relating to the mobile home program and a decrease in the loss
ratio, 7.86% at March 31, 1999 compared to 81.24% for the same period last year
contributed to the decrease in the Company's loss ratio for this period. In
addition, the automobile program experienced a decrease of 5.72% in the loss
ratio, caused mainly by the increase in company-owned policies sold, which
historically has experienced a lower loss ratio.
OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting expenses
increased 54.8% to $1.5 million for the three-month period ended March 31, 1999
from $969,000 for the same period in 1998. The increase is due to the increase
in Company-owned agencies from 14 during the first quarter of 1998 to 36 in
1999. During the last quarter of 1998 and first quarter of 1999, the Company
acquired 22 agencies. The increase in the number of company-owned agencies had
an impact in the total operating expenses during the first quarter of 1999.
10
<PAGE>
SALARIES AND WAGES. Salaries and wages increased 92.3% to $1.6 million for the
three months ended March 31, 1999 from $832,000 for the same period in 1998. The
increase is due to the increase in the number of Company-owned agencies from 14
during the first quarter of 1998 to 36 in 1999.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred
policy acquisition costs decreased to ($73,000) for the three-month period ended
March 31, 1999 from $50,000 for the same period in 1998. Amortization of
deferred policy acquisition costs consists of the actual amortization of
deferred policy acquisition costs less commissions earned on reinsurance ceded.
The decrease is partly due to an increase in premiums written by the
Company-owned agencies to $2.5 million of premiums written for the three-month
period ended in March 31, 1999 from $1.5 million for the same period in 1998.
INCOME TAX EXPENSE. The Company's estimated effective income tax rate was 37%
amounting to $355,000, for the three months ended March 31, 1999 compared to
37.5% amounting to $355,000 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are revenues generated from
operations, the net proceeds of its initial public offering, investment income
and borrowings under the credit facility. Because the Company is a holding
company, it is largely dependent upon dividends from its subsidiaries for cash
flow.
In November 1998, the company generated net proceeds of approximately
$7.9 million from the IPO in which it sold 1,250,000 shares of Common Stock at a
price of $7.50 per share. The net proceeds of the IPO have been and are being
used for contributions to Federated National's capital, repayment of debt under
the Credit Facility, the finance of acquisitions and working capital and other
general corporate purposes.
Federated Premium is party to the credit facility (the "Credit
Facility"), which is used to fund its operations. Each advance is subject to
availability under a borrowing base calculation based upon a percentage of
eligible accounts receivable, with maximum advances outstanding not to exceed
the maximum credit commitment which is currently $5.0 million, increased from
$4.0 million pursuant to a modification effective January 25, 1999. The
outstanding balance of the Credit Facility as of March 31, 1999 was $3.0
million. The annual interest rate on borrowings under the Credit Facility is
currently the prime rate plus .75%,decreased from the prime rate plus 1.75% due
to the January 1999 modification. The Credit Facility contains various operating
and financial covenants and is collateralized by a first lien and assignment of
all of Federated Premium's finance contracts receivable. Federated Premium was
in compliance with all covenants under the Credit Facility as of March 31, 1999.
The Credit Facility expires on September 30, 2000 at which time it is
anticipated that a new agreement will be negotiated.
In October 1996, Federated National purchased land in Plantation,
Florida to construct a headquarters building. In August 1998, the building was
completed and the Company consolidated its executive offices and administrative
operations in the building, which consists of approximately 14,000 square feet.
The cost of the project was approximately $1.4 million.
To retain its certificate of authority, the Florida insurance laws and
regulations require that Federated National maintain capital surplus equal to
the greater of 10.0% of its liabilities or the 1998 statutory minimum capital
and surplus requirement of $2.25 million as defined in the Florida Insurance
Code. The Company is also required to adhere to prescribed premium-to-capital
surplus ratios. The Company is in compliance with these requirements.
The Company is party to the consent order which limits the amount of
premiums it can underwrite in 1998 and 1999.
11
<PAGE>
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 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 March 31, 1999, the Company believes that it has
completed its efforts to bring the systems in compliance. The total cost
incurred during the year ended December 31, 1998 and quarter ended March 31,
1999 to modify these existing systems, which include both internal and external
costs of programming, coding and testing, was not material. The Company
continually evaluates computer hardware and software upgrades and, therefore,
many of the costs to replace existing items with year 2000 compliant upgrades
are not likely to be incremental costs to the Company. During 1999, the Company
continues to contact its business partners (including agents, banks, motor
vehicle departments and rating agencies) to determine the status of their
compliance and to assess the impact of noncompliance on the Company. The Company
believes that it is taking the necessary measures to mitigate issues that may
arise relating to the year 2000. To the extent that any additional issues arise,
the Company will evaluate the impact on its business, results of operations and
financial condition and, if material, make the necessary disclosures and take
appropriate remedial action.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
None.
ITEM 2
CHANGES IN SECURITIES
None.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
None.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Financial Data Schedule: Ex. 27 (SEC use only)
(b) None
13
<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: MAY 7, 1999 By: /s/ Edward J. Lawson
------------------------
Title: President
14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,257,019
<SECURITIES> 17,137,642
<RECEIVABLES> 10,273,617
<ALLOWANCES> (200,736)
<INVENTORY> 0
<CURRENT-ASSETS> 33,747,342
<PP&E> 2,651,847
<DEPRECIATION> (293,187)
<TOTAL-ASSETS> 39,170,361
<CURRENT-LIABILITIES> 23,538,400
<BONDS> 14,401,115
0
0
<COMMON> 33,900
<OTHER-SE> 15,598,061
<TOTAL-LIABILITY-AND-EQUITY> 39,170,361
<SALES> 0
<TOTAL-REVENUES> 6,029,011
<CGS> 0
<TOTAL-COSTS> 3,398,948
<OTHER-EXPENSES> 1,612,140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,910
<INCOME-PRETAX> 965,013
<INCOME-TAX> 355,287
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 609,726
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
