21ST CENTURY HOLDING CO, 10KSB40, 2000-03-31

21ST CENTURY HOLDING CO
10KSB40, 2000-03-31
FIRE, MARINE & CASUALTY INSURANCE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)

( x ) Annual Report under Section 13 or 15(d) of the Securities Act of 1934
For the fiscal year ended December 31, 1999
-----------------

( ) Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period of _____________to_______________

Commission file number 0-2500111

21st Century Holding Company

(Name of Small Business Issuer as specified in its Charter)

FL 65-0248866
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)

4161 N.W. 5th Street Plantation, Florida 33317
----------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)

Registrant's telephone number, including area code (954) 581-9993
-------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter periods 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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10KSB
or any amendment to this Form 10-KSB. [ X ]

State issuer's revenues for its most recent fiscal year: $25,377,454
-----------

The aggregate market value of the Issuer's Common Stock, $.01 par value, held by
non-affiliates on March 29, 2000, based on the last sale price of the Common
Stock as reported by the Nasdaq National market was: $9,455,715.

As of March 29, 2000 there were 3,385,000 shares of the issuer's Common Stock,
$.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

<PAGE>

FORWARD-LOOKING STATEMENTS

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 losses and 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
filings with the Securities and Exchange Commission the ("Commission"). See
"Glossary of Selected Terms" at the end of Item 1 for definition of insurance
terms used in this report.

PART I
------
ITEM 1. BUSINESS
- --------------------------

GENERAL

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 underwrites
nonstandard and standard personal automobile insurance and mobile home property
and casualty insurance in the State of Florida through its subsidiary, Federated
National Insurance Company ("Federated National"). The Company has underwriting
authority for third-party insurance companies which it represents through a
wholly-owned managing general agent, Assurance Managing General Agents, Inc.
("Assurance MGA"). The Company internally processes claims made by Federated
National's insureds through a wholly-owned claims adjusting company, Superior
Adjusting, Inc. ("Superior). The Company also offers premium financing to its
own and third-party insureds through its wholly-owned subsidiary, Federated
Premium Finance, Inc. ("Federated Premium"), and offers consumer loans through
its wholly-owned subsidiary, RPA Financial Corporation ("RPA Financial"), and
pay advances through Fed First Corp ("Fed First").

The Company markets and distributes Federated National's and
third-party insurers' products and its other services primarily in South
Florida, through a network of 38 Company-owned agencies and approximately 500
active independent agents. The Company believes that it can be distinguished
from its competitors because it generates revenue from substantially all aspects
of the insurance underwriting, distribution and claims process. The Company
provides quality service to both its agents and insureds by utilizing an
integrated computer system, which links the Company's insurance and service
entities. The Company's computer and software systems allow for rapid automated
premium quotation, policy issuance, billing and payment and claims processing
and enable the Company to continuously monitor substantially all aspects of its
business. Using these systems, the Company's agents can access a customer's
driving record, quote a premium, offer premium financing and, if requested,
generate a policy on-site. The Company believes that these systems have
facilitated its ability to market and underwrite insurance products on a
cost-efficient basis, and that they will enhance the Company's ability to expand
to other regions in Florida and to other states.

The Company's primary product is nonstandard personal automobile
insurance, which is principally provided to insureds who are unable to obtain
preferred or standard insurance coverage because of their payment history,
driving record, age, vehicle type or other factors, including market conditions
for preferred or standard risks. Underwriting standards for preferred or
standard insurance coverage have

<PAGE>

become more restrictive, thereby requiring more drivers to seek coverage in the
nonstandard automobile insurance market. These factors have contributed to an
increase in the size of the nonstandard personal automobile insurance market.
Based on information provided by A.M. Best, a leading rating agency for the
insurance industry, from 1993 to 1997, the nonstandard personal automobile
insurance market in the United States grew from approximately $14.2 billion to
approximately $22.0 billion in annual premium volume and from approximately
15.1% to approximately 19.2% of the total personal automobile insurance market.
Also, according to A.M. Best, from 1993 to 1997, annual premium volume in the
nonstandard personal automobile insurance market in Florida grew from
approximately $1.5 billion to approximately $2.6 billion and from approximately
27.8% to approximately 35.6% of the total personal automobile insurance market
in Florida.

The Company's executive offices are located at 4161 N.W. 5th Street,
Plantation, Florida and its telephone number is (954) 581-9993.

RECENT DEVELOPMENTS

In January 1999, the Company consummated an asset acquisition of two
agencies in exchange for $212,000 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 $512,000.

In February 1999, the Company launched FedFirst, a program for
marketing insurance directly to Florida consumers through a television, radio
and billboard advertising campaign and an Internet web site.

In June 1999, the Company consummated an asset acquisition of three
agencies in exchange for $130,000 in cash and a note payable in the amount of
$300,000. The aggregate acquisition price was allocated to the net identifiable
assets based on their fair value. The allocation of acquisition price to net
identifiable assets had an excess of fair value over the new adjusted book basis
creating goodwill of approximately $430,000.

In July 1999, the Company repurchased 40,000 shares of its outstanding
common stock for $200,000.

In August 1999, the Company acquired 80% of the outstanding stock of
Express Tax and Insurance Service, Inc., a licensor of tax return preparation
software, in exchange for $100,000 in cash and 20,000 shares of common stock.
The aggregate acquisition price was allocated to the net identifiable assets
based on their fair value. The allocation of acquisition price to net
identifiable assets had an excess of fair value over the new adjusted book basis
creating goodwill of approximately $215,000.

In September 1999, the Company filed applications with the Office of
Thrift Supervision (the "OTS") to become a savings and loan holding company and
to organize a federal savings bank (together, the "OTS Applications"). The
Company filed an application with the FDIC in February 2000 to obtain deposit
insurance (the "FDIC Application").

BUSINESS STRATEGY

The Company's strategy is to seek continued growth of its business by
capitalizing on the efficiencies of its vertical integration and

o selectively expand the Company's product offerings by underwriting
additional insurance products and programs such as standard automobile
insurance, commercial vehicle insurance and homeowners' insurance, and
marketing these products and programs through its distribution network;

o expanding direct marketing of insurance products to customers through
mailings, media advertising and the Internet;

<PAGE>

o maintaining a commitment to provide quality service to its agents and
insureds by emphasizing customer service;

o expanding the financial products and services the Company offers by
organizing the Bank;

o encouraging agents to place a high volume of quality business with the
Company by providing them with attractive commission structures tied to
premium levels and loss ratios;

o identifying and reviewing opportunities to acquire additional insurers; and

o employing the business practices developed and used in Florida to
ultimately expand to other selected states.

INSURANCE OPERATIONS

UNDERWRITING

General The Company underwrites its nonstandard and standard personal
automobile insurance mobile home property insurance and casualty insurance
through Federated National. Federated National is licensed to conduct business
only in Florida.

In connection with the Company obtaining approval from the Florida
Department of Insurance to underwrite mobile home insurance, the Company entered
into a consent order with the Florida Department of Insurance (the "Consent
Order"), which limits the amount of premiums it may underwrite. Consent orders,
are normally entered into by an insurance company with the Florida Department of
Insurance when an insurance company desires to underwrite a new product. In
1998, Federated National was only permitted to underwrite $21.0 million in gross
premiums written and $14.0 million in total net premiums written. In 1999, this
limit increased to $24.0 million and $15.0 million, respectively. Federated
National is also required to maintain a minimum capital surplus to support its
underwriting program. In 1998 and 1999, Federated National is also required to
have capital surplus of $4.7 million and $5.9 million, respectively. The premium
limits and capital surplus requirements impact Federated National's potential
growth. Federated National's potential to exceed the premium limits and capital
surplus requirements is great and its ability to exceed these requirements will
be subject to the prior approval of the Florida Department of Insurance. The
Florida Department of Insurance has indicated in writing its willingness to
modify the Consent Order and increase Federated National's underwriting
authority. At December 31, 1999, Federated National's capital surplus was $7.1
million. The Consent Order expired at December 31, 1999.

The following tables set forth the amount and percentages of Federated
National's gross premiums written and premiums ceded to reinsurers and net
premiums written by line of business for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
PREMIUM PERCENT PREMIUM PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Written:
Nonstandard Automobile........................ $16,779 87.1% $19,062 89.9%
Mobile Home................................... 2,495 12.9 2,133 10.1
------- ----- ------- -----
Total Written................................ 19,274 100.0% 21,195 100.0%
Ceded:
Nonstandard Automobile........................ (5,058) 81.3% (5,698) 85.3%
Mobile Home................................... (1,164) 18.7 (930) 14.7
------- ----- ------- -----
Total Ceded................................... (6,222) 100.0% (6,628) 100.0%
Net:
Nonstandard Automobile........................ 11,721 89.8% 13,364 92.1%
Mobile Home................................... 1,331 10.2 1,203 7.9
------- ----- ------- -----
Total Net....................................... $13,052 100.0% $14,567 100.0%
======= ===== ======= =====
</TABLE>

<PAGE>

Nonstandard Automobile. Nonstandard personal automobile insurance is
principally provided to insureds who are unable to obtain standard insurance
coverage because of their payment history, driving record, age, vehicle type or
other factors, including market conditions. Underwriting standards for preferred
and standard coverage have become more restrictive, thereby requiring more
insureds to seek nonstandard coverage and contributing to increase in the size
of the nonstandard automobile market. Nonstandard automobile insurance, however,
generally involves the potential for increased loss exposure and higher claims
experience. Loss exposure is limited because premiums usually are at higher
rates than those charged for standard insurance coverage and because
approximately 30% of the policies issued by Federated National provide the
minimum coverage required of the policyholder by statute and provide no bodily
injury coverage. Federated National currently underwrites nonstandard personal
automobile insurance in Florida, where the minimum limits are $10,000 per
individual, $20,000 per accident for bodily injury, $10,000 per accident for
property damage and comprehensive and $50,000 for collision. The average annual
premium on policies currently in force is approximately $650. Federated National
underwrites this coverage on an annual and semi-annual basis.

Due to the purchasing habits of nonstandard automobile insureds (for
example, insureds seeking the least expensive insurance required of the
policyholder by statute which satisfies the requirements of state laws to
register a vehicle), policy renewal rates tend to be low compared to standard
policies. Federated National's experience has been that a significant number of
existing policyholders allow their policies to lapse and then reapply for
insurance as new policyholders. Federated National's average policy renewal rate
is 35.0%. The success of Federated National's nonstandard automobile insurance
program, therefore, depends in part on its ability to replace non-renewing
insureds with new policyholders through marketing efforts.

The Company markets Federated National's nonstandard personal
automobile coverage primarily through its network of Company-owned agencies and
independent agents. The Company also markets its insurance on a limited basis
directly to insureds through its FedFirst direct advertising program.

The Company emphasizes customer service to both its agents and insureds
by utilizing an integrated computer system which links all of the Company's
insurance and service entities. The Company's computer and software systems
allow for rapid automated premium quotation, policy issuance, billing and
payment and claims processing and enable the Company to monitor substantially
all aspects of its business. This system enables the Company's agents to rapidly
access the customer's driving record, quote a premium and, if requested,
generate the policy on-site.

The Company is focusing its efforts on further penetrating the Florida
nonstandard personal automobile insurance market. Ultimately, the Company
intends to expand to other selected states. The Company will select states for
expansion based on a number of criteria, including the size of the personal
automobile insurance market, statewide loss results, competition and the
regulatory climate. The Company's ability to expand into other states will be
subject to the prior regulatory approval of each state. Certain states impose
seasoning requirements upon licensee applicants, which, due to the Company's
limited operating history, may impose burdens on the Company's ability to obtain
a license to conduct insurance business in those other states. There can be no
assurance that the Company will be able to obtain the required licenses, and the
failure to do so would limit the Company's ability to expand geographically.

Standard Automobile. Standard personal automobile insurance is
principally provided to insureds that present an average risk profile in terms
of payment history, driving record, vehicle type and other factors. As part of
its expansion strategy, in August 1998, Federated National commenced
underwriting standard personal automobile insurance. Limits on standard personal
automobile insurance are generally significantly higher than those for
nonstandard coverage, but typically provide for deductibles and other
restrictive terms. Federated National is initially underwriting standard
personal automobile insurance policies providing coverage no higher than
$100,000 per individual, $300,000 per accident for bodily injury, $50,000 per
accident for property damage and comprehensive and collision up to $50,000 per
accident, with deductibles ranging from $200 to $1,000. The Company is marketing
Federated National's standard personal automobile insurance through its network
of Company-owned agencies and independent

<PAGE>

agents and directly to insureds through its FedFirst direct advertising program.

Mobile Home. In 1997, Federated National commenced underwriting
homeowners insurance for mobile homes, principally in Central and Northern
Florida, where the Company believes that the risk of catastrophe loss from
hurricanes is less than in other areas of the state. Homeowners' insurance
generally protects an owner of real or personal property against covered causes
of loss to that property. Homeowners' insurance for mobile homes generally
involves the potential for above-average loss exposure. In the absence of major
catastrophe losses, loss exposure is limited because premiums usually are at
higher rates than those charged for non-mobile home property and casualty
insurance. Additionally, Federated National's property lines typically provide
maximum coverage in the amount of $75,000, with the average policy limit being
approximately $31,000. In addition, the Company presently intends to limit its
mobile home coverage to no more than 10% of its underwriting exposure. The
average annual premium on policies currently in force is approximately $379 and
the typical deductible is $500. As the Company-owned agencies are located
primarily in South Florida, the Company markets Federated National's mobile home
property and casualty insurance through independent agents in Central and
Northern Florida.

Homeowners. Federated National will commence underwriting homeowners'
insurance in the year 2000 principally in Central and Northern Florida.
Homeowners' insurance generally protects an owner of real of personal property
against covered causes of loss to that property. Limit on homeowners' insurance
is generally significantly higher than those for homeowners' insurance for
mobile homes, but typically provide for deductibles and other restrictive terms.
Federated National's property lines typically provide maximum coverage in the
amount of $150,000, with the average policy limit being approximately $100,000.
In addition, the Company presently intends to limit its homeowners' coverage to
no more than 10% of its underwriting exposure. The Company anticipates that the
average annual premium on policies will be approximately $900 and the typical
deductible will be $500. The Company will market Federated National's
homeowners' insurance through its network of Company-owned agencies and
independent agents and directly to insureds through its FedFirst direct
advertising program.

Future Products. The Company intends to expand its product offerings by
underwriting additional insurance products and programs and marketing them
through its distribution network. During 2000, the Company intends to expand its
product of commercial vehicle insurance. Expansion of the Company's product
offerings will result in an increase in expenses due to additional costs
incurred in additional actuarial rate justifications, software and personnel.
Future products may require regulatory approval. There can be no assurance that
the Company can successfully obtain the necessary regulatory approval and
underwrite and profitably market and distribute any of these products.

Assurance MGA

Assurance MGA acts as Federated National's managing general agent.
Assurance MGA currently provides all underwriting policy administration,
marketing, accounting and financial services to Federated National and the
Company's agencies and participates in the negotiation of reinsurance contracts.

Assurance MGA has established a relationship with and has underwriting
authority for Gainsco, Inc. for commercial property and casualty lines, Lloyds
of London for various other insurance products, American Colonial Insurance
Company and State National for automobile insurance. Assurance MGA also
generates revenue through policy fee income and other administrative fees from
the marketing of these companies' products through the Company's distribution
network. Assurance MGA plans to establish relationships with additional carriers
and add additional insurance products.

Superior

The Company internally processes claims made by Federated National's
insureds through Superior. The Company-owned agencies and independent agents
have no authority to settle claims or otherwise exercise control over the claims
process. Management believes that the employment of salaried claims personnel,
as opposed to independent adjusters, results in reduced ultimate loss payments,
lower LAE and improved customer service. The Company only retains independent
appraisers and adjusters on

<PAGE>

an as needed basis. Superior currently handles claims for State National and
American Vehicle.

Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon receipt,
each claim is reviewed and assigned to an adjuster based on the type and
severity of the claim. All claims-related litigation is monitored by Company
personnel. The claims policy of the Company emphasizes prompt and fair
settlement of meritorious claims and the establishment of appropriate liability
for claims. The Company believes that the internal processing of claims enables
it to provide quality customer service while controlling claims adjustment
expenses.

Federated Premium

Federated Premium provides premium financing to both Federated
National's insureds and to third-party insureds. Premium financing is marketed
through the Company's distribution network of Company-owned agencies and
independent agents. Lending operations are supported by Federated Premium's own
capital base and are currently leveraged through the Credit Facility.

Premiums for property and casualty insurance are typically payable at
the time a policy is placed in force or renewed. Federated Premium's services
allow the insured to pay a portion of the premium when the policy is placed in
force and the balance in monthly installments over the life of the policy. As
security, Federated Premium retains a contractual right, if a premium
installment is not paid when due, to cancel the insurance policy and to receive
the unearned premium from the insurer, or in the event of insolvency of an
insurer, from the Florida Guarantee Association, subject to a $100 per policy
deductible. In the event of cancellation, Federated Premium applies the unearned
premium towards the payment obligation of the insured. As part of its premium
financing offered to third-party insureds, Federated Premium may advance funds
for financed premiums to independent insurance agencies who represent
third-party insurers. If remittance is not made by the agency to the third-party
insurer, advances made by Federated Premium may only be recoverable to the
extent that the agency's receipt of such advances is received by the third-party
insurer. Premium financing which the Company offers to its own insureds involves
limited credit risk.

The following table sets forth the amount and percentages of premiums
financed for Federated National and other insurers for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
--------------------- ----------------------
PREMIUMS PERCENT PREMIUMS PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federated National......................... $12,338 46.8% $11,843 60.5%
Other insurers............................. 14,035 53.2 7,728 39.5
------- ----- ------- -----
Total................................... $26,373 100.0% $19,571 100.0%
======= ===== ======= ======
</TABLE>

Consumer Loans and Payday Advances

In August 1999, the Company began offering consumer loan services, which
are short-term (one year) loans secured by free and clear automobile titles,
through its agency network. These loans bear interest rates, ranging up to 30%
per year. The underwriting criteria for loans is that the consumer must have
acceptable credit or an indication that the consumer is working towards having
acceptable credit and that the automobile has sufficient value. In August 1999,
the Company also began to offer payday advances, in which the Company advances
up to $1,000 to a customer for a maximum of ten days. The Company charges the
customer 9% of the amount advanced plus a fee of $5 per advance.

Tax Preparation Services and Ancillary Services

The Company also offers other services at its agencies including tax return
preparation and electronic filing and the issuance and renewal of license tags.
In August 1999, the Company acquired an 80% interest in Express Tax Service.
Express Tax Service licenses tax return preparation software to over 300
agencies throughout the United States and also earns fees on all electronically
filed returns. Express Tax Service previously licensed its software to the
Company's agencies and will continue to do so in the future.

<PAGE>

MARKETING AND DISTRIBUTION

Company-employed and independent agents have the authority to sell and
bind insurance coverages in accordance with procedures established by Assurance
MGA. Assurance MGA reviews all coverages bound by the agents promptly and
generally accepts all coverages, which fall within stated underwriting criteria.
Assurance MGA also has the right within a period of 60 days from a policy's
inception to cancel any policy upon 45 days' notice, even if the risk falls
within its underwriting criteria.

The Company believes that its integrated computer system, which allows
for rapid automated premium quotation and policy issuance by its agents, is a
key element in providing quality service to both its agents and insureds. For
example, upon entering a customer's basic personal information, the customer's
driving record is accessed and a premium rate is quoted. If the customer chooses
to purchase the insurance, the system generates the policy on-site.

The Company believes that its distribution system will ultimately
enable it to lower its expense ratio and operate with more favorable loss
experience. A lower expense ratio will, in turn, allow the Company to more
effectively compete with larger providers of nonstandard automobile and other
forms of insurance.

The following table sets forth the amount and percentages of insurance
premiums written through Company-owned agencies and independent agents for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
---- ----
PREMIUMS PERCENT PREMIUMS PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Through Company-owned agencies......................... $7,929 41.1% $ 7,846 37.0%
Through independent agents............................. 11,345 58.9 13,349 63.0
------ ----- ------- ----
Total............................................... $19,274 100.0% $$21,195 100.0%
======= ====== ======== =====
</TABLE>

In the future the Company plans to continue to expand its distribution
network and market its products and services in other regions of Florida by
acquiring additional insurance agencies and establishing relationships with
additional independent agents. Ultimately, as the Company expands its insurance
operations to other states, the Company will seek to replicate its distribution
network in those states. There can be no assurance that the Company will be able
to obtain the required regulatory approvals to offer additional insurance
products or expand into states other than Florida.

REINSURANCE

Federated National follows the customary industry practice of
reinsuring a portion of its risks and paying for that protection based upon
premiums received on all policies subject to such reinsurance. Reinsurance
involves an insurance company transferring or "ceding" all or a portion of its
exposure on insurance underwritten by it to another insurer, known as a
"reinsurer." The reinsurer assumes a portion of

<PAGE>

the exposure in return for a portion, or quota share, of the premium, and pays
the ceding company a commission based upon the amount of insurance ceded. The
ceding of insurance does not legally discharge the insurer from its primary
liability for the full amount of the policies. If the reinsurer fails to meet
its obligations under the reinsurance agreement, the ceding company is still
required to pay the loss.

Reinsurance is ceded under separate contracts or "treaties" for the
separate lines of business underwritten. The Company ceded $6.2 million in
premiums written for the year ended December 31, 1999. Federated National's
reinsurance for automobile insurance is primarily ceded with Transatlantic Re,
an A++ rated reinsurance company. Federated National cedes 30% of automobile
premiums written to Transatlantic Re. Federated National maintains reinsurance
contracts for mobile home insurance with A rated reinsurers including
Transatlantic Re. Federated National cedes 40% of mobile home premiums written
to Transatlantic Re and Everest Reinsurance Company ("Everest Re"). Everest Re
is an A rated reinsurance company. The reinsurance program renews annually,
although the Company continually reviews the program and may elect to change it
more frequently. Reinsurance is placed directly by the Company and through
national reinsurance intermediaries.

The Company is selective in choosing a reinsurer and considers numerous
factors, the most important of which is the financial stability of the
reinsurer, its history of responding to claims and its overall reputation. In an
effort to minimize its exposure to the insolvency of a reinsurer, the Company
evaluates the acceptability and reviews the financial condition of the reinsurer
at least annually. The Company's current policy is to use only reinsurers that
have an A.M. Best rating of "A (Excellent)" or better.

LIABILITY FOR UNPAID LOSSES AND LAE

The Company is directly liable for loss and LAE payments under the
terms of the insurance policies that it writes. In many cases, several years may
elapse between the occurrence and reporting of an insured loss, the reporting of
the loss to the Company and the Company's payment of that loss. As required by
insurance regulations and accounting rules, the Company reflects its liability
for the ultimate payment of all incurred losses and LAE by establishing a
liability for those unpaid losses and LAE for both reported and unreported
claims, which represent estimates of future amounts needed to pay claims and
related expenses.

When a claim involving a probable loss is reported, the Company
establishes a liability for the estimated amount of the Company's ultimate loss
and LAE payments. The estimate of the amount of the ultimate loss is based upon
such factors as the type of loss, jurisdiction of the occurrence, knowledge of
the circumstances surrounding the claim, severity of injury or damage, potential
for ultimate exposure, estimate of liability on the part of the insured, past
experience with similar claims and the applicable policy provisions.

All newly reported claims received with respect to nonstandard personal
automobile policies are set up with an initial average liability. The average
liability for these claims are determined every quarter by dividing the number
of closed claims into the total amount paid during the three-month period. If a
claim is open more than 30 days, that open case liability is evaluated and the
liability is adjusted upward or downward according to the facts and damages of
that particular claim.

In addition, management provides for a liability on an aggregate basis
to provide for IBNR. The Company utilizes independent actuaries to help
establish its liability for unpaid losses and LAE. The Company does not discount
the liability for unpaid losses and LAE for financial statement purposes.

The estimates of the liability for unpaid losses and LAE are subject to
the effect of trends in claims severity and frequency and are continually
reviewed. As part of this process, the Company reviews historical data and
considers various factors, including known and anticipated legal developments,
changes in social attitudes, inflation and economic conditions. As experience
develops and other data become available, these estimates are revised, as
required, resulting in increases or decreases to the existing liability for
unpaid losses and LAE. Adjustments are reflected in results of operations in the
period in which they

<PAGE>

are made and the liabilities may deviate substantially from prior estimates.

Among the classes of insurance underwritten by the Company, the
automobile and mobile home liability claims historically tend to have longer
time lapses between the occurrence of the event, the reporting of the claim to
the Company and the final settlement than do automobile physical damage and
mobile home property claims. Liability claims often involve parties filing suit
and therefore may result in litigation. By comparison, property damage claims
tend to be reported in a relatively shorter period of time and settle in a
shorter time frame with less occurrence of litigation.

There can be no assurance that the Company's liability for unpaid
losses and LAE will be adequate to cover actual losses. If the Company's
liability for unpaid losses and LAE proves to be inadequate, the Company will be
required to increase the liability with a corresponding reduction in the
Company's net income in the period in which the deficiency is identified. Future
loss experience substantially in excess of established liability for unpaid
losses and LAE could have a material adverse effect on the Company's business,
results of operations and financial condition.

The following table sets forth a reconciliation of beginning and ending
liability for unpaid losses and LAE as shown in the Company's consolidated
financial statements for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at January 1 $7,603 $6,726

Less reinsurance recoverables.................... (2,237) (2,091)
------ ------
Net balance at January 1........................ $5,366 $4,635
====== ======

Incurred related to:
Current year..................................... $8,764 $9,404
Prior years...................................... (670) (271)
------ -----
Total incurred.................................. $8,094 $9,133
====== ======

Paid related to:
Current year..................................... $5,552 $5,699
Prior years...................................... 3,480 2,703
------ -----
Total paid...................................... $9,032 $8,402
====== ======

Net balance at end of period....................... $4,428 $5,366
Plus reinsurance recoverables.................... 1,886 2,237
------ -----
Balance at end of period........................ $6,314 $7,603
====== ======
</TABLE>

As shown above, as a result of the Company's review of its liability
for losses and LAE, which includes a re-evaluation of the adequacy of reserve
levels for prior year's claims, the Company reduced its' liability for loss and
LAE for claims occurring in prior years by $670,000 and $271,000 for the years
ended December 31, 1999 and 1998, respectively. Management does not expect
reserve reductions to continue at these levels in 2000, and there can be no
assurance concerning future adjustments of reserves, positive or negative, for
claims through December 31, 1999.

The automobile program experienced a decrease in the loss ratio,
caused mainly by the increase in policies sold by Company-owned agencies, which
historically has experienced a lower loss ratio. In addition, the loss ratio
reflects a reduction of the incurred loss and LAE expense $670,000 relating
to prior years. This reduction is principally the result of the Company's effort
to settle claims more quickly and better than anticipated results on settled
claims.

Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and LAE, the Company
believes that the liability for unpaid losses and LAE is adequate to cover all
claims and related expenses which may arise from incidents reported and IBNR.

<PAGE>

The following table presents total unpaid loss and LAE, net and total
reinsurance recoverables shown in the Company's consolidated financial
statements for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>

Loss and LAE, net.......................................... $3,124 $3,488
IBNR, net.................................................. 1,304 1,878
----- -----

Total unpaid loss and LAE, net.......................... $4,428 $5,366
====== ======

Reinsurance recoverable.................................... 1,319 1,437
IBNR recoverable........................................... 567 800
--- ---

Total reinsurance recoverable........................... $1,886 $2,237
====== ======
</TABLE>

The following table presents the liability for unpaid losses and LAE
for the Company for the years ended December 31, 1992 through 1999. The top line
of the table shows the estimated net liabilities for unpaid losses and LAE at
the balance sheet date for each of the periods indicated. These figures
represent the estimated amount of unpaid losses and LAE for claims arising in
all prior years that were unpaid at the balance sheet date, including losses
that had been incurred but not yet reported. The portion of the table labeled
"Cumulative paid as of" shows the net cumulative payments for losses and LAE
made in succeeding years for losses incurred prior to the balance sheet date.
The lower portion of the table shows the re-estimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31, (1)
----------------------------

1999 1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Liability $4,428 $5,366 $4,635 $4,532 $3,688 $3,355 $2,507 $611

Cumulative paid as of:
One year later................................ 3,480 2,690 2,852 2,638 2,449 1,964 499
Two years later............................... 3,531 3,539 2,658 2,792 2,426 554
Three years later............................. 3,884 2,924 3,018 2,449 585
Four years later.............................. 3,061 3,114 2,529 580
Five years ................................... 3,172 2,560 583
Six years later............................... 2,601 583
Seven years later............................. 583

Re-estimated net liability as of:
End of year...................................$4,428 $5,366 $4,635 $4,532 $3,688 $3,355 $2,507 $611
One year later................................ 4,696 4,364 4,334 3,750 3,570 2,566 628
Two years later............................... 4,003 4,204 3,252 3,231 2,780 586
Three years later............................. 4,048 3,255 3,305 2,596 593
Four years later.............................. 3,129 3,289 2,619 580
Five years later.............................. 3,207 2,638 583
Six years later............................... 2,628 583
Seven years later............................. 583
Cumulative redundancy (deficiency).............. -- $670 $632 $484 $559 $148 $(121) $28
</TABLE>

(1) To evaluate the information in the table properly it should be noted
that, although the Company recorded its participation in the Florida Joint
Underwriting Association ("FJUA"), an assigned risk pool for automobile
insurance drivers, from 1992 until 1995 in its 1996 statutory financial
statements, this table properly reflects the Company's participation in the
FJUA in the corresponding years.

<PAGE>

The cumulative redundancy or deficiency represents the aggregate change
in the estimates over all prior years. A deficiency indicates that the latest
estimate of the liability for losses and LAE is higher than the liability that
was originally estimated and a redundancy indicates that such estimate is lower.
It should be emphasized that the table presents a run-off of balance sheet
liability for the periods indicated rather than accident or policy loss
development for those periods. Therefore, each amount in the table includes the
cumulative effects of changes in liability for all prior periods. Conditions and
trends that have affected liabilities in the past may not necessarily occur in
the future.

Underwriting results of insurance companies are frequently measured by
their Combined Ratios. However, investment income, Federal income taxes and
other non-underwriting income or expense are not reflected in the Combined
Ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are considered profitable when the Combined Ratio is under 100% and
unprofitable when the Combined Ratio is over 100%.

The following table sets forth Loss Ratios, Expense Ratios and Combined
Ratios for the periods indicated for the insurance business of Federated
National. The ratios, inclusive of ULAE expenses, are shown in the table below,
and are computed based upon SAP. The expense ratios include management fees paid
to 21st Century Holding Company in the amount of $1.0 million and $480,000 in
1999 and 1998, respectively.

YEARS ENDED DECEMBER 31,
1999 1998
---- ----

Loss Ratio........................... 67% 72%
Expense Ratio........................ 38 24
-- --

Combined Ratio....................... 105% 96%
==== ===

INVESTMENTS

The Company's investment objective is to maximize total rate of return
after Federal income taxes while maintaining liquidity and minimizing risk. The
Company's current investment policy limits investment in non-investment grade
fixed maturity securities (including high-yield bonds), and limits total
investments in equity securities and mortgage notes receivable to approximately
17% and 1%, respectively, of total consolidated investments. The Company also
complies with applicable laws and regulations, which further restrict the type,
quality and concentration of investments. In general, these laws and regulations
permit investments, within specified limits and subject to certain
qualifications, in Federal, state and municipal obligations, corporate bonds,
preferred and common equity securities and real estate mortgages.

The Company's investment policy is established by the Board of
Directors and is reviewed on a regular basis. Pursuant to this investment
policy, as of December 31, 1999, approximately 80.2% of the Company's
investments were in investment-grade fixed income securities and short-term
investments, which are considered to be either available for sale or held to
maturity, based upon the Company's intent at the time of purchase. Fixed
maturities are considered available for sale and are marked to market. The
Company may in the future also consider fixed maturities to be held to maturity
and carried at amortized cost. The Company does not use any material swaps,
options, futures or forward contracts to hedge or enhance its investment
portfolio.

The Company's investment portfolio is managed by the Company's
Investment Committee consisting of the Company's President, the President of
Federated National and one outside advisor, in accordance with guidelines
established by the Florida Department of Insurance.

<PAGE>

The table below sets forth investment results for the periods indicated.
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,
1999 1998
---- ----
(DOLLARS IN THOUSANDS)

<S> <C> <C>
Interest on fixed maturities............................... $777 $878
Dividends on equity securities............................. 72 94
Interest on short-term investments......................... 23 3
Other...................................................... 5 24
- --

Total investment income.................................... 877 999
Investment expense......................................... (23) (15)
---- ----
Net investment income...................................... $854 $984
==== ====

Net realized gain.......................................... $952 $442
==== ====
</TABLE>

The following table summarizes, by type, the investments of the Company as of
December 31, 1999.
<TABLE>
<CAPTION>

CARRYING PERCENT
AMOUNT OF TOTAL
------ --------
(DOLLARS IN THOUSANDS)
Fixed maturities, at market:
<S> <C> <C>
U.S. government agencies and authorities $0 0%
Obligations of states and political subdivisions 9,154 65.7
Corporate securities.............................................................. 1,768 12.7
Collateralized mortgage obligations................................................ 248 1.8
------ ----

Total fixed maturities 11,170 80.2
------ ----

Equity securities, at market.......................................................2,627 18.9
Mortgage notes receivable......................................................... ..119 .9
------ ----

Total investments...............................................................$13,916 100%
======= ====
</TABLE>

Fixed maturities are carried on the Company's balance sheet at market. At
December 31, 1999, fixed maturities had the following quality ratings (by
Moody's Investors Service, Inc. ("Moody's") and for securities not assigned a
rating by Moody's, by Standard and Poor's Corporation):

CARRYING PERCENT OF
AMOUNT TOTAL
------ -----
(DOLLARS IN THOUSANDS)
AAA................... $4,307 38.6%
AA.................... 2,503 22.4
A..................... 1,887 16.9
BBB................... 2,045 18.3
BB++.................. 180 1.6
Unrated............... 248 2.2
------- ------
$11,170 100.0%
======= ======

<PAGE>

The following table summarizes, by maturity, the fixed maturities of the Company
as of December 31, 1999.
<TABLE>
<CAPTION>

CARRYING PERCENT OF
AMOUNT TOTAL
------ -----
(DOLLARS IN THOUSANDS)
Matures In:
<S> <C> <C>
One year or less..................................... $0 0%
One year to five years............................... 0 0
Five years to 10 years............................... 1,547 13.8
More than 10 years................................... 9,623 86.2
------- -------

Total fixed maturities........................... $11,170 100.0%
======== =======
</TABLE>

At December 31, 1999, the average maturity of the fixed maturities portfolio was
approximately 17 years.

COMPETITION

The Company operates in a highly competitive market and faces
competition from both national 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 their
customers. Large national writers may have certain competitive advantages over
agency writers, including increased name recognition, increased loyalty of their
customer base and reduced policy acquisition costs. 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 the pricing structure 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. Companies of comparable or smaller size which
compete with the Company in the nonstandard automobile insurance industry
include Fortune Insurance Company, U.S. Security Insurance Company, United
Automobile Insurance Company, Direct General Insurance Company and Security
National, as well as major insurers such as Progressive Casualty Insurance
Company. Competition could have a material adverse effect on the Company's
business, results of operations and financial condition.

REGULATION

General

The Company is subject to the laws and regulations in Florida and will
be subject to the laws and regulations of any other states in which it seeks to
conduct business in the future. The regulations cover all aspects of its
business and are generally designed to protect the interests of insurance
policyholders, as opposed to the interests of shareholders. Such regulations
relate to authorized lines of business, capital and surplus requirements,
allowable rates and forms (particularly for the nonstandard auto segment),
investment parameters, underwriting limitations, transactions with affiliates,
dividend limitations, changes in control, market conduct, maximum amount
allowable for premium financing service charges, maximum amount of interest
allowable for title loans and a variety of other financial and non-financial
components of the Company's business.

In connection with the Company obtaining approval from the Florida
Department of Insurance to underwrite mobile home insurance, the Company entered
into the Consent Order with the Florida Department of Insurance which limits the
amount of premiums it may underwrite. Consent orders are

<PAGE>

normally entered into by an insurance company with the Florida Department of
Insurance when an insurance company desires to underwrite a new product. The
following addresses the statutory accounts and amounts related to the Company's
insurance subsidiary, Federated National. In 1998, Federated National was only
permitted to underwrite $21.0 million in gross premiums written and $14.0
million in total net premiums written. In 1999, Federated National is limited to
$24.0 million and $15.0 million, respectively. Federated National also is
required to maintain a minimum capital surplus to support its underwriting
program. In 1999 and 1998, Federated National was required to maintain capital
surplus of at least $5.9 million and $4.7 million, respectively. The consent
order expired on December 1999. The premium limits and capital surplus
requirements impact Federated National's potential growth. Federated National's
ability to exceed these requirements will be subject to the prior approval of
the Florida Department of Insurance. At December 31, 1999, Federated National's
capital and surplus was $7.1 million. The failure of the Company to comply with
certain provisions of applicable insurance laws and regulations could have a
material adverse effect on the Company's business, results of operations or
financial condition. In addition, any changes in such laws and regulations
including the adoption of consumer initiatives regarding rates charged for
automobile or other insurance coverage, could materially adversely affect the
operations of the Company's, ability to expand its operations. The Company,
however, is unaware of any consumer initiatives which could have a material
adverse effect on the Company's business, results of operations or financial
condition.

The State of Florida has recently adopted laws regarding personal
injury protection. The Company believes that these recently adopted laws will
not have a material adverse effect on the Company's business, results of
operations or financial condition.

Many states have also enacted laws which restrict an insurer's
underwriting discretion, such as the ability to terminate policies, terminate
agents or reject insurance coverage applications, and many state regulators have
the power to reduce, or to disallow increases in, premium rates. These laws may
adversely affect the ability of an insurer to earn a profit on its underwriting
operations.

Most states have insurance laws requiring that rate schedules and other
information be filed with the state's insurance regulatory authority, either
directly or through a rating organization with which the insurer is affiliated.
The regulatory authority may disapprove a rate filing if it finds that the rates
are inadequate, excessive or unfairly discriminatory. Rates, which are not
necessarily uniform for all insurers, vary by class of business, hazard covered,
and size of risk. The Company is permitted to file rates for nonstandard
policies which are usually higher than those charged for standard risks,
reflecting the higher probability of loss. Florida and several states have
recently adopted laws or their legislatures are considering proposed legislation
which, among other things, limit the ability of insurance companies to effect
rate increases or to cancel, reduce or non-renew insurance coverage with respect
to existing policies, particularly private passenger automobile insurance.

Most states require licensure or regulatory approval prior to the
marketing of new insurance products. Typically, licensure review is
comprehensive and includes a review of a company's business plan, solvency,
reinsurance, character of its officers and directors, rates, forms and other
financial and non-financial aspects of the Company. The regulatory authorities
may not allow entry into a new market by withholding approval or not granting a
license which, in turn, would have a material adverse effect on the Company's
ability to expand its operations.

All insurance companies must file quarterly and annual statements with
certain regulatory agencies and are subject to regular and special examinations
by those agencies. The last regulatory examination of Federated National covered
the three-year period ended on December 31, 1998. No material deficiencies were
found during this regulatory examination. In some instances, various states
routinely require deposits of assets for the protection of policyholders either
in those states or for all policyholders. As of December 31, 1999, securities
with a carrying value of approximately $488,000, were on deposit with the State
of Florida.

Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its shareholders except out of that part of
its available and accumulated capital surplus funds

<PAGE>

which is derived from realized net operating profits on its business and net
realized capital gains. A Florida domestic insurer may not make dividend
payments or distributions to shareholders without prior approval of the Florida
Department of Insurance if the dividend or distribution would exceed the larger
of (i) the lesser of (a) 10.0% of capital surplus or (b) net income, not
including realized capital gains, plus a two-year carryforward, (ii) 10.0% of
capital surplus with dividends payable constrained to unassigned funds minus 25%
of unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus
or (b) net investment income plus a three-year carryforward with dividends
payable constrained to unassigned funds minus 25.0% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department of Insurance (i) if
the dividend is equal to or less than the greater of (a) 10.0% of the insurer's
capital surplus as regards policyholders derived from realized net operating
profits on its business and net realized capital gains or (b) the insurer's
entire net operating profits and realized net capital gains derived during the
immediately preceding calendar year, (ii) the insurer will have policyholder
capital surplus equal to or exceeding 115.0% of the minimum required statutory
capital surplus after the dividend or distribution, (iii) the insurer files a
notice of the dividend or distribution with the department at least ten business
days prior to the dividend payment or distribution and (iv) the notice includes
a certification by an officer of the insurer attesting that, after the payment
of the dividend or distribution, the insurer will have at least 115.0% of
required statutory capital surplus as to policyholders. Except as provided
above, a Florida domiciled insurer may only pay a dividend or make a
distribution (i) subject to prior approval by the Florida Department of
Insurance or (ii) 30 days after the Florida Department of Insurance has received
notice of such dividend or distribution and has not disapproved it within such
time.

Under these laws, Federated National is permitted to pay dividends to
the Company in 2000 in the amount of $708,000 without prior regulatory approval.
Although the Company believes that amounts required for it to meet its financial
and operating obligations will be available, there can be no assurance in this
regard. Further, there can be no assurance that, if requested, the Florida
Department of Insurance will allow any dividends in excess of the amount to be
paid by Federated National to the Company in the future.

The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on capital surplus,
which could affect an insurer's competitive position, the amount of premiums
that can be written and the ability to pay future dividends. Further, state
insurance laws and regulations require that the statutory capital surplus of an
insurance company following any dividend or distribution by it be reasonable in
relation to its outstanding liabilities and adequate for its financial needs.

While the non-insurance company subsidiaries are not subject directly
to the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the insurance companies for service (e.g., management
fees and commissions).

In order to enhance the regulation of insurer solvency, the NAIC
enacted a model law (the "Model Law") to implement its risk-based capital
requirements for insurance companies. The Model Law became effective with
respect to property and casualty insurance companies as of year-end 1994. The
requirements are designed to assess capital adequacy and to raise the level of
protection that statutory surplus provides for policyholders. The Model Law
measures three major areas of risk facing property and casualty insurers: (i)
underwriting risks, which encompass the risk of adverse loss developments and
inadequate pricing; (ii) declines in asset values arising from credit risk; and
(iii) other business risks from investments. Insurers having less statutory
surplus than required by the Model Law will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy. The Model Law
establishes various levels of regulatory action. Based upon the 1999 statutory
financial statements for Federated National, the Company's insurance subsidiary,
Federated National's statutory surplus exceeds all regulatory action levels
established by the NAIC. The Florida Department of Insurance could require
Federated National to cease operations in the event Federated National fails to
maintain the required statutory capital.

<PAGE>

The extent of regulatory intervention and action increases as the ratio
of an insurer's statutory surplus to its Authorized Control Level ("ACL"), as
calculated under the Model Law, decreases. The first action level, the Company
Action Level, requires an insurer to submit a plan of corrective actions to the
insurance regulators if statutory surplus falls below 200.0% of the ACL amount.
The second action level, the Regulatory Action Level, requires an insurer to
submit a plan containing corrective actions and permits the insurance regulators
to perform an examination or other analysis and issue a corrective order if
statutory surplus falls below 150.0% of the ACL amount. The Authorized Control
Level, the third action level, allows the regulators to rehabilitate or
liquidate an insurer in addition to the aforementioned actions if statutory
surplus falls below the ACL amount. The fourth action level is the Mandatory
Control Level which requires the regulators to rehabilitate or liquidate the
insurer if statutory surplus falls below 70.0% of the ACL amount. Federated
National's ratio of statutory surplus to its ACL, as calculated under the Model
Law, was 370.9% at December 31, 1999 and 517.7% at December 31, 1998. Regulatory
action is triggered if surplus falls below 200.0% of the ACL amount.

The NAIC has also developed IRIS ratios to assist state insurance
departments in identifying companies which may be developing performance or
solvency problems, as signaled by significant changes in the companies'
operations. Such changes may not necessarily result from any problems with an
insurance company, but may merely indicate changes in certain ratios outside the
ranges defined as normal by the NAIC. When an insurance company has four or more
ratios falling outside "usual ranges", state regulators may investigate to
determine the reasons for the variance and whether corrective action is
warranted. As of December 31, 1999, Federated National was within all NAIC usual
ranges with respect to its IRIS tests.

Insurance Holding Company Regulation

The Company is subject to laws governing insurance holding companies in
Florida where Federated National is domiciled. These laws, among other things,
(i) require the Company to file periodic information with the Florida Department
of Insurance, including information concerning its capital structure, ownership,
financial condition and general business operations, (ii) regulate certain
transactions between the Company and its affiliates, including the amount of
dividends and other distributions and the terms of surplus notes and (iii)
restrict the ability of any one person to acquire certain levels of the
Company's voting securities without prior regulatory approval. Any purchaser of
5% or more of the outstanding shares of Common Stock of the Company will be
presumed to have acquired control of Federated National unless the Florida
Insurance Commissioner, upon application, has determined otherwise.

Finance Company Regulation

The Company's premium financing program is also subject to certain laws
governing the operation of premium finance companies. These laws pertain to such
matters as books and records that must be kept, forms, licensing, fees and
charges. For example, in Florida, the maximum late payment fee Federated Premium
may charge is the greater of $10 per month or 5% of the amount of the overdue
payment.

Underwriting and Marketing Restrictions

During the past several years, various regulatory and legislative
bodies have adopted or proposed new laws or regulations to deal with the
cyclical nature of the insurance industry, catastrophic events and insurance
capacity and pricing. These regulations include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to rescind or otherwise cancel
certain policies in mid-term, (iii) advance notice requirements or limitations
imposed for certain policy non-renewals and (iv) limitations upon or decreases
in rates permitted to be charged.

Legislation

From time to time, new regulations and legislation are proposed to
limit damage awards, to control plaintiffs' counsel fees, to bring the industry
under regulation by the Federal government, to control

<PAGE>

premiums, policy terminations and other policy terms and to impose new taxes and
assessments. It is not possible to predict whether, in what form or in what
jurisdictions, any of these proposals might be adopted, or the effect, if any,
on the Company.

Industry Ratings Services

Federated National received a B+ rating from A.M. Best during 1999.
A.M. Best's ratings are based upon factors of concern to agents, reinsurers and
policyholders and are not primarily directed toward the protection of investors.
Federated National is rated "BBB" (Adequate and Secure) by Standard and Poor's
Corporation and is rated "A" (Strong) by Demotech, Inc.

Employees

As of December 31, 1999, the Company and its subsidiaries had 251
employees, including three executive officers. The Company is not a party to any
collective bargaining agreement and has not experienced work stoppages or
strikes as a result of labor disputes. The Company considers relations with its
employees to be satisfactory.

<PAGE>

GLOSSARY OF SELECTED TERMS

Cede To transfer to an insurer or
reinsurer all or part of the
insurance written by an insurance
entity.

Ceding Commission A payment by a reinsurer
to the ceding company, generally on
a proportional basis, to compensate
the ceding company for its policy
acquisition costs.

Expense Ratio Under SAP, the ratio of
underwriting expenses to net written
premiums. On a GAAP basis, the ratio
of underwriting expenses to net
premiums earned.

Generally Accepted Accounting
Principles ("GAAP") Accounting practices and
principles, as defined principally
by the American Institute of
Certified Public Accountants, the
Financial Accounting Standards
Board, and the Commission. GAAP is
the method of accounting typically
used by the Company for reporting to
persons or entities other than
insurance regulatory authorities.

Gross Premiums Written The total of premiums received or
to be received for insurance
written by an insurer
during a specific period of time
without any reduction for
reinsurance ceded.

Hard Market The portion of the market
cycle of the property and casualty
insurance industry characterized by
constricted industry capital and
underwriting capacity, increasing
premium rates and, typically,
enhanced underwriting performance.

Incurred but not Reported
Losses ("IBNR") The estimated liability of
an insurer, at a given point in
time, with respect to losses that
have been incurred but not yet
reported to the insurer, and for
potential future developments on
reported claims.

Insurance Regulatory Information
System ("IRIS") A system of ratio analysis
developed by the NAIC primarily
intended to assist state insurance
departments in executing their
statutory mandates to oversee the
financial condition of insurance
companies.

Loss Adjustment Expense ("LAE") The expenses of investigating and
settling claims, including legal
fees, outside adjustment expenses
and other general expenses of
administering the claims adjustment
process.

Loss Ratio For SAP and GAAP, net losses
and LAE incurred, divided by net
premiums earned, expressed as a
percentage.

Loss Reserves The estimated liability of
an insurer, at a given point in
time, with respect to unpaid
incurred losses, including losses
which are IBNR and related LAE.

<PAGE>

Losses Incurred The total of all policy
losses sustained by an insurance
company during a period, whether
paid or unpaid. Incurred losses
include a provision for claims that
have occurred but have not yet been
reported to the insurer.

Model Law A Model Law to implement RBC
requirements for insurance
companies. The Model Law became
effective with respect to property
and casualty insurance companies as
of year-end 1994.

National Association of Insurance
Commissioners ("NAIC") A voluntary organization of
state insurance officials that
promulgates model laws regulating
the insurance industry, values
securities owned by insurers,
develops and modifies insurer
financial reporting, statements and
insurer performance criteria and
performs other services with respect
to the insurance industry.

Net Premiums Earned The amount of net premiums
written allocable to the
expired period of an insurance
policy or policies.

Net Premiums Written The gross premiums written
during a specific period of
time, less the portion of such
premiums ceded to (reinsured by)
other insurers.

Nonstandard Risks that generally have been found
unacceptable by standard lines
insurers for various underwriting
reasons.

Reinsurance A procedure whereby a primary
insurer transfers (or "cedes") a
portion of its risk to a reinsurer
in consideration of a payment of
premiums by the primary insurer to
the reinsurer for their assumption
of such portion of the risk.
Reinsurance can be effected by a
treaty or individual risk basis.
Reinsurance does not legally
discharge the primary insurer from
its liabilities with respect to its
obligations to the insured.

Reinsurers Insurers (known as the reinsurer or
assuming company) who agree to
indemnify another insurer (known as
the reinsured or ceding company)
against all or part of a loss which
the latter may incur under a policy
or policies it has issued.

Risk-Based Capital Requirements
("RBC") Capital requirements for property
and casualty insurance companies
adopted by the NAIC to assess
minimum capital requirements and to
raise the level of protection that
statutory surplus provides for
policyholder obligations.

Soft Market The portion of the market cycle
of the property and casualty
insurance industry characterized by
heightened premium rate competition
among insurers, increased
underwriting capacity and,
typically, depressed underwriting
performance.

Standard Automobile Insurance Personal automobile insurance
written for those individuals
presenting an average risk profile
in terms of loss history, driving
record, type of vehicle driven and
other factors.

<PAGE>

Statutory Accounting Practices
("SAP") Those accounting principles and
practices which provide the
framework for the preparation of
financial statements, and the
recording of transactions, in
accordance with the rules and
procedures adopted by regulatory
authorities, generally emphasizing
solvency consideration rather than a
going concern concept of accounting.
The principal differences between
SAP and GAAP are as follows:
(a) SAP, certain assets
(non-admitted assets) are eliminated
from the balance sheet; (b) under
SAP, policy acquisition costs are
expensed upon policy inception,
while under GAAP they are deferred
and amortized over the term of the
policies; (c) under SAP, no
provision is made for deferred
income taxes; and (d) under SAP,
certain reserves are recognized
` which are not recognized under GAAP.

Underwriting The process whereby an underwriter
reviews applications submitted for
insurance coverage and determines
whether it will provide all or part
of the coverage being requested, and
the price of such premiums.
Underwriting also includes an
ongoing review of existing policies
and their pricing.

Underwriting Expense The aggregate of policy
acquisition costs, including that
portion of general and
administrative expenses attributable
to underwriting operations.

Unearned Premiums The portion of premiums
written representing unexpired
policy terms as of a certain date.

<PAGE>

ITEM 2. PROPERTIES
- ------- ----------

The Company's agencies are located in leased locations pursuant to
leases expiring at various times through February 2016. The aggregate annual
rental for the facilities is approximately $890,000.

ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is subject to routine legal proceedings in the ordinary
course of business. The Company believes that the ultimate resolution of these
lawsuits will not have a material adverse effect on its business, financial
condition or results of operations. The Company provides for a liability for
both the amount of estimated damages attributable to these lawsuits and the
estimated costs of litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------

None

PART II
-------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
- ------- AND RELATED STOCKHOLDER MATTERS

(A) MARKET INFORMATION

The Company's Common Stock has been listed for trading on the Nasdaq
National Market under the symbol "TCHC" since November 5, 1998. These quotations
represent inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions.

Quarter Ended High Low
------------- ---- ---
December 31, 1998 $7.625 $6.500
March 31, 1999 $7.750 $5.500
June 30, 1999 $7.125 $4.500
September 30, 1999 $7.000 $5.188
December 31, 1999 $5.750 $4.125

(B) SALES OF UNREGISTERED SECURITIES

The following unregistered shares of common stock were issued in 1999:

Shares Date Reason
------ ---- -------

40,000 January 1999 Acquisition of two insurance agencies
20,000 August 1999 Acquisition of Express Insurance and Tax
Services, Inc.

No commissions were paid in connection with the foregoing sales, which were
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933.

As of March 29, 2000, there were approximately 37 holders of record
of the Company's Common Stock. The Company believes that the number of
beneficial owners of its Common Stock is in excess of 1,100.

(D) DIVIDENDS

The Company has not paid dividends on its Common Stock and anticipates that
for the foreseeable future all earnings, if any, will be retained for the
operation and expansion of the Company's business. Moreover, the ability of the
Company to pay dividends, if and when its board of directors determines to do
so, may be restricted by regulatory limits on the amount of dividends which
Federated National is permitted to pay to the Company. See Regulations in Part
I, Item I.

<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company, through its subsidiaries, is engaged in the insurance
underwriting, distribution and claims business. 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,
income tax return preparation and the marketing of ancillary services. Federated
Premium generates revenue from premium financing provided to Company and third
party insureds. 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
are 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, the
Company's management believes that it is generally not in the Company's best
interest to compete solely on price, choosing instead to compete on the basis of
underwriting criteria, its distribution network and superior service to its
agents and insureds. The Company competes with respect to automobile insurance
in Florida with more than 100 companies which underwrite personal automobile
insurance.

The Company is seeking to become a diversified financial services
company by offering other financial products and services including payday
advances, short-term consumer loans, as well as tax return preparation and
electronic filing and ancillary services. The Company also intends to
significantly expand the financial products and services it offers by
establishing a newly chartered federal savings bank, FedFirst Bank, FSB (the
"Proposed Bank"), which is intended to operate as a wholly-owned subsidiary of
the Company. There can be no assurance that the Company will be able to obtain
the required regulatory approvals to operate the Proposed Bank.

<PAGE>

ANALYSIS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1999 AS COMPARED TO DECEMBER 31, 1998

Investments. Investments decreased $3.8 million to $13.9 million as of
December 31, 1999 as compared to $17.7 million as of December 31,1998. This
decrease in investments is due to a decline in the market value of investments
which resulted in the net unrealized loss in the portfolio of $2.0 million,
liquidation to fund loss and LAE of $1.3 million and payment of accrued income
taxes of $1.7 million.

Cash and cash equivalents. Cash and cash equivalents were $923,000 as
of December 31, 1999, as compared to $2.3 million as of December 31,1998. This
decrease of $1.4 million is due primarily to payment of income taxes.

Finance contracts, consumer loans receivable and pay advance
receivable. Finance contracts receivable, consumer loans and pay advance
receivable increased $2.5 million from $7.1 million at December 31, 1998 to $9.6
million at December 31, 1999. This increase is due to the continued development
and emphasis on these products.

Prepaid reinsurance premiums. Prepaid reinsurance premiums remained
constant at $2.6 million.

Premiums Receivable. At December 31, 1999, the Company had $1.3 million
in premiums receivable compared to none at December 31, 1998. Prior to 1999, the
Company did not write policies unless the premium was paid in cash. Beginning in
1999, the Company revised its policy and began billing premiums for certain
customers.

Due from Reinsurers. Due from reinsurers decreased $256,000 to $1.7
million as of December 31, 1999 from $1.9 million as of December 31,1998. This
decrease is the result of the Company's effort to process insurance policies
more quickly and, consequently, the faster ceding of policies to reinsurance
companies and quicker collection from reinsurers.

Deferred Income Taxes. The increase of $700,000 in the deferred income
taxes from $1.1 million as of December 31, 1998 to $1.8 million as of December
31, 1999 is due primarily to the deferred tax asset associated with the
unrealized loss on investments available for sale.

Property, plant and equipment. The increase in property, plant and
equipment of $751,000 to $2.5 million as of December 31, 1999 from $1.8 million
as of December 31, 1998 is due primarily to the purchase of two office
properties for $605,000.

Goodwill. Goodwill increased $654,000 to $3.4 million as of December
31, 1999 from $2.7 million as of December 31, 1998 due to the purchase of seven
agencies and Express Insurance and Tax Services, Inc.

Unpaid losses and LAE. Unpaid losses and LAE decreased $1.3 million
from $7.6 million as of December 31, 1998 to $6.3 million as of December 31,
1999 due primarily to an improvement in loss experience in 1999 as well as an
effort by the Company to expedite the processing of claims.

Unearned Premiums. Unearned premiums decreased $497,000 to $8.0 million
as of December 31, 1999 from $8.5 million as of December 31, 1998. This decrease
is the result of the decline in written premiums.

Revolving Credit Outstanding. The outstanding borrowings under the
Company's Credit Facility increased $2.6 million to $4.7 million as of December
31, 1999 from $2.1 million as of December 31, 1998 primarily to fund the
increase of $2.3 million in finance contracts receivables. In addition,
approximately $1.2 million was used to reduce an intercompany note to Federated
National, which in turn was used to reduce accounts payable and accrued
expenses.

<PAGE>

Accounts payable and accrued expenses. Accounts payable and accrued
expenses declined $1.4 million from $1.9 million as of December 31, 1998 to
$500,000 as of December 31, 1999 due primarily to the payment of 1998 income
taxes of $1.7 million.

Accumulated other comprehensive deficit. Accumulated other
comprehensive deficit increased $988,000 to $1.2 million as of December 31, 1999
from $257,000 as of December 31, 1998 primarily because the net unrealized loss
on the available for sale investment portfolio increased $1.6 million. The
increase in the net unrealized loss on the available for sale investment
portfolio was principally due to the recent increases in interest rates.

RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Net income per share. Net income per share decreased from $.78 for the
twelve-month period ended December 31, 1998 to $.46 for the twelve-month period
ended December 31, 1999. Net income per share was reduced by an increase in the
weighted average number common shares outstanding during 1999 due primarily to
the issuance of 1,250,000 shares in the initial public offering in November
1998.

Net income. Net income was $1,567,000 for 1999 compared to
$1,817,000 for 1998. Total revenues and total expenses increased by
$4.7 million and $5.2 million, respectively. The increase in total revenues and
the increase in total expenses are primarily the result of an increase in
Company-owned agencies from 33 at December 31, 1998 to 38 at December 31, 1999.

Revenue. Total revenue increased $4.7 million, or 22.7%, from $20.7
million in 1998 to $25.4 million in 1999. This increase is primarily due to
increases in commission income of $2.2 million, finance revenue of $1.9 million,
net realized gains of $510,000 and other income of $589,000.

Net premiums earned. Net premiums earned decreased $500,000 during 1999
compared to 1998. While the Company had more Company-owned agencies and was
offering mobile home policies, premiums earned did not increase because the
Company chose not to lower premiums in order to maintain its margin, in a highly
competitive market with declining prices.

Commission income. Commission income increased 120.0% to $4.4 million
1999 from $2.0 million in 1998. Commission income consists of fees earned by the
Company-owned agencies placing business with third-party insurers and
third-party premium finance companies. The increase is attributable to the
increase in Company-owned agencies.

Finance Revenues. Finance revenues increased 105.6% to $3.7 million for
1999 from approximately $1.8 million in 1998. The increase was attributable to
an increase in the number of premium contracts financed by Federated Premium.

Net investment income. Net investment income decreased 13.2% to
$854,000 for 1999 from $984,000 in 1998 due primarily to a decrease in
investments. The Company experienced net realized gains of $952,000 in 1999
compared to realized gains of $442,000 in 1998.

Other income. Other income increased 42.9% to $2.0 million for 1999
from $1.4 million 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 revenue derived under this product during
1999 was $172,000.

<PAGE>

Expenses. Total expenses increased $5.2 million, or 28.9%, from $18.0
million in 1998 to $23.0 million in 1999. This increase is primarily due to
increases in operating and underwriting expenses of $2.7 million, salaries and
wages of $3.4 million and amortization of goodwill of $308,000 partially offset
by decreases in losses and LAE of $1.0 million and amortization of deferred
acquisition costs of $198,000.

Losses and LAE. The Company's loss ratio for 1999 was 60.2% compared
with 65.4% in 1998. Losses and LAE incurred decreased 11.0% to $8.1 million for
1999 from $9.1 million in 1998. Losses and LAE, the Company's most significant
expense, represent actual payments made and changes in estimated future payments
to be made to or on behalf of its policyholders, including expenses required to
settle claims and losses. Losses and LAE are influenced by loss severity and
frequency. The automobile program experienced a decrease in the loss ratio,
caused mainly by the increase in policies sold by Company-owned agencies, which
historically has experienced a lower loss ratio. In addition, the loss ratio
reflects a reduction of the incurred loss and LAE expense $670,000 relating to
prior years. This reduction is principally the result of the Company's effort to
settle claims more quickly and better than anticipated results on settled
claims.

Operating and underwriting expenses. Operating and underwriting
expenses increased 62.8% to $7.0 million in 1999 from $4.3 million for the same
period in 1998. The increase is due to the increase in Company-owned agencies
from 15 during most of 1998 to 38 in 1999. During the last quarter of 1998 and
the first and second quarter of 1999, the Company acquired a total of 23
agencies.

Salaries and wages. Salaries and wages increased 87.5% to $7.5 million
for 1999 from $4.0 million in 1998, primarily due to the increase in
Company-owned agencies.

Amortization of deferred policy acquisition costs. Amortization of
deferred policy acquisition costs decreased to a credit of $18,000 in 1999 from
$179,000 in 1998. Amortization of deferred policy acquisition costs consists of
the actual amortization of deferred policy acquisition costs less commissions
earned on reinsurance ceded. The decrease is due to a decrease in premiums
written by independent agencies.

Income Tax Expense. The Company's effective income tax rate was 30.3%
for 1999 compared to 34.7% in 1998. The decline in the effective tax rate is
attributable to a higher percentage of tax-exempt interest in 1999.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of capital are revenues generated from
operations, investment income and borrowings under the Credit Facility. Because
the Company is a holding company, it is largely dependent upon dividends from
its subsidiaries for cash flow.

Federated Premium is party to the Credit Facility, which is used to
fund its operations. Under the Credit Facility, Federated Premium can borrow up
to the maximum credit commitment of $5.0 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. The annual
interest rate on advances under the Credit Facility is the prime rate plus .75
percent, which amounted to 9.25% at December 31, 1999. The Credit Facility
contains various operating and financial covenants and is collateralized by a
first lien and assignment of all of the Company's assigned finance contracts
receivable. The Credit Facility expires on September 30, 2000. Outstanding
borrowings under the Credit Facility as of December 31, 1999 and 1998 were
approximately $4.7 million and $2.1 million, respectively. At December 31, 1999
and 1998, the Company was in compliance with all covenants under the Revolving
Agreement. In January 2000, the maximum credit commitment was increased to $7.0
million and the annual interest rate was changed to the prime rate plus
additional interest varying from .75% to prime only based on the prior month's
average outstanding balance.

<PAGE>

For the year ended December 31, 1999, operations generated operating
cash flow deficiency of $2.0 million which was primarily attributable to the
increased volume of premium financing, consumer loans and pay advances.
Operating cash flow is expected to be positive in both the short-term and
reasonably foreseeable future due to a recent increase in insurance policies
written. In addition, the Company's investment portfolio is highly liquid as it
consists almost entirely of readily marketable securities. Cash deficit from
investing activities was $9.7 million in 1998 and $910,000 in 1999. The Company
expects a continued cash flow deficit from investing activities as the Company
intends to invest cash from operations and financing activities to fund
increases in finance contracts, consumer loans, pay advances receivables and
purchase of investment securities. Cash flow provided by financing activities
was $8.2 million in 1998 and $2.3 million in 1999. The Company believes that its
current capital resources, together with cash flow from its operations and
financing activities will be sufficient to meet its anticipated working capital
requirements through at least 2000. There can be no assurances, however, that
such will be the case.

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% of its liabilities or the 1999 statutory minimum capital and
surplus requirement of $2.5 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 Commissioner, is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid in 2000, by the Company without prior approval, is limited to the lesser of
statutory net income from operations of the preceding calendar year or 10% of
statutory unassigned capital surplus as of the preceding December 31. No
dividends were paid during 1999.

The Company is required to comply with the NAIC's risk-based capital
requirements. 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 December 31, 1999, 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 $7.3
million as of December 31, 1998 and $7.1 million as of December 31, 1999.
Statutory net income was $1.4 million for the year ended December 31, 1998 and
$1.1 million for 1999.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and related data presented herein
have been prepared in accordance with GAAP which requires the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of the general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the cost of paying losses and LAE.

Insurance premiums are established before the Company knows the amount
of loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the Company's
investment portfolio and the investment rate of return. Any future economic
changes which result in prolonged and increasing levels of inflation could cause
increases in the dollar amount of incurred loss and LAE and thereby materially
adversely affect future liability requirements.

<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----

<S> <C>
Independent Auditors' Report..................................................................................F-2
Consolidated Balance Sheets
as of December 31, 1999 and 1998............................................................................F-3
Consolidated Statements of Income
For the years ended December 31, 1999 and 1998..............................................................F-4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
For the years ended December 31, 1999 and 1998..............................................................F-5
Consolidated Statements of Cash Flows
For the years ended December 31, 1999 and 1998..............................................................F-6
Notes to Consolidated Financial Statements....................................................................F-7
</TABLE>

F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
21st Century Holding Company:

We have audited the accompanying consolidated balance sheets of 21st Century
Holding Company and Subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of income, changes in
shareholders' equity and comprehensive income, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 21st Century Holding
Company and Subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

KPMG LLP

Miami, Florida
March 30, 2000

F-2

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>

1999 1998
---- ----

ASSETS

Investments
<S> <C> <C>
Fixed maturities, available for sale, at fair value............................. $11,170,035 14,605,582
Equity securities............................................................... 2,627,232 2,936,520
Mortgage loan................................................................... 119,304 163,164
------------ -----------
Total investments........................................................... 13,916,571 17,705,266
------------ -----------

Cash and cash equivalents......................................................... 923,175 2,250,061
Finance contracts, consumer loans and pay advances receivable, net of allowance
for credit losses of $272,192 and $195,883, respectively....................... 9,642,163 7,093,593
Prepaid reinsurance premiums...................................................... 2,604,607 2,697,204
Premiums receivable, net of allowance of $50,000.................................. 1,256,485 0
Due from reinsurers, net.......................................................... 1,670,849 1,926,736
Deferred acquisition costs, net................................................... (10,243) 89,524
Deferred income taxes............................................................. 1,785,514 1,085,255
Property, plant and equipment, net................................................ 2,514,505 1,763,254
Other assets...................................................................... 980,375 817,229
Goodwill, net..................................................................... 3,402,403 2,748,281
------------ -----------
Total assets................................................................ $38,686,404 $38,176,403
============ ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses........................................ $6,314,307 7,603,460
Unearned premiums................................................................. 8,037,083 8,534,320
Premium deposits.................................................................. 357,186 492,422
Revolving credit outstanding...................................................... 4,650,026 2,062,948
Bank overdraft.................................................................... 1,528,736 1,199,941
Unearned commissions.............................................................. 802,757 586,592
Accounts payable and accrued expenses............................................. 511,997 1,932,950
Notes payable..................................................................... 417,773 500,000
Drafts payable to insurance companies............................................. 312,651 295,947
------------ -----------
Total liabilities........................................................... 22,932,516 23,208,580
------------ -----------

Shareholders' equity:
Common stock of $0.01 par value. Authorized 25,000,000 shares, issued
3,370,000 and 3,350,000 shares, outstanding 3,365,000 and 3,350,000,
respectively.................................................................. 33,700 33,500
Additional paid-in capital...................................................... 12,690,087 12,460,287
Accumulated other comprehensive deficit......................................... (1,244,830) (257,227)
Retained earnings............................................................... 4,297,994 2,731,263
Treasury stock, 5,000 shares in 1999 at cost.................................... (23,063) --
------------ -----------
Total shareholders' equity.................................................. 15,753,888 14,967,823
------------ -----------
Commitments and contingencies
Total liabilities and shareholders' equity.................................. $38,686,404 $38,176,403
============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>

1999 1998
---- ----
Revenue:
<S> <C> <C>
Gross premiums written............................... $19,273,561 $21,195,144
Gross premiums ceded................................. (6,221,853) (6,628,270)
----------- -----------

Net premiums written............................. 13,051,708 14,566,874
Decrease (increase) in unearned premiums, net
of prepaid reinsurance premiums...................... 404,640 (604,143)
----------- -----------

Net premiums earned.............................. 13,456,348 13,962,731
Commission income..................................... 4,410,856 2,036,637
Finance revenue....................................... 3,696,843 1,825,268
Net investment income................................. 853,659 983,592
Net realized investment gains......................... 952,153 441,810
Other income.......................................... 2,007,595 1,418,429
----------- -----------

Total revenue.................................... 25,377,454 20,668,467
----------- -----------

Expenses:
Losses and loss adjustment expenses.................. 8,094,677 9,133,332
Operating and underwriting expenses.................. 7,032,428 4,291,613
Salaries and wages................................... 7,474,572 4,042,226
Amortization of deferred acquisition costs, net...... (18,563) 179,057
Amortization of goodwill............................. 547,548 239,619
----------- -----------

Total expenses................................... 23,130,662 17,885,847
----------- -----------

Income before provision for income
tax expense................................... 2,246,792 2,782,620
Provision for income tax expense...................... 680,061 965,000
----------- -----------

Net income....................................... $1,566,731 $1,817,620
=========== ===========

Basic net income per share....................... $0.46 $0.79
===== =====

</TABLE>

See accompanying notes to consolidated financial statements.

F-4

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY AND COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Comprehensive Common Paid-In Comprehensive Retained Treasury Shareholders'
DESCRIPTION Income Stock Capital Deficit Earnings Stock Equity
- ----------- ------ ----- ------- ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997........... $11,261 4,304,758 124,677 286,957 4,727,653
Acquisition and consolidation of
affiliates previously combined......... 9,739 358,687 -- 626,686 995,112
Distributions to shareholders............ -- (100,000) -- -- (100,000)
Net income............................... 1,817,620 -- -- -- 1,817,620 1,817,62
Net unrealized change in investments,
net of tax effect of 223,907 (381,904) (381,904) (381,904)
Comprehensive income 1,435,716
Net Proceeds from offering................ 12,500 7,896,842 7,909,342

Balance as of December 31, 1998.......... 33,500 12,460,287 (257,227) 2,731,263 0 14,967,823

Net income............................... 1,566,731 -- -- -- 1,566,731 1,566,731
Stock issued for acquisitions.. 600 429,400 430,000
Acquisition of common shares... (223,063) (223,063)
Cancellation of common shares . (400) (199,600) 200,000 0
Net unrealized change in investments,
net of tax effect of 595,855 (987,603) (987,603) (987,603)

Comprehensive income 579,128
=======
Balance as of December 31, 1999..................... $ 33,700 $12,690,087 $(1,244,830) $4,297,994 $ (23,063) $15,753,888
=========== =========== =========== ========== ========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>

1999 1998
---- ----

Cash flow from operating activities:
<S> <C> <C>
Net income....................................................................... $1,566,731 $1,817,620
Adjustments to reconcile net income to net cash flow (used in) provided by
operating activities:
Amortization of investment premium............................................. 3,232 6,759
Depreciation and amortization of property plant and equipment.................. 199,537 54,089
Amortization of goodwill....................................................... 547,548 239,619
Deferred income tax expense.................................................... (106,337) (143,226)
Net realized investment gains.................................................. (952,153) (441,810)
Amortization of deferred acquisition costs, net................................ (18,563) 179,057
Provision for credit losses, net............................................... 838,335 266,184
Provision for uncollectible premiums receivable................................ 50,000 --

Changes in operating assets and liabilities:
Premiums receivable........................................................... (1,306,485) --
Prepaid reinsurance premiums.................................................. 92,597 (479,540)
Due from reinsurers, net...................................................... 255,887 (902,224)
Deferred acquisition costs, net............................................... 118,330 (107,647)
Other assets.................................................................. (163,146) (281,819)
Unpaid losses and loss adjustment expenses.................................... (1,289,153) 876,998
Unearned premiums............................................................. (497,237) 1,034,578
Premium deposits.............................................................. (135,236) (849,134)
Unearned commissions.......................................................... 216,165 (59,001)
Accounts payable and accrued expenses......................................... (1,420,953) 892,141
------------ -----------
Net cash flow (used in) provided by operating activities..................... (2,000,901) 2,102,644
------------ -----------

Cash flow from investing activities:
Proceeds from sale of investment securities available for sale................... 37,826,024 39,841,097
Purchases of investment securities available for sale............................ (34,715,726) (42,087,422)
Finance contracts receivables, consumer loans and pay advances receivable........ (3,386,905) (5,133,000)
Drafts payable to insurance companies.............................................. 16,704 26,787
Mortgage loan.................................................................... (120,000) --
Sale of and collection of mortgage loans......................................... 163,860 120,548
Purchases of property and equipment.............................................. (910,561) (1,431,608)

Acquisitions .................................................................... (491,697) (1,100,000)
------------ -----------
Net cash flow used in investing activities................................... (1,618,301) (9,763,598)
------------ -----------

Cash flow from financing activities:
Bank overdraft................................................................... 328,795 469,652
Loans from shareholders.......................................................... (400,494) 31,000
Distributions to shareholders.................................................... -- (100,000)
Purchases of treasury stock...................................................... (223,063) --
Net proceeds from IPO............................................................ -- 7,909,342
Repayment of indebtedness........................................................ -- (552,625)
Revolving credit outstanding..................................................... 2,587,078 469,196
------------ -----------
Net cash flow provided by financing activities............................... 2,292,316 8,226,565
------------ -----------

Net (decrease) increase in cash and cash equivalents......................... (1,326.886) 565,611
Cash and cash equivalents at beginning of year..................................... 2,250,061 1,684,450
------------ -----------

Cash and cash equivalents at end of year........................................... $923,175 $2,250,061
============ ===========

Supplemental disclosure of cash flow information: Cash paid during
the year for:
Interest........................................................................ $374,496 $322,313
============ ===========

Income taxes.................................................................... $1,788,500 $226,047
============ ===========
</TABLE>
See Note 20 for details on noncash investing activities.

See accompanying notes to consolidated financial statements

F-6

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(1) ORGANIZATION AND BUSINESS

The accompanying consolidated financial statements include the accounts
of 21st Century Holding Company and its wholly owned subsidiaries (collectively
referred to as the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.

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, consumer loans, pay
advances, tax preparation and other ancillary services to its customers.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) CASH AND CASH EQUIVALENTS

The Company considers all short-term highly liquid investments with
original maturities of three months or less to be cash equivalents.

(b) INVESTMENTS

All of the Company's investment securities have been classified as
available-for-sale because all of the Company's securities are available to be
sold in response to the Company's liquidity needs, changes in market interest
rates and asset-liability management strategies, among other reasons.
Investments available-for-sale are stated at fair value on the balance sheet.
Unrealized gains and losses are excluded from earnings and are reported as a
component of other comprehensive income within shareholders' equity, net of
related deferred income taxes.

A decline in the fair value of an available-for-sale security below
cost that is deemed other than temporary results in a charge to income,
resulting in the establishment of a new cost basis for the security. For the
years ended December 31, 1999 and 1998, the realized losses for declines in fair
value deemed to be other than temporary were approximately $100,000 and $52,000,
respectively, and are reported as a component of net realized investment gains
on the consolidated statements of income.

Premiums and discounts are amortized or accreted, respectively, over
the life of the related fixed maturity security as an adjustment to yield using
a method that approximates the effective interest method. Dividends and interest
income are recognized when earned. Realized gains and losses are included in
earnings and are derived using the specific-identification method for
determining the cost of securities sold.

Premium revenue on property and casualty insurance is earned on a pro
rata basis over the life of the policies. Unearned premiums represent the
portion of the premium related to the unexpired policy terms.

F-7

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(d) DEFERRED ACQUISITION COSTS

Deferred acquisition costs represent commissions paid to the Company's
agents at the time of policy issuance (to the extent they are recoverable from
future premium income) net of ceding premium commission earned from reinsurers,
and are amortized over the life of the related policy in relation to the amount
of premiums earned. The method followed in computing deferred acquisition costs
limits the amount of such deferred costs to their estimated realizable value,
which gives effect to the premium to be earned, related investment income,
unpaid losses and loss adjustment expenses and certain other costs expected to
be incurred as the premium is earned. There is no indication that these costs
will not be fully recoverable in the near term.

An analysis of deferred acquisition costs follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period $89,524 $160,934
Acquisition costs deferred (118,330) 107,647
Amortized to expense during period 18,563 (179,057)
------- --------
Balance, end of period ($10,243) $ 89,524
======= ========

The negative deferred acquisition cost balance is the result of unearned
reinsurance commissions exceeding policy acquisition costs.
</TABLE>

(e) PREMIUM DEPOSITS

Premium deposits represent premiums received on policies not yet
written. The Company takes approximately 30 working days to write the policy
from the date the cash and policy application are received.

(f) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Unpaid losses and loss adjustment expenses are provided for through the
establishment of liabilities in amounts estimated to cover incurred losses and
loss adjustment expenses. Such liabilities are determined based upon the
Company's assessment of claims pending and the development of prior years' loss
liability. These amounts include liabilities based upon individual case
estimates for reported losses and loss adjustment expenses and estimates of such
amounts that are incurred but not reported. Changes in the estimated liability
are charged or credited to operations as the estimates are revised. Unpaid
losses and loss adjustment expenses are reported net of estimates for salvage
and subrogation recoveries which totaled approximately $342,000 and $329,000,
net of reinsurance, at December 31, 1999 and 1998, respectively.

The estimates of unpaid losses and loss adjustment expenses are subject
to the effect of trends in claims severity and frequency and are continually
reviewed. As part of the process, the Company reviews historical data and
considers various factors, including known and anticipated legal developments,
changes in social attitudes, inflation and economic conditions. As experience
develops and other data becomes available, these estimates are revised, as
required, resulting in increases or decreases to the existing unpaid losses and
loss adjustment expenses. Adjustments are reflected in results of operations in
the period in which they are made and the liabilities may deviate substantially
from prior estimates.

F-8

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

There can be no assurance that the Company's unpaid losses and loss
adjustment expenses will be adequate to cover actual losses. If the Company's
unpaid losses and loss adjustment expenses prove to be inadequate, the Company
will be required to increase the liability with a corresponding reduction in the
Company's net income in the period in which the deficiency is identified. Future
loss experience substantially in excess of the established unpaid losses and
loss adjustment expenses could have a material adverse effect on the Company's
business, results of operations and financial condition.

The Company does not discount unpaid losses and loss adjustment
expenses for financial statement purposes.

(g) COMMISSION INCOME

Commission income consists of fees earned by the Company-owned agencies
placing business with third party insurers and third party premium finance
companies. Commission income is earned on a pro rata basis over the life of the
policies. Unearned commissions represent the portion of the commissions related
to unexpired policy terms.

(h) FINANCE REVENUE

Interest and service income, resulting from the financing of insurance
premiums, consumer loans, and pay advances, is recognized using a method that
approximates the effective interest method. Late charges are recognized as
income when chargeable.

(i) CREDIT LOSSES

Provisions for credit losses are charged to operations in amounts
sufficient to maintain the allowance for credit losses at a level considered
adequate to cover anticipated losses in the existing finance contracts, consumer
loans and pay advances receivable.

(j) POLICY FEES

Policy fees represent a $25 non-refundable application fee for
insurance coverage, which is intended to reimburse the Company for the costs
incurred to underwrite the policy. The fees and related costs are recognized
when the policy is underwritten. These underwriting costs are not included as a
component of deferred acquisition costs.

(k) REINSURANCE

The Company recognizes the income and expense on reinsurance contracts
principally on a pro-rata basis over the life of the policies covered under the
reinsurance agreements. The Company is reinsured under separate reinsurance
agreements for the different lines of business underwritten. Reinsurance
contracts do not relieve the Company from its obligations to policyholders. The
Company continually monitors its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Company only cedes risks to
reinsurers whom the Company believes to be financially sound. The Company's
reinsurance is primarily ceded to Transatlantic Re, an A++ rated reinsurance
company, on a quota share basis. At December 31, 1999, all reinsurance
recoverables are considered collectible.

F-9

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(l) INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax-credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

(m) CONTINGENT REINSURANCE COMMISSION

The Company's reinsurance contracts provide ceding commissions for
premiums written which are subject to adjustment. The amount of ceding
commissions is determined by the loss experience for the reinsurance agreement
term. The reinsurer provides commissions on a sliding scale with maximum and
minimum achievable levels. The reinsurer provides the Company with the
provisional commissions. The Company has recognized the commissions based on the
current loss experience for the policy year premiums. This results in
establishing a liability, included in due from reinsurers, for the excess of
provisional commissions retained compared to amounts recognized, which is
subject to variation until the ultimate loss experience is determinable.
Approximately $89,000 of contingent ceding commissions were recognized in income
for the year ended December 31, 1999.

(n) CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially expose the Company to
concentrations of credit risk consist primarily of investments, premiums
receivable, amounts due from reinsurers on paid and unpaid losses, and finance
contracts, consumer loans and pay advances receivable. The Company has not
experienced significant losses related to premiums receivable from individual
policyholders or groups of policyholders in a particular industry or geographic
area. The Company has not experienced significant losses related to consumer
loans or pay advances receivable. Management believes no credit risk beyond the
amounts provided for collection losses is inherent in the Company's premiums
receivable or finance contracts, consumer loans and pay advances receivable. In
order to reduce credit risk for amounts due from reinsurers, the Company seeks
to do business with financially sound reinsurance companies and regularly
reviews the financial strength of all reinsurers used.

(o) DUE FROM FLORIDA JOINT UNDERWRITING ASSOCIATION (THE "ASSOCIATION")
PARTICIPATION

An amount recorded as a component of other assets represents the
Company's proportionate share of the net assets of the Association. The
Company's proportionate share of premiums, losses, loss expenses, and other
related items is recorded and presented in their respective accounts in the
accompanying consolidated financial statements.

F-10

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(p) 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
materially impact the Company's results of operations or financial position.

(q) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivatives to be
recognized at fair value as either assets or liabilities on the balance sheet.
Any gain or loss resulting from changes in such fair value is required to be
recognized in earnings, to the extent the derivatives are not effective as
hedges. SFAS No. 137. "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133" issued in June 1999
defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15 of 2000. Adoption of this statement is not
expected to have a material impact on the Company's results of operations or
financial position.

(r) USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity
with general accepted accounting principles requires management to make
estimates and assumptions that affect the reported financial statement balances
as well as the disclosure of contingent assets and liabilities. Actual results
could differ materially from those estimates used.

Similar to other property and casualty insurers, the Company's
liability for unpaid losses and loss adjustment expenses, although supported by
actuarial projections and other data is ultimately based on management's
reasoned expectations of future events. Although considerable variability is
inherent in these estimates, management believes that this liability is
adequate. Estimates are reviewed regularly and adjusted as necessary. Such
adjustments are reflected in current operations. In addition, the realization of
the Company's deferred income tax assets is dependent on generating sufficient
future taxable income. It is reasonably possible that the expectations
associated with these accounts could change in the near term and that the effect
of such changes could be material to the consolidated financial statements.

F-11

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(s) NATURE OF OPERATIONS

The following is a description of the most significant risks facing the
Company and how it mitigates those risks:

(I) LEGAL/REGULATORY RISKS--the risk that changes in the regulatory
environment in which an insurer operates will create additional expenses
not anticipated by the insurer in pricing its products. That is,
regulatory initiatives designed to reduce insurer profits, restrict
underwriting practices and risk classifications, mandate rate reductions
and refunds, and new legal theories or insurance company insolvencies
through guaranty fund assessments may create costs for the insurer beyond
those recorded in the financial statements. The Company attempts to
mitigate this risk by monitoring proposed regulatory legislation and by
assessing the impact of new laws. As the Company writes business only in
the state of Florida, it is more exposed to this risk than some of its
more geographically balanced competitors.

(II) CREDIT RISK--the risk that issuers of securities owned by the
Company will default or that other parties, including reinsurers to whom
business is ceded, which owe the Company money, will not pay. The Company
attempts to minimize this risk by adhering to a conservative investment
strategy, maintaining reinsurance agreements with financially sound
reinsurers, and by providing for any amounts deemed uncollectible.

(III) INTEREST RATE RISK--the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. To the extent
that liabilities come due more quickly than assets mature, an insurer
might have to sell assets prior to maturity and potentially recognize a
gain or a loss.

(t) FAIR VALUE

The fair value of the Company's investments are estimated based on bid
prices published by financial services or quotations received from securities
dealers and is reflective of the interest rate environment that existed as of
the close of business on December 31, 1999 and 1998. Changes in interest rates
subsequent to December 31, 1999 may affect the fair value of the Company's
investments. Refer to note 3(a) for details.

The carrying amounts for the following financial instrument categories
approximate their fair values at December 31, 1999 and 1998 because of their
short-term nature: cash and cash equivalents, premiums receivable, finance
contracts, consumer loans and pay advance receivable, due from reinsurers,
drafts payable to insurance companies, notes payable, revolving credit
outstanding, bank overdraft, and accounts payable and accrued expenses.

The fair value of mortgage loans is estimated using the present value
of future cash flows based on the market rate for similar types of loans.
Carrying value approximates market value as rates used are commensurate with
market rate.

F-12

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(u) GOODWILL

Goodwill, representing the excess of cost over the fair value of assets
acquired, is amortized on a straight-line basis over seven years. The carrying
value of goodwill is periodically reviewed by the Company based on the expected
future undiscounted operating cash flows of the related item. Based upon its
most recent analysis, the Company believes that no impairment of goodwill exists
at December 31, 1999.

(v) STOCK OPTION PLAN

The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock.

SFAS No. 123, "Accounting for Stock-Based Compensation", establishes
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans.

(w) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation on property, plant and equipment is calculated on a
straight-line basis over the following estimated useful lives: building and
improvements - 30 years and furniture and fixtures 7 years.

(x) RECLASSIFICATIONS

Certain 1998 financial statement amounts have been reclassified to
conform with 1999 presentation.

F-13

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(3) INVESTMENTS

(a) FIXED MATURITIES AND EQUITY SECURITIES

A summary of the amortized cost, estimated fair value, gross unrealized
gains and losses of fixed maturities and equity securities at December 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ------------- -------------
DECEMBER 31,1999
Fixed Maturities:
<S> <C> <C> <C> <C>
Mortgage-backed securities..................... 265,513 0 17,478 248,035
Obligations of states and political
subdivisions................................ 10,347,412 0 1,193,007 9,154,405
Corporate securities........................... 2,028,004 0 260,409 1,767,595
----------- --------- ---------- ------------
$12,640,929 $0 $1,470,894 $11,170,035
=========== ========= ========== ============
Equity Securities:
Preferred stocks............................... $218,396 $0 $46,334 $172,062
Common stocks.................................. 2,933,322 105,059 583,211 2,455,170
----------- --------- ---------- ------------
$3,151,718 $105,059 $629,545 $2,627,232
=========== ========= ========== ============

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ------------- -------------

DECEMBER 31,1998 Fixed Maturities:
Mortgage-backed securities..................... 379,494 -- 6,969 372,525
Obligations of states and political
subdivisions................................ 10,926,135 111,983 62,118 10,976,000
Corporate securities........................... 3,264,047 48,163 55,153 3,257,057
----------- -------- -------- -----------
$14,569,676 $160,146 $124,240 $14,605,582
=========== ======== ======== ===========
Equity Securities:
Preferred stocks............................... $ 1,507,041 $ 44,595 $ 11,590 $ 1,540,046
Common stocks.................................. 1,882,943 15,142 501,611 1,396,474
----------- -------- -------- ----------
$ 3,389,984 $ 59,737 $513,201 $2,936,520
=========== ========= ======== ==========

</TABLE>

F-14

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

Below is a summary of fixed maturities at December 31, 1999 and 1998 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>

DECEMBER 31, 1999 DECEMBER 31, 1998
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ------------ ---------- -------------

<S> <C> <C> <C> <C>
Due in one year or less................. $0 $0 $0 $0
Due after one year through
five years............................. 0 0 400,403 423,40
Due after five years through ten
years.................................. 1,691,811 1,547,528 4,688,377 4,693,108
Due after ten years..................... 10,949,118 9,622,507 9,480,896 9,489,072
$12,640,929 $11,170,035 $14,569,676 $14,605,582
</TABLE>

Political subdivision bonds with an amortized cost of approximately $526,000 and
a fair market value of $488,000 were on deposit with the Florida Department of
Insurance as of December 31, 1999, as required by law.

A summary of the sources of net investment income follows:

YEARS ENDED DECEMBER 31,
1999 1998
---- ----

Fixed maturities............................. $776,948 $878,319
Equity securities............................ 71,744 94,144
Cash and cash equivalents.................... 23,363 2,886
Other........................................ 5,162 23,659
---------- ----------

Total investment income................... 877,217 999,008
Less investment expenses..................... (23,558) (15,416)
---------- ----------

Net investment income..................... $853,659 $983,592
========== ==========

Proceeds from sales of fixed maturities and equity securities for the
years ending December 31, 1999 and 1998 were $37,826,024 and $39,841,097,
respectively.

F-15

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

A summary of realized investment gains (losses) and increases (decreases) in net
unrealized losses follows:
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,
1999 1998
---- ----
Net realized gains (losses):

<S> <C> <C>
Fixed maturities.............................. $(66,048) $222,645
Equity securities............................. 1,018,201 219,165
---------- ----------
Total...................................... $952,153 $441,810
========== ==========

Change in net unrealized losses:

Fixed maturities.............................. $(1,506,800) $(192,847)
Equity securities............................. (71,022) (412,964)
---------- ----------

Total...................................... $(1,577,822) $(605,811)
========== ==========
</TABLE>

(b) MORTGAGE LOANS

These amounts represent outstanding balances from related party
transactions. Refer to note 15 for details.

(4) FINANCE CONTRACTS, CONSUMER LOANS AND PAY ADVANCES RECEIVABLE

Below is a summary of the components of the finance contracts, consumer
loans and pay advances receivable balance:
<TABLE>
<CAPTION>

December 31,
1999 1998
---- ----
<S> <C> <C>
Finance contracts receivable $8,208,213 $6,561,562
Consumer loans receivable 1,307,143 727,914
Pay advances receivable 398,999 0
------- -
$9,914,355 $7,289,476
Less: Allowance for credit losses (272,192) (195,883)
----------- -----------

Finance contracts, consumer loans and
pay advances receivable, net $9,642,163 $7,093,593
========== ==========
</TABLE>

The activity in the allowance for credit losses was as follows for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>

1999 1998
---- ----
<S> <C> <C>
Allowance for credit losses at beginning of year $195,883 $36,980
Additions charged to bad debt expense 838,335 226,184
Write-downs charged against the allowance (762,026) (67,281)

Allowance for credit losses at end of year $272,192 $195,883
========== ==========
</TABLE>

F-16

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(5) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 1999 and 1998 consist of
the following:

1999 1998
---- ----
Land 155,000 155,000
Building and Improvements 1,820,143 1,218,143
Furniture and Fixtures 1,012,276 663,488
--------- -------
2,987,419 2,036,631
Accumulated Depreciation (472,914) (273,377)
--------- ---------
$2,514,505 $1,763,254
========= =========

Depreciation of property, plant, and equipment was $199,537 and
$54,089 during 1999 and 1998 respectively.

(6) 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.

The impact of reinsurance on the financial statements is as follows:

YEARS ENDED DECEMBER 31,
1999 1998
---- ----
Premiums written:
Direct.......................... $19,273,561 $21,195,144
Ceded........................... (6,221,853) (6,628,270)
----------- -----------
$13,051,708 $14,566,874

Premiums earned:
Direct.......................... $19,770,797 $20,160,566
Ceded........................... (6,314,449) (6,197,835)
----------- -----------
$13,456,348 $13,962,731

Losses and loss adjustment expenses incurred:

Direct.......................... $11,698,046 $12,885,795
Ceded........................... (3,603,369) (3,752,463)
----------- -----------
$8,094,677 $9,133,332
=========== ===========

AS OF DECEMBER 31,
1999 1998
---- ----
Unpaid losses and loss adjustment expenses:

Direct.......................... $6,314,307 $7,603,460
Ceded .......................... (1,886,226) (2,237,688)
----------- ------------
$4,428,081 $5,365,772
=========== ============

Unearned premiums:
Direct........................... $8,037,083 $8,534,320
Ceded ........................... (2,604,607) (2,697,204)
----------- ------------
$5,432,476 $5,886,222
=========== ============

F-17

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

The Company received approximately $1.8 million and $2.0 million in
commissions on premiums ceded during the years ended December 31, 1999 and 1998,
respectively. Had all of the Company's reinsurance agreements been canceled at
December 31, 1999, the Company would have returned a total of approximately
$267,000 in reinsurance commissions to its reinsurers; in turn, its
reinsurers would have returned approximately $2.6 million in unearned premiums
to the Company.

At December 31, 1999 and 1998, the Company had an unsecured aggregate
recoverable for paid and unpaid losses and loss adjustment expenses and unearned
premiums with the following reinsurers:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
Transatlantic Reinsurance Company (A++A.M. Best Rated):
<S> <C> <C>
Unearned premiums........................................................ $2,167,937 $2,218,734
Reinsurance recoverable on paid losses and loss adjustment expenses...... 495,426 1,495,035
Unpaid losses and loss adjustment expenses............................... 1,793,623 2,173,174
----------- -----------
4,456,986 5,886,943
Other:
Unearned premium......................................................... 436,670 478,470
Reinsurance recoverable on paid losses and loss adjustment expenses...... 37,036 19,227
Unpaid losses and loss adjustment expenses............................... 92,603 64,514

Amounts due from reinsurers consisted of amounts related to:
Unpaid losses and loss adjustment expenses............................... $1,886,226 $2,237,688
Reinsurance recoverable on paid losses and loss adjustment expenses...... 532,462 1,514,262
Reinsurance payable...................................................... (481,026) (1,469,273)
Contingent ceded commissions payable..................................... (266,816) (355,941)
----------- -----------
$1,670,846 $1,926,736
=========== ===========
</TABLE>

(7) 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.

Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>

DECEMBER 31,
1999 1998
---- ----

<S> <C> <C>
Balance at January 1....................... $7,603,460 $6,726,462
Less reinsurance recoverables............. (2,237,688) (2,090,998)
----------- -----------
Net balance at January 1................ $5,365,772 $4,635,464
========== ==========
Incurred related to:
Current year.............................. $8,764,334 $9,403,866
Prior years............................... (669,657) (270,534)
--------- ---------
Total incurred.......................... $8,094,677 $9,133,332
========== ==========
Paid related to:
Current year.............................. $5,551,789 $5,700,515
Prior years............................... 3,480,579 2,702,509
--------- ---------
Total paid.............................. $9,032,368 $8,403,024
========== ==========

Net balance at year end.................... $4,428,081 $5,365,772
Plus reinsurance recoverables............. 1,886,226 2,237,688
--------- ---------
Balance at year end..................... $6,314,307 $7,603,460
========== ==========
</TABLE>

F-18

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

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.

As a result of the Company's review of its liability for losses and
LAE, which includes a re-evaluation of the adequacy of reserve levels for prior
year's claims, the Company reduced its' liability for loss and LAE for claims
occurring in prior years by $669,657 and 270,534 for the years ended December
31, 1999 and 1998, respectively. Management does not expect reserve reductions
to continue at these levels in 2000. The reduction in the liability was
primarily attributable to better than expected loss development with respect to
the Company's automobile insurance program. There can be no assurance concerning
future adjustments of reserves, positive or negative, for claims through
December 31, 1999.

(8) NOTES PAYABLE

The following is a summary of outstanding notes payable at December 31, 1999 and
1998:
<TABLE>
<CAPTION>

DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Notes payable:
Unsecured note payable in the amount of $500,000 at 6% interest,
unpaid principal and interest payable on January 1, 2000 125,000 500,000
Unsecured note payable in the amount of $300,000 at 6% interest,
unpaid principal and interest payable on June 1, 2000. The principal and
interest is payable in cash or Company stock at the option of the Company 276,950 0
Other 15,823 0
-------- --------
$417,773 $500,000
======== ========
</TABLE>

Payments on notes payable are due as follows: $407,935 in 2000, $6,161 in 2001
and $3,677 in 2002.

(9) 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 $5.0 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. The
annual interest rate on advances under the Revolving Agreement loan is the prime
rate plus .75 percent, which amounted to 9.25% at December 31, 1999. 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 receivable. The Revolving Agreement expires on September 30,
2000. Outstanding borrowings under the Revolving Agreement as of December 31,
1999 and 1998 were $4,650,026 and $2,062,948, respectively, and interest expense
for the years ended December 31, 1999 and 1998 totaled approximately $341,000
and $287,000, respectively. At December 31, 1999 and 1998, the Company was in
compliance with all covenants under the Revolving Agreement. In January 2000,
the maximum credit commitment was increased to $7.0 million and the annual
interest rate was changed to the prime rate plus additional interest varying
from .75% to prime only based on the prior month's average outstanding balance.

F-19

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(10) INCOME TAXES

A summary of the provision for income tax expense for the years ended
December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
Federal:
<S> <C> <C>
Current.................... $640,525 $929,938
Deferred................... (92,635) (129,410)
-------- ---------
547,890 800,528
------- -------
State:
Current.................... 145,873 178,288
Deferred................... (13,702) (13,816)
-------- --------
132,171 164,472
-------- --------
$680,061 $965,000
======== ========
</TABLE>
The actual income tax expense differs from the "expected" income tax
expense for the years ended December 31, 1999 and 1998 (computed by applying the
U.S. federal tax rate of 34 percent to income before provision for income tax
expense) as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
Computed "expected" tax expense,
<S> <C> <C>
at federal rate................................ $763,909 $946,091
State tax expense, net of federal deduction benefit 87,233 100,796
Tax-exempt interest............................. (179,812) (122,583)
Amortization of goodwill........................ 55,677 90,169
Dividend received deduction..................... (26,997) (16,042)
Other, net...................................... (19,949) (33,431)
-------- --------
Income tax expense, as reported................. $680,061 $965,000
======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax asset as of December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,

1999 1998
---- ----
Deferred tax assets:
<S> <C> <C>
Unpaid losses and loss adjustment expenses .................................. 173,776 $222,105
Unearned premiums............................................................. 408,848 442,997
Unrealized loss on investments available for sale............................. 751,049 157,127
Allowance for credit losses................................................... 122,377 67,734
Unearned Commissions......................................................... 302,078 220,735
Goodwill ..................................................................... 70,170 --
Deferred acquisition costs, net............................................... 13,193 --
Other......................................................................... 55,357 17,473
------ ------
Total gross deferred tax assets............................................. 1,896,848 1,128,171
Deferred tax liabilities:
Deferred acquisition costs, net............................................... -- (33,688)
Depreciation.................................................................. (28,043) (9,228)
Other......................................................................... (83,291) --
----------- -----------

Total gross deferred tax liabilities........................................ (111,334) (42,916)
----------- -----------

Net deferred tax asset...................................................... $1,785,514 $1,085,255
=========== ===========
</TABLE>

F-20

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. At
December 31, 1999 and 1998, based upon the level of historical taxable income
and projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences.

(11) REGULATORY REQUIREMENTS AND RESTRICTIONS

To retain its certificate of authority, the Florida Insurance Code (the
"Code") requires that Federated National maintain capital and surplus equal to
the greater of 10 percent of its liabilities or the 1999 statutory minimum
capital and surplus requirement of $2,5 million as defined in the Code. In 1999
and 1998, Federated National was required to have capital surplus of $5.9
million and $4.7 million, respectively. At December 31, 1999 and 1998, Federated
National's capital surplus was $7.1 million and 7.3 million, respectively.
Further, the Company is also required to adhere to prescribed premium-to-surplus
ratios. The Company is in compliance with this requirement as of December 31,
1999. Pursuant to a consent order issued in conjunction with the Company's
authorization to underwrite mobile home insurance (the "Consent Order"), the
Company's growth is subject to regulatory limits on the amount of premiums it
can underwrite. In 1998, Federated National was authorized to underwrite $21
million in direct written premiums and $14 million in total net written
premiums. In 1999, Federated National is limited to $24 million and $15 million,
respectively. Federated National also is required to maintain a minimum capital
surplus to support its underwriting program. The Consent Order expired on
December 31, 1999. As of December 31, 1999, to meet regulatory requirements, the
Company had bonds with a carrying value of approximately $488,000 pledged to the
Insurance Commissioner of the State of Florida.

Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its shareholders except out of that part of
its available and accumulated capital surplus funds which is derived from
realized net operating profits on its business and net realized capital gains. A
Florida domestic insurer may not make dividend payments or distributions to
shareholders without prior approval of the Florida Department of Insurance if
the dividend or distribution would exceed the larger of (i) the lesser of (a) 10
percent of capital surplus (b) net income, not including realized capital gains,
plus a two-year carryforward, (ii) 10 percent of capital surplus with dividends
payable constrained to unassigned funds minus 25 percent of unrealized capital
gains of (iii) the lesser of (a) 10 percent of capital surplus or (b) net
investment income plus a three-year carryfoward with dividends payable
constrained to unassigned funds minus 25 percent of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department of Insurance (i) if
the dividend is equal to or less than the greater of (a) 10 percent of the
insurer's capital surplus as regards policyholders derived from realized net
operating profits on its business and net realized capital gains or (b) the
insurer's entire net operating profits and realized net capital gains derived
during the immediately preceding calendar year, (ii) the insurer will have
policyholder capital surplus equal to or exceeding 115 percent of the minimum
required statutory capital surplus after the dividend or distribution, (iii) the
insurer files a notice of the dividend or distribution with the department at
least ten business days prior to the dividend payment or distribution and (iv)
the notice includes a certification by an officer of the insurer attesting that,
after the payment of the dividend or distribution, the insurer will have at
least 115 percent of required statutory capital surplus as to policyholders.
Except as provided above, a Florida domiciled insurer may only pay a dividend or
make a distribution (i) subject to prior approval by the Florida Department of
Insurance or (ii)

F-21

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

30 days after the Florida Department of Insurance has received notice of such
dividend or distribution and has not disapproved it within such time. No
dividends were declared or paid in 1999.

Under these laws, Federated National is permitted to pay dividends to
the Company in 2000 in the amount of $708,000. Dividends in excess of this
amount require approval by the Florida Department of Insurance. There can be no
assurance that, if requested, that the Florida Department of Insurance will
allow any dividends in excess of this amount to be paid by Federated National.

The Company is required to comply with NAIC risk-based capital ("RBC")
requirements. RBC is 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 RBC standards are used by regulators to determine
appropriate regulatory actions relating to insurers who show signs of weak or
deteriorating condition. As of December 31, 1999, 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.

Generally accepted accounting principles differ in some respects from
reporting practices prescribed or permitted by the Department of Insurance of
the State of Florida. Federated National's statutory capital and surplus was
$7.1 million and $7.3 million as of December 31, 1999 and 1998, respectively.
The Company's statutory net income was $1.1 million and $1.4 million for the
years ended December 31, 1999 and 1998, respectively. Statutory not admitted
assets were approximately $1.6 million and $348,000 as of December 31, 1999 and
1998, respectively.

(12) COMMITMENTS AND CONTINGENCIES

The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.

The Company, as a direct premium writer in the State of Florida, is
required to participate in certain risk pools. Participation in these pools is
based on the Company's written premium by line of business to total premiums
written statewide by all insurers. Participation may result in assessments
against the Company. For the year ended December 31, 1999 no amounts were
assessed against the Company. Approximately $21,000 was assessed during 1998.

F-22

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(13) LEASES

The Company leases office space under various lease agreements with
expiration dates through September 2016. Rental expense associated with
operating leases is charged to expense in the period incurred. Rental expenses
for 1999 and 1998 were approximately $821,000 and $539,000, respectively, and
are included in operating and underwriting expenses in the accompanying
consolidated statements of income.

At December 31, 1999, the minimum aggregate rental commitments are as follows:

Fiscal Year Leases
----------- ------
2000 918,931
2001 781,042
2002 625,129
2003 510,088
Thereafter 846,956
-------

Total $3,682,146
==========

(14) SEGMENT INFORMATION

The Company and its subsidiaries operate principally in two business
segments consisting of insurance and financing. The insurance segment consists
of underwriting through Federated National, managing general agent operations
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, consumer loans through RPA Financial Corporation, and pay advances
through FedFirst Corporation. The financing segment provides premium financing
to both Federated National's insureds and to third-party insureds, consumer
loans and pay advances, and is marketed through the Company's distribution
network of Company-owned agencies (Federated Agency Group) and independent
agents.

The accounting policies of the segments are the same as those described
in the summary of significant accounting policies and practices. The Company
evaluates its business segments based on GAAP pretax operating earnings.
Corporate overhead expenses are not allocated to business segments. Transactions
between reportable segments are accounted for at fair value.

Operating segments that are not individually reportable are included in
the "All Other" category, which includes the operations of 21st Century Holding
Company.

F-23

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

Information regarding components of operations for the years ended December 31,
1999 and 1998 follows:
<TABLE>
<CAPTION>

1999 1998
---- -----
Total Revenues
Insurance Segment
<S> <C> <C>
Earned Premiums $13,456,348 13,962,731
Investment Income 1,718,382 1,451,464
Adjusting Income 895,485 909,019
MGA Fee Income 963,797 971,794
Commission Income 6,053,118 3,122,492
Other Income 841,791 426,990
------------ -----------
Total Insurance Revenue $23,928,921 20,844,499
============ ===========

Financing Segment:
Premium finance income $2,810,357 1,608,145
Consumer loan interest 716,352 217,122
Pay advance interest 170,134
Investment Income 0 9,450
Miscellaneous Income 0 13,525
------------ -----------
Total Financing Revenues $3,696,843 1,848,242
============ ===========

All Other

Total All Other $2,442,927 535,118
========= =======

Total Operating Segments 30,068,691 23,227,859
Intercompany Eliminations (4,691,237) (2,559,392)
------------ -----------

Total Revenues $25,377,454 $20,668,467
============ ===========

Earnings Before Income Taxes

Insurance Segment $1,970,279 2,663,740
Financing Segment 1,400,931 619,461
All Other (876,369) (497,724)
------------ -----------

Total Operating Segments 2,494,841 2,803,477
Intercompany Eliminations (248,049) (20,857)
------------ -----------

Total Earnings before Income Taxes $2,246,792 $2,782,620
============ ===========

Total Assets

Insurance Segment $24,895,860 $28,706,376
Finance Segment 10,779,524 7,076,524
All Others 4,972,955 4,523,632
------------ -----------

Total Operating Segments 40,648,339 40,306,532
Intercompany Eliminations (1,961,935) (2,130,129)
------------ -----------

Total Assets $38,686,404 $38,176,403
============ ===========
</TABLE>

F-24

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(15) RELATED PARTY TRANSACTIONS

During 1998, the Company leased two insurance agency locations from
officers at a rental of $6,500 per month. In January 1999, the Company purchased
these properties from the officers. The properties are being utilized for agency
operations. Consideration for these acquisitions was cash in the amount of
approximately $602,000. 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.

One of the Company's directors is a partner at Conroy, Simberg, and
Ganon, a law firm which handles the Company's claims litigation. Fees paid to
this law firm amounted to approximately $281,000 and $189,000 for the years
ended December 31, 1999 and 1998, respectively.

On December 1998, the Company executed a one-year, 7% interest, note
receivable with one of its employees in the amount of $25,000. Principal and
interest is due in January 2000.

On June 1999, the Company purchased the assets of three insurance
agencies from a director for $130,000 in cash and a note payable for $300,000.

The mortgage loan receivable balance at December 31, 1999 represents a
secured loan to a relative of an officer of the Company. The balance at December
31, 1998 represents a secured loan to an officer of the Company.

The Company believes these arrangements are on terms at least as
favorable as those the Company could secure from a nonaffiliated third party.

(16) STOCK COMPENSATION PLANS

On December 1998, the Company issued warrants to two employees to
purchase 62,500 shares of common stock of the Company at $9 per share. The
warrants vested immediately and are exercisable between December 1999 and
December 2004, at which time if they have not been exercised, they will be
canceled. The estimated fair value of these warrants at the date issued was
approximately $226,000 using a Black-Scholes option pricing model and
assumptions similar to those used for valuing the Company's stock options as
described below. As of December 31, 1999 and 1998, no warrants have been
exercised.

The Company initiated a stock option plan in November 1998 that
provides for the granting of stock options to officers, key employees and
consultants. The objectives of the plan includes attracting and retaining the
best personnel, providing for additional performance incentives, and promoting
the success of the Company by providing employees the opportunity to acquire
common stock. Options outstanding under the plan have been granted at prices
which are either equal to or above the market value of the stock on the date of
grant, vest over a four-year period, and expire ten years after the grant date.

Under the Company's stock option plan, the Company is authorized to
grant options to purchase up to 350,000 common shares. As of December 31, 1999,
the Company had granted options to purchase 472,510 shares. The Company's board
of directors has authorized the Company to grant an additional 250,000 options.
The board of directors' resolution is subject to shareholder approval.
Management believes that such approval will be obtained.

F-25

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

The status of the Company's stock option plans is summarized below as of
December 31, 1999:
<TABLE>
<CAPTION>

Weighted Average
Number of Shares Option Exercise Price
---------------- ---------------------

<S> <C> <C>
Outstanding at January 1, 1998 0 $10
Granted 310,800
Exercised 0
Canceled 0
-------- -------
Outstanding at December 31, 1998 310,800 $10

Granted 198,300 $10
Exercised 0
Canceled (36,590)
-------- -------
Outstanding at December 31, 1999 472,510 $10
======== =======

Weighted Average
Options exercisable at: Number of Shares Option Exercise Price
---------------- ---------------------
1999 71,228 $10
2000 118,127 $10
2001 118,127 $10
2002 118,128 $10
2003 46,900 $10
-------
472,510
=======
</TABLE>

The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
under which no compensation cost for stock options is recognized for stock
option awards granted at or above fair market value. Had compensation expense
for the Company's stock compensation plan been determined based upon fair values
at the grant dates for awards under the plan in accordance with SFAS No. 123,
the Company's net income and net income per share would have been reduced to the
pro forma amounts indicated below. Additional stock option awards are
anticipated in future years.

1999 1998
---- ----
Net income

As reported $1,566,731 $1,817,620
Pro forma $1,409,408 $1,656,872
Net income per share
As reported $0.46 $0.79
Pro forma $0.42 $0.72

The weighted average fair value of options granted during 1999 and 1998
estimated on the date of grant using the Black-Scholes option-pricing model was
$1.86 and $3.04, respectively. The fair value of 1999 options granted is
estimated on the date of grant using the following assumptions: dividend yield
of 0%; expected volatility of 45%; risk free interest rate of 5.7% and an
expected life of 10 years. The fair value of 1998 options granted is estimated
on the date of grant using the following assumptions: dividend yield of 0%;
expected volatility of 50%, risk-free interest rate of 4.4% and an expected life
of 10 years.

F-26

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

Below is summary information about the Company's stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>

Weighted Average Weighted
Range of Outstanding Contractual Average Exercisable
Exercise Price at 12/31/99 Periods in Years Exercise Price at 12/31/99
- -------------- ----------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
$10 472,510 9.2 $10 71,228
</TABLE>

(17) 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. Options granted in accordance with the
Company's stock option plan are anti-dilutive and are not taken into account in
the computation.

At December 31, 1999 and 1998, warrants issued to two employees to
purchase 62,500 shares of common stock at $9 per share were outstanding. At
December 31, 1999 and 1998, warrants sold as part of an underwriting agreement
at a price of $0.0001 per warrant, entitling the holder to purchase 125,000
shares of common stock at $10.86 per share, were outstanding. All of these
potential common shares were excluded from the computation of net income
per share for 1999 and 1998 because their inclusion would have an anti-dilutive
effect.

A summary of the numerator and denominator of the basic net income per share
is presented below:
<TABLE>
<CAPTION>

INCOME SHARE PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------ ------
For the year ended December 31, 1999:
<S> <C> <C> <C>
Basic net income per share................................... $1,566,731 3,382,188 $0.46
========== ========= =====

For the year ended December 31, 1998:
Basic net income per share................................... $1,817,620 2,308,333 $0.79
========== ========= =====
</TABLE>

The weighted average number of shares outstanding gives effect to a
926.33-for-one stock split effected in September 1998, and gives effect to the
consolidation of the Company effected in January 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 split.

(18) COMPREHENSIVE INCOME

Reclassification adjustments related to the investment securities
included in comprehensive income for the years ended December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>

1999 1998
---- -----
<S> <C> <C>
Unrealized holdings gains (1,412,094) (170,510)
(losses) arising during the year
Reclassification adjustment for
gains/losses included in net income (171,364) (441,810)
---------- ----------

(1,583,458) (605,811)
Tax effect 595,855 223,907
---------- ----------
Net depreciation on investment securities (987,603) (381,904)
========== ==========
</TABLE>

F-27

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

(19) AUTHORIZATION OF PREFERRED STOCK

The Company's Amended and Restated Articles of Incorporation authorize
the issuance of preferred stock with designations, rights and preferences
determined from time to time by its board of directors. Accordingly, the
Company's board of directors is empowered, without shareholder approval, to
issue preferred stock with dividends, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of common stock. The Company has not issued preferred shares as of
December 31, 1999.

(20) ACQUISITIONS

In January 1998, the Company acquired all of the issued and outstanding
capital stock of eight affiliated corporations, principally the Company's
insurance agencies, in exchange for the issuance of shares of common stock. The
minority interest relative to the ownership of the affiliated corporations,
whose results were combined prior to their acquisition on January 1, 1998, was
accounted for as a component of equity of the Company. This treatment was
applied because the minority interest was in a deficit position due to
distributions to shareholders in excess of basis and deemed uncollectible from
the unaffiliated shareholders. The acquisition of the minority interest in the
affiliated corporations was accounted for by the purchase method. The aggregate
acquisition price was allocated to the portion of the net identifiable assets
pertaining to the minority interest based on their fair value. The allocation of
the acquisition price to the minority interest's net identifiable assets had an
excess of fair value over the new adjusted book basis creating goodwill of
approximately $1,035,000 and eliminated the minority interest deficit of
approximately $113,000. The acquisition of the net retained deficit of the
affiliated corporations, and the elimination of their common stock resulted in
the net credit to the equity of the Company of approximately $995,000. The
issuance of $100,000 to individuals of the controlled group for their shares in
these entities was recorded as a distribution in the statement of changes in
shareholders' equity and comprehensive income.

In December 1998, the Company consummated an asset acquisition of 18
insurance agencies in exchange for $1.1 million in cash and a $500,000 note
payable. The aggregate acquisition price was allocated to the net identifiable
assets based on their fair value. The allocation of acquisition price to net
identifiable assets had an excess of fair value over the new adjusted book basis
creating goodwill of approximately $1.4 million.

In January 1999, the Company consummated an asset acquisition of two
insurance agencies in exchange for $212,000 in cash and 40,000 shares of common
stock valued at $300,000. The aggregate acquisition price was allocated to the
net identifiable assets based on their fair value. The allocation of acquisition
price to net identifiable assets had an excess of fair value over the new
adjusted book basis creating goodwill of approximately $512,000.

In June 1999, the Company consummated an asset acquisition of three
insurance agencies in exchange for $130,000 in cash and a note payable in the
amount of $300,000. The aggregate acquisition price was allocated to the net
identifiable assets based on their fair value. The allocation of acquisition
price to net identifiable assets had an excess of fair value over the new
adjusted book basis creating goodwill of approximately $430,000.

In August 1999, the Company acquired 80% of the outstanding stock of
Express Tax and Insurance Services Inc., a licensor or tax return preparation
software, for $100,000 cash and 20,000 shares

F-28

<PAGE>

21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

of common stock valued at $130,000. The aggregate acquisition price was
allocated to the net identifiable assets based on their fair value. The
allocation of the acquisition price to the net identifiable assets had an excess
of fair value over the new adjusted book basis creating goodwill of
approximately $215,000.

Revenues of approximately $3.6 million and expenses of approximately
$3.4 million relating to acquisitions consummated in December 1998 and
throughout 1999, are included in the accompanying consolidated statements of
income for the year ended December 31, 1999.

(21) EMPLOYEE BENEFIT PLAN

The Company has established a profit sharing plan under Section 401(k)
of the Internal Revenue Code. This plan allows eligible employees to contribute
up to 15 percent of their compensation on a pre-tax basis, not to exceed $10,000
for 1999 and 1998. For the years ended December 31, 1999 and 1998, the Company
declared a discretionary match of 100 percent of the first 3 percent of the
employees' contribution. Such matching Company contributions are vested
incrementally over five years. The charge to operations for the Company's
matching contribution was approximately $59,000 and $32,000 in 1999 and 1998,
respectively.

(22) ORGANIZATION OF NEW BANK

In September 1999, the Company filed applications with the Office of
Thrift Supervision for approval to charter a new federal savings bank (the
"Proposed Bank") and to become a savings and loan holding company. The Company
filed with the Federal Deposit Insurance Corporation for deposit insurance
coverage. All such applications remain pending as of the date of this report.

The Company is pursuing several alternatives to capitalize the bank
including a private placement of common stock and/or convertible debt as well as
internal funding through the utilization of Federated Premium Finance's unused
line of credit and an investment in the Proposed Bank by Federated National. The
actual terms of the sale of any stock or debt will be negotiated and will not be
registered under the Securities Act of 1933.

There can be no assurance that the regulatory authorities will approve
the applications or that the Company will be able to obtain the financing
required to capitalize the Proposed Bank.

F-29

<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------- ---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------

None

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
- ------- ----------------------------------------------------
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT

Set forth below is certain information concerning the directors and executive
officers of the Company:
<TABLE>
<CAPTION>

Director
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
Edward J. Lawson (1)(3) 50 President, Chief Executive Officer and Director 1991
Michele V. Lawson 42 Treasurer and Director 1991
Richard A. Widdicombe 41 President, Federated National and Assurance MGA --
Samuel A. Milne 50 Chief Financial Officer --
Ronald A. Raymond (3)(4) 55 Director 1995
Joseph A. Epstein (1)(2) 45 Secretary and Director 1998
Patrick D. Doyle (1)(2) 40 Director 1998
Wallace J. Hilliard 67 Director 1999
Carla L. Leonard 38 Director 1991
Bruce F. Simberg (2) 51 Director 1998
</TABLE>

- ----------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Investment Committee
(4) Resigned effective March 2000

Edward J. Lawson co-founded the Company and has served as its
President and Chief Executive Officer since inception. Mr. Lawson has over 17
years experience in the insurance industry commencing with the founding of the
Company's initial insurance agency in 1983.

Michele V. Lawson co-founded the Company and has served as a director
and executive officer since inception. Mrs. Lawson is currently the Company's
Treasurer. Mrs. Lawson has 17 years experience in the insurance industry
commencing with the founding of the Company's initial insurance agency in 1983
and also holds a property and casualty license in Florida.

Samuel A. Milne has served as the Company's Chief Financial Officer
since July 1999 and is the proposed Chief Financial Officer of the Bank.
Prior thereto, Mr. Milne was an employee of Premier Administrative
Services, Inc., a financial consulting company from July 1998 to July 1999.
From May 1995 to April 1998, he was Senior Vice President and Chief
Financial Officer for BankUnited Financial Corporation. From April 1992 to
May 1995, Mr. Milne was Senior Vice President and Chief Financial Officer
for Consolidated Bank, N.A. From August 1984 to September 1991, Mr. Milne
served in a number of executive positions at Southeast Bank, N.A., most
recently serving as Senior Vice President-Finance. Prior thereto, Mr. Milne
was a Senior Manager with Arthur Andersen LLP, the international public
accounting firm.

Richard A. Widdicombe assumed the office of President of Federated
National and Assurance MGA in November 1999. Mr. Widdicombe has over 20 years of
insurance experience. He started as an adjuster with Allstate Insurance Company
and has worked with Indiana Insurance Company. During the

<PAGE>

15 years he has worked for Insurance Servicing and Adjusting Company and
its sister company, Jardine MacNeil as Vice President. He holds his adjuster's
license and CPCU designation. He is a member of the Florida Department of
Insurance Initial Disaster Assessment team.

Ronald A. Raymond has served as a director of the Company since June
1995 and as Federated National's President from June 1995 to November 1999.
From May 1970 to the present date, Mr. Raymond has been a shareholder and
president of Raymond/Patterson Agency, Inc., a managing general agency, in
Ft. Lauderdale, Florida. From May 1992 to the present date, Mr. Raymond has
been a shareholder of Gulfstream Insurance Group, Inc., a multi-lines
insurance agency, in Fort Lauderdale, Florida. Mr. Raymond holds general
lines, and life insurance licenses in Florida and is a past President of
the Independent Insurance Agents of Broward County.

Patrick D. Doyle has served as director of the Company since April 1998
and as Secretary of the Company from April 1998 to June 1999. Since October 1999
he has served as President of Travel Services International Inc. From April 1990
to October 1999, Mr. Doyle served as Chief Financial Officer of Effjohn North
America Limited, a lessor and manager of cruise ships. From May 1982 to April
1990, Mr. Doyle was employed by KPMG LLP, most recently as a Senior
Manager focusing on the emerging growth business sector. Mr. Doyle is a
certified public accountant. Mr. Doyle is also currently a director of a
subsidiary of Silja OY AB, a Finish company.

Joseph A. Epstein has served as a director of the Company since April
1998. Since October 1999 he has served as Chief Operating Officer of Prest,
Berger, Davis and Singerman. From January 1998 to October 1999, Mr. Epstein
served as Chief Financial Officer at the Center of English Studies, Inc., a
provider of lauguage services. From November 1996 to January 1998, Mr.
Epstein was a partner at the accounting firm of Mallah, Furman & Company,
P.A. From May 1989 to October 1996, Mr. Epstein was a shareholder firm of
Rachlin, Cohen & Holtz.

Wallace J. Hilliard joined the Company's Board of Directors in January
1999. Since May 1997, Mr. Hilliard has been the owner of a private company,
which charters business jets. Mr. Hilliard co-founded and was the Chairman
of American Medical Security, Inc., a provider of medical and specialty
health and life insurance products and administrative services, which was
sold to United Wisconsin Services, Inc. in 1996. Prior to that, Mr.
Hilliard co-founded Employers Health Insurance, which was sold to Humana,
Inc. in 1995.

Carla L. Leonard has served as a director of the Company since its
inception. Since May 1999, she has served as Executive Vice President of
RPA Financial. From September 1983 to May 1999, Ms. Leonard owned and
operated Statewide Insurance and Auto Tag Agency, Inc., an independent
insurance agency.

Bruce Simberg has served as a director of the Company since January
28, 1998. Mr. Simberg has been a practicing attorney for the last 23 years,
most recently as managing partner of Conroy, Simberg & Ganon, a law firm in
Ft. Lauderdale, Florida since October 1979.

Edward J. Lawson and Michele V. Lawson are husband and wife. There are
no other family relationships among the Company's directors and executive
officers.

The Company's Articles provide that the Board of Directors is divided
into three classes, and directors serve staggered three-year terms. Joseph A.
Epstein and Carla Leonard will hold office until the annual meeting of
Shareholders scheduled to be held in 2000. Bruce Simberg and Patrick Doyle will
hold office until the 2000 annual meeting, and Edward J. Lawson, Michele V.
Lawson and Ronald A. Raymond will hold office until the 2001 annual meeting.

The Company has agreed to elect one designee of the managing
underwriter of the IPO to the Company's Board of Directors through November
2001. Mr. Hilliard currently serves as such designee.

<PAGE>

Officers of the Company serve at the pleasure of the Board of Directors
and until the first meeting of the Board of Directors following the next annual
meeting of the Company's shareholders and until their successors have been
chosen and qualified.

Director Compensation

The Company has historically paid fees to all of its directors. Such
fees were paid at rates ranging from $12,000 to $25,000 per annum from January
1, 1998 through August 31, 1998.

Commencing September 1, 1998, non-employee directors receive a fee of
$500 per meeting of the Board of Directors or committee thereof attended and
received annual grants of stock options under the Company's 1998 Stock Option
Plan (the "1998 Plan") to purchase 3,000 shares of Common Stock. All directors
are also reimbursed for travel and lodging expenses in connection with their
attendance at meetings.

In September 1998, each of Ms. Leonard and Messrs. Doyle, Epstein and
Simberg were granted ten-year options under the 1998 Plan to purchase 3,000
shares of Common Stock at an exercise price of $10.00 per share. Such options
vest over a four-year period commencing September 1999.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and holders of more than
ten percent of the Company's Common Stock, to file reports of ownership and
changes in ownership with the Commission. Such persons are required to furnish
the Company with copies of all Section 16(a) forms they file.

Based solely on it review of the copies of such forms received by it,
or oral or written representations from certain reporting persons from whom no
Forms 5 were required, the Company believes that, within 1999, its executive
officers, directors and greater than ten percent beneficial owners complied with
all such filing requirements.

<PAGE>

ITEM 10. EXECUTIVE COMPENSATION
- -------- ----------------------

Summary Compensation Table

The following table sets forth information concerning compensation for
1999, 1998 and 1997 received by the Chief Executive Officer (the "CEO") and for
the other executive officers whose annual salary and bonus exceeded $100,000 for
1999 (collectively, with the CEO, the "Named Executive Officers").
<TABLE>
<CAPTION>

Long Term
Compensation
Annual Compensation Awards
----------------------- ------------
Securities All Other
Fiscal Salary Bonus Underlying Compensation
Name and Principal Position Year $ $ Options ($)(1)
------ ------ ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Edward J. Lawson 1999 $156,000 0 $
President and CEO 1998 $129,438 0 $
1997 $290,936 0 3,000

Michele V. Lawson 1999 $ 78,000 $
Treasurer 1998 $104,618 0 $
1997 $192,991 0 2,000

Ronald A. Raymond 1999 $ 76,500 0 $0
Director 1998 $103,320 0 $
1997 $106,000 0 5,000
</TABLE>

(1) Represents $4,680 and $2,340 in contributions for Mr. Lawson and Mrs.
Lawson, respectively to the Company's 401(k) Plan and $0 in directors fees
during 1999.
(1) Represents $3,030 in contributions for Mr. Lawson, Mrs. Lawson and Mr.
Raymond to the Company's 401(k) Plan and $49,992 in directors fees for Mr.
Lawson, Mrs. Lawson and Mr. Raymond during 1998.
(1) Represents $3,000 in contributions for Mr. Lawson and Mr. Raymond to the
Company's 401(k) Plan and $2,000 in directors fees for Mrs. Lawson and Mr.
Raymond during 1997

Employment Agreements

Effective September 1, 1998, the Company entered into employment
agreements with each of Edward J. Lawson, the Company's President and Chief
Executive Officer and Michele V. Lawson, the Treasurer. Each employment
agreement, has a "rolling" two-year term, so that at all times the remaining
term of the agreement is two years. The employment agreements provide for annual
salaries initially set at $156,000 for Mr. Lawson, and $78,000 for Mrs. Lawson,
and such bonuses and increases as may be awarded by the Board of Directors.

Each employment agreement provides that the executive officer will
continue to receive his or her salary for a period of two years after the
termination of employment, if his or her employment is terminated by the Company
for any reason other than death, disability or cause (as defined in the
employment agreement), or for a period of 24 months after termination of the
agreement as a result of his or her disability and a bonus equal to twice the
amount paid to the executive officer during the 12 months preceding the
termination, and the executive officer's estate will receive a lump sum payment
equal to two year's salary plus a bonus equal to twice the amount paid to the
executive officer during the 12 months preceding the termination by reason of
his or her death. Each employment agreement also prohibits the executive officer
from directly or indirectly competing with the Company for one year after
termination for any reason except a termination without cause. Notwithstanding
the foregoing, no assurance can be given

<PAGE>

that a court of competent jurisdiction will enforce the provisions restricting
these executives from competing with the Company. If a change of control (as
defined in the employment agreement) occurs, the employment agreement provides
for the continued employment of the executive officer for a period of two years
following the change of control. In addition, following the change of control,
if the executive officer's employment is terminated by the Company other than
for cause or by reason of his death or disability, or by the executive officer
for certain specified reasons (such as a reduction of compensation or a
diminution of duties), he or she will receive a lump sum cash payment equal to
299% of the cash compensation received by him of her during the 12 calendar
months prior to such termination.

Effective August 2, 1999, the Company entered into an employment
agreement with Samuel A. Milne, the Company's Chief Financial Officer, for a
two-year term. Pursuant to the employment agreement, Mr. Milne was granted
options under the 1998 Plan to purchase a total of 20,000 shares of Common Stock
vesting over a four-year period commencing one year from the date of grant at an
exercise price equal to $10.00 per share. The employment agreement also provides
for an annual salary of $104,000.

Effective November 11, 1999, the Company entered into an employment
agreement with Richard A. Widdicombe, President of Federated National Insurance
and Assurance MGA, for a four-year term. Pursuant to the employment agreement,
Mr. Widdicombe was granted options under the 1998 Plan to purchase a total of
40,000 shares of Common Stock vesting over a four-year period commencing one
year from the date of grant at an exercise price equal to $10.00 per share. The
employment agreement also provides for an annual salary of $78,000, a monthly
car allowance in the amount of $600 and a bonus at the end of one year in the
amount of $20,000, contingent upon an increase in revenues or gross written
premium of either Federated National or Assurance MGA.

<PAGE>

Option Grants in Last Fiscal Year. The following table sets forth information
concerning individual grants of stock options made during 1999 to each of the
named Executive Officers:
<TABLE>
<CAPTION>

OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------
Number of
Securities # of Total
Underlying Options Granted Exercise
Options to Employees in or Base Expiration
Name Granted (1) Fiscal Year Price ($/Share) Date
---- ----------- ----------- --------------- ---------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Samuel A. Milne 20,000 198,300 $10.00 08/01/09
Richard A. Widdicombe 40,000 198,300 $10.00 11/11/09
- ---------------------
</TABLE>

(1) Represents options granted under the 1998 Plan. Such options vest over a
four-year period commencing one year from the date of grant.

Stock Options Held at end of 1999. The following table indicates the total
number and value of exercisable and unexercisable stock options held by each
named Executive Officer as of December 31, 1999. No options were exercised by
the Named Executive Officers during the year ended December 31, 1999.
<TABLE>
<CAPTION>

Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year End at Fiscal Year End (1)
-------------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
- -------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Edward J. Lawson 4,000 12,000 0 0
Michele V. Lawson 2,500 7,500 0 0
Ronald A. Raymond 2,500 7,500 0 0
</TABLE>

(1) Based on The Nasdaq National Market last sale price for the Company's
Common Stock on December 31, 1999, $4.12 per share.

<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of March 19, 2000, of (i) each of
the shareholders of the Company owning more than 5% of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers of the Company
as a group:
<TABLE>
<CAPTION>

Number of Shares
Name and Address of Beneficial Owner(1) Beneficially Owned(2) Percentage of Class
- --------------------------------------- --------------------- -------------------
<S> <C> <C> <C>
Edward J. Lawson (3) 1,232,478 36.6%
Michele V. Lawson (4) 1,232,478 36.6
Ronald A. Raymond (5) 321,590 9.6
Patrick D. Doyle (6) 2,500 *
Joseph A. Epstein (7) 2,500 *
Wallace J. Hilliard (8) 352,680 10.5
Carla L. Leonard (9) 167,490 5.0
Bruce F. Simberg (10) 45,000 1.34
Samuel A. Milne 0 0
Richard A. Widdicombe 0 0
- -
All directors and executive officers as a group
(ten persons) 2,124,238 63.1
========= ====
</TABLE>
- ----------------------
* Less than 1%
(1) The address of each person named in the table is c/o 21st Century Holding
Company, 4161 N.W. 5th Street, Plantation, Florida 33317.
(2) Except as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
listed, which include shares of Common Stock that such persons have the
right to acquire a beneficial interest within 60 days from the date of this
Report.
(3) Includes 610,139 shares of Common Stock held of record by Mrs. Lawson,
5,700 shares held in an account for minor Jenel Lawson, 4,000 stock options
vested as of 9/16/99 and 2,500 stock option vested as of 9/16/99 for Mrs.
Lawson.
(4 Includes 610,139 shares of Common Stock held of record by Mr. Lawson, 5,700
shares held in an account for minor Jenel Lawson, 2,500 stock options
vested as of 9/16/99 and 4,000 stock option vested as of 9/16/99 for Mr.
Lawson.
(5) Includes 2,500 stock options vested as of 9/16/99.
(6) Includes 2,500 stock options vested as of 9/16/99.
(7) Includes 1,700 shares of Common Stock held in an individual retirement
account and 750 stock options vested as of 11/5/99.
(8) Includes 330,980 shares of Common Stock held by a trust, and 9,300 held by
Hilliard Limited Partnership in which Mr. Hilliard is a general partner,
8,000 shares of Common Stock held in an irrevocable trust account and 4,400
shares of Common Stock held in an individual retirement account.
(9) Includes 750 stock options vested as of 11/5/99.
(10) Includes 750 stock options vested as of 11/5/99.

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Corporate Reorganization Transactions

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 954,124 shares of Common
Stock to eight persons. Included in such shares were 377,481 shares of Common
Stock issued to each of Edward J. Lawson and Michele V. Lawson, who were
principal shareholders of seven of such corporations and 18,526 shares of Common
Stock issued to Ronald A. Raymond, who was the principal shareholder of the
eighth corporation.

In February 1998, the Company acquired all of the issued and
outstanding capital stock of one additional insurance agency in exchange for the
issuance of 27,792 shares of Common Stock to five persons, including 6,948
shares of Common Stock issued to each of Edward J. Lawson and Michele V. Lawson,
who were principal shareholders of the agency.

Real Estate Transactions

In January 1999, the Company purchased two office properties
from Mr. and Mrs. Lawson of the Company, which have been utilized for agencies'
operations. One of the properties had previously been sold to the officers at
the same sales price, resulting in no gain or loss to the officer. Consideration
for the acquisitions was cash in the amount of $605,000.

Other Transactions

Bruce F. Simberg, a director of the Company, is a partner of the Fort
Lauderdale, Florida law firm of Conroy, Simberg & Ganon, which renders legal
services to the Company. In 1999 and 1998, the Company paid legal fees to
Conroy, Simberg & Ganon for services rendered in the amount of $281,347 and
$189,444, respectively.

On December 1998, the Company executed a one-year, 7% interest, note
receivable with one of its employees in the amount of $25,000. Principal and
interest is due in January 2000.

On June 1999, the Company purchased the assets of three insurance
agencies from a director for $130,000 in cash and a note payable for $300,000.

Approval of Affiliated Transactions

The Company has adopted a policy that any transactions between the
Company and its executive officers, directors, principal shareholders or their
affiliates take place on an arms-length basis and require the approval of a
majority of the independent directors of the company. The January 1999
transaction between the company and Mr. and Mrs. Lawson was so approved.

<PAGE>

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8K

(a) Exhibits

Exhibit Description
- ------- -----------

3.1 Amended and Restated Articles of Incorporation (1)
3.2 Form of Registrant's Amended and Restated Bylaws (1)
4.1 Specimen of Common Stock Certificate (1)
4.2 Revised Representative's Warrant Agreement including form of
Representative's Warrant (2)
10.1 Form of Stock Option Plan (1)*
10.2 Employment Agreement between the Registrant and Edward J. Lawson (1)*
10.3 Employment Agreement between the Registrant and Michele V. Lawson (1)*
10.4 Form of Indemnification Agreement between the Registrant and its
directors and executive officers (1)*
10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding
Company, LLC and FPF, Inc., as amended (1)
10.6 Sale and Assignment Agreement between Federated Premium and FPF, Inc.,
as amended (1)
10.7 Reinsurance Agreement between Federated National and Transatlantic
Re(1)
10.8 Amended Employment Agreement between Registrant and Samuel Milne (3)
10.9 Employment Agreement between Registrant and Richard A. Widdicombe (3)
21.1 Subsidiaries of the Registrant (1)
27.1 Financial Data Schedule (SEC use only)
- -------------------------------------------------------------
* Management Compensation Plan or Arrangement
(1) Previously filed exhibit of the number to the Registrant's Registration
Statement on Form SB-2 (File No.
333-6362 3) and incorporated herein by reference.
(2) Previously filed exhibit of the 1998 Annual Report on Form 10-KSB
(3) Filed herewith.

(b) Reports on Form 8-K
None.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section D the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report or amendment to
be signed on its behalf by the undersigned, thereto duly authorized.

21st CENTURY HOLDING COMPANY

By: /s/ Edward J. Lawson
---------------------------------------
Edward J. Lawson, Chairman of the Board,
President and Chief Executive Officer

/s/ Samuel A. Milne
Samuel A. Milne, Chief Financial Officer

Dated: March 30, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration has been signed by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>

<S> <C> <C>
Signature Title Date

/s/ Edward J. Lawson Chairman of the Board March 30, 2000
- ---------------------- President, Chief Executive
Edward J. Lawson Officer

/s/ Samuel A. Milne Chief Financial Officer March 30, 2000
- ---------------------
Samuel A. Milne

/s/ Michele V. Lawson Vice President-Agency Operations, March 30, 2000
- ---------------------- Treasurer and Director
Michele V. Lawson

/s/ Richard A. Widdicombe President, Federated National Ins March 30, 2000
- --------------------------
Richard A. Widdicombe

/s/ Ronald A. Raymond Director March 30, 2000
- ----------------------
Ronald A Raymond

/s/ Patrick D. Doyle Director March 30, 2000
- ---------------------
Patrick D. Doyle

/s/ Joseph A. Epstein Director March 30, 2000
- ----------------------
Joseph A. Epstein

/s/ Wallace J. Hilliard Director March 30, 2000
- ------------------------
Wallace J. Hilliard

/s/ Carla L. Leonard Director March 30, 2000
- ---------------------
Carla L. Leonard

/s/ Bruce Simberg Director March 30, 2000
- ----------------------
Bruce Simberg
</TABLE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), made and entered into as of the 6th
day of January, 2000, by and between:

(i) Samuel A. Milne, an individual of Miami, Florida (the "Employee")
and

(ii) 21st Century Holding Company, a Florida corporation with offices
and place of business in Plantation, Florida (the "Company") and

(iii) FedFirst Bank, in organization in Plantation, Florida (the
"Bank").

P R E L I M I N A R Y S T A T E M E N T

WHEREAS, the Company is engaged in the banking and insurance business and
desires to employ Employee and to secure for the Company and the Bank the
benefit of Employee's experience, efforts and abilities in connection with the
business of the Company and the Bank, all as provided herein; and

WHEREAS, the Company has and will continue to expend substantial resources in
connection with the aforementioned endeavors; and

WHEREAS, the Company desires to engage Employee initially as Chief Financial
Officer ("CFO") of the Company, to perform such executive duties as a CFO of the
Company would normally perform or as otherwise specified in applicable
provisions of the by-laws of the Company in effect on the date of this
Agreement, and shall perform, in addition thereto, such other reasonable duties
as the Company may reasonably request;

WHEREAS, at such time as the Bank is chartered the Company desires that Employee
resign as Chief Financial Officer of the Holding Company, and desires to engage
Employee as Chief Executive Officer ("CEO") of the Bank, to perform such
executive duties as a CEO of the Bank would normally perform, and shall perform,
in addition thereto, such other reasonable duties as the Bank may reasonably
request;

NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:

1. Employment. Effective as of the date set forth above, the Company
employs Employee, and Employee hereby accepts employment by Company, and agrees
to serve the Company, upon the terms and conditions set forth in this Agreement.

2. Term of Employment. The Employee shall be employed for a period of
two (2) years from the date set forth in Paragraph 1 herein (the period of
employment may be referred to as the "Term of Employment").

3. (a) Duties of Employee as CFO of the Company. So long as employed
hereunder as

<PAGE>

the CFO of the Company, Employee agrees to devote Employee's full
business time and energy to the business and affairs of the Company,
to perform Employee's duties hereunder effectively, diligently and to
the best of Employee's ability and to use Employee's best efforts,
skill and abilities to promote the Company's interests. Employee's
duties shall include, but are not limited to, such executive duties as
a Chief Financial Officer of the Company would normally perform or as
otherwise specified in applicable provisions of the by-laws of the
Company in effect on the date of this Agreement, and shall perform, in
addition thereto, such other services as may be determined by the
Company from time to time in the Company's reasonable discretion.

(b) Duties of Employee as CEO of the Bank. Until such time as the Bank
is chartered, Employee agrees to resign as CFO of the Company and serve
as CEO of the Bank. So long as employed hereunder as the CEO of the
Bank, Employee agrees to devote Employee's full business time and
energy to the business and affairs of the Bank, to perform Employee's
duties hereunder effectively, diligently and to the best of Employee's
ability and to use Employee's best efforts, skill and abilities to
promote the Company's interests. Employee's duties shall include, but
are not limited to, such executive duties as a Chief Executive Officer
of the Bank would normally perform, and shall perform, in addition
thereto, such other services as may be determined by the Bank from time
to time in the Bank's reasonable discretion.

4. Compensation. For all services to be rendered by Employee to the
Company and the Bank during the Term of Employment, the Company agrees to
compensate Employee and Employee agrees to accept from the Company, the
following compensation:

(a) Base Salary. The Company agrees to pay Employee a minimum base
salary per week over a 52- week period payable biweekly in the
following amount:

TWO THOUSAND AND 00/100 DOLLARS ($2,000.00)

(b) Bonus. The Company agrees to pay Employee a bonus based upon
the following bonus structure:

(1) Initial Bonus: Upon the execution of this Agreement,
Employee shall receive the option to purchase 20,000 shares of
stock of the Company at $10.00 per share pursuant to the 1998
Stock Option Plan (refer to attachment "21st Century Holding
Company 1998 Stock Option Plan) of 21st Century Holding
Company.

(c) Medical Insurance. In addition to the Employee's salary and
bonus, as set forth above, and so long as Employee is employed
by the Company, the Company agrees to provide and pay the
premium cost for medical insurance coverage for the Employee
commensurate with the coverage provided by the Company for
other similarly situated employees.

5. Termination. The Company may terminate employee's employment with the
Company if any of the following shall occur:

<PAGE>

(a) Employee shall be discharged for "good cause" which shall mean
that:

(i) there has been continued gross neglect on the part of
the Employee in the performance of Employee's duties under
this Agreement with notice and an opportunity to cure: or

(ii) Employee shall have committed a material breach of any
term or condition of this Agreement; or

(iii) Employee is convicted of a felony or of any crime
involving moral turpitude which is committed by Employee
during the term of this Agreement.

(iv) Employee continued to neglect Employee Handbook Policies
and Procedures.

If Employee's employment by the Company shall be terminated as provided
in this Section 5 or if Employee voluntarily terminates Employee's employment by
the Company, the Employee shall be entitled to Employee's base weekly salary (as
provided in Section 4(a) above) prorated only through the date of the
termination of employment.

(b) Notwithstanding the provisions of paragraph (a), all parties
agree to the following:

(ii) The Bank's Board of Directors may terminate the
Employee's employment at anytime, but any termination
by the Bank's board of Directors other than termination
for cause, shall not prejudice the Employee's right to
compensation or other benefits as agreed to under the
original employment agreement. The Employee shall have
no right to receive compensation or other benefits for
any period after termination for cause. Termination for
cause shall include termination due to the Employee's
personal dishonesty, incompetence, willful misconduct,
breach of fiduciary responsibility involving personal
profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final
cease and desist order, or material breach of any
provision on the contract.

(ii) If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the
Bank's affairs by any notice served by any Federal
Regulatory Agency under Section 8 of the Federal Deposit
Insurance Act, the Bank's obligations under the contract
shall be suspended as of the date of service unless
stayed by appropriate proceedings. If the charges are
dismissed, the Bank may, in its discretion, pay the
Employee all or part of the withheld compensation while
its contractual obligations were suspended and reinstate
(in whole or in part) any of its obligations that were
suspended.

(iii) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the banks affairs
by an order issued by any Federal Regulatory Agency
under Section 8 of the Federal Deposit Insurance Act,
all obligations of the Bank under the contract shall
terminate as of the effective

<PAGE>

date of the order. However, vested night of the
contracting parties shall not be affected.

(iv) If the Bank is in default, (as defined in the Federal
Deposit Insurance Act), all obligations under the
contract shall terminate as of the date of default, but
this action shall not affect any of the vested rights of
the contracting parties:

(v) All obligations under the contract shall be terminated,
except to the extent determined that continuation of the
contract is necessary of the continued operation of the
Bank by:

o The Director or his or her designee, at
the time the Federal Deposit Insurance
Corporation or Resolution Trust
Corporation enters into an agreement to
provide assistance to, or on behalf of the
Bank under the authority contained in the
Federal Deposit Insurance Act; or

o The Director or his or her designee, at
the time the Director or his or her
designee approves a supervisory merger to
resolve problem related to operation of
the Bank or when the Bank is determined by
the Director to be in an unsafe or unsound
condition.

Any rights of the parties that have already vested, however, shall not be
affected by such action.

6. Annual Review. All parties agree that upon chartering of the Bank, each year
the Bank's Board of Directors will review the performance and compensation
arrangements between the Bank and Employee, with such action documented in the
FedFirst board of directors' minutes.

7. Salary Allocation. Upon Employee's resignation as CFO of the Company and
upon Employee's service as CEO of the Bank, the Bank agrees to reimburse the
Company for 50% of the payments made to Employee pursuant to the terms of this
Agreement, as partial compensation to the Company for Employee's services as a
full-time employee of the Bank.

8. Confidentiality Agreement. The Employee recognizes, acknowledges and agrees
that the documents, lists, files, records, data and other information developed
and acquired by the Company, including all information developed and acquired by
the Employee in the course of Employee's employment with the Company as it may
exist from time to time, are considered confidential, and include, but are not
limited to, all information relating to the Company's projects, proposed
projects or applications (the "Confidential Information").

<PAGE>

(a) Prohibited Acts. The Employee understands and agrees that all
such Confidential Information is to be preserved and
protected, is not to be disclosed or made available, directly
or indirectly, to third persons for purposes unrelated to the
objectives of the Company, without prior authorization of an
executive officer of the Company, and is not to be used,
directly or indirectly, for any purpose unrelated to the
objectives of the Company without prior written authorization
of an executive officer of the Company.

(b) Continuing Obligations. The Employee understands and agrees
that Employee's obligations under this Agreement, specifically
including the obligations to preserve and protect and not to
disclose (or make available to third persons) or use for
purposes unrelated to the objectives of the Company, without
prior written authorization of an executive officer of the
Company, Confidential Information, continue indefinitely and
do not, under any circumstances or for any reason
(specifically including wrongful discharge), cease upon
termination of employment; and that, in the event of
termination of the Employee's employment for any reason
(specifically including wrongful discharge), such Confidential
Information shall remain the sole property of the Company and
shall be left in its entirety in the undisputed possession and
control of the Company after such termination.

9. Enforcement of Covenants. In addition to all other remedies available at law
or in equity, the covenants contained in Sections 6 and 7 hereof shall be
enforceable by decree of specific performance and/or injunctive relief and shall
be construed as separate covenants covering competition in the geographical
territory set forth, and if any court shall finally determine that the
restraints provided for therein are too broad as to the area, activity or time
covered, then the area, activity or time covered, as the case may be, may be
reduced by such court to whatever extent the court deems reasonable and such
covenants shall be enforced as to such reduced area, activity or time.

10. Notices. All notices, demands and other communications which may or are
required to be given to or made by either party to the other in connection with
this Agreement shall be in writing, shall be given by hand delivery or by United
States Certified or Registered mail, return receipt requested, postage prepaid,
and shall be deemed to have been given or made when received by the addressee,
addressed to the respective parties as follows:

If to Employee: SAMUEL A. MILNE
15820 S.W. 77 Avenue
Miami, Florida 33157
If to Company
Or the Bank: 21ST CENTURY HOLDING COMPANY
4161 N.W. 5th Street
Plantation, Florida 33317
Attn: Edward J. Lawson

11. Miscellaneous:

(a) This Agreement has been executed in and shall be governed and
construed in

<PAGE>

accordance with the laws of the State of Florida.

(b) Unless otherwise provided herein, all rights, powers, and
privileges conferred hereunder upon the parties shall be cumulative and not
restrictive of those given by law.

(c) No failure of any party hereto to exercise any power given such
party hereunder or to insist upon strict compliance by the other party with its
obligations hereunder, and no customary practice of the parties at variance with
the terms hereof, shall constitute a waiver of a party's right to demand exact
compliance with the terms hereof.

(d) Time is of the essence in complying with the terms, conditions and
provisions of this Agreement.

(e) This Agreement contains the entire agreement of the parties hereto
pertaining to the subject matter hereof, and no representation, inducements,
promises or agreements between the parties not contained herein shall be of any
force or effect.

(f) This Agreement is binding upon and shall inure to the benefit of
the Company, its successors and assigns, the Bank, its successors and assigns,
and the Employee and his respective heirs, personal representatives, successors
and assigns.

(g) Any amendment to this Agreement shall not be binding upon the
parties to this Agreement unless such amendment is in writing and due executed
by all the parties hereto.

(h) In the event any litigation or controversy arises out of or in
connection with this Agreement between the parties hereto, the prevailing party
in such litigation or controversy shall be entitled to recover from the other
party or parties all reasonable attorney's fees, expenses and suit costs,
including those associated with any appellate or post-judgment collection
proceeding.

[SIGNATURES ON FOLLOWING PAGE]

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day, month and year first above written.

--------------------------------
SAMUEL A. MILNE
(the "Employee")

21ST CENTURY HOLDING COMPANY
a Florida corporation

By:------------------------------
Name: Edward J. Lawson
-----------------------------
Title: President
---------------------------
(the "Company")

FIRSTFED BANK (IN ORGANIZATION)

By:-----------------------------
Name:---------------------------
Title:--------------------------
(the "Bank")

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), made and entered into as of the
11th day of November, 1999, by and between:

(i) RICHARD A. WIDDICOMBE, an individual of Coral Springs, Florida
(the "Employee") and

(ii) 21ST CENTURY HOLDING COMPANY, a Florida corporation with
offices and place of business in Plantation, Florida (the
"Company").

P R E L I M I N A R Y S T A T E M E N T

WHEREAS, the Company is engaged in the insurance business and desires to employ
Employee and to secure for the Company the benefit of Employee's experience,
efforts and abilities in connection with the business of the Company, all as
provided herein; and

WHEREAS, the Company has and will continue to expend substantial resources in
connection with the aforementioned endeavors; and

WHEREAS, the Company desires to engage Employee as President of Federated
National Insurance Company and Assurance Managing General Agents, Inc., wholly
owned subsidiaries of the Company, to perform management functions and other
services in connection with the business of the Company, and

1. Employment. Effective as of November 29, 1999, the Company employs
Employee, and Employee hereby accepts employment by Company, and agrees to serve
the Company, upon the terms and conditions set forth in this Agreement.

2. Term of Employment. The Employee shall be employed for a period of
four (4) years from the date set forth in Paragraph 1 herein (the period of
employment may be referred to as the "Term of Employment").

3. Duties of Employee. So long as employed hereunder, Employee agrees to
devote Employee's full business time and energy to the business and affairs of
the Company, to perform Employee's duties hereunder effectively, diligently and
to the best of Employee's ability and to use Employee's best efforts, skill and
abilities to promote the Company's interests. Employee's duties shall include,
but are not limited to, management functions for the Company, as well as
providing any other services as may be determined by the Company from time to
time in the Company's reasonable discretion.

<PAGE>

4. Compensation. For all services to be rendered by Employee to the
Company during the Term of Employment, the Company agrees to compensate Employee
and Employee agrees to accept from Employer, the following compensation:

(a) Base Salary. The Company agrees to pay Employee a base salary
of FIFTEEN HUNDRED AND NO/100 DOLLARS ($1,500.00) per week
over a 52 week period payable biweekly.

(b) Bonus. The Company agrees to pay Employee a bonus based upon
the following bonus structure:

(1) Initial Bonus: Upon the execution of this Agreement,
Employee shall receive the option to purchase 40,000 shares of
stock of the Company at $10.00 per share pursuant to the 1998
Stock Option Plan (refer to attachment "21st Century Holding
Company 1998 Stock Option Plan) of 21st Century Holding
Company.

(2) Bonus: At the completion of one (1) year of employment
under this Agreement and each subsequent year of this
Agreement, the Employee will receive a bonus of TWENTY
THOUSAND AND NO/100 DOLLARS ($20,000.00) contingent upon an
increase in revenues or gross written premium for either
Assurance MGA or Federated National , and as long as the
Employee is still employed by the Company. At the Company's
sole discretion, the Bonus may be paid in cash, stock or a
combination of cash and/or stock with the valuation of the
stock to be valued at the closing price of the stock on the
aforementioned dates. The Bonus shall be paid to Employee
within fifteen (15) days of the anniversary date of this
Agreement.

(3) Reimbursement of Business Expenses: During the term of
this Agreement, the Company shall reimburse the Employee
for all reasonable business expenses incurred by Employee
in the performance of Employee's duties.

(4) Car Allowance: The Corporation shall pay to the Employee
the sum of SIX HUNDRED AND NO/100 DOLLARS ($600.00) per
month to compensate for the depreciation of the value of the
Employee's vehicle and expenses incurred (i.e. insurance,
repairs, maintenance, etc.) while vehicle is used in the
business of the Corporation.

(c) Medical Insurance. In addition to the Employee's salary and bonus,
as set forth above, and so long as Employee is employed by the Company,
the Company agrees to provide and pay the premium cost for medical
insurance coverage for the Employee commensurate with the coverage
provided by the Company for other similarly situated employees.

<PAGE>

5. Termination. Employee's employment with the Company may be terminated
by the Company if any of the following shall occur:

(a) Employee shall be discharged for "good cause" which shall mean
that:

(i) there has been continued gross neglect on the part of the
Employee in the performance of Employee's duties under this
Agreement, after notice from the Company and an opportunity to
cure; or

(ii) Employee shall have committed a material breach of any
term or condition of this Agreement, after notice from the
Company and an opportunity to cure; or

(iii) Employee is convicted of a felony or of any crime
involving moral turpitude which is committed by Employee
during the term of this Agreement.

(iv) Employee continued to neglect Employee Handbook Policies
and Procedures after written notification from the Company and
an opportunity to cure.

If Employee's employment by the Company shall be terminated as provided
in this Section 5 or if Employee, voluntarily terminates Employee's employment
by the Company, the Employee shall be entitled to Employee's base weekly salary
(as provided in Section 4(a) above) prorated only through the date of the
termination of employment.

6. Confidentiality Agreement. The Employee recognizes, acknowledges and
agrees that the documents, lists, files, records, data and other information
developed and acquired by the Company, including all information developed and
acquired by the Employee in the course of Employee's employment with the Company
as it may exist from time to time, are considered confidential, and include, but
are not limited to, all information relating to the Company's projects, proposed
projects or applications (the "Confidential Information").

(a) Prohibited Acts. The Employee understands and agrees that
all such Confidential Information is to be preserved and
protected, is not to be disclosed or made available, directly
or indirectly, to third persons for purposes unrelated to the
objectives of the Company, without prior authorization of an
executive officer of the Company, and is not to be used,
directly or indirectly, for any purpose unrelated to the
objectives of the Company without prior written authorization
of an executive officer of the Company.

<PAGE>

Company without prior written authorization of an executive
officer of the Company, Confidential Information, continue
indefinitely and do not, under any circumstances or for any
reason (specifically including wrongful discharge), cease upon
termination of employment; and that, in the event of
termination of the Employee's employment for any reason
(specifically including wrongful discharge), such Confidential
Information shall remain the sole property of the Company and
shall be left in its entirety in the undisputed possession and
control of the Company after such termination.

7. Enforcement of Covenants. In addition to all other remedies available
at law or in equity, the covenants contained in Sections 6 and 7 hereof shall be
enforceable by decree of specific performance and/or injunctive relief and shall
be construed as separate covenants covering competition in the geographical
territory set forth, and if any court shall finally determine that the
restraints provided for therein are too broad as to the area, activity or time
covered, then the area, activity or time covered, as the case may be, may be
reduced by such court to whatever extent the court deems reasonable and such
covenants shall be enforced as to such reduced area, activity or time.

8. Notices. All notices, demands and other communications which may or are
required to be given to or made by either party to the other in connection with
this Agreement shall be in writing, shall be given by hand delivery or by United
States Certified or Registered mail, return receipt requested, postage prepaid,
and shall be deemed to have been given or made when received by the addressee,
addressed to the respective parties as follows:

If to Employee: RICHARD A. WIDDICOMBE
4924 N.W. 85 Road
Coral Springs, FL 33067

If to Company: 21ST CENTURY HOLDING COMPANY
4161 N.W. 5th Street
Plantation, Florida 33317
Attn: Edward J. Lawson

9. Miscellaneous:

(a) This Agreement has been executed in and shall be governed and
construed in accordance with the laws of the State of Florida.

(b) Unless otherwise provided herein, all rights, powers, and
privileges conferred hereunder upon the parties shall be cumulative and not
restrictive of those given by law.

<PAGE>

(d) Time is of the essence in complying with the terms, conditions and
provisions of this Agreement.

(f) This Agreement is binding upon and shall inure to the benefit of
the Company, its successors and assigns and the Employee and his respective
heirs, personal representatives, successors and assigns.

(g) Any amendment to this Agreement shall not be binding upon the
parties to this Agreement unless such amendment is in writing and due executed
by all the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day, month and year first above written.

-----------------------------
RICHARD A. WIDDICOMBE
(the "Employee")

21ST CENTURY HOLDING COMPANY
a Florida corporation

By:--------------------------
Name: Edward J. Lawson
------------------------
Title: President
-----------------------
(the "Company")

<ARTICLE> 7

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 11,170,035
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,627,232
<MORTGAGE> 119,304
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<TOTAL-INVEST> 13,916,571
<CASH> 923,175
<RECOVER-REINSURE> 532,462
<DEFERRED-ACQUISITION> (10,243)
<TOTAL-ASSETS> 38,686,404
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0
0
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13,456,348
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<NET-INCOME> 1,566,731
<EPS-BASIC> 0.46
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<PROVISION-CURRENT> 8,764,334
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</TABLE>