SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________.
Commission file number 0-2500111
21st Century Holding Company
----------------------------
(Exact name of registrant as specified in its charter)
FL 65-0248866
------------------------------- ------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
4161 N.W. 5th Street, Plantation, FL 33317
------------------------------------------
(Address of principal executive offices) (Zip Code)
954-581-9993
------------
(Registrant's telephone number, including area code)
CHECK WHETHER THE REGISTRANT (1) FILED ALL REPORTS REQUIRED TO BE FILED
BY SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES [ ] NO [X]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE:
COMMON STOCK, PAR VALUE $.01 PER SHARE - 3,362,667 SHARES OUTSTANDING AS OF
NOVEMBER 9, 2000.
<PAGE>
21ST CENTURY HOLDING COMPANY
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1:
Consolidated Balance Sheets
as of September 30, 2000 (Unaudited)
and December 31, 1999 (Audited)..................................................................... 3
Consolidated Statements of Income
for the three and nine months ended September 30, 2000 (Unaudited)
and 1999 (Unaudited)................................................................................ 4
Consolidated Cash Flow Statements
for the nine months ended September 30, 2000 (Unaudited)
and 1999 (Unaudited)................................................................................ 5
Condensed Notes to Consolidated Financial Statements..................................................... 6
ITEM 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations.................................................... 10
PART II: OTHER INFORMATION
Other Information........................................................................................ 16
Signature................................................................................................ 17
</TABLE>
2
<PAGE>
PART I
ITEM I. FINANCIAL INFORMATION
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31,1999
(UNAUDITED)
ASSETS
<S> <C> <C>
Available for sale at fair value:
Investments
Fixed maturities $ 20,556,610 $ 11,170,035
Equity securities 2,937,293 2,627,232
Mortgage loans 275,119 119,304
------------ ------------
Total investments 23,769,022 13,916,571
------------ ------------
Cash and cash equivalents 1,732,865 923,175
Finance contracts, consumer loans and pay advances receivable, net of allowances for
credit losses of $632,410 and $272,192, respectively 15,140,204 9,642,163
Prepaid reinsurance premiums 1,527,960 2,604,607
Premiums receivable, net of allowance of $225,000 and $50,000, respectively 1,617,550 1,256,485
Due from reinsurers, net 1,646,741 1,670,849
Deferred acquisition costs, net 1,128,415 (10,243)
Deferred income taxes 2,914,783 1,785,514
Property, plant and equipment net 3,469,272 2,514,505
Other assets 956,536 980,375
Goodwill 2,947,412 3,402,403
------------ ------------
TOTAL ASSETS $ 56,850,760 $ 38,686,404
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 8,252,090 $ 6,314,307
Unearned premiums 14,196,001 8,394,269
Revolving credit outstanding 6,853,589 4,650,026
Bank overdraft 3,938,650 1,528,736
Unearned commissions 1,726,739 802,757
Due to third party insurers 2,262,088 --
Accounts payable and accrued expenses 1,699,665 511,997
Notes payable -- 417,773
Drafts payable to insurance companies 924,919 312,651
------------ ------------
TOTAL LIABILITIES 39,853,741 22,932,516
------------ ------------
Commitments and contingencies -- --
Shareholders' equity:
Common stock of $.01 par value. Authorized 25,000,000 shares
issued 3,410,667 and 3,370,000 shares, and outstanding 3,362,967
and 3,365,000 shares, respectively 34,107 33,700
Additional paid-in capital 12,894,630 12,690,087
Accumulated other comprehensive income (1,434,699) (1,244,830)
Retained earnings 5,720,581 4,297,994
Treasury stock, 47,700 and 5,000 shares, at cost, respectively (217,600) (23,063)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 16,997,019 15,753,888
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 56,850,760 $ 38,686,404
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $ 7,455,722 $ 3,691,802 $ 25,617,159 $ 15,529,597
Gross premiums ceded (1,310,725) (1,215,394) (1,974,812) (4,930,729)
------------ ------------ ------------ ------------
Net premiums written 6,144,997 2,476,408 23,642,347 10,598,868
Increase in unearned premiums, net
of prepaid reinsurance premiums 143,714 918,752 (7,152,456) (224,213)
------------ ------------ ------------ ------------
Net premiums earned 6,288,711 3,395,160 16,489,891 10,374,655
Commission income 556,177 1,174,465 2,289,268 3,228,962
Managing general agent fees 2,821,019 217,111 5,406,910 723,917
Finance revenue 1,522,939 958,075 4,222,657 2,589,997
Net investment income 365,005 184,118 900,267 656,107
Net realized investment (losses) gains 613,295 87,707 1,026,142 566,805
Other income 503,738 212,637 1,742,218 732,590
------------ ------------ ------------ ------------
Total revenue 12,670,884 6,229,273 32,077,353 18,873,033
------------ ------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses 4,306,663 2,069,023 11,681,939 5,970,362
Operating and underwriting expenses 2,773,066 1,710,495 7,723,858 4,909,764
Salaries and wages 2,495,599 1,856,105 6,982,942 5,344,314
Policy acquisition costs 1,993,185 123,296 2,970,673 (82,709)
Amortization of goodwill 144,390 131,828 454,991 385,893
------------ ------------ ------------ ------------
Total expenses 11,712,903 5,890,747 29,814,403 16,527,624
------------ ------------ ------------ ------------
Income before provision for income
tax expense 957,981 338,526 2,262,950 2,345,409
Provision for income tax expense 344,132 102,391 773,103 786,658
------------ ------------ ------------ ------------
Net income $ 613,849 $ 236,135 $ 1,489,847 $ 1,558,751
============ ============ ============ ============
Net income per share and net income per share-
assuming dilution $ 0.18 $ 0.07 $ 0.44 $ 0.46
============ ============ ============ ============
Weighted average number of common shares outstanding and
weighted average number of common shares outstanding 3,376,434 3,380,000 3,385,241 3,386,667
(assuming dilution)
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,489,847 $ 1,558,751
Adjustments to reconcile net income to net cash flow used
in operating activities:
Accretion of investment discounts (9,075) (1,959)
Depreciation and amortization 194,250 93,230
Amortization of goodwill 454,991 385,893
Deferred income tax expense (1,129,269) (2,520)
Net realized investment gains (1,026,142) (566,805)
Amortization of deferred acquisition costs, net 1,204,316 (82,709)
Provision for credit losses 1,076,647 334,449
Provision for uncollectible premiums receivable 175,000 --
Stock issued to employees 100,000 --
Changes in operating assets and liabilities:
Premiums receivable (536,065) (1,187,367)
Prepaid reinsurance premiums 1,076,647 (176,722)
Due from reinsurers 24,108 388,884
Deferred acquisition costs, net (2,342,974) 64,508
Other assets 23,839 95,068
Unpaid loss and loss adjustment expenses 1,937,783 (1,456,483)
Unearned premiums 5,801,732 22,591
Unearned commissions 923,982 215,701
Accounts payable and accrued expenses 1,120,408 (1,560,463)
Due to third party insurers 2,262,088 --
Drafts payable to insurance companies 612,268 24,618
------------ ------------
Net cash flow provided by operating activities 13,531,877 (1,851,335)
------------ ------------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale 39,199,209 26,244,237
Purchases of investment securities available for sale (48,050,497) (24,112,923)
Finance contracts, consumer loans and pay advances receivable (6,672,184) (1,566,776)
Mortgage loans (155,815) 43,164
Purchases of property and equipment (1,149,017) (852,420)
Acquisition of agencies -- (425,725)
------------ ------------
Net cash flow used in investing activities (16,828,304) (669,813)
------------ ------------
Cash flows from financing activities
Increase (decrease) in bank overdraft 2,409,914 96,728
Repayment of notes payable (312,823) (296,371)
Increase in revolving credit outstanding 2,203,563 2,573,144
Purchase of common stock (194,537) (200,000)
------------ ------------
Net cash flow provided by financing activities 4,106,117 2,173,501
------------ ------------
Net increase (decrease) in cash and cash equivalents 809,690 (348,277)
Cash and cash equivalents at beginning of year 923,175 2,250,061
------------ ------------
Cash and cash equivalents at end of period $ 1,732,865 $ 1,901,784
============ ============
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Shares issued for settlement of note payable $ 104,950 --
============
Shares issued for acquisition of agency and majority owned subsidiary -- $ 415,000
============
Notes payable issued for agency acquisition -- $ 360,000
============
Accrued dividend payable 67,260
============
Cash paid during the year for:
Interest 453,643 $ 237,675
============ ============
Income taxes $ 1,529,690 $ 1,788,550
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
21ST CENTURY HOLDING COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
The accompanying unaudited consolidated financial statements of 21st
Century Holding Company (the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions for Form 10-QSB and Item 310 of Regulation
S-B. These financial statements do not include all information and notes
required by GAAP for complete financial statements, and should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 1999. The December 31, 1999 year-end balance sheet data was derived
from audited financial statements but does not include all disclosures required
by GAAP. The financial information furnished reflects all adjustments,
consisting only of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position, results
of operations and cash flows for the periods presented. The results of
operations are not necessarily indicative of results of operations, which may be
achieved in the future.
The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and claims process. The Company underwrites
nonstandard and standard personal automobile insurance as well as homeowners 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 Agent ("Assurance MGA"). The Company processes claims made by Federated
National's insureds and for third-party insurance companies 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"), tax preparation software through its 80% owned subsidiary Express Tax
Service, Inc. and pay advances through FedFirst Corp ("FedFirst"). These
products are offered through the Company's 38 agencies operated by the Company's
wholly owned subsidiary Federated Agency Group, Inc. as well as agencies owned
by third parties.
In May 2000, the Company decided to discontinue making consumer loans
and to let the portfolio run off. This process should take approximately one
year. Additionally, the Company is seeking a buyer to purchase its pay advance
business.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) 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 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, 2000. Adoption of this statement is not expected
to have a material impact on the Company's results of operations or financial
position.
(B) COMPREHENSIVE INCOME (DEFICIT)
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income (deficit) presents a measure of all
changes in shareholders' equity except for changes resulting from transactions
with shareholders in their capacity as shareholders. The Company's total
comprehensive income (deficit) presently consists of net income adjusted for the
change in net unrealized holding gains (losses), net of income taxes on debt
investments available for sale and equity investments. The net change in net
unrealized holding losses on debt investments available for sale and equity
investments was $323,737 and ($426,670) for the three months ended September 30,
2000 and 1999, respectively and ($189,869) and ($890,544) for nine months ended
September 30, 2000 and 1999, respectively. Total comprehensive income (loss) was
$937,586 and $(190,535) for the three months ended September 30, 2000 and 1999
respectively, and $1,299,978 and $668,207 for the nine months ended September
30, 2000 and 1999, respectively.
(C) RECLASSIFICATIONS
Certain amounts in the Company's 1999 financial statements have been
reclassified to conform with the 2000 presentation.
6
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(D) Earnings per share
Basic earnings per share ("Basic EPS") is computed by dividing net
income by the weighted average number of common shares outstanding during each
period presented. Diluted earnings per share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common stock and common
stock equivalents during the period presented; outstanding warrants and stock
options are considered common stock equivalents and are included in the
calculation using the treasury stock method. Diluted EPS excluded the impact of
warrants and stock options as such amounts are anti-dilutive.
(E) MANAGING GENERAL AGENT FEES
Managing general agent fees and the related commission expense are
recognized at the time the policy is underwritten and are net of estimated
cancellations.
(3) REVOLVING CREDIT OUTSTANDING
On September 24, 1997, the Company, through Federated Premium, 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 Revolving Agreement contains
various operating and financial covenants and is collateralized by a first lien
on and assignment of all of the Company's eligible finance contracts receivable.
The amount of an advance is subject to availability under a borrowing base
calculation, with maximum advances outstanding not to exceed the maximum credit
commitment. In January 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 percent to prime only based on the prior
month's average outstanding balance. Effective October 31, 2000, the maximum
credit commitment was increased to $9.0 million.
(4) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
In June 2000, a lawsuit was filed against the Company and its directors
and executive officers seeking compensatory damages on the basis of allegations
that the Company's amended registration statement dated November 4, 1998 was
inaccurate and misleading concerning the manner in which the Company recognized
ceded insurance commission income, in violation of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. The lawsuit was filed in the United States District Court for the
Southern District of New York and seeks class action status. The plaintiff class
purportedly includes purchasers of the Company's common stock between November
5, 1998 and August 13, 1999. The Company believes that the lawsuit is without
merit and intends to vigorously defend such action. On November 1, 2000, the
Company filed a motion to dismiss this lawsuit.
The Company is currently negotiating with its reinsurer to increase
reinsurance on automobile policies to 30% retroactive to January 1, 2000. The
impact to the Company's net income balance sheet, if any, is not yet
determinable.
7
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) SEGMENT INFORMATION
The Company and its subsidiaries operate principally in two business
segments, insurance and financing. The insurance segment consists of
underwriting through Federated National, managing general agent activities
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 processing.
The financing segment consists of premium financing through Federated Premium ,
consumer loans through RPA Financial Corporation, and pay advances through
FedFirst Corp 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. The Company evaluates its
business segments based on GAAP pretax operating earnings. Corporate overhead
expenses are not allocated to business segments.
Operating segments that are not individually reportable are included in
the "All Other" category, which includes the operations of the parent company,
21st Century Holding Company.
Information regarding components of operations for the three month and
nine month periods ending September 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenue
Insurance Segment:
Earned Premiums $ 6,288,711 $ 3,395,160 $ 16,489,891 $ 10,374,655
Investment Income 353,720 252,574 1,217,176 1,198,279
Adjusting Income 547,147 222,252 1,251,357 684,247
MGA Fee Income 2,927,552 217,111 5,431,076 723,917
Commission Income 2,180,466 1,405,832 6,442,843 4,447,313
Miscellaneous Income 17,026 224,578 507,455 689,328
------------ ------------ ------------ ------------
Total Insurance Revenues 12,314,622 5,717,507 31,339,798 18,117,739
------------ ------------ ------------ ------------
Financing Segment:
Premium Finance Income 1,265,424 693,928 3,311,981 2,079,802
Consumer Loan Interest 17,968 283,922 308,050 527,844
Pay Advance Fees 196,873 -- 579,653 --
Other Income 42,674 -- 22,973 9,330
------------ ------------ ------------ ------------
Total Financing Revenues 1,522,939 977,850 4,222,657 2,616,976
All Other 655,556 597,527 1,176,574 1,605,927
------------ ------------ ------------ ------------
Total Operating Segments 14,493,117 7,292,884 36,739,029 22,340,642
Intercompany Eliminations (1,822,233) (1,063,611) (4,661,676) (3,467,609)
------------ ------------ ------------ ------------
Total Revenues $ 12,670,884 $ 6,229,273 $ 32,077,353 $ 18,873,033
============ ============ ============ ============
Earnings Before Income Taxes
Insurance Segment $ 380,331 $ (50,476) $ 1,212,241 $ 1,690,170
Financing Segment 397,996 494,195 1,249,094 1,202,575
All Other 179,654 (136,466) (198,385) (584,093)
------------ ------------ ------------ ------------
Total Operating Segments 957,981 307,253 2,262,950 2,308,652
Intercompany Eliminations -- 31,275 -- 36,757
------------ ------------ ------------ ------------
Total Earnings before Income Taxes $ 957,981 $ 338,528 $ 2,262,950 $ 2,345,409
============ ============ ============ ============
</TABLE>
8
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) SEGMENT INFORMATION
Information regarding components of the balance sheets for September
30, 2000 and December 31, 1999 follows:
Total Assets September 30, 2000 December 31, 1999
------------------ -----------------
Insurance Segment $ 34,620,185 $ 24,895,860
Finance Segment 16,540,858 10,779,524
All Other 8,531,836 4,972,955
------------ ------------
Total Operating Segments 59,692,879 40,648,339
Intercompany Eliminations (2,842,119) (1,961,935)
------------ ------------
Total Assets $ 56,850,760 $ 38,686,404
============ ============
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 or 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; dependence on
investment income; the adequacy of its liability for loss and loss adjustment
expense ("LAE"); regulation; insurance agents; claims experience; limited
experience in the insurance industry; competition; ratings by industry services;
catastrophe losses; reliance on key personnel, and other risks discussed
elsewhere in this Report and in the Company's other filings with the Securities
and Exchange Commission.
OVERVIEW
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 as well as homeowners and
mobile home property and casualty insurance in the State of Florida through its
subsidiary, Federated National. The Company has underwriting authority for
third-party insurance companies, which it represents through a wholly owned
managing general agent, Assurance MGA. The Company processes claims made by
Federated National's insureds and for third-party insurance companies through a
wholly owned claims adjusting company, Superior. The Company also offers premium
financing to its own and third-party insureds through its wholly owned
subsidiary, Federated Premium, tax preparation software through its 80% owned
subsidiary Express Tax Service, Inc. and pay advances through FedFirst. These
products are offered through the Company's 38 agencies operated by the Company's
wholly owned subsidiary Federated Agency Group, Inc. as well as agencies owned
by third parties. Prior to May 2000, the Company offered consumer loans through
its wholly owned subsidiary, RPA Financial Corporation.
The Company's business, results of operations and financial condition
are subject to fluctuations due to a variety of factors. Abnormally high
severity or frequency of claims in any period could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, if Federated National's estimated liabilities for unpaid losses and LAE is
less than actual losses and LAE, Federated National will be required to increase
reserves with a corresponding reduction in Federated National's net income in
the period in which the deficiency is identified. The Company operates in a
highly competitive market and faces competition from both national and regional
insurance companies, many of whom are larger and have greater financial and
other resources than the Company, have favorable A.M. Best ratings and offer
more diversified insurance coverage. The Company's competitors include other
companies, that market their products through agents, as well as companies, that
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.
10
<PAGE>
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.
In May 2000, the Company decided to discontinue making consumer loans
and let the portfolio run off. This process should take approximately one year.
Additionally, the Company is seeking a buyer to purchase its pay advance
business. The Company has determined that its customers who utilize these
products are not the customers that the Company targets for its insurance,
premium finance, tax preparation and bank services.
ANALYSIS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 2000 AS COMPARED TO DECEMBER 31, 1999
Investments. Investments increased $9.8 million to $23.8 million as of
September 30, 2000 as compared to $13.9 million as of December 31, 1999. This
increase in investments is due to the investing of cash generated by the
increase in gross premiums written and amounts due third-party insurers in 2000.
Cash and cash equivalents. Cash and cash equivalents were $1.7 million
as of September 30, 2000, as compared to $923,000 as of December 31, 1999. This
increase of $810,000 is due primarily to cash flow from increased revenues
during the quarter.
Finance contracts, consumer loans and pay advance receivables. Finance
contracts, consumer loans and pay advance receivables increased $5.5 million
from $9.6 million at December 31, 1999 to $15.1 million at September 30, 2000.
This increase is due to an increase in premium finance receivables, which are
the result of the increase in premiums written during the quarter as well as
premiums underwritten for third-party insurers by Assurance MGA.
Prepaid reinsurance premiums. Prepaid reinsurance premiums decreased
$1.1million to $1.5 million as of September 30, 2000 from $2.6 million as of
December 31, 1999 because the Company reduced its reinsurance on automobile
insurance from 30% of premiums to 15%, effective January 1, 2000. In addition,
the Company reduced its reinsurance on mobile homes from 40% to 0% effective
January 1, 2000. Effective July 1, 2000, the Company obtained catastrophe
reinsurance coverage for its mobile home and homeowners insurance to cover
losses in excess of $2.5 million. This reinsurance, together with the Florida
Hurricane Catastrophe Fund, will cover losses up to approximately $22 million,
the equivalent of estimated losses in a once-every-125-year storm.
Deferred acquisition costs, net. Deferred acquisition costs increased
from a credit of $10,000 as of December 31, 1999 to a debit of $1.1 million as
of September 30, 2000. Included in the December 31, 1999 balance were deferred
commissions of $746,000 offset by unearned ceded commissions of $756,000. As of
September 30, 2000, deferred commissions were $1.6 million offset by unearned
ceded commissions of $484,000. The increase in deferred commissions is related
to the increase in premiums written discussed below, and the decrease in
unearned ceded commissions is due to the reduction in reinsurance discussed
above.
Property, plant and equipment, net. Property, plant and equipment
increased $954,000 to $3.5 million as of September 30, 2000, from $2.5 million
as of December 31, 1999 primarily as a result of the purchase of approximately 8
acres of vacant land for $600,000. The Company has entered into a contract to
purchase a building adjacent to this property for $2.15 million. The Company
intends to use the building as its headquarters and a portion of the vacant land
for parking.
Unpaid loss and loss adjustment expenses. Unpaid loss and loss
adjustment expenses increased $2.0 million to $8.3 million as of September 30,
2000, as compared to $6.3 million as of December 31, 1999. This increase is
related to the increase in net premiums earned discussed below.
Unearned Premiums. Unearned premiums increased $5.8 million to $14.2
million as of September 30, 2000 from $8.4 million as of December 31, 1999. This
increase is the result of the increase in written premiums discussed below.
Revolving Credit Outstanding. The outstanding borrowings under the
Revolving Agreement increased $2.2 million to $6.9 million as of September 30,
2000 from $4.7 million as of December 31, 1999 primarily to fund the increase in
finance contracts receivables.
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Bank Overdraft. Bank overdraft is the result of the cash management
techniques employed by the Company. The overdraft was $3.9 million as of
September 30, 2000, a $2.4 million increase from $1.5 million as of December 31,
1999. This increase is due to increased business activity driven by the increase
in revenues.
Due to Third Party Insurers. This represents amounts owed insurance
companies for which the Company acts as managing general agent and processes
claims. This arrangement became effective in 2000, and, therefore, there was no
such liability as of December 31, 1999.
Accounts Payable and Accrued Expenses. Accounts payable and accrued
expenses increased $1.2 million from $512,000 as of December 31, 1999 to $1.7
million as of September 30, 2000 primarily due to an overall increase in
expenses generally.
Drafts Payable to Insurance Companies. Drafts payable to insurance
companies increased from $313,000 as of December 31, 1999 to $925,000 as of
September 30, 2000, principally due to new finance contracts receivable.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Gross premiums written. Gross premiums written increased $3.8 million,
or 102% to $7.5 million for the three months ended September 30, 2000 as
compared to $3.7 million for the comparable period in 1999. This increase is
attributable to an increase in pricing by major competitors in the Company's
market. The Company's pricing during the quarter was unchanged from a year ago.
Consequently, the Company is more price competitive and was able to write more
policies.
Net premiums earned. Net premiums earned increased 85.3% to $6.3
million for the three-month period ended September 30, 2000 from $3.4 million
for the same period in 1999. The increase is related to the increase in gross
premiums written discussed above for three months and below for nine months.
Commission income. Commission income decreased 52.6% to $556,000 for
the three-month period ended September 30, 2000 from $1.2 million for the same
period in 1999. Commission income consists of fees earned by Company-owned
agencies placing business with third-party insurers and third-party premium
finance companies. The decrease is attributable to a higher percentage of
commissions from Federated National and Assurance MGA, which are eliminated in
consolidation.
Managing general agent fees. Managing general agent fees increased from
$217,000 for the three-month period ended September 30, 1999 to $2.8 million for
the same period in 2000. This increase is because Assurance MGA began writing
policies for two third-party insurance companies in the past year. Prior to July
1999, substantially all policies were written for Federated National Insurance
Company for which Assurance MGA retained $25 per policy.
Finance revenues. Finance revenues increased 59.0% to $1.5 million for
the three-month period ended September 30, 2000 from $958,000 for the same
period in 1999. The increase was attributable to an increase in the number of
premium contracts financed by Federated Premium.
Net realized investment gains (losses). The Company experienced
realized gains of $613,000 for the three-month period ended September 30, 2000
compared to $87,000 for the same period in 1999, as the Company was able to take
advantage of favorable developments in the equity market. There can be no
assurances as to whether the Company will record gains or losses in the future.
Other income. Other income increased 137% to $504,000 for the
three-month period ended September 30, 2000 from $213,000 for the same period in
1999. This increase is primarily attributable to adjustment fee income of
$287,000 for the three-month period ended September 30, 2000 compared to no
outside adjustment fee income in 1999.
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the three-month period ended September 30, 2000 was 68.5%
compared with 57.5% for the same period in 1999. Losses and LAE incurred
increased 108% to $4.3 million for the three-month period ended September 30,
2000 from $2.1 million for the same period in 1999. 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.
Operating and underwriting expenses. Operating and underwriting
expenses increased 62.0% to $2.8 million for the three-month period ended
September 30, 2000 from $1.7 million for the same period in 1999. The increase
is related to the increase in revenues and is expected to continue in the near
future.
Federated National's expense and combined ratios were 37.1% and 105.6%,
respectively, for the three-month period ended September 30, 2000 compared with
38.2% and 95.7% in the same period for 1999. The increases in the combined ratio
is primarily due to loss ratio discussed above.
Salaries and wages. Salaries and wages increased 34.5% to $2.5 million
for the three months ended September 30, 2000 from $1.9 million for the same
period in 1999. The increase is related to the increase in the volume of
business during the quarter.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999 (CONTINUED)
Policy acquisition costs. Policy acquisition costs increased from a
$123,000 for the three-month period ended September 30, 1999 to $2.0 million for
the same period in 2000. Policy acquisition costs consists of commission expense
paid to third-party agencies less commissions earned on reinsurance ceded. The
increase is due to policy acquisition costs paid by Assurance Managing General
Agents for third party insurers' policies of $1.6 million in 2000 and zero in
1999 and is also related to the increase in premiums earned.
Income tax expense. The Company's estimated effective income tax rate
was 35.9 % for the three months ended September 30, 2000 compared to 30.2% for
the same period in 1999. The increase in this rate is because tax-free
investment revenue is a smaller portion of pretax income in 2000 than in 1999.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Gross premiums written. Gross premiums written increased $10.1 million,
or 65.0% to $25.6 million for the nine months ended September 30, 2000 as
compared to $15.5 million for the same period in 1999. This increase is
attributable to an increase in pricing by the Company's major competitors, as
well as a 10% rate reduction by the Company, all effective December 1, 1999.
Prior to December 1999, these two competitors' pricing was below the Company's
pricing. After the price changes, the Company became more competitive with
respect to pricing, resulting in a substantial increase in written premiums. The
Company reversed its 10% rate reduction effective June 1, 2000 to slow the
growth in premiums written.
Gross premiums ceded. Gross premiums ceded declined $2.9 million to
$2.0 million for the nine-month period ended September 30, 2000 from $4.9
million for the same period in 1999. The decrease in gross premiums ceded is due
to the reduction in quota-share reinsurance on automobile policies from 30% in
1999 to 15% in 2000 and on mobile home policies from 40% in 1999 to zero in
2000. Instead of quota-share reinsurance, the Company now carries catastrophe
reinsurance on mobile and homeowners.
Net premiums earned. Net premiums earned increased 58.9% to $16.5
million for the nine-month period ended September 30, 2000 from $10.4 million
for the same period in 1999. The increase in net premiums written discussed
above was partially offset by the increase in the deferral of premiums over the
life of the policies.
Commission income. Commission income decreased 29.1% to $2.3 million
for the nine-month period ended September 30, 2000 from $3.2 million for the
same period in 1999. Commission income consists of fees earned by Company-owned
agencies placing business with third-party insurers and third-party premium
finance companies. The decrease is attributable to a higher percentage of
commissions from Federated National and Assurance MGA, which are eliminated in
consolidation.
Managing general agent fees. Managing general agent fees increased from
$724,000 for the nine-month period ended September 30, 1999 to $5.4 million for
the same period in 2000. This increase is because Assurance MGA began writing
policies for two third-party insurance companies in the past year. Prior to July
1999, substantially all policies were written for Federated National for which
Assurance MGA retained $25 per policy.
Finance revenues. Finance revenues increased 63.0% to $4.2 million for
the nine-month period ended September 30, 2000 from approximately $2.6 million
for the same period in 1999. The increase was attributable to an increase in the
number of premium contracts financed by Federated Premium, as well as income
generated from pay advances, which began operations in the third quarter 1999.
Other income. Other income increased $1.0 million to $1.7 million for
the nine-month period ended September 30, 2000 from $733,000 for the same period
in 1999. This increase is primarily attributable to increased tax preparation
fees of $790,000 and adjusting fee income of $358,000 for the nine-month period
ended September 30, 2000 compared to $216,000 and zero, respectively, in 1999.
13
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999 (CONTINUED)
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the nine-month period ended September 30, 2000 was 70.8% compared
with 57.5 % for the same period in 1999. Losses and LAE incurred increased
$5.7million to $11.7 million for the nine-month period ended September 30, 2000
from $6.0 million for the same period in 1999. Losses and LAE, the Company's
most significant expense, represent actual payments made and changes in
estimated future payments to be made to or on behalf of its policyholders,
including expenses required to settle claims and losses. The Company believes
the increase in its loss ratio is a function of a 10% price reduction on
policies written from December 1, 1999 to May 31, 2000 coupled with increased
claims on policies issued during that period.
Operating and underwriting expenses. Operating and underwriting
expenses increased $2.8 million to $7.7 million for the nine-month period ended
September 30, 2000 from $4.9 million for the same period in 1999. The increase
is due to the 70.0% increase in revenues and is expected to continue in the near
future.
Federated National's expense and combined ratios were 46.7% and 117.5%,
respectively, for the nine-month period ended September 30, 2000 compared with
36.2% and 93.7% in the same period for 1999. The increases in these ratios are
primarily due to a 10% price reduction on policies written from December 1, 1999
to May 31, 2000.
Included in operating and underwriting expenses are the provision for
credit losses and the provision for uncollectible premiums receivables. The
provision for credit losses increased to $1,174,000 for the nine months ended
September 30, 2000 from $334,000 for the same period in 1999. The provision for
uncollectible premiums receivable increased to $175,000 for the nine months
ended September 30, 2000 from zero in 1999. Both of these increases are due to
volume growth in the related receivables.
Salaries and wages. Salaries and wages increased 30.7% to $7.0 million
for the nine months ended September 30, 2000 from $5.3 million for the same
period in 1999. The increase is related to the increase in the volume of
business during the period.
Policy acquisition costs. Policy acquisition costs increased from a
credit of $83,000 for the nine-month period ended September 30, 1999 to a debit
of $2.9 million for the same period in 2000. Policy acquisition costs consists
of commission expense paid to third-party agencies less commissions earned on
reinsurance ceded. The increase is due to policy acquisition costs paid by
Assurance Managing General Agents for third party insurers' policies of $1.8
million in 2000 and zero in 1999 and is also related to the increase in premiums
earned.
Income tax expense. The Company's estimated effective income tax rate
was 34.2 % for the nine months ended September 30, 2000 compared to 33.5% for
the same period 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 Revolving Agreement, which is used to
fund its operations. Under the Revolving Agreement, Federated Premium can borrow
up to the maximum credit commitment of $9.0 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 varies based on the
average outstanding balance from the previous month, between prime and .75%
above prime. The Revolving Agreement contains various operating and financial
covenants and is collateralized by a first lien on and assignment of all of the
Company's finance contracts receivable. The Revolving Agreement expires on
September 30, 2001. Outstanding borrowings under the Credit Facility as of
September 30, 2000 and December 31, 1999 were approximately $6.9 million and
$4.7 million, respectively. At September 30, 2000 and December 31, 1999, the
Company was in compliance with all covenants under the Revolving Agreement. The
Company currently anticipates that the Revolving Agreement will be increased and
extended prior to its expiration date. However, there can be no assurances that
the Company will be able to increase or extend this agreement.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
For the nine months ended September 30, 2000, operations generated
operating cash flow of $13.5 million, which was primarily attributable to the
increase in unearned premiums and amounts due third party insurers. Operating
cash flow is expected to be positive in both the short-term and the 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 $16.8 million for the nine months ended September 30, 2000. The
Company expects a continued cash flow deficit from investing activities as the
Company intends to invest cash from operations and financing activities. Cash
flow provided by financing activities was $4.1 million for the nine months ended
September 30, 2000, which was derived primarily from borrowings under the
Revolving Agreement and from an increase in bank overdrafts. 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.
On September 27, 2000, the Company announced a dividend on the
Company's common stock of $.02 per share, payable on December 1, 2000 to
shareholders of record as of November 8, 2000. This dividend, of approximately
$67,000, was accrued as of September 30, 2000. The Company currently intends to
pay a dividend of $.02 per share on a quarterly basis, subject to compliance
with applicable capital requirements and the Company's working capital needs.
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 in compliance with these requirements. The Company is also
required to adhere to prescribed premium-to-capital surplus ratios on an annual
basis. The Company believes it will be in compliance with this requirement, but
there can be no assurance that this will be the case.
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 December 31 of the preceding year. No
dividends were paid during 1999 or through September 30, 2000.
The Company is required to comply with the risk-based capital
requirements of the National Association of Insurance Commissioners ("NAIC").
The NAIC's risk-based capital requirements are a method of measuring the amount
of capital appropriate for an insurance company to support its overall business
operations in light of its size and risk profile. NAIC's risk-based capital
standards are used by regulators to determine appropriate regulatory actions
relating to insurers who show signs of weak or deteriorating condition. As of
September 30, 2000, based on calculations using the appropriate NAIC formula,
the Company's total adjusted capital is in excess of ratios that would require
regulatory action. GAAP differs in some respects from reporting practices
prescribed or permitted by the Florida Department of Insurance. Federated
National's statutory capital surplus was approximately $7.1 million as of
September 30, 2000. Statutory net loss was $867,000 for the nine months ended
September 30, 2000.
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.
15
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PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
In June 2000, a lawsuit was filed against the Company and its directors
and executive officers seeking compensatory damages on the basis of allegations
that the Company's amended registration statement dated November 4, 1998 was
inaccurate and misleading concerning the manner in which the Company recognized
ceded insurance commission income, in violation of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. The lawsuit was filed in the United States District Court for the
Southern District of New York and seeks class action status. The plaintiff class
purportedly includes purchasers of the Company's common stock between November
5,1998 and August 13, 1999. The Company believes that the lawsuit is without
merit and intends to vigorously defend such action. On November 1, 2000, the
Company filed a motion to dismiss this lawsuit.
ITEM 2
CHANGES IN SECURITIES
None.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
None.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Financial Data Schedule: Ex. 27
(b) Reports on Form 8-K: None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
21ST CENTURY HOLDING COMPANY
DATE: November 10, 2000 By: /s/ Samuel A. Milne
-----------------------
Title: Chief Financial Officer
17
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
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27 Financial Data Schedule
17
