SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
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(Exact name of registrant as specified in its charter)
FL 65-0248866
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
4161 N.W. 5th Street, Plantation, FL 33317
------------------------------------------
(Address of principal executive offices) (Zip Code)
954-581-9993
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
CHECK WHETHER THE REGISTRANT (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING
12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE
SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST
90 DAYS. YES [ ] NO [X]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE:
COMMON STOCK PAR VALUE $.01 PER SHARE - 3,385,000 SHARES OUTSTANDING AS OF MAY
15, 2000.
<PAGE>
21ST CENTURY HOLDING COMPANY
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
----
ITEM 1:
<S> <C>
Consolidated Balance Sheets
as of March 31, 2000 (Unaudited)
and December 31, 1999 (Audited)..................................................................... 3
Consolidated Statements of Income
for the three months ended March 31, 2000 (Unaudited)
and 1999 (Unaudited)................................................................................ 4
Consolidated Cash Flow Statements
for the three months ended March 31, 2000 (Unaudited)
and 1999 (Unaudited)................................................................................ 5
Notes to Consolidated Financial Statements............................................................... 6
ITEM 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations.................................................... 9
PART II: OTHER INFORMATION
Other Information........................................................................................ 13
Signature................................................................................................ 14
</TABLE>
2
<PAGE>
PART I
ITEM I. FINANCIAL INFORMATION
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31,1999
(UNAUDITED)
ASSETS
<S> <C> <C>
Available for sale at fair value:
Investments
Fixed maturities $ 16,228,336 $ 11,170,035
Equity securities 2,283,556 2,627,232
Mortgage loan 118,243 119,304
------------ ------------
Total investments 18,630,135 13,916,571
------------ ------------
Cash and cash equivalents 4,907,304 923,175
Finance contracts, consumer loans and pay advances receivable, net of allowances for
credit losses of $259,900 and $272,192, respectively 11,272,257 9,642,163
Prepaid reinsurance premiums 1,640,847 2,604,607
Premiums receivable, net of allowance of $100,000 and $50,000, respectively 1,322,450 1,256,485
Due from reinsurers, net 673,218 1,670,849
Deferred acquisition costs, net 815,443 (10,243)
Deferred income taxes 1,884,482 1,785,514
Property, Plant and Equipment net 2,513,947 2,514,505
Other assets 1,106,161 980,375
Goodwill 3,247,102 3,402,403
------------ ------------
TOTAL ASSETS $ 48,013,346 $ 38,686,404
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 6,777,128 $ 6,314,307
Unearned premiums 11,942,031 8,394,269
Revolving credit outstanding 5,185,816 4,650,026
Bank overdraft 2,233,529 1,528,736
Unearned commissions 824,857 802,757
Due to third party insurers 1,369,757 0
Accounts payable and accrued expenses 1,343,080 511,997
Notes payable 291,293 417,773
Drafts payable to insurance companies 1,651,869 312,651
------------ ------------
TOTAL LIABILITIES $ 31,619,360 $ 22,932,516
------------ ------------
Commitments and contingencies -- --
Shareholders' equity:
Common stock of $.01 par value. Authorized 25,000,000 shares
issued 3,390,000 and 3,370,000 shares, and outstanding 3,385,000 33,900 33,700
and 3,365,000, respectively
Additional paid in capital 12,789,887 12,690,087
Accumulated other comprehensive income (1,245,961) (1,244,830)
Retained earnings 4,839,223 4,297,994
Treasury stock, 5,000 shares, at cost (23,063) (23,063)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 16,393,986 15,753,888
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,013,346 $ 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 MARCH 31,
2000 1999
<S> <C> <C>
Revenues:
Gross premiums written $ 8,954,703 $ 6,061,463
Gross premiums ceded 247,184 (1,915,380)
----------- -----------
Net premiums written 9,201,887 4,146,083
Increase in unearned premiums, net
of prepaid reinsurance premiums (4,898,487) (732,134)
----------- -----------
Net premiums earned 4,303,400 3,413,949
Commission income 1,254,184 905,606
Finance revenue 1,209,581 794,822
Net investment income 220,160 227,885
Net realized investment gains 462,173 173,066
Other income 1,580,633 513,683
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Total revenue 9,030,131 6,029,011
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Expenses:
Losses and loss adjustment expenses 2,998,076 1,937,529
Operating and underwriting expenses 2,328,091 1,461,419
Salaries and wages 2,277,979 1,613,835
Amortization of deferred acquisition costs 449,432 (73,257)
Amortization of goodwill 155,301 124,472
----------- -----------
Total expenses 8,208,879 5,063,998
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Income before provision for income
tax expense (benefit) 821,252 965,013
Provision for income tax expense 280,023 355,287
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Net income $ 541,229 $ 609,726
=========== ===========
Net income per share and net income per share-
assuming dilution $ 0.16 $ 0.18
=========== ===========
Weighted average number of common shares outstanding and
Weighted average number of common shares outstanding 3,385,222 3,390,000
(assuming dilution)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
4
<PAGE>
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
<S> <C> <C>
Cash flow from operating activities:
Net income $ 541,229 $ 609,726
------------ ------------
Adjustments to reconcile net income to net cash flow used
in operating activities:
Amortization of investment premiums 2,486 395
Depreciation and amortization 49,264 25,706
Amortization of goodwill 155,301 124,473
Deferred income tax expense (98,285) 14,970
Net realized investment gains (462,173) (173,066)
Amortization of deferred acquisition costs, net 449,432 (73,257)
Provision for credit losses 300,696 119,852
Provision for uncollectible premiums receivable 50,000 --
Stock issued to employees 100,000 --
Changes in operating assets and liabilities:
Premiums receivable (115,965) --
Prepaid reinsurance premiums 963,760 (347,338)
Due from reinsurers 997,631 246,209
Deferred acquisition costs, net (1,275,118) 94,406
Other assets (125,786) (279,368)
Unpaid loss and loss adjustment expenses 462,821 (375,495)
Unearned premiums 3,547,762 601,188
Unearned commissions 22,100 157,021
Accounts payable and accrued expenses 831,083 (799,427)
Due to third party insurers 1,369,757 --
Drafts payable to insurance companies 1,339,218 69,883
------------ ------------
Net cash flow provided by operating activities 9,105,213 15,878
------------ ------------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale 14,852,897 7,977,683
Purchases of investment securities available for sale (19,109,649) (7,626,141)
Finance contracts receivables, consumer loans and pay advances receivable (1,930,790) (1,418,613)
Sale of and collection of mortgage loans 1,061 163,164
Purchases of property and equipment (48,706) (621,112)
Acquisition of agencies -- (160,551)
Net cash flow used in investing activities (6,235,187) (1,685,570)
------------ ------------
Cash flows from financing activities
Increase (decrease) in bank overdraft 704,793 (261,965)
Repayment of notes payable (126,480) --
Increase in revolving credit outstanding 535,790 938,615
------------ ------------
Net cash flow provided by financing activities 1,114,103 676,650
------------ ------------
Net increase (decrease) in cash & cash equivalents 3,984,129 (993,042)
Cash & cash equivalents at beginning of year 923,175 2,250,061
------------ ------------
Cash & cash equivalents at end of period $ 4,907,304 $ 1,257,019
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ $107,124 $ 51,044
============= ============
Income taxes $ $120,000 $ 950,000
============= ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
The accompanying unaudited consolidated financial statements of 21st
Century Holding Company ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-QSB and Rule 10-01 of Regulation S-X. These
financial statements do not include all information and notes required by
generally accepted accounting principles for complete financial statements, and
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-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 generally accepted accounting principles. The financial
information furnished reflects all adjustments, consisting only of normal
recurring accruals which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. The results of operations are not necessarily indicative
of results of operations which may be achieved in the future.
The Company is a vertically integrated insurance holding company, which, through
its subsidiaries controls substantially all aspects of the insurance
underwriting, distribution and 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, pay advances, tax preparation and other
ancillary services to its customers.
(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) 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 ($1,131) and
($225,588) for three months ended March 31, 2000 and 1999, respectively. Total
comprehensive income was $540,098 and $384,138 for the three months ended March
31, 2000 and 1999, respectively.
(C) RECLASSIFICATIONS
Certain amounts in 1999 financial statements have been reclassified to
conform with 2000 presentation.
(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.
6
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) REVOLVING CREDIT OUTSTANDING
On September 24, 1997, the Company, through Federated Premium Finance,
Inc. entered into a revolving loan agreement ("Revolving Agreement") with
Flatiron Funding Company LLC. Under the Revolving Agreement, the Company can
borrow up to the maximum credit commitment of $5.0 million. The Revolving
Agreement contains various operating and financial covenants and is
collateralized by a first lien 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.
(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.
(5) 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. Such
applications remain pending as of the date of this report and the Office of
Thrift Supervision has indicated to the Company that the final approval or
disapproval could likely take an additional year.
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 likely
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.
(6) SUBSEQUENT EVENT
The Company has 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.
(7) SEGMENT INFORMATION
The Company and its subsidiaries operate principally in two business
segments consisting of insurance and financing. The insurance segment consist of
underwriting through Federated National, managing general agent through
Assurance MGA, claims processing through Superior Adjusting and marketing and
distribution through Federated Agency Group. The insurance segment sells
primarily nonstandard personal automobile insurance and includes substantially
all aspects of the insurance, distribution and claims process. The financing
segment consists of premium financing through Federated Premium Finance and
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.
7
<PAGE>
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) SEGMENT INFORMATION (CONTINUED)
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates its
business segments based on Generally Accepted Accounting Principles ("GAAP")
pretax operating earnings. Corporate overhead expenses are not allocated to
business segments.
Operating segments that are not individually reportable are included in
the "All Other" category, which includes the operations of 21st Century Holding
Company.
Information regarding components of operations for the three month
period ending March 31, 2000 and 1999 follows:
2000 1999
---- -----
Total Revenue
Insurance Segment
Earned Premiums $ 4,303,400 $ 3,413,949
Investment Income 638,961 425,905
Adjusting Income 33,781 227,045
MGA Fee Income 725,638 250,677
Commission Income 1,341,465 1,445,553
Miscellaneous Income 281,403 243,507
------------ ------------
Total Insurance Revenue 7,324,648 6,006,636
------------ ------------
Financing Segment:
Premium Finance Income 847,539 685,572
Consumer Loan Interest 111,184 109,250
Pay Advance Fees 193,312 0
Other Income 57,546 0
Total Financing Revenues 1,209,581 794,822
------------ ------------
All Other 816,998 418,420
------------ ------------
Total Operating Segments 9,351,227 7,219,878
Intercompany Eliminations (321,096) (1,190,867)
------------ ------------
Total Revenues $ 9,030,131 $ 6,029,011
============ ============
Earnings Before Income Taxes
Insurance Segment $ 429,604 $ 905,737
Financing Segment 440,225 314,801
All Other (390,702) (262,633)
------------ ------------
Total Operating Segments 479,127 957,905
Intercompany Eliminations 342,125 7,108
------------ ------------
Total Earnings before Income Taxes $ 821,252 $ 965,013
============ ============
Total Assets
Insurance Segment $ 24,691,223 $ 28,201,402
Finance Segment 12,045,753 8,506,007
All Others 6,369,340 5,865,125
------------ ------------
Total Operating Segments 48,887,025 42,572,534
Intercompany Eliminations (873,679) (3,402,173)
------------ ------------
Total Assets $ 48,013,346 $ 39,170,361
============ ============
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
21st Century Holding Company (the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this report or which are otherwise made
by or on behalf of the Company. For this purpose, any statements contained in
this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "would", "estimate", or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors which may affect the Company's results include, but are not
limited to, risks related to the nature of the Company's business; 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 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 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 FedFirst Corp ("FedFirst").
The Company's business, results of operations and financial condition
are subject to fluctuations due to a variety of factors. Abnormally high
severity or frequency of claims in any period could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, if Federated National's estimated liabilities for unpaid losses and LAE is
less than actual losses and LAE, Federated National will be required to increase
reserves with a corresponding reduction in Federated National's net income in
the period in which the deficiency is identified. The Company operates in a
highly competitive market and faces competition from both national and regional
insurance companies, many of whom are larger and have greater financial and
other resources than the Company, have favorable A.M. Best ratings and offer
more diversified insurance coverage. The Company's competitors include other
companies, which market their products through agents, as well as companies,
which sell insurance directly to customers.
Large national writers may have certain competitive advantages over
agency writers, including increased name recognition, increased loyalty of their
customer base and reduced acquisition costs. The Company may also face
competition from new or temporary entrants in its niche markets. In some cases,
such entrants may, because of inexperience, desire for new business or other
reasons, price their insurance below that of the Company. Although the Company's
pricing is inevitably influenced to some degree by that of its competitors, 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 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.
The Company has 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.
9
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
AS OF MARCH 31, 2000 AS COMPARED TO DECEMBER 31, 1999
Investments. Investments increased $4.7 million to $18.6 million as of
March 31, 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 revenues during the first quarter.
Cash and cash equivalents. Cash and cash equivalents were $4.9 million
as of March 31, 2000, as compared to $923,000 as of December 31,1999. This
increase of $4.0 million is due primarily to cash flow from increased revenues
during the quarter.
Finance contracts, consumer loans receivable and pay advance
receivable. Finance contracts receivable, consumer loans and pay advance
receivable increased $1.6 million from $9.6 million at December 31, 1999 to
$11.3 million at March 31, 2000. This increase is due primarily to an increase
in premium finance receivables which are the result of the increase in premiums
written during the quarter.
Prepaid reinsurance premiums. Prepaid reinsurance premiums decreased
$1.0 million to $1.6 million as of March 31, 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
January1, 2000. The Company is in the process of negotiating catastrophe
reinsurance for its mobile home and homeowners insurance to be effective June 1,
2000, in conjunction with the official start of the hurricane season in the
Atlantic Ocean. There can be no assurance that the Company will be able to
secure catastrophe coverage at reasonable prices.
Due from Reinsurers. Due from reinsurers decreased $1.0 million to
$673,000 as of March 31, 2000 from $1.7 million as of December 31,1999. This
decrease is the result of the reduction of reinsurance discussed above.
Deferred Acquisition Costs, net. Deferred acquisition costs increased
from a credit of $10,000 as of December 31, 1999 to a debit of $815,000 as of
March 31, 2000. Included in the December 31,1999 balance were deferred
commissions of $746,000 offset by unearned ceded commissions of $756,000. As of
March 31, 2000, deferred commissions were $1.3 million offset by deferred ceded
commissions of $458,000. 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.
Unearned Premiums. Unearned premiums increased $3.5 million to $11.9
million as of March 31, 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
Company's Credit Facility increased $536,000 to $5.2 million as of March 31,
2000 from $4.7 million as of December 31, 1999 primarily to fund the increase in
finance contracts receivables.
Bank Overdraft. Bank Overdraft is the result of the cash management
techniques employed by the Company. The overdraft was $2.2 million as of March
31, 2000, a $705,000 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 an insurance
company, including amounts due for reinsurance, for which the Company acts as
managing general agent and processes claims. This arrangement became effective
January 1,2000, and therefore, there was no such liability as of December
31,1999.
Accounts Payable and Accrued Expenses. Accounts payable and accrued
expenses increased $831,000 from $512,000 as of December 31, 1999 to $1.3
million as of March 31, 2000 primarily due to an increase in income taxes
payable of $258,000, an increase in taxes and licenses payable of $109,000, and
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 $1.6 million as of
March 31, 2000, principally due to new finance contracts receivable.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Gross Premiums Written. Gross premiums written increased $2.9 million,
or 47.8% to $9.0 million for the three months ended March 31, 2000 as compared
to $6.1 million for the comparable period in 1999. This increase is attributable
to an increase in pricing by two major competitors effective December 1, 1999.
Prior to December 1999, these two competitors pricing was below the Company's
pricing. After the price increase, the Company became more competitive with
respect to pricing, hence a substantial increase in written premiums. The
Company currently anticipates a rate increase for itself effective June 1, 2000
to slow the growth in premiums written.
Net Premiums Written. Net premiums written increased 122% to $9.2
million for the three-month period ended March 31, 2000 from $4.1 million for
the same period in 1999. The increase in gross premium written, discussed above,
was further enhanced by a decrease in the amount of premiums ceded from $1.9
million to a debit of $247,000 due to the reduction in automobile reinsurance
and the cessation of reinsurance for mobile home policies.
Net Premiums Earned. Net premiums earned increased 26.0% to $4.3
million for the three-month period ended March 31, 2000 from $3.4 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 increased 38.5% to $1.3 million
for the three-month period ended March 31, 2000 from $906,000 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 increase is primarily attributable to an increase in the
number of Company owned agencies from 36 in the first quarter in 1999 to 40 in
2000 and also due to a successful third party insurer program that the Company
acts as managing general agent.
Finance Revenues. Finance revenues increased 52.2% to $1.2 million for
the three-month period ended March 31, 2000 from approximately $795,000 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 advance pay of $193,000 which began operations in third quarter 1999.
Net Realized Investment Gains. The Company experienced realized gains
of $462,000 for the three-month period ended March 31, 2000 compared to realized
gains of $173,000 for the same period in 1999, as the Company was able to take
advantage of a favorable equity market. There can be no assurance that the
Company will record gains in the future.
Other Income. Other income increased 208% to $1.6 million for the
three-month period ended March 31, 2000 from $514,000 for the same period in
1999. This increase is attributable to increase tax preparation fees of $691,000
compared with $148,000 in 1999. In addition, the Company generated additional
fee income from the third party insurer and other new business.
Losses and LAE. The Company's loss ratio, as determined in accordance
with GAAP, for the three month period ended March 31, 2000 was 69.7% compared
with 57% for the same period in 1999. Losses and LAE incurred increased 55% to
$3.0 million for the three-month period ended March 31, 2000 from $1.9 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 increased claims on certain newly issued policies, as well
increased losses on claims that were being disputed.
Operating and Underwriting Expenses. Operating and underwriting
expenses increased 59.2% to $2.3 million for the three-month period ended March
31, 2000 from $1.5 million for the same period in 1999. The increase is due to a
50% increase in revenues and is expected to continue in the near future. In
addition, the Company increased it advertising expenses from $266,000 in the
first quarter of 1999 to $536,000 in the same quarter in 2000.
Salaries and Wages. Salaries and wages increased 41.2% to $2.3 million
for the three months ended March 31, 2000 from $1.6 million for the same period
in 1999. The increase is related to the increase in the volume of business
during the quarter.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
(CONTINUED)
Amortization of Deferred Policy Acquisition Costs. Amortization of
deferred policy acquisition costs increased from ($73,000) for the three-month
period ended March 31, 1999 to $449,000 for the same period in 2000.
Amortization of deferred policy acquisition costs consists of the actual
amortization of deferred policy acquisition costs less commissions earned on
reinsurance ceded. The increase is due to an increase in premiums earned, as
well as the reduction of commissions earned on reinsurance ceded.
Income Tax Expense. The Company's estimated effective income tax rate
was 34.1% for the three months ended March 31, 2000 compared to 36.8% 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 Credit Facility, which is used to
fund its operations. Under the Credit Facility, Federated Premium can borrow up
to the maximum credit commitment of $7.0 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 varies based on the average
outstanding balance from the previous month, between prime and .75% above prime.
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 March 31, 2000 and
December 31,1999 were approximately $5.2 million and $4.7 million, respectively.
At March 31, 2000 and December 31,1999, the Company was in compliance with all
covenants under the Revolving Agreement.
For the three months ended March 31,2000, operations generated
operating cash flow of $9.1 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 $6.2 million for the quarter ended March 31, 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 $1.1 million for the quarter ended March
31, 2000, which was derived primarily from borrowings under the Revolving Credit
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.
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 or 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
March 31, 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 $6.8 million as of March
31, 2000. Statutory net loss was $1.0 million for the quarter ended March 31,
2000.
12
<PAGE>
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.
PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
None.
ITEM 2
CHANGES IN SECURITIES
During the quarter ending March 31, 2000, the Company issued 20,000 shares of
common stock to two employees representing a portion of their bonus for 2000 in
accordance with each of their respective employment contracts. In addition the
Company reached an agreement with Carla Leonard, a former director, where by the
company will issue 20,667 shares of the Company's common stock and pay $172,000
in full settlement of a note payable having a balance of $276,950 plus accrued
interest. The foregoing shares were issued without registration pursuant to the
exemption afforded by Section 4 (2) of the Securities of 1933.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
None.
13
<PAGE>
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Financial Data Schedule: Ex. 27
(b) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
21ST CENTURY HOLDING COMPANY
DATE: MAY 19, 2000 By: /s/ Samuel A. Milne
-----------------------
Title: Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
15
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 16,228,336
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,283,556
<MORTGAGE> 118,243
<REAL-ESTATE> 0
<TOTAL-INVEST> 18,630,135
<CASH> 4,907,304
<RECOVER-REINSURE> 673,218
<DEFERRED-ACQUISITION> 815,443
<TOTAL-ASSETS> 48,013,346
<POLICY-LOSSES> 6,777,128
<UNEARNED-PREMIUMS> 11,942,031
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 291,293
0
0
<COMMON> 33,900
<OTHER-SE> 16,360,086
<TOTAL-LIABILITY-AND-EQUITY> 48,013,086
4,303,400
<INVESTMENT-INCOME> 220,160
<INVESTMENT-GAINS> 462,173
<OTHER-INCOME> 1,580,633
<BENEFITS> 2,998,076
<UNDERWRITING-AMORTIZATION> 449,432
<UNDERWRITING-OTHER> 2,328,091
<INCOME-PRETAX> 821,252
<INCOME-TAX> 280,023
<INCOME-CONTINUING> 541,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 541,229
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
<RESERVE-OPEN> 6,314,307
<PROVISION-CURRENT> 1,675,570
<PROVISION-PRIOR> 1,047,852
<PAYMENTS-CURRENT> 511,118
<PAYMENTS-PRIOR> 1,749,483
<RESERVE-CLOSE> 6,777,128
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
