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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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)
FLORIDA 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)
Indicate by check mark whether the registrant (1) has 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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No[ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value - 3,848,584 outstanding as of May 13, 2004.
21ST CENTURY HOLDING COMPANY
INDEX
PART I: FINANCIAL INFORMATION PAGE
ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets
as of March 31, 2004
and December 31, 2003................................................. 3
Consolidated Statements of Operations
for the three months ended March 31, 2004
and 2003.............................................................. 4
Consolidated Cash Flow Statements
for the three months ended March 31, 2004
and 2003.............................................................. 5
Notes to Consolidated Financial Statements................................. 6
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations...................... 16
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk................. 24
ITEM 4
Controls and Procedures.....................................................25
PART II: OTHER INFORMATION
ITEM 1
Legal Proceedings.......................................................... 25
ITEM 2
Changes in Securities and Use of Proceeds.................................. 26
ITEM 3
Defaults upon Senior Securities............................................ 26
ITEM 4
Submission of Matters to a Vote of Security Holders........................ 27
ITEM 5
Other Information.......................................................... 27
ITEM 6
Exhibits and Reports on Form 8-K........................................... 27
Signatures................................................................. 28
Exhibits
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the SARBANES-OXLEY Act.
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the SARBANES-OXLEY Act.
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the SARBANES-OXLEY Act.
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the SARBANES-OXLEY Act.
2
PART I
ITEM I. FINANCIAL INFORMATION
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 2004 December 31, 2003
Unaudited See Note 1
------------- -------------
ASSETS
Investments
Fixed maturities, available for sale, at fair value $ 54,975,203 $ 43,489,598
Equity securities 8,418,758 3,663,251
Mortgage loans -- 137,571
------------- -------------
Total investments 63,393,961 47,290,420
------------- -------------
Cash and cash equivalents 1,331,760 6,770,169
Receivable for investments sold -- 2,118,595
Finance contracts, net of allowance for credit
losses of $597,348 in 2004 and $383,153 in 2003 9,136,517 9,891,642
Prepaid reinsurance premiums 4,055,222 7,823,374
Premiums receivable, net of allowance for credit
losses of $123,00 and $201,000, respectively 8,203,840 7,328,256
Reinsurance recoverable, net 11,607,754 11,645,468
Deferred acquisition costs, net 3,323,155 1,739,685
Income taxes recoverable -- 824,787
Deferred income taxes 2,654,996 3,030,183
Property, plant and equipment, net 4,118,986 4,153,643
Goodwill, net 1,739,715 1,739,715
Other assets 1,973,858 2,339,656
------------- -------------
Total assets $ 111,539,764 $ 106,695,593
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 21,674,065 $ 24,570,198
Unearned premiums 35,851,569 34,122,663
Premiums deposits 740,176 621,777
Revolving credit outstanding 4,057,786 4,098,786
Income taxes payable 809,860 --
Subordinated debt 6,250,000 6,875,000
Accounts payable and accrued expenses 5,044,239 4,360,793
------------- -------------
Total liabilities 74,427,695 74,649,217
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock of $0.01 par value
Authorized 25,000,000 shares;
issued 4,244,032 and
4,088,924 shares, respectively;
Outstanding 3,780,166 and
3,625,058 shares, respectively 42,440 40,889
Additional paid-in capital 22,544,823 20,454,917
Accumulated other comprehensive income (deficit) 178,966 (324,881)
Retained earnings 16,113,614 13,643,225
Treasury stock, 463,866 shares, at cost (1,767,774) (1,767,774)
------------- -------------
Total shareholders' equity 37,112,069 32,046,376
------------- -------------
Total liabilities and shareholders' equity $ 111,539,764 $ 106,695,593
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ending
-------------------
2004 2003
------------ ------------
Revenue:
Gross premiums written $ 17,817,726 $ 16,611,980
Gross premiums ceded 687,008 (4,398,875)
------------ ------------
Net premiums written 18,504,734 12,213,105
------------ ------------
Decrease in prepaid reinsurance premiums (3,768,152) (1,942,893)
(Increase) decrease in unearned premiums (1,728,906) 186,732
------------ ------------
Net change in prepaid reinsurance
premiums and unearned premium (5,497,058) (1,756,161)
------------ ------------
Net premiums earned 13,007,676 10,456,944
Commission income 507,434 433,039
Finance revenue 1,090,820 1,127,826
Managing general agent fees 447,358 632,547
Net investment income 528,124 365,205
Net realized investment gains 121,919 350,882
Other income 1,868,970 1,495,567
------------ ------------
Total revenue 17,572,301 14,862,010
------------ ------------
Expenses:
Loss and loss adjustment expenses 6,474,833 6,787,709
Operating and underwriting expenses 3,342,065 2,625,866
Salaries and wages 2,439,524 2,146,335
Interest expense 231,081 55,412
Amortization of deferred acquisition costs, net 441,728 (360,181)
------------ ------------
Total expenses 12,929,231 11,255,141
Income before provision for income tax expense 4,643,070 3,606,869
Provision for income tax expense 1,719,062 1,298,468
------------ ------------
Net income $ 2,924,008 $ 2,308,401
============ ============
Basic net income per share before extraordinary gain $ 0.78 $ 0.77
============ ============
Weighted average number of common shares outstanding 3,759,829 3,004,620
============ ============
Fully diluted net income per share $ 0.72 $ 0.75
============ ============
Weighted average number of common shares
outstanding (assuming dilution) 4,058,152 3,057,485
============ ============
Dividends declared per share $ 0.12 $ 0.07
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
March 31,
2004 2003
------------ ------------
Cash flow from operating activities:
Net income $ 2,924,008 $ 2,308,401
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of investment premium, net 65,642 39,947
Depreciation and amortization of property plant and equipment 124,957 101,639
Deferred income tax expense 375,187 281,070
Net realized investment (gains) losses (49,627) (350,882)
Common Stock issued for interest on Notes 103,125 --
Provision for credit losses, net 380,082 194,708
Provision for uncollectible premiums receivable 180,000 10,627
Other -- 254,312
Changes in operating assets and liabilities:
Premiums receivable (1,055,584) 323,524
Prepaid reinsurance premiums 3,768,152 1,378,292
Due from reinsurers, net 37,714 (3,254,014)
Income taxes recoverable 824,787 --
Amortization of deferred acquisition costs (1,583,470) (425,766)
Goodwill -- (179,716)
Finance contracts receivable 375,043 310,667
Other assets 365,797 (234,389)
Unpaid losses and loss adjustment expenses (2,896,133) 4,561,928
Unearned premiums 1,728,906 377,869
Premium deposits 118,399 471,305
Income taxes payable 809,860 (1,432,507)
Accounts payable and accrued expenses 683,447 (659,875)
------------ ------------
Net cash provided by operating activities 7,280,292 4,077,140
------------ ------------
Cash flow (used in) provided by investing activities:
Proceeds from sale of investment securities available for sale 10,653,239 40,687,613
Purchases of investment securities available for sale (26,456,146) (41,298,655)
Receivable for investments sold 2,118,595 --
Collection of mortgage loans 137,571 1,170
Purchases of property and equipment (40,673) (229,278)
Proceeds from sale of assets -- 270,000
------------ ------------
Net cash used in investing activities (13,587,414) (569,150)
------------ ------------
Cash flow (used in) provided by financing activities:
Exercised stock options 1,363,332 --
Dividends paid (453,619) (210,854)
Purchases of treasury stock -- (19,756)
Revolving credit outstanding (41,000) (189,775)
------------ ------------
Net cash (used in) provided by financing activities 868,713 (420,385)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,438,409) 3,087,605
Cash and cash equivalents at beginning of period 6,770,169 4,478,383
------------ ------------
Cash and cash equivalents at end of period $ 1,331,760 $ 7,565,988
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 57,010 $ 55,412
============ ============
Income taxes $ 185,000 $ 2,450,000
============ ============
Non-cash investing and finance activities:
Accrued dividends payable $ 430,475 $ 210,807
============ ============
Retirement of subordinated debt by Common Stock issuance $ 625,000 $ --
============ ============
Notes reveivable, net of deferred gains, received for sale of agencies $ 107,034 $ 13,712
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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 ("GAAP") for interim financial
information and with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. 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-K for the year ended December
31, 2003. The December 31, 2003 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 the results of operations that may be achieved
in the future.
We are a vertically integrated insurance holding company, which,
through our subsidiaries, controls substantially all aspects of the insurance
underwriting, distribution and claims process. We underwrite personal automobile
insurance, general liability insurance, flood insurance, homeowners' insurance
and mobile home property and casualty insurance in Florida and Georgia through
our wholly owned subsidiaries, Federated National Insurance Company and American
Vehicle Insurance Company. American Vehicle was approved in August 2003 to be a
foreign insurer in the State of Georgia on an excess and surplus lines basis.
Additionally, during March 2004, American Vehicle was admitted as a foreign
insurer in the State of Louisiana to write homeowners' and general liability
insurance.
During the three months ended March 31, 2004, 46.5%, 36.6%, 2.5% and
14.4% of the policies we underwrote were for personal automobile insurance,
homeowners' property and casualty insurance, mobile home property and casualty
insurance, and commercial general liability, respectively. During the year ended
December 31, 2003, 67.5%, 23.0%, 2.4% and 7.1% of the policies we underwrote
were for personal automobile insurance, homeowners' property and casualty
insurance, mobile home property and casualty insurance and commercial general
liability, respectively.We internally process claims made by our own and third
party insureds through our wholly owned claims adjusting company, Superior
Adjusting, Inc. We also offer premium financing to our own and third-party
insureds through our wholly owned subsidiary, Federated Premium Finance, Inc.
We market and distribute our own and third-party insurers' products and
our other services primarily in Central and South Florida, through a network of
24 agencies owned by Federated Agency Group, Inc., a wholly owned subsidiary, 47
franchised agencies, approximately 750 independent agents and a select number of
general agents. Through our wholly owned subsidiary, FedUSA, Inc., we franchise
agencies under the FedUSA name. As of March 31, 2004, franchises were granted
for 47 FedUSA agencies, of which 38 were operating and 9 are pending. We intend
to focus our future expansion efforts for our agency network on franchised
agencies.
Assurance Managing General Agents, Inc., a wholly owned subsidiary,
acts as Federated National's and American Vehicle's exclusive managing general
agent. Assurance MGA currently provides all underwriting policy administration,
marketing, accounting and financial services to Federated National, American
Vehicle and our agencies, and participates in the negotiation of reinsurance
contracts. Assurance MGA generates revenue through policy fee income and other
administrative fees from the marketing of companies' products through the
Company's distribution network. Assurance MGA plans to establish relationships
with additional carriers and add additional insurance products in the future.
We offer electronic tax filing services through Express Tax Service,
Inc., an 80%-owned subsidiary, as well as franchise opportunities for these
services through EXPRESSTAX. As of March 31, 2004, there were 232 franchises
granted in 18 states. Revenue is generated through franchise sales, collection
of royalties on tax preparation fees, incentives from business partners as well
as fees from the preparation of income tax returns and income tax refund
anticipation loans. In addition, Express Tax offers tax preparation services
through approximately 500 licensees nationwide.
6
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.
The most significant accounting estimates inherent in the preparation
of our financial statements include estimates associated with our evaluation of
the determination of liability for unpaid losses and loss adjustment expense and
the recoverability of goodwill. In addition, significant estimates form the
bases for our reserves with respect to finance contracts, premiums receivable,
deferred income taxes and the related valuation allowance, deferred policy
acquisition costs and loss contingencies. Various assumptions and other factors
underlie the determination of these significant estimates. The process of
determining significant estimates is fact specific and takes into account
factors such as historical experience, as well as current and expected economic
conditions. We periodically re-evaluate these significant factors and makes
adjustments where facts and circumstances dictate.
(B) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN
46"), which requires the consolidation of certain entities considered to be
variable interest entities ("VIEs"). An entity is considered to be a VIE when it
has equity investors who lack the characteristics of having a controlling
financial interest, or its capital is insufficient to permit it to finance its
activities without additional subordinated financial support. Consolidation of a
VIE by an investor is required when it is determined that the investor will
absorb a majority of the VIE's expected losses if they occur, receive a majority
of the entity's expected residual returns if they occur, or both. The adoption
of Interpretation No. 46 did not have any impact on our Consolidated Financial
Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standard
Number 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity and it requires that an issuer
classify a financial instrument that is within its scope as a liability because
the financial instrument embodies an obligation of the issuer. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective in the first interim period beginning after June 15,
2003. On July 31, 2003, we completed a private placement of our 6% Senior
Subordinated Notes (the "Notes"), which were offered and sold to accredited
investors as units consisting of one Note with a principal amount of $1,000 and
warrants (the "Warrants") to purchase shares of the Company's Common Stock.
These Notes fall within the definition of financial instruments as described in
Financial Accounting Standard Number 150 and were originally presented as a
liability in conformity with Statement of Financial Accounting Standard Number
150. As such, the adoption of this Statement did not have any impact on our
Consolidated Financial Statements.
(C) STOCK OPTIONS
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by APB Opinion No. 25, under which no
compensation cost for stock options is recognized for stock option awards
granted to employees at or above fair market value. Had compensation expense for
the Company's stock compensation plans been determined based upon fair values at
7
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the grant dates for awards under the plan in accordance with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below.
March 31, December 31,
Net income 2004 2003
------------- -------------
As reported $ 2,924,008 $ 8,364,876
Compensation, net of tax effect 212,707 4,783,080
------------- -------------
Pro forma net income $ 2,711,301 $ 3,581,796
============= =============
Net income per share
As reported - Basic $ 0.78 $ 2.64
As reported - Diluted $ 0.72 $ 2.50
Pro forma - Basic $ 0.72 $ 1.13
Pro forma - Diluted $ 0.67 $ 1.07
Additional stock option awards are anticipated in future years.
The weighted average fair value of options granted during the three
months ending March 31, 2004, estimated on the date of grant using the
Black-Scholes option-pricing model was $24.53. The weighted average fair value
of options granted during 2003 and 2002 estimated on the date of grant using the
Black-Scholes option-pricing model was $6.32 to $12.46 in 2003. The fair value
of options granted is estimated on the date of grant using the following
assumptions:
March 31, 2004 December 31, 2003
-------------- -----------------
Dividend yield 1.96% to 2.25% 1.96% to 2.10%
Expected volatility 103.20% to 108.73% 105.91% to 108.73%
Risk-free interest rate 2.13% to 3.94% 2.30% to 3.94%
Expected life (in years) 3.00 to 6.36 3.00 to 6.36
(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 shares 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.
(E) RECLASSIFICATIONS
Certain amounts in 2003 financial statements have been reclassified to
conform with the 2004 presentation.
(3) REVOLVING CREDIT OUTSTANDING
Federated Premium's operations are funded by a revolving loan agreement
("Revolving Agreement") with FlatIron Funding Company LLC ("FlatIron"). The
Revolving Agreement is structured as a sale of contracts receivable under a sale
and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of FlatIron),
which gives FPF Inc. the right to sell or assign these contracts receivable.
Federated Premium, which services these contracts, has recorded transactions
under the Revolving Agreement as secured borrowings.
We also implemented a direct bill program during 2003 for policies
underwritten by our carriers. Direct billing is where the insurance company
accepts from the insured, as a receivable, a promise to pay the premium, as
opposed to requiring the full amount of the policy, either directly from the
insured or from a premium finance company. The amount of FPF's advance is
subject to availability under a borrowing base calculation, with maximum
advances outstanding not to exceed the credit limit commitment. The annual
interest rate on advances under the Revolving Agreement is the prime rate plus
additional interest varying from 1.25% to 3.25% based on the prior month's ratio
of contracts receivable related to insurance companies with an A. M. Best rating
of B or worse to total contracts receivable.
8
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Revolving Agreement contains various operating and financial
covenants, with which the Company was in compliance at March 31, 2004 and
December 31, 2003. The Revolving Agreement, as amended, expires September 30,
2004 and we intend to negotiate a similar agreement to replace the expiring
agreement. Outstanding borrowings under the Revolving Agreement as of March 31,
2004 and December 31, 2003 were both approximately $4.1 million. Outstanding
borrowings in excess of the $4.0 million commitment totaled $57,786 and $98,786,
respectively for March 31, 2004 and December 31, 2003. The excess amounts,
permissible by reason of a compensating cash balance of $354,341 and $200,430,
respectively, for March 31, 2004 and December 31, 2003, are held for the benefit
of FPF, Inc. and are included in other assets. Interest expense on this
revolving credit line for the three months ended March 31, 2004 and 2003 totaled
approximately $57,000 and $55,000, respectively. For the three months ended
March 31, 2004 and 2003 the effective interest rate on this line of credit,
based on our average outstanding borrowings under the Revolving Agreement, was
5.59% and 5.33%, respectively.
(4) COMMITMENTS AND CONTINGENCIES
We are 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 our
consolidated financial position, results of operations, or liquidity.
In June 2000, a lawsuit was filed against us, our directors and our
executive officers seeking compensatory damages in an undisclosed amount on the
basis of allegations that our amended registration statement dated November 4,
1998 was inaccurate and misleading concerning the manner in which we 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. The plaintiff class purportedly includes
purchasers of our common stock between November 5, 1998 and August 13, 1999. The
Court granted the plaintiffs class status.
Specifically, the plaintiffs allege that we recognized ceded commission
income on a written basis, rather than amortized on a pro rata basis. The
plaintiffs allege that this was contrary to the Statement of Financial
Accounting Concepts Nos. 1, 2 and 5. We believe, however, that the lawsuit is
without merit and we have vigorously defended the action, because we reasonably
relied upon outside subject matter experts to make these determinations at the
time. We have also since accounted for ceded commission on a pro rata basis and
have done so since these matters were brought to our attention in 1998.
Nevertheless, we have also continued to actively participate in settlement
negotiations with the plaintiffs and have tentatively agreed to settle the case.
The parties are currently negotiating the final terms of a Memorandum of
Understanding, which will have to be executed by the parties and then approved
by the court. We have reserved and charged against fourth quarter 2003 earnings
$600,000 for the potential settlement and associated costs.
As a direct premium writer in the State of Florida, we are required to
participate in certain insurer solvency pools under Florida Statutes
631.57(3)(a). Participation in these pools is based on our written premium by
line of business to total premiums written statewide by all insurers.
Participation may result in assessments against us.
Federated National and American Vehicle are also required to
participate in an insurance apportionment plan under Florida Statutes 627.351
referred to as a Joint Underwriting Association Plan ("JUA Plan"). The JUA Plan
provides for the equitable apportionment of any profits realized, or losses and
expenses incurred, among participating insurers. In the event of an underwriting
deficit incurred by the JUA Plan and the deficit is not recovered through the
policyholders in the JUA Plan, such deficit shall be recovered from the
companies participating in the JUA Plan in the proportion that the net direct
premiums of each such member written during the preceding calendar year bear to
the aggregate net direct premiums written in this state by all members of the
JUA Plan.
No assessments have been incurred by either insurance company through
the date of issuance of this report.
9
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) COMPREHENSIVE INCOME
For the three months ended March 31, 2004 and 2003, comprehensive
income consisted of the following:
Three months ended March 31,
2004 2003
Net income $ 2,924,008 $ 2,308,401
Change in net unrealized gains on investments
available for sale 809,549 859,947
----------- -----------
Comprehensive income, before tax 3,733,557 3,168,348
Income tax benefit (expense) related to items
of other comprehensive income (305,702) (326,780)
----------- -----------
Comprehensive income $ 3,427,855 $ 2,841,568
=========== ===========
10
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) SEGMENT INFORMATION
The Company and its subsidiaries operate principally in two business
segments consisting of insurance and financing. The insurance segment consists
of underwriting through Federated National and American Vehicle, managing
general agent operations through Assurance MGA, claims processing through
Superior, and marketing and distribution through Federated Agency Group. The
insurance segment sells personal automobile, general liability and homeowner's
insurance and includes substantially all aspects of the insurance, distribution
and claims process. The financing segment consists of premium financing through
Federated Premium Finance Company. The financing segment provides premium
financing to the Company's insureds and is marketed through the Company's
distribution network of Company-owned agencies and franchised agents.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies and practices. The Company
evaluates its business segments based on GAAP pretax operating earnings.
Corporate overhead expenses are allocated to business segments. Transactions
between reportable segments are accounted for at fair value.
Operating segments that are not individually reportable, based on the
extent of the current operations in such segments, are included in the "All
Other" category. The "All Other" category currently includes the operations of
21st Century Holding Company, franchise operations and income tax preparation.
Information regarding components of operations for the three months
ended March 31, 2004 and 2003 follows:
Three months ended March 31,
2004 2003
------------ ------------
Total revenue
Insurance segments $ 16,445,897 $ 15,449,365
Financing segment 796,861 679,814
All other segments 2,248,318 1,184,760
------------ ------------
Total operating segments 19,491,076 17,313,939
Intercompany eliminations (1,918,775) (2,451,929)
------------ ------------
Total revenues $ 17,572,301 $ 14,862,010
============ ============
Earnings before income taxes
Insurance segments $ 3,596,106 $ 3,121,270
Financing segments 137,921 198,673
All other segments 909,042 286,926
------------ ------------
Total earnings before income taxes $ 4,643,070 $ 3,606,869
============ ============
Information regarding total assets as of March 31, 2004 and December
31, 2003 as follows:
March 31, December 31,
2004 2003
-------------- -------------
Total assets
Insurance segments $ 100,818,047 $ 73,491,480
Financing segment 11,047,443 6,955,089
All other segments 1,775,289 2,816,451
------------- -------------
Total operating segments 113,640,779 83,263,020
Intercompany eliminations (2,101,015) (1,950,794)
------------- -------------
Total assets $ 111,539,764 $ 81,312,226
============= =============
11
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) REINSURANCE AGREEMENTS
We are not subscribing to quota-share reinsurance for automobile
insurance policies issued with an effective date beyond December 31, 2003. The
quota-share reinsurance treaties for 2003 automobile insurance policies include
loss corridors with varying layers of coverage based on ultimate incurred loss
ratio results whereby the two insurance companies will retain 100% of the losses
between incurred loss ratios of 66% and 86%. Despite the loss corridor,
substantially all of the insurance risk relating to the reinsured portions of
the underlying insurance agreements has been assumed by the reinsurer, wherein
the reinsurer's exposure to loss is essentially the same as ours.
We continue to participate in the Florida Hurricane Catastrophe Fund
and we subscribe to an excess of loss reinsurance policy to protect our interest
in the insurable risks associated with our homeowner and mobile home owner
insurance products.
(8) STOCK COMPENSATION PLANS
In 1998, we issued warrants to two employees to purchase 62,500 shares
of common stock of the Company at $9.00 per share. The warrants vested
immediately and are exercisable until December 2004, at which time if they have
not been exercised, they will be canceled. The estimated fair value of these
warrants at the date issued was approximately $226,000 using a Black-Scholes
option pricing model and assumptions similar to those used for valuing the
Company's stock options as described below. During the three months ending March
31, 2004, none of the 7,800 warrants remaining were exercised.
We implemented a stock option plan in November 1998 that provides for
the granting of stock options to officers, key employees and consultants. The
objectives of this plan include attracting and retaining the best personnel,
providing for additional performance incentives, and promoting our success by
providing employees the opportunity to acquire common stock. Options outstanding
under this plan have been granted at prices, which are either equal to or above
the market value of the stock on the date of grant, vest over a four-year
period, and expire ten years after the grant date. Under this plan, we are
authorized to grant options to purchase up to 600,000 common shares, and, as of
March 31, 2004 and December 31, 2003, we had outstanding exercisable options to
purchase 205,488 and 272,353 shares, respectively.
In 2001, we implemented a franchisee stock option plan that provides
for the granting of stock options to individuals purchasing Company-owned
agencies that are then converted to franchised agencies. The purpose of the plan
is to advance our interests by providing an additional incentive to encourage
managers of Company-owned agencies to purchase the agencies and convert them to
franchises. Options outstanding under the plan have been granted at prices that
are above the market value of the stock on the date of grant, vest over a
ten-year period, and expire ten years after the grant date. Under this plan, we
are authorized to grant options to purchase up to 689,000 common shares, and as
of March 31, 2004 and December 31, 2003, we had outstanding exercisable options
to purchase 13,780 and 26,640 shares, respectively.
In 2002, we implemented the 2002 Option Plan. The purpose of this Plan
is to advance our interests by providing an additional incentive to attract,
retain and motivate highly qualified and competent persons who are key to the
Company, including key employees, consultants, independent contractors, officers
and directors, upon whose efforts and judgment our success is largely dependent,
by authorizing the grant of options to purchase Common Stock to persons who are
eligible to participate thereunder, thereby encouraging stock ownership by such
persons, all upon and subject to the terms and conditions of the plan. Options
outstanding under the plan have been granted at prices that are above the market
value of the stock on the date of grant, vest over a five-year period, and
expire six years after the grant date. Under this plan, the Company is
authorized to grant options to purchase up to 1,200,000 common shares, and, as
of March 31, 2004 and December 31, 2003, we had outstanding exercisable options
to purchase 604,326 and 625,400 shares, respectively.
12
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the Company's stock option plans for the period from
January 1, 2002 to March 31, 2004, is summarized below:
---------------------------- ----------------------------- ------------------------------
1998 Plan 2001 Franchisee Plan 2002 Plan
---------------------------- ----------------------------- ------------------------------
Weighted Average Weighted Average Weighted Average
Number of Option Exercise Number of Option Exercise Number of Option Exercise
Shares Price Shares Price Shares Price
-------- ------ -------- ------ -------- ------
Outstanding at
December 31, 2001 412,572 $10.00 83,830 $10.00 --
Granted 228,265 $10.00 783,000 $13.37
Exercised (1,000) --
Cancelled (105,499) $10.00 (5,675) $10.00 (56,000) $13.53
-------- -------- --------
Outstanding at
December 31, 2002 534,338 $10.00 78,155 $10.00 727,000 $13.35
Granted -- $10.00 10,000 $13.75 101,500 $15.77
Exercised (250,247) $10.00 (61,515) $10.00 (144,600) $12.85
Cancelled (11,738) $10.00 -- (58,500) $14.05
-------- -------- --------
Outstanding at
December 31, 2003 272,353 $10.00 26,640 $11.41 625,400 $13.80
Granted -- -- 50,500 $24.53
Exercised (59,865) $10.00 (12,860) $10.00 (46,374) $13.70
Cancelled (7,000) $10.00 -- (25,200) $14.25
-------- -------- --------
Outstanding at
March 31, 2004 205,488 $10.00 13,780 $12.72 604,326 $14.68
======== ====== ======== ========
Options outstanding as of March 31, 2004 are exercisable as follows:
---------------------------- ----------------------------- ------------------------------
1998 Plan 2001 Franchisee Plan 2002 Plan
---------------------------- ----------------------------- ------------------------------
Weighted Average Weighted Average Weighted Average
Number of Option Exercise Number of Option Exercise Number of Option Exercise
Shares Price Shares Price Shares Price
-------- ------ -------- ------ -------- ------
Options Exercisable at:
March 31, 2004 135,549 $10.00 10,756 $10.00 241,626 $13.35
December 31, 2004 4,439 $10.00 378 $10.00 82,884 $13.35
December 31, 2005 32,750 $10.00 378 $10.00 81,772 $13.35
December 31, 2006 32,750 $10.00 378 $10.00 81,772 $13.35
December 31, 2007 -- 378 $10.00 81,772 $13.35
December 31, 2008 -- 378 $10.00 24,800 $13.35
Thereafter -- 1,134 $10.00 9,700 $13.35
------- ------- -------
Total options
exercisible 205,488 13,780 604,326
======= ======= =======
13
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by APB Opinion No. 25, under which no
compensation cost for stock options is recognized for stock option awards
granted to employees at or above fair market value. Had compensation expense for
the Company's stock compensation plans been determined based upon fair values at
the grant dates for awards under the plan in accordance with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below.
March 31, December 31,
Net income 2004 2003
------------- -------------
As reported $ 2,924,008 $ 8,364,876
Compensation, net of tax effect 212,707 4,783,080
------------- -------------
Pro forma net income $ 2,711,301 $ 3,581,796
============= =============
Net income per share
As reported - Basic $ 0.78 $ 2.64
As reported - Diluted $ 0.72 $ 2.50
Pro forma - Basic $ 0.72 $ 1.13
Pro forma - Diluted $ 0.67 $ 1.07
Additional stock option awards are anticipated in future years.
The weighted average fair value of options granted during the three
months ending March 31, 2004, estimated on the date of grant using the
Black-Scholes option-pricing model, was $24.53. The weighted average fair value
of options granted during 2003 and 2002, estimated on the date of grant using
the Black-Scholes option-pricing model, was $6.32 to $12.46 in 2003. The fair
value of options granted is estimated on the date of grant using the following
assumptions:
March 31, 2004 December 31, 2003
-------------- -----------------
Dividend yield 1.96% to 2.25% 1.96% to 2.10%
Expected volatility 103.20% to 108.73% 105.91% to 108.73%
Risk-free interest rate 2.13% to 3.94% 2.30% to 3.94%
Expected life (in years) 3.00 to 6.36 3.00 to 6.36
Summary information about the Company's stock options outstanding at March 31,
2004:
Weighted Average Weighted
Range of Outstanding Contractual Average Exercisable
Exercise Price at 3/31/2004 Periods in Years Exercise Price at 3/31/2004
-------------- ------------ ---------------- -------------- ------------
1998 Plan $10.00 205,488 2.47 $10.00 135,549
2001 Franchise Plan $10.00 - $13.75 13,780 3.55 $12.72 10,756
2002 Plan $12.50 - $25.00 604,326 3.60 $14.68 241,626
(9) SUBORDINATED DEBT
On July 31, 2003, the Company completed a private placement of its 6%
Senior Subordinated Notes (the "Notes"), which were offered and sold to
accredited investors as units consisting of one Note with a principal amount of
$1,000 and warrants (the "Warrant") to purchase shares of the Company's Common
Stock. The Company sold an aggregate of $7.5 million of Notes in this placement,
which resulted in proceeds to the Company (net of placement agent fees of
$450,724 and offering expenses of $110,778) of $6,938,498.
The Notes pay interest at the annual rate of 6%, are subordinated to
senior debt of the Company, and mature on July 31, 2006. Quarterly payments of
principal and interest due on the Notes may be made in cash or, at the Company's
option, in shares of the Company's Common Stock. If paid in shares of Common
14
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock, the number of shares to be issued shall be determined by dividing the
payment due by 95% of the weighted-average volume price for the Common Stock on
Nasdaq as reported by Bloomberg Financial Markets ("Bloomberg") for the 20
consecutive trading days preceding the payment date.
The Company issued Warrants to purchase shares of the Company's Common
Stock to the purchasers of the Notes and to the placement agent in the offering,
J. Giordano Securities Group ("J. Giordano"). Each Warrant entitles the holder
to purchase one-half of one share of the Company's Common Stock. The total
number of shares issuable upon exercise of Warrants issued to the purchasers of
the Notes and to J. Giordano were determined after the expiration of 60
consecutive trading days following July 31, 2003, which was the date of closing
of the offering and totaled 408,050. The number of shares issued upon exercise
of the Warrants issued to purchasers equaled $7.5 million divided by the
exercise price of the Warrants and totaled 392,356 shares. The number of shares
issuable upon exercise of the Warrants issued to J. Giordano shall equal
$300,000 divided by the exercise price of the Warrants and totaled 15,694
shares. The exercise price of the Warrants equals 115% of the weighted-average
volume price of the Common Stock on Nasdaq as reported by Bloomberg for the 60
consecutive trading days following July 31, 2003, with a maximum of $25.00 per
share and a minimum of $15.00 per share. As computed, the exercise price of the
Warrants equaled $19.1153. The terms of the Warrants provide for adjustment of
the exercise price and the number of shares issuable thereunder upon the
occurrence of certain events typical for private offerings of this type. The
Warrants will be exercisable until July 31, 2006. GAAP requires that detachable
warrants be valued separately from debt and included in paid-in capital. Based
on the terms of the unit purchase agreement with the investors in the private
placement, management believes that the Warrants had zero value at the date of
issuance of the Notes.
Quarterly principal and interest payments totaling approximately $0.7
million per payment are due on January 31, April 30, July 31, and October 31
with the last installment due on July 31, 2006. The scheduled loan payments for
the next three years are as follows:
For the year ending
2004 1,875,000
2005 2,500,000
2006 1,875,000
----------
Total $6,250,000
==========
On or about January 31, 2004 and April 30, 2004, the Company exercised,
pursuant to the terms of the Notes, to make its quarterly payments in shares of
the Company's Common Stock and in accordance with the contractual computations
issued 36,009 and 35,819 shares of Common Stock, respectively.
15
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2:
FORWARD-LOOKING STATEMENTS
Statements in this report or in documents that are incorporated by
reference that are not historical fact are forward-looking statements that are
subject to certain risks and uncertainties that could cause actual events and
results to differ materially from those discussed herein. 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. The risks and uncertainties include,
without limitation, uncertainties related to estimates, assumptions and
projections generally; inflation and other changes in economic conditions
(including changes in interest rates and financial markets); pricing competition
and other initiatives by competitors; ability to obtain regulatory approval for
requested rate changes and the timing thereof; legislative and regulatory
developments; the outcome of litigation pending against us, including the terms
of any settlements; risks related to the nature of our business; dependence on
investment income and the composition of our investment portfolio; the adequacy
of our liability for loss and loss adjustment expense; insurance agents; claims
experience; ratings by industry services; catastrophe losses; reliance on key
personnel; weather conditions (including the severity and frequency of storms,
hurricanes, tornadoes and hail); changes in driving patterns and loss trends;
acts of war and terrorist activities; courts decisions and trends in litigation
and health care and auto repair costs; and other matters described from time to
time by us in this report, and our other filings with the SEC.
You are cautioned not to place reliance on these forward-looking
statements, which are valid only as of the date they were made. The Company
undertakes no obligation to update or revise any forward-looking statements to
reflect new information or the occurrence of unanticipated events or otherwise.
In addition, readers should be aware that GAAP prescribes when a company may
reserve for particular risks, including litigation exposures. Accordingly,
results for a given reporting period could be significantly affected if and when
a reserve is established for a major contingency. Reported results may therefore
appear to be volatile in certain accounting periods.
OVERVIEW
We are a vertically integrated insurance holding company, which,
through our subsidiaries, controls substantially all aspects of the insurance
underwriting, distribution and claims process. We underwrite personal automobile
insurance, general liability insurance, flood insurance, homeowners' insurance
and mobile home property and casualty insurance in Florida and Georgia through
our wholly owned subsidiaries, Federated National Insurance Company and American
Vehicle Insurance Company. American Vehicle was approved in August 2003 to be a
foreign insurer in the State of Georgia and was approved in March 2004 to be a
foreign insurer in the State of Louisiana. During the three months ended March
31, 2004, 46.5%, 36.6%, 2.5% and 14.4% of the policies we underwrote were for
personal automobile insurance, homeowners' property and casualty insurance,
mobile home property and casualty insurance, and commercial general liability,
respectively. During the year ended December 31, 2003, 67.2%, 23.4%, 2.4% and
7.0% of the policies we underwrote were for personal automobile insurance,
homeowners' property and casualty insurance, mobile home property and casualty
insurance, and commercial general liability, respectively. We internally process
claims made by our own and third party insureds through our wholly owned claims
adjusting company, Superior Adjusting, Inc. We also offer premium financing to
our own and third-party insureds through our wholly owned subsidiary, Federated
Premium Finance, Inc.
We market and distribute our own and third-party insurers' products and
our other services primarily in Central and South Florida, through a network of
24 agencies owned by Federated Agency Group, Inc., a wholly owned subsidiary, 47
franchised agencies, approximately 750 independent agents and a select number of
general agents. Through our wholly owned subsidiary, FedUSA, Inc., we franchise
agencies under the FedUSA name. As of March 31, 2004, franchises were granted to
47 FedUSA agencies, of which 38 were operating and 9 are pending. We intend to
focus our future expansion efforts on our agency network of franchised agencies.
Assurance Managing General Agents, Inc., a wholly owned subsidiary,
acts as Federated National's and American Vehicle's exclusive managing general
agent. Assurance MGA currently provides all underwriting policy administration,
marketing, accounting and financial services to Federated National, American
Vehicle and our agencies, and participates in the negotiation of reinsurance
contracts. Assurance MGA generates revenue through policy fee income and other
administrative fees from the marketing of companies' products through the
Company's distribution network. Assurance MGA plans to establish relationships
with additional carriers and add additional insurance products in the future.
16
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We offer electronic tax filing services through Express Tax Service,
Inc., an 80%-owned subsidiary, as well as franchise opportunities for these
services. As of March 31, 2004, there were 232 franchises granted in 18 states.
Revenue is generated through franchise sales, collection of royalties on tax
preparation fees, incentives from business partners as well as fees from the
preparation of income tax returns and income tax refund anticipation loans. In
addition, Express Tax offers tax preparation services through approximately 500
licensees nationwide.
Our 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 our
business, results of operations and financial condition. Also, if our estimated
liabilities for unpaid losses and loss adjustment expenses are less than actual
losses and loss adjustment expenses, we will be required to increase reserves
with a corresponding reduction in our net income in the period in which the
deficiency is identified.
We operate in a highly competitive market and face competition from
both national and regional insurance companies, many of whom are larger and have
greater financial and other resources, have better A.M. Best ratings and offer
more diversified insurance coverage. Our competitors include other companies
which market their products through agents, as well as companies which sell
insurance directly to their customers. Large national writers may have certain
competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and reduced policy
acquisition costs. We may also face competition from new or temporary entrants
in our niche markets. In some cases, such entrants may, because of inexperience,
desire for new business or other reasons, price their insurance below ours.
Although our pricing is inevitably influenced to some degree by that of our
competitors, we believe that it is generally not in our best interest to compete
solely on price. We instead tend to compete on the basis of underwriting
criteria, our distribution network and superior service to our agents and
insureds. We compete with respect to automobile insurance in Florida with more
than 100 companies, which underwrite personal automobile insurance. Comparable
companies which compete with us in the personal automobile insurance market
include U.S. Security Insurance Company, United Automobile Insurance Company,
Direct General Insurance Company and Security National Insurance Company, as
well as major insurers such as Progressive Casualty Insurance Company.
Comparable companies which compete with us in the homeowners' market include
Florida Family Insurance Company, Florida Select Insurance Company, Atlantic
Preferred Insurance Company and Vanguard Insurance Company. Comparable companies
which compete with us in the general liability insurance market include Century
Surety Insurance Company, Atlantic Casualty Insurance Company, Colony Insurance
Company and Burlington/First Financial Insurance Companies. Competition could
have a material adverse effect on our business, results of operations and
financial condition.
The Company's executive offices are located at 4161 N.W. Fifth Street,
Plantation, Florida and its telephone number is (954) 581-9993.
ANALYSIS OF FINANCIAL CONDITION
AS OF MARCH 31, 2004 AS COMPARED TO DECEMBER 31, 2003
INVESTMENTS.
Investments increased $16.1 million, or 34.1%, to $63.4 million as of
March 31, 2004, as compared to $47.3 million as of December 31, 2003, primarily
as a result of our investment of the proceeds from an increase in written
insurance premiums and positive underwriting experience.
As a result of the adverse market conditions that occurred in 2002,
management more carefully monitors its concentrations, industries and asset
allocations. There were no other instances of large concentrations of investment
securities requiring write-downs. We did not hold any investment securities
which were not classified as available for sale during the first quarter of 2004
or during 2003.
17
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Below is a summary of unrealized gains and (losses) at March 31, 2004
and December 31, 2003 by category.
Unrealized Gain (Loss)
March 31, 2004 December 31, 2003
-------------- -----------------
Fixed maturities:
U.S. government obligations $ (44,425) $(793,613)
Obligations of states and political subdivisions 23,335 (4,840)
--------- ---------
(21,090) (798,453)
--------- ---------
Corporate securities:
Communications 210,148 209,226
Financial 52,122 14,694
Other 68,079 45,475
--------- ---------
330,349 269,395
--------- ---------
Equity securities:
Preferred stocks 4,000 400
Common stocks (29,217) 3,154
--------- ---------
(25,217) 3,554
--------- ---------
Total fixed, corporate and equity securities $ 284,042 $(525,504)
========= =========
For further detail, see the section titled ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
RECEIVABLE FOR INVESTMENTS SOLD.
The receivable for investments sold decreased $2.1 million, or 100.0%,
from $2.1 million as of December 31, 2003. The decrease is a result of
investment trading activity that occurred in late December 2003 and did not
settle until early January 2004.
PREPAID REINSURANCE PREMIUMS.
Prepaid reinsurance premiums decreased $3.7 million, or 48.2%, to $4.1
million as of March 31, 2004, as compared to $7.8 million as of December 31,
2003. The decline reflects the decrease in the insurance companies' reliance on
automobile quota-share reinsurance. During 2003 we ceded 40% of our automobile
premiums to our reinsurer, and for the first three months of 2004, the company
has not ceded any automobile premiums.
DEFERRED ACQUISITION COSTS.
Deferred acquisition costs, increased $1.6 million, or 91.0%, to $3.3
million as of March 31, 2004, as compared to $1.7 as of December 31, 2003. For
the three months ending March 31, 2004, commission expense and commissions
income, were approximately $2.7 million and expenses connected with the writing
of premiums such as salaries and premium taxes, net of policy fees, totaled
approximately $0.6 million. Deferred policy acquisition costs, increased
primarily due to a $0.4 million increase in deferred commission expenses and a
$1.13 million decrease in ceded unearned commissions income during the three
months ending March 31, 2004. The increase in deferred commission expenses
primarily related to the increase in lines of insurance other than automobile,
which are not subject to quota-share agreements. The decrease in ceded
commissions income is due to a $3.8 million decline in ceded commissions.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES.
Unpaid losses and loss adjustment expenses decreased $2.9 million, or
11.8%, to $21.7 million as of March 31, 2004, as compared to $24.6 million as of
December 31, 2003. The decline in estimated reserves primarily relates to our
intentional reduction in automobile insurance exposure during the first quarter
of 2004, which traditionally take a longer period of time to settle.
18
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Secondarily, the decline in overall reserves is a reflection of the nature of
the type of other property and casualty insurance products that we now offer,
which are generally settled more expeditiously.
Factors that affect unpaid losses and loss adjustment expenses include
the estimates made on a claim-by-claim basis known as "case reserves" coupled
with bulk estimates known as "incurred but not reported" (IBNR). Periodic
estimates by management of the ultimate costs required to settle all claim files
are based on the Company's analysis of historical data and estimations of the
impact of numerous factors such as (i) per claim information; (ii) company and
industry historical loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the awarding of damages, and changes in
political attitudes; and (iv) trends in general economic conditions, including
the effects of inflation. Management revises its estimates based on the results
of its analysis. This process assumes that past experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate basis
for estimating the ultimate settlement of all claims. There is no precise method
for subsequently evaluating the impact of any specific factor on the adequacy of
the reserves, because the eventual redundancy or deficiency is affected by
multiple factors. For further discussion, see "Loss and Loss Adjustment
Expenses" below.
UNEARNED PREMIUMS.
Unearned premiums increased by $1.7 million or, 5.1%, to $35.9 million
as of March 31, 2004, as compared to $34.1 million as of December 31, 2003. The
increase was due to a $1.7 million increase in unearned homeowner's insurance
premiums and $0.9 million in unearned premiums associated with the newly
launched commercial liability program. Offsetting these increases was a $0.9
million decrease in automobile unearned premiums. These changes reflect our
emphasis on property and commercial general liability insurance products.
INCOME TAXES PAYABLE.
Income taxes payable increased by 100% to $0.8 million as of March 31,
2004, as compared to December 31, 2003 and are primarily due to payment patterns
established by our estimations of taxable income.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AS COMPARED TO THREE MONTHS ENDED
MARCH 31, 2003
GROSS PREMIUMS WRITTEN.
Gross premiums written increased $1.2 million, or 7.3%, to $17.8
million for the three months ended March 31, 2004, as compared to $16.6 million
for the comparable period in 2003. The following table denotes gross premiums
written by major product line.
Three months ended March 31,
2004 2003
------------------- -------------------
Automobile $ 8,288,649 46.5% $13,765,357 82.9%
Homeowners' 6,523,324 36.6% 2,367,025 14.2%
Commercial liability 2,558,559 14.4% -- 0.0%
Mobile home owners' 447,194 2.5% 479,598 2.9%
----------- ----- ----------- -----
Gross written premiums $17,817,726 100.0% $16,611,980 100.0%
=========== ===== =========== =====
As noted above, the Company's efforts to expand to lines of insurance
products other than automobile insurance are coming to fruition.
GROSS PREMIUMS CEDED.
Gross premiums ceded decreased $5.1 million to $0.7 million for the
three months ended March 31, 2004, as compared to debit balance of ($4.4)
million for the three months ended March 31, 2003. The decrease is due to the
decline in the Company's ceded quota-share reinsurance associated with its
automobile insurance. For the quarter ended March 31, 2004, we did not cede any
automobile insurance premiums, as compared to a 40% cession for the same period
last year.
19
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECREASE IN PREPAID REINSURANCE PREMIUMS.
The decrease in prepaid reinsurance premiums was $1.8 million, or
($3.8) million for the three months ended March 31, 2004, compared to ($1.9)
million for the three months ended March 31, 2003. The decrease is due to the
reduced reliance on quota-share reinsurance on our automobile insurance
products.
(INCREASE) DECREASE IN UNEARNED PREMIUMS.
Unearned premiums increased by $1.9 million to ($1.7) million as of
March 31, 2004, as compared to $0.2 million as of March 31, 2003. The increase
was due to a $1.7 million increase in unearned homeowners' insurance premiums
and $0.9 million in unearned premiums associated with the newly launched
commercial liability insurance program. Offsetting these increases was a $0.9
million decrease in automobile unearned premiums. For further discussion, see
"Unearned Premiums" above.
NET INVESTMENT INCOME.
Net investment income increased by $0.2 million, or 44.6%, to $0.5
million for the three months ended March 31, 2004, as compared to $0.3 million
for the same three-month period ended March 31, 2003. The increase in investment
income is a result of the additional amounts of invested assets. Also affecting
our net investment income was the increase in overall yield to 3.3% for the
three months ended March 31, 2004 from a yield of 3.0% for the three months
ending March 31, 2003.
NET REALIZED INVESTMENT GAINS.
Net realized investment gains decreased by $0.2 million, or 65.2% to
$0.1 million for the three months ended March 31, 2004, as compared to $0.3
million for the three months ended March 31, 2003. The table below depicts the
gains by investment category.
Net Realized Gains (Losses)
---------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2004 2003
--------- ---------
Fixed maturities:
U.S. government obligations $ 35,050 $ 85,432
Obligations of states and political subdivisions (100) 5,772
--------- ---------
34,950 91,204
--------- ---------
Corporate securities:
Communications -- 118,968
Financial (219) 93,205
Other -- 20,541
--------- ---------
(219) 232,714
--------- ---------
Equity securities:
Preferred stocks -- 23,555
Common stocks 87,188 3,409
--------- ---------
87,188 26,964
--------- ---------
Total fixed, corporate and equity securities $ 121,919 $ 350,882
========= =========
LOSS AND LOSS ADJUSTMENT EXPENSES.
Loss and loss adjustment expenses decreased by $0.3 million, or 4.6%,
to $6.5 million for the three months ended March 31, 2004, as compared to $6.8
million as of March 31, 2003. The modest decrease is predominantly due to the
decline in automobile policies as a percentage of our overall premium volume.
Our loss ratio, as determined in accordance with GAAP, for the three-month
20
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
period ended March 31, 2004 was 49.8% compared with 64.9% for the same period in
2003. The table below reflects the loss ratios by product line.
Three months ended March 31,
----------------------------
2004 2003
---- ----
Automobile 80.55% 80.51%
Homeowners' 23.40% 13.28%
Commercial liability 18.50% 0.00%
Mobile homeowners' 31.96% 34.67%
All lines 49.78% 64.91%
Losses and loss adjustment expense, our most significant expense, represent
actual payments made and changes in estimated future payments to be made to or
on behalf of our policyholders, including expenses required to settle claims and
losses. Management revises its estimates based on the results of its analysis of
estimated future payments to be made. This process assumes that past experience,
adjusted for the effects of current developments and anticipated trends, is an
appropriate basis for predicting future events. We attribute the "All Lines"
decrease in the loss ratio primarily to the increasingly significant operational
contributions made by our lines of insurance other than automobile.
OPERATING AND UNDERWRITING EXPENSES.
Operating and underwriting expenses rose by $0.7 million, or 27.3%, to
$3.3 million for the three months ended March 31, 2004, as compared to $2.6
million for the three months ended March 31, 2003. The increase is primarily
associated with our cost of obtaining various types of insurance products.
SALARIES AND WAGES.
Salaries and wages increased $0.3 million, or 13.7%, to $2.4 million
for the three months ended March 31, 2004, as compared to $2.1 million for the
three months ended March 31, 2003. Management believes that the increase in
salaries and wages is consistent with retaining quality management and increased
premium production.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS.
Amortization of deferred policy acquisition costs increased by $0.8
million, to a debit of $0.4 million for the three months ended March 31, 2004,
as compared to a credit of $0.4 million as of March 31, 2003. Amortization of
deferred policy acquisition costs consists of the actual policy acquisition
costs, including commissions, payroll and premium taxes, less commissions earned
on reinsurance ceded and policy fees earned.
During the three months ended March 31, 2004, the difference between
the ceded commissions earned of $0.9 million and amortized costs of $1.3 million
resulted in a debit to earnings of $0.4 million. The $0.8 million increase in
the amortization of deferred policy acquisition costs in the 2004 period as
compared to the 2003 period is attributable to the decrease in ceded commissions
earned during the three months ended March 31, 2004 totaling $0.8 million,
netted against insignificant amortized costs during the same three month period.
PROVISION FOR INCOME TAX EXPENSE.
The effective rate for income tax expense is 37.0% for the three months
ended March 31, 2004, compared with 36.0% for the same three-month period in
2003. The increase in the estimated income tax provision is primarily associated
with the increase in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital during the three months ended
March 31, 2004 are revenues generated from operations, issuance of debt
21
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
securities, investment income and borrowings under the Revolving Agreement,
described below. Because the Company is a holding company, it is largely
dependent upon fees from its subsidiaries for cash flow.
Federated Premium's operations are funded by a revolving loan agreement
("Revolving Agreement") with FlatIron Funding Company LLC ("FlatIron"). The
Revolving Agreement is structured as a sale of contracts receivable under a sale
and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of FlatIron),
which gives FPF Inc. the right to sell or assign these contracts receivable.
Federated Premium, which services these contracts, has recorded transactions
under the Revolving Agreement as secured borrowings.
The amount of FPF's 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 is the prime rate plus additional interest varying from
1.25% to 3.25% based on the prior month's ratio of contracts receivable related
to insurance companies with an A. M. Best rating of B or worse to total
contracts receivable.
The Revolving Agreement contains various operating and financial
covenants, with which the Company was in compliance at March 31, 2004 and
December 31, 2003. The Revolving Agreement, as amended, expires September 30,
2004 and we intend to negotiate a similar agreement to replace the expiring
agreement. Outstanding borrowings under the Revolving Agreement as of March 31,
2004 and December 31, 2003 were both approximately $4.1 million. Outstanding
borrowings in excess of the $4.0 million commitment totaled $57,786 and $98,786,
respectively for March 31, 2004 and December 31, 2003. The excess amounts,
permissible by reason of a compensating cash balance of $354,341 and $200,430,
respectively, for March 31, 2004 and December 31, 2003, are held for the benefit
of FPF, Inc. and are included in other assets. Interest expense on this
revolving credit line for the three months ended March 31, 2004 and 2003 totaled
approximately $57,000 and $55,000, respectively. For the three months ended
March 31, 2004 and 2003, the effective interest rate on this line of credit,
based on our average outstanding borrowings under the Revolving Agreement, was
5.59% and 5.33%, respectively.
We also implemented a direct bill program during 2003 for policies
underwritten by our carriers. Direct billing is where the insurance company
accepts from the insured, as a receivable, a promise to pay the premium, as
opposed to requiring the full amount of the policy, either directly from the
insured or from a premium finance company.
On July 31, 2003, the Company completed a private placement of its 6%
Senior Subordinated Notes (the "Notes"), which were offered and sold to
accredited investors as units consisting of one Note with a principal amount of
$1,000 and warrants (the "Warrant") to purchase one-half of one share of the
Company's Common Stock. The Company sold an aggregate of $7.5 million of Notes
in this placement, which resulted in proceeds to the Company (net of placement
agent fees of $450,724 and offering expenses of $110,778) of $6,938,498.
The Notes pay interest at the annual rate of 6%, are subordinated to
senior debt of the Company, and mature on July 31, 2006. Quarterly payments of
principal and interest due on the Notes may be made in cash or, at the our
option, in shares of the our Common Stock. If paid in shares of Common Stock,
the number of shares to be issued shall be determined by dividing the payment
due by 95% of the weighted-average volume price for the Common Stock on Nasdaq
as reported by Bloomberg Financial Markets ("Bloomberg") for the 20 consecutive
trading days preceding the payment date.
We issued Warrants to purchase shares of the Company's Common Stock to
the purchasers of the Notes and to the placement agent in the offering, J.
Giordano Securities Group ("J. Giordano"). Each Warrant entitles the holder to
purchase one-half of one share of our Common Stock. The total number of shares
issuable upon exercise of Warrants issued to the purchasers of the Notes and to
J. Giordano shall be determined after the expiration of 60 consecutive trading
days following July 31, 2003, which was the date of closing of the offering and
totals 408,050. The number of shares issuable upon exercise of the Warrants
issued to purchasers shall equal $7.5 million divided by the exercise price of
the Warrants and totaled 392,356. The number of shares issuable upon exercise of
the Warrants issued to J. Giordano shall equal $300,000 divided by the exercise
price of the Warrants and totaled 15,694. The exercise price of the Warrants
shall equal 115% of the weighted-average volume price of the Common Stock on
Nasdaq as reported by Bloomberg for the 60 consecutive trading days following
July 31, 2003, with a maximum of $25.00 per share and a minimum of $15.00 per
share. As computed, the exercise price of the Warrants equals $19.1153. The
terms of the Warrants provide for adjustment of the exercise price and the
number of shares issuable thereunder upon the occurrence of certain events
typical for private offerings of this type. The Warrants will be exercisable
until July 31, 2006.
22
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On or about October 31, 2003, we elected, pursuant to the terms of the
Notes, to make our quarterly estimated payment in shares of our Common Stock and
in accordance with the contractual computations issued a total of 41,195 shares
of our Common Stock. On or about January 31, 2004 and April 30, 2004, we again
elected to make our quarterly payment in shares of our Common Stock and in
accordance with the contractual computations issued 36,009 and 35,819 shares of
our Common Stock, respectively.
For the three months ended March 31, 2004, operations generated net
operating cash flow of $7.3 million as compared to $4.1 million for the same
three months ending March 31, 2003. Gross cash flow provided by operations
generated approximately $9.9 million, mostly by increased unearned premiums
liability totaling $1.7 million, increased prepaid reinsurance premiums totaling
$3.7 million and income taxes totaling $1.6 million, in conjunction with net
income of $2.9 million. The same operations for the three-month period ending
March 31, 2004 used $5.6 million of gross cash flow primarily to reduce unpaid
loss and loss adjustment expenses totaling $2.9 million, amortization of
deferred policy acquisition costs totaling $1.6 million and premiums receivable
of $1.0 million. Operating cash flow is currently expected to be positive in
both the short-term and the reasonably foreseeable future.
In addition, the Company's investment portfolio is highly liquid as it
consists almost entirely of readily marketable securities. Cash flow used in net
investing activities was $13.6 million for the three-months ended March 31,
2004, as the Company invested the cash flow from operating and financing
activities. While in a period in which written premiums are increasing, it is
reasonably expected that cash from insurance premiums will be used for investing
activities. In the future, the Company expects a continued cash flow deficit
from investing activities, as the Company invests cash from operations.
Net cash provided by financing activities was $0.9 million for the
three months ended March 31, 2004, reflecting the receipt of $1.4 million from
exercised stock options netted against the use of $0.5 million to pay dividends.
The Company believes that its current capital resources will be sufficient to
meet its currently anticipated working capital requirements. There can be no
assurances, however, that such will be the case.
To retain its certificate of authority, Florida insurance laws and
regulations require that Federated National and American Vehicle maintain
capital surplus equal to the greater of 10% of its liabilities or the 2003
statutory minimum capital and surplus requirement of $3.60 million as defined in
the Florida Insurance Code. The insurance companies are also required to adhere
to prescribed premium-to-capital surplus ratios.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its shareholders except out of that part of
its available and accumulated capital surplus funds which is derived from
realized net operating profits on its business and net realized capital gains. A
Florida domestic insurer may not make dividend payments or distributions to
shareholders without prior approval of the Florida Department of Financial
Services if the dividend or distribution would exceed the larger of (i) the
lesser of (a) 10.0% of its capital surplus or (b) net income, not including
realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital
surplus with dividends payable constrained to unassigned funds minus 25% of
unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or
(b) net investment income plus a three-year carryforward with dividends payable
constrained to unassigned funds minus 25.0% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department of Financial
Services (i) if the dividend is equal to or less than the greater of (a) 10.0%
of the insurer's capital surplus as regards policyholders derived from realized
net operating profits on its business and net realized capital gains or (b) the
insurer's entire net operating profits and realized net capital gains derived
during the immediately preceding calendar year, (ii) the insurer will have
policy holder capital surplus equal to or exceeding 115.0% of the minimum
required statutory capital surplus after the dividend or distribution, (iii) the
insurer files a notice of the dividend or distribution with the Florida
Department of Financial Services at least ten business days prior to the
dividend payment or distribution and (iv) the notice includes a certification by
an officer of the insurer attesting that, after the payment of the dividend or
distribution, the insurer will have at least 115% of required statutory capital
surplus as to policyholders. Except as provided above, a Florida domiciled
insurer may only pay a dividend or make a distribution (i) subject to prior
approval by the Florida Department of Financial Services or (ii) 30 days after
the Florida Department of Financial Services has received notice of such
dividend or distribution and has not disapproved it within such time.
Under these laws, Federated National would be permitted to pay
dividends of approximately $441,000 to 21st Century in 2004, and American
Vehicle would be permitted to pay approximately $116,000 in dividends to 21st
Century in 2004. No dividends were paid by Federated National or American
Vehicle in the first quarter of 2004, 2003 nor 2002 and none are anticipated in
23
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
2004. Although we believe that amounts required to meet our financial and
operating obligations will be available from sources other than dividends from
its insurance subsidiaries, there can be no assurance in this regard. Further,
there can be no assurance that, if requested, the Florida Department of
Financial Services will allow any dividends in excess of the amount available to
be paid by Federated National or American Vehicle in the future. The maximum
dividends permitted by state law are not necessarily indicative of an insurer's
actual ability to pay dividends or other distributions to a parent company. The
ability to pay dividends also may be constrained by business and regulatory
considerations, such as the impact of dividends on capital surplus, which could
affect an insurer's competitive position, the amount of premiums that can be
written and the ability to pay future dividends. Further, state insurance laws
and regulations require that the statutory capital surplus of an insurance
company, following any dividend or distribution by it, be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
Insurance companies are 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. Based on
calculations using the appropriate NAIC formula and the respective insurance
company data for the year ending December 31, 2003, both of the insurance
companies total adjusted capital were in excess of ratios that would require
regulatory action. GAAP differs in some respects from statutory reporting
practices prescribed or permitted by the Florida Department of Financial
Services. Federated National's and American Vehicle's statutory capital surplus
levels as of March 31, 2004 were approximately $19.2 million and $10.4 million,
respectively, and their statutory net income (loss) for the three months ended
March 31, 2004 was $0.9 million and ($0.2) million, respectively.
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 general levels of inflation. Interest
rates do not necessarily move in the same direction or with the same magnitude
as the inflationary effect on the cost of paying losses and loss adjustment
expenses.
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
premiums, 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 increased levels of inflation
could cause increases in the dollar amount of incurred loss and loss adjustment
expenses and thereby materially adversely affect future liability requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to quantitative and qualitative disclosures about
market risk was included under Item 7a, "Quantitative and Qualitative
Disclosures about Market Risk", in the Company's Annual Report on Form 10-K as
of December 31, 2003. No material changes have occurred in market risk since
this information was disclosed except as discussed below.
The Company's investment portfolio is available for sale and is carried
at fair value. Gains that represent securities with a fair value in excess of
amortized cost, and losses (amortized cost is in excess of fair value) that are
deemed temporary by management are recorded in shareholders' equity in
accumulated other comprehensive income. Losses that are deemed other than
24
21ST CENTURY HOLDING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
temporary by management are recorded as net realized losses in the consolidated
statement of operations. A summary of the investment portfolio as of March 31,
2004 follows:
Unrealized
Amortized Cost Fair Value Gain (Loss)
-------------- ---------- -----------
Fixed maturities:
U.S. government obligations $37,829,790 59.94% $37,785,365 59.60% $ (44,425)
Obligations of states and political subdivisions 8,362,708 13.25% 8,386,043 13.23% 23,335
----------- --------- ----------- --------- -----------
46,192,498 73.19% 46,171,408 72.83% (21,090)
----------- --------- ----------- --------- -----------
Corporate securities:
Communications 892,627 1.41% 1,102,775 1.74% 210,148
Financial 4,825,833 7.65% 4,877,955 7.69% 52,122
Other 2,754,987 4.37% 2,823,066 4.45% 68,079
----------- --------- ----------- --------- -----------
8,473,447 13.43% 8,803,796 13.89% 330,349
----------- --------- ----------- --------- -----------
Equity securities:
Preferred stocks 250,000 0.40% 254,000 0.40% 4,000
Common stocks 8,193,975 12.98% 8,164,758 12.88% (29,217)
----------- --------- ----------- --------- -----------
8,443,975 13.38% 8,418,758 13.28% (25,217)
----------- --------- ----------- --------- -----------
Total fixed, corporate and equity securities $63,109,920 100.00% $63,393,962 100.00% $ 284,042
=========== ========= =========== ========= ===========
As of March 31, 2004, there were no concentrations greater than 5% of
total investments in any single investment other than United States government
obligations.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. An evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures within 90 days of this report was carried out by the Company
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures have been designed and are
being operated in a manner that provides reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. Nevertheless,
the controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
CHANGES IN INTERNAL CONTROLS. Subsequent to the date of the most recent
evaluation of the Company's internal controls, there were no significant changes
in the Company's internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II
ITEM 1.
LEGAL PROCEEDINGS
We are 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 our
consolidated financial position, results of operations, or liquidity.
In June 2000, a lawsuit was filed against us, our directors and our
executive officers seeking compensatory damages in an undisclosed amount on the
basis of allegations that our amended registration statement dated November 4,
1998 was inaccurate and misleading concerning the manner in which we recognized
ceded insurance commission income, in violation of Sections 11 and 15 of the
25
21ST CENTURY HOLDING COMPANY
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. The plaintiff class purportedly includes
purchasers of our common stock between November 5, 1998 and August 13, 1999. The
Court granted the plaintiffs class status.
Specifically, the plaintiffs allege that we recognized ceded commission
income on a written basis, rather than amortized on a pro rata basis. The
plaintiffs allege that this was contrary to the Statement of Financial
Accounting Concepts Nos. 1, 2 and 5. We believe, however, that the lawsuit is
without merit and we have vigorously defended the action, because we reasonably
relied upon outside subject matter experts to make these determinations at the
time. We have also since accounted for ceded commission on a pro rata basis and
have done so since these matters were brought to our attention in 1998.
Nevertheless, we have also continued to actively participate in settlement
negotiations with the plaintiffs and have tentatively agreed to settle the case.
The parties are currently negotiating the final terms of a Memorandum of
Understanding, which will have to be executed by the parties and then approved
by the court. We have reserved and charged against fourth quarter 2003 earnings
$600,000 for the potential settlement and associated costs.
Prior to its acquisition by the Company in 2001, American Vehicle was
involved in litigation with a former officer and director. The litigation was
adjudicated and American Vehicle, among others, was found liable and paid the
final judgment. A petition was filed seeking costs of $136,000 and appellate
attorneys' fees in excess of $2.0 million. To secure this obligation, American
Vehicle's previous owners have agreed to indemnify the Company against any award
of fees and costs and the $500,000 purchase price for American Vehicle was
placed in escrow. On February 26, 2003, the court entered an amended final
judgment awarding the plaintiffs $1,140,387 in attorneys' fees and costs. On or
about May 10, 2004, the parties finalized this case without further costs to us
and all parties have now agreed that this case is closed.
A direct premium writer in the State of Florida, is required to
participate in certain insurer solvency pools under Florida Statutes Section
631.57(3)(a). Participation in these pools is based on the Company's written
premiums by line of business to total premiums written statewide by all
insurers. Participation may result in assessments against us.
Federated National and American Vehicle are also required to
participate in an insurance apportionment plan under Florida Statutes Section
627.351 referred to as a Joint Underwriting Association Plan ("JUA Plan"). The
JUA Plan provides for the equitable apportionment of any profits realized, or
losses and expenses incurred, among participating motor vehicle insurers. In the
event of an underwriting deficit incurred by the JUA Plan which is not recovered
through the policyholders in the JUA Plan, such deficit shall be recovered from
the companies participating in the JUA Plan in the proportion that the net
direct written premiums of each such member during the preceding calendar year
bear to the aggregate net direct premiums written in this state by all members
of the JUA Plan.
No assessments by have been incurred by either insurance company
through the date of this 10-Q.
ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 30, 2004, the Company issued an aggregate of 36,009 shares
of its common stock to holders of its Notes in payment of the quarterly interest
and principal payment due pursuant to the terms of the Notes. These shares were
issued without registration under the Securities Act of 1933 (the "Act") by
reason of the exemption from registration pursuant to Section 4(2) of the Act
and Regulation D thereunder.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
26
21ST CENTURY HOLDING COMPANY
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:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act.
(b) Reports on Form 8-K.
Form 8K dated March 16, 2004, attaching a press release announcing the
Company's results for its fiscal year ended December 31, 2003.
Form 8K dated May 7, 2004 attaching a press release announcing the
Company's results for its fiscal quarter ended March 31, 2004.
27
21ST CENTURY HOLDING COMPANY
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
By: /s/ Richard A. Widdicombe
Richard A. Widdicombe,
Chief Executive Officer
/s/ James G. Jennings III
James G. Jennings III,
Chief Financial Officer
Date: May 17, 2004
28