SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ______________.
Commission file number 0-2500111
21ST CENTURY HOLDING COMPANY
----------------------------
(Exact name of registrant as specified in its charter)
FL 65-0248866
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
4161 N.W. 5th Street, Plantation, FL 33317
------------------------------------------
(Address of principal executive offices) (Zip Code)
954-581-9993
------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 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 - 3,043,828 shares outstanding as of May 13, 2003.
21ST CENTURY HOLDING COMPANY
INDEX
PART I: FINANCIAL INFORMATION PAGE
-----
ITEM 1:
FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets
as of March 31, 2003
and December 31, 2002................................................ 3
Consolidated Statements of Operations
for the three months ended March 31, 2003
and 2002............................................................. 4
Consolidated Cash Flow Statements
for the three months ended March 31, 2003
and 2002............................................................. 5
Notes to Consolidated Financial Statements................................ 6
ITEM 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations..................... 11
ITEM 3:
Quantitative and Qualitative Disclosures About Market Risk................ 17
ITEM 4:
Controls and Procedures................................................... 17
PART II: OTHER INFORMATION
Other Information......................................................... 18
Signatures................................................................ 20
Certifications............................................................ 21
2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
(See Note 1)
ASSETS
Investments
Fixed maturities, available for sale, at fair value $ 26,687,897 $ 24,693,047
Equity securities -- 539,706
Mortgage loans 143,873 145,043
------------ ------------
Total investments 26,831,770 25,377,796
------------ ------------
Cash and cash equivalents 7,565,988 4,478,383
Finance contracts, net of allowance for credit
losses of $369,546 in 2003 and $404,356 in 2002 6,712,498 7,217,873
Prepaid reinsurance premiums 9,872,901 11,251,193
Premiums receivable, net of allowance for credit losses of $283,000 and $210,000, respectively 8,038,953 8,373,104
Reinsurance recoverable, net 11,110,986 7,856,972
Deferred acquisition costs, net 433,487 7,721
Income taxes recoverable -- --
Deferred income taxes 2,410,239 2,691,309
Property, plant and equipment, net 4,947,256 4,819,617
Goodwill, net 1,699,069 1,789,353
Other assets 1,689,079 1,454,690
------------ ------------
Total assets $ 81,312,226 $ 75,318,011
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 21,545,684 $ 16,983,756
Unearned premiums 29,312,355 28,934,486
Premiums deposits 1,127,018 655,713
Revolving credit outstanding 4,122,645 4,312,420
Bank overdraft 827,511 844,947
Unearned commissions 18,721 18,721
Income taxes payable 243,513 1,676,020
Accounts payable and accrued expenses 3,102,300 3,746,030
Drafts payable to insurance companies 48,805 48,254
------------ ------------
Total liabilities 60,348,552 57,220,347
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock of $0.01 par value. Authorized 25,000,000 shares; issued 3,435,667 and
3,411,667 shares, respectively;
Outstanding 3,012,201 and 2,990,201 shares, respectively 34,357 34,117
Additional paid-in capital 13,110,355 12,855,543
Accumulated other comprehensive income (deficit) 306,076 (227,091)
Retained earnings 8,618,574 6,521,027
Treasury stock, 423,466 and 421,466 shares, respectively, at cost (1,105,688) (1,085,932)
------------ ------------
Total shareholders' equity 20,963,674 18,097,664
------------ ------------
Total liabilities and shareholder's equity $ 81,312,226 $ 75,318,011
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ ------------
Revenue:
Gross premium written $ 16,611,980 $ 13,074,985
Gross premium ceded (4,398,875) (5,893,430)
------------ ------------
Net premiums written 12,213,105 7,181,555
Decrease in unearned premiums, net
of prepaid reinsurance premiums (1,756,161) (1,747,061)
------------ ------------
Net premiums earned 10,456,944 5,434,494
Commission income 433,039 428,346
Finance revenue 1,127,826 1,061,431
Managing general agent fees 632,547 959,000
Net investment income 365,205 334,622
Net realized investments gains 350,882 53,781
Other income 1,495,567 1,235,326
------------ ------------
Total revenue 14,862,010 9,507,000
Expenses:
Loss and loss adjustment expenses 6,787,709 3,184,631
Operating and underwriting expenses 2,681,278 2,845,525
Salaries and wages 2,146,335 2,002,890
Amortization of deferred acquisition costs, net (360,181) (70,282)
------------ ------------
Total expenses 11,255,141 7,962,764
Income before provision for income tax expense 3,606,869 1,544,236
Provision for income tax expense 1,298,468 552,866
------------ ------------
Net income $ 2,308,401 $ 991,370
============ ============
Basic net income per share $ 0.77 $ 0.33
============ ============
Weighted average number of common shares outstanding and
Weighted average number of common shares outstanding (assuming dilution) 3,004,620 3,028,926
============ ============
Dividends paid per common share $ 0.06 $ 0.02
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ ------------
Cash flow from operating activities:
Net income (loss) $ 2,308,401 $ 991,370
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization (accretion) of investment premium (discount), net 39,947 (15,029)
Depreciation and amortization of property plant and equipment 101,639 95,895
Deferred income tax expense 281,070 (149,700)
Net realized investment (gains) losses (350,882) (53,781)
Amortization of deferred acquisition costs, net (360,181) (70,282)
Provision for credit losses, net 194,708 474,361
Provision for uncollectible premiums receivable 10,627 96,679
Other 254,312 5,052
Changes in operating assets and liabilities:
Premiums receivable 323,524 (2,011,600)
Prepaid reinsurance premiums 1,378,292 (2,395,023)
Reinsurance recoverable, net (3,254,014) 1,322,946
Deferred acquisition costs, net (65,585) 780,152
Goodwill (179,716) --
Other assets (234,389) 1,139,065
Unpaid losses and loss adjusting expenses 4,561,928 921,472
Unearned premiums 377,869 4,142,084
Premium deposits 471,305 334,052
Unearned commissions -- (435,332)
Income taxes payable (1,432,507) --
Accounts payable and accrued expenses (642,990) 277,319
Drafts payable to insurance companies 551 636,803
------------ ------------
Net cash provided by operating activities 3,783,909 6,086,503
------------ ------------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale 40,687,613 1,767,061
Purchases of investment securities available for sale (41,298,655) (4,920,801)
Finance contracts receivable, consumer loans and pay advances receivable 310,667 (1,800,801)
Sale of and collection of mortgage loans 1,170 451,590
Purchases of property and equipment (229,278) (91,748)
Net cash used in acquisitions -- 199,687
Proceeds from sale of assets 270,000 --
------------ ------------
Net cash used in investing activities (258,483) (4,395,012)
------------ ------------
Cash flow from financing activities:
Bank overdraft (17,436) (1,337,377)
Dividends paid (210,854) (60,868)
Purchases of treasury stock (19,756) (,744)
Revolving credit outstanding (189,775) (511,145)
------------ ------------
Net cash used in financing activities (437,821) (1,918,134)
------------ ------------
Net (decrease) increase in cash and cash equivalents 3,087,605 (226,643)
Cash and cash equivalents at beginning of period 4,478,383 775,699
------------ ------------
Cash and cash equivalents at end of period $ 7,565,988 $ 549,056
============ ============
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 55,412 $ 101,172
============ ============
Income taxes $ 2,450,000 $ 258
============ ============
Non-cash investing and financing activities:
Accrued dividends payable $ 210,807 $ 60,268
============ ============
Notes receivable, net of deferred gains, received for sale of agencies $ 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, 2002. The December 31, 2002 year-end balance sheet data was derived from
audited financial statements but does not include all disclosures required by
GAAP. The financial information furnished reflects all adjustments, consisting
only of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented. The results of operations
are not necessarily indicative of results of operations, which may be achieved
in the future.
The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and the claims process. The Company
underwrites personal automobile insurance, homeowners insurance, flood insurance
and mobile home property and casualty insurance in the State of Florida through
its wholly-owned subsidiaries, Federated National Insurance Company ("Federated
National") and American Vehicle Insurance Company ("American Vehicle"). The
Company internally processes claims made by its own and third party insureds
through a wholly-owned claims adjusting company, Superior Adjusting, Inc.
("Superior"). The Company also offers premium financing to its own and
third-party insureds through its wholly-owned subsidiary, Federated Premium
Finance, Inc. ("Federated Premium").
The Company markets and distributes its own and third-party insurers'
products and its other services primarily in South Florida, through a network of
23 agencies, owned by Federated Agency Group, Inc. ("Federated Agency Group"), a
wholly-owned subsidiary, 42 franchised agencies and approximately 125
independent agents. The Company, through its wholly-owned subsidiary, FedUSA,
Inc. ("FedUSA"), franchises agencies under the FedUSA name. As of March 31,
2003, franchises were granted for 42 Fed USA agencies, of which 36 were
operating. The Company intends to focus its future expansion efforts for its
agency network on franchised agencies.
The Company offers income tax preparation, electronic tax filing
services, and income tax preparation software and service through Express Tax
Service, Inc., ("Express Tax"), an 80%-owned subsidiary, as well as franchise
opportunities for these services through EXPRESSTAX Franchise Corporation
("EXPRESSTAX"), a wholly-owned subsidiary of Express Tax. As of June 30, 2003
there were 141 EXPRESSTAX franchises granted in ten 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 bank related products. In addition, Express Tax offers tax
preparation services through more than 500 licensees nationwide, acting as sales
representatives of Express Tax.
(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
management 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 the Company's financial statements include estimates associated with
management's evaluation of the determination of liability for unpaid losses and
loss adjustment expense ("LAE") and the recoverability of goodwill. In addition,
significant estimates form the basis for the Company's 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. Management periodically
re-evaluates these significant factors and makes adjustments where facts and
circumstances dictate.
6
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(B) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No.146, "Accounting for Costs Associated with
Exit or Disposal Activities." Statement of Financial Accounting Standard No. 146
supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Statement of Financial
Accounting Standard No. 146 requires that, in certain instances, costs
associated with an exit or disposal plan be recognized when incurred rather than
at the date of a commitment to an exit or disposal plan. Statement of Financial
Accounting Standard No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of Statement of
Financial Accounting Standard No. 146 has no effect on the Company's financial
statements.
In October 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 147, "Acquisitions of Certain
Financial Institutions," which clarifies the accounting treatment for
acquisitions of financial institutions. In addition, this Statement amends
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor and borrower relationship intangible assets and credit cardholder
intangible assets. Statement of Financial Accounting Standard No. 147 is
effective on October 1, 2002. The adoption of Statement of Financial Accounting
Standard No. 147 has no effect on the Company's financial statements.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation." The new
standard provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
Additionally, the statement amends the disclosure requirements of
Statement of Financial Accounting Standard No. 123 to require prominent
disclosures in the annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This statement is effective for financial statements
for fiscal years ending after December 15, 2002. In compliance with Statement of
Financial Accounting Standard No. 148, the Company has elected to continue to
follow the intrinsic value method in accounting for the Company's stock-based
employee compensation arrangement as defined by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
(C) EARNINGS PER SHARE
Basic earnings per share ("Basic EPS") is computed by dividing net
income by the weighted average number of common shares outstanding during each
period presented. Diluted earnings per share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common stock and common
stock equivalents during the period presented; outstanding warrants and stock
options are considered common stock equivalents and are included in the
calculation using the treasury stock method. Diluted EPS for the year ended
December 31, 2002 excluded the impact of warrants and stock options as their
effect would have been anti-dilutive.
(D) RECLASSIFICATIONS
Certain amounts in 2002 financial statements have been reclassified to
conform with 2003 presentation.
7
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) REVOLVING CREDIT OUTSTANDING
Federated Premium's operations are funded by a revolving loan agreement
("Revolving Agreement"). The Revolving Agreement is structured as a sale of
contracts receivable under a sale and assignment agreement with the lender,
which gives the lender 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 Revolving Agreement,
which was amended and revised in September 2001, allowed for a maximum credit
commitment of $7.0 million plus an initial additional amount of $700,000 for the
transition from September 30, 2001 when the previous agreement expired. The line
declined by $100,000 each month beginning November 1, 2001. In September 2002,
the line was amended and revised allowing for a maximum credit commitment of
$4.0 million. The credit commitment was reduced by the lender, primarily due to
the AM Best ratings of third-party insurance carriers for which the Company was
financing policies at the time. Simultaneously, the Company ceased financing
policies underwritten by third-party insurance carriers and implemented the
Company's newly developed direct bill program. The Company believes that these
changes decreased credit risks and made the Company's reliance on the higher
credit commitment previously offered by the lender unnecessary.
By financing policies underwritten only by its own insurance carriers,
the Company believes that its credit risks are reduced because it can more
securely rely on the underwriting processes of its own insurance carriers.
Furthermore, the direct bill program enables the Company to closely manage its
risk while providing credit to its insureds. 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 Company's
underwriting standards require a down payment and subsequent monthly payments
sufficient to create "policyholder's equity," or unearned premium, in the
policy. The equity in the policy is collateral for the extension of credit to
the insured. Through the Company's monitoring systems, the Company tracks
delinquent payments and, in accordance with the terms of the extension of
credit, cancels the policy before the policyholder's equity is extinguished. If
any excess premium remains after cancellation of the policy and deduction of
applicable penalties, this excess is refunded to the policyholder.
The amount of the lender'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 Company's effective interest rate on this line of credit, based on
the Company's average outstanding borrowings under the Revolving Agreement, was
6.23% and 7.84% for the years ended December 31, 2002 and 2001, respectively.
Currently, the effective rate of interest for this arrangement is approximately
5.5%. The Revolving Agreement contains various operating and financial
covenants, with which the Company was in compliance at March 31, 2003 and
December 31, 2002. The Revolving Agreement, as amended, expires September 30,
2004. Outstanding borrowings under the Revolving Agreement as of March 31, 2003
and December 31, 2002 were approximately $4.1 million and $4.3 million,
respectively. Outstanding borrowings in excess of the $4.0 million commitment
totaled $122,645 and $312,420 for March 31, 2003 and December 31, 2002,
respectively and are permissible by reason of a compensating cash balance held
for the benefit of FPF, Inc. Interest expense on this revolving credit line for
the first quarter of 2003 and the year ended December 31, 2002 totaled
approximately $55,000 and $342,000, respectively.
(4) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
8
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2000, a lawsuit was filed against the Company and its directors
and executive officers seeking compensatory damages in an undisclosed amount on
the basis of allegations that the Company's amended registration statement dated
November 4, 1998 was inaccurate and misleading concerning the manner in which
the Company recognized ceded insurance commission income, in violation of
Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. Specifically, the plaintiffs allege that
the Company 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. The Company has
since accounted for ceded commission on a pro rata basis and has done so since
these matters were brought to the Company's attention in 1998. Nevertheless, the
Company believes that the lawsuit is without merit and is vigorously defending
the action, as the Company reasonably relied upon outside subject matter experts
to make these determinations at the time. The lawsuit was filed in the United
States District Court for the Southern District of New York and seeks class
action status. The plaintiff class purportedly includes purchasers of the
Company's common stock between November 5, 1998 and August 13, 1999. The Court
recently denied the Company's Motion to Dismiss the plaintiffs' First Amended
Complaint and the Company filed an Answer and Affirmative Defenses.
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 11th Judicial Circuit in Miami,
Florida entered an amended final judgment awarding the plaintiffs $1,140,387 in
attorney fees and costs. Both parties are appealing this judgment. Management
anticipates that there will be no costs associated with the resolution of this
case, consequently, no liability for fees and costs has been accrued.
The Company, as 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 the Company. The
Company was assessed $258,000 and $203,000 for the years ended December 31, 2002
and 2001, respectively. Should there be a 2003 assessment, the Company is
generally notified in December. During 2002, the Company recovered $180,000 of
the 2001 assessment and is entitled to recover all of these assessments as
permitted by the State of Florida through policy surcharges in 2003. During the
first six months of 2003, the Company has recovered the balance of the 2001
assessment and has recovered $92,000 of the 2002 assessment.
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 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
joint underwriting JUA Plan.
No assessments by have been incurred by either insurance company
through the date of issuance of this report.
(5) COMPREHENSIVE INCOME
For the three months ended March 31, 2003 and 2002, comprehensive
income consisted of the following:
2003 2002
---------- ----------
Net income $2,308,401 $ 991,370
Change in net unrealized gain (losses) on investments
held for sale, net of income taxes 376,150 (543,926)
---------- ----------
Comprehensive income $2,684,551 $ 447,444
========== ==========
9
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 Managing General Agents, Inc.
("Assurance MGA"), claims processing through Superior, and marketing and
distribution through Federated Agency Group. The insurance segment sells
personal automobile, flood insurance and homeowner and mobile home property and
casualty insurance and includes substantially all aspects of the insurance,
distribution and claims process. The financing segment consists of premium
financing through Federated Premium. 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 return
preparation.
Information regarding components of operations for the three-month
period ending March 31, 2003 and 2002 follows:
2003 2002
------------ ------------
TOTAL REVENUE
Insurance segment $ 15,449,365 $ 8,187,365
Financing segment 679,814 1,000,764
All other 1,184,760 1,213,452
------------ ------------
Total operating segments 17,313,939 10,401,581
Intercompany eliminations (2,451,929) (894,581)
------------ ------------
Total revenues $ 14,862,010 $ 9,507,000
============ ============
EARNINGS BEFORE INCOME TAXES
Insurance segment $ 3,121,270 $ 401,414
Financing segment 198,673 159,234
All other 286,926 983,588
------------ ------------
Total Earnings before Income Taxes $ 3,606,869 $ 1,544,236
============ ============
Information regarding total assets as of March 31, 2003 and December
31, 2002 follows:
2003 2002
------------ ------------
TOTAL ASSETS
Insurance segment $ 73,491,480 $ 66,663,775
Finance segment 6,955,089 7,548,841
All other 2,816,451 3,003,827
------------ ------------
Total Operating Segments 83,263,020 77,216,443
Intercompany eliminations (1,950,794) (1,898,432)
------------ ------------
Total Assets $ 81,312,226 $ 75,318,011
============ ============
10
21ST CENTURY HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) REINSURANCE AGREEMENTS
The quota-share reinsurance treaties include loss corridors with
varying layers of coverage based on ultimate incurred loss ratio results.
Additionally, the most current of these treaties contain conversion features
that may diminish the Company's ability to collect for loss experience at the
election of the reinsurer for loss experience between 66% and 86%. Despite the
conversion features, the reinsurer assumes significant insurance risk under the
reinsured portions of the underlying insurance contracts and it is reasonably
possible that the reinsurer may realize a significant loss from the transaction.
The Company also participates in the Florida Hurricane Catastrophe Fund
to protect its interest in insurable risks associated with its homeowner and
mobile home owner policies against catastrophic losses. Additionally, the
Company has purchased "Excess of Loss" insurance to further protect itself from
potential catastrophic events.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
Statements in this report 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 other
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 the Company; risks related to the nature of the Company's business;
dependence on investment income and the composition of the Company's investment
portfolio; the adequacy of its liability for loss and loss adjustment expense
("LAE"); 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 the Company in this report and its
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 generally accepted
accounting principles prescribe 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
The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and the claims process. The Company
underwrites personal automobile insurance, homeowners insurance, flood insurance
and mobile home property and casualty insurance in the State of Florida through
its wholly-owned subsidiaries, Federated National and American Vehicle. The
Company internally processes claims made by its own and third party insureds
through a wholly-owned claims adjusting company, Superior. The Company also
offers premium financing to its own and third-party insureds through its
wholly-owned subsidiary, Federated Premium.
11
The Company markets and distributes its own and third-party insurers'
products and its other services primarily in South Florida, through a network of
23 agencies, owned by Federated Agency Group, a wholly-owned subsidiary, 42
franchised agencies and approximately 125 independent agents. The Company,
through its wholly-owned subsidiary, FedUSA, franchises agencies under the
FedUSA name. As of March 31, 2003, franchises were granted for 42 Fed USA
agencies, of which 36 were operating. The Company intends to focus its future
expansion efforts for its agency network on franchised agencies.
The Company offers income tax preparation, electronic tax filing
services, and income tax preparation software and service through Express Tax
Service, Inc., ("Express Tax"), an 80%-owned subsidiary, as well as franchise
opportunities for these services through EXPRESSTAX Franchise Corporation
("EXPRESSTAX"), a wholly-owned subsidiary of Express Tax. As of June 30, 2003
there were 141 EXPRESSTAX franchises granted in ten 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 bank related products. In addition, Express Tax offers tax
preparation services through more than 500 licensees nationwide, acting as sales
representatives of Express Tax.
The Company believes that it can be distinguished from its competitors
because it generates revenue from substantially all aspects of the insurance
underwriting, distribution and claims process. The Company provides quality
service to both its agents and insureds by utilizing an integrated computer
system, which links the Company's insurance and service entities. The Company's
computer and software systems allow for automated premium quotation, policy
issuance, billing, payment and claims processing and enables the Company to
continuously monitor substantially all aspects of its business. Using these
systems, the Company's agents can access a customer's driving record, quote a
premium, offer premium financing and, if requested, generate a policy on-site.
The Company believes that these systems have facilitated its ability to market
and underwrite insurance products on a cost-efficient basis, allow Company-owned
and franchised agencies to be a "one stop" shop for insurance, tax preparation
and other services, and enhance the Company's ability to expand in Florida and
to other states.
The Company's primary products are standard and nonstandard personal
automobile insurance. The former is principally provided to insureds who present
an average risk profile in terms of payment history, driving record, vehicle and
other factors. The latter is principally provided to insureds who are unable to
obtain preferred or standard insurance coverage because of their payment
history, driving record, age, vehicle type or other factors, including market
conditions for preferred or standard risks. The Company's experience has been
that Underwriting criteria in the industry generally for standard insurance
coverage have become more restrictive, thereby requiring more drivers to seek
coverage in the nonstandard automobile insurance market. The Company believes
that these factors have contributed to an increase in the size of the
nonstandard personal automobile insurance market. Additionally other insurance
products offered include property insurance for the home and mobile home and, in
June of 2003, the Company plans to launch a new general liability insurance
product designed for the small artisan.
The Company currently underwrites and sells insurance only in Florida;
however, the Company intends to expand to other selected states. American
Vehicle has applied to obtain a license to underwrite and sell personal
automobile insurance in Alabama. The Company will select additional states for
expansion based on a number of criteria, including the size of the personal
automobile insurance market, statewide loss results, competition and the
regulatory climate. The Company's ability to expand into other states will be
subject to the prior regulatory approval of each state. Certain states impose
operating requirements upon licensee applicants, which may impose burdens on the
Company's ability to obtain a license to conduct insurance business in those
other states. There can be no assurance that the Company will be able to obtain
the required licenses, and the failure to do so would limit the Company's
ability to expand geographically.
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, 2003 AS COMPARED TO DECEMBER 31, 2002
INVESTMENTS. Investments increased $1.5 million, or 5.7%, to $26.8 million as of
March 31, 2003 as compared to $25.4 million as of December 31, 2002. This
increase in investments is the result of an increase in premiums written
discussed below.
12
FINANCE CONTRACTS. Finance contracts decreased $505,000, or 0.07%, to $6.7
million as of March 31, 2003 from $7.2 million as of December 31, 2002. The
decline in contracts receivable is due to the direct-bill feature offered by the
insurance companies wherein the policyholder can renew and pay premiums directly
to the Federated National and American Vehicle.
PREPAID REINSURANCE PREMIUMS. Prepaid reinsurance premiums decreased $1.4
million, or 12.2%, to $9.9 million as of March 31, 2003 from $11.3 million as of
December 31, 2002 The decrease is the result a decrease in Federated National's
ceded quota-share reinsurance on automobile insurance from 40% of premiums
written in 2002 to 30% for premiums written in 2003. American Vehicle also
reduced its ceded quota-share reinsurance from 70% of its premiums written to
40% effective November 1, 2002.
REINSURANCE RECOVERABLE. Reinsurance recoverable increased $3.3 million to $11.1
million as of March 31, 2003 from $7.9 million as of December 31, 2002. This
increase is the result of the timing of settlements between the Company and its
reinsurer. All amounts are considered current.
DEFERRED ACQUISITION COSTS, NET. Deferred acquisition costs increased from
$7,721 as of December 31, 2002 to $433,487 as of March 31, 2003. Included in the
December 31, 2002 balance were deferred commissions of $3.0 million offset by
unearned ceded commissions of $3.0 million. As of March 31, 2003, deferred
commissions were $74,000 offset by unearned ceded commissions of $500,000.
Deferred commissions increased due to the increase in premiums. The increase in
unearned ceded commissions is related to the decline of Federated National's and
American Vehicle's 2003 reinsurance cession treaties.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid loss and loss adjustment
expenses increased $4.6 million from $17.0 million as of December 31, 2002 to
$21.6 as of March 31, 2003. The increase is due to first quarter loss reserve
strengthening and to the timing of claim payments issued.
PREMIUM DEPOSITS. Premium deposits represent premiums collected in advance of
the policy's effective date of coverage and are generally associated with the
home and mobile home insurance policies. Premium deposits increased from
$656,000 as of December 31, 2002 to $1.1 million as of March 31, 2003.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
GROSS PREMIUMS WRITTEN. Gross premiums written increased $3.5 million, or 27%,
to $16.6 million for the three months ended March 31, 2003 as compared to $13.1
million for the comparable period in 2002. $1.4 million of this increase is
attributable to American Vehicle which was acquired in August 2001. Federated
National's automobile premiums written also increased by $1.4 million and its
homeowner premiums written increased by $681,000 as compared to March 31, 2002.
GROSS PREMIUMS CEDED. Gross premiums ceded decreased $1.5 million to $4.4
million for the three months ended March 31, 2003, from $5.9 million for the
three months ended March 31, 2002. The decrease is primarily due to the decline
in the Company's ceded quota-share reinsurance on automobile insurance.
DECREASED UNEARNED PREMIUMS, NET OF PREPAID REINSURANCE PREMIUMS. The decrease
in unearned premiums, net of prepaid reinsurance premiums was $1.7 million for
the three months ended March 31, 2002 as compared to a decrease of $1.7 million
for the three months ended March 31, 2003 as well. The decline is a function of
the increase in written premiums and declining ceded reinsurance quota-share
percentages.
MGA FEES. MGA fees decreased $326,000 to $633,000 for the three-month period
ended March 31, 2003 from $959,000 for the same period in 2002. The decrease is
due to commissions earned from a nonaffiliated insurance company during the
first quarter of 2002.
NET REALIZED INVESTMENT GAINS. The Company experienced net realized gains of
$351,000 for the three-month period ended March 31, 2003 compared to realized
gains of $54,000 for the same period in 2002. Realized gains or losses are
primarily a function of the bond and equity markets. There can be no assurance
that the Company will record gains in the future.
13
LOSSES AND LAE. The Company's loss ratio, as determined in accordance with GAAP,
for the three-month period ended March 31, 2003 was 64.9% compared with 58.6%
for the same period in 2002. Losses and LAE incurred increased $3.6 million to
$6.8 million for the three-month period ended March 31, 2003 from $3.2 million
for the same period in 2002. Losses and LAE, the Company's most significant
expense, represent actual payments made and changes in estimated future payments
to be made to or on behalf of its policyholders, including expenses required to
settle claims and losses. The Company attributes the 113% increase to reserve
strengthening. Loss ratios by company by major line are as follows:
March 31, 2003 March 31, 2002
-------------- --------------
Federated National Automobile 83.5% 79.2%
Federated National Home and Mobile Home 16.8% 25.1%
American Vehicle Automobile 76.8% 77.9%
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of deferred
policy acquisition costs increased from a credit of $70,000 for the three-month
period ended March 31, 2002 to a credit of $360,000 for the same period in 2003.
Amortization of deferred policy acquisition costs consists primarily of net
commissions. The increase is due to an increase in commissions earned on
reinsurance ceded.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are revenues generated from
operations, investment income and borrowings under the Revolving Agreement,
described below. Because the Company is a holding company, it is largely
dependent upon dividends and 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 Revolving Agreement,
which was amended and revised in September 2001, allowed for a maximum credit
commitment of $7.0 million plus an initial additional amount of $700,000 for the
transition from September 30, 2001 when the previous agreement expired. The line
declined by $100,000 each month beginning November 1, 2001. In September 2002,
the line was amended and revised allowing for a maximum credit commitment of
$4.0 million. The credit commitment was reduced by the lender, primarily due to
the AM Best ratings of third-party insurance carriers for which the Company was
financing policies at the time. Simultaneously, the Company ceased financing
policies underwritten by third-party insurance carriers and implemented the
Company's newly developed direct bill program. The Company believes that these
changes decreased credit risks and made the Company's reliance on the higher
credit commitment previously offered by the lender unnecessary.
By financing policies underwritten only by its own insurance carriers,
the Company believes that its credit risks are reduced because it can more
securely rely on the underwriting processes of its own insurance carriers.
Furthermore, the direct bill program enables the Company to closely manage its
risk while providing credit to its insureds. 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 Company's
underwriting standards require a down payment and subsequent monthly payments
sufficient to create "policyholder's equity," or unearned premium, in the
policy. The equity in the policy is collateral for the extension of credit to
the insured. Through the Company's monitoring systems, the Company tracks
delinquent payments and, in accordance with the terms of the extension of
credit, cancels the policy before the policyholder's equity is extinguished. If
any excess premium remains after cancellation of the policy and deduction of
applicable penalties, this excess is refunded to the policyholder.
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 AM 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, 2003 and December 31, 2002. The Revolving
Agreement, as amended, expires September 30, 2004. Outstanding borrowings under
the Revolving Agreement as of March 31, 2003 and December 31, 2002 were
approximately $4.1 million and $4.3 million, respectively. Outstanding
borrowings in excess of the $4.0 million commitment totaled $122,645 and
$312,420 for March 31, 2003 and December 31, 2002, respectively and are
permissible by reason of a compensating cash balance held for the benefit of
FPF, Inc. Interest expense on this revolving credit line for the first quarter
of 2003 and the year ended December 31, 2002 totaled approximately $55,000 and
$342,000, respectively.
14
For the three months ended March 31, 2003, operations generated
operating cash flow of $3.8 million, which was primarily attributable to the
increase in premiums written. This represents a $2.30 million decrease in cash
provided by operations as compared to the period ending March 31, 2002. The
decrease primarily reflects anomalies which occurred in the first quarter of
2002 stemming from the introduction of the accounts associated with the
acquisition American Vehicle. Also, the implementation of the Company's direct
bill program, settlement of federal and state income taxes, and declines in
accounts payable and accrued expenses contributed to the decrease.
The introduction of American Vehicle during the last quarter of 2001
resulted in significant increases in operating cash for the period ended March
31, 2002. As of March 31, 2003, however, a $1.84 million decline in cash flow
was attributable to American Vehicle's integration into the consolidated
operations of the Company for a full 12 months. Furthermore, as a result of the
profitable operations for the year ended December 31, 2002, as compared to net
losses reported for year ended December 31, 2001, federal and state income tax
payments consumed $1.43 million of operating cash. Also, declines in accounts
payable and accrued expense balances accounted for $930,000 of the decrease in
the first quarter 2003 cash flow. On the other hand, during the first quarter of
2003, the Company's direct bill program contributed $1.97 million to operating
cash, and the Company's increased net income, net of other non-cash items and
agency commissions, contributed $80,000 to operating cash.
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 $258,000
for the quarter ended March 31, 2003 as the Company invested the cash flow from
operating activities. In the future, the Company expects a continued cash flow
deficit from investing activities as the Company invests cash from operations.
Cash deficit from financing activities was $438,000 for the quarter ended March
31, 2003, as the Company reduced its bank overdraft and the amount outstanding
under its Revolving Agreement as well as dividends paid. The Company believes
that its current capital resources, together with cash flow from its operations,
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 2002
statutory minimum capital and surplus requirement of $3.25 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.
15
Under these laws, Federated National would be permitted to pay
dividends of approximately $207,000 to the Company in 2003, and American Vehicle
would be permitted to pay $73,000 in dividends in 2003. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available from sources other than dividends from 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 to the Company in the future. No dividends were
paid by Federated National or American Vehicle in 2002, 2001 or 2000, and none
are anticipated in 2003. 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 payment of dividends may also be
constrained by business and regulatory considerations, such as the impact of
dividends on capital surplus, which could affect an insurer's competitive
position and the amount of premiums that can be written, as well as 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. As of
March 31, 2003, based on calculations using the appropriate NAIC formula, the
Company's total adjusted capital is in excess of ratios that would require
regulatory action. GAAP differs in some respects from reporting practices
prescribed or permitted by the Florida Department of Financial Services.
Federated National's and American Vehicle's statutory capital surplus levels as
of March 31, 2003 were approximately $9.8 million and $5.2 million,
respectively, and their statutory net income for the quarter ended March 31,
2003 was $511,000 and $293,000, respectively.
During 2002 Federated National entered into a 10% quota-share agreement
with its affiliate American Vehicle. The agreement ceded 10% of its premium and
losses on all policies with an effective date of 2002. For presentation purposes
and in accordance with the principles of consolidation the agreement between the
two affiliated insurance companies has been eliminated.
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 cost of paying losses and LAE.
Insurance premiums are established before the Company knows the amount
of loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the Company's
investment portfolio and the investment rate of return. Any future economic
changes which result in prolonged and increasing levels of inflation could cause
increases in the dollar amount of incurred loss and LAE and thereby materially
adversely affect future liability requirements.
16
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, 2002. 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
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, 2003 follows:
Amortized Cost Fair Value Gain (Loss)
------------ ----------- ------------
Corporate Securities
Communications Industry $ 2,602,080 $ 2,782,225 $ 180,145
Financial Industry 4,354,347 4,379,431 25,084
Other Industries 4,258,484 4,323,758 65,274
----------- ----------- -----------
Total Corporate Securities 11,214,911 11,485,414 270,503
Obligations of State and Municipal Subdivisions 13,485,242 13,589,451 104,209
U. S. Government and Government Agencies 103,488 104,094 606
----------- ----------- -----------
Total Fixed Maturities $24,803,641 $25,178,959 $ 375,318
=========== =========== ===========
Equity Securities - Common Stocks $ 1,599,737 $ 1,508,939 $ (90,798)
=========== =========== ===========
As shown in the table above, at March 31, 2003 the Company had
investments with a fair value of $2.7 million and amortized cost of $2.6 million
in the communications industry. At the time these investments were made, the
Company believed that these were prudent and would enhance the yield on the
investment portfolio.
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 as amended 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.
17
PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
In June 2000, a lawsuit was filed against the Company and its directors
and executive officers seeking compensatory damages in an undisclosed amount on
the basis of allegations that the Company's amended registration statement dated
November 4, 1998 was inaccurate and misleading concerning the manner in which
the Company recognized ceded insurance commission income, in violation of
Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. Specifically, the plaintiffs allege that
the Company 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. The Company has
since accounted for ceded commission on a pro rata basis and has done so since
these matters were brought to the Company's attention in 1998.
Nevertheless, the Company believes that the lawsuit is without merit
and is vigorously defending the action, as the Company reasonably relied upon
outside subject matter experts to make these determinations at the time. The
lawsuit was filed in the United States District Court for the Southern District
of New York and seeks class action status. The plaintiff class purportedly
includes purchasers of the Company's common stock between November 5, 1998 and
August 13, 1999. The Court recently denied the Company's Motion to Dismiss the
plaintiffs' First Amended Complaint and the Company filed an Answer and
Affirmative Defenses.
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 11th Judicial Circuit in Miami,
Florida entered an amended final judgment awarding the plaintiffs $1,140,387 in
attorney fees and costs. Both parties are appealing this judgment. Management
anticipates that there will be no costs associated with the resolution of this
case; consequently, no liability for fees and costs has been accrued.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
None
18
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 8-K filed on May 5, 2003, attached and incorporated by
reference Exhibit 99.1, press release of the Company dated May 5, 2003,
reporting financial results for the first quarter of 2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 1 to Form 10-Q 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/ J. G. Jennings III
----------------------------------------------
J. G. Jennings III, Chief Financial Officer
Date: August 28, 2003
20