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 SEPTEMBER 30, 2005
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.)
3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida 33313
--------------------------------------------------------------------------------
(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 by check mark whether the registrant is a shell company (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 - 6,399,816 outstanding as of November 11, 2005.
1
21ST CENTURY HOLDING COMPANY
EXPLANATORY NOTE
This Form 10-Q/A amends and restates Items 1 and Item 2 of the Quarterly Report
on Form 10-Q filed by 21st Century Holding Company on November 14, 2005 to
correct certain typographical errors contained in those items in the Form 10-Q.
These corrections are necessary due to certain typographical errors that
occurred primarily in the preparation of the final electronic version of the
Form 10-Q prior to the transmission of the Form 10-Q to the Securities and
Exchange Commission via the Edgar System.
The typographical errors were contained in (i) a table in footnote 6 of our
financial statements entitled "Segment Information" on page 14 and (ii) our loss
ratio was indirectly described as 53.76% instead of 52.90% on page 32 of our
Form 10-Q. We also added a new line item to cover the cover page indicating that
we are not a shell company, as defined in Rule 12b-2 of the Exchange Act.
This Form 10-Q/A consists of a cover page, this explanatory note, the answers
(as amended to Items 1 and 2 of the Form 10-Q), the signature page and the
required certifications of the principal executive officer and the principal
financial officer of 21st Century. While the answers (as amended) to Items 1 and
2 have been restated in full as required by Rule 12b-15 under the Securities
Exchange Act of 1934, no changes have been made to such answers except those
described above.
Other than as set forth above, this Form 10-Q/A does not and does not purport
to, amend, update or restate the information in any other item of the Form 10-Q
or reflect any events that have occurred after the Form 10-Q was filed on
November 14, 2005
2
PART I: FINANCIAL INFORMATION
ITEM 1
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 2005 December 31, 2004
------------------ -----------------
ASSETS
Investments
Fixed maturities, available for sale, at fair value $ 76,886,274 $ 69,587,030
Equity securities 16,899,476 14,795,143
------------------ -----------------
Total investments 93,785,750 84,382,173
------------------ -----------------
Cash and cash equivalents 1,465,466 6,127,706
Receivable for investments sold 1,450,000 --
Finance contracts, net of allowance for credit losses of
$433,356 in 2005 and $475,788 in 2004, and net of
unearned finance charges of $383,210 in 2005 and
$453,487 in 2004 7,570,143 8,289,356
Prepaid reinsurance premiums 72,746 5,510,379
Premiums receivable, net of allowance for credit losses of
$81,979 and $541,851, respectively 6,186,474 6,024,913
Reinsurance recoverable, net 20,702,811 25,488,956
Deferred policy acquisition costs 8,507,210 6,957,168
Income taxes recoverable 859,174 7,915,424
Deferred income taxes 3,068,170 3,656,076
Property, plant and equipment, net 3,967,353 4,272,733
Goodwill, net -- 153,546
Other assets 6,189,294 4,822,942
------------------ -----------------
Total assets $ 153,824,591 $ 163,601,372
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and LAE $ 36,128,129 $ 46,570,679
Unearned premiums 57,961,219 50,152,711
Premiums deposits 1,947,560 1,871,683
Revolving credit outstanding 78,104 2,148,542
Bank overdraft 3,283,046 14,832,698
Funds held under reinsurance treaties 1,568,872 --
Subordinated debt 11,875,000 16,875,000
Deferred income from sale of agency operations 2,028,450 2,500,000
Accounts payable and accrued expenses 2,531,671 3,673,324
------------------ -----------------
Total liabilities 117,402,051 138,624,637
------------------ -----------------
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value. Authorized 37,500,000
shares; issued 7,090,565 and 6,744,791 shares,
respectively; Outstanding 6,393,716 and
6,047,942, respectively 70,906 67,448
Additional paid-in capital 29,556,539 26,310,147
Accumulated other comprehensive (deficit) (1,223,763) (504,972)
Retained earnings 9,798,503 883,757
Treasury stock, 696,849 shares, at cost (1,779,645) (1,779,645)
------------------ -----------------
Total shareholders' equity 36,422,540 24,976,735
------------------ -----------------
Total liabilities and shareholders' equity $ 153,824,591 $ 163,601,372
================== =================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenue:
Gross premiums written $ 25,355,235 $ 24,301,800 $ 86,815,187 $ 73,929,571
Gross premiums ceded (7,188,343) (3,525,315) (12,142,786) (5,549,725)
------------- ------------- ------------- -------------
Net premiums written 18,166,892 20,776,485 74,672,401 68,379,846
------------- ------------- ------------- -------------
Increase (Decrease) in prepaid reinsurance premiums 72,745 760,823 (5,437,633) (5,334,921)
Decrease (Increase) in unearned premiums 2,462,575 156,954 (7,808,508) (14,342,263)
------------- ------------- ------------- -------------
Net change in prepaid reinsurance premiums
and unearned premiums 2,535,320 917,777 (13,246,141) (19,677,184)
------------- ------------- ------------- -------------
Net premiums earned 20,702,212 21,694,262 61,426,260 48,702,662
Finance revenue 807,778 784,584 2,849,989 2,824,568
Managing general agent fees 558,883 501,225 1,811,576 1,488,405
Net investment income 972,302 839,641 2,776,098 2,141,686
Net realized investment gains -- 80,959 285,033 261,386
Other income 614,393 148,595 1,018,774 539,300
------------- ------------- ------------- -------------
Total revenue 23,655,568 24,049,266 70,167,730 55,958,007
------------- ------------- ------------- -------------
Expenses:
Loss and LAE 13,275,690 42,292,556 32,494,462 56,385,548
Operating and underwriting expenses 1,607,749 3,363,823 5,396,561 5,816,459
Salaries and wages 1,600,716 1,623,134 4,759,417 4,391,306
Interest expense 313,962 186,902 1,123,893 631,824
Policy acquisition costs, net of amortization 3,920,679 2,521,738 10,968,721 4,645,906
------------- ------------- ------------- -------------
Total expenses 20,718,796 49,988,154 54,743,054 71,871,043
Income (loss) from continuing operations before
provision (benefit) for income tax expense 2,936,772 (25,938,887) 15,424,676 (15,913,036)
Provision (benefit) for income tax expense 1,084,054 (9,337,258) 5,762,741 (5,677,392)
------------- ------------- ------------- -------------
Net income (loss) from continuing operations 1,852,718 (16,601,629) 9,661,935 (10,235,644)
Discontinued operations:
Income (loss) from discontinued operations
(including gain on disposal of $1,630,000
and $0, respectively) -- (540,496) 1,630,000 (173,857)
Provision (benefit) for income tax expense -- (195,867) 595,396 (62,028)
------------- ------------- ------------- -------------
Income (loss) from discontinued operations -- (344,629) 1,034,604 (111,829)
------------- ------------- ------------- -------------
Net income (loss) $ 1,852,718 $ (16,946,258) $ 10,696,539 $ (10,347,473)
============= ============= ============= =============
Basic net income (loss) per share from
continuing operations $ 0.29 $ (2.80) $ 1.56 $ (1.77)
============= ============= ============= =============
Basic net income (loss) per share from
discontinued operations $ -- $ (0.06) $ 0.17 $ (0.02)
============= ============= ============= =============
Basic net income (loss) per share $ 0.29 $ (2.86) $ 1.73 $ (1.79)
============= ============= ============= =============
Fully diluted net income (loss) per share from
continuing operations $ 0.28 $ (2.80) $ 1.48 $ (1.77)
============= ============= ============= =============
Fully diluted net income (loss) per share from
discontinued operations $ -- $ (0.06) $ 0.16 $ (0.02)
============= ============= ============= =============
Fully diluted net income (loss) per share $ 0.28 $ (2.86) $ 1.64 $ (1.79)
============= ============= ============= =============
Weighted average number of common shares
outstanding 6,384,386 5,925,952 6,189,040 5,786,803
============= ============= ============= =============
Weighted average number of common shares
outstanding (assuming dilution) 6,589,257 6,279,826 6,533,575 6,248,663
============= ============= ============= =============
Dividends declared per share $ 0.08 $ 0.08 $ 0.24 $ 0.24
============= ============= ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
2005 2004
------------ ------------
Cash flow from operating activities:
Net income (loss) $ 10,696,539 $(10,347,473)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of investment (discount) premium, net (167,113) 134,507
Depreciation and amortization of property plant and equipment, net 345,868 355,217
Gain from sale of discontinued operations (1,630,000) --
Net realized investment gains 339,267 80,959
Common Stock issued for interest on Notes 315,625 281,250
Provision for credit losses, net 455,699 707,051
(Recovery) of provision for uncollectible premiums receivable (366,824) (66,824)
Recognition of deferred income from sale of franchises -- (131,647)
Sale of equity in subsidiary (255,079) --
Changes in operating assets and liabilities:
Premiums receivable 205,263 1,551,468
Prepaid reinsurance premiums 5,437,633 5,334,921
Due from reinsurers, net 4,786,145 (23,463,843)
Income taxes recoverable 7,056,250 (6,377,438)
Deferred income tax expense 587,906 (1,351,182)
Policy acquisition costs, net of amortization (1,550,042) (5,275,089)
Goodwill 153,546 --
Finance contracts receivable 263,514 1,349,872
Other assets (1,842,798) 517,935
Unpaid losses and loss adjustment expenses (10,442,550) 52,083,422
Unearned premiums 7,808,508 14,342,263
Premium deposits 75,877 1,903,918
Funds held under reinsurance treaties 1,568,872 9,108,429
Bank overdraft (11,549,652) --
Accounts payable and accrued expenses (1,141,653) 80,750
------------ ------------
Net cash provided by operating activities 11,150,801 40,818,466
------------ ------------
Cash flow (used in) investing activities:
Proceeds from sale of investment securities available for sale 59,047,951 45,474,173
Purchases of investment securities available for sale (69,288,240) (88,685,210)
Receivable (Payable) for investments sold (purchased) (1,450,000) 1,993,689
Collection of mortgage loans -- 137,571
Purchases of property and equipment (148,954) (146,012)
Proceeds from sale of discontinued operations 1,630,000 --
Proceeds from sale of assets 59,128 --
------------ ------------
Net cash (used in) investing activities (10,150,115) (41,225,789)
------------ ------------
Cash flow (used in) provided by financing activities:
Subordinated debt (3,764,584) 12,500,000
Exercised stock options 1,698,809 2,722,562
Dividends paid (1,526,713) (1,417,784)
Purchases of treasury stock -- (2,197)
Revolving credit outstanding (2,070,438) (2,817,265)
------------ ------------
Net cash (used in) provided by financing activities (5,662,926) 10,985,316
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,662,240) 10,577,993
Cash and cash equivalents at beginning of period 6,127,706 6,770,169
------------ ------------
Cash and cash equivalents at end of period $ 1,465,466 $ 17,348,162
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
(continued) 2005 2004
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 499,855 $ 160,148
============ ============
Income taxes $ -- $ 2,095,000
============ ============
Non-cash investing and finance activities:
Accrued dividends payable $ 448,195 $ 438,720
============ ============
Retirement of subordinated debt by Common Stock issuance $ 1,666,667 $ 1,875,000
============ ============
Stock issued to pay interest on subordinated debt $ 315,625 $ 281,250
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
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/A (Amendments No. 1 and No.
2) for the year ended December 31, 2004. The December 31, 2004 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 an insurance holding company, which, through our subsidiaries and
our contractual relationships with our independent agents, control substantially
all aspects of the insurance underwriting, distribution and claims process. We
are authorized to underwrite personal automobile insurance, commercial general
liability insurance, homeowners' property and casualty insurance and mobile home
property and casualty insurance in various states with various lines of
authority through our wholly owned subsidiaries, Federated National Insurance
Company ("Federated National") and American Vehicle Insurance Company ("American
Vehicle").
Federated National is authorized to underwrite personal automobile
insurance, homeowners' property and casualty insurance and mobile home property
and casualty insurance in Florida as an admitted carrier. American Vehicle is
authorized to underwrite personal and commercial automobile insurance and
commercial general liability insurance in Florida as an admitted carrier. In
addition, American Vehicle is authorized to underwrite commercial general
liability insurance in Georgia, Kentucky and Virginia as a surplus lines carrier
and in Texas, Louisiana and Alabama as an admitted carrier. We anticipate that
underwriting will begin in Kentucky, Alabama and Virginia in the near future.
American Vehicle operations in Florida, Georgia and Louisiana are on-going.
American Vehicle operations in Texas, Alabama and Kentucky are expected to begin
this year. American Vehicle has pending applications, in various stages of
approval, to be authorized as a surplus lines carrier in the states of
California, South Carolina and Arkansas.
During the nine months ended September 30, 2005, 61.0%, 19.6%, 19.0% and
0.4% of the premium we underwrote were for homeowners' property and casualty
insurance, commercial general liability insurance, personal automobile
insurance, and mobile home property and casualty insurance, respectively. During
the nine months ended September 30, 2004, 63.8%, 13.2%, 21.4% and 1.6% of the
premium we underwrote were for homeowners' property and casualty insurance,
commercial general liability insurance, personal automobile insurance, and
mobile home property and casualty insurance, respectively. We internally process
claims made by our own and third-party insureds through our wholly owned claims
adjusting company, Superior Adjusting, Inc. ("Superior"). We also offer premium
financing to our own and third-party insureds through our wholly owned
subsidiary, Federated Premium Finance, Inc. ("Federated Premium").
We market and distribute our own and third-party insurers' products and
our other services primarily in Florida, through contractual relationships with
a network of approximately 1,500 independent agents and a select number of
general agents.
Assurance Managing General Agents, Inc. ("Assurance MGA"), 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 and American Vehicle, and participates in the negotiation of
reinsurance contracts. Assurance MGA generates revenue through a 6% commission
fee from the insurance companies' net written premium, policy fee income of $25
per policy and other administrative fees from the marketing of other companies'
products through the Company's distribution network. The 6% commission fee from
Federated National and American Vehicle was made effective January 1, 2005.
Assurance MGA plans to establish relationships with additional carriers and add
additional insurance products in the future.
7
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 expenses (LAE).
In addition, significant estimates form the basis for our reserves with respect
to finance contracts, premiums receivable, deferred income taxes, 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 make
adjustments where facts and circumstances dictate.
(B) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
revised SFAS No. 123, Share-Based Payments ("SFAS No. 123R"). This statement
eliminates the option to apply the intrinsic value measurement provisions of APB
No. 25 to stock compensation awards issued to employees. Rather, SFAS No. 123R
requires companies to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value of the
award. That cost will be recognized over the period during which an employee is
required to provide services in exchange for the award - the requisite service
period (usually the vesting period). SFAS No. 123R will also require companies
to measure the cost of employee services received in exchange for employee stock
purchase plan awards. SFAS No. 123R will be effective for the Company's fiscal
year beginning January 1, 2006 as subsequently extended by the SEC pursuant to
its April 13, 2005 announcement. We have not yet determined the effect on us of
the adoption of SFAS No. 123R.
(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
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.
For the three months For the nine months
ended September 30, ended September 30,
------------------------------ -------------------------------
2005 2004 2005 2004
------------- -------------- -------------- --------------
Net Income as reported $ 1,852,718 $ (16,946,258) $ 10,696,539 $ (10,347,473)
Compensation, net of tax effect 132,308 6,171,950 932,007 6,714,508
------------- -------------- -------------- --------------
Pro forma net income $ 1,720,410 $ (23,118,208) $ 9,764,532 $ (17,061,981)
============= ============== ============== ==============
Net income per share
As reported - Basic $ 0.29 $ (2.86) $ 1.73 $ (1.79)
As reported - Diluted $ 0.28 $ (2.86) $ 1.64 $ (1.79)
Pro forma - Basic $ 0.27 $ (3.90) $ 1.58 $ (2.95)
Pro forma - Diluted $ 0.26 $ (3.90) $ 1.49 $ (2.95)
Additional stock option awards are anticipated in future years.
8
21st Century Holding Company
Notes to Consolidated Financial Statements
The weighted average fair value for new options granted during the nine
months ending September 30, 2005, estimated on the date of grant was $18.00. In
connection with the sale of Express Tax Service, Inc. and EXPRESSTAX Franchise
Corporation on January 1, 2005, 105,000 Incentive Stock Options under the 2002
Stock Option plan were cancelled and reissued as Non-Qualified Stock Options.
The weighted average fair value of options granted during 2004 as estimated on
the date of grant using the Black-Scholes option-pricing model was $6.13 to
$18.26 in 2004. The fair value of options granted is estimated on the date of
grant using the following assumptions:
September 30, 2005 September 30, 2004
------------------ ------------------
Dividend yield 2.33% to 2.43% 2.24% to 3.19%
Expected volatility 49.85% to 96.76% 99.65% to 103.20%
Risk-free interest rate 3.34% to 4.17% 2.13% to 3.60%
Expected life (in years) 2.56 to 2.63 3.00 to 3.60
(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 outstanding 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. Additionally, when applicable,
we include in our computation of the weighted average number of common shares
outstanding all common stock issued in connection with the repayment of our
Subordinated debt.
(E) RECLASSIFICATIONS
Certain amounts in 2004 financial statements have been reclassified to
conform to the 2005 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 Westchester Premium Acceptance Corporation
("WPAC") (a wholly-owned subsidiary of FlatIron), which gives WPAC 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.
During September 2004, we negotiated a new revolving loan agreement in
which the maximum credit commitment available to us was reduced at our request
to $2.0 million with built-in options to incrementally increase the maximum
credit commitment up to $4.0 million over the next three years. Our lender could
decide to change our available credit based on a number of factors, including
the A.M. Best ratings of Federated National and American Vehicle. Pursuant to
our loan agreement, if the A.M. Best rating of Federated National falls below a
"C," or if the financial condition of American Vehicle, as determined by our
lender (in its sole and absolute discretion) suffers a material adverse change,
then under the terms of our loan agreement, policies written by that subsidiary
will no longer be eligible collateral, causing our available credit to be
reduced if we do not have other collateral qualifying as eligible collateral. As
of December 31, 2004, policies written by Federated National were not considered
by our lender to be eligible collateral. In March 2005, our lender agreed to
permit policies written by Federated National to be eligible collateral and
agreed to increase our total available credit by $0.5 million from $2.0 million
to $2.5 million. We currently believe that this higher available credit limit
will be sufficient based on our current operations. If policies written by our
insurance subsidiaries again do not qualify as eligible collateral under our
loan agreement and we are not able to obtain working capital from our operations
or other sources, then we would have to restrict our growth and, possibly, our
operations.
9
21st Century Holding Company
Notes to Consolidated Financial Statements
The amounts of WPAC's advances are 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 equals 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 lower to total
contracts receivable. The effective interest rate on this line of credit, based
on our average outstanding borrowings under the Revolving Agreement, was 8.22%
and 7.45% for the nine months ended September 30, 2005 and 2004, respectively.
Outstanding borrowings under the Revolving Agreement as of September 30,
2005 were approximately $0.08 million. Outstanding borrowings as of December 31,
2004 were approximately $2.1. Outstanding borrowings in excess of the $2.0
million credit limits totaled $148,542 as of December 31, 2004. The excess
amount was permissible by reason of a compensating cash balance of $156,095 for
December 31, 2004 that was held for the benefit of WPAC and was included in
other assets. Interest expense on this revolving credit line for the nine months
ended September 30, 2005 and September 30, 2004 totaled approximately $69,000
and $150,000, 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 alleged that we recognized ceded commission
income on a written basis, rather than amortized on a pro rata basis. The
plaintiffs alleged that this was contrary to the Statement of Financial
Accounting Concepts Nos. 1, 2 and 5. We believe, however, that the lawsuit was
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 agreed to settle the case for
$525,000. The Court has issued a Preliminary Order approving the settlement and
the full amount was funded in February 2005. Notices have been sent to class
members and the Court conducted the Final Settlement Hearing on July 26, 2005,
and approved the settlement. We anticipate our active involvement with this
matter to be concluded. We reserved and charged against fourth quarter 2003
earnings $600,000 for the potential settlement and associated costs.
In 2000 and 2001 respectively, two class action lawsuits were filed
against an unaffiliated insurance company for which our subsidiary, Assurance
MGA, was the managing general agent. These lawsuits were seeking compensatory
damages in an undisclosed amount based on allegations of unfair practices
involving the computation of interest due the policyholder in connection with
automobile premium refunds. The unaffiliated company has contested these
lawsuits over the last several years. Negotiations relative to this matter have
been ongoing and in July 2005 the parties reached an agreement wherein we have
paid $240,000 to resolve the underlying actions in these suits subject to our
contractual duties with respect to the unaffiliated company. We believe that we
will be successful in our efforts to enjoin others to participate in this
settlement; however we are unable to quantify the participation of others at
this time. Accordingly, we charged against second quarter 2005 earnings $240,000
for this action.
As an admitted carrier in the State of Florida, we are required to
participate in certain insurer solvency pools under Florida Statutes Section
631.57(3) (a). Participation in these pools is based on our written premiums by
line of business to total premiums written statewide by all insurers.
Participation may result in assessments against us. No related assessments have
been incurred by either insurance company through the date of this 10-Q.
10
21st Century Holding Company
Notes to Consolidated Financial Statements
During its regularly scheduled meeting on August 17, 2005, the Board of
Governors of Citizens Property Insurance Corporation "Citizens" determined a
2004 plan year deficit existed in the High Risk Account. The Board decided that
a $515 million Regular Assessment is in the best interest of Citizens and
consistent with Florida Statutes. On this basis, the Board certified for a
Regular Assessment. Federated National's participation in this assessment
totaled $2.0 million. Provisions contained in our excess of loss reinsurance
policies provide for their participation totaling $1.6 million. Pursuant to
Section 627.3512, Florida Statutes, insurers are permitted to recoup the
assessment by adding a surcharge to policies in an amount not to exceed the
amount paid by the insurer to Citizens. Federated National is currently
underwriting the recoupment in connection with this assessment. As noted above,
Federated National is entitled to recoup this assessment, and will subrogate
$1.6 million to our reinsurers.
Federated National and American Vehicle are also required to participate
in an insurance apportionment plan under Florida Statutes Section 627.351, which
is 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. Federated National and American Vehicle were assessed $44,350
and $1,615, respectively by the JUA Plan based on its July 2005 Cash Activity
Report.
(5) COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2005 and 2004,
comprehensive income consisted of the following:
Three months Nine months
ended September 30, ended September 30,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ------------ ----------- ------------
Net income $ 1,852,718 $(16,946,258) $ 10,696,539 $(10,347,473)
Change in net unrealized gain (loss)
on investments available for sale (860,601) 1,772,140 (1,139,339) (169,579)
----------- ------------ ----------- ------------
Comprehensive income, before tax 992,117 (15,174,118) 9,557,200 (10,517,052)
Income tax benefit (expense) related
to items of other comprehensive income 321,308 (661,633) 433,672 69,036
----------- ------------ ----------- ------------
Comprehensive income $ 1,313,425 $(15,835,751) $ 9,990,872 $(10,448,016)
=========== ============ =========== ============
(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 and claims processing through
Superior. The insurance segment sells personal automobile, homeowner's property
and casualty, and commercial general liability lines of insurance products and
includes substantially all aspects of the insurance 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 relationship with its network of non-affiliated
agencies.
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, the parent company.
11
21st Century Holding Company
Notes to Consolidated Financial Statements
Information regarding components of operations for the three and nine
months ended September 30, 2005 and 2004 follows:
Three months Nine months
ended September 30, ended September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Total revenue
Insurance segment $ 24,562,514 $ 24,834,162 $ 73,380,921 $ 57,208,183
Financing segment 630,549 594,540 2,217,415 2,118,732
All other segments 1,071,152 828,804 1,880,406 2,841,346
------------ ------------ ------------ ------------
Total operating segments 26,264,215 26,257,506 77,478,742 62,168,261
Intercompany eliminations (2,608,647) (2,208,240) (7,311,012) (6,210,254)
------------ ------------ ------------ ------------
Total revenues $ 23,655,568 $ 24,049,266 $ 70,167,730 $ 55,958,007
============ ============ ============ ============
Earnings (loss) before income taxes
Insurance segment $ 2,502,165 $(26,233,911) $ 16,210,870 $(16,876,549)
Financing segment 452,470 213,266 1,027,920 800,027
All other segments (17,863) 81,757 (1,814,114) 163,486
------------ ------------ ------------ ------------
Total earnings (loss) before income taxes $ 2,936,772 $(25,938,888) $ 15,424,676 $(15,913,036)
============ ============ ============ ============
Information regarding total assets as of September 30, 2005 and December 31,
2004 follows:
September 30, 2005 December 31, 2004
------------------ -----------------
Total assets
Insurance segment $ 143,757,620 $ 134,894,764
Financing segment 7,817,422 8,536,786
All other segments 6,165,309 15,460,463
------------------ -----------------
Total operating segments 157,740,351 158,892,013
Intercompany eliminations (3,915,760) 4,709,359
------------------ -----------------
Total assets $ 153,824,591 $ 163,601,372
================== =================
(7) REINSURANCE AGREEMENTS
We follow industry practice of reinsuring a portion of our risks and
paying for that protection based upon premiums received on all policies subject
to such reinsurance. Reinsurance involves an insurance company transferring or
"ceding" all or a portion of its exposure on insurance underwritten by it to
another insurer, known as a "reinsurer." The ceding of insurance does not
legally discharge the insurer from its primary liability for the full amount of
the policies. If the reinsurer fails to meet its obligations under the
reinsurance agreement, the ceding company is still required to pay the loss.
For the 2005-2006 hurricane season, the excess of loss treaties will
insure us for approximately $64.0 million, with the Company retaining the first
$3.0 million of loss and LAE. The treaties have a one full reinstatement
provision for each excess layer with 100% additional premium as to time and pro
rata to amount. In addition, we purchased from the private sector Reinstatement
Premium Protection which will reimburse the Company 100% of the cost of
reinstatement for the second event. Unused coverage from the first two events
carries forward to events beyond the second, in conjunction with a lowered
attachment point (as explained below) afforded by the Florida Hurricane
Catastrophe Fund ("FHCF").
In addition to the excess of loss reinsurance policies (described above),
we continue to participate in the FHCF to protect our interest in the insurable
risks associated with our homeowner and mobile home owner insurance products.
For the first two events, FHCF coverage begins after the Company's retention of
$3.0 million and its excess of loss reinsures retention of approximately $43.0
million.
12
21st Century Holding Company
Notes to Consolidated Financial Statements
Maximum coverage afforded from the combined policies of our FHCF and
excess of loss policies in effect for varying dates from June 1, 2005 to June
30, 2006 total approximately $209.0 million. FHCF will retain approximately
$145.0 million, our excess of loss reinsurance policies will retain $64.0
million, and the Company will retain the first $3 million of insurable losses
for two events. For events beyond the second largest, FHCF coverage attaches
after the Company and its excess of loss reinsures collective retention of
approximately $15.0 million. Additionally, unused coverage from our excess of
loss reinsurance treaties may be carried forward.
As a result of the loss and LAE incurred in connection with Hurricanes
Dennis, Katrina and Rita, the Company expects Hurricane Katrina is the first
reinsurable event, as illustrated in the accompanying table.
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
------------------------- ------ ----------- ------
(Dollars in Millions)
Dennis (July 10, 2005) $ 2.9 $ -- $ 2.9
Katrina (August 25, 2005) 14.6 11.6 3.0
Rita (September 20, 2005) 0.1 -- 0.1
------ ----------- ------
Total Loss Estimate $ 17.6 $ 11.6 $ 6.0
====== =========== ======
For the 2004-2005 hurricane season, the excess of loss treaties insured us
for $24 million, while the Company retained the first $10 million of loss and
LAE. The treaties had a provision which, for a prepaid premium, insured us for
another $24 million of loss and LAE for subsequent occurrences while the Company
retained the first $10 million in loss and LAE. As a result of the loss and LAE
incurred in connection with the Hurricanes Charley and Frances, the Company
exhausted its recoveries of $48 million under the terms of these treaties.
Maximum coverage afforded from the combined policies of our FHCF and
excess of loss policies in effect for varying dates from June 1, 2004 to June
30, 2005 totaled approximately $200.0 million, during which time we retained the
first $10 million of insurable losses on each event. However, loss and LAE
incurred for Hurricanes Ivan and Jeanne and any subsequent catastrophic events
through June 30, 2005, up to $34 million each, are the responsibility of the
Company as illustrated in the accompanying table.
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
--------------------------- ------ ----------- ------
(Dollars in Millions)
Charley (August 13, 2004) $ 58.1 $ 48.1 $ 10.0
Frances (September 3, 2004) 48.7 38.7 10.0
Ivan (September 14, 2004) 18.5 -- 18.5
Jeanne (September 25, 2004) 12.4 -- 12.4
------ ----------- ------
Total Loss Estimate $137.7 $ 86.8 $ 50.9
====== =========== ======
Furthermore, as a result of the 2004 hurricanes, we incurred a net
reinstatement reinsurance premium of $5.0 million that was amortized through
operations from the reinstatement date of August 13, 2004 to June 30, 2005.
In August and September 2004, the State of Florida experienced four
hurricanes, Charley, Frances, Ivan and Jeanne. Federated National incurred
significant losses relative to its homeowners' and mobile homeowners' insurance
lines of business. Approximately 8,900 policyholders have filed
hurricane-related claims totaling an estimated $138.0 million, of which we
estimate that our share of the costs associated with these hurricanes will be
approximately $50.9 million, net of reinsurance recoveries and amortized
reinstatement premiums.
13
21st Century Holding Company
Notes to Consolidated Financial Statements
The excess of loss treaties also insured us for an additional $34 million
in excess of the Company's $10 million retention plus the next $24 million as
described above. Accordingly, loss and LAE incurred for Hurricanes Ivan and
Jeanne and any subsequent catastrophic events through June 30, 2005, up to $34
million each, are the responsibility of the Company.
Reinsurance is ceded under separate contracts or "treaties" for the
separate lines of business underwritten and terms of coverage. The Company
collectively ceded $12.1 million and ($1.0) million in premiums written for the
nine months ended September 30, 2005 and 2004, respectively. During the nine
months ended September 30, 2005 and 2004, respectively, we primarily reinsured
Federated National's homeowners' insurance lines of business. The Company's
reinsurance for homeowners' insurance is with several participants, all of which
were AM Best rated "A" (Excellent) or better at the inception of our policies.
Subsequent to the inception of our treaties, two of the participants have been
downgraded by AM Best to "B" (Fair) or better. The Company does not anticipate
credit quality issues to arise from the downgrading of these participants, and
accordingly has not established a credit allowance.
Our amount of reinsurance coverage was determined by subjecting our
homeowner and mobile homeowner exposures to statistical forecasting models that
are designed to quantify a catastrophic event in terms of the frequency of a
storm occurring once in every "n" years. Our reinsurance coverage contemplated a
catastrophic event occurring once every 100 years.
We are selective in choosing a reinsurer and consider numerous factors,
the most important of which are the financial stability of the reinsurer, their
history of responding to claims and their overall reputation. In an effort to
minimize our exposure to the insolvency of a reinsurer, we evaluate the
acceptability and review the financial condition of the reinsurer at least
annually. Our current policy to engage only reinsurers that have an A.M. Best
rating of "A" or better remains unchanged.
During 2004 and through the date of this report, Federated National and
American Vehicle have not reinsured any of its automobile insurance.
(8) STOCK COMPENSATION PLANS
We implemented a stock option plan in November 1998 that provides for the
granting of stock options to directors, 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 900,000 common shares, and, as of
September 30, 2005 and December 31, 2004, we had outstanding exercisable options
to purchase 123,650 and 198,275 shares, respectively.
In 2001, we implemented a franchisee stock option plan that provided for
the granting of stock options to individuals purchasing Company owned agencies
which were then converted to franchised agencies. The purpose of the plan was 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 which
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 988,500 common shares, though
in connection with our sale of our franchise operations we do not anticipate
additional options to be granted under this plan. As of September 30, 2005 and
December 31, 2004, we had outstanding exercisable options to purchase 15,000
shares.
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, and 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 hereunder, 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 which 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 1,800,000 common shares, and, as
of September 30, 2005 and December 31, 2004, we had outstanding exercisable
options to purchase 758,808 and 906,300 shares, respectively.
14
21st Century Holding Company
Notes to Consolidated Financial Statements
Activity in the Company's stock option plans for the period from January
1, 2004 to September 30, 2005, is summarized below:
1998 Plan 2001 Franchisee Plan 2002 Plan
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- --------
Outstanding at January 1, 2004 408,530 $ 6.67 39,960 $ 7.61 938,100 $ 9.20
Granted -- -- 178,750 $ 17.83
Exercised (193,755) $ 6.67 (24,960) $ 6.67 (136,300) $ 9.16
Cancelled (16,500) $ 6.67 -- (74,250) $ 10.50
--------- --------- ---------
Outstanding at December 31, 2004 198,275 $ 6.67 15,000 $ 9.17 906,300 $ 10.80
Granted -- -- 125,000 $ 10.58
Exercised (74,625) $ 6.67 -- (111,742) $ 9.22
Cancelled -- -- (160,750) $ 11.08
--------- --------- ---------
Outstanding at September 30, 2005 123,650 $ 6.67 15,000 $ 9.17 758,808 $ 10.94
========= ========= =========
Options outstanding as of September 30, 2005 are exercisable as follows:
1998 Plan 2001 Franchisee Plan 2002 Plan
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Number of Exercise Number of Exercise Number of Exercise
Options Exercisable at: Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- --------
September 30, 2005 95,900 $ 6.67 15,000 $ 6.67 491,908 $ 9.22
December 31, 2005 -- -- 8,800 $ 9.22
December 31, 2006 27,750 $ 6.67 -- 88,750 $ 9.22
December 31, 2007 -- -- 88,750 $ 9.22
December 31, 2008 -- -- 44,800 $ 9.22
December 31, 2009 -- -- 32,800 $ 9.22
Thereafter -- -- 3,000 $ 9.22
--------- --------- ---------
Total options exercisible 123,650 15,000 758,808
========= ========= =========
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.
15
21st Century Holding Company
Notes to Consolidated Financial Statements
For the three months For the nine months
ended September 30, ended September 30,
------------------------------ -------------------------------
2005 2004 2005 2004
------------- -------------- -------------- --------------
Net Income as reported $ 1,852,718 $ (16,946,258) $ 10,696,539 $ (10,347,473)
Compensation, net of tax effect 132,308 6,171,950 932,007 6,714,508
------------- -------------- -------------- --------------
Pro forma net income $ 1,720,410 $ (23,118,208) $ 9,764,532 $ (17,061,981)
============= ============== ============== ==============
Net income per share
As reported - Basic $ 0.29 $ (2.86) $ 1.73 $ (1.79)
As reported - Diluted $ 0.28 $ (2.86) $ 1.64 $ (1.79)
Pro forma - Basic $ 0.27 $ (3.90) $ 1.58 $ (2.95)
Pro forma - Diluted $ 0.26 $ (3.90) $ 1.49 $ (2.95)
Additional stock option awards are anticipated in future years.
The weighted average fair value for new options granted during the nine
months ending September 30, 2005, estimated on the date of grant was $18.00. In
connection with the sale of Express Tax Service, Inc. and EXPRESSTAX Franchise
Corporation on January 1, 2005, 105,000 Incentive Stock Options under the 2002
Stock Option plan were cancelled and reissued as Non-Qualified Stock Options.
The weighted average fair value of options granted during 2004 as estimated on
the date of grant using the Black-Scholes option-pricing model was $6.13 to
$18.26 in 2004. The fair value of options granted is estimated on the date of
grant using the following assumptions:
September 30, 2005 September 30, 2004
------------------ ------------------
Dividend yield 2.33% to 2.43% 2.24% to 3.19%
Expected volatility 49.85% to 96.76% 99.65% to 103.20%
Risk-free interest rate 3.34% to 4.17% 2.13% to 3.60%
Expected life (in years) 2.56 to 2.63 3.00 to 3.60
Summary information about the Company's stock options outstanding at
September 30, 2005:
Weighted Average Weighted
Range of Outstanding at Contractual Average Exercisable at
Exercise Price September 30, 2005 Periods in Years Exercise Price September 30, 2005
--------------- ------------------ ---------------- -------------- ------------------
1998 Plan $6.67 123,650 2.69 $6.67 95,900
2001 Franchise Plan $6.67 to $9.17 15,000 3.21 $9.17 15,000
2002 Plan $8.33 - $20.00 758,808 2.56 $10.94 491,908
(9) SUBORDINATED DEBT
On July 31, 2003, we completed a private placement of our 6% Senior
Subordinated Notes (the "July 2003 Notes"), which were offered and sold to
accredited investors as units consisting of one July 2003 Note with a principal
amount of $1,000 and warrants (the "2003 Warrants") to purchase shares of our
Common Stock. We sold an aggregate of $7.5 million of July 2003 Notes in this
placement, which resulted in proceeds to us (net of placement agent fees of
$450,724 and offering expenses of $110,778) of $6,938,498.
The July 2003 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 July 2003 Notes may be
made in cash or, at our option, in shares of 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 for the 20 consecutive trading
days preceding the payment date.
The 2003 Warrants issued in this placement to the purchasers of the July
2003 Notes and to the placement agent in the offering, J. Giordano Securities
Group ("J. Giordano"), each entitle the holder to purchase 3/4 of one share of
our Common Stock at an exercise price of $12.74 per whole share (as adjusted for
the Company's three-for-two stock split) until July 31, 2006. The total number
of shares issuable upon exercise of 2003 Warrants issued to the purchasers of
the July 2003 Notes and to J. Giordano totaled 594,421. GAAP requires that
detachable warrants be valued separately from debt and included in paid-in
capital. Based on the terms of the purchase agreement with the investors in the
private placement, management believes that the July 2003 Warrants had zero
value at the date of issuance.
16
21st Century Holding Company
Notes to Consolidated Financial Statements
During the third quarter of 2005, the Company purchased and intends to
retire 300,000 shares of its' Warrants in connection with our July 2003 Notes.
The Warrants were separately traded under the symbol TCHCW. The Company paid
$0.80 per share for a total of $240,000.
On September 30, 2004, we completed a private placement of 6% Senior
Subordinated Notes due September 30, 2007 (the "September 2004 Notes"). These
notes were offered and sold to accredited investors as units consisting of one
September 2004 Note with a principal amount of $1,000 and warrants to purchase
shares of our Common Stock (the "2004 Warrants"), the terms of which are similar
to our July 2003 Notes and 2003 Warrants, except as described below. We sold an
aggregate of $12.5 million of units in this placement, which resulted in
proceeds (net of placement agent fees of $700,000 and offering expenses of
$32,500) to us of $11,767,500.
The September 2004 Notes pay interest at the annual rate of 6%, mature on
September 30, 2007, and rank pari passu in terms of payment and priority to the
July 2003 Notes. Quarterly payments of principal and interest due on the
September 2004 Notes, like the July 2003 Notes, may be made in cash or, at our
option, in shares of 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 for the 20 consecutive trading days preceding the payment
date.
The 2004 Warrants issued to the purchasers of the September 2004 Notes and
to the placement agent in the offering, J. Giordano, each entitle the holder to
purchase one share of our Common Stock at an exercise price of $12.75 per share
and will be exercisable until September 30, 2007. The number of shares issuable
upon exercise of the 2004 Warrants issued to purchasers equaled $12.5 million
divided by the exercise price of the warrants, and totaled 980,392. The total
number of shares issuable upon exercise of 2004 Warrants issued to the
purchasers of the September 2004 Notes and to J. Giordano totaled 1,019,608.
GAAP requires that detachable warrants be valued separately from debt and
included in paid-in capital. Based on the terms of the purchase agreement with
the investors in the private placement, management believes that the September
2004 Warrants had zero value at the date of issuance.
The terms of the 2004 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.
As indicated on the table below, we paid, pursuant to the terms of the
July 2003 Notes and in accordance with the contractual computations, the
quarterly payments of principal and interest due in shares of our Common Stock.
Quarterly payment due date 2005 2004 2003
-------------------------- ------ ------- ------
January 31, 55,537 54,014 --
April 30, -- 53,729 --
July 31, -- 49,965 --
October 31, -- 69,200 61,792
------ ------- ------
Total common stock issued 55,537 226,908 61,792
====== ======= ======
As indicated on the table below, we paid, pursuant to the terms of the
September 2004 Notes and in accordance with the contractual computations, the
quarterly payments of principal and interest due in shares of our Common Stock.
17
21st Century Holding Company
Notes to Consolidated Financial Statements
Quarterly payment due date 2005
-------------------------- -------
January 31, 103,870
April 30, --
July 31, --
October 31, --
-------
Total common stock issued 103,870
=======
For the July 2003 Notes, the quarterly principal and interest payments
totaling approximately $0.6 million per payment are due quarterly for three
years with the last installment due on July 31, 2006. The scheduled principal
loan payments for the next two years are as follows:
For the period
-------------------------------------
Three months ending December 31, 2005 $ 625,000
Year ending December 31, 2006 1,875,000
----------
Total $2,500,000
==========
For the September 2004 Notes, the quarterly principal and interest
payments, totaling approximately $1.0 million per payment, are due quarterly for
three years with the last installment due on September 30, 2007. The scheduled
principal loan payments for the next three years are as follows:
For the period
-------------------------------------
Three months ending December 31, 2005 $1,041,667
Year ending December 31, 2006 4,166,667
Year ending December 31, 2007 4,166,666
----------
Total $9,375,000
==========
The Company retains the privilege of repaying these notes in cash or by
the issuance of common stock. Through our January 31, 2005 payment, we made our
quarterly installment payments by issuing common stock. Our April 30, 2005 and
July 31, 2005 scheduled payments of principal and interest were made in cash, as
was our next regularly scheduled payment due October 31, 2005.
(10) DISCONTINUED OPERATIONS
The Company completed the transaction contemplated by the Stock Purchase
and Redemption Agreement dated January 3, 2005 with Express Tax Service, Inc.
("Express Tax"), Robert J. Kluba and Robert H. Taylor. The Company was the
beneficial and record owner of 80% of the issued and outstanding stock of
Express Tax, which in turn owned 100% of the issued and outstanding stock of
EXPRESSTAX Franchise Corporation ("EXPRESSTAX"). Mr. Kluba was the President and
a director of Express Tax and EXPRESSTAX, and the owner of the remaining 20% of
the issued and outstanding stock of Express Tax. The sale of the stock closed on
January 13, 2005 with an effective date of January 1, 2005.
The Company received at closing a cash payment of $311,351, which
reflected the purchase price of $660,000 for all of the Company's common stock
in Express Tax, less $348,649 representing intercompany receivables owed to
Express Tax by the Company. The Company also received a payment of $1,200,000 in
exchange for the Company's agreement not to compete with the current business of
Express Tax and EXPRESSTAX for five years following the closing. The Company's
investment in its subsidiary totaled $230,000.
In connection with the transaction, the Company has extended the
expiration dates for the 75,000 outstanding stock options previously granted to
Mr. Kluba and the 30,000 outstanding stock options previously granted to Mr.
Kluba's wife, such that 80% of such stock options shall expire, if not
exercised, on the first anniversary date of the closing and the remaining 20% of
such stock options shall expire on the second anniversary date of the closing;
none of these options shall be exercisable for the six-month period following
the closing.
18
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General information about 21st Century Holding Company can be found at
www.21stcenturyholding.com. We make our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports filed or furnished pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 available free of charge on our web site, as soon as
reasonably practicable after they are electronically filed with the SEC.
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 relating to losses from the seven hurricanes that occurred in the
current fiscal year and fiscal 2004 and other estimates, assumption and
projections contained in this 10-Q; 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; court 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 an insurance holding company, which, through our subsidiaries and
our contractual relationships with our independent agents, control substantially
all aspects of the insurance underwriting, distribution and claims process. We
are authorized to underwrite personal automobile insurance, commercial general
liability insurance, homeowners' property and casualty insurance and mobile home
property and casualty insurance in various states with various lines of
authority through our wholly owned subsidiaries, Federated National and American
Vehicle.
Federated National is authorized to underwrite personal automobile
insurance, homeowners' property and casualty insurance and mobile home property
and casualty insurance in Florida as an admitted carrier. American Vehicle is
authorized to underwrite personal and commercial automobile insurance and
commercial general liability insurance in Florida as an admitted carrier. In
addition, American Vehicle is authorized to underwrite commercial general
liability insurance in Georgia, Kentucky and Virginia as a surplus lines carrier
and in Texas, Louisiana and Alabama as an admitted carrier. We anticipate that
underwriting will begin in Kentucky, Alabama and Virginia in the near future.
American Vehicle operations in Florida, Georgia and Louisiana are on-going.
American Vehicle operations in Texas, Alabama and Kentucky are expected to begin
this year. American Vehicle has pending applications, in various stages of
approval, to be authorized as a surplus lines carrier in the states of
California, South Carolina and Arkansas.
During the nine months ended September 30, 2005, 61.0%, 19.6%, 19.0% and
0.4% of the premium we underwrote were for homeowners' property and casualty
insurance, commercial general liability insurance, personal automobile
insurance, and mobile home property and casualty insurance, respectively. During
the nine months ended September 30, 2004, 63.8%, 13.2%, 21.4% and 1.6% of the
premium we underwrote were for homeowners' property and casualty insurance,
commercial general liability insurance, personal automobile insurance, and
mobile home property and casualty insurance, respectively. We internally process
claims made by our own and third-party insureds through our wholly owned claims
adjusting company, Superior. We also offer premium financing to our own and
third-party insureds through our wholly owned subsidiary, Federated Premium.
19
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
We market and distribute our own and third-party insurers' products and
our other services primarily in Florida, through contractual relationships with
a network of approximately 1,500 independent agents and a select number of
general agents.
Assurance MGA, 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 and American Vehicle, and participates
in the negotiation of reinsurance contracts. Assurance MGA generates revenue
through a 6% commission fee from the insurance companies' net written premium,
policy fee income of $25 per policy and other administrative fees from the
marketing of other companies' products through the Company's distribution
network. The 6% commission fee from Federated National and American Vehicle was
made effective January 1, 2005. Assurance MGA plans to establish relationships
with additional carriers and add additional insurance products in the future.
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 LAE are less than actual losses and LAE, 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 independent
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 commercial general liability insurance
market include Century Surety Insurance Company, Atlantic Casualty Insurance
Company, Colony Insurance Company, Nautilus Insurance Company and
Burlington/First Financial Insurance Companies. Competition could have a
material adverse effect on our business, results of operations and financial
condition.
Our executive offices are located at 3661 West Oakland Park Boulevard,
Suite 300, Lauderdale Lakes, Florida and our telephone number is (954) 581-9993.
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.
20
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 expenses
("LAE"). In addition, significant estimates form the basis for our reserves with
respect to finance contracts, premiums receivable, deferred income taxes,
deferred 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 make
adjustments where facts and circumstances dictate.
Using the various complex actuarial methods and different underlying
assumptions, our actuaries produce a number of point estimates for each class of
business. After reviewing the appropriateness of the underlying assumptions,
management selects the carried reserve for each class of business. We do not
calculate a range of loss reserve estimates. Ranges are not a true reflection of
the potential volatility between carried loss reserves and the ultimate
settlement amount of losses incurred prior to the balance sheet date. This is
due to the fact that ranges are developed based on known events as of the
valuation date whereas the ultimate disposition of losses is subject to the
outcome of events and circumstances that were unknown as of the valuation date.
Among the numerous factors that contribute to the inherent uncertainty in
the process of establishing loss reserves are the following:
o Changes in the market and inflation rate for goods and services
related to covered damages such as medical care and home repair
costs,
o Changes in the judicial environment regarding the interpretation of
policy provisions relating to the determination of coverage,
o Changes in the general attitude of juries in the determination of
liability and damages,
o Legislative actions,
o Changes in our estimates of the number and/or severity of claims
that have been incurred but not reported as of the date of the
financial statements,
o Changes in our underwriting standards, and
o Any changes in our claim handling procedures.
We establish and evaluate unpaid loss reserves using recognized standard
statistical loss development methods and techniques. Each component of loss
reserves is affected by the expected frequency and average severity of claims.
Such amounts are analyzed using statistical techniques on historical claims data
and adjusted when appropriate to reflect perceived changes in loss patterns.
Data is analyzed by policy coverage, jurisdiction of loss, reporting date and
occurrence date, among other factors. A brief discussion of each component
follows.
Average reserve amounts are established for automobile claims prior to the
development of an individual case reserve. Average reserve amounts are driven by
the estimated average severity per claim and the number of new claims opened.
For other than automobile lines, claims adjusters generally establish
individual claim case loss and LAE reserve estimates as soon as the specific
facts and merits of each claim can be evaluated. Case reserves represent the
amounts that in the judgment of the adjusters are reasonably expected to be paid
in the future to completely settle the claim, including expenses. Individual
case reserves are revised as more information becomes known.
For unreported claims, incurred but not reported ("IBNR") reserve
estimates are calculated by first projecting the ultimate number of claims
expected (reported and unreported) for each significant coverage by using
historical quarterly and monthly claim counts, to develop age-to-age projections
of the ultimate counts by accident quarter. Reported claims are subtracted from
the ultimate claim projections to produce an estimate of the number of
unreported claims. The number of unreported claims is multiplied by an estimate
of the average cost per unreported claim to produce the IBNR reserve amount.
Actuarial techniques are difficult to apply reliably in certain situations, such
as to new legal precedents, class action suits, long-term claimants from
personal injury protection coverage or recent catastrophes. Consequently,
supplemental IBNR reserves for these types of events may be established.
21
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
New Accounting Pronouncements
The material set forth in Item 1, Part I, "Financial Statements - Note 2 -
Summary of Significant Accounting Policies and Practices" of this Form 10-Q is
incorporated herein by reference.
Recent Events
Beginning in June and continuing through late October of 2005, Florida was
once again affected by several hurricanes. Florida was the only state where
Federated National had homeowner insurance policies in force. Significant
efforts have been employed in order to determine the extent of claim frequency
and severity for each hurricane as they relate to our in-force homeowners'
policies in the affected areas. Estimations of ultimate gross losses have been
formulated based upon computer modeling, provided by our reinsurers, that
geographically maps the address of our risks to the storm paths and respective
intensity.
The table below is a summary of each storms projected effect on Federated
National.
* Estimated Gross Reinsurance Net
Hurricane Claim Count Losses Recoveries Losses
------------------------- ----------- ------ ----------- ------
(Dollars in Millions)
Arlene (June 7, 2005) -- $ -- $ -- $ --
Dennis (July 10, 2005) 325 2.9 -- 2.9
Katrina (August 25, 2005) 2,100 14.6 11.6 3.0
Rita (September 20, 2005) 20 0.1 -- 0.1
Wilma (October 24, 2005) 9,000 95.0 92.0 3.0
* As of this reporting date
Based on projections from our reinsurers for the ultimate gross losses
from Hurricanes Katrina and Wilma, we anticipate that our retention will be
approximately $15.0 million with coverage that extends up to approximately
$165.0 million for events beyond Hurricane Wilma; these limits are subject to
change based on the ultimate costs of these storms.
Effective as of November 10, 2005, Richard Widdicombe has agreed to resign
as the Company's Chief Executive Officer and Director. Mr. Widdicombe is
resigning for personal reasons and does not have any disagreements with the
Company. Mr. Widdicombe and the Company intend to enter into a separation and
release agreement, which will provide for Mr. Widdicombe to remain with the
Company for another month to oversee the transition to the new Chief Executive
Officer.
Effective as of November 10, 2005, Edward Lawson, the Company's President
and former Chief Executive Officer, will resume the position of Chief Executive
Officer, as well as retaining his current duties.
Analysis of Financial Condition
As of September 30, 2005 as Compared to December 31, 2004
As of September 30, 2005, our shareholders equity was $36.4 million
compared to $25.0 million as of December 31, 2004. The increase in our
shareholder's equity is primarily attributable to the changes discussed below.
Total Investments
Total Investments increased $9.4 million, or 11.1%, to $93.8 million as of
September 30, 2005, as compared to $84.4 million as of December 31, 2004. The
increase is primarily a result of our investment of the proceeds from an
increase in written insurance premiums.
22
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Accounting Standards ("SFAS") No. 115 addresses accounting and
reporting for (a) investments in equity securities that have readily
determinable fair values and (b) all investments in debt securities. FAS 115
requires that these securities be classified in three categories and given
specific accounting treatment as follows:
Classification Accounting Treatment
-------------- --------------------
Held-to-maturity (Fixed maturities) Amortized cost
Debt securities with the intent and ability
to hold to maturity
Trading securities (Corporate securities) Fair value, with unrealized holding gains and losses included
Debt and equity securities bought and in operations
held primarily for sale in the near term
Available-for-sale (Equity securities) Fair value, with unrealized holding gains and losses
Debt and equity securities not classified excluded from earnings and reported as a separate component
as held-to-maturity or trading securities of shareholders' equity, namely "Other Comprehensive Income"
23
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 September 30, 2005
and December 31, 2004 by category.
Unrealized Gains and (Losses)
---------------------------------------
September 30, 2005 December 31, 2004
------------------ -----------------
Fixed maturities:
U.S. government obligations and agencies $(827,432) $(582,309)
Obligations of states and political subdivisions (103,656) (4,501)
------------------ -----------------
(931,088) (586,810)
------------------ -----------------
Corporate securities:
Communications 9,353 23,299
Financial (78,683) (11,220)
Other (14,471) 64,377
------------------ -----------------
(83,801) 76,456
------------------ -----------------
Equity securities:
Preferred stocks -- --
Common stocks (947,214) (312,410)
------------------ -----------------
(947,214) (312,410)
------------------ -----------------
Total unrealized gains and (losses) $(1,962,103) $(822,764)
================== =================
For further detail, see "Liquidity and Capital Resources," below and
"Quantitative and Qualitative Disclosure about Market Risk" under Item 3 below.
Prepaid Reinsurance Premiums
Prepaid reinsurance premiums decreased $5.4 million, or 98.7%, to $01
million as of September 30, 2005, as compared to $5.5 million as of December 31,
2004. The decline is due to our payment patterns and the amortization of prepaid
reinsurance premiums associated with our homeowners' book of business.
Reinsurance Recoverable, net
Reinsurance Recoverable, net decreased $4.8 million, or 18.8%, to $20.7
million as of September 30, 2005, as compared to $25.5 million as of December
31, 2004. The decrease is attributable to cash payments in connection with the
settlement of loss and LAE as they relate to costs recoverable under our
reinsurance agreements.
Deferred Acquisition Costs
Deferred acquisition costs increased $1.5 million, or 22.3%, to $8.5
million as of September 30, 2005, as compared to $7.0 as of December 31, 2004.
Contributing to the increased acquisition costs is the 2004 sale of our captive
agencies, wherein our cost of acquiring policies from those agencies will no
longer be eliminated under the principles of consolidation.
Income Taxes Recoverable
Income taxes recoverable decreased $7.0 million, or 89.2%, to $0.9 million
as of September 30, 2005, as compared to $7.9 million as of December 31, 2004.
The decline is primarily due to the utilization of operating loss carry-forwards
and current profitable operations.
Other Assets
Other assets increased $1.4 million, or 28.0%, to $6.2 million as of
September 30, 2005, as compared to $4.8 million as of December 31, 2004. The
increase is primarily due to Federated National's statutory approval to recoup
the Citizens assessment by adding a surcharge to homeowner insurance policies in
an amount limited to the assessment. For further discussion see Footnote (4)
Commitments and Contingencies.
24
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Unpaid Losses and LAE
Unpaid losses and LAE decreased $10.5 million, or 22.4%, to $36.1 million
as of September 30, 2005, as compared to $46.6 million as of December 31, 2004.
The decline in unpaid losses and LAE relates to our payment patterns relative to
the settling of hurricane related claims. Case reserves totaled $17.5 million
and $31.2 million, and IBNR reserves totaled $18.6 million and $15.4 million as
of September 30, 2005 and December 31, 2004, respectively.
Factors that affect unpaid losses and LAE include the estimates made on a
claim-by-claim basis known as "case reserves" coupled with bulk estimates known
as 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 LAE" below.
Unearned Premiums
Unearned premiums increased by $7.8 million, or 15.6%, to $58.0 million as
of September 30, 2005, as compared to $50.2 million as of December 31, 2004. The
increase was due to a $6.9 million increase in unearned homeowner's insurance
premiums, a ($0.4) million decrease in unearned mobile home insurance premiums,
a ($2.4) million decrease in unearned automobile premiums, and a $3.7 million
increase in unearned commercial general liability premiums. These changes
reflect our continued growth along our homeowners' and commercial liability
lines of business.
Bank Overdraft
Bank overdraft decreased by $11.5 million, or 77.9%, to $3.3 million as of
September 30, 2005, as compared to $14.8 million as of December 31, 2004. Bank
overdraft relates to hurricane-related loss and LAE disbursements paid but not
yet presented for payment by the policyholder or vendor. The decrease relates to
our payment patterns in relationship to the rate at which those cash
disbursements are presented to the bank for payment.
Results of Operations
Three Months Ended September 30, 2005 as Compared to Three Months Ended
September 30, 2004
Gross Premiums Written
Gross premiums written increased $1.1 million, or 4.3%, to $25.4 million
for the three months ended September 30, 2005, as compared to $24.3 million for
the comparable period in 2004. The following table denotes gross premiums
written by major product line.
Three months ended September 30,
--------------------------------------------
2005 2004
-------------------- --------------------
Automobile $ 3,628,316 14.31% $ 4,045,748 16.64%
Homeowners' 16,219,886 63.97% 16,564,249 68.16%
Commercial liability 5,451,419 21.50% 3,389,017 13.95%
Mobile home owners' 55,614 0.22% 302,786 1.25%
----------- ------ ----------- ------
Gross written premiums $25,355,235 100.00% $24,301,800 100.00%
=========== ====== =========== ======
25
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's efforts to expand its commercial liability line of insurance
products is coming to fruition as reflected by increased premium sales of $5.5
million for the three months ended September 30, 2005 compared to $3.4 million
for the same period in the prior year. Furthermore, these policies reflect an
increased percentage of the Company's total gross premiums written, increasing
to 21.5% of total premium sales in the three months ended September 30, 2005
compared to 14.0% in the same period of fiscal 2004.
The Company's sale of auto insurance policies is relatively steady with
premiums relatively constant at $3.6 million for the three months ended
September 30, 2005 compared to $4.0 million in the same period of fiscal 2004,
despite the sale of the Company's captive agents who handled most of the auto
insurance policies. In 2004, the Company made a conscious decision to decrease
its sale of mobile home policies and consequently, its sales of these policies
have decreased to $0.06 million in the three months ended September 30, 2005,
representing 0.22% of total premiums written.
The Company's sale of homeowners' policies is relatively steady with
premiums relatively constant at $16.2 million for the three months ended
September 30, 2005 compared to $16.6 million in the same period of fiscal 2004.
The modest decrease of $0.4 million in our homeowners' gross premium written is
due primarily to the decrease in the number of insurable risks, offset by the
Company's rate increase of 23.1% that was affected December 1, 2004.
Gross Premiums Ceded
Gross premiums ceded increased $3.6 million, or 103.9% to a debit balance
of $7.2 million for the three months ended September 30, 2005, as compared to a
credit balance of $1.5 million for the three months ended September 30, 2004.
The change is associated with our increased homeowner's premium volume and our
reinsurance costs.
Increase in Prepaid Reinsurance Premiums
The increase in prepaid reinsurance premiums was $.07 million for the
three months ended September 30, 2005, as compared to $.80 million for the three
months ended September 30, 2004. The increased charge against written premium is
primarily associated with the timing of our reinsurance payments measured
against the term of the underlying reinsurance policies.
Decrease in Unearned Premiums
The decrease in unearned premiums was $2.5 million as of September 30,
2005, as compared to $0.2 million as of September 30, 2004. The decrease in
unearned premiums of $2.5 million as of September 30, 2005 was due to a $0.3
million decrease in unearned homeowners' insurance premiums, a $0.2 million
decrease in mobile home owners' insurance premiums, a $2.5 million decrease in
unearned automobile premiums, and a ($0.5) million (increase) in unearned
commercial liability premiums. These changes reflect our continued growth along
our homeowners' and commercial liability lines of business. For further
discussion, see "Unearned Premiums" above.
Net Investment Income
Net investment income increased by $0.2 million, or 15.8%, to $1.0 million
for the three months ended September 30, 2005, as compared to $0.8 million for
the same three-month period ended September 30, 2004. The increase in investment
income is primarily a result of the additional amounts of invested assets. Also
affecting our net investment income was a modest increase in overall yield to
4.37% for the three months ended September 30, 2005 as compared to a yield of
3.99% for the three months ending September 30, 2004.
Net Realized Investment Gains
Net realized investment gains decreased by $0.08 million, or 100% to $0.0
million for the three months ended September 30, 2005, as compared to $0.08
million for the three months ended September 30, 2004. The table below depicts
the gains by investment category.
26
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Realized
Gains (Losses)
Three Months
Ended September 30,
----------------------
2005 2004
--------- ---------
Fixed maturities:
U.S. government obligations and agencies $ -- $ (32,116)
Obligations of states and political subdivisions -- (10,450)
--------- ---------
-- (42,566)
--------- ---------
Corporate securities:
Other -- --
--------- ---------
-- --
--------- ---------
Equity securities:
Preferred stocks -- (56)
Common stocks -- 123,581
--------- ---------
-- 123,525
--------- ---------
Total net realized gains $ -- $ 80,959
========= =========
Loss and LAE
Loss and LAE decreased by $29.0 million, or 68.6%, to $13.3 million for
the three months ended September 30, 2005, as compared to $42.3 million as of
September 30, 2004. The decrease is due primarily to the Company's reinsurance
retention philosophy in connection with the frequency and severity stemming from
the three hurricanes that occurred in July, August and September of 2005, and
the four hurricanes that occurred in August and September of 2004 which were
partially offset by the impact of the improved automobile loss experience due to
management's efforts to migrate from predominately liability only policies to
full-coverage type automobile policies. Management continues to revise our
estimates of the ultimate financial impact of these storms. The revisions to our
estimates are based on our analysis of subsequent information that we receive
regarding various factors, including: (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.
The table below reflects a charge to the third quarter 2005 earnings of
$6.0 million, net of reinsurance recoveries of $11.6 million, stemming from the
three hurricanes that occurred in July, August and September of 2005.
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
------------------------- ------ ----------- ------
(Dollars in Millions)
Dennis (July 10, 2005) $ 2.9 $ -- $ 2.9
Katrina (August 25, 2005) 14.6 11.6 3.0
Rita (September 20, 2005 0.1 -- 0.1
------ ----------- ------
Total Loss Estimate $ 17.6 $ 11.6 $ 6.0
====== =========== ======
The table below reflects a charge to the third quarter 2005 earnings of
$0.7 million, net of reinsurance recoveries of $1.9 million, stemming from the
four hurricanes that occurred in August and September of 2004.
27
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
--------------------- ------ ----------- ------
(Dollars in Millions)
Charley (August 13) $ 0.9 $ 0.9 $ --
Frances (September 3) 1.0 1.0 --
Ivan (September 14) 0.7 -- 0.7
Jeanne (September 25) (0.0) -- (0.0)
------ ----------- ------
Total Loss Estimate $ 2.6 $ 1.9 $ 0.7
====== =========== ======
Our loss ratio, as determined in accordance with GAAP, for the three-month
period ended September 30, 2005 was 64.13% compared with 209.06% for the same
period in 2004. The table below reflects the loss ratios by product line.
Three months ended
September 30,
----------------
2005 2004
------ ------
Automobile 54.90% 108.31%
Homeowners' 99.49% 308.04%
Commercial liability 6.83% 9.86%
All lines 64.13% 209.06%
Losses and LAE, 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
For further discussion, see the Note 7 to the Consolidated Financial
Statements included under Part I, Item 1, of this Report.
Interest Expense
Interest expense increased by $0.1 million, or 68.0%, to $0.3 million for
the three months ended September 30, 2005, as compared to $0.2 million for the
three months ended September 30, 2004. The increase in interest expense is
attributed to the September 30, 2004 "Notes".
Deferred Policy Acquisition Costs, Net of Amortization
Amortization of deferred policy acquisition costs increased by $1.4
million, or 55.5%, to $3.9 million for the three months ended September 30,
2005, as compared to $2.5 million as of September 30, 2004. 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.
The increase in amortization of deferred policy acquisition costs is
primarily attributable to the sale of our captive agencies in December of 2004,
wherein our cost of acquiring policies from those agencies will no longer be
eliminated under the principles of consolidation.
Provision (Benefit) for Income Tax Expense
The provision for income tax expense increased by $10.4 million, to $1.1
million for the three months ended September 30, 2005, as compared to a ($9.3)
million benefit for the three months ended September 30, 2004. The effective
rate for income tax expense is 36.9% for the three months ended September 30,
2005, as compared to 36.0% for the same three-month period in 2004. The increase
in the estimated income tax provision is primarily associated with the increase
in pre-tax income from continuing operations.
28
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Nine Months Ended September 30, 2005 as Compared to Nine Months Ended September
30, 2004
Gross Premiums Written
Gross premiums written increased $12.9 million, or 17.4%, to $86.8 million
for the nine months ended September 30, 2005, as compared to $73.9 million for
the comparable period in 2004. The following table denotes gross premiums
written by major product line.
Nine months ended September 30,
---------------------------------------------
2005 2004
-------------------- ---------------------
Automobile $16,475,811 18.97% $15,824,075 21.40%
Homeowners' 52,978,565 61.03% 47,131,793 63.76%
Commercial liability 16,977,589 19.56% 9,762,932 13.20%
Mobile home owners' 383,222 0.44% 1,210,771 1.64%
----------- ------ ----------- ------
Gross written premiums $86,815,187 100.00% $73,929,571 100.00%
=========== ====== =========== ======
As noted above, the Company's efforts to expand commercial liability lines
of insurance products are coming to fruition, while maintaining automobile
production subsequent to the sale of our captive agents and our intentional
decline in the mobile home market. Additionally, the $5.9 million increase in
our homeowners' gross premium written is due to the Company's rate increase of
23.1% that was affected December 1, 2004, offset by the decrease in the number
of those same risks, as evidenced by the $472, or 37.5%, increase in our average
premium per policy to $1,730 as of September 30, 2005, compared to $1,258 as of
September 30, 2004.
Gross Premiums Ceded
Gross premiums ceded increased $6.6 million, or 118.8% to $12.1 million
for the nine months ended September 30, 2005, as compared to credit balance of
$1.0 million for the nine months ended September 30, 2004. The change is
associated with our increased homeowners' insurance premium volume and our
reinsurance costs.
(Decrease) in Prepaid Reinsurance Premiums
The (decrease) in prepaid reinsurance premiums was ($5.4) million for the
nine months ended September 30, 2005, as compared to ($5.3) million for the nine
months ended September 30, 2004. The decreased charge against written premium is
primarily associated with the timing of our reinsurance payments measured
against the term of the underlying reinsurance policies.
(Increase) in Unearned Premiums
The (increase) in unearned premiums was ($7.8) million as of September 30,
2005, as compared to ($14.3) million as of September 30, 2004. The increase was
due to a $6.9 million increase in unearned homeowners' insurance premiums, a
($0.4) million decrease in unearned mobile-home insurance premiums, a ($2.4)
million decrease in unearned automobile premiums, and a $3.7 million increase in
unearned commercial general liability premiums. These changes reflect our
continued growth along our homeowners' and commercial liability lines of
business.
Net Investment Income
Net investment income increased by $0.7 million, or 29.6%, to $2.8 million
for the nine months ended September 30, 2005, as compared to $2.1 million for
the same nine-month period ended September 30, 2004. The increase in investment
income is primarily a result of the additional amounts of invested assets. Also
affecting our net investment income was a comparatively flat overall yield of
3.12% for the nine months ended September 30, 2005 and 3.13% for the nine months
ending September 30, 2004.
29
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Realized Investment Gains
Net realized investment gains increased by $0.03 million, or 9.1% to $0.29
million for the nine months ended September 30, 2005, as compared to $0.26
million for the nine months ended September 30, 2004. The table below depicts
the gains by investment category.
Net Realized
Gains (Losses)
Nine Months Ended
September 30,
----------------------
2005 2004
--------- ---------
Fixed maturities:
U.S. government obligations and agencies $(131,066) $ 30,397
Obligations of states and political subdivisions (43) (10,566)
--------- ---------
(131,109) 19,831
--------- ---------
Corporate securities:
Financial -- (219)
Other 31,521 --
--------- ---------
31,521 (219)
--------- ---------
Equity securities:
Preferred stocks (56)
Common stocks 384,621 241,830
--------- ---------
384,621 241,774
--------- ---------
Total net realized gains $ 285,033 $ 261,386
========= =========
Loss and LAE
Loss and LAE decreased by $23.9 million, or 42.4%, to $32.5 million for
the nine months ended September 30, 2005, as compared to $56.4 million as of
September 30, 2004. The decrease is due primarily to the Company's reinsurance
retention philosophy in connection with the frequency and severity stemming from
the three hurricanes that occurred in July, August and September of 2005, and
the four hurricanes that occurred in August and September of 2004 which were
partially offset by the impact of the improved automobile loss experience due to
management's efforts to migrate from predominately liability only policies to
full-coverage type automobile policies. Management continues to revise our
estimates of the ultimate financial impact of these storms. The revisions to our
estimates are based on our analysis of subsequent information that we receive
regarding various factors, including: (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.
The table below reflects a charge to current year earnings of $6.0
million, net of reinsurance recoveries of $11.6 million, stemming from the three
hurricanes that occurred in July, August and September of 2005.
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
------------------------- ------ ----------- ------
(Dollars in Millions)
Dennis (July 10, 2005) $ 2.9 $ -- $ 2.9
Katrina (August 25, 2005) 14.6 11.6 3.0
Rita (September 20, 2005 0.1 -- 0.1
------ ----------- ------
Total Loss Estimate $ 17.6 $ 11.6 $ 6.0
30
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The table below reflects a charge to current year earnings of $7.4
million, net of reinsurance recoveries of $52.90 million, stemming from the four
hurricanes that occurred in August and September of 2004.
Gross Reinsurance Net
Hurricane Losses Recoveries Losses
--------------------- ------ ----------- ------
(Dollars in Millions)
Charley (August 13) $ 13.8 $ 13.8 $ --
Frances (September 3) 11.1 11.1 --
Ivan (September 14) 4.8 -- 4.8
Jeanne (September 25) 2.6 -- 2.6
------ ----------- ------
Total Loss Estimate $ 32.3 $ 24.9 $ 7.4
Our loss ratio, as determined in accordance with GAAP, for the nine-month
period ended September 30, 2005 was 52.90% compared with 115.78% for the same
period in 2004. The table below reflects the loss ratios by product line.
Nine months ended
September 30,
---------------
2005 2004
----- ------
Automobile 60.64% 90.31%
Homeowners' 64.18% 165.29%
Commercial liability 17.00% 17.70%
All lines 52.90% 115.78%
Losses and LAE, 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.
For further discussion, see the Note 7 to the Consolidated Financial
Statements included under Part I, Item 1, of this Report.
Salaries and Wages
Salaries and wages increased $0.4 million, or 8.4%, to $4.8 million for
the nine months ended September 30, 2005, as compared to $4.4 million for the
nine months ended September 30, 2004. Management believes that the increase in
salaries and wages is consistent with retaining quality management and increased
premium production.
Interest Expense
Interest expense increased by $0.5 million, or 77.9%, to $1.1 million for
the nine months ended September 30, 2005, as compared to $0.6 million for the
nine months ended September 30, 2004. The increase in interest expense is
attributed to the September 30, 2004 "Notes".
Deferred Policy Acquisition Costs, Net of Amortization
Amortization of deferred policy acquisition costs increased by $6.4
million, or 136.1%, to $11.0 million for the nine months ended September 30,
2005, as compared to $4.6 million as of September 30, 2004. 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.
The increase in amortization of deferred policy acquisition costs is
primarily attributable to the sale of our captive agencies in December of 2004,
wherein our cost of acquiring policies from those agencies will no longer be
eliminated under the principles of consolidation.
31
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Provision (Benefit) for Income Tax Expense
The provision for income tax expense increased by $11.5 million to $5.8
million for the nine months ended September 30, 2005, as compared to a ($5.7)
million benefit for the nine months ended September 30, 2004. The effective rate
for income tax expense is 37.4% for the nine months ended September 30, 2005, as
compared to 35.7% for the same nine-month period in 2004. The increase in the
estimated income tax provision is primarily associated with the increase in
pre-tax income from continuing operations.
Liquidity and Capital Resources
Our primary sources of capital during the nine months ended September 30,
2005 were revenues generated from operations, decreased prepaid reinsurance
premiums, realized income tax recoveries and increased unearned premiums. Also
contributing to our liquidity was the sale of our interests in Express Tax and
EXPRESSTAX, and exercised employee stock options. Because we are a holding
company, we are largely dependent upon fees from our subsidiaries for cash flow.
For the nine months ended September 30, 2005 and 2004, operations
generated net operating cash flow of $11.2 million and $40.8 million,
respectively. During the nine months ended September 30, 2005, gross cash flow
from operations generated approximately $40.1 million, due to a $7.8 million
increase in unearned premiums; a $7.1 million decrease in income taxes
recoverable; a $5.4 million decrease in prepaid reinsurance premiums; a $4.8
million decrease in due from reinsurers, net; a $1.6 increase in funds held
under reinsurance treaties; a $0.6 million decrease in deferred income tax
expense; a $0.4 million increase in the provision for credit losses, net; a $0.3
million decrease to finance contracts receivable; $0.3 million of common stock
issued for interest on debt; $0.3 million in net realized investment gains; and
$0.3 million in depreciation and amortization; $0.2 million in goodwill; a $0.2
million decrease in premiums receivable; a $0.1 million increase in premium
deposits; all in conjunction with net income of $10.7 million.
Operations for the nine months ended September 30, 2005 used $28.9 million
of gross cash flow primarily due to a $11.5 million decrease in bank overdrafts;
a $10.4 million decrease in unpaid losses and LAE; $1.6 million in connection
with our sale of discontinued operations; a $1.8 million increase in other
assets; a $1.1 million decrease in accounts payable and accrued expenses; a $1.6
million increase to policy acquisition costs, net of amortization; a $0.4
million decrease to the provision for uncollectible premiums receivable; a $0.3
million decrease in the equity of the subsidiary sold; and $0.2 million in
amortization of investment premiums, net.
Subject to catastrophic occurrences, net operating cash flow is currently
expected to be positive in both the short-term and the reasonably foreseeable
future.
In addition, our investment portfolio is highly liquid as it consists
almost entirely of readily marketable securities. Cash flow used in net
investing activities was $10.2 million for the nine months ended September 30,
2005, as we generated $59.0 million and used $69.3 million from the maturity
several times over of our very short municipal portfolio, and generated $1.6
million in connection with our sale of discontinued operations. Other changes to
cash flow from investing activities included a $1.5 million receivable for
investments sold; $0.1 million used to purchase property and equipment, and $0.1
million proceeds from the sale of assets.
Net cash used for financing activities was $5.7 million for the nine
months ended September 30, 2005. The uses of cash for financing activities were
primarily $1.5 million paid in dividends, $2.1 million used to reduce revolving
credit outstanding, and $3.8 million used to reduce subordinated debt. Cash
provided by financing activities includes $1.7 million from exercised employee
stock options.
Federated Premium's operations are funded by the Revolving loan agreement
with FlatIron Funding. The Revolving Agreement is structured as a sale of
contracts receivable under a sale and assignment agreement with WPAC (a
wholly-owned subsidiary of FlatIron), which gives WPAC 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.
32
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
During September 2004, we negotiated a new revolving loan agreement in
which the maximum credit commitment available to us was reduced at our request
to $2.0 million with built-in options to incrementally increase the maximum
credit commitment up to $4.0 million over the next three years. Our lender could
decide to change our available credit based on a number of factors, including
the A.M. Best ratings of Federated National and American Vehicle. Pursuant to
our loan agreement, if the A.M. Best rating of Federated National falls below a
"C," or if the financial condition of American Vehicle, as determined by our
lender (in its sole and absolute discretion) suffers a material adverse change,
then under the terms of our loan agreement, policies written by that subsidiary
will no longer be eligible collateral, causing our available credit to be
reduced if we do not have other collateral qualifying as eligible collateral. As
of December 31, 2004, policies written by Federated National were not considered
by our lender to be eligible collateral. In March 2005, our lender agreed to
permit policies written by Federated National to be eligible collateral and
agreed to increase our total available credit by $0.5 million from $2.0 million
to $2.5 million. We currently believe that this higher available credit limit
will be sufficient based on our current operations. If policies written by our
insurance subsidiaries again do not qualify as eligible collateral under our
loan agreement and we are not able to obtain working capital from our operations
or other sources, then we would have to restrict our growth and, possibly, our
operations.
The amounts of WPAC's advances are 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 equals 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 lower to total
contracts receivable. The effective interest rate on this line of credit, based
on our average outstanding borrowings under the Revolving Agreement, was 8.22%
and 7.45% for the nine months ended September 30, 2005 and 2004, respectively.
Outstanding borrowings under the Revolving Agreement as of September 30,
2005 were approximately $76,000. Outstanding borrowings as of December 31, 2004
were approximately $2.1 million. Outstanding borrowings in excess of the $2.0
million credit limits totaled approximately $150,000 as of December 31, 2004.
The excess amount was permissible by reason of a compensating cash balance of
approximately $160,000 for December 31, 2004 that was held for the benefit of
WPAC and was included in other assets. Interest expense on this revolving credit
line for the nine months ended September 30, 2005 and September 30, 2004 totaled
approximately $69,000 and $150,000, respectively.
As an alternative to premium finance, we offer direct billing in
connection with our automobile program, 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 advantage of direct billing a policyholder
by the insurance company is that we are not reliant on our credit facility, but
remain able to charge and collect interest from the policyholder.
We believe that our current capital resources, including the net proceeds
from the Express Tax sale, together with cash flow from operations, will be
sufficient to meet currently anticipated working capital requirements. There can
be no assurances, however, that such will be the case.
Federated National's and American Vehicle's statutory capital surplus
levels as of September 30, 2005 were approximately $9.3 million and $20.4
million, respectively, and their statutory net income for the nine months ended
September 30, 2005 were $1.5 million and $3.2 million, respectively.
As of September 30, 2005 and December 31, 2004, we did not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as "structured finance" or "special purpose"
entities, which were established for the purpose of facilitating
off-balance-sheet arrangements or other contractually narrow or limited
purposes. As such, management believes that we currently are not exposed to any
financing, liquidity, market or credit risks that could arise if we had engaged
in transactions of that type requiring disclosure herein.
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 the same direction or with the same magnitude as
the inflationary effect on the cost of paying losses and LAE.
33
21st Century Holding Company
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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, we attempt to anticipate the future impact of inflation when
establishing rate levels. While we attempt to charge adequate premiums, we may
be limited in raising its premium levels for competitive and regulatory reasons.
Inflation also affects the market value of our 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 LAE and thereby materially adversely affect future liability
requirements.
Item 6
Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act *
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act *
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act *
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act *
* Filed herewith
34
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/ Edward J. Lawson
-----------------------------------
Edward J. Lawson, Chief Executive Officer
/s/ James G. Jennings, III
-----------------------------------
James G. Jennings III, Chief Financial Officer
Date: December 9, 2005
35