Filed pursuant to Rule 424(b)(3)
Registration Number 333-120157
PROSPECTUS
1,019,608 REDEEMABLE WARRANTS
1,088,808 SHARES OF COMMON STOCK
21ST CENTURY HOLDING COMPANY
This prospectus covers:
o The resale of 1,019,608 redeemable warrants issued to the
purchasers of our 6% senior subordinated notes due September 30,
2007 and issued as compensation to the placement agent for our
private offering in which the notes were sold, all of whom are
identified later in this prospectus. Each warrant is exercisable
for one share of common stock. These warrants are transferable
and expire on September 30, 2007.
o The issuance of 1,019,608 shares of our common stock that will be
issued to holders of our warrants upon exercise of the warrants.
o 69,200 shares of our common stock issued by us as payment of
principal and interest due on our 6% senior subordinated notes
due July 31, 2006.
We will not receive any proceeds from the sale of the warrants prior to
exercise or from the sale of any shares of common stock issued either upon
exercise of the warrants or previously issued as payment of principal and
interest to our note holders. We will receive proceeds only from the exercise of
the warrants. The exercise price of the warrants is $12.75 per share. We will
pay our out-of-pocket expenses, legal and accounting fees, and the other
expenses of registering the resale of the warrants and the issuance of the
shares.
The holders of the warrants and shares named in this prospectus may
offer and sell these securities at any time using a variety of different
methods. The actual number of securities sold and the prices at which the
securities are sold will depend upon the market prices at the time of those
sales; therefore, we have not included in this prospectus information about the
price to the public of the warrants or common stock or the proceeds to the
selling security holders.
Our common stock is traded on the Nasdaq National Market under the
symbol "TCHC." On November 29, 2004, the last reported sale price of the common
stock on the Nasdaq National Market was $12.90 per share. Our warrants are not
yet approved for trading on the Nasdaq National Market or any other market.
YOU SHOULD CAREFULLY CONSIDER THE "RISKS OF INVESTING IN OUR
SECURITIES" SECTION BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is December 2, 2004.
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY.....................................................................................1
RECENT DEVELOPMENTS....................................................................................1
OVERVIEW ..............................................................................................3
RISKS OF INVESTING IN OUR SHARES.......................................................................4
The State of Florida, where our headquarters and a substantial portion of our policies
are located, has experienced four hurricanes in August and September 2004............5
As a result of the hurricanes striking Florida in August and September 2004, we are
not in compliance with certain regulatory requirements...............................5
If we are unable to continue our growth because our capital must be used to pay
greater than anticipated claims, our financial results may suffer....................6
If our ratings are downgraded or withdrawn, we may be unable to write or renew
desirable insurance policies or obtain adequate reinsurance, which would
limit or halt our growth and harm our business.......................................6
The maximum credit commitment under our revolving loan could be subject to reduction,
which would adversely affect our available working capital...........................6
We are subject to significant government regulation, which can limit our growth and
increase our expenses, thereby reducing our earnings.................................7
Emergency administrative orders have been adopted, and legislation may be enacted,
that would limit our ability to increase our premiums or cancel, reduce or
non-renew our existing policies, which could reduce our revenues or increase
our claims losses....................................................................7
Our revenues and operating performance may fluctuate with business cycles in the
property and casualty insurance industry.............................................7
We may not obtain the necessary regulatory approvals to expand the types of insurance
products we offer or the states in which we operate..................................8
Although we follow the industry practice of reinsuring a portion of our risks, our
costs of obtaining reinsurance have increased and we may not be able to
successfully alleviate risk through reinsurance arrangements.........................8
Our loss reserves may be inadequate to cover our actual liability for losses, causing
our results of operations to be adversely affected...................................9
We currently rely on agents, most of whom are independent agents or franchisees, to
write our insurance policies, and if we are not able to attract and retain
independent agents and franchisees, our revenues would be negatively
affected.............................................................................9
Nonstandard automobile insurance historically has a higher frequency of claims than
standard automobile insurance, thereby increasing our potential for loss
exposure beyond what we would be likely to experience if we offered only
standard automobile insurance........................................................9
Florida's personal injury protection insurance statute contains provisions that favor
claimants, causing us to experience a higher frequency of claims than might
otherwise be the case if we operated only outside of Florida........................10
Our business strategy is to avoid competition in our automobile insurance products
based on price to the extent possible. This strategy, however, may result in
the loss of business in the short term..............................................10
Our investment portfolio may suffer reduced returns or losses, which would
significantly reduce our earnings...................................................10
Our president and chief executive officer are key to the strategic direction of our
company. If we were to lose the services of either of them, our business
could be harmed.....................................................................11
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TABLE OF CONTENTS
(Continued)
PAGE
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The trading of our warrants may negatively affect the trading prices of our common
stock if investors purchase and exercise the warrants to facilitate other
trading strategies, such as short selling...........................................11
The warrants included in this prospectus are not currently listed for trading................12
Our largest shareholders control approximately 28% of the voting power of our
outstanding common stock, which could discourage potential acquirors and
prevent changes in management.......................................................12
We have authorized but unissued preferred stock, which could affect rights of holders
of common stock.....................................................................12
Our articles of incorporation and bylaws and Florida law may discourage takeover
attempts and may result in entrenchment of management...............................12
As a holding company, we depend on the earnings of our subsidiaries and their ability
to pay management fees and dividends to the holding company as the primary
source of our income................................................................13
Note regarding forward-looking statements.............................................................13
USE OF PROCEEDS.......................................................................................14
SELLING Security holderS..............................................................................14
HOW THE Securities MAY BE DISTRIBUTED.................................................................16
LEGAL MATTERS.........................................................................................18
EXPERTS ..............................................................................................18
WHERE YOU CAN FIND MORE INFORMATION...................................................................18
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.....................................................19
INDEMNIFICATION OF DIRECTORS AND OFFICERS.............................................................20
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus.
No dealer, salesperson or other person is authorized to give any information
that is not contained in this prospectus. This prospectus is not an offer to
sell nor is it seeking an offer to buy these shares in any jurisdiction where
the offer or sale is not permitted. The information contained in this prospectus
is correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these shares.
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PROSPECTUS SUMMARY
This is only a summary and does not contain all of the information that
may be important to you. You should read the more detailed information contained
in this prospectus and all other information, including the financial
information and statements with notes, as discussed in the "Where You Can Find
More Information" section of this prospectus.
RECENT DEVELOPMENTS
PRIVATE PLACEMENT
On September 30, 2004, we completed a private placement of 6% Senior
Subordinated Notes due September 30, 2007. These notes were offered and sold to
accredited investors as units consisting of one note with a principal amount of
$1,000 and warrants to purchase shares of our common stock, the terms of which
are similar to our notes and warrants sold in July 2003, 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 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 6% Senior
Subordinated Notes due July 31, 2006 in the original principal amount of
$7,500,000 that we sold in 2003. Quarterly payments of principal and interest
due on these notes, like the notes we sold in 2003, 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 Financial Markets for the 20 consecutive trading days
preceding the payment date.
We also issued warrants to purchase shares of our common stock to the
purchasers of the notes and to the placement agent in the offering, J. Giordano
Securities Group. Each warrant entitles 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. By comparison, the warrants we sold in 2003 are each
exercisable for one-half share of common stock at an exercise price of $12.74
per whole share. The number of shares issuable upon exercise of the warrants
issued to the purchasers in our 2004 private placement equaled $12.5 million
divided by the exercise price of the warrants, and totaled 980,392. The number
of shares issuable upon exercise of the warrants issued to J. Giordano equaled
$500,000 divided by the exercise price of the warrants, and totaled 39,216. The
terms of the warrants provide for adjustment of the exercise price and the
number of shares issuable thereunder upon the occurrence of certain events
typical for private offerings of this type.
IMPACT OF 2004 HURRICANE SEASON
In August and September 2004, the State of Florida experienced four
hurricanes, Charley, Frances, Ivan and Jeanne. One of our subsidiaries,
Federated National Insurance Company, incurred significant losses relative to
its homeowners' insurance line of business. As of the date of this prospectus,
approximately 7,500 policyholders have filed hurricane-related claims totaling
an estimated $62.0 million, of which we currently estimate that our share of the
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costs associated with these hurricanes will be approximately $33.0 million, net
of our reinsurance recoveries. As of September 30, 2004, approximately $9.1
million of reinsurance has been received to settle hurricane losses.
In August 2004, A.M. Best Company notified us that Federated National
and American Vehicle Insurance Company were being placed under review with
negative implications. A.M. Best in 2003 had assigned Federated National a B
rating ("Fair," which is the seventh of 14 rating categories) and American
Vehicle a B+ rating ("Very Good," which is the sixth of 14 rating categories).
Federated National and American Vehicle are currently rated "A" ("Unsurpassed,"
which is first of six ratings) by Demotech, Inc. We will most likely not
maintain our A. M. Best ratings due to the recent hurricanes. A downgrade or
withdrawal of our ratings could limit or prevent us from writing or renewing
desirable insurance policies or from obtaining adequate reinsurance.
To retain our certificates of authority, Florida insurance laws and
regulations require that our insurance company subsidiaries, Federated National
and American Vehicle Insurance Company, maintain capital surplus equal to the
greater of 10% of its liabilities or the 2003 statutory minimum capital and
surplus requirement of $3.60 million as defined in the Florida Insurance Code.
As of September 30, 2004, Federated National was not in compliance with its
requirement to maintain capital surplus equal to the greater of 10% of its
liabilities by approximately $0.3 million. Based on Federated National's payment
patterns associated with the settlement of its claims, compliance with the 10%
provision has been fully restored as of the date of this prospectus and we do
not currently anticipate any regulatory action relative to this matter. American
Vehicle remains in compliance with statutory minimum capital and surplus
requirement.
The insurance companies are also required to adhere to prescribed
premium-to-capital surplus ratios. As of September 30, 2004, Federated National
did not comply with the prescribed premium-to-capital surplus ratio, primarily
based on the incurred losses associated with the four hurricanes that occurred
in August and September 2004. Pursuant to verbal representations made to us by
senior officials from the Florida Office of Insurance Regulation of the Florida
Department of Financial Services, strict adherence to the prescribed
premium-to-capital surplus ratio requirement may not be immediately imposed. We
are in regular communications with the Florida Office of Insurance Regulation
and have complied with the office's verbal requests and have relied on their
verbal representation that immediate regulatory action will not be imposed
relative to its non-compliance with the prescribed premium-to-capital surplus
ratio. American Vehicle is in compliance with the prescribed premium-to-capital
surplus ratios.
Although the occurrence of four hurricanes hitting Florida within one
year has not previously occurred for as long as records for weather events have
been kept, some weather analysts believe that a period of greater hurricane
activity has begun. To address this possibility, we are exploring alternatives
to reduce our exposure to these types of storms. Although these measures may
increase operating expenses, management believes that they will protect
long-term profitability, although there can be no assurances that will be the
case.
STOCK SPLIT
On September 7, 2004, we completed a three-for-two stock split in the
form of a stock dividend, whereby shareholders received three shares of common
stock for every two shares of our common stock held on the record date. Just
2
prior to the three-for-two stock split, we had approximately 3,957,000 shares
outstanding, and following the stock split, we had approximately 5,936,000
shares outstanding.
OVERVIEW
We are a vertically integrated insurance holding company that, through
its subsidiaries, controls substantially all aspects of the insurance
underwriting, distribution and claims process. We underwrite personal automobile
insurance, general liability insurance, flood insurance and homeowners' and
mobile home property and casualty insurance in Florida, Louisiana and Georgia
through its wholly owned subsidiaries, Federated National and American Vehicle.
American Vehicle has recently been authorized to write commercial general
liability policies in Kentucky and Texas and expects to begin writing policies
in those states in the near future. American Vehicle is a fully admitted
insurance carrier in Florida and Louisiana and is admitted as a surplus lines
carrier in Georgia and Kentucky.
We internally process claims made by our own and third-party insureds
through a wholly owned claims adjusting company, Superior Adjusting, Inc. We
also offer premium financing to our own and third-party insureds through our
wholly owned subsidiary, Federated Premium Finance, Inc.
During the nine months ended September 30, 2004, 21.4%, 63.8%, 1.6% and
13.2% of the policies we underwrote were for personal automobile insurance,
homeowners' property and casualty insurance, mobile home property and casualty
insurance, and commercial general liability, respectively. During the year ended
December 31, 2003, 67.5%, 23.0%, 2.4% and 7.1% of the policies we underwrote
were for personal automobile insurance, homeowners' property and casualty
insurance, mobile home property and casualty insurance, and commercial general
liability, respectively.
We market and distribute our own and third-party insurers' products and
our other services primarily in South and Central Florida, through a network of
24 agencies owned by Federated Agency Group, Inc., a wholly-owned subsidiary, 45
franchised agencies, approximately 1,500 independent agents and a select number
of general agents. Our independent agents and general agents are primarily
responsible for the distribution of our homeowners' insurance and commercial
general liability products. Through our wholly owned subsidiary, FedUSA, Inc.,
we franchise agencies under the FedUSA name. As of June 30, 2004, franchises
were granted for 45 Fed USA agencies, of which 40 were operating and five were
pending.
Assurance Managing General Agents, Inc., a wholly owned subsidiary,
acts as Federated National's and American Vehicle's exclusive managing general
agent. Assurance MGA currently provides all underwriting policy administration,
marketing, accounting and financial services to Federated National, American
Vehicle and our agencies, and participates in the negotiation of reinsurance
contracts. Assurance MGA generates revenue through policy fee income and other
administrative fees from the marketing of companies' products through the
Company's distribution network. Assurance MGA plans to establish relationships
with additional carriers and add additional insurance products in the future.
We offer electronic tax filing services through Express Tax Service,
Inc., an 80%-owned subsidiary, as well as franchise opportunities for these
services through EXPRESSTAX. As of June 30, 2004, there were 235 franchises
granted in 18 states. Revenue is generated through franchise sales, collection
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of royalties on tax preparation fees, incentives from business partners as well
as fees from the preparation of income tax returns and income tax refund
anticipation loans. In addition, Express Tax offers tax preparation services
through approximately 500 licensees nationwide.
We believe that we can be distinguished from our competitors because we
generate revenue from substantially all aspects of the insurance underwriting,
distribution and claims process. We provide quality service to both our agents
and insureds by utilizing an integrated computer system, which links our
insurance and service entities. Our computer and software systems allow for
automated premium quotation, policy issuance, billing, payment and claims
processing and enables us to continuously monitor substantially all aspects of
our business. Using these systems, our agents can access a customer's driving
record, quote a premium, offer premium financing and, if requested, generate a
policy on-site. We believe that these systems have facilitated our ability to
market and underwrite insurance products on a cost-efficient basis, allow our
owned and franchised agencies to be a "one stop" shop for insurance, tax
preparation and other services, and will enhance our ability to expand in
Florida and to other states.
We currently underwrite and sell insurance in Florida, Louisiana and
Georgia and were recently approved to do so in Kentucky and Texas. We intend to
expand to other selected states and have applied to obtain licenses to
underwrite and sell personal automobile insurance and general liability
insurance in Alabama. We select additional states for expansion based on a
number of criteria, including the size of the personal automobile insurance
market, statewide loss results, competition and the regulatory climate. Our
ability to expand into other states will be subject to the prior regulatory
approval of each state. Certain states impose operating requirements upon
licensee applicants, which may impose burdens on our ability to obtain a license
to conduct insurance business in those other states. There can be no assurance
that we will be able to obtain the required licenses, and the failure to do so
would limit our ability to expand geographically.
As we expand our operations, we continue to review our operations and
lines of business for strategies to further improve our efficiency and results
of operations. These strategies may include expansion of operations into
additional states; possible acquisitions or dispositions of assets; and
development of procedures to improve claims history and mitigate losses from
claims. There can be no assurances, however, that any such strategies will be
developed or successfully implemented.
Our executive offices are located at 3661 West Oakland Park Boulevard,
Suite 300, Lauderdale Lakes, Florida and our telephone number is (954) 581-9993.
RISKS OF INVESTING IN OUR SHARES
You should carefully consider the following risks, in addition to the
other information presented in this prospectus or incorporated by reference into
this prospectus, before making an investment decision. If any of these risks or
uncertainties actually occur, our business, results of operations, financial
condition, or prospects could be substantially harmed, which would adversely
affect your investment.
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RISKS RELATED TO OUR BUSINESS
THE STATE OF FLORIDA, WHERE OUR HEADQUARTERS AND A SUBSTANTIAL PORTION OF OUR
POLICIES ARE LOCATED, HAS EXPERIENCED FOUR HURRICANES IN AUGUST AND SEPTEMBER
2004.
We write insurance policies that cover automobile owners, homeowners'
and business owners for losses that result from, among other things,
catastrophes. Catastrophic losses can be caused by hurricanes, tropical storms,
tornadoes, wind, hail, fires, riots and explosions, and their incidence and
severity are inherently unpredictable. The extent of losses from a catastrophe
is a function of two factors: the total amount of the insurance company's
exposure in the area affected by the event and the severity of the event. Our
policyholders are currently concentrated in South and Central Florida, which is
especially subject to adverse weather conditions such as hurricanes and tropical
storms.
In August and September 2004, the State of Florida experienced four
hurricanes, Charley, Frances, Ivan and Jeanne. We are currently receiving and
processing claims made under our homeowners' and mobile home owners' policies, a
process that is expected to continue for many months. One of our subsidiaries,
Federated National Insurance Company, incurred significant losses relative to
its homeowners' insurance line of business. As of the date of this prospectus,
approximately 7,500 policyholders have filed hurricane-related claims totaling
an estimated $62.0 million, of which we estimate that our share of the costs
associated with these hurricanes will be approximately $33.0 million, net of
reinsurance recoveries. As of September 30, 2004, approximately $9.1 million of
reinsurance has been received to settle hurricane losses.
AS A RESULT OF THE HURRICANES STRIKING FLORIDA IN AUGUST AND SEPTEMBER 2004, WE
ARE NOT IN COMPLIANCE WITH CERTAIN REGULATORY REQUIREMENTS.
To retain our certificates of authority, Florida insurance laws and
regulations require that our insurance company subsidiaries, Federated National
and American Vehicle Insurance Company, maintain capital surplus equal to the
greater of 10% of its liabilities or the 2003 statutory minimum capital and
surplus requirement of $3.60 million as defined in the Florida Insurance Code.
As of September 30, 2004, Federated National was not in compliance with its
requirement to maintain capital surplus equal to the greater of 10% of its
liabilities by approximately $0.3 million. Based on Federated National's payment
patterns associated with the settlement of its claims, compliance with the 10%
provision has been fully restored as of the date of this prospectus and we do
not currently anticipate any regulatory action relative to this matter. American
Vehicle remains in compliance with statutory minimum capital and surplus
requirement.
The insurance companies are also required to adhere to prescribed
premium-to-capital surplus ratios. As of September 30, 2004, Federated National
did not comply with the prescribed premium-to-capital surplus ratio, primarily
based on the incurred losses associated with the four hurricanes that occurred
in August and September 2004. Pursuant to verbal representations made to us by
senior officials from the Florida Office of Insurance Regulation of the Florida
Department of Financial Services, strict adherence to the prescribed
premium-to-capital surplus ratio requirement may not be immediately imposed. We
are in regular communication with the OIR and have complied with their verbal
requests and have relied on their verbal representation that immediate
regulatory action will not be imposed relative to Federated National's
5
non-compliance with the prescribed premium-to-capital surplus ratio. American
Vehicle is in compliance with the prescribed premium-to-capital surplus ratios.
IF WE ARE UNABLE TO CONTINUE OUR GROWTH BECAUSE OUR CAPITAL MUST BE USED TO PAY
GREATER THAN ANTICIPATED CLAIMS, OUR FINANCIAL RESULTS MAY SUFFER.
We have grown rapidly over the last few years. Our future growth will
depend on our ability to expand the types of insurance products we offer and the
geographic markets in which we do business. We believe that our company is
sufficiently capitalized to operate our business as it now exists and as we
currently plan to expand it. Our existing sources of funds include our revolving
loan from Flatiron Funding Company LLC, sales of our securities such as our
September 2004 and July 2003 private placements of $12,500,000 and $7,500,000,
respectively, of our senior subordinated notes, possible sales of our investment
securities, and our earnings from operations and investments. Unexpected
catastrophic events in our market areas, such as the hurricanes experienced in
Florida in August and September 2004, have resulted and will result in greater
claims losses than anticipated, which could require us to limit or halt our
growth while we redeploy our capital to pay these unanticipated claims unless we
are able to raise additional capital or increase our earnings in our other
divisions.
IF OUR RATINGS ARE DOWNGRADED OR WITHDRAWN, WE MAY BE UNABLE TO WRITE OR RENEW
DESIRABLE INSURANCE POLICIES OR OBTAIN ADEQUATE REINSURANCE, WHICH WOULD LIMIT
OR HALT OUR GROWTH AND HARM OUR BUSINESS.
Third-party rating agencies assess and rate the ability of insurers to
pay their claims. These financial strength ratings are used by the insurance
industry to assess the financial strength and quality of insurers. These ratings
are based on criteria established by the rating agencies and reflect evaluations
of each insurer's profitability, debt and cash levels, customer base, adequacy
and soundness of reinsurance, quality and estimated market value of assets,
adequacy of reserves, and management. Ratings are based upon factors of concern
to agents, reinsurers and policyholders and are not directed toward the
protection of investors, such as purchasers of our common stock.
In August 2004, A.M. Best Company notified us that Federated National
and American Vehicle were being placed under review with negative implications.
A.M. Best in 2003 had assigned Federated National a B rating ("Fair," which is
the seventh of 14 rating categories) and American Vehicle a B+ rating ("Very
Good," which is the sixth of 14 rating categories). Federated National and
American Vehicle are currently rated "A" ("Unsurpassed," which is first of six
ratings) by Demotech, Inc. We will most likely not maintain our A. M. Best
ratings due to the recent hurricanes. A downgrade or withdrawal of our ratings
could limit or prevent us from writing or renewing desirable insurance policies
or from obtaining adequate reinsurance.
THE MAXIMUM CREDIT COMMITMENT UNDER OUR REVOLVING LOAN COULD BE SUBJECT TO
REDUCTION, WHICH WOULD ADVERSELY AFFECT OUR AVAILABLE WORKING CAPITAL.
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 $4.0 million over the next three years. We believe that
this available credit is sufficient based on our current operations. Our lender,
however, could determine to reduce our available credit based on a number of
factors, including the A.M. Best ratings of Federated National and American
6
Vehicle. 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 revolving loan agreement, policies written by that subsidiary will
no longer be eligible collateral, causing our available credit to be reduced. If
that occurs and we are not able to obtain working capital from other sources,
then we would have to restrict our growth and, possibly, our operations.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION, WHICH CAN LIMIT OUR GROWTH
AND INCREASE OUR EXPENSES, THEREBY REDUCING OUR EARNINGS.
We are subject to laws and regulations in Florida, our state of
domicile, and in Georgia, Louisiana, Kentucky and Texas, states in which we have
been authorized to do business, and will be subject to the laws of any other
state in which we conduct business in the future. These laws and regulations
cover all aspects of our business and are generally designed to protect the
interests of insurance policyholders. For example, these laws and regulations
relate to licensing requirements, authorized lines of business, capital surplus
requirements, allowable rates and forms, investment parameters, underwriting
limitations, restrictions on transactions with affiliates, dividend limitations,
changes in control, market conduct, and limitations on premium financing service
charges. The cost to monitor and comply with these laws and regulations adds
significantly to our cost of doing business. Further, if we do not comply with
the laws and regulations applicable to us, we may be subject to sanctions or
monetary penalties by the applicable insurance regulator.
EMERGENCY ADMINISTRATIVE ORDERS HAVE BEEN ADOPTED, AND LEGISLATION MAY BE
ENACTED, THAT WOULD LIMIT OUR ABILITY TO INCREASE OUR PREMIUMS OR CANCEL, REDUCE
OR NON-RENEW OUR EXISTING POLICIES, WHICH COULD REDUCE OUR REVENUES OR INCREASE
OUR CLAIMS LOSSES.
In the aftermath of the hurricanes in Florida, the Florida Office of
Insurance Regulation issued emergency orders that imposed a moratorium on
cancellations and non-renewals of various types of insurance coverages and that
require mediation to resolve disputes over personal property insurance claims.
For personal residential and commercial residential policies, the moratorium is
through November 30, 2004. The orders also prohibit cancellations or
non-renewals based solely upon claims resulting from the hurricanes. Legislation
has also been proposed from time to time in Florida, which is where our
operations are now primarily located, that would limit our ability to increase
our premiums or that would restrict our ability to cancel, reduce or non-renew
existing policies. If one or more of these proposals are enacted in Florida, or
in any other state in which we conduct significant business operations, our
results of operations could be materially adversely affected if we are not able
to increase our premiums to offset higher expenses or if we are not able to
cancel, reduce or non-renew existing policies where our claims experience has
been unacceptably high.
OUR REVENUES AND OPERATING PERFORMANCE MAY FLUCTUATE WITH BUSINESS CYCLES IN THE
PROPERTY AND CASUALTY INSURANCE INDUSTRY.
Historically, the financial performance of the property and casualty
insurance industry has tended to fluctuate in cyclical patterns characterized by
periods of significant competition in pricing and underwriting terms and
conditions, which is known as a "soft" insurance market, followed by periods of
lessened competition and increasing premium rates, which is known as a "hard"
7
insurance market. Although an individual insurance company's financial
performance is dependent on its own specific business characteristics, the
profitability of most property and casualty insurance companies tends to follow
this cyclical market pattern, with profitability generally increasing in hard
markets and decreasing in soft markets. At present, we are beginning to
experience a soft market in our automobile sector while a hard market persists
in our property sector. We cannot predict, however, how long these market
conditions will persist. In the current soft automobile market, increased price
competition may cause us to have to reduce our premiums in order to maintain our
market share, which would result in a decrease in our automobile revenues.
WE MAY NOT OBTAIN THE NECESSARY REGULATORY APPROVALS TO EXPAND THE TYPES OF
INSURANCE PRODUCTS WE OFFER OR THE STATES IN WHICH WE OPERATE.
We currently have an application pending in Alabama to underwrite and
sell general liability insurance. The insurance regulators in these states may
request additional information, add conditions to the license that we find
unacceptable, or deny our application. This would delay or prevent us from
operating in that state. If we want to operate in any additional states, we must
file similar applications for licenses, which we may not be successful in
obtaining.
ALTHOUGH WE FOLLOW THE INDUSTRY PRACTICE OF REINSURING A PORTION OF OUR RISKS,
OUR COSTS OF OBTAINING REINSURANCE HAVE INCREASED AND WE MAY NOT BE ABLE TO
SUCCESSFULLY ALLEVIATE RISK THROUGH REINSURANCE ARRANGEMENTS.
We follow the insurance industry practice of reinsuring a portion of
our risks and paying for that protection based upon premiums received on all
policies subject to this reinsurance. Our business depends on our ability to
transfer or "cede" significant amounts of risk insured by us. Reinsurance makes
the assuming reinsurer liable to the extent of the risk ceded. Prior to 2004,
both Federated National and American Vehicle ceded varying amounts their
premiums from automobile insurance policies to Transatlantic Reinsurance
Company. For 2004, neither company has elected to cede any automobile premiums.
Federated National also obtains reinsurance for its property insurance policies
on the private market in Bermuda and London and through the Florida Hurricane
Catastrophe Fund. The private markets in Bermuda and London, as well as the
Florida Hurricane Catastrophe Fund, currently reinsure Federated National for
liabilities resulting from a storm causing damage in excess of the first $10
million and extend coverage up to approximately $200 million in the aggregate,
which we believed to constitute an event expected to occur no more often than
once in a period of 100 years. As a result of the hurricanes experienced in
Florida in August and September 2004, however, we will review, and may determine
to modify, our reinsurance.
Because our ceded automobile reinsurance treaties are from one
reinsurer and remain in effect for various years prior to 2004, we are also
subject to credit risk with respect to that reinsurer, as the ceding of risk
does not relieve us of liability to our insureds regarding the portion of the
risk that has been reinsured, if the reinsurer fails to pay for any reason. The
insolvency of our primary reinsurer or any of our other current or future
reinsurers, or their inability otherwise to pay claims, would increase the
claims that we must pay, thereby significantly harming our results of
operations. In addition, prevailing market conditions have limited the
availability and increased the cost of reinsurance, which may have the effect of
increased costs and reduced profitability.
8
OUR LOSS RESERVES MAY BE INADEQUATE TO COVER OUR ACTUAL LIABILITY FOR LOSSES,
CAUSING OUR RESULTS OF OPERATIONS TO BE ADVERSELY AFFECTED.
We maintain reserves to cover our estimated ultimate liabilities for
loss and loss adjustment expenses. These reserves are estimates based on
historical data and statistical projections of what we believe the settlement
and administration of claims will cost based on facts and circumstances then
known to us. Actual losses and loss adjustment expenses, however, may vary
significantly from our estimates. For example, after we compared our reserve
levels to our actual claims for the prior years, we increased our liability for
loss and loss adjustment expenses by $1,234,047 in 2003, $90,874 in 2002, and
$2,568,476 in 2001. These increases reflected primarily our loss experience
under our personal automobile policies. Because of the uncertainties that
surround estimated loss reserves, we cannot be certain that our reserves will be
adequate to cover our actual losses. If our reserves for unpaid losses and loss
adjustment expenses are less than actual losses and loss adjustment expenses, we
will be required to increase our reserves with a corresponding reduction in our
net income in the period in which the deficiency is identified. Future loss
experience substantially in excess of our reserves for unpaid losses and loss
adjustment expenses could substantially harm our results of operations and
financial condition.
WE CURRENTLY RELY ON AGENTS, MOST OF WHOM ARE INDEPENDENT AGENTS, TO WRITE OUR
INSURANCE POLICIES, AND IF WE ARE NOT ABLE TO ATTRACT AND RETAIN INDEPENDENT
AGENTS, OUR REVENUES WOULD BE NEGATIVELY AFFECTED.
We currently market and distribute Federated National's, American
Vehicle's and third-party insurers' products and our other services through a
network of approximately 1,500 independent agents, 24 agencies that we own and
45 agencies that we franchise to others. Our independent agents are our primary
source for our property insurance policies. Many of our competitors also rely on
independent agents. As a result, we must compete with other insurers for
independent agents' business and with other franchisors of insurance agencies
for franchisees. Our competitors may offer a greater variety of insurance
products, lower premiums for insurance coverage, or higher commissions to their
agents. If our products, pricing and commissions do not remain competitive, we
may find it more difficult to attract business from independent agents and to
attract franchisees for our agencies to sell our products. A material reduction
in the amount of our products that independent agents sell would negatively
affect our revenues.
NONSTANDARD AUTOMOBILE INSURANCE HISTORICALLY HAS A HIGHER FREQUENCY OF CLAIMS
THAN STANDARD AUTOMOBILE INSURANCE, THEREBY INCREASING OUR POTENTIAL FOR LOSS
EXPOSURE BEYOND WHAT WE WOULD BE LIKELY TO EXPERIENCE IF WE OFFERED ONLY
STANDARD AUTOMOBILE INSURANCE.
Nonstandard automobile insurance, which is second only to our property
insurance product, is provided to insureds who are unable to obtain preferred or
standard insurance coverage because of their payment histories, driving records,
age, vehicle types, or prior claims histories. This type of automobile insurance
historically has a higher frequency of claims than does preferred or standard
automobile insurance policies, although the average dollar amount of the claims
is usually smaller under nonstandard insurance policies. As a result, we are
exposed to the possibility of increased loss exposure and higher claims
experience than would be the case if we offered only standard automobile
insurance.
9
FLORIDA'S PERSONAL INJURY PROTECTION INSURANCE STATUTE CONTAINS PROVISIONS THAT
FAVOR CLAIMANTS, CAUSING US TO EXPERIENCE A HIGHER FREQUENCY OF CLAIMS THAN
MIGHT OTHERWISE BE THE CASE IF WE OPERATED ONLY OUTSIDE OF FLORIDA.
Florida's personal injury protection insurance statute limits an
insurer's ability to deny benefits for medical treatment that is unrelated to
the accident, that is unnecessary, or that is fraudulent. In addition, the
statute allows claimants to obtain awards for attorney's fees. Although this
statute has been amended several times in recent years, primarily to address
concerns over fraud, the Florida legislature has been only marginally successful
in implementing effective mechanisms that allow insurers to combat fraud and
other abuses. We believe that this statute contributes to a higher frequency of
claims under nonstandard automobile insurance policies in Florida, as compared
to claims under standard automobile insurance policies in Florida and
nonstandard and standard automobile insurance polices in other states. Although
we believe that we have successfully offset these higher costs with premium
increases, because of competition, we may not be able to do so with as much
success in the future.
OUR BUSINESS STRATEGY IS TO AVOID COMPETITION IN OUR AUTOMOBILE INSURANCE
PRODUCTS BASED ON PRICE TO THE EXTENT POSSIBLE. THIS STRATEGY, HOWEVER, MAY
RESULT IN THE LOSS OF BUSINESS IN THE SHORT TERM.
Although our pricing of our automobile insurance products 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, choosing instead
to compete on the basis of underwriting criteria, our distribution network, and
our superior service to our agents and insureds. With respect to automobile
insurance in Florida, we compete with more than 100 companies, which underwrite
personal automobile insurance. Comparable companies which compete with us in the
personal automobile insurance market include U.S. Security Insurance Company,
United Automobile Insurance Company, Direct General Insurance Company and
Security National Insurance Company, as well as major insurers such as
Progressive Casualty Insurance Company. Comparable companies which compete with
us in the homeowners' market include Florida Family Insurance Company, Florida
Select Insurance Company, Atlantic Preferred Insurance Company and Vanguard
Insurance Company. Comparable companies which compete with us in the general
liability insurance market include Century Surety Insurance Company, Atlantic
Casualty Insurance Company, Colony Insurance Company and Burlington/First
Financial Insurance Companies. Competition could have a material adverse effect
on our business, results of operations and financial condition. If we do not
meet the prices offered by our competitors, we may lose business in the short
term, which could also result in reduced revenues.
OUR INVESTMENT PORTFOLIO MAY SUFFER REDUCED RETURNS OR LOSSES, WHICH WOULD
SIGNIFICANTLY REDUCE OUR EARNINGS.
As do other insurance companies, we depend on income from our
investment portfolio for a substantial portion of our earnings. During the time
that normally elapses between the receipt of insurance premiums and any payment
of insurance claims, we invest the funds received, together with our other
available capital, primarily in fixed- maturity investments and equity
securities, in order to generate investment income. A significant decline in
investment yields in our investment portfolio caused by fluctuations in interest
rates or volatility in the stock market, or a default by issuers of securities
that we own, could adversely affect the value of our investment portfolio and
10
the returns that we earn on our portfolio, thereby substantially harming our
financial condition and results of operations. During the first nine months of
2004, net investment income increased by $0.9 million, or 74.2%, to $2.1
million, as compared to $1.2 million for the same nine-month period ended
September 30, 2003. The increase in investment income is a result of the
additional amounts of invested assets. Also affecting our net investment income
were our declining yields of 0.51% for the nine months ended September 30, 2004,
as compared to 5.23% for the nine months ended September 30, 2003.
Although we experienced realized gains of $2,231,333 for 2003 and
$261,386 for the first nine months of 2004, we experienced net realized
investment losses in the past of $1,369,961 for 2002 and $2,911,658 for 2001.
The net realized losses experienced in 2001 were primarily a function of the
widely publicized declines in the industrial common stock valuations. As a
result of the declines in the equity markets in 2001, we acquired securities in
the more conservative and highly rated industrial bond markets in late 2001 and
the first half of 2002. During 2002, we incurred a $2,000,000 decline in value
of our investment in WorldCom, Inc. bonds. This write down is reflected in the
$1,369,961 loss incurred in 2002.
OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER ARE KEY TO THE STRATEGIC DIRECTION OF
OUR COMPANY. IF WE WERE TO LOSE THE SERVICES OF EITHER OF THEM, OUR BUSINESS
COULD BE HARMED.
We depend, and will continue to depend, on the services of one of our
founders and principal shareholders, Edward J. Lawson, who is also our president
and chairman of the board, as well as Richard Widdicombe, who is our chief
executive officer. We have entered into an employment agreement with each of
them and we maintain $3 million and $1 million in key man life insurance on the
lives of Mr. Lawson and Mr. Widdicombe, respectively. Nevertheless, because of
Mr. Lawson's and Mr. Widdicombe's role and involvement in developing and
implementing our current business strategy, the loss of either of their services
could substantially harm our business.
RISKS RELATED TO AN INVESTMENT IN OUR SHARES
THE TRADING OF OUR WARRANTS MAY NEGATIVELY AFFECT THE TRADING PRICES OF OUR
COMMON STOCK IF INVESTORS PURCHASE AND EXERCISE THE WARRANTS TO FACILITATE OTHER
TRADING STRATEGIES, SUCH AS SHORT SELLING.
The 816,000 warrants we issued in our July 2003 private offering
currently trade on the Nasdaq National Market under the symbol of "TCHCW." Each
of the warrants entitles the holder to purchase one-half of one share of our
common stock at an exercise price per whole share of $12.74 after giving effect
to the September 2004 three-for-two stock split. The 1,019,608 warrants we
issued in our September 30, 2004 private offering are not yet currently listed
for trading on the Nasdaq National Market, although we are obligated to list
them for trading. Each of these warrants entitles the holder to purchase one
share of our common stock at an exercise price per share of $12.75. Investors
may purchase and exercise warrants to facilitate trading strategies such as
short selling, which involves the sale of securities not yet owned by the
seller. In a short sale, the seller must either purchase or borrow the security
in order to complete the sale. If shares of our common stock received upon the
exercise of warrants are used to complete short sales, this may have the effect
of reducing the trading price of our common stock.
11
THE WARRANTS INCLUDED IN THIS PROSPECTUS ARE NOT CURRENTLY LISTED FOR TRADING.
The warrants issued to the investors and the placement agent in our
September 2004 private placement, which are the warrants included in this
prospectus, are not currently listed for trading on the Nasdaq National Market
or any other market. We are obligated under the terms of our agreements with
these investors to list the warrants for trading on the Nasdaq National Market
within 120 days from the closing of the offering. We cannot provide any
assurances as to the date on which the warrants will begin trading, if at all.
OUR LARGEST SHAREHOLDERS CONTROL APPROXIMATELY 27% OF THE VOTING POWER OF OUR
OUTSTANDING COMMON STOCK, WHICH COULD DISCOURAGE POTENTIAL ACQUIRORS AND PREVENT
CHANGES IN MANAGEMENT.
Edward J. Lawson and Michele V. Lawson beneficially own approximately
27% of our outstanding common stock. As our largest shareholders, and our only
shareholders owning more than 10% of our common stock, the Lawsons have
significant influence over the outcome of any shareholder vote. This voting
power may discourage takeover attempts, changes in our officers and directors or
other changes in our corporate governance that other shareholders may desire.
WE HAVE AUTHORIZED BUT UNISSUED PREFERRED STOCK, WHICH COULD AFFECT RIGHTS OF
HOLDERS OF COMMON STOCK.
Our articles of incorporation authorize the issuance of preferred stock
with designations, rights and preferences determined from time to time by our
board of directors. Accordingly, our board of directors is empowered, without
shareholder approval, to issue preferred stock with dividends, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of common stock. In addition, the preferred stock
could be issued as a method of discouraging a takeover attempt. Although we do
not intend to issue any preferred stock at this time, we may do so in the
future.
OUR ARTICLES OF INCORPORATION AND BYLAWS AND FLORIDA LAW MAY DISCOURAGE TAKEOVER
ATTEMPTS AND MAY RESULT IN ENTRENCHMENT OF MANAGEMENT.
Our articles of incorporation and bylaws contain provisions that may
discourage takeover attempts and may result in entrenchment of management.
o Our board of directors is elected in classes, with only two or
three of the directors elected each year. As a result,
shareholders would not be able to change the membership of the
board in its entirety in any one year. Shareholders would also be
unable to bring about, through the election of a new board of
directors, changes in our officers.
o Our articles of incorporation prohibit shareholders from acting
by written consent, meaning that shareholders will be required to
conduct a meeting in order to vote on any proposals or take any
action.
o Our bylaws require at least 60 days' notice if a shareholder
desires to submit a proposal for a shareholder vote or to
nominate a person for election to our board of directors.
12
In addition, Florida has enacted legislation that may deter or frustrate
takeovers of Florida corporations, such as our company.
o The Florida Control Share Act provides that shares acquired in a
"control share acquisition" will not have voting rights unless
the voting rights are approved by a majority of the corporation's
disinterested shareholders. A "control share acquisition" is an
acquisition, in whatever form, of voting power in any of the
following ranges: (a) at least 20% but less than 33-1/3% of all
voting power, (b) at least 33-1/3% but less than a majority of
all voting power; or (c) a majority or more of all voting power.
o The Florida Affiliated Transactions Act requires supermajority
approval by disinterested shareholders of certain specified
transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or
their affiliates).
AS A HOLDING COMPANY, WE DEPEND ON THE EARNINGS OF OUR SUBSIDIARIES AND THEIR
ABILITY TO PAY MANAGEMENT FEES AND DIVIDENDS TO THE HOLDING COMPANY AS THE
PRIMARY SOURCE OF OUR INCOME.
We are an insurance holding company whose primary assets are the stock
of our subsidiaries. Our operations, and our ability to service our debt, are
limited by the earnings of our subsidiaries and their payment of their earnings
to us in the form of management fees, dividends, loans, advances or the
reimbursement of expenses. These payments can be made only when our subsidiaries
have adequate earnings. In addition, these payments made to us by our insurance
subsidiaries are restricted by Florida law governing the insurance industry.
Generally, Florida law limits the dividends payable by insurance companies under
complicated formulas based on the subsidiary's available capital and earnings.
During 2003, 2002 and 2001, the parent company received management fees
from our subsidiaries, excluding Federated National and American Vehicle,
totaling $2.0 million, $1.9 million and $2.9 million. No dividends were declared
or paid by any of our subsidiaries in 2003, 2002 or 2001. Whether our
subsidiaries will be able to pay dividends in 2004 depends on the results of
their operations and their expected needs for capital. We do not anticipate that
our subsidiaries will begin to pay dividends to the parent company during 2004.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this prospectus or in documents incorporated by reference
that are not historical fact are forward-looking statements. Forward-looking
statements 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, but are not limited to, the risks and uncertainties described in this
prospectus or from time to time in our filings with the SEC.
13
USE OF PROCEEDS
We will receive proceeds of $12.75 per share if any warrants are
exercised. The likelihood of our receiving any proceeds from the exercise of the
warrants increases as the market price of our common stock rises above the
warrant exercise price. If all of the warrants are exercised, we would receive
net proceeds of approximately $12,980,000 after deducting approximately $20,000
in expenses in connection with the registration statement. Such proceeds, if
any, will be used for working capital and general corporate purposes.
We will not receive any proceeds from the sale of the warrants prior to
exercise or from the sale of any shares of our common stock issued by us upon
the exercise of the warrants or as payment of principal and interest on the
notes.
SELLING SECURITY HOLDERS
The following tables show certain information as of the date of this
prospectus regarding the number of warrants or shares of common stock owned by
the selling security holders and that are included for sale in this prospectus.
The tables assume that all warrants or shares offered for sale in the prospectus
are sold.
No selling shareholder has been within the last three years, or is
currently, affiliated with us.
OWNERSHIP OF OWNERSHIP OF
WARRANTS WARRANTS
BEFORE OFFERING NUMBER OFFERED AFTER OFFERING
----------------------- BY SELLING ------------------------
SELLING WARRANT HOLDER NUMBER PERCENT WARRANT HOLDER NUMBER PERCENT
----------------------------------------- ------------ --------- ---------------- ------------- ---------
Corsair Capital Partners, LP 50,588 4.96% 50,588 0 *
Corsair Capital Partners 100, LP 1,961 * 1,961 0 *
Corsair Capital Partners Investors, LTD 6,275 * 6,275 0 *
Cranshire Capital, LP 78,431 7.69% 78,431 0 *
Hillson Partners Limited Partnership 78,431 7.69% 78,431 0 *
Iroquois Capital LP 78,431 7.69% 78,431 0 *
J. Giordano Securities, LLC 39,216 3.85% 39,216 0 *
Omicron Master Trust 156,863 15.38% 156,863 0 *
Pandora Select Partners, LP 78,431 7.69% 78,431 0 *
Whitebox Convertible
Arbitrage Partners, LP 392,156 38.46% 392,156 0 *
Whitebox Intermarket Partners, LP 58,824 5.77% 58,824 0 *
14
OWNERSHIP OF OWNERSHIP OF
WARRANTS WARRANTS
BEFORE OFFERING(1) NUMBER OFFERED AFTER OFFERING(1)
----------------------- BY SELLING ------------------------
SELLING WARRANT HOLDER NUMBER PERCENT WARRANT HOLDER NUMBER PERCENT
----------------------------------------- ------------ --------- ---------------- ------------- ---------
Coastal Convertibles LTD. (1) 66,981 1.10% 6,920 60,061 *
Corsair Capital Partners, LP 50,588 * 50,588 0 *
Corsair Capital Partners 100, LP 1,961 * 1,961 0 *
Corsair Capital Partners Investors, LTD 6,275 * 6,275 0 *
Cranshire Capital, LP 78,431 1.30% 78,431 0 *
Hillson Partners Limited Partnership 78,431 1.30% 78,431 0 *
Iroquois Capital LP 78,431 1.30% 78,431 0 *
J. Giordano Securities, LLC 39,216 * 39,216 0 *
Newport Alternative Income Fund (1) 4,630 * 923 3,707 *
Omicron Master Trust (1) (2) 200,712 3.24% 4,613 196,099 3.16%
OTAPE Investments LLC (1) 30,416 * 2,307 28,109 *
Pandora Select Partners, LP (1) (2) 160,354 2.60% 9,227 151,127 2.45%
SilverCreek II Limited (1) 14,917 * 2,583 12,334 *
SilverCreek Limited Partnership (1) 26,851 * 5,721 21,130 *
Whitebox Convertible Arbitrage
Partners, LP (1) (2) 552,618 8.45% 18,453 534,165 8.17%
Whitebox Hedged High Yield
Partners, LP (1) 162,346 2.64% 18,453 143,893 2.34%
Whitebox Intermarket Partners, LP 58,824 * 58,824 0 *
-----------
* Less than 1%.
(1) Includes shares underlying warrants held by the selling shareholders (each
of which is exercisable for .75 shares of common stock, reflecting our
three-for-two stock split on September 7, 2004) as follows: Coastal
Convertibles LTD, 45,428 shares; Omicron Master Trust, 39,236 shares; OTAPE
Investments LLC, 28,108 shares; Newport Alternative Income Fund, 3,041
shares; Pandora Select Partners, LP, 72,696 shares; SilverCreek II Limited,
10,100 shares; SilverCreek Limited Partnership, 17,268 shares; Whitebox
Convertible Arbitrage Partners, LP, 142,008 shares; and Whitebox Hedged
High Yield Partners, LP, 143,892 shares.
(2) Includes shares underlying warrants held by the selling shareholders (each
of which is exercisable for one share of common stock) as follows: Omicron
Master Trust, 156,863 shares; Pandora Select Partners, LP, 78,431 shares;
and Whitebox Convertible Arbitrage Partners, LP, 392,156 shares.
The selling security holders listed above have provided us with
additional information regarding the individuals or entities that exercise
control over the selling security holder. The proceeds of any sale of shares
pursuant to this prospectus will be for the benefit of the individuals that
control the selling entity. The following is a list of the selling shareholders
and the entities that may exercise the right to vote or dispose of the shares
owned by each selling shareholder:
15
o Coastal Convertibles LTD is managed by Tradewinds.
o Omicron Capital, L.P., a Delaware limited partnership ("Omicron
Capital"), serves as investment manager to Omicron Master Trust, a
trust formed under the laws of Bermuda ("Omicron"); Omicron Capital,
Inc., a Delaware corporation ("OCI"), serves as general partner of
Omicron Capital; and Winchester Global Trust Company Limited
("Winchester") serves as the trustee of Omicron. By reason of such
relationships, Omicron Capital and OCI may be deemed to share
dispositive power over the shares of our common stock owned by
Omicron, and Winchester may be deemed to share voting and dispositive
power over the shares of our common stock owned by Omicron. Omicron
Capital, OCI and Winchester disclaim beneficial ownership of such
shares of our common stock. Omicron Capital has delegated authority
from the board of directors of Winchester regarding the portfolio
management decisions with respect to the shares of common stock owned
by Omicron and, as of November 1, 2004, Mr. Olivier H. Morali and Mr.
Bruce T. Bernstein, officers of OCI, have delegated authority from the
board of directors of OCI regarding the portfolio management decisions
with respect to the shares of common stock owned by Omicron. By reason
of such delegated authority, Messrs. Morali and Bernstein may be
deemed to share dispositive power over the shares of our common stock
owned by Omicron. Messrs. Morali and Bernstein disclaim beneficial
ownership of such shares of our common stock and neither of such
persons has any legal right to maintain such delegated authority. No
other person has sole or shared voting or dispositive power with
respect to the shares of our common stock being offered by Omicron, as
those terms are used for purposes under Regulation 13D-G of the
Securities Exchange Act of 1934, as amended. Omicron and Winchester
are not "affiliates" of one another, as that term is used for purposes
of the Securities Exchange Act of 1934, as amended, or of any other
person named in this prospectus as a selling shareholder. No person or
"group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended, or the SEC's Regulation 13D-G)
controls Omicron and Winchester.
o OTAPE Investments, LLC is managed by OTA. Ira M. Leventhal, a U.S.
citizen, may be deemed to have dispositive power with regard to the
shares beneficially owned by OTAPE Investments, LLC. Mr. Leventhal
disclaims beneficial ownership of those shares.
o Each of Newport Alternative Income Fund, SilverCreek II Limited and
SilverCreek Limited Partnership is managed by SilverCreek.
o Each of Whitebox Convertible Arbitrage Partners, LP and Whitebox
Hedged High Yield Partners, LP is managed by Whitebox Advisors, LLC.
o Pandora Select Partners, LP is managed by Pandora Select Advisors,
LLC.
HOW THE SECURITIES MAY BE DISTRIBUTED
As of the date of this prospectus, the warrants are not listed for
trading on the Nasdaq National Market or any other market. We are obligated
under the terms of our agreements with the investors in our September 2004
private placement to list the warrants for trading on the Nasdaq National Market
within 120 days from the closing of the offering. We cannot provide any
assurances as to the date on which the warrants will begin trading, if at all.
16
The selling security holders may sell shares of common stock in various
ways and at various prices. Some of the methods by which the selling
shareholders may sell shares include:
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers or makes arrangements for other
brokers to participate in soliciting purchasers;
o privately negotiated transactions;
o block trades in which the broker or dealer will attempt to sell
the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by that
broker or dealer for the selling shareholder's account under this
prospectus on the Nasdaq National Market at prices and on terms
then-prevailing in the market;
o sales under Rule 144, if available, rather than using this
prospectus;
o a combination of any of these methods of sale; and
o any other legally permitted method.
The applicable sales price may be affected by the type of transaction.
The selling security holders may also pledge shares as collateral for
margin loans under their customer agreements with their brokers. If there is a
default by a selling security holder, the broker may offer and sell the pledged
shares.
When selling shares, the selling security holders intend to comply with
the prospectus delivery requirements under the Securities Act, by delivering a
prospectus to each purchaser. We may file any supplements, amendments or other
necessary documents in compliance with the Securities Act that may be required
in the event a selling security holder defaults under any customer agreement
with brokers.
Brokers and dealers may receive commissions or discounts from the
selling security holders or, in the event the broker-dealer acts as agent for
the purchaser of the shares, from that purchaser, in amounts to be negotiated.
These commissions are not expected to exceed those customary in the types of
transactions involved. We cannot estimate at the present time the amount of
commissions or discounts, if any, that will be paid by the selling security
holders in connection with the sales of the shares.
The selling security holders and any broker-dealers or agents that
participate with a selling security holder in sales of the shares may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In that event, any commissions received by the broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
17
Under the securities laws of certain states, the shares may be sold in
those states only through registered or licensed broker-dealers. In addition,
the shares may not be sold unless the shares have been registered or qualified
for sale in the relevant state or unless the shares qualify for an exemption
from registration or qualification.
We have agreed to pay all of our out-of-pocket expenses and our
professional fees and expenses incident to the registration of the shares.
The selling security holders and other persons participating in the
distribution of the securities offered under this prospectus are subject to the
applicable requirements of Regulation M promulgated under the Exchange Act in
connection with sales of the shares.
LEGAL MATTERS
Broad and Cassel, a partnership including professional associations,
Miami, Florida, is giving an opinion regarding the validity of the offered
warrants and shares of common stock.
EXPERTS
The financial statements of 21st Century Holding Company for the years
ended December 31, 2003 and December 31, 2002, incorporated by reference in this
prospectus, have been audited by De Meo, Young, McGrath, independent certified
public accountants, to the extent and for the periods set forth in their report
incorporated herein by reference, and are incorporated herein in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting.
The financial statements of 21st Century Holding Company for the year
ended December 31, 2001, incorporated by reference in this prospectus, have been
audited by McKean, Paul, Chrycy, Fletcher & Co., independent certified public
accountants, to the extent and for the periods set forth in their report
incorporated herein by reference, and are incorporated herein in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the SEC in
connection with this offering. This prospectus does not contain all of the
information set forth in the registration statement, as permitted by the rules
and regulations of the SEC. This prospectus may include references to material
contracts or other material documents of ours; any summaries of these material
contracts or documents are complete and are either included in this prospectus
or incorporated by reference into this prospectus. You may refer to the exhibits
that are part of the registration statement for a copy of the contract or
document.
We also file annual, quarterly and current reports and other
information with the SEC. You may read and copy any report or document we file,
and the registration statement, including the exhibits, may be inspected at the
SEC's public reference room located at 450 Fifth Street, N.W., Washington, D.C.
20549.
18
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
the SEC's website at http://www.sec.gov.
Quotations for the prices of our common stock appear on the Nasdaq
National Market, and quotations for our warrants will appear on the Nasdaq
National Market if and when trading in the warrants begins. Reports, proxy
statements and other information about us can also be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are incorporated by reference into this
prospectus:
o Our Current Report on Form 8-K filed with the SEC on November 16,
2004,
o Our Quarterly Report on Form 10-Q for the quarter ended September
30, 2004, filed with the SEC on November 15, 2004,
o Our Quarterly Report on Form 10-Q for the quarter ended June 30,
2004, filed with the SEC on August 16, 2004,
o Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2004, filed with the SEC on May 17, 2004,
o Our Annual Report on Form 10-K for the year ended December 31,
2003, filed with the SEC on April 2, 2004,
o Our proxy statement for our 2004 Annual Meeting of Shareholders
filed with the SEC on April 27, 2004,
o The description of our redeemable warrants contained in our
registration statement on Form 8-A filed with the SEC on November
4, 2003, as this description may be updated in any amendment to
the Form 8-A, and,
o The description of our common stock contained in our registration
statement on Form 8-A filed with the SEC on October 28, 1998, as
this description may be updated in any amendment to the Form 8-A.
In addition, all documents filed by us pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, other than
information furnished pursuant to Items 9 or 12 of Form 8-K, after the date of
this prospectus and prior to the filing of a post-effective amendment that
indicates that all securities registered hereby have been sold or that
deregisters all securities then remaining unsold, shall be deemed to be
incorporated by reference into this prospectus and to be a part hereof from the
date of filing of such documents with the SEC. Any statement contained in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this prospectus to the extent that a statement
contained herein, or in a subsequently filed document incorporated by reference
herein, modifies or supersedes that statement. Any statement so modified or
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superseded shall not be deemed, except as so modified or superseded, to
constitute part of this prospectus.
You may obtain a copy of these filings, excluding all exhibits unless
we have specifically incorporated by reference an exhibit in this prospectus or
in a document incorporated by reference herein, at no cost, by writing or
telephoning:
21st Century Holding Company
3661 West Oakland Park Boulevard, Suite 300
Lauderdale Lakes, Florida 33311
Attention: J. Gordon Jennings, III, Chief Financial Officer
Telephone: (954) 581-9993
Our file number under the Securities Exchange Act of 1934 is 0-2500111.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have authority under Section 607.0850 of the Florida Business
Corporation Act to indemnify our directors and officers to the extent provided
for in that law. Our articles of incorporation provide that we may insure, shall
indemnify and shall advance expenses on behalf of our officers and directors to
the fullest extent not prohibited by law. We also are a party to indemnification
agreements with each of our directors and officers.
The SEC is of the opinion that indemnification of directors, officers
and controlling persons for liabilities arising under the Securities Act is
against public policy and is, therefore, unenforceable.
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