MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------------------------------------------------
The Company is a vertically integrated insurance holding company, which, through its subsidiaries, controls substantially all aspects of the insurance underwriting, distribution and claims process. The Company underwrites nonstandard and standard personal automobile insurance and homeowners and mobile home property and casualty insurance in the State of Florida through its subsidiaries, Federated National and American Vehicle. The Company has underwriting authority for third-party insurance companies, which it represents through a wholly owned managing general agent, Assurance MGA. The Company internally processes claims made by Federated National, American Vehicle and third-party insurance companies through a wholly-owned claims adjusting company, Superior. The Company also offers premium financing to its own and third-party insureds through its wholly-owned subsidiary, Federated Premium and pay advances through Fed First.
The Company markets and distributes Federated National's and third-party insurers' products and its other services primarily in South Florida, through a network of 23 Company-owned agencies, 18 franchised agencies and approximately 125 active independent agents. The Company, through its wholly-owned subsidiary, FedUSA, franchises agencies under the FedUSA name. In December 2000, the Company sold its first franchised agency, which began operations on January 1, 2001. The Company intends to focus its future expansion efforts on franchised agencies.
The Company operates in a highly competitive market and faces competition from both national and regional insurance companies, many of whom are larger and have greater financial and other resources than the Company, have favorable A.M. Best ratings and offer more diversified insurance coverage. The Company's competitors include other companies that market their products through agents, as well as companies that 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. The Company may also face competition from new or temporary entrants in its niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below the pricing structure of the Company. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and superior service to its agents and insureds. The Company competes with respect to automobile insurance in Florida with more than 100 companies, which underwrite personal automobile insurance. Companies of comparable or smaller size, which compete with the Company in the nonstandard automobile insurance industry, include U.S. Security Insurance Company, United Automobile Insurance Company, Direct General Insurance Company and Security National, as well as major insurers such as Progressive Casualty Insurance Company. Competition could have a material adverse effect on the Company's business, results of operations and financial condition.
The Company's accounting policies are more fully described in Note 2 of Notes to Consolidated Financial Statements. As disclosed therein, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
INVESTMENTS. Investments decreased $1.5 million to $17.5 million as of December 31, 2001 from $19.0 million as December 31, 2000 primarily as a result of losses in the Company's common stock portfolio which was sold in the third quarter.
PREPAID REINSURANCE PREMIUMS. Prepaid reinsurance premiums increased $2.7 million to $5.6 million as of December 31, 2001 from $2.9 million as of December 31, 2000 because the Company increased its quota-share reinsurance on automobile insurance from 30% of premiums to 50%, effective January 1, 2001.
REINSURANCE RECOVERABLE. Reinsurance recoverable increased $3.9 million to $7.0 million as of December 31, 2001 from $3.1 million as of December 31, 2000. This increase is the result of the increase of reinsurance discussed above.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid loss and loss adjustment expenses increased $1.2 million, from $9.8 million at December 31, 2000 to $11.0 million as of December 31, 2001. This increase is primarily due to an increase in losses and loss adjustment expenses recorded during the year..
PREMIUM DEPOSITS. Premium deposits were $1.1 million as of December 31, 2001 as compared $382,000 as of December 31, 2000. This change is caused primarily by the timing of disbursements for cancelled policies and the timing of receipt of premium dollars as compared to the receipt of the policy from the agents.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
GROSS PREMIUMS WRITTEN. Gross premiums written increased $2.2 million, or 6.9%, to $34.3 million for the year ended December 31, 2001 as compared to $32.1 million in 2000. The increase is primarily due to an increase in homeowners premiums written, which increased to $7.7 million in 2001 from $4.6 million in 2000.
GROSS PREMIUMS WRITTEN. Gross premiums written increased $12.8 million, or 66.4% to $32.1 million for the year ended December 31, 2000 as compared to $19.3 million in 1999. This increase is attributable to an increase in pricing by the Company's major competitors, as well as a 10% rate reduction by the Company, all effective December 1, 1999. Prior to December 1999, these two competitors' pricing was below the Company's pricing. After the price changes, the Company became more competitive with respect to pricing, resulting in a substantial increase in written premiums. The Company reversed its 10% rate reduction effective June 1, 2000 to slow the growth in premiums written and further increased prices on selected products in October 2000.
NET REALIZED INVESTMENT GAINS (LOSSES). In 1999, the Company realized $952,000 in investment gains compared to investment losses of $109,000 in 2000. This change is due to the downturn in the stock market in the last third of 2000.
OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting expenses increased $4.9 million or 69.1% to $11.9 million for the year ended December 31, 2000 from $7.0 million for the year ended December 31, 1999. The increase is due primarily to the 47.9% increase in revenues and is expected to continue in the near future. Included in operating and underwriting expenses are the provision for credit losses and the provision for uncollectible premiums receivables. The provision for credit losses increased to $1,994,000 for the year ended December 31, 2000 from $838,000 for the year ended December 31, 1999. The provision for uncollectible premiums receivable increased to $432,000 for 2000 from $50,000 in 1999.
The Company's primary sources of capital are revenues generated from operations, investment income and borrowings under a revolving agreement discussed below. Because the Company is a holding company, it is largely dependent upon management fees and /or dividends from its subsidiaries for cash flow.
Federated Premium's operations are funded by a revolving loan agreement ("Revolving Agreement") with Flatiron Funding Company LLC ("Flatiron"). The Revolving Agreement is structured as a sale of contracts receivable under a sale and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of Flatiron), which gives FPF Inc. the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings. The Revolving Agreement, which was amended and revised in October 2001, allows for a maximum credit commitment of $7.0 million plus an initial additional amount of $700,000 for the transition from September 30, 2001 when the previous agreement expired. This initial additional amount declines by $100,000 each month beginning November 1, 2001. The amount of an advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the Revolving Agreement is the prime rate plus additional interest varying from 1.25% to 2.75% based on the prior month's ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or worse to total contracts receivable. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at December 31, 2001 and 2000. The Revolving Agreement, as amended, expires September 30, 2004. Outstanding borrowings under the Revolving Agreement as of December 31, 2001 and 2000 were approximately $6.7 million and $8.1 million, respectively.
To retain its certificate of authority, the Florida insurance laws and regulations require that Federated National and American Vehicle maintain capital surplus equal to the greater of 10% of its liabilities or the 2001 statutory minimum capital and surplus requirement of $3.0 million as defined in the Florida Insurance Code. The Companies are in compliance with this requirement. The Companies are also required to adhere to prescribed net premium-to-capital surplus ratios and for the year ended December 31, 2001, the Companies were in compliance with these ratios.
The maximum amount of dividends that can be paid by Florida insurance companies without prior approval of the Florida Commissioner, is subject to restrictions relating to statutory surplus. The maximum dividend that may be paid in 2001, by the insurance companies without prior approval is limited to the lesser of statutory net income from operations of the preceding calendar year or 10% of statutory unassigned capital surplus as of the preceding December 31. No dividends were paid by Federated National or American Vehicle during 2001, 2000 or 1999.
The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE.
To the Shareholders and Board of Directors of 21st Century Holding Company:
We have audited the accompanying consolidated statement of operations of 21st Century Holding Company and subsidiaries (the "Company") and the related consolidated statements of changes in shareholders' equity and comprehensive income (loss), and cash flows for the year ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the operations of 21st Century Holding Company and subsidiaries and their cash flows for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.
21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
The Company markets and distributes Federated National's, American Vehicle's and third-party insurers' products and its other services primarily in South Florida, through a network of 23 agencies, owned by the Company's wholly-owned subsidiary Federated Agency Group, Inc. ("Federated Agency Group"), 18 franchised agencies and approximately 125 active independent agents. The Company, through its wholly-owned subsidiary, FedUSA, Inc. ("FedUSA"), franchises agencies under the FedUSA name.
The Company considers all short-term highly liquid investments with original maturities of three months or less to be cash equivalents.
A decline in the fair value of an available-for-sale security below cost that is deemed other than temporary results in a charge to income, resulting in the establishment of a new cost basis for the security. For the years ended December 31, 2001 and 2000, there are no unrealized losses deemed to be other than temporary. For the year ended December 31, 1999, the unrealized losses for declines in fair value deemed to be other than temporary were approximately $100,000 and are reported as a component of net realized investment gains (losses) on the consolidated statements of operations.
Deferred acquisition costs represent primarily commissions paid to the Company's outside agents at the time of policy issuance (to the extent they are recoverable from future premium income) net of ceding premium commission earned from reinsurers, and are amortized over the life of the related policy in relation to the amount of premiums earned. The method followed in computing deferred acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, unpaid losses and loss adjustment expenses and certain other costs expected to be incurred as the premium is earned. There is no indication that these costs will not be fully recoverable in the near term.
YEAR ENDED DECEMBER 31, 2001 2000 1999 ----------- ----------- ----------- Balance, beginning of period $ 1,192,260 $ (10,243) $ 89,524 Acquisition costs deferred 286,930 2,876,257 (118,330) Amortized to expense during period (1,467,238) (1,673,754) 18,563 ----------- ----------- ----------- Balance, end of period $ 11,952 $ 1,192,260 $ (10,243) =========== =========== ===========
The negative deferred acquisition cost balance as of December 31, 1999 is the result of unearned reinsurance commissions exceeding policy acquisition costs.
The Company does not discount unpaid losses and loss adjustment expenses for financial statement purposes.
Effective January 1, 1999, the Company adopted Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", which requires entities to recognize liabilities for insurance related assessments when such assessments are probable and the amount of the assessments can be reasonably estimated. Adoption of this statement did not materially impact the Company's results of operations or financial position.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS') No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for financial statements for fiscal years beginning after June 15, 2000. There was no impact to the Company as a result of adopting this statement.
On March 31, 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25" (FIN 44). This interpretation provides guidance for issues that have arisen in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees". FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12, 2000. The implementation of FIN 44 did not have a material impact on the Company's consolidated financial statements and notes thereto.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
The Company is required to adopt the provisions of SFAS No. 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which it expects to account for using the pooling-of-interests method, and SFAS No. 142 becomes effective for fiscal years beginning after December 15, 2001. Furthermore, goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, but before SFAS No. 142 is adopted in full will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized and tested for impairment in accordance with the appropriate pre-SFAS No. 142 accounting requirements prior to the adoption of SFAS No. 142.
SFAS No. 141 will require, upon adoption of SFAS No. 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment evaluation, the SFAS will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations.
As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $1,789,353, and unamortized identifiable intangible assets in the amount of $16,964, all of which will be subject to the transition provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill was $540,010 for the year ended December 31, 2001. Because of the extensive effort needed to comply with adopting SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle.
Similar to other property and casualty insurers, the Company's liability for unpaid losses and loss adjustment expenses, although supported by actuarial projections and other data is ultimately based on management's reasoned expectations of future events. Although considerable variability is inherent in these estimates, management believes that this liability is adequate. Estimates are reviewed regularly and adjusted as necessary. Such adjustments are reflected in current operations. In addition, the realization of the Company's deferred income tax assets is dependent on generating sufficient future taxable income. It is reasonably possible that the expectations associated with these accounts could change in the near term and that the effect of such changes could be material to the consolidated financial statements.
(I) LEGAL/REGULATORY RISKS--the risk that changes in the regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits, restrict underwriting practices and risk classifications, mandate rate reductions and refunds, and new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the financial statements. The Company attempts to mitigate this risk by monitoring proposed regulatory legislation and by assessing the impact of new laws. As the Company writes business only in the state of Florida, it is more exposed to this risk than some of its more geographically balanced competitors.
(III) INTEREST RATE RISK--the risk that interest rates will change and cause a decrease in the value of an insurer's investments. To the extent that liabilities come due more quickly than assets mature, an insurer might have to sell assets prior to maturity and potentially recognize a gain or a loss.
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation on property, plant and equipment is calculated on a straight-line basis over the following estimated useful lives: building and improvements - 30 years and furniture and fixtures 7 years. The carrying value of property, plant and equipment is periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the related item. Based upon its most recent analysis, the Company believes that no impairment of property, plant and equipment exists at December 31, 2001.
Certain 2000 and 1999 financial statement amounts have been reclassified to conform with 2001 presentation.
Below is a summary of fixed maturities at December 31, 2001 and 2000 by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Political subdivision bonds with an amortized cost of approximately $1,519,000 and a fair market value of approximately $1,538,000 were on deposit with the Florida Department of Insurance as of December 31, 2001, as required by law.
AS OF DECEMBER 31, 2001 2000 ---- ---- Unpaid losses and loss adjustment expenses, net:
Unearned premiums: Direct .......................... $ 14,951,228 $ 13,038,417 Ceded ........................... (5,559,909) (2,924,082) ------------ ------------
The Company received approximately $3.8 million, $2.3 million and $1.8 million in commissions on premiums ceded during the years ended December 31, 2001, 2000 and 1999, respectively. Had all of the Company's reinsurance agreements been canceled at December 31, 2001, the Company would have returned a total of approximately $1.7 million in reinsurance commissions to its reinsurers; in turn, its reinsurers would have returned approximately $5.6 million in unearned premiums to the Company.
At December 31, 2001 and 2000, the Company had an unsecured aggregate recoverable for paid and unpaid losses and loss adjustment expenses and unearned premiums with the following reinsurers:
21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax asset as of December 31, 2001 and 2000 are as follows:
Under these laws, Federated National is permitted to pay dividends of approximately $569,000 to the Company in 2002, while American Vehicle is not permitted to pay dividends in 2002. Dividends in excess of this amount require approval by the Florida Department of Insurance. There can be no assurance that, if requested, the Florida Department of Insurance will allow any dividends in excess of this amount to be paid by Federated National.
At December 31, 2001, the minimum aggregate rental commitments are as follows:
FISCAL YEAR LEASES ----------- ------ 2002 $ 494,548 2003 371,433 2004 250,693 2005 159,249 Thereafter 304,402 ----------
In June 1999, the Company purchased the assets of three insurance agencies from a director for $130,000 in cash and a note payable for $300,000. The note was subsequently paid with 20,667 shares of the Company's common stock in April 2000 and $195,050 cash.
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, managing general agent operations through Assurance MGA, claims processing through Superior Adjusting and marketing and distribution through Federated Agency Group, franchised agencies and independent agents. The insurance segment sells primarily nonstandard personal automobile insurance and includes substantially all aspects of the insurance, distribution and claims process. The financing segment consists of premium financing through Federated Premium Finance and pay advances through FedFirst Corporation. The financing segment provides premium financing to both the Company's insureds and to third-party insureds, and pay advances, and is marketed through the Company's distribution network of Company-owned agencies and franchised agencies.
Operating segments that are not individually reportable are included in the "All Other" category, which includes the operations of 21st Century Holding Company.
Information regarding total assets as of December 31, 2001 and 2000 follows:
On December 1998, the Company issued warrants to two employees to purchase 62,500 shares of common stock of the Company at $9 per share. The warrants vested immediately and are exercisable between December 1999 and December 2004, at which time if they have not been exercised, they will be canceled. The estimated fair value of these warrants at the date issued was approximately $226,000 using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options as described below. As of December 31, 2001, no warrants have been exercised.
Net income (loss) 2001 2000 1999 ---- ---- ---- As reported $ (992,090) $ (522,874) $1,566,731 Pro forma $(1,181,855) $ (741,191) $1,409,408 Net income (loss) per share As reported $(0.31) $(0.15) $0.46 Pro forma $(0.37) $(0.22) $0.42
The weighted average fair value of options granted during 2001, 2000 and 1999 estimated on the date of grant using the Black-Scholes option-pricing model was $2.38 to $2.92 in 2001; $2.79 to $6.23 in 2000; and $1.86 in 1999. The fair value of options granted is estimated on the date of grant using the following assumptions:
American Vehicle was organized and incorporated as a multi-line property and casualty insurance company and primarily wrote nonstandard private passenger automobile liability and physical damage coverage. Pursuant to a January 8, 1998, consent order entered into with the Florida Department of Insurance (the "Department"), American Vehicle ceased writing new or renewal business and pursuant to an additional consent order, the Company had been placed in Administrative Supervision effective March 2, 2001. Pursuant to a third consent order as of August 30, 2001, the two previous consent orders were vacated and the Department approved this acquisition. Also, pursuant to the third consent order, American Vehicle is not allowed to pay dividends for three years without Department approval and all contracts with affiliates must also be approved by the Department.
The Consolidated Balance Sheet at December 31, 2001 includes the balance sheet of American Vehicle. The Consolidated Statements of Operations for the year ended December 31, 2001 and the Consolidated Statement of Cash Flow for the year ended December 30, 2001 include American Vehicle from the acquisition date (August 30, 2001) through December 31, 2001.
The Company's Amended and Restated Articles of Incorporation authorize the issuance of one million shares of preferred stock with designations, rights and preferences determined from time to time by its board of directors. Accordingly, the Company's 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. The Company has not issued preferred shares as of December 31, 2001.