UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT OF 1934
for the transition period from __________ to ___________
Commission File Number: 0-06334
AssuranceAmerica Corporation
(Exact name of small business issuer as specified in its charter)
Nevada 87-0291240
(State of Incorporation) (IRS Employer ID Number)
5500 Interstate North Parkway, Suite 600 30328
(Address of principal executive offices) (Zip Code)
(770) 952-0200
(Issuer's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 45,211,090 shares, $.01 par
value, as of April 30, 2004.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
ASSURANCEAMERICA CORPORATION
Index to Form 10-QSB
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page
Consolidated Balance Sheets
as of March 31, 2004 and December 31, 2003 ............................. 3
Consolidated Statements of Income
for the Three Months
March 31, 2004 and March 31, 2003 ...................................... 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2004
and March 31, 2003 ..................................................... 5
Notes to Consolidated Financial Statements ............................. 6
Item 2 Management's Discussion and Analysis ............................... 8
Item 3 Controls and Procedures ............................................ 10
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K ................................... 11
Signatures .................................................................. 11
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ASSURANCEAMERICA CORPORATION
(UNAUDITED) CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
March 31, December 31,
Assets 2004 2003
------------ ------------
Cash and cash equivalents $ 4,882,277 $ 3,130,553
Short term investments 2,625,000 2,625,000
Receivable from insured 5,782,294 4,332,942
Due from related party 30,783 30,783
Prepaid expenses and other assets 92,260 157,632
Prepaid reinsurance premium 5,588,275 4,048,201
Investment Income due and accrued 23,946 20,971
Reinsurance recoverable 6,639,244 4,639,626
Property and equipment:
Furniture,fixtures and improvements 1,878,404 1,863,053
Less accumulated depreciation (894,655) (827,078)
------------ ------------
Property and equipment, net 983,749 1,035,975
Intangibles:
Intangibles 4,419,685 4,419,685
Less accumulated amortization (1,097,563) (1,097,563)
------------ ------------
Intangibles, net 3,322,122 3,322,122
Deferred acquisition costs 134,626 124,505
Security deposits 72,315 70,016
------------ ------------
Total assets $ 30,176,891 $ 23,538,326
============ ============
Liabilities and equity
Accounts payable and accrued expenses $ 3,031,056 $ 2,533,981
Unearned premium 8,138,577 5,861,592
Unpaid losses and loss adjustment expenses 6,163,404 4,499,152
Reinsurance payable 5,858,377 3,879,340
Provisional commission reserve 1,002,779 1,007,333
Current portion of long term debt 1,138,720 1,138,720
Capital lease obligations 91,600 91,600
Long term debt, related party 5,904,658 5,904,658
------------ ------------
Total liabilities 31,329,171 24,916,376
Stockholder's equity
Common stock, .01 par value 452,111 452,111
(authorized 60,000,000, outstanding 45,211,090)
Surplus-paid in 14,456,255 14,456,255
Accumulated deficit (16,060,646) (16,286,416)
------------ ------------
Total stockholder's equity (1,152,280) (1,378,050)
------------ ------------
Total liabilities and stockholder's equity $ 30,176,891 $ 23,538,326
============ ============
See accompanying notes to consolidated financial statements
3
ASSURANCEAMERICA CORPORATION
(UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2004 2003
------------ ------------
Revenue:
Gross premiums written $ 8,503,724 --
Gross premiums ceded (5,838,417) --
Net premiums written 2,665,307 --
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums (736,912) --
------------ ------------
Net premiums earned 1,928,395 --
------------ ------------
Commission income 2,990,630 3,343,607
Managing general agent fees 823,409 727,506
Other fee income 300,759 245,561
Investment income 2,974 4,109
------------ ------------
Total revenue 6,045,807 4,320,783
Operating expenses:
Selling expenses 2,598,977 2,828,697
General and admin expenses 1,516,140 1,287,019
Losses and loss adjustment expenses 1,495,644 --
Depreciation and amortization expense 67,577 55,924
------------ ------------
Total operating expenses 5,678,338 4,171,640
------------ ------------
Income (loss) from operations 367,469 149,143
------------ ------------
Other income (expense)
Interest expense (141,699) (130,002)
------------ ------------
Total other income(expense) (141,699) (130,002)
Income (loss) before provision for income -- --
------------ ------------
tax expense $ 225,770 $ 19,141
============ ============
Provision for income tax -- --
------------ ------------
Income after tax $ 225,770 $ 19,141
============ ============
Per share data:
Basic 0.005 0.001
Diluted 0.005 0.001
Weighted average shares outstanding-basic 45,211,090 45,211,090
Weighted average shares outstanding-diluted 46,182,909 46,182,909
See accompanying notes to consolidated financial statements
4
AssuranceAmerica Corporation
Consolidated Statements of Cash Flows
For the three months ended March 31, 2004 2003
----------- -----------
Operating activities
Net income $ 225,770 $ 19,141
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization 67,577 55,942
Deferred acquisition costs (10,121) --
Other assets 63,073 61,544
Reinsurance recoverable (1,999,618) --
Prepaid reinsurance premiums (1,540,074) --
Unearned premiums 2,276,985 --
Unpaid loss and loss adjustment expense 1,664,252 --
Other liabilities 492,521 120,193
Receivable from insureds (1,449,352) --
Reinsurance payable 1,979,037 --
----------- -----------
Net cash provided by operating activities 1,770,050 256,820
----------- -----------
Investing activities
Investment income due and accrued (2,975) (4,110)
Purchase of fixed assets (15,351) (146,393)
Purchase of short term investments -- (2,600,000)
----------- -----------
Net cash used by investing activities (18,326) (2,750,503)
----------- -----------
Financing activities
Note Payable -- 3,048,784
----------- -----------
Net cash provided by financing activities -- 3,048,784
----------- -----------
Net change in cash 1,751,724 555,101
Cash beginning of period 3,130,553 477,197
----------- -----------
Cash end of period $ 4,882,277 $ 1,032,298
=========== ===========
See accompanying notes to consolidated financial statements
5
ASSURANCEAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
AssuranceAmerica Insurance Company ("Carrier"), AssuranceAmerica Managing
General Agency, LLC ("MGA") AssetAmerica Insurance Agencies ("Agencies"), each
wholly-owned subsidiaries of AssuranceAmerica Corporation, a Nevada corporation
(the "Company"), were organized to solicit, underwrite, and retain risks
associated with private passenger nonstandard automobile insurance.
The accompanying unaudited, consolidated, financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated. These unaudited financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and in accordance with the instructions
to Form 10-QSB for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, such statements include all adjustments (consisting of normally
recurring accruals) considered necessary for fair presentation. Operating
results for the quarter ended March 31, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004. For
further information refer to the financial statements and footnotes thereto
included in the Company's Form 10-KSB for the year ended December 31, 2003.
Footnote disclosures, which would substantially duplicate the disclosure
contained in those documents, have been omitted.
Net income per share is computed in accordance with SFAS No. 128 "Earnings per
Share."
Contingencies
In the normal course of business, the Company is named as a defendant in
lawsuits related to claims and other insurance policy issues. Some of the
actions request extra-contractual and/or punitive damages. These actions are
vigorously defended unless a reasonable settlement appears appropriate. In the
opinion of management, the ultimate outcome of litigation is not expected to be
material to the Company's financial condition, results of operations, or cash
flows.
Income Recognition
Commission income is generally recognized on the effective date of the policies.
Commissions on premiums billed and collected directly by insurance companies are
recorded as revenue when received. Premium adjustments, including policy
cancellations, are recorded as they occur. An estimated reserve is carried for
income that will not be earned due to anticipated policy cancellations.
Recognition of Premium Reserves
Property and liability premiums are generally recognized on a pro rata basis
over the policy term. The portion of premiums that will be earned in the future
are deferred and reported as unearned premiums.
Deferred Policy Acquisition Costs
Commissions and other costs of acquiring insurance that vary with and are
primarily related to the production of new and renewal business, less ceding
commissions allowed by reinsurers, are deferred and charged or credited to
earnings proportionate to premiums earned. Historical and current loss and loss
adjustment expense experience and anticipated investment income are considered
in determining the recoverability of deferred policy acquisition costs.
Start-Up Costs
Start-up costs are expensed when incurred.
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Property and Equipment
Items capitalized as property and equipment are carried at historical cost.
Depreciation is computed over the estimated useful lives of the assets using
straight-line and accelerated methods. Depreciation expense was approximately
$67,500 and $55,900 for the three months ended March 31, 2004 and 2003,
respectively.
Improvements, additions and major renewals which extend the life of an asset are
capitalized. Repairs are expensed in the year incurred.
Amortization of Intangible Assets
Intangible assets consist of noncompetition agreements and goodwill. Intangible
assets are stated at cost. Effective January 1, 2002, the Company adopted the
Financial Accounting Standards Board ("FASB")'s Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
SFAS 142 requires that goodwill and certain intangibles with indefinite lives no
longer be amortized, but instead be tested for impairment at least annually. The
noncompetition agreements are amortized.
Cash Flows
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash and cash equivalents.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Some material estimates that are particularly sensitive are:
Return commission incurred on policies originated by MGA - The Company has
calculated a provision for return commission due to cancellation of policies
before all premiums written are fully earned. This estimate is based on past
Company history.
The Company maintains a liability for unpaid losses and loss adjustment expense
based on management's estimate of the ultimate cost to settle claims currently
in process. In addition a reserve for claims that have occurred but have not
been reported is also carried as a liability. The ultimate costs to settle these
claims may vary from the current estimates. The Company does not discount the
liability for unpaid losses and loss adjustment expense.
Advertising Costs
Advertising costs are expensed as incurred.
Concentration of Risk
The Company operates in Florida, Georgia and South Carolina and is dependent
upon the economy in the area. Automobiles insured through the Carrier are
principally in South Carolina and Georgia. Premium increases generally must be
approved by state insurance commissioners.
Income taxes
The Company files a consolidated federal income tax return. The tax liability of
the group is apportioned among the members of the group in accordance with the
ratio, which that portion of the consolidated taxable income attributable to
each member of the group having taxable income bears to the consolidated income.
Each entity within the consolidated group calculates its own tax provision and
is directly responsible for its own tax benefits and/or expense.
7
The Company has loss carry-forwards that may be offset against future taxable
income and tax credits that may be used against future income taxes. If not
used, the carry-forwards will expire between now and December 31, 2022. The loss
carry-forwards at December 31, 2003 were approximately $2,710,000 and are
subject to limitations each year under Section 382 of the Internal Revenue Code.
After the merger, the Company had a net operating loss for the nine months ended
December 31, 2003 of approximately $1,220,000. There was no benefit recorded for
the quarter due to management's uncertainty as to the realization of the net
operating loss.
As a result of the net operating loss carry-forwards, the Company had a deferred
tax asset of approximately $767,000 with a 100% valuation allowance for the
quarter ended March 31, 2004. The Company has established the valuation
allowance for its net deferred tax assets due to the uncertainty regarding the
realization of these deferred income tax assets.
Stock Based Compensation
Under the Company's 2000 Stock Option Plan, the aggregate number of common
shares authorized is currently 5,000,000. As of March 31, 2004, the Company had
options to purchase an aggregate of 2,438,918 shares of common stock
outstanding. Prior to the acquisition of AssuranceAmerica Corporation, a Georgia
corporation, the Company had options to purchase 948,918 shares of common stock
outstanding and AssuranceAmerica had options to purchase 1,300,000 shares of
common stock outstanding. In connection with such acquisition, the options to
purchase shares of AssuranceAmerica common stock were exchanged on a one-for-one
basis for options to purchase shares of the Company's common stock under the
Company's 2000 Stock Option Plan. The weighted-average exercise price for all
options outstanding at March 31, 2004 is $1.81.
Reclassifications
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 presentation.
Related Party Transactions
The Company has issued certain unsecured promissory notes payable to by Guy W.
Millner, the Chairman of the Company's Board of Directors, and Lawrence (Bud)
Stumbaugh, the Company's President and Chief Executive Officer. The promissory
notes accrue interest at a rate of 8.0% per annum. As of March 31, 2004, the
amount of outstanding principal and accrued interest under such promissory notes
totaled approximately $7.1 million. The promissory notes provide for the
repayment of principal beginning in December 2004 in an amount equal to the
greater of $500,000 or an amount equal to 25% of the Company's net income after
tax, plus non-cash items, less working capital. However, the promissory notes
also permit the Company to postpone any and all payments under the promissory
notes without obtaining the consent of, and without giving notice or paying
additional consideration.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included as Item 1 of this
report. This document contains "forward-looking statements" relating to future
events or the Company's future financial performance within the meaning of
Section 21E of the Securities Exchange Act of 1934 and that are intended to be
covered by the safe harbor created thereby. These forward-looking statements are
based on the beliefs of management as well as assumptions made by and
information currently available to management. These statements contain the
words "anticipate", "believe," "expect" and words or phrases of similar import,
as they relate to the Company or management. You should be aware that these
"forward-looking" statements are subject to certain risks, uncertainties and
assumptions related to certain factors including, without limitation, risks
relating to the significant competitive pressures that the Company faces, the
extensive governmental regulation of the Company's business, the availability of
reinsurance, the Company's limited experience in underwriting nonstandard
automobile insurance, the Company's ability to respond to future business
opportunities and other risks and difficulties generally experienced by growth
stage businesses. The Company undertakes no obligation to update these
forward-looking statements.
On April 1, 2003, a wholly-owned subsidiary of the Company merged with and into
AssuranceAmerica Corporation, a Georgia corporation ("AAC"), a property and
casualty-oriented holding company, focusing on the nonstandard automobile
insurance markets. As a result of the Merger, AAC became the surviving
subsidiary of the Company.
8
Following the merger, the Company has three operating entities, each of which is
a wholly-owned subsidiary of AAC: Agencies, which owns 30 independent agencies
located primarily in Florida, writing nonstandard automobile insurance, MGA,
which writes nonstandard automobile insurance in Georgia, and Carrier, which
underwrites the business written by MGA and is licensed in South Carolina and
Georgia. Carrier commenced operations in April, 2003.
Financial Condition
Investments and cash as of March 31, 2004 increased approximately $1.8 million
(56%) over investments and cash as of December 31, 2003. The increase was
primarily due to cash provided by operations. The Company's investments are
currently in money market accounts which management believes offers the most
safety regarding principle risk. The Company has no investments in equity
securities as of March 31, 2004.
Receivable from insured as of March 31, 2004 increased approximately $1.4
million or 33% compared to December 31, 2003. The increased results from the
Carrier's increase in written premium during the three months ended March 31,
2004 ($8.5 million) compared to its written premium for the three month period
ended December 31, 2003 ($5.5 million).
Prepaid reinsurance premium increased $1.5 million or 38% for the period ending
March 31, 2004 compared to December 31, 2003 and is the result of the company's
increase in written premium compared to the previous period.
Reinsurance recoverable represents claims and claims expense due from the
company's reinsurer. The increase of $2.0 million is the result of an increase
in claims activity for the period ending March 31, 2004 compared to December 31,
2003.
Accounts payable and accrued expense increased $0.5 million as of March 31, 2004
compared to December 31, 2003 and is due primarily to the increase in agent's
commission accrual resulting from the company's increase in written premium.
Unearned premium represents premiums written by the company, which have not been
earned. The amount increased $2.2 million or 39% compared to December 31, 2003
and is the result of the company's increase in written premium.
Unpaid losses and loss adjustments expense represents claims and claims expense
reserves for claims recognized but have not been paid. The increase of $1.7
million or 37% for the period ending March 31, 2004 is the result increased
claims activity for the period.
Reinsurance payable represents premium written by the company which is payable
to its reinsurer under its current reinsurance contract. The increase of
approximately $2.0 million for the period ending March 31, 2004 compared to
December 31, 2003 is the result of the company's increase in premium written for
the period.
Liquidity and Capital Resources
Net cash provided by operating activities for the three month period ending
March 31, 2004 was approximately $1.7 million. The increase of approximately
$1.5 million, compared to the three month period ending March 31, 2003 was
primarily the result of the carrier commencing operations on April 1, 2003.
Investing and Financing activities for the three month period ending March 31,
2003 were primarily related to the formation and capitalization of the carrier.
The Company's liquidity and capital needs have been met in the past through
premium, commission and fee income and debt from its Chairman and President. The
Company's long-term debt consists of unsecured promissory notes payable to its
Chairman and President. The promissory notes carry an interest rate of 8% per
annum and provide for the repayment of principal beginning in December 2004 in
an amount equal to the greater of $500,000 or an amount equal to 25% of the
Company's net income after tax, plus non-cash items, less working capital.
The growth of the company has and will continue to put pressure on its liquidity
and capital resources. The company is currently engaged in an effort to raise
additional capital through a private placement of equity
9
securities. Carrier is required by the states of South Carolina and Georgia to
maintain a minimum capital and surplus of $3.0 million. As of March 31, 2004,
Carrier's capital and surplus was approximately $3.2 million.
The Company's only equity currently outstanding is its common stock, which has
no mandatory dividend obligations.
Results of Operations
The Company's reported a net income of $225,000 for the three month period
ending March 31, 2004. Based on the Company's operating loss carry forwards, no
provision for income tax has been established. Historically, the Company's
results for the first quarter have been more favorable than subsequent quarters
and management believes that trend will continue.
Gross premiums written was approximately $8.5 million for the quarter ended
March 31, 2004. The Carrier commenced operations April 1, 2003 and therefore
recorded no premium for the quarter ended March 31, 2003. The Carrier began
operations in the state of South Carolina in December 2003 and wrote
approximately $700,000 in premium for the quarter ended March 31, 2004.
Gross premiums ceded represents amounts ceded to reinsurers under the Carrier's
quota-share treaty. The $5.8 million ceded during the quarter ended March 31,
2004 is approximately 70% of the Carrier's eligible premium and the Carrier
ceded approximately the same percentage of claims and claims expense.
Increase in unearned premiums, net of prepaid reinsurance premium, was
approximately $736,000 for the quarter ended March 31, 2004 and represents the
Carrier's portion of the change in premiums written but not yet earned.
Commission income for the quarter ended March 31, 2004 was approximately $2.9
million, a decrease of $353,000 compared to the quarter ended March 31, 2003.
The decrease is primarily the result of the Carrier commencing operations April
2003 and the effect on MGA commission income. Commission paid to MGA from the
Carrier for the Carrier's retained business (30%) is eliminated upon
consolidation.
Managing General Agent fees for the quarter ended March 31, 2004 were $823,000
compared to $727,000 for the quarter ended March 31, 2003. The increase is
primarily the result of an 8.5% increase in written premium for the quarter
ended March 31, 2004 compared to the same quarter 2003.
Other fee income for the quarter ended March 31, 2004 was approximately
$301,000, approximately 22% more than the same quarter 2003. The increase is
primarily the result of Agencies receiving bonus income of approximately $42,000
during the quarter ended March 31, 2004.
Selling expenses for the quarter ended March 31, 2004 were approximately $2.6
million, $230,000 less than the same quarter 2003. Prior to the carrier's
formation, MGA's selling expense included a fronting fee to a third party
Carrier represented by the MGA, with the formation of our Carrier the fronting
fee was eliminated. In addition, the MGA reduced the commission rate paid to its
agents from 15% to approximately 12.5% during the third quarter of 2003.
General and administrative expense was approximately $1.5 million for the
quarter ending March 31, 2004 which was an increase of approximately $230,000
over the same quarter 2003. The increase is the result generally of small
increases in several of the Company's general operating expenses.
Losses and loss adjust expenses are the Company's portion (after reinsurance) of
the cost and anticipated costs to settle claims. The Carrier's net loss and loss
adjustment expense ratio for the quarter ending March 31, 2004 was 77.6%
Interest expense for the quarter ended March 31, 2004 was $142,000 and increase
of $12,000 over the same quarter in 2003. The increase resulted from interest
charged on interest expense accrued but not paid relating to 2003.
10
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Currently, the Company's investments are in money market
accounts and bank certificates of deposit, both of which minimize market risk.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, of the design and operation
of the Company's disclosure controls and procedures. Based on this evaluation,
the Company's Chief Executive and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information that the Company is required to
disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SEC's rules and forms. The Company's
Chief Executive Officer and Chief Financial Officer also concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
its periodic SEC filings.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of this evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification of the Company's Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Company's Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ASSURANCEAMERICA CORPORATION
By: /s/ Lawrence Stumbaugh
-----------------------
Lawrence Stumbaugh
President and CEO
Dated: May 14, 2004
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