SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
|_| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2003
|X| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934.
For the transition period from April 1, 2003 to December 31, 2003
Commission File Number: 0-6334
ASSURANCEAMERICA CORPORATION
(Name of small business issuer in its charter)
NEVADA 87-0281240
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5500 Interstate North Pkwy., Suite 600, Atlanta, Georgia 30328
(Address of Principal Executive Offices) (Zip Code)
(770) 933-8911
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Title of each class
Securities registered under Section 12(g) of the Exchange Act: Common
Stock, Par Value $0.01.
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 for 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
|_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
The Issuer's revenues for the fiscal year ended December 31, 2003, were
$17.2 million.
The aggregate market value of the voting and nonvoting common equity held
by persons other than directors and executive officers of the Registrant as of
March 25, 2004, was $2,085,818, based on a sale price of $.75 per share.
There were 45,211,090 shares of the Registrant's common stock outstanding
as of December 31, 2003.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
Document Incorporated By Reference
None.
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION PAGE NUMBER
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PART I
1. Description of Business..................................................................... 2
2. Description of Property..................................................................... 5
3. Legal Proceedings........................................................................... 5
4. Submission of Matters to a Vote of Security Holders......................................... 5
PART II
5. Market for Common Equity and Related Stockholder Matters.................................... 5
6. Management's Discussion and Analysis or Plan of Operation................................... 6
7. Financial Statements........................................................................ 8
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 8
8A. Controls and Procedures..................................................................... 9
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act..................................................... 9
10. Executive Compensation...................................................................... 9
11. Security Ownership of Certain Beneficial Owners and Management 9
12. Certain Relationships and Related Transactions.............................................. 9
13. Exhibits, List and Reports on Form 8-K...................................................... 9
14. Principal Accountant Fees and Services...................................................... 10
Signatures....................................................................................... 11
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Forward-Looking Statements
Statements in this report that are not historical fact are forward-looking
statements that are subject to certain risks and uncertainties that could cause
actual events and results to differ materially from those discussed herein.
Without limiting the generality of the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "would," "estimate," or
"continue" or the negative other variations thereof or comparable terminology
are intended to identify forward-looking statements. The risks and uncertainties
include, without limitation, uncertainties related to estimates and assumptions
generally; inflation and other changes in economic conditions (including changes
in interest rates and financial markets); pricing competition and other
initiatives by competitors; ability to obtain regulatory approval for requested
rate changes and the timing thereof; legislative and regulatory developments;
risks related to the nature of the Company's business, such as the adequacy of
its liability for loss and loss adjustment expense; claims experience; the
Company's limited experience in the insurance industry; ratings by industry
services; catastrophe losses; reliance on key personnel; weather conditions
(including the severity and frequency of storms, hurricanes, tornadoes and
hail); changes in driving patterns and loss trends; acts of war and terrorist
activities; court decisions and trends in litigation and health care and auto
repair costs; and other matters described from time to time by the Company in
this report, and other filings with the Securities and Exchange Commission. You
are cautioned not to place reliance on these forward-looking statements. In
addition, you should be aware that generally accepted accounting principles
prescribe when a company may reserve for particular risks, including litigation
exposures. Accordingly, results for a given reporting period could be
significantly affected if and when a reserve is established for a major
contingency. Reported results may therefore appear to be volatile in certain
accounting periods.
PART I
Item 1. DESCRIPTION OF BUSINESS
AssuranceAmerica Corporation, a Nevada corporation (the
"Company"),formerly Brainworks Ventures, is an insurance holding company that
was originally incorporated in 1969 under the laws of the state of Utah.
AssuranceAmerica Corporation, a Georgia corporation ("AssuranceAmerica
Georgia"), began the Company's current insurance business in 1998 through its
subsidiary, AssetAmerica Insurance Agencies, LLC ("Agencies"). Agencies is
comprised of 31 retail insurance agencies that focus upon selling nonstandard
personal automobile insurance policies in Florida and Georgia. In 1999, the
Company formed another subsidiary, AssuranceAmerica Managing General Agency LLC
("MGA"), that until 2003 provided all of the underwriting, claims and
policyholder service functions for the Georgia nonstandard personal automobile
program for Gateway Insurance Company of St. Louis, Missouri. Finally, in late
2002, the Company formed its subsidiary AssuranceAmerica Insurance Company
("Carrier"), a property and casualty insurance company that focuses upon writing
nonstandard automobile business in the states of Georgia and South Carolina.
Carrier began writing business in Georgia in April 2003 and in South Carolina in
December 2003. MGA provides all of the underwriting, policyholder administration
and claims functions for Carrier. The Company's nonstandard personal automobile
insurance products provide customers with coverage for the minimum required
statutory limits for bodily injury and property damage liability arising out of
the operation of a motor vehicle. Optional coverages written afford protection
for collision and physical damage to the customers' motor vehicles, as well as
bodily injury and property damage caused by an uninsured motorist. Additional
optional coverages written include medical payments, towing and labor, and
accidental death and dismemberment. The Company utilizes the independent agency
system as its sole distribution channel.
Nonstandard personal automobile insurance is principally provided to
insureds that are unable to obtain standard insurance coverage because of their
payment history, driving record, age, vehicle type or other factors.
Underwriting standards for preferred and standard companies have become more
restrictive, thereby requiring more insureds to seek nonstandard coverage and
increasing the size of the nonstandard market.
MGA markets Carrier's policies through approximately 350 independent
agencies in Georgia and 80 in South Carolina. MGA receives commissions and other
administrative fees from Carrier based upon the amount of gross premiums
written. Additionally, MGA receives various fees related to the insurance
transaction, which vary according to state insurance laws and regulations.
Nonstandard personal automobile insurance consumers typically purchase the
statutory minimum limits of liability insurance required to register their
vehicles. Accordingly, the primary factors considered by these consumers are
price, as well as the amount of down payment required to bind coverage. Because
of these purchasing habits, the rate of policy retention is poor when compared
to the retention rate of standard and preferred policies. The success of the
Company, therefore, depends in part on its ability to replace insureds that do
not renew their policies.
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MGA provides its services solely to Carrier. However, in the future, MGA
may seek to provide its services to other carriers. MGA's and Carrier's strategy
is to seek continued growth of their business by:
o Expanding into other states beyond Georgia and South Carolina;
o Expanding the number of independent agents appointed to sell the
Company's policies;
o Encouraging agents to place a high volume of quality business with
MGA and Carrier by providing them with attractive commission
structures that are tied to levels of premium and loss ratio;
o Completing the development of the Company's web-based agency system,
which will allow agents to sell the Company's policies in a more
efficient and effective manner; and
o Continuing to explore strategic partnership opportunities.
Agencies are currently located primarily in the State of Florida. Agencies
represents approximately ten carriers, and sells nonstandard personal automobile
insurance and related products. As remuneration for its services, Agencies
receives commissions and various fees associated with the sale of the products
of its appointed carriers.
Agencies' primary marketing expense is the cost of advertising in the
yellow pages of the local telephone directory. During the fourth fiscal quarter
of 2003, Agencies began to implement an expansion program, whereby it will open
additional stores in areas where existing stores currently operate and have
already absorbed the marketing costs of yellow page advertisements. In 2003,
Agencies opened an additional store in the State of Georgia, which brings the
number of stores in that state to three, while two new stores were opened in the
State of Florida, which brings the number of stores in that state to
twenty-eight. Agencies' strategy is to seek continued growth of its business by:
o continuing to open additional stores currently served by existing
local yellow page advertisements;
o enhancing training of store managers to improve average premium and
revenue per store;
o developing strategic partnerships to provide additional products for
its stores; and
o Investigating acquisition and franchising possibilities.
On April, 1, 2003, the Company, then known as Brainworks Ventures, Inc.,
consummated a merger with AssuranceAmerica Georgia. To effect the merger,
AAHoldings, LLC, a Delaware limited liability company, merged with and into
AssuranceAmerica Georgia for the purpose of converting the limited liability
company into a corporation. Thereafter, pursuant to an Agreement and Plan of
Merger and Reorganization by and among the Company, AAHoldings Acquisition Sub,
Inc., AAHoldings, LLC and AssuranceAmerica Georgia, dated April 1, 2003 (the
"Merger Agreement"), the shareholders of AssuranceAmerica Georgia exchanged an
aggregate of 19,508,902 shares of AssuranceAmerica Georgia common stock, no par
value, on a 1-for-1 basis, for shares of common stock, $0.01 par value, per
share, of the Company ("Company Common Stock"). Due to an insufficient number of
authorized shares of Company Common Stock, the shareholders of AssuranceAmerica
Georgia continued to hold an aggregate of 23,241,098 shares of Series A
Convertible Preferred Stock, no par value, of AssuranceAmerica Georgia
("AssuranceAmerica Georgia Preferred Stock"), which stock, pursuant to the terms
of the Merger Agreement, was converted into shares of Company Common Stock, when
the authorized number of shares of Company Common Stock was increased to a
number sufficient to exchange each share of AssuranceAmerica Georgia Preferred
Stock for one share of Company Common Stock. Upon conversion, the former
shareholders of AssuranceAmerica Georgia held a total of 42,750,000 shares of
Company Common Stock. Such conversion occurred simultaneously with the increase
in the number of authorized shares of Company Common Stock. A special meeting of
the stockholders of the Company was held on June 26, 2003, to vote upon a
proposal to increase the number of authorized shares of Company Common Stock to
permit such conversion of the AssuranceAmerica Preferred Stock. The proposal was
approved by the Company's shareholders.
The Merger Agreement also effected a change in the executive officers of
the Company and a majority change in the Board of Directors of the Company. As
of April 1, 2003, Marc Schwartz and Cole Walker resigned from their positions as
directors and executive officers of the Company. Donald Ratajczak remained as
the sole member of the Board of Directors of the Company. To fill these
vacancies on the Board, Guy W. Millner and Lawrence Stumbaugh were appointed by
Dr. Ratajczak as directors of the Company. On April 1, 2003, Mr. Stumbaugh was
appointed as President and Chief Executive Officer of the Company by the Board
of Directors.
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As a result of the aforementioned merger, the Company ceased its
historical business in order to focus upon the insurance business of
AssuranceAmerica Georgia.
Governmental Regulation of Insurance Industry
The Company's subsidiaries are subject to laws and regulations in Florida,
Georgia and South Carolina, and will be subject to the laws and regulations of
any state in which they conduct business in the future. The regulations cover
all aspects of their business and are generally designed to protect the
interests of insurance policyholders, as opposed to the interests of
shareholders. Such regulations relate to authorized lines of business, capital
and surplus requirements, allowable rates and forms, investment parameters,
underwriting limitations, transactions with affiliates, dividend limitations,
changes in control, market conduct, maximum amount allowable for premium
financing service charges, and a variety of other financial and non-financial
components of the Company's business. If the Company's subsidiaries fail to
comply with the provisions of applicable insurance laws and regulations or to
have new insurance programs approved, the Company's business, results of
operations and financial condition would be materially and adversely affected.
Prior to conducting insurance business in any states other than Florida, Georgia
and South Carolina, the Company, MGA or Carrier will need to obtain a
certificate of authority to conduct insurance business in such states. The
Company, MGA or Carrier may not be able to obtain a certificate of authority in
any additional states, and the failure to do so would limit the Company's
ability to expand geographically. In addition, any changes in laws and
regulations, including the adoption of consumer initiatives, regarding rates
charged for automobile or other insurance coverage, could materially and
adversely affect the Company's business, results of operations and financial
condition.
The national association of insurance commissioners (NAIC) has adopted a
system of assessing the financial condition and stability of insurance
companies, known as "IRIS ratios," and a system to test the adequacy of
statutory capital, known as "risk-based capital," each of which will apply to
Carrier. The IRIS ratios consist of 12 ratios that are compiled annually from an
insurance company's statutory financial reports and then compared against the
NAIC established "usual range" for each ratio. Carrier may not be able to
maintain the required statutory capital levels or stay within the acceptable
ranges of the IRIS ratios.
Competition
The Company, MGA and Carrier currently compete with many national,
regional and local writers. Regional and local writers are considered more
reflective of the Company's market posture and overall structure. Select local
writers often have better underwriting results than their national counterparts.
Up to 50% of many market places may be controlled by national writers such as
Allstate, State Farm and Progressive. However, after the national writers,
highly fragmented markets are prevalent. Usually, several local writers will
secure small, profitable portions of the market.
Agencies is subject to its own, distinctly separate competitive
environment. Unlike the standard or preferred insurance market that has
nationwide chains of retail agencies such as Allstate or State Farm, there are
no national chains of nonstandard agencies. Only a handful of regional
nonstandard agencies, such as Direct General or Acceptance, with approximately
320 and 80 locations, respectively, exist. Mostly there are "Mom and Pop"
nonstandard retail locations of one, two or three stores. The Company believes
that this has given Agencies' chain of 31 locations a clear advantage. Due to
volume potential, it is able to negotiate higher commissions from some of the
carriers whose products it sells and to attract and retain a higher quality of
licensed agent by offering superior benefits and career paths. The Company
believes that "Mom and Pop" operations have neither the resources nor expertise
to provide these items. In addition, as a result of scale, Agencies has a
competitive advantage in the area of advertising, an important success factor in
the insurance industry.
Employees
As of December 31, 2003, the Company had 165 employees.
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Item 2. DESCRIPTION OF PROPERTY
The corporate headquarters of the Company is RiverEdge One, Suite 600,
5500 Interstate North Parkway, Atlanta, Georgia 30328. The Company currently
leases its office space at the RiverEdge One facility under a 12 year lease that
commenced on May 1, 2003.
The Company's agencies are all located in leased locations throughout
Florida and Georgia. The Company believes these facilities to be sufficient for
its current and future needs.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings other than
routine litigation that is incidental to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 1, 2003, The Company's Annual Meeting of Shareholders was held
at the Company's headquarters at RiverEdge One, Suite 600, 5500 Interstate North
Parkway, Atlanta, Georgia 30328.
The Annual Meeting was held in order for the shareholders to elect five
(5) Directors, and also to vote to approve an amendment to the Company's Amended
and Restated Articles of Incorporation. The amendment's purpose was to increase
the number of shares of common stock that the Company is authorized to issue
from 60,000,000 to 80,000,000 and to authorize the Company to issue up to
5,000,000 shares of "blank check" preferred stock. No other business was brought
before the Annual Meeting.
The following individuals were re-elected to serve another one-year term:
Guy W. Millner (Chairman), Lawrence (Bud) Stumbaugh, Donald Ratajczak, Quill O.
Healey and John E. Cay, III. The number of votes cast for approval of Mr.
Millner's election totaled 43,997,174. The number of votes cast against or
withheld for Mr. Millner totaled 400. No abstentions or broker non-votes were
received regarding Mr. Millner's candidacy. The number of votes cast for
approval of Mr. Stumbaugh's election totaled 43,997,174. The number of votes
cast against or withheld for Mr. Stumbaugh totaled 400. No abstentions or broker
non-votes were received regarding Mr. Stumbaugh's candidacy. The number of votes
cast for approval of Dr. Ratajczak's election totaled 43,997,174. The number of
votes cast against or withheld for Dr. Ratajczak totaled 400. No abstentions or
broker non-votes were received regarding Dr. Ratajczak's candidacy. The number
of votes cast for approval of Mr. Healey's election totaled 43,997,174. The
number of votes cast against or withheld for Mr. Healey totaled 400. No
abstentions or broker non-votes were received regarding Mr. Healey's candidacy.
The number of votes cast for approval of Mr. Cay's election totaled 43,997,174.
The number of votes cast against or withheld for Mr. Cay totaled 400. No
abstentions or broker non-votes were received regarding Mr. Cay's candidacy.
The number of votes cast for the approval of the Amendment to the
Company's Amended and Restated Articles of Incorporation totaled 43,611,465. The
number of votes cast against approval of the amendment totaled 29,689. The
number of votes abstaining totaled 300. No broker non-votes were received
regarding the amendment.
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company Common Stock is quoted on the Over-the-Counter Bulletin Board
("OTC-BB") under the symbol "ASAM." There is currently a very limited trading
market for the Company Common Stock. The following sets forth, for the
respective periods indicated, the high and low bid prices of the Company Common
Stock in the over-the-counter market, as reported and summarized by the OTC-BB.
Such prices are based on inter-dealer bid and asked prices, without retail
mark-up, mark-down, commissions or adjustments, and may not represent actual
transactions.
BID PRICES
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QUARTER ENDED HIGH LOW
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2003 Fiscal Year(1):
June 30, 2002............................... $ 1.65 $ .70
September 30, 2002.......................... .82 .37
December 31, 2002........................... .51 .21
March 31, 2003.............................. .31 .21
2003 Fiscal Year(1):
June 30, 2003............................... $ 1.25 $ .30
September 30, 2003.......................... .65 .10
December 31, 2003........................... 1.25 .90
(1) The Board of Directors voted to amend the Company's bylaws in order to
change its fiscal year-end from March 31 to December 31 on June 26, 2003.
The Company has never declared or paid cash dividends on the Company
Common Stock and currently intends to retain any future earnings for the
operation and expansion of its business. Any determination to pay cash dividends
on the Company Common Stock will be at the discretion of the Board of Directors
of the Company and will be dependent on the Company's financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and such other factors as the Company's Board of Directors deems
relevant.
At March 26, 2004, there were approximately 757 holders of record of the
Company Common Stock.
Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Financial Condition
Investments and cash as of December 31, 2003, increased approximately $5.1
million over investments and cash as of December 31, 2002. The increase was
primarily due to the formation and operation of Carrier. Approximately $3.0
million was contributed initially to Carrier to meet the minimum capital and
surplus requirements of the State of South Carolina Department of Insurance. The
Company's investments of $2.6 million are in money market accounts. Management
believes the trade-off between higher yields and risk avoidance is appropriate
for an early growth company. The Company had no investments in equity securities
as of December 31, 2003.
Premiums receivable as of December 31, 2003, increased approximately $4.4
million compared to December 31, 2002. The increase is directly related to
Carrier's commencing operation on April 1, 2003 and represents amounts due from
Carrier's insureds. Company policy is to write off receivable balances when they
become past due 180 days, and the Company does not consider an allowance for
doubtful accounts to be necessary.
Reinsurance recoverable as of December 31, 2003, increased $4.6 million
compared to December 31, 2002. The increase is a result of Carrier commencing
operations on April 1, 2003. Carrier maintains a quota-share reinsurance treaty
with its reinsurers in which it cedes 70% of both premiums and losses. The $4.6
million represents the reinsurer's portion of losses and loss adjustment
expense. All amounts are considered current.
Prepaid reinsurance premiums as of December 31, 2003, increased
approximately $4.0 million compared to prior year end. The increase results from
Carrier commencing operations on April 1, 2003, and represents premiums ceded to
its reinsurer which have not been fully earned.
Property and equipment net of depreciation increased approximately
$214,000 as of December 31, 2002. The majority of the increase is attributable
to the capital expenditures related to the Company's new headquarters facility.
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Deferred acquisition costs increased $124,000 at December 31, 2003,
compared to December 31, 2002. The increase results from Carrier commencing
operations on April 1, 2003. The amount represents agents' commission and other
variable expenses associated with acquiring the insurance policies that are
being deferred to coincide with the earning of the related policy premiums.
Accounts payable and accrued expense as of December 31, 2003, increased
approximately $1.4 million compared to the balance as of December 31, 2002.
Approximately $.5 million of the increase represents the Company's liability for
premium taxes and is result of the Carrier commencing operations in April 2003.
The majority of the balance of the increase represents commissions payable to
the company's agents and other expenses accrued but not paid.
Unearned premium as of December 31, 2003 increased $5.9 million compared
to December 31, 2003, and represents premiums written but not earned and is the
result of the Carrier commencing operations April, 2003.
Unpaid losses and loss adjustment expenses increased $4.5 million as of
December 31, 2003, compared to December 31, 2002. This amount represents
management estimates of future amounts needed to pay claims and related expenses
and is the result of Carrier commencing operation on April 1, 2003.
Reinsurance payable as of December 31, 2003 increased $3.9 million
compared to the balance at December 31, 2002. The amount represents premiums
owed to the Company's reinsurance and is the result of Carrier commencing
operation in April 2003.
Provisional commission reserve increased $426,000 as of December 31, 2003
compared to the balance of December 31, 2002. The increase represents
commissions the company anticipated returning to its reinsurer.
Debt in aggregate increased approximately $3.4 million as of December 31,
2003 compared to December 31, 2002. The Company's long-term debt consists of
promissory notes payable to its Chairman and President. In January 2003, the
Company's Chairman and President loaned the Company an additional $3.0 million
for capitalizing Carrier. The Company has no other outside debt and existing
debt covenants to satisfy.
Liquidity and Capital Resources
Net cash provided by operating activities for the 12 months ended December
31, 2003, was $2.2 million compared to net cash used by operating activities of
$691,000 for the same period of 2002. The increase is primarily the result of
Carriers commencement of operations in April 2003, and commissions received from
the Company's reinsurer.
Net cash used in investment activities for the 12 months ended December
31, 2003, was approximately $3.0 million compared to approximately $279,000 for
the same period in 2002. The majority of the increase is the result of Carrier's
purchase of money market funds.
Net cash provided by financing activities was approximately $3.4 million
compared to $298,000 for the same period in 2002. The majority of the increase
is the result of a $3.0 million loan from the Company's Chairman and President.
The Company's liquidity and capital needs have been met in the past
through premium revenue, commission income, fees from MGA, investment income and
debt from its Chairman and President.
Long-term debt and accrued interest as of December 31, 2003, increased
approximately $3.4 million over long-term debt and accrued interest as of
December 31, 2002. The Company's long-term debt consists of certain unsecured
promissory notes payable to the Company's Chairman and President. The promissory
notes carry an interest rate of 8.0% per annum. As permitted under the
promissory notes, the Company has interest payments of $189,500 since the date
of issuance and has increased long-term debt by the amount of interest accrued
during 2003. The 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 notes without obtaining the consent of, and without
giving notice or paying additional consideration.
The growth of the Company has and will continue to strain its liquidity
and capital resources. Carrier is required by the insurance laws of the States
of Georgia and South Carolina to maintain a minimum capital and surplus of $3.0
million. As of December 31, 2003, Carrier's capital and surplus was
approximately $3.2 million.
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The Company's only equity currently outstanding is its common stock, which
has no mandatory dividend obligations.
Results of Operations
The Company reported a net loss of approximately $1.2 million for the 12
months ended December 31, 2003, compared to a net loss of approximately $4.0
million for the 12 months ended December 31, 2002. The loss of year end 2002
includes a $3.3 million loss that preceded the Merger referenced above.
The Company's 2003 loss resulted from higher than anticipated loss and
loss adjustment expenses and increases in selling and general expenses. The
Company's anticipated loss and loss adjustment expense ratio for 2003 was 68%,
while the actual ratio was 79.8%. An increase of both claims frequency and
severity generated approximately $412,000 additional loss and loss adjustment
expenses in 2003.
Additionally, as a result of Carrier recording a higher than anticipated
loss ratio, approximately $426,000 in commissions received under its quota share
reinsurance treaty will be returned to the reinsurer.
MGA experienced a personnel cost increase of 52%, or approximately
$805,000 as of December 31, 2003, when compared to December 31, 2002, which was
associated with infrastructure enhancement necessary for its anticipated growth.
Gross premiums written for the 12 month period ended December 31, 2003,
were approximately $17.4 million. Carrier commenced operations in April 2003. As
a result, Carrier recorded no premium revenue in 2002. The Company cedes
approximately 70% of its gross premiums written to its reinsurer and the amount
ceded for the 12 months ended December 31, 2003, was approximately $12 million.
The Company's net earned premium, after deducting reinsurance, was approximately
$3.5 million for the 12 months ended December 31, 2003 and compares to $0 for
the same period in 2002, as the Carrier did not commence operations until April,
2003.
Commission income for the period ending December 31, 2003 was relatively
flat compared to December 31, 2002. MGA and Agencies premium subject to
commission increased approximately 13% for the 12 months ended December 31,
2003. The Carrier pays MGA commission on the 30% of premium, which the Carrier
retains and is subsequently eliminated upon consolidation. The amount eliminated
was approximately $1.1 million for the year ended December 31, 2003.
Fee income for the 12 months ended December 31, 2003, was $4.4 million, or
an increase of $285,000 when compared to the same period of 2002. The increase
was generated by an approximately 10% increase of policies written.
After deducting reinsurance, losses and loss adjustment expense was $2.8
million for the 12 months ended December 31, 2003. Carrier commenced operations
in April 2003, therefore, there was no loss and loss adjustment expense for
2002. The amount represents actual payments made and changes in estimated future
payments to be made to or on behalf of its policyholders, including the expenses
associated with settling claims.
Other operating expenses, including selling and general, depreciation and
amortization, interest and impairment of assets decreased approximately $2.0
million for the 12 month period ended December 31, 2003, when compared to the
same period of 2002. The decrease from 2002 was the result of the elimination of
the Company's expenses partially offset by increased expenses related to the
Carrier commencing business.
Item 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements (see "Index to Financial
Statements" attached hereto) for the fiscal year ended December 31, 2003, as
well as the fiscal year ended March 31, 2003, together with the notes thereto,
have been audited by the independent accounting firm of Miller Ray & Houser,
LLP, whose opinion thereto is included herein, which is included in this Report
beginning at page F-1 hereof.
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Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the fiscal year ended December 31, 2003, there was no disagreement with
the Company's accountants on any matter of accounting principles or practices or
financial statement disclosure required to be disclosed pursuant to Item 304 of
Regulation S-B.
Item 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report on Form 10-KSB,
the Company's Chief Executive Officer and its Chief Financial Officer carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14). Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure and are
effective to ensure that such information is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of their evaluation.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's annual meeting of shareholders
scheduled to be held on April 21, 2004.
Item 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's annual meeting of shareholders
scheduled to be held on April 21, 2004.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's annual meeting of shareholders
scheduled to be held on April 21, 2004.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's annual meeting of shareholders
scheduled to be held on April 21, 2004.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
-8-
Exhibit
Number Exhibit
------ -------
2.1 Agreement and Plan of Merger and Reorganization dated April 1, 2003,
by and among the Company, AAHoldings Acquisition Sub, Inc.,
AAHoldings, LLC and AssuranceAmerica Corporation (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on April 16, 2003).
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-KSB/A for the year ended March 31, 2003).
3.2 Amendment to Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Appendix A to the Company's
Definitive Proxy Statement filed on September 9, 2003).
3.3 By-Laws of the Company (incorporated by reference to the Company's
Form 10 filed on May 30, 1972).
3.4 Amendment to the Company's By-Laws adopted February 14, 2001
(incorporated by reference to Exhibit 3ii to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December 31, 2000).
3.5 Amendment to the Company's By-Laws adopted June 26, 2003
(incorporated by reference to Exhibit 3.4 to the Company's Annual
Report on Form 10-KSB/A for the year ended March 31, 2003).
Brainworks Ventures, Inc. Stock Option Plan (incorporated by
reference to Exhibit A to the Company's Definitive Proxy Statement
filed on October 20, 2000.)
14.1 Code of Conduct
21.1 List of Subsidiaries.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
During the quarter ended December 31, 2003, the Company did not file any
Current Reports on Form 8-K.
Item 14. PRINCIPAL ACCOUNTANT FEE A SERVICES
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's annual meeting of shareholders
scheduled to be held on April 21, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
ASSURANCEAMERICA CORPORATION
Date: March 26, 2004 By: /s/ Lawrence Stumbaugh
------------------------------------
Lawrence Stumbaugh, Chief
Executive Officer
-9-
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Lawrence Stumbaugh Chief Executive Officer and Director Date: March 26, 2004
---------------------- (Principal Executive Officer)
Lawrence Stumbaugh
/s/ Robert J. Cormican Senior Vice President, Chief Financial Officer Date: March 26, 2004
---------------------- (Principal Financial and Accounting Officer)
Robert J. Cormican
/s/ Guy W. Millner Chairman of the Board of Directors Date: March 26, 2004
------------------
Guy W. Millner
/s/ Donald Ratajczak Director Date: March 26, 2004
--------------------
Donald Ratajczak
/s/ Quill O. Healey Director Date: March 26, 2004
-------------------
Quill O. Healey
/s/ John E. Cay , III Director Date: March 26, 2004
---------------------
John E. Cay, III
-10-
ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
Index to Financial Statements
PAGE
Report of Independent Public Accountants F-1
Financial statements:
Consolidated balance sheet as of December 31, 2003 and 2002 F-2
Consolidated statements of operations for the years ended December 31, 2003 and 2002 F-3
Consolidated statements of changes in stockholders' equity for the years ended December 31, 2003 and 2002 F-4
Consolidated statements of cash flows for the years ended December 31, 2003 and 2002 F-5
Notes to consolidated financial statements F-6
-11-
Report of Independent Public Accountants
The Board of Directors and Stockholders
AssuranceAmerica Corporation
We have audited the accompanying consolidated balance sheets of AssuranceAmerica
Corporation (a Nevada corporation) and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AssuranceAmerica
Corporation and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Miller Ray & Houser LLP
Atlanta, Georgia
February 16, 2004
F-1
ASSURANCEAMERICA CORPORATION
BALANCE SHEET
December 31, December 31,
2003 2002
---- ----
AssuranceAmerica
Assets Corp Corporation Brainworks Combined
------ ---- ----------- ---------- --------
Current Assets:
Cash and cash equivalents $ 3,130,553 $ 477,194 $ 70,000 $ 547,194
Short term investments, available for sale -- --
(amortized cost : $2,625,000 and $0) 2,625,000 -- --
Premiums receivable(net of allowance for -- -- --
doubtful accounts of $0 and $0) 4,332,942 --
Due from related parties 30,783 18,188 -- 18,188
Prepaid expenses 136,413 114,823 8,000 122,823
Other receivables -- 316,228 -- 316,228
Prepaid reinsurance premiums 4,048,201 -- -- --
Investment income due and accrued 20,971 -- -- --
Reinsurance recoverable 4,639,626 -- -- --
------------ -----------------------------------------------
Total Current Assets 18,964,489 926,433 78,000 1,004,433
Property and equipment:
Property and equipment 1,863,053 1,399,441 8,000 1,407,441
Less accumulated depreciation 827,078 584,022 2,000 586,022
------------ -----------------------------------------------
Property and equipment, net 1,035,975 815,419 6,000 821,419
Intangibles:
Intangibles 4,419,685 4,419,685 -- 4,419,685
Less accumulated amortization 1,097,563 1,097,563 -- 1,097,563
------------ -----------------------------------------------
Intangibles, net 3,322,122 3,322,122 -- 3,322,122
Investments in non marketable securities: -- -- 43,000 43,000
Deferred acquisition costs: 124,505 -- -- --
Security deposits: 70,016 37,936 -- 37,936
Other assets: 21,219 10,905 -- 10,905
------------ -----------------------------------------------
Total assets 23,538,326 5,112,815 127,000 5,239,815
============ ===============================================
Liabilities and stockholders equity:
Current liabilities:
Accounts payable and accrued expenses $ 2,509,384 $ 1,048,937 $ 57,000 $ 1,105,937
Drafts Payable 24,597 -- -- --
Unearned premium 5,861,592 -- -- --
Unpaid losses and loss adjustment expenses 4,499,152 -- -- --
Reinsurance payable 3,879,340 -- -- --
Provisional commission reserve 1,007,333 581,202 -- 581,202
Current portion of debt and capital lease obligation 1,138,720 30,283 -- 30,283
------------ -----------------------------------------------
Total current liabilities 18,920,118 1,660,422 57,000 1,717,422
Capital lease obligations: 91,600 107,348 -- 107,348
Long term debt, related party: 3,180,549 1,103,049 -- 1,103,049
Accrued interest, related party: 2,724,109 2,478,827 -- 2,478,827
Stockholders equity and members deficit:
Common stock, .01 par value,
(authorized 60,000,000, outstanding 45,211,100) 452,111 -- 23,000 23,000
Surplus-paid in 14,456,255 -- 7,887,000 7,887,000
Receivables for stock -- -- (10,000) (10,000)
Accumulated deficit (16,286,416) -- (7,830,000) (7,830,000)
Members equity -- (236,831) -- (236,831)
------------ -----------------------------------------------
Total stockholders' equity (1,378,050) (236,831) 70,000 (166,831)
------------ -----------------------------------------------
Total liabilities and stockholders' equity 23,538,326 5,112,815 127,000 5,239,815
============ ===============================================
F-2
ASSURANCEAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003 2002
AssuranceAmerica
Corporation Brainworks Combined
------------ --------------------------------------------------
Revenue:
Gross premiums written $ 17,377,713 $ -- $ -- $ --
Gross premiums ceded (12,082,097) -- -- --
Net premiums written 5,295,616 -- -- --
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums (1,813,390) -- -- --
------------ --------------------------------------------------
Net premiums earned 3,482,225 -- -- --
Commission income 9,308,773 9,317,215 -- 9,317,215
Fee Income 4,431,826 4,146,610 -- 4,146,610
Other Income -- 53,000 53,000
Consulting fees, net -- 5,781 5,781
------------ --------------------------------------------------
Total revenue 17,222,825 13,469,606 53,000 13,522,606
Operating expenses:
Selling, general and administrative 14,894,200 12,974,355 1,183,000 14,157,355
Loss and loss adjustment expenses 2,780,460 -- -- --
Depreciation and amortization 243,056 371,956 -- 371,956
Impairment of long lived asset -- -- 2,007,000 2,007,000
------------ --------------------------------------------------
Total operating expenses 17,917,716 13,346,311 3,190,000 16,536,311
Loss from Operations (694,891) 123,295 (3,137,000) (3,013,705)
Other income(expense)
Other income(expense) 24,290 (203,337) (17,000) (220,337)
Loss on disposal of fixed assets (6,632) (238,000) (244,632)
Interest Expense (541,373) (665,879) 18,000 (647,879)
------------ --------------------------------------------------
Total other income(expense), net (517,083) (875,848) (237,000) (1,112,848)
------------ --------------------------------------------------
Net (loss)income $ (1,211,974) $ (752,553) $ (3,374,000) $ (4,126,553)
============ ==================================================
Basic (0.05) -- (0.14) (0.17)
Diluted (0.05) -- (0.14) (0.17)
Weighted average shares outstanding-basic 23,701,638 -- 23,701,638 23,701,638
Weighted average shares outstanding-diluted 23,701,638 -- 23,701,638 23,701,638
F-3
AssuranceAmerica Corporation
For the Years Ended December 31, 2003 and 2002
Statement of Shareholders' Equity
Members' Common Additional Retained Total
deficit stock paid-in capital earnings
-------------------------------------------------------------------------------
Balance, December 31, 2001 $(5,984,278) $ -- $ -- $ -- $(5,984,278)
Conversion of debt to equity 6,500,000 -- -- -- 6,500,000
Net loss (752,553) -- -- -- (752,553)
-------------------------------------------------------------------------------
Balance, December 31, 2002 (236,831) -- -- -- (236,831)
Acquisition of Brainworks on April 1, 2003 -- 23,000 7,877,000 (7,910,000) (10,000)
Stock issued in lieu of compensation -- 1,500 36,000 -- 37,500
Capital contribution -- -- 43,255 -- 43,255
Conversion of members' deficit to equity 236,831 427,611 6,500,000 (7,164,442) --
Net loss -- -- -- (1,211,974) (1,211,974)
-------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $452,111 $14,456,255 $(16,286,416) $(1,378,050)
===============================================================================
F-4
AssuranceAmerica Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003 and 2002
AA Holdings Brainworks Combined
---------------------------------------------
2003 2002 2002 2002
---- ---- ---- ----
Cash flows from operating activities:
Net loss $ (1,211,974) $(752,553) (3,374,000) $(4,126,553)
Adjustments to reconcile net loss to
net cash (used) provided by operating activities:
Depreciation and amortization 243,056 371,956 337,000 708,956
Deferred compensation amortization -- -- 397,000 397,000
Impairment charges on intangibles -- -- 2,135,000 2,135,000
Loss on disposal of fixed assets -- 6,632 212,000 218,632
Changes in assets and liabilities: --
Receivables (4,332,942) 20,018 10,000 30,018
Prepaid expenses and other assets (8,722,388) (58,873) 4,000 (54,873)
Other receivables 316,228 (98,299) (98,299)
Unearned premiums and other payables 14,240,084 -- --
Accounts payable 1,101,700 (91,222) (364,000) (455,222)
Accrued expenses 752,475 574,001 574,001
Deferred acquisition costs (124,505) -- --
Deposits received (42,394) (20,000) (20,000)
------------ --------- ---------- -----------
Net cash provided (used) by operating activities 2,219,340 (48,340) (643,000) (691,340)
------------ --------- ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (457,612) (325,309) (325,309)
Proceeds from sale of fixed assets -- -- 45,000 45,000
Net cash received on acquisitions -- -- 1,000 1,000
Purchase of investments (2,582,000) -- --
------------ --------- ---------- -----------
Net cash (used) provided by investing activities (3,039,612) (325,309) 46,000 (279,309)
------------ --------- ---------- -----------
Cash flows from financing activities:
Proceeds from related party debt, net 3,422,782 159,800 159,800
Capital lease obligations (net) (7,311) 137,631 137,631
Advances to related party (12,595) (17,188) (17,188)
Stock grants and subscriptions -- -- 18,000 18,000
Capital contribution 80,755 --
Purchase of members' interest (80,000) -- --
------------ --------- ---------- -----------
Net cash provided by financing activities 3,403,631 280,243 18,000 298,243
------------ --------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 2,583,359 (93,406) (579,000) (672,406)
Cash and cash equivalents, beginning of period 547,194 570,600 649,000 1,219,600
------------ --------- ---------- -----------
Cash and cash equivalents, end of period $ 3,130,553 477,194 70,000 547,194
============ ========= ========== ===========
See note 7 for supplemental cash flow information.
See accompanying notes and report of independent accountants.
F-5
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(1) Description of Business
AssuranceAmerica Corporation, a Nevada corporation (the "Company") is an
insurance holding company comprised of AssuranceAmerica Insurance Company
("Carrier"), AssuranceAmerica Managing General Agency, LLC ("MGA") and
AssetAmerica Insurance Agencies, LLC ("Agencies"), each wholly-owned. The
Company solicits and underwrites nonstandard private passenger automobile
insurance.
(2) Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts
and operations of the Company. All material intercompany accounts and
transactions have been eliminated. The consolidated financial statements
have been prepared in conformity with generally accepted accounting
principles (GAAP). The preparation of the financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
actual results could differ from these estimates.
Investments
All of the Company's investment securities have been classified as
available-for-sale because all of the Company's securities are available
to be sold in response to the Company's liquidity needs, changes in market
interest rates and asset-liability management strategies, among other
reasons. Investments available-for-sale are stated at fair value on the
balance sheet. Unrealized gains and losses are excluded from earnings and
are reported as a component of other comprehensive income within
shareholders' equity, net of related deferred income taxes.
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 year ended December 31, 2003, there are no unrealized losses.
Premiums and discounts are amortized or accreted, respectively, over the
life of the related fixed maturity security as an adjustment to yield
using a method that approximates the effective interest method. Dividends
and interest income are recognized when earned. Realized gains and losses
are included in earnings and are derived using the specific-identification
method for determining the cost of securities sold.
Cash and Cash Equivalents
Cash and Cash equivalents include cash demand deposits and bank
certificates of deposit with a maturity of less than twelve months.
Recognition of Revenues
Insurance premiums are recognized pro rata over the terms of the policies.
The unearned portion of premiums is included in the Consolidated Balance
Sheet as a liability for unearned premium. Commission income is recognized
in the period the insurance policy is written and is reduced by an
estimate for future cancellations. Installment and other fees are
recognized in the periods the services are rendered.
F-6
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Deferred Acquisition Costs
Deferred acquisition costs ("DAC") include premium taxes and commissions
incurred in connection with writing business. These costs are deferred and
amortized over the period in which the related premiums are earned. The
Company does not consider anticipated investment income in determining the
recoverability of these costs. Based on current indications, management
believes that these costs will be fully recoverable and, accordingly, no
reduction in DAC has been recognized.
Leased Property Under Capital Lease
Leased property under capital lease is recorded as a capital asset and
amortized on a straight-line basis over the estimated useful life of the
property. The property and the related lease obligation are disclosed on
the balance sheet.
Property And Equipment
Property and equipment is recorded at cost and depreciated on a
straight-line basis. The estimated useful lives used for depreciation
purposes are: furniture and leasehold improvements - 7 years; equipment -
3 to 5 years; automobiles - 5 years; software currently in service - 3 to
10 years. Improvements, additions and major renewals which extend the life
of an asset are capitalized. Repairs are expensed in the year incurred.
Losses And Loss Adjustment Expenses
The estimated liabilities for losses and loss adjustment expenses ("LAE")
include the accumulation of estimates for losses for claims reported prior
to the balance sheet dates, estimates (based upon actuarial analysis of
historical data) of losses for claims incurred but not reported and for
the development of case reserves to ultimate values, and estimates of
expenses for investigating, adjusting and settling all incurred claims.
Amounts reported are estimates of the ultimate costs of settlement, net of
estimated salvage and subrogation. These estimated liabilities are
necessarily subject to the outcome of future events, such as changes in
medical and repair costs as well as economic and social conditions that
impact the settlement of claims. Management believes that, given the
inherent variability in any such estimates, the aggregate reserves are
within a reasonable and acceptable range of adequacy. The methods of
making such estimates and for establishing the resulting reserves are
reviewed and updated quarterly and any adjustments resulting therefrom are
reflected in current operations.
Reinsurance
In the normal course of business, the Company seeks to reduce its overall
risk levels by obtaining reinsurance from other insurance enterprises or
reinsurers. Reinsurance premiums and reserves on reinsured business are
accounted for on a basis consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The Company periodically reviews the financial condition of
its reinsurers to minimize its exposure to losses from reinsurer
insolvencies.
Reinsurance assets include balances due from other insurance companies
under the terms of reinsurance agreements. Amounts applicable to ceded
unearned premiums, ceded loss payments and ceded claims liabilities are
reported as assets in the accompanying balance sheets. The Company
believes the fair value of its reinsurance recoverables approximates their
carrying amounts.
F-7
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Contingent Reinsurance Commission
The Company's reinsurance contract provides ceding commissions for
premiums written which are subject to adjustment. The amount of ceding
commissions is determined by the loss experience for the reinsurance
agreement term. The reinsurer provides commissions on a sliding scale with
maximum and minimum achievable levels. The reinsurer provides the Company
with the provisional commissions. The Company has recognized the
commissions based on the current loss experience for the policy year
premiums. This results in establishing a liability for the excess of
provisional commissions retained compared to amounts recognized, which is
subject to variation until the ultimate loss experience is determinable.
Stock-Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The provisions of SFAS 123 allow companies to
either expense the estimated fair value of employee stock options or to
continue to follow the intrinsic value method set forth in Accounting
Principles Board ("APB") Option No.25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), but disclose the pro forma effects on net
income had the fair value of the options been expensed. The Company has
elected to apply APB No.25 in accounting for its employee stock option
plan.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax-credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported financial statement
balances as well as the disclosure of contingent assets and liabilities.
Actual results could differ materially from those estimates used.
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.
F-8
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Risk
The following is a description of the most significant risks facing the
Company and how it mitigates those risks:
(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 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 two states, it is
more exposed to this risk than some of its more geographically
balanced competitors.
(II) CREDIT RISK - the risk that issuers of securities owned by the
Company will default or that other parties, including
reinsurers to whom business is ceded, which owe the Company
money, will not pay. The Company attempts to minimize this
risk by adhering to a conservative investment strategy,
maintaining reinsurance agreements with financially sound
reinsurers, and by providing for any amounts deemed
uncollectible.
(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.
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 requires that goodwill and certain
intangibles with indefinite lives no longer be amortized, but instead
tested for impairment at least annually. Based upon it most recent
analysis, the Company believes that no impairment of Goodwill exists at
December 31, 2003. The noncompetition agreements were amortized on a
straight-line basis varying from 2 1/2 years to 5 years. Amortization
expense for the years ended December 31, 2003 and 2002, was $0 and
$161,632, respectively.
Advertising
Advertising costs are expensed as incurred.
(3) Investments
Securities with a carrying value of $175,000 were deposited by one of the
Company's subsidiaries under requirements of regulatory authorities as of
December 31, 2003.
F-9
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of investments is as follows:
Dec 31, 2003 Dec.31, 2002
------------ ------------
Money Market Funds $ 2,625,000 $ --
Short Term Bank CDs $ 300,000 $ --
(4) Property and Equipment
A summary of property and equipment is as follows:
2003 2002
---- ----
Furniture and equipment $ 301,656 $ 236,052
Computer equipment 769,496 666,723
Computer software 425,550 411,257
Telephone systems 27,362 16,793
Leasehold improvements 341,989 76,616
Less: accumulated depreciation (830,078) (586,022)
----------- ---------
$ 1,035,975 $ 821,419
Depreciation expense was $243,056 and $708,956 in 2003 and 2002,
respectively.
F-10
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Reinsurance
The Company reinsures (cedes) a portion of its written premiums on a
quota-share basis to nonaffiliated insurance companies in order to limit
its loss exposure. The impact of reinsurance on the financial statements
is as follows:
2003 2002+
---------- ----------
Premiums written: --
Direct 17,377,713 --
Ceded 12,082,097 --
Net 5,295,616 --
--
Premiums earned: --
Direct 11,516,120 --
Ceded 8,033,894 --
Net 3,482,226 --
--
Losses and loss adjustment expenses incurred: --
Direct 9,268,200 --
Ceded 6,487,740 --
Net 2,780,460 --
--
Unpaid losses and loss adjustment expense: --
Direct 4,499,152 --
Ceded 3,149,406 --
Net 1,349,746 --
--
Unearned premiums: --
Direct 5,861,591 --
Ceded 4,048,201 --
Net 1,813,390 --
+ The company's carrier did not begin operations until April 1, 2003
F-11
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company received approximately $3,692,764 in commissions on premiums
ceded during 2003. Had all of the Company's reinsurance agreements been
canceled at December 31, 2003, the Company would have returned
approximately $1,052,532 in reinsurance commissions to its reinsurers and
its reinsurers would have returned approximately $4,048,201 in unearned
premiums to the Company.
(6) Unpaid Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses is determined
on an individual case basis for all incidents reported. The liability also
includes amounts for uncollected expenses, anticipated future claim
development and losses incurred but not reported.
A summary of unpaid losses and loss adjustment expenses is as follows:
2003 2002+
---------- ----------
Case basis $ 742,998 $ --
IBNR 606,747 --
----------
Total $1,349,745 $ --
----------
+ The Company's carrier did not begin operation until April 1, 2003
(7) Regulatory Requirements and Restrictions
To retain its certificate of authority, the South Carolina Insurance Code
requires that the carrier maintain capital and surplus at a minimum of
$3.0 million. At December 31, 2003, the carrier's capital and surplus was
$3,233,950. Further, the carrier is required to adhere to a prescribed net
premium-to-surplus ratio. For the year ended December 31, 2003, the
carrier was in compliance with this requirement.
Under South Carolina Insurance Code, the carrier must receive prior
regulatory approval to pay a dividend in an amount exceeding ten percent
(10%) of policyholder surplus or net income, minus realized capital gains,
whichever is greater.
The Company is required to comply with NAIC risk-based capital ("RBC")
requirements. RBC is a method of measuring the amount of capital
appropriate for an insurance company to support its overall business
operations in light of its size and risk profile. NAIC's RBC standards are
used by regulators to determine appropriate regulatory actions relating to
insurers who show signs of weak or deteriorating condition. As of December
31, 2003, based upon calculations using the appropriate NAIC formula, the
carrier's total adjusted capital is in excess of ratios which would
require any form of regulatory action.
F-12
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The NAIC has developed Insurance Regulatory Information Systems ("IRIS")
ratios to assist state insurance departments in identifying companies,
which may be developing performance or solvency problems, as signaled by
significant changes in the companies' operations. Such changes may not
necessarily result from any problems with an insurance company, but may
merely indicate changes in certain ratios outside the ranges defined as
normal by the NAIC. When an insurance company has four or more ratios
falling outside the NAIC's defined "usual" ranges, state regulators may
investigate to determine the reasons for the variance and whether
corrective action is warranted. As of December 31, 2003, the carrier was
outside NAIC's usual ranges with respect to its IRIS tests on six out of
twelve ratios.
(8) Commitments and Contingencies
Operating Leases
The Company has entered into operating leases primarily for office space
and certain equipment. These leases are classified as operating leases.
The future minimum rental payments required under long-term non-cancelable
leases are summarized as follows:
Year Ending
December 31, Amount
------------ ------
2004 586,280
2005 455,423
2006 339,219
2007 284,790
2008 276,000
Thereafter 1,956,000
----------
$3,897,712
==========
Rent expense totaled $716,189 and $431,079 for 2003 and 2002,
respectively. The Company has sub-leased part of its premises for the
period April 28, 2003 to August 31, 2005 with rental income of $6,148 per
month for the first year, $6,233 per month for the second year and $6,317
per month for the remaining period of the lease.
F-13
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Reinsurance Commission
The Company has received commissions from its reinsurers based on the
current loss experience for the Treaty year premiums. The following is a
summary of the Company's liability for excess provisional commissions
received:
Treaty Year Amount
----------- ------
2001 $ 232,828
2002 Treaty #1 261,506
2002 Treaty #2 320,470
2003 Treaty #1 192,529
2003 Treaty #2 722,943
----------
Total $1,730,276
==========
(9) Long-Term Debt
The Company has various notes payable to related parties totaling to
$7,004,658 at year end. These notes are unsecured with 8% interest to be
paid quarterly. The principal is to be repaid in annual installments of
$1,100,000 or 25% free cash flow whichever is higher beginning December
2004.
The annual maturities of principal payable on long-term debt are as
follows:
Year Ending
December 31, Amount
------------ ------
2004 $1,100,000
2005 1,100,000
2006 1,100,000
2007 1,023,803
2008 1,000,000
Thereafter 1,680,855
----------
$7,004,658
==========
F-14
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Related Party Transactions
One of the Company's directors is the Chief Executive Officer of Palmer &
Cay, Inc., an insurance brokerage firm that handles the Company's
corporate insurance. Insurance premiums paid to the firm amounted to
approximately $56,877 and $27,229 for the years ending December 31, 2003
and 2002, respectively.
The Company is related to another premium finance company through common
ownership and management. Transactions with this company consist of
expenses paid on their behalf.
(11) Net Income (Loss) Per Share
Basic and diluted loss per common share is computed using the weighted
average number of common shares outstanding during the period. Stock
options and warrants have not been included in the diluted loss per share
calculations as their inclusions would have been antidilutive. Potential
common shares not included in the calculations of net loss per share for
the year ended December 31, 2003 and 2002 are as follows:
2003 2002
---- ----
Warrants 245,000 535,000
Stock Options 1,994,000 1,452,000
--------------------------------
2,239,000 1,987,000
(12) Stock Compensation Plans
Options to purchase commons stock under the Company's 2000 Stock Option
Plan ( the "Plan") can be granted to employee and directors. Under the
Plan, up to 5,000,000 shares may be granted. The Plan is administered by
the Board of Directors, which determines the terms if the options granted,
including the exercise price, the number of shares subject to option, and
the option vesting period. The exercise price of all options granted under
the plan must be at least 100% of the fair market value on the date of
grant.
For disclosure purposes, the fair value of all stock options granted are
estimated using the Black-Scholes option-pricing model. The following
weighted average assumptions were used for stock options granted by the
Company during the year ended December 31, 2003.
Annual dividends 0%
Expected Volatility 80%
Risk-free interest rate 1.5%
Expected life (in years) 5
F-15
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
If compensation cost had been determined on the basis of fair value
pursuant to SFAS 123, then net loss attributable to common stockholders
and net loss per share attributable to common stockholders would have
increased for the years ended December 31, 2003 and 2002 as follows.
(In thousands, except per share data)
2003 2002
---- ----
Net loss:
As reported ($1,212) ($4,126)
Pro forma ($1,254) ($4,126)
Basic and diluted net loss
Per share:
As reported ($0.05) ($0.17)
Pro forma ($0.05) ($0.17)
(13) Capital Leases
The Company's property under capital leases, which is included in property
and equipment is summarized as follows:
Property and equipment $ 186,220
Less: accumulated depreciation (31,277)
---------
$ 154,943
=========
Amortization of leased assets is included in depreciation expense.
Future minimum lease payments under capital leases at December 31, 2004
are as follows:
Year Ending
December 31, Amount
2004 $ 44,314
2005 44,314
2006 44,314
2007 8,282
--------
141,224
Less amount representing interest 10,924
--------
Present value of future minimum lease
Payments 130,300
Less: Current maturities 38,700
--------
$ 91,600
========
F-16
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Income Taxes
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial reporting and tax purposes
in different periods and the estimated future tax effects of
carry-forwards. Deferred income taxes are classified as current or
non-current, depending on the classification of the assets and liabilities
to which they relate. The Company has established a 100% valuation
allowance for its net deferred tax assets due to the uncertainty regarding
the realization of these deferred income tax assets, including its net
operating loss carry-forwards.
At March 31, 2003, the Company has net operating loss carry forwards for
U.S. federal and state income tax purposes of approximately $2,710,000
which expire in varying amounts beginning in the year 2015. Utilization of
the net operating losses carried forward will be limited under Section 382
of the Internal Revenue Code as the Company experienced an ownership
change greater than 50%. Accordingly, certain net operating losses may not
be realizable in future years due to this limitation.
Significant components of the provisions for income taxes are as follows:
December 31,
---------------------------
2003 2002
---------------------------
Deferred tax assets:
Net operating loss carry forwards $ 144,800 $ 1,083,800
Other 249,300 --
---------------------------
Gross deferred tax asset 394,100 1,083,800
Less valuation allowance (394,100) (1,083,800)
---------------------------
Net deferred tax assets $ -- $ --
===========================
Significant components of the provisions for income taxes are as follows:
December 31,
-----------------------------------
2003 2002
-----------------------------------
Deferred
Federal $ 343,500 $ 921,200
State 50,600 162,600
-----------------------------------
Total income tax benefit 394,100 1,083,800
Less valuation allowance (394,100) (1,083,800)
-----------------------------------
$ -- $ --
===================================
F-17
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company has unused net operating loss carry forwards available to
offset future taxable income as follows:
Expires 2015 $ 260,473
Expires 2016 645,872
Expires 2017 794,848
Expires 2022 1,008,921
------------
$ 2,710,114
============
(15) Supplemental Cash Flow Information
Cash paid during the year: 2003
------------
Interest $ 189,500
Income Taxes --
During the year ended December 31, 2003, the Company granted one of its
officers 150,000 shares valued at $37,500 as part of salary compensation.
Also, the Company granted shares of 20,000 each to two of its Board of
Directors members as compensation for services.
(16) Defined Contribution Plan
The Company's employees participate in the AssetAmerica 401(k) defined
contribution retirement plan (an affiliated company). Under the plan, the
Company can elect to make discretionary contributions. The company did not
make contributions in 2003. The plan currently does not match employee
contributions. The eligibility requirements are 21 years of age, 6 months
of service and full time employment.
(17) Prior period adjustment
Certain errors amounting to $135,659 resulted from misinterpretation of
the terms and conditions of the agreement with the reinsurer regarding
amounts to be retained for claims handling fees. Accordingly, an
adjustment of $135,659 was made to increase the accrued expenses, loss,
and member's deficit for the year ended December 31, 2002.
F-18
ASSURANCEAMERICA CORPORATION & SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(18) Debt Conversion
Effective September 1, 2002 debt of $6.5 million payable to Sercap
Holdings, LLC was converted to equity. The balance of the debt outstanding
and accrued interest was converted to notes payable with an interest rate
of 8%.
(19) Changes in Accounting for Goodwill and other Intangible Assets
Intangible Assets include the following:
2003 2002
Goodwill $ 3,809,685 $ 3,809,685
Non compete agreement 610,000 610,000
----------- -----------
4,419,685 4,419,685
Less: accumulated amortization (1,097,563) (1,097,563)
----------- -----------
$ 3,322,122 $ 3,322,122
=========== ===========
The estimated aggregate amortization expense for each of the five
succeeding five fiscal years is $0.
(20) Concentration of Credit Risk
The Company was dependent on an outside party to underwrite its policies
for the first quarter of 2003. Revenues from this underwriter comprise
100% of the revenues in the first quarter of 2003.
The Company maintains cash with major financial institutions. The company
performs periodic evaluations of the relative credit standing of these
financial institutions and limits the amount of credit exposure with any
financial institution.
(21) Reclassifications
Certain reclassifications have been made to the 2002 financial statements
to conform to the 2003 presentation.
F-19