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 June 30, 2003
|_| 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 87-0281240
(State of Incorporation) (IRS Employer ID Number)
5500 Interstate North Parkway, Suite 600, Atlanta, Georgia 30328
(Address of principal executive offices) (Zip Code)
(770) 933-8911
(Issuer's telephone number, Including area code)
Brainworks Ventures, Inc., 101 Marietta Street, Suite 3450, Atlanta, Georgia
30303, March 31st
(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: 45,021,090 shares, $.01 par
value, as of June 30, 2003.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
ASSURANCEAMERICA CORPORATION
Index to Form 10-QSB
For the Quarter Ended June 30, 2003
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page
Consolidated Balance Sheets
as of June 30, 2003 and March 31, 2003..................................3
Consolidated Statements of Income
for the Three Months Ended
June 30, 2003 and June 30, 2002.........................................4
Consolidated Statements of Cash Flows...................................5
for the Three Months Ended June 30, 2003
and June 30, 2002
Notes to Consolidated Financial Statements..............................6
Item 2 Management's Discussion and Analysis or Plan of Operation..........8
Item 3 Quantitative and Qualitative Disclosures about Market Risk........10
Item 4 Controls and Procedures...........................................10
PART II - OTHER INFORMATION
Item 5 Submission of Matters to a Vote of Security Holders...............10
Item 6 Exhibits and Reports on Form 8-K .................................10
Signatures..................................................................11
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ASSURANCEAMERICA CORPORATION
(UNAUDITED) CONSOLIDATED BALANCE SHEETS
JUNE 30 AND MARCH 31, 2003
June 30, 2003 March 31, 2003
------------- --------------
Assets Corp AA Corp Brainworks Combined
---- ------- ---------- --------
Cash and cash equivalents $ 1,875,639 $ 882,298 $ 5,000 $ 887,298
Investments, at amortized costs 150,000 150,000 150,000
(market: $150,000 and $150,000)
Short Term Investments, available for sale 2,600,000 2,600,000 -- 2,600,000
(amortized cost : $2,600,000 and $2,600,000)
Investment Income due and Accrued 12,043 4,110 -- 4,110
Premiums Receivable(net of allowance for 2,801,524 -- -- --
doubtful accounts of $7,329.46 and $0)
Reinsurance Recoverable 788,615 -- -- --
Prepaid Reinsurance Premiums 2,991,225 -- -- --
Property and equipment,at cost (net of 969,294 861,811 5,000 866,811
accumulated depreciation of $745,132 and $684,024)
Intangibles(net of amortization of $1,097,563 and $1,097,563) 3,322,122 3,322,122 3,322,122
Other receivables 205,612 232,191 10,000 242,191
Deferred Acquisition Costs 141,015 -- -- --
------------ -----------------------------------------------
Total assets 15,857,089 8,052,532 20,000 8,072,532
============ ===============================================
Liabilities and Stockholders Equity
Unpaid losses and loss adjustment expenses $ 890,196 $ -- $ -- $ --
Accounts payable and accrued expenses 2,113,547 1,404,292 30,000 1,434,292
Reinsurance payable 2,116,713 -- -- --
Unearned premium 4,273,179 46,799 -- 46,799
Long term debt 6,836,790 6,675,121 -- 6,675,121
Stockholders equity:
Common Stock, .01 par value, 450,210 -- 23,000 23,000
(authorized 60,000,000, outstanding 45,021,090)
Surplus-paid in 13,992,445 -- 7,877,000 7,877,000
Accumulated Deficit (14,815,991) -- (7,910,000) (7,910,000)
Members Equity -- (73,680) -- (73,680)
------------ -----------------------------------------------
Total stockholders' and members' equity (373,336) (73,680) (10,000) (83,680)
------------ -----------------------------------------------
Total liabilities and stockholders' equity $ 15,857,089 $ 8,052,532 $ 20,000 $ 8,072,532
============ ===============================================
See accompanying notes to consolidated financial statements
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ASSURANCEAMERICA CORP
(UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 2003 & JUNE 30, 2002
For the three months ended June 30, 2003 2002
AA Corp Brainworks Combined
------------ ----------- ------------ ------------
Revenue:
Gross premiums written $ 5,997,723 $ -- $ -- $ --
Gross premiums ceded (4,198,406) -- -- --
Net premiums written 1,799,317 -- -- --
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums (1,281,954) -- -- --
Net premiums earned 517,363 -- -- --
Commission income 2,013,492 2,243,366 -- 2,243,366
Managing general agent fees 1,022,492 842,928 -- 842,928
Net investment income 7,924 -- -- --
Other Income -- 15,000 15,000
------------ ----------- ------------ ------------
Total revenue 3,561,271 3,086,294 15,000 3,101,294
Expenses:
Losses and loss adjustment expenses 419,526 -- -- --
Selling and general expenses 3,277,016 2,851,236 466,000 3,317,236
Support Center Expense -- 49,500 -- 49,500
Depreciation and amortization expense 61,108 113,350 56,000 169,350
Interest Expense 130,000 223,781 (1,000) 222,781
Impairment of long lived asset -- -- 377,000 377,000
------------ ----------- ------------ ------------
Total operating expenses 3,887,650 3,237,867 898,000 4,135,867
------------ ----------- ------------ ------------
Income (loss) before provision for income (326,379) (151,573) (883,000) (1,034,573)
tax expense
Income Tax Provision -- -- -- --
------------ ----------- ------------ ------------
Net Loss ($ 326,379) ($ 151,573) ($ 883,000) ($ 1,034,573)
============ =========== ============ ============
Earnings per common share
Basic (0.01) -- (0.04) (0.04)
Diluted (0.01) (0.04) (0.04)
Weighted average shares outstanding-basic 23,056,975 -- 23,056,975 23,056,975
Weighted average shares outstanding-diluted 23,056,975 -- 23,056,975 23,056,975
See accompanying notes to consolidated financial statements
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ASSURANCEAMERICA CORPORATION
(UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 2003 AND JUNE 30, 2002
For the three months ended June 30, 2003 2002
Operating Activities Corp AA Corp Brainworks Combined
---- ------- ---------- --------
Net Income(loss) ($326,379) ($151,573) ($883,000) ($1,034,573)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and Amortization 61,108 113,350 56,000 169,350
Impairment charges on Intangible Assets -- -- 377,000 377,000
Deferrred Acquisition Costs (141,015) -- -- --
Deferred Compensation Amortization -- -- 322,000 322,000
Other Assets 36,579 (41,052) 17,000 (24,052)
Reinsurance Recoverable (788,615) -- -- --
Prepaid Reinsurance Premiums (2,991,225) -- -- --
Unearned Premiums 4,226,380 -- -- --
Unpaid loss and loss adjustment expense 890,196 -- -- --
Other Liabilities 679,255 (111,349) 4,000 (107,349)
Receivable from Insureds (2,801,524) -- -- --
Reinsurance Payable 2,116,713 -- -- --
----------- -------------------------------------------
Net cash provided(used) by operating activities 961,473 (190,624) (107,000) (297,624)
----------- -------------------------------------------
Investing Activities
Investment Income Due and Accrued (7,933) -- -- --
(Purchase)/Disposal of Fixed Assets (163,591) (62,264) -- (62,264)
Long Term Debt 161,669 223,781 -- 223,781
----------- -------------------------------------------
Net cash provided(used) by investing activities (9,855) 161,517 -- 161,517
----------- -------------------------------------------
Financing Activities
Capital Contributions 36,723 -- (3,000) (3,000)
----------- -------------------------------------------
Net cash provided(used) by financing activities 36,723 -- (3,000) (3,000)
----------- -------------------------------------------
Net Change in Cash 988,341 (29,107) (110,000) (139,107)
Cash Beginning of Period 887,298 378,527 397,000 775,527
----------- -------------------------------------------
Cash End of Period $ 1,875,639 $ 349,420 $ 287,000 $ 636,420
=========== ===========================================
See accompanying notes to consolidated financial statements
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ASSURANCEAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
AssuranceAmerica Insurance Company, AssuranceAmerica Managing General Agency,
AssetAmerica Insurance Agencies, and Ameraset Consulting Services, each
wholly-owned subsidiaries of AssuranceAmerica, 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 three-month period ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003.
Contingencies
In the normal course of business, the Company is named as a defendant in
lawsuits related to claim 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.
Net Loss Per Share
Basic and diluted loss per share for the three-month periods ended June 30, 2003
and June 30, 2002 is computed based on the weighted average number of common
shares outstanding.
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 premium 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.
Property and Equipment
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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
$61,108 and $104,867 at June 30, 2003 and 2002, 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 tested for impairment at least annually. The
noncompetition agreements are amortized on a straight-line basis varying from 2
1/2 years to 5 years. Amortization for the quarters ended June 30, 2003 and 2002
was $-0- and $64,483, respectively.
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:
Losses incurred on policies originated by agency - The Company has calculated a
provision for losses due to cancellation of policies before complete settlement
with the insured. This estimate is based on past Company history. Actual results
could differ from these estimates.
The Carrier maintains a liability for unpaid losses and loss adjustment expense
based on management's estimate at 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 Carrier 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 Tampa, Florida and Atlanta, Georgia and is dependent
upon the economy in the area. Automobiles insured through the Company are
principally in Florida 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.
7
Each entity within the consolidated group calculates its own tax provision and
is directly responsible for its own tax benefits and/or expense.
The Company has loss carryforwards that may be offset against future taxable
income and tax credits that may be used against future income taxes. If not
used, the carryforwards will expire between now and June 30, 2020. The loss
carryforwards at March 31, 2003 was approximately $1,701,000 for Brainworks and
are subject to limitations each year under Section 382 of the Internal Revenue
Code. The Company itself had a net operating loss for the quarter ended June 30,
2003 of approximately $190,000. There was no benefit recorded for the quarter
due to management's uncertainty as to the realization of the net operating loss.
Stock Based Compensation
Under the Company's 2001 Stock Option Plan, the aggregate number of common
shares authorized is currently 5,000,000. As of June 30, 2003, the Company had
options to purchase an aggregate of 2,248,918 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 2001 Stock Option Plan. The weighted-average exercise price for all
options outstanding at June 30, 2003 is $2.01.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLSIS OR PLAN OF OPERATION
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 our 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 our management as well as assumptions made by and information
currently available to our management. These statements contain the words
"anticipate", "believe," "expect" and words or phrases of similar import, as
they relate to us or our 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, our
ability to respond to future business opportunities and to overcome numerous
other risks and difficulties generally experienced by growth stage businesses.
We undertake no obligation to update these forward-looking statements.
Financial Condition
The company's investments of $2.8 million are currently in money market accounts
(95%) and bank certificates of deposit (5%). Management believes the trade-off
between higher yields and liquidity are appropriate for an early growth company.
The company has no investments in equity securities as of June 30, 2003.
Premiums receivable increased to $2.8 million during the three months ended June
30, 2003. This is the result of the company's insurance carrier beginning
operations April 1, 2003. The company has recorded an allowance for doubtful
accounts of $7,329.
The company's liability for loss reserves, reinsurance payable, and unearned
premium increased, in total, $3.5 million during the three months ended June 30,
2003 which resulted from the Company's insurance carrier beginning operations
April 1, 2003.
The company's long-term debt consists of promissory notes payable to its
Chairman and President, which carry an interest rate of 8%. The Company has not
made interest payments during 2003 and has increased long-term debt by the
amount of interest accrued during 2003. The Company has no other debt and the
Company's existing debt covenants do not include any rating or credit triggers.
Liquidity and Capital Resources
The company's liquidity and capital needs have been met in the past through debt
from its Chairman and President. In the future the Company anticipates creating
liquidity by collecting and investing premiums written from new and
8
renewal business in advance of paying claims and from profitable operations in
its operating subsidiaries.
The growth of the Company has and will strain its liquidity and capital
resources. If necessary, the Company believes it can access capital markets for
additional capital to support its growth and other corporate objectives. The
Carrier is required by the State of South Carolina to maintain a minimum capital
and surplus of $3.0 million. As of June 30, 2003, the Carrier's capital and
surplus was $3.1 million.
The Company's only equity currently outstanding is its Common Stock, which has
no mandatory dividend obligations.
Results of Operations
The Company has three operating entities: AssetAmerica, LLC ("Agencies"), which
owns 26 independent agencies located primarily in Florida, writing non-standard
automobile insurance, AssuranceAmerica Managing General Agency, LLC ("MGA"),
which writes non-standard automobile insurance in Georgia, and AssuranceAmerica
Insurance Company ("Carrier") which underwrites the business written by the MGA
and is licensed in South Carolina and Georgia. The fourth entity, Ameraset
Consulting Services, is inactive and has no operating activity.
The Company reported a net loss of $326,379, or $.01 loss per share (basic and
diluted) for the quarter ended June 30, 2003, compared to a net loss of
$1,034,000 in the same quarter in 2002.
The following table presents the components of the insurance carrier's
automobile operating income and GAAP combined ratio:
For the three months ended
Amount in thousands 2003 2002
------------------- ------------ ------------
Direct Premiums Written 5,998
Net Premiums Written 1,799
Net Premiums Earned 517
Loss and Loss Adjustment Expenses Incurred 419
Underwriting Expenses Incurred 105
Pretax profit(loss) (7) Company
Investment Income 8 began
Federal Income Tax Expense -- operations
Net Operating Income 1 4/1/2003
Ratios:
Loss and LAE Ratio 81.0%
Underwriting Expense Ratio 20.3%
GAAP Combined Ratio 101.3%
The following table presents the operating
income for the Agencies and MGA
Amounts in thousands
--------------------
Commission Income 2,396 2,171
Fee Income 1,022 916
Operating Expense 3,758 3,238
Federal Income Tax Expense -- --
Net Income (340) (151)
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Automobile insurance is the primary line of business written by the Company. The
Carrier is licensed in Georgia and South Carolina and only operates in Georgia.
The Company is currently evaluating opportunities relating to expansion into new
states but has not yet adopted definitive plans. Because of the lead times
involved, expansion into new states is not expected to materially affect the
Company's financial results for the year ending December 31, 2003.
Carrier reinsures 70% of the business it writes through a quota share
arrangement. Since the carrier remains ultimately responsible for all of the
business written, it selects its reinsurers carefully and has selected Dorinco
Reinsurance Company and National Grange Mutual Insurance Company, which both of
which have an AM Best rating of A.
MGA and Agencies receive commissions on the business they write as well as
numerous fees. Recent reductions in commission rates have negatively affected
income. Reduced commission rates are reflective of increased competition and the
rising costs of settling claims. The Company has taken steps to lower claims
costs with the recent addition of an experienced Vice President of Claims.
During the first six months of 2003, the Company has been building its
infrastructure to support planned growth over the next several years, and
includes the development of a robust, Internet-based processing system for the
Company's agents. Additionally, the Company recently moved into a new office
space, which will allow for additional growth. The infrastructure development
has, and will for the balance of 2003 have negative effects on income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material exposure to market risk from derivatives or other
financial instruments as of June 30, 2003.
ITEM 4. 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 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 26, 2003, a Special Meeting of Shareholders was held at the Company's
office at Riveredge One, Suite 600, 5500 Interstate North Parkway, Atlanta, GA
30328. The meeting was held to consider and vote on the approval of Amended and
Restated Articles of Incorporation to increase the number of authorized shares
of common stock that the Company is authorized to issue from 25,000,000 to
60,000,000 and to change the corporate name of the Company from Brainworks
Ventures, Inc. to AssuranceAmerica Corporation.
The number of votes cast for approval of the Amended and Restated Articles of
Incorporation totaled 20,485,820. The number of votes cast against approval of
the Amended and Restated Articles of Incorporation totaled 1,179. The number of
votes abstaining totaled 1,250.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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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.
A current report on Form 8-K was filed on April 2, 2003 containing one exhibit:
a Press Release announcing the merger of the Company's newly-formed and
wholly-owned subsidiary with and into AssuranceAmerica Corporation, a Georgia
corporation.
A current report on Form 8-K was filed on April 16, 2003 containing one exhibit:
the Agreement and Plan of Merger and Reorganization by and among Brainworks
Ventures, Inc., AA Holdings Acquisition Sub, Inc., AA Holdings, LLC and
AssuranceAmerica Corporation, dated April 1, 2003.
A current report on Form 8-K was filed on June 16, 2003 containing two exhibits:
the Audited Consolidated Financial Statements of AA Holdings, LLC and
subsidiaries as of and for the Years Ended December 31, 2002 and 2001, and
Unaudited Pro Forma Combined Condensed Financial Statements.
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: August 14, 2003
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