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 September 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 87-0291240
(State of Incorporation) (IRS Employer ID Number)
5500 Interstate North Parkway, Suite 600 30328
(Address of principal executive offices) (Zip Code)
(770) 933-8911
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 45,171,090 shares, $.01 par
value, as of November 11, 2003.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
ASSURANCEAMERICA CORPORATION
Index to Form 10-QSB
For the Quarter Ended September 30, 2003
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page
Consolidated Balance Sheets
as of September 30, 2003 and March 31, 2003 ............................ 3
Consolidated Statements of Income
for the Three Months and Six Months Ended
September 30, 2003 and September 30, 2002 .............................. 4
Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 2003
and September 30, 2002 ................................................. 5
Notes to Consolidated Financial Statements ............................. 6
Item 2 Management's Discussion and Analysis or Plan of Operation ........ 8
Item 3 Controls and Procedures ......................................... 11
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K ................................ 12
Signatures .................................................................. 12
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ASSURANCEAMERICA CORPORATION
(UNAUDITED) CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 AND MARCH 31, 2003
For the periods ending September 30, 2003 March 31, 2003
------------------ --------------
Assets Corp AA Corp Brainworks Combined
---- ------- ---------- --------
Cash and cash equivalents $ 2,103,910 $ 882,298 $ 5,000 $ 887,298
Investments, at amortized costs --
(market: $150,000 and $150,000) 150,000 150,000 150,000
Short term investments, available for sale -- --
(amortized cost : $2,625,000 and $2,600,000) 2,625,000 2,600,000 2,600,000
Investment income due and accrued 18,031 4,110 -- 4,110
Premiums receivable(net of allowance for -- -- --
doubtful accounts of $0 and $0) 4,031,164
Reinsurance recoverable 2,594,351 -- -- --
Prepaid reinsurance premiums 4,008,429 -- -- --
Property and equipment, at cost (net of
accumulated depreciation of $786,258 and $684,024) 1,018,170 861,811 5,000 866,811
Intangibles (net of amortization of $1,097,563 and $1,097,563) 3,322,122 3,322,122 3,322,122
Other receivables 499,231 232,191 10,000 242,191
Deferred acquisition costs 160,335 -- -- --
------------ ------------ ------------ ------------
Total assets $ 20,530,743 $ 8,052,532 $ 20,000 $ 8,072,532
============ ============ ============ ============
Liabilities and stockholders equity
Unpaid losses and loss adjustment expenses $ 2,327,031 $ -- $ -- $ --
Accounts payable and accrued expenses 2,118,064 1,404,292 30,000 1,434,292
Reinsurance payable 3,942,817 -- -- --
Unearned premium 5,750,719 46,799 -- 46,799
Long term debt 6,966,791 6,675,121 -- 6,675,121
------------ ------------ ------------ ------------
Total liabilities 21,105,422 8,126,212 30,000 8,156,212
------------ ------------ ------------ ------------
Stockholders equity:
Common stock, .01 par value, --
(authorized 60,000,000, outstanding 45,171,090) 451,710 23,000 23,000
Surplus-paid in 14,028,445 -- 7,877,000 7,877,000
Accumulated deficit (15,054,834) -- (7,910,000) (7,910,000)
Members equity -- (73,680) -- (73,680)
------------ ------------ ------------ ------------
Total stockholders' equity (574,679) (73,680) (10,000) (83,680)
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 20,530,743 $ 8,052,532 $ 20,000 $ 8,072,532
============ ============ ============ ============
See accompanying notes to consolidated financial statements
3
ASSURANCEAMERICA CORP
(UNAUDITED) CONSOLIDATED
STATEMENTS OF INCOME
3 months ended September 30
2003 2002
AA Corp Brainworks Combined
Revenue:
Gross premiums written $ 5,827,181 $ -- $ -- $ --
Gross premiums ceded (4,058,821) -- -- --
Net premiums written 1,768,361 -- -- --
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums (460,335) -- -- --
Net premiums earned 1,308,026 -- -- --
Commission income 2,279,766 2,354,974 -- 2,354,974
Managing general agent fees 1,138,306 1,001,538 -- 1,001,538
Net investment income 5,988 -- -- --
Other Income -- 10,000 10,000 --
------------ ------------ ------------ ------------
Total revenue 4,732,086 3,356,512 10,000 3,366,512
Expenses:
Losses and loss adjustment expenses 1,064,345 -- -- --
Selling and general expenses 3,735,457 3,209,885 237,000 3,446,885
Support center expense -- 67,500 -- 67,500
Depreciation and amortization expense 41,127 (43,630) (24,000) (67,630)
Interest expense 130,000 177,039 -- 177,039
Impairment of long lived asset -- -- -- --
------------ ------------ ------------ ------------
Total operating expenses 4,970,929 3,410,794 213,000 3,623,794
------------ ------------ ------------ ------------
Income (loss) before provision for income
tax expense (238,843) (54,282) (203,000) (257,282)
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
Net loss ($ 238,843) ($ 54,282) ($ 203,000) ($ 257,282)
============ ============ ============ ============
Earnings per common share
Basic (0.01) -- (0.00) (0.01)
Diluted (0.01) -- (0.00) (0.01)
Weighted average shares outstanding-basic 45,058,589 -- 45,058,589 45,058,589
Weighted average shares outstanding-diluted 45,058,589 -- 45,058,589 45,058,589
6 months ended September 30
2003 2002
AA Corp Brainworks Combined
------------ ------------ ------------ ------------
Revenue:
Gross premiums written $11,824,904 $ -- $ -- $ --
Gross premiums ceded (8,257,227) -- -- --
Net premiums written 3,567,677 -- -- --
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums (1,742,289) -- -- --
Net premiums earned 1,825,389 -- -- --
Commission income 4,293,258 4,520,158 -- 4,520,158
Managing general agent fees 2,160,798 1,922,649 -- 1,922,649
Net investment income 13,912 -- -- --
Other Income -- 25,000 25,000
------------ ------------ ------------ ------------
Total revenue 8,293,357 6,442,807 25,000 6,467,807
Expenses:
Losses and loss adjustment expenses 1,483,871 -- -- --
Selling and general expenses 7,012,473 6,061,620 702,000 6,763,620
Support center expense -- 117,000 -- 117,000
Depreciation and amortization expense 102,235 69,721 32,000 101,721
Interest expense 260,000 400,820 (1,000) 399,820
Impairment of long lived asset -- -- 377,000 377,000
------------ ------------ ------------ ------------
Total operating expenses 8,858,579 6,649,161 1,110,000 7,759,161
------------ ------------ ------------ ------------
Income (loss) before provision for income
tax expense (565,222) (206,354) (1,085,000) (1,291,354)
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
Net loss ($ 565,222) ($ 206,354) ($ 1,085,000) ($ 1,291,354)
============ ============ ============ ============
Earnings per common share
Basic (0.02) -- (0.03) (0.04)
Diluted (0.02) -- (0.03) (0.04)
Weighted average shares outstanding-basic 34,118,711 -- 34,118,711 34,118,711
Weighted average shares outstanding-diluted 34,118,711 -- 34,118,711 34,118,711
See accompanying notes to consolidated financial statements
4
ASSURANCEAMERICA CORPORATION
(UNAUDITED) CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended September 30, 2003 2002
Operating activities Corp AA Corp Brainworks Combined
---- ------- ---------- --------
Net income (loss) ($ 565,222) ($ 206,354) ($1,085,000) ($1,291,354)
Adjustments to reconcile net (loss) income to
net cash provided (used) by operating activities:
Depreciation and amortization 102,235 129,502 32,000 161,502
Impairment charges on intangible assets -- -- 267,000 267,000
Loss on disposal of fixed assets 212,000 212,000
Deferrred acquisition costs (160,335) -- -- --
Deferred compensation amortization -- -- 356,000 356,000
Other assets (257,040) (173,260) 37,000 (136,260)
Reinsurance recoverable (2,594,351) -- -- --
Prepaid reinsurance premiums (4,008,429) -- -- --
Unearned premiums 5,703,920 -- -- --
Unpaid loss and loss adjustment expense 2,327,031 -- -- --
Other liabilities 683,772 (11,654) (166,000) (177,654)
Receivable from insureds (4,031,164) -- -- --
Reinsurance payable 3,942,817 -- -- --
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities 1,143,234 (261,766) (347,000) (608,766)
----------- ----------- ----------- -----------
Investing activities
Investment income due and accrued (13,921) -- -- --
(Purchase)/disposal of fixed assets (253,594) (87,015) 44,000 (43,015)
(Purchase)/disposal of certificate of deposit (25,000)
----------- ----------- ----------- -----------
Net cash provided(used) by investing activities (292,515) (87,015) 44,000 (43,015)
----------- ----------- ----------- -----------
Financing activities
Capital contributions 74,223 6,398,184 -- 6,398,184
Long term debt 291,670 (6,349,185) -- (6,349,185)
----------- ----------- ----------- -----------
Net cash provided(used) by financing activities 365,893 48,999 -- 48,999
----------- ----------- ----------- -----------
Net change in cash 1,216,612 (299,782) (303,000) (602,782)
Cash beginning of period 887,298 378,527 397,000 775,527
----------- ----------- ----------- -----------
Cash end of period $2,103,910 $ 78,745 $ 94,000 $ 172,745
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
5
ASSURANCEAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
AssuranceAmerica Insurance Company ("Carrier"), AssuranceAmerica Managing
General Agency, LLC ("MGA") AssetAmerica Insurance Agencies ("Agencies"), and
Ameraset Consulting Services, each indirect wholly-owned subsidiaries of
AssuranceAmerica Corporation, a Nevada corporation (the "Company"), were
organized to solicit, underwrite, and retain risks associated with private
passenger nonstandard automobile insurance.
The accompanying unaudited, consolidated, financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated. These unaudited financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and in accordance with the instructions
to Form 10-QSB for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, such statements include all adjustments (consisting of normally
recurring accruals) considered necessary for fair presentation. Operating
results for the quarter and six-month period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
Contingencies
In the normal course of business, the Company is named as a defendant in
lawsuits related to claims and other insurance policy issues. Some of the
actions request extra-contractual and/or punitive damages. These actions are
vigorously defended unless a reasonable settlement appears appropriate. In the
opinion of management, the ultimate outcome of litigation is not expected to be
material to the Company's financial condition, results of operations, or cash
flows.
Net Loss Per Share
Basic and diluted loss per share for the quarters ended September 30, 2003 and
September 30, 2002 are 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.
6
Property and Equipment
Items capitalized as property and equipment are carried at historical cost.
Depreciation is computed over the estimated useful lives of the assets using
straight-line and accelerated methods. Depreciation expense was approximately
$102,235 and $101,721 for the six months ended September 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
two and one-half years to five years. Amortization for the quarters ended
September 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:
Return commission incurred on policies originated by agency - The Company has
calculated a provision for return commission due to cancellation of policies
before all premiums written are fully earned. This estimate is based on past
Company history.
The Company maintains a liability for unpaid losses and loss adjustment expense
based on management's estimate 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 Company does not discount the
liability for unpaid losses and loss adjustment expense.
Advertising Costs
Advertising costs are expensed as incurred.
Concentration of Risk
The Company operates in Florida and 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
7
members of the group in accordance with the ratio, which that portion of the
consolidated taxable income attributable to each member of the group having
taxable income bears to the consolidated income.
Each entity within the consolidated group calculates its own tax provision and
is directly responsible for its own tax benefits and/or expense.
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 September 30, 2020. The loss
carryforwards at March 31, 2003 were approximately $1,701,000 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 six months ended September 30,
2003 of approximately $305,000. 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 September 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 September 30, 2003 is $2.01.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included as Item 1 of this
report. This document contains "forward-looking statements" relating to future
events or the Company's future financial performance within the meaning of
Section 21E of the Securities Exchange Act of 1934 and that are intended to be
covered by the safe harbor created thereby. These forward-looking statements are
based on the beliefs of management as well as assumptions made by and
information currently available to management. These statements contain the
words "anticipate", "believe," "expect" and words or phrases of similar import,
as they relate to the Company or management. You should be aware that these
"forward-looking" statements are subject to certain risks, uncertainties and
assumptions related to certain factors including, without limitation, risks
relating to the significant competitive pressures that the Company faces, the
extensive governmental regulation of the Company's business, the availability of
reinsurance, the Company's limited experience in underwriting nonstandard
automobile insurance, the Company's ability to respond to future business
opportunities and other risks and difficulties generally experienced by growth
stage businesses. The Company undertakes no obligation to update these
forward-looking statements.
On April 1, 2003, a wholly-owned subsidiary of the Company merged with and into
AssuranceAmerica Corporation, a Georgia corporation ("AAC"), a property and
casualty-oriented holding company, focusing on the nonstandard automobile
insurance markets. As a result of the Merger, AAC became the surviving
subsidiary of the Company. Following the merger, the Company has three operating
entities, each of which is a wholly-owned subsidiary of AAC: Agencies, which
owns 30 independent agencies located primarily in Florida, writing nonstandard
automobile insurance, MGA, which writes nonstandard automobile insurance in
Georgia, and Carrier, which underwrites the business written by MGA and is
licensed in South Carolina and Georgia. Carrier commenced operations in April,
2003.
Financial Condition
Investments and cash as of September 30, 2003 increased approximately $1.2
million (34.1%) over investments and cash as of March 31, 2003. The increase was
primarily due to cash flow from operations. The Company's investments of
approximately $2.8 million as of September 30, 2003 are currently in money
market accounts (95%) and bank certificates of deposit (5%). Management believes
the trade-off between higher yields and risk avoidance is appropriate for an
early growth company. The Company has no investments in equity securities as of
September 30, 2003.
Premiums receivable as of September 30, 2003 increased approximately $4.0
million over premiums receivable as
8
of March 31, 2003. The increase is the result of Carrier commencing operations
on April 1, 2003, and represents amounts due from Carrier's insureds.
Reinsurance recoverable as of September 30, 2003 increased approximately $2.6
million over reinsurance recoverable as of March 31, 2003. Carrier currently
maintains a quota-share treaty with its reinsurer in which it cedes 70% of both
written premium and loss expense. The approximately $2.6 million of reinsurance
recoverable as of September 30, 2003 represents the loss expense due from the
reinsurer. All amounts are considered current.
Prepaid reinsurance premiums as of September 30, 2003 increased approximately
$4.0 million over prepaid reinsurance premiums as of March 31, 2003. This amount
represents the premium ceded by the Company to the reinsurer which has not been
fully earned.
Property and equipment as of September 30, 2003 increased approximately
$151,000, net of depreciation, over property and equipment as of March 31, 2003,
due primarily to the capitalization of leasehold improvements associated with
the Company's new headquarters.
Deferred acquisition costs as of September 30, 2003 increased approximately
$160,000 over deferred acquisition costs as of March 31, 2003, due to Carrier
commencing operations in April, 2003 and represents costs associated with
acquiring new policies. The costs are fully recoverable.
Unpaid losses and loss adjustment expenses as of September 30, 2003 increased
approximately $2.3 million over unpaid losses and loss adjustment expenses as of
March 31, 2003, and represents Carrier's estimate, net of reinsurance, of loss
expense to be paid.
Accounts payable and accrued expenses as of September 30, 2003 increased
approximately $684,000 over accounts payable and accrued expenses as of March
31, 2003. MGA receives a commission on the premiums it produces for Carrier
which is adjustable based upon the loss ratio of the business produced. MGA
receives a provisional commission of 26% of written premium, and is guaranteed a
commission of not less than 21.25%, regardless of the loss ratio. The majority
of the increase in accounts payable results from deferring the difference
between the provisional and minimum commission ratio, or 4.75%.
Reinsurance payable as of September 30, 2003 increased approximately $3.9
million over reinsurance payable as of March 31, 2003 and represents the amount
of premium owed by Carrier to its reinsurer.
Unearned premium as of September 30, 2003 increased approximately $5.7 million
over unearned premium as of March 31, 2003 and represents premiums written by
Carrier that are not fully earned.
Long-Term Debt increased $292,000 for the six month period. 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
Net cash provided by operating activities for the six months ended September 30,
2003, was approximately $1.1 million, compared to net cash used by operating
activities of $609,000 for the same period of 2002. The increase in cash
provided by operating activities was primarily due to Carrier commencing
operations on April 1, 2003.
Net cash used in investing activities for the six months ended September 30,
2003 was approximately $293,000, compared to approximately $43,000 for the same
period in 2002. The increase in cash used in investing activities was primarily
due to the Company's new headquarters.
Net cash provided by financing activities for the six months ended September 30,
2003 was approximately $366,000, compared to approximately $49,000 for the same
period in 2002. The increase in cash provided by financing activities was due
primarily to accrued interest which was not paid.
The company's liquidity and capital needs have been met in the past through
commission income, fees from MGA, investment income and debt from a company
controlled by its Chairman and President.
9
Long-term debt as of September 30, 2003 increased approximately $292,000 over
long-term debt as of March 31, 2003. The Company's long-term debt consists of
certain unsecured promissory notes payable to Sercap Holdings, LLC, which is
controlled by 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 not made interest payments 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 to, Sercap Holdings, LLC. Sercap
Holdings, LLC intends to convert $1.5 million of the outstanding principal and
accrued interest under such promissory notes into 3.0 million shares of the
Company's common stock upon the closing of a certain private placement of the
Company's equity securities.
The growth of the Company has and will continue to strain its liquidity and
capital resources. The Company is currently engaged in an effort to raise $3.0
to $5.0 million through a private placement of equity securities. Carrier is
required by the States of South Carolina and Georgia to maintain a minimum
capital and surplus of $3.0 million. As of September 30, 2003, Carrier's capital
and surplus was approximately $3.1 million.
The Company's only equity currently outstanding is its common stock, which has
no mandatory dividend obligations.
Since 1999, as a result of increasing loss ratios (the comparison of incurred
losses plus adjustment expenses against earned premiums) of automobile insurance
companies, there have been general increases in premium rates beginning in the
first quarter of 2000 and continuing to the present. This trend was reinforced
by the tragic events of September 11, 2001, and the ensuing adverse economic
conditions, including adverse conditions in capital markets. Management believes
that premium rates will continue to increase at least through 2003, and should
stabilize at higher levels than those that prevailed in the periods before 2000.
Results of Operations
The Company reported a net loss of approximately $239,000, or $.01 per share
(basic and diluted) for the quarter ended September 30, 2003, compared to a net
loss of approximately $257,000 for the same quarter in 2002. The Company
reported a net loss of approximately $565,000, or $.02 per share (basic and
diluted) for the six months ended September 30, 2003, compared to a net loss of
approximately $1.3 million, or $.04 per share (basic and diluted), for the same
period in 2002. The September 30, 2002 loss of $1.3 million included $1.1
million in losses from Brainworks Ventures, Inc., which is no longer in
operation.
Gross premiums written was approximately $5.8 million for the quarter ended
September 30, 2003, as compared to $0 for the same quarter in 2002. Gross
premiums written was approximately $11.8 million for the six months ended
September 30, 2003, as compared to $0 for the same period in 2002. The Carrier
commenced operations in April 2003.
Gross premiums ceded was approximately $4.0 million for the quarter ended
September 30, 2003 as compared to $0 for the same quarter in 2002. Gross
premiums ceded was approximately $8.3 million for the six months ended September
30, 2003, as compared to $0 for the same period in 2002. Gross premiums ceded
represents the amount ceded to reinsurers under the Carrier's quota-share
treaty.
Increase in unearned premiums, net of prepaid reinsurance premium, was
approximately $460,000 for the quarter ended September 30, 2003 and
approximately $1.7 million for the six months ended September 30, 2003. These
increases are a function of the increase in written premiums.
Commission income decreased by approximately $75,000, to approximately $2.3
million for the quarter ended September 30, 2003, from the same quarter in 2002.
Agencies commission income increase of approximately $272,000 for the quarter
was offset by MGA's decrease of approximately $350,000. Since Carrier commenced
operations in April 2003, the commission income to MGA from Carrier (based on
the carrier's 30% retention) has been eliminated upon consolidation. Commission
income was approximately $4.3 million for the six months ended September 30,
2003, as compared to approximately $4.5 million for the same period of 2002.
10
MGA fee income was approximately $1.1 million for the quarter ended September
20, 2003, as compared to approximately $1.0 million for the same quarter of
2002. This increase is a function of an 8% increase in policies compared to the
same period in 2002. MGA fee income was approximately $2.2 million for the six
months ended September 30, 2003, as compared to approximately $1.9 million for
the same period in 2002. This increase is a function of an 8% increase in
policies compared to the same period of 2002.
Losses and loss adjustment expense was approximately $1.1 million for the
quarter ended September 30, 2003, compared to $0 for the same quarter in 2002.
Carrier commenced operations in April, 2003. Carrier's loss and loss adjustment
expense ratio for the quarter ended September 30, 2003 is 81.3%, compared to 0%
for the same period in 2002. The 81.3% is higher than planned for the period and
is attributed to the Company's strengthening of estimated reserves, including
reserves for IBNR (losses that are Incurred But Not Reported).
Other expenses for the Company increased approximately $280,000 for the quarter
ended September 30, 2003, compared to the same quarter in 2002. The increase was
primarily related to the building up of the MGA's infrastructure. Other expenses
decreased approximately $384,000 for the six months ended September 30, 2003,
compared to the same period in 2002 and was primarily related to the elimination
of Brainworks Ventures, Inc.'s expense, partially offset by increased expense
related to the formation of Carrier.
Related Party Transactions
The Company has issued certain unsecured promissory notes to Sercap Holdings,
LLC, which is controlled by Guy W. Millner, the Chairman of the Company's Board
of Directors, and Lawrence (Bud) Stumbaugh, the Company's President and Chief
Executive Officer. The promissory notes accrue interest at a rate of 8.0% per
annum. As of October 31, 2003, the amount of outstanding principal and accrued
interest under such promissory notes totaled approximately $7.1 million. As
permitted under the promissory notes, the Company has made no payments of
accrued interest since the date of issuance. The promissory notes provide for
the repayment of principal beginning in December 2004 in an amount equal to the
greater of $500,000 or an amount equal to 25% of the Company's net income after
tax, plus non-cash items, less working capital. However, the promissory notes
also permit the Company to postpone any and all payments under the promissory
notes without obtaining the consent of, and without giving notice or paying
additional consideration to, Sercap Holdings, LLC. Sercap Holdings, LLC intends
to convert $1.5 million of the outstanding principal and accrued interest under
such promissory notes into 3.0 million shares of the Company's common stock upon
the closing of a certain private placement of its equity securities.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Currently, the Company's investments are in money market
accounts and bank certificates of deposit, both of which minimize market risk.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, of the design and operation
of the Company's disclosure controls and procedures. Based on this evaluation,
the Company's Chief Executive and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information that the Company is required to
disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SEC's rules and forms. The Company's
Chief Executive Officer and Chief Financial Officer also concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
its periodic SEC filings.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of this evaluation.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Amendment to Amended and Restated Articles of Incorporation of the Company
3.3 Amended and Restated Bylaws of the Company
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 July 8, 2003, reporting under Item 5
(Other Events) and Item 8 (Change in Fiscal Year). The items were associated
with a vote by shareholders at a Special Meeting to approve Amended and Restated
Articles of Incorporation for the Company, and a unanimous vote by the Board of
Directors to approve amended By-laws to change the Company's fiscal year from
March 31 to December 31, respectively.
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: November 12, 2003
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