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, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT OF
1934 for the transition period from __________ to ___________
Commission File Number: 0-06334
AssuranceAmerica Corporation
(Exact name of small business issuer as specified in its charter)
Nevada 87-0291240
(State of Incorporation) (IRS Employer ID Number)
5500 Interstate North Parkway, Suite 600 30328
(Address of principal executive offices) (Zip Code)
(770) 952-0200
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 45,211,090 shares, $.01 par
value, as of July 29, 2004.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
ASSURANCEAMERICA CORPORATION
Index to Form 10-QSB
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page
Consolidated Balance Sheets
as of June 30, 2004 and December 31, 2003.................................3
Consolidated Statements of Income
for the Three Months and Six Months Ended
June 30, 2004 and June 30, 2003...........................................4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2004
and June 30, 2003.........................................................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 2 Changes in Securities and Small Business Issuer Purchases
of Equity Securities...................................................12
Item 4 Submission of Matters to a Vote of Security Holders....................12
Item 6 Exhibits and Reports on Form 8-K.......................................12
Signatures....................................................................13
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AssuranceAmerica Corporation
(Unaudited) Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
June 30, December 31,
Assets 2004 2003
Short term investments $ 2,631,182 $ 2,625,000
Cash and cash equivalents 6,882,759 3,130,553
Investment Income due and accrued 571 20,971
Receivable from insureds 5,220,554 4,332,942
Reinsurance recoverable(including $3,834,302 9,570,963 4,639,626
and $1,490,218 on paid losses)
Prepaid reinsurance premium 5,882,114 4,048,201
Deferred acquisition costs 147,622 124,505
Property and equipment 931,161 1,035,975
(net of accumulated depreciation of
$993,675 and $827,078)
Due from related party 30,783 30,783
Prepaid expenses 171,876 157,632
Intangibles(net of accumulated amortization 3,322,122 3,322,122
of $1,097,563 and $1,097,563)
Security deposits 73,324 70,016
------------ ------------
Total assets $ 34,865,031 $ 23,538,326
============ ============
Liabilities and equity
Accounts payable and accrued expenses $ 1,879,033 $ 2,036,386
Unearned premium 8,608,440 5,861,591
Unpaid losses and loss adjustment expenses 8,195,229 4,499,152
Reinsurance payable 7,445,887 3,879,340
Provisional commission reserve 1,799,749 1,504,929
Current portion of long term debt 1,038,720 1,138,720
Long term debt, related party 5,904,658 5,904,658
Capital lease obligations 91,600 91,600
------------ ------------
Total liabilities 34,963,316 24,916,376
Stockholder's equity
Common stock, .01 par value
(authorized 60,000,000, outstanding 45,211,090) 452,111 452,111
Preferred Stock
(authorized 5,000,000, outstanding 240,000) 2,400 --
Surplus-paid in 15,633,851 14,456,255
Accumulated deficit (16,186,647) (16,286,416)
------------ ------------
Total stockholder's equity (98,285) (1,378,050)
------------ ------------
Total liabilities and stockholder's equity $ 34,865,031 $ 23,538,326
============ ============
See accompanying notes to consolidated financial statements
3
AssuranceAmerica Corporation
(Unaudited) Consolidated Statements of Income
Three Six
Month Month
----- -----
Period ended June 30, 2004 2003 2004 2003
Revenue
Gross premiums written $ 7,833,482 $ 5,997,723 $ 16,337,206 $ 5,997,723
Gross premiums ceded (5,347,469) (4,198,406) (11,185,886) (4,198,406)
Net premiums written 2,486,013 1,799,317 5,151,320 1,799,317
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums (176,023) (1,281,954) (912,935) (1,281,954)
Net premiums earned 2,309,990 517,363 4,238,385 517,363
Commission income 2,564,250 2,013,492 5,554,880 5,357,099
Managing general agent fees 869,885 612,398 1,692,934 1,339,904
Net investment income 8,078 7,924 11,052 12,033
Other Fee Income 192,490 116,219 493,249 361,780
------------ ------------ ------------ ------------
Total revenue 5,944,693 3,267,396 11,990,500 7,588,179
Expenses
Losses and loss adjustment expenses 1,836,313 419,526 3,331,957 419,526
Selling expenses 2,593,842 1,708,677 5,192,819 4,537,374
General and administrative expense 1,438,304 1,274,464 2,954,444 2,561,483
Depreciation and amortization expense 60,300 61,108 127,877 117,032
Interest Expense 141,935 130,000 283,634 260,002
------------ ------------ ------------ ------------
Total operating expenses 6,070,694 3,593,775 11,890,731 7,895,417
------------ ------------ ------------ ------------
Income (loss) before provision for income (126,001) (326,379) 99,769 (307,238)
tax expense
Income Tax Provision -- -- -- --
------------ ------------ ------------ ------------
Net Loss ($126,001) ($326,379) $ 99,769 ($307,238)
============ ============ ============ ============
Earnings per common share
Basic (0.003) (0.01) 0.002 (0.01)
Diluted (0.003) (0.01) 0.002 (0.01)
Weighted average shares outstanding-basic 45,211,090 45,211,090 45,211,090 45,211,090
Weighted average shares outstanding-diluted 45,211,090 45,211,090 46,182,909 45,211,090
See accompanying notes to consolidated financial statements
4
AssuranceAmerica Corporation
(Unaudited) Consolidated Statement of Cash Flows
For the six months ended June 30, 2004 2003
----------- -----------
Operating activities
Net income (loss) $ 99,769 ($307,238)
Adjustments to reconcile net (loss) income to
net cash provided (used) by operating activities:
Depreciation and amortization 127,877 117,056
Deferrred acquisition costs (23,117) (141,105)
Other assets (17,552) 98,123
Reinsurance recoverable (4,931,337) (788,615)
Prepaid reinsurance premiums (1,833,913) (2,991,225)
Unearned premiums 2,746,849 4,226,398
Unpaid loss and loss adjustment expense 3,696,077 890,196
Other liabilities 137,467 799,448
Receivable from insureds (887,612) (2,801,524)
Reinsurance payable 3,566,547 2,116,713
----------- -----------
Net cash provided (used) by operating activities 2,681,055 1,218,203
----------- -----------
Investing activities
Investment income due and accrued 14,218 (12,043)
(Purchase)/disposal of fixed assets (23,063) (309,984)
Purchase of short term investments -- (2,438,331)
----------- -----------
Net cash provided(used) by investing activities (8,845) (2,760,358)
----------- -----------
Financing activities
Capital Contribution 1,179,996 36,723
Payment of accrued interest (100,000) --
Note Payable -- 3,048,784
----------- -----------
Net cash provided(used) by financing activities 1,079,996 3,085,507
----------- -----------
Net change in cash 3,752,206 1,543,317
Cash beginning of period 3,130,553 477,197
----------- -----------
Cash end of period $ 6,882,759 $ 2,020,549
=========== ===========
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") Trustway Insurance Agencies, LLC ("Agencies"), 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 months ended June 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. For further information refer to the financial statements and footnotes
thereto included in the Company's Form 10-KSB for the year ended December 31,
2003. Footnote disclosures, which would substantially duplicate the disclosure
contained in those documents, have been omitted.
Net income per share is computed in accordance with SFAS No. 128 "Earnings per
Share."
Contingencies
In the normal course of business, the Company is named as a defendant in
lawsuits related to claims and other insurance policy issues. Some of the
actions request extra-contractual and/or punitive damages. These actions are
vigorously defended unless a reasonable settlement appears appropriate. In the
opinion of management, the ultimate outcome of litigation is not expected to be
material to the Company's financial condition, results of operations, or cash
flows.
Income Recognition
Commission income is generally recognized on the effective date of the policies.
Commissions on premiums billed and collected directly by insurance companies are
recorded as revenue when received. Premium adjustments, including policy
cancellations, are recorded as they occur. An estimated reserve is carried for
income that will not be earned due to anticipated policy cancellations.
Recognition of Premium Reserves
Property and liability premiums are generally recognized on a pro rata basis
over the policy term. The portion of premiums that will be earned in the future
are deferred and reported as unearned premiums.
Deferred Policy Acquisition Costs
Commissions and other costs of acquiring insurance that vary with and are
primarily related to the production of new and renewal business, less ceding
commissions allowed by reinsurers, are deferred and charged or credited to
earnings proportionate to premiums earned. Historical and current loss and loss
adjustment expense experience 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
$60,000 and $61,000 for the three months ended June 30, 2004 and 2003,
respectively and $127,000 and $117,000 for the six months ended June 30, 2004
and 2003 respectively.
Improvements, additions and major renewals which extend the life of an asset are
capitalized. Repairs are expensed in the year incurred.
Amortization of Intangible Assets
Intangible assets consist of noncompetition agreements and goodwill. Intangible
assets are stated at cost. Effective January 1, 2002, the Company adopted the
Financial Accounting Standards Board ("FASB")'s Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
SFAS 142 requires that goodwill and certain intangibles with indefinite lives no
longer be amortized, but instead be tested for impairment at least annually. The
noncompetition agreements are amortized.
Cash Flows
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of twelve
months or less to be cash and cash equivalents.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Some material estimates that are particularly sensitive are:
Return commission incurred on policies originated by MGA and Agencies - The
Company has calculated a provision for return commission due to cancellation of
policies before all premiums written are fully earned. This estimate is based on
past Company history.
The Company maintains a liability for unpaid losses and loss adjustment expense
based on management's estimate of the ultimate cost to settle claims currently
in process. In addition a reserve for claims that have occurred but have not
been reported is also carried as a liability. The ultimate costs to settle these
claims may vary from the current estimates. The Company does not discount the
liability for unpaid losses and loss adjustment expense.
Advertising Costs
Advertising costs are expensed as incurred.
Concentration of Risk
The Company operates in Florida, Georgia and South Carolina and is dependent
upon the economy in those states. Automobiles insured through the Carrier are
principally in South Carolina and Georgia. Premium increases generally must be
approved by state insurance commissioners.
Income taxes
The Company files a consolidated federal income tax return. The tax liability of
the group is apportioned among the members of the group in accordance with the
ratio, which that portion of the consolidated taxable income attributable to
each member of the group having taxable income bears to the consolidated income.
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 carry-forwards that may be offset against future taxable
income and tax credits that may be used against future income taxes. If not
used, the carry-forwards will expire between now and December 31, 2022. The loss
carry-forwards at December 31, 2003 were approximately $2,710,000 and are
subject to limitations each year under Section 382 of the Internal Revenue Code.
After the Company's merger with AssuranceAmerica Corporation, a Georgia
corporation, the Company had a net operating loss for the nine months ended
December 31, 2003 of approximately $1,220,000. There was no benefit recorded for
the quarter due to management's uncertainty as to the realization of the net
operating loss.
As a result of the net operating loss carry-forwards, the Company had a deferred
tax asset of approximately $602,000 with a 100% valuation allowance for the
quarter ended June 30, 2004. The Company has established the valuation allowance
for its net deferred tax assets due to the uncertainty regarding the realization
of these deferred income tax assets.
Stock Based Compensation
Under the Company's 2000 Stock Option Plan, the aggregate number of common
shares authorized is currently 5,000,000. As of June 30, 2004, the Company had
issued options to purchase an aggregate of 2,588,918 shares of common stock.
Prior to the merger with AssuranceAmerica Corporation, a Georgia corporation,
the Company had issued options to purchase 948,918 shares of common stock and
AssuranceAmerica had issued options to purchase 1,300,000 shares of common
stock. In connection with such merger, the outstanding options to purchase
shares of AssuranceAmerica common stock were exchanged on a one-for-one basis
for options to purchase shares of the Company's common stock under the Company's
2000 Stock Option Plan. The weighted-average exercise price for all options
outstanding at June 30, 2004 is $1.74.
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.
Reclassifications
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 presentation.
Related Party Transactions
The Company has issued certain unsecured promissory notes payable to by Guy W.
Millner, the Chairman of the Company's Board of Directors, and Lawrence (Bud)
Stumbaugh, the Company's President and Chief Executive Officer. The promissory
notes accrue interest at a rate of 8.0% per annum. As of June 30, 2004, the
amount of outstanding principal and accrued interest under such promissory notes
totaled approximately $7.0 million. The promissory notes provide for the
repayment of principal beginning in December 2004 in an amount equal to the
greater of $500,000 or an amount equal to 25% of the Company's net income after
tax, plus non-cash items, less working capital. However, the promissory notes
also permit the Company to postpone any and all payments under the promissory
notes without obtaining the consent of, and without giving notice or paying
additional consideration.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 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
8
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 South Carolina, 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 June 30, 2004 increased approximately $3.8 million
(65%) compared to December 31, 2003. On June 30, 2004, the Company issued
240,000 shares of its Series A Convertible Preferred Stock ("Series A Preferred
Stock") for aggregate consideration of $1.2 million. The balance of the increase
was primarily due to cash provided by the operations of Carrier. The Company's
investments are currently in money markets accounts which management believes
offers the most safety regarding principal risk. Other than the securities of
its wholly-owned subsidiaries, the Company has no investment in equity
securities as of June 30, 2004.
Receivables from insureds as of June 30, 2004 increased approximately $900,000
or 20% compared to December 31, 2003. The increase results from the Carrier's
increase in written premiums over the past six months.
Prepaid reinsurance premiums as of June 30, 2004 increased $1.8 million or 45%,
compared to December 31, 2004. This amount represents premiums ceded by Carrier
to its reinsuror that have not been fully earned. The increase results from an
increase in the Carrier's written premium over the past six months.
Reinsurance recoverables as of June 30, 2004, increased by approximately $5.0
million compared o December 31, 2003. The amount represents loss and loss
adjustments expense, both paid and reserved, due from Carrier's reinsuror. The
increase is the result of increasing loss and loss adjustment expense incurred
by Carrier.
Accounts payable and accrued expense as of June 30, 2004, decreased
approximately $157,000 compared to December 31, 2003. The decrease is primarily
related to Carrier's payment of premium taxes accrued during 2003 and paid in
2004.
Unearned premiums as of June 30, 2004, increased $2.7 million compared to
December 31, 2003. The amount represents premiums written by Carrier which have
not been earned and the increase is the result of an increase in written
premium.
Unpaid losses and loss adjustments expense as of June 30, 2004, increased $3.7
million compared to December 31, 2003. The amount represents reserves for losses
and loss adjustments expense for claims that have been reported and incurred as
well as a reserve for claims incurred but not reported. The increase is the
result of a significant increase in Carrier's claim activity.
Reinsurance payables as of June 30, 2004 increased $3.6 million compared to
December 31, 2003. The increase is the result on increase in Carrier's written
premium and represents amounts due its reinsuror under a 70% quota share
reinsurance treaty.
Provisional commission reserve as of June 30, 2004 increased $295,000 compared
to December 31, 2003. MGA/Carrier receives a provisional commission form
Carrier's reinsuror based on written premium and is adjusted based on loss and
loss adjustment expense ratios. MGA/Carrier book the difference between the
minimum and provisional commissions as a liability and the increase is the
result of MGA/Carrier's increase in written premium.
9
Liquidity and Capital Resources
Net cash provided by operating activities for the six-month period ended June
30, 2004 was approximately $2.7 million compared to $1.2 million for the same
period in 2003. The increase is primarily related to Carrier beginning
operations in April 2003 resulting in only three months of operating activity in
2003 compared to six months in 2004.
Investing and Financing activities for the six month period ended June 30, 2003
were primarily related to the formation and capitalization of Carrier.
Financing activities for the six-month period ended June 30, 2004 included a
payment of accrued interest of $100,000 to the Company's Chairman and the
issuance of preferred stock resulting in additional capital of approximately
$1.2 million.
The Company's liquidity and capital needs have been met in the past through
premium, commission and fee income and debt from its Chairman and President. The
Company's debt consists of unsecured promissory notes payable to its Chairman
and President. The promissory notes carry an interest rate of 8% per annum and
provide for the repayment of principal beginning in December 2004 in an amount
equal to the greater of $500,000 or an amount equal to 25% of the Company's net
income after tax, plus non-cash items less working capital.
On June 30, 2004, the Company closed on an initial capital raise of
approximately $1.2 million through a private placement of equity. The Company
issued 240,000 shares of Series A Preferred Stock with a semi-annual dividend of
$0.20 per share. The Company anticipates a similar transaction closing in early
August 2004.
The growth of the Company has and will continue to strain its liquidity and
capital resources. Carrier is required by the state of Georgia to maintain
minimum Capital and Surplus of $3.0 million. As of June 30, 2004, Carrier's
Capital and Surplus was approximately $3.1 million.
Results of Operations
The Company's net profit for the six-month period ended June 30, 2004 was
approximately $100,000 compared to a loss of $307,000 for the same period in
2003. The Company's results for the three month period ended June 30, 2004 was a
loss of $126,000 compared to a $326,000 loss for the same period in 2003.
Revenue for the three and six month periods ended June 30, 2004 increased 82%
and 58% respectively over the same periods in 2003. Much of the increases result
from Carrier's formation in April 2003 and the resulting increase in earned
premium. Operating expense for the three and six month periods ended June 30,
2004 increased 69% and 51% respectively compared to the same periods in 2003.
Much of the expense increase was the result of Carrier's formation in April 2003
and the corresponding increase in losses and loss adjustment expense.
Net premiums written for the three and six month periods ended June 30, 2004
increased 38% and 186% respectively. Net premiums written are premiums written
by Carrier after deducting premiums ceded to its reinsuror pursuant to the
reinsurance agreement. Carrier began operations in April 2003 and therefore
recorded no premium for the first three months of 2003.
Net premiums earned for the three and six month periods ended June 30, 2004
increased significantly compared to the corresponding periods in 2003. Premiums
written are earned over the life of the policy, typically six months, and net
earned premium represents Carrier's portion, net of reinsurance, of the net
premiums written less the increase in unearned premiums.
Commission income for the three and six month periods ended June 30, 2004
increased 27% and 4% respectively. MGA and Agencies received commissions from
the carrier whose policies they sell. Commission rates vary between carriers and
are applied to written premium to determine commission income.
For the six month period ended June 30, 2004, MGA's written premium was 26%
higher than the same period in 2003 and Agencies' written premium was 19% higher
than the same period in 2003.
Managing general agent fees increased 42% and 26% for the three and six month
periods ended June 30, 2004 compared to 2003 respectively. The increase in fees
is the result of an increase in the number of policies sold and an increase in
retention rate.
10
Other fee income increased 65% and 36% respectively for the three and six month
periods ended June 30, 2004 compared to corresponding periods in 2003. Agencies
collects fees for various services performed and for additional products sold to
insureds. The increase is the result of an increase in the number if insureds
buying policies from Agencies.
Losses and loss adjustment expense increased significantly for the three and six
month periods ended June 30, 2004 as compared to 2003. Carrier began operations
in April 2003 and therefore had relatively few losses reported by insureds
during its early months of operations. Carrier's loss and loss adjustment
expense for the three and six month periods ended June 30, 2004 was 79.5% and
78.6% respectively. The ratios for the corresponding periods in 2003 was 81% for
both periods.
Selling expenses increased 52% and 14% for the three and six month periods ended
June 30, 2004 compared to the same periods in 2003. Agencies' selling expense
increased 16% and 20% for the three and six month periods ended June 30, 2004
compared to the same periods in 2003. All increases are the result of increases
in written premiums for both Agencies and MGA.
General and administrative expense increased 13% and 15% for the three and six
month periods ended June 30, 2004 compared to the same periods in 2003.
Generally the increases are the result of moderate increases in the Company's
general operating expenses.
Interest expense increased 9% for the three and six month periods ended June 30,
2004 compared to corresponding periods in 2003. The increase resulted from
interest charged on interest expense accrued but not paid in 2003.
Related Party Transactions
The Company has issued certain unsecured promissory notes payable to by Guy W.
Millner, the Chairman of the Company's Board of Directors, and Lawrence (Bud)
Stumbaugh, the Company's President and Chief Executive Officer. The promissory
notes accrue interest at a rate of 8.0% per annum. As of June 30, 2004, the
amount of outstanding principal and accrued interest under such promissory notes
totaled approximately $7.0 million. The promissory notes provide for the
repayment of principal beginning in December 2004 in an amount equal to the
greater of $500,000 or an amount equal to 25% of the Company's net income after
tax, plus non-cash items, less working capital. However, the promissory notes
also permit the Company to postpone any and all payments under the promissory
notes without obtaining the consent of, and without giving notice or paying
additional consideration.
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 effectiveness of the
design and operation of the Company's disclosure controls and procedures in
accordance with Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"). Based on this evaluation, the Company's Chief Executive Officer
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
Exchange Act, 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 control over
financial reporting that occurred
11
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
On June 30, 2004, the Company sold 240,000 shares of its Series A Preferred
Stock to Heritage Assurance Partners, LP ("Heritage") for $1.2 million in cash.
Each share of Series A Preferred Stock is convertible into shares of common
stock, at the option of the holder thereof, at any time. Each share of Series A
Preferred Stock is convertible into the number of shares of common stock that
results from dividing the "Conversion Value" per share by the "Conversion Price"
per share in effect at the time of conversion. The number of shares of common
stock into which a share of Series A Preferred Stock is convertible is referred
to as the "Conversion Rate." The Conversion Price per share of Series A
Preferred Stock initially in effect is $0.50 and the Conversion Value per share
of Series A Preferred Stock initially in effect is equal to $5.00. The initial
Conversion Price of Series A Preferred Stock is subject to adjustment in the
event of issuances of common stock or securities convertible into common stock
for consideration per share less than the Conversion Price in effect immediately
prior to such issuance. All accrued and unpaid dividends owed to a holder of
Series A Preferred Stock may be converted into a number of shares of common
stock equal to the aggregate amount of such accrued but unpaid dividends owed
such holder, divided by $0.50.
Each share of Series A Preferred Stock will automatically convert into shares of
common stock at its then effective Conversion Rate on June 28, 2006. Each share
of Series A Preferred Stock will automatically convert into shares of common
stock at its then effective Conversion Rate immediately prior to the closing of
any public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering any of the Company's equity
securities with aggregate proceeds to the Company, at the public offering price,
of at least $20 million, before underwriting commissions and expenses, and at a
per share price of at least three times the then-current Conversion Price.
The Company issued the Series A Preferred Stock in reliance on the exemption
from registration contained in Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Shareholders held on April 21, 2004, the shareholders
of the Company elected the following five directors for terms to expire at the
2005 Annual Meeting of Shareholders, with votes as indicated opposite each
director's name:
Name of Director Votes For Votes Withheld
Guy W. Millner 42,382,713 250
Lawrence Stumbaugh 42,382,713 250
Donald Ratajczak 42,382,713 250
Quill O. Healey 42,382,713 250
John E. Cay III 42,382,713 250
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Certificate of Designations Establishing the Designations, Powers,
Preferences, Limitations, Restrictions and Relative Rights of Series A
Convertible Preferred Stock of AssuranceAmerica Corporation.
10.1 Stock Purchase Agreement dated June 30, 2004, between the Company and
Heritage Assurance Partners, L.P.
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10.2 Registration Rights Agreement dated June 30, 2004, between the Company and
Heritage Assurance Partners, L.P.
31.1 Certification of the Company's Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Company's Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ASSURANCEAMERICA CORPORATION
By: /s/ Lawrence Stumbaugh
------------------------------
Lawrence Stumbaugh
President and CEO
Dated: August 13, 2004
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