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, 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: 46,577,090 shares, $.01 par
value, as of November 1, 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 September 30, 2004 and December 31, 2003 ...................... 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 2004 and September 30, 2003 ............................ 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2004
and September 30, 2003 ............................................... 5
Notes to Consolidated Financial Statements ........................... 6
Item 2 Management's Discussion and Analysis or Plan of Operation .......... 9
Item 3 Controls and Procedures ............................................ 12
PART II - OTHER INFORMATION
Item 2 Changes in Securities and Small Business Issuer Purchases
of Equity Securities ............................................... 12
Item 6 Exhibits and Reports on Form 8-K ................................... 13
Signatures ................................................................ 13
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AssuranceAmerica Corporation
(Unaudited) Consolidated Balance Sheets
September 30, 2004 and December 31, 2003
September 30, December 31,
Assets 2004 2003
------------- ------------
Short term investments $ 2,662,924 $ 2,625,000
Cash and cash equivalents 6,613,965 3,130,553
Investment Income due and accrued 734 20,971
Receivable from insureds 5,020,292 4,332,942
Reinsurance recoverable(including $2,791,055
and $1,490,218 on paid losses) 9,911,830 4,639,626
Prepaid reinsurance premium 5,514,134 4,048,201
Deferred acquisition costs 213,928 124,505
Property and equipment
(net of accumulated depreciation of
$1,054,162 and $827,078) 913,201 1,035,975
Due from related party 30,783 30,783
Prepaid expenses 134,351 157,632
Intangibles(net of accumulated amortization
of $1,130,063 and $1,097,563) 4,589,622 3,322,122
Security deposits 74,094 70,016
------------ ------------
Total assets $ 35,679,858 $ 23,538,326
============ ============
Liabilities and equity
Accounts payable and accrued expenses $ 2,378,341 $ 2,036,386
Unearned premium 8,156,616 5,861,591
Unpaid losses and loss adjustment expenses 10,214,306 4,499,152
Reinsurance payable 6,026,527 3,879,340
Provisional commission reserve 930,143 1,504,929
Long term debt, related party 6,521,378 7,043,378
Dividends payable 33,300 --
Capital lease obligations 91,600 91,600
------------ ------------
Total liabilities 34,352,211 24,916,376
Stockholders' equity
Common stock, .01 par value
(authorized 80,000,000, outstanding 46,577.090) 465,771 452,111
Preferred stock
(authorized 5,000,000, outstanding 426,000) 4,260 --
Surplus-paid in 17,177,071 14,456,255
Accumulated deficit (16,319,455) (16,286,416)
------------ ------------
Total stockholders' equity 1,327,647 (1,378,050)
------------ ------------
Total liabilities and stockholders' equity $ 35,679,858 $ 23,538,326
============ ============
See accompanying notes to consolidated financial statements
3
ASSURANCEAMERICA CORP
(UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
Three Month Nine month
----------- ----------
Period ended September 30, 2004 2003 2004 2003
Revenue:
Gross premiums written $7,188,610 $5,827,181 $23,525,816 $11,824,904
Gross premiums ceded (4,843,586) (4,058,820) (16,029,472) (8,257,227)
Net premiums written 2,345,024 1,768,361 7,496,344 3,567,678
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums 83,844 (460,335) (829,091) (1,742,289)
Net premiums earned 2,428,868 1,308,026 6,667,253 1,825,389
Commission income 2,511,388 2,279,766 8,066,268 7,636,865
Managing general agent fees 844,069 629,965 2,536,996 1,969,869
Net investment income 6,741 5,988 17,794 18,021
Other fee Income 193,803 226,866 687,052 588,646
------------ ------------ ------------ ------------
Total revenue 5,984,869 4,450,611 17,975,363 12,038,790
Expenses:
Losses and loss adjustment expenses 1,790,091 1,064,345 5,122,048 1,483,871
Selling expenses 2,559,106 1,972,327 7,751,925 6,509,701
General and administrative expense 1,530,810 1,481,655 4,485,248 4,043,138
Depreciation and amortization expense 92,987 41,127 220,864 158,159
Interest expense 144,683 130,000 428,317 390,002
------------ ------------ ------------ ------------
Total operating expenses 6,117,677 4,689,454 18,008,402 12,584,871
------------ ------------ ------------ ------------
Loss before provision for income tax expense (132,808) (238,843) (33,039) (546,081)
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
Net loss (132,808) (238,843) (33,039) (546,081)
------------ ------------ ------------ ------------
Dividends on preferred stock (33,300) -- (33,300) --
------------ ------------ ------------ ------------
Net loss attributable to common stockholders ($166,108) ($238,843) ($66,339) ($546,081)
============ ============ ============ ============
Earnings per common share
Basic (0.004) (0.005) (0.001) (0.012)
Diluted (0.004) (0.005) (0.001) (0.012)
Weighted average shares outstanding-basic 45,498,718 45,498,718 45,498,718 45,498,718
Weighted average shares outstanding-diluted 45,498,718 45,498,718 45,498,718 45,498,718
See accompanying notes to consolidated financial statements
4
AssuranceAmerica Corporation
(Unaudited) Consolidated Statement of Cash Flows
For the nine months ended September 30, 2004 2003
----------- -----------
Operating activities
Net loss ($33,039) ($546,081)
Adjustments to reconcile net loss income to
net cash provided by operating activities:
Depreciation and amortization 220,864 158,159
Deferred acquisition costs (89,423) (160,335)
Prepaid expenses and other assets 19,203 (190,496)
Reinsurance recoverable (5,272,204) (2,594,351)
Prepaid reinsurance premiums (1,465,933) (4,008,429)
Unearned premiums 2,295,025 5,703,920
Unpaid loss and loss adjustment expense 5,715,154 2,327,031
Other liabilities (232,831) 803,983
Receivable from insureds (687,350) (4,031,164)
Reinsurance payable 2,147,187 3,942,817
----------- -----------
Net cash provided by operating activities 2,616,653 1,405,054
----------- -----------
Investing activities
(Acquisitions)/Disposals (1,300,000) --
Investment income due and accrued (17,687) (18,031)
(Purchase)/disposal of fixed assets (65,590) (399,987)
Purchase of short term investments -- (2,625,000)
----------- -----------
Net cash used by investing activities (1,383,277) (3,043,018)
----------- -----------
Financing activities
Capital Contribution 2,090,536 74,223
Payment of accrued interest (700,000) --
Note payable, related party 178,000 3,340,454
----------- -----------
Common stock issued 681,500 --
----------- -----------
Net cash provided by financing activities 2,250,036 3,414,677
----------- -----------
Net change in cash 3,483,412 1,776,713
Cash beginning of period 3,130,553 477,197
----------- -----------
Cash end of period $6,613,965 $2,253,910
=========== ===========
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 nine months ended September 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 $41,000 for the three months ended September 30, 2004 and 2003,
respectively and $188,000 and $158,000 for the nine months ended September 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.
Amortization expense for the three months ending September 30, 2004 and 2003 was
$32,000 and -0- respectively and $32,000 and -0- for the nine months ended
September 30, 2004 and 2003 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 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 $575,000 with a 100% valuation allowance for the
quarter ended September 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 September 30, 2004, the Company
had issued options to purchase an aggregate of 2,882,918 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 September 30, 2004 is $1.61.
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.
For the three months For the nine months
ending September 30, ending September 30,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income (loss) as reported $(132,808) $(238,843) $ (33,039) $(546,081)
Compensation effect (21,131) (10,686) (63,393) (32,060)
--------- --------- --------- ---------
Pro forma net income (loss) $(153,939) $(249,529) $ (96,432) $(578,141)
The weighted average fair value of options granted during the nine months ended
September 30, 2004, estimated on the date of grant using the Black-Scholes
option-pricing model, was $0.3214. The weighted average fair value of options
granted during 2003, estimated on the date of grant using the Black-Scholes
option-pricing model, was $0.1607. The fair value of options granted is
estimated on the date of grant using the following assumptions:
September 30, 2004 December 31, 2003
------------------ -----------------
Expected volatility 80% 80%
Risk-free interest rate 1.5% 1.5%
Expected life (in years) 5.0 5.0
Reclassifications
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 presentation.
8
Related Party Transactions
The Company has issued certain unsecured promissory notes payable to 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 September 30, 2004, the
amount of outstanding principal and accrued interest under such promissory notes
totaled approximately $6.3 million. The promissory notes provide for the
repayment of principal beginning in December 2004 in an amount equal to the
greater of $1.0 million 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. In addition, as part of the purchase agreement
of Thomas-Cook Holding Company, the Company issued a promissory note in the
amount of $178,000 with annual installments beginning August 1, 2005, and
carrying an interest rate of 8%. Thomas-Cook Holding Company's sole shareholder
is James C. Cook. As part of the transaction Mr. Cook agreed to be employed by
the company as President of Agencies.
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 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, Georgia and Arkansas. Carrier
commenced operations in April 2003.
Financial Condition
Investments and cash as of September 30, 2004 increased $3.5 million compared to
December 31, 2003. On June 30, 2004, the Company issued 240,000 shares of its
Series A Convertible Preferred Stock for an aggregate consideration of $1.2
million. On August 13, 2004, the Company issued an additional 186,000 of Series
A Convertible Preferred Stock for $930,000.The Series A Convertible Stock pays a
semi-annual dividend of $0.20 per share. The Company's investments are currently
in money market accounts and bank Certificates of deposit. Other than the
securities of its wholly owned subsidiaries, the Company has no investment in
equity securities as of September 30, 2004.
Receivables from insureds as of September 30, 2004 increased approximately
$687,000 or 16% compared to December 31, 2003. The increase results from
Carrier's increase in written premiums over the past nine months.
Prepaid reinsurance premiums as of September 30, 2004 increased $1.5 million or
36%, 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 Carrier's written premium over the past nine months.
Reinsurance recoverables as of September 30, 2004, increased by approximately
$5.3 million compared to 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.
9
Intangibles, net of accumulated amortization, increased $1.3 million as the
result of the purchase of substantially all of the assets of Thomas-Cook Holding
Company.
Accounts payable and accrued expense as of September 30, 2004, increased
approximately $342,000 compared to December 31, 2003. The increase is primarily
related to the accrual of agent's commission in MGA.
Unearned premiums as of September 30, 2004, increased $2.3 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 September 30, 2004, increased
$5.7 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 September 30, 2004 increased $2.1 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 September 30, 2004 decreased $575,000
compared to December 31, 2003. MGA/Carrier receives a provisional commission
from 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. The decrease is the result
of the return of a portion of the provisional commission.
Long term debt as of September 30, 2004 decreased $522,000 compared to December
31, 2003. The decrease results from payment of $700,000 to the Company's
Chairman related to the promissory note payable to him. In addition, as the
result of the purchase of Thomas-Cook Holding Company, the Company issued a
promissory note in the amount of $178,000.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine month period ended
September 30, 2004 was approximately $2.6 million compared to $1.4 million for
the same period in 2003. The increase is primarily related to Carrier beginning
operations in April 2003 resulting in only six months of operating activity in
2003 compared to nine months in 2004.
Investing activities for the nine months ended September 30, 2004 consisted
primarily of the purchase of substantially all of the assets of Thomas-Cook
Holding Company.
Financing activities for the nine month period ended September 30, 2004 included
payments of accrued interest of $700,000 to the Company's Chairman and the
issuance of preferred stock resulting in additional capital of approximately
$2.1 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 $1.0 million 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 issued an additional 186,000 shares of Series A
Preferred on August 13, 2004.
The growth of the Company has and will continue to strain its liquidity and
capital resources. Carrier is required by the state of South Carolina to
maintain minimum Capital and Surplus of $3.0 million. As of September 30, 2004,
Carrier's Capital and Surplus was approximately $3.7 million.
10
Results of Operations
The Company's net loss for the three months ended September 30, 2004 was
$133,000 compared to a net loss of $238,000 for the same period in 2003. MGA had
a net loss of $93,000 for the three month period ending September 30, 2004
compared to a net loss of $280,000 for the same period in 2003. MGA's
improvement is the result of higher premium written for the three month period
generating a 13% increase in revenue with only a 4% increase in expenses.
Carrier had a pre-tax profit of $204,000 for the three month period ending
September 30, 2004 compared to a $14,000 pre-tax profit for the same period in
2003. Carrier's improvement is the result of an improvement in its loss and loss
adjustment expense ratio from 81.3% in 2003 to 73.7% in the three month period
ending September 30, 2004. Agencies had a net loss of $316,000 for the three
month period ending September 30, 2004 compared to a pre-tax profit of $35,000
for the same period in 2003. Agencies results were affected by the opening of
four new offices which have not yet generated revenues sufficient to cover their
expenses. In addition, the hurricane activity during September caused the
closing of several locations for a number of days resulting in a decline in
revenue for the period.
For the nine months
ended September 30,
-------------------------------
2004 2003
----------- -----------
MGA revenue $ 8,006,361 $ 7,000,798
MGA expense 7,903,733 7,863,691
----------- -----------
MGA pre-tax income (loss) $ 102,628 $ (862,893)
Carrier revenue $ 7,273,188 $ 2,139,042
Carrier expense 7,016,274 2,262,111
----------- -----------
Carrier pre-tax income (loss) $ 256,914 $ (123,069)
Agencies revenue $ 5,032,947 $ 4,788,940
Agencies expense 5,504,253 4,484,782
----------- -----------
Agencies pre-tax income (loss) $ (471,306) $ 304,158
GAAP adjustment & intercompany
elimination 78,725 135,723
----------- -----------
Net loss $ (33,039) $ (546,081)
=========== ===========
Net premiums written for the three and nine month periods ended September 30,
2004 increased 33% and 110% 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 nine month periods ended September 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 nine month periods ended September 30, 2004
increased 10% and 6% 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.
Managing general agent fees increased 34% and 29% for the three and nine month
periods ended September 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.
Other fee income decreased 15% for the three month period ended September 30,
2004 compared to the same period in 2003. For the nine month period ending
September 30, 2004, other fee income increased 17% compared to the same period
in 2003. Agencies collect fees for various services performed and for additional
products sold to insureds. Hurricane activity in the state of Florida during
September 2004 caused the closing of several offices for a number of days
resulting in a decline in fee income. In addition, Agencies have begun to write
more direct bill policies which have a lower potential for fee income.
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Losses and loss adjustment expense increased significantly for the three and
nine month periods ended September 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 ratio for the three and nine month periods ended September
30, 2004 was 73.7% and 76.8% respectively. The ratios for the corresponding
periods in 2003 was 81.3% and 81.2%.
Selling expenses increased 30% and 19% for the three and nine month periods
ended September 30, 2004 compared to the same periods in 2003. Increases are the
result of increases in written premiums for both Agencies and MGA.
General and administrative expense increased 3% and 11% for the three and nine
month periods ended September 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 11% for the three month and 10% for the nine month
periods ended September 30, 2004 compared to corresponding periods in 2003. The
majority of the increase resulted from interest charged on interest expense
accrued but not paid in 2003.
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 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 August 13, 2004, the Company sold 186,000 shares of its Series A Preferred
Stock to Heritage Assurance Partners, LP ("Heritage") for $930,000 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
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Conversion Rate on August 13, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification of the Company's Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Company's Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
1. 8K dated August 13, 2004
2. 8K dated September 14, 2004
3. 8K dated October 15, 2004
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 15, 2004
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