##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
 For the fiscal year ended December 31, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934.
 Commission File Number: 0-6334
 ASSURANCEAMERICA CORPORATION
 
  NEVADA
    
    87-0281240(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)5500 Interstate North Pkwy., Suite 600, Atlanta, Georgia
    
    30328(Address of Principal Executive Offices)
    
    (Zip Code)
  
   o
 þ o
 o
 o þ
    Documents Incorporated By Reference
  £ R




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##### 



PAGEITEM NUMBER AND CAPTION
    
    NUMBERPART I
    
    11. Description of Business
    
    12. Description of Property
    
    63. Legal Proceedings
    
    64. Submission of Matters to a Vote of Security Holders
    
    6PART II
    
    75. Market for Common Equity and Related Stockholder Matters
    
    76. Managements Discussion and Analysis or Plan of Operation
    
    77. Financial Statements
    
    118. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    118A. Controls and Procedures
    
    118B. Other Information
    
    11PART III
    
    119. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
    
    1110. Executive Compensation
    
    1311. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    1312. Certain Relationships and Related Transactions
    
    1313. Exhibits
    
    1314. Principal Accountant Fees and Services
    
    14Signatures
    
    15EX-10.12 EXECUTIVE EMPLOYMENT AGREEMENTEX-21.1 LIST OF SUBSIDIARIESEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO
  i




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Forward-Looking Statements
  
 PART I
 
 Item 1. DESCRIPTION OF BUSINESS
 History
   Who We Are
   1




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Our Business
   
    Our Industry
   2




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Our Products
  Target Market
   Wholesale Operations
  Claims
     Underwriting and Customer Service
   3




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Product Development and Management
  Information Technology
      Retail Operations
    Reinsurance
  Reserves
  State Insurance Licenses
  4




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SUPERVISION AND REGULATION
         5




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Statutory Accounting Principles
  1.
    
    Commissions, premium taxes and other variable costs incurred in connection with writing new
and renewal business are capitalized and amortized on a pro rata basis over the period in
which the related premiums are earned, rather than expensed as incurred, as required by SAP.
 2.
    
    Certain assets are included in the consolidated balance sheets, but are non-admitted and
charged directly against statutory surplus under SAP. These assets consist primarily of
premium receivables that are outstanding over 90 days, federal deferred tax assets in excess
of statutory limitations, furniture, equipment, application computer software, leasehold
improvements and prepaid expenses.
 3.
    
    Amounts related to ceded reinsurance, such as prepaid reinsurance premiums and reinsurance
recoverables, are shown gross, rather than netted against unearned premium reserves and loss
and loss adjustment expense reserves, respectively, as required by SAP.
 4.
    
    Fixed-maturity securities, which are classified as available-for-sale, are reported at
current market values, rather than at amortized cost, or the lower of amortized cost or
market, depending on the credit quality of the specific security, as required by SAP. Equity
securities are reported at quoted market values, which may differ from the NAIC market values
as required by SAP.
 5.
    
    Both current and deferred taxes are recognized in the income statement for GAAP, while
deferred taxes are posted directly to surplus for SAP.
 Investments
  Competition
   Employees
  
 Item 2. DESCRIPTION OF PROPERTY
   
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  6




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PART II
 
 Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  BID PRICESQUARTER ENDED
    
    HIGH
    
    LOW2004 Fiscal Year:March 31, 2004
    
    $
    1.15
    
    
    $
    0.51June 30, 2004
    
    
    1.60
    
    
    
    0.55September 30, 2004
    
    
    1.01
    
    
    
    0.55December 31, 2004
    
    
    1.01
    
    
    
    0.552005 Fiscal Year:March 31, 2005
    
    
    0.95
    
    
    
    0.55June 30, 2005
    
    
    0.95
    
    
    
    0.64September 30, 2005
    
    
    1.01
    
    
    
    0.77December 31, 2005
    
    
    1.00
    
    
    
    0.75
   Equity Compensation Plan Information
  (a)
    
    (b)
    
    (c)Number of securities
    
    Weighted-
    
    Number of securities remainingto be issued upon
    
    average
    
    available for future issuanceexercise of
    
    exercise price of
    
    under equity compensationoutstanding options,
    
    outstanding
    
    plans (excluding securitiesPlan Category
    
    warrants and rights
    
    options
    
    reflected in column (a))Equity compensation plans
approved by stockholders(1)
    
    
    4,215,628
    
    
    $
    0.97
    
    
    
    586,372Equity compensation plans not
approved by stockholders
    
    
    0
    
    
    
    N/A
    
    
    
    0Total
    
    
    4,215,628
    
    
    $
    0.97
    
    
    
    586,372
 
  
 Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Financial Condition
  7




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8




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Liquidity and Capital Resources
      Results of Operations
   9




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Revenues
 Premiums
   Commission and Fee Income
     Net Investment Income
  Expenses
 Insurance Loss and Loss Adjustment Expenses
  10




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Other Expenses
  
 Item 7. FINANCIAL STATEMENTS
  
 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 Item 8A. CONTROLS AND PROCEDURES
  
 Item 8B. OTHER INFORMATION
  
 PART III
 
 Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
1 6(a) OF THE EXCHANGE ACT
  Executive Officers
  11




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Name
    
    Age
    
    Positions HeldGuy W. Millner
    
    
    70
    
    
    ChairmanLawrence (Bud) Stumbaugh
    
    
    65
    
    
    President and Chief Executive OfficerRenee A. Pinczes
    
    
    43
    
    
    Chief Financial Officer and Senior Vice PresidentMark H. Hain
    
    
    56
    
    
    Senior Vice President, General Counsel and SecretaryJoseph J. Skruck
    
    
    41
    
    
    President, AssuranceAmerica Managing General
Agency, LLC (a subsidiary of the Company)James C. Cook
    
    
    41
    
    
    Senior Vice President  Corporate DevelopmentElise Quadrozzi
    
    
    45
    
    
    Vice President  Claims and UnderwritingDavid Anthony
    
    
    46
    
    
    Vice President  Information TechnologyScott Nelson
    
    
    38
    
    
    Vice President  Product Development
 Biographies of Executive Officers
 Guy W. Millner
 Lawrence (Bud) Stumbaugh
 Renee A. Pinczes
 Mark H. Hain
 Joseph J. (Joe) Skruck
 James C. (Jim) Cook
 Elise A. Quadrozzi, ,
 David H. Anthony
 12




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Scott M. Nelson
 
 Item 10. EXECUTIVE COMPENSATION
  
 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 Item 13. EXHIBITS
  2.1
    
    Agreement and Plan of Merger and Reorganization dated April 1, 2003, by and among the Company, AA Holdings Acquisition Sub,
Inc., AA Holdings, LLC and AssuranceAmerica Corporation (incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on April 16, 2003).2.2
    
    Asset Purchase Agreement by and between Trustway Insurance Agencies, LLC, AssuranceAmerica Corporation, Thomas-Cook Holding
Company and James C. Cook (incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K dated
August 3, 2004).3.1
    
    Amended And Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Companys
Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003).3.2
    
    Amendment to Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Appendix A to the
Companys Definitive Proxy Statement filed on September 9, 2003).3.3
    
    By-Laws of the Company (incorporated by reference to the Companys Form 10 filed on May 30, 1972).3.4
    
    Amendment to the Companys By-Laws adopted February 14, 2001 (incorporated by reference to Exhibit 3ii to the Companys
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000).3.5
    
    Amendment to the Companys By-Laws adopted June 26, 2003 (incorporated by reference to Exhibit 3.4 to the Companys Annual
Report on Form 10-KSB/A for the year ended March 31, 2003).3.6
    
    Amendment to the Companys By-Laws adopted June 15, 2004 (incorporated by reference to Exhibit 3.6 to the Companys Annual
Report on Form 10-KSB/A for the year ended December 31, 2004).4.1
    
    Certificate of Designations Establishing the Powers, Preferences, limitations, Restrictions and Relative Rights of Series A
Convertible Preferred Stock of AssuranceAmerica Corporation (incorporated by reference to Exhibit 4.1 to the Companys
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004).4.2
    
    Amendment to Certificate of Designations Establishing the Powers, Preferences, Limitations, Restrictions and Relative
Rights of Series A Convertible Preferred Stock of AssuranceAmerica Corporation (incorporated by reference to Exhibit 3.1 to
the Companys Current Report on Form 8-K filed on April 15, 2005).4.3
    
    Amended and Restated Trust Agreement dated December 22, 2005 (incorporated by reference to Exhibit 4.1 to the Companys
Form 8-K filed on December 27, 2005).4.4
    
    Junior Subordinated Indenture dated December 22, 2005 (incorporated by reference to Exhibit 4.2 to the Companys Form 8-K
filed on December 27, 2005).10.1
    
    Brainworks Ventures, Inc. Stock Option Plan (incorporated by reference to Exhibit A to the Companys Definitive Proxy
Statement
 13




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filed on October 20, 2000).10.2
    
    Promissory Note assumed by the Company to Guy W. Millner dated February 10, 2003 (incorporated by reference to Exhibit 10.2
to the Companys Form 10-KSB/A for the year ending December 31, 2004).10.3
    
    Promissory Note assumed by the Company to Lawrence Stumbaugh dated January 3, 2003 (incorporated by reference to Exhibit
10.3 to the Companys Form 10-KSB/A for the year ending December 31, 2004).10.4
    
    Promissory Note assumed by the Company to Guy W. Millner dated August 31, 2002 (incorporated by reference to Exhibit 10.4
to the Companys Form 10-KSB/A for the year ending December 31, 2004).10.5
    
    Employment Agreement between Agencies and James C. Cook dated July 31, 2004 (incorporated by reference to Exhibit 10.2 to
the Companys Current Report on Form 8-K dated August 3, 2003).10.6
    
    Executive Employment Agreement between AssuranceAmerica General Agency, LLC and Joseph J. Skruck (incorporated by reference
to Exhibit 10.1 to the Companys current report on Form 8-K dated March 8, 2006).10.7
    
    Stock Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on April 15, 2005).10.8
    
    Amendment to Stock Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on May 10,
2005).10.9
    
    Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed on April 15, 2005).10.10
    
    Description of Executive Bonus Plan (incorporated by reference to Exhibit 10.1 of the Companys Form 10-QSB for the quarter
ended June 30, 2005).10.11
    
    Guarantee Agreement dated December 22, 2005 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed on
December 27, 2005).10.12
    
    Executive Employment Agreement between Sercap Holdings, LLC and Lawrence Stumbaugh effective July 10, 2002 and assumed by
the Company effective April 1, 2003.14.1
    
    Code of Conduct (incorporated by reference to Exhibit 14.1 to the Companys Transition Report on Form 10-KSB for the
transition period from April 1, 2003 to December 31, 2003).21.1
    
    List of Subsidiaries31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Controller Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer and Controller Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  14




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SIGNATURES
  REGISTRANT:ASSURANCEAMERICA CORPORATIONDate: March 29, 2006
    
    By:
    
    /s/ Lawrence StumbaughLawrence Stumbaugh, Chief Executive Officer
  Name
    
    Title
    
    Date/s/ Lawrence Stumbaugh

          Lawrence Stumbaugh
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    Date: March 29, 2006/s/ Renée A. Pinczes

         Renée A. Pinczes
    
    Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    Date: March 29, 2006/s/ Guy W. Millner

         Guy W. Millner
    
    Chairman of the Board of Directors
    
    Date: March 29, 2006/s/ Donald Ratajczak

         Donald Ratajczak
    
    Director
    
    Date: March 29, 2006/s/ Quill O. Healey

         Quill O. Healey
    
    Director
    
    Date: March 29, 2006/s/ John E. Cay , III

         John E. Cay, III
    
    Director
    
    Date: March 29, 2006/s/ Kaaren J. Street

         Kaaren J. Street
    
    Director
    
    Date: March 29, 2006/s/ Sam Zamarripa

         Sam Zamarripa
    
    Director
    
    Date: March 29, 2006/s/ John Ray

         John Ray
    
    Director
    
    Date: March 29, 2006
 15




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##### 



ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 Index to Financial Statements
  
 PAGEReport of Independent Registered Public Accounting Firm:
    
    F-2Consolidated balance sheets as of December 31, 2005 and 2004
    
    F-3Consolidated statements of operations for the years ended December 31, 2005 and 2004
    
    F-4Consolidated statements of changes in stockholders equity for the years ended December 31, 2005 and 2004
    
    F-5Consolidated statements of cash flows for the years ended December 31, 2005 and 2004
    
    F-6Notes to consolidated financial statements
    
    F-7
  16




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Report
of Independent Registered  Public Accounting Firm
 
    
 F-2




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ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    December 31,2005
    
    
    2004AssetsCash and cash equivalents
    
    $
    8,668,827
    
    
    $
    7,059,188Short term investments
    
    
    120,000
    
    
    
    400,000Long term investments
    
    
    8,419,835
    
    
    
    599,808Investment income due and accrued
    
    
    81,150
    
    
    
    734Receivable from insured
    
    
    13,821,477
    
    
    
    5,170,840Reinsurance recoverable (including $4,213,187 and $3,084,838 on paid losses)
    
    
    14,790,099
    
    
    
    10,543,775Prepaid reinsurance premiums
    
    
    11,211,270
    
    
    
    5,291,830Deferred acquisition costs
    
    
    798,539
    
    
    
    224,842Property and equipment (net of accumulated depreciation of $1,606,200 and $1,094,131)
    
    
    1,400,667
    
    
    
    1,185,081Other receivables
    
    
    1,674,184
    
    
    
    276,460Prepaid expenses
    
    
    161,415
    
    
    
    52,260Intangibles (net of accumulated amortization of $1,398,244 and $1,198,396)
    
    
    7,359,850
    
    
    
    5,399,789Security deposits
    
    
    75,072
    
    
    
    89,158Other assets
    
    
    378,758
    
    
    
    Total assets
    
    $
    68,961,143
    
    
    $
    36,293,765Liabilities and Stockholders EquityAccounts payable and accrued expenses
    
    $
    4,802,223
    
    
    $
    2,904,640Unearned premium
    
    
    16,574,473
    
    
    
    7,833,189Unpaid losses and loss adjustment expenses
    
    
    15,109,874
    
    
    
    10,655,625Reinsurance payable
    
    
    10,238,081
    
    
    
    4,936,933Provisional commission reserve
    
    
    1,704,379
    
    
    
    1,060,883Debt, related party
    
    
    5,568,535
    
    
    
    7,376,279Debentures payable
    
    
    4,800,185
    
    
    
    Capital lease obligations
    
    
    220,155
    
    
    
    265,545Total liabilities
    
    
    59,017,905
    
    
    
    35,033,094Stockholders equityCommon stock, .01 par value (authorized 80,000,000, outstanding 51,167,321 and 46,577,090)
    
    
    511,673
    
    
    
    465,771Preferred
stock, .01 par value (authorized 5,000,000, outstanding 1,266,000 and 426,000)
    
    
    12,660
    
    
    
    4,260Surplus-paid in
    
    
    15,678,015
    
    
    
    8,872,943Accumulated deficit
    
    
    (6,259,110
    )
    
    
    (8,082,303
    )Total stockholders equity
    
    
    9,943,238
    
    
    
    1,260,671Total liabilities and stockholders equity
    
    $
    68,961,143
    
    
    $
    36,293,765
  F-3




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ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the years ended December 31,
    
    2005
    
    
    2004Revenue:Gross premiums written
    
    $
    50,519,371
    
    
    $
    30,556,941Ceded premiums written
    
    
    (34,300,556
    )
    
    
    (20,783,807
    )Net premiums written
    
    
    16,218,815
    
    
    
    9,773,134Increase in unearned premiums, net of prepaid reinsurance premiums
    
    
    (2,821,844
    )
    
    
    (727,968
    )Net premiums earned
    
    
    13,396,971
    
    
    
    9,045,166Commission income
    
    
    16,844,593
    
    
    
    10,921,633Managing general agent fees
    
    
    5,881,026
    
    
    
    3,341,575Net investment income
    
    
    253,765
    
    
    
    30,709Other fee income
    
    
    739,129
    
    
    
    848,314Total revenue
    
    
    37,115,484
    
    
    
    24,187,397Expenses:Losses and loss adjustment expenses
    
    
    9,255,625
    
    
    
    6,648,912Selling, general, and administrative
    
    
    24,347,233
    
    
    
    16,666,175Depreciation and amortization expense
    
    
    612,160
    
    
    
    339,993Interest expense
    
    
    570,873
    
    
    
    580,615Total operating expenses
    
    
    34,785,891
    
    
    
    24,235,695Income (loss) before provision for income tax expense
    
    
    2,329,593
    
    
    
    (48,298
    )Income tax provision
    
    
    
    
    
    
    Net income (loss)
    
    
    2,329,593
    
    
    
    (48,298
    )Dividends on preferred stock
    
    
    506,400
    
    
    
    85,200Net income (loss) attributable to common stockholders
    
    $
    1,823,193
    
    
    $
    (133,498
    )Earnings per common shareBasic
    
    
    0.036
    
    
    
    (0.003
    )Diluted
    
    
    0.029
    
    
    
    (0.003
    )Weighted average shares outstanding-basic
    
    
    50,247,505
    
    
    
    45,771,315Weighted average shares outstanding-diluted
    
    
    63,516,605
    
    
    
    45,771,315
  F-4




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ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 For the years ended December 31, 2005 and 2004
 Common
    
    Preferred
    
    Paid in
    
    AccumulatedStock
    
    Stock
    
    Capital
    
    Deficit
    
    TotalBalance, December 31, 2003
    
    $
    452,111
    
    
    $
    
    
    
    $
    6,118,644
    
    
    $
    (7,948,805
    )
    
    $
    (1,378,050
    )Stock issued
    
    
    13,660
    
    
    
    4,260
    
    
    
    2,781,829
    
    
    
    
    
    
    
    2,799,749Stock issuance expenses
    
    
    
    
    
    
    
    
    
    
    (27,530
    )
    
    
    
    
    
    
    (27,530
    )Preferred dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85,200
    )
    
    
    (85,200
    )Net loss
    

    
    
    

    
    
    

    
    
    

    (48,298
    )
    

    (48,298
    )Balance, December 31, 2004
    
    
    465,771
    
    
    
    4,260
    
    
    
    8,872,943
    
    
    
    (8,082,303
    )
    
    
    1,260,671Stock issued
    
    
    45,902
    
    
    
    8,400
    
    
    
    6,866,778
    
    
    
    
    
    
    
    6,921,080Stock issuance expenses
    
    
    
    
    
    
    
    
    
    
    (61,706
    )
    
    
    
    
    
    
    (61,706
    )Preferred dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (506,400
    )
    
    
    (506,400
    )Net income
    

    
    
    

    
    
    

    
    
    

    2,329,593
    
    

    2,329,593Balance, December 31, 2005
    
    $
    511,673
    
    
    $
    12,660
    
    
    $
    15,678,015
    
    
    $
    (6,259,110
    )
    
    $

9,943,238
  F-5




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ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Years Ended December 31, 2005 and 2004
 2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    2,329,593
    
    
    $
    (48,298
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    612,160
    
    
    
    339,993Loss on disposal of property and equipment
    
    
    47,453
    
    
    
    Changes in assets and liabilities:Receivables
    
    
    (10,048,361
    )
    
    
    (1,080,805
    )Prepaid expenses and other assets
    
    
    (473,827
    )
    
    
    68,566Unearned premiums
    
    
    8,741,284
    
    
    
    1,971,598Unpaid loss and loss adjustment expenses
    
    
    4,454,249
    
    
    
    6,156,473Ceded reinsurance payable
    
    
    5,301,148
    
    
    
    1,057,593Reinsurance recoverable
    
    
    (4,246,324
    )
    
    
    (5,904,149
    )Prepaid reinsurance premiums
    
    
    (5,919,440
    )
    
    
    (1,243,629
    )Accounts payable and accrued expenses
    
    
    1,897,584
    
    
    
    405,788Deferred acquisition costs
    
    
    (573,697
    )
    
    
    (100,337
    )Provisional commission reserve
    
    
    643,496
    
    
    
    53,550Net cash provided by operating activities
    
    
    2,765,318
    
    
    
    1,676,343Cash flows from investing activities:Purchases of property and equipment, net
    
    
    (675,261
    )
    
    
    (199,464
    )Purchase of investments and accrued investment income
    
    
    (7,620,443
    )
    
    
    (699,808
    )Acquisition of agency
    
    
    
    
    
    
    (462,000
    )Net cash used by investing activities
    
    
    (8,295,704
    )
    
    
    (1,361,272
    )Cash flows from financing activities:Repayments of related party debt
    
    
    (1,807,744
    )
    
    
    (706,379
    )Proceeds from debentures issuance, net
    
    
    4,800,185
    
    
    
    Preferred dividends paid
    
    
    (506,400
    )
    
    
    (85,200
    )Repayments on capital lease obligations
    
    
    (45,390
    )
    
    
    (32,077
    )Stock issued
    
    
    4,699,374
    
    
    
    2,112,220Net cash provided by financing activities
    
    
    7,140,025
    
    
    
    1,288,564Net increase in cash and cash equivalents
    
    
    1,609,639
    
    
    
    1,603,635Cash and cash equivalents, beginning of period
    
    
    7,059,188
    
    
    
    5,455,553Cash and cash equivalents, end of period
    
    $
    8,668,827
    
    
    $
    7,059,188
   F-6




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##### Table of Contents



ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 (1) Description of Business
  (2) Summary of Significant Accounting Policies
 Basis of Consolidation and Presentation
  Estimates
    Recognition of Revenues
  Fair Value of Financial Instruments
  Deferred Acquisition Costs
  Contingencies
  F-7




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##### Table of Contents



Start-Up Costs
  Cash and Cash Equivalents
  Leased Property Under Capital Lease
  Property and Equipment
   December 31, 2005
    
    
    December 31, 2004Furniture and equipment
    
    $
    886,837
    
    
    $
    349,854Computer equipment
    
    
    1,097,942
    
    
    
    1,026,394Computer software
    
    
    477,524
    
    
    
    432,285Leasehold improvements
    
    
    544,564
    
    
    
    470,679Less: accumulated depreciation
    
    
    (1,606,200
    )
    
    
    (1,094,131
    )$
    1,400,667
    
    
    $
    1,185,081
 Amortization of Intangible Assets
 .
  2005
    
    
    2004Goodwill
    
    $
    6,388,094
    
    
    $
    5,108,185Non-compete clause
    
    
    980,000
    
    
    
    610,000Renewal list
    
    
    1,170,000
    
    
    
    660,000Restrictive covenants
    
    
    220,000
    
    
    
    220,0008,758,094
    
    
    
    6,598,185Less: Accumulated amortization
    
    
    (1,398,244
    )
    
    
    (1,198,396
    )$
    7,359,850
    
    
    $
    5,399,789
  2006
    
    $
    246,1752007
    
    $
    246,1752008
    
    $
    246,1752009
    
    $
    201,3602010
    
    $
    168,786
 F-8




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##### Table of Contents



Advertising
  Stock Options
  (3) Investments
      December 31, 2005
    
    
    December 31, 2004Short term bank certificates of deposit
    
    $
    120,000
    
    
    $
    400,000U.S. Treasury securities and obligations of U.S. government corporations and agencies
    
    
    6,300,740
    
    
    
    599,808Obligations of states and political subdivisions
    
    
    528,915
    
    
    
    Corporate debt securities
    
    
    1,590,179
    
    
    
    Total
    
    $
    8,539,835
    
    
    $
    999,808
  Years to Maturity
    
    Amortized Cost
    
    
    Fair ValueOne year or less
    
    $
    772,841
    
    
    $
    764,113After one year through five years
    
    
    2,504,323
    
    
    
    2,510,043After five years through ten years
    
    
    1,052,487
    
    
    
    1,050,994After ten years
    
    
    4,090,185
    
    
    
    4,089,251Total
    
    $
    8,419,836
    
    
    $
    8,414,401
 (4) Losses and Loss Adjustment Expenses
  F-9




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##### Table of Contents



December 31, 2005
    
    
    December 31, 2004Case basis
    
    $
    1,784,824
    
    
    $
    1,650,429IBNR
    
    
    2,748,138
    
    
    
    1,546,259Total
    
    $
    4,532,962
    
    
    $
    3,196,688
  2005
    
    2004Balance at January 1
    
    $
    10,655,625
    
    
    $
    4,499,152Less reinsurance recoverables on unpaid losses
    

    7,458,937
    
    

    3,149,408Net balance at January 1
    
    
    3,196,688
    
    
    
    1,349,744Add Losses and LAE incurred, net, related to:Current year
    
    
    9,669,325
    
    
    
    6,824,530Prior years
    

    (412,184
    )
    

    (178,041
    )Net Losses and LAE incurred in the current year
    
    
    9,257,141
    
    
    
    6,646,489Deduct Losses and LAE paid, net, related to:Current year
    
    
    5,880,003
    
    
    
    4,002,926Prior years
    

    2,040,864
    
    

    796,619Net claim payments in the current year
    

    7,920,867
    
    

    4,799,545Net balance at December 31
    
    
    4,532,962
    
    
    
    3,196,688Plus reinsurance recoverables on unpaid losses
    

    10,576,912
    
    

    7,458,937Balance at December 31
    
    $
    15,109,874
    
    
    $
    10,655,625
  (5) Reinsurance
     2005
    
    2004Premiums written:Direct
    
    $
    50,309,013
    
    
    $
    30,556,941Assumed
    
    
    210,358
    
    
    
    Ceded
    

    34,300,556
    
    

    20,783,807Net
    
    
    16,218,815
    
    
    
    9,773,134Premiums earned:Direct
    
    
    41,699,701
    
    
    
    28,585,344Assumed
    
    
    78,386
    
    
    
    Ceded
    

    28,381,116
    
    

    19,540,178Net
    
    
    13,396,971
    
    
    
    9,045,165
 F-10




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##### Table of Contents



2005
    
    2004Losses and loss adjustment expenses incurred:Direct
    
    $
    30,811,072
    
    
    $
    22,158,061Assumed
    
    
    6,846
    
    
    
    Ceded
    

    21,562,293
    
    

    15,509,149Net
    
    $
    9,255,625
    
    
    $
    6,648,912
  Unpaid losses and loss adjustment expense:Direct
    
    $
    15,109,874
    
    
    $
    10,655,627Assumed
    
    
    
    
    
    
    Ceded
    

    10,576,912
    
    

    7,458,939Net
    
    
    4,532,962
    
    
    
    3,196,688Unearned premiums:Direct
    
    
    16,442,501
    
    
    
    7,833,189Assumed
    
    
    131,972
    
    
    
    Ceded
    

    11,211,270
    
    

    5,291,830Net
    
    $
    5,363,203
    
    
    $
    2,541,359
  Contingent Reinsurance Commission and Provisional Commission Reserve
   Policy Year
    
    Amount2003
    
    $
    171,7152004
    
    
    569,6332005
    
    
    963,031Total
    
    $
    1,704,379
 (6) Long-Term Debt
 Notes Payable, Related Party
  Debentures Payable
  F-11




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##### Table of Contents



Scheduled Maturities
  Amount2006
    
    $
    1,459,3332007
    
    
    1,459,7162008
    
    
    1,020,1732009
    
    
    1,000,0002010 and after
    
    
    5,429,498Total
    
    $
    10,368,720
 (7) Income Taxes
    December 31,2005
    
    
    2004Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    Total provision for income taxes
    
    $
    
    
    
    $
    
  December 31,2005
    
    
    2004Total deferred tax assets
    
    $
    1,607,000
    
    
    $
    2,093,000Total deferred tax (liability)
    
    
    (236,000
    )
    
    
    (214,600
    )Total income tax benefit
    
    
    1,371,000
    
    
    
    1,878,400Less valuation allowance
    
    
    (1,371,000
    )
    
    
    (1,878,400
    )$
    
    
    
    $
    
  Expires 2015
    
    $
    260,473Expires 2016
    
    
    645,872Expires 2017
    
    
    794,848Expires 2022
    
    
    1,008,921Expires 2023
    
    
    1,013,703Expires 2024
    
    
    397,621$
    4,121,438
 F-12




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##### Table of Contents



(8) Capital Stock
 Preferred Stock
  Common Stock
  Stock-Based Compensation
    2005
    
    2004Weighted
    
    
    
    
    
    WeightedNumber of
    
    Average
    
    Number of
    
    AverageOptions Outstanding
    
    Shares
    
    Exercise Price
    
    Shares
    
    Exercise PriceBeginning of year
    
    
    3,302,918
    
    
    $
    1.45
    
    
    
    2,238,918
    
    
    $
    1.93Add (deduct):Granted
    
    
    2,394,050
    
    
    $
    0.81
    
    
    
    1,090,000
    
    
    $
    0.50Exercised
    
    
    (192,000
    )
    
    $
    0.25
    
    
    
    (6,000
    )
    
    $
    0.25Cancelled
    
    
    (1,289,340
    )
    
    $
    2.00
    
    
    
    (20,000
    )
    
    $
    4.25End of year
    
    
    4,215,628
    
    
    $
    0.97
    
    
    
    3,302,918
    
    
    $
    1.45Exercisable, end of year
    
    
    929,018
    
    
    $
    2.12
    
    
    
    1,173,550
    
    
    $
    3.39
  Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of Exercise
    
    Number
    
    Contractual
    
    Exercise
    
    Number of
    
    ExercisePrices
    
    of Shares
    
    Life
    
    Price
    
    Shares
    
    Price< $1.00
    
    
    3,895,710
    
    
    4.05 years
    
    $
    0.60
    
    
    
    609,100
    
    
    $
    0.36$1.00 < $3.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $3.00 < $4.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $4.00 < $5.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $5.00 < $6.50
    
    
    319,918
    
    
    0.92 years
    
    $
    5.48
    
    
    
    319,918
    
    
    $
    5.484,215,628
    
    
    3.81 years
    
    $
    0.97
    
    
    
    929,018
    
    
    $
    2.12
  F-13




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##### Table of Contents



For the twelve months ending December 31,2005
    
    
    2004Net income (loss) as reported
    
    $
    1,823,193
    
    
    $
    (133,498
    )Compensation effect
    
    
    (335,960
    )
    
    
    (82,270
    )Pro forma net income (loss)
    
    $
    1,487,233
    
    
    $
    (215,768
    )
  As reported  Basic
    


    0.036
    
    
    
    
        (0.003
    )Pro forma  Basic
    
    0.030
    
 

    
    
        (0.005
    )As reported  Diluted
 
    0.029
    
    
    

    
        (0.003
    )Pro forma  Diluted
    
    0.023
    
    
    
    
        (0.005
    )
  December 31, 2005
    
    December 31, 2004Expected volatility
    
    
    12
    %
    
    
    40
    %Risk-free interest rate
    
    
    2.0
    %
    
    
    1.15
    %Expected life (in years)
    
    
    5.0
    
    
    
    5.0
  (9) Risk
     Concentration of Risk
  Concentration of Credit Risk
   F-14




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##### Table of Contents



Regulatory Requirements and Restrictions
     (10) Commitments and Contingencies
 Operating Leases
  Year EndingDecember 31,
    
    Amount2006
    
    $
    1,042,0172007
    
    
    913,9352008
    
    
    785,6302009
    
    
    616,5162010
    
    
    598,566Thereafter
    
    
    2,683,008$
    6,639,672
   Capital Leases
  F-15




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##### Table of Contents



Property and equipment
    
    $
    306,517Less: accumulated depreciation
    
    
    (61,303
    )$
    245,214
   Year EndingDecember 31,
    
    Amount2006
    
    $
    63,9892007
    
    
    63,9892008
    
    
    63,9892009
    
    
    63,989255,956Less amount representing interest
    
    
    35,801Present value of future minimum lease payments
    
    $
    220,155
 Defined Contribution Plan
  (11) Business Combination
    (Unaudited) Pro forma Statement of Operations  For the period ended December 31, 2004
 2004
    
    2004
    
    2004(in thousands)
    
    Company
    
    Seller
    
    TotalRevenue
    
    
    24,187
    
    
    
    890
    
    
    
    25,077Net income (loss)
    
    
    (133
    )
    
    
    204
    
    
    
    71Earnings per share
    
    
    (0.003
    )
    
    
    0.004
    
    
    
    0.001
 (12) Net Income (Loss) Per Share
  F-16




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##### Table of Contents



2005
    
    
    2004Warrants
    
    
    145,000
    
    
    
    245,000Stock Options
    
    
    3,462,000
    
    
    
    3,058,0003,607,000
    
    
    
    3,303,000
 (13) Related Party Transactions
   (14) Supplemental Cash Flow Information
 2005
    
    2004Cash paid during the year:Interest
    
    $
    607,327
    
    
    $
    580,615Income Taxes
    
    
    
    
    
    
    
     (15) Recent Accounting Pronouncements
  Accounting Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 F-17




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##### Table of Contents



(16) Selected Unaudited Quarterly Financial Information
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2005Revenue
    
$
    7,806,950
    
    
$
    8,144,062
    
    
$
    9,915,267
    
    
$
    11,249,205Gross Profit
    
    
    744,710
    
    
    
    324,207
    
    
    
    771,811
    
    
    
    488,865Net income attributable to common shareholders
    
    
    698,110
    
    
    
    117,607
    
    
    
    645,211
    
    
    
    362,265Diluted net earnings per share attributable to common shareholders
    
    
    0.013
    
    
    
    0.002
    
    
    
    0.010
    
    
    
    0.0042004Revenue
    
$
    6,045,807
    
    
$
    5,944,693
    
    
$
    5,984,869
    
    
$
    6,212,028Gross Profit
    
    
    225,770
    
    
    
    (126,001
    )
    
    
    (132,808
    )
    
    
    (15,259
    )Net income attributable to common shareholders
    
    
    225,770
    
    
    
    (126,001
    )
    
    
    (166,108
    )
    
    
    (67,159
    )Diluted net earnings per share attributable to common shareholders
    
    
    0.005
    
    
    
    (0.003
    )
    
    
    (0.004
    )
    
    
    (0.001
    )
 (17) Subsequent Events
   (18) Reclassification
  (19) Segment Reporting
    F-18




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##### Table of Contents



MGA
    
    TrustWay
    
    AAIC
    
    Company(in thousands)
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Revenues from external customers
    
$
    16,844
    
    
$
    8,120
    
    
$
    7,768
    
    
$
    6,991
    
    
$
    13,650
    
    
$
    9,076
    
    
$
    
    
    
$
    Intersegment revenues
    
    
    3,794
    
    
    
    2,278
    
    
    
    1,765
    
    
    
    
    
    
    
    630
    
    
    
    764
    
    
    
    1,736
    
    
    
    811Interest expense
    
    
    
    
    
    
    39
    
    
    
    100
    
    
    
    283
    
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    Depreciation and amortization
    
    
    169
    
    
    
    175
    
    
    
    438
    
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    Segment income(loss)
    
    
    400
    
    
    
    (7
    )
    
    
    350
    
    
    
    (283
    )
    
    
    1,597
    
    
    
    783
    
    
    
    (17
    )
    
    
    (541
    )Segment assets
    
    
    3,463
    
    
    
    1,598
    
    
    
    8,550
    
    
    
    6,679
    
    
    
    55,498
    
    
    
    29,569
    
    
    
    18,966
    
    
    
    6,088
 (in thousands)
    
    2005
    
    2004RevenueTotal revenue for reportable segments
    
$
    45,040
    
    
$
    28,040Elimination of intersegment revenue
    

    (7,925
    )
    

    (3,853
    )Total consolidated revenues
    
    
    37,115
    
    
    
    24,187Profit and lossTotal income (loss) for reportable segments
    
$
    2,330
    
    
$
    (48
    )Income (loss) before tax provision
    
    
    2,330
    
    
    
    (48
    )AssetsTotal assets for reportable segments
    
$
    86,477
    
    
$
    43,935Elimination of intersegment balances
    

     (17,516
    )
    

     (7,641
    )Total consolidated assets
    
    
    68,961
    
    
    
    36,294
 F-19