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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, 2006
 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)
 Issuers telephone number (770) 933-8911
 Securities registered under Section 12(b) of the Exchange Act:
    
    NoneSecurities registered under Section 12(g) of the Exchange Act:
    
    Common Stock, par value $0.01 per share
 o
 þ o
 o
 o þ
    Documents Incorporated By Reference
  o þ




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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
    
    
    128B. Other Information
    
    
    12PART III
    
    
    129. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
    
    
    1210. Executive Compensation
    
    
    1411. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    1412. Certain Relationships and Related Transactions
    
    
    1413. Exhibits
    
    
    1414. Principal Accountant Fees and Services
    
    
    15Signatures
    
    
    16EX-21.1 LIST OF SUBSIDIARIESEX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1 SECTION 302 CERIFICATION OF THE CHIEF EXECUTIVE OFFICEREX-31.2 SECTION 302 CERIFICATION OF THE CHIEF FINANCIAL OFFICEREX-32.1 SECTION 906 CERIFICATION OF THE CHIEF EXECUTIVE OFFICER AND THE CHIEF FINANCIAL OFFICER




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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
   Product Development and Management
  3




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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
    
    LOW2005 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
    
    
    $
    0.752006 Fiscal Year:March 31, 2006
    
    $
    1.80
    
    
    $
    0.82June 30, 2006
    
    $
    1.81
    
    
    $
    1.22September 30, 2006
    
    $
    1.25
    
    
    $
    1.00December 31, 2006
    
    $
    1.12
    
    
    $
    0.78
   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)
    
    
    5,347,225
    
    
    $
    0.85
    
    
    
    1,909,125Equity compensation plans not
approved by stockholders
    
    
    0
    
    
    
    N/A
    
    
    
    0Total
    
    
    5,347,225
    
    
    $
    0.85
    
    
    
    1,909,125
 
  
 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
  10




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Expenses
 Insurance Loss and Loss Adjustment Expenses
    Other Expenses
  Income Tax Expense (Benefit)
  Off-Balance Sheet Arrangements
  
 Item 7. FINANCIAL STATEMENTS
  
 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  11




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Item 8A. CONTROLS AND PROCEDURES
  
 Item 8B. OTHER INFORMATION
  
 PART III
 
 Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
  Executive Officers
  Name
    
    Age
    
    Positions HeldGuy W. Millner
    
    
    71
    
    
    ChairmanLawrence (Bud) Stumbaugh
    
    
    66
    
    
    President and Chief Executive OfficerRenee A. Pinczes
    
    
    44
    
    
    Chief Financial Officer and Senior Vice PresidentMark H. Hain
    
    
    57
    
    
    Senior Vice President, General Counsel and SecretaryJoseph J. Skruck
    
    
    42
    
    
    President, AssuranceAmerica Managing General
Agency, LLC (a subsidiary of the Company)
 12




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Name
    
    Age
    
    Positions HeldCourtney M. Wright
    
    
    51
    
    
    President, TrustWay Insurance Agencies, LLC (a
subsidiary of the Company)James C. Cook
    
    
    42
    
    
    President of TrustWay Partners ProgramElise Quadrozzi
    
    
    46
    
    
    Senior Vice President  Claims and UnderwritingDavid Anthony
    
    
    47
    
    
    Vice President  Information TechnologyScott Nelson
    
    
    39
    
    
    Regional Vice President  Product DevelopmentTony Pepsoski
    
    
    39
    
    
    Regional Vice President  Product Development
 Biographies of Executive Officers
 Guy W. Millner
 Lawrence (Bud) Stumbaugh
 Renee A. Pinczes
 Mark H. Hain
 Joseph J. (Joe) Skruck,
 Courtney M Wright
 James C. (Jim) Cook
 Elise A. Quadrozzi, ,
 David H. Anthony
 Scott M. Nelson
 Tony Pepsoski
 13




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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).
 14




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10.1
    
    Brainworks Ventures, Inc. Stock Option Plan (incorporated by reference to Exhibit A to the Companys Definitive Proxy
Statement filed on October 20, 2000).10.2
    
    Amendment to the Brainworks Ventures, Inc. Stock Option Plan (incorporated by reference to Appendix 3 to the Companys
Definitive Proxy Statement filed on April 11, 2006).10.3
    
    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).10.4
    
    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).10.5
    
    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).10.6
    
    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).10.7
    
    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).10.8
    
    Stock Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on April 15, 2005).10.9
    
    Amendment to Stock Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on May 10,
2005).10.10
    
    Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed on April 15, 2005).10.11
    
    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).10.12
    
    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).10.13
    
    Executive Employment Agreement between Sercap Holdings, LLC and Lawrence Stumbaugh effective July 10, 2002 and assumed by
the Company effective April 1, 2003 (incorporated by reference to Exhibit 10.12 to the Companys Form 10KSB for the year
ending December 31, 2005).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).16.1
    
    Letter on change in certifying accountant as required by Item 304(a)(3) (incorporated by reference to Exhibit 16.2 to the
Companys Form 8-K/A filed on December 20, 2006)21.1
    
    List of Subsidiaries23.1
    
    Consent of Independent Public
Accountants31.1
    
    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
  15




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SIGNATURES
  REGISTRANT:
ASSURANCEAMERICA CORPORATIONDate: March 30, 2007
    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 30, 2007/s/ Renée A. Pinczes

Renée A. Pinczes
    
    Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    Date: March 30, 2007/s/ Guy W. Millner

Guy W. Millner
    
    Chairman of the Board of Directors
    
    Date March 30, 2007/s/ Donald Ratajczak

Donald Ratajczak
    
    Director
    
    Date: March 30, 2007/s/ Quill O. Healey

Quill O. Healey
    
    Director
    
    Date: March 30, 2007/s/ John E. Cay , III

John E. Cay, III
    
    Director
    
    Date: March 30, 2007/s/ Kaaren J. Street

Kaaren J. Street
    
    Director
    
    Date: March 30, 2007/s/ Sam Zamarripa

Sam Zamarripa
    
    Director
    
    Date: March 30, 2007/s/ John Ray

John Ray
    
    Director
    
    Date: March 30, 2007
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ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 Index to Financial Statements
 PAGEReport of Independent Registered Public Accounting Firms
    
    
    F-2, F-3Consolidated balance sheets as of December 31, 2006 and 2005
    
    
    F-4Consolidated statements of operations for the years ended December 31, 2006 and 2005
    
    
    F-5Consolidated statements of changes in stockholders equity for the years ended December 31, 2006 and 2005
    
    
    F-6Consolidated
statements of comprehensive income for the years ended December 31,
2006 and 2005
    
    
    F-7Consolidated statements of cash flows for the years ended December 31, 2006 and 2005
    
    
    F-8Notes to consolidated financial statements
    
    
    F-9
 F-1




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Report of Independent Registered Public Accounting Firm
       Porter
Keadle Moore, LLP Atlanta, GeorgiaMarch 28, 2007
 F-2




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Report of Independent Registered Public Accounting Firm
 
    
 F-3




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ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    December 31,2006
    
    
    2005AssetsCash and cash equivalents
    
    $
    8,185,539
    
    
    $
    8,668,827Short term investments
    
    
    619,843
    
    
    
    120,000Long term investments
    
    
    10,446,830
    
    
    
    8,419,835Marketable equity securities
    
    
    2,055,983
    
    
    
    Other securities
    
    
    155,000
    
    
    
    155,000Investment income due and accrued
    
    
    117,363
    
    
    
    81,150Receivable from insureds
    
    
    18,707,773
    
    
    
    13,821,477Reinsurance recoverable (including $5,130,845 and $4,213,187 on paid losses)
    
    
    22,563,990
    
    
    
    14,790,099Prepaid reinsurance premiums
    
    
    14,012,481
    
    
    
    11,211,270Deferred acquisition costs
    
    
    800,125
    
    
    
    798,539Property and equipment (net of accumulated depreciation of $2,136,512 and $1,606,200)
    
    
    2,481,660
    
    
    
    1,400,667Other receivables
    
    
    585,999
    
    
    
    1,674,184Prepaid expenses
    
    
    273,733
    
    
    
    161,415Intangibles (net of accumulated amortization of $1,824,334 and $1,398,244)
    
    
    11,114,882
    
    
    
    7,359,850Security deposits
    
    
    74,140
    
    
    
    75,072Prepaid income tax
    
    
    668,677
    
    
    
    Deferred tax assets
    
    
    2,506,503
    
    
    
    Other assets
    
    
    374,365
    
    
    
    378,758Total assets
    
    $
    95,744,886
    
    
    $
    69,116,143Liabilities and stockholders equityAccounts payable and accrued expenses
    
    $
    5,039,900
    
    
    $
    4,802,223Unearned premium
    
    
    20,614,781
    
    
    
    16,574,473Unpaid losses and loss adjustment expenses
    
    
    24,904,492
    
    
    
    15,109,874Reinsurance payable
    
    
    16,744,406
    
    
    
    10,238,081Provisional commission reserve
    
    
    2,319,540
    
    
    
    1,704,379Debt, related party
    
    
    5,797,122
    
    
    
    5,568,535Junior subordinated debentures payable
    
    
    4,961,852
    
    
    
    4,955,185Capital lease obligations
    
    
    265,670
    
    
    
    220,155Total liabilities
    
    
    80,647,763
    
    
    
    59,172,905Commitments and contingenciesStockholders equityCommon stock, .01 par value (authorized 120,000,000 and 80,000,000, outstanding
56,072,971 and 51,167,321)
    
    
    560,730
    
    
    
    511,673Preferred stock, .01 par value (authorized 5,000,000, outstanding 840,000 and
1,266,000; liquidation preference $4,200,000 and $6,330,000)
    
    
    8,400
    
    
    
    12,660Surplus-paid in
    
    
    16,426,292
    
    
    
    15,678,015Accumulated deficit
    
    
    (1,948,711
    )
    
    
    (6,259,110
    )Accumulated other comprehensive income:Net unrealized appreciation on investment securities, net of taxes
    
    
    50,412
    
    
    
    Total stockholders equity
    
    
    15,097,123
    
    
    
    9,943,238Total liabilities and stockholders equity
    
    $
    95,744,886
    
    
    $
    69,116,143
  F-4




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ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the years ended December 31,
    
    2006
    
    
    2005Revenue:Gross premiums written
    
    $
    69,108,965
    
    
    $
    50,519,371Ceded premiums written
    
    
    (47,016,892
    )
    
    
    (34,300,556
    )Net premiums written
    
    
    22,092,073
    
    
    
    16,218,815Increase in unearned premiums, net of prepaid reinsurance premiums
    
    
    (1,239,097
    )
    
    
    (2,821,844
    )Net premiums earned
    
    
    20,852,976
    
    
    
    13,396,971Commission income
    
    
    22,232,993
    
    
    
    16,844,593Managing general agent fees
    
    
    9,249,488
    
    
    
    5,881,026Net investment income
    
    
    727,969
    
    
    
    253,765Net investment gains on securities
    
    
    24,445
    
    
    
    Other fee income
    
    
    634,971
    
    
    
    739,129Total revenue
    
    
    53,722,842
    
    
    
    37,115,484Expenses:Losses and loss adjustment expenses
    
    
    15,318,922
    
    
    
    9,255,625Selling, general, and administrative
    
    
    33,091,167
    
    
    
    24,347,233Stock option expense
    
    
    429,351
    
    
    
    Depreciation and amortization expense
    
    
    1,030,165
    
    
    
    612,160Interest expense
    
    
    1,141,368
    
    
    
    570,873Total operating expenses
    
    
    51,010,973
    
    
    
    34,785,891Income before provision for income tax expense
    
    
    2,711,869
    
    
    
    2,329,593Income tax provision (benefit)
    
    
    (2,019,730
    )
    
    
    Net income
    
    
    4,731,599
    
    
    
    2,329,593Dividends on preferred stock
    
    
    421,200
    
    
    
    506,400Net income attributable to common stockholders
    
    $
    4,310,399
    
    
    $
    1,823,193Earnings per common shareBasic
    
    
    0.080
    
    
    
    0.036Diluted
    
    
    0.075
    
    
    
    0.036Weighted average shares outstanding-basic
    
    
    53,609,956
    
    
    
    50,247,505Weighted average shares outstanding-diluted
    
    
    63,480,814
    
    
    
    64,038,643
  F-5




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ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 For the years ended December 31, 2006 and 2005
 AccumulatedChange in OtherComprehensiveCommon
    
    
    Preferred
    
    
    
    
    
    
    Accumulated
    
    
    Income, Net ofStock
    
    
    Stock
    
    
    Paid in Capital
    
    
    Deficit
    
    
    Taxes
    
    
    TotalBalance, 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
    )
    
    
    
    
    
    
    9,943,238Stock issued
    
    
    6,457
    
    
    
    
    
    
    
    398,516
    
    
    
    
    
    
    
    
    
    
    
    404,973Stock issuance expenses
    
    
    
    
    
    
    
    
    
    
    (41,250
    )
    
    
    
    
    
    
    
    
    
    
    (41,250
    )Conversion of preferred to common stock
    
    
    42,600
    
    
    
    (4,260
    )
    
    
    (38,340
    )
    
    
    
    
    
    
    
    
    
    
    Stock option expense
    
    
    
    
    
    
    
    
    
    
    429,351
    
    
    
    
    
    
    
    
    
    
    
    429,351Change in value of available-for-sale
securities, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,412
    
    
    
    50,412Preferred dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (421,200
    )
    
    
    
    
    
    
    (421,200
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,731,599
    
    
    
    
    
    
    
    4,731,599Balance, December 31, 2006
    
    $
    560,730
    
    
    $
    8,400
    
    
    $
    16,426,292
    
    
    $
    (1,948,711
    )
    
    $
    50,412
    
    
    $
    15,097,123
 Share Activity(in thousands of shares)2006
    
    
    2005Common stockIssuedAt beginning of year
    
    
    51,167
    
    
    
    46,577Issued
    
    
    646
    
    
    
    4,590Converted from preferred stock
    
    
    4,260
    
    
    
    At end of year
    
    
    56,073
    
    
    
    51,167Common shares outstanding at end of year
    
    
    56,073
    
    
    
    51,167Preferred stockIssuedAt beginning of year
    
    
    1,266
    
    
    
    426Issued
    
    
    
    
    
    
    840Converted to preferred stock
    
    
    (426
    )
    
    
    At end of year
    
    
    840
    
    
    
    1,266Preferred shares outstanding at end of year
    
    
    840
    
    
    
    1,266
  F-6




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##### Table of Contents



ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
 For the Years Ended December 31,
 2006
    
    
    2005Net income
    
    $
    4,731,599
    
    
    $
    2,329,593Other comprehensive income (loss):Unrealized appreciation of investments
    
    
    80,659Deferred income tax benefit (expense) on above changes
    
    
    (30,247
    )Other comprehensive income (loss)
    
    
    50,412
    
    
    
    Comprehensive income
    
    $
    4,782,011
    
    
    $
    2,329,593
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##### Table of Contents



ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Years Ended December 31, 2006 and 2005
 2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    4,731,599
    
    
    $
    2,329,593Adjustments to reconcile net income to net cash provided by operating
activities, net of effect of agency acquisitions:Depreciation and amortization
    
    
    1,036,832
    
    
    
    612,345Stock-based compensation
    
    
    429,351
    
    
    
    Loss on disposal of property and equipment
    
    
    18,602
    
    
    
    47,453Deferred tax assets
    
    
    (2,183,791
    )
    
    
    Changes in assets and liabilities, net of effect of agency acquisitions:Receivables
    
    
    (3,367,517
    )
    
    
    (10,048,361
    )Prepaid expenses and other assets
    
    
    (77,439
    )
    
    
    (473,827
    )Unearned premiums
    
    
    4,040,308
    
    
    
    8,741,284Unpaid loss and loss adjustment expenses
    
    
    9,794,618
    
    
    
    4,454,249Ceded reinsurance payable
    
    
    6,506,325
    
    
    
    5,301,148Reinsurance recoverable
    
    
    (7,773,891
    )
    
    
    (4,246,324
    )Prepaid reinsurance premiums
    
    
    (2,801,211
    )
    
    
    (5,919,440
    )Accounts payable and accrued expenses
    
    
    (2,424,942
    )
    
    
    1,897,584Prepaid income taxes
    
    
    (668,677
    )
    
    
    Deferred acquisition costs
    
    
    (1,586
    )
    
    
    (573,697
    )Provisional commission reserve
    
    
    615,161
    
    
    
    643,496Net cash provided by operating activities, net of effect of agency acquisitions
    
    
    7,873,742
    
    
    
    2,765,503Cash flows from investing activities, net of effect of agency acquisitions:Purchases of property and equipment, net
    
    
    (1,490,247
    )
    
    
    (675,261
    )Purchase of investments and accrued investment income
    
    
    (4,538,375
    )
    
    
    (7,775,443
    )Cash paid for acquisition of agencies, net of cash acquired
    
    
    (361,700
    )
    
    
    Net cash used by investing activities, net of effect of agency acquisitions
    
    
    (6,390,322
    )
    
    
    (8,450,704
    )Cash flows from financing activities, net of effect of agency acquisitions:Repayments of notes payable
    
    
    (1,954,746
    )
    
    
    (1,807,744
    )Proceeds from debentures issuance, net
    
    
    
    
    
    
    4,955,000Preferred dividends paid
    
    
    (421,200
    )
    
    
    (506,400
    )Proceeds from capital lease obligations
    
    
    108,739
    
    
    
    Repayments of capital lease obligations
    
    
    (63,224
    )
    
    
    (45,390
    )Stock issued
    
    
    363,723
    
    
    
    4,699,374Net cash provided by financing activities, net of effect of agency acquisitions
    
    
    (1,966,708
    )
    
    
    7,294,840Net (decrease) increase in cash and cash equivalents
    
    
    (483,288
    )
    
    
    1,609,639Cash and cash equivalents, beginning of period
    
    
    8,668,827
    
    
    
    7,059,188Cash and cash equivalents, end of period
    
    $
    8,185,539
    
    
    $
    8,668,827
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##### Table of Contents



ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 December 31, 2006 and 2005
 (1)
    
    Description of Business
 AssuranceAmerica Corporation, a Nevada corporation (the Company) is an insurance holding
company whose business is comprised of AssuranceAmerica Insurance Company (AAIC),
AssuranceAmerica Managing General Agency, LLC (MGA) and TrustWay Insurance Agencies, LLC
(TrustWay), each wholly-owned. The Company solicits and underwrites nonstandard private
passenger automobile insurance. The Company is headquartered in Atlanta, Georgia.
 (2)
    
    Summary of Significant Accounting Policies
 Basis of Consolidation and Presentation
 The accompanying consolidated financial statements include the accounts and operations of the
Company. All material intercompany accounts and transactions have been eliminated. The
consolidated financial statements have been prepared in conformity with U.S. generally accepted
accounting principles (GAAP). The preparation of the financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Such estimates and assumptions could change in
the future as more information becomes known that could impact the amounts reported and the
actual results could differ from these estimates.
 Estimates
 The preparation of the consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported financial statement balances as well as the disclosure of contingent assets and
liabilities. Actual results could differ materially from those estimates used.The Companys liability for unpaid losses and loss adjustment expenses (an estimate of the
ultimate cost to settle claims both reported and unreported), although supported by actuarial
projections and other data, is ultimately based on managements reasoned expectations of future
events. Although considerable variability is inherent in these estimates, management believes
that this liability is adequate. Estimates are reviewed regularly and adjusted as necessary.
Such adjustments are reflected in current operations.Goodwill represents the amount by which the cost of acquired net assets exceeds their related
fair value. Other intangible assets include the costs of specifically identifiable intangible
assets, primarily customer renewal lists. In accordance with Statement of Financial Accounting
Standards No. 142, the carrying value of goodwill and other intangible assets is reviewed
annually or whenever events or changes in circumstances indicate that the carrying amount might
not be recoverable. If the fair value of the operations to which goodwill relates is less than
the carrying amount of those operations, including unamortized goodwill, the carrying amount of
goodwill is reduced accordingly with a charge to expense.
 Recognition of RevenuesInsurance premiums are recognized pro rata over the terms of the policies. The unearned portion
of premiums is included in the Consolidated Balance Sheet as a liability for unearned premium.
Commission income is recognized in the period the insurance policy is written and is reduced by
an estimate of future cancellations. Installment and other fees are recognized in the periods
the services are rendered.Fair Value of Financial InstrumentsThe carrying amounts of the Companys financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities, approximate fair value because of
their short maturities. The carrying amounts of equity securities and long-term bonds purchased
are adjusted to reflect the current market value. The carrying amounts of the Companys capital
lease obligations approximate fair value because these obligations are based upon managements
best estimates of interest rates that would be available for similar debt obligations as of
December 31, 2006 and December 31, 2005. The carrying value of the junior subordinated
debentures approximates the fair value because the interest rate adjusts quarterly.Deferred Acquisition CostsDeferred acquisition costs (DAC) include premium taxes and commissions incurred in connection
with the production of new and renewal business, less ceding commissions allowed by reinsurers.
These costs are deferred and amortized over the period in which the related premiums are earned.
The Company does not consider anticipated investment income in determining the recoverability of
these costs. Based on current indications, management believes that these costs will be fully
recoverable and, accordingly, no reduction in DAC has been recognized.
 F-9




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##### Table of Contents



ContingenciesIn 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 seek 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.Start-Up CostsStart-up costs are expensed when incurred.Cash and Cash EquivalentsCash and cash equivalents include cash demand deposits, money market accounts and bank
certificates of deposit with a maturity of less than three months.Leased Property Under Capital LeaseLeased property under a capital lease is recorded as a capital asset and amortized on a
straight-line basis over the estimated useful life of the property. The property and the related
lease obligation are disclosed on the balance sheet.Property and EquipmentProperty and equipment is recorded at cost and depreciated on a straight-line basis. The
estimated useful lives used for depreciation purposes are: Furniture and fixtures  5 to 7 years;
equipment  3 to 5 years; software currently in service  3 to 5 years; leasehold improvements 
over the remaining life of the lease, including options. Improvements, additions and major
renewals which extend the life of an asset are capitalized. Repairs are expensed in the year
incurred. Depreciation expense was $604,076 and $412,312 for the twelve months ended December
31, 2006 and 2005, respectively.A summary of property and equipment is as follows:
 December 31, 2006
    
    
    December 31, 2005Furniture and equipment
    
    $
    1,337,210
    
    
    $
    886,837Computer equipment
    
    
    1,457,834
    
    
    
    1,097,942Computer software
    
    
    769,488
    
    
    
    477,524Leasehold improvements
    
    
    1,053,640
    
    
    
    544,564Less: accumulated depreciation
    
    
    (2,136,512
    )
    
    
    (1,606,200
    )$
    2,481,660
    
    
    $
    1,400,667
 Amortization of Intangible AssetsIntangible assets consist of non-competition agreements, renewal lists, restrictive covenants and
goodwill. Intangible assets are stated at cost. Effective January 1, 2002, the Company adopted
the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill and
certain intangibles with indefinite lives no longer be amortized, but
instead be tested for
impairment at least annually. The non-competition agreements are amortized on a straight-line
basis varying from 2 1/2 years to 5 years. Amortization expense was $426,088 and $199,848 for
the twelve months ended December 31, 2006 and 2005, respectively.Intangible assets include the following:
 December 31, 2006
    
    
    December 31, 2005Goodwill
    
    $
    8,763,566
    
    
    $
    6,388,094Non-compete clause
    
    
    760,000
    
    
    
    760,000Renewal list
    
    
    3,195,650
    
    
    
    1,390,000Restrictive covenants
    
    
    220,000
    
    
    
    220,00012,939,216
    
    
    
    8,758,094Less accumulated amortization
    
    
    (1,824,334
    )
    
    
    (1,398,244
    )$
    11,114,882
    
    
    $
    7,359,850
  2007
    
    $
    432,8512008
    
    $
    424,7032009
    
    $
    377,8512010
    
    $
    349,3512011
    
    $
    308,564
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Based upon its most recent analysis, the Company believes that no impairment of goodwill exists
at December 31, 2006 or December 31, 2005.AdvertisingAdvertising costs are expensed as incurred. Advertising expense for the years ended December 31,
2006 and 2005 was $1,189,397 and $790,789, respectively.Stock OptionsEffective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-based payment
(SFAS 123R). The provisions of SFAS 123R require companies to expense in their financial
statements the estimated fair value of awarded stock options after the effective date. The
Company adopted this statement using the modified prospective application. For options granted
and vested prior to the effective date, the Company continues to follow the intrinsic value
method set forth in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25), and disclose the pro forma effects on net income had the
fair value of these options been expensed. The disclosure provisions required by SFAS 123R
are provided in Note 8.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets
and liabilities are established for temporary differences between the financial reporting bases
and the tax bases of assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences are expected to be recovered or settled. The principal assets and
liabilities that generate these temporary differences are unearned premiums, loss and loss
adjustment expense reserves, deferred policy acquisition costs, operating loss and tax-credit
carry forwards and non-deductible provisions for unearned revenue. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in net income in the period that
includes the enactment date.The Company has entered into a tax allocation agreement with AAIC. The operating results for
AAIC are included in the consolidated income tax return filed by the Company. The income tax
provision is computed separately for AAIC and the Company. The tax sharing agreement between the
Company and its affiliates provides for the federal tax liability to be apportioned among the
members of the affiliated group in accordance with the ratio that the portion of the consolidated
taxable income, attributable to each member of the group having taxable income bears to the total
consolidated taxable income. TrustWay and MGA are not tax paying entities for federal income tax
purposes and their results are consolidated with the Companys in the tax allocation calculation.
AAIC only pays federal income tax.(3)
    
    InvestmentsAll of the Companys equity and long-term investment securities have been classified as
available-for-sale because all of the Companys long-term securities are available to be sold in
response to the Companys liquidity needs, changes in market interest rates and asset-liability
management strategies, and other economic factors. Investments available-for-sale are stated at
fair value on the balance sheet. Unrealized gains and losses are excluded from earnings and are
reported as a component of other comprehensive income within shareholders equity, net of related
deferred income taxes.A decline in the fair value of an available-for-sale security below cost that is deemed other
than temporary results in a charge to income, resulting in the establishment of a new cost basis
for the security. Net unrealized gains for the twelve months ended December 31, 2006 and 2005
were $80,659 and $0, respectively.Premiums and discounts are amortized or accreted, respectively, over the life of the related
fixed maturity security as an adjustment to yield using a method that approximates the effective
interest method. Dividends and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the specific-identification method for
determining the cost of securities sold.At December 31, 2006, long-term investments carried at market value of $1,895,550 and short term
investments of approximately $619,843 were pledged by one of the Companys subsidiaries under
requirements of regulatory authorities.A summary of investments follows as of:
 December 31, 2006
    
    
    December 31, 2005Short term bank certificates of deposit
    
    $
    120,000
    
    
    $
    120,000U.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    
    5,273,037
    
    
    
    6,300,740Obligations of states and political subdivisions
    
    
    4,110,076
    
    
    
    528,916Corporate debt securities
    
    
    1,563,560
    
    
    
    1,590,179Marketable equity securities
    
    
    2,055,983
    
    
    
    Total
    
    $
    13,122,656
    
    
    $
    8,539,835
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The amortized cost, fair value and gross unrealized gain or loss of debt securities
available-for-sale at December 31, 2006, by contractual maturity, is shown below:
 Gross
    
    
    GrossYears to Maturity
    
    Amortized Cost
    
    
    Unrealized Gains
    
    
    Unrealized Losses
    
    
    Fair ValueWithin one year
    
    $
    499,843
    
    
    $
    
    
    
    $
    
    
    
    $
    499,843One to five years
    
    
    2,841,229
    
    
    
    
    
    
    
    15,575
    
    
    
    2,825,654Five to ten years
    
    
    661,463
    
    
    
    8,633
    
    
    
    646
    
    
    
    669,450Over ten years
    
    
    6,920,401
    
    
    
    61,377
    
    
    
    30,052
    
    
    
    6,951,726Total
    
    $
    10,922,936
    
    
    $
    70,010
    
    
    $
    46,273
    
    
    $
    10,946,673
 The amortized cost, fair value and gross unrealized gain or loss of securities
available-for-sale at December 31, 2006, by security type, is shown below:
 Gross
    
    
    GrossSecurity type
    
    Amortized Cost
    
    
    Unrealized Gains
    
    
    Unrealized Losses
    
    
    Fair ValueU.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    5,295,497
    
    
    $
    
    
    
    $
    22,460
    
    
    $
    5,273,037Obligations of states and political subdivisions
    
    
    4,045,076
    
    
    
    70,010
    
    
    
    5,010
    
    
    
    4,110,076Corporate debt securities
    
    
    1,582,363
    
    
    
    
    
    
    
    18,803
    
    
    
    1,563,560Marketable equity securities
    
    
    1,999,061
    
    
    
    70,611
    
    
    
    13,689
    
    
    
    2,055,983Total
    
    $
    12,921,997
    
    
    $
    140,621
    
    
    $
    59,962
    
    
    $
    13,002,656
 As of December 31, 2006, the Company has determined that all of the unrealized losses in the
table above were temporary. There were no fundamental issues with any of these securities and
the Company has the ability and intent to hold the securities until there is a recovery in fair
value. There were no securities with unrealized losses of greater than 10% of book value.(4)
    
    Losses and Loss Adjustment ExpensesThe estimated liabilities for losses and loss adjustment expenses (LAE) include the
accumulation of estimates for losses for claims reported prior to the balance sheet dates (case
reserves), estimates (based upon actuarial analysis of historical data) of losses for claims
incurred but not reported (IBNR) and for the development of case reserves to ultimate values,
and estimates of expenses for investigating, adjusting and settling all incurred claims. Amounts
reported are estimates of the ultimate costs of settlement, net of estimated salvage and
subrogation. These estimated liabilities are subject to the outcome of future events, such as
changes in medical and repair costs as well as economic and social conditions that impact the
settlement of claims. Management believes that, given the inherent variability in any such
estimates, the aggregate reserves are within a reasonable and acceptable range of adequacy. The
methods of making such estimates and for establishing the resulting reserves are reviewed and
updated quarterly and any resulting adjustments are reflected in current operations.A summary of unpaid losses and loss adjustment expenses, net of reinsurance ceded, is as follows:
 December 31, 2006
    
    
    December 31, 2005Case basis
    
    $
    3,510,978
    
    
    $
    1,784,824IBNR
    
    
    3,960,369
    
    
    
    2,748,138Total
    
    $
    7,471,347
    
    
    $
    4,532,962
 Activity in the liability for unpaid claims and claim adjustment expenses is summarized as
follows:
 2006
    
    
    2005Balance at January 1
    
    $
    15,109,874
    
    
    $
    10,655,625Less reinsurance recoverables on unpaid losses
    
    
    10,576,912
    
    
    
    7,458,937Net balance at January 1
    
    
    4,532,962
    
    
    
    3,196,688Add Losses and LAE incurred, net, related to:Current year
    
    
    15,159,788
    
    
    
    9,669,325Prior years
    
    
    159,134
    
    
    
    (412,184
    )Net Losses and LAE incurred in the current year
    
    
    15,318,922
    
    
    
    9,257,141
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##### Table of Contents



2006
    
    
    2005Deduct Losses and LAE paid, net, related to:Current year
    
    
    9,437,032
    
    
    
    5,880,003Prior years
    
    
    2,943,505
    
    
    
    2,040,864Net claim payments in the current year
    
    
    12,380,537
    
    
    
    7,920,867Net balance at December 31
    
    
    7,471,347
    
    
    
    4,532,962Plus reinsurance recoverables on unpaid losses
    
    
    17,433,145
    
    
    
    10,576,912Balance at December 31
    
    $
    24,904,492
    
    
    $
    15,109,874
 The majority of the Companys net claim payments related to accidents occurring in the current
accident year. As a result of changes in estimates of insured events in prior years, the claims
and claim adjustment expenses incurred (net of reinsurance recoveries of $35,689,738 and
$21,562,293 in 2006 and 2005, respectively) increased by $0.2 million in 2006 reflecting higher
than anticipated losses.(5)
    
    ReinsuranceIn the normal course of business, the Company seeks to reduce its overall risk levels by
obtaining reinsurance from other insurance enterprises or reinsurers. Reinsurance premiums and
reserves on reinsured business are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of the reinsurance contracts.Reinsurance contracts do not relieve the Company from its obligations to policyholders. The
Company periodically reviews the financial condition of its reinsurers to minimize its exposure
to losses from reinsurer insolvencies.Reinsurance assets include balances due from other insurance companies under the terms of
reinsurance agreements. Amounts applicable to ceded unearned premiums, ceded loss payments and
ceded claims liabilities are reported as assets in the accompanying balance sheets. The Company
believes the fair value of its reinsurance recoverables approximates their carrying amounts.The impact of reinsurance on the statements of operations for the period ended December 31 is as
follows:
 2006
    
    
    2005Premiums written:Direct
    
    $
    68,825,601
    
    
    $
    50,309,013Assumed
    
    
    283,364
    
    
    
    210,358Ceded
    
    
    47,016,892
    
    
    
    34,300,556Net
    
    $
    22,092,073
    
    
    $
    16,218,815Premiums earned:Direct
    
    $
    64,768,234
    
    
    $
    41,699,701Assumed
    
    
    300,423
    
    
    
    78,386Ceded
    
    
    44,215,681
    
    
    
    28,381,116Net
    
    $
    20,852,976
    
    
    $
    13,396,971Losses and loss adjustment expenses incurred:Direct
    
    $
    51,008,247
    
    
    $
    30,811,072Assumed
    
    
    413
    
    
    
    6,846Ceded
    
    
    35,689,738
    
    
    
    21,562,293Net
    
    $
    15,318,922
    
    
    $
    9,255,625
 The impact of reinsurance on the balance sheets as of December 31 is as follows:
 Unpaid losses and loss adjustment expense:Direct
    
    $
    24,904,492
    
    
    $
    15,109,874Assumed
    
    
    
    
    
    
    Ceded
    
    
    17,433,145
    
    
    
    10,576,912Net
    
    $
    7,471,347
    
    
    $
    4,532,962Unearned premiums:Direct
    
    $
    20,499,867
    
    
    $
    16,442,501Assumed
    
    
    114,914
    
    
    
    131,972Ceded
    
    
    14,012,481
    
    
    
    11,211,270Net
    
    $
    6,602,300
    
    
    $
    5,363,203
 The Company received $12,224,440 in commissions on premiums ceded during 2006. Had all of the
Companys reinsurance agreements been cancelled at December 31, 2006, the Company would have
returned $3,643,245 in reinsurance commissions to its reinsurers and its reinsurers would have
returned $14,012,481 in unearned premiums to the Company.
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Contingent Reinsurance Commission and Provisional Commission ReserveThe Companys reinsurance contract provides ceding commissions for premiums written which are
subject to adjustment. The amount of ceding commissions, net of adjustments, is determined by
the loss experience for the reinsurance agreement term. The reinsurers provide commissions on a
sliding scale with maximum and minimum achievable levels. The reinsurers pay the Company with
the provisional commissions, before adjustment. The Company adjusts the commissions based on the
current loss experience for the policy year premiums. This results in establishing a liability
for the excess of provisional commissions retained compared to amounts recognized, which is
subject to variation until the ultimate loss experience is determinable.The total liability for excess provisional commissions received as of December 31, 2006 by
policy year is:
 Policy Year
    
    Amount2003
    
    $
    60,5562004
    
    
    2,0122005
    
    
    916,8452006
    
    
    1,340,127Total
    
    $
    2,319,540
 (6)
    
    Long-Term DebtNotes Payable, Related PartyThe Company has various notes payable to related parties totaling to $3,946,789 at December 31,
2006. This Notes Payable debt consists primarily of unsecured promissory notes payable to its
Chairman and its Chief Executive Officer. The promissory notes provide for the repayment of
principal beginning in December 2004 in an amount equal to the greater of $1.1 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 the holders, and without giving
notice or paying additional consideration. As a result of the acquisition of a Georgia insurance
agency in 2004, the Company also has an unsecured promissory note payable to a Division President
of the Company. The promissory note carries an interest rate of 8% and provides for the
repayment of principal in three equal installments beginning August 2005. There is one remaining
principal payment on this promissory note as of December 31, 2006.Other Notes PayableAs a result of the acquisitions of two Florida insurance agencies in 2006, the Company also has
unsecured promissory notes payable to the former owners. The first promissory note, executed in
connection with the acquisition of The Insurance Center, Inc. effective January 1, 2006, carries
an interest rate of 8%. This note provides for the payment of interest in quarterly installments
beginning April 1, 2006 and the repayment of principal in one installment on July 1, 2008.
Amounts due under this note, as of December 31, 2006, total $1,567,000. The second promissory
note, executed in connection with the acquisition of the assets of Tampa No-Fault Insurance
Agency, Inc. effective January 16, 2006, carries an interest rate of 8%. The note provides for
the payment of interest in quarterly installments beginning on March 31, 2006 and the repayment
of principal in two equal installments on January 16, 2007 and January 16, 2008. Amounts due
under this note, as of December 31, 2006 total $283,333.Junior Subordinated DebenturesOn December 22, 2005, the Company, through a newly-formed Delaware statutory trust,
AssuranceAmerica Capital Trust I (the Trust), consummated the private placement of 5,000 of the
Trusts floating rate Capital Securities, with a liquidation amount of $1,000 per capital
security (the Capital Securities). In connection with the Trusts issuance and sale of the
Capital Securities, the Company purchased from the Trust 155 of the Trusts floating rate Common
Securities, with a liquidation amount of $1,000 per common security (the Common Securities).
The Trust used the proceeds from the issuance and sale of the Capital Securities and the Common
Securities to purchase $5,155,000 in aggregate principal amount of the floating rate junior
subordinated debentures of the Company (the Debentures).
The Debentures bear interest at a floating rate of three-month LIBOR
plus 5.75%, reset quarterly. The Debentures and Capital Securities mature on
December 31, 2035, but may be redeemed at par beginning December 31, 2010 if and to the extent
the Company exercises its right to redeem the Debentures. The Capital Securities require
quarterly distributions by the Trust to the holders of the Capital Securities, at a floating rate
of three-month LIBOR plus 5.75% per annum, reset quarterly. Distributions are cumulative and will
accrue from the date of original issuance but may be deferred for a period of up to 20
consecutive quarterly interest payment periods if the Company exercises its right under the
Indenture to defer the payment of interest on the Debentures. The Company has guaranteed the
obligations of the Trust.
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Scheduled Maturities
  Amount2007
    
    $
    1,596,5492008
    
    
    2,728,1112009
    
    
    1,000,0002010
    
    
    472,4632011 and after
    
    
    4,961,851Total
    
    $
    10,758,974
 (7)
    
    Income Taxes
 The provision for federal and state income taxes for the years ended are as follows:
 December 31,2006
    
    
    2005Current
    
    $
    164,061
    
    
    $
    Reversal of prior year valuation allowance
    
    
    (2,266,000
    )
    
    
    Deferred
    
    
    82,209
    
    
    
    Total provision for income taxes
    
    $
    (2,019,730
    )
    
    $
    
  2006Income before income taxes
    
    $
    2,711,869Income tax expense at statutory rate
    
    $
    922,035Tax effect of:Tax exempt interest income
    
    
    (31,395
    )Utilization of net operating loss carry-forwards
    
    
    (482,460
    )Reversal of prior year valuation allowance
    
    
    (2,266,000
    )State taxes, net of federal tax benefit
    
    
    22,328Other, net
    
    
    (184,238
    )Total income tax expense
    
    $
    (2,019,730
    )
  2006
    
    
    2005Deferred income tax assets:Discounting of loss reserves
    
    $
    188,000
    
    
    $
    105,000Federal operating loss carry-forward
    
    
    1,051,000
    
    
    
    738,000Amortization of intangibles
    
    
    781,000
    
    
    
    1,181,000Unearned premium reserves
    
    
    495,000
    
    
    
    402,000Unearned commission reserves
    
    
    220,000
    
    
    
    253,000Stock options
    
    
    161,000
    
    
    
    Gross deferred tax assets
    
    
    2,896,000
    
    
    
    2,679,000Less valuation allowance
    
    
    
    
    
    
    (2,266,000
    )Gross deferred tax assets net of valuation allowance
    
    
    2,896,000
    
    
    
    413,000Deferred income tax liabilities:Deferred acquisition costs
    
    
    300,000
    
    
    
    299,000Depreciation
    
    
    59,000
    
    
    
    114,000Unrealized gains on securities available for sale
    
    
    30,000
    
    
    
    Gross deferred tax liabilities
    
    
    389,000
    
    
    
    413,000Net deferred tax assets
    
    $
    2,507,000
    
    
    $
    
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SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance be established
when it is more likely than not that all or a portion of a deferred tax asset will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences are deductible. In
making this determination, management considers all available positive and negative evidence
affecting specific deferred tax assets, including the Companys past and anticipated future
performance, the reversal of deferred tax liabilities and the implementation of tax planning
strategies. Objective positive evidence is necessary to support a conclusion that a valuation
allowance is not needed for all or a portion of the deferred tax assets when significant negative
evidence exists.Through December 31, 2005, the Company had established a valuation allowance for its net deferred
tax assets due to the uncertainty regarding the realization of these deferred income tax assets.
This valuation allowance was reversed in 2006 as the Company determined that the Company will be
able to generate sufficient future taxable income during the periods in which the temporary
differences are deductible.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 in varying amounts between the year 2015 and December 31, 2025. The loss carry-forwards
at January 1, 2006 were approximately $4,351,000. Utilization of part of the net operating
losses carried forward will be limited under Section 382 of the Internal Revenue Code as the
Company experienced an ownership change greater than 50% effective April 1, 2003, and on January
1, 2006 for carry-forwards related to the acquisition of The Insurance Center, Inc..
Accordingly, certain net operating losses may not be realizable in future years due to this
limitation.The Company has unused net operating loss carry forwards available to offset future taxable
income as follows:
 Expires 2017
    
    $
    173,992Expires 2022
    
    
    1,008,921Expires 2023
    
    
    387,855Expires 2024
    
    
    397,621Expires 2025
    
    
    2,382,143$
    4,350,532
 (8)
    
    Capital StockPreferred StockDuring 2005, the Company issued 840,000 shares of its series A convertible preferred stock
for an aggregate consideration of $4,200,000. The series A convertible stock pays a cumulative semi-annual
dividend of $0.20 per share. Each outstanding share of preferred stock is convertible into ten shares of
common stock automatically two years from the date of issuance, or at
any time prior to such automatic conversion at the Holders
request, and has the voting rights of 10 common shares. The outstanding preferred stock will automatically convert,
if not converted sooner, at various times during 2007 with the last
automatic conversion scheduled for May 24, 2007. During 2006, 426,000 shares of preferred stock converted to 4,260,000 shares of
common stock.Common StockDuring the fourth quarter of 2005, the Company issued 669,231 shares of common stock, $0.01 par
value, through a private placement. During the first quarter of 2006, the Company issued 600,000
shares of common stock, $0.01 par value, through a private placement. During 2006, 426,000
shares of preferred stock converted to 4,260,000 shares of common stock.Stock-Based CompensationThe Companys 2000 Stock Option Plan provides for the granting of stock options to officers, key
employees, directors, consultants, independent contractors and other agents at the discretion of
the Board of Directors. The Company believes that such awards better align the interests of its
associates with those of its shareholders. Options become exercisable at various dates,
generally vesting over a five-year continuous period of service and have similar contractual
terms. Certain employment agreements may provide for accelerated vesting if there is a change in
control of the Company (as defined in the Plan). Generally, options are issued with exercise
prices no less than the fair market value of the common stock at the time of the grant (or in the
case of a ten-percent-or-greater stockholder, 110 percent of fair market value).The aggregate number of common shares authorized under the plan is currently 7,500,000. Prior to
the merger with AssuranceAmerica Corporation, a Georgia corporation, the Company had issued
options to purchase 948,918 shares of common stock and, after the merger the Company 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. On April 27, 2006 the shareholders voted in favor of an
amendment to the Companys 2000 Stock Option Plan to increase the number of shares available for
issuance from 5,000,000 to 7,500,000.
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Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-based Payment
(SFAS 123R). The provisions of
SFAS 123R require companies to expense in their financial statements the estimated fair value of
awarded stock options after the effective date. The Company adopted this statement using the
modified prospective application. For options granted and vested prior to the effective date,
the Company continues to follow the intrinsic value method set forth in Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
disclose the pro forma effects on net income had the fair value of these options been expensed.The fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model using the assumptions noted in the following table.
Expected volatilities are based on historical volatilities of the Companys stock. The Company
uses historical data to estimate expected term and option forfeitures within the valuation model.
The risk-free rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. The Company does not provide for any
expected dividends or discount for post-vesting restrictions in the model.
 2006
    
    2005Expected volatility
    
    
    111% - 119%
    
    
    
    120% - 168%Weighted average volatility
    
    
    112%
    
    
    
    144%Risk-free interest rate
    
    
    1.90% - 2.40%
    
    
    
    1.00% - 2.00%Expected term (in years)
    
    
    5.0
    
    
    
    5.0
 A summary of all stock option activity during 2006 follows:
 2006
    
    2005Weighted
    
    
    
    
    
    WeightedNumber of
    
    Average
    
    Number of
    
    AverageOptions Outstanding
    
    Shares
    
    Exercise Price
    
    Shares
    
    Exercise PriceBeginning of year
    
    
    4,215,628
    
    
    $
    0.97
    
    
    
    3,302,918
    
    
    $
    1.45Add (deduct):Granted
    
    
    2,431,315
    
    
    $
    1.10
    
    
    
    2,394,050
    
    
    $
    0.81Exercised
    
    
    (45,650
    )
    
    $
    0.33
    
    
    
    (192,000
    )
    
    $
    0.25Forfeited
    
    
    (1,014,150
    )
    
    $
    0.86
    
    
    
    (720,340
    )
    
    $
    0.59Expired
    
    
    (239,918
    )
    
    $
    5.56
    
    
    
    (569,000
    )
    
    $
    3.78End of year
    
    
    5,347,225
    
    
    $
    0.85
    
    
    
    4,215,628
    
    
    $
    0.97Exercisable, end of year
    
    
    1,394,782
    
    
    $
    0.76
    
    
    
    929,018
    
    
    $
    2.12
 The weighted-average grant date fair value of options granted during the twelve months ended
December 31, 2006 and December 31, 2005, using the Black-Scholes-Merton option-pricing model, was
$0.6817 and $0.5203, respectively. The total intrinsic value of options exercised during the
twelve months ended December 31, 2006 and December 31, 2005 was $60,091 and $97,320,
respectively.Total compensation cost for share-based payment arrangements
recognized for the twelve month period ended December 31, 2006 was
$429,351. SFAS 123R is
effective for periods beginning after December 15, 2005. Accordingly, no provision was recorded
in the financial statements for the twelve month period ended December 31, 2005.As of December 31, 2006, the total compensation cost, related to nonvested
awards not yet recognized in the financial statements is $2,230,778. The Company expects to
recognize the compensation cost over the weighted-average contractual term of 3.8 years.For options granted and vested prior to the effective date, the Company continues to follow the
intrinsic value method set forth in Accounting Principles Board (APB) Opinion 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 these options been expensed. The pro forma effect of the
application of APB Opinion No. 25 for options granted and vested prior to January 1, 2006 was:
 For the twelve months ended December 31,2006
    
    
    2005Net income
attributed to common stockholders, as reported
    
    $
    4,310,399
    
    
    $
    1,823,193Compensation effect, net of tax effect
    
    
    (4,856
    )
    
    
    (335,960
    )Pro forma net income
    
    $
    4,305,543
    
    
    $
    1,487,233Basic and diluted net income attributable to common stockholdersAs reported  Basic
    
    
    0.080
    
    
    
    0.036Pro forma  Basic
    
    
    0.080
    
    
    
    0.030As reported  Diluted
    
    
    0.075
    
    
    
    0.036Pro forma  Diluted
    
    
    0.074
    
    
    
    0.031
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The following fully vested stock options and stock options
expected to vest were outstanding or exercisable as of December 31, 2006:
 Options Outstanding
    
    Options ExercisableNumber of shares
    
    
    5,347,225
    
    
    
    1,394,782Weighted average exercise price
    
    $
    0.85
    
    
    $
    0.76Aggregate intrinsic value
    
    $
    907,045
    
    
    $
    457,047Weighted average remaining contractual term
    
    3.45 years
    
    2.54 years
 The following stock options were outstanding or exercisable as of December 31, 2006:
 Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of Exercise
    
    Number
    
    Contractual
    
    Exercise
    
    Number of
    
    ExercisePrices
    
    of Shares
    
    Life
    
    Price
    
    Shares
    
    Price< $1.00
    
    
    3,995,725
    
    
    3.13 years
    
    $
    0.62
    
    
    
    1,314,782
    
    
    $
    0.49$1.00 < $3.00
    
    
    1,271,500
    
    
    4.63 years
    
    $
    1.30
    
    
    
    
    
    
    
    $3.00 < $4.00
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    $4.00 < $5.00
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    $5.00 < $6.50
    
    
    80,000
    
    
    0.51 years
    
    $
    5.25
    
    
    
    80,000
    
    
    $
    5.255,347,225
    
    
    3.45 years
    
    $
    0.85
    
    
    
    1,394,782
    
    
    $
    0.76
 (9)
    
    RiskThe following is a description of the most significant risks facing the Company and how it
mitigates those risks:(I) LEGAL/REGULATORY RISKS  the risk that changes in the regulatory environment in which an
insurer operates will create additional expenses not anticipated by the insurer in pricing its
products. That is, regulatory initiatives designed to reduce insurer profits, restrict
underwriting practices and risk classifications, mandate rate reductions and refunds, and new
legal theories or insurance company insolvencies through guaranty fund assessments may create
costs for the insurer beyond those recorded in the financial statements. The Company attempts to
mitigate this risk by monitoring proposed regulatory legislation and by assessing the impact of
new laws. As the Company writes business only in five states, it is more exposed to this risk
than some of its more geographically balanced competitors.(II) CREDIT RISK  the risk that issuers of securities owned by the Company will default or that
other parties, including reinsurers to whom business is ceded, which owe the Company money, will
not pay. The Company attempts to minimize this risk by adhering to a conservative investment
strategy, maintaining reinsurance agreements with financially sound reinsurers with an A.M. Best
rating of A- or better, and by providing for any amounts deemed uncollectible. As of December
31, 2006, there were no amounts deemed uncollectible.(III) INTEREST RATE RISK  the risk that interest rates will change and cause a decrease in the
value of an insurers investments. To the extent that liabilities come due more quickly than
assets mature, an insurer might have to sell assets prior to maturity and potentially recognize a
gain or a loss. The Company, in accordance with its investment policy, manages its investment
portfolio duration according to expected liability duration needs. Since the Companys
liabilities are predominantly short-term, the investment portfolio is also short-term duration.
The investment policy requires that the duration of the investment portfolio will not diverge
from the Companys liability duration by more than + 15%.
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Concentration of RiskThe Company operates in Alabama, Florida, Georgia, Louisiana, South Carolina and Texas and is
dependent upon the economies in those states. Automobiles insured through AAIC are principally
in Alabama, Florida, Georgia, Louisiana, South Carolina and Texas. Premium increases generally
must be approved by state insurance commissioners.Concentration of Credit RiskFinancial instruments that potentially subject the Company to significant concentrations of
credit risk consist principally of cash. The Company maintains cash and cash equivalents with
various financial institutions. The Companys policy is to maintain balances with high credit
quality financial institutions. The Company has not sustained material credit losses from
instruments held at financial institutions.The Company maintains a relationship with two reinsurers. The Company performs periodic
evaluations of the relative credit standing of each of these companies.Regulatory Requirements and RestrictionsTo retain its certificate of authority, the South Carolina Insurance Code requires that AAIC
maintain capital and surplus at a minimum of $3.0 million. At December 31, 2006, AAICs capital
and surplus was approximately $9.8 million. AAIC is required to adhere to a prescribed net
premium-to-surplus ratio. At December 31, 2006, AAIC was in compliance with this requirement.Under the South Carolina Insurance Code, AAIC must receive prior regulatory approval to pay a
dividend in an amount exceeding ten percent (10%) of policyholder surplus or net income, minus
realized capital gains, whichever is greater.The Company is required to comply with the NAIC risk-based capital (RBC) requirements. RBC is
a method of measuring the amount of capital appropriate for an insurance company to support its
overall business operations and to ensure that it has an acceptably low expectation of becoming
financially impaired in light of its size and risk profile. NAICs RBC standards are used by
regulators to determine appropriate regulatory actions relating to insurers which show signs of
weak or deteriorating condition and are evaluated on at least an annual basis at the end of each
year. The model law provides for increasing levels of regulatory intervention as the ratio of an
insurers total adjusted capital and surplus decreases relative to its risk based capital,
culminating with mandatory control of the operations of the insurer by the domiciliary insurance
department at the so-called mandatory control level. As of December 31, 2006, based upon
calculations using the appropriate NAIC formula, AAICs total adjusted capital is in excess of
ratios which would require any form of corrective actions on our part or action on the part of
the regulators.The NAIC Insurance Regulatory Information System (IRIS) is part of a collection of analytical
tools designed to provide state insurance regulators with an integrated approach to screening and
analyzing the financial condition of insurance companies operating in their respective states.
IRIS is intended to assist state insurance regulators in targeting resources to those insurers in
greatest need of regulatory attention. IRIS consists of two phases: statistical and analytical.
In the statistical phase, the NAIC database generates key financial ratio results based on
financial information obtained from insurers annual statutory statements. The analytical phase
is a review of the annual statements, financial ratios and other automated solvency tools. The
primary goal of the analytical phase is to identify companies that appear to require immediate
regulatory attention. A ratio result falling outside the usual range of IRIS ratios is not
considered a failing result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for financially sound
companies to have several ratios with results outside the usual ranges. An insurance company may
fall out of the usual range for one or more ratios because of specific transactions that are in
themselves immaterial. As of December 31, 2006, AAIC had three IRIS ratios outside the usual
range. The majority of the results outside of the usual range were attributable to increases in
net premium written and surplus. We do not expect any regulatory action as a result of these
results outside of the usual range.(10)
    
    Commitments and ContingenciesOperating LeasesThe Company has entered into operating leases primarily for office space and certain equipment.
These leases are classified as operating leases. The future minimum rental payments required
under long-term non-cancelable leases are summarized as follows:
 Year EndingDecember 31,
    
    Amount2007
    
    $
    1,414,1582008
    
    
    1,125,3752009
    
    
    859,8722010
    
    
    655,9332011
    
    
    599,923Thereafter
    
    
    2,126,461$
    6,781,722
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Rent expense totaled $1,423,911 and $1,000,012 for 2006 and 2005, respectively.In 2006, the Company paid to a third party a license fee of $8,400 per month for the use of their software. The
agreement is subject to a 5% annual increase and is renewable at the option of the Company.Capital LeasesThe Companys property under capital leases, which is included in property and equipment is
summarized as follows:
 Property and equipment
    
    $
    415,263Less: accumulated depreciation
    
    
    (138,368
    )$
    276,895
 Amortization of leased assets is included in depreciation expense.Future minimum lease payments under capital leases at December 31, 2006 are as follows:
 Year EndingDecember 31,
    
    Amount2007
    
    $
    104,6332008
    
    
    104,6332009
    
    
    84,311293,577Less amount representing interest
    
    
    27,907Present value of future minimum lease payments
    
    $
    265,670
 Defined Contribution PlanThe Companys employees participate in the AssuranceAmerica 401(k) defined contribution
retirement plan. Under the plan, the Company can elect to make discretionary contributions. The
Company did not make contributions in 2006 or 2005. The plan currently does not match employee
contributions. The eligibility requirements are 21 years of age, 6 months of service and full
time employment.(11)
    
    Business CombinationOn January 18, 2005, the
Company acquired Cannon Insurance Agency, Inc. and E&S Insurance Services, Inc. (the Seller)
pursuant to an Asset Purchase Agreement (the Agreement) with TrustWay,
the Seller and Steve Speir. The Company acquired the Seller as part of managements strategy to
increase its agency operation through acquisitions. Pursuant to the Agreement, as consideration
for the purchased assets, the Company issued to the Seller an aggregate of 3,600,000 shares of
the Companys common stock. For purposes of the acquisition, management valued the common stock
at $0.60 per share based upon the fair market value of the Companys shares as of the closing
date. As part of the total purchase price, the Company assigned $730,000 to the purchased book
of business amortized over a ten-year period. The Company assigned $150,000 to a noncompete
covenant amortized over a five-year period. The Company assigned $1,280,000 to goodwill which is
being valued in accordance with FAS 142.On January 16, 2006 TrustWay purchased all of
the assets of Tampa No-Fault Insurance Agency, Inc. (TNF) pursuant to the terms of an Asset
Purchase Agreement (the APA) by and between the Company,
TrustWay, Tampa No-Fault Insurance Agency, Inc., Mario A. Suarez, Mary Suarez, and Mario C.
Suarez. TNF is an insurance agency selling primarily nonstandard automobile insurance in Tampa,
Florida. The purchase price was $425,000 payable one-third in cash at the closing and the
delivery of a promissory note for the remainder payable in two equal annual payments of principal
with quarterly interest payments at 8%. Each principal also agreed to a three-year restrictive
covenants prohibiting them from competing with the TNF, soliciting its customers, or hiring its
employees. As part of the total purchase price, the Company assigned
$155,650 to the purchased
book of business amortized over a ten-year period. The Company
assigned $269,350 to goodwill
which is being valued in accordance with FAS 142.On January 27, 2006, the Company acquired The Insurance Center, Inc. (TIC), doing business as
Apple Insurance Mall, a 16-office insurance agency selling primarily nonstandard automobile
insurance in southern Florida. The acquisition was effected by the merger of a subsidiary of the
Company and TIC with TIC being the survivor pursuant to the terms of an Agreement and Plan of
Merger by and among the Company, AAC Merger Corporation I, The Insurance Center,
Inc., and Shareholders Representative dated January 27, 2006 (Merger Agreement). The total
consideration paid for all shares of TIC was $3,900,000 subject to adjustment upward or downward
on a dollar for dollar basis for every dollar that the tangible net worth of TIC as defined in
the Merger Agreement is greater or less than one dollar as of December 31, 2005. Based upon an
estimated tangible net worth as of December 31, 2005, the estimated merger price was $3,161,931.
The consideration was
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paid by the delivery of $1,115,744 cash to an escrow agent, the payment of certain liabilities of
TIC, and the delivery of the Companys promissory note for $1,900,000 with principal due on July
1, 2008 and quarterly interest payments at 8%; the principal of the note is subject to setoff in
accordance with the terms of the Merger Agreement. The final calculation of the merger
consideration, based on an evaluation of the final tangible net worth, was $2,828,536.
Immediately following the merger described above, TIC was merged into a subsidiary of TrustWay
with the subsidiary of TrustWay being the survivor. As part of the total purchase price, the
Company assigned $1,650,000 to the purchased book of business amortized over a ten-year period.
The Company assigned $2,106,122 to goodwill which is being valued in accordance with FAS 142.(12)
    
    Net Income Per ShareBasic and diluted income per common share is computed using the weighted average number of
common shares outstanding during the period. Potential common shares not included in
the calculations of net income per share for the years ended
December 31, 2006 and 2005, because their inclusion would be
anti-dilutive are
as follows:
 2006
    
    2005Warrants
    
    
    80,000
    
    
    
    145,000Stock options
    
    
    2,799,725
    
    
    
    3,462,0002,879,725
    
    
    
    3,607,000
 The reconciliation of the amounts used in the computation of
both basic earnings per share and diluted earnings per share for the
years ended December 31, 2006 and 2005 are as follows:
 Average Shares
    
    Per shareNet
Income
    

Outstanding
    

AmountFor the
year ended December 31, 2006:Net income -
basic
    
    $
    4,310,399
    
    
    
    53,609,956
    
    
    
    0.080Effect of
common shares issued upon conversion of preferred
    
    
    421,200
    
    
    
    8,400,000Effect of
dilutive stock warrants and options
    
    
    
    
    
    
    1,470,858Net income -
diluted
    
    $
    4,731,599
    
    
    
    63,480,814
    
    
    
    0.075For the
year ended December 31, 2005:Net income -
basic
    
    $
    1,823,193
    
    
    
    50,247,505
    
    
    
    0.036Effect of
common shares issued upon conversion of preferred
    
    
    506,400
    
    
    
    12,660,000Effect of
dilutive stock warrants and options
    
    
    
    
    
    
    1,131,138Net income -
diluted
    
    $
    2,329,593
    
    
    
    64,038,643
    
    
    
    0.036
 (13)
    
    Related Party TransactionsIn the past, our Chairman, Mr. Millner, and our Chief Executive Officer, Mr. Stumbaugh have
loaned us approximately $6.2 million and $0.3 million, respectively. We incurred interest on the
Promissory Note to our Chairman, Mr. Millner, of $328,538 in 2006 and $437,827 in 2005.
Additional payments of $759,791 and $1,347,561 for accrued and unpaid interest were made to Mr.
Millner in 2006 and 2005, respectively. We also made principal payments to Mr. Millner in the
amount of $397,059 and $0 in 2006 and 2005, respectively. We incurred interest on the Promissory
Note to Mr. Stumbaugh of $13,894 in 2006 and $24,241 in 2005. We made payments of accrued and
unpaid interest on the Promissory Note to Mr. Stumbaugh, our Chief Executive Officer, of $13,894
and $48,346 in 2006 and 2005, respectively. We also made principal payments to Mr. Stumbaugh in
the amount of $100,728 and $78,006 in 2006 and 2005, respectively. Outstanding amounts under the
Promissory Notes held by Messrs. Millner and Stumbaugh accrue interest at an annual rate of 8%.
The Note to Mr. Stumbaugh requires annual principal payments of $100,000 beginning December,
2004; however, the December 2004 payment was deferred until 2005. The Notes to Mr. Millner
require annual principal payments of the greater of $500,000 or 25% of Free Cash Flow (net income
after tax plus non cash items minus working capital) on each of two notes beginning in December,
2004; the December 2004 payment was deferred until 2005. The Promissory Notes are not secured by
any of our assets.In July 2004, we purchased substantially all of the assets of Thomas-Cook Holding Company
(TCHC), which was controlled by James C. Cook, a division President of the Company. Pursuant
to the Agreement, as consideration, for the purchased assets, we paid TCHC $462,000 in cash,
issued TCHC a Promissory Note in the amount of $1,078,000, and issued TCHC 1,320,000 shares of
our common stock. The principal amount of the Promissory Note is payable in three equal
installments on each of August 1, 2005, August 1, 2006 and August 1, 2007. Outstanding amounts
under the Promissory Note accrue interest at an annual rate of 8%. We are required to make
payments of accrued and unpaid interest on outstanding amounts under the Promissory Note on a
quarterly basis. We incurred $48,085 and $77,355 of interest on this Promissory Note in 2006 and
2005, respectively. We made a principal payment in the amount of $359,333 and $359,333 in 2006
and 2005, respectively.AAIC and MGA are party to a Management Agreement. Under the agreement, AAIC will appoint MGA as
its managing general agent in the states where it is licensed to do business. Under the terms of
the agreement, MGA provides all of the marketing, underwriting, accounting, product management,
legal, policyholder administration and claims functions for AAIC. As compensation for its
services, MGA receives the amount of ceding commission AAIC receives from its reinsurers. MGA
also pays AAIC a fronting fee. Additionally, MGA receives various fees related to insurance
transactions associated with these policies that vary according to state insurance laws and
regulations.TrustWay is comprised of 45 retail insurance agencies with 40 locations in Florida and 5
locations in Georgia. TrustWay has been appointed by AAIC to sell non-standard personal
automobile insurance. TrustWay receives commissions from MGA and various fees from insureds
associated with the sale of these policies.The Company provides executive management services, including finance, audit and legal, to MGA
and TrustWay. The Company charges a management fee to these subsidiaries in exchange for these
services.The Company has entered into a tax allocation agreement with AAIC. The operating results for
AAIC are included in the consolidated income tax return filed by the Company. The income tax
provision was computed separately for AAIC and the Company. The tax sharing agreement between the
Company and its affiliates provides for the tax liability to be apportioned among the members of
the affiliated group in accordance with the ratio that the portion of the consolidated taxable
income, attributable to each member of the group having taxable income bears to the total
consolidated taxable income.
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(14)
    
    Supplemental Cash Flow Information
 2006
    
    2005Cash paid
during the year:Interest
    
    $
    1,121,691
    
    
    $
    607,327Income Taxes
    
    
    832,738
    
    
    
    
 The Company recorded net unrealized gains on investment
securities during 2006 in the amount of $50,412, net of taxes. No
unrealized gains or losses on investment securities were recorded in
2005.On January 18, 2005 the Company acquired Cannon Insurance Agency, Inc and E&S Insurance Services.
This acquisition was valued at $2,160,000, as noted in the Business Combination footnote, and
was a non-cash transaction.On January 16, 2006 the Company purchased the assets of Tampa No-Fault Insurance Agency, Inc. As
part of the purchase agreement, the Company issued a note payable in the amount of $283,333.On January 27, 2006, the Company acquired The Insurance Center, Inc. As part of the purchase
agreement, the Company issued a note payable in the amount of $1,900,000, subject to adjustment
as noted in the Business Combination footnote.(15)
    
    Recent Accounting PronouncementsThe Company periodically reviews recent accounting pronouncements issued by the Financial
Accounting Standards Board, American Institute of Certified Public Accountants, Emerging Issues
Task Force and Staff Accounting Bulletins issued by the United States Securities and Exchange
Commission to determine the potential impact on the Companys financial statements. Based on its
most recent review, the Company has determined that the majority of these recently issued
accounting standards either do not apply to the Company or will not have a material impact on its
financial statements.In June 2006 the Financial Accounting standards Board (FASB)
issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 is an interpretation of
FASB Statement No. 109, Accounting for Income
Taxes, and must be adopted by the Company no later than
January 1, 2007. FIN 48 prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the financial
statements uncertain tax positions that the Company has taken or
expects to take in its returns. Management will be required to
evaluate every open tax position that exists in every jurisdiction on
the date of initial adoption.In September 2006 the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value
Measurements. This Statement does not require any new fair
value measurements, but rather, it provides enhanced guidance to
other pronouncements that require or permit assets or liabilities to
be measured at fair value. However, the application of this Statement
may change how fair value is determined. The Statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years.(16)
    
    Selected Unaudited Quarterly Financial Information
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2006Revenue
    
    $
    15,376,950
    
    
    $
    12,986,923
    
    
    $
    13,127,204
    
    
    $
    12,231,765Income from
operations
    
    
    1,198,153
    
    
    
    512,474
    
    
    
    851,735
    
    
    
    149,523Net income attributable to common shareholders
    
    
    669,971
    
    
    
    237,169
    
    
    
    699,307
    
    
    
    2,703,968
    *Diluted net earnings per share attributable to common shareholders
    
    
    0.010
    
    
    
    0.004
    
    
    
    0.011
    
    
    
    0.041
    *2005Revenue
    
    $
    7,806,950
    
    
    $
    8,144,062
    
    
    $
    9,915,267
    
    
    $
    11,249,205Income from
operations
    
    
    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
    
    
    
    0.004
 
 *
    
    The Company recorded a tax adjustment during the fourth quarter of 2006 of approximately
$2.5 million in tax benefits. This adjustment recognized previously unrecognized deferred
tax assets. (17)
    
    Subsequent EventsEffective January 1, 2007, TW Partners Agencies of Alabama, Inc. (TWPAA), a newly formed
subsidiary of TrustWay Insurance Agencies, LLC, purchased all of the assets and assumed certain
liabilities of Frontline Insurance Group, LLC (FIG), an Alabama LLC, which was controlled by
Jim Bohanan, pursuant to the terms of an Asset Purchase Agreement. FIG is an insurance agency
selling primarily automobile insurance in Montgomery and Troy, Alabama. The purchase price was
$414,440, subject to certain adjustments plus 20% of the outstanding stock of TWPAA, payable 72%
in cash at closing, the delivery of a promissory note for the remainder payable in two equal
annual payments of principal with quarterly interest payment at 8%, and the delivery of certain
shares of the Common Stock of TWPAA. The principal also agreed to a five-year restrictive
covenant prohibiting him from soliciting customers, or hiring its employees.(18)
    
    ReclassificationCertain reclassifications have been made to the 2005 financial statements to conform to the 2006
presentations.(19)
    
    Segment ReportingThe Companys subsidiaries are each unique operating entities performing a separate business
function. AAIC, a property and casualty insurance company focuses on writing nonstandard
automobile business in the states of Georgia, Alabama, Florida, Louisiana, South Carolina and
Texas.
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MGA markets AAICs policies through more than 1,400 independent agencies in these states. MGA
provides all of the underwriting, accounting, product management, legal, policyholder
administration and claims functions for AAIC and for an unaffiliated insurer that in 2005
retained the non-standard automobile insurance policies produced by MGA in Florida. MGA receives
various fees related to insurance transactions that vary according to state insurance laws and
regulations. TrustWay is comprised of 45 retail insurance agencies that focus on selling
nonstandard automobile policies and related coverages in Georgia, Florida and Alabama. TrustWay
receives commissions and various fees associated with the sale of the products and services from
its appointing insurance carriers.The Company evaluates profitability based on pretax income. Pretax income for each segment is
defined as the revenues less the segments operating expenses including depreciation,
amortization and interest.Following are the operating results for the Companys various segments and an overview of segment
assets:
 ($ in thousands)
    
    MGA
    
    TrustWay
    
    AAIC
    
    Company
    
    Eliminations
    
    Consolidated2006RevenuesExternal customer
    
    
    22,477
    
    
    
    9,641
    
    
    
    21,600
    
    
    
    5
    
    
    
    
    
    
    
    53,723Intersegment
    
    
    5,391
    
    
    
    2,502
    
    
    
    2,409
    
    
    
    2,186
    
    
    
    (12,488
    )
    
    
    IncomeSegment pretax income(loss)
    
    
    2,394
    
    
    
    (1,433
    )
    
    
    2,979
    
    
    
    (1,228
    )
    
    
    
    
    
    
    2,712AssetsSegment assets
    
    
    5,262
    
    
    
    11,153
    
    
    
    75,294
    
    
    
    24,670
    
    
    
    (20,634
    )
    
    
    95,745
 ($ in thousands)
    
    MGA
    
    TrustWay
    
    AAIC
    
    Company
    
    Eliminations
    
    Consolidated2005RevenuesExternal customer
    
    
    15,697
    
    
    
    7,768
    
    
    
    13,650
    
    
    
    
    
    
    
    
    
    
    
    37,115Intersegment
    
    
    3,795
    
    
    
    1,765
    
    
    
    630
    
    
    
    1,736
    
    
    
    (7,926
    )
    
    
    IncomeSegment pretax income(loss)
    
    
    400
    
    
    
    350
    
    
    
    1,597
    
    
    
    (17
    )
    
    
    
    
    
    
    2,330AssetsSegment assets
    
    
    3,463
    
    
    
    8,550
    
    
    
    55,498
    
    
    
    18,966
    
    
    
    (17,361
    )
    
    
    69,116
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