Prior to our April 30, 2004 acquisition of USAuto Holdings, Inc., we were engaged in pursuing opportunities to acquire one or more operating companies in order to increase value to existing stockholders and provide us with a new focus and direction. In addition, we marketed for sale a portfolio of foreclosed real estate. We will continue to market the remaining real estate held (six tracts of land in San Antonio, Texas) and will attempt to sell it on a basis that provides us with the best economic return. New investments in real estate are not anticipated. In addition, our acquisition opportunities will most likely be limited to those that would be related to the insurance operations.
Our insurance operation derives its revenues from selling, servicing and underwriting non-standard personal automobile insurance policies in seven states. We conduct our underwriting operations through two insurance company subsidiaries, USAuto Insurance Company, Inc. and Village Auto Insurance Company, Inc. Our insurance operations revenues are primarily derived from:
During the year ended June 30, 2004, the number of sales offices (or “stores”) expanded by 30, increasing from 109 at June 30, 2003 to 139 at June 30, 2004. During the fiscal year ended June 30, 2003, we opened 17 stores. The stores opened during the 2004 fiscal year were profit neutral, but are expected to be profit accretive during the 2005 fiscal year. There were a total of 146 offices open as of September 1, 2004.
Investment income on cash equivalents decreased to $1.1 million for the year ended June 30, 2003 from $1.3 million for the year ended June 30, 2002. This decrease was primarily due to a decrease in interest rates. Unrestricted cash increased from $56.5 million at June 30, 2002 to $56.8 million at June 30, 2003 primarily due to interest earned on unrestricted cash accounts, proceeds from the sale of foreclosed real estate and proceeds from the sale of shares of our common stock.
Other operating expenses included compensation expense of $1.8 million for the year ended June 30, 2003 as compared to $0.1 million for the year ended June 30, 2002. The increased expense included the addition of salary expense for our President and Chief Executive Officer and two other new employees. The expense also includes $0.5 million in stock-based compensation resulting from the issuance of common stock to Mr. Edwards at a price less than the then current market value, as well as the grant of in-the-money stock options to Mr. Edwards and one other employee.
The remaining note payable to a financial institution at June 30, 2004 consisted of a term loan with an unpaid balance of $4 million, that bears interest at LIBOR plus 366 basis points. The note is payable in scheduled quarterly installments through June 30, 2007 and is secured by the common stock and certain assets of USAuto’s direct wholly-owned subsidiaries. The term loan contains certain financial covenants and requires USAuto to maintain certain financial ratios. At June 30, 2004, USAuto was in compliance with all provisions of the loan agreement, including the financial covenants and ratios, except for a Risk Based Capital ratio and a Debt Service Coverage ratio for which waivers had been obtained.
decreased market values on the properties due to a softening of the local real estate market. No losses for write-downs of real estate were recognized in the same period in 2004. There are six remaining parcels of land remaining to be sold in the San Antonio area, totaling 310 acres. As of August 31, 2004, we have received conditional contracts or letters of intent on properties totaling more than $0.9 million in book value. No assurance can be provided, however, that any of these contracts or expressions of interest ultimately will culminate in a successful sale.
USAuto is a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. USAuto currently writes non-standard personal automobile insurance in Georgia, Tennessee, Alabama, Ohio, Missouri, Mississippi and Indiana, and is licensed as an insurer in 16 additional states. Business is written through two subsidiaries, USAuto Insurance Company, Inc. and Village Insurance Company, Inc. (the “Insurance Companies”.) Neither company is licensed in Alabama where business is assumed through reinsurance contracts with unaffiliated insurance companies. Incidental run-off operations are also conducted by USAuto as a managing general agency whereby premiums are written on behalf of other insurance companies. For the two months ended June 30, 2004, approximately 50%, 20% and 19% of USAuto’s gross premiums written were generated in Georgia, Tennessee and Alabama, respectively.
Insurance premiums are earned on a pro-rata basis over the respective terms of the policies. Premiums are paid monthly by insureds and are generally collected in advance of providing risk coverage, minimizing the Company’s exposure to credit risk.
Of the $6,000 in acquired identifiable intangible assets, $1,500 and $3,300 were assigned to state insurance licenses and trademark and trade names, respectively, that are not subject to amortization. The remaining $1,200 of acquired identifiable intangible assets relate to the value of policy renewals and is being amortized over a 24-month period in proportion to anticipated policy expirations.