SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[ ] Transitional Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended May 31, 1996
Commission File No. 0-26920
USASURANCE GROUP, INC.
(Name of small business issuer in its charter)
Colorado 84-1298212
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number
7345 E. Peakview Ave.
Englewood, Colorado 80111
(303) 689-0123
(Address, including zip code and telephone number, including area
code, of registrant's executive offices)
Securities registered under Section 12(b) of the Exchange Act:
none
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. X
Issuer's revenues for its most recent fiscal year: $ 39,903
(Continued on Following Page)
<PAGE>
State the aggregate market value of the voting stock held by non-
affiliates, computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of
a specified date within the past 60 days: As of August 28, 1996:
$5,076,500.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As of
August 28, 1996 there were 1,566,000 shares of the Company's common
stock issued and outstanding.
Documents Incorporated by Reference: None
This Form 10-KSB consists of 32 pages.
Exhibit Index is Located at Page Thirty-One.
2
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT
USASURANCE GROUP, INC.
PAGE
<S> <C> <C>
Facing Page
Index
PART I
Item 1. Description of Business..................... 4
Item 2. Description of Property..................... 5
Item 3. Legal Proceedings........................... 6
Item 4. Submission of Matters to a Vote of
Security Holders........................ 6
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters......... 6
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 6
Item 7. Financial Statements........................ 10
Item 8. Changes in and Disagreements on Accounting
and Financial Disclosure................ 24
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons, Compliance with
Section 16(a) of the Exchange Act....... 24
Item 10. Executive Compensation...................... 26
Item 11. Security Ownership of Certain Beneficial
Owners and Management................... 27
Item 12. Certain Relationships and Related
Transactions............................ 28
PART IV
Item 13. Exhibits and Reports of Form 8-K............ 29
SIGNATURES............................................. 30
</TABLE>
3
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
USAsurance Group, Inc. (the "Company"), is a company
incorporated pursuant to the laws of the State of Colorado on
January 15, 1991, for the purpose of engaging as an insurance
brokerage company. The Company did not undertake any business
activities relevant thereto and in June 1995, the Company's Board
of Directors elected to change the Company's principal business
activities to the viatical settlement industry. Viatical
settlements are made to persons who are terminally ill and who want
to sell their life insurance to obtain the benefit of the money
provided by the settlement during the remainder of their life. The
term viatical is derived from the Latin word viaticum which means
money for traveling expenses. In the business context, a viatical
settlement provides financial comfort and dignity to the terminally
ill person.
Since June 1995, the Company has purchased, for its own
account, 10 different insurance policies with a face value of
$538,294 from individuals, for an aggregate purchase price of
$489,795. Three of these policies with a face amount of $151,100
have matured and the proceeds from these policies have been paid to
the Company, which received the net aggregate amount of $39,903.
Of the policies purchased by the Company since June 1995, all
of these policies have been purchased from individuals diagnosed
with Human Immunodeficiency Virus (HIV). In deference to new
treatments involving combinations of various drugs for treating HIV
positive patients, the Company has temporarily slowed down its
activities relating to the purchasing of policies which insure
people afflicted with AIDS and HIV and will not take an aggressive
approach to such acquisitions until additional information can be
obtained and analyzed relating to the effect these new treatments.
At present, management is of the opinion that insufficient
information is available to allow the Company to make decisions on
accrual periods or in the methodology for income recognition. The
Company is continuing to analyze available data regarding new
treatments and cannot, as of the date of this report, predict what
impact this situation will have on its business, prospects, results
of operations or financial position. Additionally, the Company has
not determined the implication of these recent developments on the
Company's strategic direction. The Company will not utilize any
additional debt capital to purchase insurance policies from
individuals diagnosed as HIV positive or with AIDS, assuming that
such debt capital would be made available to the Company, of which
there can be no assurance. However, the Company will consider
purchasing insurance policies of persons afflicted with other
terminal diseases.
4
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In the event management decides that attempting to continue to
implement the Company's present business plan becomes impractical,
management may consider diverting the Company's future business
plan into other areas in which management has experience, including
other insurance related areas.
Other Matters
In June 1995, the Company's former President, Terry Whiteside,
loaned the Company the principal sum of $42,342, which the Company
utilized to purchase its initial insurance policy with a face value
of $58,000. Repayment of this obligation was originally due in
June 1996, but was extended to June 1997 by mutual agreement. In
August 1995, Ms. Whiteside loaned the Company the principal sum of
$58,000, which was due in August 1996. Repayment of this note was
also extended until August 1997. Additionally in August 1995, a
minority shareholder of the Company loaned the Company the
principal sum of $75,000. This loan is now due in August 1997.
Each of these aforesaid loans accrue interest at the rate of 7% per
annum. The Company utilized the proceeds of these loans to
purchase insurance policies.
In August 1995, the Company successfully completed a private
placement of its common stock pursuant to an exemption from
registration provided by Rule 504 of Regulation D, as promulgated
under the Securities Act of 1933, as amended. The Company sold
66,000 shares of its common stock, par value $0.0001 per share, to
7 investors for aggregate gross proceeds of $330,000 ($5.00 per
share).
Employees
During the fiscal year ended May 31, 1996, the Company had no
salaried employees. However, it did have three non-salaried
employees, including two executive officers, Terry Whiteside, the
former President of the Company and Thomas Chase, the former
Secretary and present President of the Company and one
administrator. However, during the fiscal year ended May 17, 1996,
the Company recorded approximately $33,000 in salary expense. See
"Item 7, Financial Statements" and "Item 9, Directors, Executive
Officers, Promoters and Control Persons."
ITEM 2. DESCRIPTION OF PROPERTY
Facilities. The Company subleases its offices at 7345 E.
Peakview Ave., Englewood, Colorado 80111, a building owned jointly
by unaffiliated parties. The Company has been provided this space
on a rent free basis. Beginning in December, 1996, the Company
will be obligated to pay rent in the sum of $1,000 per month
pursuant to an oral lease arrangement, on a month-to-month basis.
The Company's offices consist of approximately 1,200 square feet of
executive office space and secretarial area. Management believes
5
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that this space will meet the Company's needs for the foreseeable
future. The Company did not pay any rent during its 1996 fiscal
year.
Other Property. The Company owns no other property.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings which are pending or
have been threatened against the Company of which management is
aware.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
(a) Market Information. The following table sets forth the
range of high and low bid prices as reported on the OTC Bulletin
Board operated by the NASD commencing March 1, 1996 (the date the
Company's Common Stock commenced trading). On August 28, 1996, the
last reported sales price was $6.50 bid, $7.25 asked.
<TABLE>
<CAPTION>
Quarter Ended Bid Price
Low High
_____ _____
<S> <C> <C>
May 31, 1996 $5.00 $6.00
</TABLE>
(b) Holders. There are 23 holders of the Company's Common
Stock, not including those shareholders holding their securities in
"street name".
(c) Dividends. The Company has not paid any dividends on its
Common Stock. The Company does not foresee that the Company will
have the ability to pay a dividend on its Common Stock in the
fiscal year ended May 31, 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
the Financial Statements and notes thereto included herein.
Results from Operations for the Fiscal Year Ended May 31, 1996
During the fiscal year ended May 31, 1996, the Company had
earned discounts of approximately $40,000 on purchased life
6
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insurance policies. General and administrative expenses totaling
$63,810 included approximately $33,000 of contributed salaries and
approximately $14,000 in professional services. The Company had no
revenues or expenses for the fiscal year ended May 31, 1995, as the
Company had no operations during that year.
The Company, while incorporated in January 1991, did not
commence business operations until June 1995, when the present
business plan of the Company was adopted. Since June 1995, the
Company has purchased, for its own account, 10 different insurance
policies with a face value of $538,294 from individuals, for an
aggregate purchase price of $489,795. Three of these policies in
the amount of $151,100 have matured and the proceeds from these
policies have been paid to the Company. The Company recognizes
income (earned discount) on each purchased policy by accruing, over
the period between the acquisition date of the policy and the
Company's estimated date of collection of the face value of the
policy (the accrual period), the difference (the unearned discount)
between (a) the death benefit payable (face value under the policy
less the amount of fees, if any, payable to a referral source upon
collection of the face value; and (b) the carrying value of the
policy. The carrying value of each policy is reflected on the
Company's balance sheet under "purchased life insurance policies"
and consists of the purchase price, other capitalized cost and the
earned discount on the policy accrued to the balance sheet date.
The Company capitalizes as incurred the following costs of a
purchased policy: (i) the purchased price paid for the policy;
(ii) policy premiums, if any, paid by the Company; (iii) amounts,
if any, paid to referral sources upon acquisition of the policy;
and (iv) amounts paid to the Company retained physicians or other
medical consultants who estimated the insured's life expectancy.
The carrying value of a policy will change over time and is
adjusted quarterly to reflect the earned discounts accrued on the
policy, amounts paid for any additional future increases in
coverage, any additional premium payments and any premium refunds
if the policy becomes covered by premium waiver provisions. The
length of the accrual period is determined by the Company based
upon its estimate of the date on which it will collect the face
value of the policy. Such date is based upon the Company's
estimate of the life expectancy of the insured, after review of the
medical records of the insured by our medical consultants, and also
takes into account the historical accuracy of the life expectancies
estimated by the Company's consultants and the typical period
(collection period) between the date of the insured's death and the
date on which the Company collects the face value of the policy.
The unearned discount is accrued over the accrual period using
the straight line method, regardless when the Company collects the
face value. Under the straight line method, the unearned discount
is earned evenly throughout the accrual period and the unearned
discount will be fully accrued as earned discount by the end of the
accrual period.
7
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The weighted average original Accrual period of the Company's
portfolio of policies comprising "purchased life insurance
policies" and "matured policies receivable" as of August 28, 1996
was 9.0 months. At that date, 4.5 months of the accrual period had
elapsed, leaving a weighted average remaining accrual period at the
end of the period of 4.5 months. The average accrual period will
change as the composition of policies comprising the Company's
portfolio changes. To the extent the Company purchases policies
insuring lives of individuals with longer life expectancies, the
average accrual period will become longer. The Company has a
relatively limited operating history and as it accumulates more
experience and data, it may need to revise the accrual periods for
existing and newly acquired policies to reflect more accurately
such experience and data. In addition, the Company has been using
several consultants to estimate life expectancies of insured's
afflicted with AIDS. Accrual periods may also be revised if (i)
such consultants become more or less accurate in their estimates of
life expectancies of insured persons; (ii) the Company uses
additional or different consultants who produce different levels of
accuracy ; or (iii) the Company purchases more non-Aids policies or
policies insuring the lives of individuals with longer life
expectancies, both of which may result in different levels of life
expectancy accuracy.
Any change in accrual periods will not cause a restatement of
earned discounts in prior periods but will impact earned discounts
in the current and future periods on both policies then owned by
the Company (by either accelerating or decelerating the recognition
of remaining unearned discount) and policies thereafter acquired by
the Company. The Company cannot predict how any accrual period
will change, if at all, in the future.
Liquidity and Capital Resources
The Company's primary need for capital has been, and will
continue to be, the funding of policy purchases. Since
commencement of its business operations described herein in June
1995, the Company has primarily utilized the proceeds which it
derived from its private offering to implement its business plan of
purchasing insurance policies. The Company intends to attempt to
continue to implement its present business plan, except as
described herein. While it is perceived by management that there
are numerous potential sellers in the Viatical market, management
believes that the Company may be limited in the number of insurance
policies the Company may acquire because of the Company's present
limited financial resources. In response thereto, management has
undertaken various discussions with investment bankers and venture
capitalists in order to arrange to provide the Company with
additional financial resources. As a result, in October 1995, the
Company received and accepted a proposal from Ambient Capital
Group, Inc., Los Angeles, California ("Ambient"), for Ambient to
serve as the Company's exclusive financial advisor in initially
8
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raising up to $5 million on a debt or quasi-debt basis, as well as
further capital raising activities over an initial three month
period. By mutual agreement, this contract was terminated on May
31, 1996. The Company is again seeking out and having discussions
with other possible funding sources but as of the date of this
report there is no agreement between the Company and any other
entity wherein the Company will receive any additional capital,
either debt or equity. There can be no assurances that the Company
will obtain such funds from any entity in the future. In the event
the Company is unable to obtain additional capital, management
intends to continue to fund the Company's acquisition of insurance
policies through the proceeds derived from operations, if any.
There can be no assurances that the Company will continue to
generate profits from its current operations, or if such profits
continue to be generated to significantly increase the number of
policies it purchases. If possible, the Company may explore the
possibility of obtaining loans from established financial
institutions. However, while the Company has had informal
discussions with various financial institutions to obtain loans, as
of the date hereof, there is no agreement between the Company and
any financial entity wherein the Company will obtain any additional
funding, either equity or debt.
The Company's cash requirements have been and will continue to
be significant in order to finance its policy purchases. As a
result of accruing income on each purchased policy prior to
collecting the face value, the amount of earned discount recognized
is not related to the collection of cash by the Company on
policies. Net cash flows provided by operating activities reflect
net income (loss) adjusted to reflect earned discounts on life
insurance policies, assets and liabilities.
It is not anticipated that the Company will expend any of its
present financial resources on the purchase of any significant
equipment in the future, nor is it anticipated that the number of
employees of the Company will increase to any significant degree in
the future.
Trends
Of the policies purchased by the Company since June 1995, all
of these policies have been purchased from individuals diagnosed
with Human Immunodeficiency Virus (HIV). In deference to new
treatments involving combinations of various drugs for treating HIV
positive patients, the Company has temporarily slowed down its
activities relating to the purchasing of policies which insure
people afflicted with AIDS and HIV and will not take an aggressive
approach to such acquisitions until additional information can be
obtained and analyzed relating to the effect these new treatments.
At present, management is of the opinion that insufficient
information is available to allow the Company to make decisions on
accrual periods or in the methodology for income recognition. The
9
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Company is continuing to analyze available data regarding new
treatments and cannot, as of the date of this report, predict what
impact this situation will have on its business, prospects, results
of operations or financial position. Additionally, the Company has
not determined the implication of these recent developments on the
Company's strategic direction. The Company will not utilize any
additional debt capital to purchase insurance policies from
individuals diagnosed as HIV positive or with AIDS, assuming that
such debt capital would be made available to the Company, of which
there can be no assurance. However, the Company will consider
purchasing insurance policies of persons afflicted with other
terminal diseases.
In the event management decides that attempting to continue to
implement the Company's present business plan becomes impractical,
management may consider diverting the Company's future business
plan into other areas in which management has experience, including
other insurance related areas.
ITEM 7. FINANCIAL STATEMENTS
10
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USAsurance Group, Inc.
Financial Statements
For the Year Ended
May 31, 1996
11
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<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
<S> <C>
Independent Auditor's Report . . . . . . . . . . . . . . . . . F-2
Balance Sheet - May 31, 1996 . . . . . . . . . . . . . . . . . F-4
Statements of Operations - For the Years Ended
May 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-5
Statement of Changes in Stockholders' Equity -
For the Period from June 1, 1994 through May 31, 1996 . . F-6
Statements of Cash Flows - For the Years Ended
May 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements . . . . . . . . . . . . . . . . F-8
</TABLE>
F-1
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INDEPENDENT AUDITOR'S REPORT
Board of Directors
USAsurance Group, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of USAsurance Group,
Inc. as of May 31, 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of USAsurance
Group, Inc. as of May 31, 1996, and the results of its operations and
its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Hein + Associates LLP
Hein + Associates LLP
Denver, Colorado
August 6, 1996
F-2
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KISH, LEAKE & ASSOCIATES, P.C.
Certified Public Accountants
J.D. Kish, C.P.A., M.B.A. 7901 E. Belleview Ave., Suite 220
James D. Leake, C.P.A., M.T. Englewood, Colorado 80111
Telephone (303) 779-5006
Arleen R. Brogan, C.P.A. Facsimile (303) 779-5724
Independent Auditor's Report
To: The Board of Directors
USAsurance Group, Inc.
We have audited the balance sheet (not included herein) and the
accompanying statement of operations, shareholders' equity, and cash
flows for the year ended May 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and its
cash flows of USAsurance Group, Inc. for the years ended May 31, 1995,
in conformity with generally accepted accounting principles.
Kish, Leake & Associates, P.C.
Kish, Leake & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
September 19, 1995
F-3
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<TABLE>
USAsurance Group, Inc.
BALANCE SHEET
MAY 31, 1996
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash $124,540
Purchased Life Insurance Policies 379,405
Other assets 14,430
________
Total current assets 518,375
Deferred Tax Asset 6,100
_________
Total Assets $524,475
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current Liabilities:
Accounts payable $ 1,534
Deferred tax liability 10,900
Accrued Interest 9,205
________
Total current liabilities 21,639
Long-Term Debt, Related Parties 175,340
Stockholders' Equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized,
none outstanding 0
Common stock, $.0001 par value;
900,000,000 shares authorized,
1,566,000 shares issued and outstanding 157
Additional paid-in capital 364,991
Accumulated deficit ( 37,652)
________
Total stockholders' equity 327,496
________
Total Liabilities and Stockholders' Equity $524,475
<FN>
See accompanying notes to these financial statements.
</TABLE>
F-4
15
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<TABLE>
USAsurance Group, Inc.
STATEMENTS OF OPERATIONS
<CAPTION>
For the Years Ended
May 31,
1996 1995
________ ______
<S> <C> <C>
Revenues $ 39,903 $ 0
General and Administrative Expenses 63,810 0
________ ______
Loss from Operations ( 23,907) 0
Other Income (Expense):
Interest income 1,760 0
Interest expense ( 9,205) 0
________ ______
Other, net ( 7,445) 0
Loss Before Taxes ( 31,352) 0
Deferred tax expense ( 4,800) 0
________ ______
Net Loss $(36,152) $ 0
<FN>
See accompanying notes to these financial statements.
</TABLE>
F-5
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<TABLE>
USAsurance Group, Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 1, 1994 THROUGH MAY 31, 1996
<CAPTION>
Common Stock Preferred Stock Additional
Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
_________ ______ ______ ______ __________ _________ ________
<S> <C> <C> <C> <C> <C> <C> <C>
Balances,
June 1, 1994
and May 31, 1995 1,500,000 $ 150 0 $ 0 $ 1,350 $ (1,500) $ 0
Contributed
Services and Rent 0 0 0 0 34,200 0 34,200
Issuance of common
stock August 1995
- for cash 66,000 7 0 0 329,441 0 329,448
Net (Loss) 0 0 0 0 0 (36,152) (36,152)
_________ _____ ______ ______ __________ ________ ________
Balances,
May 31, 1996 1,566,000 $ 157 0 0 $ 364,991 $(37,652) $327,496
</TABLE>
[FN]
See accompanying notes to these financial statements.
F-6
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<TABLE>
USAsurance Group, Inc.
STATEMENTS OF CASH FLOWS
<CAPTION>
For the Years Ended
May 31,
1996 1995
________ ________
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(36,152) $ 0
Adjustments to reconcile net loss
to net cash used in operating activities:
Contributed services and rent 34,200 0
Earned discount on purchased
life insurance policies (39,903) 0
Deferred tax 4,800 0
Changes in operating
assets and liabilities:
Purchased life insurance policies (489,795) 0
Collections on life
insurance policies 151,000 0
Other assets (14,430) 0
Accounts payable and accrued expenses 827 0
Accrued interest payable 9,205 0
_________ ________
Net cash used in operating activities (380,248) 0
Cash Flows from Financing Activity:
Proceeds from issuance of common stock 329,448 0
Proceeds from issuance of notes payable 175,340 0
Net cash provided by financing activities 504,788 0
________ ________
Increase in Cash 124,540 0
Cash, at beginning of year 0 0
________ ________
Cash, at end of year $124,540 $ 0
<FN>
See accompanying notes to these financial statements.
</TABLE>
F-7
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USASURANCE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Organization and Nature of Operations - USAsurance Group, Inc.
(the Company) was incorporated as a Colorado Corporation in 1991
and commenced business in June 1995. The Company's principal
business activities are currently in the viatical settlement
industry. Viatical settlements are made to persons who are
terminally ill and who want to sell their life insurance to
obtain the benefit of the money provided by the settlement during
the remainder of their life.
Purchased Life Insurance Policies - The Company recognizes income
(earned discount) on each purchased policy by accruing, over the
period between the acquisition date of the policy and the
Company's estimated date of collection of the face value of the
policy (the Accrual Period), the difference (the unearned
discount) between, (a) the death benefit payable (face value)
under the policy less the amount of fees, if any, payable to a
referral source upon collection of the face value, and (b) the
carrying value of the policy. The carrying value of each policy
is reflected on the Company's balance sheet under "purchased life
insurance policies" and consists of the purchase price, other
capitalized costs, and the earned discount on the policy accrued
to the balance sheet date. The Company capitalizes as incurred
the following costs of a purchased policy (not to exceed the face
amount of the policy): (i) the purchase price paid for the
policy, (ii) policy premiums, if any, paid by the Company, (iii)
amounts, if any, paid to referral sources upon acquisition of the
policy, and (iv) amounts paid to the Company retained physicians
or other medical consultants who estimated the insured's life
expectancy. The carrying value of a policy will change over
time, and is adjusted quarterly to reflect the earned discounts
accrued on the policy, amounts paid for any additional future
increases in coverage, any additional premium payments and any
premium refunds, if the policy becomes covered by premium waiver
provisions. The length of the Accrual Period is determined by
the Company based upon its estimate of the date on which it will
collect the face value of the policy. This estimate is based
upon the Company's estimate of the life expectancy of the
insured, after review of the medical records of the insured by
one or more Consultants, and also takes into account the
historical accuracy of the life expectancies estimated by the
Company's Consultants and the typical period (collection period)
between the date of the insured's death and the date on which the
Company collects the face value of the policy.
F-8
19
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USASURANCE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
The unearned discount is accrued over the accrual period using
the straight-line method. Under the straight-line method, the
unearned discount is earned evenly throughout the accrual period
and the unearned discount will be fully accrued as earned
discount by the end of the accrual period.
Differences will arise between the timing of estimated and actual
collections. The Company recalculates the accrual periods
periodically, based on medical analyses and using actual
collection experience and, if necessary, adjusts prospectively
the period over which income is recognized.
The Company will purchase both group and individual policies that
will include term, whole life, and universal life insurance.
Upon maturity of the policies the Company will then receive the
face amount of the policy in the form of a cashiers check made
out to the Company usually within 30 days.
In July 1996, the International AIDS conference reported there
were a number of studies which indicated that treatments
involving various drugs were substantially reducing and perhaps
eradicating the levels of Human Immunodiffiency Virus (HIV)
detectable in the blood of persons previously diagnosed with HIV
and AIDS. All of the Company's historical purchases have
involved policies insuring the lives of individuals with HIV or
AIDS. The Company continues to analyze the effect of such
research results on its business and in particular, purchases by
the Company of policies, the timing of collections on owned
policies and the appropriateness of the accrual period over which
the Company recognizes income or earned discounts.
Income Taxes - The Company accounts for income taxes in
accordance with the provision of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS
No. 109). Under the asset and liability method prescribed by
SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis (temporary
differences). Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date of the tax change.
F-9
20
<PAGE>
USASURANCE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
Under SFAS No. 109, deferred tax assets are recognized for
deductible temporary differences and operating loss and tax
credit carryforwards, and then a valuation allowance is
established to reduce that deferred tax asset if it is "more
likely than not" that the related tax benefits will not be
realized.
Concentration of Credit Risk - Financial instruments that subject
the Company to concentration of credit risk consist primarily of
receivables from insurance companies which are the obligors under
insurance policies purchased by the Company. As of June 30,
1995, the Company had seven purchased life insurance policies
with individual insurers with aggregate face values that
individually represented greater than 5% of the total purchased
life insurance policies.
Fair Value of Financial Instruments - The estimated fair values
for financial instruments are determined at discrete points in
time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision.
The carrying amounts of notes payable, account payable and
accrued liabilities approximate fair value. The carrying amount
of purchased life insurance policies may be in excess of fair
value as approximately $198,000 is carried at maturity value,
however, the contract has not yet matured. No further income
will be earned on these policies. Fair value on these policies
are estimated at approximately $188,000.
Use of Estimates - The preparation of the Company's financial
statements in conformity with generally accepted accounting
principles requires the Company's management to make estimates
and assumptions that affect the amounts reported in these
financial statements and accompanying notes. The Company makes
significant assumptions concerning accrual period of the
Company's purchased policies. Due to uncertainties inherent in
the estimation process, it is at least reasonably possible that
the accrual period on purchased life insurance policies be
further revised in the near term and such revisions could be
material. Actual results could differ from those estimates.
2. Purchased Life Insurance Policies:
Purchased life insurance policies consist of the following as of
May 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Capitalized costs of purchased
life insurance policies $360,325
Earned discount 19,080
________
Purchased life insurance policies $379,405
</TABLE>
F-10
21
<PAGE>
USASURANCE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
Purchased life insurance policies included in the above table for
which the discount has been fully earned, but for which the
Company has not yet received notification of the insured's death,
consist of the following at May 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Capitalized costs of purchased
life insurance policies $197,000
Earned discount 1,000
________
Included in purchased life insurance policies $198,000
</TABLE>
During the year ended May 31, 1996, the Company purchased life
insurance policies totaling $146,000 at face value from an entity
which is a 2% stockholder of the Company.
3. Stockholders' Equity:
The Company has the authority to issue 1,000,000 shares of
preferred stock. The Board of Directors has the authority to
issue such preferred shares in series and determine the rights
and preferences of the shares as may be determined by the Board
of Directors.
During August 1995, the Company sold, in a private placement,
66,000 shares of common stock for $5.00 per share. Proceeds of
$329,448 is net of $552 of offering costs.
During the year ended May 31, 1996, the Company's management
contributed $33,000 of services and $1,200 of office space, both
of which have been recorded as a contribution to equity and as
general and administrative expenses.
4. Long-Term Debt:
Notes payable as of May 31, 1996 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable to stockholder and officer
of the Company, with interest at 7%.
Principal and interest due August 1996.
Subsequent to year-end, the note payable
was extended to August 1997. $ 58,000
Note payable to the stockholder and officer
of the Company, with interest at 7%.
Principal and interest due June 1996.
Subsequent to year-end, the note payable
was extended to June 1997. 42,342
F-11
22
<PAGE>
USASURANCE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
Note payable to stockholder, with interest
at 7%. Principal and interest due September
1996. Subsequent to year-end, the note
payable was extended to September 1997. 75,000
________
Total long-term debt $175,342
</TABLE>
5. Income Taxes:
The amounts which give rise to the net deferred tax asset
(liability) as of May 31, 1996, are as follows:
<TABLE>
<CAPTION>
Current Long-Term
________ __________
<S> <C> <C>
Deferred assets (liabilities):
Purchased life
insurance policies $(10,900) $ 0
Net operating loss carryforward 0 6,100
________ __________
Net deferred tax asset
(liability) $(10,900) $ 6,100
</TABLE>
As of May 31, 1996, the Company has a net operating loss
carryforward of approximately $16,400 which, if not used,
expire in the years 2010 and 2011.
F-12
23
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On May 31, 1996, Kish, Leake & Associates, P.C., the Company's
independent accountant for the prior two fiscal years prior to May
31, 1996, resigned. The Company's financial statements for the two
fiscal years ended May 31, 1994 and 1995 were prepared by Kish,
Leake & Associates, P.C. and contained no adverse opinion or
disclaimer of opinion, nor were qualified as to uncertainty, audit
scope, or accounting principles.
Also on May 31, 1996, the Company engaged the accounting firm
of Hein + Associates LLP as the independent public accountants to
audit the Company's fiscal year ended May 31, 1996, as well as
future financial statements, to replace the firm of Kish, Leake &
Associates, P.C. This change in independent accountants was
approved by the Board of Directors of the Company.
There were no disagreements during May 31, 1994 and 1995 and
subsequent periods with Kish, Leake & Associates, P.C., on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope of procedure, which disagreement(s),
if not resolved to the satisfaction of Kish, Leake & Associates,
P.C., would have caused that firm to make reference in connection
with its reports to the subject matter of the disagreement(s) or
any reportable events.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors are elected for one-year terms or until the next
annual meeting of shareholders and until their successors are duly
elected and qualified. Officers continue in office at the pleasure
of the Board of Directors.
The Directors and Officers of the Company as of the date of
this report are as follows:
<TABLE>
<CAPTION>
Name Age Position
_______________________ ___ ___________________
<S> <C> <C>
Thomas J. Chase 56 President, Director
Matthew J. Kavanagh III 61 Secretary, Director
Duane C. Peterson 70 Director
</TABLE>
All Directors of the Company will hold office until the next
annual meeting of the shareholders and until successors have been
elected and qualified. Officers of the Company are elected by the
Board of Directors and hold office until their death or until they
resign or are removed from office.
There are no family relationships among the officers and
directors. There is no arrangement or understanding between the
24
<PAGE>
Company (or any of its directors or officers) and any other person
pursuant to which such person was or is to be selected as a
director or officer.
(b) Resumes:
Thomas J. Chase, President and a director. Mr. Chase has been
a director of the Company since its inception. Also, from
inception through May 31, 1996, Mr. Chase held the position of
Secretary of the Company. He was appointed President of the
Company on May 31, 1996. Since March 1988, Mr. Chase has been
President and sole owner of Tom Chase & Co., Inc., a privately held
Colorado corporation engaged as a broker of insurance and financial
services. Primarily, this company functions as a broker for
property and casualty insurance, life insurance and commercial
mortgages. Mr. Chase received a Bachelor of Science degree in
business administration from Miami University (Ohio) in 1963. He
devotes only such time as necessary to the business of the Company.
Matthew J. Kavanagh III, Secretary and a director. Mr.
Kavanagh was appointed to his positions with the Company on May 31,
1996. Since September 1982, Mr. Kavanagh has been the President of
The Amherst Group Ltd., a privately held corporation located in
Englewood, Colorado, engaged in consulting services, including
sales, marketing, franchising, real estate development and fund
raising to growth and development stage companies. Mr. Kavanagh
holds a Bachelor of Arts degree from Southern Methodist University
in Dallas, Texas. Mr. Kavanagh received a professional
certification as a Chartered Life Underwriter in 1969.
Additionally, he is a licensed real estate broker and insurance
broker in the State of Colorado. Mr. Kavanagh devotes only such
time as is necessary to the business of the Company.
Duane C. Peterson, director. Mr. Peterson has been a director
of the Company since its inception. Mr. Peterson has been retired
for the past five years, acting as a private investor on his own
behalf. Mr. Peterson graduated with a Bachelor of Science degree
from Northwestern University in 1948 and received a Master's Degree
from the Kellog School of Business, also in 1948. He devotes only
such time as necessary to the business of the Company.
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers, directors and person who own more than 10%
of the Company's Common Stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission.
All of the aforesaid persons are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on review of the copies of such forms furnished
to the Company, the Company believes that the Form 5 annual reports
of the Company's officers, directors and holders of 10% or more of
the outstanding shares of the Company, which are required to be
filed within 45 days after the end of the Company's fiscal year,
25
<PAGE>
were timely filed. These reports reflected no changes in the
securities holdings of any person.
ITEM 10. EXECUTIVE COMPENSATION.
Remuneration
The following table reflects all forms of compensation for
services to the Company for the year ended May 31, 1996 of the
chief executive officer of the Company.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
____________________________
Annual Compensation Awards Payouts
_____________________ ____________________ _______
Securities
Other Under- All
Name Annual Restricted lying Other
and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
__________ ____ ______ _____ ______ ________ _______ _______ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Terry A.
Whiteside
President & (1)(2)
Director 1996 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
_________________________
<FN>
(1) Ms. Whiteside did not receive any salary during the fiscal year ended May
31, 1996 from the Company. She resigned her positions with the Company
effective May 31, 1996 and was replaced by Thomas Chase.
(2) It is not anticipated that any executive officer of the Company will
receive compensation exceeding $100,000 during the fiscal year ending May
31, 1997.
</TABLE>
The Company maintains a policy whereby the directors of the
Company may be compensated for out of pocket expenses incurred by
each of them in the performance of their relevant duties. The
Company did not reimburse any director for such expenses during the
fiscal year ended May 31, 1996.
In addition to the cash compensation set forth above, the
Company reimburses each executive officer for expenses incurred on
behalf of the Company on an out-of-pocket basis. The Company
cannot determine, without undue expense, the exact amount of such
expense reimbursement. However, the Company believes that such
reimbursements did not exceed, in the aggregate, $1,000 during
fiscal year 1996.
26
<PAGE>
There are no bonus or incentive plans in effect, nor are there
any understandings in place concerning additional compensation to
the Company's officers. As part of the proposals to be included in
the Company's special meeting of shareholders, the adoption of a
Stock Option Plan is being presented to shareholders for approval.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(a) and (b) Security Ownership of Certain Beneficial Owners
and Management.
The table below lists the beneficial ownership of the
Company's voting securities by each person known by the Company to
be the beneficial owner of more than 5% of such securities, as well
as beneficial ownership for each class of equity securities of the
Company beneficially owned by all directors and officers of the
Company. Unless otherwise indicated, the shareholders listed
possess sole voting and investment power with respect to the shares
shown and there are no outstanding arrangements which would result
in change of control of the Company.
<TABLE>
<CAPTION>
Name and Amount and
Address of Nature of
Title of Beneficial Beneficial Percent of
Class Owner Ownership Class
________ ____________________ __________ __________
<S> <C> <C> <C>
Common Terry Whiteside 775,000 49.5%
7345 E. Peakview Ave
Englewood, CO 80111
Common Duane C.Peterson(1) 5,000 *
7345 E. Peakview Ave.
Englewood, CO 80111
Common Thomas J. Chase(1) 5,000 *
7345 E. Peakview Ave.
Englewood, CO 80111
Common All Officers and 785,000 50.1%
Directors as a
Group (4 persons)
_________________________
<FN>
* Less than 1%
(1) Officer and/or director of the Company.
(2) The information relating to beneficial ownership of the
Company's common stock is based on information furnished by
them using the definition of "beneficial ownership" set forth
in rules promulgated by the Securities and Exchange Commission
under Section 13(d) of the Securities Exchange Act of 1934.
Except where there may be special relationships with other
persons, including shares voting or investment power, the
27
<PAGE>
directors and nominees possess sole voting and investment power
with respect to the shares set forth beside their names.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In June 1995, Terry Whiteside, the Company's former President
loaned the Company the principal sum of $42,340, which the Company
utilized to purchase its initial insurance policy with a face value
of $58,000. In August 1995, Ms. Whiteside loaned the Company the
principal sum of $58,000. Additionally in August 1995, a minority
shareholder of the Company loaned the Company the principal sum of
$75,000. Each of these aforesaid loans are unsecured and are
presently due in June 1997, August 1997 and August 1997,
respectively, with interest accruing at the rate of 7% per annum.
The Company utilized the proceeds of these loans to purchase
insurance policies.
Management believes that because the Company had no assets or
other collateral at the time such loans were made, no established
financial institution would have undertaken to make any loans to
the Company. Further, management believes that the terms of these
loans are more favorable to the Company than could have been
provided by any other financing entity, had such a financing entity
been amenable to undertaking such lending activities.
Between July and September 1995, the Company successfully
concluded a private placement of its common stock pursuant to
exemptions from registration included under Rule 504 of Regulation
D, promulgated under the Securities Act of 1933, as amended. In
this private offering, the Company sold an aggregate of 66,000
shares of its common stock to 7 investors for total subscriptions
of $330,000 ($5.00 per share).
The Company reimburses its executive officers and directors
from time to time for out-of-pocket expenditures, including travel,
long distance telephone, photocopying and similar such costs and
expenses, paid by them on behalf of the Company. The total amount
of expense reimbursements by the Company to any executive officer
and/or director did not exceed $10,000 in the Company's fiscal year
ended May 31, 1996.
During the fiscal year ended May 31, 1996, the Company
purchased life insurance policies totalling $146,000 at the face
value of the policy from an entity which is approximately a 2%
stockholder of the Company.
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following Exhibits were filed with the Securities and
Exchange Commission in the Exhibits to Form 10-SB, filed on October
3, 1995 and are incorporated by reference herein:
28
<PAGE>
*3.1 Certificate and Articles of Incorporation
*3.2 Bylaws
EX-27 Financial Data Schedule
* Filed with the Securities and Exchange Commission in the Exhibits
to Form 10-SB, filed on July 27, 1994 and are incorporated by
reference herein.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on or about May 31, 1996, wherein the Company
advised of the change in certified public accountants, of the
termination of the Ambient financing agreement and the resignation
of Terry Whiteside as the Company's President and a director.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on
August 28, 1996.
USASURANCE GROUP, INC.
(Registrant)
By:/s/ Thomas J. Chase
Thomas J. Chase,
President
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities indicated on August 28, 1996.
/s/ Thomas J. Chase
Thomas J. Chase, Director
/s/ Duane C. Peterson
Duane C. Peterson, Director
/s/ Matthew J. Kavanagh, III
Matthew J. Kavanagh, III, Director
30
<PAGE>
<TABLE>
USASURANCE GROUP, INC.
Exhibit Index to Annual Report on Form 10-KSB
For the Fiscal Year Ended May 31, 1996
<CAPTION>
EXHIBITS Page No.
<S> <C> <C>
EX-27 Financial Data Schedule . . . . . . . . . . . . . . . . . . 32
31
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED MAY 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 124,540
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 379,405
<CURRENT-ASSETS> 518,375
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 524,475
<CURRENT-LIABILITIES> 21,639
<BONDS> 0
0
0
<COMMON> 157
<OTHER-SE> 327,339
<TOTAL-LIABILITY-AND-EQUITY> 524,475
<SALES> 39,903
<TOTAL-REVENUES> 39,903
<CGS> 0
<TOTAL-COSTS> 63,810
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,445
<INCOME-PRETAX> (31,352)
<INCOME-TAX> (4,800)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,152)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
