U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
Quarterly Report Under
the Securities Exchange Act of 1934
For Quarter Ended: November 30, 1996
Commission File Number: 0-26920
USAsurance Group, Inc.
(Exact name of small business issuer as specified in its charter)
Colorado
(State or other jurisdiction of incorporation or organization)
84-1298212
(IRS Employer Identification No.)
7345 E. Peakview Ave.
Englewood, Colorado
(Address of principal executive offices)
80111
(Zip Code)
(303) 689-0123
(Issuer's Telephone Number)
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes __X__ No _____.
The number of shares of the registrant's only class of common stock
issued and outstanding, as of November 30, 1996, was 1,566,000
shares.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS.
The unaudited financial statements for the six month period
ended November 30, 1996, are attached hereto.
ITEM 2. 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.
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.
Results of Operations
Comparison of Results of Operations for the three month period
ended November 30, 1996 and three month period ended November 30,
1995
The Company's revenues for the three month period ended
November 30, 1996 were $2,492 compared to $21,284 for the three
month period ended November 30, 1995, a decrease of $18,792 (88%).
This decrease was as a result of the maturity of an insurance
policy owned by the Company during the three months ended November
30, 1995. During the similar period in 1996, no insurance policies
owned by the Company matured. In the three month period ended
November 30, 1996, expenses increased $1,119 (8%) to $14,957 from
$13,838 in November 30, 1995. This increase was due to costs
associated with increased general and administrative expenses,
including legal and accounting expenses.
The Company's net operating income decreased from $4,378 to
($15,533), primarily due to a required noncash bookkeeping entry
related to the payment of management salaries. However, as of the
date of this report, the Company does not pay its management any
salaries, by accrual or otherwise.
Comparison of Results of Operations for the six month period ended
November 30, 1996 and six month period ended November 30, 1995
The Company's revenues for the six month period ended November
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<PAGE>
30, 1996 were $7,551 compared to $23,722 for the six month period
ended November 30, 1995, a decrease of $16,171 (68%). This
decrease was due to the fact that no insurance policies owed by the
Company matured during the period ended Nov. 30, 1996, while one
insurance policy matured during the period ended Nov. 30, 1995. In
the six month period ended November 30, 1996, the Company incurred
expenses of $32,940, as compared to expenses of $16,508 for the
similar period ended Nov. 30, 1995, an increase of $16,432 (99%).
This increase was due to costs associated with increased general
and administrative expenses, including legal and accounting
expenses.
The Company's net operating income decreased from $4,171 to
($31,180), primarily due to the increase of operating activities.
Interest expense increased by approximately $2,748. The
increase resulted primarily from interest accruing on notes payable
to the Company's lenders which the Company had borrowed to fund
previous purchases of policies.
Since June 1995 the Company has purchased, for its own
account, 12 different insurance policies with a face value of
$628,294 from individuals, for an aggregate purchase price of
$565,795. Four of these policies in the amount of $203,200 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 retained physicians or other medical consultants who
estimated the insured's life expectancy. The carrying value of a
policy 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 the
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<PAGE>
Company's 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. 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.
The weighted average original accrual period of the Company's
portfolio of policies comprising "purchased life insurance
policies" and "matured policies receivable" as of November 30, 1996
was 12.0 months. At that date, 7.5 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 insureds
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 insureds; (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 for the
funding of policy purchases. Since commencement of its business
operations 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 business plan
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<PAGE>
during the next 12 months. 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. However,
as of the date of this report, the Company has obtained no
commitments from any sources to provide the Company with either
debt or equity capital in the future and there can be no assurances
that such agreements will be obtained by the Company from any such
sources 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 generate profits from its current operations, or if profits
are generated, that the Company will be able 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 has
decreased by $328,541. This was due to an decrease in policies
purchased.
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 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 the 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
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<PAGE>
of operations or financial position. Additionally, the Company has
not determined the implication of these recent developments on the
Company's strategic direction. Until management is satisfied as to
the future treatment of AIDS, the Company will not utilize any
additional debt capital to purchase insurance policies from
individuals diagnosed as HIV positive or with AIDS. However, the
Company will consider purchasing insurance policies of persons
afflicted with other terminal diseases.
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.
Inflation has not had and is not expected to have a
significant impact on the Company's financial position or operating
results.
The Company's common stock shares are currently traded on the
NASDAQ over the counter Bulletin Board using the trading symbol
"UASG".
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
NONE.
ITEM 5. OTHER INFORMATION - NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EX-27 Financial Data Schedule
(b) Reports on Form 8-K - None.
6
<PAGE>
<TABLE>
USAsurance Group, Inc.
Balance Sheet
<CAPTION>
Unaudited Audited
November May
30, 1996 31, 1996
_________ _________
<S> <C> <C>
ASSETS
Current Assets:
Cash $14,142 $124,540
Other Receivables 15,000 12,000
Purchased Life Insurance Policies 442,442 389,405
Escrow deposit 38,476 0
_________ _________
Total Current Assets 510,060 525,945
_________ _________
Equipment (net of depreciation) 2160 2430
_________ _________
Other Assets - Deferred Tax Asset 6100 6100
_________ _________
TOTAL ASSETS $518,320 $534,475
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts Payable $7,572 $1,534
Deferred Tax Liability 8,900 10,900
Interest Payable 3,092 9,205
_________ _________
Total Current Liabilities 19,564 21,639
_________ _________
Long-Term Debt - Related Party 75,000 75,000
Long-Term Debt - Other 100,340 100,340
_________ _________
Long-Term Liabilities 175,340 175,340
_________ _________
TOTAL LIABILITIES 194,904 196,979
_________ _________
SHAREHOLDERS' EQUITY
Common Stock, $.0001 Par Value
Authorized 900,000,000 Shares;
Issued And Outstanding 1,566,000 Shares 157 157
Capital Paid In Excess Of
Par Value Of Common Stock 382,091 364,991
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<PAGE>
Preferred Stock, $.01 Par Value, Non Voting
Authorized 1,000,000 Shares;
Issued And Outstanding -0- Shares 0 0
Retained Earnings (Deficit) (58,832) (27,652)
_________ _________
TOTAL SHAREHOLDERS' EQUITY 323,416 337,496
_________ _________
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $518,320 $534,475
<FN>
The Accompanying Notes Are An Integral Part Of These
Unaudited Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
USAsurance Group, Inc.
Statement Of Operations
<CAPTION>
Unaudited Unaudited
6 Month 6 Month
Period Ended Period Ended
November November
30, 1996 30, 1995
_________ _________
<S> <C> <C>
Income:
Earned Discount On Life Insurance Policies $7,551 $23,722
_________ _________
Expenses:
Depreciation 270 0
Legal And Accounting 14,972 8,622
Licenses And Fees 0 2,705
Office 223 899
Officers Compensation 16,500 0
Professional Dues 0 2,750
Rent 600 0
Telephone 375 0
Travel 0 1,532
_________ _________
Total 32,940 16,508
_________ _________
Net (Loss) Profit From Operations (25,389) 7,214
Other Income (Expense):
Interest Income 96 25
Interest (Expense) (5,887) (3,068)
_________ _________
Total (5,791) (3,043)
_________ _________
Net (Loss) Profit ($31,180) $4,171
Net (Loss) Profit Per Common Share ($0.02) $0.00
Weighted Average Common Shares
Outstanding 1,566,000 1,566,000
<FN>
The Accompanying Notes Are An Integral Part Of These
Unaudited Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
USAsurance Group, Inc.
Statement Of Operations
<CAPTION>
Unaudited Unaudited
3 Month 3 Month
Period Ended Period Ended
November November
30, 1996 30, 1995
_________ _________
<S> <C> <C>
Income:
Earned Discount On Life Insurance Policies $2,492 $21,284
--------- ---------
Expenses:
Depreciation 135 0
Legal And Accounting 5,772 8,622
Licenses And Fees 0 2,705
Office 50 729
Officers Compensation 8,250 0
Professional Dues 0 250
Rent 500 0
Telephone 250 0
Travel 0 1,532
_________ _________
Total 14,957 13,838
Net (Loss) Profit From Operations (12,465) 7,446
_________ _________
Other Income (Expense):
Interest Income 0 0
Interest (Expense) (3,068) (3,068)
_________ _________
Total (3,068) (3,068)
_________ _________
Net (Loss) Profit ($15,533) $4,378
Net (Loss) Profit Per Common Share ($0.01) $0.00
Weighted Average Common Shares
Outstanding 1,566,000 1,566,000
<FN>
The Accompanying Notes Are An Integral Part Of These
Unaudited Financial Statements.
</TABLE>
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<TABLE>
USAsurance Group, Inc.
Statement Of Cash Flows
<CAPTION>
Unaudited Unaudited
6 Month 6 Month
Period Ended Period Ended
November November
30, 1996 30, 1995
_________ _________
<S> <C> <C>
Net (Loss) Profit ($31,180) $4,171
Adjustments To Reconcile Net
(Loss) Profit To Net Cash
Used In Operating Activities:
Depreciation 270 0
Contributed Services And Rent 17,100 0
Changes In Operating Assets And Liabilities:
(Increase) In Other Accounts Receivable (3,000) 0
(Increase) In Purchased
Life Insurance Policies (53,037) (446,178)
(Increase) In Escrow Deposits (38,476) 0
Increase In Accounts Payable 6,038 0
(Decrease) In Deferred Tax Liability (2,000)
(Decrease) In Interest Payable (6,113) 3,068
_________ _________
Net Flows From Operations (110,398) (438,939)
Cash Flows From Investing Activities:
Net Cash Flows From Investing 0 0
_________ _________
Cash Flows From Financing Activities:
Issuance Of Common Stock 0 330,000
Funds Received From Loans 0 75,000
Advances From Related Parties 0 58,500
Payments Made On Loans 0 (500)
_________ _________
Cash Flows From Financing 0 463,000
Net Increase In Cash (110,398) 24,061
Cash At Beginning Of Period 124,540 0
_________ _________
Cash At End Of Period $14,142 $24,061
Summary Of Non-Cash Investing
And Financing Activities:
Inventory Purchased By Related Party as
Loan To Related Party $0 $42,340
Policies Matured Not Collected 0 $40,100
Matured Policy Unearned Revenue $0 $7,331
<FN>
The Accompanying Notes Are An Integral Part Of These
Unaudited Financial Statements.
</TABLE>
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USAsurance Group, Inc.
Notes To Unaudited Financial Statements
For The Six Month Period Ended November 30, 1996
Note 1 - Unaudited Financial Information
The unaudited financial information included for the three month
and six month interim periods ended November 30, 1996 and 1995 were
taken from the books and records without audit. However, such
information reflects all adjustments (consisting only of normal
recurring adjustments, which are of the opinion of management,
necessary to reflect properly the results of interim periods
presented). The results of operations for the six month period
ended November 30, 1996 are not necessarily indicative of the
results expected for the fiscal year ended May 31, 1997
Note 2 - Type of Life Insurance Policies and Collection of Proceeds
The Company has purchased both group and individual policies that
include term, whole life, and universal life insurance from various
individuals that have life expectancies of 12 months or less. Upon
the maturity of the policies the Company will receive a cashiers
check for the face amount of the policy made out to the Company
within 30 days.
Note 3 - 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: (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 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 estimate is based upon the Company's
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<PAGE>
USAsurance Group, Inc.
Notes To The Unaudited Financial Statements
For The Six Month Period Ended November 30, 1996
Note 3 - Continued
estimate of the life expectancy of the insured, after review of the
medical records of the insured by one or more Consultants, and also
take 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 of 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.
Differences will arise between the timing of estimated and actual
collections. The Company recalculates the accrual periods on a
quarterly basis, using actual collection experience and, if
necessary, adjusts prospectively the period over which income is
recognized.
Purchased life insurance policies consist of the following as of
November 30, 1996:
<TABLE>
<S> <C>
Capitalized costs of purchased
life insurance policies $405,811
Earned Discount 56,631
________
Purchased life insurance policies $442,442
</TABLE>
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 November 30, 1996:
<TABLE>
<S> <C>
Capitalized costs of purchased
life insurance policies $328,806
Earned discount 27,194
________
Included in purchased
life insurance policies $356,000
</TABLE>
13
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USAsurance Group, Inc.
Notes To The Unaudited Financial Statements
For The Six Month Period Ended November 30, 1996
Note 4 - Unearned Discount
As of November 30, 1996 there were $7,005 in unearned discounts.
All policies at November 30, 1996 are expected to mature in 12
months or less.
Note 5 - Officer Compensation And Facility Rent
During the six month interim period the Company's management
contributed $16,500 of services and $600 of facility rent both of
which have been recorded as a contribution of equity and as general
and administrative expenses.
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SIGNATURES
Pursuant to the requirements of Section 12 of the
Securities and Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
USAsurance Group, Inc.
(Registrant)
Dated: January 13, 1997
By: s/Thomas J. Chase
Thomas J. Chase
President and
Chief Financial Officer
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USAsurance Group, Inc.
Exhibit Index to Quarterly Report on Form 10-QSB
For the Quarter Ended November 30, 1996
EXHIBITS Page No.
EX-27 Financial Data Schedule . . . . . . . . . . . 17
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED NOVEMBER 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 14,142
<SECURITIES> 0
<RECEIVABLES> 15,000
<ALLOWANCES> 0
<INVENTORY> 480,918
<CURRENT-ASSETS> 510,060
<PP&E> 2,160
<DEPRECIATION> 0
<TOTAL-ASSETS> 518,320
<CURRENT-LIABILITIES> 19,564
<BONDS> 0
0
0
<COMMON> 157
<OTHER-SE> 323,259
<TOTAL-LIABILITY-AND-EQUITY> 519,320
<SALES> 7,551
<TOTAL-REVENUES> 7,551
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,791
<INCOME-PRETAX> (31,180)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,180)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
