<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended MARCH 31, 1996 Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 95-2583928
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
23251 MULHOLLAND DRIVE WOODLAND HILLS, CALIFORNIA 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
NONE
(Title of each class)
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has 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 Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference as Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of Registrant's voting stock held by non-affiliates
as of June 24, 1996 was $24,877,099 (based upon the closing sales price on such
date, as reported by the Wall Street Journal).
5,972,668
Number of shares of common stock outstanding as of June 24, 1996
Portions of the definitive proxy statement which registrant intends to file
pursuant to regulation 14(A) by a date no later than 120 days after March 31,
1996, to be used in connection with the annual meeting of shareholders, are
incorporated herein by reference into Part III hereof. If such definitive proxy
statement is not filed in the 120 day period, the information called for by Part
III will be filed as an amendment to this Form 10-K not later than the end of
the 120 day period.
1
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PART I
ITEM 1. BUSINESS
Unico American Corporation is referred to herein as the "Company" or "Unico" and
such references include both the corporation and its subsidiaries, all of which
are wholly owned, unless otherwise indicated. Unico was incorporated under the
laws of Nevada in 1969. Unico American Corporation is an insurance holding
company which provides property, casualty, health and life insurance and related
premium financing through its wholly owned subsidiaries.
GENERAL AGENCY OPERATIONS
The Company's general agency subsidiaries are as follows:
Unifax Insurance Systems, Inc. ("Unifax") primarily sells and services business
package insurance policies. In addition, it also sells and services commercial
liability, commercial property, commercial automobile and workers' compensation
insurance policies. Its commercial automobile and workers' compensation policies
are sold in California for non-affiliated insurers. All other policies are sold
and serviced by Unifax in California, Oregon, Washington, Arizona and Nevada for
Crusader Insurance Company ("Crusader"), a wholly owned subsidiary of Unico.
Bedford Insurance Services, Inc. ("Bedford") sells and services daily automobile
rental policies in most states for a non-affiliated insurer.
National Coverage Corporation ("NCC") renews and services existing commercial
automobile and auto physical damage policies in California on a discontinued
program for a non-affiliated insurer.
As general agents, these subsidiaries market, rate, underwrite, inspect and
issue policies, bill and collect insurance premiums, and maintain accounting and
statistical data. Unifax is the exclusive general agent for Crusader. Unifax,
Bedford and NCC are non-exclusive general agents for non-affiliated insurance
companies. The Company's marketing is conducted through advertising to
independent insurance agents and brokers. For its services, the general agent
receives a commission (based on the premium written) from the insurance company,
and in some cases, a service fee from the customer. These subsidiaries all hold
licenses issued by the California Department of Insurance and other states where
applicable.
INSURANCE CLAIM ADJUSTING OPERATION
The Company's subsidiary, U.S. Risk Managers, Inc. ("U.S. Risk"), provides
insurance claim adjusting services to the various non-affiliated property and
casualty insurance companies for which the Company acts as general agents. This
service consists of receiving, reserving, adjusting, paying and accounting for
insurance claims. U.S. Risk engages independent field examiners for all work
performed outside the company's office. For its services, U.S. Risk receives a
percentage of the premium written by the general agent. U.S. Risk operates under
a license issued by the California Department of Insurance and other states
where applicable. All claim adjusting services for Crusader policies are
administered by Crusader. Crusader engages independent field examiners for all
work performed outside the company's office.
2
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INSURANCE PREMIUM FINANCE OPERATION
American Acceptance Corporation ("AAC") is a licensed insurance premium finance
company which provides insurance purchasers with the ability to pay their
insurance premiums on an installment basis. The premium finance company pays the
insurance premium to the insurance company in return for a premium finance note
from the insured. These notes are paid off by the insured in nine monthly
installments and are secured by the unearned premiums held by the insurance
company. The premium finance company also finances commercial auto policies
produced by Unifax for a non-affiliated insurance company.
HEALTH AND LIFE INSURANCE OPERATIONS
The Company's subsidiaries: National Insurance Brokers, Inc. ("NIB") and
American Insurance Brokers, Inc. ("AIB"), market medical, dental, life, and
accidental death and dismemberment insurance through non-affiliated insurance
companies for individuals and groups. The services provided consist of
marketing, billing and collection, accounting, and customer service. For its
services, these subsidiaries receive a commission from the insurance company.
Most of the business is produced through independent insurance agents and
brokers who receive a commission from NIB or AIB. NIB and AIB hold licenses
issued by the California Department of Insurance. All business is currently
written in the State of California.
ASSOCIATION OPERATION
The Company's subsidiary Insurance Club, Inc., DBA The American Association For
Quality Health Care ("AAQHC"), is a membership association which provides
various consumer benefits to its members, including participation in group
health care and life insurance policies which AAQHC negotiates for the
Association. For these services, AAQHC receives membership and fee income from
its members.
INSURANCE COMPANY OPERATION
GENERAL
The insurance company operations are conducted through Crusader, which as of
March 31, 1996, is licensed as an admitted insurance carrier in the states of
California, Arizona, Nevada, Oregon and Washington. Crusader is a multiple line
property and casualty insurance company which began transacting business on
January 1, 1985. As of March 31, 1996, it was primarily writing business package
policies in all the states in which it is licensed. Crusader also writes
commercial property and commercial liability policies in those states. Its
business is sold through Unifax Insurance Systems, Inc., its sister corporation.
Unifax has substantial experience with these classes of business. Crusader is
licensed in all property and casualty and disability lines by the California
Department of Insurance.
REINSURANCE
A reinsurance transaction occurs when an insurance company transfers ("cedes") a
portion of its exposure on business written by it to a reinsurer which assumes
that risk for a premium ("ceded premium"). Reinsurance does not legally
discharge the company from primary liability under its policies; and if the
reinsurer fails to meet the obligations, the company must nonetheless pay its
policy obligations. Crusader has reinsurance agreements with National
Reinsurance Corporation, a California admitted reinsurance company, which helps
protect it against liabilities in excess of certain retentions, including major
or catastrophic losses which may occur from any one or more of the property
and/or casualty risks which Crusader insures. Crusader also has additional
catastrophe reinsurance from various California admitted reinsurance companies.
3
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The aggregate amount of insurance premiums ceded to the reinsurers for the
fiscal years ended March 31, 1996, and March 31, 1995, was $6,077,403 and
$9,258,535 respectively.
Crusader's retention is currently $150,000 per risk subject to a maximum dollar
amount and to catastrophe and clash covers. The catastrophe and clash covers
(subject to a maximum occurrence and annual aggregate amount) help protect the
company from one loss occurrence affecting multiple policies. The premium ceded
to the reinsurers for the catastrophe and clash covers and for all exposures
over $500,000 is a fixed percentage of the premium charged by Crusader. On
exposures up to $500,000, the reinsurer charges a provisional rate which is
subject to adjustment and is based on the amount of losses ceded, limited by a
maximum percentage that can be charged by the reinsurer. On most of the premium
that Crusader cedes to the reinsurer, the reinsurer pays a commission to
Crusader which includes a reimbursement of the cost of acquiring the portion of
the premium which is ceded. Crusader does not currently assume any reinsurance
from other insurance companies. The company intends to continue obtaining
reinsurance although the availability and cost may vary from time to time. The
unpaid losses ceded to the reinsurer are recorded as an asset on the balance
sheet.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Crusader maintains reserves for losses and loss adjustment expenses with respect
to both reported and unreported losses. Crusader establishes reserves for
reported losses based on historical experience, upon case-by-case evaluation of
facts surrounding each known loss, and the related policy provisions. The amount
of reserves for unreported losses is estimated by analysis of historical and
statistical information. Historical data includes 11.25 years that Crusader has
been in operation and the data from its general agent developed with other
insurance companies prior to 1985. Since the ultimate liability of Crusader may
be greater or less than estimated reserves, all reserves are constantly
monitored and adjusted. Reserves for loss adjustment expenses are estimated to
cover the direct costs associated with specific claims as well as an estimate of
administrative costs.
The process of establishing loss reserves involves significant judgmental
factors. The following table shows the development of the unpaid losses and loss
adjustment expenses for fiscal years 1986 through 1996. The top line of the
table shows the estimated liability for unpaid loss and loss adjustment expenses
recorded at the balance sheet date for each of the indicated years. This
liability represents the estimated amount of losses and loss adjustment expenses
for losses arising in the current and prior years that are unpaid at the balance
sheet date, including the estimated losses that had been incurred but not
reported to the company. The table shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known.
The table reflects deficiencies in Crusader's loss and loss adjustment expense
reserves from 1986 through 1987 and redundancies thereafter. In January 1988,
the company began a file-by-file revaluation of all open claims and a
revaluation of the estimated liability for incurred but not reported claims
("IBNR") to insure that its reserves were adequate. Reserves on casualty claims
were reestimated on a combination of both the estimated liability and the
potential exposure. In addition, minimum reserves on bodily injury claims were
substantially increased. The minimum reserves are the reserves set up after
coverage is confirmed on a reported claim but before the information is received
to adequately estimate the loss. The minimum reserves are based on the average
of all bodily injury claims incurred. Furthermore, procedures were instituted to
ensure that loss adjustment expense reserves were adequate. This revaluation of
fiscal 1985 through fiscal 1987 open claims was completed in September 1988 and
resulted in significant adjustments to the loss and loss adjustment reserves.
The redundancies in reserves from fiscal 1988 to the present are due to
Crusader's loss reserving practices used in determining its IBNR. Although
redundancies have been reported since fiscal 1988, there is no assurance that
they will continue and the company believes a change in the way it computes IBNR
is not warranted. Crusader is a relatively small insurance company with just
over 10 years of its own statistical experience. The company is constantly
changing its product mix and exposures, including the types of businesses
insured within its business package program as well as its lines of
4
<PAGE>
business. In addition, it is regularly expanding its territories both inside
and outside of California and is growing in premium volume. Considering the
uncertainties from this changing environment as well as its limited internal
data and history, the company recognizes the difficulties in developing its
own unique IBNR statistics and, therefore, it incorporates industry standards
and averages into its estimates. When Crusader establishes its IBNR reserves,
although conservative, it is still well below industry average and the
company believes that it is properly stated. When subsequent development
justifies changes in IBNR, the company acts accordingly.
When evaluating the information in the following table, it should be noted that
each amount includes the effects of all changes in amounts of prior periods and,
therefore, the cumulative redundancy or deficiency represents the aggregate
change in the estimates over all prior years. Conditions and trends that have
affected development of liability in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
deficiencies or redundancies based on this table.
5
<PAGE>
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
Fiscal Year Ending March 31,
1986 1987 1988 1989 1990 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses & Loss
Adjustment
Expenses $3,432,237 $7,510,784 $16,574,249 $23,511,133 $23,601,435 $22,918,442
PAID CUMULATIVE AS OF
1 Year Later 1,771,226 3,558,709 6,924,260 6,326,868 6,204,559 6,425,329
2 Years Later 3,101,706 7,153,804 10,927,698 10,726,038 10,357,708 10,946,318
3 Years Later 4,357,663 9,270,812 13,313,849 13,652,062 12,935,827 12,409,499
4 Years Later 5,042,971 10,154,854 14,639,530 15,121,985 13,561,987 12,951,511
5 Years Later 5,211,215 10,695,504 15,163,791 15,316,299 13,768,277 13,357,941
6 Years Later 5,298,004 10,797,045 15,218,575 15,385,519 13,866,654
7 Years Later 5,301,804 10,817,288 15,382,717 15,416,138
8 Years Later 5,374,281 10,856,723 15,381,552
9 Years Later 5,325,685 10,853,741
10 Years Later 5,325,685
RESERVES REESTIMATED
AS OF
1 Year Later 3,952,753 11,694,406 20,893,557 22,315,883 20,990,669 20,153,906
2 Years Later 5,930,188 13,462,872 19,583,939 20,165,458 18,566,956 17,136,498
3 Years Later 6,193,207 12,703,847 17,807,451 18,348,965 15,846,416 14,788,046
4 Years Later 5,951,648 11,863,127 16,729,893 16,385,905 14,631,554 13,961,555
5 Years Later 5,518,051 11,414,661 15,738,815 15,782,294 14,115,281 13,833,745
6 Years Later 5,408,772 10,945,435 15,491,674 15,511,081 14,063,578
7 Years Later 5,322,934 10,887,766 15,419,031 15,471,448
8 Years Later 5,385,846 10,874,035 15,395,735
9 Years Later 5,325,925 10,861,331
10 Years Later 5,325,800
Cumulative
Redundancy
(Deficiency) $(1,893,563) $(3,350,547) $1,178,514 $8,039,685 $9,537,857 $9,084,697
----------- ----------- ---------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ---------- ----------
Gross Liability for
Unpaid Losses and
Loss Adjustment
Expenses
Ceded Liability for
Unpaid Losses and
Loss Adjustment
Expenses
Net Liability for
Unpaid Losses and
Loss Adjustment
Expenses
Gross Liability
Reestimated
Ceded Liability
Reestimated
Net Liability
Reestimated
Gross Reserve
Redundancy
(Deficiency)
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ending March 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses & Loss
Adjustment
Expenses $21,249,902 $20,824,039 $21,499,778 $27,633,304 $32,682,153
PAID CUMULATIVE AS OF
1 Year Later 6,368,554 8,904,427 7,687,180 8,814,611
2 Years Later 9,583,885 10,824,024 13,453,833
3 Years Later 11,814,445 13,178,262
4 Years Later 12,667,989
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
RESERVES REESTIMATED
AS OF
1 Year Later 18,562,116 19,599,695 20,912,743 25,666,251
2 Years Later 15,021,149 15,742,478 20,289,699
3 Years Later 13,802,009 15,463,566
4 Years Later 13,620,235
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Cumulative
Redundancy
(Deficiency) $7,629,667 $5,360,473 $1,210,079 $1,967,053
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Gross Liability for
Unpaid Losses and
Loss Adjustment
Expenses $23,011,868 $26,294,199 $32,370,752 $37,006,458
Ceded Liability for
Unpaid Losses and
Loss Adjustment
Expenses (2,187,829) (4,794,421) (4,737,448) (4,324,305)
----------- ----------- ----------- -----------
Net Liability for
Unpaid Losses and
Loss Adjustment
Expenses $20,824,039 $21,499,778 $27,633,304 $32,682,153
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Gross Liability
Reestimated $15,999,086 $21,638,763 $28,183,836
Ceded Liability
Reestimated (535,519) (1,349,064) (2,517,585)
----------- ----------- -----------
Net Liability
Reestimated $15,463,566 $20,289,699 $25,666,251
----------- ----------- -----------
----------- ----------- -----------
Gross Reserve
Redundancy
(Deficiency) $7,012,782 $4,655,436 $4,186,916
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
6
<PAGE>
The following table presents an analysis of losses and loss adjusting expenses
and provides a reconciliation of beginning and ending reserves for losses and
loss adjustment expenses net of reinsurance for the fiscal years ended March 31,
1996, 1995, and 1994.
CRUSADER INSURANCE COMPANY
RECONCILIATION OF LOSS RESERVES
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Reserve for unpaid losses and loss adjustment
expenses at beginning of year $27,633,304 $21,499,778 $20,824,039
----------- ----------- -----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 19,276,602 18,057,338 14,516,383
Increase (decrease) in provision for events
of prior years (1,967,053) (587,038) (1,224,344)
----------- ----------- -----------
Total losses and loss adjustment expenses 17,309,549 17,470,300 13,292,039
----------- ----------- -----------
Payments
Losses and loss adjustment expenses attributable
to insured events of the current year 3,446,088 3,469,594 2,598,236
Losses and loss adjustment expenses attributable
to insured events of prior years 8,814,612 7,867,180 8,904,427
----------- ----------- -----------
Total payments 12,260,700 11,336,774 11,502,663
----------- ----------- -----------
Allocations
Loss adjustment expenses allocated
from affiliated company (1) - - 1,113,637
----------- ----------- -----------
Reserve for unpaid losses & loss adjustment expenses
at end of year - net of reinsurance $32,682,153 $27,633,304 $21,499,778
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
Reconciliation of liability for losses and loss adjustment expense reserves to Balance Sheet
<S> <C> <C> <C>
Reserve for unpaid losses & loss adjustment expenses
at end of year - net of reinsurance $32,682,153 $27,633,304 $21,499,778
Reinsurance recoverable on unpaid losses
at end of year 4,324,305 4,737,448 4,794,421
----------- ----------- -----------
Reserve for unpaid losses & loss adjustment expenses
at end of year - gross of reinsurance $37,006,458 $32,370,752 $26,294,199
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(1) As of January 1, 1994, Crusader began processing its own claims. This claim
processing function had previously been provided by its sister company,
U.S. Risk Managers, Inc.
7
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NET PREMIUM WRITTEN TO POLICYHOLDERS' SURPLUS RATIO
The following table shows, for the periods indicated, Crusader's statutory
ratios of net premiums written to statutory policyholders' surplus. Since each
property and casualty insurance company has different capital needs, an
"acceptable" ratio of net premium written to policyholders' surplus for one
company may be inapplicable to another company. While there is no statutory
requirement applicable to the Company which establishes a permissible net
premium to surplus ratio, guidelines established by the National Association of
Insurance Commissioners provide that such ratio should generally be no greater
than 3 to 1.
<TABLE>
<CAPTION>
Fiscal year ended March 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Premiums Written $32,915,964 $30,785,970 $27,583,084 $16,894,276 $16,370,320
Policyholders' Surplus $22,721,183 $19,585,839 $17,313,744 $16,265,104 $18,680,413
Ratio 1.4 to 1 1.6 to 1 1.6 to 1 1.0 to 1 0.9 to 1
</TABLE>
REGULATION
The insurance company operation is subject to regulation by the California
Department of Insurance ("the insurance department") and also by the department
of insurance of other states in which the company is licensed. The insurance
department has broad regulatory, supervisory and administrative powers. These
powers relate primarily to the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature and
limitation of insurers' investments; the prior approval of rates, rules and
forms; the issuance of securities by insurers; periodic examinations of the
affairs of insurers; the annual and other reports required to be filed on the
financial condition and results of operations of such insurers or for other
purposes; and the establishment of reserves required to be maintained for
unearned premiums, losses and other purposes. The regulations and supervision by
the insurance department are designed principally for the benefit of
policyholders and not for the insurance company shareholders. The last
examination of Crusader by the insurance department covered the three years
ending December 31, 1994, and was completed in November of 1995.
In December 1993, the National Association of Insurance Commissioners ("NAIC")
adopted a Risk-Based Capital ("RBC") Model Law for property and casualty
companies. The RBC Model Law is intended to provide standards for calculating a
variable regulatory capital requirement related to a company's current
operations and its risk exposures (asset risk, underwriting risk, credit risk
and off-balance sheet risk). These standards are intended to serve as a
diagnostic solvency tool for regulators that establishes uniform capital levels
and specific authority levels for regulatory intervention when an insurer falls
below minimum capital levels. The RBC Model Law specifies four distinct action
levels at which a regulator can intervene with increasing degrees of authority
over a domestic insurer if its RBC is equal to or less than 200% of its computed
authorized control level RBC.
A company's RBC is required to be disclosed in its statutory annual statement.
The RBC is not intended to be used as a rating or ranking tool nor is it to be
used in premium rate making or approval. The company calculated its RBC
requirement as of December 31, 1995 for its 1995, statutory annual statement and
reported that its total adjusted surplus to policyholders was 482% of its
authorized control level RBC.
CALIFORNIA INSURANCE GUARANTEE ASSOCIATION
In 1969, the California Insurance Guarantee Association ("CIGA") was created
pursuant to California law to provide for payment of claims for which insolvent
insurers of most casualty lines are liable but which cannot be paid out of such
insurers' assets. Crusader is subject to assessment by CIGA for its pro-rata
share of such claims (based on premiums written in the particular line in the
year preceding the
8
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assessment by insurers writing that line of insurance in California). Such
assessments are based upon estimates of losses incurred in liquidating an
insolvent insurer. In a particular year, Crusader cannot be assessed an amount
greater than 1% of its premiums written in the preceding year. California
Insurance Code Sections 1063.5 and 1063.14 allow Crusader to recoup assessments
by surcharging policyholders. Crusader was assessed $209,186 by CIGA for the
1995 calendar year, of which it recouped all but $18,431. This unrecouped
portion was charged to other operating expenses on the consolidated statement of
operations. No assessment was made by CIGA for the 1996 calendar year.
HOLDING COMPANY ACT
The Company's subsidiaries are subject to regulation by the insurance department
pursuant to the provisions of the California Insurance Holding Company System
Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company Act,
the insurance department may examine the affairs of Crusader at any time.
Certain transactions defined to be of an "extraordinary" type may not be
effected without the prior approval of the insurance department. Such
transactions include, but are not limited to, sales, purchases, exchanges, loans
and extensions of credit, and investments made within the immediate preceding 12
months involving in the net aggregate, more than the lesser of 5% of Crusader's
admitted assets or policyholders' surplus, as of the preceding December 31st. An
extraordinary transaction also includes a dividend which, together with other
dividends or distributions made within the preceding 12 months, exceeds the
greater of 10% of the insurance company's policyholders' surplus as of the
preceding December 31st or the insurance company's net income for the preceding
calendar year. An insurance company is also required to notify the insurance
department of any dividend after declaration, but prior to payment. The Company
is in compliance with the Holding Company Act.
RATING
Crusader has been rated A- (Excellent) by A.M. Best Company since its initial
rating in 1990.
INVESTMENTS
The investments of the Company are made by the Company's Chief Financial Officer
under the supervision of an investment committee appointed by the Company's
Board of Directors. The Company's investment guidelines are to maintain the
Company's cash and invested assets in high-grade investments. The Company's
fixed maturity obligations have maturities no greater than eight years and
consist of U.S. treasury securities, high-grade industrial and municipal
obligations, and certificates of deposit. In addition, all investments in
municipal obligations are pre-refunded municipals which are secured by U.S.
treasury securities. The Company's investment in equity securities consists of
common shares in two regional telephone companies. The balance of the Company's
investments are invested in high-grade short-term instruments consisting of bank
money market accounts, certificates of deposit and commercial paper. These
investments are either FDIC insured or are in an institution with a Moody's
rating of P1 and/or Standard & Poor's rating of A1. All of the Company's
investments are readily marketable and could be liquidated without any material
financial impact.
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<PAGE>
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated:
<TABLE>
<CAPTION>
As of March 31,
---------------------------------------------------------
(Amounts in Thousands)
1996 1995 1994
----------------- ----------------- -----------------
Amortized Market Amortized Market Amortized Market
Type of Security Cost Value Cost Value Cost Value
- ------------------------------------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Government bonds $18,192 $18,325 $4,884 $4,953 - -
Taxable bonds 11,766 12,126 14,065 14,052 $16,097 $16,629
Tax exempt state and municipal bonds 38,127 38,437 41,759 41,434 34,118 33,723
------- ------- ------ ------ ------- -------
Total fixed maturity investments 68,085 68,888 60,708 60,439 50,215 50,352
Short-term cash investments 3,466 3,466 3,382 3,382 2,615 2,615
Equity investments 995 998 - - 1,169 1,061
------- ------- ------ ------ ------- -------
Total Investments $72,546 $73,352 $64,090 $63,821 $53,999 $54,028
------- ------- ------ ------ ------- -------
------- ------- ------ ------ ------- -------
</TABLE>
At March 31, 1996, the Company had a net unrealized gain on all investments of
$805,739 before income taxes.
The maturity distributions of the Company's fixed maturity investments at
March 31, 1996 and 1995 were as follows:
(Amounts in Thousands)
1996 1996 1995 1995
--------- ------ --------- ------
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------ --------- ------
Fixed maturities due:
- ---------------------
Within 1 year $ 7,143 $ 7,180 $11,758 $11,840
Beyond 1 year but within 5 years 37,149 37,499 24,873 24,724
Beyond 5 years but within 10 years 23,793 24,209 24,077 23,875
------- ------- ------- -------
Total $68,085 $68,888 $60,708 $60,439
------- ------- ------- -------
------- ------- ------- -------
COMPETITION
GENERAL
The property and casualty insurance industry is highly competitive on the basis
of price and service and is highly cyclical, characterized by periods of high
premium rates and shortages of underwriting capacity followed by periods of
severe price competition and excess capacity.
The profitability of insurers is affected by many factors including rate
competition, the frequency of claims and their average cost, natural disasters,
state regulations, interest rates, crime rates, general business conditions, and
court decisions redefining and expanding the extent of coverage and granting
higher compensation awards. One of the challenging and unique features of the
property and casualty business is the fact that, since premiums are collected
before losses are paid, its products must be priced before its costs are known.
10
<PAGE>
INSURANCE COMPANY AND GENERAL AGENCY OPERATIONS (PROPERTY & CASUALTY)
The Company's property and casualty insurance business continues to be very
competitive. There are many substantial competitors who have larger resources,
operate in more states, insure coverages in more lines and in higher limits than
the Company. The principal method of competition among these competitors is
price. While the Company attempts to meet this competition with competitive
prices, its emphasis is on service, promotion and distribution.
INSURANCE CLAIM ADJUSTING OPERATION
The insurance claim adjusting operation generates all its business from "in-
house production" for non-affiliated insurance companies; thus, competition is
not a major factor as long as U.S. Risk produces a quality product at a fair
price. Its growth is dependent on the growth of the general agency operations
which produce the business. As of January 1, 1994, Crusader began processing its
own claims. This claim processing function had previously been provided by its
sister company, U.S. Risk.
INSURANCE PREMIUM FINANCING OPERATION
The insurance premium financing operation is currently financing Crusader
policies and commercial automobile policies written through Unifax for a non-
affiliated insurer. Although competition is intense in the premium finance
business, the competitive pricing, the quality of its service, and the ease and
convenience of financing with AAC has made its growth and profitability
possible. Its continued growth is dependent on the growth of Crusader and
Unifax.
HEALTH AND LIFE INSURANCE OPERATIONS
Competition in the health and life insurance business is also intense.
Approximately 84% of the Company's present health and life business is from the
CIGNA HealthCare medical & dental plan programs. This percentage is up from
approximately 80% in the prior year. The company is continuing its efforts to
diversify and offer a wider variety of products to its customers and believes
that this effort will make it more competitive and should increase future
revenues.
EMPLOYEES
On June 14, 1996, the Company employed 139 persons at its facility located in
Woodland Hills, California. The Company has no collective bargaining agreements
and believes its relations with its employees are excellent.
ITEM 2. PROPERTIES
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rental of $1,025,952.
Erwin Cheldin, the Company's president, chairman and principal stockholder, is
the owner of the building. On February 22, 1995, the Company signed an extension
to the lease with no increase in rent to March 31, 2007. The terms of the lease
at inception and at the time the lease extension was signed were at least as
favorable to the Company as could have been obtained from unaffiliated third
parties.
The Company utilizes for its own operations 100% of the space it leases.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings in which it may be named as either
plaintiff or defendant. The Company is required to resort to legal proceedings
from time-to-time in order to enforce collection of premiums and other
commissions or fees for the services rendered to customers or to their agents.
These routine items of litigation do not materially affect the Company and are
handled on a routine basis by the Company through its general counsel.
Likewise, the Company is sometimes named as a cross-defendant in litigation
which is principally directed against that insurer who has issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or other agents which relate to disputes
concerning the issuance or non-issuance of individual policies. These items are
also handled on a routine basis by the Company's general counsel and they do not
materially affect the operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "UNAM."
The high and low sales prices (by quarter) and dividends paid during the last
two fiscal years are as follows:
High Low Dividend
Quarter Ended Price Price Declared
------------- ----- ----- --------
June 30, 1994 6 1/8 4 3/8 $0.07
September 30, 1994 5 1/4 4
December 31, 1994 4 1/2 4
March 31, 1995 5 3/8 4 1/8
June 30, 1995 5 3/8 4 1/8 $0.07
September 30, 1995 6 1/8 5 1/8
December 31, 1995 6 5/8 5 5/8
March 31, 1996 7 1/8 6
As of March 31, 1996, the approximate number of shareholders of record of the
Company's common stock was 700. A substantial number of shares of the Company's
stock is held in street name; and, therefore, the actual number of holders of
the Company's common stock exceeds 700.
On June 24, 1991, the Company declared its first cash dividend on its common
stock and has declared dividends annually thereafter. The Company's intention is
to declare annual cash dividends subject to continued profitability and cash
requirements. On May 17, 1996, the Company declared its latest annual cash
dividend of $0.07 per common share payable on August 14, 1996, to shareholders
of record on July 31, 1996.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal year ended March 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues $42,468,474 $39,444,223 $32,979,913 $ 24,784,994 $27,021,164
Total cost & expenses 34,060,183 34,486,546 27,931,741 35,466,587 19,562,679
----------- ----------- ----------- ------------ -----------
Income (loss) before taxes 8,408,291 4,957,677 5,048,172 (10,681,593) 7,458,485
Income (loss) after taxes $ 5,947,481 $ 3,792,179 $ 3,521,787 $(6,802,146) $ 5,009,153
Income (loss) per share (1) $0.97 $0.63 $0.58 $ (1.17) $0.90
Cash dividends per share $0.07 $0.07 $0.07 $0.06 $0.05
Total assets $95,817,377 $87,456,701 $76,999,203 $ 64,037,036 $64,866,203
Long term debt $ 758,135 $ 750,824 $ 1,151,834 $ 1,961,520 $985,016
Stockholders' equity $32,387,158 $26,147,827 $22,843,567 $ 19,708,720 $25,284,010
</TABLE>
(1) The calculation of earnings per share was based on the weighted average
number of common shares outstanding and common stock equivalents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES:
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. Cash and
investments (excluding unrealized gains) at March 31, 1996 were $72,700,991
compared to $64,262,794 in the prior year, a 13% increase. Crusader's cash and
investments amounted to $69,332,581 or 95% of the Company's total.
In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
is required to classify its investments in debt and equity securities into one
of three categories: held-to-maturity, available-for-sale or trading securities.
In the quarter ended March 31, 1995 the company reclassified all of its
securities from held-to-maturity to the available-for-sale category. Although
all of the Company's investments are classified as available-for-sale, the
Company's investment guidelines place primary emphasis on buying and holding
high-quality investments.
As of March 31, 1996, the Company had invested $68,085,376 (at amortized cost)
or 94% of its investments in fixed maturity obligations. The balance of the
Company's investments were in equity securities consisting of common shares in
two regional telephone companies and high-quality, short-term investments which
included bank money market accounts, certificates of deposit and commercial
paper. The Company's investments in fixed maturity obligations included
$38,126,835 (56%) of tax-exempt, pre-refunded state and municipal bonds,
$18,191,847 (27%) of U.S. treasury securities, and $11,766,694 (17%) in high-
quality industrial bonds and certificates of deposit. This compares to fixed
maturity obligations in the prior fiscal year of $60,707,261 that included
$41,758,522 (69%) of tax-exempt, pre-refunded state and municipal bonds,
$4,884,350 (8%) of U.S. treasury notes, and $14,064,389 (23%) in high-quality
industrial bonds and certificates of deposit. The tax-exempt interest income
earned (net of bond premium/discount amortization) during the fiscal year ended
March 31, 1996, was $1,738,799 compared to $1,898,772 in the fiscal year ended
March 31, 1995.
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<PAGE>
The Company's investment policy limits investments in any one company to no more
than $1,000,000. This limitation excludes bond premiums paid in excess of par
value and U.S. Government or U.S. Government guaranteed issues. All of the
Company's investments are high grade investment quality.
The Company's premium finance subsidiary, American Acceptance Corporation, has a
bank credit line of $6,000,000 with a variable rate of interest based on
fluctuations in the London Interbank Offered Rate ("LIBOR"). This credit line is
only used to provide American Acceptance Corporation with funds to finance
insurance premiums.
The maximum and average bank note payable and weighted average interest rate are
as follows:
Year Ended Year Ended
March 31, March 31,
1996 1995
---------- ----------
Maximum bank note payable $3,975,001 $4,467,001
Average bank note payable $3,388,334 $4,229,418
Weighted average interest rate 7.7% 7.2%
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at year end, net
of trust restriction of $2,465,923, statutory deposits of $725,000, and dividend
restriction between Crusader and Unico (as discussed under "Insurance Company
Operation - Holding Company Act") plus the cash to be generated from operations,
should be sufficient to meet its operating requirements (excluding AAC's credit
line discussed above) during the next twelve months without the necessity of
borrowing funds.
On June 15, 1995, the Company repaid from its cash flow the remaining $500,000
of its related party debt. This debt was incurred by Unico in June of 1992 to
increase Crusader's surplus following the Los Angeles riot.
Crusader's statutory capital and surplus as of March 31, 1996, was $22,721,183,
an increase of $3,135,344 from the surplus balance at March 31, 1995, of
$19,585,839.
There are no material commitments for capital expenditures as of
the date of this report.
RESULTS OF OPERATION:
GENERAL
The Company had net income after taxes of $5,947,481 for the fiscal year ended
March 31, 1996, compared to $3,792,179 for the fiscal year ended March 31, 1995,
and net income of $3,521,787 for fiscal year ended March 31, 1994. Total revenue
for the year ended March 31, 1996, was $42,468,474 compared to $39,444,223 and
$32,979,913 for the years ended March 31, 1995, and 1994 respectively.
For the fiscal year ended March 31, 1996, income before taxes increased by
$3,450,614 (70%) and net income increased by $2,155,302 (57%) compared to the
prior fiscal year. The increase in net income was primarily due to an increase
of $2,175,220 in the pre-tax underwriting profit (net earned premium less loss
and loss adjustment expenses and policy acquisition costs) from Crusader, an
increase in investment income of $545,783 (16%) (excluding realized gains), a
decrease in other operating expenses of $451,145 (12%), and an increase in gross
commissions and fees of $192,311 (3%).
For the fiscal year ended March 31, 1995, income before taxes decreased by
$90,495 (2%) while net income increased by $270,392 (8%) compared to the
prior fiscal year. Although total investment income increased by $66,943
(2%), tax-exempt investment income increased by $798,586 (73%) which resulted
in a tax benefit of approximately $231,000. The increase in net income was
due primarily to this tax benefit.
14
<PAGE>
The effect of inflation on the net income of the Company during the year ended
March 31, 1996, was not significant.
The Company derives revenue from various sources as discussed below:
INSURANCE COMPANY OPERATION
Premium and loss information of Crusader are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Gross written premium $37,631,357 $39,039,549 $37,278,300
Net written premium $33,193,911 $30,424,864 $27,463,164
Earned premium before reinsurance $37,554,830 $38,466,825 $31,400,463
Earned premium net of reinsurance $31,477,427 $29,208,290 $22,714,825
Losses and Loss adjustment expenses $17,309,549 $17,470,300 $13,292,039
Unpaid losses and loss adjustment expenses $37,006,458 $32,370,752 $26,294,199
</TABLE>
Gross written premium decreased by $1,408,192 (4%) in the fiscal year ending
March 31, 1996, compared to an increase of $1,761,249 (5%) for the fiscal year
ended March 31, 1995. The decrease in written premium was primarily attributable
to Crusader's decision to intentionally reduce its Other Liability line in an
effort to improve the utilization of its surplus. Other Liability gross written
premium for the fiscal year ended March 31, 1996, was $289,364, a $4,679,191
(94%) decrease from the prior fiscal year. The decrease in Other Liability
written premium was offset by growth of $3,304,242 (10%) in Crusader's
Commercial Package business. The Commercial Package premium for the fiscal year
March 31, 1996 totaled $36,960,933 compared to written premium of $33,656,691 in
the prior fiscal year. The Commercial Package line is Crusader's primary line of
business and represents approximately 98% of its total premiums written. The
increase in gross written premiums in the Commercial Package line was primarily
due to increases in premiums in states outside of California. Gross premiums
written in Washington, Oregon, Arizona and Nevada increased $2,318,626 (46%) to
$7,341,329 while gross written premiums in California increased $977,207 (3%) to
$29,619,604. In the fiscal year ending March 31, 1995, the increase in gross
written premium was primarily the result of an increase of $5,993,669 (22%) in
the company's Commercial Package business to $33,656,691. This increase was
offset by a $3,831,980 (44%) decrease in the company's Other Liability line of
business. The company began its deliberate reduction of Other Liability premium
in fiscal year 1995.
Crusader's net earned premium was $31,477,427, an increase of $2,269,137 (8%)
when compared to net earned premium in the fiscal year ending March 31, 1995.
The increase in net earned premium was primarily the result of a decrease in
earned ceded premium in the current fiscal year. The percentage of earned
premium ceded to premium earned for the fiscal year ended March 31, 1996, was
16%. This compares to 24% for the fiscal year ended March 31, 1995, and 28% for
the fiscal year ended March 31, 1994. The decrease in the fiscal year ended
March 31, 1996, compared to March 31, 1995, was primarily attributable to a
reduction in Crusader's Other Liability line of business which cedes a higher
percentage of premium than its other lines, and to an increase in loss retention
from $100,000 to $150,000 on April 1, 1995. The decrease in fiscal year ended
March 31, 1995 compared to March 31, 1994 was primarily attributable to the
reduction in Crusader's Other Liability line of business.
The combined ratio is the sum of (1) the ratio of losses and loss adjustment
expenses incurred (including a provision for incurred but not reported losses)
to net premiums earned (the "loss ratio") and (2) the ratio of policy
acquisition and general operating costs to net premiums earned (the "expense
ratio"). The following table shows the loss ratios, expense ratios, and combined
ratios of Crusader as derived from data prepared in accordance with generally
accepted accounting principles. Generally, if the combined
15
<PAGE>
INSURANCE COMPANY OPERATION (CONTINUED)
ratio is below 100% an insurance company has an underwriting profit; if it is
above 100% the company has an underwriting loss.
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1996 1995 1994
--------- ---------- ----------
Loss ratio 55.0% 59.8% 58.5%
Expense ratio 27.2% 28.5% 28.9%
Combined ratio 82.2% 88.3% 87.4%
The company's future writings and growth is dependent on market conditions,
competition, the company's ability to introduce new profitable products, and its
ability to expand geographically. Crusader is currently licensed as an admitted
insurance company in the states of California, Arizona, Nevada, Oregon and
Washington and is approved as a non-admitted surplus lines writer in several
other states. Crusader is currently writing in all the states in which it is
licensed.
DAILY AUTOMOBILE RENTAL INSURANCE PROGRAM
The daily automobile rental insurance program is produced by Bedford. Bedford
receives a commission and a claim administration fee from a non-affiliated
insurance company based on premium written. Commission and fee income from the
daily automobile rental insurance program are as follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Daily auto rental program
commission & claim
administration fee $871,841 $756,162 $695,330
Revenues during the fiscal year ended March 31, 1996, increased 15% from the
fiscal year ended March 31, 1995. Revenues for the fiscal year ended March 31,
1995, increased 9% from the fiscal year ended March 31, 1994.
Although the daily automobile rental insurance program experienced an increase
in commission and fee income in the current and prior fiscal years, price
competition remains intense in this market. To avoid underwriting losses for the
non-affiliated insurance company which Bedford represents, it continues to
produce business only at rates which it believes to be adequate. The company
cannot determine how long this "soft market" condition will continue.
COMMERCIAL AND PERSONAL AUTOMOBILE INSURANCE PROGRAM
NCC renews and services existing commercial automobile and personal automobile
physical damage policies in California for a non-affiliated insurer. NCC
receives a commission and claim administration fee from a non-affiliated
insurance company based on premium written; however, NCC plans to discontinue
these programs. Unifax produces commercial auto policies in California for a
non-affiliated insurer and receives a commission from them based on premium
written. Unifax and NCC also receive a service fee from the policyholder.
16
<PAGE>
Commercial and personal auto program commission, service fee and claim
administration income are as follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Commercial & personal auto
program commission, service fee &
claim administration income $183,519 $257,775 $240,076
Revenue for the fiscal year ended March 31, 1996, decreased $74,256 (29%) from
the prior fiscal year while revenue for the fiscal year ended March 31, 1995,
increased $17,699 (7%) from the prior fiscal year.
Unifax commission and fee income on this program was $166,189 in the fiscal year
ended March 31, 1996, compared to $233,267 in the fiscal year ended March 31,
1995, and $205,937 in the fiscal year ended March 31, 1994. NCC commission and
fee income was $17,330 in the fiscal year ended March 31, 1996, compared to
$23,849 in the year ending March 31, 1995, and $34,139 in the fiscal year ended
March 31, 1994. By increasing its marketing effort, Unifax intends to increase
revenues on this program.
HEALTH AND LIFE INSURANCE PROGRAM
Commission income from the health and life insurance sales of NIB and AIB are as
follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Commission income $2,539,802 $2,467,003 $2,697,681
NIB and AIB market health and life insurance through non-affiliated insurance
companies for individuals and groups. Approximately 84% of the health and life
commission income in the current fiscal year is from the CIGNA HealthCare
medical and dental plan programs compared to approximately 79% in the prior
fiscal year. Revenue for the year ended March 31, 1996, increased by 3% from the
prior fiscal year compared to a decrease in revenues of 9% for the fiscal year
ended March 31, 1995 compared to March 31, 1994.
The increase in revenues in the fiscal year ended March 31, 1996, was primarily
due to an increase in sales of policies covering individual and family members
resulting from rate reductions in March 1995 and July 1995 which made the
products more competitive. The increase in sales is also due to aggressive
marketing of quality products to customers along with outstanding customer
service. Because of the intense competition among carriers for small groups (as
discussed below), many carriers have begun an incentive program to increase
business. These incentives are based on business written and retained for a
minimum of one year. The incentive program for the company began in October
1994. In the fiscal year ended March 31, 1996, $31,575 was earned on this
incentive program. Future incentive, if any, cannot yet be determined.
The decrease in the health and life revenues in the fiscal year ended March 31,
1995, was due to changes in the commission structure resulting from intense rate
competition and the effects of the recession in California. Regulations on
California health care medical providers to small businesses of 5 to 50
employees became effective on July 1, 1993 (AB 1672). In July, 1995, small
businesses with as few as 3 employees became covered by these regulations. These
regulations among other things created an alliance of health insurance companies
called the Health Insurance Plan of California ("HIPC"). There are currently 22
insurance companies in the alliance, and this number is expected to increase.
The premiums charged by the companies in the alliance were approved by the State
of California and are very competitive. To meet this competition, insurance
companies marketing programs outside of HIPC are forced to lower their rates and
costs. Insurance carriers are paying lower commissions to keep their rates low
and competitive. The health insurance market for small business has become a
level playing
17
<PAGE>
field because the rates charged by any California health insurance carrier are
the same rates charged by all their administrators and general agents.
Therefore, the health insurance rates charged by the company are the same rates
charged by its competitors. The impact of these regulations on the company was
and will continue to be, lower revenues from reduced sales on its small business
group programs.
Individual medical programs are not covered by AB 1672 and all of the company's
major insurance carriers have now provided the company with individual medical
insurance programs. The company is now marketing these individual programs and
anticipates growth in this area. The company is also continuing its efforts to
provide more choices to its customers by offering a wide variety of products and
expanding its marketing area.
NIB and AIB currently market health and life insurance for the following
companies:
COMPANY PRODUCT
------- -------
CIGNA HealthCare Group & Individual Medical & Dental
FHP, Inc. Group & Individual Medical & Dental
Foundation Health Group & Individual Medical & Dental
Universal Care Group & Individual Medical
Greater California Dental Plan Group & Individual Dental
Vision Plan of America Group & Individual Vision Plan
MDC (Managed Dental Care) Group Dental
Blue Cross Individual Medical
Life Insurance Company of Group Term Life & Group &
North America (LINA) Individual Accidental Death &
Dismemberment (AD&D)
ASSOCIATION OPERATION
Membership and fee income from the Association program of AAQHC is as follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Membership and fee income $277,754 $222,271 $270,630
The increase in membership and fee income in the fiscal year ending March 31,
1996, was attributed to an increase in individual and family members in the
Association. Membership income had decreased in the prior fiscal year as a
result of a decrease in membership in the Association.
PREMIUM FINANCE PROGRAM
Premium finance charges and late fees earned from financing policies are as
follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Premium finance charges and
late fees earned $1,279,850 $1,306,953 $1,136,977
New loans 10,212 10,523 9,893
American Acceptance Corporation, the Company's insurance premium finance
subsidiary, provides premium financing to Crusader and to a non-affiliated
insurer on commercial auto policies produced by Unifax. AAC is continuing to
finance approximately 85% of those Crusader policies which are financed. Since
this program is financing only policies produced by Unifax, the further growth
of this program is dependent and directly related to the growth of Crusader's
written premium and the commercial auto program produced by Unifax.
18
<PAGE>
SERVICE FEE INCOME
Unifax sells and services insurance policies for Crusader. The service fee
charged to the policyholder by Unifax is recognized as income in the
consolidated financial statements. The commissions paid by Crusader to Unifax
are eliminated as intercompany transactions and are not reflected in commission
income or commission expense.
Service fee income from Unifax is as follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Service fee income $1,891,405 $1,884,041 $1,716,937
Policies written 16,881 17,830 17,067
Service fee income is primarily related to the number of policies written by
Unifax.
INVESTMENT INCOME
Investment income consists of interest, dividends and net realized investment
gain as follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Interest and dividend income
Insurance company operations $3,708,891 $3,181,791 $3,115,516
Other operations 154,842 136,159 135,491
---------- ---------- ----------
Total interest and dividends
on investments 3,863,733 3,317,950 3,251,007
Net realized investment gains 55,743 7,552 30,739
---------- ---------- ----------
Total investment income $3,919,476 $3,325,502 $3,281,746
---------- ---------- ----------
---------- ---------- ----------
Investment interest and dividends earned (excluding net realized gains)
increased approximately 16% during the fiscal year ended March 31, 1996,
compared to the prior fiscal year. This increase was primarily due to an
increase in invested assets (at amortized value) of $8,457,083 (13%) and, to a
lesser extent, to the mix of taxable and tax-exempt securities in the portfolio.
The mix of tax-exempt investments to total investments decreased from
$41,758,522 (65%) to $38,126,835 (53%) at March 31, 1996. Tax-exempt securities
carry a lower pre-tax yield than equivalent rated taxable securities.
Investment interest and dividends earned (excluding net realized gains)
increased approximately 2% in the fiscal year ended March 31, 1995, compared to
the prior fiscal year. Although total invested assets (at amortized value)
increased $10,090,333 (19%) during that period, investment income only increased
slightly due to maturing investments being invested at lower yields (due to the
general decline in yields in the marketplace) and the increase in tax exempt
investments. The mix of tax-exempt investments to total investments increased
from $34,118,102 (63%) at March 31, 1994, to $41,758,522 (65%) at March 31,
1995.
Additional information regarding investments and investment income are described
in the "Management Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources."
OPERATING EXPENSES
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs which are related to and vary with the
production of Crusader insurance policies. These costs include both Crusader
expenses and allocated expenses of other Unico subsidiaries. On
19
<PAGE>
certain reinsurance treaties, Crusader receives a ceding commission from its
reinsurer which represents a reimbursement of the acquisition costs related to
the premium ceded. Policy acquisition costs, net of ceding commission, are
deferred and amortized as the related premiums are earned. Policy acquisition
costs, net of ceding commission, are as follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Policy acquisition costs $8,569,395 $8,314,727 $6,564,746
Ratio to net earned premium 27% 28% 29%
SALARIES AND EMPLOYEE BENEFITS decreased $40,214 (1%) during the fiscal year
ended March 31, 1996, compared with an increase of $102,097 (3%) in the fiscal
year ending March 31, 1995.
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Salaries and employee benefits $3,684,989 $3,725,203 $3,623,106
COMMISSIONS TO AGENTS/BROKERS (not including commissions on Crusader policies
which are reflected in policy acquisition costs) are generally related to gross
commission income. During the fiscal year ended March 31, 1996, commission
expense decreased $28,921 (2%).
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Commissions to agents/brokers $1,328,672 $1,357,593 $1,293,015
OTHER OPERATING EXPENSES generally do not change significantly with changes in
production. This is true for both increases and decreases in production. Other
operating expenses decreased $451,145 (12%) during the fiscal year ended March
31, 1996, compared to the prior fiscal year. This decrease was primarily due to
a decrease in interest and legal expenses. Included in the prior fiscal year was
a $300,000 provision for interest due the Internal Revenue Service relating to
the tax effect from timing differences of loss reserve deductions in prior
years. Legal expenses declined in the current fiscal by $110,644.
Other operating expenses increased $459,888 (15%) during the fiscal year ended
March 31, 1995, compared to the fiscal year ended March 31, 1994, as a result of
a $300,000 interest expense provision to the Internal Revenue Service (discussed
above) and an increase of $74,579 in interest expense from the Company's premium
finance operation.
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Other operating expenses $3,167,578 3,618,723 $3,158,835
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
------
Independent Auditors' Report 22
Consolidated Balance Sheets as of March 31, 1996, and 1995 23
Consolidated Statements of Operations for the three years ended
March 31, 1996, 1995, and 1994 24
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended March 31, 1996, 1995, and 1994 25
Consolidated Statements of Cash Flows for the three years ended
March 31, 1996, 1995, and 1994 26
Notes to Consolidated Financial Statements 27
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Unico American Corporation
We have audited the accompanying consolidated balance sheets of Unico American
Corporation and its subsidiaries as of March 31, 1996, and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Unico
American Corporation and its subsidiaries as of March 31, 1996, and 1995 and the
consolidated results of operations and cash flows for each of the three years in
the period ended March 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's ("FASB")
Statement No. 115 ("Accounting for Certain Investments in Debt and Equity
Securities") in the fiscal year ended March 31, 1994.
GETZ, KRYCLER & JAKUBOVITS
Sherman Oaks, California
June 20, 1996
22
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
--------- ---------
ASSETS
<S> <C> <C>
Investments
Available for sale:
Fixed maturities at market (amortized cost:
1996, $68,085,376; 1995, $60,707,261) $68,888,277 $60,438,930
Equity securities at market (cost: 1996, $995,237; 1995, $0) 998,075 --
Short-term investments, at cost 3,466,032 3,382,301
----------- -----------
Total investments 73,352,384 63,821,231
Cash 154,346 173,232
Accrued investment income 1,261,049 1,368,773
Premium and notes receivable, net 8,141,243 8,061,352
Reinsurance recoverable:
Paid losses and loss adjustment expenses 212,368 56,173
Unpaid losses and loss adjustment expenses 4,324,305 4,737,448
Prepaid reinsurance premiums 1,363,624 2,784,432
Deferred policy acquisition costs 4,333,708 4,113,936
Property and equipment (net of accumulated depreciation) 278,618 335,495
Deferred income taxes 1,523,778 1,610,075
Other assets 871,954 394,554
----------- -----------
Total Assets $95,817,377 $87,456,701
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $37,006,458 $32,370,752
Unearned premiums 19,646,502 19,569,975
Advance premiums 1,588,628 1,652,377
Funds held as security for performance 758,135 750,824
Accrued expenses and other liabilities 2,332,398 2,174,560
Income taxes payable 98,097 315,385
Note payable - bank 2,000,001 3,975,001
Note payable - related party -- 500,000
----------- -----------
Total Liabilities 63,430,219 61,308,874
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par - authorized 10,000,000 shares, issued and
outstanding shares 5,957,738 at March 31, 1996, and 5,957,645
at March 31, 1995 2,834,801 2,834,801
Net unrealized investment gains (losses) 531,787 (177,098)
Retained earnings 29,020,570 23,490,124
----------- -----------
Total Stockholders' Equity 32,387,158 26,147,827
----------- -----------
Total Liabilities and Stockholders' Equity $95,817,377 $87,456,701
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Insurance Company Revenues
Premium earned $37,554,830 $38,466,825 $31,400,463
Less: Premium ceded 6,077,403 9,258,535 8,685,638
----------- ----------- -----------
Net premium earned 31,477,427 29,208,290 22,714,825
Investment income, net 3,708,891 3,181,791 3,115,516
Net realized investment gains 55,743 7,552 30,739
Other income (expense) 803 (14,286) 525
----------- ----------- -----------
Total Insurance Company Revenues 35,242,864 32,383,347 25,861,605
Other Revenues from Insurance Operations
Gross commissions and fees 5,779,769 5,587,458 5,621,074
Investment income 154,842 136,159 135,491
Finance charges and late fees earned 1,279,850 1,306,953 1,136,977
Other income 11,149 30,306 224,766
----------- ----------- -----------
Total Revenues 42,468,474 39,444,223 32,979,913
----------- ----------- -----------
EXPENSES
Losses and loss adjustment expenses 17,309,549 17,470,300 13,292,039
Policy acquisition costs 8,569,395 8,314,727 6,564,746
Salaries and employee benefits 3,684,989 3,725,203 3,623,106
Commissions to agents/brokers 1,328,672 1,357,593 1,293,015
Other operating expenses 3,167,578 3,618,723 3,158,835
----------- ----------- -----------
Total Expenses 34,060,183 34,486,546 27,931,741
----------- ----------- -----------
Income Before Income Taxes 8,408,291 4,957,677 5,048,172
Income Tax Provision 2,460,810 1,165,498 1,526,385
----------- ----------- -----------
Net Income $5,947,481 $3,792,179 $3,521,787
----------- ----------- -----------
----------- ----------- -----------
PER SHARE DATA:
Weighted Average Shares Outstanding: 6,150,250 6,061,738 6,113,922
Net Income Per Share $ 0.97 $ 0.63 $ 0.58
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Common Shares Unrealized
-------------------------- Investment
Issued and Gains & Retained
Outstanding Amount (Losses) Earnings Total
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1993 5,946,564 $2,799,801 $(100,684) $17,009,603 $19,708,720
Shares rescinded, canceled
or adjusted 39 -- -- -- --
Cash dividend paid
($0.07 per share) -- -- -- (416,259) (416,259)
Change in market value of
investments, net of deferred tax -- -- 29,319 29,319
Net income 3,521,787 3,521,787
--------- ---------- --------- ----------- -----------
Balance - March 31, 1994 5,946,603 2,799,801 (71,365) 20,115,131 22,843,567
Shares issued for exercise
of stock options 10,000 35,000 -- -- 35,000
Shares rescinded, canceled
or adjusted 1,042 -- -- -- --
Cash dividend paid
($0.07 per share) -- -- -- (417,186) (417,186)
Cumulative effect of change in
accounting for fixed maturities,
net of deferred income tax -- -- (177,098) -- (177,098)
Change in market value of
investments, net of deferred tax -- -- 71,365 -- 71,365
Net income 3,792,179 3,792,179
--------- ---------- --------- ----------- -----------
Balance - March 31, 1995 5,957,645 2,834,801 (177,098) 23,490,124 26,147,827
Shares rescinded, canceled
or adjusted 93 -- -- -- --
Cash dividend paid
($0.07 per share) -- -- -- (417,035) (417,035)
Change in market value of
investments, net of deferred tax -- -- 708,885 -- 708,885
Net income 5,947,481 5,947,481
--------- ---------- --------- ----------- -----------
Balance - March 31, 1996 5,957,738 $2,834,801 $531,787 $29,020,570 $32,387,158
--------- ---------- --------- ----------- -----------
--------- ---------- --------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,947,481 $ 3,792,179 $3,521,787
Adjustments to reconcile net income
to net cash from operations
Depreciation & amortization 142,306 128,210 166,258
Bond amortization, net 577,481 705,176 353,408
Net realized (gain) loss on sale of securities (55,743) (7,552) 52,620
Changes in assets and liabilities:
Due from related parties -- -- 109,250
Premium, notes & investment income receivables 27,833 (207,664) (2,174,286)
Reinsurance recoverable 256,948 87,251 (2,432,777)
Prepaid reinsurance premiums 1,420,808 443,404 (1,104,424)
Deferred policy acquisition costs (219,772) (191,372) (1,197,049)
Federal income tax recoverable -- -- 3,679,751
Other assets (477,399) 80,012 (295,141)
Reserve for unpaid losses & loss adjusting expenses 4,635,706 6,076,553 3,282,331
Unearned premium reserve 76,527 746,480 5,704,081
Funds held as security & advanced premiums (56,438) 38,559 (93,350)
Accrued expenses & other liabilities 157,839 451,261 509,260
Income taxes - current/deferred (496,174) (296,425) (102,059)
----------- ----------- ----------
Net cash provided from operations 11,937,403 11,846,072 9,979,660
----------- ----------- ----------
Cash flows from investing activities
Purchase of fixed maturity investments (21,591,676) (23,614,690) (22,927,100)
Proceeds from maturity of fixed maturity investment 13,643,268 7,924,100 8,061,237
Proceeds from sale of fixed maturity investment -- 4,624,470 --
Purchase of equity securities - cost (1,593,401) (5,933) (722,397)
Proceeds from sale of equity securities 646,714 1,051,216 3,882,332
Increase (decrease) in net short term investments (83,731) (767,119) 1,871,625
Purchases of property & equipment (85,428) (233,310) (115,607)
----------- ----------- ----------
Net cash (used) by investing activities (9,064,254) (11,021,266) (9,949,910)
----------- ----------- ----------
Cash flows from financing activities
Proceeds from issuance of common stock -- 35,000 --
Proceeds (repayments) of note payable - bank (1,975,000) $ (225,000) 1,675,000
Repayment of notes payable (500,000) $ (250,000) (1,250,000)
Dividends paid to stockholders (417,035) (417,186) (416,259)
----------- ----------- ----------
Net cash provided (used) by financing activities (2,892,035) (857,186) 8,741
----------- ----------- ----------
Net increase (decrease) in cash (18,886) (32,380) 38,491
Cash at beginning of year 173,232 205,612 167,121
----------- ----------- ----------
Cash at end of year $ 154,346 $ 173,232 $ 205,612
----------- ----------- ----------
----------- ----------- ----------
Supplemental cash flow information
Cash paid during the year for:
Interest $ 290,268 $ 343,692 $ 318,634
Income taxes paid $ 2,967,000 $ 1,202,000 $1,819,000
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Unico American Corporation is an insurance holding company. Unico American
Corporation and its subsidiaries, all of which are wholly owned (the "Company"),
provides primarily in California, property, casualty, health and life insurance
and related premium financing.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Unico American
Corporation and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). As described in Note 17, the
Company's insurance subsidiary also files financial statements with regulatory
agencies prepared on a statutory basis of accounting which differs from
generally accepted accounting principles.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosure of certain assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. While every effort is made to ensure the
integrity of such estimates, actual results could differ from those estimates.
INVESTMENTS
The Company adopted FASB Statement No. 115 ("Accounting for Certain Investments
in Debt and Equity Securities") in the fiscal year ended March 31, 1994.
Statement No. 115 requires investments in all debt securities and equity securi-
ties to be classified in one of three categories: held-to-maturity securities,
available-for-sale securities and trading securities. Held-to-maturity
securities are recorded at amortized cost. Available-for-sale securities are
recorded at market value with unrealized gains and losses reported as a separate
component of stockholders' equity. Trading securities are recorded at market
value with unrealized gains and losses reported in earnings. At the time the
Company adopted FASB Statement No. 115, all of its fixed income securities were
classified as held-to-maturity.
The Company reclassified all of its fixed maturity securities as
available-for-sale beginning with the quarter ended March 31, 1995. This
transaction did not have a material effect on the Company's financial
statements. Although all of the Company's fixed maturity investments are
classified as available-for-sale and are stated at market value, the
Company's investment guidelines place primary emphasis on buying and holding
high-quality investments. Short-term investments are carried at cost, which
approximates market value.
Market value for fixed maturities are obtained from a national quotation
service. Market value for equity securities are determined by quotations on
national securities exchanges. When a decline in the value of a fixed maturity
or equity security is considered other than temporary, a loss is recognized in
the consolidated statement of operations. Realized gains and losses are
included in the consolidated statements of operations based upon the specific
identification method.
The Company had net unrealized investment gains of $531,787 as of March 31,
1996, and net unrealized investment losses of $177,098 as of March 31, 1995.
27
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using accelerated depreciation methods over the
estimated useful lives of the related assets.
INCOME TAXES
The provision for federal income taxes is computed on the basis of income as
reported for financial reporting purposes under generally accepted accounting
principles. Deferred income taxes arise principally from certain revenues and
expenses which are recognized for income tax in different periods than for
financial statements. Effective April 1, 1993, the Company changed its method
of accounting for income taxes from the "deferred" method to the "asset and
liability" method required by FASB Statement No. 109. Under the "asset and
liability" method, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
EARNINGS PER SHARE
Earnings per share is computed by dividing the net income by the weighted
average number of common shares outstanding.
REVENUE RECOGNITION
a. GENERAL AGENCY OPERATIONS
Commissions and service fees due the Company are recognized as income on the
effective date of the insurance policies.
b. INSURANCE COMPANY OPERATIONS
Premiums are earned on a pro-rata basis over the terms of the policies.
Premiums applicable to the unexpired terms of policies in force are recorded as
unearned premiums. The Company earns a commission on policies that are ceded
to its reinsurers. This commission is considered earned on a pro-rata basis
over the terms of the policies. Ceding commission applicable to the unexpired
terms of policies in force are recorded as unearned ceding commission which is
included in deferred policy acquisition costs.
c. INSURANCE PREMIUM FINANCING OPERATIONS
Premium finance fees are charged to policyholders who choose to finance
insurance premiums. Fees are charged at rates that vary with the amount of
premium financed. Premium finance fees are recognized over the term of the
premium note based upon the effective yield.
LOSSES AND LOSS ADJUSTING EXPENSES
The process of establishing loss reserves involves significant judgmental
factors. The reserves for unpaid losses and loss adjustment expenses are based
on estimates of ultimate claim cost, including claims incurred but not reported.
These estimates are reviewed regularly and, as experience develops and new
information becomes known, the reserves are adjusted as necessary. Such
adjustments are reflected in results of operations in the period in which they
become known. Management believes that the aggregate reserves for losses and
loss adjustment expenses are reasonable and adequate to cover the cost of
claims, both reported and unreported.
28
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RESTRICTED FUNDS
1996 1995
---- ----
Premium trust funds (1) $2,465,923 $ 2,931,786
Assigned to state agencies (2) 725,000 725,000
----------- -----------
Total restricted funds $ 3,190,923 $ 3,656,786
----------- -----------
----------- -----------
(1) As required by law, the Company segregates from its operating accounts
the premiums collected from insurers which are payable to insurance
companies into separate trust accounts. These amounts are included in
cash and short-term investments.
(2) Included in fixed maturity investments are statutory deposits assigned
to and held by the California State Treasurer and the Insurance
Commissioner of the state of Nevada. These deposits are required for
writing certain lines of business in California and for admission in
states other than California.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs consist of direct and indirect costs associated with
the production of insurance policies such as commissions, premium taxes and
certain other underwriting expenses which vary with and are primarily related to
the production of the insurance policy. Policy acquisition costs are deferred
and amortized as the related premiums are earned and are limited to their
estimated realizable value based on the related unearned premiums plus
investment income less anticipated losses and loss adjustment expenses.
REINSURANCE
The Company cedes reinsurance to provide for greater diversification of
business, to allow management to control exposure to potential losses arising
from large risks by reinsuring certain levels of risk in various areas of
exposure, to reduce the loss that may arise from catastrophes, and to provide
additional capacity for growth. Prepaid reinsurance premiums and reinsurance
receivables are reported as assets and represent ceded unearned premiums and
reinsurance recoverable on both paid and unpaid losses, respectively. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policies.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
NOTE 2 - ADVANCE PREMIUMS"
Unico subsidiaries selling auto, health, life and dental insurance policies
require payments of premium prior to the effective date of coverage. To conform
with the above requirement, invoices are sent out as early as two months prior
to the effective date of the policy and payments are received prior to the
policy effective date. Insurance premiums received by these subsidiaries for
coverage effective after the balance sheet date are recorded as advance
premiums.
29
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS
A summary of net investments and related income is as follows:
Investment Income
Investment income is summarized as follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Fixed maturities $ 3,587,856 $ 3,085,667 $ 2,863,866
Equity securities 5,886 15,909 192,438
Short-term investments 264,956 234,909 192,701
Notes receivable - - 9,029
----------- ----------- -----------
Total investment income 3,858,698 3,336,485 3,258,034
Less, investment expenses (5,035) 18,535 7,027
----------- ----------- -----------
Net investment income $ 3,863,733 $ 3,317,950 $ 3,251,007
----------- ----------- -----------
----------- ----------- -----------
Net realized investment gains and (losses) are summarized as follows:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Gross Realized Gains:
Fixed maturities $ 7,193 131,199 $ 83,360
Equity securities 48,550 - 100,853
Gross Realized Losses:
Equity securities - (123,647) (153,474)
-------- -------- --------
Net realized investment gains $ 55,743 $ 7,552 $ 30,739
-------- -------- --------
-------- -------- --------
A summary of the net change in unrealized appreciation (depreciation) on
investments carried at market and the applicable deferred federal income taxes
is shown below:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Gross Unrealized Appreciation:
Fixed maturities $ 954,381 $ - $ -
Equity securities 2,838 - -
Gross Unrealized (Depreciation):
Fixed maturities (151,480) $(268,331) -
Equity securities - - (108,129)
--------- --------- ---------
Net unrealized appreciation
(depreciation) on investments 805,739 (268,331) (108,129)
Deferred federal income taxes (273,952) 91,233 36,764
--------- --------- ---------
Net unrealized appreciation
(depreciation),net of deferred
federal income taxes $ 531,787 $(177,098) $ (71,365)
--------- --------- ---------
--------- --------- ---------
30
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS (continued)
The amortized cost and estimated market values of investments in fixed
maturities by categories are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
March 31, 1996
- --------------
Available-for-Sale
Fixed maturities:
Certificates of deposit $ 1,111,378 $ - $ - $ 1,111,378
U.S. treasury notes 18,191,847 157,987 24,468 18,325,366
State, municipal and
political subdivision
tax-exempt bonds 38,126,835 437,470 127,012 38,437,293
Industrial and miscellaneous
taxable bonds 10,655,316 358,924 - 11,014,240
---------- -------- -------- ----------
Total fixed maturities ' $68,085,376 $954,381 $151,480 $68,888,277
---------- -------- -------- ----------
---------- -------- -------- ----------
Equity securities:
Common stocks $995,237 $2,838 $ - $998,075
------- ----- ------- -------
------- ----- ------- -------
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
March 31, 1995
- --------------
Available for Sale
Fixed maturities:
Certificates of deposit $ 1,111,378 $ - $ - $ 1,111,378
U.S. treasury notes 4,884,350 68,375 - 4,952,725
State, municipal and
political subdivision
tax-exempt bonds 41,758,522 - 324,575 41,433,947
Industrial and miscellaneous
taxable bonds 12,953,011 - 12,131 12,940,880
---------- -------- -------- ----------
Total fixed maturities $60,707,261 $ 68,375 $336,706 $60,438,930
---------- -------- -------- ----------
---------- -------- -------- ----------
</TABLE>
The amortized cost and estimated market value of fixed maturity investments at
March 31, 1996, by contractual maturity are as follows:
Estimated
Amortized Market
Cost Value
Due in one year or less $ 7,143,065 $ 7,179,768
Due after one year through five years 37,148,831 37,499,245
Due after five years through ten years 23,793,480 24,209,264
---------- ----------
Total fixed maturities $68,085,376 $68,888,277
---------- ----------
---------- ----------
31
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS (continued)
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalties.
Short-term investments have an initial maturity of one year or less and consist
of the following:
March 31, March 31,
1996 1995
--------- ---------
Certificates of deposit $ 25,000 $ 25,000
Commercial paper 2,230,000 2,700,000
Commercial bank money market accounts 1,186,602 633,355
Savings account 24,430 23,946
--------- ---------
Total short-term investments $3,466,032 $3,382,301
--------- ---------
NOTE 4 - PREMIUM AND NOTES RECEIVABLE, NET
Premium and notes receivable consist of the following:
March 31, March 31,
1996 1995
--------- ---------
Premiums receivable $2,493,592 $1,585,702
Premium finance notes receivable 5,672,984 6,493,879
--------- ---------
Total premiums and notes receivable 8,166,576 8,079,581
Less allowance for doubtful accounts 25,333 18,229
--------- ---------
Net premiums and notes receivable $8,141,243 $8,061,352
--------- ---------
--------- ---------
The allowance for doubtful accounts is maintained at a minimum since the
receivables are secured by unearned premiums and funds held as security for
performance. Bad debt expense for the fiscal years ended March 31, 1996 and
1995 was $38,815 and $51,042 respectively. Premium finance notes receivable
represent the balance due to the Company's premium finance subsidiary from
policyholders who elect to finance their premiums over the policy term. These
notes are net of unearned finance charges.
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs, net of ceding commission, consist of
commissions, premium taxes, inspection fees, and certain other underwriting
costs which are related to and vary with the production of Crusader Insurance
Company policies. These costs are incurred by Crusader and include allocated
expenses of other Unico subsidiaries. Policy acquisition costs are deferred and
amortized as the related premiums are earned. Deferred acquisition costs are
reviewed to determine if they are recoverable from future income, including
investment income.
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Deferred policy acquisition costs at beginning of year $4,113,936 $3,922,564 $2,725,515
Policy acquisition costs incurred during year 8,789,167 8,506,099 7,761,795
Policy acquisition costs amortized during year (8,569,395) (8,314,727) (6,564,746)
--------- --------- ---------
Deferred policy acquisition costs at end of year . $4,333,708 $4,113,936 $3,922,564
--------- --------- ---------
--------- --------- ---------
</TABLE>
32
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PROPERTY & EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
Property and equipment consist of the following:
March 31, March 31,
1996 1995
--------- ---------
Furniture, fixtures, computer, office
& transportation equipment $2,414,739 $2,339,329
Accumulated depreciation 2,136,121 2,003,834
--------- ---------
Net property & equipment $ 278,618 $ 335,495
--------- ---------
--------- ---------
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of the liabilities for losses
and loss adjustment expenses for the periods shown:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Reserve for unpaid losses and loss adjustment
expenses at beginning of year $27,633,304 $21,499,778 $20,824,039
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 19,276,602 18,057,338 14,516,383
(Decrease) in provision for events
of prior years (1,967,053) (587,038) (1,224,344)
---------- ---------- ----------
Total losses and loss adjustment expenses
17,309,549 17,470,300 13,292,039
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable
to insured events of the current year 3,446,088 3,469,594 2,598,236
Losses and loss adjustment expenses attributable
to insured events of prior years 8,814,612 7,867,180 8,904,427
Total payments 12,260,700 11,336,774 11,502,663
---------- ---------- ----------
Allocation
Loss adjustment expenses allocated
from affiliated company (1) - - 1,113,637
---------- ---------- ----------
Reserve for unpaid losses & loss adjustment expenses
at end of year - net of reinsurance $ 32,682,153 $ 27,633,304 $ 21,499,778
---------- ---------- ----------
Reconciliation of liability for losses and loss adjustment expense reserves to Balance Sheet
Reserve for unpaid losses & loss adjustment expenses
at end of year - net of reinsurance $32,682,153 $27,633,304 $21,499,778
Reinsurance recoverable on unpaid losses
at end of year 4,324,305 4,737,448 4,794,421
---------- ---------- ----------
Reserve for unpaid losses & loss adjustment expenses
at end of year - gross of reinsurance $ 37,006,458 $ 32,370,752 $ 26,294,199
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) As of January 1, 1994, Crusader began processing its own claims. This
claim processing function had previously been provided by its sister
company, U.S. Risk Managers, Inc.
33
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FUNDS HELD AS SECURITY
Funds held as security for performance represent funds received in order to
guarantee the contractual obligations entered into with customers and are
treated as restricted funds.
NOTE 9 - ACCRUED EXPENSES AND OTHER LIABILITIES"
Accrued expenses and other liabilities consist of the following:
March 31, March 31,
1996 1995
--------- ---------
Premium payable $ 696,997 $ 717,842
Unearned adjusting income 300,000 300,000
Profit sharing contributions 480,863 477,028
Accrued interest payable 300,000 300,000
Accrued salaries 206,638
Other 347,900 379,690
--------- ---------
Total accrued expenses and other liabilities $2,332,398 $2,174,560
--------- ---------
--------- ---------
NOTE 10 - NOTE PAYABLE - BANK"
American Acceptance Corporation ("AAC"), the Company's premium finance
subsidiary, has a line of credit with Union Bank which can be used only to fund
its premium finance operation. This line of credit was increased from
$5,000,000 to $6,000,000 in December 1994. Interest on the note is referenced
to the London Interbank Offered Rate ("LIBOR"). The note amount is
collateralized by the assets of AAC and is guaranteed by the Company. The loan
agreement contains certain covenants including restrictions on certain
transactions between AAC and the Company and the maintenance of certain
financial ratios. The note matures August 31, 1996, and is expected to be
renewed. The terms of the note call for monthly payments of interest only.
The interest rate at March 31, 1996, was 7.16%
March 31, March 31,
1996 1995
--------- ---------
Note payable bank $2,000,001 $3,975,001
--------- ---------
--------- ---------
Maximum bank note payable $3,975,001 $4,467,001
Average bank note payable $3,388,334 $4,229,418
Weighted average interest rate 7.7% 7.2%
NOTE 11 - NOTE PAYABLE RELATED PARTY
In June, 1992, the Company borrowed $500,000 from Erwin Cheldin, its president,
chairman and principal stockholder. This note bore interest at 8% per annum.
Principal and accrued interest were paid in full on the due date of June 15,
1995.
March 31, March 31,
1996 1995
--------- ---------
Note payable related party $ - $ 500,000
34
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - CLAIMS AND LITIGATION
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings in which it may be named as either
plaintiff or defendant. The Company is required to resort to legal proceedings
from time-to-time in order to enforce collection of premiums and other
commissions or fees for the services rendered to customers or to their agents.
These routine items of litigation do not materially affect the Company and are
handled on a routine basis by the Company through its general counsel.
Likewise, the Company is sometimes named as a cross-defendant in litigation
which is principally directed against that insurer who has issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or other agents which relate to disputes
concerning the issuance or non-issuance of individual policies. These items are
also handled on a routine basis by the Company's general counsel and they do not
materially affect the operations of the Company. Management is confident that
the ultimate outcome of pending litigation should not have an adverse effect on
the Company's consolidated operation or financial position.
NOTE 13 - LEASE COMMITMENT
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The total rent expense under this lease agreement was
$1,025,952 for each of the fiscal years ended March 31, 1996; March 31, 1995;
and March 31, 1994.
The lease provides for the following minimum annual rental commitments:
Fiscal Year Ending
- ------------------
March 31, 1997 $ 1,025,952
March 31, 1998 $ 1,025,952
March 31, 1999 $ 1,025,952
March 31, 2000 $ 1,025,952
March 31, 2001 $ 1,025,952
March 31, 2002 (through March 31, 2007) $ 6,155,712
----------
Total minimum payments $ 11,285,472
----------
----------
Erwin Cheldin, the Company's president, chairman and principal stockholder is
the owner of the building. On February 22, 1995, the Company signed an extension
to the lease with no increase in rent to March 31, 2007. The terms of the
lease at inception and at the time the lease extension was signed, were at least
as favorable to the Company as could have been obtained from unaffiliated third
parties. The Company utilizes for its own operations 100% of the space it
leases.
NOTE 14 - REINSURANCE
A reinsurance transaction occurs when an insurance company transfers (cedes) a
portion of its exposure on business written by it to a reinsurer which assumes
that risk for a premium (ceded premium). Reinsurance does not legally discharge
the company from primary liability under its policies; and if the reinsurer
fails to meet the obligations, the company must nonetheless pay its policy
obligations. The company continually monitors and evaluates the liquidity and
financial strength of its reinsurers to determine their ability to fulfill
obligations assumed under the reinsurance contracts.
35
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - REINSURANCE (continued)
Crusader has reinsurance agreements with National Reinsurance Corporation, a
California admitted reinsurance company, which helps protect it against
liabilities in excess of certain retentions, including major or catastrophic
losses which may occur from any one or more of the property and/or casualty
risks which Crusader insures. In August 1992 Crusader purchased additional
catastrophe reinsurance from various California admitted reinsurance companies.
Crusader's retention increased from $100,000 to $150,000 per risk on April 1,
1995. This retention is subject to a maximum dollar amount and to catastrophe
and clash covers. The catastrophe and clash covers (subject to a maximum
occurrence and annual aggregate amount) help protect the company from one loss
occurrence affecting multiple policies. The premium ceded to the reinsurers for
the catastrophe and clash covers and for all exposures over $500,000 is a fixed
percentage of the premium charged by Crusader. On exposures up to $500,000, the
reinsurer charges a provisional rate which is subject to adjustment and is based
on the amount of losses ceded, limited by a maximum percentage that can be
charged by the reinsurer. On most of the premium that Crusader cedes to the
reinsurer, the reinsurer pays a commission to Crusader, which includes a
reimbursement of the cost of acquiring the portion of the premium that is ceded.
Crusader does not currently assume any reinsurance from other insurance
companies. The company intends to continue obtaining reinsurance although the
availability and cost may vary from time to time.
The effect of reinsurance on premiums written and earned is as follows:
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1996 1995 1994
---------- ---------- ----------
Premiums written:
Direct business $37,631,357 $39,039,549 $37,278,300
Reinsurance assumed
Reinsurance ceded $(4,437,446) $(8,614,685) $(9,815,136)
Premiums Earned:
Direct business $37,554,830 $38,466,825 $31,400,463
Reinsurance assumed
Reinsurance ceded $(6,077,403) $(9,258,535) $(8,685,638)
NOTE 15 - CONTINGENCIES
The Company's federal tax returns for the fiscal years ended March 31, 1990,
through March 31, 1994, are currently being examined by the Internal Revenue
Service. The primary issue of the examination is the loss reserve deductions
for the fiscal years under audit. Any changes in the these deductions resulting
from the examination would be a temporary difference. Since any tax increase
from this temporary difference should be offset by a tax decrease in subsequent
years, no tax liability has been accrued. Management estimated and accrued
$300,000 of interest expense in the fiscal year ending March 31, 1995, related
to this temporary difference.
NOTE 16 - PROFIT SHARING PLAN"
During the fiscal year ended March 31, 1986, the Company adopted the Unico
American Corporation Profit Sharing Plan. Employees who are at least 21 years
of age and have been employed by the Company for at least two years are
participants in the Plan. Pursuant to the terms of the Plan, the Company
annually contributes to the account of each participant an amount equal to a
percentage of the
36
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PROFIT SHARING PLAN (continued)
participant's eligible compensation as determined by the Board of Directors.
Participants are entitled to receive benefits under the plan upon the later of
the following: the date 60 days after the end of the plan year in which the
participant's retirement occurs or one year and 60 days after the end of the
plan year following the participant's termination with the Company. However the
participant's interest must be distributed in its entirety no later than April 1
of the calendar year following the calendar year in which the participant
attains age 70 1/2 or otherwise in accordance with the Treasury Regulations
promulgated under the Internal Revenue Code of 1954 as amended.
Contributions to the plan were as follows:
Profit
Year Ended Sharing Plan
---------- ------------
March 31, 1996 $484,715
March 31, 1995 $477,028
March 31, 1994 $419,505
NOTE 17 - STATUTORY CAPITAL AND SURPLUS
Crusader is required to file an annual statement with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (i.e., statutory basis). Prescribed statutory accounting practices
include state laws, regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance Commissioners
(NAIC). Permitted statutory accounting practices encompass all accounting
practices not so prescribed.
The NAIC has a project to codify statutory accounting practices, the result of
which is expected to constitute the only source of "prescribed" statutory
accounting practices. The codification, when completed, will likely change the
definitions of what comprises prescribed as opposed to permitted statutory
accounting practices and may result in changes to the accounting policies that
insurance companies use to prepare the statutory financial statements.
Crusader Insurance Company statutory capital and surplus is as follows:
As of March 31, 1996 $22,721,183
As of March 31, 1995 $19,585,839
Crusader Insurance Company statutory net income is as follows:
Fiscal year ended March 31, 1996 $4,639,537
Fiscal year ended March 31, 1995 $2,661,428
Fiscal year ended March 31, 1994 $1,287,470
Crusader's statutory capital and surplus was deemed sufficient to support the
insurance premiums written based on guidelines established by the NAIC.
Crusader is restricted in the amount of dividends it may pay to its parent Unico
without prior approval of the California Insurance Department. Presently,
without prior approval, Crusader may pay a dividend to Unico equal to the
greater of (1) 10% of Crusader's statutory policyholders' surplus or (2)
Crusader's statutory net income for the preceding calendar year. The maximum
dividend which may be made without prior approval in calendar year 1996 is
$4,113,181.
37
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - INCENTIVE STOCK OPTION PLAN"
The Company under its 1985 stock option plan provides for the grant of
"incentive stock options" to officers and key employees. The options and prices
set forth below have been adjusted, where applicable, for all subsequent stock
splits, reverse stock splits and stock dividends. All options were granted at
fair market value. As of March 31, 1996, of the 680,000 options outstanding,
552,527 options were currently exercisable. There are no additional options
available for future grant under the 1985 plan. The changes in the number of
common shares under option are summarized as follows:
Options Exercise Price
------- --------------
Outstanding at March 31, 1993 619,836 $3.4375 to $3.85
Options terminated July 1, 1993 (5,000) $3.50
Options terminated December 21, 1993 (5,000) $3.50
-------
Outstanding at March 31, 1994 609,836 $3.4375 to $3.85
Options exercised May 16, 1994 (5,000) $3.50
Options terminated July 1, 1994 (10,000) $3.50
Options exercised July 5, 1994 (5,000) $3.50
Options granted August 17, 1994 90,164 $4.375
-------
Outstanding at March 31, 1995 680,000 $3.4375 to $4.375
Options granted -
Options exercised -
Options terminated -
-------
Outstanding at March 31, 1996 680,000 $3.4375 to $4.375
-------
-------
NOTE 19 - TAXES ON INCOME
The provision for taxes on income consists of the following:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Current provision:
Federal $2,574,766 $1,583,545 $1,489,242
State 164,931 102,529 167,675
--------- --------- ---------
Total federal and state 2,739,697 1,686,074 1,656,917
Deferred (278,887) (520,576) (130,532)
--------- --------- ---------
Provision for taxes $2,460,810 $1,165,498 $1,526,385
--------- --------- ---------
--------- --------- ---------
The income tax provision reflected in the consolidated statement of operations
is less than the expected federal income tax on income as shown in the table
below.
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Computed tax expense at 34% $2,858,819 $1,685,610 $1,716,378
Tax effect of:
Tax exempt income (502,513) (548,745) (317,954)
Dividend exclusion (1,191) - -
Other (49,847) (69,580) (36,989)
State income tax expense 155,542 98,213 164,950
--------- --------- ---------
Tax per financial statement $2,460,810 $1,165,498 $(1,526,385)
--------- --------- ---------
--------- --------- ---------
38
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - TAXES ON INCOME (continued)"
The provision for deferred income taxes results from the following temporary
differences between taxable income and income reported in the accompanying
financial statements.
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
Deferred policy acquisition costs $74,722 $65,066 $406,996
Discounting of losses and
unearned premium reserves (295,375) (439,127) (480,512)
Accrued interest not currently
deductible - (102,000) -
Other (58,234) (44,515) (57,016)
-------- -------- --------
Total deferred tax (benefit) $(278,887) $(520,576) $(130,532)
-------- -------- --------
-------- -------- --------
The components of the net federal income tax asset included in the financial
statements at March 31, 1996, and 1995, as required by the asset and liability
method, are as follows:
1996 1995
---- ----
Deferred tax assets:
- --------------------
Discount on loss reserves $2,000,235 $1,828,443
Discount on salvage & subrogation 8,589 1,727
Unearned premiums 1,194,244 1,077,523
Unrealized loss on investments - 91,233
Other 68,123 9,888
--------- ---------
Total deferred tax assets $3,271,191 $3,008,814
--------- ---------
Deferred tax liabilities:
- -------------------------
Deferred acquisition costs $1,473,461 $1,398,739
Unrealized gain on investments 273,952 -
--------- ---------
Total deferred tax liabilities $1,747,413 $1,398,739
--------- ---------
Net deferred tax asset $1,523,778 $1,610,075
--------- ---------
--------- ---------
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in the states of California, Oregon, Washington, Nevada
and Arizona. The premium tax is in lieu of state franchise taxes; thus, the
above provision for state taxes does not include the premium tax.
In April 1993 the Company adopted FASB Statement No. 109. The cumulative effect
of this change in accounting for income taxes was immaterial; therefore, there
is no cumulative effect reported in the consolidated statement of operations for
the fiscal year ended March 31, 1994. Prior years' financial statements have
not been restated to apply the provisions of FASB Statement No. 109.
39
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal Year by Quarter
----------------------
First Second Third Fourth
----- ------ ----- ------
March 31, 1996
- --------------
Total revenue $10,169,592 $10,400,201 $10,903,066 $10,995,615
Earnings before taxes 1,827,849 2,003,588 2,179,764 2,397,090
Net earnings 1,327,306 1,414,145 1,531,213 1,674,817
Earnings per share $0.22 $0.23 $0.25 $0.27
March 31, 1995
- --------------
Total revenue $9,571,300 $9,826,331 $10,074,930 $9,971,662
Earnings before taxes 993,697 993,313 1,367,575 1,603,092
Net earnings 746,663 763,070 1,032,089 1,250,357
Earnings per share $0.12 $0.13 $0.17 $0.21
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to Item 10 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to Item 11 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to Item 12 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to Item 13 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
41
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules Filed as a Part of this Report:
1. Financial statements:
The consolidated financial statements for the year ended March 31,
1996, are contained herein as listed in the index to consolidated
financial statements on page 21.
2. Financial schedules:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report on Financial Statement Schedules
Schedule I - Summary of Investments Other than Investments in Related
Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplemental Insurance Information
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning Property/Casualty
Insurance Operations
Schedules other than those listed above are omitted, since they are
not applicable, not required, or the information required to be set
forth is included in the consolidated financial statements or notes.
3. Exhibits:
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1984).
3.2 By-Laws of Registrant, as amended. (Incorporated herein by reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1991).
10.1 Unico American Corporation Profit Sharing Plan & Trust.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1985).
(*)
10.2 Unico American Corporation Employee Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985). (*)
10.3 Amendment to Unico American Corporation Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1987). (*)
10.4 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1987).
10.5 The Lease Amendment 1 dated February 22, 1995, between Unico American
Corporation and Cheldin Management amending the lease dated July 31,
1986. (Incorporated herein by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995).
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1984).
27 Financial Data Schedule
28P Information from Insurance reports furnished to state regulatory
authorities as of December 31, 1995.
(*) Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
None
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 26, 1996
UNICO AMERICAN CORPORATION
By: /s/ ERWIN CHELDIN
----------------------
Erwin Cheldin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ----- -----
<S> <C> <C>
/s/ ERWIN CHELDIN Chairman of the Board, June 26, 1996
- ------------------- President and Chief Executive Officer,
Erwin Cheldin (Principal Executive Officer)
/s/ LESTER A. AARON Treasurer, Chief Financial June 26, 1996
- --------------------------- Officer and Director
Lester A. Aaron K (Principal Accounting and
Principal Financial Officer)
/s/ CARY L. CHELDIN Executive Vice President June 26, 1996
- -------------------------- and Director
Cary L. Cheldin
/s/ GEORGE C. GILPATRICK Vice President, Secretary June 26, 1996
- -------------------------- and Director
George C. Gilpatrick
/s/ ROGER H. PLATTEN Vice President and Director June 26, 1996
- ---------------------
Roger H. Platten
</TABLE>
43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULES
Board of Directors
Unico American Corporation
Under date of June 20, 1996, we reported on the consolidated balance sheets of
Unico American Corporation and subsidiaries as of March 31, 1996, and 1995 and
the related consolidated statement of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1996, as
contained in the annual report of Form 10-K for the fiscal year ended March 31,
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed under Item 14(a)2. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's ("FASB")
Statement No. 115 ("Accounting for Certain Investments in Debt and Equity
Securities") in the fiscal year ended March 31, 1994.
GETZ, KRYCLER & JAKUBOVITS
Sherman Oaks, California
June 20, 1996
44
<PAGE>
SCHEDULE I
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
MARCH 31, 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D
-------- -------- --------- --------
Amount at which
shown in the
TYPE OF INVESTMENT Cost Value Balance Sheet
- ----------------- ---- ----- ---------------
<S> <C> <C> <C>
Fixed maturities:
U.S. treasury notes $18,191,847 $18,325,366 $18,325,366
State and municipal bonds 38,126,835 38,437,293 38,437,293
Industrial and miscellaneous bonds 10,655,316 11,014,240 11,014,240
Certificates of deposit 1,111,378 1,111,378 1,111,378
---------- ----------- ----------
Total fixed maturities 68,085,376 68,888,277 68,888,277
Equity securities
Common stocks 995,237 998,075 998,075
Short-term investments 3,466,032 3,466,032 3,466,032
---------- ------------ ------------
Total investments $ 72,546,645 $ 73,352,384 $ 73,352,384
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
45
<PAGE>
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
---- ----
ASSETS
------
<S> <C> <C>
Cash 53,148 62,652
Investments in subsidiaries 39,016,614 38,617,819
Property and equipment (net of accumulated depreciation) 278,618 335,495
Other assets 79,361 77,741
---------- ----------
Total Assets $ 39,427,741 $39,093,707
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Accrued expenses and other liabilities $ 1,110,039 $ 998,023
Payables to subsidiaries (net of receivables) 5,930,544 11,447,857
Note payable - related party - 500,000
---------- ----------
Total Liabilities 7,040,583 12,945,880
---------- ----------
STOCKHOLDERS' EQUITY
Common stock 2,834,801 2,834,801
Net unrealized investment gains (losses) 531,787 (177,098)
Retained earnings 29,020,570 23,490,124
---------- ----------
Total Stockholders' Equity 32,387,158 26,147,827
----------- -----------
Total Liabilities and Stockholders' Equity $ 39,427,741 $ 39,093,707
----------- -----------
----------- -----------
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
46
<PAGE>
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS - PARENT COMPANY ONLY
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
REVENUES
General and administrative expenses
allocated to subsidiaries $5,237,708 $5,218,234 $5,212,580
Investment income 12,422 1,802 27,066
Other income 12,138 12,083 219,698
--------- --------- ---------
Total Revenues 5,262,268 5,232,119 5,459,344
EXPENSES
General and administrative 5,246,708 5,227,521 5,320,392
--------- --------- ---------
Income before equity in net income
of subsidiaries 15,560 4,598 138,952
Equity in net income of subsidiaries 5,931,921 3,787,581 3,382,835
--------- --------- ---------
Net Income $ 5,947,481 $ 3,792,179 $ 3,521,787
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received a $1,500,000 cash dividend from Crusader in the fiscal year ended
March 31, 1996, and $500,000 in the fiscal years ended March 31, 1995, and 1994.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
47
<PAGE>
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
FOR THE YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $5,947,481 $3,792,179 $3,521,787
Adjustments to reconcile net income to
net cash from operations
Undistributed equity in net (income) of
subsidiaries (5,931,921) (3,787,581) (3,382,835)
Depreciation and amortization 142,306 128,210 166,258
Due from related parties - - 109,250
Accrued expenses and other liabilities 112,016 463,549 147,773
Accrued investment income - - 2,948
Other assets (1,621) 175,501 (168,074)
-------- -------- --------
Net cash provided from operations 268,261 771,858 397,107
-------- -------- --------
Cash flows from investing activities
Proceeds from sale of investments - - 84,115
Purchase of property & equipment (85,428) (233,310) (115,607)
-------- -------- --------
Net cash (used) by investing activities (85,428) (233,310) (31,492)
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of common stock - 35,000 -
Dividends paid to stockholders (417,035) (417,186) (416,259)
Repayment of notes payable (500,000) (250,000) (1,250,000)
Net change in payables and receivables
from subsidiaries 724,698 147,353 1,295,831
-------- -------- --------
Net cash (used) by
financing activities (192,337) (484,833) (370,428)
-------- -------- --------
Net increase (decrease) in cash (9,504) 53,715 (4,813)
Cash at beginning of year 62,652 8,937 13,750
-------- -------- --------
Cash at end of year $ 53,148 $ 62,652 $ 8,937
-------- -------- --------
-------- -------- --------
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
48
<PAGE>
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future policy
Deferred benefits,
policy losses, claims Net
acquisition and loss Unearned Premium investment
cost expenses premiums revenue income
-------------- --------------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended
March 31, 1996
Property &
Casualty $4,333,708 $37,006,458 $19,646,502 $31,477,427 $3,708,891
Year Ended
March 31, 1995
Property & Casualty $4,113,936 $32,370,752 $19,569,975 $29,208,290 $3,181,791
Year Ended
March 31, 1994
Property & Casualty $3,922,564 $26,294,199 $18,823,495 $22,714,825 $3,115,516
<CAPTION>
Benefits, Amortization
claims, of deferred
losses & policy Other
settlement acquisition operating Premiums
expenses costs costs written
---------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Year Ended
March 31, 1996
Property &
Casualty $17,309,549 $8,569,395 $10,989,570 $33,193,911
Year Ended
March 31, 1995
Property & Casualty $17,470,300 $8,314,727 $10,778,265 $30,424,864
Year Ended
March 31, 1994
Property & Casualty
$13,292,039 $6,564,746 $11,096,639 $27,463,164
</TABLE>
<PAGE>
SCHEDULE IV
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
REINSURANCE
<TABLE>
<CAPTION>
Ceded to Assumed Percentage of
Gross other from other Net amount assumed
amount companies companies amount to net
----------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1996 $37,554,830 $6,077,403 - $31,477,427 -
Property & Casualty
Year Ended March 31, 1995 $38,466,825 $9,258,535 - $29,208,290 -
Property & Casualty
Year Ended March 31, 1994 $31,400,463 $8,685,638 - $22,714,825 -
Property & Casualty
</TABLE>
<PAGE>
SCHEDULE VI
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY
INSURANCE OPERATIONS
<TABLE>
<CAPTION>
Reserves for
Unpaid Discount
Deferred Claims if any,
Affiliation Policy and Claim Deducted Net
with Acquisition Adjustment in Unearned Earned Investment
Registrant Costs Expenses Column C Premiums Premiums Income
(A) (B) (C) (D) (E) (F) (G)
- ---------------- ----------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Company &
Consolidated
Susidiaires
Fiscal
Year Ended
March 31,
1996 $4,333,708 $37,006,458 - $19,646,502 $31,477,427 $3,708,891
1995 $4,113,936 $32,370,752 - $19,569,975 $29,208,290 $3,181,791
1994 $3,922,564 $26,294,199 - $18,823,495 $22,714,825 $3,115,516
<CAPTION>
Claims and
Claim
Adjustment Amortization
Expenses Incurred of Deferred Paid Claims
Affiliation Related to Policy and Claim
with (1) Current Year Acquisition Adjustment Premiums
Registrant (2) Prior Year Costs Expenses Written
(A) (H) (I) (J) (K)
- -------------- ----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Company &
Consolidated
Susidiaires
Fiscal
Year Ended
March 31,
1996 $19,276,602 (1) $8,569,395 $12,260,700 $33,193,911
$(1,967,053) (2)
1995 $18,057,338 (1) $8,314,727 $11,336,774 $30,424,864
$(587,038) (2)
1994 $14,516,383 (1) $6,564,746 $11,502,663 $27,463,164
$(1,224,344) (2)
</TABLE>
<PAGE>
EXHIBIT INDEX
TO
UNICO AMERICAN CORPORATION ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
No Item Page
- --- ----- ----
<C> <S> <C>
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1984).
3.2 By-Laws of Registrant, as amended. (Incorporated herein by reference to
Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1991).
10.1 Unico American Corporation Profit Sharing Plan & Trust.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1985).
10.2 Unico American Corporation Employee Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985).
10.3 Amendment to Unico American Corporation Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1987).
10.4 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1987).
10.5 The Lease Amendment #1 dated February 22, 1995, between Unico American
Corporation and Cheldin Management amending the lease dated July 31,
1986. (Incorporated herein by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995).
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1984)
27 Financial Data Schedule
28P Information from Insurance reports furnished to state regulatory
authorities as of December 31, 1995.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 68,888,277
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 998,075
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 73,352,384
<CASH> 154,346
<RECOVER-REINSURE> 212,368
<DEFERRED-ACQUISITION> 4,333,708
<TOTAL-ASSETS> 95,817,377
<POLICY-LOSSES> 37,006,458
<UNEARNED-PREMIUMS> 19,646,502
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,332,398
<NOTES-PAYABLE> 2,000,001
0
0
<COMMON> 2,834,801
<OTHER-SE> 29,552,357
<TOTAL-LIABILITY-AND-EQUITY> 95,817,377
31,477,427
<INVESTMENT-INCOME> 3,863,733
<INVESTMENT-GAINS> 55,743
<OTHER-INCOME> 7,071,571
<BENEFITS> 17,309,549
<UNDERWRITING-AMORTIZATION> 8,569,395
<UNDERWRITING-OTHER> 8,181,239
<INCOME-PRETAX> 8,408,291
<INCOME-TAX> 2,460,810
<INCOME-CONTINUING> 5,947,481
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,947,481
<EPS-PRIMARY> .97
<EPS-DILUTED> .97
<RESERVE-OPEN> 27,633,304
<PROVISION-CURRENT> 19,276,602
<PROVISION-PRIOR> (1,967,053)
<PAYMENTS-CURRENT> 3,446,088
<PAYMENTS-PRIOR> 8,814,612
<RESERVE-CLOSE> 32,682,153
<CUMULATIVE-DEFICIENCY> 1,967,053
</TABLE>
