SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period from January 1, 1997 to March 31, 1997
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)
No Change
(Former name,former address and former fiscal year,if changed since last report)
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
6,120,081
Number of shares of common stock outstanding as of May 9, 1997
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<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- -----------
<S> <C> <C>
ASSETS
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: March
31, 1997 $79,631,910, December 31, 1996 $75,984,966 $ 79,558,418 $ 77,109,214
Equity securities at market (cost: March 31, 1997
$999,460; December 31, 1996 $0) 856,200 -
Short-term investments, at cost 4,042,389 4,861,745
----------- -----------
Total Investments 84,457,007 81,970,959
Cash 506,434 82,637
Accrued investment income 1,414,983 1,443,551
Accounts and notes receivable, net 7,687,955 8,898,839
Reinsurance recoverable:
Paid losses and loss adjustment expenses 919,350 452,943
Unpaid losses and loss adjustment expenses 1,513,537 2,629,019
Prepaid reinsurance premiums 1,302,229 1,647,806
Deferred policy acquisition costs 5,093,193 4,953,085
Property and equipment (net of accumulated depreciation) 231,699 229,972
Deferred income taxes 1,923,189 1,503,655
Other assets 597,107 638,856
----------- -----------
Total Assets $105,646,683 $104,451,322
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $39,830,411 $39,740,865
Unearned premiums 21,705,006 22,120,241
Advance premiums 1,413,497 1,358,671
Funds held as security for performance 739,497 730,426
Accrued expenses and other liabilities 2,635,734 2,395,699
Income taxes payable 586,674 -
Note payable-bank 500,001 750,001
Dividends payable 428,405 -
---------- ----------
Total Liabilities $67,839,225 $67,095,903
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, no par - authorized 10,000,000 shares issued and outstanding
shares 6,120,081 at March 31, 1997
and 6,028,781 at December 31, 1996 2,836,772 2,836,422
Net unrealized investment gains (losses) (143,056) 742,004
Retained earnings 35,113,742 33,776,993
---------- ----------
Total Stockholders' Equity 37,807,458 37,355,419
---------- ----------
Total Liabilities and Stockholders' Equity $105,646,683 $104,451,322
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---------- ----------
<S> <C> <C>
REVENUES
Insurance Company Revenues
Premium earned $10,097,163 $ 9,294,192
Premium ceded 955,623 1,080,365
----------- ----------
Net premium earned 9,141,540 8,213,827
Investment income 1,154,516 957,956
Net realized investment gains 919 19,542
Other income 115 30
---------- ---------
Total Insurance Company Revenues 10,297,090 9,191,355
Other Revenues from Insurance Operations
Gross commissions and fees 1,418,736 1,468,340
Investment income 34,954 42,530
Finance charges and late fees earned 290,068 293,625
Other income 2,801 (235)
---------- ----------
Total Revenues 12,043,649 10,995,615
---------- ----------
EXPENSES
Losses & loss adjustment expenses 4,974,473 4,399,361
Policy acquisition costs 2,639,930 2,215,129
Salaries and employee benefits 924,413 912,681
Commissions to agents/brokers 274,976 306,584
Other operating expenses 733,627 764,770
----------- -----------
Total Expenses 9,547,419 8,598,525
---------- ----------
Income Before Income Taxes 2,496,230 2,397,090
Income Tax Provision 731,076 722,273
--------- ---------
Net Income $ 1,765,154 $ 1,674,817
Retained Earnings December 31, 33,776,993 27,345,753
Dividend declared (428,405) -
----------- ----------
Retained Earnings March 31, $35,113,742 $29,020,570
========== ==========
PER SHARE DATA
Weighted Average Shares Outstanding 6,330,790 6,210,632
Earnings Per Share $0.28 $0.27
</TABLE>
See notes to consolidated financial statements
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<PAGE>
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Net Income $1,765,154 $1,674,817
Adjustments to reconcile net income to net cash from operations
Depreciation & amortization 20,308 54,599
Bond amortization, net 111,766 156,442
Net realized (gain) on sale of securities (919) (19,542)
Changes in assets and liabilities
Premium, notes & investment income receivable 1,239,452 325,735
Reinsurance recoverable 649,075 546,243
Prepaid reinsurance premiums 345,577 100,880
Deferred policy acquisitions costs (140,108) (113,622)
Other assets 41,750 (74,354)
Reserve for unpaid losses & loss adjustment expenses 89,546 309,576
Unearned premium reserve (415,235) 284,410
Funds held as security & advanced premiums 63,897 10,833
Accrued expenses & other liabilities 240,035 27,604
Income taxes current/deferred 623,080 (43,995)
--------- ---------
Net Cash Provided from Operations 4,633,378 3,239,626
---------- ---------
Investing Activities
Purchase of fixed maturity investments (5,768,290) (3,888,377)
Proceeds from maturity of fixed maturity investments 2,000,000 1,818,514
Purchase of equity securities - cost (1,019,500) (1,293,561)
Proceeds from sale of equity securities 20,959 317,865
Net increase in short-term investments 828,935 878,406
Additions to property & equipment (22,035) (24,078)
---------- ----------
Net Cash (Used) by Investing Activities (3,959,931) (2,191,231)
--------- ---------
Financing Activities
Proceeds from issuance of common stock 350 -
Repayment of note payable - bank (250,000) (895,000)
------- -------
Net Cash (Used) by Financing Activities (249,650) (895,000)
------- -------
Net increase in cash 423,797 153,395
Cash at beginning of period 82,637 951
-------- ----------
Cash at End of Period $506,434 $154,346
======= =======
Supplemental cash flow information Cash paid during the period for:
Interest $12,314 $47,063
Income taxes - $775,000
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Unico American Corporation is an insurance holding company. Unico American and
its subsidiaries, all of which are wholly owned (the "Company"), provide,
primarily in California, property, casualty, health and life insurance, and
related premium financing.
Change of Fiscal Year
On December 16, 1996, the Board of Directors approved a change in the Company's
fiscal year end from March 31 to December 31 effective December 31, 1996.
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) which differ in some respects
from those followed in reports to insurance regulatory authorities.
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
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. Investments in equity securities are carried at market value. The
unrealized gains or losses from fixed maturities and equity securities are
reported as a separate component of stockholders' equity, net of any deferred
tax effect. Short-term investments are carried at cost which approximates market
value. 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.
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 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 assets and liabilities
which are recognized for income tax purposes in different periods than for
financial statements.
NOTE 2 - FUNDS HELD AS SECURITY
Funds held as security for performance represent funds received in order to
guarantee the contractual obligations entered into with customers.
5 of 9
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE 3 - RESTRICTED FUNDS
As required by law, the Company segregates from its operating accounts premiums
collected from insureds into separate trust accounts. As of a March 31, 1997,
these trust funds represent $2,137,672 of the Company's cash and short-term
investments. In addition, $725,000 of the Company's investments represent
statutory deposits of Crusader which are assigned to and held by the California
State Treasurer and the Insurance Commissioner of the State of Nevada. These
deposits are required for Crusader to write certain lines of business in
California and for its admission in states other than California.
NOTE 4 - STATUTORY CAPITAL AND SURPLUS
As of March 31, 1997, Crusader's statutory capital and surplus were deemed
sufficient to support its present insurance premium writings.
NOTE 5 - INCENTIVE STOCK OPTION PLAN
The Company's 1985 stock option plan provided for the grant of "incentive stock
options" to officers and key employees. The plan covers an aggregate of
1,500,000 shares of the Company's common stock (subject to adjustment in the
case of stock splits, reverse stock splits, stock dividends, etc.). As of March
31, 1997, 424,599 options were outstanding of which 325,697 were currently
exercisable. During the quarter ended March 31, 1997, options on 136,100 shares
of common stock were exercised. There are no additional options available for
future grant under the 1985 plan.
NOTE 6 - 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, 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 7 - LEASE COMMITMENTS AND CONTINGENCIES
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. The terms of the lease at inception and at the time
the lease extension was executed were at least as favorable to the Company as
could have been obtained from unaffiliated third parties. The Company utilizes
for its own operation 100% of the space it leases.
NOTE 8
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all necessary adjustments, which consist of normal recurring
adjustments, to present fairly the results of operations for the three months
ended March 31, 1997, and March 31, 1996.
NOTE 9
The results of operations for the three months ended March 31, 1997, should not
be considered as necessarily indicative of the results to be expected for the
full year.
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<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(a) 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 reinvestment of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company.
Crusader's losses 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. As of March 31, 1997,
the Company had cash and cash investments of $85,180,193 (at amortized cost) of
which $81,734,760 (96%) were investments of Crusader.
As of the quarter ended March 31, 1997, the Company had invested $79,631,910 (at
amortized cost) or 94% of its invested assets in fixed maturity obligations.
Although all of the Company's fixed maturity investments are classified as
available-for-sale, the Company's investment guidelines place primary emphasis
on buying and holding high quality investments. The balance of the Company's
investments were in equity securities of regional utility companies and
high-quality short-term investments that include a U.S. treasury bill, bank
money market accounts, certificates of deposit, commercial paper and a
short-term treasury money market fund.
The Company's investments in fixed maturity obligations of $79,631,910 (at
amortized cost) include $39,474,855 (49%) of pre-refunded state and municipal
tax exempt bonds, $20,453,922 (26%) of U.S. treasury securities, $19,703,133
(25%) in high quality industrial bonds and certificates of deposit. The tax
exempt interest income earned for the three months ended March 31, 1997 and 1996
was $454,616 and $410,488 respectively.
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. The Company's
fixed maturity obligations have maturities no greater than eight years. All of
the Company's investments are high-grade investment quality.
On March 4, 1997, the Board of Directors declared a ($0.07) per share cash
dividend payable on August 15, 1997, to shareholders of record at the close of
business on August 1, 1997.
The Company's premium finance subsidiary, American Acceptance Corporation
("AAC"), has a bank credit line of $4,000,000 with a variable rate of interest
based on fluctuations in the London Inter Bank Offered Rate ("LIBOR"). This
credit line is only used to provide AAC with the additional funds it requires to
finance insurance premiums. AAC has been paying down its bank note payable from
its internal cash flow as well as from intercompany loans from Unico. The bank
note payable has been reduced from $750,001 as of December 31, 1996 to $500,001
as of March 31, 1997.
Although material capital expenditures may also be funded through borrowings,
the Company believes that cash generated from operations, plus cash and
short-term investments at the quarter end, net of trust restriction of
$2,137,672 and statutory deposits of $725,000, should be sufficient to meet its
operating requirements during the next twelve months without the necessity of
borrowing additional funds. Crusader is restricted in the amount of dividends it
may pay to its parent, Unico, without prior regulatory approval by the
California Department of Insurance. Crusader anticipates that it will not be
required to obtain prior regulatory approval for any dividend which it may pay
to Unico in the next twelve months.
There are no material commitments for capital expenditures as of the date of
this report.
7 of 9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(b) Results of Operations:
All comparisons made in this discussion are comparing the three months ended
March 31, 1997, to the three months ended March 31, 1996, unless otherwise
indicated.
The Company's net income for the quarter ended March 31, 1997, increased $90,337
(5%) to $1,765,154. Revenues increased $1,048,034 (10%) to $12,043,649.
Premium earned before reinsurance increased $802,971 (9%) for the quarter ended
March 31, 1997 of which $328,425 (41%) was from California and $474,546 (59%)
was from states outside of California.
Ceded premium decreased from 12% of premium earned to 9% for the current quarter
primarily due to reduced reinsurance cost related to an increase in loss
retention from $100,000 to $150,000 on April 1, 1995, and to other rate
decreases due to the Company's favorable loss experience with its reinsurers and
competition in the reinsurance marketplace.
Losses and loss adjustment expenses were 54% of net premium earned for both
quarters ended March 31, 1997 and 1996. Crusader has continued to experience
favorable development of prior period losses.
Policy acquisition costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs which are directly or indirectly related to
the production of Crusader insurance policies. These costs include both Crusader
expenses and allocated expenses of other Unico subsidiaries. Crusader's
reinsurer pays Crusader a ceding commission which is primarily a reimbursement
of the acquisition cost related to the ceded premium.
Policy acquisition costs, net of ceding commission, are deferred and amortized
as the related premiums are earned. These costs increased by $424,801 (19%) for
the quarter ended March 31, 1997. The increase in costs was primarily due to
the increase in Crusader's net earned premium.
Investment income, excluding realized investment gains, increased $188,984 (19%)
to $1,189,470 for the quarter ended March 31, 1997, compared to $1,000,486. This
increase was primarily due to a 15% increase (at amortized cost) in invested
assets.
Commissions to agents/brokers decreased $31,608 (10%) in the quarter ended March
31, 1997 primarily due to related revenue decreases in the health, life and
automobile programs.
Other operating expenses decreased $31,143 (4%) during the quarter ended March
31, 1997.
There were no significant changes in other revenue or expense items.
The effect of inflation on net income of the Company during the three months
ended March 31, 1997, and 1996 was not significant.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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<PAGE>
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
(c) During the quarter ended March 31, 1997, the Company issued an aggregate
of 136,100 shares of its common stock upon exercise of employee stock
options granted under the Unico American Corporation Employee Incentive
Stock Option Plan. These shares were issued to an aggregate of two
employees of the Company. Of these shares, an aggregate of 136,000 shares
were issued in exchange for an aggregate of 44,800 shares of common stock
and an aggregate of 100 shares were issued in exchange for an aggregate of
$350.00 in cash. These shares were acquired for investment and without a
view to the public distribution or resale thereof, and the issuance
thereof was exempt from the registration requirements under the Securities
Act of 1933, as amended, under Section 4 (2) thereof as transactions not
involving a public offering.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto authorized.
UNICO AMERICAN CORPORATION
Date: May 12, 1997 By: /s/ Erwin Cheldin
---------------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: May 12, 1997 By: /s/ Lester A. Aaron
-----------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
9 of 9
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 83,600,807
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 856,200
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 84,457,007
<CASH> 506,434
<RECOVER-REINSURE> 919,350
<DEFERRED-ACQUISITION> 5,093,193
<TOTAL-ASSETS> 105,646,683
<POLICY-LOSSES> 39,830,411
<UNEARNED-PREMIUMS> 21,705,006
<POLICY-OTHER> 2,152,994
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 500,001
0
0
<COMMON> 2,836,772
<OTHER-SE> 34,970,686
<TOTAL-LIABILITY-AND-EQUITY> 105,646,683
9,141,540
<INVESTMENT-INCOME> 1,189,470
<INVESTMENT-GAINS> 919
<OTHER-INCOME> 1,711,720
<BENEFITS> 4,974,473
<UNDERWRITING-AMORTIZATION> 2,639,930
<UNDERWRITING-OTHER> 1,933,016
<INCOME-PRETAX> 2,496,230
<INCOME-TAX> 731,076
<INCOME-CONTINUING> 1,765,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,765,154
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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</TABLE>
