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 December 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)
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 March 20, 1998 was $58,607,584 (based on the closing sales price on such
date, as reported by the Wall Street Journal).
6,158,861
Number of shares of common stock outstanding as of March 20, 1998
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 December 31,
1997, 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
<PAGE>
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. Crusader Insurance
Company ("Crusader"), the Company's property and casualty insurance company,
represents approximately 85% of the Company's total revenues.
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, and workers' compensation insurance policies. In
February 1997, management decided to discontinue writing new commercial
automobile policies for a non-affiliated insurer. These policies were only sold
in California. Subsequent to February 1997, Unifax only serviced and renewed
existing commercial automobile policies until the book of business was sold to a
non-affiliated party in June 1997. Unifax's workers' compensation policies are
sold in Arizona and California for a non-affiliated insurer. All other policies
are sold and serviced by Unifax in Arizona, California, Nevada, Ohio, Oregon,
Pennsylvania, and Washington for Crusader.
Bedford Insurance Services, Inc., ("Bedford") sells and services daily
automobile rental policies in most states for a non-affiliated insurer.
National Coverage Corporation ("NCC") renewed and serviced commercial and
personal automobile policies in California for a non-affiliated insurer. This
program was terminated in August 1996, and the corporation is now inactive.
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 and
Bedford 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 non-affiliated property and casualty
insurance company that Bedford represents as a general agent. 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.
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 provides premium financing to Crusader.
2
<PAGE>
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
December 31, 1997, is licensed as an admitted insurance carrier in the states of
Arizona, California, Nevada, Oregon and Washington. Crusader is a multiple line
property and casualty insurance company which began transacting business on
January 1, 1985. As of December 31, 1997, 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 and NAC Reinsurance Corporation, both California
admitted reinsurers. National Reinsurance Corporation was acquired by General
Reinsurance Corporation in 1996. These reinsurance agreements help protect
Crusader 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 other reinsurance companies of which 77% of the
participating reinsurers are admitted in California.
The aggregate amount of earned premium ceded to the reinsurers was $6,394,328
for the fiscal year ended December 31, 1997, $4,387,450 for the twelve month
period ended December 31, 1996, and $3,307,085 for the nine month fiscal year
ended December 31, 1996.
On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per
risk subject to aggregate limits 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 charged
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. This provisional rated treaty was cancelled and replaced by a flat
rated treaty on January 1, 1998. 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. 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.
3
<PAGE>
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 the 13 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 when appropriate. 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 1988 through 1997. The top line of the
table shows the estimated liability for unpaid losses 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 redundancies in reserves from fiscal 1988 to the present are due to
Crusader's loss reserving practices used in determining its incurred but not
reported losses and loss adjustment expenses ("IBNR"). Although redundancies
have been reported for all years except 1994, there is no assurance the
redundancies 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 13 years of its own statistical experience. Crusader 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 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;
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;
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.
4
<PAGE>
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
Fiscal Year Ended March 31
------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 l994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $16,574,249 $23,511,133 $23,601,435 $22,918,442 $21,249,902 $20,824,039 $21,499,778
Paid Cumulative as of
1 Year Later 6,924,260 6,326,868 6,204,559 6,425,329 6,368,554 8,904,427 7,687,180
2 Years Later 10,927,698 10,726,038 10,357,708 10,946,318 9,583,885 10,824,024 13,453,833
3 Years Later 13,313,849 13,652,062 12,935,827 12,409,499 11,814,445 13,178,262 16,597,366
4 Years Later 14,639,530 15,121,985 13,561,987 12,951,511 12,667,989 14,462,911 19,073,442
5 Years Later 15,163,791 15,316,299 13,768,277 13,357,941 13,093,970 15,821,444
6 Years Later 15,218,575 15,385,519 13,866,654 13,459,123 13,385,215
7 Years Later 15,382,717 15,416,138 13,923,206 13,422,013
8 Years Later 15,381,552 15,450,239 13,797,865
9 Years Later 15,398,385 15,467,116
10 Years Later 15,413,833
Reserves Reestimated as of
1 Year Later 20,893,557 22,315,883 20,990,669 20,153,906 18,562,116 19,599,695 20,912,743
2 Years Later 19,583,939 20,165,458 18,566,956 17,136,498 15,021,149 15,742,478 20,289,699
3 Years Later 17,807,451 18,348,965 15,846,416 14,788,046 13,802,009 15,463,566 21,217,766
4 Years Later 16,729,893 16,385,905 14,631,554 13,961,555 13,620,235 16,174,111 21,843,632
5 Years Later 15,738,815 15,782,294 14,115,281 13,833,745 13,790,786 16,888,885
6 Years Later 15,491,674 15,511,081 14,063,578 13,754,304 13,878,797
7 Years Later 15,419,031 15,471,448 14,063,080 13,529,769
8 Years Later 15,395,735 15,486,955 13,853,735
9 Years Later 15,417,748 15,489,438
10 Years Later 15,414,543
Cumulative
Redundancy
(Deficiency) $1,159,706 $8,021,695 $9,747,700 $9,388,673 $7,371,105 $3,935,154 $(343,854)
========= ========= ========= ========= ========= ========= =========
Gross Liability for Unpaid Losses and Loss Adjustment Expenses $23,011,868 $26,294,199
Ceded Liability for Unpaid Losses and Loss Adjustment Expenses
Net Liability for Unpaid Losses and Loss Adjustment Expenses
(2,187,829) (4,794,421)
----------- -----------
$20,824,039 $21,499,778
========== ==========
Gross Liability $22,952,553 $23,232,154
Reestimated
Ceded Liability (6,063,668) (1,388,522)
----------- -----------
Reestimated
Net Liability Reestimated $16,888,885 $21,843,632
========== ==========
Gross Reserve Redundancy (Deficiency) $59,315 $3,062,045
====== =========
</TABLE>
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
March 31 December 31
----------------- ------------------
1995 1996 1996 1997
---- ---- ---- ----
(Nine Months)
<S> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $27,633,304 $32,682,153 $37,111,846 $40,591,248
Paid Cumulative as of
1 Year Later 8,814,611 7,019,175 10,996,896
2 Years Later 13,502,224 15,292,415
3 Years Later 18,911,104
Reserves Reestimated as of
1 Year Later 25,666,251 31,232,388 32,838,369
2 Years Later 24,984,032 28,636,286
3 Years Later 24,575,023
Cumulative
Redundancy
(Deficiency) $3,058,281 $4,045,867 $4,273,477
========= ========= =========
Gross Liability for Unpaid Losses and Loss Adjustment Expenses $32,370,752 $37,006,458 $39,740,865 $42,004,851
Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (4,737,448) (4,324,305) (2,629,019) (1,413,603)
---------- ---------- ---------- ----------
Net liability for Unpaid Losses and Loss Adjustment Expenses $27,633,304 $32,682,153 $37,111,846 $40,591,248
Gross Liability Reestimated $27,503,813 $31,490,506 $37,561,432
Ceded Liability (2,928,790) (2,854,220) (4,723,063)
---------- ---------- ----------
Net Liability Restimated $24,575,023 $28,636,286 $32,838,369
========== ========== ==========
Gross Reserve Redundancy (Deficiency) $4,866,939 $5,515,952 $2,179,433
</TABLE>
5
<PAGE>
The following table presents an analysis of losses and loss adjustment expenses
and provides a reconciliation of beginning and ending reserves for losses and
loss adjustment expenses net of reinsurance for the fiscal year ended December
31, 1997, for the nine month fiscal year ended December 31, 1996, and the fiscal
year ended March 31, 1996.
CRUSADER INSURANCE COMPANY
RECONCILIATION OF LOSS RESERVES
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $37,111,846 $32,682,153 $27,633,304
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 23,564,325 16,251,499 19,276,602
Increase (decrease) in provision for events of prior
years (1) (4,275,759) (1,449,765) (1,967,053)
---------- ---------- ----------
Total losses and loss adjustment expenses 19,288,566 14,801,734 17,309,549
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 4,812,268 3,352,866 3,446,088
Losses and loss adjustment expenses attributable to
insured events of prior years 10,996,896 7,019,175 8,814,612
---------- --------- ---------
Total payments 15,809,164 10,372,041 12,260,700
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $40,591,248 $37,111,846 $32,682,153
========== ========== ==========
Reconciliation of liability for losses and loss adjustment
expense reserves to Balance Sheet
Reserve for unpaid losses and loss adjustment
expenses at end of year - net of reinsurance $40,591,248 $37,111,846 $32,682,153
Reinsurance recoverable on unpaid losses at end of
year 1,413,603 2,629,019 4,324,305
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment
expenses at end of year - gross of reinsurance $42,004,851 $39,740,865 $37,006,458
========== ========== ==========
(1) Decreases in incurred losses and loss adjustment expenses related to the
indicated prior years reflect favorable loss experience during these years
attributable to a number of combined factors which have produced favorable
frequency and severity trends in recent years. In addition, actuarial
assumptions based on historical trends have proven to be conservative.
</TABLE>
6
<PAGE>
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. While there is no statutory requirement
applicable to Crusader 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>
Twelve Months Ended
-------------------------------------------------------------------------------
December 31 March 31
---------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
Statutory
- -------------------------------------
<S> <C> <C> <C> <C> <C>
Net Premiums Written $36,059,086 $36,652,776 $32,915,964 $30,785,970 $27,583,084
Policyholders' Surplus $30,899,761 $25,748,757 $22,721,183 $19,585,839 $17,313,744
Ratio 1.2 to 1 1.4 to 1 1.4 to 1 1.6 to 1 1.6 to 1
</TABLE>
Regulation
- ----------
The insurance company operation is subject to regulation by the California
Department of Insurance ("the insurance department") and by the department of
insurance of other states in which Crusader 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
ended 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. At December 31, 1997, Crusader's
adjusted capital was well in excess of the required capital levels.
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 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.No assessment was made by CIGA
for the 1997 calendar year.
7
<PAGE>
Holding Company Act
- -------------------
Crusader is 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 immediately preceding 12 months involving one-half
of one percent of admitted assets as of the preceding December 31. An
extraordinary transaction also includes a dividend which, together with other
dividends or distributions made within the preceding twelve months, exceeds the
greater of 10% of the insurance company's policyholders' surplus as of the
preceding December 31 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 which are secured by U.S. treasury
securities. The Company's investment in equity securities consists of common
stock shares of a public utility. 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.
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated:
<TABLE>
<CAPTION>
(Amounts in Thousands)
-------------------------------------------------------------------------------------
As of December 31 As of December 31 As of March 31
1997 1996 1996
Amortized Market Amortized Market Amortized Market
Type of Security Cost Value Cost Value Cost Value
---------------- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit $ 500 $ 500 $ 798 $ 798 $ 1,111 $ 1,111
U.S. treasury securities 15,480 15,794 22,447 22,613 18,192 18,325
Industrial and miscellaneous
Taxable bonds 31,765 32,489 13,106 13,440 10,655 11,015
State and municipal
tax-exempt bonds 38,361 39,183 39,634 40,258 38,127 38,437
------ ------ ------ ------ ------ ------
Total fixed maturity bonds 86,106 87,966 75,985 77,109 68,085 68,888
Short-term cash investments 6,137 6,137 4,862 4,862 3,466 3,466
Equity investments 230 223 - - 995 998
------ ------ ------ ------ ------ ------
Total investments $92,473 $94,326 $80,847 $81,971 $72,546 $73,352
====== ====== ====== ====== ====== ======
</TABLE>
At December 31, 1997, the Company had a net unrealized gain on all investments
of $1,851,659 before income taxes.
8
<PAGE>
The maturity dates of the Company's fixed maturity investments at December 31,
1997, and December 31, 1996, were as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
----------------------------------------------------------------------
December 31, 1997 December 31, 1996
Amortized Market Amortized Market
Fixed maturities due Cost Value Cost Value
-------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 1 year $11,073 $11,109 $ 9,204 $ 9,274
Beyond 1 year but within 5 years 46,082 47,126 46,501 47,052
Beyond 5 years but within 10 years 28,951 29,731 20,280 20,783
------ ------ ------ ------
Total $86,106 $87,966 $75,985 $77,109
====== ====== ====== ======
</TABLE>
Competition
-----------
General
- -------
The property and casualty insurance industry is highly competitive on the basis
of price and service. It 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.
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, and 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 a non-affiliated insurance company; 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 operation
which produces the business.
Insurance Premium Financing Operation
- -------------------------------------
The insurance premium financing operation finances Crusader policies and, until
February 1997, 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.
9
<PAGE>
Health and Life Insurance Operations
- ------------------------------------
Competition in the health and life insurance business is also intense.
Approximately 90% of the Company's present health and life business is from the
CIGNA HealthCare medical and dental plan programs. This percentage is
approximately the same as the prior year. The Company is continuing its efforts
to diversify and offer a wider variety of products to its customers, and it
believes that this effort will make it more competitive and should increase
future revenues.
Employees
---------
On February 5, 1998, the Company employed 144 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 rent 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 Company believes that
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 non-affiliated third parties.
The Company utilizes for its own operations 100% of the space it leases.
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, 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.
10
<PAGE>
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 comparable twelve month periods are as follows:
High Low Dividend
Quarter Ended Price Price Declared
------------- ----- ----- --------
March 31, 1996 7 1/8 6
June 30, 1996 7 3/4 6 5/8 $0.07
September 30, 1996 8 3/4 7 1/8
December 31, 1996 11 7 5/8
March 31, 1997 10 7/8 9 5/8 $0.07
June 30, 1997 11 1/4 9 3/4
September 30, 1997 11 3/4 10 3/4
December 31, 1997 14 1/8 11 1/2
As of December 31, 1997, the approximate number of shareholders of record of the
Company's common stock was 700. In addition, the Company estimates beneficial
owners of the Company's common stock held in the name of nominees to be
approximately 1,000.
The Company has declared a cash dividend on its common stock annually since June
24, 1991. The Company's intention is to declare annual cash dividends subject to
continued profitability and cash requirements. On March 4, 1997, the Company
declared its latest annual cash dividend of $0.07 per common share payable on
August 15, 1997, to shareholders of record on August 1, 1997.
From January 1, 1997, to December 31, 1997, the Company issued an aggregate of
186,751 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 five employees of the Company.
Of these shares, an aggregate of 186,284 shares were issued in exchange for an
aggregate of 61,964 shares of common stock and an aggregate of 467 shares were
issued in exchange for an aggregate of $1,635.81 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. Selected Financial Data
- --------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------------------------
December 31 March 31
--------------------------- -----------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Nine Months)
<S> <C> <C> <C> <C> <C>
Total revenues $48,290,721 $34,884,657 $42,468,474 $39,444,223 $32,979,913
Total costs and expenses 37,301,688 27,505,670 34,060,183 34,486,546 27,931,741
---------- ---------- ---------- ---------- ----------
Income before taxes $10,989,033 $7,378,987 $8,408,291 $4,957,677 $5,048,172
Net income $7,654,362 $5,174,510 $5,947,481 $3,792,179 $3,521,787
Basic earnings per share $1.25 $0.87 $1.00 $0.64 $0.59
Diluted earnings per share $1.20 $0.83 $0.97 $0.63 $0.58
Cash dividends per share $0.07 $0.07 $0.07 $0.07 $0.07
Total assets $112,942,384 $104,451,322 $95,817,377 $87,456,701 $76,999,203
Long term debt $723,066 $730,426 $758,135 $750,824 $1,151,834
Stockholders' equity $45,060,784 $37,355,419 $32,387,158 $26,147,827 $22,843,567
</TABLE>
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operation
------------
In December 1996, the Company changed its fiscal year end from March 31 to
December 31, effective December 31, 1996. As a result of this change, the
Company's fiscal year ended December 31, 1996, consisted of nine months. For
that reason, management's discussion and analysis includes many comparisons of
the Company's fiscal year ended December 31, 1997, which consists of twelve
months, to the comparable twelve month period of the prior year. The financial
information for the unaudited twelve month period ended December 31, 1996, is
included in this discussion for comparisons.
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 December 31, 1997, were $92,530,294
compared to $80,929,348 at December 31, 1996, a 14% increase. Crusader's cash
and investments at December 31, 1997, was $88,456,803, or 96% of the total held
by the Company compared to $77,833,104 or 96% of the total held by the Company
at December 31, 1996.
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.
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 to maturity.
The Company's investments are as follows:
<TABLE>
<CAPTION>
December 31 December 31 March 31
1997 1996 1996
------------------- ------------------ ------------------
Amount % Amount % Amount %
Fixed maturities (at amortized cost)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit $ 500,000 1 $ 798,000 1 $ 1,111,378 1
U.S. treasury securities 15,480,258 18 22,447,391 30 18,191,847 27
Industrial and miscellaneous (taxable) 31,765,034 37 13,105,416 17 10,655,316 16
State and municipal (tax exempt) 38,361,279 44 39,634,159 52 38,126,835 56
---------- --- ---------- --- ---------- ---
Total fixed maturity investments 86,106,571 100 75,984,966 100 68,085,376 100
---------- === ---------- === ---------- ===
Short-term cash investments (at cost)
Certificates of deposit 225,000 4 125,000 3 25,000 1
Commercial paper 4,750,000 77 2,810,000 58 2,230,000 64
Bank money market accounts 426,775 7 1,144,292 23 1,186,602 34
Short-term U.S. treasury 732,216 12 757,653 15 - -
Bank savings accounts 3,504 - 24,800 1 24,430 1
--------- --- --------- --- --------- ---
Total short-term cash investments 6,137,495 100 4,861,745 100 3,466,032 100
--------- === --------- === --------- ===
Equity investments (at cost) 230,460 - 995,237
---------- ---------- ----------
Total investments $92,474,526 $80,846,711 $72,546,645
========== ========== ==========
</TABLE>
12
<PAGE>
The tax exempt interest income earned (net of bond premium and discount
amortization) during the fiscal year ended December 31, 1997, was $1,809,043
compared to $1,770,382 in the twelve month period ended December 31, 1996. In
the fiscal year ended March 31, 1996, tax exempt interest income earned totaled
$1,738,799.
The Company's investment policy limits investments in any one company. This
limit was raised from $1,000,000 to $1,500,000 in 1997. 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; all state
and municipal tax exempt fixed maturity investments are pre-refunded issues, and
all certificates of deposit are FDIC insured.
AAC has a bank line of credit with a variable rate of interest based on
fluctuations in the London Interbank 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 this bank note payable from its internal
cash flow as well as from intercompany loans from its parent, Unico. The bank
note payable was paid in full on July 3, 1997, resulting in no amounts being
outstanding under the bank credit line. Due to decreased utilization, AAC
decreased this bank credit line from $4,000,000 to $2,000,000 in September 1997.
The maximum and average bank note payable and weighted average interest rate are
as follows:
Fiscal Year Ended
---------------------------------
December 31 December 31
1997 1996
---- ----
(Nine Months)
Maximum bank note payable $750,001 $2,000,001
Average bank note payable $296,576 $1,387,038
Weighted average interest rate 7.3% 7.2%
In addition to the AAC line of credit, Unico has a $2,000,000 line of credit
with Union Bank. Interest on this line is referenced to LIBOR and is payable
monthly. The agreement contains certain covenants including maintenance of
certain financial ratios. This credit line expires September 2, 1998, at which
time it is expected to be renewed. As of December 31, 1997, no amounts have been
borrowed.
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 $2,668,472, statutory deposits of $2,725,000, 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 during the
next twelve months without the necessity of borrowing funds (excluding AAC's
credit line discussed above).
Dividends paid by Crusader to Unico were $1,500,000 in 1997 and $1,000,000 in
1996. Unico invested $1,000,000 of the 1997 dividend it received from Crusader
in a two year U.S. treasury note.
Crusader's statutory capital and surplus as of December 31, 1997, was
$30,899,761, an increase of $5,151,004 over December 31, 1996. Crusader's
statutory capital and surplus as of December 31, 1996, was $25,748,757, an
increase of $3,858,981 over December 31, 1995.
The Company has initiated a review of all computer programs in order that all
computer systems will function properly with respect to dates in the year 2000
and thereafter. Some of the older programs were written using two digits rather
than four digits to define a year. As a result, these programs have
time-sensitive software which would recognize a date of "00" as 1900 rather than
2000. Failure to correct these programs could cause a system failure or
miscalculation and disrupt operations or inhibit the Company's ability to
conduct normal business activities. The project to review and correct all
programs is in progress and is estimated to be completed by the middle of 1999,
prior to any anticipated impact on its operating systems. Portions of this
project have been completed and tested as of December 31, 1997.
13
<PAGE>
The Company believes that with modification to existing software, the year 2000
issue will not pose significant operational problems for its computer systems.
The costs of the project are not expected to have a material adverse effect on
the Company's financial position.
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 $7,654,362 for the fiscal year ended
December 31, 1997, compared to $6,849,327 for the twelve month period ended
December 31, 1996, and $5,947,481 for the fiscal year ended March 31, 1996.
Total revenue for the fiscal year ended December 31, 1997, was $48,290,721
compared to $45,880,272 for the twelve month period ended December 31, 1996, and
$42,468,474 for the fiscal year ended March 31, 1996.
For the fiscal year ended December 31, 1997, income before taxes increased by
$1,212,956 (12%) and net income increased by $805,035 (12%) compared to the
twelve month period ended December 31, 1996. The increase in pre-tax income was
primarily due to an increase of $499,418 (8%) in the underwriting profit (net
earned premium less losses and loss adjustment expenses and policy acquisition
costs) from Crusader and an increase in investment income of $762,891 (18%)
(excluding realized investment gains).
For the twelve month period ended December 31, 1996, income before taxes
increased by $1,367,786 (16%) and net income increased by $901,846 (15%)
compared to the fiscal year ended March 31, 1996. The increase in pre-tax income
was primarily due to an increase of $378,236 (7%) in the underwriting profit
from Crusader, an increase in investment income of $369,637 (10%) (excluding
realized investment gains), a decrease in other operating expenses of $383,821
(12%), and an increase in net commission and fee income of $252,469 (gross
commission and fees less commissions to agents/brokers).
The effect of inflation on the net income of the Company during the fiscal year
ended December 31, 1997, 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>
Fiscal Year 12 Months Fiscal Year
Ended Ended Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Gross written premium $42,273,990 $41,425,715 $37,631,357
Net written premium $35,586,046 $36,643,457 $33,193,911
Earned premium before reinsurance $42,721,222 $38,667,566 $37,554,830
Earned premium net of reinsurance $36,326,894 $34,280,116 $31,477,427
Losses and loss adjustment expenses $19,288,566 $19,201,095 $17,309,549
Unpaid losses and loss adjustment expenses $42,004,851 $39,740,865 $37,006,458
</TABLE>
In the fiscal year ended December 31, 1997, gross written premium increased by
$848,275 (2%) compared to the twelve month period ended December 31, 1996. The
increase in gross written premium was primarily attributable to an increase in
Crusader's Commercial Package business of $1,419,864 (4%) to $40,881,943. This
increase was partially offset by a decrease in Crusader's Commercial
14
<PAGE>
Property and Other Liability line of business of $571,589 (29%). For the fiscal
year ended December 31, 1997, the Commercial Package premium accounted for 97%
of the Crusader's total written premium. Premium written in California increased
$651,454 (2%) to $33,048,085 while premiums written outside of California
increased $196,821 (2%) to $9,225,905 compared to the twelve month period ended
December 31, 1996. The slight increase in written premiums was primarily due to
increased competition in the California and Pacific Northwest markets.
In the twelve month period ended December 31, 1996, gross written premium
increased $3,794,358 (10%) compared to the fiscal year ended March 31, 1996.
This increase was primarily the result of an increase in Crusader's Commercial
Package business of $2,501,146 (7%) and an increase in Commercial Property and
Other Liability business of $1,293,212 (193%). For the twelve month period ended
December 31, 1996, the Commercial Package premium accounted for 95% of the
Crusader's total written premium. Premium written in California increased
$2,106,603 (7%) while premium written outside of California increased $1,687,755
(23%).
In the fiscal year ended December 31, 1997, Crusader's direct earned premium
increased $4,053,656 (10%) and net premium earned increased $2,046,778 (6%) over
the twelve month period ended December 31, 1996. For the twelve month period
ended December 31, 1996, Crusader's direct earned premium increased $1,112,736
(3%) and net premium earned increased $2,802,689 (9%) over the fiscal year ended
March 31, 1996. The percentage of earned ceded premium to gross premium earned
was 15% for the fiscal year ended December 31, 1997, 11% for the twelve month
period ended December 31, 1996, and 16% for the fiscal year ended March 31,
1996.
The combined ratio is the sum of (1) the net 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 ratio is below 100%,
an insurance company has an underwriting profit; if it is above 100%, a company
has an underwriting loss.
Fiscal Year Ended 12 Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
Loss ratio 53.1% 56.0% 55.0%
Expense ratio 29.1% 26.5% 27.2%
---- ---- ----
Combined ratio 82.2% 82.5% 82.2%
==== ==== ====
The Company's future writings and growth are dependent on market conditions,
competition, the Company's ability to introduce new profitable products, and its
ability to expand geographically. As of December 31, 1997, Crusader was 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's written premium by state is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended 12 Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
California $33,048,085 $32,396,631 $30,290,028
Washington 4,704,286 5,024,276 4,534,377
Oregon 2,779,691 3,052,379 2,411,704
Arizona 1,346,589 862,352 383,994
Ohio 242,751 - -
Nevada 111,077 90,077 11,254
Pennsylvania 41,511 - -
---------- ---------- ----------
Total $42,273,990 $41,425,715 $37,631,357
========== ========== ==========
</TABLE>
15
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended 12 Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
Daily auto rental program
<S> <C> <C> <C>
Commission and claim
administration fee $757,098 $797,481 $871,841
</TABLE>
Revenues during the fiscal year ended December 31, 1997, were $757,098 a
decrease of $40,383 (5%) compared to the same period of the prior year. Revenue
for the twelve month period ended December 31, 1996, decreased 9% compared to
the prior fiscal year.
The daily automobile rental insurance program continues to experience decreased
commission and fee income due to decreased premium written. This decrease is due
to continued price competition. 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
- ----------------------------------------------------
Unifax produced commercial auto policies in California for a non-affiliated
insurer and received a commission from them based on premium written. Unifax
also received a policy service fee from the insured. In February 1997,
management decided to discontinue writing new policies in the Unifax commercial
automobile program and only serviced and renewed existing policies until the
book of business was sold to an non-affiliated third party in June 1997. As
consideration for the sale of this book of business, Unifax will receive a
percentage of the commission earned for a two year period on policies which were
in force at the time of sale.
NCC renewed and serviced existing commercial and personal automobile policies in
California for a non-affiliated insurer until August 31, 1996, when the NCC
program was discontinued. NCC received a commission and claim administration fee
from the non-affiliated insurance company based on premium written and a policy
service fee from the insured.
Commercial and personal auto program commission, service fee, and claim
administration income are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended 12 Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commercial and personal auto
program commission, service fee,
and claim administration income $82,439 $212,909 $183,519
</TABLE>
Revenue for the fiscal year ended December 31, 1997, decreased $130,470 (61%)
compared to the twelve month period ended December 31, 1996, due to the
discontinuance of the programs. Revenue for the twelve months ended December 31,
1996, increased $29,390 (16%) compared to the fiscal year ended March 31, 1996.
16
<PAGE>
Health and Life Insurance Program
- ---------------------------------
Commission income from the health and life insurance sales of NIB and AIB is as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended 12 Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commission income $2,083,782 $2,432,208 $2,539,802
</TABLE>
NIB and AIB market health and life insurance through non-affiliated insurance
companies for individuals and groups. Approximately 90% of the health and life
commission income in the fiscal year ended December 31, 1997, was from the CIGNA
HealthCare medical and dental plan programs compared to approximately 90% in the
same period of the prior year. Revenues for the fiscal year ended December 31,
1997, decreased $348,426 (14%) compared to the twelve month period ended
December 31, 1996. Revenues for the twelve month period ended December 31, 1996,
decreased $107,594 (4%) compared to the fiscal year ended March 31, 1996.
Group health and life insurance programs
- ----------------------------------------
The decrease in commission income in the health and life insurance programs is
primarily a result of a decrease in sales of small business group accounts due
to increased competition in the health insurance field. The rates charged by
CIGNA for certain group accounts have not been competitive and have resulted in
non-renewal.
Regulations on California health care medical providers to small businesses
became effective on July 1, 1993 (AB 1672). These regulations now cover small
businesses with 2 to 50 employees. These regulations, among other things,
created an alliance of health insurance companies called the Health Insurance
Plan of California ("HIPC"). There are currently 20 insurance companies in the
alliance. The premiums charged by the insurance 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 were forced
to lower their rates to small groups. 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. CIGNA revised its rates in July 1996 and July
1997. In July 1996, some rates were increased which resulted in loss of business
and others were decreased to retain existing business. In July 1997 all rates
were increased which contributed to a further loss of business.
Individual medical and dental programs
- --------------------------------------
Individual medical programs are not affected by AB 1672, and all of the
Company's major insurance carriers provide the Company with individual medical
insurance programs. Commission income from the individual medical and dental
programs continues to increase due to aggressive marketing and the quality of
the Company's customer service. However, the increases in commission income on
the individual programs, which generally have lower premiums than group
programs, were not enough to offset the loss of commission income from the group
programs.
New legislation
- ---------------
The Health Insurance Portability and Accountability Act of 1996 ("HIPPA"), which
became effective January 1, 1998, requires that individual health plans accept
consumers moving from group plans on a guarantee-issue basis if certain
specified criteria is met. Rates charged for individual and group accounts are
expected to increase in order to cover the increased costs related to the
guarantee-issue policy.
Also effective January 1, 1998, is the implementation of Cal COBRA, a new law
that pertains to small groups with 2 to 19 eligible employees. Cal COBRA allows
departing employees of small firms to continue their health insurance coverage
for at least 18 months at a cost of 110% of the rate charged for group members.
The Company has not determined the effect on health insurance sales resulting
from the implementation of the above new legislation.
17
<PAGE>
Workers' Compensation Program
- -----------------------------
Unifax produces workers' compensation policies in California and Arizona for a
non-affiliated insurer and receives a commission from them based on premium
written.
<TABLE>
<CAPTION>
Fiscal Year Ended Twelve Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commission income $298,006 $81,775 $15,192
</TABLE>
Commission income for the fiscal year ended December 31, 1997, increased
$216,231 (264%) compared to the twelve month period ended December 31, 1996. The
increase was primarily the result of increased sales of workers' compensation
insurance and incentive bonus commissions earned as a result of the increased
sales.
Association Operation
- ---------------------
Membership and fee income from the Association program of AAQHC is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Twelve Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Membership and fee income $336,968 $326,491 $277,754
</TABLE>
Membership and fee income in the fiscal year ended December 31, 1997, increased
$10,477 (3%) compared to the twelve month period ended December 31, 1996.
Membership income increased $48,737 (18%) in the twelve months ended December
31, 1996, compared to the fiscal year ended March 31, 1996. These increases are
attributable to an increase in individual and family members in the Association
which offset the decrease in group memberships.
Premium Finance Program
- -----------------------
Premium finance charges and late fees earned from financing policies are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Twelve Months Fiscal Year
Ended Ended Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Premium finance charges and late fees earned $1,191,503 $1,191,796 $1,279,850
New loans 8,615 9,256 10,212
</TABLE>
American Acceptance Corporation, the Company's insurance premium finance
subsidiary, provides premium financing to Crusader, and until February 1997 a
non-affiliated insurer on commercial auto policies produced by Unifax. In
February 1997, the commercial auto program with the non-affiliated insurer was
discontinued. The growth of this program is dependent and directly related to
the growth of Crusader's written premium and AAC's ability to market its
competitive rates and service to finance those policies. AAC finances policies
primarily in California.
Premium finance charges and late fees earned on loans decreased $293 in the
fiscal year ended December 31, 1997, compared to the twelve month period ended
December 31, 1996. For the twelve months ended December 31, 1996, premium
finance charges and late fees earned on loans decreased $88,054 (7%) compared to
the fiscal year ended March 31, 1996. The number of AAC loans decreased
primarily as a result of fewer Crusader policies being financed in California.
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:
<TABLE>
<CAPTION>
Fiscal Year Ended Twelve Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Service fee income $2,182,074 $2,105,851 $1,891,405
Policies written 19,305 18,359 16,881
</TABLE>
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
gains as follows:
<TABLE>
<CAPTION>
Fiscal Year Twelve Months Fiscal Year
Ended Ended Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
Interest and dividend income
<S> <C> <C> <C>
Insurance company operations $4,855,580 $4,073,066 $3,708,891
Other operations 140,681 160,304 154,842
--------- --------- ---------
Total interest and dividend income 4,996,261 4,233,370 3,863,733
Net realized investment gains 25,093 210,033 55,743
--------- --------- ---------
Total investment income $5,021,354 $4,443,403 $3,919,476
========= ========= =========
</TABLE>
Investment interest and dividends earned (excluding net realized gains)
increased $762,891 (18%) in the fiscal year ended December 31, 1997, compared to
the twelve month period ended December 31, 1996. This increase was primarily due
to an increase in invested assets (at amortized value) of $11,627,815 (14%) at
December 31, 1997, compared to December 31, 1996, and to the mix of taxable and
tax exempt securities in the portfolio. The Company's investments at December
31, 1997 are comprised of $38,361,279 (41%) of tax exempt investments compared
to $39,634,159 (49%) of tax exempt investments at December 31, 1996.
For the twelve month period ended December 31, 1996, investment interest and
dividends earned (excluding net realized gains) increased $369,637 (10%)
compared to the fiscal year ended March 31, 1996. This increase was primarily
due to an increase in invested assets (at amortized value) of $8,300,066 (11%)
at December 31, 1996, compared to March 31, 1996. The Company's investments at
December 31, 1996, were comprised of $39,634,159 (49% of total investments) tax
exempt investments and $38,126,835 (53% of total investments) of tax exempt
investments at March 31, 1996.
Additional information regarding investments and investment income is described
in the "Management Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources."
19
<PAGE>
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 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:
<TABLE>
<CAPTION>
Fiscal Year Ended Twelve Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commission income $10,562,191 $9,102,302 $8,569,395
Ratio to earned premium 29% 27% 27%
</TABLE>
Salaries and Employee Benefits decreased $5,707 for the fiscal year ended
December 31, 1997, compared to the twelve month period ended December 31, 1996.
Salaries and employee benefits increased $78,677 (2%) in the twelve month period
ended December 31, 1996, compared to the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
Fiscal Year Ended Twelve Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Salaries and employee benefits $3,757,959 $3,763,666 $3,684,989
</TABLE>
Commissions to Agents/Brokers (not including commissions on Crusader policies
which are reflected in policy acquisition costs) are generally related to gross
commission income. Commissions to agents and brokers decreased $217,776 (17%)
for the fiscal year ended December 31, 1997, compared to the twelve month period
ended December 31, 1996. This decrease was primarily related to the 14% decrease
in health and life insurance commission income. During the twelve month period
ended December 31, 1996, commission expense decreased $75,297 (6%) compared to
fiscal year ended March 31, 1996. This decrease was also primarily due to a 4%
decrease in health and life insurance commissions.
<TABLE>
<CAPTION>
Fiscal Year Ended Twelve Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commission to agents/brokers $1,035,599 $1,253,375 $1,328,672
</TABLE>
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 $126,384 (5%) during the fiscal year ended December
31, 1997, compared to the twelve month period ended December 31, 1996. The
decrease was primarily due to a decrease in interest expense of $101,425 as a
result of the reduction in the Company's bank note payable.
20
<PAGE>
Other operating expenses decreased $383,821 (12%) during the twelve month period
ended December 31, 1996, compared to the fiscal year ended March 31, 1996. This
decrease was primarily due to a decrease in interest expense of $166,893 as a
result of the reduction in the Company's bank note payable.
<TABLE>
<CAPTION>
Fiscal Year Ended Twelve Months Ended Fiscal Year Ended
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Other operating expenses $2,657,373 $2,783,757 $3,167,578
</TABLE>
Forward Looking Statements
- --------------------------
Certain statements contained herein that are not historical facts are forward
looking. These statements involve risks and uncertainties, many of which are
beyond the control of the Company. Such risks and uncertainties could cause
actual results to differ materially from these forward looking statements.
Factors which could cause actual results to differ materially include those
described under Item 1 - Business - "Competition," premium rate adequacy
relating to competition or regulation, actual versus estimated claim experience,
regulatory changes or developments, unforeseen calamities, general market
conditions, the Company's ability to introduce new profitable products, and the
Company's ability to expand geographically.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- ---------------------------------------------------------------------
Not applicable
21
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Reports 23-24
Consolidated Balance Sheets as of December 31, 1997, and December 31, 1996 25
Consolidated Statements of Operations for the fiscal year ended December 31, 26
1997, twelve months ended December 31, 1996 (unaudited), nine months ended
December 31 1996, and the fiscal year ended March 31, 1996
Consolidated Statements of Changes in Stockholders' Equity for the fiscal year ended 27
December 31, 1997, and the nine months ended December 31, 1996, and the fiscal year ended March 31, 1996
Consolidated Statements of Cash Flows for the fiscal year ended December 31, 28
1997, the nine months ended December 31, 1996, and the fiscal year ended
March 31, 1996
Notes to Consolidated Financial Statements 29
</TABLE>
22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Unico American Corporation
We have audited the accompanying consolidated balance sheet of Unico American
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unico American
Corporation and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 20, 1998
23
<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 December 31, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the nine months ended December 31, 1996 and the year 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 December 31, 1996, and the
consolidated results of operations and cash flows for the nine months ended
December 31, 1996 and the year ended March 31, 1996 in conformity with generally
accepted accounting principles.
GETZ, KRYCLER & JAKUBOVITS
Sherman Oaks, California
March 20, 1997
24
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
ASSETS ---- ----
------
<S> <C> <C>
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: December 31,
1997 $86,106,571; December 31, 1996 $75,984,966) $87,965,590 $77,109,214
Equity securities at market ( cost: December 31, 1997,
$230,460; December 31, 1996 $0) 223,100 -
Short-term investments, at cost 6,137,495 4,861,745
---------- ----------
Total Investments 94,326,185 81,970,959
Cash 55,768 82,637
Accrued investment income 1,807,364 1,443,551
Premiums and notes receivable, net 7,404,606 8,898,839
Reinsurance recoverable:
Paid losses and loss adjustment expenses 56,379 452,943
Unpaid losses and loss adjustment expenses 1,413,603 2,629,019
Prepaid reinsurance premiums 945,563 1,647,806
Deferred policy acquisition costs 4,886,684 4,953,085
Property and equipment (net of accumulated depreciation) 203,709 229,972
Deferred income taxes 1,005,865 1,503,655
Other assets 836,658 638,856
----------- -----------
Total Assets $112,942,384 $104,451,322
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $42,004,851 $39,740,865
Unearned premiums 21,673,009 22,120,241
Advance premiums 1,368,114 1,358,671
Funds held as security for performance 723,066 730,426
Accrued expenses and other liabilities 2,095,567 2,395,699
Income taxes payable 16,993 -
Note payable - bank - 750,001
---------- ----------
Total Liabilities $67,881,600 $67,095,903
---------- ----------
STOCKHOLDERS' EQUITY
- ---------------------
Common stock, no par - authorized 10,000,000 shares, issued and outstanding
shares 6,153,706 at December 31, 1997 and 6,028,781
at December 31, 1996 $2,838,058 $2,836,422
Net unrealized investment gains 1,222,095 742,004
Retained earnings 41,000,631 33,776,993
---------- ----------
Total Stockholders' Equity $45,060,784 $37,355,419
---------- ----------
Total Liabilities and Stockholders' Equity $112,942,384 $104,451,322
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Twelve
Fiscal Year Months
Ended Ended Fiscal Year Ended
----------------------------------
December 31 December 31 December 31 March 31
----------- --------
1997 1996 1996 1996
---- ---- ---- ----
(Unaudited) (Nine Months)
<S> <C> <C> <C> <C>
REVENUES
- --------
Insurance Company Revenues
Premium earned $42,721,222 $38,667,566 $29,373,374 $37,554,830
Premium ceded 6,394,328 4,387,450 3,307,085 6,077,403
----------- ----------- ----------- -----------
Net premium earned 36,326,894 34,280,116 26,066,289 31,477,427
Net investment income 4,855,580 4,073,066 3,115,110 3,708,891
Net realized investment gains 25,093 210,033 190,491 55,743
Other income 428 215 185 803
---------- ---------- ---------- ----------
Total Insurance Company Revenues 41,207,995 38,563,430 29,372,075 35,242,864
Other Revenues from Insurance Operations
Gross commissions and fees 5,740,589 5,956,941 4,488,601 5,779,769
Investment income 140,681 160,304 117,774 154,842
Finance charges and late fees earned 1,191,503 1,191,796 898,171 1,279,850
Other income 9,953 7,801 8,036 11,149
---------- ---------- ---------- ----------
Total Revenues 48,290,721 45,880,272 34,884,657 42,468,474
---------- ---------- ---------- ----------
EXPENSES
- --------
Losses & loss adjustment expenses 19,288,566 19,201,095 14,801,734 17,309,549
Policy acquisition costs 10,562,191 9,102,302 6,887,173 8,569,395
Salaries and employee benefits 3,757,959 3,763,666 2,850,985 3,684,989
Commissions to agents/brokers 1,035,599 1,253,375 946,791 1,328,672
Other operating expenses 2,657,373 2,783,757 2,018,987 3,167,578
---------- ---------- ---------- ----------
Total Expenses 37,301,688 36,104,195 27,505,670 34,060,183
---------- ---------- ---------- ----------
Income Before Taxes 10,989,033 9,776,077 7,378,987 8,408,291
Income Tax Provision 3,334,671 2,926,750 2,204,477 2,460,810
--------- --------- --------- ---------
Net Income $7,654,362 $6,849,327 $5,174,510 $5,947,481
========= ========= ========= =========
PER SHARE DATA:
Basic Shares Outstanding 6,132,096 5,967,667 5,970,977 5,957,670
Basic Earnings Per Share $1.25 $1.15 $0.87 $1.00
Diluted Shares Outstanding 6,401,359 6,240,855 6,250,930 6,150,250
Diluted Earnings Per Share $1.20 $1.10 $0.83 $0.97
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, THE NINE MONTHS
ENDED DECEMBER 31, 1996 AND THE FISCAL YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Common Shares Unrealized
------------------------- Investment
Issued and Gains & Retained
Outstanding Amount (Losses) Earnings Total
----------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1995 5,957,645 $2,834,801 $(177,098) $23,490,124 $26,147,827
Shares canceled or adjusted 93 - - - -
Cash dividend paid ($0.07
per share) - - - (417,035) (417,035)
Change in market value of
investments, net of deferred
income 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
Net shares issued for exercise
of stock options 71,043 1,621 - - 1,621
Cash dividend paid ($0.07
per share) - - - (418,087) (418,087)
Change in market value of
investments, net of deferred
income tax - - 210,217 - 210,217
Net income - - - 5,174,510 5,174,510
--------- --------- ------- ---------- ----------
Balance - December 31, 1996 6,028,781 2,836,422 742,004 33,776,993 37,355,419
Net shares issued for exercise
of stock options 124,787 1,636 - - 1,636
Shares canceled or adjusted 138 - - - -
Cash dividend paid ($0.07
per share) - - - (430,724) (430,724)
Change in market value of
investments, net of deferred
income tax - - 480,091 - 480,091
Net income - - - 7,654,362 7,654,362
--------- --------- --------- ---------- -----------
Balance - December 31, 1997 6,153,706 $2,838,058 $1,222,095 $41,000,631 $45,060,784
========= ========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
December 31 March 31
----------------------------
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $7,654,362 $5,174,510 $5,947,481
Adjustments to reconcile net income to net cash from
operations
Depreciation & amortization 104,029 83,488 142,306
Bond amortization, net 579,228 431,502 577,481
Net realized (gain) on sale of securities (25,093) (190,491) (55,743)
Changes in assets and liabilities
Premium, notes & investment income receivable 1,130,420 (940,098) 27,833
Reinsurance recoverable 1,611,980 1,454,711 256,948
Prepaid reinsurance premiums 702,243 (284,182) 1,420,808
Deferred policy acquisitions costs 66,401 (619,377) (219,772)
Other assets (197,802) 232,479 (477,399)
Reserve for unpaid losses & loss adjustment expenses 2,263,986 2,734,407 4,635,706
Unearned premium reserve (447,232) 2,473,739 76,527
Funds held as security & advanced premiums 2,083 (257,666) (56,438)
Accrued expenses & other liabilities (300,129) 63,301 157,839
Income taxes current/deferred 267,463 (185,648) (496,174)
---------- ---------- ----------
Net Cash Provided from Operations 13,411,939 10,170,675 11,937,403
---------- ---------- ----------
Investing Activities
Purchase of fixed maturity investments (19,934,951) (12,981,849) (21,591,676)
Proceeds from maturity of fixed maturity investments 8,198,000 4,628,378 13,643,268
Proceeds from sale of fixed maturity investments 996,856 - -
Purchase of equity securities - cost (1,019,500) (2,253,112) (1,593,401)
Proceeds from sale of equity securities 814,132 3,438,841 646,714
Net increase in short-term investments (1,236,490) (1,373,335) (83,731)
Additions to property & equipment (77,766) (34,841) (85,428)
---------- --------- ---------
Net Cash (Used) by Investing Activities (12,259,719) (8,575,918) (9,064,254)
---------- --------- ---------
Financing Activities
Proceeds from issuance of common stock 1,636 1,621 -
Repayment of note payable - bank (750,001) (1,250,000) (1,975,000)
Repayment of note payable - related party - - (500,000)
Dividends paid to shareholders (430,724) (418,087) (417,035)
--------- --------- ---------
Net Cash (Used) by Financing Activities (1,179,089) (1,666,466) (2,892,035)
--------- --------- ---------
Net (decrease) in cash (26,869) (71,709) (18,886)
Cash at beginning of period 82,637 154,346 173,232
------ ------- -------
Cash at End of Period $55,768 $82,637 $154,346
====== ====== =======
Supplemental cash flow information Cash paid during the period for:
Interest $21,950 $76,312 $290,268
Income taxes $2,970,000 $2,515,000 $2,967,000
</TABLE>
See accompanying notes to consolidated financial statements.
28
<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.
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. As a
result of the change, the Company's Consolidated Statements of Operations and
Consolidated Statements of Cash Flows for the fiscal year ended December 31,
1996, covers nine months.
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 16, 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
- -----------
All of the Company's fixed maturity investments are classified as available-for
sale and are stated at market value. Although classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments to maturity. Short-term investments are carried at
cost, which approximates market value. 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. When a decline in value of a fixed
maturity or equity security is considered other than temporary, a loss is
recognized in the consolidated statements of operations. Realized gains and
losses are included in the consolidated statements of operations based on the
specific identification method.
The Company had net unrealized investment gains of $1,222,095 as of December 31,
1997, and net unrealized investment gains of $742,004 as of December 31, 1996.
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.
29
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Fair Value of Financial Instruments
- -----------------------------------
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investment Securities - Fair values for fixed maturity securities are
obtained from a national quotation service. The fair values for equity
securities are based on quoted market prices.
Cash and Short-Term Investments - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Premiums and Notes Receivable - The carrying amounts reported in the
balance sheet for these instruments approximate the fair values.
Note Payable - Bank - The carrying amounts reported in the balance sheet
for the bank note payable approximates the fair value due to the variable
rate nature of the line of credit.
Income Taxes
- ------------
The provision for federal income taxes is computed on the basis of income as
reported for financial reporting purposes. 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 expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. Income tax expense provisions increase or decrease
in the same period in which a change in tax rates is enacted.
Earnings Per Share
- ------------------
Basic earnings per share excludes the impact of common share equivalents and is
based upon the weighted average common shares outstanding. Diluted earnings per
share utilizes the average market price per share when applying the treasury
stock method in determining common share equivalents. Outstanding stock options
are treated as common share equivalents for purposes of computing diluted
earnings per share and represent the difference between basic and diluted
weighted average 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.
c. Insurance Premium Financing Operations
------------------------------------------
Premium finance interest is charged to policyholders who choose to finance
insurance premiums. Interest is charged at rates that vary with the amount
of premium financed. Premium finance interest is recognized using a method
which approximates the interest (actuarial) method.
30
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Losses and Loss Adjustment 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.
Restricted Funds
- ----------------
Restricted funds are as follows:
Fiscal Year Ended December 31
------------------------------
1997 1996
---- ----
Restricted Funds:
Premium trust funds (1) $2,668,472 $2,642,932
Assigned to state agencies (2) 2,725,000 725,000
--------- ----------
Total restricted funds $5,393,472 $3,367,932
========= =========
(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. 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.
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.
31
<PAGE>
UNICO AMERICA CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------------
Recently Issued Accounting Standards
- ------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share."
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share
excludes the impact of common share equivalents and is based upon the weighted
average common shares outstanding. Diluted earnings per share utilizes the
average market price per share when applying the treasury stock method in
determining common share equivalents. The Company adopted the provisions of SFAS
No. 128 in the December 31, 1997, financial statements, including the earnings
per share for all prior periods. Outstanding stock options are treated as common
share equivalents for purposes of computing diluted earnings per share and
represent the difference between basic and diluted weighted average shares
outstanding.
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards No. 131
(SFAS No. 131), "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997 and are effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income, which includes net income and
changes in equity except those resulting from investments by, or distributions
to stockholders. SFAS No. 131 establishes standards for disclosures related to
business operating segments. The Company is currently evaluating the impact that
these statements will have on the consolidated financial statements.
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.
NOTE 3 - INVESTMENTS
- ---------------------
A summary of net investments and related income is as follows:
Investment Income
-----------------
Investment income is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Fixed maturities $4,694,838 $3,041,485 $3,587,856
Equity securities 48,960 46,144 5,886
Short-term investments 253,053 145,855 264,956
--------- --------- ---------
Total investment income 4,996,851 3,233,484 3,858,698
Less investment expenses 590 600 (5,035)
--------- --------- ---------
Net investment income $4,996,261 $3,232,884 $3,863,733
========= ========= =========
</TABLE>
32
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS (continued)
- --------------------------------
Net realized investment gains and (losses) are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Gross realized gains:
Fixed maturities $ - $ - $ 7,193
Equity securities 25,093 196,413 48,550
Gross realized (losses):
Equity securities - ( 5,922) -
------ ------- ------
Net realized investment gains $25,093 $190,491 $55,743
====== ======= =======
</TABLE>
A summary of the unrealized appreciation (depreciation) on investments carried
at market and the applicable deferred federal income taxes is shown below:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Gross unrealized appreciation:
Fixed maturities $1,878,723 $1,183,881 $954,381
Equity securities - - 2,838
Gross unrealized (depreciation):
Fixed maturities (19,704) (59,633) (151,480)
Equity securities (7,360) - -
----- ------ -------
Net unrealized appreciation
(depreciation) on investments 1,851,659 1,124,248 805,739
Deferred federal income taxes (629,564) (382,244) (273,952)
------- ------- -------
Net unrealized appreciation (depreciation),
net of deferred income taxes $1,222,095 $742,004 $531,787
========= ======= =======
</TABLE>
The amortized cost and estimated market value of fixed maturity investments at
December 31, 1997, by contractual maturity are as follows. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Estimated
Amortized Market
Cost Value
---- -----
Due in one year or less $11,073,532 $ 11,108,518
Due after one year through five years 46,081,678 47,126,488
Due after five years through ten years 28,951,361 29,730,584
---------- ----------
Total fixed maturities $86,106,571 $87,965,590
========== ==========
33
<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
December 31, 1997 ---- ----- ------ -----
- -----------------
Available for sale
<S> <C> <C> <C> <C>
Fixed maturities
Certificates of deposit $ 500,000 $ - $ - $ 500,000
U.S. treasury securities 15,480,258 313,491 224 15,793,525
State and municipal
tax exempt bonds 38,361,279 822,093 - 39,183,372
Industrial and miscellaneous
taxable bonds 31,765,034 743,139 19,480 32,488,693
---------- --------- ------ ----------
Total fixed maturities $86,106,571 $1,878,723 $19,704 $87,965,590
========== ========= ====== ==========
December 31, 1996
- ------------------
Available for sale
Fixed maturities
Certificates of deposit $ 798,000 $ - $ - $ 798,000
U.S. treasury securities 22,447,391 185,410 19,699 22,613,102
State and municipal
tax exempt bonds 39,634,159 657,634 33,652 40,258,141
Industrial and miscellaneous
taxable bonds 13,105,416 340,837 6,282 13,439,971
---------- --------- ------ ----------
Total fixed maturities $75,984,966 $1,183,881 $59,633 $77,109,214
========== ========= ====== ==========
</TABLE>
Short-term investments have an initial maturity of one year or less and consist
of the following:
Fiscal Year Ended December 31
-----------------------------
1997 1996
---- ----
Certificates of deposit $ 225,000 $ 125,000
Commercial paper 4,750,000 2,810,000
Commercial bank money market accounts 426,775 1,144,292
Short-term U.S. treasury note 732,216 757,653
Savings account 3,504 24,800
--------- ---------
Total short-term investments $6,137,495 $4,861,745
========= =========
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
- -----------------------------------------------------------------
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Furniture, fixtures, computer, office, and transportation equipment $2,204,554 $2,449,581
Accumulated Depreciation 2,000,845 2,219,609
--------- ---------
Net property and equipment $ 203,709 $ 229,972
======= =======
</TABLE>
34
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET
- -------------------------------------------
Premiums and notes receivable are substantially secured by unearned premiums and
funds held as security for performance.
Fiscal Year Ended December 31
-----------------------------
1997 1996
---- ----
Premiums receivable $2,525,588 $3,171,706
Premium finance notes receivable 4,902,269 5,751,709
--------- ---------
Total premiums and notes receivable 7,427,857 8,923,415
Less allowance for doubtful accounts 23,251 24,576
--------- ---------
Net premiums and notes receivable $7,404,606 $8,898,839
========= =========
Bad debt expense for the fiscal year ended December 31, 1997, and the nine month
fiscal year ended December 31, 1996, was $28,903 and $22,387, 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 6 - 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
-------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Deferred policy acquisition costs at beginning of year $4,953,085 $4,333,708 $4,113,936
Policy acquisition costs incurred during year 10,495,790 7,506,550 8,789,167
Policy acquisition costs amortized during year (10,562,191) (6,887,173) (8,569,395)
---------- --------- ---------
Deferred policy acquisition costs at end of year $4,886,684 $4,953,085 $4,333,708
========= ========= =========
</TABLE>
NOTE 7 - CLAIMS AND LITIGATION
- ------------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings 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.
35
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - 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>
Fiscal Year Ended
------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $37,111,846 $32,682,153 $27,633,304
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 23,564,325 16,251,499 19,276,602
Increase (decrease) in provision for events of prior
years (1) (4,275,759) (1,449,765) (1,967,053)
--------- --------- ---------
Total losses and loss adjustment expenses 19,288,566 14,801,734 17,309,549
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 4,812,268 3,352,866 3,446,088
Losses and loss adjustment expenses attributable to
insured events of prior years 10,996,896 7,019,175 8,814,612
---------- ---------- ----------
Total payments 15,809,164 10,372,041 12,260,700
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $40,591,248 $37,111,846 $32,682,153
========== ========== ==========
Reconciliation of liability for losses and loss adjustment
expense reserves to Balance Sheet
Reserve for unpaid losses and loss adjustment
expenses at end of year - net of reinsurance $40,591,248 $37,111,846 $32,682,153
Reinsurance recoverable on unpaid losses at end of
year 1,413,603 2,629,019 4,324,305
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment
expenses at end of year - gross of reinsurance $42,004,851 $39,740,865 $37,006,458
========== ========== ==========
</TABLE>
(1) Decreases in incurred losses and loss adjustment expenses related to the
indicated prior years reflect favorable loss experience during these years
attributable to a number of combined factors which have produced favorable
frequency and severity trends in recent years. In addition, actuarial
assumptions based on historical trends have proven to be conservative.
NOTE 9 - FUNDS HELD AS SECURITY FOR PERFORMANCE
- -----------------------------------------------
Funds held as security for performance represent funds received from the
Company's daily automobile rental program which guarantee the contractual
obligations of its customers.
36
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - ACCRUED EXPENSES AND OTHER LIABILITIES
- ------------------------------------------------
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Premium payable $ 525,839 $ 708,733
Unearned claim adjusting income 300,000 300,000
Profit sharing contributions 395,000 375,000
Accrued contingent interest expense (See Note 14) 300,000 300,000
Accrued salaries 406,117 404,350
Other 168,611 307,616
--------- ---------
Total accrued expenses and other liabilities $2,095,567 $2,395,699
========= =========
</TABLE>
NOTE 11 - 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. At the Company's request, this line of credit was
decreased from $4,000,000 to $2,000,000 in September 1997. 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 was paid in full on July 3, 1997. The credit line
matures September 2, 1998, and is expected to be renewed.
Fiscal Year Ended December 31
-----------------------------
1997 1996
---- ----
Note payable - bank $ - $750,001
======= =======
Maximum bank note payable $750,001 $2,000,001
Average bank note payable $296,576 $1,387,038
Weighted average interest rate 7.3% 7.2%
In addition to the AAC line of credit, Unico has a $2,000,000 line of credit
with Union Bank. Interest on this line is referenced to LIBOR and is payable
monthly. The agreement contains certain covenants including maintenance of
certain financial ratios. This credit line expires September 2, 1998, at which
time it is expected to be renewed. As of December 31, 1997, no amounts have been
borrowed.
37
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - 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 the fiscal year ended December 31, 1997, $769,464 for the nine month period
ended December 31, 1996, and $1,025,952 for the fiscal year ended March 31,
1996.
The lease provides for the following minimum annual rental commitments:
Fiscal Year Ending
------------------
December 31, 1998 $1,025,952
December 31, 1999 $1,025,952
December 31, 2000 $1,025,952
December 31, 2001 $1,025,952
December 31, 2002 $1,025,952
December 31, 2003 (through March 31, 2007) $4,360,296
---------
Total minimum payments $9,490,056
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 Company believes
that 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 13 - 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.
Crusader has reinsurance agreements with National Reinsurance Corporation and
NAC Reinsurance Corporation, both California admitted reinsurers. National
Reinsurance Corporation was acquired by General Reinsurance Corporation in 1996.
Crusader also has additional catastrophe reinsurance from various other
reinsurance companies of which 77% of the participating reinsurers are admitted
in California. These reinsurance agreements help protect Crusader 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's retention increased from $150,000 to
$250,000 per risk on July 1, 1997. 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.
38
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - REINSURANCE (continued)
- --------------------------------
The effect of reinsurance on premiums written, premiums earned, and incurred
losses is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Premiums written:
Direct business $42,273,990 $31,847,113 $37,631,357
Reinsurance assumed - - -
Reinsurance ceded $(6,687,944) $(3,701,766) $(4,437,446)
Premiums earned:
Direct business $42,721,222 $29,373,374 $37,554,830
Reinsurance assumed - - -
Reinsurance ceded $(6,394,328) $(3,307,085) $(6,077,403)
Incurred losses and loss adjustment expenses:
Direct $26,415,825 $16,777,799 $18,936,455
Assumed - - -
Ceded $(7,127,262) $(1,976,065) $(1,626,906)
</TABLE>
NOTE 14 - CONTINGENCIES
- -----------------------
The Company's federal income tax returns for the fiscal years ended March 31,
1990, through March 31, 1994, were examined by the Internal Revenue Service. The
primary issue of the examination was 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. The issue is currently under appeal. Management
estimated and accrued $300,000 of interest expense in the fiscal year ended
March 31, 1995, related to this temporary difference. No change was made to this
accrual as of December 31, 1997.
NOTE 15 - 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 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:
Fiscal year ended December 31, 1997 $545,906
Fiscal year ended December 31, 1996 (nine months) $364,226
Fiscal year ended March 31, 1996 $484,715
39
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - STATUTORY CAPITAL AND SURPLUS
- ---------------------------------------
Crusader is required to file an annual statement with insurance regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities ("statutory"). Statutory accounting practices differ in certain
respects from generally accepted accounting principles. The more significant of
these differences for statutory accounting are (a) premium income is taken into
earnings over the periods covered by the policies, whereas the related
acquisition and commission costs are expensed when incurred; (b) all bonds are
recorded at amortized cost, regardless of trading activity; (c) non-admitted
assets are charged directly against surplus; (d) loss reserves and unearned
premium reserves are stated net of reinsurance; and (e) federal income taxes are
recorded when payable. Additionally, the cash flow presentation is not
consistent with generally accepted accounting principles and a reconciliation
from net income to funds provided by operations is not presented.
Crusader Insurance Company statutory capital and surplus is as follows:
As of December 31, 1997 $30,899,761
As of December 31, 1996 $25,748,757
Crusader Insurance Company statutory net income is as follows:
Fiscal year ended December 31, 1997 $6,658,352
Fiscal year ended December 31, 1996 (nine months) $3,526,515
Fiscal year ended March 31, 1996 $4,639,537
The Company believes that Crusader's statutory capital and surplus was
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 in
any twelve (12) month period without prior approval of the California Department
of Insurance. Presently, without prior approval, Crusader may pay a dividend in
any twelve (12) month period to its parent equal to the greater of (a) 10% of
Crusader's statutory policyholders' surplus or (b) Crusader's statutory net
income for the preceding calendar year. The maximum dividend which may be made
without prior approval as of December 31, 1997, is $6,658,352. After taking into
account the dividends paid by Crusader to its parent in 1997 of $1,500,000, the
remaining dividend which may be made without prior approval as of December 31,
1997, is $5,158,352.
NOTE 17 - 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 December 31, 1997, of the 373,948 options outstanding,
275,046 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, 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
Options granted -
Options exercised (114,651) $3.4375 to $3.85
Options terminated (4,650) $3.50
-------
Outstanding at December 31, 1996 560,699 $3.4375 to $4.375
Options granted -
Options exercised (186,751) $3.4375 to $3.50
Options terminated -
-------
Outstanding at December 31, 1997 373,948 $3.4375 to $4.375
=======
40
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - TAXES ON INCOME
- -------------------------
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Current provision:
Federal $2,900,181 $2,133,283 $2,574,766
State 184,020 159,364 164,931
--------- --------- ---------
Total federal and state 3,084,201 2,292,647 2,739,697
Deferred 250,470 (88,170) (278,887)
--------- --------- ---------
Provision for taxes $3,334,671 $2,204,477 $2,460,810
========= ========= =========
</TABLE>
The income tax provision reflected in the consolidated statements of operations
is less than the expected federal income tax on income as shown in the table
below.
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Computed tax expense at 34% $3,736,270 $2,508,855 $2,858,819
Tax effect of:
Tax exempt income (522,813) (393,009) (502,513)
Dividend exclusion (9,905) (9,335) (1,191)
Other (54,971) (56,354) (49,847)
State income tax expense 186,090 154,320 155,542
--------- --------- ---------
Tax per financial statement $3,334,671 $2,204,477 $2,460,810
========= ========= =========
</TABLE>
The components of the net federal income tax asset included in the financial
statements as required by the assets and liability method are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Discount on loss reserves $1,900,368 $2,121,793
Unearned premiums 1,285,242 1,335,620
Other 118,668 121,284
--------- ---------
Total deferred tax assets $3,304,278 $3,578,697
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs $1,661,474 $1,684,049
Discount on salvage & subrogation 7,376 8,749
Unrealized gain on investments 629,563 382,244
--------- ---------
Total deferred tax liabilities $2,298,413 $2,075,042
--------- ---------
Net deferred tax assets $1,005,865 $1,503,655
========= =========
</TABLE>
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. The amount of the
deferred tax assets considered realizable could be reduced in the near term if
estimates of future taxable income during the carry forward period are reduced.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in the states of Arizona, California, Nevada, Oregon, and
Washington. The premium tax is in lieu of state franchise taxes; thus, the above
provision for state taxes does not include the premium tax.
41
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - EARNINGS PER SHARE
- ----------------------------
A reconciliation of the numerator and denominator used in the basic and diluted
earnings per share calculation is presented below:
<TABLE>
<CAPTION>
Twelve
Fiscal Year Months Fiscal Year Fiscal Year
Ended Ended Ended Ended
December 31 December 31 December 31 March 31
1997 1996 1996 1996
---- ---- ---- ----
(Unaudited) (Nine Months)
<S> <C> <C> <C> <C>
Basic Earnings Per Share
- ------------------------
Net income numerator $7,654,362 $6,849,327 $5,174,510 $5,947,481
========= ========= ========= =========
Weighted average shares outstanding
denominator 6,132,096 5,967,667 5,970,977 5,957,670
========= ========= ========= =========
Per share amount $1.25 $1.15 $0.87 $1.00
Diluted Earnings Per Share
- --------------------------
Net income numerator $7,654,362 $6,849,327 $5,174,510 $5,947,481
========= ========= ========= =========
Weighted average shares outstanding 6,132,096 5,967,667 5,970,977 5,957,670
Effect of diluted securities 269,263 273,188 279,953 192,580
--------- --------- --------- ---------
Diluted shares outstanding denominator 6,401,359 6,240,855 6,250,930 6,150,250
========= ========= ========= =========
Per share amount $1.20 $1.10 $0.83 $0.97
</TABLE>
NOTE 20 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------
Summarized unaudited quarterly financial data for each of the calendar years
1997 and 1996 is set forth below:
<TABLE>
<CAPTION>
Comparable Period by Quarter Ended
----------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Calendar Year 1997
------------------
<S> <C> <C> <C> <C>
Total revenues $12,043,649 $12,100,854 $12,166,012 $11,980,206
Income before taxes 2,496,230 2,729,840 2,812,198 2,950,765
Net income 1,765,154 1,884,584 1,950,806 2,053,818
Earnings per share:
Basic $0.29 $0.31 $0.32 $0.33
Diluted $0.28 $0.30 $0.30 $0.32
Calendar Year 1996
------------------
Total revenues $10,995,615 $11,338,697 $11,784,899 $11,761,061
Income before taxes 2,397,090 2,394,096 2,517,121 2,467,770
Net income 1,674,817 1,674,094 1,748,741 1,751,675
Earnings per share:
Basic $0.28 $0.28 $0.29 $0.29
Diluted $0.27 $0.27 $0.28 $0.28
</TABLE>
42
<PAGE>
Item 9. Changes in and Disagreements with Accountants
- ------------------------------------------------------
on Accounting and Financial Disclosure
--------------------------------------
Change in accountants was previously reported.
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
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
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
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
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
43
<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 fiscal year ended December
31, 1997, are contained herein as listed in the index to consolidated
financial statements on page 22.
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
(*) Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
On Form 8-K dated August 27, 1997, with date of earliest event reported being
August 25, 1997, Registrant reported under Item 4, a change in Registrant's
Certifying Accountant. Item 4 of the Form 8-K was amended by Form 8-K/A dated
August 29, 1997.
44
<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: March 23, 1998
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, March 23, 1998
-----------------
Erwin Cheldin President and Chief
Executive Officer,
(Principal Executive Officer)
/s/ LESTER A. AARON Treasurer, Chief Financial March 23, 1998
-------------------
Lester A. Aaron Officer and Director
(Principal Accounting and
Principal Financial Officer)
/s/ CARY L. CHELDIN Executive Vice President March 23, 1998
-------------------
Cary L. Cheldin and Director
/s/ GEORGE C. GILPATRICK Vice President, Secretary March 23, 1998
------------------------
George C. Gilpatrick and Director
/s/ ROGER H. PLATTEN Vice President and Director March 23, 1998
--------------------
Roger H. Platten
</TABLE>
45
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Unico American Corporation
Under date of March 20, 1998, we reported on the consolidated balance sheet of
Unico American Corporation and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 1997, as contained in the annual report on
the Form 10-K for the year 1997. In connection with our audit 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 audit.
In our opinion, such financial statement 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.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 20, 1998
46
<PAGE>
INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULES
Board of Directors
Unico American Corporation
Under date of March 20, 1997, we reported on the consolidated balance sheets of
Unico American Corporation and subsidiaries as of December 31, 1996, and March
31, 1996 and the related consolidated statement of operations, shareholders'
equity and cash flows for the nine months ended December 31, 1996 and the year
ended March 31, 1996, as contained in the annual report of Form 10-K for the
nine months ended December 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.
GETZ, KRYCLER & JAKUBOVITS
Sherman Oaks, California
March 20, 1997
47
<PAGE>
SCHEDULE I
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<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 securities $15,480,258 $15,793,525 $15,793,525
State and municipal tax exempt bonds 38,361,279 39,183,372 39,183,372
Industrial and miscellaneous bonds 31,765,034 32,488,693 32,488,693
Certificates of deposit 500,000 500,000 500,000
----------- ---------- ----------
Total fixed maturities 86,106,571 87,965,590 87,965,590
Equity securities 230,460 223,100 223,100
Short-term investments 6,137,495 6,137,495 6,137,495
---------- ---------- ----------
Total investments $92,474,526 $94,326,185 $94,326,185
========== ========== ==========
</TABLE>
48
<PAGE>
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------
December 31 December 31
1997 1996
---- ----
ASSETS
------
<S> <C> <C>
Short-term investments $ 1,200,000 $ -
Cash 19,939 29,325
Accrued investment income 5,343 -
Investments in subsidiaries 51,736,149 44,167,914
Property and equipment (net of accumulated depreciation) 203,709 229,972
Other assets 105,604 103,251
---------- ----------
Total Assets $53,270,744 $44,530,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Accrued expenses and other liabilities $1,089,713 $1,114,647
Payables to subsidiaries (net of receivables) 7,103,254 6,060,396
Income taxes payable 16,993 -
--------- ---------
Total Liabilities $8,209,960 $7,175,043
--------- ---------
STOCKHOLDERS' EQUITY
- --------------------
Common stock $ 2,838,058 $ 2,836,422
Net unrealized investment gains 1,222,095 742,004
Retained earnings 41,000,631 33,776,993
---------- ----------
Total Stockholders' Equity $45,060,784 $37,355,419
---------- ----------
Total Liabilities and Stockholders' Equity $53,270,744 $44,530,462
========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
49
<PAGE>
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Twelve
Fiscal Year Months Fiscal Year Ended
Ended Ended ----------------------------
December 31 December 31 December 31 March 31
1997 1996 1996 1996
---- ---- ---- ----
(Unaudited) (Nine Months)
REVENUES
- --------
<S> <C> <C> <C> <C>
General and administrative expenses
allocated to subsidiaries $5,036,332 $4,977,656 $3,870,364 $5,237,708
Net investment income 150,292 92,846 82,569 12,422
Other income 9,401 12,130 7,414 12,138
--------- --------- --------- ---------
Total Revenue 5,196,025 5,082,632 3,960,347 5,262,268
EXPENSES
- --------
General and administrative expenses 5,109,898 5,033,280 3,937,137 5,246,708
--------- --------- --------- ---------
Income before equity in net income
of subsidiaries 86,127 49,352 23,210 15,560
Equity in net income of subsidiaries 7,568,235 6,799,975 5,151,300 5,931,921
--------- --------- --------- ---------
Net Income $7,654,362 $6,849,327 $5,174,510 $5,947,481
========= ========= ========= =========
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received cash dividends from Crusader of $1,500,000 in the fiscal year
ended December 31, 1997, $500,000 in the nine month fiscal year ended December
31, 1996, and $1,500,000 in the fiscal year ended March 31, 1996.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
50
<PAGE>
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
December 31 December 31 March 31
1997 1996 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $7,654,362 $5,174,510 $5,947,481
Adjustments to reconcile net income to net cash
from operations
Undistributed equity in net (income) of
subsidiaries (7,568,235) (5,151,300) (5,931,921)
Depreciation and amortization 104,029 83,488 142,306
Accrued expenses and other liabilities (7,941) 4,608 112,016
Accrued investment income (5,343) (2,500) -
Other assets (2,353) (21,390) (1,621)
------- ------ -------
Net cash provided from operations 174,519 87,416 268,261
------- ------ -------
Cash flows from investing activities
Increase in short-term investments (1,200,000) - -
Purchase of property and equipment (77,766) (34,841) (85,428)
---------- ------ ------
Net cash (used) by investing activities (1,277,766) (34,841) (85,428)
--------- ------ ------
Cash flows from financing activities
Proceeds from issuance of common stock 1,636 1,621 -
Dividends paid to stockholders (430,724) (418,087) (417,035)
Repayment of note payable - - (500,000)
Net change in payables and receivables
from subsidiaries 1,522,949 340,068 724,698
--------- ------- -------
Net cash (used) by financing activities 1,093,861 (76,398) (192,337)
--------- ------ -------
Net increase (decrease) in cash (9,386) (23,823) (9,504)
Cash at beginning of year 29,325 53,148 62,652
------ ------ ------
Cash at end of year $19,939 $29,325 $53,148
====== ====== ======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
51
<PAGE>
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future Benefits,
Deferred Benefits, Claims,
Policy Losses, Net Losses and
Acquisition and Loss Unearned Premium Investment Settlement
Cost Expenses Premiums Revenue Income Expenses
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1997
Property &
Casualty $4,886,684 $42,004,851 $21,673,009 $36,326,894 $4,855,580 $19,288,566
Fiscal Year Ended
December 31, 1996
(Nine Months)
Property &
Casualty $4,953,085 $39,740,865 $22,120,241 $26,066,289 $3,115,110 $14,801,734
Fiscal Year Ended
March 31, 1996
Property &
Casualty $4,333,708 $37,006,458 $19,646,502 $31,477,427 $3,708,891 $17,309,549
<CAPTION>
Amortization
of Deferred
Policy Other
Acquisition Operating Premium
Cost Costs Written
-----------------------------------------------
<S> <C> <C> <C>
Fiscal Year Ended
December 31, 1997
Property &
Casualty $10,562,191 $1,855,589 $35,586,046
Fiscal Year Ended
December 31, 1996
(Nine Months)
Property &
Casualty $6,887,173 $1,653,077 $28,145,347
Fiscal Year Ended
March 31, 1996
Property &
Casualty $8,569,395 $2,419,635 $33,193,911
</TABLE>
52
<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> <C>
Fiscal Year Ended
December 31, 1997
Property & Casualty $42,721,222 $6,394,328 - $36,326,894 -
Fiscal Year Ended
December 31, 1996
(Nine Months)
Property & Casualty $29,373,374 $3,307,085 - $26,066,289 -
Fiscal Year Ended
March 31, 1996
Property & Casualty $37,554,830 $6,077,403 - $31,477,427 -
</TABLE>
53
<PAGE>
SCHEDULE VI
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY
INSURANCE OPERATIONS
<TABLE>
<CAPTION>
Claims and
Reserves for Claim
Unpaid Discount Adjustment
Deferred Claims if Any, Expenses Incurred
Affiliation Policy and Claim Deducted Net Related to
with Acquisition Adjustment in Unearned Earned Investment (1) Current Year
Registrant Costs Expenses Column C Premiums Premiums Income (2) Prior Year
(A) (B) (C) (D) (E) (F) (G) (H)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Company &
Consolidated
Subsidiaries
Fiscal Year Ended
December 31, 1997 $4,886,684 $42,004,851 - $21,673,009 $36,326,894 $4,855,580 $23,564,325 (1)
$(4,275,759)(2)
December 31,1996 $4,953,085 $39,740,865 - $22,120,241 $26,066,289 $3,115,110 $16,251,499 (1)
(Nine Months) $(1,449,765)(2)
March 31,1996 $4,333,708 $37,006,458 - $19,646,502 $31,477,427 $3,708,891 $19,276,602 (1)
$(1,967,053)(2)
<CAPTION>
Amortization
of Deferred Paid Claims
Affiliation Policy and Claim
with Acquisition Adjustment Premiums
Registrant Costs Expenses Written
(A) (I) (J) (K)
-----------------------------------------------------------------
<S> <C> <C> <C>
Company &
Consolidated
Subsidiaries
Fiscal Year Ended
December 31, 1997 $10,562,191 $15,809,164 $35,586,046
December 31,1996 $6,887,173 $10,372,041 $28,145,347
(Nine Months)
March 31,1996 $8,569,395 $12,260,700 $33,193,911
</TABLE>
54
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<DEBT-HELD-FOR-SALE> 94,103,085
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 223,100
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 94,326,185
<CASH> 55,768
<RECOVER-REINSURE> 56,379
<DEFERRED-ACQUISITION> 4,886,684
<TOTAL-ASSETS> 112,942,384
<POLICY-LOSSES> 42,004,851
<UNEARNED-PREMIUMS> 21,673,009
<POLICY-OTHER> 2,091,180
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,838,058
<OTHER-SE> 42,222,726
<TOTAL-LIABILITY-AND-EQUITY> 112,942,384
36,326,894
<INVESTMENT-INCOME> 4,996,261
<INVESTMENT-GAINS> 25,093
<OTHER-INCOME> 6,942,473
<BENEFITS> 19,288,566
<UNDERWRITING-AMORTIZATION> 10,562,191
<UNDERWRITING-OTHER> 7,450,931
<INCOME-PRETAX> 10,989,033
<INCOME-TAX> 3,334,671
<INCOME-CONTINUING> 7,654,362
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,654,362
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.20
<RESERVE-OPEN> 37,111,846
<PROVISION-CURRENT> 23,564,325
<PROVISION-PRIOR> (4,275,759)
<PAYMENTS-CURRENT> 4,812,268
<PAYMENTS-PRIOR> 10,996,896
<RESERVE-CLOSE> 40,591,248
<CUMULATIVE-DEFICIENCY> 4,273,477
</TABLE>
