SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period from April 1, 1999 to June 30, 1999 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Ace of 1934
For the transition period from __________to__________
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
No Change
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
6,304,953
Number of shares of common stock outstanding as of August 10, 1999
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
---- ----
ASSETS
------
Investments
Available for sale:
<S> <C> <C>
Fixed maturities, at market value (amortized cost: June 30,
1999 $97,727,132; December 31, 1998 $96,358,812) $97,802,573 $99,472,720
Equity securities at market (cost: June 30, 1999
$164,170; December 31, 1998 $503,503) 118,500 481,500
Short-term investments, at cost 7,447,939 6,573,862
----------- -----------
Total Investments 105,369,012 106,528,082
Cash 99,006 277,544
Accrued investment income 2,006,990 2,022,197
Premiums and notes receivable, net 5,925,318 5,922,716
Reinsurance recoverable:
Paid losses and loss adjustment expenses 150,154 146,205
Unpaid losses and loss adjustment expenses 2,344,516 1,139,713
Prepaid reinsurance premiums 26,740 19,452
Deferred policy acquisition costs 4,537,635 4,665,772
Property and equipment (net of accumulated depreciation) 175,910 205,369
Deferred income taxes 843,704 208,976
Other assets 359,162 581,617
----------- -----------
Total Assets $121,838,147 $121,717,643
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $39,409,888 $41,513,945
Unearned premiums 17,680,242 18,136,895
Advance premium and premium deposits 2,486,461 2,329,356
Accrued expenses and other liabilities 6,402,784 5,418,459
Income taxes payable - 150,906
Dividends payable 1,576,238 -
---------- ----------
Total Liabilities $67,555,613 $67,549,561
---------- ----------
STOCKHOLDERS' EQUITY
- ---------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 6,304,953 at June 30, 1999, and 6,223,424 at
at December 31, 1998 $3,098,389 $2,895,702
Accumulated other comprehensive income 19,649 1,998,536
Retained earnings 51,164,496 49,273,844
---------- ----------
Total Stockholders' Equity $54,282,534 $54,168,082
---------- ----------
Total Liabilities and Stockholders' Equity $121,838,147 $121,717,643
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
<S> <C> <C> <C> <C>
Premium earned $8,741,566 $10,415,497 $17,649,890 $20,970,307
Premium ceded 1,799,361 1,600,108 3,216,157 2,771,136
--------- ------------ --------- -----------
Net premium earned 6,942,205 8,815,389 14,433,733 18,199,171
Net investment income 1,401,370 1,350,677 2,817,780 2,660,462
Net realized investment gains 59,785 16,230 59,160 16,230
Other income 372 105 372 1,063
--------- ---------- ---------- ----------
Total Insurance Company Revenues 8,403,732 10,182,401 17,311,045 20,876,926
Other Revenues from Insurance Operations
Gross commissions and fees 1,380,282 1,316,134 2,772,703 2,785,379
Investment income 74,361 54,520 139,210 103,613
Finance charges and late fees earned 227,977 254,765 460,867 517,918
Other income 5,515 3,601 8,639 5,129
---------- ---------- ---------- ----------
Total Revenues 10,091,867 11,811,421 20,692,464 24,288,965
---------- ---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 4,098,349 4,394,980 7,478,151 9,194,681
Policy acquisition costs 2,056,422 2,396,532 4,273,913 5,025,638
Salaries and employee benefits 1,022,049 992,116 2,137,871 2,041,737
Commissions to agents/brokers 322,645 235,611 640,647 480,538
Other operating expenses 619,024 501,145 1,278,876 1,129,871
--------- --------- ---------- ----------
Total Expenses 8,118,489 8,520,384 15,809,458 17,872,465
--------- --------- ---------- ----------
Income Before Taxes 1,973,378 3,291,037 4,883,006 6,416,500
Income Tax Provision 538,250 1,106,927 1,416,116 2,068,680
--------- --------- --------- ---------
Net Income $1,435,128 $2,184,110 $3,466,890 $4,347,820
========= ========= ========= =========
PER SHARE DATA
Basic Shares Outstanding 6,238,243 6,179,592 6,231,184 6,167,441
Basic Earnings Per Share $0.23 $0.35 $0.56 $0.70
Diluted Shares Outstanding 6,355,999 6,440,927 6,354,889 6,432,800
Diluted Earnings Per Share $0.23 $0.34 $0.55 $0.68
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,435,128 $2,184,110 $3,466,890 $4,347,820
Other changes in comprehensive income
net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period (967,094) 150,256 (1,958,790) 74,019
Less: reclassification adjustment for
gains (losses) included in net income (106,432) 10,712 (20,097) 10,712
------- --------- --------- ---------
Comprehensive Income $361,602 $2,345,078 $1,488,003 $4,432,551
======= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $3,466,890 $4,347,820
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 37,524 49,396
Bond amortization, net 366,442 324,269
Net realized (gain) on sale of securities (59,160) (16,230)
Changes in assets and liabilities
Premium, notes and investment income receivable 12,605 1,230,779
Reinsurance recoverable (1,208,752) (554,729)
Prepaid reinsurance premiums (7,288) 923,374
Deferred policy acquisitions costs 128,137 (192,580)
Other assets 222,454 315,144
Reserve for unpaid losses and loss adjustment expenses (2,104,057) 665,448
Unearned premium reserve (456,653) (1,417,053)
Funds held as security and advanced premiums 157,105 (70,724)
Accrued expenses and other liabilities 1,001,561 1,511,008
Income taxes current/deferred 280,379 570,933
--------- ---------
Net Cash Provided from Operations 1,837,187 7,686,855
--------- ---------
Investing Activities
Purchase of fixed maturity investments (8,036,900) (14,376,864)
Proceeds from maturity of fixed maturity investments 6,285,500 6,774,600
Purchase of equity securities - cost (3,243,078) -
Proceeds from sale of equity securities 3,641,571 246,690
Net (decrease) in short-term investments (857,440) (200,749)
Additions to property and equipment (8,065) (51,803)
--------- ---------
Net Cash (Used) by Investing Activities (2,218,412) (7,608,126)
--------- ---------
Financing Activities
Proceeds from issuance of common stock 202,687 48,894
------- ------
Net Cash Provided by Financing Activities 202,687 48,894
------- ------
Net increase (decrease) in cash (178,538) 127,623
Cash at beginning of period 277,544 55,768
------- --------
Cash at End of Period $99,006 $183,391
====== =======
Supplemental Cash Flow Information Cash paid during the period for:
Interest $1,341 $121
Income taxes $1,175,000 $1,448,336
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Nature of Business
- ------------------
Unico American Corporation ("Unico") is an insurance holding company. Unico and
its subsidiaries (the "Company"), all of which are wholly owned provides
primarily in California, property, casualty, health and life insurance, and
related premium financing.
Principles of Consolidation
- ---------------------------
The accompanying unaudited 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 accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. Quarterly financial statements should be read in conjunction with the
financial statements and related notes in the Company's 1998 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
Recently Issued Accounting Standards
- ------------------------------------
Statement of Position 98-1 (SOP 98-1), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, is effective for financial
statements beginning after December 15, 1998. SOP 98-1 requires that certain
costs of internally developed software be capitalized. There were no costs
incurred for software purchase or development in the three and six months ended
June 30, 1999, which were required to be capitalized.
Statement of Position 97-3 (SOP 97-3), Accounting by Insurance and Other
Enterprises for Insurance Related Assessments, is effective for financial
statements beginning after December 15, 1998. SOP 97-3 requires that liability
for insurance related assessments be recognized when an assessment is probable,
the event obligating the assessment has occurred and the assessment can be
reasonably estimated. The adoption has no material effect on the financial
statements.
NOTE 2 - INCENTIVE STOCK OPTION PLAN
- ------------------------------------
The Company's 1985 stock option plan provided for the grant of "incentive stock
options" to officers and key employees. The plan covers an aggregate of
1,500,000 shares of the Company's common stock (subject to adjustment in the
case of stock splits, reverse stock splits, stock dividends, etc.). As of June
30, 1999, 101,415 options were outstanding and all are currently exercisable.
During the quarter ended June 30, 1999, options on 91,831 shares of common stock
were exercised. There are no additional options available for future grant under
the 1985 plan.
6
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 3 - EARNINGS PER SHARE
- ---------------------------
The following table represents the reconciliation of the numerators and
denominators of the Company's basic earnings per share and diluted earnings per
share computations reported on the Consolidated Statements of Operations for the
three months ended June 30, 1999 and 1998, and for the six months ended June 30,
1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Basic Earnings Per Share
- ------------------------
<S> <C> <C> <C> <C>
Net income numerator $1,435,128 $2,184,110 $3,466,890 $4,347,820
========= ========= ========= =========
Weighted average shares outstanding
denominator 6,238,243 6,179,592 6,231,184 6,167,441
========= ========= ========= =========
Basic Earnings Per Share $0.23 $0.35 $0.56 $0.70
Diluted Earnings Per Share
- --------------------------
Net income numerator $1,435,128 $2,184,110 $3,466,890 $4,347,820
========= ========= ========= =========
Weighted average shares outstanding 6,238,243 6,179,592 6,231,184 6,167,441
Effect of diluted securities 117,756 261,335 123,705 265,359
--------- --------- --------- ---------
Diluted shares outstanding denominator 6,355,999 6,440,927 6,354,889 6,432,800
========= ========= ========= =========
Diluted Earnings Per Share $0.23 $0.34 $0.55 $0.68
</TABLE>
NOTE 4 - SEGMENT REPORTING
- --------------------------
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures
about Segments of an Enterprise and Related Information, became effective for
fiscal years effective after December 15, 1997. SFAS No. 131 establishes
standards for the way information about operating segments is reported in
financial statements. The Company has adopted SFAS No. 131 and has identified
its insurance company operation, Crusader Insurance Company ("Crusader"), as its
primary reporting segment. Revenues from this segment comprise 84% of
consolidated revenues. The Company's remaining operations constitute a variety
of specialty insurance services, each with unique characteristics and
individually insignificant to consolidated revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Revenues
- --------
<S> <C> <C> <C> <C>
Insurance company operation $8,403,732 $10,182,401 $17,311,045 $20,876,926
Other insurance operations 4,218,632 4,388,633 8,520,245 9,254,006
Intersegment elimination (1) (2,530,497 (2,759,613) (5,138,826) (5,841,967)
--------- ---------- ---------- ----------
Total other insurance operations 1,688,135 1,629,020 3,381,419 3,412,039
--------- --------- --------- ---------
Total Revenues $10,091,867 $11,811,421 $20,692,464 $24,288,965
========== ========== ========== ==========
Income (Loss) Before Income Taxes
- ---------------------------------
Insurance company operation $1,778,058 $2,841,095 $4,730,165 $5,609,637
Other insurance operations 195,320 449,942 152,841 806,863
---------- ---------- ---------- ----------
Total Income Before Income Taxes $1,973,378 $3,291,037 $4,883,006 $6,416,500
========= ========= ========= =========
</TABLE>
7
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 4 - SEGMENT REPORTING (continued)
- -------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Assets
- ------
<S> <C> <C> <C> <C>
Insurance company operation $102,617,974 $100,844,256 $102,617,974 $100,844,256
Intersegment eliminations (2) (411,462) (452,062) (411,462) (452,062)
----------- ----------- ----------- -----------
Total insurance company operation 102,206,512 100,392,194 102,206,512 100,392,194
Other insurance operations 19,631,635 18,739,840 19,631,635 18,739,840
---------- ---------- ---------- ----------
Total Assets $121,838,147 $119,132,034 $121,838,147 $119,132,034
=========== =========== =========== ===========
</TABLE>
(1) Intersegment revenue eliminations reflect commission paid by Crusader to
Unifax Insurance Systems, Inc., ("Unifax") a wholly owned subsidiary of the
Company.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
(a) Liquidity and Capital Resources:
- -------------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material 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. As of June 30,
1999, the Company had cash and investments of $105,438,247 (at amortized cost)
of which $97,677,727 (93%) were investments of Crusader.
As of the quarter ended June 30, 1999, the Company had invested $97,727,132 (at
amortized cost) or 93% of its invested assets in fixed maturity obligations. 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.
The Company's investments in fixed maturity obligations of $97,727,132 (at
amortized cost) include $28,573,601 (29%) of pre-refunded state and municipal
tax exempt bonds, $8,584,553 (9%) of U.S. treasury securities, $60,368,978 (62%)
of high-quality industrial and miscellaneous bonds, and $200,000 of certificates
of deposit. The tax exempt interest income earned for the three and six months
ended June 30, 1999, was $370,326 and $778,291, respectively. The tax exempt
interest income earned for the three and six months ended June 30, 1998, was
$419,206 and $865,953, respectively.
The balance of the Company's investments are in equity securities and
high-quality, short-term investments that include a U.S. treasury bill, bank
money market accounts, certificates of deposit, commercial paper and a
short-term treasury money market fund.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
The Company's investment policy limits investments in any one issuer to
$2,000,000. This limitation excludes bond premiums paid in excess of par value
and U.S. government or U.S. government guaranteed issues. The Company also
limits its holdings of equity securities to no greater than five percent of
stockholders' equity. 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 deposits are FDIC insured.
On March 12, 1999, the Board of Directors declared a twenty-five cents ($0.25)
per share cash dividend payable on July 15, 1999, to shareholders of record at
the close of business on July 1, 1999.
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 $3,030,640, statutory deposits of $2,725,000, and the
dividend restriction between Crusader and Unico 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.
State of Washington Regulatory Proceeding
- -----------------------------------------
In August 1999, the Insurance Commissioner of the State of Washington announced
that she would seek to suspend Crusader's Certificate of Authority to do
business in the State of Washington for a period of 120 days, impose a $307,000
fine, and seek repayment of policy service fees to Washington policyholders. The
Insurance Commissioner alleges that a service fee of $250 per policy, which was
charged by a Washington agent, is premium and subject to rate filing
requirements and premium taxes. The Company does not believe it has done
anything improper and intends to defend vigorously these charges and does not
believe that the outcome of this matter will have a material adverse effect on
its financial statements. The foregoing statement is a forward looking statement
which involves risks and uncertainties and actual results may differ if, in
fact, the Insurance Commissioner would prevail on all requests at the
administrative hearing and the administrative judge's decision were upheld in
the court proceedings following such a decision.
Year 2000
- ---------
The Company initiated a review of all computer programs to ensure that all
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Year 2000 issue is the result of computer programs being
written utilizing two digits rather than four digits to define a year. Any
computer programs which have date sensitive software utilizing a two digit year
would recognize a year of "00" as 1900 rather than 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar activities. The Company has assessed its Year
2000 issues and has made and tested the necessary modifications to its computer
system. The project to review and correct all programs was completed and tested
at December 31, 1998, prior to any anticipated impact on its operating systems.
The cost of the project has been charged to current operations as incurred and
did not have a material effect on the Company's results of operations or
financial position.
Crusader anticipates that any claims from its policyholders due to Year 2000
events will not be material. Any business interruption losses resulting from
Year 2000 events, which Crusader policyholders may incur, would not be covered
unless such events also caused physical damage to the insured's property, which
the Company believes is not a material exposure.
The Company does business with thousands of licensed agents and brokers and does
not anticipate it would be materially adversely affected if some of them are
temporarily unable to function due to Year 2000 problems. The Company has
requested and received information from its bank and reinsurers as to their Year
2000 readiness. Based on the information received to date, the Company believes
that it will not be materially adversely affected by its bank or its reinsurers.
Due to the nature of the Company's business, it is not dependent on any specific
suppliers and, therefore, does not expect to be adversely materially affected by
them.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
Due to the unusual nature of the problem and lack of historical experience with
Year 2000 issues, it is difficult to predict with certainty what will happen
after December 31, 1999. As stated above, the Company does not anticipate it
will be adversely materially affected by Year 2000 events from its internal
operations or from others with whom the Company directly or indirectly does
business. However, other events such as general public infrastructure failures
may adversely materially affect the Company's ability to operate during such
failures. The Company has no formal contingency plans for Year 2000.
There are no material commitments for capital expenditures as of the date of
this report.
(b) Results of Operations:
- ----------------------------
All comparisons made in this discussion are comparing the three and six months
ended June 30, 1999, to the three and six months ended June 30, 1998, unless
otherwise indicated.
The Company's net income decreased $748,982 (34%) to $1,435,128 for the three
months and $880,930 (20%) to $3,466,890 for the six months ended June 30, 1999,
compared to net income of $2,184,110 for the three months and $4,347,820 for the
six months ended June 30, 1998. Total revenues decreased $1,719,554 (15%) for
the three months and $3,596,501 (15%) for the six months ended June 30, 1999,
when compared to the three and six months ended June 30, 1998.
Premium earned before reinsurance decreased $1,673,931 (16%) to $8,741,566 for
the three months and $3,320,417 (16%) to $17,649,890 for the six months ended
June 30, 1999, compared to the three and six months ended June 30, 1998. In
1998, the Company changed its marketing strategy in the states of Washington and
Oregon by discontinuing marketing through an exclusive agent in those states and
commenced marketing directly to all retail agents and brokers. The Company
anticipates that the long-term results of this change will be increased revenues
with reduced acquisition expense and less dependence on any one large producer.
In addition, intense price competition adversely affected the premium written
and earned in all states in which the Company does business. Although the
Company attempts to be competitive on price, it believes that maintaining
adequate rates and a favorable loss ratio is a better business strategy than
increasing premium writings at inadequate rates. The Company cannot determine
how long this "soft market" condition will continue.
Premium ceded increased $199,253 (12%) to $1,799,361 for the three months and
$445,021 (16%) to $3,216,157 for the six months ended June 30, 1999, compared to
the three and six months ended June 30, 1998. Ceded premiums increased due to
higher than anticipated loss experience on the Company's provisionally rated
reinsurance contract. Premium ceded under this contract, which was canceled on a
run off basis effective December 31, 1997, is subject to adjustment based on the
amount of losses ceded, limited by a maximum percentage that can be charged by
the reinsurer. The change in premium ceded is as follows:
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
(Decrease) in ceded premium (excluding provisionally
rated premium ceded) $(170,194) $(354,899)
Increase in provisionally rated premium ceded 369,447 799,920
------- -------
Net increase in ceded premium $199,253 $445,021
======= =======
</TABLE>
Premium written before reinsurance decreased $772,169 (8%) to $8,467,342 for the
three months and decreased $2,360,015 (12%) to $17,193,239 for the six months
ended June 30, 1999, compared to the three and six months ended June 30, 1998.
The decrease in written premium in Oregon and Washington accounted for $204,819
(27%) of this decrease in the three months and $1,576,596 (67%) in the six
months ended June 30, 1999.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- -------------------------
Crusader's written premium by state is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 Increase 1999 1998 Increase
---- ---- (Decrease) ---- ---- (Decrease)
-------- --------
<S> <C> <C> <C> <C> <C> <C>
California $7,385,752 $8,158,226 $(772,474) $14,792,416 $16,045,754 $(1,253,338)
Arizona 290,930 323,565 (32,635) 561,447 682,255 (120,808)
Washington 197,462 279,548 (82,086) 461,340 1,451,880 (990,540)
Oregon 168,803 291,536 (122,733) 389,627 975,683 (586,056)
Montana 130,659 0 130,659 217,691 0 217,691
Pennsylvania 128,164 62,178 65,986 410,466 144,655 265,811
Ohio 126,479 115,059 11,420 247,049 228,455 18,594
Texas 16,889 0 16,889 75,735 0 75,735
Kentucky 13,893 5,578 8,315 28,016 5,578 22,438
Nevada 8,311 3,821 4,490 9,452 18,994 (9,542)
--------- --------- ------- ---------- ---------- ----------
Total $8,467,342 $9,239,511 $(772,169) $17,193,239 $19,553,254 $(2,360,015)
========= ========= ======== ========== ========== ==========
</TABLE>
Net investment income, excluding realized investment gains, increased $70,534
(5%) to $1,475,731 for the three months and $192,915 (7%) to $2,956,990 for the
six months ended June 30, 1999, compared to investment income of $1,405,197 for
the three months and $2,764,075 for the six months ended June 30, 1998. This
increase was primarily due to a 9% increase (at amortized cost) in invested
assets.
Gross commission and fee income increased $64,148 (5%) to $1,380,282 for the
three months and decreased $12,676 (0.5%) to $2,772,203 for the six months ended
June 30, 1999, compared to the three and six months ended June 30, 1998. The
increase for the three months and decrease for the six months consisted of the
following:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
Health and life insurance program $127,770 $232,151
Daily automobile rental insurance program 8,404 21,272
Commercial automobile insurance program (599) 4,144
Workers' compensation program (13,063) (99,154)
Service fee income (58,364) (171,089)
------ -------
Net increase (decrease) in commission and fee income $64,148 $(12,676)
====== ========
</TABLE>
Health and life insurance commission and fee income increased primarily as a
result of an increase in the sales of small business group accounts for CIGNA
and an increase in the number of small business group accounts administered by
the Company for CIGNA.
The decrease in service fee income is primarily related to the decrease in the
number of policies written by Unifax for Crusader.
Losses and loss adjustment expenses were 59% of net premium earned for the three
months and 52% for the six months ended June 30, 1999, compared to 50% of net
premium earned for the three months and 51% for the six months ended June 30,
1998. The increased loss ratio in the quarter ended June 30, 1999, occurred due
to reduced favorable development of prior period reserves on Crusader's
commercial multiple peril line of business. The reduced favorable development
resulted from higher prior period losses incurred in the quarter ended June 30,
1999, than had been experienced in the comparable 1998 period.
Policy acquisition costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs which are related to the production of
Crusader insurance policies. These costs include both Crusader expenses and
allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay
Crusader a ceding commission, which is primarily a reimbursement of the
acquisition cost related to the ceded premium. Policy acquisition costs, net of
ceding commission, are deferred and amortized as the related premiums are
earned. These costs were 30% of net premium earned for the three months and 30%
of net premium earned for the six months ended June 30, 1999, compared to 27% of
net premium earned for the three months and 28% of net premium earned for six
months ended June 30, 1998.
11
<PAGE>
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- -------------------------
Salaries and employee benefits increased $29,933 (3%) to $1,022,049 for the
three months and increased $96,134 (5%) to $2,137,871 for the six months ended
June 30, 1999, compared to salary and employee benefits of $992,116 for the
three months and $2,041,737 for the six months ended June 30, 1998.
Commissions to agents/brokers increased $87,034 (37%) to $322,645 for the three
months and increased $160,109 (33%) to $640,647 for the six months ended June
30, 1999, compared to the three and six months ended June 30, 1998. The increase
is primarily due to related increases in revenue in the health and life program
and the daily automobile rental program.
Other operating expenses increased $117,879 (24%) for the three months and
$149,005 (13%) for the six months ended June 30, 1999, compared to the three and
six months ended June 30, 1998. This increase was primarily due to the fact that
the June 30, 1998, quarter included a $255,000 interest expense credit resulting
from a settlement of federal income tax issues which were under appeal. This
amount was offset in that quarter by insurance department examination fees of
$87,477 which consisted primarily of cost related to Crusader's regular
tri-annual examination.
The effect of inflation on net income of the Company during the three and six
months ended June 30, 1999, and 1998 was not significant.
Forward Looking Statements
- --------------------------
Information contained in this discussion, other than historical information, are
considered "forward looking statements" and may be subject to change based on
various important factors and uncertainties. Some, but not all, of the factors
and uncertainties that may cause actual results to differ significantly from
those expected in any forward looking statements are disclosed in the Company's
1998 Form 10-K as filed with the Securities and Exchange Commission. Further,
the statements herein concerning the effects of the Company's stated expectation
as to the long-term results of marketing in the states of Washington and Oregon
directly to retail agents and brokers rather than through the Company's former
general agent are forward looking statements which involve risks and
uncertainties that could cause actual results to differ materially from these
forward looking statements. With respect to the statement concerning the effects
of the change in marketing in the states of Washington and Oregon, factors which
would cause the actual results to differ materially include the Company's
ability to effectively market to retail agents and brokers in those states, the
willingness of the retail agents and brokers in those states to deal directly
with the Company, and general economic conditions and competition in those
states.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk.
The Company's invested assets consist of the following:
<TABLE>
<CAPTION>
June 30 December 31 Increase
1999 1998 (Decrease)
---- ---- --------
<S> <C> <C> <C>
Fixed maturity bonds (at amortized value) $97,527,132 $96,158,812 $1,368,320
Short-term cash investments (at cost) 7,447,939 6,573,862 874,077
Equity securities (at cost) 164,170 503,503 (339,333)
Certificates of deposit (over 1 year, at cost) 200,000 200,000 -
----------- ----------- ---------
Total invested assets $105,339,241 $103,436,177 $1,903,064
=========== =========== =========
</TABLE>
There have been no material changes in the composition of the Company's invested
assets or market risk exposures since the end of the preceding fiscal year end.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
(c) During the quarter ended June 30, 1999, the Company issued an aggregate of
91,831 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 three employees
of the Company. Of these shares, 58,497 shares were issued in exchange for
$202,656.19 in cash and 33,334 shares were issued in exchange for 11,247
shares of common stock and $6.81 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 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
(a) On June 4, 1999, the Company held its Annual Meeting of Stockholders.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934; there was no solicitation in opposition to
nominees of the Board of Directors as listed in the Proxy Statement and all
such nominees were elected.
(c) At the meeting, the following persons were elected by the vote indicated)
as directors to serve until the next meeting of shareholders and until
their successors are duly elected and qualified. There were 24,100
abstentions and no broker non-votes.
Name For Against or Withheld
- ---- --------- -------------------
Erwin Cheldin 5,314,362 25,236
Lester A. Aaron 5,313,562 25,236
Cary L. Cheldin 5,305,708 25,236
George C. Gilpatrick 5,305,708 25,236
Roger H. Platten 5,305,358 25,236
David A. Lewis 5,311,596 25,236
David E. Driscoll 5,311,596 25,236
At the meeting, the proposal adopting the 1999 Omnibus Stock Plan covering
500,000 shares of the Company's common stock was approved. There were 3,979,074
votes for the plan, 612,553 votes against the plan, 18,860 abstentions, and
734,291 broker non-votes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
- -------------------------------------------------------
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto authorized.
UNICO AMERICAN CORPORATION
Date: August 11, 1999 By: /s/ERWIN CHELDIN
----------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: August 11, 1999 By: /s/LESTER A. AARON
------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 105,250,512
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 118,500
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 105,369,012
<CASH> 99,006
<RECOVER-REINSURE> 2,494,670
<DEFERRED-ACQUISITION> 4,537,635
<TOTAL-ASSETS> 121,838,147
<POLICY-LOSSES> 39,409,888
<UNEARNED-PREMIUMS> 17,680,242
<POLICY-OTHER> 2,486,461
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,098,389
<OTHER-SE> 51,184,144
<TOTAL-LIABILITY-AND-EQUITY> 121,838,147
14,433,733
<INVESTMENT-INCOME> 2,956,990
<INVESTMENT-GAINS> 59,160
<OTHER-INCOME> 3,242,581
<BENEFITS> 7,478,151
<UNDERWRITING-AMORTIZATION> 4,273,913
<UNDERWRITING-OTHER> 4,057,394
<INCOME-PRETAX> 4,883,006
<INCOME-TAX> 1,416,116
<INCOME-CONTINUING> 3,466,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,466,890
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.55
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
