SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period from April 1, 2000 to June 30, 2000
Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
No Change
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
6,000,365
Number of shares of common stock outstanding as of August 8, 2000
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
2000 1999
---- ----
<S> <C> <C>
ASSETS
------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: June 30,
2000 $96,945,700; December 31, 1999 $99,142,275) $95,123,678 $97,594,134
Equity securities at market (cost: June 30, 2000
$164,170; December 31, 1999 $164,170) 52,500 66,000
Short-term investments, at cost 5,224,915 5,968,173
----------- -----------
Total Investments 100,401,093 103,628,307
Cash 265,247 105,439
Accrued investment income 1,935,058 2,060,471
Premiums and notes receivable, net 5,667,908 5,496,890
Reinsurance recoverable:
Paid losses and loss adjustment expenses 43,541 19,850
Unpaid losses and loss adjustment expenses 4,989,221 3,964,324
Prepaid reinsurance premiums 43,235 32,438
Deferred policy acquisition costs 4,488,023 4,338,217
Property and equipment (net of accumulated depreciation) 123,731 148,667
Deferred income taxes 1,532,379 1,541,242
Other assets 415,907 642,911
----------- -----------
Total Assets $119,905,343 $121,978,756
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
Unpaid losses and loss adjustment expenses $39,666,236 $41,592,489
Unearned premiums 16,921,362 16,583,143
Advance premium and premium deposits 2,520,493 2,571,190
Accrued expenses and other liabilities 6,354,718 6,391,137
---------- ----------
Total Liabilities $65,462,809 $67,137,959
---------- ----------
STOCKHOLDERS' EQUITY
---------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 6,224,565 at June 30, 2000, and 6,304,953 at December 31, 1999 $ 2,588,462 $ 3,098,389
Accumulated other comprehensive (loss) (1,276,237) (1,086,565)
Retained earnings 53,130,309 52,828,973
---------- ----------
Total Stockholders' Equity $54,442,534 $54,840,797
---------- ----------
Total Liabilities and Stockholders' Equity $119,905,343 $121,978,756
=========== ===========
</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
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
--------
Insurance Company Revenues
Premium earned $8,093,893 $8,741,566 $16,210,445 $17,649,890
Premium ceded 1,614,606 1,799,361 2,954,112 3,216,157
--------- --------- ---------- ----------
Net premium earned 6,479,287 6,942,205 13,256,333 14,433,733
Net investment income 1,411,869 1,401,370 2,843,359 2,817,780
Net realized investment gains - 59,785 - 59,160
Other income 4,613 372 9,648 372
--------- --------- ---------- ----------
Total Insurance Company Revenues 7,895,769 8,403,732 16,109,340 17,311,045
Other Revenues from Insurance Operations
Gross commissions and fees 1,469,708 1,380,282 2,884,060 2,772,703
Investment income 102,688 74,361 195,355 139,210
Finance charges and late fees earned 208,898 227,977 416,032 460,867
Other income 3,057 5,515 4,619 8,639
--------- ---------- ---------- ----------
Total Revenues 9,680,120 10,091,867 19,609,406 20,692,464
--------- ---------- ---------- ----------
EXPENSES
--------
Losses and loss adjustment expenses 4,739,888 4,098,349 9,690,427 7,478,151
Policy acquisition costs 2,003,216 2,056,422 4,106,567 4,273,913
Salaries and employee benefits 1,098,302 1,022,049 2,179,863 2,137,871
Commissions to agents/brokers 323,667 322,645 656,795 640,647
Other operating expenses 706,577 619,024 1,338,969 1,278,876
--------- --------- ---------- ----------
Total Expenses 8,871,650 8,118,489 17,972,621 15,809,458
--------- --------- ---------- ----------
Income Before Taxes 808,470 1,973,378 1,636,785 4,883,006
Income Tax Provision 196,398 538,250 389,704 1,416,116
------- --------- ---------- ---------
Net Income $ 612,072 $1,435,128 $1,247,081 $3,466,890
======= ========= ========= =========
PER SHARE DATA
--------------
Basic Shares Outstanding 6,270,012 6,238,243 6,287,488 6,231,184
Basic Earnings Per Share $0.10 $0.23 $0.20 $0.56
Diluted Shares Outstanding 6,311,950 6,355,999 6,330,371 6,354,889
Diluted Earnings Per Share $0.10 $0.23 $0.20 $0.55
</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
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $612,072 $1,435,128 $1,247,081 $3,466,890
Other changes in comprehensive income net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period 19,064 (967,094) (189,672) (1,958,790)
Less: reclassification adjustment for
gains (losses) included in net income - (106,432) - (20,097)
------- ------- --------- ---------
Comprehensive Income $631,136 $361,602 $1,057,409 $1,488,003
======= ======= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $1,247,081 $3,466,890
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 31,473 37,524
Bond amortization, net 289,649 366,442
Net realized (gain) on sale of securities - (59,160)
Changes in assets and liabilities
Premium, notes and investment income receivable (45,605) 12,605
Reinsurance recoverable (1,048,588) (1,208,752)
Prepaid reinsurance premiums (10,797) (7,288)
Deferred policy acquisitions costs (149,806) 128,137
Other assets 227,002 222,454
Reserve for unpaid losses and loss adjustment expenses (1,926,253) (2,104,057)
Unearned premium reserve 338,219 (456,653)
Funds held as security and advanced premiums (50,697) 157,105
Accrued expenses and other liabilities (36,419) 1,001,561
Income taxes current/deferred 106,573 280,379
--------- ---------
Net Cash Provided (Used) from Operations (1,028,168) 1,837,187
--------- ---------
Investing Activities
Purchase of fixed maturity investments (4,469,270) (8,036,900)
Proceeds from maturity of fixed maturity investments 6,355,600 6,285,500
Purchase of equity securities - cost - (3,243,078)
Proceeds from sale of equity securities - 3,641,571
Net (increase) decrease in short-term investments 763,854 (857,440)
Additions to property and equipment (6,537) (8,065)
--------- ---------
Net Cash Provided (Used) by Investing Activities 2,643,647 (2,218,412)
--------- ---------
Financing Activities
Proceeds from issuance of common stock - 202,687
Repurchase of common stock (509,926) -
Dividends paid to shareholders (945,745) -
---------- -------
Net Cash Provided (Used) by Financing Activities (1,455,671) 202,687
--------- -------
Net increase (decrease) in cash 159,808 (178,538)
Cash at beginning of period 105,439 277,544
------- -------
Cash at End of Period $265,247 $99,006
======= ======
Supplemental Cash Flow Information
Cash paid during the period for:
Interest - $1,341
Income taxes $100,025 $1,175,000
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
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, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. Quarterly financial statements should be read in conjunction with the
financial statements and related notes in the Company's 1999 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
NOTE 2 - INCENTIVE STOCK PLANS
------------------------------
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, 2000, there
were 101,415 options outstanding and all are currently exercisable. There are no
additional options available for future grant under the 1985 plan.
The Company's 1999 Omnibus Stock Plan also provides, among other things, for the
grant of incentive options to officers and key employees. The plan covers an
aggregate of 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, 2000, there were 135,000 options outstanding under this plan. None of
the 135,000 options outstanding under the 1999 stock option plan are currently
exercisable.
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, 2000 and 1999, and for the six months ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Share
------------------------
Net income numerator $612,072 $1,435,128 $1,247,081 $3,466,890
======= ========= ========= =========
Weighted average shares outstanding denominator 6,270,012 6,238,243 6,287,488 6,231,184
========= ========= ========= =========
Basic Earnings Per Share $0.10 $0.23 $0.20 $0.56
</TABLE>
6
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 3 - EARNINGS PER SHARE (continued)
---------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Diluted Earnings Per Share
--------------------------
Net income numerator $612,072 $1,435,128 $1,247,081 $3,466,890
======= ========= ========= =========
Weighted average shares outstanding 6,270,012 6,238,243 6,287,488 6,231,184
Effect of diluted securities 41,938 117,756 42,883 123,705
--------- --------- --------- ---------
Diluted shares outstanding denominator 6,311,950 6,355,999 6,330,371 6,354,889
========= ========= ========= =========
Diluted Earnings Per Share $0.10 $0.23 $0.20 $0.55
</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 comprised 82% of
consolidated revenues for the three and six months ended June 30, 2000, 83% of
revenues for the three months ended and 84% of revenues for the six months ended
June 30,1999. 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
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
--------
Insurance company operation $7,895,769 $8,403,732 $16,109,340 $17,311,045
Other insurance operations 4,254,558 4,218,632 8,437,907 8,520,245
Intersegment elimination (1) (2,470,207) (2,530,497) (4,937,841) (5,138,826)
--------- --------- --------- ---------
Total other insurance operations 1,784,351 1,688,135 3,500,066 3,381,419
--------- --------- --------- ---------
Total Revenues $9,680,120 $10,091,867 $19,609,406 $20,692,464
========= ========== ========== ==========
Income Before Income Taxes
---------------------------
Insurance company operation $631,244 $1,778,058 $1,381,761 $4,730,165
Other insurance operations 177,226 195,320 255,024 152,841
------- --------- ---------- ----------
Total Income Before Income Taxes $808,470 $1,973,378 $1,636,785 $4,883,006
======= ========= ========= =========
Assets
------
Insurance company operation $103,136,569 $102,617,974
Intersegment eliminations (2) (459,126) (411,462)
------------ ----------
Total insurance company operation 102,677,443 102,206,512
Other insurance operations 17,227,900 19,631,635
------------ -----------
Total Assets $119,905,343 $121,838,147
=========== ===========
(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.
</TABLE>
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
(a) Liquidity and Capital Resources:
------------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material 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,
2000, the Company had cash and investments of $102,600,032 (at amortized cost)
of which $94,809,714 (92%) were investments of Crusader.
As of the quarter ended June 30, 2000, the Company had invested $96,945,700 (at
amortized cost) or 95% 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 $96,945,700 (at
amortized cost) include $25,104,748 (26%) of pre-refunded state and municipal
tax-exempt bonds, $9,927,952 (10%) of U.S. treasury securities, $61,613,000
(64%) of high-quality industrial and miscellaneous bonds, and $300,000 of
certificates of deposit. The tax-exempt interest income earned for the three and
six months ended June 30, 2000, was $308,286 and $640,681, respectively. The
tax-exempt interest income earned for the three and six months ended June 30,
1999, was $370,326 and $778,291, 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.
The Company's investment policy limits investments in any one company 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's
investment guidelines on equity securities limit investments in equity
securities to an aggregate maximum of $2,000,000. 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 May 19, 2000, the Company paid the fifteen-cent ($0.15) per share cash
dividend that was declared by the Board of Directors on March 1, 2000, to
shareholders of record at the close of business on April 28, 2000.
In April 2000, the Company announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
315,000 shares of the common stock of the Company. As of June 30, 2000, the
Company had purchased an aggregate of 80,400 shared of its common stock at a
cost of $509,926. These shares were purchased using cash-on-hand and the
proceeds from the maturities of short-term investments. On August 8, 2000, the
Board of Directors authorized the repurchase in the open market from time to
time of an additional 315,000 shares of the Company's common stock, bringing the
total authorized to 630,000 shares. On August 8, 2000, an aggregate of 304,600
shares had been repurchased at a cost of $1,950,404.
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 $3,028,551, 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.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS (continued)
--------------------------
State of Washington Regulatory Proceeding
-----------------------------------------
In August 1999 the Insurance Commissioner of the State of Washington announced
that she would seek to impose a $307,000 fine, seek repayment of policy service
fees to Washington policyholders including interest at the rate of 12% per annum
(estimated to be approximately $780,000 plus interest to November 5, 2000, of
$360,000), seek payment of all back premium taxes owed on the subject service
fees including appropriate penalties required for delinquent taxes (estimated to
be approximately $16,000 plus penalties), and seek to suspend Crusader's
Certificate of Authority to do business in the state of Washington for a period
of 120 days. The Insurance Commissioner alleges that a service fee of $250 per
policy, which was charged by a Washington agent after the Company became
admitted in the state of Washington, is premium and subject to rate filing
requirements and premium taxes. This service fee was first charged by the
Washington agent under his broker's license in 1992, when the Company began its
operation in Washington as a non-admitted insurer. The Company believes that the
nature of the service fee did not change in 1995 when the Company became
admitted in Washington, and believes that the service fee continued to be a
broker fee and is not subject to rate filing requirements or premium taxes.
Crusader commenced pursuit of its legal remedies, starting with a demand for an
administrative hearing. That administrative hearing ended on February 7, 2000.
On May 5, 2000, the administrative hearing officer, an employee of the
Washington Commissioner's Office, rendered her decision against the Company and
ordered that all of the sanctions previously stated be imposed. The order states
that the $307,000 fine be paid on or before August 5, 2000; that refunds to
policyholders be completed by November 5, 2000; that all back premium taxes on
the subject service fees be paid on or before May 5, 2001; and that Crusader's
Certificate of Authority to do business in the state of Washington be suspended
from May 20, 2000, through September 17, 2000. The Company and the Insurance
Commissioner have agreed to a stay of the administrative hearing officer's
decision pending the outcome of the Company's appeal in the superior court for
the state of Washington. Premium written in the state of Washington was $176,396
for the three months and $392,815 for the six months ended June 30, 2000. The
Company does not believe it has done anything improper and does not believe that
the outcome of this matter will have a materially adverse effect on its
financial statements. No accruals have been made in the June 30, 2000, financial
statements for the sanctions described above, however, the Company has accrued
$51,000 which it estimates it will incur in the legal and administrative cost of
the appeal.
Year 2000
---------
Subsequent to December 31, 1999, the Company has not experienced adverse effects
as a result of Year 2000 issues from either internal or external sources.
However, due to the unusual nature of the problem and lack of historical
experience with Year 2000 issues, it is difficult to predict with certainty if
there may be other computer or infrastructure problems which may occur and
affect the Company and its customers or suppliers. Due to the fact that the
Company has not experienced any adverse effects of Year 2000 issues through the
date of this report, the Company does not anticipate it will be adversely
materially affected by any future Year 2000 events from its internal operations
or from others with whom the Company directly or indirectly does business.
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, 2000, to the three and six months ended June 30, 1999, unless
otherwise indicated.
The Company's net income decreased $823,056 (57%) to $612,072 for the three
months and $2,219,809 (64%) to $1,247,081 for the six months ended June 30,
2000, compared to net income of $1,435,128 for the three months and $3,466,890
for the six months ended June 30, 1999. Total revenues decreased $411,747 (4%)
for the three months and $1,083,058 (5%) for the six months ended June 30, 2000,
when compared to the three and six months ended June 30, 1999.
PREMIUM EARNED before reinsurance decreased $647,673 (7%) to $8,093,893 for the
three months and decreased $1,439,445 (8%) to $16,210,445 for the six months
ended June 30, 2000, compared to the three and six months ended June 30, 1999.
Intense price competition continues to adversely affect the premium written and
earned in nearly all states that 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.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS (continued)
-------------------------
PREMIUM CEDED decreased $184,755 (10%) to $1,614,606 for the three months and
$262,045 (8%) to $2,954,112 for the six months ended June 30, 2000, compared to
the three and six months ended June 30, 1999. Although earned premium ceded
decreased, the ratio of earned premium ceded to earned premium remained
approximately 20% for the comparable three month periods and approximately 18%
for the comparable six month periods. Earned premium ceded consists of both
premium ceded under the Company's current reinsurance contracts and premium
ceded to the Company's provisionally rated reinsurance contract. Premium ceded
under the provisionally rated contract, which was canceled on a runoff 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 between the quarter and year-to-date
periods is as follows:
Three Months Six Months
Ended Ended
June 30, 2000 June 30, 2000
------------- -------------
(Decrease) in ceded premium (excluding
provisionally rated premium ceded) $(135,304) $(288,009)
Increase (decrease) in provisionally
rated premium ceded ( 49,451) 25,964
------- -------
Net decrease in ceded premium $(184,755) $(262,045)
======= =======
PREMIUM WRITTEN before reinsurance decreased $189,891 (2%) to $8,277,451 for the
three months and decreased $644,575 (4%) to $16,548,664 for the six months ended
June 30, 2000, compared to the three and six months ended June 30, 1999.
Crusader's written premium by state is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
California $7,073,621 $7,385,752 $(312,131) $14,125,042 $14,792,416 $(667,374)
Arizona 320,552 290,930 29,622 681,050 561,447 119,603
Washington 176,396 197,462 (21,066) 392,815 461,340 (68,525)
Pennsylvania 130,324 128,164 2,160 347,477 410,466 (62,989)
Ohio 189,191 126,479 62,712 305,337 247,049 58,288
Oregon 128,794 168,803 (40,009) 278,423 389,627 (111,204)
Montana 175,445 130,659 44,786 256,667 217,691 38,976
Texas 60,083 16,889 43,194 109,148 75,735 33,413
Nevada 17,551 8,311 9,240 40,124 9,452 30,672
Kentucky 1,092 13,893 (12,801) 8,179 28,016 (19,837)
Idaho 4,402 - 4,402 4,402 4,402
--------- --------- ------- ---------- ---------- -------
Total $8,277,451 $8,467,342 $(189,891) $16,548,664 $17,193,239 $(644,575)
========= ========= ======= ========== ========== =======
</TABLE>
NET INVESTMENT INCOME, excluding realized investment gains, increased $38,826
(3%) to $1,514,557 for the three months and $81,724 (3%) to $3,038,714 for the
six months ended June 30, 2000, compared to investment income of $1,475,731 for
the three months and $2,956,990 for the six months ended June 30, 1999. Although
average fixed maturity (at amortized value) and short-term investments decreased
less than one percent, the mix of the taxable and tax-exempt fixed maturity
investments changed. Tax-exempt securities, which generally carry a lower yield
than taxable securities, decreased to $25,104,748 (25% of fixed maturities) at
June 30, 2000, compared to $28,573,601 (29% of fixed maturities) as of June
30, 1999.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS (continued)
-------------------------
GROSS COMMISSION AND FEE INCOME increased $89,426 (6%) to $1,469,708 for the
three months and increased $111,357 (4%) to $2,884,060 for the six months ended
June 30, 2000, compared to the three and six months ended June 30, 1999. The
increase for the three and six months consisted of the following:
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------- -------------
Health and life insurance program $20,964 $66,528
Daily automobile rental insurance program 62,796 58,221
Other commission and fee income 17,810 24,856
Service fee income (5,936) (1,557)
Workers' compensation program (6,208) (36,691)
------ -------
Net increase in commission and fee income $89,426 $111,357
====== =======
LOSSES AND LOSS ADJUSTMENT EXPENSES were 73% of net premium earned for both the
three and six months ended June 30, 2000, compared to 59% for the three months
and 52% for the six months ended June 30, 1999. This increase was primarily due
to an increase in reserves for losses of prior years of approximately $528,000
(adverse development) in the three months and $1,031,000 (adverse development)
in the six months ended June 30, 2000, compared to a reduction in reserves for
losses of prior years of approximately $373,000 (favorable development) in the
three months and a reduction in reserves for losses of prior years of
approximately $1,855,000 (favorable development) in the six months ended June
30, 1999.
Although the methodology used by the Company in determining case and IBNR
reserves during the six months ended June 30, 2000, is consistent with prior
years, the Company is not reflecting favorable development as it did in previous
years due to uncertainty resulting from various settlements and/or verdicts in
excess of reserves which occurred during 1999 and the three and six months ended
June 30, 2000.
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 31% of net premium earned for both the three months and
six months ended June 30, 2000, compared to 30% of net premium earned for both
the three months and six months ended June 30, 1999.
SALARIES AND EMPLOYEE BENEFITS increased $76,253 (7%) to $1,098,302 for the
three months and increased $41,992 (2%) to $2,179,863 for the six months ended
June 30, 2000, compared to salary and employee benefits of $1,022,049 for the
three months and $2,137,871 for the six months ended June 30, 1999.
COMMISSIONS TO AGENTS/BROKERS increased $1,022 (0%) to $323,667 for the three
months and increased $16,148 (3%) to $656,795 for the six months ended June 30,
2000, compared to the three and six months ended June 30, 1999.
OTHER OPERATING EXPENSES increased $87,553 (14%) for the three months and
$60,093 (5%) for the six months ended June 30, 2000, compared to the three and
six months ended June 30, 1999. The increase was primarily due to legal expenses
related to the State of Washington regulatory proceedings.
INCOME TAX PROVISION decreased to 24% of income before taxes in the three and
six months ended June 30, 2000, compared to 27% of income before taxes in the
three months and 29% in the six months ended June 30, 1999. This change was
primarily due to tax-exempt interest income which comprised 38% of income before
taxes in the three months and 39% in the six months ended June 30, 2000,
compared to 19% in the three months and 16% in the six months ended June 30,
1999.
The effect of inflation on net income of the Company during the three and six
months ended June 30, 2000, and the three and six months ended June 30, 1999,
was not significant.
11
<PAGE>
Forward Looking Statements
--------------------------
Certain statements contained herein, including the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are not historical facts are forward looking. These
statements, which may be identified by forward-looking words or phrases such as
"anticipate," "believe," "expect," "intend," "may," "should," and "would,"
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 premium rate adequacy relating to
competition or regulation, actual versus estimated claim experience, regulatory
changes or developments, unforeseen calamities, general market conditions
(including the continuation of the "soft market" condition referred to under
Results of Operations), the Company's ability to introduce new profitable
products, the outcome of the state of Washington proceedings, and the Company's
ability to expand geographically.
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
2000 1999 (Decrease)
---- ---- --------
<S> <C> <C> <C>
Fixed maturity bonds (at amortized value) $96,645,700 $98,942,275 $(2,296,575)
Short-term cash investments (at cost) 5,224,915 5,968,173 (743,258)
Equity securities (at cost) 164,170 164,170 -
Certificates of deposit (over 1 year, at cost) 300,000 200,000 100,000
------- ----------- ----------
Total invested assets $102,334,785 $105,274,618 $(2,939,833)
=========== =========== ==========
</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.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
--------------------------------------------------------
(a) On June 1, 2000, 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 annual meeting of shareholders and until
their successors are duly elected and qualified. There were 27,193
abstentions and no broker non-votes.
Name For Against or Withheld
---- --- -------------------
Erwin Cheldin 5,628,577 27,193
Lester A. Aaron 5,625,677 27,193
Cary L. Cheldin 5,615,611 27,193
George C. Gilpatrick 5,628,577 27,193
Roger H. Platten 5,628,577 27,193
David A. Lewis 5,627,577 27,193
David E. Driscoll 5,624,165 27,193
12
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto authorized.
UNICO AMERICAN CORPORATION
Date: August 11, 2000 By: /s/ ERWIN CHELDIN
------------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: August 11, 2000 By: /s/ LESTER A. AARON
--------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
