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 July 1, 2000 to September 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
5,749,899
Number of shares of common stock outstanding as of November 9, 2000
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
---- ----
<S> <C> <C>
ASSETS
------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: September 30,
2000 $97,202,470; December 31, 1999 $99,142,275) $96,319,837 $97,594,134
Equity securities at market (cost: September 30, 2000
$164,170; December 31, 1999 $164,170) 46,080 66,000
Short-term investments, at cost 2,929,137 5,968,173
---------- -----------
Total Investments 99,295,054 103,628,307
Cash 182,777 105,439
Accrued investment income 1,688,298 2,060,471
Premiums and notes receivable, net 5,774,923 5,496,890
Reinsurance recoverable:
Paid losses and loss adjustment expenses 671,908 19,850
Unpaid losses and loss adjustment expenses 5,198,935 3,964,324
Prepaid reinsurance premiums 32,417 32,438
Deferred policy acquisition costs 4,509,685 4,338,217
Property and equipment (net of accumulated depreciation) 124,869 148,667
Deferred income taxes 1,240,662 1,541,242
Other assets 426,317 642,911
----------- -----------
Total Assets $119,145,845 $121,978,756
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
Unpaid losses and loss adjustment expenses $39,591,195 $41,592,489
Unearned premiums 17,141,688 16,583,143
Advance premium and premium deposits 2,374,874 2,571,190
Reinsurance payable 5,734,571 4,644,621
Accrued expenses and other liabilities 2,364,565 1,746,516
---------- ----------
Total Liabilities $67,206,893 $67,137,959
---------- ----------
STOCKHOLDERS' EQUITY
---------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,733,565 at September 30, 2000, and 6,304,953 at December 31, 1999 $ 2,817,591 $ 3,098,389
Accumulated other comprehensive (loss) (660,477) (1,086,565)
Retained earnings 49,781,838 52,828,973
---------- ----------
Total Stockholders' Equity $51,938,952 $54,840,797
---------- ----------
Total Liabilities and Stockholders' Equity $119,145,845 $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 Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
--------
Insurance Company Revenues
Premium earned $8,226,204 $8,606,924 $24,436,649 $26,256,814
Premium ceded 2,136,835 2,265,845 5,090,947 5,482,002
--------- --------- ---------- ----------
Net premium earned 6,089,369 6,341,079 19,345,702 20,774,812
Investment income 1,451,540 1,439,237 4,294,899 4,257,017
Net realized investment gains - 5,633 - 64,793
Other income 34,286 256 43,934 628
--------- --------- ---------- ----------
Total Insurance Company Revenues 7,575,195 7,786,205 23,684,535 25,097,250
Other Revenues from Insurance Operations
Gross commissions and fees 1,383,049 1,462,969 4,267,109 4,235,672
Investment income 78,874 63,434 274,229 202,644
Net realized investment gains 2,508 - 2,508 -
Finance charges and late fees earned 209,423 229,492 625,455 690,359
Other income 4,402 1,528 9,021 10,167
--------- --------- ---------- ----------
Total Revenues 9,253,451 9,543,628 28,862,857 30,236,092
--------- --------- ---------- ----------
EXPENSES
--------
Losses and loss adjustment expenses 5,054,246 3,972,201 14,744,673 11,450,352
Policy acquisition costs 2,098,883 2,062,228 6,205,450 6,336,141
Salaries and employee benefits 1,067,731 1,097,561 3,247,594 3,235,432
Commissions to agents/brokers 330,569 327,904 987,364 968,551
Other operating expenses 575,917 610,538 1,914,886 1,889,414
--------- --------- ---------- ----------
Total Expenses 9,127,346 8,070,432 27,099,967 23,879,890
--------- --------- ---------- ----------
Income Before Taxes 126,105 1,473,196 1,762,890 6,356,202
Income Tax Provision (29,325) 415,554 360,379 1,831,670
-------- --------- --------- ---------
Net Income $ 155,430 $1,057,642 $1,402,511 $4,524,532
======= ========= ========= =========
PER SHARE DATA
--------------
Basic Shares Outstanding 5,923,682 6,304,953 6,166,220 6,255,774
Basic Earnings Per Share $0.03 $0.17 $0.23 $0.72
Diluted Shares Outstanding 5,972,337 6,367,661 6,211,027 6,359,146
Diluted Earnings Per Share $0.03 $0.17 $0.23 $0.71
</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 Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
----- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $155,430 $1,057,642 $1,402,511 $4,524,532
Other changes in comprehensive income net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period 615,760 (373,582) 426,088 (2,332,372)
Less: reclassification adjustment for
(losses) included in net income - - - (20,097)
------- -------- --------- ---------
Comprehensive Income $771,190 $684,060 $1,828,599 $2,172,063
======= ======= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $1,402,511 $4,524,532
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 49,184 66,048
Bond amortization, net 412,056 524,756
Net realized (gain) on sale of securities (2,508) (64,793)
Changes in assets and liabilities:
Premium, notes and investment income receivable 94,140 62,017
Reinsurance recoverable (1,886,669) (1,427,342)
Prepaid reinsurance premiums 21 (13,264)
Deferred policy acquisitions costs (171,468) 172,516
Other assets 216,594 181,653
Reserve for unpaid losses and loss adjustment expenses (2,001,294) (2,540,438)
Unearned premium reserve 558,545 (790,097)
Funds held as security and advanced premiums (196,316) 121,270
Reinsurance payable 1,089,950 1,485,966
Accrued expenses and other liabilities 618,049 (46,217)
Income taxes current/deferred 81,080 265,292
------- ---------
Net Cash Provided from Operations 263,875 2,521,899
------- ---------
Investing Activities:
Purchase of fixed maturity investments (8,703,237) (11,342,604)
Proceeds from maturity of fixed maturity investments 10,201,450 7,839,250
Purchase of equity securities - cost - (3,758,378)
Proceeds from sale of equity securities - 4,162,504
Net decrease in short-term investments 3,071,080 1,885,470
Additions to property and equipment (25,386) (27,812)
--------- ---------
Net Cash Provided (Used) by Investing Activities 4,543,907 (1,241,570)
--------- ---------
Financing Activities:
Proceeds from issuance of common stock - 202,687
Repurchase of common stock (3,784,934) -
Dividends paid to shareholders (945,510) (1,576,239)
---------- ----------
Net Cash (Used) by Financing Activities (4,730,444) (1,373,552)
--------- ----------
Net increase (decrease) in cash 77,338 (93,223)
Cash at beginning of period 105,439 277,544
------- -------
Cash at End of Period $182,777 $184,321
======= =======
Supplemental Cash Flow Information Cash paid during the period for:
Interest $ - $1,492
Income taxes $210,025 $1,725,000
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 September 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
September 30, 2000, there were 132,500 options outstanding under this plan and
50,000 of these options 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 September 30, 2000 and 1999, and for the nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Net income numerator $155,430 $1,057,642 $1,402,511 $4,524,532
======= ========= ========= =========
Weighted average shares outstanding denominator 5,923,682 6,304,953 6,166,220 6,255,774
========= ========= ========= =========
Basic Earnings Per Share $0.03 $0.17 $0.23 $0.72
</TABLE>
6
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 3 - EARNINGS PER SHARE (continued)
--------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------- ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Diluted Earnings Per Share
--------------------------
Net income numerator $155,430 $1,057,642 $1,402,511 $4,524,532
======= ========= ========= =========
Weighted average shares outstanding 5,923,682 6,304,953 6,166,220 6,255,774
Effect of diluted securities 48,655 62,708 44,807 103,372
--------- -------- -------- ---------
Diluted shares outstanding denominator 5,972,337 6,367,661 6,211,027 6,359,146
========= ========= ========= =========
Diluted Earnings Per Share $0.03 $0.17 $0.23 $0.71
</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 nine months ended September 30, 2000,
82% of revenues for the three months and 83% of revenues for the nine months
ended September 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 Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
--------
Insurance company operation $7,575,195 $7,786,205 $23,684,535 25,097,250
Other insurance operations 4,198,046 4,230,042 12,635,953 12,750,287
Intersegment elimination (1) (2,519,790) (2,472,619) (7,457,631) (7,611,445)
--------- --------- --------- ---------
Total other insurance operations 1,678,256 1,757,423 5,178,322 5,138,842
--------- --------- --------- ---------
Total Revenues $9,253,451 $9,543,628 $28,862,857 $30,236,092
========= ========= ========== ==========
Income Before Income Taxes
---------------------------
Insurance company operation $(47,421) $1,299,567 $1,334,340 $6,029,732
Other insurance operations 173,526 173,629 428,550 326,470
------- --------- ---------- ---------
Total Income Before Income Taxes $126,105 $1,473,196 $1,762,890 $6,356,202
======= ========= ========= =========
September 30 December 31
2000 1999
---- ----
Assets
------
Insurance company operation $104,723,107 $103,450,995
Intersegment eliminations (2) (397,339) (479,933)
----------- -----------
Total insurance company operation 104,325,768 102,971,062
Other insurance operations 14,820,077 19,007,694
----------- -----------
Total Assets $119,145,845 $121,978,756
=========== ===========
(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>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 5 - Repurchase of Common Stock - Effect on Stockholders' Equity
--------------------------------------------------------------------
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. On August 8, 2000, the Board
of Directors authorized the repurchase of an additional 315,000 shares and on
September 6, 2000, the Board of Directors authorized the repurchase of another
315,000 shares of the common stock of the Company in the open market from time
to time. This brings the total shares of the Company's common stock authorized
to be repurchased and retired to 945,000 shares. As of September 30, 2000, the
Company had purchased and retired an aggregate of 571,400 shares of its common
stock at a cost of $3,784,934 of which $280,798 was allocated to capital and
$3,504,136 was allocated to retained earnings.
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 historically 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
September 30, 2000, the Company had cash and investments of $100,478,554 (at
amortized cost) of which $95,484,721 (95%) were investments of Crusader.
As of the quarter ended September 30, 2000, the Company had invested $97,202,470
(at amortized cost) or 97% 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 $97,202,470 (at
amortized cost) include $22,171,977 (23%) of pre-refunded state and municipal
tax-exempt bonds, $9,015,691 (9%) of U.S. treasury securities, $65,614,802 (68%)
of high-quality industrial and miscellaneous bonds, and $400,000 of certificates
of deposit. The tax-exempt interest income earned for the three and nine months
ended September 30, 2000, was $289,585 and $930,266, respectively. The
tax-exempt interest income earned for the three and nine months ended September
30, 1999, was $345,940 and $1,124,231, 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.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS (continued)
------------------------
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. On August 8, 2000, the Board
of Directors authorized the repurchase of an additional 315,000 shares and on
September 6, 2000, the Board of Directors authorized the repurchase of another
315,000 shares of the common stock of the Company in the open market from time
to time. This brings the total shares of the Company's common stock authorized
to be repurchased and retired to 945,000 shares. As of September 30, 2000, the
Company had purchased and retired an aggregate of 571,400 shares of its common
stock at a cost of $3,784,934. These shares were purchased using cash-on-hand
and the proceeds from the maturities of short-term investments.
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 $2,896,447, 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 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 alleged 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 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 $215,380 for the
three months and $608,195 for the nine months ended September 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 September 30, 2000,
financial statements for the sanctions described above; however, the Company has
accrued $30,000 that it estimates is the remaining amount it will incur in the
legal and administrative cost of the appeal.
City of Los Angeles Business License
------------------------------------
On September 13, 2000, the City of Los Angeles audited Unico (parent company
only) for the years 1997, 1998 and 1999 with respect to its Los Angeles business
license gross receipts tax. The audit resulted in an assessment of $97,681, plus
interest of $24,196, plus penalty of $39,072, for a total due of $160,949. The
assessment was based on the city's position that expenses of Unico's
subsidiaries that are paid by Unico (parent company) are subject to the gross
receipts business tax when those expenses are reimbursed by the subsidiaries to
Unico. The Company disagrees with the audit findings and has appealed the
matter. A hearing is expected to take place in December 2000. As of September
30, 2000, the Company has accrued $25,000 that it estimates will cover the cost
of the appeal and an estimate of the gross receipts tax, penalty, and interest
that may ultimately become due based on the information currently available.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS (continued)
-------------------------
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 that 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.
Although there are no material commitments for capital expenditures as of the
date of this report, the Company anticipates that it will spend approximately
$150,000 out of working capital on upgrading and replacing its computers over
the next twelve months.
b) Results of Operations:
--------------------------
All comparisons made in this discussion are comparing the three and nine months
ended September 30, 2000, to the three and nine months ended September 30, 1999,
unless otherwise indicated.
The Company's net income decreased $902,212 (85%) to $155,430 for the three
months and $3,122,021 (69%) to $1,402,511 for the nine months ended September
30, 2000, compared to net income of $1,057,642 for the three months and
$4,524,532 for the nine months ended September 30, 1999. Total revenues
decreased $290,177 (3%) for the three months and $1,373,235 (5%) for the nine
months ended September 30, 2000, when compared to the three and nine months
ended September 30, 1999.
PREMIUM EARNED before reinsurance decreased $380,720 (4%) to $8,226,204 for the
three months and decreased $1,820,165 (7%) to $24,436,649 for the nine months
ended September 30, 2000, compared to the three and nine months ended September
30, 1999. Intense price competition that has effected previous periods appears
to have bottomed out in the quarter ended September 30, 2000, as reflected by
the slight growth in written premium during the quarter as described below.
Although the Company attempts to be competitive on price, it believes that
maintaining adequate rates is a better business strategy than increasing premium
writings at inadequate rates.
PREMIUM CEDED decreased $129,010 (6%) to $2,136,835 for the three months and
$391,055 (7%) to $5,090,947, for the nine months ended September 30, 2000,
compared to the three and nine months ended September 30, 1999. Although earned
premium ceded decreased, the ratio of earned premium ceded to earned premium
remained approximately 26% for the comparable three month periods and
approximately 21% for the comparable nine 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 Nine Months
Ended Ended
September 30, 2000 September 30, 2000
------------------ ------------------
(Decrease) in ceded premium (excluding
provisionally rated premium ceded) $(113,073) $(401,082)
Increase (decrease) in provisionally
rated premium ceded ( 15,937) 10,027
------- -------
Net decrease in ceded premium $(129,010) $(391,055)
======= =======
PREMIUM WRITTEN before reinsurance increased $173,052 (2%) to $8,446,530 for the
three months and decreased $471,523 (2%) to $24,995,194 for the nine months
ended September 30, 2000, compared to the three and nine months ended September
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 September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
California $7,375,848 $7,139,128 $236,720 $21,500,890 $21,931,544 $(430,654)
Arizona 253,954 230,150 23,804 935,004 791,597 143,407
Washington 215,380 272,990 (57,610) 608,195 734,330 (126,135)
Ohio 205,523 156,710 48,813 510,860 403,759 107,101
Pennsylvania 116,978 92,189 24,789 464,455 502,655 (38,200)
Oregon 105,254 193,675 (88,421) 383,677 583,302 (199,625)
Montana 116,421 127,943 (11,522) 373,088 345,634 27,454
Texas 19,503 16,408 3,095 128,651 92,143 36,508
Nevada 7,801 9,278 (1,477) 47,925 18,730 29,195
Kentucky 16,503 35,007 (18,504) 24,682 63,023 (38,341)
Idaho 13,365 - 13,365 17,767 17,767
--------- ---------- ------- ---------- ---------- -------
Total $8,446,530 $8,273,478 $173,052 $24,995,194 $25,466,717 $(471,523)
========= ========= ======= ========== ========== =======
</TABLE>
NET INVESTMENT INCOME, excluding realized investment gains, increased $27,743
(2%) to $1,530,414 for the three months and $109,467 (2%) to $4,569,128 for the
nine months ended September 30, 2000, compared to investment income of
$1,502,671 for the three months and $4,459,661 for the nine months ended
September 30, 1999. Although average fixed maturity (at amortized value) and
short-term investments decreased 4%, 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 $22,171,977 (23% of fixed
maturities) at September 30, 2000, compared to $28,198,842 (28% of fixed
maturities) as of September 30,1999.
GROSS COMMISSION AND FEE INCOME decreased $79,920 (5%) to $1,383,049 for the
three months and increased $31,437 (1%) to $4,267,109 for the nine months ended
September 30, 2000, compared to the three and nine months ended September 30,
1999. The decrease for the three and increase for the nine months consisted of
the following:
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Workers' compensation program $ 8,002 $(28,689)
Other commission and fee income 7,361 32,216
Daily automobile rental insurance
program (9,213) 49,008
Service fee income (12,876) (14,433)
Health and life insurance program (73,194) (6,665)
------ -----
Increase (decrease) in commission
and fee income $(79,920) $31,437
====== ======
The decrease in gross commission and fee income from the health and life
insurance program for the three months ended September 30, 2000, compared to the
three months ended September 30, 1999, was primarily due to the recognition of a
$95,000 bonus commission in the three month ended September 30, 1999. Excluding
the effect of this bonus commission, total commission and fee income would have
increased $15,080 (1%) for the three months and $126,437 (3%) for the nine
months when compared to the comparable periods of the prior year.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 83% of net premium earned for the three
and 76% of net premium earned for the nine months ended September 30, 2000,
compared to 63% for the three months and 55% for the nine months ended September
30, 1999. This increase was primarily due to an increase in prior year losses
(adverse development) of approximately $1,096,000 in the three months and
$2,170,000 in the nine months ended September 30, 2000, compared to a reduction
in prior period losses (favorable development) of approximately $149,000 in the
three months and approximately $2,053,000 in the nine months ended September 30,
1999.
Although the methodology used by the Company in determining case and IBNR
reserves during the three and nine months ended September 30, 2000, is
consistent with prior years, the Company has not reduced its IBNR reserves as it
did in previous years due to uncertainty resulting from various settlements
and/or verdicts in excess of case reserves which occurred during 1999 and the
three and nine months ended September 30, 2000.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS (continued)
-------------------------
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that 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 34% of net premium earned for the three months and 32%
for the nine months ended September 30, 2000, compared to 33% of net premium
earned for the three months and 30% of net premium earned for the nine months
ended September 30, 1999.
SALARIES AND EMPLOYEE BENEFITS decreased $29,830 (3%) to $1,067,731 for the
three months and increased $12,162 (0%) to $3,247,594 for the nine months ended
September 30, 2000, compared to salary and employee benefits of $1,097,561 for
the three months and $3,235,432 for the nine months ended September 30, 1999.
COMMISSIONS TO AGENTS/BROKERS increased $2,665 (1%) to $330,569 for the three
months and increased $18,813 (2%) to $987,364 for the nine months ended
September 30, 2000, compared to the three and nine months ended September 30,
1999.
OTHER OPERATING EXPENSES decreased $34,621 (6%) for the three months and
increased $25,472 (1%) for the nine months ended September 30, 2000, compared to
the three and nine months ended September 30, 1999.
INCOME TAX PROVISION provided a benefit of $29,325, (23%) of income before taxes
in the three months and decreased to 20% of income before taxes for the nine
months ended September 30, 2000, compared to 28% of income before taxes in the
three months and 29% in the nine months ended September 30, 1999. This change
was primarily due both to the decrease in taxable income in the current three
month period and to tax-exempt interest income which comprised 195% of income
before taxes in the three months and 45% in the nine months ended September 30,
2000, compared to 20% in the three months and 15% in the nine months ended
September 30, 1999.
EARNINGS PER SHARE were effected by the reduction in the weighted average shares
outstanding for the three month period from 6,304,953 to 5,923,682 and for the
nine month period from 6,255,774 to 6,166,220 primarily as a result of the
Company's repurchase of its outstanding common stock which is described under
"Liquidity and Capital Resources."
The effect of inflation on net income of the Company during the three and nine
months ended September 30, 2000, and the three and nine months ended September
30, 1999, was not significant.
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," "appears," "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 continuation of intense price
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, the outcome of the state of Washington
proceedings, the outcome of the appeal of the City of Los Angeles business
license assessment, and the Company's ability to expand geographically.
12
<PAGE>
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>
September 30 December 31 Increase
2000 1999 (Decrease)
---- ---- --------
<S> <C> <C> <C>
Fixed maturity bonds (at amortized value) $96,802,470 $98,942,275 $(2,139,805)
Short-term cash investments (at cost) 2,929,137 5,968,173 (3,039,036)
Equity securities (at cost) 164,170 164,170 -
Certificates of deposit (over 1 year, at cost) 400,000 200,000 200,000
----------- ----------- ---------
Total invested assets $100,295,777 $105,274,618 $(4,978,841)
=========== =========== ==========
</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 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: November 10, 2000 By: /s/ Erwin Cheldin
-------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: November 10, 2000 By: /s/ Lester A. Aaron
---------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
13
