10-Q 1 0001.txt FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 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 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ----------------------------- UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30 December 31 2000 1999 ---- ---- 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 =========== ===========
See notes to unaudited consolidated financial statements. 2 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ---- ---- ---- ---- 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
See notes to unaudited consolidated financial statements. 3 UNICO AMERICAN CORPORATION AND SUBSIDIARIES STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ---- ---- ---- ---- 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 ======= ======= ========= =========
See notes to unaudited consolidated financial statements. 4 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999 ---- ---- 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
See notes to unaudited consolidated financial statements. 5 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:
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ---- ---- ---- ---- 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
6 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 NOTE 3 - EARNINGS PER SHARE (continued) ---------------------------------------
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ---- ---- ---- ---- 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
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.
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2000 1999 2000 1999 ---- ---- ---- ---- 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.
7 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 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 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:
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ Increase Increase 2000 1999 (Decrease) 2000 1999 (Decrease) ---- ---- -------- ---- ---- -------- 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) ========= ========= ======= ========== ========== =======
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 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 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:
June 30 December 31 Increase 2000 1999 (Decrease) ---- ---- -------- 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) =========== =========== ==========
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 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)