-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MR8CoLhn2NppHoIh28Yfc3GyfQcZsWyWGXZB4T6zUCfjjwbIX3XPgRB1RV5EIwgS LuCuCt1g01aHFPhDOspMqg== 0000100716-01-000002.txt : 20010409 0000100716-01-000002.hdr.sgml : 20010409 ACCESSION NUMBER: 0000100716-01-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNICO AMERICAN CORP CENTRAL INDEX KEY: 0000100716 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 952583928 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-03978 FILM NUMBER: 1589678 BUSINESS ADDRESS: STREET 1: 23251 MULHOLLAND DR CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 8185919800 MAIL ADDRESS: STREET 1: 23251 MULHOLLAND DRIVE CITY: WOODLAND HILLS STATE: CA ZIP: 91364 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSAL COVERAGE CORP DATE OF NAME CHANGE: 19730823 10-K 1 0001.txt 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the year ended December 31, 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) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy of information statements incorporated by reference as Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of Registrant's voting stock held by non-affiliates as of March 19, 2001, was $17,248,974 (based on the closing sales price on such date, as reported by the Wall Street Journal). 5,626,919 Number of shares of common stock outstanding as of March 19, 2001 Portions of the definitive proxy statement which Registrant intends to file pursuant to Regulation 14(A) by a date no later than 120 days after December 31, 2000, to be used in connection with the annual meeting of shareholders, are incorporated herein by reference into Part III hereof. If such definitive proxy statement is not filed in the 120 day period, the information called for by Part III will be filed as an amendment to this Form 10-K not later than the end of the 120 day period. 1 PART I Item 1. Business - ----------------- Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, health and life insurance through its agency subsidiaries; and provides insurance premium financing, claim administration services, and membership association services through its other subsidiaries. Unico American Corporation is referred to herein as the "Company" or "Unico" and such references include both the corporation and its subsidiaries, all of which are wholly owned, unless otherwise indicated. Unico was incorporated under the laws of Nevada in 1969. Descriptions of the Company's operations in the following paragraphs are categorized between the Company's major segment, its insurance company operation, and all other revenues from insurance operations. The insurance company operation is conducted through Crusader Insurance Company ("Crusader"), Unico's property and casualty insurance company. Insurance company revenues and other revenues from insurance operations for the years ended December 31, 2000, and December 31, 1999, are as follows:
Year ended December 31 ---------------------- 2000 1999 ------------------------ ------------------------ Percent Percent of of Total Total Total Company Total Company Revenues Revenues Revenues Revenues -------- -------- -------- -------- Insurance Company Revenues $31,572,070 82.3% $33,888,077 83.2% Other Revenues from Insurance Operations - ---------------------------------------- Health and life insurance program commission income 2,625,193 6.9% 2,668,582 6.6% Service fee income 1,654,735 4.3% 1,677,223 4.1% Daily automobile rental insurance program Association operations membership and fee income 397,157 1.0% 396,958 1.0% Other commission and fee income 71,949 0.2% 49,241 0.1% Workers' compensation program commission income 44,818 0.1% 81,919 0.2% --------- ---- ------ ---- Total gross commission and fee income 5,605,493 14.6% 5,634,542 13.9% Insurance premium financing operation finance charges and late fees 837,902 2.2% 915,940 2.2% Non-insurance company investment income 338,492 0.9% 283,942 0.7% Other income 13,992 - 11,756 - --------- ----- --------- ----- Total Other Revenues from Insurance Operations 6,795,879 17.7% 6,846,180 16.8% --------- ----- --------- ----- Total Revenues $38,367,949 100.0% $40,734,257 100.0% ========== ====== ========== ======
INSURANCE COMPANY OPERATION --------------------------- General - ------- The insurance company operation is conducted through Crusader, which as of December 31, 2000, was licensed as an admitted insurance carrier in the states of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon and Washington. Crusader is a multiple line property and casualty insurance company which began transacting business on January 1, 1985. As of December 31, 2000, 97% of Crusader's business was commercial multiple peril business package insurance policies. Commercial multiple peril policies provide a combination of property and liability coverage for businesses. Commercial property coverages insure against loss or damage to buildings, inventory and equipment from natural disasters, including hurricanes, windstorms, hail, water, explosions, severe winter weather and other events such as theft and vandalism, fires and storms and financial 2 loss due to business interruption resulting from covered property damage. Commercial liability coverages insure against third party liability from accidents occurring on the insured's premises or arising out of its operations, such as injuries sustained from products sold. In addition to commercial multiple peril policies, Crusader also writes separate policies to insure commercial property and commercial liability risks on a mono-line basis. Crusader's business is produced by Unifax Insurance Systems, Inc., ("Unifax") its sister corporation. Unifax has substantial experience with these classes of business. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected in the above table. Crusader is licensed in all property and casualty and disability lines by the California Department of Insurance. Reinsurance - ----------- A reinsurance transaction occurs when an insurance company transfers ("cedes") a portion of its exposure on business written by it to a reinsurer which assumes that risk for a premium ("ceded premium"). Reinsurance does not legally discharge the Company from primary liability under its policies. If the reinsurer fails to meet its obligations the Company must nonetheless pay its policy obligations. In 2000, Crusader had its primary reinsurance agreements with Partners Reinsurance Company of the U.S., a California admitted reinsurer. In 1999, Crusader had its primary reinsurance agreements with General Reinsurance Corporation, a California admitted reinsurer. These reinsurance agreements help protect Crusader against liabilities in excess of certain retentions, including major or catastrophic losses that may occur from any one or more of the property and/or casualty risks which Crusader insures. Crusader also has additional catastrophe reinsurance from various other reinsurance companies of which 90% of the premium is ceded to participating catastrophe reinsurers that are admitted in California. The aggregate amount of earned premium ceded to the reinsurers was $6,843,931 for the fiscal year ended December 31, 2000, and $6,583,752 for the fiscal year ended December 31, 1999. On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per risk. Concurrently, Crusader maintained catastrophe and clash covers (subject to a maximum occurrence and annual aggregate) to help protect the Company from one loss occurrence affecting multiple policies. Beginning January 1, 1998, an annual aggregate deductible of $750,000 commenced on losses ceded to its reinsurance treaty covering losses between $250,000 and $500,000. Beginning January 1, 2000, an annual aggregate deductible of $500,000 commenced on losses ceded to its reinsurance treaty covering losses between $250,000 and $500,000. Prior to January 1, 1998, National Reinsurance Corporation charged a provisional rate on exposures up to $500,000 that was subject to adjustment and was based on the amount of losses ceded, limited by a maximum percentage that could be charged. That provisional rated treaty was cancelled on a runoff basis and replaced by a flat rated treaty on January 1, 1998. On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader which includes a reimbursement of the cost of acquiring the portion of the premium which is ceded. Crusader does not currently assume any reinsurance. The Company intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The unpaid losses ceded to the reinsurer are recorded as an asset on the balance sheet. Unpaid Losses and Loss Adjustment Expenses - ------------------------------------------ Crusader maintains reserves for losses and loss adjustment expenses with respect to both reported and unreported losses. Crusader establishes reserves for reported losses based on historical experience, upon case-by-case evaluation of facts surrounding each known loss, and the related policy provisions. The amount of reserves for unreported losses is estimated by analysis of historical and statistical information. Historical data includes the 16 years that Crusader has been in operation and the data from its general agent developed with other insurance companies prior to 1985. The ultimate liability of Crusader may be greater or less than estimated reserves. All reserves are constantly monitored and adjusted when appropriate and reflected in the statement of operation in the period of adjustment. Reserves for loss adjustment expenses are estimated to cover the direct costs associated with specific claims as well as an estimate of administrative costs. The process of establishing loss reserves involves significant judgment. The following table shows the development of the unpaid losses and loss adjustment expenses for fiscal years 1991 through 2000. The top line of the table shows the estimated liability for unpaid losses and loss adjustment expenses recorded at the balance 3 sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for losses arising in the current and prior years that are unpaid at the balance sheet date, including the estimated losses that had been incurred but not reported to the Company. The table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known. The table reflects deficiencies in Crusader's net loss and loss adjustment expense reserves in 1994, 1995, 1998 and 1999. All other years reflect redundancies. These redundancies and deficiencies were due to Crusader's loss reserving practices used in determining its case reserves and incurred but not reported losses and loss adjustment expenses ("IBNR"). There is no assurance that redundancies or deficiencies will continue, and the Company believes a change in the way it computes reserves is not warranted. Crusader is a relatively small insurance company with 16 years of its own statistical experience. Crusader is constantly changing its product mix and exposures, including the types of businesses insured within its business package program as well as its lines of business. In addition, it is regularly expanding its territories both inside and outside of California. Considering the uncertainties from this changing environment as well as its limited internal data and history, the Company recognizes the difficulties in developing its own unique reserving statistics; therefore, it incorporates industry standards and averages into its estimates. The Company believes that its loss and loss adjustment expense reserves are properly stated. When subsequent loss and loss adjustment expense development justifies changes in reserving practices, the Company acts accordingly. When evaluating the information in the following table, it should be noted that each amount includes the effects of all changes in amounts of prior periods; therefore, the cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future deficiencies or redundancies based on this table. 4 CRUSADER INSURANCE COMPANY ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended March 31 ---------------------------------------------------------------------------------- 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- Reserve for Unpaid Losses and Loss Adjustment Expenses $22,918,442 $21,249,902 $20,824,039 $21,499,778 $27,633,304 $32,682,153 Paid Cumulative as of - --------------------- 1 Year Later 6,425,329 6,368,554 8,904,427 7,687,180 8,814,611 7,019,175 2 Years Later 10,946,318 9,583,885 10,824,024 13,453,833 13,502,224 15,292,415 3 Years Later 12,409,499 11,814,445 13,178,262 16,597,366 18,911,104 20,898,580 4 Years Later 12,951,511 12,667,989 14,462,911 19,073,442 22,631,450 24,932,922 5 Years Later 13,357,941 13,093,970 15,821,444 21,452,429 25,509,618 27,726,438 6 Years Later 13,459,123 13,385,215 16,936,140 23,900,335 27,844,199 7 Years Later 13,422,013 14,067,010 17,729,857 25,687,342 8 Years Later 13,630,780 14,479,299 18,628,698 9 Years Later 13,742,084 14,959,539 10 Years Later 13,884,825 Reserves Reestimated as of - -------------------------- 1 Year Later 20,153,906 18,562,116 19,599,695 20,912,743 25,666,251 31,232,388 2 Years Later 17,136,498 15,021,149 15,742,478 20,289,699 24,984,032 28,636,286 3 Years Later 14,788,046 13,802,009 15,463,566 21,217,766 24,575,023 28,074,691 4 Years Later 13,961,555 13,620,235 16,174,111 21,843,632 26,146,874 29,774,762 5 Years Later 13,833,745 13,790,786 16,888,885 23,767,472 28,687,265 32,382,991 6 Years Later 13,754,304 13,878,797 17,762,615 26,193,900 31,416,091 7 Years Later 13,529,769 14,374,473 18,692,720 28,528,744 8 Years Later 13,730,935 15,132,286 19,849,364 9 Years Later 13,951,604 15,387,869 10 Years Later 14,109,979 Cumulative Redundancy (Deficiency) $8,808,463 $5,862,033 $974,675 $(7,028,966) $(3,782,787) $299,162 ========= ========= ======= ========= ========= ======= Gross Liability for Unpaid Losses and Loss Adjustment Expenses $23,011,868 $26,294,199 $32,370,752 $37,006,458 Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (2,187,829) (4,794,421) (4,737,448) (4,324,305) --------- --------- --------- --------- Net Liability for Unpaid Losses and Loss Adjustment Expenses $20,824,039 $21,499,778 $27,633,304 $32,682,153 ========== ========== ========== ========== Gross Liability Reestimated $29,580,731 $41,085,058 $46,220,727 $49,148,344 Ceded Liability Reestimated (9,731,367) (12,556,314) (14,804,636) (16,765,353) --------- ---------- ---------- ---------- Net Liability Reestimated $19,849,364 $28,528,744 $31,416,091 $32,382,991 ========== ========== ========== ========== Gross Reserve Redundancy (Deficiency) $(6,568,863) $(14,790,859) $(13,849,975) $(12,141,886) ========= ========== ========== ==========
5 CRUSADER INSURANCE COMPANY ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended December 31 ---------------------------------------------------------------------- 1996 1997 1998 1999 2000 (Nine Months) ---- ---- ---- ---- ---- Reserve for Unpaid Losses and Loss Adjustment Expenses $37,111,846 $40,591,248 $40,374,232 $37,628,165 $34,546,026 Paid Cumulative as of - --------------------- 1 Year Later 10,996,896 12,677,646 15,393,167 18,745,224 2 Years Later 19,488,853 23,740,181 28,570,117 3 Years Later 25,552,756 30,217,031 4 Years Later 29,730,976 5 Years Later 6 Years Later 7 Years Later 8 Years Later 9 Years Later 10 Years Later Reserves Reestimated as of - -------------------------- 1 Year Later 32,838,369 35,730,603 39,132,945 41,898,796 2 Years Later 31,086,210 36,032,215 43,164,627 3 Years Later 32,347,788 38,844,953 4 Years Later 35,513,862 5 Years Later 6 Years Later 7 Years Later 8 Years Later 9 Years Later 10 Years Later Cumulative Redundancy (Deficiency) $1,597,984 $1,746,295 $(2,790,395) $(4,270,631) ========= ========= ========= ========= Gross Liability for Unpaid Losses and Loss Adjustment Expenses $39,740,865 $42,004,851 $41,513,945 $41,592,489 $45,217,369 Ceded Liability for Unpaid Losses amd Loss Adjustment Expenses (2,629,019) (1,413,603) (1,139,713) (3,964,324) (10,671,343) --------- --------- --------- --------- ---------- Net Liability for Unpaid Losses and Loss Adjustment Expenses $37,111,846 $40,591,248 $40,374,232 $37,628,165 $34,546,026 ========== ========== ========== ========== ========== Gross Liability Reestimated $55,561,269 $52,753,025 $56,558,396 $54,771,531 Ceded Liability Reestimated (20,047,407) (13,908,072) (13,393,769) (12,872,735) ---------- ----------- ---------- ---------- Net Liability Reestimated $35,513,862 $38,844,953 $43,164,627 $41,898,796 ========== ========== ========== ========== Gross Reserve Redundancy (Deficiency) $(15,820,404) $(10,748,174) $(15,044,451) $(13,179,042) ========== ========== ========== ==========
5 The following table provides an analysis of the roll forward of Crusader's losses and loss adjustment expenses, including a reconciliation of the ending balance sheet liability for the periods indicated:
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Reserve for unpaid losses and loss adjustment expenses at beginning of year - net of reinsurance $37,628,165 $40,374,232 $40,591,248 ---------- ---------- ---------- Incurred losses and loss adjustment expenses Provision for insured events of current year 17,406,284 18,268,710 22,454,229 Increase (decrease) in provision for events of prior years (*) 4,270,631 (1,241,520) (4,860,647) ---------- ---------- ---------- Total losses and loss adjustment expenses 21,676,915 17,027,190 17,593,582 ---------- ---------- ---------- Payments Losses and loss adjustment expenses attributable to insured events of the current year 6,013,830 4,380,090 5,132,952 Losses and loss adjustment expenses attributable to insured events of prior years 18,745,224 15,393,167 12,677,646 ---------- ---------- ---------- Total payments 24,759,054 19,773,257 17,810,598 ---------- ---------- ---------- Reserve for unpaid losses and loss adjustment expenses at end of year - net of reinsurance 34,546,026 37,628,165 40,374,232 Reinsurance recoverable on unpaid losses and loss adjustment expenses at end of year 10,671,343 3,964,324 1,139,713 ---------- --------- ---------- Reserve for unpaid losses and loss adjustment expenses at end of year per balance sheet, gross of reinsurance (**) $45,217,369 $41,592,489 $41,513,945 ========== ========== ==========
(*) See Management Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations for discussion of the increase in the provision for events of prior years for the years ended December 31, 2000 and December 31, 1999. The methodology used by the Company in determining 2000 case reserves and IBNR is consistent with prior years. (**) In accordance with Financial Accounting Standards Board Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, reinsurance recoverable on unpaid losses and loss adjustment expenses are reported for generally accepted accounting practices as assets rather than netted against the corresponding liability for such items on the balance sheet. Net Premium Written to Policyholders' Surplus Ratio - --------------------------------------------------- The following table shows, for the periods indicated, Crusader's statutory ratios of net premiums written to statutory policyholders' surplus. Due to certain GAAP adjustments for written premium on policies which do not become effective in the year written, statutory net premiums written differ slightly from those reported on the Company's financial statements. Since each property and casualty insurance company has different capital needs, an "acceptable" ratio of net premium written to policyholders' surplus for one company may be inapplicable to another. While there is no statutory requirement applicable to Crusader that establishes a permissible net premium to surplus ratio, guidelines established by the National Association of Insurance Commissioners provide that such ratio should generally be no greater than 3 to 1.
Twelve months ended December 31 ----------------------------------------------------------------------------------- Statutory: 2000 1999 1998 1997 1996 - ---------- ---- ---- ---- ---- ---- Net Premiums Written $26,406,565 $26,209,180 $34,203,908 $36,059,086 $36,652,776 Policyholders' Surplus $39,626,269 $40,952,456 $37,611,089 $30,899,761 $25,748,757 Ratio .7 to 1 .6 to 1 .9 to 1 1.2 to 1 1.4 to 1
Regulation - ---------- The insurance company operation is subject to regulation by the California Department of Insurance ("the insurance department") and by the department of insurance of other states in which Crusader is licensed. The insurance department has broad regulatory, supervisory, and administrative powers. These powers relate primarily to the 6 standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature and limitation of insurers' investments; the prior approval of rates, rules and forms; the issuance of securities by insurers; periodic examinations of the affairs of insurers; the annual and other reports required to be filed on the financial condition and results of operations of such insurers or for other purposes; and the establishment of reserves required to be maintained for unearned premiums, losses, and other purposes. The regulations and supervision by the insurance department are designed principally for the benefit of policyholders and not for the insurance company shareholders. The last examination of Crusader by the insurance department covered the three years ended December 31, 1997. The report of examination that was filed with the insurance department on December 23, 1998, reported no adjustments to Crusader's statutory financial statements. In December 1993, the National Association of Insurance Commissioners ("NAIC") adopted a Risk-Based Capital ("RBC") Model Law for property and casualty companies. The RBC Model Law is intended to provide standards for calculating a variable regulatory capital requirement related to a company's current operations and its risk exposures (asset risk, underwriting risk, credit risk and off-balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for regulators that establishes uniform capital levels and specific authority levels for regulatory intervention when an insurer falls below minimum capital levels. The RBC Model Law specifies four distinct action levels at which a regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company's RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. At December 31, 2000, Crusader's adjusted capital was well in excess of the required capital levels. NAIC'S Statutory Accounting Initiative - -------------------------------------- The NAIC's project to codify accounting practices was approved by the NAIC in March 1998. The approval included a provision for commissioners' discretion in determining appropriate statutory accounting for insurers in their states. Consequently, prescribed and permitted accounting practices may continue to differ from state to state. Codification became effective on January 1, 2001. The implementation of codification resulted in an increase in statutory surplus of $1,720,694. The Company is unable to predict how insurance rating agencies will interpret or react to any such changes. No assurance can be given that future legislative or regulatory changes resulting from such activities will not adversely affect the Company and its subsidiaries. California Insurance Guarantee Association - ------------------------------------------ In 1969, the California Insurance Guarantee Association ("CIGA") was created pursuant to California law to provide for payment of claims for which insolvent insurers are liable but which cannot be paid out of such insurers' assets. Crusader is subject to assessment by CIGA for its pro-rata share of such claims, based on premiums written in the particular line in the year preceding the assessment by insurers writing that line of insurance in California. Such assessments are based upon estimates of losses incurred in liquidating an insolvent insurer. In any particular year, Crusader cannot be assessed an amount greater than 1% of its premiums written in the preceding year. California Insurance Code Sections 1063.5 and 1063.14 allow Crusader to recoup assessments by surcharging policyholders. No assessment was made by CIGA for the 2000 or 1999 calendar years. Holding Company Act - ------------------- Crusader is subject to regulation by the insurance department pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company Act, the insurance department may examine the affairs of Crusader at any time. Certain transactions defined to be of an "extraordinary" type may not be effected without the prior approval of the insurance department. Such transactions include, but are not limited to, sales, purchases, exchanges, loans and extensions of credit, and investments made within the immediately preceding 12 months involving the lesser of 3% of admitted assets or 25% of policyholders' surplus, as of the preceding December 31. An extraordinary transaction also includes a dividend which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of 10% of the insurance company's policyholders' surplus as of the preceding December 31 or the insurance company's net income for the preceding calendar year. An insurance company is also required to notify the insurance department of any dividend after declaration, but prior to payment. 7 The Holding Company Act also provides that the acquisition or change of "control" of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the Insurance Commissioner. In general, a presumption of "control" arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or a person that controls a California insurance company, such as Crusader. A person seeking to acquire "control," directly or indirectly, of the Company must generally file with the Insurance Commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganization or mergers without prior regulatory approval. The Company is in compliance with the Holding Company Act. Rating - ------ Insurance companies are rated to provide both industry participants and insurance consumers with meaningful information on specific insurance companies. Higher ratings generally indicate financial stability and a strong ability to pay claims. These ratings are based upon factors relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security and may be revised or withdrawn at any time. Ratings focus primarily on the following factors: capital resources, financial strength, demonstrated management expertise in the insurance business, credit analysis, systems development, market segment position and growth opportunities, marketing, sales conduct practices, investment operations, minimum policyholders' surplus requirements and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy. Crusader is rated A (Excellent) by the A. M. Best Company. OTHER INSURANCE OPERATIONS -------------------------- General Agency Operations - ------------------------- Unifax primarily sells and services commercial multiple peril business insurance policies. In addition, it sells and services commercial liability, commercial property, workers' compensation, and commercial earthquake insurance policies. Unifax's workers' compensation, commercial earthquake, and some of the commercial liability insurance policies are sold primarily in California for non-affiliated insurers. All other policies are sold and serviced for Crusader by Unifax in Arizona, California, Idaho, Kentucky, Montana, Nevada, Ohio, Oregon, Pennsylvania, Texas, and Washington. Bedford Insurance Services, Inc., ("Bedford") sells and services daily automobile rental policies in most states for a non-affiliated insurer. As general agents, these subsidiaries market, rate, underwrite, inspect and issue policies, bill and collect insurance premiums, and maintain accounting and statistical data. Unifax is the exclusive general agent for Crusader. Unifax and Bedford are non-exclusive general agents for non-affiliated insurance companies. The Company's marketing is conducted through advertising to independent insurance agents and brokers. For its services, the general agent receives a commission (based on the premium written) from the insurance company and, in some cases, a service fee from the customer. These subsidiaries all hold licenses issued by the California Department of Insurance and other states where applicable. Insurance Claim Administration Operation - ---------------------------------------- The Company's subsidiary U.S. Risk Managers, Inc., ("U.S. Risk") provides insurance claim administration services to the non-affiliated property and casualty insurance companies that Bedford represents as a general agent. These services consist of receiving, reserving, adjusting, paying and accounting for insurance claims. U.S. Risk engages independent field examiners for all work performed outside the Company's office. U.S. Risk operates under a license issued by the California Department of Insurance and other states where applicable. All claim adjusting services for Crusader policies are administered by Crusader. Crusader engages independent field examiners for all work performed outside the Company's office. 8 Insurance Premium Finance Operation - ----------------------------------- American Acceptance Corporation ("AAC") is a licensed insurance premium finance company that provides insurance purchasers with the ability to pay their insurance premiums on an installment basis. The premium finance company pays the insurance premium to the insurance company in return for a premium finance note from the insured. These notes are paid off by the insured in nine monthly installments and are secured by the unearned premiums held by the insurance company. AAC provides premium financing primarily for the Crusader policies that are produced by Unifax in California. Health and Life Insurance Operations - ------------------------------------ The Company's subsidiaries National Insurance Brokers, Inc., ("NIB") and American Insurance Brokers, Inc., ("AIB") market medical, dental, life, vision, and accidental death and dismemberment insurance through non-affiliated insurance companies for individuals and groups. The services provided consist of marketing, billing and collection, accounting, and customer service. For their services, these subsidiaries receive a commission from the insurance company. Most of the business is produced through independent insurance agents and brokers who receive a commission from NIB or AIB. NIB and AIB hold licenses issued by the California Department of Insurance. All business is currently written in California. Association Operation - --------------------- The Company's subsidiary Insurance Club, Inc., DBA The American Association for Quality Health Care ("AAQHC"), is a membership association that provides various consumer benefits to its members, including participation in group health care and life insurance policies that AAQHC negotiates for the Association. For these services, AAQHC receives membership and fee income from its members. INVESTMENTS ----------- The investments of the Company are made by the Company's Chief Financial Officer under the supervision of an investment committee appointed by the Company's Board of Directors. The Company's investment guidelines on equity securities limit investments in equity securities to an aggregate maximum of $2,000,000. The Company's investment guidelines on fixed maturities limit fixed maturity investments to high-grade obligations with a maximum term of eight years and a maximum investment in any one issuer of $2,000,000. This dollar limitation excludes bond premiums paid in excess of par value and U.S. government or U.S. government guaranteed issues. All investments in municipal securities are pre-refunded and secured by U.S. treasury securities. Short-term cash investments consist of bank money market accounts, certificates of deposit, commercial paper, a U.S. government obligation money market fund, and U.S. treasury bills. These short-term investments are either U.S. government obligations, FDIC insured or are in an institution with a Moody's rating of P1 and/or Standard & Poor's rating of A1. All of the Company's investments are readily marketable and could be liquidated without any material financial impact. The following table sets forth the composition of the investment portfolio of the Company at the dates indicated:
(Amounts in Thousands) As of December 31 ------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Amortized Market Amortized Market Amortized Market Type of Security Cost Value Cost Value Cost Value - ---------------- ---- ----- ---- ----- ---- ----- Certificates of deposit $ 400 $ 400 $ 200 $ 200 $ 200 $ 200 U.S. treasury securities 7,995 8,192 10,056 10,076 9,610 10,098 Industrial and miscellaneous taxable bonds 66,613 66,356 60,807 58,974 52,404 54,011 State and municipal tax-exempt bonds 19,790 20,035 28,079 28,344 34,144 35,164 ------ ------ ------ ------ ------ ------ Total fixed maturity investments 94,798 94,983 99,142 97,594 96,358 99,473 Short-term cash investments 3,355 3,355 5,968 5,968 6,574 6,574 Equity investments 26 26 164 66 504 481 ------ ------ ------- ------- ------- ------- Total investments $98,179 $98,364 $105,274 $103,628 $103,436 $106,528 ====== ====== ======= ======= ======= =======
9 At December 31, 2000, the Company had net unrealized gains on all investments of $184,553 before income taxes. The amortized cost and estimated market value of fixed maturity investments at December 31, 2000, by contractual maturity are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. (Amounts in Thousands) As of December 31, 2000 ----------------------- Amortized Market Fixed maturities due Cost Value -------------------- ---- ----- Within 1 year $17,975 $18,060 Beyond 1 year but within 5 years 72,757 72,826 Beyond 5 years but within 10 years 4,066 4,097 ------ ------ Total $94,798 $94,983 ====== ====== COMPETITION ----------- General - ------- The property and casualty insurance industry is highly competitive in the areas of price and service. It is highly cyclical, characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. The profitability of insurers is affected by many factors including rate competition, the frequency of claims and their average cost, natural disasters, state regulations, interest rates, crime rates, general business conditions, and court decisions redefining and expanding the extent of coverage and granting higher compensation awards. One of the challenging and unique features of the property and casualty business is the fact that, since premiums are collected before losses are paid, its products are normally priced before its costs are known. Insurance Company and General Agency Operations (Property and Casualty) - ---------------------------------------------------------------------- The Company's property and casualty insurance business continues to experience a competitive marketplace. There are many substantial competitors who have larger resources, operate in more states, and insure coverages in more lines and in higher limits than the Company. In addition, Crusader competes not only with other insurance companies but also with the general agents. Many of these general agents offer more products than the Company. The principal method of competition among competitors is price. While the Company attempts to meet this competition with competitive prices, its emphasis is on service, promotion, and distribution. Additional information regarding competition in the insurance marketplace is discussed in the Management Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations. Insurance Claim Administration Operation - ---------------------------------------- The insurance claim administration operation generates all its business from insurance policies produced by its sister company Bedford for a non-affiliated insurance company. Competition is not a major factor as long as U.S. Risk produces a quality product at a fair price. The growth of U.S. Risk is dependent on the growth of Bedford. Insurance Premium Financing Operation - ------------------------------------- The insurance premium financing operation currently finances only policies written through its sister company, Unifax. Although competition is intense in the premium finance business, the competitive pricing, the quality of its service, and the ease and convenience of financing with AAC has made its growth and profitability possible. AAC's growth is dependent on the growth of Crusader and Unifax. Health and Life Insurance Operations - ------------------------------------ Competition in the health and life insurance business is also intense. Approximately 93% of the Company's present health and life insurance business is from the CIGNA HealthCare medical and dental plan programs. This percentage is slightly lower than the prior year. The Company is continuing its efforts to diversify and offer a wider variety of products to its customers. 10 EMPLOYEES --------- On March 15, 2001, the Company employed 146 persons at its facility located in Woodland Hills, California. The Company has no collective bargaining agreements and believes its relations with its employees are excellent. Item 2. Properties - ------------------- The Company presently occupies a 46,000 square foot building located at 23251 Mulholland Drive, Woodland Hills, California, under a master lease expiring March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin Cheldin, the Company's president, chairman and principal stockholder, is the owner of the building. On February 22, 1995, the Company signed an extension to the lease with no increase in rent to March 31, 2007. The Company believes that the terms of the lease at inception and at the time the lease extension was signed were at least as favorable to the Company as could have been obtained from non-affiliated third parties. The Company utilizes for its own operations 100% of the space it leases. Item 3. Legal Proceedings - -------------------------- The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings in which it may be named as either plaintiff or defendant. Incidental actions are sometimes brought by customers or others that relate to disputes concerning the issuance or non-issuance of individual insurance policies. In addition, the Company resorts to legal proceedings from time to time in order to enforce collection of premiums, commissions, or fees for the services rendered to customers or to their agents. These routine items of litigation do not materially affect the Company and are handled on a routine basis through its counsel and they do not materially affect the operations of the Company. State of Washington Regulatory Proceeding - ----------------------------------------- The Insurance Commissioner of the State of Washington 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 it believes that the service fee continued to be a broker fee and is not subject to rate filing requirements or premium taxes. In August 1999 the Insurance Commissioner 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 premium taxes deemed 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. On May 5, 2000, an administrative hearing officer ordered that all of the sanctions previously stated be imposed. The order stated 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 $990,725 in the year ended December 31, 2000. After each party filed briefs with the Superior Court, and after the National Association of Independent Insurers ("NAII") filed an amicus curie brief in support of Crusader's position, the Commissioner's office agreed to drop all sanctions in exchange for Crusader's agreement to pay $13,714. On January 30, 2001, although the Company did not believe it had done anything improper, it agreed to the $13,714 settlement. The Insurance Commissioner agreed to the settlement on January 31, 2001. 11 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 in gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in a total amount 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 disagreed with the audit findings and has appealed the matter. As of December 31, 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. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. 12 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------ The Company's common stock is traded on the NASDAQ National Market System under the symbol "UNAM." The high and low sales prices (by quarter) and dividends declared during the last two comparable twelve month periods are as follows: High Low Dividend Quarter Ended Price Price Declared ------------- ------- ------- -------- March 31, 1999 13 3/4 9 3/4 $0.25 June 30, 1999 10 3/4 8 5/8 September 30, 1999 10 1/2 8 3/13 December 31, 1999 8 5/8 6 3/8 March 31, 2000 7 7/8 4 5/8 $0.15 June 30, 2000 6 3/4 4 1/2 September 30, 2000 7 1/4 5 7/8 December 31, 2000 7 3/4 5 3/8 As of December 31, 2000, the approximate number of shareholders of record of the Company's common stock was 500. In addition, the Company estimates beneficial owners of the Company's common stock held in the name of nominees to be approximately 1,000. The Company has declared a cash dividend on its common stock annually since June 24, 1991. The Company's intention is to declare annual cash dividends subject to continued profitability and cash requirements. On March 1, 2000, the Company declared an annual cash dividend of $0.15 per common share payable on May 19, 2000, to shareholders of record on April 28, 2000. On March 1, 2001, the Company declared an annual cash dividend of $0.05 per common share payable on May 18, 2001, to shareholders of record on April 27, 2001. Because the Company is a holding company and operates through its subsidiaries, its cash flow and, consequently, its ability to pay dividends are dependent upon the earnings of its subsidiaries and the distribution of those earnings to the Company. Also, the ability of Crusader to pay dividends to the Company is subject to certain regulatory restrictions under the Holding Company Act (See Item 1 - Business - Insurance Company Operation - Holding Company Act). As of December 31, 2000, the maximum additional dividend that could have been made by Crusader to Unico without prior approval was $2,462,626. 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 December 31, 2000, the Company had purchased and retired an aggregate of 628,600 shares of its common stock at a cost of $4,130,068 of which $308,908 was allocated to capital and $3,821,160 was allocated to retained earnings. From January 1, 2000 to December 31, 2000, the Company issued 30,140 shares of its common stock as a result of the exercise of employee stock options granted under the Unico American Corporation Employee Incentive Stock Option Plan. These shares were issued to one employee of the Company in exchange for $13.38 in cash and 13,833 shares of the Company's common stock. The shares were acquired for investment and without a view to the public distribution or resale thereof, and the issuance thereof was exempt from the registration requirements under the Securities Act of 1933, as amended, under Section 4(2) thereof as a transaction not involving a public offering. 13 Item 6. Selected Financial Data - --------------------------------
Fiscal year ended December 31 -------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Nine Months*) Total revenues $38,367,949 $40,734,257 $47,544,270 $48,290,721 $34,884,657 Total costs and expenses 38,174,336 33,609,368 34,789,372 37,301,688 27,505,670 ---------- ---------- ---------- ---------- ---------- Income before taxes $193,613 $7,124,889 $12,754,898 $10,989,033 $7,378,987 Net income $439,797 $5,131,366 $8,708,669 $7,654,362 $5,174,510 Basic earnings per share $0.07 $0.82 $1.41 $1.25 $0.87 Diluted earnings per share $0.07 $0.81 $1.36 $1.20 $0.83 Cash dividends per share $0.15 $0.25 $0.07 $0.07 $0.07 Total assets $123,945,820 $121,978,756 $121,717,643 $112,942,384 $104,451,322 Stockholders' equity $51,413,329 $54,840,797 $54,168,082 $45,060,784 $37,355,419
(*) The Company changed its fiscal year end from March 31, to December 31, effective December 31, 1996. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- 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. Because the Company is a holding company and operates through its subsidiaries, its cash flow is dependent upon the earnings of its subsidiaries and the distributions of those earnings to the Company. Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, its reserves for loss payments, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash and investments (excluding net unrealized gains or losses) at December 31, 2000, were $98,234,157 compared to $105,380,057 at December 31, 1999, a 7% decrease. Crusader's cash and investments at December 31, 2000, was $93,578,918 or 95% of the total held by the Company, compared to $97,452,621or 92% of the total held by the Company at December 31, 1999. The Company's investments are as follows:
December 31, 2000 December 31, 1999 December 31, 1998 ----------------- ----------------- ----------------- Amount % Amount % Amount % ------ - ------ - ------ - Fixed maturities (at amortized cost) Certificates of deposit $ 400,000 - $ 200,000 - $ 200,000 - U.S. treasury securities 7,995,324 9 10,056,163 10 9,610,487 10 Industrial and miscellaneous (taxable) 66,613,078 70 60,807,507 62 52,403,981 54 State and municipal (tax exempt) 19,789,675 21 28,078,605 28 34,144,344 36 ---------- --- ---------- --- ---------- --- Total fixed maturity investments 94,798,077 100 99,142,275 100 96,358,812 100 ---------- === ---------- === ---------- === Short-term cash investments (at cost) Certificates of deposit 225,000 7 425,000 7 425,000 6 Commercial paper 2,000,000 60 2,675,000 45 3,425,000 52 Bank money market accounts 417,280 12 2,055,254 35 694,834 11 U.S. gov't obligation money market fund 28,778 1 78,799 1 1,290,108 20 Short-term U.S. treasury 681,414 20 731,281 12 735,346 11 Bank savings accounts 2,882 - 2,839 - 3,574 - --------- --- --------- --- --------- --- Total short-term cash investments 3,355,354 100 5,968,173 100 6,573,862 100 --------- === --------- === --------- === Equity investments (at cost) 25,920 164,170 503,503 Total investments $98,179,351 $105,274,618 $103,436,177 ========== =========== ===========
14 In accordance with Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company is required to classify its investments in debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading securities. Although all of the Company's investments are classified as available-for-sale, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. The tax-exempt interest income earned (net of bond premium and discount amortization) during the year ended December 31, 2000, was $1,191,794 compared to $1,473,922 in the year ended December 31, 1999. In the year ended December 31, 1998, tax-exempt interest income earned totaled $1,698,211. 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 fixed maturity investments are high-grade investment quality, all state and municipal tax exempt fixed maturity investments are pre-refunded issues, and all certificates of deposit are FDIC insured. Unico has a $2,000,000 line of credit with Union Bank of California. Interest on this line is referenced to LIBOR and is payable monthly. The agreement contains certain covenants including maintenance of certain financial ratios. This credit line expires September 3, 2002, at which time it is expected to be renewed. Unico did not borrow against its line of credit in 2000 or 1999. Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments at year end, net of trust restriction of $2,755,572, statutory deposits of $2,725,000, and dividend restriction between Crusader and Unico (See Item 1 - Business - Insurance Company Operation - Holding Company Act) plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next twelve months without the necessity of borrowing funds. Dividends paid by Crusader to Unico were $1,500,000 in 2000 and $2,000,000 in 1999. These funds were invested in short-term instruments and were ultimately used to help fund the repurchase of shares of the Company's common stock discussed below. As of December 31, 2000, the maximum additional dividend that could have been made by Crusader to Unico without prior of the California Department of Insurance approval was $2,462,626. 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 of common stock of the Company 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 to 945,000 shares. As of December 31, 2000, the Company had purchased an aggregate of 628,600 shares of its common stock at a cost of $4,130,068. These shares were purchased using cash-on-hand and the proceeds from the maturities of short-term investments. Crusader's statutory capital and surplus as of December 31, 2000, was $39,626,269, a decrease of $1,326,187 (3%) over December 31, 1999. Crusader's statutory capital and surplus as of December 31, 1999, was $40,952,456, an increase of $3,341,367 (9%) over December 31, 1998. Cash flow used by operations for the year ended December 31, 2000, was $1,374,774, a decrease of $5,074,800 from the $3,700,026 of cash provided by operations in the year ended December 31, 1999. The decrease was primarily due to an increase in claim payments during the year ended December 31, 2000. The Company has initiated an upgrade and replacement of computer systems and expects to spend approximately $150,000 in the next twelve months to complete this project. There are no other material commitments for capital expenditures as of the date of this report. 15 Results of Operations: --------------------- General - ------- The Company had net income of $439,797 for the year ended December 31, 2000, compared to $5,131,366 for the year ended December 31, 1999, and $8,708,669 for the year ended December 31, 1998. Total revenue for the year ended December 31, 2000, was $38,367,949 compared to $40,734,257 for the year ended December 31, 1999, and $47,544,270 for the year ended December 31, 1998. For the year ended December 31, 2000, income before taxes decreased by $6,931,276 (97%) and net income decreased by $4,691,569 (91%) compared to the year ended December 31, 1999. The decrease in pre-tax income was primarily due to a decrease of $6,800,955 in the underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) from Crusader. For the year ended December 31, 1999, income before taxes decreased by $5,630,009 (44%) and net income decreased by $3,577,303 (41%) compared to the year ended December 31, 1998. The decrease in pre-tax income was primarily due to a decrease of $5,104,399 (65%) in the underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) from Crusader. The effect of inflation on the net income of the Company during the year ended December 31, 2000, was not significant. The Company derives revenue from various sources as discussed below: Insurance Company Operation - --------------------------- Premium and loss information of Crusader are as follows:
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Gross written premium $33,259,948 $33,139,361 $37,079,303 Net written premium (net of reinsurance ceded) $26,406,565 $26,543,921 $34,126,963 Earned premium before reinsurance ceded $32,743,165 $34,693,113 $40,615,417 Earned premium net of reinsurance ceded $25,899,234 $28,109,361 $34,915,195 Losses and loss adjustment expenses $21,676,915 $17,027,190 $17,593,582 Unpaid losses and loss adjustment expenses $45,217,369 $41,592,489 $41,513,945
Crusader's primary line of business is commercial multiple peril business package policies. This line of business represented approximately 97% of Crusader's total written premium for both fiscal years ended December 31, 2000 and 1999. Crusader's gross written premium by state is as follows:
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- California $28,513,822 $28,636,676 $31,323,804 Arizona 1,178,094 976,872 1,095,922 Washington 990,725 1,086,815 1,958,179 Ohio 753,264 489,266 526,004 Pennsylvania 546,801 565,628 416,485 Oregon 509,971 697,033 1,289,054 Montana 482,735 436,390 98,612 Texas 135,968 118,066 239,563 Nevada 82,963 34,520 49,096 Idaho 38,037 - - Kentucky 27,568 98,095 82,584 ---------- ---------- ---------- Total gross written premium $33,259,948 $33,139,361 $37,079,303 ========== ========== ==========
16 For the year ended December 31, 2000, gross written premium increased by $120,587 compared to the year ended December 31, 1999. The Company believes that the slight growth in written premium in 2000 is the result of a subsidence in the intensity of price-based competition in the property casualty insurance market. For the year ended December 31, 1999, gross written premium decreased by $3,939,942 (11%) compared to the year ended December 31, 1998. This decrease was due to intense price competition that adversely affected the premium written in nearly all states that the Company does business. Although the Company attempts to be competitive on price, it believes that maintaining adequate rates on the insurance policies it sells is a better business strategy than increasing total written premium by selling more policies at inadequate rates. This business philosophy has resulted in decreased written premium in 1999 and virtually no premium growth in 2000. Although it appears that the intensity of price-based competition has somewhat subsided, the Company does not believe that it is in a " hard market." While some of its competitors have recently raised rates or adopted more restrictive rules, those changes have not yet been large enough to redirect the flow of new business to the Company. The Company cannot determine how long the existing market conditions will continue, nor in which direction they might change. The Company continues to believe that it can compete effectively and profitably by offering better service and by marketing its policies through its current independent agents and brokers. In pursuing its growth plan, the Company adopted a geographic expansion plan several years ago. In 1992, 100% of the Company's sales were in California. As of December 31, 2000, the Company had established marketing relations and products in ten other states, decreasing the percentage of its California business to 86%. The Company has no short-term plan to expand into additional states, nor to expand upon its marketing channels. However, the Company does plan to adopt "fine-tuning" changes to its existing rates, rules and forms, and it plans to add new programs for the states where it currently operates. Currently, agents and brokers who call for quotes on policies sold by the Company may also have to call competitors for quotes on products which the Company does not offer. Thus, Crusader competes with not only other insurance companies, but with general agents who produce business for other insurance companies. Many of these general agents offer more products than the Company and thus make it easier for the agents and brokers because they can do more business with fewer telephone calls. To provide better service to the Company's agents and brokers, the Company is currently working on additional non-affiliated insurance company products to be offered by its General Agency operations. In addition to generating additional commission and fee income, the expansion of the General Agency operations may benefit Crusader because agents and brokers may place more of their business with Crusader. The Company writes annual policies and therefore earns written premium over the one year policy term. Premium earned before reinsurance decreased $1,949,948 (6%) in the year ended December 31, 2000, compared to the year ended December 31, 1999, and decreased $5,922,304 (15%) in the year ended December 31, 1999, compared to the year ended December 31, 1998. The decrease in earned premium before reinsurance was directly related to the decrease in written premium discussed above. Earned premium ceded increased $260,179 (4%) to $6,843,931 or 21% of earned premium before reinsurance in the year ended December 31, 2000, compared to $6,583,752 or 19% of earned premium before reinsurance for the year ended December 31, 1999. Earned premium ceded increased $883,530 (16%) to $6,583,752 or 19% of earned premium before reinsurance for the year ended December 31, 1999, compared to $5,700,222 or 14% of earned premium before reinsurance for the year ended December 31, 1998. Ceded premiums increased in the year ended December 31, 2000, primarily due to higher than anticipated loss experience on prior accident years that was subject to the Company's provisionally rated reinsurance contract. Premium ceded under this contract, which was canceled on a runoff basis effective December 31, 1997, is subject to adjustments based on the amount of losses ceded, limited by a maximum percentage that can be charged by the reinsurer. The decrease in earned ceded premium (excluding provisionally rated ceded premium) in 2000, 1999 and 1998 was primarily due to decreased earned premium before reinsurance. 17 The following table shows the changes in ceded premium:
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- (Decrease) in earned ceded premium (excluding provisionally rated ceded premium) $(447,593) $(800,074) $(818,860) Increase in provisionally rated ceded premium 707,772 1,683,604 124,754 ------- --------- ------- Net increase (decrease) in earned ceded premium $ 260,179 $ 883,530 $(694,106) ======= ======= =======
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment expenses incurred (including a provision for incurred-but-not-reported losses "IBNR") to net premiums earned ("loss ratio") and (2) the ratio of policy acquisition and general operating costs to net premiums earned ("expense ratio"). The following table shows the loss ratios, expense ratios, and combined ratios of Crusader as derived from data prepared in accordance with generally accepted accounting principles. As shown on the table below, the loss ratio increased to 83.7% in 2000 from 60.6% in 1999. This increase in the loss ratio was primarily due to a decreased earned premium before reinsurance (discussed above), an increase in earned premium ceded (discussed above), and an increase in incurred losses on prior years. Generally, if the combined ratio is below 100%, an insurance company has an underwriting profit; if it is above 100%, a company has an underwriting loss. Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Loss ratio 83.7% 60.6% 50.4% Expense ratio 32.1% 29.8% 27.2% ----- ---- ---- Combined ratio 115.8% 90.4% 77.6% ===== ==== ==== During 1999, as part of the Company's ongoing reserve review process and loss trending analysis, the Company determined that its average claim costs were increasing and claims were settling for amounts greater than had been anticipated. To address this trend, the Company reviewed its open claim files to ensure that its case reserves and IBNR were adequate. The review process took approximately one year and resulted in increased reserves. The increase in incurred losses and loss adjustment expenses recognized in 2000 and 1999 was primarily due to the following: 1. Higher than anticipated claim cost from business outside of California. 2. The effect on settlements of escalating jury awards 3. Increased development of losses due to the impact of changes in California law that expanded coverage and increased loss exposure, (e.g., Montrose Chemical Corp. v. Admiral Insurance Co.(1994), Montrose Chemical Corp. v. Admiral Insurance Co. (1995), Armstrong World Industries, Inc. v. Aetna Gas & Sur. Co. (1996), James Pepperell, et al., v. Scottsdale Insurance Company (1998), Pardee Construction Company v. Insurance Company of the West et al., (2000), Pershing Park Villas HOA v. United Pacific Ins. Co. (2000), Centex Golden Construction Co. v. Dale Tile Co.(2000)). The Company's future writings and growth are dependent on market conditions, competition, and the Company's ability to introduce new and profitable products. As of December 31, 2000, Crusader was licensed as an admitted insurance company in the states of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon, and Washington and is approved as a non-admitted surplus lines writer in other states. Other Insurance Operations - -------------------------- Health and Life Insurance Program --------------------------------- Commission income from the health and life insurance sales of NIB and AIB is as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Commission income $2,625,193 $2,668,582 $2,216,446 18 NIB and AIB market health and life insurance through non-affiliated insurance companies for individuals and groups. Approximately 93% of the health and life commission income for the years ended December 31, 2000 and 1999, was from the CIGNA HealthCare medical and dental plan programs. Revenues for the year ended December 31, 2000, decreased $43,389 (2%) compared to the year ended December 31, 1999. The decrease in commission income in the health and life insurance programs is primarily a due to a one-time bonus commission of $143,191 which the Company received from CIGNA in 1999. Excluding the effect of the 1999 bonus commission, commission income for the current year increased $99,802 (4%) when compared to the prior year. Revenues for the year ended December 31, 1999, increased $452,136 (20%) compared the year ended December 31, 1998. This increase was a result of continued increase in sales of small business group accounts for CIGNA, an increase in the number of small business accounts administered by the Company for CIGNA, and a bonus commission of $143,191 received from CIGNA. Since approximately 93% of the Company's health and life insurance income comes from CIGNA programs, future growth is dependent of the competitiveness of CIGNA's rates, products, and product enhancements. Service Fee Income ------------------ Unifax sells and services insurance policies for Crusader. The service fee charged to the policyholder by Unifax is recognized as income in the consolidated financial statements. Service fee income of Unifax is as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Service fee income $1,654,735 $1,677,223 $1,896,258 Policies written 17,351 17,225 18,306 Service fee income is primarily related to the number of policies written by Unifax. In addition, in 1999, Unifax voluntarily discontinued charging service fees in several of states outside of California, contributing to the decrease in service fee income. Daily Automobile Rental Insurance Program ----------------------------------------- The daily automobile rental insurance program is produced by Bedford. Bedford receives a commission and a claim administration fee from a non-affiliated insurance company based on premium written. Commission and fee income from the daily automobile rental insurance program are as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Daily auto rental program commission and claim administration fee $741,662 $731,884 $758,073 Contingent commission 69,979 28,735 49,430 ------- ------- ------- Total commission and fee income $811,641 $760,619 $807,503 ======= ======= ======= Revenues during the year ended December 31, 2000, were $811,641, an increase of $51,022 (7%) compared to the same period of the prior year. Revenue for the year ended December 31, 1999, decreased by $46,884 (6%) compared to the year ended December 31, 1998. The daily automobile rental insurance program commission and fee income (excluding contingent commission) increased in 2000 only slightly due to continued price competition in the daily automobile insurance market. To avoid underwriting losses for the non-affiliated insurance company that it represents, Bedford continues to produce business only at rates which it believes to be adequate. The Company cannot determine how long the existing market conditions will continue, nor in which direction they might change. 19 Association Operation --------------------- Membership and fee income from the association program of AAQHC is as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Membership and fee income $397,157 $396,958 $355,781 Membership and fee income in the year ended December 31, 2000, was comparable to the year ended December 31, 1999. Membership income increased $41,177 (12%) in the year ended December 31, 1999, compared to the year ended December 31, 1998. Other Commission and Fee Income ------------------------------- Other commission and fee income are as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Workers' compensation program commission income $44,816 $81,919 $329,465 Earthquake program commission income $15,993 $22,421 - Commercial liability program commission and fee income $55,828 $22,280 - Commercial and personal auto program commission and fee income - $4,363 $1,843 Miscellaneous fee income $128 $177 $242 ------- ------- -------- Total other commission and fee income $116,767 $131,160 $331,550 ======= ======= ======= Unifax produces workers' compensation policies primarily in California for non-affiliated insurers and receives a commission from them based on premium written. Unifax discontinued writing new business with one of its non-affiliated insurers in 1998 and began placing new business with other non-affiliated insurance companies. The decrease in commission income in 2000 and 1999 was due to underwriting constraints of the new insurance companies that limited the types and classes of business that they would accept. Unifax began producing commercial earthquake insurance policies in California for non-affiliated insurance companies in 1999. Unifax received a commission from the insurance company based on premium written. Commission income on the earthquake program for the year ended December 31, 2000, decreased $6,428 (29%) compared to the prior year as a result of the non-affiliated insurance company discontinuing writing earthquake insurance in California in October, 2000. Unifax expects to begin writing commercial earthquake insurance policies with a new non-affiliated insurance company in April, 2001. Unifax began producing commercial liability insurance policies in California for non-affiliated insurance companies in 1999. Unifax receives a commission from the insurance company based on premium written and a service fee from the policyholder. Commission and fee income on the commercial liability program increased in the year ended December 31, 2000, $33,548 (151%) due to increased marketing and the expansion of the product lines written by non-affiliated insurance carriers. Unifax produced commercial auto policies in California for a non-affiliated insurer and received a commission from them based on premium written. The Company discontinued that program in February of 1997. Unifax also received a policy service fee from the insured. In February 1997, the Company decided to discontinue writing new policies in the Unifax commercial automobile program and only serviced and renewed existing policies until the book of business was sold to a non-affiliated third party in June 1997. As consideration for the sale of this book of business, Unifax received a percentage of the commission earned for a two-year period on policies which were in force at the time of sale. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected in commission income or commission expense. 20 Premium Finance Program ----------------------- Premium finance charges and late fees earned from financing policies are as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Premium finance charges and late fees earned $837,902 $915,940 $1,033,479 New loans 7,166 7,597 8,092 AAC provides premium financing primarily to Crusader policies produced by Unifax in California. The growth of this program is dependent and directly related to the growth of Crusader's written premium and AAC's ability to market its competitive rates and service to finance those policies. Due to the intense competition in the market place Unifax has produced only slightly more policies than the previous year. The decrease in revenues and loans in 2000 is primarily due to the fact that fewer policies are being financed. Although AAC finances approximately 80% of all Unifax policies which are financed, the percentage of all Unifax policies which are financed decreased from approximately 54% in 1999 to approximately 50% in 2000. Premium finance charges and late fees earned on loans decreased $78,038 (9%) in the year ended December 31, 2000, compared to the year ended December 31, 1999. The decrease was primarily a result of fewer policies being financed due to an overall decrease in the number of policyholders financing policies. For the year ended December 31, 1999, premium finance charges and late fees earned on loans decreased $117,539 (11%) compared to the year ended December 31, 1998, as a result of fewer policies being written by Crusader and fewer policies being financed. Investment Income and Net Realized Gains (Losses) - ---------------------------------------------------- Investment income and net realized gains (losses) are as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Interest and dividend income Insurance company operations $5,764,094 $5,706,945 $5,497,323 Other operations 335,984 283,942 234,580 --------- --------- --------- Total interest and dividend income 6,100,078 5,990,887 5,731,903 Net realized investment gains (losses) (135,389) 64,793 247,931 --------- -------- --------- Total investment income and realized gains (losses) $5,964,689 $6,055,680 $5,979,834 ========= ========= ========= The Company continually evaluates the recoverability of its investment holdings. When a decline in value of fixed maturities or equity securities is considered other than temporary, a loss is recognized in the consolidated statement of operations. During 2000, the Company realized a loss of $138,250 on one equity security where a decline in market value was considered other than temporary. Investment interest and dividends earned (excluding net realized gains) increased $109,191 (2%) in the year ended December 31, 2000, compared to the year ended December 31, 1999, primarily as a result of an increase in return on the Company's investment portfolio. Average invested assets in the year ended December 31, 2000, (at amortized value) decreased $2,628,414 (3%) compared to the year ended December 31, 1999. Investment income return based on average invested assets was 6.0% for the year ended December 31, 2000, compared to 5.74% for the year ended December 31, 1999. The mix of taxable and tax-exempt securities in the portfolio affect the investment income return percentage. Tax-exempt securities, which generally carry a lower yield than taxable securities, decreased to $19,789,675 (20% of total investments) at December 31, 2000, compared to $28,078,605 (27% of total investments) at December 31, 1999. Investment interest and dividends earned (excluding net realized gains) increased $258,984 (5%) in the year ended December 31, 1999, compared to the year ended December 31, 1998, primarily as a result of additional invested assets from operating activities. Average invested assets in the year ended December 31, 1999, (at 21 amortized value) increased $6,400,046 (7%) compared to the year ended December 31, 1998. Investment income return based on average invested assets was 5.74% for the year ended December 31, 1999, compared to 5.85% for the year ended December 31, 1998. The mix of taxable and tax-exempt securities in the portfolio affect the above investment income return percentage. Tax-exempt securities, which generally carry a lower yield than taxable securities, decreased to $28,078,605 (27% of total investments) at December 31, 1999, compared to $34,144,344 (33% of total investments) at December 31, 1998. Additional information regarding investments and investment income is described in the Management Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. Operating Expenses - ------------------ Policy Acquisition Costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are related to and vary with the production of Crusader insurance policies. These costs include both Crusader expenses and allocated expenses of other Unico subsidiaries. On certain reinsurance treaties, Crusader receives a ceding commission from its reinsurer that represents a reimbursement of the acquisition costs related to the premium ceded. No ceding commission is received on provisionally rated ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. The ratio of policy acquisition cost to net earned premium increased in 1999 and 2000 primarily due to an increase in provisionally rated ceded premium. The provisionally rated reinsurance contract was cancelled on a run off basis on December 31, 1997. Policy acquisition costs, net of ceding commission, are as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Policy acquisition costs $8,303,917 $8,362,814 $9,497,857 Ratio to net earned premium (GAAP ratio) 32% 30% 27% Salaries and Employee Benefits decreased $110,433 (3%) for the year ended December 31, 2000, compared to the year ended December 31, 1999. Salaries and employee benefits increased $135,797 (3%) in the year ended December 31, 1999, compared to the year ended December 31, 1998. Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Salaries and employee benefits $4,241,117 $4,351,550 $4,215,753 Commissions to Agents/Brokers (not including commissions on Crusader policies that are reflected in policy acquisition costs) are generally related to gross commission income from the health and life insurance program, the daily automobile rental insurance program, the earthquake program and the commercial liability program. Commissions to agents and brokers increased $3,971 (0%) for the year ended December 31, 2000, compared to the year ended December 31, 1999. Commissions to agents and brokers increased $261,833 (25%) for the year ended December 31, 1999, compared to the year ended December 31, 1998. Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Commission to agents/brokers $1,309,490 $1,305,519 $1,043,686 22 Other Operating Expenses generally do not change significantly with changes in production. This is true for both increases and decreases in production. Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Other operating expenses $2,642,897 $2,562,295 $2,438,494 Income Taxes - ------------ Income tax benefit for 2000 was $246,184 compared to $1,993,523 income tax expense for 1999. The effective combined income tax rates for 2000 and 1999 were (127.2%) and 30.9%, respectively. The change in the effective tax rate is due to significantly larger portion of tax exempt interest in the income before taxes in 2000 than in 1999. New Accounting Standards - ------------------------ In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 2000, and establishes standards for the reporting for derivative instruments. It requires changes in the fair value of a derivative instrument and the change in fair value of assets or liabilities hedged by the instrument to be included in income. To the extent that the hedge transaction is effective, income is equally offset by both investments. Currently the changes in fair value of derivative instruments and hedged items are reported in net unrealized gain (loss) on securities. The Company does not participate in derivative instruments or hedging activities. Consequently, the Company's financial statements would not be impacted by the adoption of SFAS 133. Forward Looking Statements - -------------------------- Certain statements contained herein, including the Sections entitled "Business," "Legal Proceedings" and "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," "estimates," "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 those described under Item 1 - Business - "Competition," premium rate adequacy relating to competition or regulation, actual versus estimated claim experience, regulatory changes or developments, unforeseen calamities, general market conditions, the Company's ability to introduce new profitable products, and the Company's ability to expand geographically. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- 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 at December 31, 2000 and 1999 consisted of the following: 2000 1999 ---- ---- Fixed maturity bonds (at amortized cost ) $94,398,077 $98,942,275 Short-term cash investments (at cost) 3,355,354 5,968,173 Equity securities (at cost) 25,920 164,170 Certificates of deposit -over 1 year (at cost) 400,000 200,000 ---------- ----------- Total invested assets $98,179,351 $105,274,618 ========== =========== 23 The Company's interest rate risk is primarily in its fixed maturity bond portfolio. As market interest rates decrease, the value of the portfolio increases with the opposite holding true in rising interest rate environments. In addition, the longer the maturity, the more sensitive the asset is to market interest rate fluctuations. The Company limits this risk by investing in securities with maturities no greater than eight years. In addition, although fixed maturity bonds are classified as available-for-sale, the Company's investment guidelines place primary emphasis on buying and holding high-quality bonds to maturity. Since inception of the Company, only ten bonds have been sold prior to their maturity or call date. Because fixed maturity bonds are primarily held to maturity, the change in the market value of these bonds resulting from interest rate movements are unrealized, and no gains or losses are recognized in the consolidated statements of operations. Unrealized gains and losses are reported as separate components of stockholders' equity, net of any deferred tax effect. As of December 31, 2000, the Company's unrealized gains (net of unrealized losses) before income taxes on its fixed maturity bond portfolio was $184,553. As of December 31, 1999, the Company's unrealized losses (net of unrealized gains) was $1,548,141. Given a hypothetical parallel increase of 100 basis points in interest rates, the fair value of the fixed maturity bond portfolio would decrease by approximately $2.77 million. This decrease would not be reflected in the statements of operations except to the extent that the securities are sold. The Company's short-term investments and certificates of deposit have only minimal interest rate risk. Due to the Company's small investment in equity securities (approximately one half of one percent of total invested assets), the Company has only minimal exposure to equity price risk. 24 Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number ------ Independent Auditors' Report 26 Consolidated Balance Sheets as of December 31, 2000, and December 31, 1999 27 Consolidated Statements of Operations for the years ended December 31, 2000, December 31, 1999, and December 31, 1998 28 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, December 31, 1999, and December 31, 1998 29 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, December 31, 1999, and December 31, 1998 30 Consolidated Statements of Cash Flows for the years ended December 31, 2000, December 31,1999, and December 31, 1998 31 Notes to Consolidated Financial Statements 32 25 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Unico American Corporation: We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unico American Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Los Angeles, California March 9, 2001 26 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 December 31 2000 1999 ---- ---- ASSETS ------ Investments Available for sale: Fixed maturities, at market value (amortized cost: December 31, 2000 $94,798,077; December 31, 1999 $99,142,275) $94,982,630 $97,594,134 Equity securities at market (cost: December 31, 2000 $25,920; December 31, 1999 $164,170) 25,920 66,000 Short-term investments, at cost 3,355,354 5,968,173 ---------- ----------- Total Investments 98,363,904 103,628,307 Cash 54,806 105,439 Accrued investment income 1,908,547 2,060,471 Premiums and notes receivable, net 5,807,731 5,496,890 Reinsurance recoverable: Paid losses and loss adjustment expenses 393,198 19,850 Unpaid losses and loss adjustment expenses 10,671,343 3,964,324 Prepaid reinsurance premiums 29,531 32,438 Deferred policy acquisition costs 4,500,147 4,338,217 Property and equipment (net of accumulated depreciation) 114,107 148,667 Deferred income taxes 948,442 1,541,242 Other assets 1,154,064 642,911 ----------- ----------- Total Assets $123,945,820 $121,978,756 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES - ----------- Unpaid losses and loss adjustment expenses $45,217,369 $41,592,489 Unearned premiums 17,099,927 16,583,143 Advance premium and premium deposits 2,316,016 2,571,190 Accrued expenses and other liabilities 7,899,179 6,391,137 ---------- ---------- Total Liabilities $72,532,491 $67,137,959 ---------- ---------- STOCKHOLDERS' EQUITY - -------------------- Common stock, no par - authorized 10,000,000 shares, issued and outstanding shares 5,692,699 at December 31, 2000, and 6,304,953 at December 31, 1999 $2,789,494 $3,098,389 Accumulated other comprehensive income gain (loss) 121,805 (1,086,565) Retained earnings 48,502,030 52,828,973 ---------- ---------- Total Stockholders' Equity $51,413,329 $54,840,797 ---------- ---------- Total Liabilities and Stockholders' Equity $123,945,820 $121,978,756 =========== ===========
See accompanying notes to consolidated financial statements. 27 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998 ---- ---- ---- REVENUES - -------- Insurance Company Revenues Premium earned $32,743,165 $34,693,113 $40,615,417 Premium ceded 6,843,931 6,583,752 5,700,222 ---------- ---------- ---------- Net premium earned 25,899,234 28,109,361 34,915,195 Net investment income 5,764,094 5,706,945 5,497,323 Net realized investment gains (losses) (137,897) 64,793 247,931 Other income 46,639 6,978 1,183 ---------- ---------- ---------- Total Insurance Company Revenues 31,572,070 33,888,077 40,661,632 Other Revenues from Insurance Operations Gross commissions and fees 5,605,493 5,634,542 5,607,538 Investment income 335,984 283,942 234,580 Net realized investment gains 2,508 - - Finance charges and late fees earned 837,902 915,940 1,033,479 Other income 13,992 11,756 7,041 ---------- ---------- ---------- Total Revenues 38,367,949 40,734,257 47,544,270 ---------- ---------- ---------- EXPENSES - -------- Losses and loss adjustment expenses 21,676,915 17,027,190 17,593,582 Policy acquisition costs 8,303,917 8,362,814 9,497,857 Salaries and employee benefits 4,241,117 4,351,550 4,215,753 Commissions to agents/brokers 1,309,490 1,305,519 1,043,686 Other operating expenses 2,642,897 2,562,295 2,438,494 ---------- ---------- ---------- Total Expenses 38,174,336 33,609,368 34,789,372 ---------- ---------- ---------- Income Before Taxes 193,613 7,124,889 12,754,898 Income Tax Provision (246,184) 1,993,523 4,046,229 ------- --------- --------- Net Income $439,797 $5,131,366 $8,708,669 ======= ========= ========= PER SHARE DATA: - -------------- Basic Shares Outstanding 6,058,674 6,268,069 6,194,133 Basic Earnings Per Share $0.07 $0.82 $1.41 Diluted Shares Outstanding 6,101,692 6,358,607 6,420,580 Diluted Earnings Per Share $0.07 $0.81 $1.36
See accompanying notes to consolidated financial statements. 28 UNICO AMERICAN CORPORATION AND SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998 ---- ---- ---- Net income $439,797 $5,131,366 $8,708,669 Other changes in comprehensive income net of tax: Unrealized gains (losses) on securities classified as available-for-sale arising during the period 1,299,381 (3,060,091) 839,134 Less: reclassification adjustment for (gains) losses included in net income 91,011 (25,010) (62,693) --------- --------- --------- Comprehensive Income $1,830,189 $2,046,265 $9,485,110 ========= ========= =========
See accompanying notes to consolidated financial statements. 29 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
Accumulated Other Common Shares Comprehensive ----------------------------- Income Issued and Gains and Retained Outstanding Amount (Losses) Earnings Total ----------- ------ ------ -------- ----- Balance - December 31, 1997 6,153,706 $2,838,058 $1,222,095 $41,000,631 $45,060,784 Net shares issued for exercise of stock options 69,439 57,644 - - 57,644 Shares canceled or adjusted 279 - - - - Cash dividend paid ($0.07 per share) - - - (435,456) (435,456) Change in comprehensive income, net of deferred income tax - - 776,441 - 776,441 Net income - - - 8,708,669 8,708,669 --------- --------- --------- ---------- ---------- Balance - December 31, 1998 6,223,424 2,895,702 1,998,536 49,273,844 54,168,082 Net shares issued for exercise of stock options 81,529 202,687 - - 202,687 Cash dividend paid ($0.25 per share) - - - (1,576,237 (1,576,237) Change in comprehensive income, net of deferred income tax - - (3,085,101) - (3,085,101) Net income - - - 5,131,366 5,131,366 --------- --------- --------- ---------- ---------- Balance - December 31, 1999 6,304,953 3,098,389 (1,086,565) 52,828,973 54,840,797 Net shares issued for exercise of stock options 16,307 13 - - 13 Shares canceled or adjusted 39 - - - - Shares repurchased (628,600) (308,908) - (3,821,160) (4,130,068) Cash dividend paid ($0.15 per share) - - - (945,580) (945,580) Change in comprehensive income, net of deferred income tax - - 1,208,370 - 1,208,370 Net income - 439,797 439,797 --------- --------- ------- ---------- ---------- Balance - December 31, 2000 5,692,699 $2,789,494 $121,805 $48,502,030 $51,413,329 ========= ========= ======= ========== ==========
See accompanying notes to consolidated financial statements. 30 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income $439,797 $5,131,366 $8,708,669 Adjustments to reconcile net income to net cash from operations Depreciation and amortization 68,632 97,087 98,585 Bond amortization, net 526,030 684,548 644,726 Net realized (gain) loss on sale of securities 135,389 (64,793) (247,931) Changes in assets and liabilities Premium, notes and investment income receivable (158,917) 387,552 1,267,057 Reinsurance recoverable (7,080,367) (2,698,256) 184,064 Prepaid reinsurance premiums 2,907 (12,986) 926,111 Deferred policy acquisitions costs (161,930) 327,555 220,912 Other assets (511,153) (61,293) 255,041 Reserve for unpaid losses and loss adjustment expenses 3,624,880 78,544 (490,906) Unearned premium reserve 516,784 (1,553,752) (3,536,114) Advance premium and premium deposits (255,174) 241,834 238,176 Accrued expenses and other liabilities 1,508,042 989,912 3,305,659 Income taxes current/deferred (29,694) 152,708 484,230 --------- --------- ---------- Net Cash Provided (Used) from Operations (1,374,774) 3,700,026 12,058,279 --------- --------- ---------- Investing Activities Purchase of fixed maturity investments (9,736,357) (12,341,754) (24,797,224) Proceeds from maturity of fixed maturity investments 11,505,400 8,839,250 12,898,500 Proceeds from sale of fixed maturity investments 2,008,594 - 1,041,250 Purchase of equity securities - cost - (3,758,378) (3,583,913) Proceeds from sale of equity securities - 4,162,504 3,480,043 Net (increase) decrease in short-term investments 2,656,211 640,182 (397,102) Additions to property and equipment (34,072) (40,385) (100,245) --------- --------- ---------- Net Cash Provided (Used) by Investing Activities 6,399,776 (2,498,581) (11,458,691) --------- --------- ---------- Financing Activities Proceeds from issuance of common stock 13 202,687 57,644 Repurchase of common stock (4,130,068) - - Dividends paid to shareholders (945,580) (1,576,237) (435,456) ---------- ---------- ------- Net Cash (Used) by Financing Activities (5,075,635) (1,373,550) (377,812) --------- --------- ------- Net increase (decrease) in cash (50,633) (172,105) 221,776 Cash at beginning of year 105,439 277,544 55,768 ------- ------- ------- Cash at End of Year $54,806 $105,439 $277,544 ====== ======= ======= Supplemental cash flow information Cash paid during the period for: Interest $25,417 $1,492 $60,116 Income taxes $245,414 $2,114,042 $3,430,000
See accompanying notes to consolidated financial statements. 31 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Nature of Business - ------------------ Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, health and life insurance through its agency subsidiaries; and provides insurance premium financing, claim administration services, and membership association services through its other subsidiaries. Unico American Corporation is referred to herein as the "Company" or "Unico" and such references include both the corporation and its subsidiaries, all of which are wholly owned, unless otherwise indicated. Unico was incorporated under the laws of Nevada in 1969. Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Basis of Presentation - --------------------- The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP). As described in Note 14, the Company's insurance subsidiary also files financial statements with regulatory agencies prepared on a statutory basis of accounting that differs from generally accepted accounting principles. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While every effort is made to ensure the integrity of such estimates, actual results could differ. Investments - ----------- All of the Company's fixed maturity investments are classified as available-for sale and are stated at market value. Although classified as available-for-sale, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates market value. Investments in equity securities are carried at market value. The unrealized gains or losses from fixed maturities and equity securities are reported as accumulated other comprehensive income (loss) which is a separate component of stockholders' equity, net of any deferred tax effect. When a decline in value of a fixed maturity or equity security is considered other than temporary, a loss is recognized in the consolidated statements of operations. Realized gains and losses are included in the consolidated statements of operations based on the specific identification method. The Company had net unrealized investment gains of $121,805 as of December 31, 2000, and net unrealized investment losses of $1,086,565 as of December 31, 1999. These amounts are net of deferred taxes. Property and Equipment - ---------------------- Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using accelerated depreciation methods over the estimated useful lives of the related assets. Income Taxes - ------------ The provision for federal income taxes is computed on the basis of income as reported for financial reporting purposes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and are measured using the enacted tax rates and laws expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense provisions increase or decrease in the same period in which a change in tax rates is enacted. 32 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Financial Instruments - ----------------------------------- The Company has used the following methods and assumptions in estimating its fair value disclosures: Investment Securities - Fair values for fixed maturity securities are obtained from a national quotation service. The fair values for equity securities are based on quoted market prices. Cash and Short-Term Investments - The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Premiums and Notes Receivable - The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Earnings Per Share - ------------------ Basic earnings per share excludes the impact of common share equivalents and is based upon the weighted average common shares outstanding. Diluted earnings per share utilize the average market price per share when applying the treasury stock method in determining common share dilution. Outstanding stock options are treated as common share equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding. Revenue Recognition - ------------------- a. General Agency Operations ----------------------------- Commissions and service fees due the Company are recognized as income on the effective date of the insurance policies. b. Insurance Company Operations -------------------------------- Premiums are earned on a pro-rata basis over the terms of the policies. Premiums applicable to the unexpired terms of policies in force are recorded as unearned premiums. The Company earns a commission on policies that are ceded to its reinsurers. This commission is considered earned on a pro-rata basis over the terms of the policies. c. Insurance Premium Financing Operations ------------------------------------------ Premium finance interest is charged to policyholders who choose to finance insurance premiums. Interest is charged at rates that vary with the amount of premium financed. Premium finance interest is recognized using a method which approximates the interest (actuarial) method. d. Insurance Claim Administration Operation -------------------------------------------- Claim administration income is based on premium written by Bedford for non-affiliated insurers. Income is recognized on the effective date of the insurance policies and a liability is recognized for the estimated cost of completing the administration of all current and future claims that are covered by these policies. Losses and Loss Adjustment Expenses - ----------------------------------- The liability for unpaid losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period plus estimates based on experience and industry data for development of case estimates and for unreported losses and loss adjustment expenses. There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for the Company. The long-tailed nature of liability claims and the volatility of jury awards exacerbates that uncertainty. Management has selected target loss and loss expense ratios that it believes are reasonable and reflective of anticipated ultimate experience. The ultimate cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Company claim reserving procedures and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Company operations and management philosophy also may cause actual developments to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims may vary significantly from the estimated 33 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Management believes that the aggregate reserves for losses and loss adjustment expenses are reasonable and adequate to cover the cost of claims, both reported and unreported. Restricted Funds - ---------------- Restricted funds are as follows: Year ended December 31 ---------------------- 2000 1999 ---- ---- Restricted Funds: Premium trust funds (1) 2,755,572 $3,071,696 Assigned to state agencies (2) 2,725,000 2,725,000 --------- --------- Total restricted funds $5,480,572 $5,796,696 ========= ========= (1) As required by law, the Company segregates from its operating accounts the premiums collected from insurers which are payable to insurance companies into separate trust accounts. These amounts are included in cash and short-term investments. (2) Included in fixed maturity investments are statutory deposits assigned to and held by the California State Treasurer and the Insurance Commissioner of the state of Nevada. These deposits are required for writing certain lines of business in California and for admission in states other than California. Deferred Policy Acquisition Costs - --------------------------------- Policy acquisition costs consist of costs associated with the production of insurance policies such as commissions, premium taxes, and certain other underwriting expenses which vary with and are primarily related to the production of the insurance policy. Policy acquisition costs are deferred and amortized as the related premiums are earned and are limited to their estimated realizable value based on the related unearned premiums plus investment income less anticipated losses and loss adjustment expenses. Ceding commission applicable to the unexpired terms of policies in force is recorded as unearned ceding commission which is included in deferred policy acquisition costs. Reinsurance - ----------- The Company cedes reinsurance to provide for greater diversification of business, to allow management to control exposure to potential losses arising from large risks by reinsuring certain levels of risk in various areas of exposure, to reduce the loss that may arise from catastrophes, and to provide additional capacity for growth. Prepaid reinsurance premiums and reinsurance receivables are reported as assets and represent ceded unearned premiums and reinsurance recoverable on both paid and unpaid losses, respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. 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 for the fiscal year ended December 31, 1997, and has identified its insurance company operation as its primary reporting segment. Revenues from this segment comprise 82.3% of consolidated revenues. The Company's remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues. 34 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The insurance company operation is conducted through Crusader, which as of December 31, 2000, was licensed as an admitted insurance carrier in the states of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon and Washington. Crusader is a multiple line property and casualty insurance company which began transacting business on January 1, 1985. As of December 31, 2000, 97% of Crusader's business was commercial multiple peril business package insurance policies. Commercial multiple peril policies provide a combination of property and liability coverage for businesses. Commercial property coverages insure against loss or damage to buildings, inventory and equipment from natural disasters, including hurricanes, windstorms, hail, water, explosions, severe winter weather and other events such as theft and vandalism, fires and storms and financial loss due to business interruption resulting from covered property damage. Commercial liability coverages insure against third party liability from accidents occurring on the insured's premises or arising out of its operations, such as injuries sustained from products sold. In addition to commercial multiple peril policies, Crusader also writes separate policies to insure commercial property and commercial liability risks on a mono-line basis. Revenues, income before income taxes and assets by segment are as follows:
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Revenues - -------- Insurance company operation $31,572,070 $33,888,077 $40,661,632 ---------- ---------- ---------- Other insurance operations 16,715,332 16,717,884 17,962,867 Intersegment elimination (1) (9,919,453) (9,871,704) (11,080,229) --------- --------- ---------- Total other insurance operations 6,795,879 6,846,180 6,882,638 --------- --------- --------- Total revenues $38,367,949 $40,734,257 $47,544,270 ========== ========== ========== Income (loss) before income taxes - --------------------------------- Insurance company operation $(237,593) $6,921,533 $11,753,137 Other insurance operations 431,206 203,356 1,001,761 ------- --------- ---------- Total income before income taxes $193,613 $7,124,889 $12,754,898 ======= ========= ========== Assets - ------ Insurance company operation $108,959,681 $103,450,995 $104,779,787 Intersegment eliminations (2) (528,196) (479,933) (150,097) ----------- ----------- ----------- Total Insurance company operation 108,431,485 102,971,062 104,629,690 Other insurance operations 15,514,335 19,007,694 17,087,953 ---------- ---------- ---------- Total assets $123,945,820 $121,978,756 $121,717,643 =========== =========== ===========
(1) Intersegment revenue eliminations reflect commissions paid by Crusader to Unifax. (2) Intersegment asset eliminations reflect the elimination of Crusader receivables and Unifax payables. Stock-Based Compensation - ------------------------ In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning after December 15, 1995. The Company accounts for stock-based compensation under the accounting methods prescribed by Accounting Principles Board (APB) Opinion No. 25, as allowed by SFAS No. 123. Disclosure of stock-based compensation determined in accordance with SFAS No. 123 is presented in Footnote 15. The adoption of this pronouncement did not have a material effect on the financial statements of the Company. 35 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recently Issued Accounting Standards - ------------------------------------ Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" is effective for financial statements beginning after December 15, 1998. SOP 98-1 requires that the cost of internally developed software be capitalized. There were no costs incurred for software purchased or developed in the year ending December 31, 2000, which were required to be capitalized. Statement of Position 97-3 (SOP 97-3), "Accounting by Insurance and Other Enterprises for Insurance Related Assessments," is effective for financial statements beginning after December 15, 1998. SOP 97-3 requires that a liability for insurance related assessments be recognized when an assessment is probable, the event obligating the assessment has occurred, and the assessment can be reasonably estimated. The adoption of SOP 97-3 has no material effect on the financial statements. Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging Activities" is effective for fiscal years beginning after June 15, 2000, and establishes standards for the reporting for derivative instruments. It requires changes in the fair value of a derivative instrument and the changes in fair value of assets or liabilities hedged by that instrument to be included in income. To the extent that the hedge transaction is effective, income is equally offset by both investments. Currently the changes in fair value of derivative instruments and hedged items are reported in net unrealized gain (loss) on securities. The Company has not adopted SFAS 133. However, the effect of adoption on the consolidated financial statements at December 31, 2000, would not be material. NOTE 2 - ADVANCE PREMIUM AND PREMIUM DEPOSITS - --------------------------------------------- Some of the Company's health and life programs require payments of premium prior to the effective date of coverage; and accordingly, invoices are sent out as early as two months prior to the coverage effective date. Insurance premiums received for coverage months effective after the balance sheet date are recorded as advance premiums. Deposit premiums represent funds received from the Company's daily automobile rental program which guarantee the payment of premiums for past coverage months. These deposits are required when information such as gross receipts or number of rental cars is required to compute the actual premium due, but is not available until after the coverage month. NOTE 3 - INVESTMENTS - -------------------- A summary of net investments and related income is as follows: Investment income is summarized as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Fixed maturities $5,848,248 $5,752,154 $5,463,418 Equity securities - 1,380 8,095 Short-term investments 251,930 238,017 260,725 --------- --------- --------- Total investment income 6,100,178 5,991,551 5,732,238 Less investment expenses 100 664 335 --------- --------- --------- Net investment income $6,100,078 $5,990,887 $5,731,903 ========= ========= ========= Net realized investment gains and (losses) are summarized as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Gross realized gains: Fixed maturities $ 2,861 $ - $ 78,758 Equity securities - 190,169 170,540 Gross realized (losses): Equity securities (138,250) (125,376) (1,367) ------- ------- ------- Net realized investment gains $(135,389) $64,793 $247,931 ======= ====== ======= 36 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the unrealized appreciation (depreciation) on investments carried at market and the applicable deferred federal income taxes is shown below:
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Gross unrealized appreciation: Fixed maturities $936,589 $363,627 $3,181,405 Gross unrealized (depreciation): Fixed maturities (752,036) (1,911,768) (67,497) Equity securities - (98,170) (39,238) ------- --------- --------- Net unrealized appreciation (depreciation) on investments 184,553 (1,646,311) 3,074,670 Deferred federal income tax benefit (expense) (62,748) 559,746 (1,076,134) ------- --------- --------- Net unrealized appreciation (depreciation) net of deferred income taxes $121,805 $(1,086,565) $1,998,536 ======= ========= =========
The amortized cost and estimated market value of fixed maturity investments at December 31, 2000, by contractual maturity are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Amortized Estimated Cost Market Value ---- ------------ Due in one year or less $17,974,663 $18,059,680 Due after one year through five years 72,757,426 72,825,890 Due after five years through ten years 4,065,988 4,097,060 --------- --------- Total fixed maturities $94,798,077 $94,982,630 ========== ==========
The amortized cost and estimated market values of investments in fixed maturities by categories are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- December 31, 2000 - ----------------- Available for sale: Fixed maturities ---------------- Certificates of deposit $ 400,000 $ - $ - $ 400,000 U.S. treasury securities 7,995,324 197,697 971 8,192,050 State and municipal tax-exempt bonds 19,789,675 244,759 - 20,034,434 Industrial and miscellaneous taxable bonds 66,613,078 494,133 751,065 66,356,146 ---------- -------- -------- ---------- Total fixed maturities $94,798,077 $936,589 $752,036 $94,982,630 ========== ======= ======= ========== December 31, 1999 - ----------------- Available for sale: Fixed maturities ---------------- Certificates of deposit $ 200,000 $ - $ - $ 200,000 U.S. treasury securities 10,056,163 43,845 24,045 10,075,963 State and municipal tax-exempt bonds 28,078,605 266,568 583 28,344,590 Industrial and miscellaneous taxable bonds 60,807,507 53,214 1,887,140 58,973,581 ---------- ------- --------- ---------- Total fixed maturities $99,142,275 $363,627 $1,911,768 $97,594,134 ========== ======= ========= ==========
37 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Short-term investments have an initial maturity of one year or less and consist of the following: Year ended December 31 ---------------------- 2000 1999 ---- ---- Certificates of deposit $ 225,000 $ 425,000 Commercial paper 2,000,000 2,675,000 Commercial bank money market accounts 417,280 2,055,254 U.S. government obligation money market fund 28,778 78,799 Short-term U.S. treasury note 681,414 731,281 Savings account 2,882 2,839 --------- --------- Total short-term investments $3,355,354 $5,968,173 ========= ========= NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION) - ---------------------------------------------------------------- Property and equipment consist of the following: Year ended December 31 ---------------------- 2000 1999 ---- ---- Furniture, fixtures, computer, office, and transportation equipment $2,354,072 $2,329,113 Accumulated depreciation 2,239,965 2,180,446 --------- --------- Net property and equipment $ 114,107 $ 148,667 ======= ======= NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET - ------------------------------------------- Premiums and notes receivable are substantially secured by unearned premiums and funds held as security for performance. Year ended December 31 ---------------------- 2000 1999 ---- ---- Premiums receivable $1,931,311 $1,615,238 Premium finance notes receivable 3,896,959 3,903,586 --------- --------- Total premiums and notes receivable 5,828,270 5,518,824 Less allowance for doubtful accounts 20,539 21,934 --------- --------- Net premiums and notes receivable $5,807,731 $5,496,890 ========= ========= Bad debt expense for the fiscal year ended December 31, 2000, and the fiscal year ended December 31, 1999, was $19,878 and $20,736, respectively. Premium finance notes receivable represent the balance due to the Company's premium finance subsidiary from policyholders who elect to finance their premiums over the policy term. These notes are net of unearned finance charges. NOTE 6 - NOTE PAYABLE - BANK - ---------------------------- Unico has a $2,000,000 line of credit with Union Bank of California. Interest on this line is referenced to LIBOR and is payable monthly. The agreement contains certain covenants including maintenance of certain financial ratios. This credit line expires September 3, 2002, at which time it is expected to be renewed. As of December 31, 2000 and 1999, no amounts were borrowed. 38 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES - --------------------------------------------------- The following table provides an analysis of the roll forward of Crusader's losses and loss adjustment expenses, including a reconciliation of the ending balance sheet liability for the periods indicated:
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Reserve for unpaid losses and loss adjustment expenses at beginning of year - net of reinsurance $37,628,165 $40,374,232 $40,591,248 ---------- ---------- ---------- Incurred losses and loss adjustment expenses Provision for insured events of current year 17,406,284 18,268,710 22,454,229 Increase (decrease) in provision for events of prior years (*) 4,270,631 (1,241,520) (4,860,647) ---------- ---------- ---------- Total losses and loss adjustment expenses 21,676,915 17,027,190 17,593,582 ---------- ---------- ---------- Payments Losses and loss adjustment expenses attributable to insured events of the current year 6,013,830 4,380,090 5,132,952 Losses and loss adjustment expenses attributable to insured events of prior years 18,745,224 15,393,167 12,677,646 ---------- ---------- ---------- Total payments 24,759,054 19,773,257 17,810,598 ---------- ---------- ---------- Reserve for unpaid losses and loss adjustment expenses at end of year - net of reinsurance $34,546,026 $37,628,165 $40,374,232 Reinsurance recoverable on unpaid losses and loss adjustment expenses at end of year 10,671,343 3,964,324 1,139,713 ---------- ---------- ---------- Reserve for unpaid losses and loss adjustment expenses at end of year per balance sheet - gross of reinsurance (**) $45,217,369 $41,592,489 $41,513,945 ========== ========== ==========
(*) During 1999, as part of the Company's ongoing reserve review process and loss trending analysis, the Company determined that its average claim costs were increasing and claims were settling for amounts greater than had been anticipated. To address this trend, the Company reviewed its open claim files to ensure that its case reserves and IBNR were adequate. The review process took approximately one year and resulted in increased reserves. The methodology used by the Company in determining case and IBNR reserves is consistent with prior years. The increase in incurred losses and loss adjustment expenses recognized in 2000 and 1999 was primarily due to the following: 1. Higher than anticipated claim cost from business outside of California. 2. The effect on settlements of escalating jury awards. 3. Increased development of losses due to the impact of changes in California law that expanded coverage and increased loss exposure, (e.g., Montrose Chemical Corp. v. Admiral Insurance Co. (1994), Montrose Chemical Corp. v. Admiral Insurance Co. (1995), Armstrong World Industries, Inc. v. Aetna Gas & Sur. Co. (1996), James Pepperell, et al., v. Scottsdale Insurance Company (1998), Pardee Construction Company v. Insurance Company of the West et al., (2000), Pershing Park Villas HOA v. United Pacific Ins. Co.(2000), Centex Golden Construction Co. v. Dale Tile Co. (2000)). (**) In accordance with Financial Accounting Standards Board Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, reinsurance recoverable on unpaid losses and loss adjustment expenses are reported for generally accepted accounting practices as assets rather than netted against the corresponding liability for such items on the balance sheet. 39 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - DEFERRED POLICY ACQUISITION COSTS - ------------------------------------------ Deferred policy acquisition costs consist of commissions (net of ceding commission), premium taxes, inspection fees, and certain other underwriting costs which are related to and vary with the production of Crusader Insurance Company policies. These costs are incurred by Crusader and include allocated expenses of other Unico subsidiaries. Policy acquisition costs are deferred and amortized as the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, including investment income.
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Deferred policy acquisition costs at beginning of year $4,338,217 $4,665,772 $4,886,684 Policy acquisition costs incurred during year 8,465,847 8,035,259 9,276,945 Policy acquisition costs amortized during year (8,303,917) (8,362,814) (9,497,857) --------- --------- --------- Deferred policy acquisition costs at end of year $4,500,147 $4,338,217 $4,665,772 ========= ========= =========
NOTE 9 - LEASE COMMITMENT - ------------------------- The Company presently occupies a 46,000 square foot building located at 23251 Mulholland Drive, Woodland Hills, California, under a master lease expiring March 31, 2007. The total rent expense under this lease agreement was $1,025,952 for the year ended December 31, 2000; $1,025,952 for the year ended December 31, 1999; and $1,025,952 for the year ended December 31, 1998. The lease provides for the following minimum annual rental commitments: Year ending ----------- December 31, 2001 $1,025,952 December 31, 2002 $1,025,952 December 31, 2003 $1,025,952 December 31, 2004 $1,025,952 December 31, 2005 (through March 31, 2007) $2,308,392 --------- Total minimum payments $6,412,200 ========= Erwin Cheldin, the Company's president, chairman, and principal stockholder, is the owner of the building. On February 22, 1995, the Company signed an extension to the lease with no increase in rent to March 31, 2007. The Company believes that the terms of the lease at inception and at the time the lease extension was signed were at least as favorable to the Company as could have been obtained from non-affiliated third parties. The Company utilizes for its own operations 100% of the space it leases. NOTE 10 - ACCRUED EXPENSES AND OTHER LIABILITIES - ------------------------------------------------ Accrued expenses and other liabilities consist of the following: Year ended December 31 ---------------------- 2000 1999 ---- ---- Premium payable $6,192,201 $5,208,491 Unearned claim administration income 300,000 300,000 Profit sharing contributions 395,305 406,667 Accrued salaries 475,740 469,721 Security purchases payable (settlement date in 2001) 140,625 - Other 395,308 6,258 --------- --------- Total accrued expenses and other liabilities $7,899,179 $6,391,137 ========= ========= 40 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - CLAIMS AND LITIGATION - ------------------------------- The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings as either plaintiff or defendant. The Company is also required to resort to legal proceedings from time to time in order to enforce collection of premiums, commissions, or fees for the services rendered to customers or to their agents. These routine items of litigation do not materially affect the Company and are handled on a routine basis by the Company through its general counsel. Likewise, the Company is sometimes named as a cross-defendant in litigation which is principally directed against that insurer who has issued a policy of insurance directly or indirectly through the Company. Incidental actions are sometimes brought by customers or others which relate to disputes concerning the issuance or non-issuance of individual policies. These items are also handled on a routine basis by the Company's general counsel, and they do not materially affect the operations of the Company. Management is confident that the ultimate outcome of pending litigation should not have an adverse effect on the Company's consolidated operation or financial position. 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 in gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in a total amount 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 disagreed with the audit findings and has appealed the matter. As of December 31, 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. NOTE 12 - REINSURANCE - --------------------- A reinsurance transaction occurs when an insurance company transfers ("cedes") a portion of its exposure on business written by it to a reinsurer which assumes that risk for a premium ("ceded premium"). Reinsurance does not legally discharge the Company from primary liability under its policies. If the reinsurer fails to meet its obligations, the Company must nonetheless pay its policy obligations. The Company's reinsurance agreements help protect Crusader against liabilities in excess of certain retentions, including major or catastrophic losses which may occur from any one or more of the property and/or casualty risks which Crusader insures. The Company continually monitors and evaluates the liquidity and financial strength of its reinsurers to determine their ability to fulfill obligations assumed under the reinsurance contracts. In 2000, Crusader had its primary reinsurance agreements with Partner Reinsurance Company of the U.S., a California admitted reinsurer. In 1999, Crusader had its primary reinsurance agreements with General Reinsurance Corporation, a California admitted reinsurers. These reinsurance agreements help protect Crusader against liabilities in excess of certain retentions, including major or catastrophic losses that may occur from any one or more of the property and/or casualty risks which Crusader insures. Crusader also has additional catastrophe reinsurance from various other reinsurance companies of which 90% of the premium is ceded to participating catastrophe reinsurers that are admitted in California. Any catastrophe loss ceded to the reinsurer not admitted in California requires the reinsurer to immediately obtain a non-cancelable (Evergreen) letter of credit covering their ceded outstanding loss including any IBNR. On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per risk. Concurrently, Crusader maintained catastrophe and clash covers (subject to a maximum occurrence and annual aggregate) to help protect the Company from one loss occurrence affecting multiple policies. Beginning January 1, 1998, an annual aggregate deductible of $750,000 commenced on losses ceded to its reinsurance treaty covering losses between $250,000 and $500,000. Beginning January 1, 2000, an annual aggregate deductible of $500,000 commenced on losses ceded to its reinsurance treaty covering losses between $250,000 and $500,000. Prior to January 1, 1998, National Reinsurance Corporation charged a provisional rate on exposures up to $500,000 that was subject to adjustment and was based on the amount of losses ceded, limited by a maximum percentage that could be charged. That provisional rated treaty was cancelled on a runoff basis and replaced by a flat rated treaty on January 1, 1998. 41 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader which includes a reimbursement of the cost of acquiring the portion of the premium which is ceded. Crusader does not currently assume any reinsurance. The Company intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The unpaid losses ceded to the reinsurer are recorded as an asset on the balance sheet. The effect of reinsurance on premiums written, premiums earned, and incurred losses is as follows: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Premiums written: Direct business $33,259,948 $33,139,361 $37,079,303 Reinsurance assumed - - - Reinsurance ceded (6,853,383) (6,595,440) (2,952,340) ---------- ---------- ---------- Net premiums written $26,406,565 $26,543,921 $34,126,963 ========== ========== ========== Premiums earned: Direct business $32,743,165 $34,693,113 $40,615,417 Reinsurance assumed - - - Reinsurance ceded (6,843,931) (6,583,752) (5,700,222) ---------- ---------- ---------- Net premiums earned $25,899,234 $28,109,361 $34,915,195 ========== ========== ========== Incurred losses and loss adjustment expenses: Direct $34,225,322 $23,189,173 $20,557,887 Assumed - - - Ceded (12,548,407) (6,161,983) (2,964,305) ---------- ---------- ---------- Net incurred losses and loss adjustment expenses $21,676,915 $17,027,190 $17,593,582 ========== ========== ========== NOTE 13 - PROFIT SHARING PLAN - ----------------------------- During the fiscal year ended March 31, 1986, the Company adopted the Unico American Corporation Profit Sharing Plan. Employees who are at least 21 years of age and have been employed by the Company for at least two years are participants in the Plan. Pursuant to the terms of the Plan, the Company annually contributes to the account of each participant an amount equal to a percentage of the participant's eligible compensation as determined by the Board of Directors. Participants are entitled to receive benefits under the plan upon the later of the following: the date 60 days after the end of the plan year in which the participant's retirement occurs or one year and 60 days after the end of the plan year following the participant's termination with the Company. However, the participant's interest must be distributed in its entirety no later than April 1 of the calendar year following the calendar year in which the participant attains age 70 1/2 or otherwise in accordance with the Treasury Regulations promulgated under the Internal Revenue Code of 1954 as amended. Contributions to the plan were as follows: Year ended December 31, 2000 $624,388 Year ended December 31, 1999 $653,389 Year ended December 31, 1998 $563,160 NOTE 14 - STATUTORY CAPITAL AND SURPLUS - --------------------------------------- Crusader is required to file an annual statement with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities ("statutory"). Statutory accounting practices differ in certain respects from generally accepted accounting principles. The more significant of these differences for statutory accounting are (a) premium income is taken into earnings over the periods covered by the policies, whereas the related acquisition and commission costs are expensed when incurred; (b) all bonds are recorded at amortized cost, regardless of trading activity; (c) non-admitted assets are charged directly against surplus; (d) loss reserves and unearned premium reserves are stated net of reinsurance; and (e) federal income taxes are recorded when 42 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS payable. Additionally, the cash flow presentation is not consistent with generally accepted accounting principles and a reconciliation from net income to cash provided by operations is not presented. Comprehensive income is not presented under statutory accounting. The NAIC's project to codify accounting practices was approved by the NAIC in March 1998. The approval included a provision for commissioners' discretion in determining appropriate statutory accounting for insurers in their states. Consequently, prescribed and permitted accounting practices may continue to differ from state to state. Codification became effective on January 1, 2001. The implementation of codification resulted in an increase in statutory surplus of $1,720,694. The Company is unable to predict how insurance rating agencies will interpret or react to any such changes. No assurance can be given that future legislative or regulatory changes resulting from such activities will no adversely affect the Company and its subsidiaries. Crusader Insurance Company statutory capital and surplus are as follows: As of December 31, 2000 $39,626,269 As of December 31, 1999 $40,952,456 Crusader Insurance Company statutory net income is as follows: Year ended December 31, 2000 $214,787 Year ended December 31, 1999 $5,404,526 Year ended December 31, 1998 $8,243,434 The Company believes that Crusader's statutory capital and surplus were sufficient to support the insurance premiums written based on guidelines established by the NAIC. Crusader is restricted in the amount of dividends it may pay to its parent in any twelve (12) month period without prior approval of the California Department of Insurance. Presently, without prior approval, Crusader may pay a dividend in any twelve (12) month period to its parent equal to the greater of (a) 10% of Crusader's statutory policyholders' surplus or (b) Crusader's statutory net income for the preceding calendar year. The maximum dividend that may be made without prior approval as of December 31, 2000, is $3,962,626. After taking into account the dividends paid by Crusader to its parent in 2000 of $1,500,000, the remaining dividend which may be made without prior approval as of December 31, 2000, was $2,462,626. NOTE 15 - STOCK PLANS - --------------------- The Company's 1985 stock option plan provided for the grant of incentive stock options to officers and key employees. The plan covered 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 December 31, 2000, there were 71,275 options outstanding, and all are currently exercisable. Options granted under this plan had a life of either 5 or 10 years and had a vesting period from immediate to 9 years. All options were granted at fair market value. There are no additional options available for future grant under the 1985 plan. The Company's 1999 Omnibus Stock Plan that covers 500,000 shares of the Company's common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) was approved by shareholders June 4, 1999. On August 26, 1999, the Company granted 135,000 incentive stock options of which 2,500 were terminated and 132,500 were outstanding as of December 31, 2000. These options expire ten years from the date of the grant and were not exercisable prior to September 1, 2000. Options covering 10,000 or less shares become exercisable at the rate of 2,500 shares per year commencing September 1, 2000; and options covering more than 10,000 shares become exercisable at the rate of 5,000 shares per year commencing September 1, 2000. At December 31, 2000, 50,000 options under the 1999 stock option plan were exercisable. As explained in Note 1, the Company applies APB Opinion No. 25 in accounting for its incentive stock option plans. Accordingly, no compensation cost has been recognized in the statements of operations. Had compensation cost for the Company plans been determined based on the fair value at the grant dates consistent 43 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS with the method of SFAS No. 123, the Company's 2000 net income would have been reduced by $81,771 and 1999 net income would have been reduced $135,453. Net income for 1998 was not affected by the calculation. In addition, 2000 earnings per share (basic and diluted) would have been reduced by $0.01 and 1999 earnings per share (basic and diluted) would have been reduced by $0.02. Calculations of the fair value under the method prescribed by SFAS No. 123 were made using the Black-Scholes option-price model with the following weighted average assumptions used for the 1999 grant: dividend yield 2.46%, expected volatility of 43%, expected lives of 10 years, and risk-free interest rates of 6.09%. No options were granted during 2000. The changes in the number of common shares under option are summarized as follows: Weighted Average Options Exercise Price ------- -------------- Outstanding at December 31, 1997 373,948 $3.700 Options granted - - Options exercised (90,082) $3.455 Options terminated (89,320) $3.500 ------- Outstanding at December 31, 1998 194,546 $3.592 Options granted 135,000 $9.250 Options exercised (93,131) $3.691 Options terminated - - ------- Outstanding at December 31, 1999 236,415 $6.780 Options granted - - Options exercised (30,140) $3.500 Options terminated (2,500) $9.250 ------- Outstanding at December 31, 2000 203,775 $7.239 ======= The weighted average fair value of options granted during 1999 was $4.30. No options were granted in 1998. Options exercisable were 121,275 at December 31, 2000, at a weighted average exercise price of $5.87; 101,415 at December 31, 1999, at a weighted average exercise price of $3.50; 194,546 at December 31, 1998, at a weighted average exercise price of $3.59. The following table summarizes information regarding the stock options outstanding at December 31, 2000:
Weighted Weighted Weighted Average Average Average Number of Remaining Exercise Price Number of Exercise Price Exercise Options Contractual Life of Outstanding Options of Exercisable Price Outstanding (Years) Options Exercisable Options ----- ----------- ----- ------- ----------- ------- $3.50 71,275 1.37 $3.50 71,275 $3.50 $9.25 132,500 8.65 $9.25 50,000 $9.25
NOTE 16 - TAXES ON INCOME - ------------------------- The provision for taxes on income consists of the following: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Current provision: Federal $(253,899) $1,668,332 $3,516,390 State 37,409 21,577 179,521 -------- --------- --------- Total federal and state (216,490) 1,689,909 3,695,911 Deferred (29,694) 303,614 350,318 ------- --------- --------- Provision for taxes $(246,184) $1,993,523 $4,046,229 ======= ========= ========= 44 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The income tax provision reflected in the consolidated statements of operations is less than the expected federal income tax on income as shown in the table below: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Computed tax expense $65,828 $2,422,462 $4,336,665 Tax effect of: Tax exempt income (344,428) (425,963) (490,783) Dividend exclusion - (279) (1,638) Other (5,910) (23,334) 23,525 State income tax expense 38,326 20,637 178,460 ------- --------- --------- Tax per financial statements $(246,184) $1,993,523 $4,046,229 ======= ========= ========= The components of the net federal income tax asset included in the financial statements as required by the assets and liability method are as follows: Year ended December 31 ---------------------- 2000 1999 ---- ---- Deferred tax assets: Discount on loss reserves $1,385,505 $1,371,087 Unearned premiums 1,159,690 1,125,191 Unrealized loss on investments - 559,745 Other 189,883 153,968 --------- --------- Total deferred tax assets $2,735,078 $3,209,991 --------- --------- Deferred tax liabilities: Deferred acquisition costs $1,530,051 $1,474,995 Discount on salvage and subrogation 8,027 7,944 Unrealized gain on investments 62,748 - Other 185,810 185,810 --------- --------- Total deferred tax liabilities $1,786,636 $1,668,749 --------- --------- Net deferred tax assets $948,442 $1,541,242 ======= ========= Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. As a California insurance company, Crusader is obligated to pay a premium tax on gross premiums written in the states of Arizona, California, Colorado, Montana, Nevada, Oregon, and Washington. The premium tax is in lieu of state franchise taxes; thus, the above provision for state taxes does not include the premium tax. NOTE 17 - 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 December 31, 2000, the Company had purchased and retired an aggregate of 628,600 shares of its common stock at a cost of $4,130,068 of which $308,908 was allocated to capital and $3,821,160 was allocated to retained earnings. In addition, the Company has an open commitment to purchase 65,000 shares of the Company's common stock at a price of $6.50 per share. This commitment was completed on February 13, 2001. 45 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - EARNINGS PER SHARE - ---------------------------- A reconciliation of the numerator and denominator used in the basic and diluted earnings per share calculation is presented below:
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Basic Earnings Per Share - ------------------------ Net income numerator $439,797 $5,131,366 $8,708,669 ======= ========= ========= Weighted average shares outstanding denominator 6,058,674 6,268,069 6,194,133 ========= ========= ========= Per share amount $0.07 $0.82 $1.41 Diluted Earnings Per Share - -------------------------- Net income numerator $439,797 $5,131,366 $8,708,669 ======= ========= ========= Weighted average shares outstanding 6,058,674 6,268,069 6,194,133 Effect of diluted securities 43,018 90,538 226,447 --------- --------- --------- Diluted shares outstanding denominator 6,101,692 6,358,607 6,420,580 ========= ========= ========= Per share amount $0.07 $0.81 $1.36
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------ Summarized unaudited quarterly financial data for each of the calendar years 2000 and 1999 is set forth below:
Comparable Period by Quarter Ended ---------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Calendar Year 2000 ------------------ Total revenues $9,929,286 $9,680,120 $9,253,451 $9,505,092 Income (loss) before taxes 828,315 808,470 126,105 (1,569,277) Net income (loss) 635,009 612,072 155,430 (962,714) Earnings per share: Basic $0.10 $0.10 $0.03 $(0.17) Diltued $0.10 $0.10 $0.03 $(0.17) Calendar Year 1999 ------------------ Total revenues $10,600,597 $10,091,867 $9,543,628 $10,498,165 Income before taxes 2,909,628 1,973,378 1,473,196 768,687 Net income 2,031,762 1,435,128 1,057,642 606,834 Earnings per share: Basic $0.33 $0.23 $0.17 $0.10 Diluted $0.32 $0.23 $0.17 $0.10
46 Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure -------------------- None PART III -------- Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ Information in response to Item 10 is incorporated by reference from the Company's definitive proxy statement to be used in connection with the Company's Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K. Item 11. Executive Compensation - -------------------------------- Information in response to Item 11 is incorporated by reference from the Company's definitive proxy statement to be used in connection with the Company's Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Information in response to Item 12 is incorporated by reference from the Company's definitive proxy statement to be used in connection with the Company's Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- Information in response to Item 13 is incorporated by reference from the Company's definitive proxy statement to be used in connection with the Company's Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K. 47 PART IV ------- Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------------------------------------------------------------------------ (a) Financial Statements and Schedules Filed as a Part of this Report: 1. Financial statements: The consolidated financial statements for the fiscal year ended December 31, 2000, are contained herein as listed in the index to consolidated financial statements on page 25. 2. Financial schedules: Index to Consolidated Financial Statements ------------------------------------------ Independent Auditors' Report on Financial Statement Schedules Schedule I - Summary of Investments Other than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant Schedule III - Supplemental Insurance Information Schedule IV - Reinsurance Schedule VI - Supplemental Information Concerning Property/Casualty Insurance Operations Schedules other than those listed above are omitted, since they are not applicable, not required, or the information required to be set forth is included in the consolidated financial statements or notes. 3. Exhibits: 3.1 Articles of Incorporation of Registrant, as amended. (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1984). 3.2 By-Laws of Registrant, as amended. (Incorporated herein by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1991). 10.1 Unico American Corporation Profit Sharing Plan & Trust. (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1985). (*) 10.2 Unico American Corporation Employee Incentive Stock Option Plan (1985). (Incorporated herein by reference to Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1985). (*) 10.3 Amendment to Unico American Corporation Incentive Stock Option Plan (1985). (Incorporated herein by reference to Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1987). (*) 10.4 The Lease dated July 31, 1986, between Unico American Corporation and Cheldin Management Company. (Incorporated herein by reference to Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1987). 10.5 The Lease Amendment #1 dated February 22, 1995, between Unico American Corporation and Cheldin Management amending the lease dated July 31, 1986. (Incorporated herein by reference to Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1995). 10.6 2000 Omnibus Stock Plan of Unico American Corporation (Incorporated herein by reference to Exhibit A to Registrant's Proxy Statement for its Annual Meeting of Shareholders held June 4, 2000). (*) 48 10.7 Employment Agreement between the Company and Roger Platten dated November 27, 1996. (Incorporated herein by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (*) 10.8 Employment Agreement between the Company and Cary Cheldin dated November 27, 1996. (Incorporated herein by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (*) 10.9 Amendment to Employment Agreement between the Company and Cary Cheldin dated January 10, 2000. (Incorporated herein by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (*) 10.10 Agreement to modify employment and general release of all claims between the Company and Roger Platten dated December 21, 2000. (*) 10.11 New employment agreement between the Company and Roger Platten dated December 21, 2000. (*) 10.12 Stock purchase agreement between the Company and Roger Platten dated December 21, 2000. (*) 21 Subsidiaries of Registrant. (Incorporated herein by reference to Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1984). (*) Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: None. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 23, 2001 UNICO AMERICAN CORPORATION By: /s/ ERWIN CHELDIN ----------------- Erwin Cheldin Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ ERWIN CHELDIN Chairman of the Board, ----------------- President and Chief Executive Officer, (Principal Executive Officer) March 23, 2001 /s/ LESTER A. AARON Treasurer, Chief Financial ------------------- Officer and Driector (Principal Accounting and Principal Financial Officer) March 23, 2001 /s/ CARY L. CHELDIN Executive Vice President ------------------- and Director March 23, 2001 /s/ GEORGE C. GILPATRICK Vice President, Secretary ------------------------ and Director March 23, 2001 50 INDEPENDENT AUDITORS' REPORT The Board of Directors Unico American Corporation: Under date of March 9, 2001, we reported on the consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000, as contained in the annual report on Form 10-K for the year 2000. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed under Item 14(a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Los Angeles, California March 9, 2001 51 SCHEDULE I UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2000
Column A Column B Column C Column D - -------- -------- -------- -------- Amount at which shown in the Type of Investment Cost Value Balance Sheet - ------------------ ---- ----- ------------- Fixed maturities: U.S. treasury securities $ 7,995,324 $8,192,050 $8,192,050 State and municipal tax exempt bonds 19,789,675 20,034,434 20,034,434 Industrial and miscellaneous bonds 66,613,078 66,356,146 66,356,146 Certificates of deposit 400,000 400,000 400,000 ---------- ---------- ---------- Total fixed maturities 94,798,077 94,982,630 94,982,630 Equity securities 25,920 25,920 25,920 Short-term investments 3,355,354 3,355,354 3,355,354 --------- ---------- --------- Total investments $98,179,351 $98,363,904 $98,363,904 ========== ========== ==========
52 SCHEDULE II UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS - PARENT COMPANY ONLY
December 31 December 31 2000 1999 ---- ---- ASSETS ------ Investments Available for sale: Fixed maturities, at market value (amortized cost December 31, 2000 $1,499,575; December 31, 1999 $2,498,963) $1,499,063 $2,484,687 Short-term investments 117,816 100,000 --------- --------- Total Investments 1,616,879 2,584,687 Cash 16,406 27,736 Accrued investment income 22,252 46,081 Investments in subsidiaries 68,429,823 65,443,692 Property and equipment (net of accumulated depreciation) 114,107 148,667 Other assets 197,297 85,557 ---------- ---------- Total Assets $70,396,764 $68,336,420 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES - ----------- Accrued expenses and other liabilities $1,073,593 $793,758 Payables to subsidiaries (net of receivables) 17,909,842 12,701,865 ---------- ---------- Total Liabilities $18,983,435 $13,495,623 ---------- ---------- STOCKHOLDERS' EQUITY - -------------------- Common stock $2,789,494 $ 3,098,389 Net unrealized investment gains (losses) 121,805 (1,086,565) Retained earnings 48,502,030 52,828,973 ---------- ---------- Total Stockholders' Equity $51,413,329 $54,840,797 ---------- ---------- Total Liabilities and Stockholders' Equity $70,396,764 $68,336,420 ========== ==========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 53 SCHEDULE II (continued) UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998 ---- ---- ---- REVENUES - -------- General and administrative expenses allocated to subsidiaries (*) $2,081,837 $5,273,146 $4,863,910 Net investment income 138,487 143,215 210,071 Net realized investment gains 2,508 - - Other income 13,497 10,755 6,031 --------- --------- --------- Total Revenue 2,236,329 5,427,116 5,080,012 EXPENSES - -------- General and administrative expenses 4,782,663 5,356,474 5,018,162 --------- --------- --------- Income before equity in net income of subsidiaries (2,546,334) 70,642 61,850 Equity in net income of subsidiaries 2,986,131 5,060,724 8,646,819 --------- --------- --------- Net Income $439,797 $5,131,366 $8,708,669 ======= ========= =========
(*) In the year ended 2000, the parent company did not allocate any of its salaries or payroll taxes to its subsidiaries. The Company and its subsidiaries file a consolidated federal income tax return. Unico received cash dividends of $1,500,000 from Crusader and $500,000 from American Acceptance Corporation in the year ended December 31, 2000; $2,000,000 from Crusader in the year ended December 31, 1999; and $1,500,000 from Crusader in the year ended December 31, 1998. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 54 SCHEDULE II (continued) UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income $439,797 $5,131,366 $8,708,669 Adjustments to reconcile net income to net cash from operations Undistributed equity in net (income) of subsidiaries (2,986,131) (5,060,724) (8,646,819) Net realized (gain) on sale of securities (2,508) - - Depreciation and amortization 67,615 96,334 98,030 Accrued expenses and other liabilities 279,835 (153,869) (159,081) Accrued investment income 23,829 (17,114) (23,624) Other assets (111,740) 18,575 1,474 --------- ------ ------ Net cash provided (used) from operations (2,289,303) 14,568 (21,351) --------- ------ ------ Cash flows from investing activities Purchase of fixed maturity investments (998,340) (1,498,875) (998,781) Proceeds from maturity of fixed maturity investments 1,000,000 - - Proceeds from sale of fixed maturity investments 1,001,250 - - (Increase) decrease in short-term investments (17,816) 1,650,000 (550,000) Additions to property and equipment (34,072) (40,385) (100,245) ------- ------- --------- Net cash provided (used) by investing activities 951,022 110,740 (1,649,026) ------- ------- --------- Cash flows from financing activities Proceeds from issuance of common stock 13 202,687 57,644 Repurchase of common stock (4,130,068) - - Dividends paid to shareholders (945,580) (1,576,237) (435,456) Net change in payables and receivables from subsidiaries 6,402,586 1,255,114 2,049,114 --------- ------- --------- Net cash provided (used) by financing activities 1,326,951 (118,436) 1,671,302 --------- ------- --------- Net increase (decrease) in cash (11,330) 6,872 925 Cash at beginning of year 27,736 20,864 19,939 ------ ------ ------ Cash at end of year $16,406 $27,736 $20,864 ====== ====== ======
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 55 SCHEDULE III UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION
Future Benefits, Amortization Deferred Benefits, Claims, of Deferred Policy Losses, Net Losses and Policy Other Acquisition and Loss Unearned Premium Investment Settlement Acquisition Operating Premium Cost Expenses Premiums Revenue Income Expenses Costs Costs Written ------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 Property & Casualty $4,500,147 $45,217,369 $17,099,927 $25,899,234 $5,764,094 $21,676,915 $8,303,917 $1,440,011 $26,406,565 Year Ended December 31, 1999 Property & Casualty $4,338,217 $41,592,489 $16,583,143 $28,109,361 $5,706,945 $17,027,190 $8,362,814 $1,949,865 $26,543,921 Year Ended December 31, 1998 Property & Casualty $4,665,772 $41,513,945 $18,136,895 $34,915,195 $5,497,323 $17,593,582 $9,497,857 $1,663,214 $34,126,963
56 SCHEDULE IV UNICO AMERICAN CORPORATION AND SUBSIDIARIES REINSURANCE
Ceded to Assumed Percentage of Gross Other from Other Net Amount Assumed Amount Companies Companies Amount to Net ------------------------------------------------------------------------ Year Ended December 31, 2000 Property & Casualty $32,743,165 $6,843,931 - $25,899,234 - Year Ended December 31, 1999 Property & Casualty $34,693,113 $6,583,752 - $28,109,361 - Year Ended December 31, 1998 Property & Casualty $40,615,417 $5,700,222 - $34,915,195 -
57 SCHEDULE VI UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS
Claims and Reserves for Claim Unpaid Discount Adjustment Deferred Claims if Any, Expenses Incurred Affiliation Policy and Claim Deducted Net Related to with Acquisition Adjustment in Unearned Earned Investment (1) Current Year Registrant Costs Expenses Column C Premiums Premiums Income (2) Prior Year (A) (B) (C) (D) (E) (F) (G) (H) - -------------------------------------------------------------------------------------------------------------------------------- Company & Consolidated Subsidiaries Year Ended - ---------- December 31, 2000 $4,500,147 $45,217,369 - $17,099,927 $25,899,234 $5,764,094 $17,406,284 (1) $4,270,631 (2) December 31, 1999 $4,338,217 $41,592,489 - $16,583,143 $28,109,361 $5,706,945 $18,268,710 (1) $(1,241,520) (2) December 31, 1998 $4,665,772 $41,513,945 - $18,136,895 $34,915,195 $5,497,323 $22,454,229 (1) (4,860,647) (2) Amortization of Deferred Paid Claims Policy and Claim Acquisition Adjustment Premiums Costs Expenses Written (I) (J) (K) - -------------------------------------------------------------------------------- Year Ended - ---------- December 31, 2000 $8,303,917 $24,759,054 $26,406,565 December 31,1999 $8,362,814 $19,773,257 $26,543,921 December 31,1998 $9,497,857 $17,810,598 $34,126,963
58 EX-10.10 2 0002.txt AGREEMENT TO MODIFY EMPLOYMENT - ROGER PLATTEN AGREEMENT TO MODIFY EMPLOYMENT AND GENERAL RELEASE OF ALL CLAIMS THIS AGREEMENT TO MODIFY EMPLOYMENT AND GENERAL RELEASE OF ALL CLAIMS (hereinafter "Agreement") is made this 21 day of December 2000, by and between Roger Platten (hereinafter "Platten") and Unico American Corporation, a Nevada corporation (hereinafter "Company"), in reference to the following facts: WHEREAS, Platten was employed by Company as Vice President and General Counsel pursuant to the Employment Agreement dated November 27, 1996 (hereinafter "Original Employment Agreement") and is a Director of the Company; WHEREAS, pursuant to the Original Employment Agreement, Platten's term of employment is until December 1, 2001; WHEREAS, the Parties have agreed to terminate the Original Employment Agreement and enter into a New Employment Agreement (hereinafter "New Employment Agreement") as provided for herein modifying Platten's employment and status with the Company; THEREFORE, for valuable consideration, receipt of which is hereby acknowledged, the Parties agree as follows: 1. Termination of Original Employment Agreement. -------------------------------------------- Effective upon the execution of this Agreement ("Effective Date"), the Original Employment Agreement shall be deemed terminated and Platten shall be deemed to have resigned from his position as Vice President and General Counsel of the Company and from his position as a Director of the Company's Board of Directors. 2. New Employment Agreement. ------------------------ Concurrently with the execution of this Agreement, the parties shall enter into the New Employment Agreement as set forth in Exhibit A hereto. 3. Payments to Platten. ------------------- a. Platten shall receive a Guaranteed Bonus of Thirty Thousand Dollars for the calendar year ending December 31, 2000 to be paid on or before December 31, 2000. In addition, Company will pay Platten a Guaranteed Bonus of Thirty Thousand Dollars for the calendar year ending December 31, 2001 to be paid on or before December 31, 2001 provided: (1) That Platten`s employment is not terminated for cause by the Company prior to December 31, 2001; and (2) That Platten does not resign his employment with the Company prior to December 31, 2001. These Guaranteed Bonuses are in lieu of any other claims to a Bonus that Platten might otherwise assert under the Original Employment Agreement or under any other agreements between the parties hereto. 1 b. Platten has previously asserted that he has not received all of the cost of living adjustments to which he is entitled pursuant to the terms of the Original Employment Agreement. The Company has asserted that Platten has received all of the cost of living adjustments to which he is entitled pursuant to the terms of the Original Employment Agreement. In settlement of all disputes between Platten and the Company relating to Platten`s claims concerning the cost of living adjustments pursuant to the terms of the Original Employment Agreement, the Company shall pay Platten the sum of $5000 on or before December 31, 2001. c. In addition to the Guaranteed Bonus and the cost of living adjustment referenced in Sections 3a and 3b above, and except as provided in Sections 3a and 3b above, Platten shall be entitled to all salary and employee benefits to which he would otherwise be entitled pursuant to the Original Employment Agreement through the Effective Date. 4. Prior Agreements Canceled. Except as provided for herein, agreements ------------------------- entered into between Platten and Company arising out of or relative to Patten's employment by Company, including but not limited to, the Original Employment Agreement and any other contract of employment, are hereby canceled and shall have no further force or effect. 5. General Release. Platten releases Company as follows: --------------- a. In consideration of payments and other consideration as set forth in this Agreement, to which Platten understands and acknowledges he would not, absent this Agreement, be entitled to receive, Platten hereby knowingly and voluntarily waives, releases, acquits and forever discharges the Company, and all of its affiliates, parents, subsidiaries and their respective agents, officers, directors, shareholders and employees from any liability, action, suit, claim, damages, judgment, known or unknown, liquidated or unliquidated, fixed or contingent which he has ever had or has, arising out of actions by the Company prior to the Effective Date of this Agreement and arising out of or in conjunction with Patten's employment with the Company or any of its affiliates or the termination thereof, including, without limitation, claims for personal injury, pain and suffering, defamation, negligence or other tortious conduct, claims under federal, state or local common law or statute, as well as any form of employment discrimination prohibited under Title VII of the Civil Rights Act of 1964, the Americans with Disability Act (hereinafter "ADA"), ERISA, any anti-discrimination law or ordinance, any applicable collective bargaining agreement, any applicable wage and hour laws, and for wrongful discharge, breach of contract, breach of any express or implied promise, retaliation, breach of public policy, or any other theory, whether legal or equitable, including any claims which could have been asserted up to the Effective Date of this Agreement; b. Platten further agrees to expressly waive and relinquish any of the rights and benefits that he might otherwise have or claim to have under the provisions of Section 1542 of the California Civil Code, which provides as follows: 2 "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." c. The foregoing waiver of the provisions of Section 1542 of the California Civil Code was separately bargained for, and Platten expressly agrees that the releases contained herein shall be given full force and effect in accordance with each and all of the expressed terms and provisions relating to unknown and unsuspected claims, demands and causes of action, if any. Platten acknowledges that he may have sustained damages, expenses and losses that are presently unknown or not suspected, and that such damages, expenses and losses, if any, may give rise to additional claims for damages, expenses and losses in the future, which are not now anticipated by him. Nevertheless, Platten acknowledges that this Agreement has been negotiated and agreed upon in light of this realization and, being fully aware of the situation, hereby expressly waives all rights that he may have under California Civil Code section 1542, as well as under any other state or federal statute or common law principle of similar effect; and d. Notwithstanding any provision herein, Platten does not hereby waive any vested benefits he may have under any pension plan sponsored by Company which are subject to the Employee Retirement Income Security Act (ERISA), any rights to obtain continued health plan coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), any rights which may not be waived by law, or the right to indemnification and defense pursuant to Labor Code section 2802 as the result of any legal action or other proceeding commenced by any third party against Platten for acts arising out of the discharge of his duties as an employee of Company. 6. Waiver of Age Discrimination in Employment Act Rights. In addition, ------------------------------------------------------ Platten hereby knowingly and voluntarily waives any rights he may have pursuant to the Age Discrimination in Employment Act (hereinafter "ADEA") as amended by the Older Workers? Benefit Protection Act of 1990 (hereinafter "OWBPA") subject to the following conditions. a. This waiver is part of the Agreement. b. Platten understands that he is waiving his rights to make any claim based upon age discrimination or any rights he may have pursuant to the ADEA or the OWBPA. c. The waiver of rights pursuant to this section applies only to rights or claims in existence before or at the time of the execution of this Agreement and does not apply to any rights or claims that may arise after the date the waiver is executed. d. This waiver is in exchange for consideration in addition to anything of value to which Platten is already entitled. 3 e. Platten is hereby advised in this writing: (1) To consult with an attorney prior to the execution of this Agreement; (2) To be represented by counsel in all matters relative to the Agreement, including this waiver; and (3) To seek the advice of his counsel as to the legal effect of entering into the Agreement and this waiver. Platten has represented to the Company that he is an attorney and specifically waives his right to consult with counsel in connection with all matters relating to this Agreement and the New Employment Agreement (Exhibit A hereto). f. Platten has been given sufficient time to consider this Agreement and specifically waives his right to be given twenty-one (21) days within which to consider this Agreement. g. Platten shall have a period of seven (7) days following the execution of this Agreement to revoke this Agreement and it shall not become effective or enforceable until the revocation period has expired. h. This waiver applies only to Platten and does not affect any other individual or any class, unit, or group of individuals. i. Neither this Agreement nor the waiver of rights under the ADEA or OWBPA arises out of any bona fide employee benefit plan, voluntary early retirement incentive plan or any other exit incentive or other employment termination program. 7. No Transfers. Each Party hereto warrants and represents that ------------- it has not heretofore assigned, transferred or encumbered any of the claims, demands, duties, liabilities, debts, obligations or causes of action, or any matter or portion thereof released hereunder, or which is the subject of this Agreement. 8. Legal Action. In any legal action or other proceeding brought to ------------- enforce or interpret any of the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and legal costs incurred in connection therewith. 9. Time of the Essence. Time is of the essence in this Agreement with ------------------- respect to all of the terms, provisions, covenants and conditions contained herein, including specifically, but not limited to, the payment of any monies or execution and delivery of any documents provided for herein. 4 10. Drafting. The Parties hereto agree that this Agreement has been -------- jointly negotiated and drafted, that the order of the paragraphs has no significance, and that the language hereof shall be construed as a whole according to its fair meaning and interpretation, and not strictly for or against any of the Parties hereto. 11. Cooperation. Each party hereto agrees to take such further action ----------- and execute and deliver such further documents, and to give oath to or acknowledge before a notary public any documents reasonably deemed necessary or convenient by any party to implement the terms or intent hereof. 12. Survival. Notwithstanding anything to the contrary herein, all -------- rights and obligations, representations and warranties created under or pursuant to this Agreement shall survive the execution and delivery of this Agreement, the releases contained herein, and the documents provided for herein. 13. No Admission of Liability. This Agreement is a settlement of --------------------------- disputed claims, and each of the Parties hereto agrees and acknowledges that nothing contained herein shall constitute or be deemed an admission of any fact or liability with respect to any claim, contention or cause of action that is the subject matter hereof. 14. Entire Agreement. This Agreement and the documents incorporated ----------------- herein or concurrently executed herewith shall constitute the entire agreement between the Parties hereto with respect to the subject matter hereof, and shall supersede all prior agreements, understandings, warranties, representations and negotiations of any party herein concerning the subject matter hereof. 15. Binding Effect. This Agreement shall inure to the benefit of and --------------- be binding upon the successors in interest of each of the Parties hereto. 16. Amendments. This Agreement may not be released, amended or ---------- modified in any manner whatsoever, except in writing, signed by each of the Parties hereto. 17. Gender. All references herein to the singular or plural shall ------ be deemed to refer to the other, as the context requires, and all references to the masculine, feminine or neuter shall refer to all of such genders, unless the context requires otherwise. 18. Governing Law. This Agreement shall be deemed to have been -------------- entered into and shall be construed and interpreted in accordance with the laws of the State of California. Venue of any action arising from or related to this Agreement shall be in Los Angeles County, California. 19. Counterparts. This Agreement may be executed in one or more ------------ separate counterparts, each of which, when so executed, shall be deemed an original and shall together constitute one and the same instrument which may be sufficiently evidenced by any one counterpart, and each of which shall be fully effective against all persons executing the same and all persons or entities claiming under them. 5 20. Captions. The captions of this Agreement are solely for the -------- convenience of the Parties, do not compromise any part of this Agreement, and shall not be used to interpret or determine the validity of any provision hereof. 21. Authority. Each party that is not a natural person hereto hereby --------- represents and warrants that it has the power, authority and capacity to enter into and perform this Agreement, and the person signing on behalf of such party represents and warrants that he is duly authorized to so act. 22. Representation. All Parties to this Agreement have been represented -------------- by counsel of their own choosing and have been fully advised by their respective counsel and understand that by entering into this Agreement, they are waiving valuable rights and have created other rights and obligations and with that knowledge and understanding, freely enter into this Agreement. IN WITNESS WHEREOF, this Agreement is entered into and shall be effective as of the date first written above. DATE: December 21, 2000 /s/ Roger Platten ------------------ Roger Platten DATE: December 21, 2000 Unico American Corporation, a Nevada corporation By: /s/ Erwin Cheldin ------------------- Erwin Cheldin, Executive Vice President 6 EX-10.11 3 0003.txt NEW EMPLOYMENT AGREEMENT -ROGER PLATTEN STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made this 21 day of December 2000, by and between Roger Platten (hereinafter "Platten") and Unico American Corporation, a Nevada corporation (hereinafter "Company"), in reference to the following facts: WHEREAS, Platten is employed by Company as Vice President and General Counsel pursuant to the Employment Agreement dated November 27, 1996 (hereinafter "Original Employment Agreement") and is a Director of the Company; WHEREAS, pursuant to the Original Employment Agreement, Platten's term of employment is until December 1, 2001; WHEREAS, the Parties have agreed to terminate the Original Employment Agreement and enter into a New Employment Agreement, which New Employment Agreement ?is being executed concurrently herewith; WHEREAS, the parties hereto are concurrently executing an Agreement to Modify Employment and General Release of All Claims (the "Release"); WHEREAS, Platten is the owner of Sixty Five Thousand (65,000) shares of stock in the Company; and WHEREAS, Platten desires to sell to the Company, and the Company desires to purchase from Platten, on the terms and conditions set forth herein, Platten`s Sixty Five Thousand (65,000) shares of stock in the Company; THEREFORE, for valuable consideration, receipt of which is hereby acknowledged, the Parties agree as follows: 1. Purchase of Stock. ------------------ The Company hereby agrees to purchase from Platten, and Platten hereby agrees to sell to the Company, Platten`s Sixty Five Thousand (65,000) shares of stock in the Company at a price of $6.50 per share. 2. No Right of Revocation ---------------------- The Release which is being executed concurrently herewith provides that Platten shall have a period of seven (7) days following the execution of the Release to revoke it and it shall not become effective or enforceable until the revocation period has expired. In the event that the Release is revoked within the aforementioned seven (7) day period, then, at the option of the Company, the Company may elect to purchase all or such part of Platten's Sixty Five Thousand (65,000) shares of stock in the Company as the Company so chooses. 1 In the event that the Release is revoked within the aforementioned seven (7) day period, than the aforementioned election to purchase by the Company shall be in a writing to Platten notifying him of the Company`s election. The writing is effective only if it is hand-delivered or mailed to Platten within five (5) business days of the Company's receipt of notice of Platten`s revocation of the Release. If the writing is mailed to Platten, it shall be addressed to his last known home address and it shall be deemed to be timely if it was deposited in the United States mail, by first class postage, within the aforementioned five (5) day period. In the event that the Release is revoked within the aforementioned seven (7) day period and the Company does not timely give Platten the notice of election to purchase as provided herein, than the Company will be deemed to have elected to not purchase any of Platten's Sixty Five Thousand (65,000) shares of stock in the Company. Platten does not have any right whatsoever to revoke this Stock Purchase Agreement. Whether or not the Company makes any election as provided in this Paragraph, all other terms and conditions of this Stock Purchase Agreement shall remain in full force and effect. 3. Payment to Platten and Surrender of Stock Certificates. ------------------------------------------------------ All of the shares of stock being sold by Platten to the Company pursuant to this Stock Purchase Agreement shall be delivered to the Company, free and clear of all liens and encumbrances, no later than March 21, 2001. If Platten so desires, he may sell the stock and transfer the stock certificates to the Company in increments of no less than Five Thousand (5,000) shares at any time during the aforementioned twelve (12) week period, except that the last sale and transfer may be in less than a Five Thousand (5,000) share increment. For each sale and transfer, Platten and the Company shall attend a closing, in the offices of the Company at which: a. The Company will pay Platten, by Company check, the sum of Six Dollars and Fifty Cents ($6.50)for each share of Platten`s stock in the Company being sold to the Company; and b. Platten will surrender to the Company stock certificates evidencing the number of shares of his stock being purchased by the Company. 4. Failure to Deliver. ------------------- In the event that Platten cannot or does not timely deliver all of the stock certificates to the Company which are being purchased hereunder, he will be deemed to be in material default of this agreement, entitling the Company to exercise any and all remedies available to it in law and in equity, including but not limited to, damages and/or rescission. 5. General Release. --------------- Platten releases the Company as follows: 2 a. Except for the obligations specifically referred to in this Stock Purchase Agreement, the New Employment Agreement and the Release, Platten hereby knowingly and voluntarily waives, releases, acquits and forever discharges the Company, and all of its affiliates, parents, subsidiaries and their respective agents, officers, directors, shareholders and employees from any liability, action, suit, claim, damages, judgment, known or unknown, liquidated or unliquidated, fixed or contingent, express or implied, which he has ever had or has, arising out of actions by the Company prior to the date of execution of this Stock Purchase Agreement. b. Platten further agrees to expressly waive and relinquish any of the rights and benefits that he might otherwise have or claim to have under the provisions of Section 1542 of the California Civil Code, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." c. The foregoing waiver of the provisions of Section 1542 of the California Civil Code was separately bargained for, and Platten expressly agrees that the releases contained herein shall be given full force and effect in accordance with each and all of the expressed terms and provisions relating to unknown and unsuspected claims, demands and causes of action, if any. Platten acknowledges that he may have sustained damages, expenses and losses that are presently unknown or not suspected, and that such damages, expenses and losses, if any, may give rise to additional claims for damages, expenses and losses in the future, which are not now anticipated by him. Nevertheless, Platten acknowledges that this Stock Purchase Agreement has been negotiated and agreed upon in light of this realization and, being fully aware of the situation, hereby expressly waives all rights that he may have under California Civil Code section 1542, as well as under any other state or federal statute or common law principle of similar effect. 6. Platten is hereby advised in this writing: a. To consult with an attorney prior to the execution of this Stock Purchase Agreement; b. To be represented by counsel in all matters relative to the Stock Purchase Agreement, including this waiver; and c. To seek the advice of his counsel as to the legal effect of entering into the Stock Purchase Agreement. 3 Platten has represented to the Company that he is an attorney and specifically waives his right to consult with counsel in connection with all matters relating to this Stock Purchase Agreement. 7. No Transfers. Platten hereby warrants and represents that (except ------------ for certain of the subject shares which are presently being held in a margin account) he has not heretofore assigned, transferred or encumbered any of the shares of stock which are the subject of this Stock Purchase Agreement. Platten further warrants and represents that all of the shares which are being surrendered to the Company hereunder will be surrendered free and clear of all claims, liens, assignments and encumbrances. 8. Legal Action. In any legal action or other proceeding brought to ------------- enforce or interpret any of the terms of this Stock Purchase Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and legal costs incurred in connection therewith. 9. Time of the Essence. Time is of the essence in this Stock Purchase ------------------- Agreement with respect to all of the terms, provisions, covenants and conditions contained herein, including specifically, but not limited to, the payment of any monies or execution and delivery of any documents provided for herein. 10. Drafting. The Parties hereto agree that this Stock Purchase -------- Agreement has been jointly negotiated and drafted, that the order of the paragraphs has no significance, and that the language hereof shall be construed as a whole according to its fair meaning and interpretation, and not strictly for or against any of the Parties hereto. 11. Cooperation. Each party hereto agrees to take such further action ----------- and execute and deliver such further documents, and to give oath to or acknowledge before a notary public any documents reasonably deemed necessary or convenient by any party to implement the terms or intent hereof. Without limiting the generality of the foregoing, in the event that the Company exercises the option referred to in paragraph 4c above, Platten shall take any and all actions necessary to timely deliver to the Company stock certificates evidencing the number of shares being purchased by the Company. The failure of Platten to timely deliver the aforementioned stock certificates to the Company shall be deemed a material breach of this Stock Purchase Agreement by Platten. 12. Survival. Notwithstanding anything to the contrary herein, all -------- rights and obligations, representations and warranties created under or pursuant to this Stock Purchase Agreement shall survive the execution and delivery of this Stock Purchase Agreement, the releases contained herein, and the documents provided for herein. 13. No Admission of Liability. This Stock Purchase Agreement is a ---------------------------- settlement of disputed claims, and each of the Parties hereto agrees and acknowledges that nothing contained herein shall constitute or be deemed an admission of any fact or liability with respect to any claim, contention or cause of action that is the subject matter hereof. 4 14. Entire Agreement. This Stock Purchase Agreement and the documents ---------------- incorporated herein or concurrently executed herewith shall constitute the entire agreement between the Parties hereto with respect to the subject matter hereof, and shall supersede all prior agreements, understandings, warranties, representations and negotiations of any party herein concerning the subject matter hereof. 15. Binding Effect. This Stock Purchase Agreement shall inure to the benefit of and be binding upon the successors in interest of each of the Parties hereto. 16. Amendments. This Stock Purchase Agreement may not be released, ---------- amended or modified in any manner whatsoever, except in writing, signed by each of the Parties hereto. 17. Gender. All references herein to the singular or plural shall ------ be deemed to refer to the other, as the context requires, and all references to the masculine, feminine or neuter shall refer to all of such genders, unless the context requires otherwise. 18. Governing Law. This Stock Purchase Agreement shall be deemed to -------------- have been entered into and shall be construed and interpreted in accordance with the laws of the State of California. Venue of any action arising from or related to this Stock Purchase Agreement shall be in Los Angeles County, California. 19. Counterparts. This Stock Purchase Agreement may be executed in one ------------ or more separate counterparts, each of which, when so executed, shall be deemed an original and shall together constitute one and the same instrument which may be sufficiently evidenced by any one counterpart, and each of which shall be fully effective against all persons executing the same and all persons or entities claiming under them. 20. Captions. The captions of this Stock Purchase Agreement are -------- solely for the convenience of the Parties, do not compromise any part of this Stock Purchase Agreement, and shall not be used to interpret or determine the validity of any provision hereof. 21. Authority. Each party that is not a natural person hereto hereby --------- represents and warrants that it has the power, authority and capacity to enter into and perform this Stock Purchase Agreement, and the person signing on behalf of such party represents and warrants that he is duly authorized to so act. IN WITNESS WHEREOF, this Stock Purchase Agreement is entered into and shall be effective as of the date first written above. DATE: December 21, 2000 /s/ Roger Platten ---------------------- Roger Platten DATE: December 21, 2000 Unico American Corporation, a Nevada corporation By: /s/ Erwin Cheldin -------------------- Erwin Cheldin, President 5 EX-10.12 4 0004.txt STOCK PURCHASE AGREEMENT - ROGER PLATTEN NEW EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into by and between Unico American Corporation, a Nevada corporation ("Employer") and Roger Platten ("Employee"), as follows: 1. EMPLOYMENT. Employer hereby agrees to employ Employee as a ---------- Consultant, subject to the terms, conditions and provisions of this Agreement. Employee hereby accepts such employment and agrees to devote up to eight (8) hours per day, as may be needed, and all of his knowledge and skill to his employment with Employer. In connection with the rendition of such services, Employee shall report to Cary L. Cheldin, or to such other person or persons as designated by Cary L. Cheldin or the Board of Directors of Employer and he shall perform those services as assigned consistent with his position. 2. PERFORMANCE OF SERVICES. During the term of his employment with ------------------------ Employer, Employee shall perform no act or fail to perform any act, the performance or absence of which is or will be disloyal to or in material derogation of the interests of Employer or any affiliate of Employer under any circumstances. 3. COMPENSATION. ------------ a. Base Salary. During the term of his employment, Employee shall ----------- be paid as follows: (1) From the commencement of the term of this Agreement until December 31, 2000, Employee shall be paid gross base salary at the same rate that he was being paid immediately prior to the termination of the Employment Agreement between Employee and Employer dated November 27, 1996; (2) From January 1, 2001 until the date of termination of this Agreement, Employee shall be paid a gross base salary of Two Hundred Thousand Dollars ($200,000.00) per year. b. Guaranteed Bonus. The only bonus to which Employee is entitled ----------------- or will be paid is the Guaranteed Bonus referred to in Section 3a of the Agreement To Modify Employment and General Release of All Claims, executed concurrently herewith. c. Benefits. During the term of his employment, in addition to the -------- Guaranteed Bonus and Base salary referred to above, Employee shall be entitled to whatever employee benefits, if any, Employer elects to make available to its employees, provided that Employee meets all qualifications and eligibility requirements for employee benefits which Employer may periodically establish and which apply generally to Employer's employees. Employer shall have no obligation under this Agreement to provide any employee benefit to Employee that Employer elects to discontinue or that Employer does not make generally available to its employees or on terms more favorable than those generally applicable to Employer's employees as periodically modified by Employer. Further, during the term of this Agreement, Employee shall receive an automobile allowance in the sum of Two Hundred Fifty Dollars ($250.00) per month. 1 d. Continuing Education. During the term of this Agreement, the --------------------- Company will reimburse employee for continuing legal education expenses. Such expenses shall not include any expense for transportation, lodging or meals and shall be limited only to actual registration expenses not to exceed $50.00 per accredited hour of continuing legal education, up to a maximum of $1000.00. 4. PRIOR EMPLOYMENT AGREEMENT TERMINATED. ------------------------------------- Employee acknowledges and agrees that the Employment Agreement between he and the Company dated November 27, 1996, has been terminated and has no further force or effect. 5. TERM AND TERMINATION OF EMPLOYMENT. ---------------------------------- a. Term. Employee's employment shall expire on December 31, 2001, ---- unless sooner terminated by mutual agreement or pursuant to the provisions of this section 5, hereinbelow. b. Termination for Cause. Employer may terminate this Agreement at any --------------------- time without notice for cause. Cause of termination will be deemed to exist under the following circumstances: Employee commits any material acts of dishonesty; discloses confidential information; is guilty of carelessness or misconduct; neglects his duties under this Agreement; fails to follow the specific instructions of Employer; fails to or is incapable of discharging his duties; acts in any way that has a direct, substantial and adverse effect on Employer's reputation; or other good cause exists for termination. c. Compensation Upon Termination. Upon the termination of Employee's ----------------------------- employment, Employer shall only be obligated for compensation earned by the Employee through the date of termination. Thereafter, all employee benefits shall terminate. 6. EMPLOYEE'S DUTY UPON TERMINATION. Upon the termination of employment -------------------------------- hereunder, Employee shall forthwith deliver up to Employer all lists of customers, correspondence, accounts, records and "confidential information" as defined hereinbelow and any other documents or property made or held by him or under his control in relation to the business or affairs of Employer or any subsidiary or affiliate thereof, and no copy of any such confidential information or lists, correspondence, accounts, records, documents or property shall be retained by him or given to any third party. 7. UNFAIR ADVANTAGE. ---------------- a. Confidentiality. In order that Employer shall receive and be able to --------------- maintain the benefit of the goodwill, trade secrets and confidential information that Employer enjoys in connection with its business, and recognizing that the covenants hereinafter set forth are not severable from such goodwill, and that trade secrets and confidential information are granted to Employer in order to protect the same, and in order to otherwise protect Employer's legitimate business interests, Employee agrees, during the term of this Agreement and upon termination of his employment with Employer and for the periods indicated below, that: 2 (1) During the course of employment with Employer, Employee will have access to and gain knowledge of certain trade secrets and confidential information relative to the business affairs of Employer. For the purposes of the Agreement, "confidential information" shall mean any information relating to the business of Employer or any affiliate of Employer that has not previously been publicly released by duly authorized representatives of Employer and shall include, but shall not be limited to, Employer information or information of any affiliate of Employer encompassed in all drawings, reports, designs, plans, proposals, marketing and sales plans, training techniques, financial data, cost and pricing information, customer information including customer lists and files, and all methods, concepts or ideas in or reasonably related to the business of Employer or affiliates of Employer. Employee therefore acknowledges and agrees that: (2) Confidential information is both confidential and a trade secret, is not readily accessible to competitors of Employer, and shall be used by Employee for the sole benefit of Employer. (3) The confidential information has been compiled through and by use of Employer's ingenuity, time, marketing and product development strategies, pricing, policies, labor, expense, investigation and long experience rendering the confidential information a valuable asset of Employer, owned solely by Employer, and is part of its goodwill. (4) Actual use or divulging to others for their use of the confidential information in violation of the terms of this Agreement would be unfair use, to the Employer's extreme prejudice. (5) Employee agrees to regard and preserve as confidential all confidential information pertaining to the business of Employer or any affiliate of Employer that has been or may be obtained by the Employee in the course of his employment with Employer, whether he has such information in his memory or in writing or in other physical form. Employee will not, without written authority from Employer, use for his benefit or purposes, nor disclose to others, either during the term of his employment or thereafter, except as required by the conditions of his employment, any information concerning the business of Employer or any affiliate of Employer. (6) Employee agrees not to remove from the premises of Employer, except as an Employee in the pursuit of the business of Employer or any of its affiliates, or except as specifically permitted in writing by Employer, any equipment or document containing or reflecting any confidential information of Employer or any affiliate of Employer. b. Solicitation of Company Employees. Employee recognizes and agrees ---------------------------------- that upon termination of employment with Employer, regardless of the reason, cause or occasion for such termination, Employee will not either directly or indirectly for a period of three (3) years next following the date of termination (or if this period shall be unenforceable by law, then for such periods as shall be enforceable) employ or seek to employ any person who is employed by Employer, nor shall he induce any such person to leave employment with Employer. 3 c. Business Opportunities. Employee agrees that during his employment ---------------------- hereunder he will not take any action that might divert from Employer or any subsidiary or affiliate of Employer an opportunity that would be within the scope of any of the present or future business thereof. d. Breach. In the event of a breach or threatened breach of this ------ section 7, Employer shall be entitled to an injunction restraining such breach; but nothing herein shall be construed as prohibiting Employer from any other remedy as may be provided by law or in equity, together with such real and punitive damages as may be available. The remedies herein shall be cumulative one of the other and not exclusive; with the right of Employer to pursue such rights, remedies and privileges as it desires and in such order as it might elect. 8. ASSIGNABILITY AND BINDING EFFECT. This Agreement shall inure to the -------------------------------- benefit of and be binding upon Employer and Employee and their successors and assigns. The obligations of Employee may not be delegated, and Employee may not assign, transfer, pledge, encumber, hypothecate or otherwise dispose of any of his rights hereunder without the prior written consent of Employer, and any such attempted delegation or disposition shall be null and void and without effect and shall relieve Employer of any and all liability hereunder. 9. MERGER OR CONSOLIDATION. In the event of the merger or consolidation ----------------------- of Employer with any corporation or corporations, or of the sale by Employer of a major portion of its assets or of its business and goodwill, this Agreement may be assigned and transferred to such successor in interest as an asset of Employer upon such assignee assuming Employer's obligations hereunder. 10. NO CONFLICTING AGREEMENTS. Employee represents and warrants that he ------------------------- is not a party to any agreement, contract or understanding, whether of employment or otherwise, that would in any way restrict or prohibit him from undertaking or performing employment in accordance with the terms and conditions of this Agreement. 11. GOVERNING LAW. This Agreement shall be subject to and governed by ------------- the laws of California. Venue of any action arising from or related to this Agreement shall be in Los Angeles County, California. 12. ENTIRE AGREEMENT. ---------------- a. This Agreement constitutes the entire agreement between the parties and contains all of the agreements between the parties with respect to the subject matter hereof and supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the subject matter hereof. b. No change or modification of this Agreement shall be valid unless the same shall be in writing and signed by Employee and Employer. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the party or person to be charged. 4 13. SEVERABILITY. In case any one or more of the provisions of this ------------ Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected thereby. 14. SECTION HEADINGS. The section headings contained in this Agreement ---------------- are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. NOTICES. Any and all notices required or permitted to be sent ------- hereunder shall be personally delivered or sent by certified or registered mail, return receipt requested, with postage prepaid, to the addresses as follows: If to Employer: Unico American Corporation 23251 Mulholland Drive Woodland Hills, CA 91364-2732 Attn.: Cary L. Cheldin, Executive Vice President If to Employee: Roger Platten P.O. Box 8632 Calabasas, CA 91372 Any party may, upon written notice to the other, change its address for receipt of notices. 16. INJUNCTIVE RELIEF. It is understood and agreed by and between the ------------------ parties hereto that the services to be rendered by the Employee hereunder, and the rights and privileges granted to the Employer by the Employee hereunder, are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and that a breach of this Agreement will cause Employer great irreparable injury and damage. The Employee hereby expressly agrees that Employer shall be entitled to the remedies of injunction, specific performance and other equitable relief to prevent a breach of the Agreement by the Employee. This provision shall not, however, be construed as a waiver of any of the rights that Employer may have for damages or otherwise. 17. ARBITRATION. ----------- a. Arbitrable Claims. To the fullest extent permitted by law, all ----------------- disputes between Employee (and his attorneys, successors, and assigns) and Company (and its Affiliates, shareholders, directors, officers, employees, agents, successors, attorneys, and assigns) relating in any manner whatsoever to the employment or termination of Employee, including, without limitation, all disputes arising under this Agreement, ("Arbitrable Claims") shall be resolved by arbitration. All persons and entities specified in the preceding sentence (other than Company and Employee) shall be considered third-party beneficiaries of the rights and obligations created by this Section on Arbitration. Arbitrable Claims shall include, but are not limited to, contract 5 (express or implied) and tort claims of all kinds, as well as all claims based on any federal, state, or local law, statute, or regulation, excepting only claims under applicable workers' compensation law and unemployment insurance claims. By way of example and not in limitation of the foregoing, Arbitrable Claims shall include (to the fullest extent permitted by law) any claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the California Fair Employment and Housing Act, as well as any claims asserting wrongful termination, harassment, breach of contract, breach of the covenant of good faith and fair dealing, negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, defamation, invasion of privacy, and claims related to disability. b. Procedure. Arbitration of Arbitrable Claims shall be in --------- accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association, in effect as of the date of this Agreement or as amended subsequently thereto ("AAA Employment Rules"), as augmented in this Agreement. Arbitration shall be initiated as provided by the AAA Employment Rules, although the written notice to the other party initiating arbitration shall also include a statement of the claim(s) asserted and the facts upon which the claim(s) are based. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims. Either party may bring an action in court to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate nor prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. All arbitration hearings under this Agreement shall be conducted in Los Angeles County, California. The interpretation and enforcement of this agreement to arbitrate shall be governed by the California Arbitration Act. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS, INCLUDING WITHOUT LIMITATION ANY RIGHT TO TRIAL BY JURY AS TO THE MAKING, EXISTENCE, VALIDITY, OR ENFORCEABILITY OF THE AGREEMENT TO ARBITRATE. c. Arbitrator Selection. All disputes involving Arbitrable Claims -------------------- shall be decided by a single arbitrator. The arbitrator shall be selected by mutual agreement of the parties within thirty (30) days of the effective date of the notice initiating the arbitration. If the parties cannot agree on an arbitrator, then the complaining party shall notify the AAA and request selection of an arbitrator in accordance with the AAA Employment Rules. d. Authority Of Arbitrator, Discovery And Arbitration Fees. The ----------------------- arbitrator shall have exclusive authority to resolve all Arbitrable Claims, including, but not limited to, any claim that all or any part of this Agreement is void or unenforceable. Parties to arbitration proceedings under this Agreement shall have the right to conduct discovery utilizing all discovery procedures available in civil actions brought in the Superior Court of California. The arbitrator shall have authority to enforce all rights, remedies, procedures, duties, liabilities and obligations arising under said discovery procedures and to impose all sanctions and penalties as can be imposed in like circumstances in a civil action brought in the Superior Court of California. The arbitrator shall issue a written decision and shall have authority to award equitable relief, money damages, 6 costs, and reasonable attorney's fees to the greatest extent permitted by law, including, but not limited to, any remedy or relief available in a civil action. The fees of the arbitrator and all expenses of the arbitration shall be paid by Company. Each party shall pay his/its own attorney's fees unless otherwise provided by law. 18. ATTORNEYS' FEES. Should any litigation be commenced between the ---------------- parties hereto or their personal representatives to enforce any provision of this Agreement or the rights and duties of any person in relation thereto, including the right to arbitrate, the prevailing party in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for their or his attorneys' fees in such litigation or in a separate action brought for that purpose. 19. EMPLOYEE ACKNOWLEDGMENT. Employee hereby acknowledges that he ------------------------ has read this Agreement and understands the provisions contained herein. Employee further acknowledges that he has been advised to seek independent legal and tax advice with regard to the matters set forth herein. 20. REVOCATION. Concurrently with the execution of this Agreement, ---------- Employee and Company have executed an Agreement to Modify Employment and General Release of All Claims ("Release"). Paragraph 6(g) of the Release provides that Employee "shall have a period of seven (7) days following the execution of this [Release] to revoke this [Release] and it shall not become effective or enforceable until the revocation period has expired." In the event that Employee revokes the Release within the seven (7) day period referred to therein, this New Employment Agreement shall be deemed to have been concurrently revoked. DATED: December 21, 2000 \s\Roger Platten ----------------- Roger Platten, Employee UNICO AMERICAN CORPORATION By: /s/ Erwin Cheldin --------------------- Erwin Cheldin, President Employer 7 -----END PRIVACY-ENHANCED MESSAGE-----