-----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, S4e4Ld+xhVs2ZnTwxpp9EuiHVtssLd0kvwfOKOsfLvYNXcpz8F7iRqndcIxAibCJ 90wsa5d/UF3o3MmGWq+qDQ== 0000912057-96-013477.txt : 19960701 0000912057-96-013477.hdr.sgml : 19960701 ACCESSION NUMBER: 0000912057-96-013477 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960628 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNICO AMERICAN CORP CENTRAL INDEX KEY: 0000100716 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 952583928 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03978 FILM NUMBER: 96588750 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 10-K 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 Fiscal Year Ended MARCH 31, 1996 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 June 24, 1996 was $24,877,099 (based upon the closing sales price on such date, as reported by the Wall Street Journal). 5,972,668 Number of shares of common stock outstanding as of June 24, 1996 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 March 31, 1996, 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 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. Unico American Corporation is an insurance holding company which provides property, casualty, health and life insurance and related premium financing through its wholly owned subsidiaries. GENERAL AGENCY OPERATIONS The Company's general agency subsidiaries are as follows: Unifax Insurance Systems, Inc. ("Unifax") primarily sells and services business package insurance policies. In addition, it also sells and services commercial liability, commercial property, commercial automobile and workers' compensation insurance policies. Its commercial automobile and workers' compensation policies are sold in California for non-affiliated insurers. All other policies are sold and serviced by Unifax in California, Oregon, Washington, Arizona and Nevada for Crusader Insurance Company ("Crusader"), a wholly owned subsidiary of Unico. Bedford Insurance Services, Inc. ("Bedford") sells and services daily automobile rental policies in most states for a non-affiliated insurer. National Coverage Corporation ("NCC") renews and services existing commercial automobile and auto physical damage policies in California on a discontinued program 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, Bedford and NCC 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 ADJUSTING OPERATION The Company's subsidiary, U.S. Risk Managers, Inc. ("U.S. Risk"), provides insurance claim adjusting services to the various non-affiliated property and casualty insurance companies for which the Company acts as general agents. This service consists 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. For its services, U.S. Risk receives a percentage of the premium written by the general agent. 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. 2 INSURANCE PREMIUM FINANCE OPERATION American Acceptance Corporation ("AAC") is a licensed insurance premium finance company which 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. The premium finance company also finances commercial auto policies produced by Unifax for a non-affiliated insurance company. HEALTH AND LIFE INSURANCE OPERATIONS The Company's subsidiaries: National Insurance Brokers, Inc. ("NIB") and American Insurance Brokers, Inc. ("AIB"), market medical, dental, life, 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 its 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 the State of California. ASSOCIATION OPERATION The Company's subsidiary Insurance Club, Inc., DBA The American Association For Quality Health Care ("AAQHC"), is a membership association which provides various consumer benefits to its members, including participation in group health care and life insurance policies which AAQHC negotiates for the Association. For these services, AAQHC receives membership and fee income from its members. INSURANCE COMPANY OPERATION GENERAL The insurance company operations are conducted through Crusader, which as of March 31, 1996, is licensed as an admitted insurance carrier in the states of California, Arizona, Nevada, Oregon and Washington. Crusader is a multiple line property and casualty insurance company which began transacting business on January 1, 1985. As of March 31, 1996, it was primarily writing business package policies in all the states in which it is licensed. Crusader also writes commercial property and commercial liability policies in those states. Its business is sold through Unifax Insurance Systems, Inc., its sister corporation. Unifax has substantial experience with these classes of business. 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; and if the reinsurer fails to meet the obligations, the company must nonetheless pay its policy obligations. Crusader has reinsurance agreements with National Reinsurance Corporation, a California admitted reinsurance company, which helps protect it 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. Crusader also has additional catastrophe reinsurance from various California admitted reinsurance companies. 3 The aggregate amount of insurance premiums ceded to the reinsurers for the fiscal years ended March 31, 1996, and March 31, 1995, was $6,077,403 and $9,258,535 respectively. Crusader's retention is currently $150,000 per risk subject to a maximum dollar amount and to catastrophe and clash covers. The catastrophe and clash covers (subject to a maximum occurrence and annual aggregate amount) help protect the company from one loss occurrence affecting multiple policies. The premium ceded to the reinsurers for the catastrophe and clash covers and for all exposures over $500,000 is a fixed percentage of the premium charged by Crusader. On exposures up to $500,000, the reinsurer charges a provisional rate which is subject to adjustment and is based on the amount of losses ceded, limited by a maximum percentage that can be charged by the reinsurer. 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 from other insurance companies. 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 11.25 years that Crusader has been in operation and the data from its general agent developed with other insurance companies prior to 1985. Since the ultimate liability of Crusader may be greater or less than estimated reserves, all reserves are constantly monitored and adjusted. 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 judgmental factors. The following table shows the development of the unpaid losses and loss adjustment expenses for fiscal years 1986 through 1996. The top line of the table shows the estimated liability for unpaid loss and loss adjustment expenses recorded at the balance 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 loss and loss adjustment expense reserves from 1986 through 1987 and redundancies thereafter. In January 1988, the company began a file-by-file revaluation of all open claims and a revaluation of the estimated liability for incurred but not reported claims ("IBNR") to insure that its reserves were adequate. Reserves on casualty claims were reestimated on a combination of both the estimated liability and the potential exposure. In addition, minimum reserves on bodily injury claims were substantially increased. The minimum reserves are the reserves set up after coverage is confirmed on a reported claim but before the information is received to adequately estimate the loss. The minimum reserves are based on the average of all bodily injury claims incurred. Furthermore, procedures were instituted to ensure that loss adjustment expense reserves were adequate. This revaluation of fiscal 1985 through fiscal 1987 open claims was completed in September 1988 and resulted in significant adjustments to the loss and loss adjustment reserves. The redundancies in reserves from fiscal 1988 to the present are due to Crusader's loss reserving practices used in determining its IBNR. Although redundancies have been reported since fiscal 1988, there is no assurance that they will continue and the company believes a change in the way it computes IBNR is not warranted. Crusader is a relatively small insurance company with just over 10 years of its own statistical experience. The company 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 4 business. In addition, it is regularly expanding its territories both inside and outside of California and is growing in premium volume. 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 IBNR statistics and, therefore, it incorporates industry standards and averages into its estimates. When Crusader establishes its IBNR reserves, although conservative, it is still well below industry average and the company believes that it is properly stated. When subsequent development justifies changes in IBNR, 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 and, 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. 5 CRUSADER INSURANCE COMPANY ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ending March 31, 1986 1987 1988 1989 1990 1991 ---- ---- ---- ---- ---- ---- Reserve for Unpaid Losses & Loss Adjustment Expenses $3,432,237 $7,510,784 $16,574,249 $23,511,133 $23,601,435 $22,918,442 PAID CUMULATIVE AS OF 1 Year Later 1,771,226 3,558,709 6,924,260 6,326,868 6,204,559 6,425,329 2 Years Later 3,101,706 7,153,804 10,927,698 10,726,038 10,357,708 10,946,318 3 Years Later 4,357,663 9,270,812 13,313,849 13,652,062 12,935,827 12,409,499 4 Years Later 5,042,971 10,154,854 14,639,530 15,121,985 13,561,987 12,951,511 5 Years Later 5,211,215 10,695,504 15,163,791 15,316,299 13,768,277 13,357,941 6 Years Later 5,298,004 10,797,045 15,218,575 15,385,519 13,866,654 7 Years Later 5,301,804 10,817,288 15,382,717 15,416,138 8 Years Later 5,374,281 10,856,723 15,381,552 9 Years Later 5,325,685 10,853,741 10 Years Later 5,325,685 RESERVES REESTIMATED AS OF 1 Year Later 3,952,753 11,694,406 20,893,557 22,315,883 20,990,669 20,153,906 2 Years Later 5,930,188 13,462,872 19,583,939 20,165,458 18,566,956 17,136,498 3 Years Later 6,193,207 12,703,847 17,807,451 18,348,965 15,846,416 14,788,046 4 Years Later 5,951,648 11,863,127 16,729,893 16,385,905 14,631,554 13,961,555 5 Years Later 5,518,051 11,414,661 15,738,815 15,782,294 14,115,281 13,833,745 6 Years Later 5,408,772 10,945,435 15,491,674 15,511,081 14,063,578 7 Years Later 5,322,934 10,887,766 15,419,031 15,471,448 8 Years Later 5,385,846 10,874,035 15,395,735 9 Years Later 5,325,925 10,861,331 10 Years Later 5,325,800 Cumulative Redundancy (Deficiency) $(1,893,563) $(3,350,547) $1,178,514 $8,039,685 $9,537,857 $9,084,697 ----------- ----------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- Gross Liability for Unpaid Losses and Loss Adjustment Expenses Ceded Liability for Unpaid Losses and Loss Adjustment Expenses Net Liability for Unpaid Losses and Loss Adjustment Expenses Gross Liability Reestimated Ceded Liability Reestimated Net Liability Reestimated Gross Reserve Redundancy (Deficiency)
Fiscal Year Ending March 31, 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Reserve for Unpaid Losses & Loss Adjustment Expenses $21,249,902 $20,824,039 $21,499,778 $27,633,304 $32,682,153 PAID CUMULATIVE AS OF 1 Year Later 6,368,554 8,904,427 7,687,180 8,814,611 2 Years Later 9,583,885 10,824,024 13,453,833 3 Years Later 11,814,445 13,178,262 4 Years Later 12,667,989 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 18,562,116 19,599,695 20,912,743 25,666,251 2 Years Later 15,021,149 15,742,478 20,289,699 3 Years Later 13,802,009 15,463,566 4 Years Later 13,620,235 5 Years Later 6 Years Later 7 Years Later 8 Years Later 9 Years Later 10 Years Later Cumulative Redundancy (Deficiency) $7,629,667 $5,360,473 $1,210,079 $1,967,053 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 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 $15,999,086 $21,638,763 $28,183,836 Ceded Liability Reestimated (535,519) (1,349,064) (2,517,585) ----------- ----------- ----------- Net Liability Reestimated $15,463,566 $20,289,699 $25,666,251 ----------- ----------- ----------- ----------- ----------- ----------- Gross Reserve Redundancy (Deficiency) $7,012,782 $4,655,436 $4,186,916 ----------- ----------- ----------- ----------- ----------- -----------
6 The following table presents an analysis of losses and loss adjusting expenses and provides a reconciliation of beginning and ending reserves for losses and loss adjustment expenses net of reinsurance for the fiscal years ended March 31, 1996, 1995, and 1994. CRUSADER INSURANCE COMPANY RECONCILIATION OF LOSS RESERVES
Year Ended Year Ended Year Ended March 31, March 31, March 31, 1996 1995 1994 ----------- ----------- ----------- Reserve for unpaid losses and loss adjustment expenses at beginning of year $27,633,304 $21,499,778 $20,824,039 ----------- ----------- ----------- Incurred losses and loss adjustment expenses Provision for insured events of current year 19,276,602 18,057,338 14,516,383 Increase (decrease) in provision for events of prior years (1,967,053) (587,038) (1,224,344) ----------- ----------- ----------- Total losses and loss adjustment expenses 17,309,549 17,470,300 13,292,039 ----------- ----------- ----------- Payments Losses and loss adjustment expenses attributable to insured events of the current year 3,446,088 3,469,594 2,598,236 Losses and loss adjustment expenses attributable to insured events of prior years 8,814,612 7,867,180 8,904,427 ----------- ----------- ----------- Total payments 12,260,700 11,336,774 11,502,663 ----------- ----------- ----------- Allocations Loss adjustment expenses allocated from affiliated company (1) - - 1,113,637 ----------- ----------- ----------- Reserve for unpaid losses & loss adjustment expenses at end of year - net of reinsurance $32,682,153 $27,633,304 $21,499,778 ----------- ----------- ----------- ----------- ----------- ----------- Reconciliation of liability for losses and loss adjustment expense reserves to Balance Sheet Reserve for unpaid losses & loss adjustment expenses at end of year - net of reinsurance $32,682,153 $27,633,304 $21,499,778 Reinsurance recoverable on unpaid losses at end of year 4,324,305 4,737,448 4,794,421 ----------- ----------- ----------- Reserve for unpaid losses & loss adjustment expenses at end of year - gross of reinsurance $37,006,458 $32,370,752 $26,294,199 ----------- ----------- ----------- ----------- ----------- -----------
(1) As of January 1, 1994, Crusader began processing its own claims. This claim processing function had previously been provided by its sister company, U.S. Risk Managers, Inc. 7 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. 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 company. While there is no statutory requirement applicable to the Company which 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.
Fiscal year ended March 31, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Net Premiums Written $32,915,964 $30,785,970 $27,583,084 $16,894,276 $16,370,320 Policyholders' Surplus $22,721,183 $19,585,839 $17,313,744 $16,265,104 $18,680,413 Ratio 1.4 to 1 1.6 to 1 1.6 to 1 1.0 to 1 0.9 to 1
REGULATION The insurance company operation is subject to regulation by the California Department of Insurance ("the insurance department") and also by the department of insurance of other states in which the company is licensed. The insurance department has broad regulatory, supervisory and administrative powers. These powers relate primarily to the 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 ending December 31, 1994, and was completed in November of 1995. 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. The company calculated its RBC requirement as of December 31, 1995 for its 1995, statutory annual statement and reported that its total adjusted surplus to policyholders was 482% of its authorized control level RBC. 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 of most casualty lines 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 8 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 a 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. Crusader was assessed $209,186 by CIGA for the 1995 calendar year, of which it recouped all but $18,431. This unrecouped portion was charged to other operating expenses on the consolidated statement of operations. No assessment was made by CIGA for the 1996 calendar year. HOLDING COMPANY ACT The Company's subsidiaries are 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 immediate preceding 12 months involving in the net aggregate, more than the lesser of 5% of Crusader's admitted assets or policyholders' surplus, as of the preceding December 31st. An extraordinary transaction also includes a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company's policyholders' surplus as of the preceding December 31st 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. The Company is in compliance with the Holding Company Act. RATING Crusader has been rated A- (Excellent) by A.M. Best Company since its initial rating in 1990. 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 are to maintain the Company's cash and invested assets in high-grade investments. The Company's fixed maturity obligations have maturities no greater than eight years and consist of U.S. treasury securities, high-grade industrial and municipal obligations, and certificates of deposit. In addition, all investments in municipal obligations are pre-refunded municipals which are secured by U.S. treasury securities. The Company's investment in equity securities consists of common shares in two regional telephone companies. The balance of the Company's investments are invested in high-grade short-term instruments consisting of bank money market accounts, certificates of deposit and commercial paper. These investments are either 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. 9 The following table sets forth the composition of the investment portfolio of the Company at the dates indicated:
As of March 31, --------------------------------------------------------- (Amounts in Thousands) 1996 1995 1994 ----------------- ----------------- ----------------- Amortized Market Amortized Market Amortized Market Type of Security Cost Value Cost Value Cost Value - ------------------------------------ --------- ------ --------- ------ --------- ------ Government bonds $18,192 $18,325 $4,884 $4,953 - - Taxable bonds 11,766 12,126 14,065 14,052 $16,097 $16,629 Tax exempt state and municipal bonds 38,127 38,437 41,759 41,434 34,118 33,723 ------- ------- ------ ------ ------- ------- Total fixed maturity investments 68,085 68,888 60,708 60,439 50,215 50,352 Short-term cash investments 3,466 3,466 3,382 3,382 2,615 2,615 Equity investments 995 998 - - 1,169 1,061 ------- ------- ------ ------ ------- ------- Total Investments $72,546 $73,352 $64,090 $63,821 $53,999 $54,028 ------- ------- ------ ------ ------- ------- ------- ------- ------ ------ ------- -------
At March 31, 1996, the Company had a net unrealized gain on all investments of $805,739 before income taxes. The maturity distributions of the Company's fixed maturity investments at March 31, 1996 and 1995 were as follows: (Amounts in Thousands) 1996 1996 1995 1995 --------- ------ --------- ------ Amortized Market Amortized Market Cost Value Cost Value --------- ------ --------- ------ Fixed maturities due: - --------------------- Within 1 year $ 7,143 $ 7,180 $11,758 $11,840 Beyond 1 year but within 5 years 37,149 37,499 24,873 24,724 Beyond 5 years but within 10 years 23,793 24,209 24,077 23,875 ------- ------- ------- ------- Total $68,085 $68,888 $60,708 $60,439 ------- ------- ------- ------- ------- ------- ------- ------- COMPETITION GENERAL The property and casualty insurance industry is highly competitive on the basis of price and service and 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 must be priced before its costs are known. 10 INSURANCE COMPANY AND GENERAL AGENCY OPERATIONS (PROPERTY & CASUALTY) The Company's property and casualty insurance business continues to be very competitive. There are many substantial competitors who have larger resources, operate in more states, insure coverages in more lines and in higher limits than the Company. The principal method of competition among these competitors is price. While the Company attempts to meet this competition with competitive prices, its emphasis is on service, promotion and distribution. INSURANCE CLAIM ADJUSTING OPERATION The insurance claim adjusting operation generates all its business from "in- house production" for non-affiliated insurance companies; thus, competition is not a major factor as long as U.S. Risk produces a quality product at a fair price. Its growth is dependent on the growth of the general agency operations which produce the business. As of January 1, 1994, Crusader began processing its own claims. This claim processing function had previously been provided by its sister company, U.S. Risk. INSURANCE PREMIUM FINANCING OPERATION The insurance premium financing operation is currently financing Crusader policies and commercial automobile policies written through Unifax for a non- affiliated insurer. 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. Its continued 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 84% of the Company's present health and life business is from the CIGNA HealthCare medical & dental plan programs. This percentage is up from approximately 80% in the prior year. The company is continuing its efforts to diversify and offer a wider variety of products to its customers and believes that this effort will make it more competitive and should increase future revenues. EMPLOYEES On June 14, 1996, the Company employed 139 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 rental 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 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 unaffiliated third parties. The Company utilizes for its own operations 100% of the space it leases. 11 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. The Company is required to resort to legal proceedings from time-to-time in order to enforce collection of premiums and other 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 other agents 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 paid during the last two fiscal years are as follows: High Low Dividend Quarter Ended Price Price Declared ------------- ----- ----- -------- June 30, 1994 6 1/8 4 3/8 $0.07 September 30, 1994 5 1/4 4 December 31, 1994 4 1/2 4 March 31, 1995 5 3/8 4 1/8 June 30, 1995 5 3/8 4 1/8 $0.07 September 30, 1995 6 1/8 5 1/8 December 31, 1995 6 5/8 5 5/8 March 31, 1996 7 1/8 6 As of March 31, 1996, the approximate number of shareholders of record of the Company's common stock was 700. A substantial number of shares of the Company's stock is held in street name; and, therefore, the actual number of holders of the Company's common stock exceeds 700. On June 24, 1991, the Company declared its first cash dividend on its common stock and has declared dividends annually thereafter. The Company's intention is to declare annual cash dividends subject to continued profitability and cash requirements. On May 17, 1996, the Company declared its latest annual cash dividend of $0.07 per common share payable on August 14, 1996, to shareholders of record on July 31, 1996. 12 ITEM 6. SELECTED FINANCIAL DATA
Fiscal year ended March 31, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Total revenues $42,468,474 $39,444,223 $32,979,913 $ 24,784,994 $27,021,164 Total cost & expenses 34,060,183 34,486,546 27,931,741 35,466,587 19,562,679 ----------- ----------- ----------- ------------ ----------- Income (loss) before taxes 8,408,291 4,957,677 5,048,172 (10,681,593) 7,458,485 Income (loss) after taxes $ 5,947,481 $ 3,792,179 $ 3,521,787 $(6,802,146) $ 5,009,153 Income (loss) per share (1) $0.97 $0.63 $0.58 $ (1.17) $0.90 Cash dividends per share $0.07 $0.07 $0.07 $0.06 $0.05 Total assets $95,817,377 $87,456,701 $76,999,203 $ 64,037,036 $64,866,203 Long term debt $ 758,135 $ 750,824 $ 1,151,834 $ 1,961,520 $985,016 Stockholders' equity $32,387,158 $26,147,827 $22,843,567 $ 19,708,720 $25,284,010
(1) The calculation of earnings per share was based on the weighted average number of common shares outstanding and common stock equivalents. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION LIQUIDITY AND CAPITAL RESOURCES: Due to the nature of the Company's business (insurance and insurance services) and whereas Company growth does not normally require material reinvestments of profits into property or equipment, the cash flow generated from operations usually results in improved liquidity for the Company. Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, reserves for loss payments, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash and investments (excluding unrealized gains) at March 31, 1996 were $72,700,991 compared to $64,262,794 in the prior year, a 13% increase. Crusader's cash and investments amounted to $69,332,581 or 95% of the Company's total. 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. In the quarter ended March 31, 1995 the company reclassified all of its securities from held-to-maturity to the available-for-sale category. 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. As of March 31, 1996, the Company had invested $68,085,376 (at amortized cost) or 94% of its investments in fixed maturity obligations. The balance of the Company's investments were in equity securities consisting of common shares in two regional telephone companies and high-quality, short-term investments which included bank money market accounts, certificates of deposit and commercial paper. The Company's investments in fixed maturity obligations included $38,126,835 (56%) of tax-exempt, pre-refunded state and municipal bonds, $18,191,847 (27%) of U.S. treasury securities, and $11,766,694 (17%) in high- quality industrial bonds and certificates of deposit. This compares to fixed maturity obligations in the prior fiscal year of $60,707,261 that included $41,758,522 (69%) of tax-exempt, pre-refunded state and municipal bonds, $4,884,350 (8%) of U.S. treasury notes, and $14,064,389 (23%) in high-quality industrial bonds and certificates of deposit. The tax-exempt interest income earned (net of bond premium/discount amortization) during the fiscal year ended March 31, 1996, was $1,738,799 compared to $1,898,772 in the fiscal year ended March 31, 1995. 13 The Company's investment policy limits investments in any one company to no more than $1,000,000. This limitation excludes bond premiums paid in excess of par value and U.S. Government or U.S. Government guaranteed issues. All of the Company's investments are high grade investment quality. The Company's premium finance subsidiary, American Acceptance Corporation, has a bank credit line of $6,000,000 with a variable rate of interest based on fluctuations in the London Interbank Offered Rate ("LIBOR"). This credit line is only used to provide American Acceptance Corporation with funds to finance insurance premiums. The maximum and average bank note payable and weighted average interest rate are as follows: Year Ended Year Ended March 31, March 31, 1996 1995 ---------- ---------- Maximum bank note payable $3,975,001 $4,467,001 Average bank note payable $3,388,334 $4,229,418 Weighted average interest rate 7.7% 7.2% 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 $2,465,923, statutory deposits of $725,000, and dividend restriction between Crusader and Unico (as discussed under "Insurance Company Operation - Holding Company Act") plus the cash to be generated from operations, should be sufficient to meet its operating requirements (excluding AAC's credit line discussed above) during the next twelve months without the necessity of borrowing funds. On June 15, 1995, the Company repaid from its cash flow the remaining $500,000 of its related party debt. This debt was incurred by Unico in June of 1992 to increase Crusader's surplus following the Los Angeles riot. Crusader's statutory capital and surplus as of March 31, 1996, was $22,721,183, an increase of $3,135,344 from the surplus balance at March 31, 1995, of $19,585,839. There are no material commitments for capital expenditures as of the date of this report. RESULTS OF OPERATION: GENERAL The Company had net income after taxes of $5,947,481 for the fiscal year ended March 31, 1996, compared to $3,792,179 for the fiscal year ended March 31, 1995, and net income of $3,521,787 for fiscal year ended March 31, 1994. Total revenue for the year ended March 31, 1996, was $42,468,474 compared to $39,444,223 and $32,979,913 for the years ended March 31, 1995, and 1994 respectively. For the fiscal year ended March 31, 1996, income before taxes increased by $3,450,614 (70%) and net income increased by $2,155,302 (57%) compared to the prior fiscal year. The increase in net income was primarily due to an increase of $2,175,220 in the pre-tax underwriting profit (net earned premium less loss and loss adjustment expenses and policy acquisition costs) from Crusader, an increase in investment income of $545,783 (16%) (excluding realized gains), a decrease in other operating expenses of $451,145 (12%), and an increase in gross commissions and fees of $192,311 (3%). For the fiscal year ended March 31, 1995, income before taxes decreased by $90,495 (2%) while net income increased by $270,392 (8%) compared to the prior fiscal year. Although total investment income increased by $66,943 (2%), tax-exempt investment income increased by $798,586 (73%) which resulted in a tax benefit of approximately $231,000. The increase in net income was due primarily to this tax benefit. 14 The effect of inflation on the net income of the Company during the year ended March 31, 1996, 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 Year Ended Year Ended March 31, March 31, March 31, 1996 1995 1994 ----------- ----------- ----------- Gross written premium $37,631,357 $39,039,549 $37,278,300 Net written premium $33,193,911 $30,424,864 $27,463,164 Earned premium before reinsurance $37,554,830 $38,466,825 $31,400,463 Earned premium net of reinsurance $31,477,427 $29,208,290 $22,714,825 Losses and Loss adjustment expenses $17,309,549 $17,470,300 $13,292,039 Unpaid losses and loss adjustment expenses $37,006,458 $32,370,752 $26,294,199
Gross written premium decreased by $1,408,192 (4%) in the fiscal year ending March 31, 1996, compared to an increase of $1,761,249 (5%) for the fiscal year ended March 31, 1995. The decrease in written premium was primarily attributable to Crusader's decision to intentionally reduce its Other Liability line in an effort to improve the utilization of its surplus. Other Liability gross written premium for the fiscal year ended March 31, 1996, was $289,364, a $4,679,191 (94%) decrease from the prior fiscal year. The decrease in Other Liability written premium was offset by growth of $3,304,242 (10%) in Crusader's Commercial Package business. The Commercial Package premium for the fiscal year March 31, 1996 totaled $36,960,933 compared to written premium of $33,656,691 in the prior fiscal year. The Commercial Package line is Crusader's primary line of business and represents approximately 98% of its total premiums written. The increase in gross written premiums in the Commercial Package line was primarily due to increases in premiums in states outside of California. Gross premiums written in Washington, Oregon, Arizona and Nevada increased $2,318,626 (46%) to $7,341,329 while gross written premiums in California increased $977,207 (3%) to $29,619,604. In the fiscal year ending March 31, 1995, the increase in gross written premium was primarily the result of an increase of $5,993,669 (22%) in the company's Commercial Package business to $33,656,691. This increase was offset by a $3,831,980 (44%) decrease in the company's Other Liability line of business. The company began its deliberate reduction of Other Liability premium in fiscal year 1995. Crusader's net earned premium was $31,477,427, an increase of $2,269,137 (8%) when compared to net earned premium in the fiscal year ending March 31, 1995. The increase in net earned premium was primarily the result of a decrease in earned ceded premium in the current fiscal year. The percentage of earned premium ceded to premium earned for the fiscal year ended March 31, 1996, was 16%. This compares to 24% for the fiscal year ended March 31, 1995, and 28% for the fiscal year ended March 31, 1994. The decrease in the fiscal year ended March 31, 1996, compared to March 31, 1995, was primarily attributable to a reduction in Crusader's Other Liability line of business which cedes a higher percentage of premium than its other lines, and to an increase in loss retention from $100,000 to $150,000 on April 1, 1995. The decrease in fiscal year ended March 31, 1995 compared to March 31, 1994 was primarily attributable to the reduction in Crusader's Other Liability line of business. The combined ratio is the sum of (1) the ratio of losses and loss adjustment expenses incurred (including a provision for incurred but not reported losses) to net premiums earned (the "loss ratio") and (2) the ratio of policy acquisition and general operating costs to net premiums earned (the "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. Generally, if the combined 15 INSURANCE COMPANY OPERATION (CONTINUED) ratio is below 100% an insurance company has an underwriting profit; if it is above 100% the company has an underwriting loss. Year Ended Year Ended Year Ended March 31, March 31, March 31, 1996 1995 1994 --------- ---------- ---------- Loss ratio 55.0% 59.8% 58.5% Expense ratio 27.2% 28.5% 28.9% Combined ratio 82.2% 88.3% 87.4% The company's future writings and growth is dependent on market conditions, competition, the company's ability to introduce new profitable products, and its ability to expand geographically. Crusader is currently licensed as an admitted insurance company in the states of California, Arizona, Nevada, Oregon and Washington and is approved as a non-admitted surplus lines writer in several other states. Crusader is currently writing in all the states in which it is licensed. 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: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Daily auto rental program commission & claim administration fee $871,841 $756,162 $695,330 Revenues during the fiscal year ended March 31, 1996, increased 15% from the fiscal year ended March 31, 1995. Revenues for the fiscal year ended March 31, 1995, increased 9% from the fiscal year ended March 31, 1994. Although the daily automobile rental insurance program experienced an increase in commission and fee income in the current and prior fiscal years, price competition remains intense in this market. To avoid underwriting losses for the non-affiliated insurance company which Bedford represents, it continues to produce business only at rates which it believes to be adequate. The company cannot determine how long this "soft market" condition will continue. COMMERCIAL AND PERSONAL AUTOMOBILE INSURANCE PROGRAM NCC renews and services existing commercial automobile and personal automobile physical damage policies in California for a non-affiliated insurer. NCC receives a commission and claim administration fee from a non-affiliated insurance company based on premium written; however, NCC plans to discontinue these programs. Unifax produces commercial auto policies in California for a non-affiliated insurer and receives a commission from them based on premium written. Unifax and NCC also receive a service fee from the policyholder. 16 Commercial and personal auto program commission, service fee and claim administration income are as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Commercial & personal auto program commission, service fee & claim administration income $183,519 $257,775 $240,076 Revenue for the fiscal year ended March 31, 1996, decreased $74,256 (29%) from the prior fiscal year while revenue for the fiscal year ended March 31, 1995, increased $17,699 (7%) from the prior fiscal year. Unifax commission and fee income on this program was $166,189 in the fiscal year ended March 31, 1996, compared to $233,267 in the fiscal year ended March 31, 1995, and $205,937 in the fiscal year ended March 31, 1994. NCC commission and fee income was $17,330 in the fiscal year ended March 31, 1996, compared to $23,849 in the year ending March 31, 1995, and $34,139 in the fiscal year ended March 31, 1994. By increasing its marketing effort, Unifax intends to increase revenues on this program. HEALTH AND LIFE INSURANCE PROGRAM Commission income from the health and life insurance sales of NIB and AIB are as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Commission income $2,539,802 $2,467,003 $2,697,681 NIB and AIB market health and life insurance through non-affiliated insurance companies for individuals and groups. Approximately 84% of the health and life commission income in the current fiscal year is from the CIGNA HealthCare medical and dental plan programs compared to approximately 79% in the prior fiscal year. Revenue for the year ended March 31, 1996, increased by 3% from the prior fiscal year compared to a decrease in revenues of 9% for the fiscal year ended March 31, 1995 compared to March 31, 1994. The increase in revenues in the fiscal year ended March 31, 1996, was primarily due to an increase in sales of policies covering individual and family members resulting from rate reductions in March 1995 and July 1995 which made the products more competitive. The increase in sales is also due to aggressive marketing of quality products to customers along with outstanding customer service. Because of the intense competition among carriers for small groups (as discussed below), many carriers have begun an incentive program to increase business. These incentives are based on business written and retained for a minimum of one year. The incentive program for the company began in October 1994. In the fiscal year ended March 31, 1996, $31,575 was earned on this incentive program. Future incentive, if any, cannot yet be determined. The decrease in the health and life revenues in the fiscal year ended March 31, 1995, was due to changes in the commission structure resulting from intense rate competition and the effects of the recession in California. Regulations on California health care medical providers to small businesses of 5 to 50 employees became effective on July 1, 1993 (AB 1672). In July, 1995, small businesses with as few as 3 employees became covered by these regulations. These regulations among other things created an alliance of health insurance companies called the Health Insurance Plan of California ("HIPC"). There are currently 22 insurance companies in the alliance, and this number is expected to increase. The premiums charged by the companies in the alliance were approved by the State of California and are very competitive. To meet this competition, insurance companies marketing programs outside of HIPC are forced to lower their rates and costs. Insurance carriers are paying lower commissions to keep their rates low and competitive. The health insurance market for small business has become a level playing 17 field because the rates charged by any California health insurance carrier are the same rates charged by all their administrators and general agents. Therefore, the health insurance rates charged by the company are the same rates charged by its competitors. The impact of these regulations on the company was and will continue to be, lower revenues from reduced sales on its small business group programs. Individual medical programs are not covered by AB 1672 and all of the company's major insurance carriers have now provided the company with individual medical insurance programs. The company is now marketing these individual programs and anticipates growth in this area. The company is also continuing its efforts to provide more choices to its customers by offering a wide variety of products and expanding its marketing area. NIB and AIB currently market health and life insurance for the following companies: COMPANY PRODUCT ------- ------- CIGNA HealthCare Group & Individual Medical & Dental FHP, Inc. Group & Individual Medical & Dental Foundation Health Group & Individual Medical & Dental Universal Care Group & Individual Medical Greater California Dental Plan Group & Individual Dental Vision Plan of America Group & Individual Vision Plan MDC (Managed Dental Care) Group Dental Blue Cross Individual Medical Life Insurance Company of Group Term Life & Group & North America (LINA) Individual Accidental Death & Dismemberment (AD&D) ASSOCIATION OPERATION Membership and fee income from the Association program of AAQHC is as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Membership and fee income $277,754 $222,271 $270,630 The increase in membership and fee income in the fiscal year ending March 31, 1996, was attributed to an increase in individual and family members in the Association. Membership income had decreased in the prior fiscal year as a result of a decrease in membership in the Association. PREMIUM FINANCE PROGRAM Premium finance charges and late fees earned from financing policies are as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Premium finance charges and late fees earned $1,279,850 $1,306,953 $1,136,977 New loans 10,212 10,523 9,893 American Acceptance Corporation, the Company's insurance premium finance subsidiary, provides premium financing to Crusader and to a non-affiliated insurer on commercial auto policies produced by Unifax. AAC is continuing to finance approximately 85% of those Crusader policies which are financed. Since this program is financing only policies produced by Unifax, the further growth of this program is dependent and directly related to the growth of Crusader's written premium and the commercial auto program produced by Unifax. 18 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. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected in commission income or commission expense. Service fee income from Unifax is as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Service fee income $1,891,405 $1,884,041 $1,716,937 Policies written 16,881 17,830 17,067 Service fee income is primarily related to the number of policies written by Unifax. INVESTMENT INCOME Investment income consists of interest, dividends and net realized investment gain as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Interest and dividend income Insurance company operations $3,708,891 $3,181,791 $3,115,516 Other operations 154,842 136,159 135,491 ---------- ---------- ---------- Total interest and dividends on investments 3,863,733 3,317,950 3,251,007 Net realized investment gains 55,743 7,552 30,739 ---------- ---------- ---------- Total investment income $3,919,476 $3,325,502 $3,281,746 ---------- ---------- ---------- ---------- ---------- ---------- Investment interest and dividends earned (excluding net realized gains) increased approximately 16% during the fiscal year ended March 31, 1996, compared to the prior fiscal year. This increase was primarily due to an increase in invested assets (at amortized value) of $8,457,083 (13%) and, to a lesser extent, to the mix of taxable and tax-exempt securities in the portfolio. The mix of tax-exempt investments to total investments decreased from $41,758,522 (65%) to $38,126,835 (53%) at March 31, 1996. Tax-exempt securities carry a lower pre-tax yield than equivalent rated taxable securities. Investment interest and dividends earned (excluding net realized gains) increased approximately 2% in the fiscal year ended March 31, 1995, compared to the prior fiscal year. Although total invested assets (at amortized value) increased $10,090,333 (19%) during that period, investment income only increased slightly due to maturing investments being invested at lower yields (due to the general decline in yields in the marketplace) and the increase in tax exempt investments. The mix of tax-exempt investments to total investments increased from $34,118,102 (63%) at March 31, 1994, to $41,758,522 (65%) at March 31, 1995. Additional information regarding investments and investment income are described in the "Management Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." OPERATING EXPENSES POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees, and certain other underwriting costs which 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 19 certain reinsurance treaties, Crusader receives a ceding commission from its reinsurer which represents a reimbursement of the acquisition costs related to the premium ceded. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. Policy acquisition costs, net of ceding commission, are as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Policy acquisition costs $8,569,395 $8,314,727 $6,564,746 Ratio to net earned premium 27% 28% 29% SALARIES AND EMPLOYEE BENEFITS decreased $40,214 (1%) during the fiscal year ended March 31, 1996, compared with an increase of $102,097 (3%) in the fiscal year ending March 31, 1995. Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Salaries and employee benefits $3,684,989 $3,725,203 $3,623,106 COMMISSIONS TO AGENTS/BROKERS (not including commissions on Crusader policies which are reflected in policy acquisition costs) are generally related to gross commission income. During the fiscal year ended March 31, 1996, commission expense decreased $28,921 (2%). Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Commissions to agents/brokers $1,328,672 $1,357,593 $1,293,015 OTHER OPERATING EXPENSES generally do not change significantly with changes in production. This is true for both increases and decreases in production. Other operating expenses decreased $451,145 (12%) during the fiscal year ended March 31, 1996, compared to the prior fiscal year. This decrease was primarily due to a decrease in interest and legal expenses. Included in the prior fiscal year was a $300,000 provision for interest due the Internal Revenue Service relating to the tax effect from timing differences of loss reserve deductions in prior years. Legal expenses declined in the current fiscal by $110,644. Other operating expenses increased $459,888 (15%) during the fiscal year ended March 31, 1995, compared to the fiscal year ended March 31, 1994, as a result of a $300,000 interest expense provision to the Internal Revenue Service (discussed above) and an increase of $74,579 in interest expense from the Company's premium finance operation. Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Other operating expenses $3,167,578 3,618,723 $3,158,835 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER ------ Independent Auditors' Report 22 Consolidated Balance Sheets as of March 31, 1996, and 1995 23 Consolidated Statements of Operations for the three years ended March 31, 1996, 1995, and 1994 24 Consolidated Statements of Changes in Stockholders' Equity for the three years ended March 31, 1996, 1995, and 1994 25 Consolidated Statements of Cash Flows for the three years ended March 31, 1996, 1995, and 1994 26 Notes to Consolidated Financial Statements 27 21 INDEPENDENT AUDITORS' REPORT Board of Directors Unico American Corporation We have audited the accompanying consolidated balance sheets of Unico American Corporation and its subsidiaries as of March 31, 1996, and 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1996. These 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of Unico American Corporation and its subsidiaries as of March 31, 1996, and 1995 and the consolidated results of operations and cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's ("FASB") Statement No. 115 ("Accounting for Certain Investments in Debt and Equity Securities") in the fiscal year ended March 31, 1994. GETZ, KRYCLER & JAKUBOVITS Sherman Oaks, California June 20, 1996 22 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, March 31, 1996 1995 --------- --------- ASSETS Investments Available for sale: Fixed maturities at market (amortized cost: 1996, $68,085,376; 1995, $60,707,261) $68,888,277 $60,438,930 Equity securities at market (cost: 1996, $995,237; 1995, $0) 998,075 -- Short-term investments, at cost 3,466,032 3,382,301 ----------- ----------- Total investments 73,352,384 63,821,231 Cash 154,346 173,232 Accrued investment income 1,261,049 1,368,773 Premium and notes receivable, net 8,141,243 8,061,352 Reinsurance recoverable: Paid losses and loss adjustment expenses 212,368 56,173 Unpaid losses and loss adjustment expenses 4,324,305 4,737,448 Prepaid reinsurance premiums 1,363,624 2,784,432 Deferred policy acquisition costs 4,333,708 4,113,936 Property and equipment (net of accumulated depreciation) 278,618 335,495 Deferred income taxes 1,523,778 1,610,075 Other assets 871,954 394,554 ----------- ----------- Total Assets $95,817,377 $87,456,701 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Unpaid losses and loss adjustment expenses $37,006,458 $32,370,752 Unearned premiums 19,646,502 19,569,975 Advance premiums 1,588,628 1,652,377 Funds held as security for performance 758,135 750,824 Accrued expenses and other liabilities 2,332,398 2,174,560 Income taxes payable 98,097 315,385 Note payable - bank 2,000,001 3,975,001 Note payable - related party -- 500,000 ----------- ----------- Total Liabilities 63,430,219 61,308,874 ----------- ----------- STOCKHOLDERS' EQUITY Common stock, no par - authorized 10,000,000 shares, issued and outstanding shares 5,957,738 at March 31, 1996, and 5,957,645 at March 31, 1995 2,834,801 2,834,801 Net unrealized investment gains (losses) 531,787 (177,098) Retained earnings 29,020,570 23,490,124 ----------- ----------- Total Stockholders' Equity 32,387,158 26,147,827 ----------- ----------- Total Liabilities and Stockholders' Equity $95,817,377 $87,456,701 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 23 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATION FOR THE YEARS ENDED MARCH 31,
1996 1995 1994 ---- ---- ---- REVENUES Insurance Company Revenues Premium earned $37,554,830 $38,466,825 $31,400,463 Less: Premium ceded 6,077,403 9,258,535 8,685,638 ----------- ----------- ----------- Net premium earned 31,477,427 29,208,290 22,714,825 Investment income, net 3,708,891 3,181,791 3,115,516 Net realized investment gains 55,743 7,552 30,739 Other income (expense) 803 (14,286) 525 ----------- ----------- ----------- Total Insurance Company Revenues 35,242,864 32,383,347 25,861,605 Other Revenues from Insurance Operations Gross commissions and fees 5,779,769 5,587,458 5,621,074 Investment income 154,842 136,159 135,491 Finance charges and late fees earned 1,279,850 1,306,953 1,136,977 Other income 11,149 30,306 224,766 ----------- ----------- ----------- Total Revenues 42,468,474 39,444,223 32,979,913 ----------- ----------- ----------- EXPENSES Losses and loss adjustment expenses 17,309,549 17,470,300 13,292,039 Policy acquisition costs 8,569,395 8,314,727 6,564,746 Salaries and employee benefits 3,684,989 3,725,203 3,623,106 Commissions to agents/brokers 1,328,672 1,357,593 1,293,015 Other operating expenses 3,167,578 3,618,723 3,158,835 ----------- ----------- ----------- Total Expenses 34,060,183 34,486,546 27,931,741 ----------- ----------- ----------- Income Before Income Taxes 8,408,291 4,957,677 5,048,172 Income Tax Provision 2,460,810 1,165,498 1,526,385 ----------- ----------- ----------- Net Income $5,947,481 $3,792,179 $3,521,787 ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE DATA: Weighted Average Shares Outstanding: 6,150,250 6,061,738 6,113,922 Net Income Per Share $ 0.97 $ 0.63 $ 0.58 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 24 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1996, 1995, and 1994
Common Shares Unrealized -------------------------- Investment Issued and Gains & Retained Outstanding Amount (Losses) Earnings Total ----------- ----------- ---------- ----------- ----------- Balance - March 31, 1993 5,946,564 $2,799,801 $(100,684) $17,009,603 $19,708,720 Shares rescinded, canceled or adjusted 39 -- -- -- -- Cash dividend paid ($0.07 per share) -- -- -- (416,259) (416,259) Change in market value of investments, net of deferred tax -- -- 29,319 29,319 Net income 3,521,787 3,521,787 --------- ---------- --------- ----------- ----------- Balance - March 31, 1994 5,946,603 2,799,801 (71,365) 20,115,131 22,843,567 Shares issued for exercise of stock options 10,000 35,000 -- -- 35,000 Shares rescinded, canceled or adjusted 1,042 -- -- -- -- Cash dividend paid ($0.07 per share) -- -- -- (417,186) (417,186) Cumulative effect of change in accounting for fixed maturities, net of deferred income tax -- -- (177,098) -- (177,098) Change in market value of investments, net of deferred tax -- -- 71,365 -- 71,365 Net income 3,792,179 3,792,179 --------- ---------- --------- ----------- ----------- Balance - March 31, 1995 5,957,645 2,834,801 (177,098) 23,490,124 26,147,827 Shares rescinded, canceled or adjusted 93 -- -- -- -- Cash dividend paid ($0.07 per share) -- -- -- (417,035) (417,035) Change in market value of investments, net of deferred tax -- -- 708,885 -- 708,885 Net income 5,947,481 5,947,481 --------- ---------- --------- ----------- ----------- Balance - March 31, 1996 5,957,738 $2,834,801 $531,787 $29,020,570 $32,387,158 --------- ---------- --------- ----------- ----------- --------- ---------- --------- ----------- -----------
See accompanying notes to consolidated financial statements. 25 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31,
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 5,947,481 $ 3,792,179 $3,521,787 Adjustments to reconcile net income to net cash from operations Depreciation & amortization 142,306 128,210 166,258 Bond amortization, net 577,481 705,176 353,408 Net realized (gain) loss on sale of securities (55,743) (7,552) 52,620 Changes in assets and liabilities: Due from related parties -- -- 109,250 Premium, notes & investment income receivables 27,833 (207,664) (2,174,286) Reinsurance recoverable 256,948 87,251 (2,432,777) Prepaid reinsurance premiums 1,420,808 443,404 (1,104,424) Deferred policy acquisition costs (219,772) (191,372) (1,197,049) Federal income tax recoverable -- -- 3,679,751 Other assets (477,399) 80,012 (295,141) Reserve for unpaid losses & loss adjusting expenses 4,635,706 6,076,553 3,282,331 Unearned premium reserve 76,527 746,480 5,704,081 Funds held as security & advanced premiums (56,438) 38,559 (93,350) Accrued expenses & other liabilities 157,839 451,261 509,260 Income taxes - current/deferred (496,174) (296,425) (102,059) ----------- ----------- ---------- Net cash provided from operations 11,937,403 11,846,072 9,979,660 ----------- ----------- ---------- Cash flows from investing activities Purchase of fixed maturity investments (21,591,676) (23,614,690) (22,927,100) Proceeds from maturity of fixed maturity investment 13,643,268 7,924,100 8,061,237 Proceeds from sale of fixed maturity investment -- 4,624,470 -- Purchase of equity securities - cost (1,593,401) (5,933) (722,397) Proceeds from sale of equity securities 646,714 1,051,216 3,882,332 Increase (decrease) in net short term investments (83,731) (767,119) 1,871,625 Purchases of property & equipment (85,428) (233,310) (115,607) ----------- ----------- ---------- Net cash (used) by investing activities (9,064,254) (11,021,266) (9,949,910) ----------- ----------- ---------- Cash flows from financing activities Proceeds from issuance of common stock -- 35,000 -- Proceeds (repayments) of note payable - bank (1,975,000) $ (225,000) 1,675,000 Repayment of notes payable (500,000) $ (250,000) (1,250,000) Dividends paid to stockholders (417,035) (417,186) (416,259) ----------- ----------- ---------- Net cash provided (used) by financing activities (2,892,035) (857,186) 8,741 ----------- ----------- ---------- Net increase (decrease) in cash (18,886) (32,380) 38,491 Cash at beginning of year 173,232 205,612 167,121 ----------- ----------- ---------- Cash at end of year $ 154,346 $ 173,232 $ 205,612 ----------- ----------- ---------- ----------- ----------- ---------- Supplemental cash flow information Cash paid during the year for: Interest $ 290,268 $ 343,692 $ 318,634 Income taxes paid $ 2,967,000 $ 1,202,000 $1,819,000
See accompanying notes to consolidated financial statements. 26 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. Unico American Corporation and its subsidiaries, all of which are wholly owned (the "Company"), provides primarily in California, property, casualty, health and life insurance and related premium financing. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. BASIS OF PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP). As described in Note 17, the Company's insurance subsidiary also files financial statements with regulatory agencies prepared on a statutory basis of accounting which 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 and disclosure of certain 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 from those estimates. INVESTMENTS The Company adopted FASB Statement No. 115 ("Accounting for Certain Investments in Debt and Equity Securities") in the fiscal year ended March 31, 1994. Statement No. 115 requires investments in all debt securities and equity securi- ties to be classified in one of three categories: held-to-maturity securities, available-for-sale securities and trading securities. Held-to-maturity securities are recorded at amortized cost. Available-for-sale securities are recorded at market value with unrealized gains and losses reported as a separate component of stockholders' equity. Trading securities are recorded at market value with unrealized gains and losses reported in earnings. At the time the Company adopted FASB Statement No. 115, all of its fixed income securities were classified as held-to-maturity. The Company reclassified all of its fixed maturity securities as available-for-sale beginning with the quarter ended March 31, 1995. This transaction did not have a material effect on the Company's financial statements. Although all of the Company's fixed maturity investments are classified as available-for-sale and are stated at market value, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments. Short-term investments are carried at cost, which approximates market value. Market value for fixed maturities are obtained from a national quotation service. Market value for equity securities are determined by quotations on national securities exchanges. When a decline in the value of a fixed maturity or equity security is considered other than temporary, a loss is recognized in the consolidated statement of operations. Realized gains and losses are included in the consolidated statements of operations based upon the specific identification method. The Company had net unrealized investment gains of $531,787 as of March 31, 1996, and net unrealized investment losses of $177,098 as of March 31, 1995. 27 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 under generally accepted accounting principles. Deferred income taxes arise principally from certain revenues and expenses which are recognized for income tax in different periods than for financial statements. Effective April 1, 1993, the Company changed its method of accounting for income taxes from the "deferred" method to the "asset and liability" method required by FASB Statement No. 109. Under the "asset and liability" method, 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 that will be in effect when the differences are expected to reverse. EARNINGS PER SHARE Earnings per share is computed by dividing the net income by the weighted average number of common 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. Ceding commission applicable to the unexpired terms of policies in force are recorded as unearned ceding commission which is included in deferred policy acquisition costs. c. INSURANCE PREMIUM FINANCING OPERATIONS Premium finance fees are charged to policyholders who choose to finance insurance premiums. Fees are charged at rates that vary with the amount of premium financed. Premium finance fees are recognized over the term of the premium note based upon the effective yield. LOSSES AND LOSS ADJUSTING EXPENSES The process of establishing loss reserves involves significant judgmental factors. The reserves for unpaid losses and loss adjustment expenses are based on estimates of ultimate claim cost, including claims incurred but not reported. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in results of operations in the period in which they become known. 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. 28 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) RESTRICTED FUNDS 1996 1995 ---- ---- Premium trust funds (1) $2,465,923 $ 2,931,786 Assigned to state agencies (2) 725,000 725,000 ----------- ----------- Total restricted funds $ 3,190,923 $ 3,656,786 ----------- ----------- ----------- ----------- (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 direct and indirect 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. 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. RECLASSIFICATIONS Certain reclassifications have been made to prior year balances to conform to the current year presentation. NOTE 2 - ADVANCE PREMIUMS" Unico subsidiaries selling auto, health, life and dental insurance policies require payments of premium prior to the effective date of coverage. To conform with the above requirement, invoices are sent out as early as two months prior to the effective date of the policy and payments are received prior to the policy effective date. Insurance premiums received by these subsidiaries for coverage effective after the balance sheet date are recorded as advance premiums. 29 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - INVESTMENTS A summary of net investments and related income is as follows: Investment Income Investment income is summarized as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Fixed maturities $ 3,587,856 $ 3,085,667 $ 2,863,866 Equity securities 5,886 15,909 192,438 Short-term investments 264,956 234,909 192,701 Notes receivable - - 9,029 ----------- ----------- ----------- Total investment income 3,858,698 3,336,485 3,258,034 Less, investment expenses (5,035) 18,535 7,027 ----------- ----------- ----------- Net investment income $ 3,863,733 $ 3,317,950 $ 3,251,007 ----------- ----------- ----------- ----------- ----------- ----------- Net realized investment gains and (losses) are summarized as follows: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Gross Realized Gains: Fixed maturities $ 7,193 131,199 $ 83,360 Equity securities 48,550 - 100,853 Gross Realized Losses: Equity securities - (123,647) (153,474) -------- -------- -------- Net realized investment gains $ 55,743 $ 7,552 $ 30,739 -------- -------- -------- -------- -------- -------- A summary of the net change in unrealized appreciation (depreciation) on investments carried at market and the applicable deferred federal income taxes is shown below: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Gross Unrealized Appreciation: Fixed maturities $ 954,381 $ - $ - Equity securities 2,838 - - Gross Unrealized (Depreciation): Fixed maturities (151,480) $(268,331) - Equity securities - - (108,129) --------- --------- --------- Net unrealized appreciation (depreciation) on investments 805,739 (268,331) (108,129) Deferred federal income taxes (273,952) 91,233 36,764 --------- --------- --------- Net unrealized appreciation (depreciation),net of deferred federal income taxes $ 531,787 $(177,098) $ (71,365) --------- --------- --------- --------- --------- --------- 30 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - INVESTMENTS (continued) 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 ---------- ---------- ---------- ----------- March 31, 1996 - -------------- Available-for-Sale Fixed maturities: Certificates of deposit $ 1,111,378 $ - $ - $ 1,111,378 U.S. treasury notes 18,191,847 157,987 24,468 18,325,366 State, municipal and political subdivision tax-exempt bonds 38,126,835 437,470 127,012 38,437,293 Industrial and miscellaneous taxable bonds 10,655,316 358,924 - 11,014,240 ---------- -------- -------- ---------- Total fixed maturities ' $68,085,376 $954,381 $151,480 $68,888,277 ---------- -------- -------- ---------- ---------- -------- -------- ---------- Equity securities: Common stocks $995,237 $2,838 $ - $998,075 ------- ----- ------- ------- ------- ----- ------- ------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ---------- ---------- ----------- March 31, 1995 - -------------- Available for Sale Fixed maturities: Certificates of deposit $ 1,111,378 $ - $ - $ 1,111,378 U.S. treasury notes 4,884,350 68,375 - 4,952,725 State, municipal and political subdivision tax-exempt bonds 41,758,522 - 324,575 41,433,947 Industrial and miscellaneous taxable bonds 12,953,011 - 12,131 12,940,880 ---------- -------- -------- ---------- Total fixed maturities $60,707,261 $ 68,375 $336,706 $60,438,930 ---------- -------- -------- ---------- ---------- -------- -------- ----------
The amortized cost and estimated market value of fixed maturity investments at March 31, 1996, by contractual maturity are as follows: Estimated Amortized Market Cost Value Due in one year or less $ 7,143,065 $ 7,179,768 Due after one year through five years 37,148,831 37,499,245 Due after five years through ten years 23,793,480 24,209,264 ---------- ---------- Total fixed maturities $68,085,376 $68,888,277 ---------- ---------- ---------- ---------- 31 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - INVESTMENTS (continued) Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Short-term investments have an initial maturity of one year or less and consist of the following: March 31, March 31, 1996 1995 --------- --------- Certificates of deposit $ 25,000 $ 25,000 Commercial paper 2,230,000 2,700,000 Commercial bank money market accounts 1,186,602 633,355 Savings account 24,430 23,946 --------- --------- Total short-term investments $3,466,032 $3,382,301 --------- --------- NOTE 4 - PREMIUM AND NOTES RECEIVABLE, NET Premium and notes receivable consist of the following: March 31, March 31, 1996 1995 --------- --------- Premiums receivable $2,493,592 $1,585,702 Premium finance notes receivable 5,672,984 6,493,879 --------- --------- Total premiums and notes receivable 8,166,576 8,079,581 Less allowance for doubtful accounts 25,333 18,229 --------- --------- Net premiums and notes receivable $8,141,243 $8,061,352 --------- --------- --------- --------- The allowance for doubtful accounts is maintained at a minimum since the receivables are secured by unearned premiums and funds held as security for performance. Bad debt expense for the fiscal years ended March 31, 1996 and 1995 was $38,815 and $51,042 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 5 - DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs, net of ceding commission, consist of commissions, 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.
Fiscal Year ended March 31, 1996 1995 1994 --------- --------- --------- Deferred policy acquisition costs at beginning of year $4,113,936 $3,922,564 $2,725,515 Policy acquisition costs incurred during year 8,789,167 8,506,099 7,761,795 Policy acquisition costs amortized during year (8,569,395) (8,314,727) (6,564,746) --------- --------- --------- Deferred policy acquisition costs at end of year . $4,333,708 $4,113,936 $3,922,564 --------- --------- --------- --------- --------- ---------
32 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - PROPERTY & EQUIPMENT (NET OF ACCUMULATED DEPRECIATION) Property and equipment consist of the following: March 31, March 31, 1996 1995 --------- --------- Furniture, fixtures, computer, office & transportation equipment $2,414,739 $2,339,329 Accumulated depreciation 2,136,121 2,003,834 --------- --------- Net property & equipment $ 278,618 $ 335,495 --------- --------- --------- --------- NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The following table sets forth a reconciliation of the liabilities for losses and loss adjustment expenses for the periods shown:
Year Ended Year Ended Year Ended March 31, March 31, March 31, 1996 1995 1994 ---------- ---------- ---------- Reserve for unpaid losses and loss adjustment expenses at beginning of year $27,633,304 $21,499,778 $20,824,039 ---------- ---------- ---------- Incurred losses and loss adjustment expenses Provision for insured events of current year 19,276,602 18,057,338 14,516,383 (Decrease) in provision for events of prior years (1,967,053) (587,038) (1,224,344) ---------- ---------- ---------- Total losses and loss adjustment expenses 17,309,549 17,470,300 13,292,039 ---------- ---------- ---------- Payments Losses and loss adjustment expenses attributable to insured events of the current year 3,446,088 3,469,594 2,598,236 Losses and loss adjustment expenses attributable to insured events of prior years 8,814,612 7,867,180 8,904,427 Total payments 12,260,700 11,336,774 11,502,663 ---------- ---------- ---------- Allocation Loss adjustment expenses allocated from affiliated company (1) - - 1,113,637 ---------- ---------- ---------- Reserve for unpaid losses & loss adjustment expenses at end of year - net of reinsurance $ 32,682,153 $ 27,633,304 $ 21,499,778 ---------- ---------- ---------- Reconciliation of liability for losses and loss adjustment expense reserves to Balance Sheet Reserve for unpaid losses & loss adjustment expenses at end of year - net of reinsurance $32,682,153 $27,633,304 $21,499,778 Reinsurance recoverable on unpaid losses at end of year 4,324,305 4,737,448 4,794,421 ---------- ---------- ---------- Reserve for unpaid losses & loss adjustment expenses at end of year - gross of reinsurance $ 37,006,458 $ 32,370,752 $ 26,294,199 ---------- ---------- ---------- ---------- ---------- ----------
(1) As of January 1, 1994, Crusader began processing its own claims. This claim processing function had previously been provided by its sister company, U.S. Risk Managers, Inc. 33 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - FUNDS HELD AS SECURITY Funds held as security for performance represent funds received in order to guarantee the contractual obligations entered into with customers and are treated as restricted funds. NOTE 9 - ACCRUED EXPENSES AND OTHER LIABILITIES" Accrued expenses and other liabilities consist of the following: March 31, March 31, 1996 1995 --------- --------- Premium payable $ 696,997 $ 717,842 Unearned adjusting income 300,000 300,000 Profit sharing contributions 480,863 477,028 Accrued interest payable 300,000 300,000 Accrued salaries 206,638 Other 347,900 379,690 --------- --------- Total accrued expenses and other liabilities $2,332,398 $2,174,560 --------- --------- --------- --------- NOTE 10 - NOTE PAYABLE - BANK" American Acceptance Corporation ("AAC"), the Company's premium finance subsidiary, has a line of credit with Union Bank which can be used only to fund its premium finance operation. This line of credit was increased from $5,000,000 to $6,000,000 in December 1994. Interest on the note is referenced to the London Interbank Offered Rate ("LIBOR"). The note amount is collateralized by the assets of AAC and is guaranteed by the Company. The loan agreement contains certain covenants including restrictions on certain transactions between AAC and the Company and the maintenance of certain financial ratios. The note matures August 31, 1996, and is expected to be renewed. The terms of the note call for monthly payments of interest only. The interest rate at March 31, 1996, was 7.16% March 31, March 31, 1996 1995 --------- --------- Note payable bank $2,000,001 $3,975,001 --------- --------- --------- --------- Maximum bank note payable $3,975,001 $4,467,001 Average bank note payable $3,388,334 $4,229,418 Weighted average interest rate 7.7% 7.2% NOTE 11 - NOTE PAYABLE RELATED PARTY In June, 1992, the Company borrowed $500,000 from Erwin Cheldin, its president, chairman and principal stockholder. This note bore interest at 8% per annum. Principal and accrued interest were paid in full on the due date of June 15, 1995. March 31, March 31, 1996 1995 --------- --------- Note payable related party $ - $ 500,000 34 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - CLAIMS AND LITIGATION 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. The Company is required to resort to legal proceedings from time-to-time in order to enforce collection of premiums and other 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 other agents 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. NOTE 13 - 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 each of the fiscal years ended March 31, 1996; March 31, 1995; and March 31, 1994. The lease provides for the following minimum annual rental commitments: Fiscal Year Ending - ------------------ March 31, 1997 $ 1,025,952 March 31, 1998 $ 1,025,952 March 31, 1999 $ 1,025,952 March 31, 2000 $ 1,025,952 March 31, 2001 $ 1,025,952 March 31, 2002 (through March 31, 2007) $ 6,155,712 ---------- Total minimum payments $ 11,285,472 ---------- ---------- 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 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 unaffiliated third parties. The Company utilizes for its own operations 100% of the space it leases. NOTE 14 - 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; and if the reinsurer fails to meet the obligations, the company must nonetheless pay its policy obligations. 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. 35 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - REINSURANCE (continued) Crusader has reinsurance agreements with National Reinsurance Corporation, a California admitted reinsurance company, which helps protect it 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. In August 1992 Crusader purchased additional catastrophe reinsurance from various California admitted reinsurance companies. Crusader's retention increased from $100,000 to $150,000 per risk on April 1, 1995. This retention is subject to a maximum dollar amount and to catastrophe and clash covers. The catastrophe and clash covers (subject to a maximum occurrence and annual aggregate amount) help protect the company from one loss occurrence affecting multiple policies. The premium ceded to the reinsurers for the catastrophe and clash covers and for all exposures over $500,000 is a fixed percentage of the premium charged by Crusader. On exposures up to $500,000, the reinsurer charges a provisional rate which is subject to adjustment and is based on the amount of losses ceded, limited by a maximum percentage that can be charged by the reinsurer. 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 that is ceded. Crusader does not currently assume any reinsurance from other insurance companies. The company intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The effect of reinsurance on premiums written and earned is as follows: Year Ended Year Ended Year Ended March 31, March 31, March 31, 1996 1995 1994 ---------- ---------- ---------- Premiums written: Direct business $37,631,357 $39,039,549 $37,278,300 Reinsurance assumed Reinsurance ceded $(4,437,446) $(8,614,685) $(9,815,136) Premiums Earned: Direct business $37,554,830 $38,466,825 $31,400,463 Reinsurance assumed Reinsurance ceded $(6,077,403) $(9,258,535) $(8,685,638) NOTE 15 - CONTINGENCIES The Company's federal tax returns for the fiscal years ended March 31, 1990, through March 31, 1994, are currently being examined by the Internal Revenue Service. The primary issue of the examination is the loss reserve deductions for the fiscal years under audit. Any changes in the these deductions resulting from the examination would be a temporary difference. Since any tax increase from this temporary difference should be offset by a tax decrease in subsequent years, no tax liability has been accrued. Management estimated and accrued $300,000 of interest expense in the fiscal year ending March 31, 1995, related to this temporary difference. NOTE 16 - 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 36 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - PROFIT SHARING PLAN (continued) 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: Profit Year Ended Sharing Plan ---------- ------------ March 31, 1996 $484,715 March 31, 1995 $477,028 March 31, 1994 $419,505 NOTE 17 - STATUTORY CAPITAL AND SURPLUS Crusader is required to file an annual statement with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (i.e., statutory basis). Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices not so prescribed. The NAIC has a project to codify statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. The codification, when completed, will likely change the definitions of what comprises prescribed as opposed to permitted statutory accounting practices and may result in changes to the accounting policies that insurance companies use to prepare the statutory financial statements. Crusader Insurance Company statutory capital and surplus is as follows: As of March 31, 1996 $22,721,183 As of March 31, 1995 $19,585,839 Crusader Insurance Company statutory net income is as follows: Fiscal year ended March 31, 1996 $4,639,537 Fiscal year ended March 31, 1995 $2,661,428 Fiscal year ended March 31, 1994 $1,287,470 Crusader's statutory capital and surplus was deemed 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 Unico without prior approval of the California Insurance Department. Presently, without prior approval, Crusader may pay a dividend to Unico equal to the greater of (1) 10% of Crusader's statutory policyholders' surplus or (2) Crusader's statutory net income for the preceding calendar year. The maximum dividend which may be made without prior approval in calendar year 1996 is $4,113,181. 37 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - INCENTIVE STOCK OPTION PLAN" The Company under its 1985 stock option plan provides for the grant of "incentive stock options" to officers and key employees. The options and prices set forth below have been adjusted, where applicable, for all subsequent stock splits, reverse stock splits and stock dividends. All options were granted at fair market value. As of March 31, 1996, of the 680,000 options outstanding, 552,527 options were currently exercisable. There are no additional options available for future grant under the 1985 plan. The changes in the number of common shares under option are summarized as follows: Options Exercise Price ------- -------------- Outstanding at March 31, 1993 619,836 $3.4375 to $3.85 Options terminated July 1, 1993 (5,000) $3.50 Options terminated December 21, 1993 (5,000) $3.50 ------- Outstanding at March 31, 1994 609,836 $3.4375 to $3.85 Options exercised May 16, 1994 (5,000) $3.50 Options terminated July 1, 1994 (10,000) $3.50 Options exercised July 5, 1994 (5,000) $3.50 Options granted August 17, 1994 90,164 $4.375 ------- Outstanding at March 31, 1995 680,000 $3.4375 to $4.375 Options granted - Options exercised - Options terminated - ------- Outstanding at March 31, 1996 680,000 $3.4375 to $4.375 ------- ------- NOTE 19 - TAXES ON INCOME The provision for taxes on income consists of the following: Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Current provision: Federal $2,574,766 $1,583,545 $1,489,242 State 164,931 102,529 167,675 --------- --------- --------- Total federal and state 2,739,697 1,686,074 1,656,917 Deferred (278,887) (520,576) (130,532) --------- --------- --------- Provision for taxes $2,460,810 $1,165,498 $1,526,385 --------- --------- --------- --------- --------- --------- The income tax provision reflected in the consolidated statement of operations is less than the expected federal income tax on income as shown in the table below. Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Computed tax expense at 34% $2,858,819 $1,685,610 $1,716,378 Tax effect of: Tax exempt income (502,513) (548,745) (317,954) Dividend exclusion (1,191) - - Other (49,847) (69,580) (36,989) State income tax expense 155,542 98,213 164,950 --------- --------- --------- Tax per financial statement $2,460,810 $1,165,498 $(1,526,385) --------- --------- --------- --------- --------- --------- 38 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 - TAXES ON INCOME (continued)" The provision for deferred income taxes results from the following temporary differences between taxable income and income reported in the accompanying financial statements. Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Deferred policy acquisition costs $74,722 $65,066 $406,996 Discounting of losses and unearned premium reserves (295,375) (439,127) (480,512) Accrued interest not currently deductible - (102,000) - Other (58,234) (44,515) (57,016) -------- -------- -------- Total deferred tax (benefit) $(278,887) $(520,576) $(130,532) -------- -------- -------- -------- -------- -------- The components of the net federal income tax asset included in the financial statements at March 31, 1996, and 1995, as required by the asset and liability method, are as follows: 1996 1995 ---- ---- Deferred tax assets: - -------------------- Discount on loss reserves $2,000,235 $1,828,443 Discount on salvage & subrogation 8,589 1,727 Unearned premiums 1,194,244 1,077,523 Unrealized loss on investments - 91,233 Other 68,123 9,888 --------- --------- Total deferred tax assets $3,271,191 $3,008,814 --------- --------- Deferred tax liabilities: - ------------------------- Deferred acquisition costs $1,473,461 $1,398,739 Unrealized gain on investments 273,952 - --------- --------- Total deferred tax liabilities $1,747,413 $1,398,739 --------- --------- Net deferred tax asset $1,523,778 $1,610,075 --------- --------- --------- --------- Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. As a California insurance company, Crusader is obligated to pay a premium tax on gross premiums written in the states of California, Oregon, Washington, Nevada and Arizona. The premium tax is in lieu of state franchise taxes; thus, the above provision for state taxes does not include the premium tax. In April 1993 the Company adopted FASB Statement No. 109. The cumulative effect of this change in accounting for income taxes was immaterial; therefore, there is no cumulative effect reported in the consolidated statement of operations for the fiscal year ended March 31, 1994. Prior years' financial statements have not been restated to apply the provisions of FASB Statement No. 109. 39 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Fiscal Year by Quarter ---------------------- First Second Third Fourth ----- ------ ----- ------ March 31, 1996 - -------------- Total revenue $10,169,592 $10,400,201 $10,903,066 $10,995,615 Earnings before taxes 1,827,849 2,003,588 2,179,764 2,397,090 Net earnings 1,327,306 1,414,145 1,531,213 1,674,817 Earnings per share $0.22 $0.23 $0.25 $0.27 March 31, 1995 - -------------- Total revenue $9,571,300 $9,826,331 $10,074,930 $9,971,662 Earnings before taxes 993,697 993,313 1,367,575 1,603,092 Net earnings 746,663 763,070 1,032,089 1,250,357 Earnings per share $0.12 $0.13 $0.17 $0.21 40 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 1996 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 1996 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 1996 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 1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K. 41 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 year ended March 31, 1996, are contained herein as listed in the index to consolidated financial statements on page 21. 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). 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). 27 Financial Data Schedule 28P Information from Insurance reports furnished to state regulatory authorities as of December 31, 1995. (*) Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: None 42 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: June 26, 1996 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, June 26, 1996 - ------------------- President and Chief Executive Officer, Erwin Cheldin (Principal Executive Officer) /s/ LESTER A. AARON Treasurer, Chief Financial June 26, 1996 - --------------------------- Officer and Director Lester A. Aaron K (Principal Accounting and Principal Financial Officer) /s/ CARY L. CHELDIN Executive Vice President June 26, 1996 - -------------------------- and Director Cary L. Cheldin /s/ GEORGE C. GILPATRICK Vice President, Secretary June 26, 1996 - -------------------------- and Director George C. Gilpatrick /s/ ROGER H. PLATTEN Vice President and Director June 26, 1996 - --------------------- Roger H. Platten
43 INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULES Board of Directors Unico American Corporation Under date of June 20, 1996, we reported on the consolidated balance sheets of Unico American Corporation and subsidiaries as of March 31, 1996, and 1995 and the related consolidated statement of operations, shareholders' equity and cash flows for each of the years in the three-year period ended March 31, 1996, as contained in the annual report of Form 10-K for the fiscal year ended March 31, 1996. 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 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. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's ("FASB") Statement No. 115 ("Accounting for Certain Investments in Debt and Equity Securities") in the fiscal year ended March 31, 1994. GETZ, KRYCLER & JAKUBOVITS Sherman Oaks, California June 20, 1996 44 SCHEDULE I UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES MARCH 31, 1996
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 notes $18,191,847 $18,325,366 $18,325,366 State and municipal bonds 38,126,835 38,437,293 38,437,293 Industrial and miscellaneous bonds 10,655,316 11,014,240 11,014,240 Certificates of deposit 1,111,378 1,111,378 1,111,378 ---------- ----------- ---------- Total fixed maturities 68,085,376 68,888,277 68,888,277 Equity securities Common stocks 995,237 998,075 998,075 Short-term investments 3,466,032 3,466,032 3,466,032 ---------- ------------ ------------ Total investments $ 72,546,645 $ 73,352,384 $ 73,352,384 ----------- ----------- ----------- ----------- ----------- -----------
45 SCHEDULE II UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS - PARENT COMPANY ONLY
March 31, March 31, 1996 1995 ---- ---- ASSETS ------ Cash 53,148 62,652 Investments in subsidiaries 39,016,614 38,617,819 Property and equipment (net of accumulated depreciation) 278,618 335,495 Other assets 79,361 77,741 ---------- ---------- Total Assets $ 39,427,741 $39,093,707 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES Accrued expenses and other liabilities $ 1,110,039 $ 998,023 Payables to subsidiaries (net of receivables) 5,930,544 11,447,857 Note payable - related party - 500,000 ---------- ---------- Total Liabilities 7,040,583 12,945,880 ---------- ---------- STOCKHOLDERS' EQUITY Common stock 2,834,801 2,834,801 Net unrealized investment gains (losses) 531,787 (177,098) Retained earnings 29,020,570 23,490,124 ---------- ---------- Total Stockholders' Equity 32,387,158 26,147,827 ----------- ----------- Total Liabilities and Stockholders' Equity $ 39,427,741 $ 39,093,707 ----------- ----------- ----------- -----------
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 46 SCHEDULE II (continued) UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF OPERATIONS - PARENT COMPANY ONLY FOR THE YEARS ENDED MARCH 31,
1996 1995 1994 ---- ---- ----- REVENUES General and administrative expenses allocated to subsidiaries $5,237,708 $5,218,234 $5,212,580 Investment income 12,422 1,802 27,066 Other income 12,138 12,083 219,698 --------- --------- --------- Total Revenues 5,262,268 5,232,119 5,459,344 EXPENSES General and administrative 5,246,708 5,227,521 5,320,392 --------- --------- --------- Income before equity in net income of subsidiaries 15,560 4,598 138,952 Equity in net income of subsidiaries 5,931,921 3,787,581 3,382,835 --------- --------- --------- Net Income $ 5,947,481 $ 3,792,179 $ 3,521,787 ---------- ---------- --------- ---------- ---------- ---------
The Company and its subsidiaries file a consolidated federal income tax return. Unico received a $1,500,000 cash dividend from Crusader in the fiscal year ended March 31, 1996, and $500,000 in the fiscal years ended March 31, 1995, and 1994. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 47 SCHEDULE II (continued) UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY FOR THE YEARS ENDED MARCH 31,
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $5,947,481 $3,792,179 $3,521,787 Adjustments to reconcile net income to net cash from operations Undistributed equity in net (income) of subsidiaries (5,931,921) (3,787,581) (3,382,835) Depreciation and amortization 142,306 128,210 166,258 Due from related parties - - 109,250 Accrued expenses and other liabilities 112,016 463,549 147,773 Accrued investment income - - 2,948 Other assets (1,621) 175,501 (168,074) -------- -------- -------- Net cash provided from operations 268,261 771,858 397,107 -------- -------- -------- Cash flows from investing activities Proceeds from sale of investments - - 84,115 Purchase of property & equipment (85,428) (233,310) (115,607) -------- -------- -------- Net cash (used) by investing activities (85,428) (233,310) (31,492) -------- -------- -------- Cash flows from financing activities Proceeds from issuance of common stock - 35,000 - Dividends paid to stockholders (417,035) (417,186) (416,259) Repayment of notes payable (500,000) (250,000) (1,250,000) Net change in payables and receivables from subsidiaries 724,698 147,353 1,295,831 -------- -------- -------- Net cash (used) by financing activities (192,337) (484,833) (370,428) -------- -------- -------- Net increase (decrease) in cash (9,504) 53,715 (4,813) Cash at beginning of year 62,652 8,937 13,750 -------- -------- -------- Cash at end of year $ 53,148 $ 62,652 $ 8,937 -------- -------- -------- -------- -------- --------
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 48 SCHEDULE III UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION
Future policy Deferred benefits, policy losses, claims Net acquisition and loss Unearned Premium investment cost expenses premiums revenue income -------------- --------------- ---------- ------- ---------- Year Ended March 31, 1996 Property & Casualty $4,333,708 $37,006,458 $19,646,502 $31,477,427 $3,708,891 Year Ended March 31, 1995 Property & Casualty $4,113,936 $32,370,752 $19,569,975 $29,208,290 $3,181,791 Year Ended March 31, 1994 Property & Casualty $3,922,564 $26,294,199 $18,823,495 $22,714,825 $3,115,516 Benefits, Amortization claims, of deferred losses & policy Other settlement acquisition operating Premiums expenses costs costs written ---------- ------------- --------- ---------- Year Ended March 31, 1996 Property & Casualty $17,309,549 $8,569,395 $10,989,570 $33,193,911 Year Ended March 31, 1995 Property & Casualty $17,470,300 $8,314,727 $10,778,265 $30,424,864 Year Ended March 31, 1994 Property & Casualty $13,292,039 $6,564,746 $11,096,639 $27,463,164
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 March 31, 1996 $37,554,830 $6,077,403 - $31,477,427 - Property & Casualty Year Ended March 31, 1995 $38,466,825 $9,258,535 - $29,208,290 - Property & Casualty Year Ended March 31, 1994 $31,400,463 $8,685,638 - $22,714,825 - Property & Casualty
SCHEDULE VI UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS
Reserves for Unpaid Discount Deferred Claims if any, Affiliation Policy and Claim Deducted Net with Acquisition Adjustment in Unearned Earned Investment Registrant Costs Expenses Column C Premiums Premiums Income (A) (B) (C) (D) (E) (F) (G) - ---------------- ----------- ---------- --------- -------- -------- ---------- Company & Consolidated Susidiaires Fiscal Year Ended March 31, 1996 $4,333,708 $37,006,458 - $19,646,502 $31,477,427 $3,708,891 1995 $4,113,936 $32,370,752 - $19,569,975 $29,208,290 $3,181,791 1994 $3,922,564 $26,294,199 - $18,823,495 $22,714,825 $3,115,516 Claims and Claim Adjustment Amortization Expenses Incurred of Deferred Paid Claims Affiliation Related to Policy and Claim with (1) Current Year Acquisition Adjustment Premiums Registrant (2) Prior Year Costs Expenses Written (A) (H) (I) (J) (K) - -------------- ----------------- ----------- ----------- ----------- Company & Consolidated Susidiaires Fiscal Year Ended March 31, 1996 $19,276,602 (1) $8,569,395 $12,260,700 $33,193,911 $(1,967,053) (2) 1995 $18,057,338 (1) $8,314,727 $11,336,774 $30,424,864 $(587,038) (2) 1994 $14,516,383 (1) $6,564,746 $11,502,663 $27,463,164 $(1,224,344) (2)
EXHIBIT INDEX TO UNICO AMERICAN CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1996
No Item Page - --- ----- ---- 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). 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) 27 Financial Data Schedule 28P Information from Insurance reports furnished to state regulatory authorities as of December 31, 1995.
EX-27 2 FDS
7 YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 68,888,277 0 0 998,075 0 0 73,352,384 154,346 212,368 4,333,708 95,817,377 37,006,458 19,646,502 0 2,332,398 2,000,001 0 0 2,834,801 29,552,357 95,817,377 31,477,427 3,863,733 55,743 7,071,571 17,309,549 8,569,395 8,181,239 8,408,291 2,460,810 5,947,481 0 0 0 5,947,481 .97 .97 27,633,304 19,276,602 (1,967,053) 3,446,088 8,814,612 32,682,153 1,967,053
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