UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the year ended December 31, 2000 Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S.Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
Securities registered pursuant to section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy of information statements
incorporated by reference as Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of Registrant's voting stock held by non-affiliates
as of March 19, 2001, was $17,248,974 (based on the closing sales price on such
date, as reported by the Wall Street Journal).
5,626,919
Number of shares of common stock outstanding as of March 19, 2001
Portions of the definitive proxy statement which Registrant intends to file
pursuant to Regulation 14(A) by a date no later than 120 days after December 31,
2000, to be used in connection with the annual meeting of shareholders, are
incorporated herein by reference into Part III hereof. If such definitive proxy
statement is not filed in the 120 day period, the information called for by Part
III will be filed as an amendment to this Form 10-K not later than the end of
the 120 day period.
1
PART I
Item 1. Business
- -----------------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and provides insurance premium financing, claim administration
services, and membership association services through its other subsidiaries.
Unico American Corporation is referred to herein as the "Company" or "Unico" and
such references include both the corporation and its subsidiaries, all of which
are wholly owned, unless otherwise indicated. Unico was incorporated under the
laws of Nevada in 1969.
Descriptions of the Company's operations in the following paragraphs are
categorized between the Company's major segment, its insurance company
operation, and all other revenues from insurance operations. The insurance
company operation is conducted through Crusader Insurance Company ("Crusader"),
Unico's property and casualty insurance company. Insurance company revenues and
other revenues from insurance operations for the years ended December 31, 2000,
and December 31, 1999, are as follows:
Year ended December 31
----------------------
2000 1999
------------------------ ------------------------
Percent Percent of
of Total Total
Total Company Total Company
Revenues Revenues Revenues Revenues
-------- -------- -------- --------
Insurance Company Revenues $31,572,070 82.3% $33,888,077 83.2%
Other Revenues from Insurance Operations
- ----------------------------------------
Health and life insurance program commission
income 2,625,193 6.9% 2,668,582 6.6%
Service fee income 1,654,735 4.3% 1,677,223 4.1%
Daily automobile rental insurance program
Association operations membership and fee income 397,157 1.0% 396,958 1.0%
Other commission and fee income 71,949 0.2% 49,241 0.1%
Workers' compensation program commission income 44,818 0.1% 81,919 0.2%
--------- ---- ------ ----
Total gross commission and fee income 5,605,493 14.6% 5,634,542 13.9%
Insurance premium financing operation finance
charges and late fees 837,902 2.2% 915,940 2.2%
Non-insurance company investment income 338,492 0.9% 283,942 0.7%
Other income 13,992 - 11,756 -
--------- ----- --------- -----
Total Other Revenues from Insurance Operations 6,795,879 17.7% 6,846,180 16.8%
--------- ----- --------- -----
Total Revenues $38,367,949 100.0% $40,734,257 100.0%
========== ====== ========== ======
INSURANCE COMPANY OPERATION
---------------------------
General
- -------
The insurance company operation is conducted through Crusader, which as of
December 31, 2000, was licensed as an admitted insurance carrier in the states
of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon and
Washington. Crusader is a multiple line property and casualty insurance company
which began transacting business on January 1, 1985. As of December 31, 2000,
97% of Crusader's business was commercial multiple peril business package
insurance policies. Commercial multiple peril policies provide a combination of
property and liability coverage for businesses. Commercial property coverages
insure against loss or damage to buildings, inventory and equipment from natural
disasters, including hurricanes, windstorms, hail, water, explosions, severe
winter weather and other events such as theft and vandalism, fires and storms
and financial
2
loss due to business interruption resulting from covered property damage.
Commercial liability coverages insure against third party liability from
accidents occurring on the insured's premises or arising out of its operations,
such as injuries sustained from products sold. In addition to commercial
multiple peril policies, Crusader also writes separate policies to insure
commercial property and commercial liability risks on a mono-line basis.
Crusader's business is produced by Unifax Insurance Systems, Inc., ("Unifax")
its sister corporation. Unifax has substantial experience with these classes of
business. The commissions paid by Crusader to Unifax are eliminated as
intercompany transactions and are not reflected in the above table. Crusader is
licensed in all property and casualty and disability lines by the California
Department of Insurance.
Reinsurance
- -----------
A reinsurance transaction occurs when an insurance company transfers ("cedes") a
portion of its exposure on business written by it to a reinsurer which assumes
that risk for a premium ("ceded premium"). Reinsurance does not legally
discharge the Company from primary liability under its policies. If the
reinsurer fails to meet its obligations the Company must nonetheless pay its
policy obligations. In 2000, Crusader had its primary reinsurance agreements
with Partners Reinsurance Company of the U.S., a California admitted reinsurer.
In 1999, Crusader had its primary reinsurance agreements with General
Reinsurance Corporation, a California admitted reinsurer. These reinsurance
agreements help protect Crusader against liabilities in excess of certain
retentions, including major or catastrophic losses that may occur from any one
or more of the property and/or casualty risks which Crusader insures. Crusader
also has additional catastrophe reinsurance from various other reinsurance
companies of which 90% of the premium is ceded to participating catastrophe
reinsurers that are admitted in California.
The aggregate amount of earned premium ceded to the reinsurers was $6,843,931
for the fiscal year ended December 31, 2000, and $6,583,752 for the fiscal year
ended December 31, 1999.
On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per
risk. Concurrently, Crusader maintained catastrophe and clash covers (subject to
a maximum occurrence and annual aggregate) to help protect the Company from one
loss occurrence affecting multiple policies. Beginning January 1, 1998, an
annual aggregate deductible of $750,000 commenced on losses ceded to its
reinsurance treaty covering losses between $250,000 and $500,000. Beginning
January 1, 2000, an annual aggregate deductible of $500,000 commenced on losses
ceded to its reinsurance treaty covering losses between $250,000 and $500,000.
Prior to January 1, 1998, National Reinsurance Corporation charged a provisional
rate on exposures up to $500,000 that was subject to adjustment and was based on
the amount of losses ceded, limited by a maximum percentage that could be
charged. That provisional rated treaty was cancelled on a runoff basis and
replaced by a flat rated treaty on January 1, 1998.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader which includes a reimbursement of the cost of acquiring
the portion of the premium which is ceded. Crusader does not currently assume
any reinsurance. The Company intends to continue obtaining reinsurance although
the availability and cost may vary from time to time. The unpaid losses ceded to
the reinsurer are recorded as an asset on the balance sheet.
Unpaid Losses and Loss Adjustment Expenses
- ------------------------------------------
Crusader maintains reserves for losses and loss adjustment expenses with respect
to both reported and unreported losses. Crusader establishes reserves for
reported losses based on historical experience, upon case-by-case evaluation of
facts surrounding each known loss, and the related policy provisions. The amount
of reserves for unreported losses is estimated by analysis of historical and
statistical information. Historical data includes the 16 years that Crusader has
been in operation and the data from its general agent developed with other
insurance companies prior to 1985. The ultimate liability of Crusader may be
greater or less than estimated reserves. All reserves are constantly monitored
and adjusted when appropriate and reflected in the statement of operation in the
period of adjustment. Reserves for loss adjustment expenses are estimated to
cover the direct costs associated with specific claims as well as an estimate of
administrative costs.
The process of establishing loss reserves involves significant judgment. The
following table shows the development of the unpaid losses and loss adjustment
expenses for fiscal years 1991 through 2000. The top line of the table shows the
estimated liability for unpaid losses and loss adjustment expenses recorded at
the balance
3
sheet date for each of the indicated years. This liability represents the
estimated amount of losses and loss adjustment expenses for losses arising in
the current and prior years that are unpaid at the balance sheet date, including
the estimated losses that had been incurred but not reported to the Company. The
table shows the reestimated amount of the previously recorded liability based on
experience as of the end of each succeeding year. The estimate is increased or
decreased as more information becomes known.
The table reflects deficiencies in Crusader's net loss and loss adjustment
expense reserves in 1994, 1995, 1998 and 1999. All other years reflect
redundancies. These redundancies and deficiencies were due to Crusader's loss
reserving practices used in determining its case reserves and incurred but not
reported losses and loss adjustment expenses ("IBNR"). There is no assurance
that redundancies or deficiencies will continue, and the Company believes a
change in the way it computes reserves is not warranted. Crusader is a
relatively small insurance company with 16 years of its own statistical
experience. Crusader is constantly changing its product mix and exposures,
including the types of businesses insured within its business package program as
well as its lines of business. In addition, it is regularly expanding its
territories both inside and outside of California. Considering the uncertainties
from this changing environment as well as its limited internal data and history,
the Company recognizes the difficulties in developing its own unique reserving
statistics; therefore, it incorporates industry standards and averages into its
estimates. The Company believes that its loss and loss adjustment expense
reserves are properly stated. When subsequent loss and loss adjustment expense
development justifies changes in reserving practices, the Company acts
accordingly.
When evaluating the information in the following table, it should be noted that
each amount includes the effects of all changes in amounts of prior periods;
therefore, the cumulative redundancy or deficiency represents the aggregate
change in the estimates over all prior years. Conditions and trends that have
affected development of liability in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
deficiencies or redundancies based on this table.
4
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended March 31
----------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $22,918,442 $21,249,902 $20,824,039 $21,499,778 $27,633,304 $32,682,153
Paid Cumulative as of
- ---------------------
1 Year Later 6,425,329 6,368,554 8,904,427 7,687,180 8,814,611 7,019,175
2 Years Later 10,946,318 9,583,885 10,824,024 13,453,833 13,502,224 15,292,415
3 Years Later 12,409,499 11,814,445 13,178,262 16,597,366 18,911,104 20,898,580
4 Years Later 12,951,511 12,667,989 14,462,911 19,073,442 22,631,450 24,932,922
5 Years Later 13,357,941 13,093,970 15,821,444 21,452,429 25,509,618 27,726,438
6 Years Later 13,459,123 13,385,215 16,936,140 23,900,335 27,844,199
7 Years Later 13,422,013 14,067,010 17,729,857 25,687,342
8 Years Later 13,630,780 14,479,299 18,628,698
9 Years Later 13,742,084 14,959,539
10 Years Later 13,884,825
Reserves Reestimated as of
- --------------------------
1 Year Later 20,153,906 18,562,116 19,599,695 20,912,743 25,666,251 31,232,388
2 Years Later 17,136,498 15,021,149 15,742,478 20,289,699 24,984,032 28,636,286
3 Years Later 14,788,046 13,802,009 15,463,566 21,217,766 24,575,023 28,074,691
4 Years Later 13,961,555 13,620,235 16,174,111 21,843,632 26,146,874 29,774,762
5 Years Later 13,833,745 13,790,786 16,888,885 23,767,472 28,687,265 32,382,991
6 Years Later 13,754,304 13,878,797 17,762,615 26,193,900 31,416,091
7 Years Later 13,529,769 14,374,473 18,692,720 28,528,744
8 Years Later 13,730,935 15,132,286 19,849,364
9 Years Later 13,951,604 15,387,869
10 Years Later 14,109,979
Cumulative
Redundancy
(Deficiency) $8,808,463 $5,862,033 $974,675 $(7,028,966) $(3,782,787) $299,162
========= ========= ======= ========= ========= =======
Gross Liability for Unpaid Losses
and Loss Adjustment Expenses $23,011,868 $26,294,199 $32,370,752 $37,006,458
Ceded Liability for Unpaid Losses
and Loss Adjustment Expenses (2,187,829) (4,794,421) (4,737,448) (4,324,305)
--------- --------- --------- ---------
Net Liability for Unpaid Losses
and Loss Adjustment Expenses $20,824,039 $21,499,778 $27,633,304 $32,682,153
========== ========== ========== ==========
Gross Liability Reestimated $29,580,731 $41,085,058 $46,220,727 $49,148,344
Ceded Liability Reestimated (9,731,367) (12,556,314) (14,804,636) (16,765,353)
--------- ---------- ---------- ----------
Net Liability Reestimated $19,849,364 $28,528,744 $31,416,091 $32,382,991
========== ========== ========== ==========
Gross Reserve Redundancy (Deficiency) $(6,568,863) $(14,790,859) $(13,849,975) $(12,141,886)
========= ========== ========== ==========
5
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended December 31
----------------------------------------------------------------------
1996 1997 1998 1999 2000
(Nine Months) ---- ---- ---- ----
----
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $37,111,846 $40,591,248 $40,374,232 $37,628,165 $34,546,026
Paid Cumulative as of
- ---------------------
1 Year Later 10,996,896 12,677,646 15,393,167 18,745,224
2 Years Later 19,488,853 23,740,181 28,570,117
3 Years Later 25,552,756 30,217,031
4 Years Later 29,730,976
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Reserves Reestimated as of
- --------------------------
1 Year Later 32,838,369 35,730,603 39,132,945 41,898,796
2 Years Later 31,086,210 36,032,215 43,164,627
3 Years Later 32,347,788 38,844,953
4 Years Later 35,513,862
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Cumulative
Redundancy
(Deficiency) $1,597,984 $1,746,295 $(2,790,395) $(4,270,631)
========= ========= ========= =========
Gross Liability for Unpaid Losses
and Loss Adjustment Expenses $39,740,865 $42,004,851 $41,513,945 $41,592,489 $45,217,369
Ceded Liability for Unpaid Losses
amd Loss Adjustment Expenses (2,629,019) (1,413,603) (1,139,713) (3,964,324) (10,671,343)
--------- --------- --------- --------- ----------
Net Liability for Unpaid Losses
and Loss Adjustment Expenses $37,111,846 $40,591,248 $40,374,232 $37,628,165 $34,546,026
========== ========== ========== ========== ==========
Gross Liability Reestimated $55,561,269 $52,753,025 $56,558,396 $54,771,531
Ceded Liability Reestimated (20,047,407) (13,908,072) (13,393,769) (12,872,735)
---------- ----------- ---------- ----------
Net Liability Reestimated $35,513,862 $38,844,953 $43,164,627 $41,898,796
========== ========== ========== ==========
Gross Reserve Redundancy (Deficiency) $(15,820,404) $(10,748,174) $(15,044,451) $(13,179,042)
========== ========== ========== ==========
5
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $37,628,165 $40,374,232 $40,591,248
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 17,406,284 18,268,710 22,454,229
Increase (decrease) in provision for events of prior years (*) 4,270,631 (1,241,520) (4,860,647)
---------- ---------- ----------
Total losses and loss adjustment expenses 21,676,915 17,027,190 17,593,582
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 6,013,830 4,380,090 5,132,952
Losses and loss adjustment expenses attributable to
insured events of prior years 18,745,224 15,393,167 12,677,646
---------- ---------- ----------
Total payments 24,759,054 19,773,257 17,810,598
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance 34,546,026 37,628,165 40,374,232
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 10,671,343 3,964,324 1,139,713
---------- --------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet, gross of reinsurance (**) $45,217,369 $41,592,489 $41,513,945
========== ========== ==========
(*) See Management Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations for discussion of the increase in
the provision for events of prior years for the years ended December 31,
2000 and December 31, 1999. The methodology used by the Company in
determining 2000 case reserves and IBNR is consistent with prior years.
(**) In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, reinsurance recoverable on unpaid losses and loss
adjustment expenses are reported for generally accepted accounting
practices as assets rather than netted against the corresponding liability
for such items on the balance sheet.
Net Premium Written to Policyholders' Surplus Ratio
- ---------------------------------------------------
The following table shows, for the periods indicated, Crusader's statutory
ratios of net premiums written to statutory policyholders' surplus. Due to
certain GAAP adjustments for written premium on policies which do not become
effective in the year written, statutory net premiums written differ slightly
from those reported on the Company's financial statements. Since each property
and casualty insurance company has different capital needs, an "acceptable"
ratio of net premium written to policyholders' surplus for one company may be
inapplicable to another. While there is no statutory requirement applicable to
Crusader that establishes a permissible net premium to surplus ratio, guidelines
established by the National Association of Insurance Commissioners provide that
such ratio should generally be no greater than 3 to 1.
Twelve months ended December 31
-----------------------------------------------------------------------------------
Statutory: 2000 1999 1998 1997 1996
- ---------- ---- ---- ---- ---- ----
Net Premiums Written $26,406,565 $26,209,180 $34,203,908 $36,059,086 $36,652,776
Policyholders' Surplus $39,626,269 $40,952,456 $37,611,089 $30,899,761 $25,748,757
Ratio .7 to 1 .6 to 1 .9 to 1 1.2 to 1 1.4 to 1
Regulation
- ----------
The insurance company operation is subject to regulation by the California
Department of Insurance ("the insurance department") and by the department of
insurance of other states in which Crusader is licensed. The insurance
department has broad regulatory, supervisory, and administrative powers. These
powers relate primarily to the
6
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature and limitation of insurers' investments;
the prior approval of rates, rules and forms; the issuance of securities by
insurers; periodic examinations of the affairs of insurers; the annual and other
reports required to be filed on the financial condition and results of
operations of such insurers or for other purposes; and the establishment of
reserves required to be maintained for unearned premiums, losses, and other
purposes. The regulations and supervision by the insurance department are
designed principally for the benefit of policyholders and not for the insurance
company shareholders. The last examination of Crusader by the insurance
department covered the three years ended December 31, 1997. The report of
examination that was filed with the insurance department on December 23, 1998,
reported no adjustments to Crusader's statutory financial statements.
In December 1993, the National Association of Insurance Commissioners ("NAIC")
adopted a Risk-Based Capital ("RBC") Model Law for property and casualty
companies. The RBC Model Law is intended to provide standards for calculating a
variable regulatory capital requirement related to a company's current
operations and its risk exposures (asset risk, underwriting risk, credit risk
and off-balance sheet risk). These standards are intended to serve as a
diagnostic solvency tool for regulators that establishes uniform capital levels
and specific authority levels for regulatory intervention when an insurer falls
below minimum capital levels. The RBC Model Law specifies four distinct action
levels at which a regulator can intervene with increasing degrees of authority
over a domestic insurer if its RBC is equal to or less than 200% of its computed
authorized control level RBC.
A company's RBC is required to be disclosed in its statutory annual statement.
The RBC is not intended to be used as a rating or ranking tool nor is it to be
used in premium rate making or approval. At December 31, 2000, Crusader's
adjusted capital was well in excess of the required capital levels.
NAIC'S Statutory Accounting Initiative
- --------------------------------------
The NAIC's project to codify accounting practices was approved by the NAIC in
March 1998. The approval included a provision for commissioners' discretion in
determining appropriate statutory accounting for insurers in their states.
Consequently, prescribed and permitted accounting practices may continue to
differ from state to state. Codification became effective on January 1, 2001.
The implementation of codification resulted in an increase in statutory surplus
of $1,720,694. The Company is unable to predict how insurance rating agencies
will interpret or react to any such changes. No assurance can be given that
future legislative or regulatory changes resulting from such activities will not
adversely affect the Company and its subsidiaries.
California Insurance Guarantee Association
- ------------------------------------------
In 1969, the California Insurance Guarantee Association ("CIGA") was created
pursuant to California law to provide for payment of claims for which insolvent
insurers are liable but which cannot be paid out of such insurers' assets.
Crusader is subject to assessment by CIGA for its pro-rata share of such claims,
based on premiums written in the particular line in the year preceding the
assessment by insurers writing that line of insurance in California. Such
assessments are based upon estimates of losses incurred in liquidating an
insolvent insurer. In any particular year, Crusader cannot be assessed an amount
greater than 1% of its premiums written in the preceding year. California
Insurance Code Sections 1063.5 and 1063.14 allow Crusader to recoup assessments
by surcharging policyholders. No assessment was made by CIGA for the 2000 or
1999 calendar years.
Holding Company Act
- -------------------
Crusader is subject to regulation by the insurance department pursuant to the
provisions of the California Insurance Holding Company System Regulatory Act
(the "Holding Company Act"). Pursuant to the Holding Company Act, the insurance
department may examine the affairs of Crusader at any time. Certain transactions
defined to be of an "extraordinary" type may not be effected without the prior
approval of the insurance department. Such transactions include, but are not
limited to, sales, purchases, exchanges, loans and extensions of credit, and
investments made within the immediately preceding 12 months involving the lesser
of 3% of admitted assets or 25% of policyholders' surplus, as of the preceding
December 31. An extraordinary transaction also includes a dividend which,
together with other dividends or distributions made within the preceding twelve
months, exceeds the greater of 10% of the insurance company's policyholders'
surplus as of the preceding December 31 or the insurance company's net income
for the preceding calendar year. An insurance company is also required to notify
the insurance department of any dividend after declaration, but prior to
payment.
7
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or a person that
controls a California insurance company, such as Crusader. A person seeking to
acquire "control," directly or indirectly, of the Company must generally file
with the Insurance Commissioner an application for change of control containing
certain information required by statute and published regulations and provide a
copy of the application to the Company. The Holding Company Act also effectively
restricts the Company from consummating certain reorganization or mergers
without prior regulatory approval.
The Company is in compliance with the Holding Company Act.
Rating
- ------
Insurance companies are rated to provide both industry participants and
insurance consumers with meaningful information on specific insurance companies.
Higher ratings generally indicate financial stability and a strong ability to
pay claims. These ratings are based upon factors relevant to policyholders and
are not directed toward protection of investors. Such ratings are neither a
rating of securities nor a recommendation to buy, hold or sell any security and
may be revised or withdrawn at any time. Ratings focus primarily on the
following factors: capital resources, financial strength, demonstrated
management expertise in the insurance business, credit analysis, systems
development, market segment position and growth opportunities, marketing, sales
conduct practices, investment operations, minimum policyholders' surplus
requirements and capital sufficiency to meet projected growth, as well as access
to such traditional capital as may be necessary to continue to meet standards
for capital adequacy. Crusader is rated A (Excellent) by the A. M. Best Company.
OTHER INSURANCE OPERATIONS
--------------------------
General Agency Operations
- -------------------------
Unifax primarily sells and services commercial multiple peril business insurance
policies. In addition, it sells and services commercial liability, commercial
property, workers' compensation, and commercial earthquake insurance policies.
Unifax's workers' compensation, commercial earthquake, and some of the
commercial liability insurance policies are sold primarily in California for
non-affiliated insurers. All other policies are sold and serviced for Crusader
by Unifax in Arizona, California, Idaho, Kentucky, Montana, Nevada, Ohio,
Oregon, Pennsylvania, Texas, and Washington.
Bedford Insurance Services, Inc., ("Bedford") sells and services daily
automobile rental policies in most states for a non-affiliated insurer.
As general agents, these subsidiaries market, rate, underwrite, inspect and
issue policies, bill and collect insurance premiums, and maintain accounting and
statistical data. Unifax is the exclusive general agent for Crusader. Unifax and
Bedford are non-exclusive general agents for non-affiliated insurance companies.
The Company's marketing is conducted through advertising to independent
insurance agents and brokers. For its services, the general agent receives a
commission (based on the premium written) from the insurance company and, in
some cases, a service fee from the customer. These subsidiaries all hold
licenses issued by the California Department of Insurance and other states where
applicable.
Insurance Claim Administration Operation
- ----------------------------------------
The Company's subsidiary U.S. Risk Managers, Inc., ("U.S. Risk") provides
insurance claim administration services to the non-affiliated property and
casualty insurance companies that Bedford represents as a general agent. These
services consist of receiving, reserving, adjusting, paying and accounting for
insurance claims. U.S. Risk engages independent field examiners for all work
performed outside the Company's office. U.S. Risk operates under a license
issued by the California Department of Insurance and other states where
applicable. All claim adjusting services for Crusader policies are administered
by Crusader. Crusader engages independent field examiners for all work performed
outside the Company's office.
8
Insurance Premium Finance Operation
- -----------------------------------
American Acceptance Corporation ("AAC") is a licensed insurance premium finance
company that provides insurance purchasers with the ability to pay their
insurance premiums on an installment basis. The premium finance company pays the
insurance premium to the insurance company in return for a premium finance note
from the insured. These notes are paid off by the insured in nine monthly
installments and are secured by the unearned premiums held by the insurance
company. AAC provides premium financing primarily for the Crusader policies that
are produced by Unifax in California.
Health and Life Insurance Operations
- ------------------------------------
The Company's subsidiaries National Insurance Brokers, Inc., ("NIB") and
American Insurance Brokers, Inc., ("AIB") market medical, dental, life, vision,
and accidental death and dismemberment insurance through non-affiliated
insurance companies for individuals and groups. The services provided consist of
marketing, billing and collection, accounting, and customer service. For their
services, these subsidiaries receive a commission from the insurance company.
Most of the business is produced through independent insurance agents and
brokers who receive a commission from NIB or AIB. NIB and AIB hold licenses
issued by the California Department of Insurance. All business is currently
written in California.
Association Operation
- ---------------------
The Company's subsidiary Insurance Club, Inc., DBA The American Association for
Quality Health Care ("AAQHC"), is a membership association that provides various
consumer benefits to its members, including participation in group health care
and life insurance policies that AAQHC negotiates for the Association. For these
services, AAQHC receives membership and fee income from its members.
INVESTMENTS
-----------
The investments of the Company are made by the Company's Chief Financial Officer
under the supervision of an investment committee appointed by the Company's
Board of Directors. The Company's investment guidelines on equity securities
limit investments in equity securities to an aggregate maximum of $2,000,000.
The Company's investment guidelines on fixed maturities limit fixed maturity
investments to high-grade obligations with a maximum term of eight years and a
maximum investment in any one issuer of $2,000,000. This dollar limitation
excludes bond premiums paid in excess of par value and U.S. government or U.S.
government guaranteed issues. All investments in municipal securities are
pre-refunded and secured by U.S. treasury securities. Short-term cash
investments consist of bank money market accounts, certificates of deposit,
commercial paper, a U.S. government obligation money market fund, and U.S.
treasury bills. These short-term investments are either U.S. government
obligations, FDIC insured or are in an institution with a Moody's rating of P1
and/or Standard & Poor's rating of A1. All of the Company's investments are
readily marketable and could be liquidated without any material financial
impact.
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated:
(Amounts in Thousands)
As of December 31
-------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Amortized Market Amortized Market Amortized Market
Type of Security Cost Value Cost Value Cost Value
- ---------------- ---- ----- ---- ----- ---- -----
Certificates of deposit $ 400 $ 400 $ 200 $ 200 $ 200 $ 200
U.S. treasury securities 7,995 8,192 10,056 10,076 9,610 10,098
Industrial and miscellaneous
taxable bonds 66,613 66,356 60,807 58,974 52,404 54,011
State and municipal tax-exempt bonds 19,790 20,035 28,079 28,344 34,144 35,164
------ ------ ------ ------ ------ ------
Total fixed maturity investments 94,798 94,983 99,142 97,594 96,358 99,473
Short-term cash investments 3,355 3,355 5,968 5,968 6,574 6,574
Equity investments 26 26 164 66 504 481
------ ------ ------- ------- ------- -------
Total investments $98,179 $98,364 $105,274 $103,628 $103,436 $106,528
====== ====== ======= ======= ======= =======
9
At December 31, 2000, the Company had net unrealized gains on all investments of
$184,553 before income taxes. The amortized cost and estimated market value of
fixed maturity investments at December 31, 2000, by contractual maturity are as
follows. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.
(Amounts in Thousands)
As of December 31, 2000
-----------------------
Amortized Market
Fixed maturities due Cost Value
-------------------- ---- -----
Within 1 year $17,975 $18,060
Beyond 1 year but within 5 years 72,757 72,826
Beyond 5 years but within 10 years 4,066 4,097
------ ------
Total $94,798 $94,983
====== ======
COMPETITION
-----------
General
- -------
The property and casualty insurance industry is highly competitive in the areas
of price and service. It is highly cyclical, characterized by periods of high
premium rates and shortages of underwriting capacity followed by periods of
severe price competition and excess capacity.
The profitability of insurers is affected by many factors including rate
competition, the frequency of claims and their average cost, natural disasters,
state regulations, interest rates, crime rates, general business conditions, and
court decisions redefining and expanding the extent of coverage and granting
higher compensation awards. One of the challenging and unique features of the
property and casualty business is the fact that, since premiums are collected
before losses are paid, its products are normally priced before its costs are
known.
Insurance Company and General Agency Operations (Property and Casualty)
- ----------------------------------------------------------------------
The Company's property and casualty insurance business continues to experience a
competitive marketplace. There are many substantial competitors who have larger
resources, operate in more states, and insure coverages in more lines and in
higher limits than the Company. In addition, Crusader competes not only with
other insurance companies but also with the general agents. Many of these
general agents offer more products than the Company. The principal method of
competition among competitors is price. While the Company attempts to meet this
competition with competitive prices, its emphasis is on service, promotion, and
distribution. Additional information regarding competition in the insurance
marketplace is discussed in the Management Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations.
Insurance Claim Administration Operation
- ----------------------------------------
The insurance claim administration operation generates all its business from
insurance policies produced by its sister company Bedford for a non-affiliated
insurance company. Competition is not a major factor as long as U.S. Risk
produces a quality product at a fair price. The growth of U.S. Risk is dependent
on the growth of Bedford.
Insurance Premium Financing Operation
- -------------------------------------
The insurance premium financing operation currently finances only policies
written through its sister company, Unifax. Although competition is intense in
the premium finance business, the competitive pricing, the quality of its
service, and the ease and convenience of financing with AAC has made its growth
and profitability possible. AAC's growth is dependent on the growth of Crusader
and Unifax.
Health and Life Insurance Operations
- ------------------------------------
Competition in the health and life insurance business is also intense.
Approximately 93% of the Company's present health and life insurance business is
from the CIGNA HealthCare medical and dental plan programs. This percentage is
slightly lower than the prior year. The Company is continuing its efforts to
diversify and offer a wider variety of products to its customers.
10
EMPLOYEES
---------
On March 15, 2001, the Company employed 146 persons at its facility located in
Woodland Hills, California. The Company has no collective bargaining agreements
and believes its relations with its employees are excellent.
Item 2. Properties
- -------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin
Cheldin, the Company's president, chairman and principal stockholder, is the
owner of the building. On February 22, 1995, the Company signed an extension to
the lease with no increase in rent to March 31, 2007. The Company believes that
the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties.
The Company utilizes for its own operations 100% of the space it leases.
Item 3. Legal Proceedings
- --------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings in which it may be named as either
plaintiff or defendant. Incidental actions are sometimes brought by customers or
others that relate to disputes concerning the issuance or non-issuance of
individual insurance policies. In addition, the Company resorts to legal
proceedings from time to time in order to enforce collection of premiums,
commissions, or fees for the services rendered to customers or to their agents.
These routine items of litigation do not materially affect the Company and are
handled on a routine basis through its counsel and they do not materially affect
the operations of the Company.
State of Washington Regulatory Proceeding
- -----------------------------------------
The Insurance Commissioner of the State of Washington alleged that a service fee
of $250 per policy, which was charged by a Washington agent after the Company
became admitted in the state of Washington, is premium and subject to rate
filing requirements and premium taxes. This service fee was first charged by the
Washington agent under his broker's license in 1992, when the Company began its
operation in Washington as a non-admitted insurer. The Company believes that the
nature of the service fee did not change in 1995 when the Company became
admitted in Washington, and it believes that the service fee continued to be a
broker fee and is not subject to rate filing requirements or premium taxes.
In August 1999 the Insurance Commissioner announced that she would seek to
impose a $307,000 fine, seek repayment of policy service fees to Washington
policyholders including interest at the rate of 12% per annum (estimated to be
approximately $780,000 plus interest to November 5, 2000, of $360,000), seek
payment of all premium taxes deemed owed on the subject service fees including
appropriate penalties required for delinquent taxes (estimated to be
approximately $16,000 plus penalties), and seek to suspend Crusader's
Certificate of Authority to do business in the state of Washington for a period
of 120 days.
On May 5, 2000, an administrative hearing officer ordered that all of the
sanctions previously stated be imposed. The order stated that the $307,000 fine
be paid on or before August 5, 2000; that refunds to policyholders be completed
by November 5, 2000; that all back premium taxes on the subject service fees be
paid on or before May 5, 2001; and that Crusader's Certificate of Authority to
do business in the state of Washington be suspended from May 20, 2000, through
September 17, 2000. The Company and the Insurance Commissioner agreed to a stay
of the administrative hearing officer's decision pending the outcome of the
Company's appeal in the Superior Court for the state of Washington. Premium
written in the state of Washington was $990,725 in the year ended December 31,
2000.
After each party filed briefs with the Superior Court, and after the National
Association of Independent Insurers ("NAII") filed an amicus curie brief in
support of Crusader's position, the Commissioner's office agreed to drop all
sanctions in exchange for Crusader's agreement to pay $13,714. On January 30,
2001, although the Company did not believe it had done anything improper, it
agreed to the $13,714 settlement. The Insurance Commissioner agreed to the
settlement on January 31, 2001.
11
City of Los Angeles Business License
- ------------------------------------
On September 13, 2000, the City of Los Angeles audited Unico (parent company
only) for the years 1997, 1998 and 1999 with respect to its Los Angeles business
license gross receipts tax. The audit resulted in an assessment of $97,681 in
gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in
a total amount due of $160,949. The assessment was based on the city's position
that expenses of Unico's subsidiaries that are paid by Unico (parent company)
are subject to the gross receipts business tax when those expenses are
reimbursed by the subsidiaries to Unico. The Company disagreed with the audit
findings and has appealed the matter. As of December 31, 2000, the Company has
accrued $25,000 that it estimates will cover the cost of the appeal and an
estimate of the gross receipts tax, penalty, and interest that may ultimately
become due based on the information currently available.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
12
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "UNAM." The high and low sales prices (by quarter) and dividends
declared during the last two comparable twelve month periods are as follows:
High Low Dividend
Quarter Ended Price Price Declared
------------- ------- ------- --------
March 31, 1999 13 3/4 9 3/4 $0.25
June 30, 1999 10 3/4 8 5/8
September 30, 1999 10 1/2 8 3/13
December 31, 1999 8 5/8 6 3/8
March 31, 2000 7 7/8 4 5/8 $0.15
June 30, 2000 6 3/4 4 1/2
September 30, 2000 7 1/4 5 7/8
December 31, 2000 7 3/4 5 3/8
As of December 31, 2000, the approximate number of shareholders of record of the
Company's common stock was 500. In addition, the Company estimates beneficial
owners of the Company's common stock held in the name of nominees to be
approximately 1,000.
The Company has declared a cash dividend on its common stock annually since June
24, 1991. The Company's intention is to declare annual cash dividends subject to
continued profitability and cash requirements. On March 1, 2000, the Company
declared an annual cash dividend of $0.15 per common share payable on May 19,
2000, to shareholders of record on April 28, 2000. On March 1, 2001, the Company
declared an annual cash dividend of $0.05 per common share payable on May 18,
2001, to shareholders of record on April 27, 2001. Because the Company is a
holding company and operates through its subsidiaries, its cash flow and,
consequently, its ability to pay dividends are dependent upon the earnings of
its subsidiaries and the distribution of those earnings to the Company. Also,
the ability of Crusader to pay dividends to the Company is subject to certain
regulatory restrictions under the Holding Company Act (See Item 1 - Business -
Insurance Company Operation - Holding Company Act). As of December 31, 2000, the
maximum additional dividend that could have been made by Crusader to Unico
without prior approval was $2,462,626.
In April 2000, the Company announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
315,000 shares of the common stock of the Company. On August 8, 2000, the Board
of Directors authorized the repurchase of an additional 315,000 shares and on
September 6, 2000, the Board of Directors authorized the repurchase of another
315,000 shares of the common stock of the Company in the open market from time
to time. This brings the total shares of the Company's common stock authorized
to be repurchased and retired to 945,000 shares. As of December 31, 2000, the
Company had purchased and retired an aggregate of 628,600 shares of its common
stock at a cost of $4,130,068 of which $308,908 was allocated to capital and
$3,821,160 was allocated to retained earnings.
From January 1, 2000 to December 31, 2000, the Company issued 30,140 shares of
its common stock as a result of the exercise of employee stock options granted
under the Unico American Corporation Employee Incentive Stock Option Plan. These
shares were issued to one employee of the Company in exchange for $13.38 in cash
and 13,833 shares of the Company's common stock. The shares were acquired for
investment and without a view to the public distribution or resale thereof, and
the issuance thereof was exempt from the registration requirements under the
Securities Act of 1933, as amended, under Section 4(2) thereof as a transaction
not involving a public offering.
13
Item 6. Selected Financial Data
- --------------------------------
Fiscal year ended December 31
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Nine Months*)
Total revenues $38,367,949 $40,734,257 $47,544,270 $48,290,721 $34,884,657
Total costs and expenses 38,174,336 33,609,368 34,789,372 37,301,688 27,505,670
---------- ---------- ---------- ---------- ----------
Income before taxes $193,613 $7,124,889 $12,754,898 $10,989,033 $7,378,987
Net income $439,797 $5,131,366 $8,708,669 $7,654,362 $5,174,510
Basic earnings per share $0.07 $0.82 $1.41 $1.25 $0.87
Diluted earnings per share $0.07 $0.81 $1.36 $1.20 $0.83
Cash dividends per share $0.15 $0.25 $0.07 $0.07 $0.07
Total assets $123,945,820 $121,978,756 $121,717,643 $112,942,384 $104,451,322
Stockholders' equity $51,413,329 $54,840,797 $54,168,082 $45,060,784 $37,355,419
(*) The Company changed its fiscal year end from March 31, to December 31,
effective December 31, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Liquidity and Capital Resources:
-------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company. Because the Company is a
holding company and operates through its subsidiaries, its cash flow is
dependent upon the earnings of its subsidiaries and the distributions of those
earnings to the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, its reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. Cash and
investments (excluding net unrealized gains or losses) at December 31, 2000,
were $98,234,157 compared to $105,380,057 at December 31, 1999, a 7% decrease.
Crusader's cash and investments at December 31, 2000, was $93,578,918 or 95% of
the total held by the Company, compared to $97,452,621or 92% of the total held
by the Company at December 31, 1999.
The Company's investments are as follows:
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Amount % Amount % Amount %
------ - ------ - ------ -
Fixed maturities (at amortized cost)
Certificates of deposit $ 400,000 - $ 200,000 - $ 200,000 -
U.S. treasury securities 7,995,324 9 10,056,163 10 9,610,487 10
Industrial and miscellaneous (taxable) 66,613,078 70 60,807,507 62 52,403,981 54
State and municipal (tax exempt) 19,789,675 21 28,078,605 28 34,144,344 36
---------- --- ---------- --- ---------- ---
Total fixed maturity investments 94,798,077 100 99,142,275 100 96,358,812 100
---------- === ---------- === ---------- ===
Short-term cash investments (at cost)
Certificates of deposit 225,000 7 425,000 7 425,000 6
Commercial paper 2,000,000 60 2,675,000 45 3,425,000 52
Bank money market accounts 417,280 12 2,055,254 35 694,834 11
U.S. gov't obligation money market fund 28,778 1 78,799 1 1,290,108 20
Short-term U.S. treasury 681,414 20 731,281 12 735,346 11
Bank savings accounts 2,882 - 2,839 - 3,574 -
--------- --- --------- --- --------- ---
Total short-term cash investments 3,355,354 100 5,968,173 100 6,573,862 100
--------- === --------- === --------- ===
Equity investments (at cost) 25,920 164,170 503,503
Total investments $98,179,351 $105,274,618 $103,436,177
========== =========== ===========
14
In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
is required to classify its investments in debt and equity securities into one
of three categories: held-to-maturity, available-for-sale or trading securities.
Although all of the Company's investments are classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments to maturity.
The tax-exempt interest income earned (net of bond premium and discount
amortization) during the year ended December 31, 2000, was $1,191,794 compared
to $1,473,922 in the year ended December 31, 1999. In the year ended December
31, 1998, tax-exempt interest income earned totaled $1,698,211.
The Company's investment policy limits investments in any one company to
$2,000,000. This limitation excludes bond premiums paid in excess of par value
and U.S. government or U.S. government guaranteed issues. The Company's
investment guidelines on equity securities limit investments in equity
securities to an aggregate maximum of $2,000,000. All of the Company's fixed
maturity investments are high-grade investment quality, all state and municipal
tax exempt fixed maturity investments are pre-refunded issues, and all
certificates of deposit are FDIC insured.
Unico has a $2,000,000 line of credit with Union Bank of California. Interest on
this line is referenced to LIBOR and is payable monthly. The agreement contains
certain covenants including maintenance of certain financial ratios. This credit
line expires September 3, 2002, at which time it is expected to be renewed.
Unico did not borrow against its line of credit in 2000 or 1999.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at year end, net
of trust restriction of $2,755,572, statutory deposits of $2,725,000, and
dividend restriction between Crusader and Unico (See Item 1 - Business -
Insurance Company Operation - Holding Company Act) plus the cash to be generated
from operations, should be sufficient to meet its operating requirements during
the next twelve months without the necessity of borrowing funds.
Dividends paid by Crusader to Unico were $1,500,000 in 2000 and $2,000,000 in
1999. These funds were invested in short-term instruments and were ultimately
used to help fund the repurchase of shares of the Company's common stock
discussed below. As of December 31, 2000, the maximum additional dividend that
could have been made by Crusader to Unico without prior of the California
Department of Insurance approval was $2,462,626.
In April 2000 the Company announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
315,000 shares of the common stock of the Company. On August 8, 2000, the Board
of Directors authorized the repurchase of an additional 315,000 shares of common
stock of the Company and on September 6, 2000, the Board of Directors authorized
the repurchase of another 315,000 shares of the common stock of the Company in
the open market from time to time. This brings the total shares of the Company's
common stock authorized to be repurchased to 945,000 shares. As of December 31,
2000, the Company had purchased an aggregate of 628,600 shares of its common
stock at a cost of $4,130,068. These shares were purchased using cash-on-hand
and the proceeds from the maturities of short-term investments.
Crusader's statutory capital and surplus as of December 31, 2000, was
$39,626,269, a decrease of $1,326,187 (3%) over December 31, 1999. Crusader's
statutory capital and surplus as of December 31, 1999, was $40,952,456, an
increase of $3,341,367 (9%) over December 31, 1998.
Cash flow used by operations for the year ended December 31, 2000, was
$1,374,774, a decrease of $5,074,800 from the $3,700,026 of cash provided by
operations in the year ended December 31, 1999. The decrease was primarily due
to an increase in claim payments during the year ended December 31, 2000.
The Company has initiated an upgrade and replacement of computer systems and
expects to spend approximately $150,000 in the next twelve months to complete
this project. There are no other material commitments for capital expenditures
as of the date of this report.
15
Results of Operations:
---------------------
General
- -------
The Company had net income of $439,797 for the year ended December 31, 2000,
compared to $5,131,366 for the year ended December 31, 1999, and $8,708,669 for
the year ended December 31, 1998. Total revenue for the year ended December 31,
2000, was $38,367,949 compared to $40,734,257 for the year ended December 31,
1999, and $47,544,270 for the year ended December 31, 1998.
For the year ended December 31, 2000, income before taxes decreased by
$6,931,276 (97%) and net income decreased by $4,691,569 (91%) compared to the
year ended December 31, 1999. The decrease in pre-tax income was primarily due
to a decrease of $6,800,955 in the underwriting profit (net earned premium less
losses and loss adjustment expenses and policy acquisition costs) from Crusader.
For the year ended December 31, 1999, income before taxes decreased by
$5,630,009 (44%) and net income decreased by $3,577,303 (41%) compared to the
year ended December 31, 1998. The decrease in pre-tax income was primarily due
to a decrease of $5,104,399 (65%) in the underwriting profit (net earned premium
less losses and loss adjustment expenses and policy acquisition costs) from
Crusader.
The effect of inflation on the net income of the Company during the year ended
December 31, 2000, was not significant.
The Company derives revenue from various sources as discussed below:
Insurance Company Operation
- ---------------------------
Premium and loss information of Crusader are as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Gross written premium $33,259,948 $33,139,361 $37,079,303
Net written premium (net of reinsurance ceded) $26,406,565 $26,543,921 $34,126,963
Earned premium before reinsurance ceded $32,743,165 $34,693,113 $40,615,417
Earned premium net of reinsurance ceded $25,899,234 $28,109,361 $34,915,195
Losses and loss adjustment expenses $21,676,915 $17,027,190 $17,593,582
Unpaid losses and loss adjustment expenses $45,217,369 $41,592,489 $41,513,945
Crusader's primary line of business is commercial multiple peril business
package policies. This line of business represented approximately 97% of
Crusader's total written premium for both fiscal years ended December 31, 2000
and 1999.
Crusader's gross written premium by state is as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
California $28,513,822 $28,636,676 $31,323,804
Arizona 1,178,094 976,872 1,095,922
Washington 990,725 1,086,815 1,958,179
Ohio 753,264 489,266 526,004
Pennsylvania 546,801 565,628 416,485
Oregon 509,971 697,033 1,289,054
Montana 482,735 436,390 98,612
Texas 135,968 118,066 239,563
Nevada 82,963 34,520 49,096
Idaho 38,037 - -
Kentucky 27,568 98,095 82,584
---------- ---------- ----------
Total gross written premium $33,259,948 $33,139,361 $37,079,303
========== ========== ==========
16
For the year ended December 31, 2000, gross written premium increased by
$120,587 compared to the year ended December 31, 1999. The Company believes that
the slight growth in written premium in 2000 is the result of a subsidence in
the intensity of price-based competition in the property casualty insurance
market.
For the year ended December 31, 1999, gross written premium decreased by
$3,939,942 (11%) compared to the year ended December 31, 1998. This decrease was
due to intense price competition that adversely affected the premium written in
nearly all states that the Company does business.
Although the Company attempts to be competitive on price, it believes that
maintaining adequate rates on the insurance policies it sells is a better
business strategy than increasing total written premium by selling more policies
at inadequate rates. This business philosophy has resulted in decreased written
premium in 1999 and virtually no premium growth in 2000.
Although it appears that the intensity of price-based competition has somewhat
subsided, the Company does not believe that it is in a " hard market." While
some of its competitors have recently raised rates or adopted more restrictive
rules, those changes have not yet been large enough to redirect the flow of new
business to the Company. The Company cannot determine how long the existing
market conditions will continue, nor in which direction they might change.
The Company continues to believe that it can compete effectively and profitably
by offering better service and by marketing its policies through its current
independent agents and brokers. In pursuing its growth plan, the Company adopted
a geographic expansion plan several years ago. In 1992, 100% of the Company's
sales were in California. As of December 31, 2000, the Company had established
marketing relations and products in ten other states, decreasing the percentage
of its California business to 86%. The Company has no short-term plan to expand
into additional states, nor to expand upon its marketing channels. However, the
Company does plan to adopt "fine-tuning" changes to its existing rates, rules
and forms, and it plans to add new programs for the states where it currently
operates.
Currently, agents and brokers who call for quotes on policies sold by the
Company may also have to call competitors for quotes on products which the
Company does not offer. Thus, Crusader competes with not only other insurance
companies, but with general agents who produce business for other insurance
companies. Many of these general agents offer more products than the Company and
thus make it easier for the agents and brokers because they can do more business
with fewer telephone calls. To provide better service to the Company's agents
and brokers, the Company is currently working on additional non-affiliated
insurance company products to be offered by its General Agency operations. In
addition to generating additional commission and fee income, the expansion of
the General Agency operations may benefit Crusader because agents and brokers
may place more of their business with Crusader.
The Company writes annual policies and therefore earns written premium over the
one year policy term. Premium earned before reinsurance decreased $1,949,948
(6%) in the year ended December 31, 2000, compared to the year ended December
31, 1999, and decreased $5,922,304 (15%) in the year ended December 31, 1999,
compared to the year ended December 31, 1998. The decrease in earned premium
before reinsurance was directly related to the decrease in written premium
discussed above.
Earned premium ceded increased $260,179 (4%) to $6,843,931 or 21% of earned
premium before reinsurance in the year ended December 31, 2000, compared to
$6,583,752 or 19% of earned premium before reinsurance for the year ended
December 31, 1999. Earned premium ceded increased $883,530 (16%) to $6,583,752
or 19% of earned premium before reinsurance for the year ended December 31,
1999, compared to $5,700,222 or 14% of earned premium before reinsurance for the
year ended December 31, 1998. Ceded premiums increased in the year ended
December 31, 2000, primarily due to higher than anticipated loss experience on
prior accident years that was subject to the Company's provisionally rated
reinsurance contract. Premium ceded under this contract, which was canceled on a
runoff basis effective December 31, 1997, is subject to adjustments based on the
amount of losses ceded, limited by a maximum percentage that can be charged by
the reinsurer. The decrease in earned ceded premium (excluding provisionally
rated ceded premium) in 2000, 1999 and 1998 was primarily due to decreased
earned premium before reinsurance.
17
The following table shows the changes in ceded premium:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
(Decrease) in earned ceded premium (excluding
provisionally rated ceded premium) $(447,593) $(800,074) $(818,860)
Increase in provisionally rated ceded premium 707,772 1,683,604 124,754
------- --------- -------
Net increase (decrease) in earned ceded premium $ 260,179 $ 883,530 $(694,106)
======= ======= =======
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment
expenses incurred (including a provision for incurred-but-not-reported losses
"IBNR") to net premiums earned ("loss ratio") and (2) the ratio of policy
acquisition and general operating costs to net premiums earned ("expense
ratio"). The following table shows the loss ratios, expense ratios, and combined
ratios of Crusader as derived from data prepared in accordance with generally
accepted accounting principles. As shown on the table below, the loss ratio
increased to 83.7% in 2000 from 60.6% in 1999. This increase in the loss ratio
was primarily due to a decreased earned premium before reinsurance (discussed
above), an increase in earned premium ceded (discussed above), and an increase
in incurred losses on prior years.
Generally, if the combined ratio is below 100%, an insurance company has an
underwriting profit; if it is above 100%, a company has an underwriting loss.
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Loss ratio 83.7% 60.6% 50.4%
Expense ratio 32.1% 29.8% 27.2%
----- ---- ----
Combined ratio 115.8% 90.4% 77.6%
===== ==== ====
During 1999, as part of the Company's ongoing reserve review process and loss
trending analysis, the Company determined that its average claim costs were
increasing and claims were settling for amounts greater than had been
anticipated. To address this trend, the Company reviewed its open claim files to
ensure that its case reserves and IBNR were adequate. The review process took
approximately one year and resulted in increased reserves.
The increase in incurred losses and loss adjustment expenses recognized in 2000
and 1999 was primarily due to the following:
1. Higher than anticipated claim cost from business outside of California.
2. The effect on settlements of escalating jury awards
3. Increased development of losses due to the impact of changes in California
law that expanded coverage and increased loss exposure, (e.g., Montrose
Chemical Corp. v. Admiral Insurance Co.(1994), Montrose Chemical Corp. v.
Admiral Insurance Co. (1995), Armstrong World Industries, Inc. v. Aetna
Gas & Sur. Co. (1996), James Pepperell, et al., v. Scottsdale Insurance
Company (1998), Pardee Construction Company v. Insurance Company of the
West et al., (2000), Pershing Park Villas HOA v. United Pacific Ins. Co.
(2000), Centex Golden Construction Co. v. Dale Tile Co.(2000)).
The Company's future writings and growth are dependent on market conditions,
competition, and the Company's ability to introduce new and profitable products.
As of December 31, 2000, Crusader was licensed as an admitted insurance company
in the states of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio,
Oregon, and Washington and is approved as a non-admitted surplus lines writer in
other states.
Other Insurance Operations
- --------------------------
Health and Life Insurance Program
---------------------------------
Commission income from the health and life insurance sales of NIB and AIB is as
follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Commission income $2,625,193 $2,668,582 $2,216,446
18
NIB and AIB market health and life insurance through non-affiliated insurance
companies for individuals and groups. Approximately 93% of the health and life
commission income for the years ended December 31, 2000 and 1999, was from the
CIGNA HealthCare medical and dental plan programs. Revenues for the year ended
December 31, 2000, decreased $43,389 (2%) compared to the year ended December
31, 1999. The decrease in commission income in the health and life insurance
programs is primarily a due to a one-time bonus commission of $143,191 which the
Company received from CIGNA in 1999. Excluding the effect of the 1999 bonus
commission, commission income for the current year increased $99,802 (4%) when
compared to the prior year.
Revenues for the year ended December 31, 1999, increased $452,136 (20%) compared
the year ended December 31, 1998. This increase was a result of continued
increase in sales of small business group accounts for CIGNA, an increase in the
number of small business accounts administered by the Company for CIGNA, and a
bonus commission of $143,191 received from CIGNA.
Since approximately 93% of the Company's health and life insurance income comes
from CIGNA programs, future growth is dependent of the competitiveness of
CIGNA's rates, products, and product enhancements.
Service Fee Income
------------------
Unifax sells and services insurance policies for Crusader. The service fee
charged to the policyholder by Unifax is recognized as income in the
consolidated financial statements.
Service fee income of Unifax is as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Service fee income $1,654,735 $1,677,223 $1,896,258
Policies written 17,351 17,225 18,306
Service fee income is primarily related to the number of policies written by
Unifax. In addition, in 1999, Unifax voluntarily discontinued charging service
fees in several of states outside of California, contributing to the decrease in
service fee income.
Daily Automobile Rental Insurance Program
-----------------------------------------
The daily automobile rental insurance program is produced by Bedford. Bedford
receives a commission and a claim administration fee from a non-affiliated
insurance company based on premium written. Commission and fee income from the
daily automobile rental insurance program are as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Daily auto rental program commission
and claim administration fee $741,662 $731,884 $758,073
Contingent commission 69,979 28,735 49,430
------- ------- -------
Total commission and fee income $811,641 $760,619 $807,503
======= ======= =======
Revenues during the year ended December 31, 2000, were $811,641, an increase of
$51,022 (7%) compared to the same period of the prior year. Revenue for the year
ended December 31, 1999, decreased by $46,884 (6%) compared to the year ended
December 31, 1998.
The daily automobile rental insurance program commission and fee income
(excluding contingent commission) increased in 2000 only slightly due to
continued price competition in the daily automobile insurance market. To avoid
underwriting losses for the non-affiliated insurance company that it represents,
Bedford continues to produce business only at rates which it believes to be
adequate. The Company cannot determine how long the existing market conditions
will continue, nor in which direction they might change.
19
Association Operation
---------------------
Membership and fee income from the association program of AAQHC is as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Membership and fee income $397,157 $396,958 $355,781
Membership and fee income in the year ended December 31, 2000, was comparable to
the year ended December 31, 1999. Membership income increased $41,177 (12%) in
the year ended December 31, 1999, compared to the year ended December 31, 1998.
Other Commission and Fee Income
-------------------------------
Other commission and fee income are as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Workers' compensation program
commission income $44,816 $81,919 $329,465
Earthquake program commission income $15,993 $22,421 -
Commercial liability program
commission and fee income $55,828 $22,280 -
Commercial and personal auto program
commission and fee income - $4,363 $1,843
Miscellaneous fee income $128 $177 $242
------- ------- --------
Total other commission and fee income $116,767 $131,160 $331,550
======= ======= =======
Unifax produces workers' compensation policies primarily in California for
non-affiliated insurers and receives a commission from them based on premium
written. Unifax discontinued writing new business with one of its non-affiliated
insurers in 1998 and began placing new business with other non-affiliated
insurance companies. The decrease in commission income in 2000 and 1999 was due
to underwriting constraints of the new insurance companies that limited the
types and classes of business that they would accept.
Unifax began producing commercial earthquake insurance policies in California
for non-affiliated insurance companies in 1999. Unifax received a commission
from the insurance company based on premium written. Commission income on the
earthquake program for the year ended December 31, 2000, decreased $6,428 (29%)
compared to the prior year as a result of the non-affiliated insurance company
discontinuing writing earthquake insurance in California in October, 2000.
Unifax expects to begin writing commercial earthquake insurance policies with a
new non-affiliated insurance company in April, 2001.
Unifax began producing commercial liability insurance policies in California for
non-affiliated insurance companies in 1999. Unifax receives a commission from
the insurance company based on premium written and a service fee from the
policyholder. Commission and fee income on the commercial liability program
increased in the year ended December 31, 2000, $33,548 (151%) due to increased
marketing and the expansion of the product lines written by non-affiliated
insurance carriers.
Unifax produced commercial auto policies in California for a non-affiliated
insurer and received a commission from them based on premium written. The
Company discontinued that program in February of 1997. Unifax also received a
policy service fee from the insured. In February 1997, the Company decided to
discontinue writing new policies in the Unifax commercial automobile program and
only serviced and renewed existing policies until the book of business was sold
to a non-affiliated third party in June 1997. As consideration for the sale of
this book of business, Unifax received a percentage of the commission earned for
a two-year period on policies which were in force at the time of sale.
The commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected in commission income or commission expense.
20
Premium Finance Program
-----------------------
Premium finance charges and late fees earned from financing policies are as
follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Premium finance charges and
late fees earned $837,902 $915,940 $1,033,479
New loans 7,166 7,597 8,092
AAC provides premium financing primarily to Crusader policies produced by Unifax
in California. The growth of this program is dependent and directly related to
the growth of Crusader's written premium and AAC's ability to market its
competitive rates and service to finance those policies. Due to the intense
competition in the market place Unifax has produced only slightly more policies
than the previous year. The decrease in revenues and loans in 2000 is primarily
due to the fact that fewer policies are being financed. Although AAC finances
approximately 80% of all Unifax policies which are financed, the percentage of
all Unifax policies which are financed decreased from approximately 54% in 1999
to approximately 50% in 2000.
Premium finance charges and late fees earned on loans decreased $78,038 (9%) in
the year ended December 31, 2000, compared to the year ended December 31, 1999.
The decrease was primarily a result of fewer policies being financed due to an
overall decrease in the number of policyholders financing policies. For the year
ended December 31, 1999, premium finance charges and late fees earned on loans
decreased $117,539 (11%) compared to the year ended December 31, 1998, as a
result of fewer policies being written by Crusader and fewer policies being
financed.
Investment Income and Net Realized Gains (Losses)
- ----------------------------------------------------
Investment income and net realized gains (losses) are as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Interest and dividend income
Insurance company operations $5,764,094 $5,706,945 $5,497,323
Other operations 335,984 283,942 234,580
--------- --------- ---------
Total interest and dividend income 6,100,078 5,990,887 5,731,903
Net realized investment gains (losses) (135,389) 64,793 247,931
--------- -------- ---------
Total investment income and
realized gains (losses) $5,964,689 $6,055,680 $5,979,834
========= ========= =========
The Company continually evaluates the recoverability of its investment holdings.
When a decline in value of fixed maturities or equity securities is considered
other than temporary, a loss is recognized in the consolidated statement of
operations. During 2000, the Company realized a loss of $138,250 on one equity
security where a decline in market value was considered other than temporary.
Investment interest and dividends earned (excluding net realized gains)
increased $109,191 (2%) in the year ended December 31, 2000, compared to the
year ended December 31, 1999, primarily as a result of an increase in return on
the Company's investment portfolio. Average invested assets in the year ended
December 31, 2000, (at amortized value) decreased $2,628,414 (3%) compared to
the year ended December 31, 1999. Investment income return based on average
invested assets was 6.0% for the year ended December 31, 2000, compared to 5.74%
for the year ended December 31, 1999. The mix of taxable and tax-exempt
securities in the portfolio affect the investment income return percentage.
Tax-exempt securities, which generally carry a lower yield than taxable
securities, decreased to $19,789,675 (20% of total investments) at December 31,
2000, compared to $28,078,605 (27% of total investments) at December 31, 1999.
Investment interest and dividends earned (excluding net realized gains)
increased $258,984 (5%) in the year ended December 31, 1999, compared to the
year ended December 31, 1998, primarily as a result of additional invested
assets from operating activities. Average invested assets in the year ended
December 31, 1999, (at
21
amortized value) increased $6,400,046 (7%) compared to the year ended December
31, 1998. Investment income return based on average invested assets was 5.74%
for the year ended December 31, 1999, compared to 5.85% for the year ended
December 31, 1998. The mix of taxable and tax-exempt securities in the portfolio
affect the above investment income return percentage. Tax-exempt securities,
which generally carry a lower yield than taxable securities, decreased to
$28,078,605 (27% of total investments) at December 31, 1999, compared to
$34,144,344 (33% of total investments) at December 31, 1998.
Additional information regarding investments and investment income is described
in the Management Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
Operating Expenses
- ------------------
Policy Acquisition Costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that are related to and vary with the
production of Crusader insurance policies. These costs include both Crusader
expenses and allocated expenses of other Unico subsidiaries. On certain
reinsurance treaties, Crusader receives a ceding commission from its reinsurer
that represents a reimbursement of the acquisition costs related to the premium
ceded. No ceding commission is received on provisionally rated ceded premium.
Policy acquisition costs, net of ceding commission, are deferred and amortized
as the related premiums are earned. The ratio of policy acquisition cost to net
earned premium increased in 1999 and 2000 primarily due to an increase in
provisionally rated ceded premium. The provisionally rated reinsurance contract
was cancelled on a run off basis on December 31, 1997. Policy acquisition costs,
net of ceding commission, are as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Policy acquisition costs $8,303,917 $8,362,814 $9,497,857
Ratio to net earned premium
(GAAP ratio) 32% 30% 27%
Salaries and Employee Benefits decreased $110,433 (3%) for the year ended
December 31, 2000, compared to the year ended December 31, 1999. Salaries and
employee benefits increased $135,797 (3%) in the year ended December 31, 1999,
compared to the year ended December 31, 1998.
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Salaries and employee benefits $4,241,117 $4,351,550 $4,215,753
Commissions to Agents/Brokers (not including commissions on Crusader policies
that are reflected in policy acquisition costs) are generally related to gross
commission income from the health and life insurance program, the daily
automobile rental insurance program, the earthquake program and the commercial
liability program. Commissions to agents and brokers increased $3,971 (0%) for
the year ended December 31, 2000, compared to the year ended December 31, 1999.
Commissions to agents and brokers increased $261,833 (25%) for the year ended
December 31, 1999, compared to the year ended December 31, 1998.
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Commission to agents/brokers $1,309,490 $1,305,519 $1,043,686
22
Other Operating Expenses generally do not change significantly with changes in
production. This is true for both increases and decreases in production.
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Other operating expenses $2,642,897 $2,562,295 $2,438,494
Income Taxes
- ------------
Income tax benefit for 2000 was $246,184 compared to $1,993,523 income tax
expense for 1999. The effective combined income tax rates for 2000 and 1999 were
(127.2%) and 30.9%, respectively. The change in the effective tax rate is due to
significantly larger portion of tax exempt interest in the income before taxes
in 2000 than in 1999.
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000, and establishes standards for the reporting for
derivative instruments. It requires changes in the fair value of a derivative
instrument and the change in fair value of assets or liabilities hedged by the
instrument to be included in income. To the extent that the hedge transaction is
effective, income is equally offset by both investments. Currently the changes
in fair value of derivative instruments and hedged items are reported in net
unrealized gain (loss) on securities. The Company does not participate in
derivative instruments or hedging activities. Consequently, the Company's
financial statements would not be impacted by the adoption of SFAS 133.
Forward Looking Statements
- --------------------------
Certain statements contained herein, including the Sections entitled "Business,"
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," that are not historical facts are forward
looking. These statements, which may be identified by forward-looking words or
phrases such as "anticipate," "appears," "believe," "estimates," "expect,"
"intend," "may," "should," and "would," involve risks and uncertainties, many of
which are beyond the control of the Company. Such risks and uncertainties could
cause actual results to differ materially from these forward looking statements.
Factors which could cause actual results to differ materially include those
described under Item 1 - Business - "Competition," premium rate adequacy
relating to competition or regulation, actual versus estimated claim experience,
regulatory changes or developments, unforeseen calamities, general market
conditions, the Company's ability to introduce new profitable products, and the
Company's ability to expand geographically.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk.
The Company's invested assets at December 31, 2000 and 1999 consisted of the
following:
2000 1999
---- ----
Fixed maturity bonds (at amortized cost ) $94,398,077 $98,942,275
Short-term cash investments (at cost) 3,355,354 5,968,173
Equity securities (at cost) 25,920 164,170
Certificates of deposit -over 1 year (at cost) 400,000 200,000
---------- -----------
Total invested assets $98,179,351 $105,274,618
========== ===========
23
The Company's interest rate risk is primarily in its fixed maturity bond
portfolio. As market interest rates decrease, the value of the portfolio
increases with the opposite holding true in rising interest rate environments.
In addition, the longer the maturity, the more sensitive the asset is to market
interest rate fluctuations. The Company limits this risk by investing in
securities with maturities no greater than eight years. In addition, although
fixed maturity bonds are classified as available-for-sale, the Company's
investment guidelines place primary emphasis on buying and holding high-quality
bonds to maturity. Since inception of the Company, only ten bonds have been sold
prior to their maturity or call date. Because fixed maturity bonds are primarily
held to maturity, the change in the market value of these bonds resulting from
interest rate movements are unrealized, and no gains or losses are recognized in
the consolidated statements of operations. Unrealized gains and losses are
reported as separate components of stockholders' equity, net of any deferred tax
effect. As of December 31, 2000, the Company's unrealized gains (net of
unrealized losses) before income taxes on its fixed maturity bond portfolio was
$184,553. As of December 31, 1999, the Company's unrealized losses (net of
unrealized gains) was $1,548,141. Given a hypothetical parallel increase of 100
basis points in interest rates, the fair value of the fixed maturity bond
portfolio would decrease by approximately $2.77 million. This decrease would not
be reflected in the statements of operations except to the extent that the
securities are sold.
The Company's short-term investments and certificates of deposit have only
minimal interest rate risk. Due to the Company's small investment in equity
securities (approximately one half of one percent of total invested assets), the
Company has only minimal exposure to equity price risk.
24
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
Independent Auditors' Report 26
Consolidated Balance Sheets as of December 31, 2000, and
December 31, 1999 27
Consolidated Statements of Operations for the years ended
December 31, 2000, December 31, 1999, and December 31, 1998 28
Consolidated Statements of Comprehensive Income for the years
ended December 31, 2000, December 31, 1999, and December 31, 1998 29
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2000, December 31, 1999, and December 31, 1998 30
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, December 31,1999, and December 31, 1998 31
Notes to Consolidated Financial Statements 32
25
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Unico American Corporation:
We have audited the accompanying consolidated balance sheets of Unico American
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unico American
Corporation and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Los Angeles, California
March 9, 2001
26
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 December 31
2000 1999
---- ----
ASSETS
------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost: December 31,
2000 $94,798,077; December 31, 1999 $99,142,275) $94,982,630 $97,594,134
Equity securities at market (cost: December 31, 2000
$25,920; December 31, 1999 $164,170) 25,920 66,000
Short-term investments, at cost 3,355,354 5,968,173
---------- -----------
Total Investments 98,363,904 103,628,307
Cash 54,806 105,439
Accrued investment income 1,908,547 2,060,471
Premiums and notes receivable, net 5,807,731 5,496,890
Reinsurance recoverable:
Paid losses and loss adjustment expenses 393,198 19,850
Unpaid losses and loss adjustment expenses 10,671,343 3,964,324
Prepaid reinsurance premiums 29,531 32,438
Deferred policy acquisition costs 4,500,147 4,338,217
Property and equipment (net of accumulated depreciation) 114,107 148,667
Deferred income taxes 948,442 1,541,242
Other assets 1,154,064 642,911
----------- -----------
Total Assets $123,945,820 $121,978,756
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $45,217,369 $41,592,489
Unearned premiums 17,099,927 16,583,143
Advance premium and premium deposits 2,316,016 2,571,190
Accrued expenses and other liabilities 7,899,179 6,391,137
---------- ----------
Total Liabilities $72,532,491 $67,137,959
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, no par - authorized 10,000,000 shares, issued and
outstanding shares 5,692,699 at December 31, 2000, and 6,304,953
at December 31, 1999 $2,789,494 $3,098,389
Accumulated other comprehensive income gain (loss) 121,805 (1,086,565)
Retained earnings 48,502,030 52,828,973
---------- ----------
Total Stockholders' Equity $51,413,329 $54,840,797
---------- ----------
Total Liabilities and Stockholders' Equity $123,945,820 $121,978,756
=========== ===========
See accompanying notes to consolidated financial statements.
27
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
REVENUES
- --------
Insurance Company Revenues
Premium earned $32,743,165 $34,693,113 $40,615,417
Premium ceded 6,843,931 6,583,752 5,700,222
---------- ---------- ----------
Net premium earned 25,899,234 28,109,361 34,915,195
Net investment income 5,764,094 5,706,945 5,497,323
Net realized investment gains (losses) (137,897) 64,793 247,931
Other income 46,639 6,978 1,183
---------- ---------- ----------
Total Insurance Company Revenues 31,572,070 33,888,077 40,661,632
Other Revenues from Insurance Operations
Gross commissions and fees 5,605,493 5,634,542 5,607,538
Investment income 335,984 283,942 234,580
Net realized investment gains 2,508 - -
Finance charges and late fees earned 837,902 915,940 1,033,479
Other income 13,992 11,756 7,041
---------- ---------- ----------
Total Revenues 38,367,949 40,734,257 47,544,270
---------- ---------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 21,676,915 17,027,190 17,593,582
Policy acquisition costs 8,303,917 8,362,814 9,497,857
Salaries and employee benefits 4,241,117 4,351,550 4,215,753
Commissions to agents/brokers 1,309,490 1,305,519 1,043,686
Other operating expenses 2,642,897 2,562,295 2,438,494
---------- ---------- ----------
Total Expenses 38,174,336 33,609,368 34,789,372
---------- ---------- ----------
Income Before Taxes 193,613 7,124,889 12,754,898
Income Tax Provision (246,184) 1,993,523 4,046,229
------- --------- ---------
Net Income $439,797 $5,131,366 $8,708,669
======= ========= =========
PER SHARE DATA:
- --------------
Basic Shares Outstanding 6,058,674 6,268,069 6,194,133
Basic Earnings Per Share $0.07 $0.82 $1.41
Diluted Shares Outstanding 6,101,692 6,358,607 6,420,580
Diluted Earnings Per Share $0.07 $0.81 $1.36
See accompanying notes to consolidated financial statements.
28
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
Net income $439,797 $5,131,366 $8,708,669
Other changes in comprehensive income
net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period 1,299,381 (3,060,091) 839,134
Less: reclassification adjustment for
(gains) losses included in net income 91,011 (25,010) (62,693)
--------- --------- ---------
Comprehensive Income $1,830,189 $2,046,265 $9,485,110
========= ========= =========
See accompanying notes to consolidated financial statements.
29
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
Accumulated
Other
Common Shares Comprehensive
----------------------------- Income
Issued and Gains and Retained
Outstanding Amount (Losses) Earnings Total
----------- ------ ------ -------- -----
Balance - December 31, 1997 6,153,706 $2,838,058 $1,222,095 $41,000,631 $45,060,784
Net shares issued for exercise of
stock options 69,439 57,644 - - 57,644
Shares canceled or adjusted 279 - - - -
Cash dividend paid ($0.07 per share) - - - (435,456) (435,456)
Change in comprehensive income,
net of deferred income tax - - 776,441 - 776,441
Net income - - - 8,708,669 8,708,669
--------- --------- --------- ---------- ----------
Balance - December 31, 1998 6,223,424 2,895,702 1,998,536 49,273,844 54,168,082
Net shares issued for exercise of
stock options 81,529 202,687 - - 202,687
Cash dividend paid ($0.25 per share) - - - (1,576,237 (1,576,237)
Change in comprehensive income,
net of deferred income tax - - (3,085,101) - (3,085,101)
Net income - - - 5,131,366 5,131,366
--------- --------- --------- ---------- ----------
Balance - December 31, 1999 6,304,953 3,098,389 (1,086,565) 52,828,973 54,840,797
Net shares issued for exercise of
stock options 16,307 13 - - 13
Shares canceled or adjusted 39 - - - -
Shares repurchased (628,600) (308,908) - (3,821,160) (4,130,068)
Cash dividend paid ($0.15 per share) - - - (945,580) (945,580)
Change in comprehensive income,
net of deferred income tax - - 1,208,370 - 1,208,370
Net income - 439,797 439,797
--------- --------- ------- ---------- ----------
Balance - December 31, 2000 5,692,699 $2,789,494 $121,805 $48,502,030 $51,413,329
========= ========= ======= ========== ==========
See accompanying notes to consolidated financial statements.
30
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income $439,797 $5,131,366 $8,708,669
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 68,632 97,087 98,585
Bond amortization, net 526,030 684,548 644,726
Net realized (gain) loss on sale of securities 135,389 (64,793) (247,931)
Changes in assets and liabilities
Premium, notes and investment income receivable (158,917) 387,552 1,267,057
Reinsurance recoverable (7,080,367) (2,698,256) 184,064
Prepaid reinsurance premiums 2,907 (12,986) 926,111
Deferred policy acquisitions costs (161,930) 327,555 220,912
Other assets (511,153) (61,293) 255,041
Reserve for unpaid losses and loss adjustment expenses 3,624,880 78,544 (490,906)
Unearned premium reserve 516,784 (1,553,752) (3,536,114)
Advance premium and premium deposits (255,174) 241,834 238,176
Accrued expenses and other liabilities 1,508,042 989,912 3,305,659
Income taxes current/deferred (29,694) 152,708 484,230
--------- --------- ----------
Net Cash Provided (Used) from Operations (1,374,774) 3,700,026 12,058,279
--------- --------- ----------
Investing Activities
Purchase of fixed maturity investments (9,736,357) (12,341,754) (24,797,224)
Proceeds from maturity of fixed maturity investments 11,505,400 8,839,250 12,898,500
Proceeds from sale of fixed maturity investments 2,008,594 - 1,041,250
Purchase of equity securities - cost - (3,758,378) (3,583,913)
Proceeds from sale of equity securities - 4,162,504 3,480,043
Net (increase) decrease in short-term investments 2,656,211 640,182 (397,102)
Additions to property and equipment (34,072) (40,385) (100,245)
--------- --------- ----------
Net Cash Provided (Used) by Investing Activities 6,399,776 (2,498,581) (11,458,691)
--------- --------- ----------
Financing Activities
Proceeds from issuance of common stock 13 202,687 57,644
Repurchase of common stock (4,130,068) - -
Dividends paid to shareholders (945,580) (1,576,237) (435,456)
---------- ---------- -------
Net Cash (Used) by Financing Activities (5,075,635) (1,373,550) (377,812)
--------- --------- -------
Net increase (decrease) in cash (50,633) (172,105) 221,776
Cash at beginning of year 105,439 277,544 55,768
------- ------- -------
Cash at End of Year $54,806 $105,439 $277,544
====== ======= =======
Supplemental cash flow information
Cash paid during the period for:
Interest $25,417 $1,492 $60,116
Income taxes $245,414 $2,114,042 $3,430,000
See accompanying notes to consolidated financial statements.
31
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Nature of Business
- ------------------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and provides insurance premium financing, claim administration
services, and membership association services through its other subsidiaries.
Unico American Corporation is referred to herein as the "Company" or "Unico" and
such references include both the corporation and its subsidiaries, all of which
are wholly owned, unless otherwise indicated. Unico was incorporated under the
laws of Nevada in 1969.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Unico American
Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
- ---------------------
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). As described in Note 14, the
Company's insurance subsidiary also files financial statements with regulatory
agencies prepared on a statutory basis of accounting that differs from generally
accepted accounting principles.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. While
every effort is made to ensure the integrity of such estimates, actual results
could differ.
Investments
- -----------
All of the Company's fixed maturity investments are classified as available-for
sale and are stated at market value. Although classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments to maturity. Short-term investments are carried at
cost, which approximates market value. Investments in equity securities are
carried at market value. The unrealized gains or losses from fixed maturities
and equity securities are reported as accumulated other comprehensive income
(loss) which is a separate component of stockholders' equity, net of any
deferred tax effect. When a decline in value of a fixed maturity or equity
security is considered other than temporary, a loss is recognized in the
consolidated statements of operations. Realized gains and losses are included in
the consolidated statements of operations based on the specific identification
method.
The Company had net unrealized investment gains of $121,805 as of December 31,
2000, and net unrealized investment losses of $1,086,565 as of December 31,
1999. These amounts are net of deferred taxes.
Property and Equipment
- ----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using accelerated depreciation methods over the
estimated useful lives of the related assets.
Income Taxes
- ------------
The provision for federal income taxes is computed on the basis of income as
reported for financial reporting purposes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and are measured using the enacted tax rates and laws expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Income tax expense provisions increase or
decrease in the same period in which a change in tax rates is enacted.
32
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
- -----------------------------------
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investment Securities - Fair values for fixed maturity securities are
obtained from a national quotation service. The fair values for equity
securities are based on quoted market prices.
Cash and Short-Term Investments - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Premiums and Notes Receivable - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Earnings Per Share
- ------------------
Basic earnings per share excludes the impact of common share equivalents and is
based upon the weighted average common shares outstanding. Diluted earnings per
share utilize the average market price per share when applying the treasury
stock method in determining common share dilution. Outstanding stock options are
treated as common share equivalents for purposes of computing diluted earnings
per share and represent the difference between basic and diluted weighted
average shares outstanding.
Revenue Recognition
- -------------------
a. General Agency Operations
-----------------------------
Commissions and service fees due the Company are recognized as income on
the effective date of the insurance policies.
b. Insurance Company Operations
--------------------------------
Premiums are earned on a pro-rata basis over the terms of the policies.
Premiums applicable to the unexpired terms of policies in force are
recorded as unearned premiums. The Company earns a commission on policies
that are ceded to its reinsurers. This commission is considered earned on a
pro-rata basis over the terms of the policies.
c. Insurance Premium Financing Operations
------------------------------------------
Premium finance interest is charged to policyholders who choose to finance
insurance premiums. Interest is charged at rates that vary with the amount
of premium financed. Premium finance interest is recognized using a method
which approximates the interest (actuarial) method.
d. Insurance Claim Administration Operation
--------------------------------------------
Claim administration income is based on premium written by Bedford for
non-affiliated insurers. Income is recognized on the effective date of the
insurance policies and a liability is recognized for the estimated cost of
completing the administration of all current and future claims that are
covered by these policies.
Losses and Loss Adjustment Expenses
- -----------------------------------
The liability for unpaid losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period plus estimates based on experience and industry data
for development of case estimates and for unreported losses and loss adjustment
expenses.
There is a high level of uncertainty inherent in the evaluation of the required
loss and loss adjustment expense reserves for the Company. The long-tailed
nature of liability claims and the volatility of jury awards exacerbates that
uncertainty. Management has selected target loss and loss expense ratios that it
believes are reasonable and reflective of anticipated ultimate experience. The
ultimate cost of claims is dependent upon future events, the outcomes of which
are affected by many factors. Company claim reserving procedures and settlement
philosophy, current and perceived social and economic inflation, current and
future court rulings and jury attitudes, improvements in medical technology, and
many other economic, scientific, legal, political, and social factors all can
have significant effects on the ultimate costs of claims. Changes in Company
operations and management philosophy also may cause actual developments to vary
from the past. Since the emergence and disposition of claims are subject to
uncertainties, the net amounts that will ultimately be paid to settle claims may
vary significantly from the estimated
33
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts provided for in the accompanying consolidated financial statements. Any
adjustments to reserves are reflected in the operating results of the periods in
which they are made. Management believes that the aggregate reserves for losses
and loss adjustment expenses are reasonable and adequate to cover the cost of
claims, both reported and unreported.
Restricted Funds
- ----------------
Restricted funds are as follows:
Year ended December 31
----------------------
2000 1999
---- ----
Restricted Funds:
Premium trust funds (1) 2,755,572 $3,071,696
Assigned to state agencies (2) 2,725,000 2,725,000
--------- ---------
Total restricted funds $5,480,572 $5,796,696
========= =========
(1) As required by law, the Company segregates from its operating
accounts the premiums collected from insurers which are payable to
insurance companies into separate trust accounts. These amounts are
included in cash and short-term investments.
(2) Included in fixed maturity investments are statutory deposits
assigned to and held by the California State Treasurer and the
Insurance Commissioner of the state of Nevada. These deposits are
required for writing certain lines of business in California and for
admission in states other than California.
Deferred Policy Acquisition Costs
- ---------------------------------
Policy acquisition costs consist of costs associated with the production of
insurance policies such as commissions, premium taxes, and certain other
underwriting expenses which vary with and are primarily related to the
production of the insurance policy. Policy acquisition costs are deferred and
amortized as the related premiums are earned and are limited to their estimated
realizable value based on the related unearned premiums plus investment income
less anticipated losses and loss adjustment expenses. Ceding commission
applicable to the unexpired terms of policies in force is recorded as unearned
ceding commission which is included in deferred policy acquisition costs.
Reinsurance
- -----------
The Company cedes reinsurance to provide for greater diversification of
business, to allow management to control exposure to potential losses arising
from large risks by reinsuring certain levels of risk in various areas of
exposure, to reduce the loss that may arise from catastrophes, and to provide
additional capacity for growth. Prepaid reinsurance premiums and reinsurance
receivables are reported as assets and represent ceded unearned premiums and
reinsurance recoverable on both paid and unpaid losses, respectively. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policies.
Segment Reporting
- -----------------
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures
about Segments of an Enterprise and Related Information," became effective for
fiscal years effective after December 15, 1997. SFAS No. 131 establishes
standards for the way information about operating segments is reported in
financial statements. The Company has adopted SFAS No. 131 for the fiscal year
ended December 31, 1997, and has identified its insurance company operation as
its primary reporting segment. Revenues from this segment comprise 82.3% of
consolidated revenues. The Company's remaining operations constitute a variety
of specialty insurance services, each with unique characteristics and
individually insignificant to consolidated revenues.
34
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The insurance company operation is conducted through Crusader, which as of
December 31, 2000, was licensed as an admitted insurance carrier in the states
of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon and
Washington. Crusader is a multiple line property and casualty insurance company
which began transacting business on January 1, 1985. As of December 31, 2000,
97% of Crusader's business was commercial multiple peril business package
insurance policies. Commercial multiple peril policies provide a combination of
property and liability coverage for businesses. Commercial property coverages
insure against loss or damage to buildings, inventory and equipment from natural
disasters, including hurricanes, windstorms, hail, water, explosions, severe
winter weather and other events such as theft and vandalism, fires and storms
and financial loss due to business interruption resulting from covered property
damage. Commercial liability coverages insure against third party liability from
accidents occurring on the insured's premises or arising out of its operations,
such as injuries sustained from products sold. In addition to commercial
multiple peril policies, Crusader also writes separate policies to insure
commercial property and commercial liability risks on a mono-line basis.
Revenues, income before income taxes and assets by segment are as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Revenues
- --------
Insurance company operation $31,572,070 $33,888,077 $40,661,632
---------- ---------- ----------
Other insurance operations 16,715,332 16,717,884 17,962,867
Intersegment elimination (1) (9,919,453) (9,871,704) (11,080,229)
--------- --------- ----------
Total other insurance operations 6,795,879 6,846,180 6,882,638
--------- --------- ---------
Total revenues $38,367,949 $40,734,257 $47,544,270
========== ========== ==========
Income (loss) before income taxes
- ---------------------------------
Insurance company operation $(237,593) $6,921,533 $11,753,137
Other insurance operations 431,206 203,356 1,001,761
------- --------- ----------
Total income before income taxes $193,613 $7,124,889 $12,754,898
======= ========= ==========
Assets
- ------
Insurance company operation $108,959,681 $103,450,995 $104,779,787
Intersegment eliminations (2) (528,196) (479,933) (150,097)
----------- ----------- -----------
Total Insurance company operation 108,431,485 102,971,062 104,629,690
Other insurance operations 15,514,335 19,007,694 17,087,953
---------- ---------- ----------
Total assets $123,945,820 $121,978,756 $121,717,643
=========== =========== ===========
(1) Intersegment revenue eliminations reflect commissions paid by Crusader to
Unifax.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
Stock-Based Compensation
- ------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning
after December 15, 1995. The Company accounts for stock-based compensation under
the accounting methods prescribed by Accounting Principles Board (APB) Opinion
No. 25, as allowed by SFAS No. 123. Disclosure of stock-based compensation
determined in accordance with SFAS No. 123 is presented in Footnote 15. The
adoption of this pronouncement did not have a material effect on the financial
statements of the Company.
35
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Standards
- ------------------------------------
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" is effective for financial
statements beginning after December 15, 1998. SOP 98-1 requires that the cost of
internally developed software be capitalized. There were no costs incurred for
software purchased or developed in the year ending December 31, 2000, which were
required to be capitalized.
Statement of Position 97-3 (SOP 97-3), "Accounting by Insurance and Other
Enterprises for Insurance Related Assessments," is effective for financial
statements beginning after December 15, 1998. SOP 97-3 requires that a liability
for insurance related assessments be recognized when an assessment is probable,
the event obligating the assessment has occurred, and the assessment can be
reasonably estimated. The adoption of SOP 97-3 has no material effect on the
financial statements.
Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting
for Derivative Instruments and Hedging Activities" is effective for fiscal years
beginning after June 15, 2000, and establishes standards for the reporting for
derivative instruments. It requires changes in the fair value of a derivative
instrument and the changes in fair value of assets or liabilities hedged by that
instrument to be included in income. To the extent that the hedge transaction is
effective, income is equally offset by both investments. Currently the changes
in fair value of derivative instruments and hedged items are reported in net
unrealized gain (loss) on securities. The Company has not adopted SFAS 133.
However, the effect of adoption on the consolidated financial statements at
December 31, 2000, would not be material.
NOTE 2 - ADVANCE PREMIUM AND PREMIUM DEPOSITS
- ---------------------------------------------
Some of the Company's health and life programs require payments of premium prior
to the effective date of coverage; and accordingly, invoices are sent out as
early as two months prior to the coverage effective date. Insurance premiums
received for coverage months effective after the balance sheet date are recorded
as advance premiums. Deposit premiums represent funds received from the
Company's daily automobile rental program which guarantee the payment of
premiums for past coverage months. These deposits are required when information
such as gross receipts or number of rental cars is required to compute the
actual premium due, but is not available until after the coverage month.
NOTE 3 - INVESTMENTS
- --------------------
A summary of net investments and related income is as follows:
Investment income is summarized as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Fixed maturities $5,848,248 $5,752,154 $5,463,418
Equity securities - 1,380 8,095
Short-term investments 251,930 238,017 260,725
--------- --------- ---------
Total investment income 6,100,178 5,991,551 5,732,238
Less investment expenses 100 664 335
--------- --------- ---------
Net investment income $6,100,078 $5,990,887 $5,731,903
========= ========= =========
Net realized investment gains and (losses) are summarized as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Gross realized gains:
Fixed maturities $ 2,861 $ - $ 78,758
Equity securities - 190,169 170,540
Gross realized (losses):
Equity securities (138,250) (125,376) (1,367)
------- ------- -------
Net realized investment gains $(135,389) $64,793 $247,931
======= ====== =======
36
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the unrealized appreciation (depreciation) on investments carried
at market and the applicable deferred federal income taxes is shown below:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Gross unrealized appreciation:
Fixed maturities $936,589 $363,627 $3,181,405
Gross unrealized (depreciation):
Fixed maturities (752,036) (1,911,768) (67,497)
Equity securities - (98,170) (39,238)
------- --------- ---------
Net unrealized appreciation (depreciation) on investments 184,553 (1,646,311) 3,074,670
Deferred federal income tax benefit (expense) (62,748) 559,746 (1,076,134)
------- --------- ---------
Net unrealized appreciation (depreciation)
net of deferred income taxes $121,805 $(1,086,565) $1,998,536
======= ========= =========
The amortized cost and estimated market value of fixed maturity investments at
December 31, 2000, by contractual maturity are as follows. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Amortized Estimated
Cost Market Value
---- ------------
Due in one year or less $17,974,663 $18,059,680
Due after one year through five years 72,757,426 72,825,890
Due after five years through ten years 4,065,988 4,097,060
--------- ---------
Total fixed maturities $94,798,077 $94,982,630
========== ==========
The amortized cost and estimated market values of investments in fixed maturities by categories are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2000
- -----------------
Available for sale:
Fixed maturities
----------------
Certificates of deposit $ 400,000 $ - $ - $ 400,000
U.S. treasury securities 7,995,324 197,697 971 8,192,050
State and municipal tax-exempt bonds 19,789,675 244,759 - 20,034,434
Industrial and miscellaneous taxable bonds 66,613,078 494,133 751,065 66,356,146
---------- -------- -------- ----------
Total fixed maturities $94,798,077 $936,589 $752,036 $94,982,630
========== ======= ======= ==========
December 31, 1999
- -----------------
Available for sale:
Fixed maturities
----------------
Certificates of deposit $ 200,000 $ - $ - $ 200,000
U.S. treasury securities 10,056,163 43,845 24,045 10,075,963
State and municipal tax-exempt bonds 28,078,605 266,568 583 28,344,590
Industrial and miscellaneous taxable bonds 60,807,507 53,214 1,887,140 58,973,581
---------- ------- --------- ----------
Total fixed maturities $99,142,275 $363,627 $1,911,768 $97,594,134
========== ======= ========= ==========
37
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-term investments have an initial maturity of one year or less and consist
of the following:
Year ended December 31
----------------------
2000 1999
---- ----
Certificates of deposit $ 225,000 $ 425,000
Commercial paper 2,000,000 2,675,000
Commercial bank money market accounts 417,280 2,055,254
U.S. government obligation money market fund 28,778 78,799
Short-term U.S. treasury note 681,414 731,281
Savings account 2,882 2,839
--------- ---------
Total short-term investments $3,355,354 $5,968,173
========= =========
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
- ----------------------------------------------------------------
Property and equipment consist of the following:
Year ended December 31
----------------------
2000 1999
---- ----
Furniture, fixtures, computer, office,
and transportation equipment $2,354,072 $2,329,113
Accumulated depreciation 2,239,965 2,180,446
--------- ---------
Net property and equipment $ 114,107 $ 148,667
======= =======
NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET
- -------------------------------------------
Premiums and notes receivable are substantially secured by unearned premiums and
funds held as security for performance.
Year ended December 31
----------------------
2000 1999
---- ----
Premiums receivable $1,931,311 $1,615,238
Premium finance notes receivable 3,896,959 3,903,586
--------- ---------
Total premiums and notes receivable 5,828,270 5,518,824
Less allowance for doubtful accounts 20,539 21,934
--------- ---------
Net premiums and notes receivable $5,807,731 $5,496,890
========= =========
Bad debt expense for the fiscal year ended December 31, 2000, and the fiscal
year ended December 31, 1999, was $19,878 and $20,736, respectively. Premium
finance notes receivable represent the balance due to the Company's premium
finance subsidiary from policyholders who elect to finance their premiums over
the policy term. These notes are net of unearned finance charges.
NOTE 6 - NOTE PAYABLE - BANK
- ----------------------------
Unico has a $2,000,000 line of credit with Union Bank of California. Interest on
this line is referenced to LIBOR and is payable monthly. The agreement contains
certain covenants including maintenance of certain financial ratios. This credit
line expires September 3, 2002, at which time it is expected to be renewed. As
of December 31, 2000 and 1999, no amounts were borrowed.
38
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
- ---------------------------------------------------
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $37,628,165 $40,374,232 $40,591,248
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 17,406,284 18,268,710 22,454,229
Increase (decrease) in provision for events of prior years (*) 4,270,631 (1,241,520) (4,860,647)
---------- ---------- ----------
Total losses and loss adjustment expenses 21,676,915 17,027,190 17,593,582
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 6,013,830 4,380,090 5,132,952
Losses and loss adjustment expenses attributable to
insured events of prior years 18,745,224 15,393,167 12,677,646
---------- ---------- ----------
Total payments 24,759,054 19,773,257 17,810,598
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $34,546,026 $37,628,165 $40,374,232
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 10,671,343 3,964,324 1,139,713
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet - gross of reinsurance (**) $45,217,369 $41,592,489 $41,513,945
========== ========== ==========
(*) During 1999, as part of the Company's ongoing reserve review process and
loss trending analysis, the Company determined that its average claim costs
were increasing and claims were settling for amounts greater than had been
anticipated. To address this trend, the Company reviewed its open claim
files to ensure that its case reserves and IBNR were adequate. The review
process took approximately one year and resulted in increased reserves. The
methodology used by the Company in determining case and IBNR reserves is
consistent with prior years.
The increase in incurred losses and loss adjustment expenses recognized in
2000 and 1999 was primarily due to the following:
1. Higher than anticipated claim cost from business outside of California.
2. The effect on settlements of escalating jury awards.
3. Increased development of losses due to the impact of changes in
California law that expanded coverage and increased loss exposure,
(e.g., Montrose Chemical Corp. v. Admiral Insurance Co. (1994),
Montrose Chemical Corp. v. Admiral Insurance Co. (1995), Armstrong
World Industries, Inc. v. Aetna Gas & Sur. Co. (1996), James Pepperell,
et al., v. Scottsdale Insurance Company (1998), Pardee Construction
Company v. Insurance Company of the West et al., (2000), Pershing Park
Villas HOA v. United Pacific Ins. Co.(2000), Centex Golden Construction
Co. v. Dale Tile Co. (2000)).
(**) In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, reinsurance recoverable on unpaid losses and loss
adjustment expenses are reported for generally accepted accounting
practices as assets rather than netted against the corresponding liability
for such items on the balance sheet.
39
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEFERRED POLICY ACQUISITION COSTS
- ------------------------------------------
Deferred policy acquisition costs consist of commissions (net of ceding
commission), premium taxes, inspection fees, and certain other underwriting
costs which are related to and vary with the production of Crusader Insurance
Company policies. These costs are incurred by Crusader and include allocated
expenses of other Unico subsidiaries. Policy acquisition costs are deferred and
amortized as the related premiums are earned. Deferred acquisition costs are
reviewed to determine if they are recoverable from future income, including
investment income.
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Deferred policy acquisition costs at beginning of year $4,338,217 $4,665,772 $4,886,684
Policy acquisition costs incurred during year 8,465,847 8,035,259 9,276,945
Policy acquisition costs amortized during year (8,303,917) (8,362,814) (9,497,857)
--------- --------- ---------
Deferred policy acquisition costs at end of year $4,500,147 $4,338,217 $4,665,772
========= ========= =========
NOTE 9 - LEASE COMMITMENT
- -------------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The total rent expense under this lease agreement was $1,025,952
for the year ended December 31, 2000; $1,025,952 for the year ended December 31,
1999; and $1,025,952 for the year ended December 31, 1998.
The lease provides for the following minimum annual rental commitments:
Year ending
-----------
December 31, 2001 $1,025,952
December 31, 2002 $1,025,952
December 31, 2003 $1,025,952
December 31, 2004 $1,025,952
December 31, 2005 (through March 31, 2007) $2,308,392
---------
Total minimum payments $6,412,200
=========
Erwin Cheldin, the Company's president, chairman, and principal stockholder, is
the owner of the building. On February 22, 1995, the Company signed an extension
to the lease with no increase in rent to March 31, 2007. The Company believes
that the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties. The Company utilizes for its own operations
100% of the space it leases.
NOTE 10 - ACCRUED EXPENSES AND OTHER LIABILITIES
- ------------------------------------------------
Accrued expenses and other liabilities consist of the following:
Year ended December 31
----------------------
2000 1999
---- ----
Premium payable $6,192,201 $5,208,491
Unearned claim administration income 300,000 300,000
Profit sharing contributions 395,305 406,667
Accrued salaries 475,740 469,721
Security purchases payable (settlement date in 2001) 140,625 -
Other 395,308 6,258
--------- ---------
Total accrued expenses and other liabilities $7,899,179 $6,391,137
========= =========
40
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CLAIMS AND LITIGATION
- -------------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings as either plaintiff or defendant. The
Company is also required to resort to legal proceedings from time to time in
order to enforce collection of premiums, commissions, or fees for the services
rendered to customers or to their agents. These routine items of litigation do
not materially affect the Company and are handled on a routine basis by the
Company through its general counsel.
Likewise, the Company is sometimes named as a cross-defendant in litigation
which is principally directed against that insurer who has issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or others which relate to disputes concerning the
issuance or non-issuance of individual policies. These items are also handled on
a routine basis by the Company's general counsel, and they do not materially
affect the operations of the Company. Management is confident that the ultimate
outcome of pending litigation should not have an adverse effect on the Company's
consolidated operation or financial position.
On September 13, 2000, the City of Los Angeles audited Unico (parent company
only) for the years 1997, 1998 and 1999 with respect to its Los Angeles business
license gross receipts tax. The audit resulted in an assessment of $97,681 in
gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in
a total amount due of $160,949. The assessment was based on the city's position
that expenses of Unico's subsidiaries that are paid by Unico (parent company)
are subject to the gross receipts business tax when those expenses are
reimbursed by the subsidiaries to Unico. The Company disagreed with the audit
findings and has appealed the matter. As of December 31, 2000, the Company has
accrued $25,000 that it estimates will cover the cost of the appeal and an
estimate of the gross receipts tax, penalty, and interest that may ultimately
become due based on the information currently available.
NOTE 12 - REINSURANCE
- ---------------------
A reinsurance transaction occurs when an insurance company transfers ("cedes") a
portion of its exposure on business written by it to a reinsurer which assumes
that risk for a premium ("ceded premium"). Reinsurance does not legally
discharge the Company from primary liability under its policies. If the
reinsurer fails to meet its obligations, the Company must nonetheless pay its
policy obligations. The Company's reinsurance agreements help protect Crusader
against liabilities in excess of certain retentions, including major or
catastrophic losses which may occur from any one or more of the property and/or
casualty risks which Crusader insures. The Company continually monitors and
evaluates the liquidity and financial strength of its reinsurers to determine
their ability to fulfill obligations assumed under the reinsurance contracts.
In 2000, Crusader had its primary reinsurance agreements with Partner
Reinsurance Company of the U.S., a California admitted reinsurer. In 1999,
Crusader had its primary reinsurance agreements with General Reinsurance
Corporation, a California admitted reinsurers. These reinsurance agreements help
protect Crusader against liabilities in excess of certain retentions, including
major or catastrophic losses that may occur from any one or more of the property
and/or casualty risks which Crusader insures. Crusader also has additional
catastrophe reinsurance from various other reinsurance companies of which 90% of
the premium is ceded to participating catastrophe reinsurers that are admitted
in California. Any catastrophe loss ceded to the reinsurer not admitted in
California requires the reinsurer to immediately obtain a non-cancelable
(Evergreen) letter of credit covering their ceded outstanding loss including any
IBNR. On July 1, 1997, Crusader increased its retention from $150,000 to
$250,000 per risk. Concurrently, Crusader maintained catastrophe and clash
covers (subject to a maximum occurrence and annual aggregate) to help protect
the Company from one loss occurrence affecting multiple policies. Beginning
January 1, 1998, an annual aggregate deductible of $750,000 commenced on losses
ceded to its reinsurance treaty covering losses between $250,000 and $500,000.
Beginning January 1, 2000, an annual aggregate deductible of $500,000 commenced
on losses ceded to its reinsurance treaty covering losses between $250,000 and
$500,000. Prior to January 1, 1998, National Reinsurance Corporation charged a
provisional rate on exposures up to $500,000 that was subject to adjustment and
was based on the amount of losses ceded, limited by a maximum percentage that
could be charged. That provisional rated treaty was cancelled on a runoff basis
and replaced by a flat rated treaty on January 1, 1998.
41
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader which includes a reimbursement of the cost of acquiring
the portion of the premium which is ceded. Crusader does not currently assume
any reinsurance. The Company intends to continue obtaining reinsurance although
the availability and cost may vary from time to time. The unpaid losses ceded to
the reinsurer are recorded as an asset on the balance sheet.
The effect of reinsurance on premiums written, premiums earned, and incurred
losses is as follows:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Premiums written:
Direct business $33,259,948 $33,139,361 $37,079,303
Reinsurance assumed - - -
Reinsurance ceded (6,853,383) (6,595,440) (2,952,340)
---------- ---------- ----------
Net premiums written $26,406,565 $26,543,921 $34,126,963
========== ========== ==========
Premiums earned:
Direct business $32,743,165 $34,693,113 $40,615,417
Reinsurance assumed - - -
Reinsurance ceded (6,843,931) (6,583,752) (5,700,222)
---------- ---------- ----------
Net premiums earned $25,899,234 $28,109,361 $34,915,195
========== ========== ==========
Incurred losses and loss
adjustment expenses:
Direct $34,225,322 $23,189,173 $20,557,887
Assumed - - -
Ceded (12,548,407) (6,161,983) (2,964,305)
---------- ---------- ----------
Net incurred losses and
loss adjustment expenses $21,676,915 $17,027,190 $17,593,582
========== ========== ==========
NOTE 13 - PROFIT SHARING PLAN
- -----------------------------
During the fiscal year ended March 31, 1986, the Company adopted the Unico
American Corporation Profit Sharing Plan. Employees who are at least 21 years of
age and have been employed by the Company for at least two years are
participants in the Plan. Pursuant to the terms of the Plan, the Company
annually contributes to the account of each participant an amount equal to a
percentage of the participant's eligible compensation as determined by the Board
of Directors. Participants are entitled to receive benefits under the plan upon
the later of the following: the date 60 days after the end of the plan year in
which the participant's retirement occurs or one year and 60 days after the end
of the plan year following the participant's termination with the Company.
However, the participant's interest must be distributed in its entirety no later
than April 1 of the calendar year following the calendar year in which the
participant attains age 70 1/2 or otherwise in accordance with the Treasury
Regulations promulgated under the Internal Revenue Code of 1954 as amended.
Contributions to the plan were as follows:
Year ended December 31, 2000 $624,388
Year ended December 31, 1999 $653,389
Year ended December 31, 1998 $563,160
NOTE 14 - STATUTORY CAPITAL AND SURPLUS
- ---------------------------------------
Crusader is required to file an annual statement with insurance regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities ("statutory"). Statutory accounting practices differ in certain
respects from generally accepted accounting principles. The more significant of
these differences for statutory accounting are (a) premium income is taken into
earnings over the periods covered by the policies, whereas the related
acquisition and commission costs are expensed when incurred; (b) all bonds are
recorded at amortized cost, regardless of trading activity; (c) non-admitted
assets are charged directly against surplus; (d) loss reserves and unearned
premium reserves are stated net of reinsurance; and (e) federal income taxes are
recorded when
42
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payable. Additionally, the cash flow presentation is not consistent with
generally accepted accounting principles and a reconciliation from net income to
cash provided by operations is not presented. Comprehensive income is not
presented under statutory accounting.
The NAIC's project to codify accounting practices was approved by the NAIC in
March 1998. The approval included a provision for commissioners' discretion in
determining appropriate statutory accounting for insurers in their states.
Consequently, prescribed and permitted accounting practices may continue to
differ from state to state. Codification became effective on January 1, 2001.
The implementation of codification resulted in an increase in statutory surplus
of $1,720,694. The Company is unable to predict how insurance rating agencies
will interpret or react to any such changes. No assurance can be given that
future legislative or regulatory changes resulting from such activities will no
adversely affect the Company and its subsidiaries.
Crusader Insurance Company statutory capital and surplus are as follows:
As of December 31, 2000 $39,626,269
As of December 31, 1999 $40,952,456
Crusader Insurance Company statutory net income is as follows:
Year ended December 31, 2000 $214,787
Year ended December 31, 1999 $5,404,526
Year ended December 31, 1998 $8,243,434
The Company believes that Crusader's statutory capital and surplus were
sufficient to support the insurance premiums written based on guidelines
established by the NAIC.
Crusader is restricted in the amount of dividends it may pay to its parent in
any twelve (12) month period without prior approval of the California Department
of Insurance. Presently, without prior approval, Crusader may pay a dividend in
any twelve (12) month period to its parent equal to the greater of (a) 10% of
Crusader's statutory policyholders' surplus or (b) Crusader's statutory net
income for the preceding calendar year. The maximum dividend that may be made
without prior approval as of December 31, 2000, is $3,962,626. After taking into
account the dividends paid by Crusader to its parent in 2000 of $1,500,000, the
remaining dividend which may be made without prior approval as of December 31,
2000, was $2,462,626.
NOTE 15 - STOCK PLANS
- ---------------------
The Company's 1985 stock option plan provided for the grant of incentive stock
options to officers and key employees. The plan covered an aggregate of
1,500,000 shares of the Company's common stock (subject to adjustment in the
case of stock splits, reverse stock splits, stock dividends, etc.). As of
December 31, 2000, there were 71,275 options outstanding, and all are currently
exercisable. Options granted under this plan had a life of either 5 or 10 years
and had a vesting period from immediate to 9 years. All options were granted at
fair market value. There are no additional options available for future grant
under the 1985 plan.
The Company's 1999 Omnibus Stock Plan that covers 500,000 shares of the
Company's common stock (subject to adjustment in the case of stock splits,
reverse stock splits, stock dividends, etc.) was approved by shareholders June
4, 1999. On August 26, 1999, the Company granted 135,000 incentive stock options
of which 2,500 were terminated and 132,500 were outstanding as of December 31,
2000. These options expire ten years from the date of the grant and were not
exercisable prior to September 1, 2000. Options covering 10,000 or less shares
become exercisable at the rate of 2,500 shares per year commencing September 1,
2000; and options covering more than 10,000 shares become exercisable at the
rate of 5,000 shares per year commencing September 1, 2000. At December 31,
2000, 50,000 options under the 1999 stock option plan were exercisable.
As explained in Note 1, the Company applies APB Opinion No. 25 in accounting for
its incentive stock option plans. Accordingly, no compensation cost has been
recognized in the statements of operations. Had compensation cost for the
Company plans been determined based on the fair value at the grant dates
consistent
43
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with the method of SFAS No. 123, the Company's 2000 net income would have been
reduced by $81,771 and 1999 net income would have been reduced $135,453. Net
income for 1998 was not affected by the calculation. In addition, 2000 earnings
per share (basic and diluted) would have been reduced by $0.01 and 1999 earnings
per share (basic and diluted) would have been reduced by $0.02. Calculations of
the fair value under the method prescribed by SFAS No. 123 were made using the
Black-Scholes option-price model with the following weighted average assumptions
used for the 1999 grant: dividend yield 2.46%, expected volatility of 43%,
expected lives of 10 years, and risk-free interest rates of 6.09%. No options
were granted during 2000.
The changes in the number of common shares under option are summarized as
follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at December 31, 1997 373,948 $3.700
Options granted - -
Options exercised (90,082) $3.455
Options terminated (89,320) $3.500
-------
Outstanding at December 31, 1998 194,546 $3.592
Options granted 135,000 $9.250
Options exercised (93,131) $3.691
Options terminated - -
-------
Outstanding at December 31, 1999 236,415 $6.780
Options granted - -
Options exercised (30,140) $3.500
Options terminated (2,500) $9.250
-------
Outstanding at December 31, 2000 203,775 $7.239
=======
The weighted average fair value of options granted during 1999 was $4.30. No
options were granted in 1998. Options exercisable were 121,275 at December 31,
2000, at a weighted average exercise price of $5.87; 101,415 at December 31,
1999, at a weighted average exercise price of $3.50; 194,546 at December 31,
1998, at a weighted average exercise price of $3.59.
The following table summarizes information regarding the stock options
outstanding at December 31, 2000:
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Price Number of Exercise Price
Exercise Options Contractual Life of Outstanding Options of Exercisable
Price Outstanding (Years) Options Exercisable Options
----- ----------- ----- ------- ----------- -------
$3.50 71,275 1.37 $3.50 71,275 $3.50
$9.25 132,500 8.65 $9.25 50,000 $9.25
NOTE 16 - TAXES ON INCOME
- -------------------------
The provision for taxes on income consists of the following:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Current provision:
Federal $(253,899) $1,668,332 $3,516,390
State 37,409 21,577 179,521
-------- --------- ---------
Total federal and state (216,490) 1,689,909 3,695,911
Deferred (29,694) 303,614 350,318
------- --------- ---------
Provision for taxes $(246,184) $1,993,523 $4,046,229
======= ========= =========
44
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision reflected in the consolidated statements of operations
is less than the expected federal income tax on income as shown in the table
below:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Computed tax expense $65,828 $2,422,462 $4,336,665
Tax effect of:
Tax exempt income (344,428) (425,963) (490,783)
Dividend exclusion - (279) (1,638)
Other (5,910) (23,334) 23,525
State income tax expense 38,326 20,637 178,460
------- --------- ---------
Tax per financial statements $(246,184) $1,993,523 $4,046,229
======= ========= =========
The components of the net federal income tax asset included in the financial
statements as required by the assets and liability method are as follows:
Year ended December 31
----------------------
2000 1999
---- ----
Deferred tax assets:
Discount on loss reserves $1,385,505 $1,371,087
Unearned premiums 1,159,690 1,125,191
Unrealized loss on investments - 559,745
Other 189,883 153,968
--------- ---------
Total deferred tax assets $2,735,078 $3,209,991
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs $1,530,051 $1,474,995
Discount on salvage and subrogation 8,027 7,944
Unrealized gain on investments 62,748 -
Other 185,810 185,810
--------- ---------
Total deferred tax liabilities $1,786,636 $1,668,749
--------- ---------
Net deferred tax assets $948,442 $1,541,242
======= =========
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. The amount of the
deferred tax assets considered realizable could be reduced in the near term if
estimates of future taxable income during the carry forward period are reduced.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in the states of Arizona, California, Colorado, Montana,
Nevada, Oregon, and Washington. The premium tax is in lieu of state franchise
taxes; thus, the above provision for state taxes does not include the premium
tax.
NOTE 17 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------
In April 2000, the Company announced that its Board of Directors had authorized
the repurchase in the open market from time to time of up to an aggregate of
315,000 shares of the common stock of the Company. On August 8, 2000, the Board
of Directors authorized the repurchase of an additional 315,000 shares and on
September 6, 2000, the Board of Directors authorized the repurchase of another
315,000 shares of the common stock of the Company in the open market from time
to time. This brings the total shares of the Company's common stock authorized
to be repurchased and retired to 945,000 shares. As of December 31, 2000, the
Company had purchased and retired an aggregate of 628,600 shares of its common
stock at a cost of $4,130,068 of which $308,908 was allocated to capital and
$3,821,160 was allocated to retained earnings. In addition, the Company has an
open commitment to purchase 65,000 shares of the Company's common stock at a
price of $6.50 per share. This commitment was completed on February 13, 2001.
45
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - EARNINGS PER SHARE
- ----------------------------
A reconciliation of the numerator and denominator used in the basic and diluted
earnings per share calculation is presented below:
Year ended December 31
----------------------
2000 1999 1998
---- ---- ----
Basic Earnings Per Share
- ------------------------
Net income numerator $439,797 $5,131,366 $8,708,669
======= ========= =========
Weighted average shares outstanding denominator 6,058,674 6,268,069 6,194,133
========= ========= =========
Per share amount $0.07 $0.82 $1.41
Diluted Earnings Per Share
- --------------------------
Net income numerator $439,797 $5,131,366 $8,708,669
======= ========= =========
Weighted average shares outstanding 6,058,674 6,268,069 6,194,133
Effect of diluted securities 43,018 90,538 226,447
--------- --------- ---------
Diluted shares outstanding denominator 6,101,692 6,358,607 6,420,580
========= ========= =========
Per share amount $0.07 $0.81 $1.36
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------
Summarized unaudited quarterly financial data for each of the calendar years
2000 and 1999 is set forth below:
Comparable Period by Quarter Ended
----------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Calendar Year 2000
------------------
Total revenues $9,929,286 $9,680,120 $9,253,451 $9,505,092
Income (loss) before taxes 828,315 808,470 126,105 (1,569,277)
Net income (loss) 635,009 612,072 155,430 (962,714)
Earnings per share: Basic $0.10 $0.10 $0.03 $(0.17)
Diltued $0.10 $0.10 $0.03 $(0.17)
Calendar Year 1999
------------------
Total revenues $10,600,597 $10,091,867 $9,543,628 $10,498,165
Income before taxes 2,909,628 1,973,378 1,473,196 768,687
Net income 2,031,762 1,435,128 1,057,642 606,834
Earnings per share: Basic $0.33 $0.23 $0.17 $0.10
Diluted $0.32 $0.23 $0.17 $0.10
46
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
None
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information in response to Item 10 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 11. Executive Compensation
- --------------------------------
Information in response to Item 11 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information in response to Item 12 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information in response to Item 13 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
47
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ------------------------------------------------------------------------
(a) Financial Statements and Schedules Filed as a Part of this Report:
1. Financial statements:
The consolidated financial statements for the fiscal year ended December
31, 2000, are contained herein as listed in the index to consolidated
financial statements on page 25.
2. Financial schedules:
Index to Consolidated Financial Statements
------------------------------------------
Independent Auditors' Report on Financial Statement Schedules
Schedule I - Summary of Investments Other than Investments in
Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplemental Insurance Information
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning Property/Casualty
Insurance Operations
Schedules other than those listed above are omitted, since they are not
applicable, not required, or the information required to be set forth is
included in the consolidated financial statements or notes.
3. Exhibits:
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1984).
3.2 By-Laws of Registrant, as amended. (Incorporated herein by reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1991).
10.1 Unico American Corporation Profit Sharing Plan & Trust. (Incorporated
herein by reference to Exhibit 10.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1985). (*)
10.2 Unico American Corporation Employee Incentive Stock Option Plan (1985).
(Incorporated herein by reference to Exhibit 10.3 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1985).
(*)
10.3 Amendment to Unico American Corporation Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the fiscal year ended March
31, 1987). (*)
10.4 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1987).
10.5 The Lease Amendment #1 dated February 22, 1995, between Unico American
Corporation and Cheldin Management amending the lease dated July 31,
1986. (Incorporated herein by reference to Exhibit 10.5 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
10.6 2000 Omnibus Stock Plan of Unico American Corporation (Incorporated
herein by reference to Exhibit A to Registrant's Proxy Statement for
its Annual Meeting of Shareholders held June 4, 2000). (*)
48
10.7 Employment Agreement between the Company and Roger Platten dated
November 27, 1996. (Incorporated herein by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2000). (*)
10.8 Employment Agreement between the Company and Cary Cheldin dated
November 27, 1996. (Incorporated herein by reference to Exhibit 10.2
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000). (*)
10.9 Amendment to Employment Agreement between the Company and Cary Cheldin
dated January 10, 2000. (Incorporated herein by reference to Exhibit
10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000). (*)
10.10 Agreement to modify employment and general release of all claims
between the Company and Roger Platten dated December 21, 2000. (*)
10.11 New employment agreement between the Company and Roger Platten dated
December 21, 2000. (*)
10.12 Stock purchase agreement between the Company and Roger Platten dated
December 21, 2000. (*)
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1984).
(*) Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
None.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 23, 2001
UNICO AMERICAN CORPORATION
By: /s/ ERWIN CHELDIN
-----------------
Erwin Cheldin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ ERWIN CHELDIN Chairman of the Board,
----------------- President and Chief
Executive Officer,
(Principal Executive Officer) March 23, 2001
/s/ LESTER A. AARON Treasurer, Chief Financial
------------------- Officer and Driector
(Principal Accounting and
Principal Financial Officer) March 23, 2001
/s/ CARY L. CHELDIN Executive Vice President
------------------- and Director March 23, 2001
/s/ GEORGE C. GILPATRICK Vice President, Secretary
------------------------ and Director March 23, 2001
50
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Unico American Corporation:
Under date of March 9, 2001, we reported on the consolidated balance sheets of
Unico American Corporation and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, comprehensive income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2000, as contained in the annual report on
Form 10-K for the year 2000. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules as listed under Item 14(a)2. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
March 9, 2001
51
SCHEDULE I
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2000
Column A Column B Column C Column D
- -------- -------- -------- --------
Amount at which
shown in the
Type of Investment Cost Value Balance Sheet
- ------------------ ---- ----- -------------
Fixed maturities:
U.S. treasury securities $ 7,995,324 $8,192,050 $8,192,050
State and municipal tax exempt bonds 19,789,675 20,034,434 20,034,434
Industrial and miscellaneous bonds 66,613,078 66,356,146 66,356,146
Certificates of deposit 400,000 400,000 400,000
---------- ---------- ----------
Total fixed maturities 94,798,077 94,982,630 94,982,630
Equity securities 25,920 25,920 25,920
Short-term investments 3,355,354 3,355,354 3,355,354
--------- ---------- ---------
Total investments $98,179,351 $98,363,904 $98,363,904
========== ========== ==========
52
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
December 31 December 31
2000 1999
---- ----
ASSETS
------
Investments
Available for sale:
Fixed maturities, at market value (amortized cost December 31, 2000
$1,499,575; December 31, 1999 $2,498,963) $1,499,063 $2,484,687
Short-term investments 117,816 100,000
--------- ---------
Total Investments 1,616,879 2,584,687
Cash 16,406 27,736
Accrued investment income 22,252 46,081
Investments in subsidiaries 68,429,823 65,443,692
Property and equipment (net of accumulated depreciation) 114,107 148,667
Other assets 197,297 85,557
---------- ----------
Total Assets $70,396,764 $68,336,420
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Accrued expenses and other liabilities $1,073,593 $793,758
Payables to subsidiaries (net of receivables) 17,909,842 12,701,865
---------- ----------
Total Liabilities $18,983,435 $13,495,623
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock $2,789,494 $ 3,098,389
Net unrealized investment gains (losses) 121,805 (1,086,565)
Retained earnings 48,502,030 52,828,973
---------- ----------
Total Stockholders' Equity $51,413,329 $54,840,797
---------- ----------
Total Liabilities and Stockholders' Equity $70,396,764 $68,336,420
========== ==========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
53
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
REVENUES
- --------
General and administrative expenses allocated to
subsidiaries (*) $2,081,837 $5,273,146 $4,863,910
Net investment income 138,487 143,215 210,071
Net realized investment gains 2,508 - -
Other income 13,497 10,755 6,031
--------- --------- ---------
Total Revenue 2,236,329 5,427,116 5,080,012
EXPENSES
- --------
General and administrative expenses 4,782,663 5,356,474 5,018,162
--------- --------- ---------
Income before equity in net income of subsidiaries (2,546,334) 70,642 61,850
Equity in net income of subsidiaries 2,986,131 5,060,724 8,646,819
--------- --------- ---------
Net Income $439,797 $5,131,366 $8,708,669
======= ========= =========
(*) In the year ended 2000, the parent company did not allocate any of its
salaries or payroll taxes to its subsidiaries.
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received cash dividends of $1,500,000 from Crusader and $500,000 from
American Acceptance Corporation in the year ended December 31, 2000; $2,000,000
from Crusader in the year ended December 31, 1999; and $1,500,000 from Crusader
in the year ended December 31, 1998.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
54
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income $439,797 $5,131,366 $8,708,669
Adjustments to reconcile net income to net cash
from operations
Undistributed equity in net (income) of subsidiaries (2,986,131) (5,060,724) (8,646,819)
Net realized (gain) on sale of securities (2,508) - -
Depreciation and amortization 67,615 96,334 98,030
Accrued expenses and other liabilities 279,835 (153,869) (159,081)
Accrued investment income 23,829 (17,114) (23,624)
Other assets (111,740) 18,575 1,474
--------- ------ ------
Net cash provided (used) from operations (2,289,303) 14,568 (21,351)
--------- ------ ------
Cash flows from investing activities
Purchase of fixed maturity investments (998,340) (1,498,875) (998,781)
Proceeds from maturity of fixed maturity investments 1,000,000 - -
Proceeds from sale of fixed maturity investments 1,001,250 - -
(Increase) decrease in short-term investments (17,816) 1,650,000 (550,000)
Additions to property and equipment (34,072) (40,385) (100,245)
------- ------- ---------
Net cash provided (used) by investing activities 951,022 110,740 (1,649,026)
------- ------- ---------
Cash flows from financing activities
Proceeds from issuance of common stock 13 202,687 57,644
Repurchase of common stock (4,130,068) - -
Dividends paid to shareholders (945,580) (1,576,237) (435,456)
Net change in payables and receivables
from subsidiaries 6,402,586 1,255,114 2,049,114
--------- ------- ---------
Net cash provided (used) by financing activities 1,326,951 (118,436) 1,671,302
--------- ------- ---------
Net increase (decrease) in cash (11,330) 6,872 925
Cash at beginning of year 27,736 20,864 19,939
------ ------ ------
Cash at end of year $16,406 $27,736 $20,864
====== ====== ======
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
55
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Future Benefits, Amortization
Deferred Benefits, Claims, of Deferred
Policy Losses, Net Losses and Policy Other
Acquisition and Loss Unearned Premium Investment Settlement Acquisition Operating Premium
Cost Expenses Premiums Revenue Income Expenses Costs Costs Written
-------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2000
Property &
Casualty $4,500,147 $45,217,369 $17,099,927 $25,899,234 $5,764,094 $21,676,915 $8,303,917 $1,440,011 $26,406,565
Year Ended
December 31, 1999
Property &
Casualty $4,338,217 $41,592,489 $16,583,143 $28,109,361 $5,706,945 $17,027,190 $8,362,814 $1,949,865 $26,543,921
Year Ended
December 31, 1998
Property &
Casualty $4,665,772 $41,513,945 $18,136,895 $34,915,195 $5,497,323 $17,593,582 $9,497,857 $1,663,214 $34,126,963
56
SCHEDULE IV
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
REINSURANCE
Ceded to Assumed Percentage of
Gross Other from Other Net Amount Assumed
Amount Companies Companies Amount to Net
------------------------------------------------------------------------
Year Ended
December 31, 2000
Property & Casualty $32,743,165 $6,843,931 - $25,899,234 -
Year Ended
December 31, 1999
Property & Casualty $34,693,113 $6,583,752 - $28,109,361 -
Year Ended
December 31, 1998
Property & Casualty $40,615,417 $5,700,222 - $34,915,195 -
57
SCHEDULE VI
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY
INSURANCE OPERATIONS
Claims and
Reserves for Claim
Unpaid Discount Adjustment
Deferred Claims if Any, Expenses Incurred
Affiliation Policy and Claim Deducted Net Related to
with Acquisition Adjustment in Unearned Earned Investment (1) Current Year
Registrant Costs Expenses Column C Premiums Premiums Income (2) Prior Year
(A) (B) (C) (D) (E) (F) (G) (H)
- --------------------------------------------------------------------------------------------------------------------------------
Company &
Consolidated
Subsidiaries
Year Ended
- ----------
December 31, 2000 $4,500,147 $45,217,369 - $17,099,927 $25,899,234 $5,764,094 $17,406,284 (1)
$4,270,631 (2)
December 31, 1999 $4,338,217 $41,592,489 - $16,583,143 $28,109,361 $5,706,945 $18,268,710 (1)
$(1,241,520) (2)
December 31, 1998 $4,665,772 $41,513,945 - $18,136,895 $34,915,195 $5,497,323 $22,454,229 (1)
(4,860,647) (2)
Amortization
of Deferred Paid Claims
Policy and Claim
Acquisition Adjustment Premiums
Costs Expenses Written
(I) (J) (K)
- --------------------------------------------------------------------------------
Year Ended
- ----------
December 31, 2000 $8,303,917 $24,759,054 $26,406,565
December 31,1999 $8,362,814 $19,773,257 $26,543,921
December 31,1998 $9,497,857 $17,810,598 $34,126,963
58