Commission and fee income during the year ended December 31, 2003, were $815,625, an increase of $26,142 (3%) compared to the same period of the prior year. Revenue for the year ended December 31, 2002, increased by $122,065 (18%) compared to the year ended December 31, 2001.
AAC provides premium financing 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. Revenue increased $74,227 (8%) in the year ended December 31, 2003, compared to the prior year although there were 124 (2%) fewer loans financed in the current year. The increase in revenue in 2003 is primarily due to an increase of approximately 23% in the amount of average loan financed. Although AAC financed approximately 81% of all Unifax policies financed compared to 77% in the prior year, the percentage of all Unifax policies that are financed decreased from approximately 44% in 2002 to approximately 36% in 2003.
Operating Expenses - ------------------ Policy Acquisition Costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly 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 in 2003 was lower than the ratio in 2002 and 2001 primarily due to the increase in the Company's ceding commission from its reinsurer as of January 1, 2003 from 25% in 2002 to 35% in 2003. Policy acquisition costs, net of ceding commission, are as follows:
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2003, December 31, 2002, and December 31, 2001 40
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 exacerbate that uncertainty. Crusader sets loss and loss adjustment expense reserves at each balance sheet date at management's best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and related expenses incurred as of that date for both reported and unreported losses. 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 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 ---------------------- 2003 2002 ---- ---- Restricted Funds: Premium trust funds (1) $939,491 $1,114,403 Cash deposited in lieu of bond (2) 752,659 - Assigned to state agencies (3) 2,825,000 2,725,000 --------- --------- Total restricted funds $4,517,150 $3,839,403 ========= =========
In 2003, Unico made capital contributions totaling $3,000,000 to its Crusader subsidiary. The contributions were made to ensure that Crusader's capital remained above $25,000,000. The funding of Unico's capital contribution to Crusader was derived from available cash from the Company's other operations and the proceeds of two notes. On September 29, 2003, the Company borrowed $1,000,000 from Erwin Cheldin, a director and the Company's principal shareholder, president and chief executive officer, and $500,000 from The Cary and Danielle Cheldin Family Trust. Cary L. Cheldin is a director and the Company's executive vice president. The notes are due and payable upon demand of lender (on no less than fourteen days' notice) and, if no demand is made, then the notes are payable in full on September 28, 2007. The notes may be prepaid at any time without penalty. The notes are unsecured and bear interest as follows: Interest on the $1,000,000 note is 5% and is adjustable in April 1, 2004, and every third month thereafter by adding a margin of one percentage point to the prime rate; interest on the $500,000 note is 7% per annum. Interest is payable monthly on both notes.
The decrease in policy acquisition amortized during the year ended December 31, 2003, was primarily due to the increase in ceding commissions from 25% in 2002 to 35% in 2003.
NOTE 9 - LEASE COMMITMENT TO RELATED PARTY - ------------------------------------------ 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, 2003; $1,025,952 for the year ended December 31, 2002; and $1,025,952 for the year ended December 31, 2001.
NOTE 15 - STOCK PLANS - --------------------- 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 40,000 were terminated and 95,000 were outstanding as of December 31, 2003. These options expire 10 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, 2003, there were 95,000 options under the 1999 stock option plan that were exercisable.
The income tax provision reflected in the consolidated statements of operations is different than the expected federal income tax on income as shown in the table below: Year ended December 31 ---------------------- 2003 2002 2001 ---- ---- ---- Computed tax expense (benefit) $730,786 $(1,636,780) $(5,685,857) Tax effect of: Tax exempt income (34,071) (82,034) (217,383) State tax, net of federal tax benefit 370,784 114,413 20,568 Other 13,222 15,031 29,581 --------- --------- --------- Tax per financial statements $1,080,721 $(1,589,370) $(5,853,091) ========= ========= =========