U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 0-20848
UNIVERSAL INSURANCE HOLDINGS, INC.
(Name of small business issuer in its charter)
DELAWARE 65-0231984
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2875 N.E. 191ST STREET, SUITE 300 33180
MIAMI, FLORIDA (Zip Code)
(Address of principal executive offices)
Company's telephone number, including area code: (305) 792-4200
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE OTC BULLETIN BOARD
REDEEMABLE COMMON STOCK PURCHASE WARRANTS OTC BULLETIN BOARD
(Title of each class) (Name of exchange where registered)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 | |
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $13,726,986
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold as of December 31, 2001: $3,723,646
State the number of shares of Common Stock of Universal Insurance
Holdings, Inc. outstanding as of March 1, 2002: 17,794,584
Transitional Small Business Disclosure Format: YES | | NO |X|
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Universal Insurance Holdings, Inc. ("UIH" or the "Company") was
originally organized as Universal Heights, Inc. in 1990. The Company changed its
name to Universal Insurance Holdings, Inc. on January 12, 2001. In April 1997,
the Company organized a subsidiary, Universal Property & Casualty Insurance
Company ("UPCIC"), as part of its strategy to take advantage of what management
believed to be profitable business and growth opportunities in the marketplace.
UPCIC was formed to participate in the transfer of homeowner insurance policies
from the Florida Residential Property and Casualty Joint Underwriting
Association ("JUA"). The Company has since evolved into a vertically integrated
insurance holding company, which, through its various subsidiaries, covers
substantially all aspects of insurance underwriting, distribution and claims
process.
The Company was incorporated under the laws of the State of Delaware on
November 13, 1990 and its principal executive offices are located at 2875 N.E.
191st Street, Suite 300, Miami, Florida 33180, and its telephone number is (305)
792-4200.
INSURANCE BUSINESS
On October 29, 1997, the Florida Department of Insurance ("DOI")
approved UPCIC's application for a permit to organize as a domestic property and
casualty insurance company in the State of Florida. On December 4, 1997, UIH
raised approximately $6.7 million in a private placement of common stock with
various institutional and other accredited investors. The proceeds of the
offering were used to meet the minimum regulatory capitalization requirements
($5.3 million) of the DOI to obtain an insurance company license and for general
working capital purposes. UPCIC received a license to engage in underwriting
homeowners' insurance in the State of Florida on December 31, 1997. In 1998,
UPCIC began operations through the assumption of homeowner insurance policies
issued by the JUA.
The JUA was established in 1992 as a temporary measure to provide
insurance coverage for individuals who could not obtain coverage from private
carriers because of the impact on the private insurance market of Hurricane
Andrew in 1992. Rather than serving as a temporary source of emergency insurance
coverage as was originally intended, the JUA became a major provider of original
and renewal insurance coverage for Florida residents. In an attempt to reduce
the number of policies in the JUA, and thus the exposure of the program to
liability, the Florida legislature approved a number of initiatives to
depopulate the JUA. The Florida legislature subsequently approved, and the DOI
implemented, a Market Challenge/Takeout Bonus Program ("Takeout Program"), which
provided additional incentives to private insurance companies to acquire
policies from the JUA.
The Takeout Program was attractive because it provided both substantial
regulatory and financial incentives to private insurer participants. On the
regulatory side, participants are exempt from assessments by the DOI for the
state's emergency insurance coverage programs for a period of three years. On
the financial side, Takeout Program participants receive a bonus payment based
upon the number of policies taken out of the JUA portfolio. Through December 31,
2001, UPCIC has received bonus payments of approximately $2,723,600 based upon a
portfolio takeout of approximately 30,000 policies. Bonus payments were held in
escrow for three years. After the three-year period, if certain conditions were
met, including maintaining a minimum number of policies, UPCIC would have
unrestricted use of the bonus payments. In addition, UPCIC would have investment
income from the bonus payments that would also be available at the end of the
three years. These bonus payments were not included in the Company's assets
until receipt at the end of the three-year period. To date, the Company has
substantially complied with requirements related to the bonus payments and bonus
payments of $2,723,600 were released from escrow for 27,278 policies which
reached their three-year anniversary in 2001. The Company will not be receiving
any additional bonus payments. Accrued investment income of $452,947 was
received in January 2002.
UPCIC's initial business and operations consisted of providing property
and casualty coverage through homeowners' insurance policies acquired from the
JUA. The insurance business acquired from the JUA provided a base for renewal
premiums. The majority of these policies subsequently renewed with UPCIC. In an
effort to further grow its insurance operations, in 1998 UPCIC also began to
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solicit business actively in the open market through independent agents. In
determining appropriate guidelines for such open market policy sales, UPCIC
employs standards similar to those used in its selection of JUA policies.
Through renewal of the JUA business combined with business solicited in the
market through independent agents, UPCIC is currently servicing approximately
40,000 homeowners' insurance policies covering homes and condominium units.
The Company's primary product is homeowners insurance. The Company's
criteria for selecting insurance policies includes the use of specific policy
forms, limitations on coverage amounts on buildings and contents, acceptance of
policies with low frequency of claims, and required compliance with local
building codes. Also, to improve underwriting and manage risk, the Company uses
analytical tools and data currently developed in conjunction with Risk
Management Solutions. UPCIC's portfolio at December 31, 2001 includes
approximately 30,000 policies with coverage for wind risks and 10,000 policies
without wind risk. The average wind premium is approximately $800 and the
average ex-wind premium is approximately $507. Approximately 32% of the policies
are located in Dade, Broward and Palm Beach counties.
OPERATIONS
All underwriting, rating, policy issuance and administration functions
for UPCIC during 2001 were performed by Universal Property and Casualty
Management, Inc. ("Universal Management"), an outside management company,
pursuant to a management agreement. Universal Management is a wholly-owned
subsidiary of American European Group, Inc. ("AEG"), a Delaware insurance
holding company. UPCIC and Universal Management terminated the management
agreement effective as of January 15, 2002. Services previously provided by
Universal Management to UPCIC under the management agreement are now performed
by UPCIC, Universal Risk Advisors, Inc., a wholly-owned subsidiary of the
Company, and unaffiliated third parties.
Claims handling functions for UPCIC were initially administered by an
independent claims adjustment firm licensed in Florida. In 1999, the Company
formed Universal Adjusting Corporation, a wholly-owned subsidiary, which
currently performs claims adjustment for UPCIC. This gives the Company greater
command over its loss control and expenditures.
The earnings of UPCIC from policy premiums are supplemented by the
generation of investment income from investment policies adopted by the Board of
Directors of UPCIC. UPCIC's principal investment goals are to maintain safety
and liquidity, enhance equity values and achieve an increased rate of return
consistent with regulatory requirements.
MANAGEMENT OPERATIONS
The Company continues to develop into a vertically integrated insurance
holding company performing various aspects of insurance underwriting,
distribution and claims. Universal Risk Advisors, Inc., the Company's
wholly-owned Managing General Agent ("MGA"), was incorporated in Florida on July
2, 1998 and became licensed by the DOI on September 28, 1998. Through the MGA,
the Company has underwriting and claims authority for UPCIC as well as third
party insurance companies. In addition, Universal Risk Life Advisors, Inc. was
incorporated in Florida on June 1, 1999 as the Company's wholly-owned managing
general agent for life insurance products. The MGA seeks to generate revenue
through policy fee income and other administrative fees from the marketing of
UPCIC as well as third party insurance products through the Company's
distribution network. The Company markets and distributes UPCIC's products and
services in Florida through a network of approximately 1,100 active independent
agents.
AGENCY OPERATIONS
Universal Florida Insurance Agency was incorporated in Florida on July
2, 1998 and U.S. Insurance Solutions, Inc. was incorporated in Florida on August
4, 1998 as wholly-owned subsidiaries of the Company to solicit voluntary
business. These two entities are the foundation of the Company's agency
operations which seek to generate income from policy fees, commissions, premium
financing referral fees and the marketing of ancillary services. U.S.A.
Insurance Solutions, Inc. was incorporated in Florida on December 10, 1998 as a
wholly-owned subsidiary of U.S. Insurance Solutions, Inc. to acquire the assets
of an insurance agency.
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DIRECT SALES OPERATIONS
The Company has formed subsidiaries that specialize, or will
specialize, in selling insurance via the Internet. Tigerquote.com Insurance &
Financial Services Group, Inc. ("TigerQuote.com") and Tigerquote.com Insurance
Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23,
1999, respectively. Tigerquote.com is an Internet insurance company while
Tigerquote.com Insurance Solutions, Inc. is a currently operating network of
Internet insurance agencies. To date, these insurance agencies have been
established in 22 states. Separate legal entities have been formed for each
state and are governed by the respective states' departments of insurance.
OTHER OPERATIONS
On June 2, 2000 Capital Resources Group, LTD. was incorporated as a
subsidiary of UIH to participate in the international insurance and reinsurance
markets. On January 3, 2000, Universal Inspection Corporation was incorporated
in Florida as a subsidiary of UIH. Universal Inspection Corporation performs
property inspections for homeowners' policies underwritten by UPCIC and the JUA.
During 2001, the Company formed Tiger Home Services, Inc., which furnishes pest
control, pool services, landscaping, house cleaning and hurricane shutters to
homeowners.
FACTORS AFFECTING OPERATION RESULTS AND MARKET PRICE OF STOCK
The Company and its subsidiaries operate in a rapidly changing
environment that involves a number of uncertainties, some of which are beyond
the Company's control. This report contains in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The words "expect," "estimate," "anticipate," "believe," "intend," "plan," and
similar expressions and variations thereof are intended to identify
forward-looking statements. The Company's actual results could differ materially
from those set forth in or implied by any forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those uncertainties discussed below as well as those discussed elsewhere in
this report.
NATURE OF THE COMPANY'S BUSINESS
Factors affecting the sectors of the insurance industry in which the
Company operates may subject the Company to significant fluctuations in
operating results. These factors include competition, catastrophe losses and
general economic conditions including interest rate changes, as well as
legislative initiatives, the frequency of litigation, the size of judgments and
severe weather conditions. Specifically the homeowners insurance market, which
comprises the bulk of the Company's current operations, is influenced by many
factors, including state and federal laws, market conditions for homeowners
insurance and residential plans. Additionally, an economic downturn could result
in fewer homeowner sales and less demand for homeowners insurance.
Historically, the financial performance of the property and casualty
insurance industry has tended to fluctuate in cyclical patterns of soft markets
followed by hard markets. Although an individual insurance company's financial
performance is dependent on its own specific business characteristics, the
profitability of most property and casualty insurance companies tends to follow
this cyclical market pattern.
The Company believes that a substantial portion of its future growth
will depend on its ability, among other things, to successfully implement its
business strategy, including expanding the Company's product offering by
underwriting and marketing additional insurance products and programs through
its distribution network and further penetrating the Florida market by
establishing relationships with additional independent agents in order to expand
its distribution network. Any future growth is contingent on various factors,
including the availability of adequate capital, the Company's ability to hire
and train additional personnel, regulatory requirements and rating agency
considerations. There is no assurance that the Company will be successful in
expanding its business, that the existing infrastructure will be able to support
additional expansion or that any new business will be profitable. Moreover, as
the Company expands its insurance products and programs and the Company's mix of
business changes, there can be no assurance that the Company will be able to
improve its profit margins or other operating results. There can also be no
assurance that the Company will be able to obtain the required regulatory
approvals to offer additional insurance products. UPCIC also is required to
maintain a minimum capital surplus to support its underwriting program. The
capital surplus requirement impacts UPCIC's potential growth. As of December 31,
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2001, UPCIC's adjusted statutory capital of $4,124,880 included approximately
$851,000 of affiliate receivables which are considered nonadmitted assets under
the National Association of Insurance Commissioners statutory accounting
principles, but for which UPCIC is pursuing a permitted practice as the amounts
were collected during the first quarter of 2002. See additional disclosure
regarding regulatory matters at Item 6, "Financial Condition and Regulatory
Requirements."
LIMITED INSURANCE COMPANY OPERATING HISTORY
UPCIC was incorporated in April 1997 and began operations in February
1998. Accordingly, UPCIC did not generate significant revenue until the second
quarter of 1998 when it had completed the acquisition of, and received premiums
for, policies from the JUA. UPCIC's growth to date may not be an accurate
indication of future results of operations in light of UPCIC's short operating
history, the competitive nature of the insurance industry, and the effects, if
any, of seasonality on UPCIC's results of operations.
Because of UPCIC's limited operating history, there can be no assurance
that UPCIC will achieve or sustain profitability or significant revenues. The
Company's continuation as a going concern is dependent upon UPCIC's ability to
attain profitability and the Company's financial statements are presented
subject to a going concern opinion. Management has initiated premium rate
increases and is pursuing discussions with various parties to decrease the cost
of its catastrophe reinsurance. There can be no assurance that management's
efforts will successfully address these risks or that UPCIC and the Company will
attain profitability.
MANAGEMENT OF EXPOSURE TO CATASTROPHIC LOSSES
UPCIC is exposed to multiple insured losses arising out of a single
occurrence, such as a natural catastrophe. As with all property and casualty
insurers, UPCIC will incur some losses related to catastrophes and will price
its policies accordingly. UPCIC's exposure to catastrophic losses arises
principally out of hurricanes and windstorms. Through the use of standard
industry modeling techniques, UPCIC manages its exposure to such losses on an
ongoing basis from an underwriting perspective. In addition, UPCIC protects
itself against the risk of catastrophic loss by obtaining reinsurance coverage
up to the 100 year Probable Maximum Loss ("PML"). UPCIC's reinsurance program
consists of excess of loss, quota share and catastrophe reinsurance.
RELIANCE ON THIRD PARTIES AND REINSURERS
UPCIC is dependent upon third parties to perform certain functions
including, but not limited to, claims management, investment management, the
purchase of reinsurance, underwriting, policy origination and risk management
analysis. UPCIC also relies on reinsurers to limit the amount of risk retained
under its policies and to increase its ability to write additional risks.
UPCIC's intention is to limit its exposure and therefore protect its capital,
even in the event of catastrophic occurrences, through reinsurance agreements
that currently transfer the risk of loss in excess of $1,000,000 up to the 100
year PML. Commencing January 15, 2002, certain administrative functions
previously provided by third parties are now performed by Universal Risk
Advisors, Inc.
REINSURANCE
The property and casualty reinsurance industry is subject to the same
market conditions as the direct property and casualty insurance market, and
there can be no assurance that reinsurance will be available to UPCIC to the
same extent and at the same cost as currently in place for UPCIC. Reinsurance
does not legally discharge an insurer from its primary liability for the full
amount of the risks it insures, although it does make the reinsurer liable to
the primary insurer. Therefore, UPCIC is subject to credit risk with respect to
its reinsurers. Management evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. A reinsurer's insolvency or
inability to make payments under a reinsurance treaty could have a material
adverse affect on the financial condition and profitability of UPCIC.
ADEQUACY OF LIABILITIES FOR LOSSES
The liabilities for losses and loss adjustment expenses periodically
established by UPCIC are estimates of amounts needed to pay reported and
unreported claims and related loss adjustment expenses. The estimates
necessarily will be based on certain assumptions related to the ultimate cost to
settle such claims. There is an inherent degree of uncertainty involved in the
5
establishment of liabilities for losses and loss adjustment expenses and there
may be substantial differences between actual losses and UPCIC's liabilities
estimates. In the case of UPCIC, this uncertainty is compounded by UPCIC's
limited historical claims experience. UPCIC relies on industry data and JUA
data, as well as the expertise and experience of key individuals and service
providers referenced herein, in an effort to establish accurate estimates and
adequate liabilities. Furthermore, factors such as storms and weather
conditions, inflation, claim settlement patterns, legislative activity and
litigation trends may have an impact on UPCIC's future loss experience.
Accordingly, there can be no assurance that UPCIC's liabilities will be adequate
to cover ultimate loss developments. UPCIC's profitability and financial
condition could be adversely affected to the extent that its liabilities are
inadequate.
GOVERNMENT REGULATION
Florida insurance companies are subject to regulation and supervision
by the DOI. Notwithstanding the three-year assessment relief available to UPCIC
under the Takeout Program, the DOI has broad regulatory, supervisory and
administrative powers. Such powers relate, among other things, to the granting
and revocation of licenses to transact business; the licensing of agents; the
standards of solvency to be met and maintained; the nature of and limitations on
investments; approval of policy forms and rates; periodic examination of the
affairs of insurance companies; and the form and content of required financial
statements. Such regulation and supervision are primarily for the benefit and
protection of policyholders and not for the benefit of investors.
In addition, the Florida legislature and the National Association of
Insurance Commissioners from time to time consider proposals that may affect,
among other things, regulatory assessments and reserve requirements. UPCIC
cannot predict the effect that any proposed or future legislation or regulatory
or administrative initiatives may have on the financial condition or operations
of UPCIC.
The Department of Insurance has completed its examination of the fiscal
year 2000 statutory financial statements of UPCIC. To date the Department has
not issued a final report. However, the Department has issued a draft report
with proposed adjustments to UPCIC's statutory capital at December 31, 2000 that
would result in statutory capital below the minimum surplus requirement at
December 31, 2000. The Department's examination of the fiscal year 2001
statutory financial statements is currently in progress. See additional
disclosure regarding regulatory matters at Item 6, "Financial Condition and
Regulatory Requirements."
DEPENDENCE ON KEY INDIVIDUALS AND THIRD PARTIES
UPCIC's operations depend in large part on the efforts of Bradley I.
Meier, who serves as President of UPCIC. Mr. Meier has also served as President,
Chief Executive Officer and Director of the Company since its inception in
November 1990. The loss of the services provided by Mr. Meier could have a
material adverse effect on UPCIC's financial condition and results of
operations.
COMPETITION
The insurance industry is highly competitive and many companies
currently write homeowners property and casualty insurance. Additionally, the
Company and its subsidiaries must compete with companies that have greater
capital resources and longer operating histories. Increased competition from
other insurance companies could adversely affect the Company's ability to do
business profitably. Although the Company's pricing is inevitably influenced to
some degree by that of its competitors, management of the Company believes that
it is generally not in the Company's best interest to compete solely on price,
choosing instead to compete on the basis of underwriting criteria, its
distribution network and high quality service to its agents and insureds.
EMPLOYEES
As of March 1, 2002, the Company had 59 employees. None of the
Company's employees is represented by a labor union. The Company has an
employment agreement with its President and Chief Executive Officer as well as
with its Chief Technology Officer and Chief E-Commerce Officer. See "Executive
Compensation--Employment Agreement."
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 9,200 square feet of office space for
its corporate headquarters in Miami, Florida under a three-year lease expiring
December 31, 2004. The Company leases approximately 600 square feet of office
space in its Ormond Beach agency operation under a lease expiring April 30,
2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain lawsuits. In the opinion of
management, except for the lawsuit described below, none of these lawsuits (1)
involve claims for damages exceeding 10% of the current assets of the Company,
(2) involve matters that are not routine litigation incidental to the business,
(3) involve bankruptcy, receivership, or similar proceedings, (4) involve
material federal, state, or local environmental laws, (5) involve a damages
claim for more than 10% of the current assets of the Company or potentially
involve more than $100,000 in sanctions and a governmental authority is a party,
or (6) are material proceedings to which any director, officer, affiliate of the
Company, beneficial owner of more than 5% of any class of voting securities of
the Company, or security holder is a party adverse to the Company or has a
material interest adverse to the Company.
Universal Management performed various services with respect to UPCIC
insurance policies and received fees for performing these services based upon
policies written pursuant to an agreement originally executed in 1997. The
parties agreed to terminate the agreement effective January 15, 2002. Universal
Management communicated to UPCIC that all management services would cease on the
date of termination rather than continuing through the life of the policies for
which fees were paid on a premiums written basis. As a result, UPCIC ceased
remittance of the management fees to Universal Management as of September 1,
2001. On November 6, 2001, UPCIC filed a Complaint against Universal Management
in the United States District Court for The Southern District of Florida, Miami
Division, alleging breach of contract and demanding specific performance and
unspecified damages. On December 28, 2001, Universal Management filed a
counterclaim for breach of contract, alleging that it is entitled to fees for
policies written from September 2001 through the date of termination. As of
December 31, 2001, UPCIC has recorded a receivable from Universal Management
representing the management fees remitted on the basis of premiums earned
subsequent to the termination date, January 15, 2002 and provided an allowance
for doubtful accounts for the entire receivable. Discovery is in the early
stages and the likelihood of an unfavorable outcome or the likely amount
associated therewith cannot be estimated. Therefore, UPCIC has not accrued a
liability with respect to the management fees claimed by Universal Management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting on December 21, 2001. The meeting
involved the election of directors. The names of each director elected at the
meeting are specified below:
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Election of two directors: positions currently held by Bradley I. Meier and
Norman M. Meier
Total number of Series M Preferred Stock shares present: 88,690
% of total Votes Withheld/
Name Votes for shares present Abstentions
---- --------- -------------- -----------
Bradley I. Meier 88,690 100% -
Norman M. Meier 88,690 100% -
Election of three directors: positions currently held by Irwin L. Kellner, Reed
J. Slogoff and Joel M. Wilentz
Total number of Common Stock, Series A Preferred Stock and Series M Preferred
Stock shares present: 11,323,364
% of total Votes Withheld/
Name Votes for shares present Abstentions
---- --------- -------------- -----------
Irwin L. Kellner 10,934,724 96.65% 241,000
Reed J. Slogoff 10,934,724 96.65% 241,000
Joel M. Wilentz 10,934,724 96.65% 241,000
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $.01 par value Common Stock ("Common Stock") is quoted on
the OTC Bulletin Board under the symbol UVIH. The following table sets forth
prices of the Common Stock, as reported by the OTC Bulletin Board. The following
data reflects inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
Year Ended December 31, 2000 High Low
---------------------------- ---- ---
First Quarter $ 1.63 $ 0.81
Second Quarter 0.88 0.44
Third Quarter 0.88 0.44
Fourth Quarter 0.75 0.32
Year Ended December 31, 2001 High Low
---------------------------- ---- ---
First Quarter $ 0.55 $ 0.17
Second Quarter 0.55 0.20
Third Quarter 0.50 0.15
Fourth Quarter 0.48 0.16
At March 1, 2002, there were 38 shareholders of record of the Company's
Common Stock. There were 425 beneficial owners of its Common Stock. In addition,
there were three shareholders of the Company's Series A and Series M Preferred
Stock ("Preferred Stock").
In October 1994, 49,950 shares of Series A Preferred Stock were issued
in repayment of $499,487 of related party debt and 88,690 shares of Series M
Preferred Stock were issued during fiscal year ended April 30, 1997, for
repayment of $88,690 of related party debt. Each share of Preferred Stock is
convertible into 2.5 shares of Common Stock and 5 shares of Common Stock,
respectively, into an aggregate of 568,326 common shares. The Preferred Stock
8
was redeemable by the Company at $10 per share through April 2000. Beginning May
1, 1998, the Series A Preferred Stock paid a cumulative dividend of $.25 per
quarter.
Applicable provisions of the Delaware General Corporation Law may
affect the ability of the Company to declare and pay dividends on its Common
Stock. In particular, pursuant to the Delaware General Corporation Law, a
company may pay dividends out of its surplus, as defined, or out of its net
profits, for the fiscal year in which the dividend is declared and/or the
preceding year. Surplus is defined in the Delaware General Corporation Law to be
the excess of net assets of the company over capital. Capital is defined to be
the aggregate par value of shares issued. Moreover, the ability of the Company
to pay dividends, if and when declared by its Board of Directors, may be
restricted by regulatory limits on the amount of dividends which UPCIC is
permitted to pay the Company. Pursuant to a Consent Order ("Consent Order")
issued in conjunction with the Company's authorization to underwrite homeowners
insurance, during the first four years of operations, UPCIC shall pay only those
dividends which have been approved in advance in writing by the DOI. Section
628.371 of the Florida statutes sets forth limitations, based on net income and
statutory capital, on the amount of dividends that UPCIC may pay to the Company
without approval from the Department.
During 2001, the Company paid a dividend of one cent per share to
common stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
A NUMBER OF STATEMENTS CONTAINED IN THIS REPORT ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE APPLICABLE STATEMENTS.
THESE RISKS AND UNCERTAINTIES INCLUDE BUT ARE NOT LIMITED TO THE COSTS AND THE
UNCERTAINTIES ASSOCIATED WITH THE RISK FACTORS SET FORTH IN ITEM 1 ABOVE.
OVERVIEW
UPCIC's application to become a Florida licensed property and casualty
insurance company was filed with the DOI on May 14, 1997 and approved on October
29, 1997. UPCIC's proposal to begin operations through the acquisition of
homeowner insurance policies issued by the JUA was approved by the JUA on May
21, 1997, subject to certain minimum capitalization and other requirements. One
of the requirements imposed by the DOI was to limit the number of policies UPCIC
could assume from the JUA to 30,000.
The DOI requires applicants to have a minimum capitalization of $5.3
million to be eligible to operate as an insurance company in the State of
Florida. Upon being issued an insurance license, companies must maintain
capitalization of at least $4 million. If an insurance company's capitalization
falls below $4 million, then the company will be deemed out of compliance with
DOI requirements, which could result in revocation of the participant's license
to operate as an insurance company in the State of Florida.
The Company has continued to implement its plan to become a financial
services company and, through its wholly-owned insurance subsidiaries, has
sought to position itself to take advantage of what management believes to be
profitable business and growth opportunities in the marketplace.
The Company entered into an agreement with the JUA whereby during 1998,
UPCIC assumed approximately 30,000 policies from the JUA. In addition, UPCIC
received bonus incentive funds from the JUA for assuming the policies. The bonus
funds were maintained in an escrow account for three years. These bonus payments
were not included in the Company's assets until receipt at the end of the
three-year period. UPCIC could not cancel the policies from the JUA for this
three-year period at which point UPCIC would receive the bonus funds. To date,
the Company has substantially complied with requirements related to the bonus
payments and bonus payments of $2,723,600 were released from escrow for 27,278
policies which reached their three-year anniversary in 2001. The Company will
not be receiving any additional bonus payments. Accrued interest income of
$452,947 was received in January 2002.
The Company expects that premiums from renewals and new business will
be sufficient to meet the Company's working capital requirements beyond the next
twelve months. However, the Company has experienced losses in the years 2001 and
2000, and although management believes it has taken the necessary steps to
9
improve the financial condition of the Company, and that the implementation of
these plans will be successful, there can be no assurance as to that effect.
UPCIC does not expect to obtain additional policies from the JUA. The
policies obtained from the JUA provided the opportunity for UPCIC to solicit
future renewal premiums. The majority of the policies obtained from the JUA
subsequently renewed with UPCIC. In an effort to further grow its insurance
operations, in 1998 the Company began to solicit business actively in the open
market. Through renewal of JUA business combined with business solicited in the
market through independent agents, UPCIC is currently servicing approximately
39,000 homeowners insurance policies. In determining appropriate guidelines for
such open market policy sales, UPCIC employs standards similar to those used in
its selection of JUA policies. Also, to improve underwriting and manage risk,
the Company uses analytical tools and data currently developed in conjunction
with Risk Management Solutions. To diversify UPCIC's product lines, UPCIC has
begun underwriting inland marine policies. Management may consider underwriting
other types of policies in the future. Any such program will require DOI
approval. See "Factors Affecting Operation Results and Market Price of Stock -
COMPETITION" for a discussion of the material conditions and uncertainties that
may affect UPCIC's ability to obtain additional policies.
FINANCIAL CONDITION AND REGULATORY REQUIREMENTS
As previously discussed in Item 1, "Government Regulation," the
Department of Insurance completed an examination of UPCIC as of December 31,
2000 and has proposed adjustments in a draft examination report which would
cause UPCIC to fail to meet the minimum statutory capital requirement as of
December 31, 2000. The Department of Insurance is currently conducting an
examination as of December 31, 2001. As of December 31, 2001, UPCIC has adjusted
statutory capital of $4,124,880 which is $124,880 above the minimum requirement.
Included in UPCIC's adjusted statutory capital as of December 31, 2001 are
approximately $851,000 of affiliate receivables which are considered nonadmitted
assets under the National Association of Insurance Commissioners statutory
accounting principles. These amounts were collected during the first quarter of
2002. Based on these collections, UPCIC has commenced discussions with the
Department of Insurance to admit these assets. In the event that the Department
of Insurance does not provide a permitted practice to include these assets in
statutory capital at December 31, 2001, UPCIC's statutory capital would not be
in compliance with the minimum requirement and would be considered impaired at
such date.
UPCIC has also experienced recurring losses from operations during the
past three years, including 2001, which included nonrecurring other revenue of
approximately $3.2 million. If UPCIC continues to sustain operating losses
during 2002, it will not comply with minimum statutory capital requirement in
the near future unless UPCIC is able to raise additional capital through other
sources.
UPCIC is also required to comply with the National Association of
Insurance Commissioners ("NAIC") risk-based capital ("RBC") requirements. RBC is
a method of measuring the amount of capital appropriate for an insurance company
to support its overall business operations in light of its size and risk
profile. As of December 31, 2001, UPCIC's RBC was equivalent to a Company-level
action. As a result, management is required to file a Risk Based Capital Plan
containing items specified in Florida statutes.
UPCIC has experienced increasing loss ratios, net underwriting losses
and net losses for the past three years. Management attributes the losses
reported for these periods primarily to higher than expected costs of
catastrophic reinsurance and adverse loss experience in the homeowners'
insurance line of business. Management intends to improve and strengthen the
financial condition of UPCIC as follows. A rate increase of approximately 7% has
been approved by the Department of Insurance on new and renewal policies and was
implemented as of July 1, 2001. In addition, the Company is currently working
toward decreasing the cost of its catastrophe reinsurance through negotiation of
better rates and program changes. Program changes could result in a lower level
of catastrophe reinsurance coverage.
The Company's continuation as a going concern is dependent upon the
ability of UPCIC to meet minimum statutory capital requirements and to attain
profitable operations. Failure to meet the minimum level of statutory capital
could result in one or more regulatory sanctions in the future, including the
revocation of UPCIC's certificate of authority or ultimately, the placement of
UPCIC in conservation, rehabilitation or liquidation. These factors, among
others, raise substantial doubt that the Company will be able to continue as a
going concern for a reasonable period of time. The consolidated financial
statements do not include any adjustments relating to the recoverability and
10
classification of recorded assets and liabilities that might be necessary should
the Company be unable to continue as a going concern.
Management believes that the implementation of its plans described
above will be successful. However, there can be no assurance that the success of
these plans will be achieved or will be sufficient to ensure UPCIC's compliance
with minimum statutory capital requirements or that the Company will be able to
achieve profitability.
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of 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 periods. The Company's primary
areas of estimate are described below.
RECOGNITION OF PREMIUM REVENUES. Property and liability premiums are recognized
as revenue on a pro rata basis over the policy term. The portion of premiums
that will be earned in the future are deferred and reported as unearned
premiums. The Company believes that its revenue recognition policies conform to
Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
INSURANCE LIABILITIES. Claims and claim adjustment expenses are provided for as
claims are incurred. The provision for unpaid claims and claim adjustment
expenses includes: (1) the accumulation of individual case estimates for claims
and claim adjustment expenses reported prior to the close of the accounting
period; (2) estimates for unreported claims based on industry data; and (3)
estimates of expenses for investigating and adjusting claims based on the
experience of the Company and the industry.
Inherent in the estimates of ultimate claims are expected trends in claim
severity, frequency and other factors that may vary as claims are settled. The
amount of uncertainty in the estimates for casualty coverage is significantly
affected by such factors as the amount of claims experience relative to the
development period, knowledge of the actual facts and circumstances and the
amount of insurance risk retained. In the case of UPCIC, this uncertainty is
compounded by UPCIC's limited history of claims experience. In addition, UPCIC's
policyholders are currently concentrated in South Florida, which is periodically
subject to adverse weather conditions such as hurricanes and tropical storms.
The methods for making such estimates and for establishing the resulting
liability are continually reviewed, and any adjustments are reflected in
earnings currently.
DEFERRED POLICY ACQUISITION COSTS. Commissions and other costs of acquiring
insurance that vary with and are primarily related to the production of new and
renewal business are deferred and amortized over the terms of the policies or
reinsurance treaties to which they are related. Determination of costs other
than commissions that vary with and are primarily related to the production of
new and renewal business requires estimates to allocate certain operating
expenses. When determining the maximum amount of deferred policy acquisition
costs, investment income to be earned over the remaining policy period is
estimated and taken into consideration. Estimates of the costs of losses,
catastrophic reinsurance and policy maintenance are also required in the
determination of the maximum amount of deferred policy acquisition costs.
PROVISION FOR PREMIUM DEFICIENCY. It is the Company's policy to evaluate and
recognize losses on insurance contracts when estimated future claims and
maintenance costs under a group of existing contracts will exceed anticipated
future premiums and investment income. The determination of the provision for
premium deficiency requires estimation of the costs of losses, catastrophic
reinsurance and policy maintenance to be incurred and investment income to be
earned over the remaining policy period.
REINSURANCE. In the normal course of business, the Company seeks to reduce the
risk of loss that may arise from catastrophes or other events that cause
unfavorable underwriting results by reinsuring certain levels of risk in various
areas of exposure with other insurance enterprises or reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
provisions of the reinsurance agreement and consistent with the establishment of
the liability of the Company. The Company's reinsurance policies do not relieve
the Company from its obligations to policyholders. Failure of reinsurers to
honor their obligations could result in losses to the Company; consequently,
allowances are established for amounts deemed uncollectible.
11
RELATED PARTIES
All underwriting, rating, policy issuance and administration functions for UPCIC
during the years 2000 and 2001 were performed by Universal Management pursuant
to a Management Agreement dated June 2, 1997 and Addenda thereto dated June 12,
1997 and June 1, 1998. UPCIC and Universal Management terminated the management
agreement effective as of January 15, 2002. Services previously provided by
Universal Management to UPCIC under the management agreement are now performed
by UPCIC, Universal Risk Advisors, and unaffiliated third parties.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2001 AND YEAR ENDED DECEMBER 31,
2000.
Gross premiums written and assumed decreased 11.0% to $25,536,716 for
the year ended December 31, 2001 from $28,710,230 for the year ended December
31, 2000. The decrease in gross premiums written is primarily attributable to
the Company's nonrenewal of certain policies in high exposure areas in order to
mitigate reinsurance costs.
Net premiums written increased 81.0% to $8,302,716 for the year ended
December 31, 2001 from $4,587,534 for the year ended December 31, 2000. The
increase in net premiums written reflects the impact of reinsurance, since
$17,234,000 or 67.5% of premiums written were ceded to reinsurers for the year
ended December 31, 2001 as compared to $24,122,697 or 84.0% for the year ended
December 31, 2000. This fluctuation was a result of the Company's election under
its quota share reinsurance treaty to cede 50% of gross written premiums,
losses, and loss adjustment expenses during 2001, versus 50% during the first
quarter of 2000 and 65% during the remaining three quarters of 2000.
Net premiums earned increased 21.1% to $7,711,804 for the year ended
December 31, 2001 from $6,367,045 for the year ended December 31, 2000. The
increase in net premiums earned is attributable to the Company's election under
its quota share reinsurance treaty to cede 50% of gross written premiums,
losses, and loss adjustment expenses during 2001, versus 50% during the first
quarter of 2000 and 65% during the remaining three quarters of 2000.
Commission revenue increased 11.0% to $1,786,675 for the year ended
December 31, 2001 from $1,610,175 for the year ended December 31, 2000.
Commission income is comprised mainly of the Managing General Agent's policy fee
income on all new and renewal insurance policies and commissions generated from
agency operations. The increase is primarily due to the Company's effort to
solicit business in the open market.
Investment income consists of net investment income and net realized
gains (losses). Investment income decreased 50.5% to $578,903 for the year ended
December 31, 2001 from $1,168,796 for the year ended December 31, 2000. The
decrease is primarily due to lower interest rates during 2001.
Other revenue consists primarily of JUA bonus payments of $2,723,600
released from escrow during 2001, as well as accrued interest income of $452,947
related to the JUA bonus payments which was received in January 2002.
Losses and loss adjustment expenses ("LAE") incurred increased 86.7% to
$7,767,980 for the year ended December 31, 2001 from $4,161,661 for the year
ended December 31, 2000 as compared to net premiums earned which increased 21.1%
to $7,711,804 for the year ended December 31, 2001 from $6,367,045 for the year
ended December 31, 2000. The Company's direct loss ratio for the year ended
December 31, 2001 was 58.1% compared to 40.0% for the year ended December 31,
2000. The Company's direct loss ratio increased principally due to the higher
severity of claims in 2001. The Company's net loss ratio for the year ended
December 31, 2001 was 100.7% compared to 65.4% for the year ended December 31,
2000. Losses and LAE, the Company's most significant expense, represent actual
payments made and changes in estimated future payments to be made to or on
behalf of its policyholders, including expenses required to settle claims and
losses. Losses and LAE are influenced by loss severity and frequency. The net
loss ratio increased due to the increase in the direct loss ratio and the
decrease in net premiums earned as discussed above. During 2001 and 2000,
Florida did not experience windstorm catastrophes.
12
Catastrophes are an inherent risk of the property-liability insurance
business which may contribute to material year-to-year fluctuations in UPCIC's
results of operations and financial position. The level of catastrophe loss
experienced in any year cannot be predicted and could be material to the results
of operations and financial position. While management believes its catastrophe
management strategies will reduce the severity of future losses, UPCIC continues
to be exposed to similar or greater catastrophes.
General and administrative expenses increased 34.6% to $8,711,025 for
the year ended December 31, 2001 from $6,472,519 for the year ended December 31,
2000. General and administrative expenses have increased primarily due to
limitations on acquisition costs that can be deferred, as well as the decrease
in the ceding commissions resulting from the change in the quota share ceding
percentage from 65% for the nine months ended December 31, 2000 to 50% in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are premium revenues,
commission income and investment income.
For the year ended December 31, 2001, cash flows provided by operating
activities were $1,928,451, primarily representing JUA bonus payments of
$2,723,600 released from escrow during the year. If not for receipt of the JUA
bonus payments, cash flows from operating activities would have been negative,
primarily due to the increase in losses and reinsurance costs, as well as a
decrease in gross premiums written. The Company's investment portfolio is highly
liquid as it consists almost entirely of readily marketable securities. Cash
flows from investing activities are primarily comprised of purchases and sales
of debt and equity securities. Cash flows from financing activities are
comprised of payment of cash dividends on common and preferred stock and
purchases of treasury stock.
During 2001 the Company borrowed monies in the amount of $306,665 to
finance several vehicles and a boat. The amounts will become due during the
years 2003, 2004 and 2011.
The balance of cash and cash equivalents at December 31, 2001 is
$10,481,699. This amount along with readily marketable equity securities
aggregating $241,808 would be available to pay claims in the event of a
catastrophic event pending reimbursement for any aggregate amount in excess of
$1,000,000 up to the 100 year PML which would be covered by reinsurers.
Catastrophic reinsurance is recoverable upon presentation to the reinsurer of
evidence of claim payment.
Generally accepted accounting principles differ in some respects from
reporting practices prescribed or permitted by the Florida Department of
Insurance. To retain its certificate of authority, the Florida insurance laws
and regulations require that UPCIC maintain capital surplus equal to the
statutory minimum capital and surplus requirement defined in the Florida
Insurance Code. The Company is also required to adhere to prescribed
premium-to-capital surplus ratios. As of December 31, 2001, UPCIC's adjusted
statutory capital of $4,124,880 included approximately $851,000 of affiliate
receivables which are considered nonadmitted assets under the National
Association of Insurance Commissioners statutory accounting principles. These
amounts were collected during the first quarter of 2002. Based on these
collections, UPCIC has commenced discussions with the DOI to admit these assets.
In the event that the DOI does not provide a permitted practice to include these
assets in statutory capital at December 31, 2001, UPCIC's statutory capital
would not be in compliance with the minimum requirement and would be considered
impaired at such date.
Adjusted statutory net loss was $1,201,114 for the year ended December
31, 2001 and $637,509 for the year ended December 31, 2000. The Company's
continuation as a going concern is dependent upon the ability of UPCIC to meet
minimum statutory capital requirements and the Company's ability to attain
profitable operations. Failure to meet the minimum level of statutory capital
could result in one or more regulatory sanctions in the future, including the
revocation of UPCIC's certificate of authority or ultimately, the placement of
UPCIC in conservation, rehabilitation or liquidation. These factors, among
others, raise substantial doubt that the Company will be able to continue as a
going concern for a reasonable period of time. The consolidated financial
statements do not include any adjustments relating to the revocability and
classification of recorded assets and liabilities that might be necessary should
the Company be unable to continue as a going concern.
The maximum amount of dividends which can be paid by Florida insurance
companies without prior approval of the Florida Commissioner is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid by UPCIC to the Company without prior approval is limited to the lesser of
statutory net income from operations of the preceding calendar year or 10.0% of
statutory unassigned capital surplus as of the preceding year end. Pursuant to
the Consent Order issued to UPCIC, during UPCIC's first four years of
operations, any dividend would require DOI approval. No dividends have been paid
to date.
13
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary assets of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of the general
levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the cost of paying losses and LAE.
Insurance premiums are established before the Company knows the amount
of loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the Company's
investment portfolio and the investment rate of return. Any future economic
changes which result in prolonged and increasing levels of inflation could cause
increases in the dollar amount of incurred loss and LAE and thereby materially
adversely affect future liability requirements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are annexed to this report and
are referenced as pages F-1 to F-28.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company as of December 31,
2001 are as follows:
Name Age Position
---- --- --------
Bradley I. Meier 33 President, Chief Executive Officer, Assistant
Secretary and Director
Norman M. Meier 62 Director
Irwin L. Kellner 63 Director, Secretary
Reed J. Slogoff 33 Director
Joel M. Wilentz 67 Director
James M. Lynch 47 Vice President and Chief Financial Officer
Thomas M. Modica 41 Chief Technology Officer and Chief E-Commerce
Officer
BRADLEY I. MEIER has been President, Chief Executive Officer and a
Director of the Company since its inception in November 1990. He has served as
President of UPCIC, a wholly-owned subsidiary of the Company, since its
formation in April 1997. In 1990, Mr. Meier graduated from the Wharton School of
Business with a B.S. in Economics.
NORMAN M. MEIER has been a Director of the Company since July 1992.
From December 1986 until November 1999, Mr. Meier was President, Chief Executive
Officer and a Director of Columbia Laboratories, Inc., a publicly-traded
corporation in the pharmaceuticals business. From 1971 to 1977, Mr. Meier was
Vice President of Sales and Marketing for Key Pharmaceuticals. From 1977 until
1986, Mr. Meier served as a consultant to Key Pharmaceuticals.
14
IRWIN L. KELLNER has been a Director of the Company since March 1997.
Since 1997, Dr. Kellner has been the Augustus B. Weller Distinguished Chair of
Economics at Hofstra University, author of Hofstra University's Economic Report,
and Chief Economist for CBS Market Watch, an interactive financial news website.
Since February 2001, Dr. Kellner has served as chief economist for North Fork
Bank Corporation. From 1997 to 1998, Dr. Kellner worked as an independent
consultant. From 1996 through 1997, Dr. Kellner was the Chief Economist for
Chase Manhattan's Regional Bank, and held the same position from 1980 to 1996 at
Chemical Bank and Manufacturers Hanover Trust, predecessors to Chase. The bank
had employed Dr. Kellner since 1970. Dr. Kellner is a member of the boards of
several organizations, including Claire's Stores, DataTreasury Corporation,
Inc., FreeTrek.com Inc., International Bioimmune Systems, and the North Shore
Health System, and serves on the New York State Comptroller's Economic Advisory
Committee. Dr. Kellner is a past president of the Forecasters Club of New York
and the New York Association of Business Economists. He is a member of several
professional associations, including the American Economic Association, American
Statistical Association and the National Association of Business Economists.
REED J. SLOGOFF has been a Director of the Company since March 1997.
Mr. Slogoff is currently a principal with Pearl Properties Commercial
Management, LLC, a commercial real estate investment and management firm based
in Philadelphia, Pennsylvania. Mr. Slogoff was formerly with Entercom
Communications Corp., a publicly-traded radio broadcasting company and
previously was a member of the corporate and real estate group of the law firm
of Dilworth, Paxson, LLP. Mr. Slogoff received a B.A. with honors from the
University of Pennsylvania in 1990, and a J.D. from the University of Miami
School of Law in 1993.
JOEL M. WILENTZ has been a Director of the Company since March 1997.
Dr. Wilentz is one of the founding members of Dermatology Associates in Florida,
founded in 1970. He is a member of the boards of the Neurological Injury
Compensation Associate for Florida, the Broward County Florida Medical
Association, and the American Arm of the Israeli Emergency Medical Service for
the southeastern United States, of which he is also President. Dr. Wilentz is a
past member of the Board of Overseers of the Nova Southeastern University School
of Pharmacy.
JAMES M. LYNCH has been Vice President and Chief Financial Officer of
the Company since August 1998. Before joining the Company in August 1998, Mr.
Lynch was Chief Financial Officer of Florida Administrators, Inc., an
organization specializing in property and casualty insurance. Prior to working
at Florida Administrators, Inc., Mr. Lynch held the position of Senior Vice
President of Finance and Comptroller of Trust Group, Inc., which also
specialized in property and casualty insurance. Before his position at Trust
Group, Mr. Lynch was a Manager with the accounting and auditing firm of Coopers
& Lybrand, which later became PricewaterhouseCoopers LLC.
THOMAS M. MODICA has been Chief Technology Officer and Chief E-Commerce
Officer of the Company since March 15, 2000. Before joining the Company in March
2000, Mr. Modica was Director of Insurance Services at Clientsoft, where he
executed strategic relationships with Allstate and Zurich/Farmers Insurance by
providing legacy systems integration technology. Prior to working at Clientsoft,
Mr. Modica was employed as the National Sales Director by Homecom, an
application service provider that specializes in e-commerce solutions for the
financial services industry.
Norman M. Meier and Bradley I. Meier are father and son, respectively,
and Irwin L. Kellner and Norman M. Meier are first cousins. There are no other
family relationships among the Company's executive officers and directors.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Directors receive no
compensation for serving on the Board, except for the receipt of stock options
and the reimbursement of reasonable expenses incurred in attending meetings.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
The Company has entered into indemnification agreements with its
executive officers and directors pursuant to which the Company has agreed to
indemnify such individuals, to the fullest extent permitted by law, for claims
made against them in connection with their positions as officers, directors or
agents of the Company.
15
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
All required disclosures of Forms 3, 4 and 5 were timely filed by
directors, officers and 10% beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION
The tables and descriptive information set forth below are intended to
comply with the Securities and Exchange Commission compensation disclosure
requirements applicable to, among other reports and filings, annual reports on
Form 10-KSB. This information is furnished with respect to the Company's
executive officers who earned in excess of $100,000 during the fiscal year ended
December 31, 2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
Name and Year Ended Long Term Compensation
Principal Position December 31 Salary Bonus Securities Underlying Options
------------------ ----------- ------ ----- ------------------
Bradley I. Meier 2001 $ 315,000 $ 0 150,000
President and CEO 2000 262,500 0 166,666 (1)
1999 250,000 40,000 775,000
James M. Lynch 2001 $ 140,500 $5,000 100,000
Vice President and CFO 2000 122,500 10,000 20,000 (1)
1999 113,000 15,000 45,000
Thomas M. Modica (2) 2001 $ 125,000 $ 0 0
Chief Technology and 2000 98,958 1,250 225,000
Chief E-Commerce Officer 1999 - - -
(1) Options granted under TigerQuote.com non-qualified stock option plan.
TigerQuote.com is a wholly-owned subsidiary of the Company.
(2) Mr. Modica was hired on March 15, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------
Number of % of Total
Securities Options Granted
Underlying to Employees in Exercise or
Name Options Granted Fiscal Year Base Price Expiration Date
---- --------------- ----------- ---------- ---------------
Bradley I. Meier 150,000 26% $0.60 2011
James M. Lynch 100,000 18% $0.50 2011
16
AGGREGATED OPTION EXERCISES AND OPTION VALUES
FOR THE YEAR ENDED DECEMBER 31, 2001
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-The-Money Options at
on Value Options at December 31, 2001 December 31, 2001
Exchange Realized
-------- --------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Bradley I. Meier -- -- 150,000 -- $-- $--
James M. Lynch -- -- 100,000 -- -- --
EMPLOYMENT AGREEMENTS
As of August 11, 1999, the Company entered into a four-year employment
agreement with Bradley I. Meier, amending and restating the previous employment
agreement of May 1, 1997 between the Company and Mr. Meier. Under the terms of
the employment agreement, Mr. Meier will devote substantially all of his time to
the Company and will be paid a base salary of $250,000 per year which shall be
increased by 5% each year beginning with the first anniversary of the effective
date. Additionally, pursuant to the employment agreement, and during each year
thereof, Mr. Meier will be entitled to a bonus equal to 3% of pretax profits up
to $5 million and 4% of pretax profits in excess of $5 million. On May 4, 2001,
Addendum No. 3 to the employment agreement was approved by the Board of
Directors, whereby Mr. Meier was entitled to receive an additional fifteen
percent (15%) increase in his base compensation in addition to the cumulative
base compensation and increase calculated at the beginning of 2001, retroactive
to January 1, 2001 and under Addendum No. 3, for each successive year of the
term of the employment agreement, the base compensation as adjusted by previous
increase(s) will be increased by ten (10%) percent. The employment agreement
with Mr. Meier contains non-competition and non-disclosure covenants. In
addition, the agreement shall be extended automatically for one year at each
anniversary of the date of the agreement up to the fourth year of the agreement,
at the option of Mr. Meier. Under the terms of the employment agreement dated
May 1, 1997, Mr. Meier was granted ten-year stock options to purchase 1,500,000
shares of Common Stock at $1.06 per share, of which 500,000 options vested
immediately, 500,000 options vested after one year and the remaining options
vested after two years.
As of March 15, 2000, the Company and TigerQuote.com entered into an
employment agreement with Thomas M. Modica. The initial term of the agreement
ends on December 31, 2002. Under the terms of the employment agreement, Mr.
Modica will devote substantially all of his time to the Company and will be paid
a base salary of $125,000 per year during each of the first three years. The
employment agreement with Mr. Modica contains non-competition and non-disclosure
covenants. Under the terms of the employment agreement, Mr. Modica was granted
stock options to purchase 225,000 shares of Common Stock at $1.00 per share, of
which 75,000 options vested on March 15, 2001, 75,000 vest on March 15, 2002 and
75,000 vest on March 15, 2003.
17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SERIES M PREFERRED STOCK
As of March 1, 2002, directors and named executive officers,
individually and as a group, beneficially owned Series M Preferred Stock as
follows:
Name and Address of Beneficial Amount and Nature of Beneficial
Owner (1) Ownership Percent of Class
--------- --------- ----------------
Bradley I. Meier*(2) 48,890 48.0%
Norman M. Meier* (3) 53,000 52.0%
Officers and directors as a group
(2 persons) (4) 86,890 98.0%
* Director
(1) Unless otherwise indicated, the Company believes that each person has
sole voting and investment rights with respect to the shares of Series
M Preferred Stock of the Company specified opposite his name. Unless
otherwise indicated, the mailing address of each shareholder is c/o
Universal Insurance Holdings, Inc., 2875 N.E. 191st Street, Suite 300,
Miami, Florida 33180.
(2) Consists of (i) 33,890 shares of Series M Preferred Stock and (ii)
15,000 shares of Series M Preferred Stock beneficially owned by Belmer
Partners, a Florida General Partnership ("Belmer"), of which Mr. Meier
is a general partner. Excludes all shares of Series M Preferred Stock
owned by Norman M. Meier and Phylis R. Meier, Mr. Meier's father and
mother, respectively, as to which Mr. Meier disclaims beneficial
ownership.
(3) Consists of (i) 38,000 shares of Series M Preferred Stock and (ii)
15,000 shares of Series M Preferred Stock beneficially owned by Belmer,
of which Mr. Meier is a general partner. Excludes all shares of Series
M Preferred Stock owned by Bradley I. Meier and Phylis R. Meier, Mr.
Meier's son and former spouse, respectively, as to which Mr. Meier
disclaims beneficial ownership.
(4) See footnotes (1) - (3) above.
SERIES A PREFERRED STOCK
As of March 1, 2002, directors and named executive officers,
individually and as a group, beneficially owned Series A Preferred Stock as
follows:
Name and Address of Beneficial Amount and Nature of Beneficial
Owner (1) Ownership Percent of Class
--------- --------- ----------------
Norman M. Meier* (2) 9,975 20%
Officers and directors as a group
(1 person) (3)
* Director
18
(1) Unless otherwise indicated, the Company believes that each person has
sole voting and investment rights with respect to the shares of Series
A Preferred Stock of the Company specified opposite his name. Unless
otherwise indicated, the mailing address of each shareholder is c/o
Universal Insurance Holdings, Inc., 2875 N.E. 191st Street, Suite 300,
Miami, Florida 33180.
(2) Consists of 9,975 shares of Series A Preferred Stock beneficially owned
by Belmer, of which Mr. Meier is a general partner. Excludes all shares
of Series A Preferred Stock owned by Bradley I. Meier and Phylis R.
Meier, Mr. Meier's son and former spouse, respectively, as to which Mr.
Meier disclaims beneficial ownership.
(3) See footnotes (1) - (2) above.
COMMON STOCK
As of March 1, 2002, directors and named executive officers,
individually and as a group, beneficially owned Common Stock as follows:
Name and Address of Beneficial Amount and Nature of Beneficial
Owner (1) Ownership (2) Percent of Class
--------- --------- ----------------
Bradley I. Meier (3) 5,543,544 31.2%
Norman M. Meier (4) 2,620,654 14.7%
Irwin L. Kellner (5) 220,000 1.2%
Reed J. Slogoff (6) 220,000 1.2%
Joel M. Wilentz (7) 220,000 1.2%
James M. Lynch (8) 75,000 0.4%
Thomas M. Modica (9) 75,000 0.4%
Officers and directors as a group
(7 people) (10) 8,642,437 48.6%
(1) Unless otherwise indicated, the Company believes that each person has
sole voting and investment rights with respect to the shares of Common
Stock of the Company specified opposite his name. Unless otherwise
indicated, the mailing address of each shareholder is c/o Universal
Insurance Holdings, Inc., 2875 N.E. 191st Street, Suite 300, Miami,
Florida 33180.
(2) A person is deemed to be the beneficial owner of Common Stock that can
be acquired by such person within 60 days of the date hereof upon the
exercise of warrants or stock options or conversion of Series A
Preferred Stock, Series M Preferred Stock or convertible debt. Except
as otherwise specified, each beneficial owner's percentage ownership is
determined by assuming that warrants, stock options, Series A Preferred
Stock, Series M Preferred Stock and convertible debt that is held by
such person (but not those held by any other person) and that are
exercisable or convertible within 60 days from the date hereof, have
been exercised or converted.
(3) Consists of (i) (a) 972,829 shares of Common Stock, (b) options to
purchase 1,875 shares of Common Stock at an exercise price of $9.00 per
share, options to purchase 1,875 shares of Common Stock at an exercise
price of $12.50 per share, ten-year options to purchase 90,000 shares
at an exercise price of $2.88 as to 45,000 shares and $3.88 as to the
remaining 45,000 shares granted pursuant to Mr. Meier's employment
agreement, options to purchase 90,000 shares of Common Stock at an
exercise price of $1.13 per share and options to purchase 500,000
shares of Common Stock at an exercise price of $1.25 per share, (c)
warrants to purchase 15,429 shares of Common Stock at an exercise price
of $1.75 per share, warrants to purchase 339,959 shares of Common Stock
at an exercise price of $3.00 per share, warrants to purchase 82,000
shares of Common Stock at an exercise price of $1.00 per share and
warrants to purchase 131,700 shares of Common Stock at an exercise
price of $.75 per share, (d) 169,450 shares of Common Stock issuable
upon conversion of Series M Preferred Stock, (e) options to purchase
250,000 shares of Common Stock at an exercise price of $1.06 per share
19
which vested on November 2, 1997, (f) options to purchase 500,000
shares of Common Stock at an exercise price of $1.06 per share which
vested on May 1, 1997 granted pursuant to Mr. Meier's employment
agreement, options to purchase 500,000 shares of Common Stock at $1.06
per share which vested on May 1, 1998 granted pursuant to Mr. Meier's
employment agreement and options to purchase 500,000 shares of Common
Stock at an exercise price of $1.06 per share which vested on May 1,
1999 granted pursuant to Mr. Meier's employment agreement, (g) options
to purchase 250,000 shares of Common Stock at an exercise price of
$1.63 per share, (h) options to purchase 150,000 shares of Common Stock
at an exercise price of $1.25 per share which vested on December 23,
1999 and (ii) an aggregate of 331,761 shares of Common Stock (including
shares of Common Stock issuable upon exercise of warrants and
conversion of Series A and Series M Preferred Stock) beneficially owned
by Belmer Partners, of which Mr. Meier is a general partner. Excludes
options to purchase 625,000 shares of Common Stock of Tigerquote.com at
an exercise price of $.50 per share. Also excludes all securities owned
by Norman M. Meier and Phyllis R. Meier, Mr. Meier's father and mother,
respectively, as to which Mr. Meier disclaims beneficial ownership.
Includes 416,666 and 250,000 shares owned by Lynda Meier and Eric
Meier, respectively, who are the sister and brother, respectively, of
Bradley I. Meier, which shares are subject to proxies granting voting
rights for such shares to Bradley I. Meier.
(4) Consists of (i) (a) 457,371 shares of Common Stock, (b) options to
purchase 3,750 shares of Common Stock at an exercise price of $12.50
per share, options to purchase 3,750 shares of Common Stock at an
exercise price of $9.00 per share and options to purchase 250,000
shares of Common Stock at an exercise price of $1.25 per share, (c)
warrants to purchase 3,082 shares of Common Stock at an exercise price
of $22.00 per share, warrants to purchase 2,494 shares of Common Stock
at an exercise price of $4.25 per share, warrants to purchase 28,538
shares of Common Stock at an exercise price of $1.50 per share,
warrants to purchase 120,000 shares of Common Stock at an exercise
price of $3.00 per share and warrants to purchase 129,970 shares of
Common Stock at an exercise price of $1.00 per share, (d) 214,938
shares of Common Stock issuable upon conversion of Series A and Series
M Preferred Stock, (e) options to purchase 500,000 shares of Common
Stock at an exercise price of $1.06 per share which vested on November
2, 1997, (f) options to purchase 500,000 shares of Common Stock at an
exercise price of $1.63 per share, (g) options to purchase 75,000
shares of Common Stock at an exercise price of $1.25 per share, and
(ii) an aggregate of 331,761 shares of Common Stock (including shares
of Common Stock issuable upon exercise of warrants and conversion of
Series A and Series M Preferred Stock) beneficially owned by Belmer, of
which Mr. Meier is a general partner. Excludes options to purchase
100,000 shares of Common Stock of Tigerquote.com at an exercise price
of $.50 per share. Excludes all securities owned by Bradley I. Meier or
Phyllis Meier, Mr. Meier's son and former spouse, respectively, as to
which Mr. Meier disclaims beneficial ownership.
(5) Consists of (i) options to purchase 100,000 shares of Common Stock at
an exercise price of $1.06 per share, (ii) options to purchase 100,000
shares of Common Stock at an exercise price of $1.63 per share and
(iii) options to purchase 20,000 shares of Common Stock at an exercise
price of $1.25 per share. Excludes options to purchase 20,000 shares of
Common Stock of Tigerquote.com at an exercise price of $.50 per share.
(6) Consists of (i) options to purchase 100,000 shares of Common Stock at
an exercise price of $1.06 per share, (ii) options to purchase 100,000
shares of Common Stock at an exercise price of $1.63 per share, of
which 50,000 are held in a custodial account for Mr. Slogoff's minor
son, and (iii) options to purchase 20,000 shares of Common Stock at an
exercise price of $1.25 per share. Excludes options to purchase 20,000
shares of Common Stock of TigerQuote.com at an exercise price of $.50
per share.
(7) Consists of (i) options to purchase 100,000 shares of Common Stock at
an exercise price of $1.06 per share, (ii) options to purchase 100,000
shares of Common Stock at an exercise price of $1.63 per share and
(iii) options to purchase 20,000 shares of Common Stock at an exercise
price of $1.25 per share. Excludes options to purchase 20,000 shares of
Common Stock of TigerQuote.com at an exercise price of $.50 per share.
(8) Consists of (i) options to purchase 50,000 shares of Common Stock at an
exercise price of $1.87 per share and (ii) options to purchase 25,000
shares of Common Stock at an exercise price of $1.25 per share.
20
Excludes options to purchase 20,000 shares of Common Stock of
TigerQuote.com at an exercise price of $.50 per share.
(9) Consists of options to purchase 75,000 shares of Common Stock at an
exercise price of $1.00 per share.
(10) See footnotes (1) - (9) above
SERIES M PREFERRED STOCK
As of March 1, 2002, the following table sets forth information
regarding the number and percentage of Series M Preferred Stock held by all
persons, other than those persons listed immediately above, who are known by the
Company to beneficially own or exercise voting or dispositive control over 5% or
more of the Company's outstanding Series M Preferred Stock:
Name and Address of Beneficial Amount and Nature of Beneficial
Owner (1) Ownership Percent of Class
--------- --------- ----------------
Phyllis R. Meier (2) 16,800 18.9%
Universal Insurance Holdings, Inc.
2875 N.E. 191st Street
Suite 300
Miami, Florida 33180
Belmer Partners (3) 15,000 16.9%
c/o Phyllis R. Meier
Managing General Partner
Universal Insurance Holdings, Inc.
2875 N.E. 191st Street
Suite 300
Miami, Florida 33180
(1) Unless otherwise indicated, the Company believes that each person has
sole voting and investment rights with respect to the shares of Series
M Preferred Stock specified opposite her or its name.
(2) Consists of (i) 1,800 shares of Series M Preferred Stock and (ii)
15,000 shares of Series M Preferred Stock beneficially owned by Belmer,
of which Ms. Meier is the managing general partner. Excludes all
securities owned by Bradley I. Meier and Norman M. Meier, the son and
former spouse, respectively, as to which Ms. Meier disclaims beneficial
ownership.
(3) Belmer Partners is a Florida general partnership in which Phylis R.
Meier is managing general partner and Bradley I. Meier and Norman M.
Meier are general partners.
SERIES A PREFERRED STOCK
As of March 1, 2002, the following table sets forth information
regarding the number and percentage of Series A Preferred Stock held by all
persons, other than those persons listed immediately above, who are known by the
Company to beneficially own or exercise voting or dispositive control over 5% or
more of the Company's outstanding Series A Preferred Stock:
Name and Address of Beneficial Amount and Nature of Beneficial
Owner (1) Ownership Percent of Class
--------- --------- ----------------
Phyllis R. Meier (2) 9,975 20.0%
Universal Insurance Holdings, Inc.
2875 N.E. 191st Street
Suite 300
Miami, Florida 33180
21
Belmer Partners (3) 30,000 60.0%
c/o Phyllis R. Meier
Managing General Partner
Universal Insurance Holdings, Inc.
2875 N.E. 191st Street
Suite 300
Miami, Florida 33180
(1) Unless otherwise indicated, the Company believes that each person has
sole voting and investment rights with respect to the shares of Series
A Preferred Stock specified opposite her or its name.
(2) Consists of 9,975 shares of Series A Preferred Stock beneficially own.
Excludes all securities owned by Bradley I. Meier and Norman M. Meier,
the son and former spouse, respectively, as to which Ms. Meier
disclaims beneficial ownership.
(3) Belmer Partners is a Florida general partnership in which Phylis R.
Meier is managing general partner and Bradley I. Meier and Norman M.
Meier are general partners
COMMON STOCK
As of March 1, 2002, the following table sets forth information
regarding the number and percentage of Common Stock held by all persons, other
than those persons listed immediately above, who are known by the Company to
beneficially own or exercise voting or dispositive control over 5% or more of
the Company's outstanding Common Stock:
Name and Address of Beneficial Amount and Nature of Beneficial
Owner (1) Ownership (2) Percent of Class
--------- --------- ----------------
Phyllis R. Meier (3) 1,076,456 6.0%
Universal Insurance Holdings, Inc.
2875 N.E. 191st Street
Suite 300
Miami, Florida 33180
(1) Unless otherwise indicated, the Company believes that each person has
sole voting and investment rights with respect to the shares of Common
Stock of the Company specified opposite her name.
(2) A person is deemed to be the beneficial owner of Common Stock that can
be acquired by such person within 60 days of the date hereof upon the
exercise of warrants or stock options or conversion of Series A and
Series M Preferred Stock or convertible debt. Except as otherwise
specified, each beneficial owner's percentage ownership is determined
by assuming that warrants, stock options, Series A and Series M
Preferred Stock and convertible debt that are held by such a person
(but not those held by any other person) and that are exercisable
within 60 days from the date hereof, have been exercised or converted.
(3) Consists of (i) (a) 333,792 shares of Common Stock, (b) 2,880 shares of
Common Stock issuable upon conversion of related party debt, (c)
warrants to purchase 374,085 shares of Common Stock, and (d) 33,938
shares of Common Stock issuable upon conversion of Series A and Series
M Preferred Stock owned by Ms. Meier, and (ii) an aggregate of 331,761
shares of Common Stock (including shares of Common Stock issuable upon
exercise of warrants and conversion of Series A and Series M Preferred
Stock) beneficially owned by Belmer. Excludes all securities owned by
Bradley Meier and Norman Meier, the son and former spouse of Ms. Meier,
respectively, as to which Ms. Meier disclaims beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All underwriting, rating, policy issuance and administration functions
for UPCIC during 2001 and 2000 were performed by Universal Property and Casualty
Management, Inc. ("Universal Management") pursuant to a Management Agreement
22
dated June 2, 1997 and Addenda thereto dated June 12, 1997 and June 1, 1998.
Universal Management is a wholly-owned subsidiary of American European Group,
Inc. ("AEG") which is a Delaware insurance holding company. During the years
ended December 31, 2001 and 2000, UPCIC incurred administrative costs to
Universal Management of $911,449 and $1,122,377, respectively. UPCIC and
Universal Management terminated the management agreement effective as of January
15, 2002. Services previously provided by Universal Management to UPCIC under
the management agreement are now performed by UPCIC, Universal Risk Advisors,
Inc. and unaffiliated third parties.
As of December 31, 2001, corporate counsel held $290,000 in trust, for
the benefit of the Company, which funds were placed in trust in connection with
a dispute involving a Company director and an unrelated entity. These funds are
included in the Company's assets as of December 31, 2001.
Transactions between the Company and its affiliates are on terms no
less favorable to the Company than can be obtained from third parties on an
arms' length basis. Transactions between the Company and any of its executive
officers or directors require the approval of a majority of disinterested
directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
3.1 Registrant's Restated Amended and Restated Certificate of Incorporation
(1)
3.2 Registrant's Bylaws (1)
3.3 Certificate of Designations, Preferences, and Rights of Series M
Convertible Preferred Stock dated August 13, 1997 (2)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Warrant Certificate (1)
4.3 Form of Warrant Agency Agreement (1)
4.4 Form of Underwriter Warrant (1)
4.5 Affiliate Warrant (1)
4.6 Form of Warrant to purchase 100,000 shares of Common Stock at an
exercise price of $2.00 per share issued to Steven Guarino dated as of
April 24, 1997. (Substantially similar in form to two additional
warrants to purchase 100,000 shares of Common Stock issued to Mr.
Guarino dated as of April 24, 1997, with exercise prices of $2.75 and
$3.50 per share, respectively) (2)
10.1 Registrant's 1992 Stock Option Plan (1)
10.2 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers (1)
10.5 Management Agreements by and between Universal Property & Casualty
Insurance Company and Universal P&C Management, Inc. dated as of June
2, 1997 (2)
10.6 Employment Agreement dated as of May 1, 1997 between Universal Heights,
Inc. and Bradley I. Meier (2)
16.1 Letter on change in certifying accountants from Millward & Co. CPA's
dated February 12, 1999, and as amended February 26, 1999 (3)
23
21.1 List of Subsidiaries
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-51546) declared effective on December 14, 1992
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended April 30, 1997 filed with the Securities and
Exchange Commission on August 13, 1997, as amended
(3) Incorporated by reference to the Registrant's Current Report on Form
8-K and Current Report on Form 8-K/A, filed with the Securities and
Exchange Commission on February 12, 1999 and February 26, 1999,
respectively
REPORTS ON FORM 8-K
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
UNIVERSAL INSURANCE HOLDINGS, INC.
Dated: April 16, 2002 By: /s/ Bradley I. Meier
----------------------------
Bradley I. Meier, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Bradley I. Meier President, Chief Executive April 16, 2002
---------------------- Officer and Director
Bradley I. Meier
/s/ James M. Lynch Chief Financial Officer April 16, 2002
--------------------
James M. Lynch
/s/ Norman M. Meier Director April 16, 2002
---------------------
Norman M. Meier
/s/ Irwin L. Kellner Director April 16, 2002
----------------------
Irwin I. Kellner
/s/ Reed J. Slogoff Director April 16, 2002
--------------------
Reed J. Slogoff
/s/ Joel M. Wilentz Director April 16, 2002
--------------------
Joel M. Wilentz
24
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheet - December 31, 2001...............................F-3
Consolidated Statements of Operations for the Years Ended December 31,
2001 and 2000 ...............................................................F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) for the Years Ended December 31, 2001 and 2000........................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001 and 2000..........................................................F-6 - F-7
Notes to Consolidated Financial Statements.............................F-8 -F-28
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Universal Insurance Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Universal
Insurance Holdings, Inc. and subsidiaries (the "Company") as of December 31,
2001, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss), and cash flows for each of the two years
in the period then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 audits 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 Universal Insurance
Holdings, Inc. and subsidiaries as of December 31, 2001, and the results of
their operations and their cash flows for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has recurring losses from
operations and the Company's subsidiary, Universal Property & Casualty Insurance
Company ("UPCIC"), has adjusted statutory capital at December 31, 2001 that is
marginally above the minimum statutory capital requirement. Included in UPCIC's
adjusted statutory capital as of December 31, 2001 are approximately $851,000 of
affiliate receivables which are considered non admitted assets under the
National Association of Insurance Commissioners statutory accounting principles.
These amounts were collected during the first quarter of 2002. Based on these
collections, UPCIC has commenced discussions with the Florida Department of
Insurance to admit these assets under a permitted practice. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning this matter are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
April 9, 2002
F-2
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Cash and cash equivalents $ 10,481,699
Debt securities held-to-maturity (fair value of $3,153,505) 3,035,720
Equity securities available for sale (cost of $281,644) 241,808
Investments in real estate 216,558
Prepaid reinsurance premiums and reinsurance recoverables 13,113,278
Premiums and other receivables 1,208,919
Deferred policy acquisition costs 529,942
Property, plant and equipment net 961,861
--------------------
Total Assets $ 29,789,785
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 6,246,867
Unearned premiums 14,053,239
Reinsurance payable 3,327,902
Accounts payable 1,363,724
Other accrued expenses 507,686
Accrued taxes, licenses and fees 189,728
Loans payable 444,084
--------------------
Total Liabilities 26,133,230
--------------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 14)
STOCKHOLDERS' EQUITY:
Cumulative convertible preferred stock, $.01 par value, 1,000,000 shares
authorized, 138,640 shares issued and outstanding, minimum liquidation
preference of $1,419,700 1,387
Common stock, $.01 par value 40,000,000 shares authorized, 14,894,584
shares issued and 14,685,939 shares outstanding 148,946
Common stock in treasury, at cost - 208,645 shares (101,820)
Additional paid-in capital 14,977,297
Accumulated deficit (11,329,419)
Accumulated other comprehensive loss (39,836)
--------------------
Total stockholders' equity 3,656,555
--------------------
Total liabilities and stockholders' equity $ 29,789,785
====================
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------- -----------------
PREMIUMS EARNED AND OTHER REVENUES:
Premium income, net $ 7,711,804 $ 6,367,045
Net investment income 578,903 1,168,796
Commission revenue 1,786,675 1,610,175
Other revenue 3,362,273 -
------------ -------------
Total revenues 13,439,655 9,146,016
------------ -------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 7,767,980 4,161,661
General and administrative expenses 8,711,025 6,472,519
------------ -------------
Total operating costs and expenses 16,479,005 10,634,180
------------ -------------
NET LOSS $ (3,039,350) $ (1,488,164)
============ =============
LOSS PER COMMON SHARE:
Basic $ (0.21) $ (0.10)
============ =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 14,698,000 14,788,000
============ =============
LOSS PER COMMON SHARE
Diluted $ (0.21) $ (0.10)
============ =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 14,698,000 14,788,000
============ =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2001 AND 2000
Preferred Common Treasury Additional
Stock Stock Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
BALANCE, January 1, 2000 138,640 $ 1,387 14,794,548 $ 147,946 $ 15,089,741
Net loss - - - - - - -
Net change in unrealized gain
on available for sale securities - - - - - - -
Comprehensive loss - - - - - - -
Preferred stock dividend - - - - - - -
Purchase of treasury stock - - - - 141,795 (84,254) -
Issuance of common stock - - 1,000,000 1,000 - - 36,501
--------- -------- ----------- ------- -------- -------- ----------
BALANCE, December 31, 2000 138,640 1,387 14,894,584 148,946 141,795 (84,254) 15,126,242
--------- -------- ----------- ------- -------- -------- ----------
Net loss - - - - - - -
Net change inunrealized losses
on available for sale securities - - - - - - -
Comprehensive loss - - - - - - -
Preferred stock dividend - - - - - - -
Common stock dividend - - - - - - (148,945)
Purchase of treasury stock - - - - 66,850 (17,566) -
--------- -------- ----------- ------- -------- -------- ----------
BALANCE, December 31, 2001 138,640 1,387 14,894,584 148,946 208,645 (101,820) 14,977,297
========= ======== =========== ======= ======== ======== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
Accumulated
Accumulated Other Comp
Deficit Income (loss) Total
------- ------------- -----
BALANCE, January 1, 2000 $ (6,072,006) $ 233,227 $ 8,770,295
Net loss (1,488,164) (1,488,164)
Net change in unrealized gain
on available for sale securities - (293,099) (293,099)
-----------
Comprehensive loss - - (1,781,263)
Preferred stock dividend (49,949) - (49,949)
Purchase of treasury stock - - (84,254)
Issuance of common stock - - 37,501
----------- --------- -----------
BALANCE, December 31, 2000 (8,240,119) (59,872) 6,892,330
----------- --------- -----------
Net loss (3,039,350) - (3,039,350)
Net change inunrealized losses
on available for sale securities - 20,036 20,036
--------
Comprehensive loss - - (3,019,314)
Preferred stock dividend (49,949) - (49,949)
Common stock dividend - (148,945)
Purchase of treasury stock - - (17,566)
----------- --------- -----------
BALANCE, December 31, 2001 (11,329,419) (39,836) $ 3,656,555
=========== ========= ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, 2001 December 31, 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,039,350) $ (1,488,164)
Adjustments to reconcile net loss
to cash provided by (used in) operations:
Amortization and depreciation 157,308 98,455
Gains on sales of equity securities available for sale (3,334) (190,194)
Net accretion of bond premiums and discounts (15,633) (12,984)
Net change in assets and liabilities relating to operating activities:
Prepaid reinsurance premiums and reinsurance recoverable 2,107,898 (4,521,319)
Premiums and other receivables (335,860) 36,498
Deferred policy acquisition costs 1,268,725 722,208
Reinsurance payable 793,871 (1,297,401)
Accounts payable 457,059 (538,159)
Other accrued expenses (69,571) (1,072,481)
Accrued taxes, licenses and fees (30,946) 6,412
Unpaid losses and loss adjustment expenses 2,778,743 403,736
Unearned premiums (2,120,419) 1,379,086
Due from related parties (20,040) -
------------ --------------
Net cash provided by (used in) operating activities 1,928,451 (6,474,307)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (505,767) (458,715)
Purchase of equity secuities available for sale (127,546) (744,688)
Proceeds from sale of equity securities available for sale 23,195 1,121,787
Purchase of debt securities held to maturity (601,062) (1,145,719)
Proceeds from maturities of debt securities held to maturity 1,012,438 441,207
Purchase of real estate (216,558) -
Net cash used in investing activities (415,300) (786,128)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (49,950) (49,949)
Common stock dividend (148,945) -
Purchase of treasury stock (17,566) (84,254)
Proceeds from loans payable 306,665 -
Net cash provided by (used in) financing activities 90,204 (134,203)
NET INCREASE (DECREASE) IN CASH AND CASH 1,603,355 (7,394,638)
EQUIVALENTS
CASH AND CASH EQUIALENTS, Beginning of year 8,878,344 16,272,982
------------ -------------
CASH AND CASH EQUIALENTS, End of year $ 10,481,699 $ 8,878,344
F-6
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
Year Ended Year Ended
December 31, 2001 December 31, 2002
----------------- -----------------
SUPPLEMENTAL NON CASH FINANCING AND
INVESTING ACTIVITIES:
Issuance of stock for purchase of software $ - $ 37,501
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
NATURE OF OPERATIONS
Universal Insurance Holdings, Inc. (the "Company") was originally incorporated
as Universal Heights, Inc. in Delaware in November 1990. The Company changed its
name to Universal Insurance Holdings, Inc. on January 12, 2001. The Company,
through its wholly-owned subsidiary, Universal Insurance Holding Company, formed
Universal Property & Casualty Insurance Company ("UPCIC") in 1997. UPCIC's
application to become a Florida licensed property and casualty insurance company
was filed in May 1997 with the Florida Department of Insurance ("DOI") and was
approved on October 29, 1997. In 1998, UPCIC began operations through the
acquisition of homeowner insurance policies issued by the Florida Residential
Property and Casualty Joint Underwriting Association ("JUA").
The JUA was established in 1992 as a temporary measure to provide insurance
coverage for individuals who could not obtain coverage from private carriers
because of the impact on the private insurance market of Hurricane Andrew in
1992. Rather than serving as a temporary source of emergency insurance coverage
as was originally intended, the JUA became a major provider of original and
renewal insurance coverage for Florida residents. In an attempt to reduce the
number of policies in the JUA, and thus the exposure of the program to
liability, the Florida legislature approved a number of initiatives to
depopulate the JUA, which resulted in policies being acquired by private
insurers and provided additional incentives to private insurance companies to
acquire policies from the JUA.
On December 4, 1997, the Company raised approximately $6,700,000 in a private
offering with various institutional and/or otherwise accredited investors
pursuant to which the Company issued, in the aggregate, 11,208,996 shares of its
common stock at a price of $.60 per share. The proceeds of this transaction were
used partially for working capital purposes and to meet the minimum regulatory
capitalization requirements ($5,300,000) required by the Florida Department of
Insurance to engage in this type of homeowners insurance company business.
In February 1998, the Company commenced its insurance business. Since then the
Company has developed into a vertically integrated insurance holding company
performing all aspects of insurance underwriting, distribution and claims.
Universal Risk Advisors, Inc. was incorporated in Florida on July 2, 1998, and
became licensed by the Florida Department of Insurance on September 28, 1998 as
the Company's wholly-owned managing general agent ("MGA"). Through the MGA, the
Company has underwriting and claims authority for UPCIC as well as third party
insurance companies. The MGA seeks to generate revenue through policy fee income
and other administrative fees from the marketing of UPCIC and third party
insurance products through the Company's distribution network and UPCIC.
Universal Florida Insurance Agency was incorporated in Florida on July 2, 1998
and U.S. Insurance Solutions, Inc. was incorporated in Florida on August 4, 1998
as wholly-owned subsidiaries of Universal Insurance Holdings, Inc. to solicit
voluntary business and generate commission revenue. These two entities are the
foundation of the Company's agency operations, which seek to generate income
from policy fees, commissions, premium financing referral fees and the marketing
of ancillary services. U.S.A. Insurance Solutions, Inc., was incorporated in
Florida on December 10, 1998 as a wholly-owned subsidiary of U.S. Insurance
Solutions, Inc. to acquire the assets of an insurance agency. In addition,
Capital Resources Group, LTD. was incorporated in the British Virgin Islands on
June 2, 2000 as a subsidiary of the Company to participate in contingent capital
products. Universal Risk Life Advisors, Inc. was incorporated in Florida on June
1, 1999 as the Company's wholly-owned managing general agent for life insurance
products. The Company has also formed a claims adjusting company, Universal
Adjusting Corporation, which was incorporated in Delaware on August 9, 1999.
Universal Adjusting Corporation currently has claims authority for Universal
Property & Casualty Insurance Company claims. The Company has also formed
subsidiaries that specialize, or will specialize, in selling insurance via the
Internet. Tigerquote.com Insurance & Financial Services Group, Inc.
("Tigerquote.com") and Tigerquote.com Insurance Solutions, Inc. were
incorporated in Delaware on June 6, 1999 and August 23, 1999, respectively.
Tigerquote.com is an Internet insurance company while Tigerquote.com Insurance
F-8
Solutions, Inc. is a currently operating network of Internet insurance agencies.
As of December 31, 2001, these insurance agencies have been established in 22
states.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") that differ from statutory accounting practices prescribed or
permitted for insurance companies by regulatory authorities. The Company has one
reportable segment during each period reported in the accompanying consolidated
financial statements, based upon management reporting.
As discussed in Note 9, the DOI completed an examination of UPCIC as of December
31, 2000 and has proposed adjustments in a draft examination report which would
cause UPCIC to fail to meet the minimum statutory capital requirement as of
December 31, 2000. The DOI is currently conducting an examination as of December
31, 2001. As of December 31, 2001, UPCIC has adjusted statutory capital of
$4,124,880 which is $124,880 above the minimum requirement. Included in UPCIC's
adjusted statutory capital as of December 31, 2001 are approximately $851,000 of
affiliate receivables which are considered nonadmitted assets under the National
Association of Insurance Commissioners statutory accounting principles. These
amounts were collected during the first quarter of 2002. Based on these
collections, UPCIC has commenced discussions with the DOI to admit these assets.
In the event that the DOI does not provide a permitted practice to include these
assets in statutory capital at December 31, 2001, UPCIC's statutory capital
would not be in compliance with the minimum requirement and would be considered
impaired at such date.
UPCIC has also experienced recurring losses from operations during the past
three years, including 2001 which included nonrecurring other revenue of
approximately $3.2 million. If UPCIC continues to sustain operating losses
during 2002, it will not comply with the minimum statutory capital requirements
in the near future unless UPCIC is able to raise additional capital through
other sources.
UPCIC is also required to comply with the National Association of Insurance
Commissioners ("NAIC") risk-based capital ("RBC") requirements. RBC is a method
of measuring the amount of capital appropriate for an insurance company to
support its overall business operations in light of its size and risk profile.
As of December 31, 2001, UPCIC's RBC was equivalent to a Company-level action.
As a result, management is required to file a Risk Based Capital Plan containing
items specified in Florida Statutes.
UPCIC has experienced increasing loss ratios, net underwriting losses and net
losses for the past three years. Management attributes the losses reported for
these periods primarily to higher than expected costs of catastrophic
reinsurance and adverse loss experience in the homeowners' line of business.
Management intends to improve and strengthen the financial condition of UPCIC as
follows. A rate increase of approximately 7% has been approved by the DOI on new
and renewal policies and was implemented as of July 1, 2001. In addition, the
Company is currently working toward decreasing the cost of its catastrophe
reinsurance through negotiation of better rates and program changes. Program
changes could result in a lower level of catastrophe reinsurance coverage.
The Company's continuation as a going concern is dependent upon the ability of
UPCIC to meet minimum statutory capital requirements and the Company's ability
to attain profitable operations. Failure to meet the minimum level of statutory
capital could result in one or more regulatory sanctions in the future,
including the revocation of UPCIC's certificate of authority or ultimately, the
placement of UPCIC in conservation, rehabilitation or liquidation. These
factors, among others, raise substantial doubt that the Company will be able to
continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and liabilities that might
be necessary should the Company be unable to continue as a going concern.
Management believes that the implementation of its plans described above will be
successful. However, there can be no assurance that the success of these plans
will be achieved or will be sufficient to ensure UPCIC's compliance with minimum
statutory capital requirements or that the Company will be able to achieve
profitability.
F-9
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are summarized as
follows:
USE OF ESTIMATES. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of 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 periods. The Company's primary
areas of estimate are the recognition of premium revenues, insurance
liabilities, deferred policy acquisition costs, provision for premium deficiency
and reinsurance. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts, after intercompany eliminations, of the Company and its subsidiaries.
CASH AND CASH EQUIVALENTS. The Company includes all short-term, highly liquid
investments that are readily convertible to known amounts of cash and have an
original maturity of three months or less in cash equivalents.
SECURITIES HELD TO MATURITY. Debt securities which the Company has the intent
and ability to hold to maturity are reported at amortized cost, adjusted for
amortization of premiums or accretion of discounts and other-than-temporary
declines in fair value.
INVESTMENTS IN REAL ESTATE. Investments in real estate are reported at cost,
less allowances for depreciation and impairment of value. Investments in real
estate, other than land, are depreciated over their estimated useful life of 25
years.
SECURITIES AVAILABLE FOR SALE. Equity securities are reported at fair value,
adjusted for other than temporary declines in fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity. Realized
gains and losses are determined on the specific identification method.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is recorded at
cost. Depreciation is provided on the straight-line basis over the estimated
useful life of the assets. Estimated useful life of all property, plant and
equipment ranges from three to five years. Routine repairs and maintenance are
expensed as incurred. Website development costs are capitalized and amortized
over their estimated useful life.
RECOGNITION OF PREMIUM REVENUES. Property and liability premiums are recognized
as revenue on a pro rata basis over the policy term. The portion of premiums
that will be earned in the future are deferred and reported as unearned
premiums. The Company believes that its revenue recognition policies conform to
Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
RECOGNITION OF COMMISSION REVENUE. Commission revenue, which is comprised of the
managing general agent's policy fee income on all new and renewal insurance
policies and commissions generated from agency operations is recognized as
income upon policy inception. The Company believes that its revenue recognition
policies conform to Staff Accounting Bulletin 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS.
DEFERRED POLICY ACQUISITION COSTS. Commissions and other costs of acquiring
insurance that vary with and are primarily related to the production of new and
renewal business are deferred and amortized over the terms of the policies or
reinsurance treaties to which they are related. Investment income is taken into
consideration when calculating the maximum amount of deferred acquisition cost.
INSURANCE LIABILITIES. Unpaid losses and loss adjustment expenses are provided
for as claims are incurred. The provision for unpaid losses and loss adjustment
expenses includes: (1) the accumulation of individual case estimates for claims
and claim adjustment expenses reported prior to the close of the accounting
period; (2) estimates for unreported claims based on industry data; and (3)
estimates of expenses for investigating and adjusting claims based on the
experience of the Company and the industry.
F-10
Inherent in the estimates of ultimate claims are expected trends in claim
severity, frequency and other factors that may vary as claims are settled. The
amount of uncertainty in the estimates for casualty coverage is significantly
affected by such factors as the amount of claims experience relative to the
development period, knowledge of the actual facts and circumstances and the
amount of insurance risk retained. In the case of UPCIC, this uncertainty is
compounded by UPCIC's limited history of claims experience. In addition, UPCIC's
policyholders are currently concentrated in South Florida, which is periodically
subject to adverse weather conditions such as hurricanes and tropical storms.
The methods for making such estimates and for establishing the resulting
liability are continually reviewed, and any adjustments are reflected in
earnings currently.
PROVISION FOR PREMIUM DEFICIENCY. It is the Company's policy to evaluate and
recognize losses on insurance contracts when estimated future claims and
maintenance costs under a group of existing contracts will exceed anticipated
future premiums. No accrual for premium deficiency was considered necessary at
December 31, 2001.
REINSURANCE. In the normal course of business, the Company seeks to reduce the
risk of loss that may arise from catastrophes or other events that cause
unfavorable underwriting results by reinsuring certain levels of risk in various
areas of exposure with other insurance enterprises or reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
provisions of the reinsurance agreement and consistent with the establishment of
the liability of the Company.
INCOME TAXES. Income tax provisions are based on the asset and liability method.
Deferred federal income taxes have been provided for temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the consolidated financial statements.
INCOME (LOSS) PER SHARE OF COMMON STOCK. Basic earnings per share is computed by
dividing the Company's net income (loss) less cumulative Preferred Stock
dividends by the weighted average number of shares of Common Stock outstanding
during the period. Diluted earnings per share is computed by dividing the
Company's net income (loss) minus Preferred Stock dividends by the weighted
average number of shares of Common Stock outstanding during the period and the
impact of all dilutive potential common shares, primarily Preferred Stock,
options and warrants. The dilutive impact of stock options and warrants is
determined by applying the treasury stock method and the dilutive impact of the
Preferred Stock is determined by applying the "if converted" method.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting
Standards ("SFAS") No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, requires disclosure of the estimated fair value of all financial
instruments including both assets and liabilities unless specifically exempted.
The Company uses the following methods and assumptions in estimating the fair
value of financial instruments.
Cash and cash equivalents: the carrying amount reported in
the consolidated balance sheet for cash and cash equivalents
approximates fair value due to the short-term nature of
those items.
Premiums and other receivables and accounts payable: the
carrying amounts reported in the consolidated balance sheet
for premiums and other receivables and accounts payable
approximate their fair value due to their short-term nature.
Equity securities available-for-sale and debt securities
held-to-maturity: fair values for equity and debt securities
are based on quoted market prices.
Loans payable: the carrying amount reported in the
consolidated balance sheet for loans payable is equal to the
amount of the respective notes.
CONCENTRATIONS OF CREDIT RISK. Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash,
investments, premiums receivable and reinsurance recoverables. Concentrations of
credit risk with respect to premiums receivable are limited due to the large
number of individuals comprising the Company's customer base. However, the
majority of the Company's revenues are currently derived from products and
services offered to customers in Florida which could be adversely affected by
economic downturns, an increase in competition or other environmental changes.
In order to reduce credit risk for amounts due from reinsurers, the Company
F-11
seeks to do business with financially sound reinsurance companies and regularly
evaluates the financial strength of all reinsurers used.
STOCK OPTIONS. The Company grants options for a fixed number of shares to
employees and outside directors with an exercise price equal to the fair value
of the shares at the grant date. The Company has elected to apply Accounting
Principles Board ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations in accounting for its stock options granted to employees
and directors, and Statement of Financial Accounting Standard ("SFAS") No. 123
ACCOUNTING FOR STOCK-BASED COMPENSATION, for its stock options granted to
non-employees. Under APB No. 25, because the exercise price of the Company's
employee and director stock options equals the market price of underlying stock
on the date of the grant, no compensation expense is recognized. The Company
expenses the fair value (as determined at the grant date) of options and
warrants granted to non-employees in accordance with SFAS No. 123. The Company
has adopted the disclosure only provisions of SFAS No. 123 (see Note 12).
NEW ACCOUNTING PRONOUNCEMENTS. The Company prepares its statutory financial
statements in conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Florida. Effective January 1, 2001, the
Insurance Department of the State of Florida required that insurance companies
domiciled in the State of Florida prepare their statutory financial statements
in accordance with the National Association of Insurance Commissioners' ("NAIC")
Accounting Practices and Procedures Manual--Version effective January 1, 2001
(the "Manual") , as modified by the Insurance Department of the State of
Florida. Accordingly, the admitted assets, liabilities, and capital and surplus
of Universal Property & Casualty Insurance Company as of December 31, 2001, and
the results of its operations and its cash flow for the year then ended have
been determined in accordance with the new accounting principles.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. These standards establish accounting and reporting for business
combinations. SFAS No. 141 requires all business combinations entered into
subsequent to June 30, 2001 to be accounted for using the purchase method of
accounting. SFAS No. 142 provides that goodwill and other intangible assets with
indefinite lives will not be amortized, but will be tested for impairment on an
annual basis. Universal will adopt the provisions of these statements in the
first quarter of 2002. The impact of such adoption is not anticipated to have a
material effect on the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which is effective for fiscal years beginning
after December 15, 2001. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends Accounting Research Bulletin No. 51, CONSOLIDATED
FINANCIAL STATEMENTS, to eliminate the exception to consolidation for
subsidiaries for which control is likely to be temporary. Universal will adopt
SFAS No. 144 in the first quarter of 2002. The impact of such adoption is not
anticipated to have a material effect on the Company's consolidated financial
statements.
RECLASSIFICATIONS. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current year presentation.
NOTE 3 - INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the JUA. UPCIC received the unearned premiums and began servicing the
policies. Subsequently, UPCIC was successful in renewing a large number of these
policies while commencing solicitation of business in the voluntary market
through independent agents. Unearned premiums represent amounts that UPCIC would
refund policyholders if their policies were canceled. Accordingly, UPCIC
determines unearned premiums by calculating the pro-rata amount that would be
due to the policyholder at a given point in time based upon the premiums owed
over the life of each policy. At December 31, 2001, the Company has direct
unearned premiums of $14,053,239.
F-12
UPCIC's obligation for liabilities for policies assumed from the JUA began at
11:59 p.m. on the date of assumption of the policies. UPCIC has no liability for
assumed policies prior to the assumption date nor does UPCIC have any liability
for claims made to the JUA. Similarly, the JUA has no liability for assumed
liabilities subsequent to the assumption date.
Through December 31, 2001, UPCIC has received bonus payments of approximately
$2,723,600 based upon a portfolio takeout of approximately 30,000 policies.
Bonus payments were held in escrow for three years. After the three-year period,
if certain conditions were met, including maintaining a minimum number of
policies, UPCIC would have unrestricted use of the bonus payments. In addition,
UPCIC would have investment income from the bonus payments that would also be
available at the end of the three years. These bonus payments were not included
in the Company's assets until receipt at the end of the three-year period. To
date, the Company has complied with requirements related to the bonus payments
and bonus payments of $2,723,600 were released from escrow for 27,278 policies
which reached their three-year anniversary in 2001. The Company will not be
receiving any additional bonus payments. Investment income of $452,947 was
recognized in 2001 and was received in January 2002.
NOTE 4 - REINSURANCE
UPCIC's in-force policyholder coverage for windstorm exposures as of December
31, 2001 was approximately $4.5 billion. In the normal course of business, UPCIC
also seeks to reduce the risk of loss that may arise from catastrophes or other
events that cause unfavorable underwriting results by reinsuring certain levels
of risk in various areas of exposure with other insurance enterprises or
reinsurers.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the reinsurance policy. Reinsurance premiums, losses and loss adjustment
expenses are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contracts.
Reinsurance ceding commissions received are deferred and amortized over the
effective period of the related insurance policies.
UPCIC limits the maximum net loss that can arise from large risks or risks in
concentrated areas of exposure by reinsuring (ceding) certain levels of risks
with other insurers or reinsurers, either on an automatic basis under general
reinsurance contracts known as "treaties" or by negotiation on substantial
individual risks. The reinsurance arrangements are intended to provide UPCIC
with the ability to maintain its exposure to loss within its capital resources.
Such reinsurance includes quota share, excess of loss and catastrophe forms of
reinsurance.
QUOTA SHARE
Effective June 1, 2001, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with Swiss Reinsurance America Corporation, rated A+
by A.M. Best. Under the quota share treaty, UPCIC cedes 50% of its gross written
premiums, losses and loss adjustment expenses with a provisional ceding
commission ranging from 27% to 35%; the commission percentage reflected in these
financial statements is 27% based on the ceded loss ratio. For the year ended
December 31, 2001, UPCIC ceded 50% of gross written premiums, losses and loss
adjustment expenses. During the first quarter of 2000, UPCIC ceded 50% of gross
written premiums, losses and loss adjustment expenses. For the nine months ended
December 31, 2000, UPCIC elected to cede 65% of gross written premiums, losses
and loss adjustment expenses. In addition, the quota share treaty currently has
a limitation for any one occurrence of $6,500,000 with an option for an
additional $3,500,000.
EXCESS PER RISK
Effective June 1, 2000, and continuing through December 31, 2001, UPCIC entered
into an excess per risk agreement with Swiss Reinsurance America Corporation,
rated A+ by A.M. Best. Under the excess per risk agreement, UPCIC obtained
coverage of $1,300,000 in excess of $500,000 ultimate net loss for each risk,
each loss, excluding losses arising from the peril of wind to the extent such
wind related losses are the result of a hurricane. A $2,600,000 limit applies to
any one-loss occurrence.
F-13
EXCESS CATASTROPHE
The excess catastrophe reinsurance agreement provides four layers of excess
catastrophe coverage as of December 31, 2000 as follows:
FIRST LAYER SECOND LAYER THIRD LAYER FOURTH LAYER
Coverage $5,000,000 in $20,000,000 in $12,000,000 in excess $10,000,000 in excess of
excess of excess of of $27,000,000 each $39,000,000 each loss
$2,000,000 each $7,000,000 each loss loss occurrence occurrence (see
loss occurrence occurrence discussion of coverage
provided by Florida
Hurricane Catastrophe
Fund below)
Deposit premium $1,800,000 $3,900,000 $1,020,000 $362,500
Minimum premium $1,440,000 $3,120,000 $816,000 $290,000
Premium rate -% of 2.0179% 4.3722% 8.5% .8129%
Probable maximum loss
Effective June 1, 2001, UPCIC revised and enhanced its excess catastrophe
reinsurance program. The excess catastrophe reinsurance agreement provides four
layers of excess catastrophe coverage as of December 31, 2001 as follows:
FIRST LAYER SECOND LAYER THIRD LAYER FOURTH LAYER
Coverage $5,000,000 in $9,500,000 in excess $14,000,000 in excess $19,000,000 in excess of
excess of of $7,000,000 each of $16,500,000 each $30,500,000 each loss
$2,000,000 each loss occurrence loss occurrence occurrence (see
loss occurrence discussion of coverage
provided by Florida
Hurricane Catastrophe
Fund below)
Deposit premium $1,800,000 $2,565,000 $1,862,000 $1,615,000
Minimum premium $1,440,000 $2,052,000 $1,489,600 $1,292,000
Premium rate -% of 0.036% 0.0513% 0.03724% 0.0323%
Probable maximum loss
Loss occurrence is defined as all individual losses directly occasioned by any
one disaster, accident or loss or series of disasters, accidents or losses
arising out of one event, which occurs within the area of one state of the
United States or province of Canada and states or provinces contiguous thereto
and to one another.
Effective June 1, 2000 UPCIC entered a reimbursement agreement with the Florida
Hurricane Catastrophe Fund (the "Fund") which is administered by the Florida
State Board of Administration. Under the reimbursement agreement, the Fund would
reimburse the Company, with respect to each loss occurrence during the contract
year (June 1, 2000 to May 31, 2001) for 90% of the ultimate loss paid by the
Company in excess of the Company's retention plus 5% of the reimbursed losses to
cover loss adjustment expenses. A covered event means any one storm declared to
be a hurricane by the National Hurricane Center for losses incurred in Florida,
both while it is a hurricane and through subsequent downgrades. The Fund
provided UPCIC with coverage of $69,167,394 in excess of $19,724,457. The
premium for this coverage was $2,759,032. Effective June 1, 2001, UPCIC entered
a subsequent reimbursement agreement with the Fund under the same terms. The
Fund has provided UPCIC with coverage of $57,784,569 in excess of $16,847,968 as
of December 31, 2001. The premium for this coverage was $2,423,202. In the event
F-14
of depletion of the Fund due to losses arising from catastrophic events, the
Fund would assess homeowners' insurers writing business in the state of Florida.
In the event that a loss occurrence were to decrease the coverage available to
UPCIC under the Fund, effective June 1, 2000, UPCIC purchased second event
excess catastrophe reinsurance covering the period June 1, 2000 to May 31, 2001
which could replace the coverage provided by the Fund for 100% of losses of
$40,000,000 in excess of $49,000,000. The premium for this coverage was
$370,000.
Effective July 1, 2001, UPCIC purchased industry loss warranty catastrophe
reinsurance, covering the period July 1, 2001 to June 30, 2002, which could
supplement other coverages. The premiums for these coverages are $352,855.
Amounts recoverable from reinsurers are estimated in accordance with the
reinsurance contract. Reinsurance premiums, losses and loss adjustment expenses
("LAE") are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contracts.
The preceding reinsurance arrangements had the following effect on certain items
in the accompanying consolidated financial statements:
Year Ended Year Ended
December 31, 2001 December 31, 2000
Premiums Premiums Loss and Loss Premiums Premiums Loss and Loss
Written Earned Adjustment Written Earned Adjustment
------- ------ Expenses ------- ------ Expenses
-------- --------
Direct $ 25,536,716 $27,657,135 $ 16,069,111 $28,733,138 $ 27,354,052 $ 10,948,937
Assumed - - - (22,907) (22,907) (16,260)
Ceded (17,234,000) (19,945,331) (8,301,131) (24,122,697) (20,964,100) (6,771,016)
------------ ----------- ----------- ----------- -----------
Net $ 8,302,716 $ 7,711,804 $ 7,767,980 $ 4,587,534 $ 6,367,045 $ 4,161,661
============ =========== ============ =========== ============ ============
Other amounts:
DECEMBER 31, 2001
-----------------
Reinsurance recoverable on unpaid losses and loss adjustment expenses $3,278,316
Reinsurance recoverable on paid losses 220,032
Unearned premiums ceded 9,614,930
----------
Prepaid reinsurance premiums and reinsurance recoverable $13,113,278
===========
Reinsurance payable $3,327,902
==========
UPCIC's reinsurance contracts do not relieve UPCIC from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to UPCIC; consequently, allowances are established for amounts deemed
uncollectible. UPCIC evaluates the similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. As of December 31, 2001, UPCIC
has reinsurance contracts with various reinsurers located throughout the United
States and internationally. UPCIC believes that this distribution of reinsurance
contracts adequately minimizes UPCIC's risk from any potential operating
difficulties of its reinsurers.
F-15
NOTE 5 - INVESTMENTS
Major categories of net investment income are summarized as follows:
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------- -----------------
Debt securities held-to-maturity $ 241,913 $ 223,524
Common Stocks 1,294 5,300
Cash and cash equivalents 361,243 974,704
--------- -----------
604,450 1,203,528
Investment expenses 25,547 34,732
--------- -----------
$ 578,903 $ 1,168,796
========== ===========
Proceeds from the sale of equity securities during 2001 and 2000 were $23,195
and $1,121,787, respectively. Gross gains on the sale of securities during 2001
and 2000 were $11,215 and $196,588, respectively. Gross losses on the sale of
securities during 2001 and 2000 were $7,881 and $6,394, respectively.
The aggregate amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value as of December 31, 2001 for available-for-sale and
held-to-maturity securities by major security type are as follows:
Cost or Gross Gross Fair
Amortized Cost Unrealized Gains Unrealized Losses Value
-------------- ---------------- ----------------- -----
Available-for-sale securities:
Equity securities $ 281,644 - $ (39,836) $ 241,808
=========== ============ ========= ===========
Held-to-maturity securities:
US government agencies $ 2,998,020 $ 119,187 $ (2,814) $ 3,114,393
Mortgage backed securities 37,700 1,412 - $ 39,112
----------- ------------ --------- -----------
Total $ 3,035,720 $ 120,599 $ (2,814) $ 3,153,505
The scheduled maturities of held-to-maturity securities at December 31, 2001
were as follows:
Amortized
Cost Fair Value
--- ----------
Due after five years through ten years $408,488 $379,294
Due after ten years 2,627,232 2,774,211
--------- ---------
Total $3,035,720 $3,153,505
========= =========
The preceding data is based on the stated maturities of the securities. Actual
maturities may differ as borrowers may have the right to call or prepay
obligations.
At December 31, 2001, investments with a carrying value of $300,000 were on
deposit with regulatory authorities.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2001 consisted of the following:
Computers $ 87,500
Furniture 81,911
Automobiles and equipment 639,795
Software 443,725
---------
Total cost 1,252,931
Less: Accumulated depreciation 291,070
---------
Net carrying value $ 961,861
=========
NOTE 7 - LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
As described in Note 2, UPCIC establishes liabilities for unpaid losses and loss
adjustment expense on reported and unreported claims of insured losses. These
liability estimates are based on known facts and interpretation of factors such
as claim payment patterns, loss payments, pending levels of unpaid claims,
product mix and industry experience. The establishment of appropriate
liabilities, including liabilities for catastrophes, is an inherently uncertain
process. This uncertainty is compounded by UPCIC's limited history of claims
experience. UPCIC regularly updates its estimates as new facts become known and
further events occur which may impact the resolution of unsettled claims.
The level of catastrophe loss experienced in any year cannot be predicted and
could be material to results of operations and financial position. UPCIC's
policyholders are concentrated in South Florida, which is periodically subject
to adverse weather conditions such as hurricanes and tropical storms. UPCIC's
in-force policyholder coverage for windstorm exposures as of December 31, 2001
was approximately $4.5 billion. UPCIC continuously evaluates alternative
business strategies to more effectively manage its exposure to catastrophe
losses, including the maintenance of catastrophic reinsurance coverage as
discussed in Note 4.
Management believes that the liabilities for claims and claims expense at
December 31, 2001 is appropriately established in the aggregate and adequate to
cover the ultimate cost of reported and unreported claims arising from losses
which had occurred by that date.
F-17
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
Year Ended Year Ended
December 31, 2001 December 31, 2000
Balance at beginning of year $ 3,468,124 $ 3,064,388
Less reinsurance recoverable (2,094,643) (1,532,194)
----------- -----------
Net balance at beginning of year 1,373,481 1,532,194
----------- -----------
Incurred related to:
Current year 8,190,980 4,327,661
Current year (423,000) (166,000)
----------- -----------
Current year 7,767,980 4,161,661
----------- -----------
Paid related to:
Current year 4,790,090 3,348,000
Prior years 1,382,820 972,374
----------- -----------
Total paid 6,172,910 4,320,374
----------- -----------
Net balance at end of year 2,968,551 1,373,481
Plus reinsurance recoverable 3,278,316 2,094,643
----------- -----------
Balance at end of year $ 6,246,867 $ 3,468,124
=========== ===========
The Company's liabilities for unpaid losses and LAE, net of related reinsurance
recoverables, at December 31, 2001 and 2000, were decreased in the following
year by $423,000 and $166,000, respectively, for claims that had occurred on or
prior to the balance sheet date. This favorable loss emergence resulted
principally from settling homeowners' losses established in the prior year for
amounts that were less than expected.
NOTE 8 - LOANS PAYABLE
Loans payable at December 31, 2001 consists of the following bank loans secured
by the respective assets: a boat loan for $142,394, principal due in May 2011,
with interest paid monthly at 8.8%, and several vehicle loans totaling $301,690,
principal due from January 2003 to September 2004, with interest paid monthly
ranging from 7.5% to 10%.
Loan repayents are due as follows:
2002 149,877
2003 120,515
2004 65,130
2005 13,578
2006 14,822
Thereafter 80,162
------------
444,084
============
NOTE 9 - REGULATORY REQUIREMENTS AND RESTRICTIONS
UPCIC is subject to comprehensive supervision and regulation by the DOI. The
Florida Insurance Code (the "Code") requires that UPCIC maintain minimum
statutory surplus of $4,000,000. UPCIC is also required to adhere to prescribed
premium-to-surplus ratios under the Code and to maintain approved securities on
deposit with the State of Florida.
On December 31, 1997, UPCIC entered into a consent order with the DOI related to
the issuance of its certificate of authority (the "Consent Order"). Under the
terms of the Consent Order, during its first four years of operations, UPCIC may
only pay dividends on its common stock approved in advance and in writing by the
DOI. No dividends were declared or paid by UPCIC on its common stock during 2001
or 2000. The Consent Order also requires that UPCIC obtain prior written
approval of the DOI before amending, updating, or changing any managing general
agent contracts. During 2001, UPCIC amended the contract with its managing
general agent, Universal Risk Advisors, Inc., in regards to the calculation of
the management fee and in 2002 to assume the management company functions
formerly performed by Universal Property & Casualty Management, Inc. ("Universal
Management"). These amendments have been submitted to the Department of
Insurance for approval.
On January 16, 1998, UPCIC entered into a consent order with the DOI related to
the proposed participation in the JUA depopulation program (the "Depopulation
Consent Order"). Under the Depopulation Consent Order, UPCIC is required to
maintain catastrophe reinsurance up to its 100 year Probable Maximum Loss with
reinsurers who are authorized and/or approved or approved in advance and in
writing by the DOI. The Depopulation Consent Order also requires UPCIC to
materially abide by its depopulation plan submitted to the DOI, which limits
UPCIC's depopulation assumptions to 30,000 policies. The premium limits and
surplus requirements impact UPCIC's potential growth. UPCIC's ability to exceed
these limitations will be subject to its ability to continue to renew policies
transferred from the Takeout Program and attract additional policyholders from
the voluntary insurance market as well as maintaining capital and surplus to
support its underwriting program. As of December 31, 2001 and 2000, UPCIC was in
compliance with requirements of the Consent Order and the Depopulation Consent
Order. The Depopulation Consent Order expired January 16, 2001.
The Department of Insurance has completed its examination of the fiscal year
2000 statutory financial statements of UPCIC. To date the Department has not
issued a final report. However, the Department has issued a draft report with
proposed adjustments to UPCIC's statutory capital at December 31, 2000 that
would result in statutory capital below the minimum surplus requirement at
December 31, 2000. The proposed adjustments relate to affiliate receivables and
income tax recoverables and would decrease statutory surplus by approximately
$960,000. The Department's examination of the fiscal year 2001 statutory
financial statements is currently in progress.
The following schedule reconciles statutory net loss and surplus of UPCIC as
reported in the 2001 and 2000 annual statements filed with the DOI, prepared on
the basis of statutory accounting principles, to UPCIC's net loss for the years
ended December 31, 2001 and 2000 and stockholders' equity under GAAP at December
31, 2000:
Year Ended Year Ended
December 31, 2001 December 31, 2000
------------------------- -----------------
Net Loss Surplus Net Loss
-------- ------- --------
Balance per statutory financial statement,
as originally filed $ (1,133,115) $ 4,400,342 $ (637,509)
Increase allowance for other receivables
(91,078) (91,078) -
Increase accrued expenses
(99,758) (99,758) -
Decrease liability for losses
69,494 69,494 -
Increase deferred income tax asset
53,343 53,343 -
Increase non-admitted assets - (207,463) -
------------- ------------ ------------
Balance per statutory financial
statement, as adjusted (1,201,114) 4,124,880 (637,509)
Deferred policy acquisition costs (1,268,725) 529,942 (722,209)
Deferred income taxes 287,228 (396,222) 117,531
------------- ------------ ------------
Balance in conformity with GAAP $ (2,182,611) $ 4,258,600 $ (1,242,187)
The State of Florida has adopted the National Association of Insurance
Commissioners' statutory accounting principles ("NAIC SAP") with certain
modifications as the basis of its statutory accounting practices. The State of
Florida requires all insurance companies to adopt NAIC SAP effective January 1,
2001. In addition, the Commissioner of the State of Florida Department of
Insurance has the right to permit other specific practices that may deviate from
prescribed practices. Included in UPCIC's adjusted statutory capital of
$4,124,880 as of December 31, 2001 are approximately $851,000 of affiliate
receivables which are considered non admitted assets under NAIC SAP. These
amounts were collected during the first quarter of 2002. Based on these
collections, UPCIC has commenced discussions with the DOI to admit these assets.
A reconciliation between UPCIC's statutory capital (or "net worth"), as adjusted
(above) and NAIC SAP as of December 31, 2001 is shown below:
Statutory surplus, as adjusted $ 4,124,880
Affiliate balances under discussion as
permitted practice (850,891)
------------------
Statutory surplus in conformity with NAIC SAP $ 3,273,989
==================
NOTE 10 - RELATED PARTY TRANSACTIONS
All underwriting, rating, policy issuance and administration functions for UPCIC
during 2000 and 2001 were performed by Universal Management pursuant to a
Management Agreement dated June 2, 1997 and Addenda thereto dated June 12, 1997
and June 1, 1998. Universal Management is a wholly-owned subsidiary of American
European Group, Inc., a Delaware insurance holding company. UPCIC and Universal
Management terminated the management agreement effective as of January 15, 2002.
During the years ended December 31, 2001 and 2000, UPCIC incurred administrative
costs to Universal Management of $911,449 and $1,122,377, respectively. Services
previously provided by Universal Management to UPCIC under the management
agreement are now performed by UPCIC, Universal Risk Advisors, Inc., a
wholly-owned subsidiary of the Company, and unaffiliated third parties.
As of December 31, 2001, corporate counsel held $290,000 in trust, for the
benefit of the Company, which funds were placed in trust in connection with a
dispute involving a Company director and an unrelated entity. These funds are
included in cash and cash equivalents as of December 31, 2001.
NOTE 11- INCOME TAX PROVISION
F-20
Since its inception, the Company has incurred cumulative tax-operating losses.
Therefore, the Company has not incurred any significant income tax liabilities
during that time. As of December 31, 2001, the Company had net operating loss
carryforwards totaling approximately $8,324,000 which are available to offset
future taxable income, if any, through 2021.
The following table reconciles the statutory federal income tax rate to the
Company's effective tax rate for the years ended December 31, 2001 and 2000:
2001 2000
---- ----
Statutory federal income tax rate 34.0% 34.0%
Increases (decreases) resulting from:
Change in valuation allowance (36.7%) (33.8%)
Other 2.7% (0.2%)
-------- ---------
Effective tax rate 0.0% 0.0%
======== =========
Deferred income taxes at December 31, 2001 are provided for the temporary
differences between financial reporting basis and the tax basis of the Company's
assets and liabilities under SFAS 109. The tax effects of temporary differences
are as follows:
Deferred income tax assets:
Net operating loss carryforward $ 3,133,000
Unearned premiums 334,000
Unpaid losses 135,000
Organizational costs 29,000
-----------
3,631,000
-----------
Deferred income tax liabilities:
Property, plant and equipment (36,000)
Deferred acquisition costs (199,000)
-----------
Subtotal (235,000)
-----------
Net deferred income tax asset 3,396,000
Less: valuation allowance (3,396,000)
$ -
===========
A valuation allowance is deemed necessary because management does not believe
that is more likely than not that the Company will generate taxable income
sufficient to realize the tax benefits associated with the net deferred tax
asset shown above.
F-21
The remaining net operating loss carryforwards will expire as follows:
Expiration
2007 $ 328,000
2008 1,010,000
2009 1,116,000
2010 677,000
2011 1,570,000
2012 1,379,000
2013 5,000
2020 1,229,000
2021 1,010,000
---------
$ 8,324,000
===========
NOTE 12 - STOCKHOLDERS' EQUITY
CUMULATIVE PREFERRED STOCK
In October 1994, 49,950 shares of Series A Preferred Stock were issued in
repayment of $499,487 of related party debt, and 88,690 shares of Series M
Preferred Stock were issued during fiscal year ended April 30, 1997 for
repayment of $88,690 of related party debt. Each share of Series A and M
Preferred Stock is convertible by the Company into 2.5 shares of Common Stock
and 5 shares of Common Stock, respectively, into an aggregate of 568,326 common
shares. Beginning May 1, 1998, the Series A Preferred Stock pays a cumulative
dividend of $.25 per share per quarter. In connection with this issuance of the
Series A Preferred Stock, the Company issued the holders warrants to purchase
12,488 shares of Common Stock at $4.25 per share, exercisable through October
17, 2004.
STOCK OPTIONS
The Company adopted a 1992 Stock Option Plan (the "Plan") under which shares of
Common Stock are reserved for issuance upon the exercise of the options. The
Plan is designed to serve as an incentive for attracting and retaining qualified
and competent employees, officers, directors and consultants of the Company. All
employees, officers, directors and consultants of the Company or any subsidiary
are eligible to participate in the Plan.
A summary of the option activity for the years ended December 31, 2001 and 2000
is presented below:
Weighted
Average
Number Option Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2000 5,813,624 $ 0.63 $ 22.00 $ 1.32 5,813,624 $ 1.32
Granted 455,000 $ 1.00 $ 1.10 $ 1.08
----------
Outstanding December 31, 2000 6,268,624 $ 0.63 $ 22.00 $ 1.30 6,268,624 $ 1.30
Granted 570,000 $ 0.50 $ 1.00 $ 0.59
----------
Outstanding December 31, 2001 6,838,624 $ 0.50 $ 22.00 $ 1.24 6,838,624 $ 1.24
The following table summarizes the information about options outstanding at
December 31, 2001:
Options Outstanding and Exercisable
-----------------------------------
Weighted Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (in years) Exercise Price
--------------- ----------- ---------- --------------
$.0.50 - $1.87 6,660,000 5.9 $1.12
$ 2.88 - $3.88 142,999 3.4 $3.39
$ 6.00 - $22.00 35,625 2.0 $14.52
----------------
6,838,624
================
The Company adopted a 2000 Stock Option Plan (the "Tigerquote.com Plan") under
which shares of Common Stock of Tigerquote.com are reserved for issuance upon
the exercise of the options. The Tigerquote.com Plan is designed to serve as an
incentive for attracting and retaining qualified and competent employees,
officers, directors and consultants of the Company. All employees, officers,
directors and consultants of the Company or any subsidiary are eligible to
participate in the Plan.
A summary of the option activity of the Tigerquote.com Plan for the years ended
December 31, 2001 and 2000 is presented below:
Weighted
Average
Number Option Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2000 - $ - $ - $ - - $ -
Granted 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
-------
Outstanding December 31, 2000 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
Granted - $ - $ - $ - - $ -
-------
Outstanding December 31, 2001 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
------------------------------------------------------------------------------------------------------------------
The following table summarizes the information about options outstanding at
December 31, 2001:
Options Outstanding and Exercisable
-----------------------------------
Weighted Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (in years) Exercise Price
--------------- ----------- ---------- --------------
$.0.50 835,000 8.25 $0.50
-------
835,000
-------
As described in Note 2, the Company accounts for stock-based compensation using
the provisions of APB No. 25 and related interpretations. No compensation
expense has been recognized in the years ended December 31, 2001 and 2000 for
options granted to employees and directors as the exercise prices for stock
options granted are equal to their fair market value at the time of grant. The
Company expenses the fair value (as determined at the grant date) of options and
warrants granted to non-employees over the vesting period. Had compensation cost
for options granted to employees and directors been determined in accordance
with the fair value provisions of SFAS 123, the Company's net loss and net loss
per share would have been as follows:
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------- -----------------
Net loss:
As reported $(3,039,350) $ (1,488,164)
Pro forma $(3,415,783) $ (1,972,325)
Net loss per share:
Basic
As reported $ (0.21) $ (0.10)
Pro forma $ (0.23) $ (0.13)
Diluted
As reported $ (0.21) $ (0.10)
Pro forma $ (0.23) $ (0.13)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option Pricing Model with the following weighted-average
assumptions.
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------- -----------------
Dividend yield 0.00% 0.00%
Expected life of option 5 years 5 years
Risk free interest rate 6.50% 6.50%
Expected volatility 104.69% 86.56%
Using the Black-Scholes Pricing Model, the estimated weighted average fair value
per option granted during the years ended December 31, 2001 and 2000 was $0.12
and $.79, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
The pro forma amounts may not be representative of the future effects on
reported net income (loss) and net income (loss) per share that will result from
the future granting of stock options since the pro forma compensation expense is
allocated over the periods in which options become exercisable and new option
awards are granted each year.
F-24
WARRANTS
A summary of the warrant activity for the years ended December 31, 2001 and 2000
is presented below:
Warrants Exercisable
Weighted Weighted
Average Average
Number Warrant Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2000 4,393,652 $ 0.75 $ 6.00 $ 1.34 4,393,652 $ 1.34
Granted 325,000 $ 1.00 $ 3.25 $ 2.15
Canceled (325,000) $ 1.00 $ 3.25 $ 2.15
---------
Outstanding December 31, 2000 4,393,652 $ 0.75 $ 6.00 $ 1.34 4,393,652 $ 1.34
Granted - $ - $ - $ -
---------
Outstanding December 31, 2001 4,393,652 $ 0.75 $ 6.00 $ 1.34 4,393,652 $ 1.34
The following table summarizes the information about warrants outstanding at
December 31, 2001:
Warrants Outstanding and Exercisable
------------------------------------
Weighted Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (in years) Exercise Price
--------------- ----------- -------- --------------
$.0.75 - $1.50 3,614,109 2.9 $1.01
$1.75 - $6.00 779,543 3.9 $2.84
-------------
4,393,652
=============
No warrants were issued in 2001. During the year ended December 31, 2000, the
Company issued and canceled 325,000 warrants to purchase Common Stock at prices
ranging from $1.00 to $3.25 per share for investor relation services.
OTHER STOCK ISSUANCES
During the year ended December 31, 2001, the Company issued no shares of Common
Stock. During the year ended December 31, 2000, the Company issued 100,000
shares of Common Stock at a price of $.375 per share for the purchase of a
website and domain name. The value of the shares was based on the quoted market
price at the date of issuance.
STOCK GRANTOR TRUST
On April 3, 2000, the Company established the Universal Insurance Holdings, Inc.
Stock Grantor Trust ("SGT") to fund its obligations arising from its various
stock option agreements. The Company funded the SGT with 2,900,000 shares of
Company Common Stock. In exchange, the SGT has delivered $29,000 and a
promissory note to the Company for approximately $2,320,000 which together
represent the purchase price of the shares. Amounts owed by the SGT to the
Company will be repaid by cash received by the SGT, which will result in the SGT
releasing shares to satisfy Company obligations for stock options.
F-25
NOTE 13 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
In 1997 the Company entered into a four-year employment agreement with the
president of the Company. Under the terms of the employment agreement, the
president will devote substantially all of his time to the Company and will be
paid a base salary of $250,000 per year with a 5% annual increase. Additionally,
pursuant to the employment agreement, and during each year thereof, the
president is entitled to a bonus equal to 3% of pretax profits up to $5,000,000
and 4% of pretax profits in excess of $5,000,000. On May 4, 2001, Addendum No. 3
to the employment agreement was approved by the Board of Directors, whereby Mr.
Meier was entitled to receive an additional fifteen (15%) percent increase in
his base compensation in addition to the cumulative base compensation and
increase calculated at the beginning of 2001, retroactive to January 1, 2001;
and for each successive year of the term of the employment agreement the base
compensation as adjusted by previous increase(s) shall be increased by ten (10%)
percent. The employment agreement contains non-competition and non-disclosure
covenants. Under the terms of the agreement in 1999, the president was granted
ten-year stock options to purchase 1,500,000 shares of Common Stock at $1.00 per
share, of which 500,000 options vested immediately, 500,000 options vested after
one year and the remaining options vested after two years. The exercise price of
the options equaled the market price of the Company's Common Stock at the date
of grant. In addition, the agreement may be extended for an additional two years
at the option of the president.
NOTE 14 - LITIGATION
Certain lawsuits have been filed against the Company. In the opinion of
management, none of these lawsuits, except for the lawsuit described below, are
material and they are all adequately reserved for or covered by insurance or, if
not so covered, are without merit or involve such amounts that if disposed of
unfavorably would not have a material adverse effect on the Company's financial
position or results of operations.
Universal Management performed various services with respect to UPCIC insurance
policies and received fees for performing these services based upon policies
written pursuant to an agreement originally executed in 1997. The parties agreed
to terminate the agreement effective January 15, 2002. Universal Management
communicated to UPCIC that all management services would cease on the date of
termination rather than continuing through the life of the policies for which
fees were paid on a premiums written basis. As a result, UPCIC ceased remittance
of the management fees to Universal Management as of September 1, 2001. On
November 6, 2001, UPCIC filed a Complaint against Universal Management in the
United States District Court for The Southern District of Florida, Miami
Division, alleging breach of contract and demanding specific performance and
unspecified damages. On December 28, 2001, Universal Management filed a
counterclaim for breach of contract, alleging that it is entitled to fees for
policies written from September 2001 through the date of termination. Such fees
would amount to approximately $672,000 as of December 31, 2001. As of December
31, 2001, UPCIC has recorded a receivable from Universal Management representing
the management fees remitted on the basis of premiums earned subsequent to the
termination date, and has provided an allowance for doubtful accounts for the
entire receivable. Discovery is in the early stages and the likelihood of an
unfavorable outcome or the likely amount associated therewith cannot be
estimated. Therefore, UPCIC has not accrued a liability with respect to the
management fees claimed by Universal Management.
F-26
NOTE 15 - EARNINGS PER SHARE
The following table reconciles the numerator (earnings) and denominator (shares)
of the basic and diluted earnings per share computations for net income (loss)
for the years ended December 31, 2001 and 2000.
Year Ended Year Ended
December 31, 2001 December 31, 2000
Loss Loss
Available to Available to
Common Common
Stockholders Per Share Stcokholders Per Share
Amount Shares Amount Amount Shares Amount
------ ------ -------- ------ ------ ------
Net loss $(3,039,350) $(1,488,164)
Less: Preferred stock dividends (49,950) (49,949)
----------- -----------
Loss available
to common stockholders (3,089,300) 14,698,000 $ (0.21) (1,538,113) 14,788,000 $ (0.10)
======= =======
Effect of dilutive securities:
Stock options and warrants - - - - - -
Preferred Stock - - - - - -
----------- ---------- -------- ----------- ---------- --------
Loss available to common
stockholders and assumed
conversion $(3,089,300) 14,698,000 $ (0.21) $(1,538,113) 14,788,000 $ (0.10)
=========== ========== ======== =========== ========== ========
Options and warrants totaling 11,232,276 and 10,737,276 were excluded from the
calculation of diluted earnings per share as their effect was anti-dilutive for
the years ended December 31, 2001 and 2000, respectively.