-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OiXS7pGWug5+cOJHqCtAJBTY7FpzmW7oyEb2pbhG+3WVQb9zGeVDRBKe/dwNr7da 8lGUjcqE/pYn+n9+4qJA/g== 0000898432-01-000287.txt : 20010409 0000898432-01-000287.hdr.sgml : 20010409 ACCESSION NUMBER: 0000898432-01-000287 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL INSURANCE HOLDINGS INC CENTRAL INDEX KEY: 0000891166 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 650231984 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-20848 FILM NUMBER: 1589940 BUSINESS ADDRESS: STREET 1: 2875 NE 191 STREET STREET 2: SUITE 400A CITY: MIAMI STATE: FL ZIP: 33180 BUSINESS PHONE: 3057924200 MAIL ADDRESS: STREET 1: 2875 NE 191 STREET CITY: MIAMI STATE: FL ZIP: 33180 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSAL HEIGHTS INC DATE OF NAME CHANGE: 19950817 10KSB 1 0001.txt 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, 2000 [ ] 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 OTC BULLETIN BOARD WARRANTS (Name of exchange where registered) (Title of each class) 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. [X] State issuers revenues for its most recent fiscal year: $9,146,016 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, 2000: $9,309,115 State the number of shares of Common Stock of Universal Insurance Holdings, Inc. outstanding as of March 1, 2000: 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 its 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 ("Private Offering"). 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, 2000, UPCIC has received bonus payments of approximately $2,700,000 based upon a portfolio takeout of approximately 30,000 policies. Bonus payments must be held in escrow for three years. After the three-year period, if certain conditions are met, including maintaining a minimum number of policies, UPCIC will have unrestricted use of the bonus payments. In addition, UPCIC will have investment income from the bonus payments that will also be available at the end of the three years. These bonus payments will not be 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. In March 2001, bonus payments of $1,815,200 were released from escrow for 18,152 policies which reached their three-year anniversary in the first two months of 2001. 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 the Company. In an effort to further grow its insurance operations, in 1998 UPCIC also began to solicit business actively in the open market through independent agents. In determining appropriate guidelines for such open market policy sales, UPCIC 2 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 (RMS). UPCIC's portfolio at December 31, 2000 includes approximately 30,000 policies with coverage for wind risks and 10,000 policies without wind risk. The average wind premium is approximately $790 and the average ex-wind premium is approximately $480. Approximately 36% of the policies are located in Dade, Broward and Palm Beach counties. OPERATIONS All underwriting, rating, policy issuance and administration functions for UPCIC are 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. Universal Management and AEG both employ Joseph DeAlessandro as a senior officer and director. Mr. DeAlessandro has over 40 years of experience in the insurance industry having served as a senior executive with a number of insurance companies, including American International Group, Travelers Insurance Group and its subsidiary, Gulf Insurance Company. Claims handling functions for UPCIC were initially administered by an independent claims adjustment firm licensed in Florida that is nationally recognized as an expert in claims adjusting and which has catastrophe response capabilities. UPCIC retained oversight of claims administration by imposing specified limits of claims settlement authority and by conducting regular audits of claims practices. In 1999, the Company formed Universal Adjusting Corporation, a wholly-owned subsidiary, which currently performs claims adjustment for UPCIC claims. 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's as well as third party insurance products through the Company's distribution network. The Company markets and distributes UPCIC's products and services primarily in Florida, through a network of approximately 860 active independent agents. The Company believes that it can be distinguished from its competitors by providing quality service to both its agents and insureds. 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. 3 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. and Tigerquote.com Insurance Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23, 1999, respectively. Tigerquote.com Insurance & Financial Services Group, Inc., which is not yet operational, will be 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. The Company has also formed an inspection company Universal Inspection Corporation, which was incorporated in Florida on January 3, 2000. Universal Inspection Corporation performs property inspections for homeowners' policies underwritten by UPCIC and the JUA. 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 maintain 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. 4 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. There can be no assurance that UPCIC will successfully address these risks by successfully executing its growth strategy and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. 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 $700,000 up to the 100 year PML. 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 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. 5 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. DEPENDENCE ON KEY INDIVIDUALS AND THIRD PARTIES UPCIC's operations are materially dependent upon the efforts of Universal Management, whose key executives include Joseph P. DeAlessandro, Chairman and Chief Executive Officer; David Asher, Senior Vice President and Chief Underwriting Officer; Robert Thomas, Chief Financial Officer and Executive Vice President; and Barry J. Goldstein, Senior Vice President. In addition, 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 Universal Management's key executives or 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, 2001, 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. See "Executive Compensation--Employment Agreement." ITEM 2. DESCRIPTION OF PROPERTY The Company leases approximately 2,700 square feet of office space for its corporate headquarters in Miami, Florida under a three-year lease expiring April 30, 2003. The Company leases approximately 1,500 square feet of office space in Hallandale, Florida under a three-year lease expiring January 31, 2002, to operate its MGA. The Company also leases approximately 1,000 square feet of office space in Hallandale, Florida under a two year lease expiring January 31, 2002 to operate its claims adjusting and inspection companies. The Company leases approximately 600 square feet of office space in its Ormond Beach agency operation under a lease expiring April 30, 2001. In addition, the Company has leased offices for its internet insurance agencies on a month to month basis in executive office suites located in various states. 6 ITEM 3. LEGAL PROCEEDINGS Certain lawsuits have been filed against the Company. In the opinion of management, 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 proceeding, (4) involve material federal, state, or local environmental laws, 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 (5) are material proceedings to which any director, officer, affiliate of the Company, any owner of record or beneficially 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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, 1999 High Low - ---------------------------- ---- ---- First Quarter $ 1.25 $ 0.70 Second Quarter 1.19 0.88 Third Quarter 1.25 0.88 Fourth Quarter 1.81 0.94 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 At March 1, 2001, there were 39 shareholders of record of the Company's Common Stock. There were 444 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 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. The Company has never paid a cash dividend on its Common Stock and does not anticipate the payment of cash dividends in the foreseeable future. The Company intends to retain any earnings for use in the development and expansion of its business. 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 its Board of Directors determines to do so, may be 7 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. 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's insurance subsidiary, UPCIC, maintains a separate account to hold the minimum required capitalization as well as gains in surplus. In June 1997, the Company named Joseph DeAlessandro Chairman of the Board and Chief Executive Officer of UPCIC. See Item 9, "Key Employees," for a description of Mr. DeAlessandro's insurance industry experience. In connection with Mr. DeAlessandro's appointments, the Company entered into an agreement with Universal P&C Management Co. headed by Mr. DeAlessandro to provide underwriting, claims and accounting services to UPCIC. In addition, as part of becoming a financial services company, in March 1997, Dr. Irwin Kellner, former chief economist for Chase Manhattan's Regional Bank, was appointed to the Company's Board of Directors. 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 has received approximately $90 per policy in bonus incentive funds from the JUA for assuming the policies. The bonus funds must be maintained in an escrow account for three years. These bonus payments will not be included in the Company's assets until receipt at the end of the three-year period. UPCIC must not cancel the policies from the JUA for this three-year period at which point UPCIC will receive the bonus funds. To date, the Company has substantially complied with requirements related to the bonus payments. In March 2001, bonus payments of $1,815,200 were released from escrow for 18,152 policies which reached their three-year anniversary in the first two months of 2001. 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. The primary use of the Private Offering was to provide cash needed for the capitalization of UPCIC. 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 the Company. 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 8 solicited in the market through independent agents, UPCIC is currently servicing approximately 40,000 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 (RMS). To diversify UPCIC's product lines, UPCIC has begun underwriting inland marine and personal umbrella liability 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. RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2000 AND YEAR ENDED DECEMBER 31, 1999. Gross premiums written increased 31.5% to $28,710,230 for the year ended December 31, 2000 from $21,837,777 for the year ended December 31, 1999. The increase in gross premiums written is primarily attributable to the Company's effort to solicit business in the open market through independent agents. Net premiums written decreased 30.6% to $4,587,534 for the year ended December 31, 2000 from $6,608,597 for the year ended December 31, 1999. The decrease in net premiums written reflects the impact of reinsurance, since $24,122,697 or 84.0% of premiums written were ceded to reinsurers for the year ended December 31, 2000 as compared to $15,229,180 or 69.7% for the year ended December 31, 1999. This was a result of increased costs of the reinsurance program relative to the premium base in 2000 as well as a higher rate of cession on the quota share reinsurance treaty. Net premiums earned decreased 6.1% to $6,367,045 for the year ended December 31, 2000 from $6,782,476 for the year ended December 31, 1999. The decrease in net premiums earned is attributable to policies assumed from the JUA as part of the Takeout Program that did not renew with the Company during 1999, as well as a result of increased costs of the reinsurance program and a higher rate of cession on the quota share reinsurance treaty. The decrease was mitigated by the Company's effort to solicit business in the open market. Commission income increased 17.9% to $1,610,175 for the year ended December 31, 2000 from $1,365,811 for the year ended December 31, 1999. 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 increased 85.2% to $1,168,796 for the year ended December 31, 2000 from $630,908 for the year ended December 31, 1999. The increase is primarily due to gains recognized on the sale of equity securities in the year ended December 31, 2000. Losses and loss adjustment expenses ("LAE") incurred increased 7.7% to $4,161,661 for the year ended December 31, 2000 from $3,864,309 for the year ended December 31, 1999 as compared to net premiums earned which decreased 6.1% to $6,367,045 for the year ended December 31, 2000 from $6,782,476 for the year ended December 31, 1999. The Company's loss ratio for the year ended December 31, 2000 was 65.4% compared to 57.0% for the year ended December 31, 1999. 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 loss ratio increased because the loss ratio is dependent on net premiums earned and the fact that the ratio of net premiums earned over gross premiums written decreased to 22.2% for the year ended December 31, 2000 from 31.1% for the year ended December 31, 1999. The ratio changed due to increased costs of the Company's catastrophe reinsurance program and a higher rate of cession on the quota share reinsurance treaty. During 2000, Florida did not experience windstorm catastrophes. During 1999, Florida experienced one windstorm catastrophe. As a result of this storm, the Company incurred approximately $800,000 in losses prior to reinsurance and $400,000 net of reinsurance. These losses resulted in 5.9% of the 1999 loss ratio. Except for these claims, the Company believes that the severity and frequency of claims remained relatively stable for the years under comparison. 9 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 UPCIC's 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 73.1% to $6,472,519 for the year ended December 31, 2000 from $3,739,443 for the year ended December 31, 1999. General and administrative expenses have increased due to further development of the Company's insurance operations. Approximately $1,500,000 of general and administrative expenses were incurred in 2000 developing the Company's insurance Internet initiative. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital are premium revenues, commission income and investment income. For the year ended December 31, 2000, cash flows used in operating activities were $4,804,570, primarily due to JUA policies that did not renew. Cash flow is expected to be positive in both the short-term and reasonably foreseeable future. In addition, the Company's investment portfolio is highly liquid as it consists almost entirely of readily marketable securities. The Company believes that its current capital resources will be sufficient to support current operations and expected growth for at least 24 months. The balance of cash and cash equivalents at December 31, 2000 is $10,357,663. This amount along with readily marketable debt and equity securities aggregating $3,735,968 would be available to pay claims in the event of a catastrophic event pending reimbursement for any aggregate amount in excess of $700,000 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. 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. The Company is in compliance with these requirements. 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 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 accrued to date. The Company is required to comply with the National Association of Insurance Commissioner's ("NAIC") Risk-Based Capital requirements ("RBC"). 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. NAIC's RBC standards are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of December 31, 2000, based on calculations using the appropriate NAIC formula, the Company's total adjusted capital is in excess of the amount which would require any form of regulatory action. Generally accepted accounting principles differ in some respects from reporting practices prescribed or permitted by the Florida Department of Insurance. UPCIC's statutory capital and surplus was $4,585,739 as of December 31, 2000 and $5,469,308 as of December 31, 1999. Statutory net loss was $637,509 for the year ended December 31, 2000 and $276,339 for the year ended December 31, 1999. 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 requires the measurement of financial position and operating results in 10 terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities 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-23. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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, 2000 are as follows: Name Age Position - ---- --- -------- Bradley I. Meier 33 President, Chief Executive Officer, Assistant Secretary and Director Norman M. Meier 62 Director Irwin I. Kellner 62 Director, Secretary Reed J. Slogoff 32 Director Joel M. Wilentz 67 Director James M. Lynch 46 Vice President and Chief Financial 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 May 1998. 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 ("Key"). From 1977 until 1986, Mr. Meier served as a consultant to Key. 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 Hofsta 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 1996 through 1997, Dr. Kellner was the Chief Economist for Chase Manhattan's Regional Bank, and held the same position from 1980 to 11 1996 at Chemical Bank and Manufacturers Hanover Trust, predecessors to Chase. Dr. Kellner had been employed by the bank since 1970. Dr. Kellner is a member of the boards of several organizations, including Claire's Stores, 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. Since December 1998, Mr. Slogoff has been Associate Counsel to Entercom Communications Corp., a publicly-traded radio broadcasting company. Prior to joining the Entercom management team, Mr. Slogoff was a member of the corporate and securities department in the Philadelphia office of the law firm 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 USA, 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, 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 specializes 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. Except for Norman M. Meier and Bradley I. Meier, who are father and son, respectively, there are no immediate 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. KEY EMPLOYEES JOSEPH P. DEALESSANDRO was named Chairman of the Board and Chief Executive Officer of UPCIC in June 1997. Mr. DeAlessandro has served as President and CEO of Rutgers Casualty Insurance Company from July 1995 to present and President and CEO of Kentucky National Insurance Company from October 1995 to present. Prior to serving in such capacities, Mr. DeAlessandro served in executive management positions at both Gulf Insurance Co. and Traveler's Insurance Group, and was a senior key executive at AIG Insurance Group for over 20 years. Mr. DeAlessandro is 70 years old. 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. 12 SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
Name and Year Ended Long Term Compensation Principal Position December 31 Salary Bonus Securities Underlying Options - ------------------ ----------- ------ ----- ----------------------------- Bradley I. Meier 2000 $ 270,000 $ 0 166,666 President and CEO 1999 257,800 40,000 775,000 1998 250,000 66,215 250,000 James M. Lynch 2000 $ 122,500 $10,000 20,000 Vice President and CFO 1999 113,000 15,000 45,000 1998* 42,917 3,000 50,000 *Mr. Lynch was hired on August 1, 1998.
OPTION/SAR 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 166,666* 82% $0.60 2010 James M. Lynch 20,000* 10% $0.60 2010 *Options Granted Under Tigerquote.com Insurance and Financial Services Group, Inc. Non-Qualified Stock Option Plan
AGGREGATED OPTION EXERCISES AND OPTION VALUES FOR THE YEAR ENDED DECEMBER 31, 2000
Shares Number of Securities Number of Unexercised Acquired on Unexercised Options at In-The-Money Options December 31, 2000 December 31, 2000 Name Exchange Value Realized Exercisable Unexercisable Exercisable Unexercisable - ---- -------- -------------- ----------- ------------- ----------- ------------- Bradley I. Meier -- -- 166,666 -- -- -- James M. Lynch -- -- 20,000 -- -- --
EMPLOYMENT AGREEMENT As of August 11, 1999, the Company entered into a four-year employment agreement with Bradley I. 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. 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 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 13 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. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 1, 2001, directors and named executive officers, individually and as a group, beneficially owned Common Stock as follows: Shares, Nature of Interest and Name of Beneficial Owner (1) Percentage of Equity Securities (2) Bradley I. Meier (3) 5,473,484 25.6% Norman M. Meier (4) 2,540,624 11.9% Irwin L. Kellner (5) 220,000 1.0% Reed J. Slogoff (6) 220,000 0.8% Joel M. Wilentz (7) 220,000 1.0% James M. Lynch (8) 75,000 0.5% Officers and directors as a group (6 people) (9) 8,699,108 39.8% (1) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to the shares of Common Stock beneficially owned by them. The address for each director is 2875 N.E. 191st Street, Suite 300, Miami, FL 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 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 is held by such 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) 962,829 shares of Common Stock, (b) options to purchase 1,875 shares of Common Stock at an exercise price of $9.00, options to purchase 1,875 shares of Common Stock at an exercise price of $12.50, 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 at an exercise price of $1.13 per share and options to purchase 500,000 shares at $1.25 per share, (c) warrants to purchase 15,429 shares of Common Stock at an exercise price of $1.75, warrants to purchase 339,959 shares at an exercise price of $3.00 per share, warrants to purchase 82,000 shares of Common Stock at $1.00 and warrants to purchase 131,700 shares of Common Stock at a 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 $1.06 per share which vested on November 2, 1997, (f) options to purchase 500,000 shares of Common Stock at $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 $1.06 per share which vested on May 1, 1999 granted pursuant to Mr. Meier's employment agreement and (ii) an aggregate of 271,701 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, a Florida general partnership ("Belmer"), of which Mr. Meier is a general partner, (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 $1.25 per share which vested on December 23, 1999. Excludes options to purchase 625,000 shares of Common Stock of Tigerquote.com Insurance and Financial Services Group, Inc. at an exercise price of $.50 per share and options to purchase 166,666 shares of Common Stock of Tigerquote.com Insurance and Financial Services Group, Inc. at an exercise price of $.60 per share. Also excludes all securities owned by Norman Meier and Phyllis Meier, Mr. Meier's father and mother, respectively. Includes 416,666 and 250,000 shares owned by Lynda Meier and Eric Meier, respectively, who are the sister and brother, 14 respectively, of Bradley I. Meier, which shares are subject to proxies granting voting rights for such shares to Bradley I. Meier. Mr. Meier is the President, Chief Executive Officer and a Director of the Company. (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, and 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, (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 and warrants to purchase 110,000 shares of Common Stock at an exercise price of $1.00, (d) 214,938 shares of Common Stock issuable upon conversion of Series A and Series M Preferred Stock owned by such person, (e) options to purchase 500,000 shares of Common Stock at $1.06 per share which vested on November 2, 1997, and (ii) an aggregate of 271,701 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, (f) options to purchase 500,000 shares of Common Stock at an exercise price of $1.63 per share. Also (g) options to purchase 75,000 shares of Common Stock at an exercise price of $1.25 per share. Excludes options to purchase 100,000 shares of Common Stock of Tigerquote.com Insurance and Financial Services Group, Inc. at an exercise price of $.50 per share. Excludes all securities owned by Bradley Meier or Phyllis Meier. Mr. Meier is a Director of the Company, the father of Bradley Meier, the President of the Company and the former spouse of Phyllis Meier. (5) Consists of options to purchase 100,000 shares of Common Stock at an exercise price of $1.06 per share, options to purchase 100,000 shares of Common Stock at an exercise price of $1.63 per share and 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 Insurance and Financial Services Group, Inc. at an exercise price of $.50 per share. Dr. Kellner is a Director of the Company. (6) Consists of options to purchase 100,000 shares of Common Stock at an exercise price of $1.06 per share, options to purchase 50,000 shares of Common Stock at an exercise price of $1.63 per share and options to purchase 20,000 shares of Common Stock at an exercise price of $1.25 per share. Excludes options to purchase 50,000 shares of Common Stock at an exercise price of $1.63 per share held by a custodian for the benefit of Mr. Slogoff's son and options to purchase 20,000 shares of Common Stock of Tigerquote.com Insurance and Financial Services Group, Inc. at an exercise price of $.50 per share. Mr. Slogoff is a Director of the Company. (7) Consists of options to purchase 100,000 shares of Common Stock at an exercise price of $1.06 per share, options to purchase 100,000 shares of Common Stock at an exercise price of $1.63 per share and 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 Insurance and Financial Services Group, Inc. at an exercise price of $.50 per share. Mr. Wilentz is a Director of the Company. (8) Consists of options to purchase 50,000 shares of Common Stock at an exercise price of $1.87 per share and options to purchase 25,000 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 Insurance and Financial Services Group, Inc. at an exercise price of $.50 per share and options to purchase 20,000 shares of Common Stock of Tigerquote.com Insurance and Financial Services Group, Inc. at an exercise price of $.60 per share. Mr. Lynch is Vice President and Chief Financial Officer of the Company. (9) See footnotes (1) - (8) above 15 As of March 1, 2001, 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:
Number of Shares Name and Address Beneficially Owned Percent of Class (1) (2) - ---------------- ------------------ ------------------------ Phyllis R. Meier (3) 996,426 6.4% Universal Insurance Holdings, Inc. 2875 N.E. 191st Street Suite 300 Miami, Florida 33180 Belmer Partners (4) 271,701 1.7% c/o Phyllis R. Meier Managing General Partner Universal Insurance Holdings, Inc. 2875 N.E. 191st Street Suite 300 Miami, Florida 3318
(1) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to the shares of Common Stock beneficially owned by them. (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 354,115 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 271,701 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. Ms. Meier is managing general partner of Belmer. (4) Consists of (a) 54,533 shares of Common Stock, (b) 67,168 shares of Common Stock issuable upon exercise of warrants and (c) 150,000 shares of Common Stock issuable upon conversion of Series A and Series M Preferred Stock. Belmer Partners is a Florida general partnership in which Phyllis R. Meier is managing general partner and Bradley I. Meier and Norman M. Meier are general partners. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS All underwriting, rating, policy issuance and administration functions are performed for UPCIC by Universal Management pursuant to a Management Agreement dated June 2, 1997 ("Management Agreement") and Addenda thereto dated June 12, 1997 and June 1, 1998 ("Addenda"). Universal Management is a wholly-owned subsidiary of AEG which is a Delaware insurance holding company. Universal Management and AEG both employ UPCIC's CEO, Joseph P. DeAlessandro, as a senior officer and director. During the years ended December 31, 2000 and 1999, UPCIC incurred administrative costs to Universal Management of $1,122,377 and $1,057,766 respectively. 16 As of December 31, 2000, 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, 2000. 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) 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. 17 REPORTS ON FORM 8-K None 18 SIGNATURES Pursuant to the requirements 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: March 31, 2001 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 March 31, 2001 - ---------------------- Officer and Director Bradley I. Meier /s/ James M. Lynch Chief Financial Officer March 31, 2001 - -------------------- James M. Lynch /s/ Norman M. Meier Director March 31, 2001 - --------------------- Norman M. Meier /s/ Irwin I. Kellner Director March 31, 2001 - ---------------------- Irwin I. Kellner /s/ Reed J. Slogoff Director March 31, 2001 - -------------------- Reed J. Slogoff /s/ Joel M. Wilentz Director March 31, 2001 - -------------------- Joel M. Wilentz 19 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report....................................................................................F-2 Consolidated Balance Sheet - December 31, 2000..................................................................F-3 Consolidated Statements of Operations for the Years Ended December 31, 2000 and 1999 ...........................F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000 and 1999..................F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000 and 1999......................F-6 - F-7 Notes to Consolidated Financial Statements...............................................................F-8 - F-23
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Universal Insurance Holdings, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of Universal Insurance Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2000, 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, 2000, 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. /s/ Deloitte & Touche LLP Certified Public Accountants Miami, Florida March 28, 2001 F-2 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000
ASSETS Debt securities held-to-maturity (fair value of $3,440,923).............................................$ 3,440,550 Equity securities available for sale (cost of $355,290).................................................. 295,418 Cash and cash equivalents................................................................................10,357,663 Prepaid reinsurance premiums and reinsurance recoverable.................................................12,687,145 Premiums and other receivables........................................................................... 845,339 Deferred policy acquisition costs........................................................................ 1,798,667 Property, plant and equipment, net....................................................................... 641,122 -------- Total assets............................................................................................$30,065,904 =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Unpaid losses and loss adjustment expenses..............................................................$ 3,468,124 Unearned premiums....................................................................................... 16,173,658 Accounts payable........................................................................................ 2,713,821 Other accrued expenses.................................................................................. 577,257 Accrued taxes, licenses and fees........................................................................ 220,674 Due to related parties.................................................................................. 20,040 ------- Total liabilities....................................................................................... 23,173,574 ---------- COMMITMENTS AND CONTINGENCIES (Note 11) 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, 17,936,379 shares issued and 17,794,584 outstanding............................................... 148,946 Common stock in treasury, at cost - 141,795 shares..................................................... (84,254) Additional paid-in capital.............................................................................. 15,126,242 Accumulated deficit.....................................................................................(8,240,119) Accumulated other comprehensive loss.................................................................... (59,872) --------- Total stockholders' equity.............................................................................. 6,892,330 ---------- Total liabilities and stockholders' equity..............................................................$30,065,904 =========== The accompanying notes to consolidated financial statements are an integral part of this statement.
F-3 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended December 31, 2000 December 31, 1999 ----------------- ----------------- PREMIUMS EARNED AND OTHER REVENUES: Premium income, net $6,367,045 $6,782,476 Net investment income 1,168,796 630,908 Commission revenue 1,610,175 1,365,811 --------- ---------- Total Revenues 9,146,016 8,779,195 --------- --------- OPERATING COST AND EXPENSES: Losses and loss adjustment expenses 4,161,661 3,864,309 General and administrative expenses 6,472,519 3,739,443 --------- --------- Total Operating Cost and Expenses 10,634,180 7,603,752 ---------- --------- NET INCOME (LOSS) $(1,488,164) $1,175,443 ============ ========== INCOME (LOSS) PER COMMON SHARE: Basic $ (0.10) $ 0.08 ============ ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 14,788,000 14,747,000 INCOME (LOSS) PER COMMON SHARE Diluted $ (0.10) $ 0.07 ============= ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 14,788,000 15,904,000 ============= ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
F-4 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated Other Preferred Common Treasury Additional Comprehensive Stock Stock Stock Paid-In Accumulated Income Shares Amount Shares Amount Shares Amount Capital Deficit (Loss) Total ------ ------ ------ ------ ------- ------ ------- ------- ------ ----- BALANCE, January 1, 1999 138,640 $1,387 14,714,584 $147,146 - $ - $15,010,541 $(7,827,499) $26,069 $7,357,644 Net income - - - - - - - 1,175,443 - 1,175,443 Net change in unrealized gain on available-for-sale securities - - 207,158 207,158 Comprehensive income - - - - - - - - - 1,382,601 Preferred stock dividend - - - - - - - (49,950) - (49,950) Issuance of common stock for services - - 80,000 800 - - 79,200 - - 80,000 ------ ------ ------ ------ ----- ----- ------- -------- ----- --------- BALANCE, December 138,640 $1,387 14,794,584 147,946 - - 15,089,741 (6,702,006) 233,227 8,770,295 ------- ------ ---------- ------- ----- ----- ---------- ----------- ------- --------- Net loss - - - - - - - (1,488,164) - (1,488,164) Net change in - - - - - - - - (293,099) (293,099) unrealized gain on --------- available-for-sale securities Comprehensive loss - - - - - - - - - (1,781,263) Preferred stock dividend - - - - - - - (49,949) - (49,949) Purchase of treasury stock - - - - 141,795 (84,254) - - - (84,254) Issuance of common - - 100,000 1,000 - - 36,501 - - 37,501 stock ------- ------ ---------- ------- ----- ----- ---------- ----------- ------- --------- BALANCE, December 138,640 $1,387 4,894,584 $148,946 141,795 ($84,254) $15,126,242 ($8,240,119) (59,872) $6,892,330 31, 2000 ======= ====== ========== ======== ======= ========= =========== ============ ======== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
F-5 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended December 31, 2000 December 31, 1999 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($1,488,164) $1,175,443 Adjustments to reconcile net income (loss) to cash (used in) provided by operations: Amortization and depreciation 98,455 151,356 Gain on sales of equity securities available for sale (190,194) (41,765) Net accretion of bond premiums and discounts (12,984) 17,174 Net change in assets and liabilities relating to operating activities: Prepaid reinsurance premiums and reinsurance (5,818,720) 1,143,703 recoverable Premiums and other receivables 36,498 (174,781) Reinsurance and recoverable on losses - 1,419,154 Deferred policy acquisition costs 722,208 (1,033,864) Accounts payable 1,131,578 466,564 Other accrued expenses (1,072,481) 225,423 Accrued taxes, licenses and fees 6,412 89,262 Unpaid losses and loss adjustment expenses 403,736 540,332 Unearned premiums 1,379,086 981,657 Due to related parties - (96,167) - -------- Net cash (used in) provided by operating activities (4,804,570) 4,863,491 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (458,715) (267,360) Purchase of equity securities available for sale (744,688) - Proceeds from sale of equity securities available 931,369 235,232 for sale Purchase of debt securities held to maturity (1,145,719) (2,173,920) Proceeds from maturities of debt securities 441,207 1,428,398 held-to-maturity Collections on notes receivable - 250,000 - ------- Net cash used in investing activities (976,546) (527,650) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Preferred stock dividend (49,949) (49,950) Purchase of treasury stock (84,254) - -------- - Net cash used in financing activities (134,203) (49,950) --------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,915,319) 4,285,891 CASH AND CASH EQUIVALENTS, Beginning of year 16,272,982 11,987,091 ---------- ---------- CASH AND CASH EQUIVALENTS, End of year $10,357,663 $16,272,982 ========== ==========
F-6 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
Year Ended Year Ended December 31, 2000 December 31, 1999 ------------------ ----------------- SUPPLEMENTAL NONCASH FINANCING AND INVESTING ACTIVITIES: Common stock issued for services rendered $ - $80,000 Issuance of stock for purchase of software $37,501 $ - The accompanying notes to consolidated financial statements are an integral part of this statement.
F-7 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES 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. and Tigerquote.com Insurance Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23, 1999, respectively. Tigerquote.com Insurance & Financial Services Group, Inc., which is not yet operational, will be an internet insurance company while Tigerquote.com Insurance Solutions, Inc. is a currently F-8 operating network of internet insurance agencies. As of December 31, 2000, these insurance agencies have been established in 22 states. 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 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. 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. BASIS OF PRESENTATION. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles that differs 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. 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. 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. 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. 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 is 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. RECOGNITION OF COMMISSION AND POLICY FEE INCOME. Commission income, 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. INSURANCE LIABILITIES. The liability for losses and loss adjustment expenses includes an amount determined from loss reports and individual cases and an amount, based on industry experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. In the case of UPCIC, this uncertainty is compounded F-9 by UPCIC's limited history of claims experience. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. REINSURANCE. In the normal course of business, the Company seeks to reduce the 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. 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 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 10). F-10 NEW ACCOUNTING PRONUUNCEMENTS. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In July 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which changes the effective date of SFAS No. 133 to financial statements for fiscal years beginning after June 15, 2000. Management has determined the effect of adopting SFAS No. 133 will not have a material impact on the Company's financial position, results of operations or cash flows. In October 1998, the AICPA issued SOP 98-7, DEPOSIT ACCOUNTING: ACCOUNTING FOR INSURANCE AND REINSURANCE CONTRACTS THAT DO NOT TRANSFER INSURANCE RISK. SOP 98-7 provides guidance on the accounting for insurance and reinsurance contracts that do not transfer insurance risk. SOP 98-7 is effective for financial statements for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. The effect of the initial adoption of SOP 98-7 is required to be reported as a cumulative effect of a change in accounting principle. The adoption of SOP 98-7 did not have any impact on the Company's financial position, results of operations or cash flows. In March 1998, the National Association of Insurance Commissioners adopted the CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES (the "Codification"). The Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The state of Florida will require adoption of the Codification for the preparation of statutory financial statements effective January 1, 2001. The Company has determined that the impact of the adoption of the Codification as modified by Florida will not have a materially adverse effect on the Company's statutory capital and surplus as of January 1, 2001. NOTE 2 - 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 approximately 65% 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, 2000, the Company has direct and assumed unearned premiums of $16,173,658. 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. The JUA's incentive program (Note 1) has provided approximately $2,700,000 to an escrow account. These funds will be released to UPCIC when certain conditions are met including assuming and retaining for a three-year period a minimum number of policies acquired from the JUA. Three years after UPCIC assumes the Takeout Program policies, the JUA will confirm UPCIC's compliance with applicable JUA requirements, and instruct the escrow agent to transfer to UPCIC an amount equal to the per policy takeout bonus times the number of policies that UPCIC has held for the requisite three year period. Pursuant to the Takeout Program, if an insured voluntarily terminates or elects not to renew a policy, the Company will still be entitled to the bonus money held in escrow for such policy. As of December 31, 2000, the Company has substantially complied with the requirements related to the bonus payments. The escrow account is not included in the accompanying consolidated financial statements. In March 2001, bonus payments of $1,815,200 were released from escrow for 18,152 policies which reached their three-year anniversary in the first two months of 2001. Premiums earned are included in earnings on a pro-rata basis over the terms of the policies. UPCIC does not have policies that provide for retroactive premium adjustments. The Company considers anticipated investment income in determining whether a premium deficiency exists. F-11 Policy acquisition costs, consisting of commissions and other costs that vary with and are directly related to the production of business, net of ceding commissions are deferred and amortized over the terms of the policies, but only to the extent that unearned premiums are sufficient to cover all related costs and expenses. At December 31, 2000, deferred policy acquisition costs amounted to $1,798,667. Claims and claim adjustment expenses, less related reinsurance, 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. NOTE 3 - REINSURANCE UPCIC's in-force policyholder coverage for windstorm exposures as of December 31, 2000 was approximately $4.6 billion. In the normal course of business, UPCIC also seeks to reduce the 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. 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, 1999, UPCIC entered into a quota share agreement with Swiss Reinsurance America Corporation, rated A+ by A.M. Best. Under the quota share treaty, UPCIC cedes a portion of its gross written premiums, losses and loss adjustment expenses with a ceding commission of 35%. The Company has the option to retroactively increase the annual cession to 75% or retroactively reduce the cession to 45%. For the nine months ended December 31, 2000, UPCIC elected to cede 65% of gross written premiums, losses and loss adjustment expenses. During 1999 and the first quarter of 2000, UPCIC ceded 50% 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. Effective January 1, 2001, UPCIC will cede 50% of gross written premiums, losses and loss adjustment expenses. EXCESS PER RISK Effective, and continuously since June 1, 1999, 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-12 EXCESS CATASTROPHE Effective February 1, 1999 UPCIC entered into an excess catastrophe reinsurance treaty with various reinsurers, including certain foreign reinsurance companies. The excess catastrophe reinsurance agreement provides three layers of excess catastrophe coverage as follows:
First Layer Second Layer Third Layer ----------- ------------ ----------- Coverage $5,000,000 in excess of $13,000,000 in excess $14,000,000 in excess of $2,000,000 each loss of $7,000,000 each $73,000,000 each loss occurrence loss occurrence occurrence (see discussion of coverage provided by Florida Hurricane Catastrophe Fund below) Deposit premium $1,500,000 $2,080,000 $1,120,000 Minimum premium $1,350,000 $1,872,000 $1,008,000 Premium rate -% of 2.0568% 2.8521% 7.0% probable maximum loss
UPCIC also obtained variable coverage of $2,000,00 in excess of the Company's 100-year probable maximum loss for a premium of $110,000. Effective June 1, 2000, 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, 2000 as follows:
First Layer Second Layer Third Layer Fourth Layer ----------- ------------ ----------- ------------ Coverage $5,000,000 in $20,000,000 in excess $12,000,000 in $10,000,000 in excess of excess of of $7,000,000 each excess of $39,000,000 each loss $2,000,000 each loss occurrence $27,000,000 each occurrence (see loss occurrence loss 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
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, 1999 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 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 F-13 Hurricane Center for losses incurred in Florida, both while it is a hurricane and through subsequent downgrades. The Fund provided UPCIC with coverage of $59,464,312 in excess of $14,123,079. The premium for this coverage was $2,128,794. Effective June 1, 2000, UPCIC entered a subsequent reimbursement agreement with the Fund under the same terms. The Fund has provided UPCIC with current coverage of $70,879,532 in excess of $19,724,457 as of December 31, 2000. The premium for this coverage was $2,759,032. In the event 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. Under UPCIC's assumption agreements with the JUA, the Takeout Program policies are exempt from such catastrophic assessments for a three-year period. In the event that a loss occurrence were to decrease the coverage available to UPCIC under the Fund, effective June 1, 1999 UPCIC purchased contingency coverage to replace the coverage provided by the Fund for 100% of losses of 47,600,000 in excess of $47,600,000 otherwise recoverable in excess of $11,300,000. Various foreign reinsurers provided this coverage. The premium for this coverage was $714,000. However, if the paid losses exceeded the third layer of UPCIC's excess catastrophe coverage or if the coverage under the Fund was depleted on an incurred basis, UPCIC would have paid an additional premium to the reinsurers of $1,523,200. Effective June 1, 2000, UPCIC purchased second event excess catastrophe reinsurance 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 is $370,000. 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, 2000 December 31, 1999 ------------------ -----------------
Loss and Loss Loss and Loss Premiums Premiums Adjustment Premiums Premiums Adjustment Written Earned Expenses Written Earned Expenses ------- ------ -------- ------- ------ -------- Direct $ 28,733,138 $ 27,354,052 $10,948,937 $ 21,947,270 $ 19,611,962 $ 7,093,063 Assumed (22,907) (22,907) (16,260) (109,493) 1,244,192 643,332 Ceded (24,122,697) (20,964,100) (6,771,016) (15,229,180) (14,073,678) (3,872,086) ------------ ------------ ----------- ------------ ------------ ----------- Net $ 4,587,534 $ 6,367,045 $ 4,161,661 $ 6,608,597 $ 6,782,476 $ 3,864,309 =========== =========== =========== =========== =========== =========== Other Amounts: December 31, 2000 ----------------- Reinsurance recoverable on unpaid losses and loss adjustment expenses $6,215,884 Unearned premiums ceded 12,326,261 Reinsurance payable (5,855,000) ----------- Prepaid Reinsurance Premiums and Reinsurance Recoverable $12,687,145 ===========
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, 2000, 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-14 NOTE 4 - INVESTMENTS Major categories of net investment income are summarized as follows:
Year Ended Year Ended December 31, 2000 December 31, 1999 ------------------ ----------------- Debt securities held-to-maturity $223,524 $135,829 Common Stocks 5,300 - Cash and cash equivalents 974,704 510,325 ------- ------- 1,203,528 646,154 Investment expenses 34,732 15,246 -------- -------- $1,168,796 $630,908 ========= =======
Proceeds from the sale of securities during 2000 and 1999 were $931,369 and $235,232, respectively. Gross gains on the sale of securities during 2000 and 1999 were $190,194 and $41,765, respectively The aggregate amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value as of December 31, 2000 for available-for-sale and held-to-maturity securities by major security type are as follows:
Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Available-for-sale securities: Equity securities $355,290 - $59,872 $295,418 ======= ====== ======= Held-to-maturity securities: U.S. government agencies $3,252,767 $52,359 $56,656 $3,248,470 Mortgage backed securities 187,783 4,744 74 192,453 ------- ----- -- ------- Total $3,440,550 $57,103 $56,730 $3,440,923 ========= ====== ====== ========= The scheduled maturities of held-to-maturity securities at December 31, 2000 were as follows:
Amortized Cost Fair Value ---- ---------- Due after five years through ten years $101,288 $103,226 Due after ten years 3,339,262 3,337,697 --------- --------- Total $3,440,550 $3,440,923 ========= ========= 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, 2000, investments with a carrying value of $300,000 were on deposit with regulatory authorities.
F-15 NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 2000 consisted of the following: Computers $87,805 Furniture 17,152 Automobiles 213,248 Software 443,417 ------- Total cost 761,622 Less: accumulated depreciation 120,500 ------- Net carrying value $641,122 ======= NOTE 6 -LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES As described in Note 2, UPCIC establishes liabilities for claims and claims 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, 2000 was approximately $4.6 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 3. Management believes that the liabilities for claims and claims expense at December 31, 2000 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-16 Activity in the liability for unpaid claims and claim adjustment expenses is summarized as follows:
Year Ended Year Ended December 31, 2000 December 31, 1999 ----------------- ----------------- Balance at beginning of year $3,064,388 $2,524,056 Less reinsurance recoverable (1,532,194) (1,271,528) ----------- ----------- Net balance at beginning of year 1,532,194 1,252,528 --------- --------- Incurred related to: Current year 4,327,661 4,385,309 Prior years (166,000) (521,000) --------- --------- Total incurred 4,161,661 3,864,309 --------- --------- Paid related to: Current year 3,348,000 2,656,000 Prior years 972,374 928,643 ------- ------- Total paid 4,320,374 3,584,643 --------- --------- Net balance at end of year 1,373,481 1,532,194 Plus reinsurance recoverable 2,094,643 1,532,194 --------- --------- Balance at end of year $3,468,124 $3,064,388 ========== ==========
The Company's liabilities for unpaid losses and LAE, net of related reinsurance recoverables, at December 31, 2000 and 1999, were decreased in the following year by $166,000, and $521,000, respectively, for claims that had occurred on or prior to the balance sheet date. This favorable loss emergence resulted principally from settling losses established in the prior year for amounts that were less than expected. NOTE 7 - 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 2000 or 1999. The Consent Order also requires that UPCIC obtain prior written approval of the DOI before amending, updating, or changing any managing general agent contracts. 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, 2000 and 1999, UPCIC was in F-17 compliance with requirements of the Code, the Consent Order and the Depopulation Consent Order. The Depopulation Consent Order expired January 16, 2001. The Company is 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. NAIC RBC standards are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating conditions. As of December 31, 2000 and 1999, based on calculations using appropriate NAIC formulas, the Company's total adjusted capital is in excess of ratios which would require any form of regulatory action. The following schedule reconciles statutory net income and surplus of UPCIC as reported in the 2000 and 1999 annual statements filed with the DOI, prepared on the basis of statutory accounting principles, to UPCIC's net income for the years ended December 31, 2000 and 1999 and stockholders' equity under GAAP at December 31, 1999:
Year Ended Year Ended December 31, 2000 December 31, 1999 ----------------- ----------------- NET INCOME SURPLUS NET INCOME Balance per statutory financial statements $(637,509) $4,585,739 $(276,339) Deferred policy acquisition costs (722,209) 1,798,667 1,033,864 Deferred income taxes 117,531 (287,227) (361,307) Other - 9,778 - ------------ ---------- ---------- Balance in conformity with GAAP ($1,242,187) $6,106,957 $396,218 ============ ========== ==========
NOTE 8 - RELATED PARTY TRANSACTIONS All underwriting, rating, policy issuance and administration functions are performed for UPCIC by Universal Property & Casualty Management, Inc. ("Universal Management") pursuant to a Management Agreement dated June 2, 1997 ("Management Agreement") and Addenda thereto dated June 12, 1997 and June 1, 1998 ("Addenda"). Universal Management is a wholly-owned subsidiary of American European Group, Inc. ("AEG"), a Delaware insurance holding company. Universal Management and AEG both employ UPCIC's CEO as a senior officer and director. During the years ended December 31, 2000 and 1999, UPCIC incurred administrative costs to Universal Management of $1,122,377 and $1,057,766, respectively. As of December 31, 2000, 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, 2000. NOTE 9 - INCOME TAX PROVISION 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, 2000, the Company had net operating loss carryforwards totaling approximately $7,294,000 which are available to offset future taxable income, if any, through 2020. F-18 The following table reconciles the statutory federal income tax rate to the Company's effective tax rate for the years ended December 31, 2000 and 1999: 2000 1999 ---- ---- Statutory federal income tax rate 34.0% 34.0% Increases (decrease) resulting from: Change in valuation allowance (33.8%) (34.4%) Other (0.2%) 0.4% ------- ------- Effective tax rate 0.0% 0.0% ======= ======= Deferred income taxes at December 31, 2000 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 tax assets: Net operating loss carryforward $2,762,000 Unearned premiums 290,000 Unpaid losses 60,000 Organizational costs 25,000 ------ 3,137,000 Deferred tax liabilities: Fixed assets (11,000) Deferred acquisition costs (677,000) --------- Subtotal (688,000) --------- Net deferred tax asset 2,449,000 Less: valuation allowance (2,449,000) ----------- Net deferred income tax asset $ - =========== 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. The net operating loss carryforwards will expire as follows: Expiration 2008 $328,000 2009 1,010,000 2010 1,116,000 2011 677,000 2012 1,570,000 2013 1,379,000 2014 5,000 2020 1,209,000 --------- $7,294,000 NOTE 10 - 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 F-19 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. The Series A and Series M Preferred Stock was redeemable by the Company at $10 per share through April 2000 and had a liquidation value of $10 per share plus accrued dividends. 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, 2000 and 1999 is presented below: Options Exercisable -------------------
Weighted Average Number Option Price Per Share Number Exercise of Shares Low High Weighted of Shares Price --------- --- ---- -------- --------- ----- Outstanding January 1, 1999 5,763,624 $0.63 $22.00 $1.32 5,763,624 $1.34 Granted 50,000 $0.75 $0.75 $0.75 ------ Outstanding December 31, 1999 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 =========
The following table summarizes the information about options outstanding at December 31, 2000: Options Outstanding and Exercisable ----------------------------------- Weighted Average Remaining Weighted Range of Number Contractual Life Average Exercise Prices Outstanding (in years) Exercise Price ----------------- ----------- ---------------- -------------- $0.63 -$1.87 6,090,000 6.7 $1.17 $2.88 -$3.88 142,999 4.9 $3.39 $6.00-$22.00 35,625 3.0 $14.52 --------- 6,268,624 ========= As described in Note 1, 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, 2000 and 1999 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 income (loss) and income (loss) per share would have been as follows: F-20 Year Ended Year Ended December 31, 2000 December 31, 1999 ----------------- ------------------ Net Loss Net Income Net income (loss): As reported $(1,488,164) $1,175,443 Pro forma $(1,972,325) $882,420 Income (loss) per share: Basic As reported $(0.10) $0.08 Pro forma $(0.13) $0.06 Diluted As reported $(0.10) $0.07 Pro forma $(0.13) $0.05 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, 2000 December 31, 1999 ----------------- ----------------- Dividend yield 0.00% 0.00% Expected life of option 5 years 5 years Risk free interest rate 6.50% 6.50% Expected volatility 86.56% 103.36% Using the Black-Scholes Pricing Model, the estimated weighted average fair value per option granted during the years ended December 31, 2000 and 1999 was $.79 and $.60, 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-21 WARRANTS A summary of the warrant activity for the years ended December 31, 2000 and 1999 is presented below:
Warrants Exercisable -------------------- Weighted Weighted Warrant Price Per Share Average Average Number ----------------------- Number Exercise of Shares Low High Weighted of Shares Price --------- --- ---- -------- --------- ----- Outstanding January 1, 1999 4,714,606 $0.75 $6.00 $1.47 4,714,606 $1.47 Canceled (320,954) $2.00 $3.50 $2.75 --------- Outstanding December 31, 1999 4,393,652 $.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 January 1, 2000 4,393,652 $.75 $6.00 $1.34 4,393,652 $1.34 =========
The following table summarizes the information about warrants outstanding at December 31, 2000: Warrants Outstanding and Exercisable ------------------------------------ Weighted Average Remaining Weighted Range of Number Contractual Average Exercise Prices Outstanding Life (in years) Exercise Price --------------- ----------- --------------- -------------- $0.75 - $1.50 3,614,109 3.7 $1.01 $1.75 - $6.00 779,543 4.9 $2.84 --------- 4,393,652 ========= During the year ended December 31, 2000, the Company issued 325,000 warrants to purchase Common Stock at prices ranging from $1.00 to $3.25 per share for investor relation services. No warrants were issued in 1999. OTHER STOCK ISSUANCES During the year ended December 31, 2000, the Company issued 100,000 shares of Common Stock of the Company 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. During the year ended December 31, 1999, the Company issued 80,000 shares of Common Stock at a price of $1.00 per share in connection with a settlement agreement and mutual release related to a previously pending lawsuit. The shares were valued 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 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-22 NOTE 11 - 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. The employment agreement contains non-competition and non-disclosure covenants. Under the terms of the agreement, 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 12 - LITIGATION Certain lawsuits have been filed against the Company. In the opinion of management, none of these lawsuits 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. NOTE 13 - 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, 2000 and 1999. Year Ended Year Ended December 31, 2000 December 31, 1999 ----------------- -----------------
Income Income Available to Available to Common Common Per Stockholders Per Share Stockholders Share Amount Shares Amount Amount Shares Amount ------ ------ ------ ------ ------ ------ Net (loss) income $(1,488,164) $1,175,443 Less: Preferred stock dividends (49,949) (49,950) -------- -------- (Loss) income available to common stockholders (1,538,113) 14,788,000 $(0.10) 1,125,493 14,747,000 $0.08 ===== ==== Effect of dilutive securities: Stock options and warrants -- -- -- - 588,000 (0.01) Preferred Stock -- -- -- 49,950 569,000 -- -- -- ----- -------- ------- ---- (Loss) income available to common stockholders and assumed conversion $(1,538,113) 14,788,000 $(0.10) $1,175,443 15,904,000 $0.07 ============ ========== ======= ========= ========== ==== Options and warrants totaling 10,737,276 and 9,619,276 were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive for the years ended December 31, 2000 and 1999, respectively.
EX-21.1 2 0002.txt Exhibit 21.1 List of Subsidiaries of Universal Insurance Holdings, Inc. This schedule contains a list of subsidiaries of Universal Insurance Holdings, Inc. as of December 31, 2000. ENTITY NAME JURISDICTION OF INCORPORATION Universal Insurance Holding Co. of Florida Florida Universal Risk Advisors Florida Universal Property & Casualty Insurance Company Florida Universal Risk Life Advisors, Inc. Florida Universal Adjusting Corp. Florida Universal Florida Insurance Agency, Inc. Florida U.S. Insurance Solutions, Inc. Florida U.S.A. Insurance Solutions, Inc. Florida Universal Life Support Corporation Florida Universal Inspection Corporation Florida Pinpoint Adjusting Corporation Florida Pinpoint Inspection Corporation Florida Capital Resources Group, Ltd. British Virgin Islands Tigerquote.com Managing General Agency, Inc. Florida Tigerquote.com Life Managing General Agency, Inc. Florida Tigerquote.Com Insurance & Financial Services Group, Inc. Delaware Tigerquote.Com Insurance Solutions, Inc. Delaware Tigerquote.com Insurance Solutions of Arizona, Inc. Arizona Tigerquote.com Insurance Services of California, Inc. California Tigerquote.com Insurance Solutions of Colorado, Inc. Colorado Tigerquote.com Insurance Agency of Georgia, Inc. Georgia Tigerquote.com Insurance Solutions of Illinois, Inc. Illinois Tigerquote.com Insurance Solutions of Indiana, Inc. Indiana Tigerquote.com Insurance Solutions of Iowa, Inc. Iowa Tigerquote.com Insurance Solutions of Kentucky, Inc. Kentucky Tigerquote.com Insurance Services of Michigan, Inc. Michigan Tigerquote.com Insurance Solutions of Missouri, Inc. Missouri Tigerquote.com Insurance Solutions of Nevada, Inc. Nevada Tigerquote.com Insurance Agency of New York, Inc. New York Tigerquote.com Insurance Solutions of Ohio, Inc. Ohio Tigerquote.com Insurance Solutions of Oregon, Inc. Oregon Tigerquote.com Insurance Solutions of Pennsylvania, Inc. Pennsylvania Tigerquote.com Insurance Solutions of Tennessee, Inc. Tennessee Tigerquote.com Insurance Solutions of Texas, Inc. Texas Tigerquote.com Insurance Solutions of Vermont, Inc. Vermont Tigerquote.com Insurance Solutions of Virginia, Inc. Virginia Tigerquote.com Insurance Solutions of Washington, Inc. Washington Tigerquote.com Insurance Services of Wisconsin, Inc. Wisconsin World Financial Resources, Ltd. (Barbados) (inactive) Barbados Izano Sports Company, LC (inactive) Florida -----END PRIVACY-ENHANCED MESSAGE-----