-----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, ITrA18ZifUpr36Wb8otnXFzZLQdOaZq3f3xPtO81vg5FvunVvIXVarQCXN5v1L8Z /OgAxCb7jCqp8pGnclkQEg== 0000898432-02-000297.txt : 20020416 0000898432-02-000297.hdr.sgml : 20020416 ACCESSION NUMBER: 0000898432-02-000297 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020416 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: 1934 Act SEC FILE NUMBER: 000-20848 FILM NUMBER: 02612725 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 u497989.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, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-20848 UNIVERSAL INSURANCE HOLDINGS, INC. (Name of small business issuer in its charter) DELAWARE 65-0231984 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2875 N.E. 191ST STREET, SUITE 300 33180 MIAMI, FLORIDA (Zip Code) (Address of principal executive offices) Company's telephone number, including area code: (305) 792-4200 Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, $.01 PAR VALUE OTC BULLETIN BOARD REDEEMABLE COMMON STOCK PURCHASE WARRANTS OTC BULLETIN BOARD (Title of each class) (Name of exchange where registered) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES |X| NO | | Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $13,726,986 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold as of December 31, 2001: $3,723,646 State the number of shares of Common Stock of Universal Insurance Holdings, Inc. outstanding as of March 1, 2002: 17,794,584 Transitional Small Business Disclosure Format: YES | | NO |X| PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY Universal Insurance Holdings, Inc. ("UIH" or the "Company") was originally organized as Universal Heights, Inc. in 1990. The Company changed its name to Universal Insurance Holdings, Inc. on January 12, 2001. In April 1997, the Company organized a subsidiary, Universal Property & Casualty Insurance Company ("UPCIC"), as part of its strategy to take advantage of what management believed to be profitable business and growth opportunities in the marketplace. UPCIC was formed to participate in the transfer of homeowner insurance policies from the Florida Residential Property and Casualty Joint Underwriting Association ("JUA"). The Company has since evolved into a vertically integrated insurance holding company, which, through its various subsidiaries, covers substantially all aspects of insurance underwriting, distribution and claims process. The Company was incorporated under the laws of the State of Delaware on November 13, 1990 and its principal executive offices are located at 2875 N.E. 191st Street, Suite 300, Miami, Florida 33180, and its telephone number is (305) 792-4200. INSURANCE BUSINESS On October 29, 1997, the Florida Department of Insurance ("DOI") approved UPCIC's application for a permit to organize as a domestic property and casualty insurance company in the State of Florida. On December 4, 1997, UIH raised approximately $6.7 million in a private placement of common stock with various institutional and other accredited investors. The proceeds of the offering were used to meet the minimum regulatory capitalization requirements ($5.3 million) of the DOI to obtain an insurance company license and for general working capital purposes. UPCIC received a license to engage in underwriting homeowners' insurance in the State of Florida on December 31, 1997. In 1998, UPCIC began operations through the assumption of homeowner insurance policies issued by the JUA. The JUA was established in 1992 as a temporary measure to provide insurance coverage for individuals who could not obtain coverage from private carriers because of the impact on the private insurance market of Hurricane Andrew in 1992. Rather than serving as a temporary source of emergency insurance coverage as was originally intended, the JUA became a major provider of original and renewal insurance coverage for Florida residents. In an attempt to reduce the number of policies in the JUA, and thus the exposure of the program to liability, the Florida legislature approved a number of initiatives to depopulate the JUA. The Florida legislature subsequently approved, and the DOI implemented, a Market Challenge/Takeout Bonus Program ("Takeout Program"), which provided additional incentives to private insurance companies to acquire policies from the JUA. The Takeout Program was attractive because it provided both substantial regulatory and financial incentives to private insurer participants. On the regulatory side, participants are exempt from assessments by the DOI for the state's emergency insurance coverage programs for a period of three years. On the financial side, Takeout Program participants receive a bonus payment based upon the number of policies taken out of the JUA portfolio. Through December 31, 2001, UPCIC has received bonus payments of approximately $2,723,600 based upon a portfolio takeout of approximately 30,000 policies. Bonus payments were held in escrow for three years. After the three-year period, if certain conditions were met, including maintaining a minimum number of policies, UPCIC would have unrestricted use of the bonus payments. In addition, UPCIC would have investment income from the bonus payments that would also be available at the end of the three years. These bonus payments were not included in the Company's assets until receipt at the end of the three-year period. To date, the Company has substantially complied with requirements related to the bonus payments and bonus payments of $2,723,600 were released from escrow for 27,278 policies which reached their three-year anniversary in 2001. The Company will not be receiving any additional bonus payments. Accrued investment income of $452,947 was received in January 2002. UPCIC's initial business and operations consisted of providing property and casualty coverage through homeowners' insurance policies acquired from the JUA. The insurance business acquired from the JUA provided a base for renewal premiums. The majority of these policies subsequently renewed with UPCIC. In an effort to further grow its insurance operations, in 1998 UPCIC also began to 2 solicit business actively in the open market through independent agents. In determining appropriate guidelines for such open market policy sales, UPCIC employs standards similar to those used in its selection of JUA policies. Through renewal of the JUA business combined with business solicited in the market through independent agents, UPCIC is currently servicing approximately 40,000 homeowners' insurance policies covering homes and condominium units. The Company's primary product is homeowners insurance. The Company's criteria for selecting insurance policies includes the use of specific policy forms, limitations on coverage amounts on buildings and contents, acceptance of policies with low frequency of claims, and required compliance with local building codes. Also, to improve underwriting and manage risk, the Company uses analytical tools and data currently developed in conjunction with Risk Management Solutions. UPCIC's portfolio at December 31, 2001 includes approximately 30,000 policies with coverage for wind risks and 10,000 policies without wind risk. The average wind premium is approximately $800 and the average ex-wind premium is approximately $507. Approximately 32% of the policies are located in Dade, Broward and Palm Beach counties. OPERATIONS All underwriting, rating, policy issuance and administration functions for UPCIC during 2001 were performed by Universal Property and Casualty Management, Inc. ("Universal Management"), an outside management company, pursuant to a management agreement. Universal Management is a wholly-owned subsidiary of American European Group, Inc. ("AEG"), a Delaware insurance holding company. UPCIC and Universal Management terminated the management agreement effective as of January 15, 2002. Services previously provided by Universal Management to UPCIC under the management agreement are now performed by UPCIC, Universal Risk Advisors, Inc., a wholly-owned subsidiary of the Company, and unaffiliated third parties. Claims handling functions for UPCIC were initially administered by an independent claims adjustment firm licensed in Florida. In 1999, the Company formed Universal Adjusting Corporation, a wholly-owned subsidiary, which currently performs claims adjustment for UPCIC. This gives the Company greater command over its loss control and expenditures. The earnings of UPCIC from policy premiums are supplemented by the generation of investment income from investment policies adopted by the Board of Directors of UPCIC. UPCIC's principal investment goals are to maintain safety and liquidity, enhance equity values and achieve an increased rate of return consistent with regulatory requirements. MANAGEMENT OPERATIONS The Company continues to develop into a vertically integrated insurance holding company performing various aspects of insurance underwriting, distribution and claims. Universal Risk Advisors, Inc., the Company's wholly-owned Managing General Agent ("MGA"), was incorporated in Florida on July 2, 1998 and became licensed by the DOI on September 28, 1998. Through the MGA, the Company has underwriting and claims authority for UPCIC as well as third party insurance companies. In addition, Universal Risk Life Advisors, Inc. was incorporated in Florida on June 1, 1999 as the Company's wholly-owned managing general agent for life insurance products. The MGA seeks to generate revenue through policy fee income and other administrative fees from the marketing of UPCIC as well as third party insurance products through the Company's distribution network. The Company markets and distributes UPCIC's products and services in Florida through a network of approximately 1,100 active independent agents. AGENCY OPERATIONS Universal Florida Insurance Agency was incorporated in Florida on July 2, 1998 and U.S. Insurance Solutions, Inc. was incorporated in Florida on August 4, 1998 as wholly-owned subsidiaries of the Company to solicit voluntary business. These two entities are the foundation of the Company's agency operations which seek to generate income from policy fees, commissions, premium financing referral fees and the marketing of ancillary services. U.S.A. Insurance Solutions, Inc. was incorporated in Florida on December 10, 1998 as a wholly-owned subsidiary of U.S. Insurance Solutions, Inc. to acquire the assets of an insurance agency. 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. ("TigerQuote.com") and Tigerquote.com Insurance Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23, 1999, respectively. Tigerquote.com is an Internet insurance company while Tigerquote.com Insurance Solutions, Inc. is a currently operating network of Internet insurance agencies. To date, these insurance agencies have been established in 22 states. Separate legal entities have been formed for each state and are governed by the respective states' departments of insurance. OTHER OPERATIONS On June 2, 2000 Capital Resources Group, LTD. was incorporated as a subsidiary of UIH to participate in the international insurance and reinsurance markets. On January 3, 2000, Universal Inspection Corporation was incorporated in Florida as a subsidiary of UIH. Universal Inspection Corporation performs property inspections for homeowners' policies underwritten by UPCIC and the JUA. During 2001, the Company formed Tiger Home Services, Inc., which furnishes pest control, pool services, landscaping, house cleaning and hurricane shutters to homeowners. FACTORS AFFECTING OPERATION RESULTS AND MARKET PRICE OF STOCK The Company and its subsidiaries operate in a rapidly changing environment that involves a number of uncertainties, some of which are beyond the Company's control. This report contains in addition to historical information, forward-looking statements that involve risks and uncertainties. The words "expect," "estimate," "anticipate," "believe," "intend," "plan," and similar expressions and variations thereof are intended to identify forward-looking statements. The Company's actual results could differ materially from those set forth in or implied by any forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those uncertainties discussed below as well as those discussed elsewhere in this report. NATURE OF THE COMPANY'S BUSINESS Factors affecting the sectors of the insurance industry in which the Company operates may subject the Company to significant fluctuations in operating results. These factors include competition, catastrophe losses and general economic conditions including interest rate changes, as well as legislative initiatives, the frequency of litigation, the size of judgments and severe weather conditions. Specifically the homeowners insurance market, which comprises the bulk of the Company's current operations, is influenced by many factors, including state and federal laws, market conditions for homeowners insurance and residential plans. Additionally, an economic downturn could result in fewer homeowner sales and less demand for homeowners insurance. Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns of soft markets followed by hard markets. Although an individual insurance company's financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern. The Company believes that a substantial portion of its future growth will depend on its ability, among other things, to successfully implement its business strategy, including expanding the Company's product offering by underwriting and marketing additional insurance products and programs through its distribution network and further penetrating the Florida market by establishing relationships with additional independent agents in order to expand its distribution network. Any future growth is contingent on various factors, including the availability of adequate capital, the Company's ability to hire and train additional personnel, regulatory requirements and rating agency considerations. There is no assurance that the Company will be successful in expanding its business, that the existing infrastructure will be able to support additional expansion or that any new business will be profitable. Moreover, as the Company expands its insurance products and programs and the Company's mix of business changes, there can be no assurance that the Company will be able to improve its profit margins or other operating results. There can also be no assurance that the Company will be able to obtain the required regulatory approvals to offer additional insurance products. UPCIC also is required to maintain a minimum capital surplus to support its underwriting program. The capital surplus requirement impacts UPCIC's potential growth. As of December 31, 4 2001, UPCIC's adjusted statutory capital of $4,124,880 included approximately $851,000 of affiliate receivables which are considered nonadmitted assets under the National Association of Insurance Commissioners statutory accounting principles, but for which UPCIC is pursuing a permitted practice as the amounts were collected during the first quarter of 2002. See additional disclosure regarding regulatory matters at Item 6, "Financial Condition and Regulatory Requirements." LIMITED INSURANCE COMPANY OPERATING HISTORY UPCIC was incorporated in April 1997 and began operations in February 1998. Accordingly, UPCIC did not generate significant revenue until the second quarter of 1998 when it had completed the acquisition of, and received premiums for, policies from the JUA. UPCIC's growth to date may not be an accurate indication of future results of operations in light of UPCIC's short operating history, the competitive nature of the insurance industry, and the effects, if any, of seasonality on UPCIC's results of operations. Because of UPCIC's limited operating history, there can be no assurance that UPCIC will achieve or sustain profitability or significant revenues. The Company's continuation as a going concern is dependent upon UPCIC's ability to attain profitability and the Company's financial statements are presented subject to a going concern opinion. Management has initiated premium rate increases and is pursuing discussions with various parties to decrease the cost of its catastrophe reinsurance. There can be no assurance that management's efforts will successfully address these risks or that UPCIC and the Company will attain profitability. MANAGEMENT OF EXPOSURE TO CATASTROPHIC LOSSES UPCIC is exposed to multiple insured losses arising out of a single occurrence, such as a natural catastrophe. As with all property and casualty insurers, UPCIC will incur some losses related to catastrophes and will price its policies accordingly. UPCIC's exposure to catastrophic losses arises principally out of hurricanes and windstorms. Through the use of standard industry modeling techniques, UPCIC manages its exposure to such losses on an ongoing basis from an underwriting perspective. In addition, UPCIC protects itself against the risk of catastrophic loss by obtaining reinsurance coverage up to the 100 year Probable Maximum Loss ("PML"). UPCIC's reinsurance program consists of excess of loss, quota share and catastrophe reinsurance. RELIANCE ON THIRD PARTIES AND REINSURERS UPCIC is dependent upon third parties to perform certain functions including, but not limited to, claims management, investment management, the purchase of reinsurance, underwriting, policy origination and risk management analysis. UPCIC also relies on reinsurers to limit the amount of risk retained under its policies and to increase its ability to write additional risks. UPCIC's intention is to limit its exposure and therefore protect its capital, even in the event of catastrophic occurrences, through reinsurance agreements that currently transfer the risk of loss in excess of $1,000,000 up to the 100 year PML. Commencing January 15, 2002, certain administrative functions previously provided by third parties are now performed by Universal Risk Advisors, Inc. REINSURANCE The property and casualty reinsurance industry is subject to the same market conditions as the direct property and casualty insurance market, and there can be no assurance that reinsurance will be available to UPCIC to the same extent and at the same cost as currently in place for UPCIC. Reinsurance does not legally discharge an insurer from its primary liability for the full amount of the risks it insures, although it does make the reinsurer liable to the primary insurer. Therefore, UPCIC is subject to credit risk with respect to its reinsurers. Management evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. A reinsurer's insolvency or inability to make payments under a reinsurance treaty could have a material adverse affect on the financial condition and profitability of UPCIC. ADEQUACY OF LIABILITIES FOR LOSSES The liabilities for losses and loss adjustment expenses periodically established by UPCIC are estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses. The estimates necessarily will be based on certain assumptions related to the ultimate cost to settle such claims. There is an inherent degree of uncertainty involved in the 5 establishment of liabilities for losses and loss adjustment expenses and there may be substantial differences between actual losses and UPCIC's liabilities estimates. In the case of UPCIC, this uncertainty is compounded by UPCIC's limited historical claims experience. UPCIC relies on industry data and JUA data, as well as the expertise and experience of key individuals and service providers referenced herein, in an effort to establish accurate estimates and adequate liabilities. Furthermore, factors such as storms and weather conditions, inflation, claim settlement patterns, legislative activity and litigation trends may have an impact on UPCIC's future loss experience. Accordingly, there can be no assurance that UPCIC's liabilities will be adequate to cover ultimate loss developments. UPCIC's profitability and financial condition could be adversely affected to the extent that its liabilities are inadequate. GOVERNMENT REGULATION Florida insurance companies are subject to regulation and supervision by the DOI. Notwithstanding the three-year assessment relief available to UPCIC under the Takeout Program, the DOI has broad regulatory, supervisory and administrative powers. Such powers relate, among other things, to the granting and revocation of licenses to transact business; the licensing of agents; the standards of solvency to be met and maintained; the nature of and limitations on investments; approval of policy forms and rates; periodic examination of the affairs of insurance companies; and the form and content of required financial statements. Such regulation and supervision are primarily for the benefit and protection of policyholders and not for the benefit of investors. In addition, the Florida legislature and the National Association of Insurance Commissioners from time to time consider proposals that may affect, among other things, regulatory assessments and reserve requirements. UPCIC cannot predict the effect that any proposed or future legislation or regulatory or administrative initiatives may have on the financial condition or operations of UPCIC. The Department of Insurance has completed its examination of the fiscal year 2000 statutory financial statements of UPCIC. To date the Department has not issued a final report. However, the Department has issued a draft report with proposed adjustments to UPCIC's statutory capital at December 31, 2000 that would result in statutory capital below the minimum surplus requirement at December 31, 2000. The Department's examination of the fiscal year 2001 statutory financial statements is currently in progress. See additional disclosure regarding regulatory matters at Item 6, "Financial Condition and Regulatory Requirements." DEPENDENCE ON KEY INDIVIDUALS AND THIRD PARTIES UPCIC's operations depend in large part on the efforts of Bradley I. Meier, who serves as President of UPCIC. Mr. Meier has also served as President, Chief Executive Officer and Director of the Company since its inception in November 1990. The loss of the services provided by Mr. Meier could have a material adverse effect on UPCIC's financial condition and results of operations. COMPETITION The insurance industry is highly competitive and many companies currently write homeowners property and casualty insurance. Additionally, the Company and its subsidiaries must compete with companies that have greater capital resources and longer operating histories. Increased competition from other insurance companies could adversely affect the Company's ability to do business profitably. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to compete solely on price, choosing instead to compete on the basis of underwriting criteria, its distribution network and high quality service to its agents and insureds. EMPLOYEES As of March 1, 2002, the Company had 59 employees. None of the Company's employees is represented by a labor union. The Company has an employment agreement with its President and Chief Executive Officer as well as with its Chief Technology Officer and Chief E-Commerce Officer. See "Executive Compensation--Employment Agreement." 6 ITEM 2. DESCRIPTION OF PROPERTY The Company leases approximately 9,200 square feet of office space for its corporate headquarters in Miami, Florida under a three-year lease expiring December 31, 2004. The Company leases approximately 600 square feet of office space in its Ormond Beach agency operation under a lease expiring April 30, 2002. ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain lawsuits. In the opinion of management, except for the lawsuit described below, none of these lawsuits (1) involve claims for damages exceeding 10% of the current assets of the Company, (2) involve matters that are not routine litigation incidental to the business, (3) involve bankruptcy, receivership, or similar proceedings, (4) involve material federal, state, or local environmental laws, (5) involve a damages claim for more than 10% of the current assets of the Company or potentially involve more than $100,000 in sanctions and a governmental authority is a party, or (6) are material proceedings to which any director, officer, affiliate of the Company, beneficial owner of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. Universal Management performed various services with respect to UPCIC insurance policies and received fees for performing these services based upon policies written pursuant to an agreement originally executed in 1997. The parties agreed to terminate the agreement effective January 15, 2002. Universal Management communicated to UPCIC that all management services would cease on the date of termination rather than continuing through the life of the policies for which fees were paid on a premiums written basis. As a result, UPCIC ceased remittance of the management fees to Universal Management as of September 1, 2001. On November 6, 2001, UPCIC filed a Complaint against Universal Management in the United States District Court for The Southern District of Florida, Miami Division, alleging breach of contract and demanding specific performance and unspecified damages. On December 28, 2001, Universal Management filed a counterclaim for breach of contract, alleging that it is entitled to fees for policies written from September 2001 through the date of termination. As of December 31, 2001, UPCIC has recorded a receivable from Universal Management representing the management fees remitted on the basis of premiums earned subsequent to the termination date, January 15, 2002 and provided an allowance for doubtful accounts for the entire receivable. Discovery is in the early stages and the likelihood of an unfavorable outcome or the likely amount associated therewith cannot be estimated. Therefore, UPCIC has not accrued a liability with respect to the management fees claimed by Universal Management. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting on December 21, 2001. The meeting involved the election of directors. The names of each director elected at the meeting are specified below: 7 Election of two directors: positions currently held by Bradley I. Meier and Norman M. Meier Total number of Series M Preferred Stock shares present: 88,690 % of total Votes Withheld/ Name Votes for shares present Abstentions ---- --------- -------------- ----------- Bradley I. Meier 88,690 100% - Norman M. Meier 88,690 100% - Election of three directors: positions currently held by Irwin L. Kellner, Reed J. Slogoff and Joel M. Wilentz Total number of Common Stock, Series A Preferred Stock and Series M Preferred Stock shares present: 11,323,364 % of total Votes Withheld/ Name Votes for shares present Abstentions ---- --------- -------------- ----------- Irwin L. Kellner 10,934,724 96.65% 241,000 Reed J. Slogoff 10,934,724 96.65% 241,000 Joel M. Wilentz 10,934,724 96.65% 241,000 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's $.01 par value Common Stock ("Common Stock") is quoted on the OTC Bulletin Board under the symbol UVIH. The following table sets forth prices of the Common Stock, as reported by the OTC Bulletin Board. The following data reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Year Ended December 31, 2000 High Low - ---------------------------- ---- --- First Quarter $ 1.63 $ 0.81 Second Quarter 0.88 0.44 Third Quarter 0.88 0.44 Fourth Quarter 0.75 0.32 Year Ended December 31, 2001 High Low - ---------------------------- ---- --- First Quarter $ 0.55 $ 0.17 Second Quarter 0.55 0.20 Third Quarter 0.50 0.15 Fourth Quarter 0.48 0.16 At March 1, 2002, there were 38 shareholders of record of the Company's Common Stock. There were 425 beneficial owners of its Common Stock. In addition, there were three shareholders of the Company's Series A and Series M Preferred Stock ("Preferred Stock"). In October 1994, 49,950 shares of Series A Preferred Stock were issued in repayment of $499,487 of related party debt and 88,690 shares of Series M Preferred Stock were issued during fiscal year ended April 30, 1997, for repayment of $88,690 of related party debt. Each share of Preferred Stock is convertible into 2.5 shares of Common Stock and 5 shares of Common Stock, respectively, into an aggregate of 568,326 common shares. The Preferred Stock 8 was redeemable by the Company at $10 per share through April 2000. Beginning May 1, 1998, the Series A Preferred Stock paid a cumulative dividend of $.25 per quarter. Applicable provisions of the Delaware General Corporation Law may affect the ability of the Company to declare and pay dividends on its Common Stock. In particular, pursuant to the Delaware General Corporation Law, a company may pay dividends out of its surplus, as defined, or out of its net profits, for the fiscal year in which the dividend is declared and/or the preceding year. Surplus is defined in the Delaware General Corporation Law to be the excess of net assets of the company over capital. Capital is defined to be the aggregate par value of shares issued. Moreover, the ability of the Company to pay dividends, if and when declared by its Board of Directors, may be restricted by regulatory limits on the amount of dividends which UPCIC is permitted to pay the Company. Pursuant to a Consent Order ("Consent Order") issued in conjunction with the Company's authorization to underwrite homeowners insurance, during the first four years of operations, UPCIC shall pay only those dividends which have been approved in advance in writing by the DOI. Section 628.371 of the Florida statutes sets forth limitations, based on net income and statutory capital, on the amount of dividends that UPCIC may pay to the Company without approval from the Department. During 2001, the Company paid a dividend of one cent per share to common stockholders. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION A NUMBER OF STATEMENTS CONTAINED IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE APPLICABLE STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE BUT ARE NOT LIMITED TO THE COSTS AND THE UNCERTAINTIES ASSOCIATED WITH THE RISK FACTORS SET FORTH IN ITEM 1 ABOVE. OVERVIEW UPCIC's application to become a Florida licensed property and casualty insurance company was filed with the DOI on May 14, 1997 and approved on October 29, 1997. UPCIC's proposal to begin operations through the acquisition of homeowner insurance policies issued by the JUA was approved by the JUA on May 21, 1997, subject to certain minimum capitalization and other requirements. One of the requirements imposed by the DOI was to limit the number of policies UPCIC could assume from the JUA to 30,000. The DOI requires applicants to have a minimum capitalization of $5.3 million to be eligible to operate as an insurance company in the State of Florida. Upon being issued an insurance license, companies must maintain capitalization of at least $4 million. If an insurance company's capitalization falls below $4 million, then the company will be deemed out of compliance with DOI requirements, which could result in revocation of the participant's license to operate as an insurance company in the State of Florida. The Company has continued to implement its plan to become a financial services company and, through its wholly-owned insurance subsidiaries, has sought to position itself to take advantage of what management believes to be profitable business and growth opportunities in the marketplace. The Company entered into an agreement with the JUA whereby during 1998, UPCIC assumed approximately 30,000 policies from the JUA. In addition, UPCIC received bonus incentive funds from the JUA for assuming the policies. The bonus funds were maintained in an escrow account for three years. These bonus payments were not included in the Company's assets until receipt at the end of the three-year period. UPCIC could not cancel the policies from the JUA for this three-year period at which point UPCIC would receive the bonus funds. To date, the Company has substantially complied with requirements related to the bonus payments and bonus payments of $2,723,600 were released from escrow for 27,278 policies which reached their three-year anniversary in 2001. The Company will not be receiving any additional bonus payments. Accrued interest income of $452,947 was received in January 2002. The Company expects that premiums from renewals and new business will be sufficient to meet the Company's working capital requirements beyond the next twelve months. However, the Company has experienced losses in the years 2001 and 2000, and although management believes it has taken the necessary steps to 9 improve the financial condition of the Company, and that the implementation of these plans will be successful, there can be no assurance as to that effect. UPCIC does not expect to obtain additional policies from the JUA. The policies obtained from the JUA provided the opportunity for UPCIC to solicit future renewal premiums. The majority of the policies obtained from the JUA subsequently renewed with UPCIC. In an effort to further grow its insurance operations, in 1998 the Company began to solicit business actively in the open market. Through renewal of JUA business combined with business solicited in the market through independent agents, UPCIC is currently servicing approximately 39,000 homeowners insurance policies. In determining appropriate guidelines for such open market policy sales, UPCIC employs standards similar to those used in its selection of JUA policies. Also, to improve underwriting and manage risk, the Company uses analytical tools and data currently developed in conjunction with Risk Management Solutions. To diversify UPCIC's product lines, UPCIC has begun underwriting inland marine policies. Management may consider underwriting other types of policies in the future. Any such program will require DOI approval. See "Factors Affecting Operation Results and Market Price of Stock - COMPETITION" for a discussion of the material conditions and uncertainties that may affect UPCIC's ability to obtain additional policies. FINANCIAL CONDITION AND REGULATORY REQUIREMENTS As previously discussed in Item 1, "Government Regulation," the Department of Insurance completed an examination of UPCIC as of December 31, 2000 and has proposed adjustments in a draft examination report which would cause UPCIC to fail to meet the minimum statutory capital requirement as of December 31, 2000. The Department of Insurance is currently conducting an examination as of December 31, 2001. As of December 31, 2001, UPCIC has adjusted statutory capital of $4,124,880 which is $124,880 above the minimum requirement. Included in UPCIC's adjusted statutory capital as of December 31, 2001 are approximately $851,000 of affiliate receivables which are considered nonadmitted assets under the National Association of Insurance Commissioners statutory accounting principles. These amounts were collected during the first quarter of 2002. Based on these collections, UPCIC has commenced discussions with the Department of Insurance to admit these assets. In the event that the Department of Insurance does not provide a permitted practice to include these assets in statutory capital at December 31, 2001, UPCIC's statutory capital would not be in compliance with the minimum requirement and would be considered impaired at such date. UPCIC has also experienced recurring losses from operations during the past three years, including 2001, which included nonrecurring other revenue of approximately $3.2 million. If UPCIC continues to sustain operating losses during 2002, it will not comply with minimum statutory capital requirement in the near future unless UPCIC is able to raise additional capital through other sources. UPCIC is also required to comply with the National Association of Insurance Commissioners ("NAIC") risk-based capital ("RBC") requirements. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. As of December 31, 2001, UPCIC's RBC was equivalent to a Company-level action. As a result, management is required to file a Risk Based Capital Plan containing items specified in Florida statutes. UPCIC has experienced increasing loss ratios, net underwriting losses and net losses for the past three years. Management attributes the losses reported for these periods primarily to higher than expected costs of catastrophic reinsurance and adverse loss experience in the homeowners' insurance line of business. Management intends to improve and strengthen the financial condition of UPCIC as follows. A rate increase of approximately 7% has been approved by the Department of Insurance on new and renewal policies and was implemented as of July 1, 2001. In addition, the Company is currently working toward decreasing the cost of its catastrophe reinsurance through negotiation of better rates and program changes. Program changes could result in a lower level of catastrophe reinsurance coverage. The Company's continuation as a going concern is dependent upon the ability of UPCIC to meet minimum statutory capital requirements and to attain profitable operations. Failure to meet the minimum level of statutory capital could result in one or more regulatory sanctions in the future, including the revocation of UPCIC's certificate of authority or ultimately, the placement of UPCIC in conservation, rehabilitation or liquidation. These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include any adjustments relating to the recoverability and 10 classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern. Management believes that the implementation of its plans described above will be successful. However, there can be no assurance that the success of these plans will be achieved or will be sufficient to ensure UPCIC's compliance with minimum statutory capital requirements or that the Company will be able to achieve profitability. CRITICAL ACCOUNTING POLICIES USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company's primary areas of estimate are described below. RECOGNITION OF PREMIUM REVENUES. Property and liability premiums are recognized as revenue on a pro rata basis over the policy term. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums. The Company believes that its revenue recognition policies conform to Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. INSURANCE LIABILITIES. Claims and claim adjustment expenses are provided for as claims are incurred. The provision for unpaid claims and claim adjustment expenses includes: (1) the accumulation of individual case estimates for claims and claim adjustment expenses reported prior to the close of the accounting period; (2) estimates for unreported claims based on industry data; and (3) estimates of expenses for investigating and adjusting claims based on the experience of the Company and the industry. Inherent in the estimates of ultimate claims are expected trends in claim severity, frequency and other factors that may vary as claims are settled. The amount of uncertainty in the estimates for casualty coverage is significantly affected by such factors as the amount of claims experience relative to the development period, knowledge of the actual facts and circumstances and the amount of insurance risk retained. In the case of UPCIC, this uncertainty is compounded by UPCIC's limited history of claims experience. In addition, UPCIC's policyholders are currently concentrated in South Florida, which is periodically subject to adverse weather conditions such as hurricanes and tropical storms. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. DEFERRED POLICY ACQUISITION COSTS. Commissions and other costs of acquiring insurance that vary with and are primarily related to the production of new and renewal business are deferred and amortized over the terms of the policies or reinsurance treaties to which they are related. Determination of costs other than commissions that vary with and are primarily related to the production of new and renewal business requires estimates to allocate certain operating expenses. When determining the maximum amount of deferred policy acquisition costs, investment income to be earned over the remaining policy period is estimated and taken into consideration. Estimates of the costs of losses, catastrophic reinsurance and policy maintenance are also required in the determination of the maximum amount of deferred policy acquisition costs. PROVISION FOR PREMIUM DEFICIENCY. It is the Company's policy to evaluate and recognize losses on insurance contracts when estimated future claims and maintenance costs under a group of existing contracts will exceed anticipated future premiums and investment income. The determination of the provision for premium deficiency requires estimation of the costs of losses, catastrophic reinsurance and policy maintenance to be incurred and investment income to be earned over the remaining policy period. REINSURANCE. In the normal course of business, the Company seeks to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreement and consistent with the establishment of the liability of the Company. The Company's reinsurance policies do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. 11 RELATED PARTIES All underwriting, rating, policy issuance and administration functions for UPCIC during the years 2000 and 2001 were performed by Universal Management pursuant to a Management Agreement dated June 2, 1997 and Addenda thereto dated June 12, 1997 and June 1, 1998. UPCIC and Universal Management terminated the management agreement effective as of January 15, 2002. Services previously provided by Universal Management to UPCIC under the management agreement are now performed by UPCIC, Universal Risk Advisors, and unaffiliated third parties. RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2001 AND YEAR ENDED DECEMBER 31, 2000. Gross premiums written and assumed decreased 11.0% to $25,536,716 for the year ended December 31, 2001 from $28,710,230 for the year ended December 31, 2000. The decrease in gross premiums written is primarily attributable to the Company's nonrenewal of certain policies in high exposure areas in order to mitigate reinsurance costs. Net premiums written increased 81.0% to $8,302,716 for the year ended December 31, 2001 from $4,587,534 for the year ended December 31, 2000. The increase in net premiums written reflects the impact of reinsurance, since $17,234,000 or 67.5% of premiums written were ceded to reinsurers for the year ended December 31, 2001 as compared to $24,122,697 or 84.0% for the year ended December 31, 2000. This fluctuation was a result of the Company's election under its quota share reinsurance treaty to cede 50% of gross written premiums, losses, and loss adjustment expenses during 2001, versus 50% during the first quarter of 2000 and 65% during the remaining three quarters of 2000. Net premiums earned increased 21.1% to $7,711,804 for the year ended December 31, 2001 from $6,367,045 for the year ended December 31, 2000. The increase in net premiums earned is attributable to the Company's election under its quota share reinsurance treaty to cede 50% of gross written premiums, losses, and loss adjustment expenses during 2001, versus 50% during the first quarter of 2000 and 65% during the remaining three quarters of 2000. Commission revenue increased 11.0% to $1,786,675 for the year ended December 31, 2001 from $1,610,175 for the year ended December 31, 2000. Commission income is comprised mainly of the Managing General Agent's policy fee income on all new and renewal insurance policies and commissions generated from agency operations. The increase is primarily due to the Company's effort to solicit business in the open market. Investment income consists of net investment income and net realized gains (losses). Investment income decreased 50.5% to $578,903 for the year ended December 31, 2001 from $1,168,796 for the year ended December 31, 2000. The decrease is primarily due to lower interest rates during 2001. Other revenue consists primarily of JUA bonus payments of $2,723,600 released from escrow during 2001, as well as accrued interest income of $452,947 related to the JUA bonus payments which was received in January 2002. Losses and loss adjustment expenses ("LAE") incurred increased 86.7% to $7,767,980 for the year ended December 31, 2001 from $4,161,661 for the year ended December 31, 2000 as compared to net premiums earned which increased 21.1% to $7,711,804 for the year ended December 31, 2001 from $6,367,045 for the year ended December 31, 2000. The Company's direct loss ratio for the year ended December 31, 2001 was 58.1% compared to 40.0% for the year ended December 31, 2000. The Company's direct loss ratio increased principally due to the higher severity of claims in 2001. The Company's net loss ratio for the year ended December 31, 2001 was 100.7% compared to 65.4% for the year ended December 31, 2000. Losses and LAE, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. Losses and LAE are influenced by loss severity and frequency. The net loss ratio increased due to the increase in the direct loss ratio and the decrease in net premiums earned as discussed above. During 2001 and 2000, Florida did not experience windstorm catastrophes. 12 Catastrophes are an inherent risk of the property-liability insurance business which may contribute to material year-to-year fluctuations in UPCIC's results of operations and financial position. The level of catastrophe loss experienced in any year cannot be predicted and could be material to the results of operations and financial position. While management believes its catastrophe management strategies will reduce the severity of future losses, UPCIC continues to be exposed to similar or greater catastrophes. General and administrative expenses increased 34.6% to $8,711,025 for the year ended December 31, 2001 from $6,472,519 for the year ended December 31, 2000. General and administrative expenses have increased primarily due to limitations on acquisition costs that can be deferred, as well as the decrease in the ceding commissions resulting from the change in the quota share ceding percentage from 65% for the nine months ended December 31, 2000 to 50% in 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash flow are premium revenues, commission income and investment income. For the year ended December 31, 2001, cash flows provided by operating activities were $1,928,451, primarily representing JUA bonus payments of $2,723,600 released from escrow during the year. If not for receipt of the JUA bonus payments, cash flows from operating activities would have been negative, primarily due to the increase in losses and reinsurance costs, as well as a decrease in gross premiums written. The Company's investment portfolio is highly liquid as it consists almost entirely of readily marketable securities. Cash flows from investing activities are primarily comprised of purchases and sales of debt and equity securities. Cash flows from financing activities are comprised of payment of cash dividends on common and preferred stock and purchases of treasury stock. During 2001 the Company borrowed monies in the amount of $306,665 to finance several vehicles and a boat. The amounts will become due during the years 2003, 2004 and 2011. The balance of cash and cash equivalents at December 31, 2001 is $10,481,699. This amount along with readily marketable equity securities aggregating $241,808 would be available to pay claims in the event of a catastrophic event pending reimbursement for any aggregate amount in excess of $1,000,000 up to the 100 year PML which would be covered by reinsurers. Catastrophic reinsurance is recoverable upon presentation to the reinsurer of evidence of claim payment. Generally accepted accounting principles differ in some respects from reporting practices prescribed or permitted by the Florida Department of Insurance. To retain its certificate of authority, the Florida insurance laws and regulations require that UPCIC maintain capital surplus equal to the statutory minimum capital and surplus requirement defined in the Florida Insurance Code. The Company is also required to adhere to prescribed premium-to-capital surplus ratios. As of December 31, 2001, UPCIC's adjusted statutory capital of $4,124,880 included approximately $851,000 of affiliate receivables which are considered nonadmitted assets under the National Association of Insurance Commissioners statutory accounting principles. These amounts were collected during the first quarter of 2002. Based on these collections, UPCIC has commenced discussions with the DOI to admit these assets. In the event that the DOI does not provide a permitted practice to include these assets in statutory capital at December 31, 2001, UPCIC's statutory capital would not be in compliance with the minimum requirement and would be considered impaired at such date. Adjusted statutory net loss was $1,201,114 for the year ended December 31, 2001 and $637,509 for the year ended December 31, 2000. The Company's continuation as a going concern is dependent upon the ability of UPCIC to meet minimum statutory capital requirements and the Company's ability to attain profitable operations. Failure to meet the minimum level of statutory capital could result in one or more regulatory sanctions in the future, including the revocation of UPCIC's certificate of authority or ultimately, the placement of UPCIC in conservation, rehabilitation or liquidation. These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include any adjustments relating to the revocability and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The maximum amount of dividends which can be paid by Florida insurance companies without prior approval of the Florida Commissioner is subject to restrictions relating to statutory surplus. The maximum dividend that may be paid by UPCIC to the Company without prior approval is limited to the lesser of statutory net income from operations of the preceding calendar year or 10.0% of statutory unassigned capital surplus as of the preceding year end. Pursuant to the Consent Order issued to UPCIC, during UPCIC's first four years of operations, any dividend would require DOI approval. No dividends have been paid to date. 13 IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE. Insurance premiums are established before the Company knows the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, the Company attempts to anticipate the future impact of inflation when establishing rate levels. While the Company attempts to charge adequate rates, the Company may be limited in raising its premium levels for competitive and regulatory reasons. Inflation also affects the market value of the Company's investment portfolio and the investment rate of return. Any future economic changes which result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements. ITEM 7. FINANCIAL STATEMENTS The financial statements of the Company are annexed to this report and are referenced as pages F-1 to F-28. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The directors and executive officers of the Company as of December 31, 2001 are as follows: Name Age Position - ---- --- -------- Bradley I. Meier 33 President, Chief Executive Officer, Assistant Secretary and Director Norman M. Meier 62 Director Irwin L. Kellner 63 Director, Secretary Reed J. Slogoff 33 Director Joel M. Wilentz 67 Director James M. Lynch 47 Vice President and Chief Financial Officer Thomas M. Modica 41 Chief Technology Officer and Chief E-Commerce Officer BRADLEY I. MEIER has been President, Chief Executive Officer and a Director of the Company since its inception in November 1990. He has served as President of UPCIC, a wholly-owned subsidiary of the Company, since its formation in April 1997. In 1990, Mr. Meier graduated from the Wharton School of Business with a B.S. in Economics. NORMAN M. MEIER has been a Director of the Company since July 1992. From December 1986 until November 1999, Mr. Meier was President, Chief Executive Officer and a Director of Columbia Laboratories, Inc., a publicly-traded corporation in the pharmaceuticals business. From 1971 to 1977, Mr. Meier was Vice President of Sales and Marketing for Key Pharmaceuticals. From 1977 until 1986, Mr. Meier served as a consultant to Key Pharmaceuticals. 14 IRWIN L. KELLNER has been a Director of the Company since March 1997. Since 1997, Dr. Kellner has been the Augustus B. Weller Distinguished Chair of Economics at Hofstra University, author of Hofstra University's Economic Report, and Chief Economist for CBS Market Watch, an interactive financial news website. Since February 2001, Dr. Kellner has served as chief economist for North Fork Bank Corporation. From 1997 to 1998, Dr. Kellner worked as an independent consultant. From 1996 through 1997, Dr. Kellner was the Chief Economist for Chase Manhattan's Regional Bank, and held the same position from 1980 to 1996 at Chemical Bank and Manufacturers Hanover Trust, predecessors to Chase. The bank had employed Dr. Kellner since 1970. Dr. Kellner is a member of the boards of several organizations, including Claire's Stores, DataTreasury Corporation, Inc., FreeTrek.com Inc., International Bioimmune Systems, and the North Shore Health System, and serves on the New York State Comptroller's Economic Advisory Committee. Dr. Kellner is a past president of the Forecasters Club of New York and the New York Association of Business Economists. He is a member of several professional associations, including the American Economic Association, American Statistical Association and the National Association of Business Economists. REED J. SLOGOFF has been a Director of the Company since March 1997. Mr. Slogoff is currently a principal with Pearl Properties Commercial Management, LLC, a commercial real estate investment and management firm based in Philadelphia, Pennsylvania. Mr. Slogoff was formerly with Entercom Communications Corp., a publicly-traded radio broadcasting company and previously was a member of the corporate and real estate group of the law firm of Dilworth, Paxson, LLP. Mr. Slogoff received a B.A. with honors from the University of Pennsylvania in 1990, and a J.D. from the University of Miami School of Law in 1993. JOEL M. WILENTZ has been a Director of the Company since March 1997. Dr. Wilentz is one of the founding members of Dermatology Associates in Florida, founded in 1970. He is a member of the boards of the Neurological Injury Compensation Associate for Florida, the Broward County Florida Medical Association, and the American Arm of the Israeli Emergency Medical Service for the southeastern United States, of which he is also President. Dr. Wilentz is a past member of the Board of Overseers of the Nova Southeastern University School of Pharmacy. JAMES M. LYNCH has been Vice President and Chief Financial Officer of the Company since August 1998. Before joining the Company in August 1998, Mr. Lynch was Chief Financial Officer of Florida Administrators, Inc., an organization specializing in property and casualty insurance. Prior to working at Florida Administrators, Inc., Mr. Lynch held the position of Senior Vice President of Finance and Comptroller of Trust Group, Inc., which also specialized in property and casualty insurance. Before his position at Trust Group, Mr. Lynch was a Manager with the accounting and auditing firm of Coopers & Lybrand, which later became PricewaterhouseCoopers LLC. THOMAS M. MODICA has been Chief Technology Officer and Chief E-Commerce Officer of the Company since March 15, 2000. Before joining the Company in March 2000, Mr. Modica was Director of Insurance Services at Clientsoft, where he executed strategic relationships with Allstate and Zurich/Farmers Insurance by providing legacy systems integration technology. Prior to working at Clientsoft, Mr. Modica was employed as the National Sales Director by Homecom, an application service provider that specializes in e-commerce solutions for the financial services industry. Norman M. Meier and Bradley I. Meier are father and son, respectively, and Irwin L. Kellner and Norman M. Meier are first cousins. There are no other family relationships among the Company's executive officers and directors. All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Directors receive no compensation for serving on the Board, except for the receipt of stock options and the reimbursement of reasonable expenses incurred in attending meetings. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Company has entered into indemnification agreements with its executive officers and directors pursuant to which the Company has agreed to indemnify such individuals, to the fullest extent permitted by law, for claims made against them in connection with their positions as officers, directors or agents of the Company. 15 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE All required disclosures of Forms 3, 4 and 5 were timely filed by directors, officers and 10% beneficial owners. ITEM 10. EXECUTIVE COMPENSATION The tables and descriptive information set forth below are intended to comply with the Securities and Exchange Commission compensation disclosure requirements applicable to, among other reports and filings, annual reports on Form 10-KSB. This information is furnished with respect to the Company's executive officers who earned in excess of $100,000 during the fiscal year ended December 31, 2001. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION ------------------- Name and Year Ended Long Term Compensation Principal Position December 31 Salary Bonus Securities Underlying Options - ------------------ ----------- ------ ----- ------------------ Bradley I. Meier 2001 $ 315,000 $ 0 150,000 President and CEO 2000 262,500 0 166,666 (1) 1999 250,000 40,000 775,000 James M. Lynch 2001 $ 140,500 $5,000 100,000 Vice President and CFO 2000 122,500 10,000 20,000 (1) 1999 113,000 15,000 45,000 Thomas M. Modica (2) 2001 $ 125,000 $ 0 0 Chief Technology and 2000 98,958 1,250 225,000 Chief E-Commerce Officer 1999 - - -
(1) Options granted under TigerQuote.com non-qualified stock option plan. TigerQuote.com is a wholly-owned subsidiary of the Company. (2) Mr. Modica was hired on March 15, 2000. OPTION GRANTS IN LAST FISCAL YEAR Individual Grants ----------------- Number of % of Total Securities Options Granted Underlying to Employees in Exercise or Name Options Granted Fiscal Year Base Price Expiration Date - ---- --------------- ----------- ---------- --------------- Bradley I. Meier 150,000 26% $0.60 2011 James M. Lynch 100,000 18% $0.50 2011
16 AGGREGATED OPTION EXERCISES AND OPTION VALUES FOR THE YEAR ENDED DECEMBER 31, 2001 Shares Number of Securities Value of Unexercised Acquired Underlying Unexercised In-The-Money Options at on Value Options at December 31, 2001 December 31, 2001 Exchange Realized -------- -------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Bradley I. Meier -- -- 150,000 -- $-- $-- James M. Lynch -- -- 100,000 -- -- --
EMPLOYMENT AGREEMENTS As of August 11, 1999, the Company entered into a four-year employment agreement with Bradley I. Meier, amending and restating the previous employment agreement of May 1, 1997 between the Company and Mr. Meier. Under the terms of the employment agreement, Mr. Meier will devote substantially all of his time to the Company and will be paid a base salary of $250,000 per year which shall be increased by 5% each year beginning with the first anniversary of the effective date. Additionally, pursuant to the employment agreement, and during each year thereof, Mr. Meier will be entitled to a bonus equal to 3% of pretax profits up to $5 million and 4% of pretax profits in excess of $5 million. On May 4, 2001, Addendum No. 3 to the employment agreement was approved by the Board of Directors, whereby Mr. Meier was entitled to receive an additional fifteen percent (15%) increase in his base compensation in addition to the cumulative base compensation and increase calculated at the beginning of 2001, retroactive to January 1, 2001 and under Addendum No. 3, for each successive year of the term of the employment agreement, the base compensation as adjusted by previous increase(s) will be increased by ten (10%) percent. The employment agreement with Mr. Meier contains non-competition and non-disclosure covenants. In addition, the agreement shall be extended automatically for one year at each anniversary of the date of the agreement up to the fourth year of the agreement, at the option of Mr. Meier. Under the terms of the employment agreement dated May 1, 1997, Mr. Meier was granted ten-year stock options to purchase 1,500,000 shares of Common Stock at $1.06 per share, of which 500,000 options vested immediately, 500,000 options vested after one year and the remaining options vested after two years. As of March 15, 2000, the Company and TigerQuote.com entered into an employment agreement with Thomas M. Modica. The initial term of the agreement ends on December 31, 2002. Under the terms of the employment agreement, Mr. Modica will devote substantially all of his time to the Company and will be paid a base salary of $125,000 per year during each of the first three years. The employment agreement with Mr. Modica contains non-competition and non-disclosure covenants. Under the terms of the employment agreement, Mr. Modica was granted stock options to purchase 225,000 shares of Common Stock at $1.00 per share, of which 75,000 options vested on March 15, 2001, 75,000 vest on March 15, 2002 and 75,000 vest on March 15, 2003. 17 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SERIES M PREFERRED STOCK As of March 1, 2002, directors and named executive officers, individually and as a group, beneficially owned Series M Preferred Stock as follows: Name and Address of Beneficial Amount and Nature of Beneficial Owner (1) Ownership Percent of Class --------- --------- ---------------- Bradley I. Meier*(2) 48,890 48.0% Norman M. Meier* (3) 53,000 52.0% Officers and directors as a group (2 persons) (4) 86,890 98.0%
* Director (1) Unless otherwise indicated, the Company believes that each person has sole voting and investment rights with respect to the shares of Series M Preferred Stock of the Company specified opposite his name. Unless otherwise indicated, the mailing address of each shareholder is c/o Universal Insurance Holdings, Inc., 2875 N.E. 191st Street, Suite 300, Miami, Florida 33180. (2) Consists of (i) 33,890 shares of Series M Preferred Stock and (ii) 15,000 shares of Series M Preferred Stock beneficially owned by Belmer Partners, a Florida General Partnership ("Belmer"), of which Mr. Meier is a general partner. Excludes all shares of Series M Preferred Stock owned by Norman M. Meier and Phylis R. Meier, Mr. Meier's father and mother, respectively, as to which Mr. Meier disclaims beneficial ownership. (3) Consists of (i) 38,000 shares of Series M Preferred Stock and (ii) 15,000 shares of Series M Preferred Stock beneficially owned by Belmer, of which Mr. Meier is a general partner. Excludes all shares of Series M Preferred Stock owned by Bradley I. Meier and Phylis R. Meier, Mr. Meier's son and former spouse, respectively, as to which Mr. Meier disclaims beneficial ownership. (4) See footnotes (1) - (3) above. SERIES A PREFERRED STOCK As of March 1, 2002, directors and named executive officers, individually and as a group, beneficially owned Series A Preferred Stock as follows: Name and Address of Beneficial Amount and Nature of Beneficial Owner (1) Ownership Percent of Class --------- --------- ---------------- Norman M. Meier* (2) 9,975 20% Officers and directors as a group (1 person) (3)
* Director 18 (1) Unless otherwise indicated, the Company believes that each person has sole voting and investment rights with respect to the shares of Series A Preferred Stock of the Company specified opposite his name. Unless otherwise indicated, the mailing address of each shareholder is c/o Universal Insurance Holdings, Inc., 2875 N.E. 191st Street, Suite 300, Miami, Florida 33180. (2) Consists of 9,975 shares of Series A Preferred Stock beneficially owned by Belmer, of which Mr. Meier is a general partner. Excludes all shares of Series A Preferred Stock owned by Bradley I. Meier and Phylis R. Meier, Mr. Meier's son and former spouse, respectively, as to which Mr. Meier disclaims beneficial ownership. (3) See footnotes (1) - (2) above. COMMON STOCK As of March 1, 2002, directors and named executive officers, individually and as a group, beneficially owned Common Stock as follows: Name and Address of Beneficial Amount and Nature of Beneficial Owner (1) Ownership (2) Percent of Class --------- --------- ---------------- Bradley I. Meier (3) 5,543,544 31.2% Norman M. Meier (4) 2,620,654 14.7% Irwin L. Kellner (5) 220,000 1.2% Reed J. Slogoff (6) 220,000 1.2% Joel M. Wilentz (7) 220,000 1.2% James M. Lynch (8) 75,000 0.4% Thomas M. Modica (9) 75,000 0.4% Officers and directors as a group (7 people) (10) 8,642,437 48.6%
(1) Unless otherwise indicated, the Company believes that each person has sole voting and investment rights with respect to the shares of Common Stock of the Company specified opposite his name. Unless otherwise indicated, the mailing address of each shareholder is c/o Universal Insurance Holdings, Inc., 2875 N.E. 191st Street, Suite 300, Miami, Florida 33180. (2) A person is deemed to be the beneficial owner of Common Stock that can be acquired by such person within 60 days of the date hereof upon the exercise of warrants or stock options or conversion of Series A Preferred Stock, Series M Preferred Stock or convertible debt. Except as otherwise specified, each beneficial owner's percentage ownership is determined by assuming that warrants, stock options, Series A Preferred Stock, Series M Preferred Stock and convertible debt that is held by such person (but not those held by any other person) and that are exercisable or convertible within 60 days from the date hereof, have been exercised or converted. (3) Consists of (i) (a) 972,829 shares of Common Stock, (b) options to purchase 1,875 shares of Common Stock at an exercise price of $9.00 per share, options to purchase 1,875 shares of Common Stock at an exercise price of $12.50 per share, ten-year options to purchase 90,000 shares at an exercise price of $2.88 as to 45,000 shares and $3.88 as to the remaining 45,000 shares granted pursuant to Mr. Meier's employment agreement, options to purchase 90,000 shares of Common Stock at an exercise price of $1.13 per share and options to purchase 500,000 shares of Common Stock at an exercise price of $1.25 per share, (c) warrants to purchase 15,429 shares of Common Stock at an exercise price of $1.75 per share, warrants to purchase 339,959 shares of Common Stock at an exercise price of $3.00 per share, warrants to purchase 82,000 shares of Common Stock at an exercise price of $1.00 per share and warrants to purchase 131,700 shares of Common Stock at an exercise price of $.75 per share, (d) 169,450 shares of Common Stock issuable upon conversion of Series M Preferred Stock, (e) options to purchase 250,000 shares of Common Stock at an exercise price of $1.06 per share 19 which vested on November 2, 1997, (f) options to purchase 500,000 shares of Common Stock at an exercise price of $1.06 per share which vested on May 1, 1997 granted pursuant to Mr. Meier's employment agreement, options to purchase 500,000 shares of Common Stock at $1.06 per share which vested on May 1, 1998 granted pursuant to Mr. Meier's employment agreement and options to purchase 500,000 shares of Common Stock at an exercise price of $1.06 per share which vested on May 1, 1999 granted pursuant to Mr. Meier's employment agreement, (g) options to purchase 250,000 shares of Common Stock at an exercise price of $1.63 per share, (h) options to purchase 150,000 shares of Common Stock at an exercise price of $1.25 per share which vested on December 23, 1999 and (ii) an aggregate of 331,761 shares of Common Stock (including shares of Common Stock issuable upon exercise of warrants and conversion of Series A and Series M Preferred Stock) beneficially owned by Belmer Partners, of which Mr. Meier is a general partner. Excludes options to purchase 625,000 shares of Common Stock of Tigerquote.com at an exercise price of $.50 per share. Also excludes all securities owned by Norman M. Meier and Phyllis R. Meier, Mr. Meier's father and mother, respectively, as to which Mr. Meier disclaims beneficial ownership. Includes 416,666 and 250,000 shares owned by Lynda Meier and Eric Meier, respectively, who are the sister and brother, respectively, of Bradley I. Meier, which shares are subject to proxies granting voting rights for such shares to Bradley I. Meier. (4) Consists of (i) (a) 457,371 shares of Common Stock, (b) options to purchase 3,750 shares of Common Stock at an exercise price of $12.50 per share, options to purchase 3,750 shares of Common Stock at an exercise price of $9.00 per share and options to purchase 250,000 shares of Common Stock at an exercise price of $1.25 per share, (c) warrants to purchase 3,082 shares of Common Stock at an exercise price of $22.00 per share, warrants to purchase 2,494 shares of Common Stock at an exercise price of $4.25 per share, warrants to purchase 28,538 shares of Common Stock at an exercise price of $1.50 per share, warrants to purchase 120,000 shares of Common Stock at an exercise price of $3.00 per share and warrants to purchase 129,970 shares of Common Stock at an exercise price of $1.00 per share, (d) 214,938 shares of Common Stock issuable upon conversion of Series A and Series M Preferred Stock, (e) options to purchase 500,000 shares of Common Stock at an exercise price of $1.06 per share which vested on November 2, 1997, (f) options to purchase 500,000 shares of Common Stock at an exercise price of $1.63 per share, (g) options to purchase 75,000 shares of Common Stock at an exercise price of $1.25 per share, and (ii) an aggregate of 331,761 shares of Common Stock (including shares of Common Stock issuable upon exercise of warrants and conversion of Series A and Series M Preferred Stock) beneficially owned by Belmer, of which Mr. Meier is a general partner. Excludes options to purchase 100,000 shares of Common Stock of Tigerquote.com at an exercise price of $.50 per share. Excludes all securities owned by Bradley I. Meier or Phyllis Meier, Mr. Meier's son and former spouse, respectively, as to which Mr. Meier disclaims beneficial ownership. (5) Consists of (i) options to purchase 100,000 shares of Common Stock at an exercise price of $1.06 per share, (ii) options to purchase 100,000 shares of Common Stock at an exercise price of $1.63 per share and (iii) options to purchase 20,000 shares of Common Stock at an exercise price of $1.25 per share. Excludes options to purchase 20,000 shares of Common Stock of Tigerquote.com at an exercise price of $.50 per share. (6) Consists of (i) options to purchase 100,000 shares of Common Stock at an exercise price of $1.06 per share, (ii) options to purchase 100,000 shares of Common Stock at an exercise price of $1.63 per share, of which 50,000 are held in a custodial account for Mr. Slogoff's minor son, and (iii) options to purchase 20,000 shares of Common Stock at an exercise price of $1.25 per share. Excludes options to purchase 20,000 shares of Common Stock of TigerQuote.com at an exercise price of $.50 per share. (7) Consists of (i) options to purchase 100,000 shares of Common Stock at an exercise price of $1.06 per share, (ii) options to purchase 100,000 shares of Common Stock at an exercise price of $1.63 per share and (iii) options to purchase 20,000 shares of Common Stock at an exercise price of $1.25 per share. Excludes options to purchase 20,000 shares of Common Stock of TigerQuote.com at an exercise price of $.50 per share. (8) Consists of (i) options to purchase 50,000 shares of Common Stock at an exercise price of $1.87 per share and (ii) options to purchase 25,000 shares of Common Stock at an exercise price of $1.25 per share. 20 Excludes options to purchase 20,000 shares of Common Stock of TigerQuote.com at an exercise price of $.50 per share. (9) Consists of options to purchase 75,000 shares of Common Stock at an exercise price of $1.00 per share. (10) See footnotes (1) - (9) above SERIES M PREFERRED STOCK As of March 1, 2002, the following table sets forth information regarding the number and percentage of Series M Preferred Stock held by all persons, other than those persons listed immediately above, who are known by the Company to beneficially own or exercise voting or dispositive control over 5% or more of the Company's outstanding Series M Preferred Stock: Name and Address of Beneficial Amount and Nature of Beneficial Owner (1) Ownership Percent of Class --------- --------- ---------------- Phyllis R. Meier (2) 16,800 18.9% Universal Insurance Holdings, Inc. 2875 N.E. 191st Street Suite 300 Miami, Florida 33180 Belmer Partners (3) 15,000 16.9% c/o Phyllis R. Meier Managing General Partner Universal Insurance Holdings, Inc. 2875 N.E. 191st Street Suite 300 Miami, Florida 33180
(1) Unless otherwise indicated, the Company believes that each person has sole voting and investment rights with respect to the shares of Series M Preferred Stock specified opposite her or its name. (2) Consists of (i) 1,800 shares of Series M Preferred Stock and (ii) 15,000 shares of Series M Preferred Stock beneficially owned by Belmer, of which Ms. Meier is the managing general partner. Excludes all securities owned by Bradley I. Meier and Norman M. Meier, the son and former spouse, respectively, as to which Ms. Meier disclaims beneficial ownership. (3) Belmer Partners is a Florida general partnership in which Phylis R. Meier is managing general partner and Bradley I. Meier and Norman M. Meier are general partners. SERIES A PREFERRED STOCK As of March 1, 2002, the following table sets forth information regarding the number and percentage of Series A Preferred Stock held by all persons, other than those persons listed immediately above, who are known by the Company to beneficially own or exercise voting or dispositive control over 5% or more of the Company's outstanding Series A Preferred Stock: Name and Address of Beneficial Amount and Nature of Beneficial Owner (1) Ownership Percent of Class --------- --------- ---------------- Phyllis R. Meier (2) 9,975 20.0% Universal Insurance Holdings, Inc. 2875 N.E. 191st Street Suite 300 Miami, Florida 33180 21 Belmer Partners (3) 30,000 60.0% c/o Phyllis R. Meier Managing General Partner Universal Insurance Holdings, Inc. 2875 N.E. 191st Street Suite 300 Miami, Florida 33180
(1) Unless otherwise indicated, the Company believes that each person has sole voting and investment rights with respect to the shares of Series A Preferred Stock specified opposite her or its name. (2) Consists of 9,975 shares of Series A Preferred Stock beneficially own. Excludes all securities owned by Bradley I. Meier and Norman M. Meier, the son and former spouse, respectively, as to which Ms. Meier disclaims beneficial ownership. (3) Belmer Partners is a Florida general partnership in which Phylis R. Meier is managing general partner and Bradley I. Meier and Norman M. Meier are general partners COMMON STOCK As of March 1, 2002, the following table sets forth information regarding the number and percentage of Common Stock held by all persons, other than those persons listed immediately above, who are known by the Company to beneficially own or exercise voting or dispositive control over 5% or more of the Company's outstanding Common Stock: Name and Address of Beneficial Amount and Nature of Beneficial Owner (1) Ownership (2) Percent of Class --------- --------- ---------------- Phyllis R. Meier (3) 1,076,456 6.0% Universal Insurance Holdings, Inc. 2875 N.E. 191st Street Suite 300 Miami, Florida 33180
(1) Unless otherwise indicated, the Company believes that each person has sole voting and investment rights with respect to the shares of Common Stock of the Company specified opposite her name. (2) A person is deemed to be the beneficial owner of Common Stock that can be acquired by such person within 60 days of the date hereof upon the exercise of warrants or stock options or conversion of Series A and Series M Preferred Stock or convertible debt. Except as otherwise specified, each beneficial owner's percentage ownership is determined by assuming that warrants, stock options, Series A and Series M Preferred Stock and convertible debt that are held by such a person (but not those held by any other person) and that are exercisable within 60 days from the date hereof, have been exercised or converted. (3) Consists of (i) (a) 333,792 shares of Common Stock, (b) 2,880 shares of Common Stock issuable upon conversion of related party debt, (c) warrants to purchase 374,085 shares of Common Stock, and (d) 33,938 shares of Common Stock issuable upon conversion of Series A and Series M Preferred Stock owned by Ms. Meier, and (ii) an aggregate of 331,761 shares of Common Stock (including shares of Common Stock issuable upon exercise of warrants and conversion of Series A and Series M Preferred Stock) beneficially owned by Belmer. Excludes all securities owned by Bradley Meier and Norman Meier, the son and former spouse of Ms. Meier, respectively, as to which Ms. Meier disclaims beneficial ownership. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS All underwriting, rating, policy issuance and administration functions for UPCIC during 2001 and 2000 were performed by Universal Property and Casualty Management, Inc. ("Universal Management") pursuant to a Management Agreement 22 dated June 2, 1997 and Addenda thereto dated June 12, 1997 and June 1, 1998. Universal Management is a wholly-owned subsidiary of American European Group, Inc. ("AEG") which is a Delaware insurance holding company. During the years ended December 31, 2001 and 2000, UPCIC incurred administrative costs to Universal Management of $911,449 and $1,122,377, respectively. UPCIC and Universal Management terminated the management agreement effective as of January 15, 2002. Services previously provided by Universal Management to UPCIC under the management agreement are now performed by UPCIC, Universal Risk Advisors, Inc. and unaffiliated third parties. As of December 31, 2001, corporate counsel held $290,000 in trust, for the benefit of the Company, which funds were placed in trust in connection with a dispute involving a Company director and an unrelated entity. These funds are included in the Company's assets as of December 31, 2001. Transactions between the Company and its affiliates are on terms no less favorable to the Company than can be obtained from third parties on an arms' length basis. Transactions between the Company and any of its executive officers or directors require the approval of a majority of disinterested directors. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS 3.1 Registrant's Restated Amended and Restated Certificate of Incorporation (1) 3.2 Registrant's Bylaws (1) 3.3 Certificate of Designations, Preferences, and Rights of Series M Convertible Preferred Stock dated August 13, 1997 (2) 4.1 Form of Common Stock Certificate (1) 4.2 Form of Warrant Certificate (1) 4.3 Form of Warrant Agency Agreement (1) 4.4 Form of Underwriter Warrant (1) 4.5 Affiliate Warrant (1) 4.6 Form of Warrant to purchase 100,000 shares of Common Stock at an exercise price of $2.00 per share issued to Steven Guarino dated as of April 24, 1997. (Substantially similar in form to two additional warrants to purchase 100,000 shares of Common Stock issued to Mr. Guarino dated as of April 24, 1997, with exercise prices of $2.75 and $3.50 per share, respectively) (2) 10.1 Registrant's 1992 Stock Option Plan (1) 10.2 Form of Indemnification Agreement between the Registrant and each of its directors and executive officers (1) 10.5 Management Agreements by and between Universal Property & Casualty Insurance Company and Universal P&C Management, Inc. dated as of June 2, 1997 (2) 10.6 Employment Agreement dated as of May 1, 1997 between Universal Heights, Inc. and Bradley I. Meier (2) 16.1 Letter on change in certifying accountants from Millward & Co. CPA's dated February 12, 1999, and as amended February 26, 1999 (3) 23 21.1 List of Subsidiaries (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-51546) declared effective on December 14, 1992 (2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the year ended April 30, 1997 filed with the Securities and Exchange Commission on August 13, 1997, as amended (3) Incorporated by reference to the Registrant's Current Report on Form 8-K and Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on February 12, 1999 and February 26, 1999, respectively REPORTS ON FORM 8-K None. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. UNIVERSAL INSURANCE HOLDINGS, INC. Dated: April 16, 2002 By: /s/ Bradley I. Meier ---------------------------- Bradley I. Meier, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Bradley I. Meier President, Chief Executive April 16, 2002 - ---------------------- Officer and Director Bradley I. Meier /s/ James M. Lynch Chief Financial Officer April 16, 2002 - -------------------- James M. Lynch /s/ Norman M. Meier Director April 16, 2002 - --------------------- Norman M. Meier /s/ Irwin L. Kellner Director April 16, 2002 - ---------------------- Irwin I. Kellner /s/ Reed J. Slogoff Director April 16, 2002 - -------------------- Reed J. Slogoff /s/ Joel M. Wilentz Director April 16, 2002 - -------------------- Joel M. Wilentz 24 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report.................................................F-2 Consolidated Balance Sheet - December 31, 2001...............................F-3 Consolidated Statements of Operations for the Years Ended December 31, 2001 and 2000 ...............................................................F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2001 and 2000........................F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001 and 2000..........................................................F-6 - F-7 Notes to Consolidated Financial Statements.............................F-8 -F-28 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Universal Insurance Holdings, Inc. We have audited the accompanying consolidated balance sheet of Universal Insurance Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the two years in the period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal Insurance Holdings, Inc. and subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has recurring losses from operations and the Company's subsidiary, Universal Property & Casualty Insurance Company ("UPCIC"), has adjusted statutory capital at December 31, 2001 that is marginally above the minimum statutory capital requirement. Included in UPCIC's adjusted statutory capital as of December 31, 2001 are approximately $851,000 of affiliate receivables which are considered non admitted assets under the National Association of Insurance Commissioners statutory accounting principles. These amounts were collected during the first quarter of 2002. Based on these collections, UPCIC has commenced discussions with the Florida Department of Insurance to admit these assets under a permitted practice. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning this matter are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Deloitte & Touche LLP Certified Public Accountants Miami, Florida April 9, 2002 F-2 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 ASSETS Cash and cash equivalents $ 10,481,699 Debt securities held-to-maturity (fair value of $3,153,505) 3,035,720 Equity securities available for sale (cost of $281,644) 241,808 Investments in real estate 216,558 Prepaid reinsurance premiums and reinsurance recoverables 13,113,278 Premiums and other receivables 1,208,919 Deferred policy acquisition costs 529,942 Property, plant and equipment net 961,861 -------------------- Total Assets $ 29,789,785 ==================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Unpaid losses and loss adjustment expenses $ 6,246,867 Unearned premiums 14,053,239 Reinsurance payable 3,327,902 Accounts payable 1,363,724 Other accrued expenses 507,686 Accrued taxes, licenses and fees 189,728 Loans payable 444,084 -------------------- Total Liabilities 26,133,230 -------------------- COMMITMENTS AND CONTINGENCIES (Notes 13 and 14) STOCKHOLDERS' EQUITY: Cumulative convertible preferred stock, $.01 par value, 1,000,000 shares authorized, 138,640 shares issued and outstanding, minimum liquidation preference of $1,419,700 1,387 Common stock, $.01 par value 40,000,000 shares authorized, 14,894,584 shares issued and 14,685,939 shares outstanding 148,946 Common stock in treasury, at cost - 208,645 shares (101,820) Additional paid-in capital 14,977,297 Accumulated deficit (11,329,419) Accumulated other comprehensive loss (39,836) -------------------- Total stockholders' equity 3,656,555 -------------------- Total liabilities and stockholders' equity $ 29,789,785 ==================== The accompanying notes to consolidated financial statements are an integral part of these statements.
F-3 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended Year Ended December 31, 2001 December 31, 2000 ----------------- ----------------- PREMIUMS EARNED AND OTHER REVENUES: Premium income, net $ 7,711,804 $ 6,367,045 Net investment income 578,903 1,168,796 Commission revenue 1,786,675 1,610,175 Other revenue 3,362,273 - ------------ ------------- Total revenues 13,439,655 9,146,016 ------------ ------------- OPERATING COSTS AND EXPENSES Losses and loss adjustment expenses 7,767,980 4,161,661 General and administrative expenses 8,711,025 6,472,519 ------------ ------------- Total operating costs and expenses 16,479,005 10,634,180 ------------ ------------- NET LOSS $ (3,039,350) $ (1,488,164) ============ ============= LOSS PER COMMON SHARE: Basic $ (0.21) $ (0.10) ============ ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 14,698,000 14,788,000 ============ ============= LOSS PER COMMON SHARE Diluted $ (0.21) $ (0.10) ============ ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 14,698,000 14,788,000 ============ ============= The accompanying notes to consolidated financial statements are an integral part of these statements.
F-4 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2001 AND 2000
Preferred Common Treasury Additional Stock Stock Stock Paid-in Shares Amount Shares Amount Shares Amount Capital ------ ------ ------ ------ ------ ------ ------- BALANCE, January 1, 2000 138,640 $ 1,387 14,794,548 $ 147,946 $ 15,089,741 Net loss - - - - - - - Net change in unrealized gain on available for sale securities - - - - - - - Comprehensive loss - - - - - - - Preferred stock dividend - - - - - - - Purchase of treasury stock - - - - 141,795 (84,254) - Issuance of common stock - - 1,000,000 1,000 - - 36,501 --------- -------- ----------- ------- -------- -------- ---------- BALANCE, December 31, 2000 138,640 1,387 14,894,584 148,946 141,795 (84,254) 15,126,242 --------- -------- ----------- ------- -------- -------- ---------- Net loss - - - - - - - Net change inunrealized losses on available for sale securities - - - - - - - Comprehensive loss - - - - - - - Preferred stock dividend - - - - - - - Common stock dividend - - - - - - (148,945) Purchase of treasury stock - - - - 66,850 (17,566) - --------- -------- ----------- ------- -------- -------- ---------- BALANCE, December 31, 2001 138,640 1,387 14,894,584 148,946 208,645 (101,820) 14,977,297 ========= ======== =========== ======= ======== ======== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5
Accumulated Accumulated Other Comp Deficit Income (loss) Total ------- ------------- ----- BALANCE, January 1, 2000 $ (6,072,006) $ 233,227 $ 8,770,295 Net loss (1,488,164) (1,488,164) Net change in unrealized gain on available for sale securities - (293,099) (293,099) ----------- Comprehensive loss - - (1,781,263) Preferred stock dividend (49,949) - (49,949) Purchase of treasury stock - - (84,254) Issuance of common stock - - 37,501 ----------- --------- ----------- BALANCE, December 31, 2000 (8,240,119) (59,872) 6,892,330 ----------- --------- ----------- Net loss (3,039,350) - (3,039,350) Net change inunrealized losses on available for sale securities - 20,036 20,036 -------- Comprehensive loss - - (3,019,314) Preferred stock dividend (49,949) - (49,949) Common stock dividend - (148,945) Purchase of treasury stock - - (17,566) ----------- --------- ----------- BALANCE, December 31, 2001 (11,329,419) (39,836) $ 3,656,555 =========== ========= ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended Year Ended December 31, 2001 December 31, 2002 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,039,350) $ (1,488,164) Adjustments to reconcile net loss to cash provided by (used in) operations: Amortization and depreciation 157,308 98,455 Gains on sales of equity securities available for sale (3,334) (190,194) Net accretion of bond premiums and discounts (15,633) (12,984) Net change in assets and liabilities relating to operating activities: Prepaid reinsurance premiums and reinsurance recoverable 2,107,898 (4,521,319) Premiums and other receivables (335,860) 36,498 Deferred policy acquisition costs 1,268,725 722,208 Reinsurance payable 793,871 (1,297,401) Accounts payable 457,059 (538,159) Other accrued expenses (69,571) (1,072,481) Accrued taxes, licenses and fees (30,946) 6,412 Unpaid losses and loss adjustment expenses 2,778,743 403,736 Unearned premiums (2,120,419) 1,379,086 Due from related parties (20,040) - ------------ -------------- Net cash provided by (used in) operating activities 1,928,451 (6,474,307) ------------ -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (505,767) (458,715) Purchase of equity secuities available for sale (127,546) (744,688) Proceeds from sale of equity securities available for sale 23,195 1,121,787 Purchase of debt securities held to maturity (601,062) (1,145,719) Proceeds from maturities of debt securities held to maturity 1,012,438 441,207 Purchase of real estate (216,558) - Net cash used in investing activities (415,300) (786,128) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Preferred stock dividend (49,950) (49,949) Common stock dividend (148,945) - Purchase of treasury stock (17,566) (84,254) Proceeds from loans payable 306,665 - Net cash provided by (used in) financing activities 90,204 (134,203) NET INCREASE (DECREASE) IN CASH AND CASH 1,603,355 (7,394,638) EQUIVALENTS CASH AND CASH EQUIALENTS, Beginning of year 8,878,344 16,272,982 ------------ ------------- CASH AND CASH EQUIALENTS, End of year $ 10,481,699 $ 8,878,344 F-6 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED Year Ended Year Ended December 31, 2001 December 31, 2002 ----------------- ----------------- SUPPLEMENTAL NON CASH FINANCING AND INVESTING ACTIVITIES: Issuance of stock for purchase of software $ - $ 37,501
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION NATURE OF OPERATIONS Universal Insurance Holdings, Inc. (the "Company") was originally incorporated as Universal Heights, Inc. in Delaware in November 1990. The Company changed its name to Universal Insurance Holdings, Inc. on January 12, 2001. The Company, through its wholly-owned subsidiary, Universal Insurance Holding Company, formed Universal Property & Casualty Insurance Company ("UPCIC") in 1997. UPCIC's application to become a Florida licensed property and casualty insurance company was filed in May 1997 with the Florida Department of Insurance ("DOI") and was approved on October 29, 1997. In 1998, UPCIC began operations through the acquisition of homeowner insurance policies issued by the Florida Residential Property and Casualty Joint Underwriting Association ("JUA"). The JUA was established in 1992 as a temporary measure to provide insurance coverage for individuals who could not obtain coverage from private carriers because of the impact on the private insurance market of Hurricane Andrew in 1992. Rather than serving as a temporary source of emergency insurance coverage as was originally intended, the JUA became a major provider of original and renewal insurance coverage for Florida residents. In an attempt to reduce the number of policies in the JUA, and thus the exposure of the program to liability, the Florida legislature approved a number of initiatives to depopulate the JUA, which resulted in policies being acquired by private insurers and provided additional incentives to private insurance companies to acquire policies from the JUA. On December 4, 1997, the Company raised approximately $6,700,000 in a private offering with various institutional and/or otherwise accredited investors pursuant to which the Company issued, in the aggregate, 11,208,996 shares of its common stock at a price of $.60 per share. The proceeds of this transaction were used partially for working capital purposes and to meet the minimum regulatory capitalization requirements ($5,300,000) required by the Florida Department of Insurance to engage in this type of homeowners insurance company business. In February 1998, the Company commenced its insurance business. Since then the Company has developed into a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Universal Risk Advisors, Inc. was incorporated in Florida on July 2, 1998, and became licensed by the Florida Department of Insurance on September 28, 1998 as the Company's wholly-owned managing general agent ("MGA"). Through the MGA, the Company has underwriting and claims authority for UPCIC as well as third party insurance companies. The MGA seeks to generate revenue through policy fee income and other administrative fees from the marketing of UPCIC and third party insurance products through the Company's distribution network and UPCIC. Universal Florida Insurance Agency was incorporated in Florida on July 2, 1998 and U.S. Insurance Solutions, Inc. was incorporated in Florida on August 4, 1998 as wholly-owned subsidiaries of Universal Insurance Holdings, Inc. to solicit voluntary business and generate commission revenue. These two entities are the foundation of the Company's agency operations, which seek to generate income from policy fees, commissions, premium financing referral fees and the marketing of ancillary services. U.S.A. Insurance Solutions, Inc., was incorporated in Florida on December 10, 1998 as a wholly-owned subsidiary of U.S. Insurance Solutions, Inc. to acquire the assets of an insurance agency. In addition, Capital Resources Group, LTD. was incorporated in the British Virgin Islands on June 2, 2000 as a subsidiary of the Company to participate in contingent capital products. Universal Risk Life Advisors, Inc. was incorporated in Florida on June 1, 1999 as the Company's wholly-owned managing general agent for life insurance products. The Company has also formed a claims adjusting company, Universal Adjusting Corporation, which was incorporated in Delaware on August 9, 1999. Universal Adjusting Corporation currently has claims authority for Universal Property & Casualty Insurance Company claims. The Company has also formed subsidiaries that specialize, or will specialize, in selling insurance via the Internet. Tigerquote.com Insurance & Financial Services Group, Inc. ("Tigerquote.com") and Tigerquote.com Insurance Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23, 1999, respectively. Tigerquote.com is an Internet insurance company while Tigerquote.com Insurance F-8 Solutions, Inc. is a currently operating network of Internet insurance agencies. As of December 31, 2001, these insurance agencies have been established in 22 states. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") that differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities. The Company has one reportable segment during each period reported in the accompanying consolidated financial statements, based upon management reporting. As discussed in Note 9, the DOI completed an examination of UPCIC as of December 31, 2000 and has proposed adjustments in a draft examination report which would cause UPCIC to fail to meet the minimum statutory capital requirement as of December 31, 2000. The DOI is currently conducting an examination as of December 31, 2001. As of December 31, 2001, UPCIC has adjusted statutory capital of $4,124,880 which is $124,880 above the minimum requirement. Included in UPCIC's adjusted statutory capital as of December 31, 2001 are approximately $851,000 of affiliate receivables which are considered nonadmitted assets under the National Association of Insurance Commissioners statutory accounting principles. These amounts were collected during the first quarter of 2002. Based on these collections, UPCIC has commenced discussions with the DOI to admit these assets. In the event that the DOI does not provide a permitted practice to include these assets in statutory capital at December 31, 2001, UPCIC's statutory capital would not be in compliance with the minimum requirement and would be considered impaired at such date. UPCIC has also experienced recurring losses from operations during the past three years, including 2001 which included nonrecurring other revenue of approximately $3.2 million. If UPCIC continues to sustain operating losses during 2002, it will not comply with the minimum statutory capital requirements in the near future unless UPCIC is able to raise additional capital through other sources. UPCIC is also required to comply with the National Association of Insurance Commissioners ("NAIC") risk-based capital ("RBC") requirements. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. As of December 31, 2001, UPCIC's RBC was equivalent to a Company-level action. As a result, management is required to file a Risk Based Capital Plan containing items specified in Florida Statutes. UPCIC has experienced increasing loss ratios, net underwriting losses and net losses for the past three years. Management attributes the losses reported for these periods primarily to higher than expected costs of catastrophic reinsurance and adverse loss experience in the homeowners' line of business. Management intends to improve and strengthen the financial condition of UPCIC as follows. A rate increase of approximately 7% has been approved by the DOI on new and renewal policies and was implemented as of July 1, 2001. In addition, the Company is currently working toward decreasing the cost of its catastrophe reinsurance through negotiation of better rates and program changes. Program changes could result in a lower level of catastrophe reinsurance coverage. The Company's continuation as a going concern is dependent upon the ability of UPCIC to meet minimum statutory capital requirements and the Company's ability to attain profitable operations. Failure to meet the minimum level of statutory capital could result in one or more regulatory sanctions in the future, including the revocation of UPCIC's certificate of authority or ultimately, the placement of UPCIC in conservation, rehabilitation or liquidation. These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern. Management believes that the implementation of its plans described above will be successful. However, there can be no assurance that the success of these plans will be achieved or will be sufficient to ensure UPCIC's compliance with minimum statutory capital requirements or that the Company will be able to achieve profitability. F-9 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed by the Company are summarized as follows: USE OF ESTIMATES. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company's primary areas of estimate are the recognition of premium revenues, insurance liabilities, deferred policy acquisition costs, provision for premium deficiency and reinsurance. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts, after intercompany eliminations, of the Company and its subsidiaries. CASH AND CASH EQUIVALENTS. The Company includes all short-term, highly liquid investments that are readily convertible to known amounts of cash and have an original maturity of three months or less in cash equivalents. SECURITIES HELD TO MATURITY. Debt securities which the Company has the intent and ability to hold to maturity are reported at amortized cost, adjusted for amortization of premiums or accretion of discounts and other-than-temporary declines in fair value. INVESTMENTS IN REAL ESTATE. Investments in real estate are reported at cost, less allowances for depreciation and impairment of value. Investments in real estate, other than land, are depreciated over their estimated useful life of 25 years. SECURITIES AVAILABLE FOR SALE. Equity securities are reported at fair value, adjusted for other than temporary declines in fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses are determined on the specific identification method. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is recorded at cost. Depreciation is provided on the straight-line basis over the estimated useful life of the assets. Estimated useful life of all property, plant and equipment ranges from three to five years. Routine repairs and maintenance are expensed as incurred. Website development costs are capitalized and amortized over their estimated useful life. RECOGNITION OF PREMIUM REVENUES. Property and liability premiums are recognized as revenue on a pro rata basis over the policy term. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums. The Company believes that its revenue recognition policies conform to Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. RECOGNITION OF COMMISSION REVENUE. Commission revenue, which is comprised of the managing general agent's policy fee income on all new and renewal insurance policies and commissions generated from agency operations is recognized as income upon policy inception. The Company believes that its revenue recognition policies conform to Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. DEFERRED POLICY ACQUISITION COSTS. Commissions and other costs of acquiring insurance that vary with and are primarily related to the production of new and renewal business are deferred and amortized over the terms of the policies or reinsurance treaties to which they are related. Investment income is taken into consideration when calculating the maximum amount of deferred acquisition cost. INSURANCE LIABILITIES. Unpaid losses and loss adjustment expenses are provided for as claims are incurred. The provision for unpaid losses and loss adjustment expenses includes: (1) the accumulation of individual case estimates for claims and claim adjustment expenses reported prior to the close of the accounting period; (2) estimates for unreported claims based on industry data; and (3) estimates of expenses for investigating and adjusting claims based on the experience of the Company and the industry. F-10 Inherent in the estimates of ultimate claims are expected trends in claim severity, frequency and other factors that may vary as claims are settled. The amount of uncertainty in the estimates for casualty coverage is significantly affected by such factors as the amount of claims experience relative to the development period, knowledge of the actual facts and circumstances and the amount of insurance risk retained. In the case of UPCIC, this uncertainty is compounded by UPCIC's limited history of claims experience. In addition, UPCIC's policyholders are currently concentrated in South Florida, which is periodically subject to adverse weather conditions such as hurricanes and tropical storms. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. PROVISION FOR PREMIUM DEFICIENCY. It is the Company's policy to evaluate and recognize losses on insurance contracts when estimated future claims and maintenance costs under a group of existing contracts will exceed anticipated future premiums. No accrual for premium deficiency was considered necessary at December 31, 2001. REINSURANCE. In the normal course of business, the Company seeks to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreement and consistent with the establishment of the liability of the Company. INCOME TAXES. Income tax provisions are based on the asset and liability method. Deferred federal income taxes have been provided for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. INCOME (LOSS) PER SHARE OF COMMON STOCK. Basic earnings per share is computed by dividing the Company's net income (loss) less cumulative Preferred Stock dividends by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed by dividing the Company's net income (loss) minus Preferred Stock dividends by the weighted average number of shares of Common Stock outstanding during the period and the impact of all dilutive potential common shares, primarily Preferred Stock, options and warrants. The dilutive impact of stock options and warrants is determined by applying the treasury stock method and the dilutive impact of the Preferred Stock is determined by applying the "if converted" method. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting Standards ("SFAS") No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the estimated fair value of all financial instruments including both assets and liabilities unless specifically exempted. The Company uses the following methods and assumptions in estimating the fair value of financial instruments. Cash and cash equivalents: the carrying amount reported in the consolidated balance sheet for cash and cash equivalents approximates fair value due to the short-term nature of those items. Premiums and other receivables and accounts payable: the carrying amounts reported in the consolidated balance sheet for premiums and other receivables and accounts payable approximate their fair value due to their short-term nature. Equity securities available-for-sale and debt securities held-to-maturity: fair values for equity and debt securities are based on quoted market prices. Loans payable: the carrying amount reported in the consolidated balance sheet for loans payable is equal to the amount of the respective notes. CONCENTRATIONS OF CREDIT RISK. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, investments, premiums receivable and reinsurance recoverables. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of individuals comprising the Company's customer base. However, the majority of the Company's revenues are currently derived from products and services offered to customers in Florida which could be adversely affected by economic downturns, an increase in competition or other environmental changes. In order to reduce credit risk for amounts due from reinsurers, the Company F-11 seeks to do business with financially sound reinsurance companies and regularly evaluates the financial strength of all reinsurers used. STOCK OPTIONS. The Company grants options for a fixed number of shares to employees and outside directors with an exercise price equal to the fair value of the shares at the grant date. The Company has elected to apply Accounting Principles Board ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its stock options granted to employees and directors, and Statement of Financial Accounting Standard ("SFAS") No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION, for its stock options granted to non-employees. Under APB No. 25, because the exercise price of the Company's employee and director stock options equals the market price of underlying stock on the date of the grant, no compensation expense is recognized. The Company expenses the fair value (as determined at the grant date) of options and warrants granted to non-employees in accordance with SFAS No. 123. The Company has adopted the disclosure only provisions of SFAS No. 123 (see Note 12). NEW ACCOUNTING PRONOUNCEMENTS. The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of Florida. Effective January 1, 2001, the Insurance Department of the State of Florida required that insurance companies domiciled in the State of Florida prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures Manual--Version effective January 1, 2001 (the "Manual") , as modified by the Insurance Department of the State of Florida. Accordingly, the admitted assets, liabilities, and capital and surplus of Universal Property & Casualty Insurance Company as of December 31, 2001, and the results of its operations and its cash flow for the year then ended have been determined in accordance with the new accounting principles. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These standards establish accounting and reporting for business combinations. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. Universal will adopt the provisions of these statements in the first quarter of 2002. The impact of such adoption is not anticipated to have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which is effective for fiscal years beginning after December 15, 2001. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business (as previously defined in that opinion). This statement also amends Accounting Research Bulletin No. 51, CONSOLIDATED FINANCIAL STATEMENTS, to eliminate the exception to consolidation for subsidiaries for which control is likely to be temporary. Universal will adopt SFAS No. 144 in the first quarter of 2002. The impact of such adoption is not anticipated to have a material effect on the Company's consolidated financial statements. RECLASSIFICATIONS. Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the current year presentation. NOTE 3 - INSURANCE OPERATIONS UPCIC commenced its insurance activity in February 1998 by assuming policies from the JUA. UPCIC received the unearned premiums and began servicing the policies. Subsequently, UPCIC was successful in renewing a large number of these policies while commencing solicitation of business in the voluntary market through independent agents. Unearned premiums represent amounts that UPCIC would refund policyholders if their policies were canceled. Accordingly, UPCIC determines unearned premiums by calculating the pro-rata amount that would be due to the policyholder at a given point in time based upon the premiums owed over the life of each policy. At December 31, 2001, the Company has direct unearned premiums of $14,053,239. F-12 UPCIC's obligation for liabilities for policies assumed from the JUA began at 11:59 p.m. on the date of assumption of the policies. UPCIC has no liability for assumed policies prior to the assumption date nor does UPCIC have any liability for claims made to the JUA. Similarly, the JUA has no liability for assumed liabilities subsequent to the assumption date. Through December 31, 2001, UPCIC has received bonus payments of approximately $2,723,600 based upon a portfolio takeout of approximately 30,000 policies. Bonus payments were held in escrow for three years. After the three-year period, if certain conditions were met, including maintaining a minimum number of policies, UPCIC would have unrestricted use of the bonus payments. In addition, UPCIC would have investment income from the bonus payments that would also be available at the end of the three years. These bonus payments were not included in the Company's assets until receipt at the end of the three-year period. To date, the Company has complied with requirements related to the bonus payments and bonus payments of $2,723,600 were released from escrow for 27,278 policies which reached their three-year anniversary in 2001. The Company will not be receiving any additional bonus payments. Investment income of $452,947 was recognized in 2001 and was received in January 2002. NOTE 4 - REINSURANCE UPCIC's in-force policyholder coverage for windstorm exposures as of December 31, 2001 was approximately $4.5 billion. In the normal course of business, UPCIC also seeks to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsurance policy. Reinsurance premiums, losses and loss adjustment expenses are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reinsurance ceding commissions received are deferred and amortized over the effective period of the related insurance policies. UPCIC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risks with other insurers or reinsurers, either on an automatic basis under general reinsurance contracts known as "treaties" or by negotiation on substantial individual risks. The reinsurance arrangements are intended to provide UPCIC with the ability to maintain its exposure to loss within its capital resources. Such reinsurance includes quota share, excess of loss and catastrophe forms of reinsurance. QUOTA SHARE Effective June 1, 2001, UPCIC entered into a quota share reinsurance treaty and excess per risk agreements with Swiss Reinsurance America Corporation, rated A+ by A.M. Best. Under the quota share treaty, UPCIC cedes 50% of its gross written premiums, losses and loss adjustment expenses with a provisional ceding commission ranging from 27% to 35%; the commission percentage reflected in these financial statements is 27% based on the ceded loss ratio. For the year ended December 31, 2001, UPCIC ceded 50% of gross written premiums, losses and loss adjustment expenses. During the first quarter of 2000, UPCIC ceded 50% of gross written premiums, losses and loss adjustment expenses. For the nine months ended December 31, 2000, UPCIC elected to cede 65% of gross written premiums, losses and loss adjustment expenses. In addition, the quota share treaty currently has a limitation for any one occurrence of $6,500,000 with an option for an additional $3,500,000. EXCESS PER RISK Effective June 1, 2000, and continuing through December 31, 2001, UPCIC entered into an excess per risk agreement with Swiss Reinsurance America Corporation, rated A+ by A.M. Best. Under the excess per risk agreement, UPCIC obtained coverage of $1,300,000 in excess of $500,000 ultimate net loss for each risk, each loss, excluding losses arising from the peril of wind to the extent such wind related losses are the result of a hurricane. A $2,600,000 limit applies to any one-loss occurrence. F-13 EXCESS CATASTROPHE The excess catastrophe reinsurance agreement provides four layers of excess catastrophe coverage as of December 31, 2000 as follows: FIRST LAYER SECOND LAYER THIRD LAYER FOURTH LAYER Coverage $5,000,000 in $20,000,000 in $12,000,000 in excess $10,000,000 in excess of excess of excess of of $27,000,000 each $39,000,000 each loss $2,000,000 each $7,000,000 each loss loss occurrence occurrence (see loss occurrence occurrence discussion of coverage provided by Florida Hurricane Catastrophe Fund below) Deposit premium $1,800,000 $3,900,000 $1,020,000 $362,500 Minimum premium $1,440,000 $3,120,000 $816,000 $290,000 Premium rate -% of 2.0179% 4.3722% 8.5% .8129% Probable maximum loss
Effective June 1, 2001, UPCIC revised and enhanced its excess catastrophe reinsurance program. The excess catastrophe reinsurance agreement provides four layers of excess catastrophe coverage as of December 31, 2001 as follows: FIRST LAYER SECOND LAYER THIRD LAYER FOURTH LAYER Coverage $5,000,000 in $9,500,000 in excess $14,000,000 in excess $19,000,000 in excess of excess of of $7,000,000 each of $16,500,000 each $30,500,000 each loss $2,000,000 each loss occurrence loss occurrence occurrence (see loss occurrence discussion of coverage provided by Florida Hurricane Catastrophe Fund below) Deposit premium $1,800,000 $2,565,000 $1,862,000 $1,615,000 Minimum premium $1,440,000 $2,052,000 $1,489,600 $1,292,000 Premium rate -% of 0.036% 0.0513% 0.03724% 0.0323% Probable maximum loss
Loss occurrence is defined as all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event, which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. Effective June 1, 2000 UPCIC entered a reimbursement agreement with the Florida Hurricane Catastrophe Fund (the "Fund") which is administered by the Florida State Board of Administration. Under the reimbursement agreement, the Fund would reimburse the Company, with respect to each loss occurrence during the contract year (June 1, 2000 to May 31, 2001) for 90% of the ultimate loss paid by the Company in excess of the Company's retention plus 5% of the reimbursed losses to cover loss adjustment expenses. A covered event means any one storm declared to be a hurricane by the National Hurricane Center for losses incurred in Florida, both while it is a hurricane and through subsequent downgrades. The Fund provided UPCIC with coverage of $69,167,394 in excess of $19,724,457. The premium for this coverage was $2,759,032. Effective June 1, 2001, UPCIC entered a subsequent reimbursement agreement with the Fund under the same terms. The Fund has provided UPCIC with coverage of $57,784,569 in excess of $16,847,968 as of December 31, 2001. The premium for this coverage was $2,423,202. In the event F-14 of depletion of the Fund due to losses arising from catastrophic events, the Fund would assess homeowners' insurers writing business in the state of Florida. In the event that a loss occurrence were to decrease the coverage available to UPCIC under the Fund, effective June 1, 2000, UPCIC purchased second event excess catastrophe reinsurance covering the period June 1, 2000 to May 31, 2001 which could replace the coverage provided by the Fund for 100% of losses of $40,000,000 in excess of $49,000,000. The premium for this coverage was $370,000. Effective July 1, 2001, UPCIC purchased industry loss warranty catastrophe reinsurance, covering the period July 1, 2001 to June 30, 2002, which could supplement other coverages. The premiums for these coverages are $352,855. Amounts recoverable from reinsurers are estimated in accordance with the reinsurance contract. Reinsurance premiums, losses and loss adjustment expenses ("LAE") are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. The preceding reinsurance arrangements had the following effect on certain items in the accompanying consolidated financial statements:
Year Ended Year Ended December 31, 2001 December 31, 2000 Premiums Premiums Loss and Loss Premiums Premiums Loss and Loss Written Earned Adjustment Written Earned Adjustment ------- ------ Expenses ------- ------ Expenses -------- -------- Direct $ 25,536,716 $27,657,135 $ 16,069,111 $28,733,138 $ 27,354,052 $ 10,948,937 Assumed - - - (22,907) (22,907) (16,260) Ceded (17,234,000) (19,945,331) (8,301,131) (24,122,697) (20,964,100) (6,771,016) ------------ ----------- ----------- ----------- ----------- Net $ 8,302,716 $ 7,711,804 $ 7,767,980 $ 4,587,534 $ 6,367,045 $ 4,161,661 ============ =========== ============ =========== ============ ============ Other amounts: DECEMBER 31, 2001 ----------------- Reinsurance recoverable on unpaid losses and loss adjustment expenses $3,278,316 Reinsurance recoverable on paid losses 220,032 Unearned premiums ceded 9,614,930 ---------- Prepaid reinsurance premiums and reinsurance recoverable $13,113,278 =========== Reinsurance payable $3,327,902 ==========
UPCIC's reinsurance contracts do not relieve UPCIC from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to UPCIC; consequently, allowances are established for amounts deemed uncollectible. UPCIC evaluates the similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. As of December 31, 2001, UPCIC has reinsurance contracts with various reinsurers located throughout the United States and internationally. UPCIC believes that this distribution of reinsurance contracts adequately minimizes UPCIC's risk from any potential operating difficulties of its reinsurers. F-15 NOTE 5 - INVESTMENTS Major categories of net investment income are summarized as follows: Year Ended Year Ended December 31, 2001 December 31, 2000 ----------------- ----------------- Debt securities held-to-maturity $ 241,913 $ 223,524 Common Stocks 1,294 5,300 Cash and cash equivalents 361,243 974,704 --------- ----------- 604,450 1,203,528 Investment expenses 25,547 34,732 --------- ----------- $ 578,903 $ 1,168,796 ========== =========== Proceeds from the sale of equity securities during 2001 and 2000 were $23,195 and $1,121,787, respectively. Gross gains on the sale of securities during 2001 and 2000 were $11,215 and $196,588, respectively. Gross losses on the sale of securities during 2001 and 2000 were $7,881 and $6,394, respectively. The aggregate amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value as of December 31, 2001 for available-for-sale and held-to-maturity securities by major security type are as follows: Cost or Gross Gross Fair Amortized Cost Unrealized Gains Unrealized Losses Value -------------- ---------------- ----------------- ----- Available-for-sale securities: Equity securities $ 281,644 - $ (39,836) $ 241,808 =========== ============ ========= =========== Held-to-maturity securities: US government agencies $ 2,998,020 $ 119,187 $ (2,814) $ 3,114,393 Mortgage backed securities 37,700 1,412 - $ 39,112 ----------- ------------ --------- ----------- Total $ 3,035,720 $ 120,599 $ (2,814) $ 3,153,505
The scheduled maturities of held-to-maturity securities at December 31, 2001 were as follows: Amortized Cost Fair Value --- ---------- Due after five years through ten years $408,488 $379,294 Due after ten years 2,627,232 2,774,211 --------- --------- Total $3,035,720 $3,153,505 ========= ========= The preceding data is based on the stated maturities of the securities. Actual maturities may differ as borrowers may have the right to call or prepay obligations. At December 31, 2001, investments with a carrying value of $300,000 were on deposit with regulatory authorities. NOTE 6 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 2001 consisted of the following: Computers $ 87,500 Furniture 81,911 Automobiles and equipment 639,795 Software 443,725 --------- Total cost 1,252,931 Less: Accumulated depreciation 291,070 --------- Net carrying value $ 961,861 ========= NOTE 7 - LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES As described in Note 2, UPCIC establishes liabilities for unpaid losses and loss adjustment expense on reported and unreported claims of insured losses. These liability estimates are based on known facts and interpretation of factors such as claim payment patterns, loss payments, pending levels of unpaid claims, product mix and industry experience. The establishment of appropriate liabilities, including liabilities for catastrophes, is an inherently uncertain process. This uncertainty is compounded by UPCIC's limited history of claims experience. UPCIC regularly updates its estimates as new facts become known and further events occur which may impact the resolution of unsettled claims. The level of catastrophe loss experienced in any year cannot be predicted and could be material to results of operations and financial position. UPCIC's policyholders are concentrated in South Florida, which is periodically subject to adverse weather conditions such as hurricanes and tropical storms. UPCIC's in-force policyholder coverage for windstorm exposures as of December 31, 2001 was approximately $4.5 billion. UPCIC continuously evaluates alternative business strategies to more effectively manage its exposure to catastrophe losses, including the maintenance of catastrophic reinsurance coverage as discussed in Note 4. Management believes that the liabilities for claims and claims expense at December 31, 2001 is appropriately established in the aggregate and adequate to cover the ultimate cost of reported and unreported claims arising from losses which had occurred by that date. F-17 Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows: Year Ended Year Ended December 31, 2001 December 31, 2000 Balance at beginning of year $ 3,468,124 $ 3,064,388 Less reinsurance recoverable (2,094,643) (1,532,194) ----------- ----------- Net balance at beginning of year 1,373,481 1,532,194 ----------- ----------- Incurred related to: Current year 8,190,980 4,327,661 Current year (423,000) (166,000) ----------- ----------- Current year 7,767,980 4,161,661 ----------- ----------- Paid related to: Current year 4,790,090 3,348,000 Prior years 1,382,820 972,374 ----------- ----------- Total paid 6,172,910 4,320,374 ----------- ----------- Net balance at end of year 2,968,551 1,373,481 Plus reinsurance recoverable 3,278,316 2,094,643 ----------- ----------- Balance at end of year $ 6,246,867 $ 3,468,124 =========== =========== The Company's liabilities for unpaid losses and LAE, net of related reinsurance recoverables, at December 31, 2001 and 2000, were decreased in the following year by $423,000 and $166,000, respectively, for claims that had occurred on or prior to the balance sheet date. This favorable loss emergence resulted principally from settling homeowners' losses established in the prior year for amounts that were less than expected. NOTE 8 - LOANS PAYABLE Loans payable at December 31, 2001 consists of the following bank loans secured by the respective assets: a boat loan for $142,394, principal due in May 2011, with interest paid monthly at 8.8%, and several vehicle loans totaling $301,690, principal due from January 2003 to September 2004, with interest paid monthly ranging from 7.5% to 10%. Loan repayents are due as follows: 2002 149,877 2003 120,515 2004 65,130 2005 13,578 2006 14,822 Thereafter 80,162 ------------ 444,084 ============ NOTE 9 - REGULATORY REQUIREMENTS AND RESTRICTIONS UPCIC is subject to comprehensive supervision and regulation by the DOI. The Florida Insurance Code (the "Code") requires that UPCIC maintain minimum statutory surplus of $4,000,000. UPCIC is also required to adhere to prescribed premium-to-surplus ratios under the Code and to maintain approved securities on deposit with the State of Florida. On December 31, 1997, UPCIC entered into a consent order with the DOI related to the issuance of its certificate of authority (the "Consent Order"). Under the terms of the Consent Order, during its first four years of operations, UPCIC may only pay dividends on its common stock approved in advance and in writing by the DOI. No dividends were declared or paid by UPCIC on its common stock during 2001 or 2000. The Consent Order also requires that UPCIC obtain prior written approval of the DOI before amending, updating, or changing any managing general agent contracts. During 2001, UPCIC amended the contract with its managing general agent, Universal Risk Advisors, Inc., in regards to the calculation of the management fee and in 2002 to assume the management company functions formerly performed by Universal Property & Casualty Management, Inc. ("Universal Management"). These amendments have been submitted to the Department of Insurance for approval. On January 16, 1998, UPCIC entered into a consent order with the DOI related to the proposed participation in the JUA depopulation program (the "Depopulation Consent Order"). Under the Depopulation Consent Order, UPCIC is required to maintain catastrophe reinsurance up to its 100 year Probable Maximum Loss with reinsurers who are authorized and/or approved or approved in advance and in writing by the DOI. The Depopulation Consent Order also requires UPCIC to materially abide by its depopulation plan submitted to the DOI, which limits UPCIC's depopulation assumptions to 30,000 policies. The premium limits and surplus requirements impact UPCIC's potential growth. UPCIC's ability to exceed these limitations will be subject to its ability to continue to renew policies transferred from the Takeout Program and attract additional policyholders from the voluntary insurance market as well as maintaining capital and surplus to support its underwriting program. As of December 31, 2001 and 2000, UPCIC was in compliance with requirements of the Consent Order and the Depopulation Consent Order. The Depopulation Consent Order expired January 16, 2001. The Department of Insurance has completed its examination of the fiscal year 2000 statutory financial statements of UPCIC. To date the Department has not issued a final report. However, the Department has issued a draft report with proposed adjustments to UPCIC's statutory capital at December 31, 2000 that would result in statutory capital below the minimum surplus requirement at December 31, 2000. The proposed adjustments relate to affiliate receivables and income tax recoverables and would decrease statutory surplus by approximately $960,000. The Department's examination of the fiscal year 2001 statutory financial statements is currently in progress. The following schedule reconciles statutory net loss and surplus of UPCIC as reported in the 2001 and 2000 annual statements filed with the DOI, prepared on the basis of statutory accounting principles, to UPCIC's net loss for the years ended December 31, 2001 and 2000 and stockholders' equity under GAAP at December 31, 2000: Year Ended Year Ended December 31, 2001 December 31, 2000 ------------------------- ----------------- Net Loss Surplus Net Loss -------- ------- -------- Balance per statutory financial statement, as originally filed $ (1,133,115) $ 4,400,342 $ (637,509) Increase allowance for other receivables (91,078) (91,078) - Increase accrued expenses (99,758) (99,758) - Decrease liability for losses 69,494 69,494 - Increase deferred income tax asset 53,343 53,343 - Increase non-admitted assets - (207,463) - ------------- ------------ ------------ Balance per statutory financial statement, as adjusted (1,201,114) 4,124,880 (637,509) Deferred policy acquisition costs (1,268,725) 529,942 (722,209) Deferred income taxes 287,228 (396,222) 117,531 ------------- ------------ ------------ Balance in conformity with GAAP $ (2,182,611) $ 4,258,600 $ (1,242,187)
The State of Florida has adopted the National Association of Insurance Commissioners' statutory accounting principles ("NAIC SAP") with certain modifications as the basis of its statutory accounting practices. The State of Florida requires all insurance companies to adopt NAIC SAP effective January 1, 2001. In addition, the Commissioner of the State of Florida Department of Insurance has the right to permit other specific practices that may deviate from prescribed practices. Included in UPCIC's adjusted statutory capital of $4,124,880 as of December 31, 2001 are approximately $851,000 of affiliate receivables which are considered non admitted assets under NAIC SAP. These amounts were collected during the first quarter of 2002. Based on these collections, UPCIC has commenced discussions with the DOI to admit these assets. A reconciliation between UPCIC's statutory capital (or "net worth"), as adjusted (above) and NAIC SAP as of December 31, 2001 is shown below: Statutory surplus, as adjusted $ 4,124,880 Affiliate balances under discussion as permitted practice (850,891) ------------------ Statutory surplus in conformity with NAIC SAP $ 3,273,989 ================== NOTE 10 - RELATED PARTY TRANSACTIONS All underwriting, rating, policy issuance and administration functions for UPCIC during 2000 and 2001 were performed by Universal Management pursuant to a Management Agreement dated June 2, 1997 and Addenda thereto dated June 12, 1997 and June 1, 1998. Universal Management is a wholly-owned subsidiary of American European Group, Inc., a Delaware insurance holding company. UPCIC and Universal Management terminated the management agreement effective as of January 15, 2002. During the years ended December 31, 2001 and 2000, UPCIC incurred administrative costs to Universal Management of $911,449 and $1,122,377, respectively. Services previously provided by Universal Management to UPCIC under the management agreement are now performed by UPCIC, Universal Risk Advisors, Inc., a wholly-owned subsidiary of the Company, and unaffiliated third parties. As of December 31, 2001, corporate counsel held $290,000 in trust, for the benefit of the Company, which funds were placed in trust in connection with a dispute involving a Company director and an unrelated entity. These funds are included in cash and cash equivalents as of December 31, 2001. NOTE 11- INCOME TAX PROVISION F-20 Since its inception, the Company has incurred cumulative tax-operating losses. Therefore, the Company has not incurred any significant income tax liabilities during that time. As of December 31, 2001, the Company had net operating loss carryforwards totaling approximately $8,324,000 which are available to offset future taxable income, if any, through 2021. The following table reconciles the statutory federal income tax rate to the Company's effective tax rate for the years ended December 31, 2001 and 2000: 2001 2000 ---- ---- Statutory federal income tax rate 34.0% 34.0% Increases (decreases) resulting from: Change in valuation allowance (36.7%) (33.8%) Other 2.7% (0.2%) -------- --------- Effective tax rate 0.0% 0.0% ======== ========= Deferred income taxes at December 31, 2001 are provided for the temporary differences between financial reporting basis and the tax basis of the Company's assets and liabilities under SFAS 109. The tax effects of temporary differences are as follows: Deferred income tax assets: Net operating loss carryforward $ 3,133,000 Unearned premiums 334,000 Unpaid losses 135,000 Organizational costs 29,000 ----------- 3,631,000 ----------- Deferred income tax liabilities: Property, plant and equipment (36,000) Deferred acquisition costs (199,000) ----------- Subtotal (235,000) ----------- Net deferred income tax asset 3,396,000 Less: valuation allowance (3,396,000) $ - =========== A valuation allowance is deemed necessary because management does not believe that is more likely than not that the Company will generate taxable income sufficient to realize the tax benefits associated with the net deferred tax asset shown above. F-21 The remaining net operating loss carryforwards will expire as follows: Expiration 2007 $ 328,000 2008 1,010,000 2009 1,116,000 2010 677,000 2011 1,570,000 2012 1,379,000 2013 5,000 2020 1,229,000 2021 1,010,000 --------- $ 8,324,000 =========== NOTE 12 - STOCKHOLDERS' EQUITY CUMULATIVE PREFERRED STOCK In October 1994, 49,950 shares of Series A Preferred Stock were issued in repayment of $499,487 of related party debt, and 88,690 shares of Series M Preferred Stock were issued during fiscal year ended April 30, 1997 for repayment of $88,690 of related party debt. Each share of Series A and M Preferred Stock is convertible by the Company into 2.5 shares of Common Stock and 5 shares of Common Stock, respectively, into an aggregate of 568,326 common shares. Beginning May 1, 1998, the Series A Preferred Stock pays a cumulative dividend of $.25 per share per quarter. In connection with this issuance of the Series A Preferred Stock, the Company issued the holders warrants to purchase 12,488 shares of Common Stock at $4.25 per share, exercisable through October 17, 2004. STOCK OPTIONS The Company adopted a 1992 Stock Option Plan (the "Plan") under which shares of Common Stock are reserved for issuance upon the exercise of the options. The Plan is designed to serve as an incentive for attracting and retaining qualified and competent employees, officers, directors and consultants of the Company. All employees, officers, directors and consultants of the Company or any subsidiary are eligible to participate in the Plan. A summary of the option activity for the years ended December 31, 2001 and 2000 is presented below: Weighted Average Number Option Price per Share Number Exercise of Shares Low High Weighted of Shares Price --------- --- ---- -------- --------- ----- Outstanding January 1, 2000 5,813,624 $ 0.63 $ 22.00 $ 1.32 5,813,624 $ 1.32 Granted 455,000 $ 1.00 $ 1.10 $ 1.08 ---------- Outstanding December 31, 2000 6,268,624 $ 0.63 $ 22.00 $ 1.30 6,268,624 $ 1.30 Granted 570,000 $ 0.50 $ 1.00 $ 0.59 ---------- Outstanding December 31, 2001 6,838,624 $ 0.50 $ 22.00 $ 1.24 6,838,624 $ 1.24
The following table summarizes the information about options outstanding at December 31, 2001: Options Outstanding and Exercisable ----------------------------------- Weighted Average Remaining Weighted Range of Number Contractual Life Average Exercise Prices Outstanding (in years) Exercise Price --------------- ----------- ---------- -------------- $.0.50 - $1.87 6,660,000 5.9 $1.12 $ 2.88 - $3.88 142,999 3.4 $3.39 $ 6.00 - $22.00 35,625 2.0 $14.52 ---------------- 6,838,624 ================ The Company adopted a 2000 Stock Option Plan (the "Tigerquote.com Plan") under which shares of Common Stock of Tigerquote.com are reserved for issuance upon the exercise of the options. The Tigerquote.com Plan is designed to serve as an incentive for attracting and retaining qualified and competent employees, officers, directors and consultants of the Company. All employees, officers, directors and consultants of the Company or any subsidiary are eligible to participate in the Plan. A summary of the option activity of the Tigerquote.com Plan for the years ended December 31, 2001 and 2000 is presented below: Weighted Average Number Option Price per Share Number Exercise of Shares Low High Weighted of Shares Price --------- --- ---- -------- --------- ----- Outstanding January 1, 2000 - $ - $ - $ - - $ - Granted 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50 ------- Outstanding December 31, 2000 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50 Granted - $ - $ - $ - - $ - ------- Outstanding December 31, 2001 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50 - ------------------------------------------------------------------------------------------------------------------
The following table summarizes the information about options outstanding at December 31, 2001: Options Outstanding and Exercisable ----------------------------------- Weighted Average Remaining Weighted Range of Number Contractual Life Average Exercise Prices Outstanding (in years) Exercise Price --------------- ----------- ---------- -------------- $.0.50 835,000 8.25 $0.50 ------- 835,000 ------- As described in Note 2, the Company accounts for stock-based compensation using the provisions of APB No. 25 and related interpretations. No compensation expense has been recognized in the years ended December 31, 2001 and 2000 for options granted to employees and directors as the exercise prices for stock options granted are equal to their fair market value at the time of grant. The Company expenses the fair value (as determined at the grant date) of options and warrants granted to non-employees over the vesting period. Had compensation cost for options granted to employees and directors been determined in accordance with the fair value provisions of SFAS 123, the Company's net loss and net loss per share would have been as follows: Year Ended Year Ended December 31, 2001 December 31, 2000 ----------------- ----------------- Net loss: As reported $(3,039,350) $ (1,488,164) Pro forma $(3,415,783) $ (1,972,325) Net loss per share: Basic As reported $ (0.21) $ (0.10) Pro forma $ (0.23) $ (0.13) Diluted As reported $ (0.21) $ (0.10) Pro forma $ (0.23) $ (0.13) The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions. Year Ended Year Ended December 31, 2001 December 31, 2000 ----------------- ----------------- Dividend yield 0.00% 0.00% Expected life of option 5 years 5 years Risk free interest rate 6.50% 6.50% Expected volatility 104.69% 86.56% Using the Black-Scholes Pricing Model, the estimated weighted average fair value per option granted during the years ended December 31, 2001 and 2000 was $0.12 and $.79, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The pro forma amounts may not be representative of the future effects on reported net income (loss) and net income (loss) per share that will result from the future granting of stock options since the pro forma compensation expense is allocated over the periods in which options become exercisable and new option awards are granted each year. F-24 WARRANTS A summary of the warrant activity for the years ended December 31, 2001 and 2000 is presented below:
Warrants Exercisable Weighted Weighted Average Average Number Warrant Price per Share Number Exercise of Shares Low High Weighted of Shares Price --------- --- ---- -------- --------- ----- Outstanding January 1, 2000 4,393,652 $ 0.75 $ 6.00 $ 1.34 4,393,652 $ 1.34 Granted 325,000 $ 1.00 $ 3.25 $ 2.15 Canceled (325,000) $ 1.00 $ 3.25 $ 2.15 --------- Outstanding December 31, 2000 4,393,652 $ 0.75 $ 6.00 $ 1.34 4,393,652 $ 1.34 Granted - $ - $ - $ - --------- Outstanding December 31, 2001 4,393,652 $ 0.75 $ 6.00 $ 1.34 4,393,652 $ 1.34
The following table summarizes the information about warrants outstanding at December 31, 2001: Warrants Outstanding and Exercisable ------------------------------------ Weighted Average Remaining Weighted Range of Number Contractual Life Average Exercise Prices Outstanding (in years) Exercise Price --------------- ----------- -------- -------------- $.0.75 - $1.50 3,614,109 2.9 $1.01 $1.75 - $6.00 779,543 3.9 $2.84 ------------- 4,393,652 ============= No warrants were issued in 2001. During the year ended December 31, 2000, the Company issued and canceled 325,000 warrants to purchase Common Stock at prices ranging from $1.00 to $3.25 per share for investor relation services. OTHER STOCK ISSUANCES During the year ended December 31, 2001, the Company issued no shares of Common Stock. During the year ended December 31, 2000, the Company issued 100,000 shares of Common Stock at a price of $.375 per share for the purchase of a website and domain name. The value of the shares was based on the quoted market price at the date of issuance. STOCK GRANTOR TRUST On April 3, 2000, the Company established the Universal Insurance Holdings, Inc. Stock Grantor Trust ("SGT") to fund its obligations arising from its various stock option agreements. The Company funded the SGT with 2,900,000 shares of Company Common Stock. In exchange, the SGT has delivered $29,000 and a promissory note to the Company for approximately $2,320,000 which together represent the purchase price of the shares. Amounts owed by the SGT to the Company will be repaid by cash received by the SGT, which will result in the SGT releasing shares to satisfy Company obligations for stock options. F-25 NOTE 13 - COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENT In 1997 the Company entered into a four-year employment agreement with the president of the Company. Under the terms of the employment agreement, the president will devote substantially all of his time to the Company and will be paid a base salary of $250,000 per year with a 5% annual increase. Additionally, pursuant to the employment agreement, and during each year thereof, the president is entitled to a bonus equal to 3% of pretax profits up to $5,000,000 and 4% of pretax profits in excess of $5,000,000. On May 4, 2001, Addendum No. 3 to the employment agreement was approved by the Board of Directors, whereby Mr. Meier was entitled to receive an additional fifteen (15%) percent increase in his base compensation in addition to the cumulative base compensation and increase calculated at the beginning of 2001, retroactive to January 1, 2001; and for each successive year of the term of the employment agreement the base compensation as adjusted by previous increase(s) shall be increased by ten (10%) percent. The employment agreement contains non-competition and non-disclosure covenants. Under the terms of the agreement in 1999, the president was granted ten-year stock options to purchase 1,500,000 shares of Common Stock at $1.00 per share, of which 500,000 options vested immediately, 500,000 options vested after one year and the remaining options vested after two years. The exercise price of the options equaled the market price of the Company's Common Stock at the date of grant. In addition, the agreement may be extended for an additional two years at the option of the president. NOTE 14 - LITIGATION Certain lawsuits have been filed against the Company. In the opinion of management, none of these lawsuits, except for the lawsuit described below, are material and they are all adequately reserved for or covered by insurance or, if not so covered, are without merit or involve such amounts that if disposed of unfavorably would not have a material adverse effect on the Company's financial position or results of operations. Universal Management performed various services with respect to UPCIC insurance policies and received fees for performing these services based upon policies written pursuant to an agreement originally executed in 1997. The parties agreed to terminate the agreement effective January 15, 2002. Universal Management communicated to UPCIC that all management services would cease on the date of termination rather than continuing through the life of the policies for which fees were paid on a premiums written basis. As a result, UPCIC ceased remittance of the management fees to Universal Management as of September 1, 2001. On November 6, 2001, UPCIC filed a Complaint against Universal Management in the United States District Court for The Southern District of Florida, Miami Division, alleging breach of contract and demanding specific performance and unspecified damages. On December 28, 2001, Universal Management filed a counterclaim for breach of contract, alleging that it is entitled to fees for policies written from September 2001 through the date of termination. Such fees would amount to approximately $672,000 as of December 31, 2001. As of December 31, 2001, UPCIC has recorded a receivable from Universal Management representing the management fees remitted on the basis of premiums earned subsequent to the termination date, and has provided an allowance for doubtful accounts for the entire receivable. Discovery is in the early stages and the likelihood of an unfavorable outcome or the likely amount associated therewith cannot be estimated. Therefore, UPCIC has not accrued a liability with respect to the management fees claimed by Universal Management. F-26 NOTE 15 - EARNINGS PER SHARE The following table reconciles the numerator (earnings) and denominator (shares) of the basic and diluted earnings per share computations for net income (loss) for the years ended December 31, 2001 and 2000. Year Ended Year Ended December 31, 2001 December 31, 2000 Loss Loss Available to Available to Common Common Stockholders Per Share Stcokholders Per Share Amount Shares Amount Amount Shares Amount ------ ------ -------- ------ ------ ------ Net loss $(3,039,350) $(1,488,164) Less: Preferred stock dividends (49,950) (49,949) ----------- ----------- Loss available to common stockholders (3,089,300) 14,698,000 $ (0.21) (1,538,113) 14,788,000 $ (0.10) ======= ======= Effect of dilutive securities: Stock options and warrants - - - - - - Preferred Stock - - - - - - ----------- ---------- -------- ----------- ---------- -------- Loss available to common stockholders and assumed conversion $(3,089,300) 14,698,000 $ (0.21) $(1,538,113) 14,788,000 $ (0.10) =========== ========== ======== =========== ========== ========
Options and warrants totaling 11,232,276 and 10,737,276 were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive for the years ended December 31, 2001 and 2000, respectively. EX-21 3 u500398.txt (1) EXHIBIT 21.1 LIST OF SUBSIDIARIES Capital Resources Group, Ltd. Coastal Homeowners Insurance Specialists, Inc. Pinpoint Adjusting Corporation Pinpoint Inspection Corporation Pinpoint Property Appraisal Corporation Pinpoint Residential Inspection Corporation Quoters, Inc. Tiger Home Services, Inc. Tigerquote.com Insurance & Financial Services Group, Inc. Tigerquote.com Insurance Solutions, Inc. Tigerquote.com Insurance Solutions of Arizona, Inc. Tigerquote.com Insurance Solutions of California, Inc. Tigerquote.com Insurance Solutions of Colorado, Inc. Tigerquote.com Insurance Agency of Georgia, Inc. Tigerquote.com Insurance Solutions of Illinois, Inc. Tigerquote.com Insurance Solutions of Indiana, Inc. Tigerquote.com Insurance Solutions of Iowa, Inc. Tigerquote.com Insurance Solutions of Kentucky, Inc. Tigerquote.com Insurance Solutions of Michigan, Inc. Tigerquote.com Insurance Solutions of Missouri, Inc. Tigerquote.com Insurance Solutions of Nevada, Inc. Tigerquote.com Insurance Agency of New York, Inc. Tigerquote.com Insurance Solutions of Ohio, Inc. Tigerquote.com Insurance Solutions of Oregon, Inc. Tigerquote.com Insurance Solutions of Pennsylvania, Inc. Tigerquote.com Insurance Solutions of Tennessee, Inc. Tigerquote.com Insurance Solutions of Texas, Inc. Tigerquote.com Insurance Solutions of Vermont, Inc. Tigerquote.com Insurance Solutions of Virginia, Inc. Tigerquote.com Insurance Solutions of Washington, Inc. Tigerquote.com Insurance Services of Wisconsin, Inc. Tigerquote.com Life Managing General Agency, Inc. Tigerquote.com Managing General Agency, Inc. US Insurance Solutions, Inc. Universal Adjusting Corporation Universal Florida Insurance Agency, Inc. Universal Inspection Corporation Universal Insurance Holding Company of Florida Universal Life Support Corporation Universal Property & Casualty Insurance Company Universal Risk Advisors Universal Risk Life Advisors, Inc. USA Insurance Solutions, Inc. -----END PRIVACY-ENHANCED MESSAGE-----