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, 2003
[ ] 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 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: $ 6,966,553
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 January 31, 2004: $1,761,615.
State the number of shares of Common Stock of Universal Insurance Holdings,
Inc. outstanding as of March 1, 2004: 32,183,775
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 processing.
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 Office of Insurance Regulation ("OIR") 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 OIR 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 OIR
implemented, a Market Challenge/Takeout Bonus Program ("Takeout Program"), which
provided additional incentives to private insurance companies to acquire
policies from the JUA.
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
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
utilizes standard industry modeling techniques for hurricane and windstorm
exposure. UPCIC's portfolio as of December 31, 2003 includes approximately
34,000 policies with coverage for wind risks and 6,000 policies without wind
risks. The average wind premium is approximately $775 and the average ex-wind
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premium is approximately $455. Approximately 27% of the policies are located in
Dade, Broward and Palm Beach counties.
OPERATIONS
All underwriting, rating, policy issuance and administration functions for
UPCIC are performed by 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 to an extent 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 has developed 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 OIR 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 640 active independent agents.
AGENCY OPERATIONS
Universal Florida Insurance Agency was incorporated in Florida on July 2,
1998, U.S. Insurance Solutions, Inc. was incorporated in Florida on August 4,
1998 and Coastal Homeowner Insurance Specialists, Inc. was incorporated in
Florida on July 2, 2001, each as wholly owned subsidiaries of the Company to
solicit voluntary business. These entities are a part of the Company's agency
operations, which seek to generate income from commissions, premium financing
referral fees and the marketing of ancillary services. U.S. Insurance Solutions,
Inc. was sold back to its former agency principal on May 21, 2003 for $100 and
the assumption of certain obligations in the aggregate amount of $16,000.
DIRECT SALES OPERATIONS
The Company has formed subsidiaries that specialize, or will specialize, in
selling insurance and generating insurance leads 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 lead generating network while Tigerquote.com Insurance Solutions, Inc.
is a network of Internet insurance agencies. These entities seek to generate
income from the selling of leads and commissions on policies written. To date,
insurance agencies have been established in 22 states and are active in 5
states. Separate legal entities have been formed for each state and are governed
by the respective states' departments of insurance.
3
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. During
2001, the Company formed Tiger Home Services, Inc., which furnishes pool
services and landscaping to homeowners. The services are currently offered to
commercial and residential customers in certain areas in the state of Florida.
Various plans are offered to fit customer needs.
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 new homeowners seeking 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 minimum surplus to support its underwriting program. The surplus
requirement affects UPCIC's potential growth.
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 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.
4
Because of UPCIC's limited operating history, there can be no assurance
that UPCIC will achieve or sustain profitability or significant revenues. There
can be no assurance that 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 that are susceptible to change, 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 approximately 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 the purchase of reinsurance 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 $200,000 up to
approximately the 100 year PML. This amount may change in the future.
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 arising from similar geographic
regions, activities, or economic characteristics of the reinsurers 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 effect on the financial condition and profitability of UPCIC.
ADEQUACY OF LIABILITIES FOR LOSSES
The liabilities for losses and loss adjustment expenses periodically
established by UPCIC are estimates of amounts needed to pay reported and
unreported claims and related loss adjustment expenses. The estimates
necessarily will be based on certain assumptions related to the ultimate cost to
settle such claims. There is an inherent degree of uncertainty involved in the
establishment of liabilities for losses and loss adjustment expenses and there
may be substantial differences between actual losses and UPCIC's liabilities
estimates. In the case of UPCIC, this uncertainty is compounded by UPCIC's
limited historical claims experience. UPCIC relies on industry data, as well as
the expertise and experience of independent actuaries 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.
UPCIC is directly liable for loss and loss adjustment expenses ("LAE")
payments under the terms of the insurance policies that it writes. In many
cases, several years may elapse between the occurrence of an insured loss, the
reporting of the loss to the Company and the Company's payment of that loss. As
required by insurance regulations and accounting rules, the Company reflects its
liability for the ultimate payment of all incurred losses and LAE by
5
establishing a liability for those unpaid losses and LAE for both reported and
unreported claims, which represent estimates of future amounts needed to pay
claims and related expenses.
When a claim involving a probable loss is reported, the Company establishes
a liability for the estimated amount of the Company's ultimate loss and LAE
payments. The estimate of the amount of the ultimate loss is based upon such
factors as the type of loss, jurisdiction of the occurrence, knowledge of the
circumstances surrounding the claim, severity of injury or damage, potential for
ultimate exposure, estimate of liability on the part of the insured, past
experience with similar claims and the applicable policy provisions.
All newly reported claims received are set up with an initial average
liability. That claim is then evaluated and the liability is adjusted upward or
downward according to the facts and damages of that particular claim.
In addition, management provides for a liability on an aggregate basis to
provide for losses incurred but not reported ("IBNR"). The Company utilizes
independent actuaries to help establish its liability for unpaid losses and LAE.
The Company does not discount the liability for unpaid losses and LAE for
financial statement purposes.
The estimates of the liability for unpaid losses and LAE are subject to the
effect of trends in claims severity and frequency and are continually reviewed.
As part of this process, the Company reviews historical data and considers
various factors, including known and anticipated legal developments, changes in
social attitudes, inflation and economic conditions. As experience develops and
other data become available, these estimates are revised, as required, resulting
in increases or decreases to the existing liability for unpaid losses and LAE.
Adjustments are reflected in results of operations in the period in which they
are made and the liabilities may deviate substantially from prior estimates.
Among the classes of insurance underwritten by the Company, the homeowner's
liability claims historically tend to have longer time lapses between the
occurrence of the event, the reporting of the claim to the Company and the final
settlement than do homeowners property claims. Liability claims often involve
parties filing suit and therefore may result in litigation. By comparison,
property damage claims tend to be reported in a relatively shorter period of
time and settle in a shorter time frame with less occurrence of litigation.
There can be no assurance that the Company's liability for unpaid losses
and LAE will be adequate to cover actual losses. If the Company's liability for
unpaid losses and LAE proves to be inadequate, the Company will be required to
increase the liability with a corresponding reduction in the Company's net
income in the period in which the deficiency is identified. Future loss
experience substantially in excess of established liability for unpaid losses
and LAE could have a material adverse effect on the Company's business, results
of operations and financial condition.
The following table sets forth a reconciliation of beginning and ending
liability for unpaid losses and LAE as shown in the Company's consolidated
financial statements for the periods indicated.
6
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Balance at beginning of year $ 7,224,755 $ 6,246,867
Less reinsurance recoverable (5,634,455) (3,278,316)
----------- -----------
Net balance at beginning of year 1,590,330 2,968,551
----------- -----------
Incurred related to:
Current years 1,174,437 3,908,724
Prior years (199,948) 729,436
----------- -----------
Total incurred 974,489 4,638,160
----------- -----------
Paid related to:
Current year 786,430 2,894,786
Prior year 427,359 3,121,625
----------- -----------
Total paid 1,213,789 6,016,411
----------- -----------
Net balance at end of year 1,351,000 1,590,300
Plus reinsurance recoverable 6,329,872 5,634,455
----------- -----------
Balance at end of year $ 7,680,872 $ 7,224,755
=========== ===========
As shown above, as a result of the Company's review of its liability for
losses and LAE, which includes a re-evaluation of the adequacy of reserve levels
for prior year's claims, the Company decreased its liability for loss and LAE
for claims occurring in prior years by $199,948 for the year ended December 31,
2003 and increased its liability for loss and LAE for claims occurring in prior
years by $729,436 in 2002. There can be no assurance concerning future
adjustments of reserves, positive or negative, for claims through December 31,
2003.
Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and LAE, the Company
believes that the liability for unpaid losses and LAE is currently adequate to
cover all claims and related expenses which may arise from incidents reported
and IBNR.
The following table presents total unpaid loss and LAE, net, and the
corresponding total reinsurance recoverables shown in the Company's consolidated
financial statements for the periods indicated.
YEARS ENDED DECEMBER 31,
2003 2002
---- ----
(DOLLARS IN THOUSANDS)
Loss and LAE, net $ 655 $939
IBNR, net 696 651
------ ------
Total unpaid loss and LAE, net $1,351 $1,590
====== ======
Reinsurance recoverable $2,693 $3,133
IBNR recoverable 2,286 2,501
------ ------
Total reinsurance recoverable $6,330 $5,634
===== ======
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The following table presents the liability for unpaid losses and LAE for
the Company since inception. The top line of the table shows the estimated net
liabilities for unpaid losses and LAE at the balance sheet date for each of the
periods indicated. These figures represent the estimated amount of unpaid losses
and LAE for claims arising in all prior years that were unpaid at the balance
sheet date, including losses that had been incurred but not yet reported. The
portion of the table labeled "Cumulative paid as of" shows the net cumulative
payments for losses and LAE made in succeeding years for losses incurred prior
to the balance sheet date. The lower portion of the table shows the re-estimated
amount of the previously recorded liability based on experience as of the end of
each succeeding year.
YEARS ENDED DECEMBER 31,
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
(DOLLARS IN THE THOUSANDS)
Balance Sheet liability $1,351 $1,590 $2,969 $1,373 $1,532 $1,253
Cumulative paid as of:
One year later - 668 3,659 1,308 897 939
Two years later - - 3,667 1,634 1,081 904
Three years later - - - 1,692 1,115 1,010
Four years later - - - - 1,151 1,024
Five years later - - - - - 999
Re-estimated liability as of:
End of year $1,351 $1,590 $2,969 $1,373 $1,532 $1,253
One year later - 1,250 4,235 1,797 1,344 1,067
Two years later - - 3,973 1,943 1,269 1,089
Three years later - - - 1,925 1,286 1,071
Four years later - - - - 1,270 1,024
Five years later - - - - - 1,013
Cumulative redundancy (deficiency) - 340 (1,004) (552) 262 240
The cumulative redundancy or deficiency represents the aggregate change in
the estimates over all prior years. A deficiency indicates that the latest
estimate of the liability for losses and LAE is higher than the liability that
was originally estimated and a redundancy indicates that such estimate is lower.
It should be emphasized that the table presents a run-off of balance sheet
liability for the periods indicated rather than accident or policy loss
development for those periods. Therefore, each amount in the table includes the
cumulative effects of changes in liability for all prior periods. Conditions and
trends that have affected liabilities in the past may not necessarily occur in
the future.
Underwriting results of insurance companies are frequently measured by
their combined ratios. However, investment income, federal income taxes and
other non-underwriting income or expense are not reflected in the combined
ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are considered profitable when the combined ratio is under 100% and
unprofitable when the combined ratio is over 100%.
The following table sets forth loss ratios, expense ratios and combined
ratios for the periods indicated for the insurance business of Universal
Insurance Holdings, Inc. The ratios, inclusive of unallocated loss adjustment
expenses ("ULAE"), are shown in the table below, and are computed based upon
Statutory Accounting Principles (`SAP"). The expense ratio includes management
fees paid to the Company in the amount of $660,613 in 2003 and $1,374,492 in
2002.
8
YEARS ENDED DECEMBER 31,
2003 2002
---- ----
Loss Ratio 62% 116%
Expense Ratio 51 35
--- ---
Combined Ratio 113% 151%
=== ===
In order to reduce losses and thereby reduce the loss ratio and the
combined ratio, the Company has taken several steps. These include implementing
rate increases for new and renewal business, restructuring the homeowners'
coverage offered, restructuring the catastrophic reinsurance coverage to reduce
cost and working to reduce general and administrative expenses.
GOVERNMENT REGULATION
Florida insurance companies are subject to regulation and supervision by
the OIR. The OIR has broad regulatory, supervisory and administrative powers.
Such powers relate, among other things, to the granting and revocation of
licenses to transact business; the licensing of agents; the standards of
solvency to be met and maintained; the nature of and limitations on investments;
approval of policy forms and rates; periodic examination of the affairs of
insurance companies; and the form and content of required financial statements.
Such regulation and supervision are primarily for the benefit and protection of
policyholders and not for the benefit of investors.
In addition, the Florida legislature and the National Association of
Insurance Commissioners from time to time consider proposals that may affect,
among other things, regulatory assessments and reserve requirements. UPCIC
cannot predict the effect that any proposed or future legislation or regulatory
or administrative initiatives may have on the financial condition or operations
of UPCIC.
DEPENDENCE ON KEY INDIVIDUALS
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. In addition, UPCIC's operations are materially dependent on the efforts of
Sean P. Downes, who serves as Chief Operating Officer of UPCIC. Mr. Downes has
also served as a Director of UPCIC since May 2003. The loss of the services
provided by Mr. Meier or Mr. Downes 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, 2004, the Company had 58 full-time employees. None of the
Company's employees is represented by a labor union. The Company has an
employment agreement with its President and Chief Executive Officer. See
"Executive Compensation--Employment Agreement."
9
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain lawsuits. In the opinion of management,
none of these lawsuits (1) involve claims for damages exceeding 10% of the
current assets of the Company, (2) involve matters that are not routine
litigation incidental to the business, (3) involve bankruptcy, receivership or
similar proceedings, (4) involve material Federal, state, or local environmental
laws, (5) 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 Property and Casualty Management, Inc. ("Universal Management"),
an outside management company, 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 was entitled to fees for
policies written from September 2001 through the date of termination. During
2003, the parties settled the matter out of court and a settlement was
finalized. Accordingly, the Company has no further liability with respect to the
management fees claimed by the Universal Management. The terms of the settlement
included a cash payment of $250,000 by the Company to Universal Management. This
amount was recorded as an expense and paid during the year.
Since December 1997, as a condition of the licensing of the Company's
subsidiary, the Company's outside counsel has held $290,000 in trust for the
benefit of the Company in the counsel's escrow account pending resolution of a
claim against a Company director and an unrelated entity. Such funds have been
included in the Company's financial statements as cash and cash equivalents. In
October 2003, the dispute was resolved and the claim was settled on terms
including a cash payment of $201,000, which the Company paid under and
indemnification arrangement with the director. Legal fees related to the
settlement were $37,036. These amounts were recorded as an expense during the
fourth quarter of 2003. The remaining funds, net of settlement cost and attorney
fees, were returned to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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, 2002 High Low
---------------------------- ---- ---
First Quarter $ 0.25 $ 0.10
10
Second Quarter 0.13 0.07
Third Quarter 0.10 0.04
Fourth Quarter 0.15 0.01
Year ended December 31, 2003 High Low
---------------------------- ---- ---
First Quarter $ 0.05 $ 0.02
Second Quarter 0.04 0.02
Third Quarter 0.14 0.02
Fourth Quarter 0.11 0.03
At March 1, 2004, there were 41 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. Beginning May 1, 1998,
the Series A Preferred Stock paid a cumulative dividend of $.25 per quarter.
During 2003, dividends on the Preferred Stock of $49,948 were declared. During
2002, dividends on the Preferred Stock of $49,950 were declared.
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.
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 2003, the Company did not pay a dividend to common stockholders.
OTHER STOCK ISSUANCES
During the year ended December 31, 2003, the Company issued 4,708,332
shares of Common Stock in conjunction with amendments approved by the Board of
Directors to the employment agreement between the Company and Bradley I. Meier,
the Company's President, whereby Mr. Meier converted salary and accrued vacation
into shares of common stock. An additional 2,823,529 shares were issued on
February 25, 2004. The shares were issued to Mr. Meier in private transactions
performed in accordance with the terms of the amendments and pursuant to section
4(2) of the Securities Act of 1933, as amended. During the year ended December
31, 2003, the Company issued 75,000 shares of Common Stock to the Board of
Directors as board compensation.
EQUITY COMPENSATION PLANS
See Item 11, "Security Ownership of Certain Beneficial Owners and
Management - Equity Compensation Plan Information," for a discussion of shares
of Common Stock issued under the Company's equity compensation plans.
11
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 OIR 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 OIR was to limit the number of policies UPCIC
could assume from the JUA to 30,000.
The OIR 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
OIR 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 received the bonus funds. The Company
will not be receiving any additional bonus payments.
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.
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
40,000 homeowners insurance policies. In determining appropriate guidelines for
such open market policy sales, UPCIC employs standards similar to those used in
its selection of JUA policies. Also, to improve underwriting and manage risk,
the Company utilizes standard industry modeling techniques for hurricane and
windstorm exposure. 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
Competition under "Factors Affecting Operation Results and Market Price of
Stock" for a discussion of the material conditions and uncertainties that may
affect UPCIC's ability to obtain additional policies.
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
12
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.
Deferred reinsurance commissions have reduced net deferred policy acquisition
costs to $0 as of December 31, 2003.
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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements during 2003.
RELATED PARTIES
All underwriting, rating, policy issuance and administration functions for UPCIC
were previously performed by Universal Management pursuant to a Management
Agreement dated June 2, 1997 and Addenda thereto dated June 12, 1997 and June 1,
13
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, 2003 AND YEAR ENDED DECEMBER 31,
2002.
Gross premiums written decreased 7.3% to $30,745,878 for the year ended
December 31, 2003 from $33,160,567 for the year ended December 31, 2002. The
decrease in gross premiums written is primarily attributable to a decrease in
new business mitigated by premium rate increases.
Net premiums written increased 60.6% to $3,127,502 for the year ended
December 31, 2003 from $1,947,182 for the year ended December 31, 2002. The
increase in net premiums written reflects the impact of reinsurance, since
$27,618,376 or 89.8% of premiums written were ceded to reinsurers for the year
ended December 31, 2003 as compared to $31,213,385 or 94.1% for the year ended
December 31, 2002. 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 the first five months of 2002, 80% during
the subsequent four months and 90% during the remaining three months of 2002,
versus 90% during 2003 except for new and renewal without wind risk business
with policy effective dates of June 1, 2003 and after. The Company ceded the
additional amounts commencing in 2002 in order to limit its loss exposure while
it further stabilized operations. The increase in net premiums written is also
attributable to premium rate increases.
Net premiums earned decreased 45.0% to $2,694,170 for the year ended
December 31, 2003 from $4,895,623 for the year ended December 31, 2002. The
decrease in net premiums earned is attributable to the Company's election under
its quota share reinsurance treaty to cede 90% of gross written premiums, losses
and loss adjustment expenses during 2003 except for new and renewal without wind
risk business with policy effective dates of June 1, 2003 and after versus 50%
of gross written premiums, losses and loss adjustment expenses during the first
five months of 2002, 80% during the subsequent four months and 90% during the
remaining three months of 2002.
Commission revenue decreased 17.9% to $1,167,606 for the year ended
December 31, 2003 from $1,421,906 for the year ended December 31, 2002.
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 decrease is primarily due to reduced policy fee income
attributable to a decrease in new and renewal business.
Investment income consists of net investment income and net realized gains
(losses). Investment income decreased 76.9% to $82,458 for the year ended
December 31, 2003 from $357,623 for the year ended December 31, 2002. The
decrease is primarily due to lower investment balances and a lower interest rate
environment during 2003.
Transaction fees consist of revenue from the selling of insurance leads.
Transaction fee revenue increased 44.7% to $1,379,211 for the year ended
December 31, 2003 from $953,389 for the year ended December 31, 2002. The
increase is primarily due to increased sales of insurance leads to insurance
agents. In 2002, leads were primarily sold to insurance companies.
Other revenue decreased 29.2% to $1,156,571 for the year ended December 31,
2003 from $1,633,567 for the year ended December 31, 2002. Other revenue is
comprised of fee revenue from direct sales and service revenue from other
operations. The decrease is primarily attributable to the fact that there is
less activity in the direct sales and service operations this year.
Losses and loss adjustment expenses ("LAE") incurred decreased 79.0% to
$974,489 for the year ended December 31, 2003 from $4,638,160 for the year ended
December 31, 2002 as compared to net premiums earned which decreased 45.0% to
$2,694,170 for the year ended December 31, 2003 from $4,895,623 for the year
ended December 31, 2002. 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.
14
Losses and LAE decreased due to the lower frequency and severity of claims in
2003 and because of changes to the Company's reinsurance program discussed
above. The Company's direct loss ratio for the year ended December 31, 2003 was
46.2% compared to 62.5% for the year ended December 31, 2002. The Company's
direct loss ratio decreased principally due to the lower frequency and severity
of claims in 2003 and also because of premium rate increases in 2003. The
Company's net loss ratio for the year ended December 31, 2003 was 36.2% compared
to 94.7% for the year ended December 31, 2002. The net loss ratio decreased due
to a decrease in direct losses incurred in conjunction with changes to the
Company's reinsurance program. During 2003 and 2002, Florida did not experience
windstorm catastrophes.
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.
The reserve for unpaid losses and loss adjustment expenses at December 31,
2003 is $7,680,872. Based upon consultations with the Company's independent
actuarial consultants and their statement of opinion on losses and loss
adjustment expenses, the Company believes that the liability for unpaid losses
and loss adjustment expenses is adequate to cover all claims and related
expenses which may arise from incidents reported. The range of direct loss
reserve estimates as determined by the Company's independent actuarial
consultants is a low of $7,130,000 and a high of $8,714,000. The key assumption
used to arrive at management's best estimate of loss reserves in relation to the
actuary's range and the specific factors that led to management's best estimate
is that the liability is based on management's estimate of the ultimate cost of
settling each loss and an amount for losses incurred but not reported.
As a result of the Company's review of its liability for losses and loss
adjustment expenses, which includes a re-evaluation of the adequacy of reserve
levels for prior year claims, the Company's liabilities for unpaid losses and
LAE, net of related reinsurance recoverables, as of December 31, 2003 were
decreased in the current year by $199,948 for claims that had occurred on or
before the prior year 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. The Company's liabilities for unpaid
losses and LAE, net of related reinsurance recoverables, as of December 31, 2002
were increased by $729,436 for claims that had occurred on or before the
previous year balance sheet date. This unfavorable loss emergence resulted
principally from settling homeowners' losses established in the prior year for
amounts that were more than expected. As of December 31, 2002, the Company
changed a key assumption to estimate reserves since the last reporting date by
reserving the coverage limit for certain potentially large claims, specifically
sinkhole claims. Changes of this nature were made in 2002 on related outstanding
claims, primarily for conservative reasons. Recognition of this change occurred
in 2002 in light of the Company's experience with claims of this nature, which
occurred primarily in 2001 due to contributing weather conditions. Reported
claims of this nature were less frequent in 2002 and 2003. Nonetheless, there
can be no assurance concerning future adjustments of reserves, positive or
negative, for claims through December 31, 2003.
General and administrative expenses increased 27.1% to $5,787,055 for the
year ended December 31, 2003 from $4,552,897 for the year ended December 31,
2002. General and administrative expenses have increased primarily due to lower
ceding commissions on premiums ceded to reinsurers due to ceding commission
recognized in 2002 as a result of the change in the quota share ceding
percentage from 50% during the first five months of 2002, 80% during the
subsequent four months and 90% during the remaining three months of 2002 versus
90% during 2003 except for new and renewal without wind risk business with
policy effective dates of June 1, 2003 and after. In addition, ceding
commissions were lower in 2003 due to a decrease in the dollar amount of ceded
premiums written to quota share reinsurers.
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, 2003, cash flows provided by operating
activities were $3,586,586. Cash flows from operating activities are expected to
be positive in both the short-term and reasonably foreseeable future. In
addition, the Company's investment portfolio is highly liquid as it consists
almost entirely of readily marketable securities. Cash flows from investing
activities are primarily comprised of purchases and sales of debt and equity
securities. Cash flows from financing activities primarily relate to Company
borrowings.
During 2002, the Company became a party to a senior Promissory Note with a
reinsurer for $750,000 payable in 12 monthly installments through July 2003 at
an annual interest rate of 9%. The funds were used to make an additional capital
contribution to UPCIC. The remaining balance of the loan was paid off in 2003.
During 2003, the Company purchased software for $520,000. Management believes
this will result in reducing overall management expenses versus the previous
outside vendor agreement. Of the remaining purchase price of $480,000 as of
December 31, 2003, $30,000 was payable on January 5, 2004 and the remainder is
payable in 5 monthly installments of $10,000 through May 2004 followed by 10
monthly installments of $40,000 through March 2005. In addition, the Company has
outstanding loans in the amount of $277,936 to finance several vehicles and a
boat, all acquired for business use and $83,333 for working capital needs. The
amounts will become due during the years 2004 through 2011.
The balance of cash and cash equivalents as of December 31, 2003 was
$8,011,278. This amount along with readily marketable debt and equity securities
aggregating $250,039 would be available to pay claims in the event of a
catastrophic event pending reimbursement for any aggregate amount in excess of
$200,000 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.
Accounting principles generally accepted in the United States of America
differ in some respects from reporting practices prescribed or permitted by the
Florida Office of Insurance Regulation. To retain its certificate of authority,
the Florida insurance laws and regulations require that UPCIC maintain capital
surplus equal to the statutory minimum capital and surplus requirement defined
in the Florida Insurance Code. The Company is also required to adhere to
prescribed premium-to-capital surplus ratios. The Company is in compliance with
these requirements.
The maximum amount of dividends which can be paid by Florida insurance
companies without prior approval of the Florida Commissioner is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid by 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.
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-25.
16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 7, 2002, the Company filed a Form 8-K with the Securities and
Exchange Commission reporting that Deloitte & Touche LLP resigned as the
independent auditor for the Company effective as of September 30, 2002. On
November 4, 2002, the Company filed a Form 8-K with the Securities and Exchange
Commission reporting that the Company engaged Blackman Kallick Bartelstein LLP
as the Company's new independent accountants effective as of October 28, 2002.
On April 4, 2003, the Company filed an amended Form 8-K which provided
additional information to its October 7, 2002 Form 8-K.
During the Company's two fiscal years ended December 31, 2001, and the
subsequent interim period through September 30, 2002, there were no
disagreements between the Company and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche LLP, would have caused Deloitte & Touche LLP to make reference
to the subject matter of the disagreements in connection with its reports. In
connection with the audit of the Company's consolidated financial statements for
the year ended December 31, 2001, Deloitte & Touche LLP informed the Company
that a material weakness under standards established by the American Institute
of Certified Public Accountants existed in the design and operation of the
Company's internal control related to the processing of claims payments,
including the duplication of drafts issued and the omission of drafts from the
accounting records. This matter was discussed by Deloitte & Touche LLP with the
Company's Audit Committee. The Company also authorized Deloitte & Touche LLP to
respond to Blackman Kallick Bartelstein LLP's inquiries. In addition, the
Company took a number of steps to address Deloitte & Touche LLP's concerns
regarding the material control weakness.
Except as noted above, during the two fiscal years ended December 31, 2001
and through the subsequent interim period through September 30, 2002, there have
been no events of the type described in Item 304 (a)(1)(iv) of Regulation S-B.
The audit reports of Deloitte & Touche LLP on the consolidated financial
statements of the Company as of and for the fiscal years ended December 31, 2000
and 2001 did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles, except that the audit report of Deloitte & Touche LLP for the fiscal
year ended December 31, 2001 contained a separate paragraph regarding the
Company's ability to continue as a going concern.
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, 2003
are as follows:
Name Age Position
---- --- --------
Bradley I. Meier 36 President, Chief Executive Officer,
Secretary and Director
Norman M. Meier 64 Director, Secretary
Reed J. Slogoff 35 Director
Joel M. Wilentz, M.D. 69 Director
James M. Lynch 49 Executive Vice President and Chief
Financial Officer
Sean P. Downes 33 Chief Operating Officer of UPCIC
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.
17
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.
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 was
previously 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, M.D. 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.
SEAN P. DOWNES has been Chief Operating Officer and a Director of Universal
Property & Casualty Insurance Company since July 2003. Mr. Downes was Chief
Operating Officer of Universal Adjusting Corporation from July 1999 to July
2003. During that time Mr. Downes created the Company's claims operation. Before
joining the Company in July 1999, Mr. Downes was Vice President of Dennis Downes
and Associates, a multi-line insurance adjustment corporation.
Norman M. Meier and Bradley I. Meier are father and son, respectively.
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. 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.
AUDIT COMMITTEE
The Company has a separately designated audit committee, whose members are
Bradley I. Meier and Reed J. Slogoff. The Company's Board of Directors has
determined that the Company does not have an audit committee financial expert
serving on its audit committee because the Company has not identified an
individual with the required expertise and experience.
CODE OF ETHICS
The Company had not adopted a code of ethics for senior executive and
financial officers because it has not expended the resources necessary for such
adoption.
18
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, 2003.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
Name and Year Ended Long-Term Compensation
Principal Position December 31 Salary Bonus Securities Underlying Options
------------------ ----------- ------ ----- -----------------------------
Bradley I. Meier 2003 $ 381,150 $ 0 0
President and CEO 2002 346,500 0 0
2001 315,000 0 150,000
James M. Lynch 2003 $ 155,000 $ 0 0
Executive Vice President and 2002 149,250 15,000 0
CFO 2001 140,500 5,000 100,000
Sean P. Downes 2003 $ 109,167 $ 0 0
Chief Operating Officer of 2002 81,250 0 200,000
UPCIC 2001 73,050 0 100,000
OPTION GRANTS IN LAST FISCAL YEAR
None.
AGGREGATED OPTION EXERCISES AND OPTION VALUES
FOR THE YEAR ENDED DECEMBER 31, 2003
None.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
None.
EMPLOYMENT AGREEMENT
As of August 11, 1999, the Company entered into a four-year employment
agreement with Bradley I. Meier, the Company's President and Chief Executive
Officer, 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
19
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. On March
4, 2004, Mr. Meier was granted ten-year stock options to purchase 1,000,000
shares of Common Stock at $0.06 per share, which vested immediately. The Company
issued 4,708,332 and 6,782,330 shares of Common Stock during the respective
years ended December 31, 2003 and 2002 in conjunction with amendments approved
by the Board of Directors to the employment agreement between the Company and
Mr. Meier whereby Mr. Meier converted salary and accrued vacation into shares of
common stock. An additional 2,823,529 shares were issued on February 25, 2004.
The shares were issued to Mr. Meier in private transactions performed in
accordance with the terms of the amendments and pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information with respect to all of the
Company's equity compensation plans in effect as of December 31, 2003:
Equity Compensation Plan Information
-----------------------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average issuance under equity
issued upon exercise of exercise price of compensation plans
outstanding options, warrants outstanding options, (excluding securities reflected
Plan Category and rights warrants and rights in column (a))
-----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 10,261,651 $1.57 N/A
approved by security holders
-----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security - - -
holders
-----------------------------------------------------------------------------------------------------------------------------------
Total 10,261,651 $1.57 N/A
-----------------------------------------------------------------------------------------------------------------------------------
Descriptions of the plans are contained in Note 12 to the Consolidated Financial
Statements.
20
SERIES M PREFERRED STOCK
As of March 1, 2004, 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 Percent of Class
Owner(1) Ownership ----------------
----- --------
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, 2004, 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 Percent of Class
Owner(1) Ownership ----------------
----- --------
Norman M. Meier* (2) 9,975 20%
Officers and directors as a group
(1 person) (3)
21
* 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 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, 2004, 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 Percent of Class
Owner(1) Ownership ----------------
----- --------
Bradley I. Meier (3) 20,051,110 62.3%
Norman M. Meier (4) 2,665,654 8.3%
Sean P. Downes (5) 315,000 1.0%
Reed J. Slogoff (6) 255,000 .8%
Joel M. Wilentz (7) 255,000 .8%
James M. Lynch (8) 175,000 .5%
Officers and directors as a group
(6 people) (9) 23,716,764 73.7%
(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) 15,330,243 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)
22
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 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 $1.10 per share which vested on December 23, 1999, (i)
options to purchase 150,000 shares of Common Stock at an exercise price of
$0.60 per share which vested on December 21, 2001, 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 250,225 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) 482,371 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 $1.10 per
share, (h) options to purchase 25,000 shares of Common Stock at an
exercise price of $0.60 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 15,000 shares of Common Stock at an
exercise price of $1.10 per share, (ii) options to purchase 100,000 shares
of Common Stock at an exercise price of $0.50 per share and (iii) options
to purchase 200,000 shares of Common Stock at an exercise price of $0.04
per share.
(6) Consists of (i) 25,000 shares of Common Stock, (ii) options to purchase
100,000 shares of Common Stock at an exercise price of $1.06 per share,
(iii) 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, (iv) options to purchase 20,000 shares of
Common Stock at an exercise price of $1.10 per share and (v) options to
purchase 10,000 shares of Common Stock at an exercise price of $0.60 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) 25,000 shares of Common Stock, (ii) options to purchase
100,000 shares of Common Stock at an exercise price of $1.06 per share,
(iii) options to purchase 100,000 shares of Common Stock at an exercise
23
price of $1.63 per share, (iv) options to purchase 20,000 shares of Common
Stock at an exercise price of $1.10 per share and (v) options to purchase
10,000 shares of Common Stock at an exercise price of $0.60 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 $1.10 per share and options
to purchase 100,000 shares of Common Stock at an exercise price of $0.50
per share. Excludes options to purchase 20,000 shares of Common Stock of
Tigerquote.com at an exercise price of $.50 per share.
(9) See footnotes (1) - (8) above.
SERIES M PREFERRED STOCK
As of March 1, 2004, 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:
Amount and Nature of
Name and Address (1) Beneficial 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
24
(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, 2004, 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:
Amount and Nature of
Name and Address (1) Beneficial 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
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 owned.
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, 2004, 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:
25
Amount and Nature of
Name and Address(1) Beneficial Ownership(2) Percent of Class
---------------- -------------------- ----------------
Martin Steinberg, Esq., as the 6,518,004 20.3%
receiver for Lancer Offshore Inc.(3)
c/o David E. Wells, Esq.
Hunton & Williams LLP
1111 Brickell Avenue, Suite 2500
Miami, FL 33131
(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 its 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 6,518,004 shares of Common Stock as indicated on Schedule
13D dated July 10, 2003 filed with the Securities and Exchange
Commission.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since December 1997, as a condition to the licensing of the Company's
subsidiary, the Company's outside counsel has held $290,000 in trust for the
benefit of the Company in the Counsel's escrow account pending resolution of a
claim against a Company director and an unrelated entity. Such funds have been
included in the Company's financial statements as cash and cash equivalents. In
October 2003, the dispute was resolved and the claim was settled on terms
including a cash payment of $201,000, which the Company paid under an
indemnification arrangement with the director. Legal fees related to the
settlement were $37,036. These amounts were recorded as an expense during the
fourth quarter of 2003. The remaining funds, net of settlement cost and attorney
fees, were returned to the Company.
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 Designation for Series A Convertible Preferred Stock dated
October 11, 1994 (4)
3.4 Certificate of Designations, Preferences, and Rights of Series M
Convertible Preferred Stock dated August 13, 1997 (2)
3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated October 19, 1998 (4)
26
3.6 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated December 18, 2000 (4)
3.7 Certificate of Amendment of Certificate of Designations of the Series A
Convertible Preferred Stock dated October 29, 2001 (4)
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)
16.2 Letter on change in certifying accountants from Deloitte & Touche LLP
dated October 7, 2002(5)
16.3 Letter on change in certifying accountants from Deloitte & Touche LLP
dated March 27, 2003(6)
21 List of Subsidiaries
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to Title 18, United States Code, Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(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
27
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 2002 filed with the Securities and
Exchange Commission on April 9, 2003
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on October 7, 2002
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on April 2, 2003
REPORTS ON FORM 8-K
Form 8-K/A, filed April 2, 2003, reporting under Items 4 and 7.
ITEM 14. CONTROLS AND PROCEDURES.
Based on the evaluation by the Chief Executive Officer and Chief Financial
Officer of the Company as of a date within 90 days of the filing date of this
annual report, the Company's disclosure controls and procedures are adequately
designed to ensure that the information required to be included in this report
has been recorded, processed, summarized and reported on a timely basis. There
have not been any significant changes in the Company's internal controls or in
any other factors that could significantly affect these controls and there have
been no corrective actions taken with regard to significant deficiencies and
material weaknesses subsequent to the date of such officers' evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
Audit fees for the fiscal years ended December 31, 2003 and December 31, 2002
were $115,000 and $110,000, respectively.
AUDIT RELATED FEES
Audit related fees for the fiscal years ended December 31, 2003 and December 31,
2002 were $0.
TAX FEES
Tax fees for the fiscal years ended December 31, 2003 and December 31, 2002 were
$25,000 and $30,000, respectively.
ALL OTHER FEES
All other fees for products and services provided by the Company's principal
accountant for the fiscal years ended December 31, 2003 and December 31, 2002
were $0.
28
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: March 25, 2004 By: /s/ Bradley I. Meier
----------------------------------------
Bradley I. Meier, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Bradley I. Meier President, Chief Executive March 25, 2004
-------------------- Officer and Director
Bradley I. Meier
/s/ James M. Lynch Chief Financial Officer March 25, 2004
------------------
James M. Lynch
/s/ Norman M. Meier Director March 25, 2004
-------------------
Norman M. Meier
/s/ Reed J. Slogoff Director March 25, 2004
-------------------
Reed J. Slogoff
/s/ Joel M. Wilentz Director March 25, 2004
-------------------
Joel M. Wilentz
29
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report.................................................F-2
Consolidated Balance Sheet - December 31, 2003...............................F-3
Consolidated Statements of Operations for the Years Ended December 31, 2003
and 2002.....................................................................F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the Years Ended December 31, 2003 and 2002.................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003 and 2002................................................................F-6
Notes to Consolidated Financial Statements............................F-7 - F-25
F-1
INDEPENDENT AUDITOR'S 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,
2003, 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 audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Universal Insurance
Holdings, Inc. and subsidiaries as of December 31, 2003, and the results of
their operations and their cash flows for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Blackman Kallick Bartelstein LLP
Chicago, Illinois
March 5, 2004
F-2
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2003
ASSETS
Cash and cash equivalents $ 8,011,278
Debt securities held-to-maturity (fair value of $103,335) 100,243
Equity securities available for sale (cost of $175,453) 149,796
Investments in real estate 204,743
Prepaid reinsurance premiums and reinsurance recoverables 24,837,539
Premiums and other receivables 536,586
Property and equipment, net 1,211,643
Other assets 183,661
--------------
Total Assets $ 35,235,489
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 7,680,872
Unearned premiums 16,105,576
Accounts payable 1,176,654
Reinsurance payable 5,135,834
Other accrued expenses 822,018
Loans payable 841,269
--------------
Total Liabilities 31,762,223
--------------
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, 29,360,246
shares issued and 26,251,601 shares outstanding 215,008
Common stock in treasury, at cost - 208,645 shares (101,820)
Additional paid-in capital 15,024,142
Accumulated deficit (11,639,794)
Accumulated other comprehensive loss (25,657)
--------------
Total stockholders' equity 3,473,266
--------------
Total liabilities and stockholders' equity $ 35,235,489
==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
PREMIUMS EARNED AND OTHER REVENUES:
Premium income, net $ 2,694,170 $ 4,895,623
Net investment income 82,458 357,623
Commission revenue 1,167,606 1,421,906
Transaction fees 1,379,211 953,389
Other revenue 1,156,571 1,633,567
----------- ------------
Total revenues 6,480,016 9,262,108
----------- ------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 974,489 4,638,160
General and administrative expenses 5,787,055 4,552,897
----------- ------------
Total operating costs and expenses 6,761,544 9,191,057
----------- ------------
NET (LOSS) INCOME $ (281,528) $ 71,051
=========== ============
(LOSS) INCOME PER COMMON SHARE:
Basic $ (0.01) $ 0.00
=========== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 23,777,515 15,600,921
=========== ============
(LOSS) INCOME PER COMMON SHARE
Diluted $ (0.01) $ 0.00
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 23,777,515 16,173,956
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2003 AND 2002
PREFERRED COMMON TREASURY ADDITIONAL ACCUMULATED
STOCK STOCK STOCK PAID-IN ACCUMULATED OTHER COMP
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) TOTAL
------ ------- ------ ------ ------ ------ ------- ------- ------------- -----
BALANCE
January 1,
2002 138,640 $1,387 14,894,584 $148,946 208,645 $(101,820) $14,977,297 $(11,329,419) $(39,836) $3,656,555
Net Income - - - - - - - 71,051 - 71,051
Net change in
unrealized
losses
on available
for sale
securities - - - - - - - - (34,835) (34,835)
-----------
Comprehensive
income 36,216
Preferred stock
dividend - - - - - - - (49,950) - (49,950)
Issuance of
common stock - - 6,782,330 18,229 - - 26,679 - - 44,908
-------- ------ ---------- -------- ------- --------- ----------- ------------ -------- -----------
BALANCE,
December 31,
2002 138,640 1,387 21,676,914 167,175 208,645 (101,820) 15,003,976 (11,308,318) (74,671) 3,687,729
-------- ------ ---------- -------- ------- --------- ----------- ------------ -------- -----------
Net loss - - - - - - - (281,528) - (281,528)
Net change in
unrealized
gains
on available
for sale
securities - - - - - - - - 49,014 49,014
-----------
Comprehensive
loss (232,514)
Preferred stock
dividend - - - - - - - (49,948) - (49,948)
Issuance of
common stock - - 4,783,332 47,833 - - 20,166 - - 67,999
-------- ------ ---------- -------- ------- --------- ----------- ------------ -------- -----------
BALANCE,
December 31,
2003 138,640 $1,387 26,460,246 $215,008 208,645 $(101,820) $15,024,142 $(11,639,794) $(25,657) $ 3,473,266
======== ====== ========== ======== ======= ========= =========== ============ ======== ===========
The accompanying notes are an integral part of the consolidated financial statements.
F-5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (281,528) $71,051
Adjustments to reconcile net (loss) income
to cash provided by (used in) operations:
Amortization and depreciation 268,953 236,316
Loss on disposal of assets (40,503)
Issuance of common stock as compensation 67,999 44,908
Net accretion of bond premiums and discounts (5,793) (2,161)
Net change in assets and liabilities relating to operating activities:
Prepaid reinsurance premiums and reinsurance recoverable 996,780 (11,674,228)
Premiums and other receivables 664,988 7,345
Deferred policy acquisition costs - 529,942
Reinsurance payable 4,089,021 (3,327,902)
Accounts payable (158,565) (28,505)
Other accrued expenses (151,430) 282,792
Accrued taxes, licenses and fees - (6,758)
Unpaid losses and loss adjustment expenses 456,117 977,888
Unearned premiums (2,319,453) 4,371,790
------------- -------------
Net cash provided by (used in) operating activities 3,586,586 (8,517,522)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (237,069) (155,345)
Purchase of equity securities available for sale - (18,160)
Proceeds from sale of equity securities available for sale 133,414 -
Proceeds from maturities of debt securities held to maturity 235,133 2,699,235
Purchase of real estate - (280,487)
Sale of real estate 93,405 173,102
------------- -------------
Net cash provided by investing activities 224,883 2,418,345
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (49,948) (49,950)
Payments on loans payable (665,163) -
Proceeds from loans payable 327,000 255,348
------------- -------------
Net cash (used in) provided by financing activities (388,111) 205,398
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH 3,423,358 (5,893,779)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, Beginning of year 4,587,920 10,481,699
------------- -------------
CASH AND CASH EQUIVALENTS, End of year $ 8,011,278 $ 4,587,920
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
F-6
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 of
Florida, 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 Office of Insurance
Regulation ("OIR") 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,
U.S. Insurance Solutions, Inc. was incorporated in Florida on August 4, 1998 and
Coastal Homeowners Insurance Specialist, Inc. was incorporated in Florida on
July 2, 2001, each as wholly owned subsidiaries of Universal Insurance Holdings,
Inc. to solicit voluntary business and to generate commission revenue. U.S.
Insurance Solutions, Inc. was sold back to its former agency principal during
2003 for $100 and the assumption of certain obligations in the aggregate amount
of $16,000. The remaining two entities are a part of the Company's agency
operations, which seek to generate income from commissions, premium financing
referral fees and the marketing of ancillary services. 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. The Company has also formed subsidiaries
that specialize, or will specialize, in selling insurance and generating
insurance leads via the Internet. Tigerquote.com Insurance & Financial Services
Group, Inc. ("Tigerquote.com") and Tigerquote.com Insurance Solutions, Inc. were
F-7
incorporated in Delaware on June 6, 1999 and August 23, 1999, respectively.
Tigerquote.com is an Internet insurance lead generating network while
Tigerquote.com Insurance Solutions, Inc. is a network of Internet insurance
agencies. As of December 31, 2003, insurance agencies have been established in
22 states and are active in 5 states. During 2001, the Company formed Tiger Home
Services, Inc., which furnishes pest control, pool services and landscaping to
homeowners. The services are currently offered to commercial and residential
customers in certain areas in the state of Florida. Various plans are offered to
fit customer needs.
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.
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 as of 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 the lower
of cost or appraised value. Real estate represents residential properties
purchased by UPCIC in connection with the settlement of certain claims. The
properties are rented for the production of income until they can be sold.
Depreciation is provided on the straight-line basis over twenty seven and one
half years.
SECURITIES AVAILABLE FOR SALE. Equity securities are reported at fair value,
with unrealized gains and losses reported net of deferred tax as a separate
component of stockholders' equity. Realized gains and losses are determined on
the specific identification method.
PROPERTY AND EQUIPMENT. Property 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 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.
F-8
RECOGNITION OF COMMISSION REVENUE. Commission revenue, which is comprised of the
MGA'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.
RECOGNITION OF TRANSACTION FEE REVENUE. Transaction fee revenue, which is
comprised of revenue from the selling of insurance leads is recognized as income
upon sale of the lead. 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 net of reinsurance commissions 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 ("LAE") 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.
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 current
earnings.
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 as
of December 31, 2003.
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
F-9
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.
Notes payable are principally equal to the unpaid balance 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
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 as of 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 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 (determined as of 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).
STATUTORY ACCOUNTING. The Company prepares its statutory financial statements in
conformity with accounting practices prescribed or permitted by the Office of
Insurance Regulation of the State of Florida. Effective January 1, 2001, the
Office of Insurance Regulation 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 (the
"Manual"), as modified by the Office of Insurance Regulation of the State of
Florida. Accordingly, the admitted assets, liabilities and capital and surplus
of Universal Property & Casualty Insurance Company as of December 31, 2003, 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.
NEW ACCOUNTING PRONOUNCEMENTS. 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 adopted the provisions of
these statements in the first quarter of 2002. The impact of such adoption did
not 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
F-10
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 adopted SFAS
No. 144 in the first quarter of 2002. The impact of such adoption did not have a
material effect on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement, which is effective for
years ending after December 15, 2002, amends Statement No. 123, Accounting for
Stock-Based Compensation, and provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 regardless of the accounting method used to
account for stock-based compensation. The Company has chosen to continue to
account for stock-based compensation of employees using the intrinsic value
method prescribed in APB No. 25, Accounting for Stock Issued to Employees and
related interpretations. However, the enhanced disclosure provisions as defined
by SFAS No. 148 became effective and were adopted by the Company in the first
quarter of 2003.
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. As of December 31, 2003, the Company has direct
unearned premiums of $16,105,576.
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.
NOTE 4 - REINSURANCE
UPCIC's in-force policyholder coverage for windstorm exposures as of December
31, 2003 was approximately $4.6 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.
F-11
QUOTA SHARE
Effective June 1, 2003, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, UPCIC cedes 90% of its gross written premiums, losses and loss
adjustment expenses for policies with coverage for wind risk with a ceding
commission equal to 28% of ceded gross premiums written. For the year ended
December 31, 2002, UPCIC ceded 50% of gross written premiums, losses and loss
adjustment expenses for all policies during the first five months of 2002, 80%
during the subsequent four months and 90% during the remaining three months.
UPCIC continued to cede 90% of all policies during 2003, except for new and
renewal without wind risk business with policy effective dates of June 1, 2003
and after. In addition, the quota share treaty has a limitation for any one
occurrence of $2,000,000.
EXCESS PER RISK
Effective June 1, 2003, UPCIC entered into an excess per risk agreement with
various reinsurers. 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
property loss, and $1,000,000 in excess of $300,000 each casualty loss,
excluding losses arising from the peril of wind to the extent such wind related
losses are the result of a hurricane. A $5,200,000 limit applies to the term of
the contract.
EXCESS CATASTROPHE
The excess catastrophe reinsurance agreement provides three layers of excess
catastrophe coverage as of December 31, 2002 as follows:
First Layer Second Layer Third Layer
----------- ------------ -----------
Coverage $12,000,000 in $25,000,000 in $13,000,000 in
excess of excess of excess of
$2,000,000 each $14,000,000 each $19,000,000 each
loss occurrence loss occurrence loss occurrence
Deposit premium $3,600,000 $2,750,000 $1,300,000
Minimum premium $2,880,000 $2,600,000 $1,040,000
Premium rate -% of 0.078% 0.016% 0.028%
total insurance value
Effective June 1, 2003, UPCIC revised and enhanced its excess catastrophe
reinsurance program. The excess catastrophe reinsurance agreement provides two
layers of excess catastrophe coverage as of December 31, 2003 as follows:
First Layer Second Layer
----------- ------------
Coverage $18,000,000 in $6,000,000 in
excess of excess of
$2,000,000 each $20,000,000 each
loss occurrence loss occurrence
Deposit premium $4,680,000 $810,000
Minimum premium $3,744,000 $648,000
Premium rate -% of 0.102% 0.018%
total insurance value
F-12
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, 2002 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, 2002 to May 31, 2003) 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 $56,312,000 in excess of $19,228,000. The
premium for this coverage was $2,394,227. Effective June 1, 2003, UPCIC entered
a subsequent reimbursement agreement with the Fund under the same terms through
May 31, 2004. The Fund has provided UPCIC with coverage of $54,341,000 in excess
of $21,446,000 as of December 31, 2003. The premium for this coverage was
$2,397,060. In the event of depletion of the Fund due to losses arising from
catastrophic events, the Fund would assess homeowners' insurers writing business
in the state of Florida. Florida law allows insurers to make rate filings to
pass these assessments to policyholders.
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, 2003 December 31, 2002
----------------- -----------------
Premiums Premiums Loss and Loss Premiums Premiums
Written Earned Adjustment Written Earned Adjustment
------- ------ Expenses ------- ------ Expenses
-------- ---------
Direct $ 30,745,878 $ 33,065,332 $ 15,275,032 $ 33,160,567 $ 28,788,776 $ 17,998,488
Ceded (27,618,376) (30,371,162) (14,300,543) (31,213,385) (23,893,153) (13,360,328)
------------ ------------- ------------- ------------- ------------- -------------
Net $ 3,127,502 $ 2,694,170 $ 974,489 $ 1,947,182 $ 4,895,623 $ 4,638,160
============ ============= ============= ============= ============= =============
Other amounts:
December 31, 2003
Reinsurance recoverable on unpaid losses and loss adjustment
expenses $6,329,872
Reinsurance recoverable on paid losses 2,166,133
Other reinsurance receivables 2,159,157
Unearned premiums ceded 14,182,377
------------
Prepaid reinsurance premiums and reinsurance recoverable $24,837,539
============
Reinsurance payable $5,135,834
============
F-13
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. Two reinsurers have unsecured
balances greater than 10% of the total amounts of prepaid reinsurance premiums
and reinsurance recoverables as of December 31, 2003. The balances for these
reinsurers are $6,451,000 and $5,560,000. As of December 31, 2003, 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.
NOTE 5 - INVESTMENTS
Major categories of net investment income are summarized as follows:
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Debt securities held-to-maturity $ 13,551 $ 237,440
Common stocks 7,398 2,040
Cash and cash equivalents 88,521 130,951
---------- ----------
109,470 370,431
Investment expenses 27,012 12,808
---------- ----------
$ 82,458 $ 357,623
========== ==========
Proceeds from the sale of equity securities during 2003 and 2002 were $133,414
and $0 respectively. Gross gains on the sale of securities during 2003 and 2002
were $7,266 and $81,299, respectively. Gross losses on the sale of securities
during 2003 and 2002 were $347 and $2,644, respectively.
The aggregate amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value as of December 31, 2003 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:
Cash and cash equivalents $ 8,011,278 $ - $ - $ 8,011,278
Equity securities 175,453 - (25,657) $ 149,796
------------ ---------------- ----------------- ------------
Total $ 8,186,731 $ - $ (25,657) $ 8,161,074
============ ================ ================= ============
Held-to-maturity securities:
US government agencies $ 100,243 3,092 $ - $ 103,335
============ ================ ================= ============
The scheduled maturities of held-to-maturity securities as of December 31, 2003
were as follows:
Amortized
Cost Fair Value
--- ----------
Due after one year through five years $100,243 $103,335
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.
F-14
As of December 31, 2003, investments with a carrying value of $1,500,000 were on
deposit with regulatory authorities.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2003 consisted of the following:
Computers $ 482,167
Furnture 131,472
Automobiles and equipment 712,203
Software 520,000
-------------
Total cost 1,845,842
Less: Accumulated depreciation and amortization (634,199)
-------------
$ 1,211,643
NOTE 7 - LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
As described in Note 2, UPCIC establishes liabilities for unpaid losses and loss
adjustment expenses 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, 2003
was approximately $4.6 billion. UPCIC continuously evaluates alternative
business strategies to more effectively manage its exposure to catastrophe
losses, including the maintenance of catastrophic reinsurance coverage as
discussed in Note 4.
Management believes that the liabilities for claims and claims expense as of
December 31, 2003 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-15
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Balance at beginning of year $ 7,224,755 $ 6,246,867
Less reinsurance recoverable (5,634,455) (3,278,316)
----------- -----------
Net balance at beginning of year 1,590,330 2,968,551
----------- -----------
Incurred related to:
Current year 1,174,437 3,908,724
Prior year (199,948) 729,436
----------- -----------
Total incurred 974,489 4,638,160
----------- -----------
Paid related to:
Current year 786,430 2,894,786
Prior years 427,359 3,121,625
----------- -----------
Total paid 1,213,789 6,016,411
----------- -----------
Net balance at end of year 1,351,000 1,590,300
Plus reinsurance recoverable 6,329,872 5,634,455
----------- -----------
Balance at end of year $ 7,680,872 $ 7,224,755
=========== ===========
The Company's liabilities for unpaid losses and LAE, net of related reinsurance
recoverables, as of December 31, 2003 were decreased in the current year by
$199,948 for claims that had occurred on or before the prior year 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. The Company's liabilities for unpaid losses and LAE, net of related
reinsurance recoverables, as of December 31, 2002 were increased by $729,436 for
claims that had occurred on or before the previous year balance sheet date. This
unfavorable loss emergence resulted principally from settling homeowners' losses
established in the prior year for amounts that were more than expected.
NOTE 8 - LOANS PAYABLE
On May 29, 2002, the Company entered into a Senior Promissory Note with
Renaissance Reinsurance LTD. for the principal sum of $750,000 payable in 12
monthly installments of $62,500. Interest accrued on the unpaid balance of the
principal amount at a fixed annual rate of 9%. Universal Risk Advisors, Inc.
signed as guarantor of the note. The loan amount was contributed to UPCIC as
additional paid-in capital. The remaining balance of the loan was paid off
during 2003.
During 2003, the Company purchased software for $520,000. Management believes
this will result in reducing overall management expenses versus the previous
outside vendor agreement. Of the remaining unpaid purchase price of $480,000 as
of December 31, 2003, $30,000 was payable on January 5, 2004 and the remainder
is payable in 5 monthly installments of $10,000 through May 2004 followed by 10
monthly installments of $40,000 through March 2005. The remaining installments
include principal and interest as there is no stipulated interest rate.
Loans payable as of December 31, 2003 also consists of the following bank loans
secured by the respective assets: a boat loan for $119,574, principal due in May
2011, with interest paid monthly at 8.8%, and several vehicle loans totaling
$158,362, principal due from January 2004 to September 2006, with interest paid
monthly ranging from 5.6% to 10%. Other loans with vendors amounted to $83,333
as of December 31, 2003.
F-16
Loan repayments are due as follows:
2004 $ 554,401
2005 169,961
2006 35,445
2007 16,181
2008 17,664
Thereafter 47,617
-----------
$ 841,269
===========
NOTE 9 - REGULATORY REQUIREMENTS AND RESTRICTIONS
UPCIC is subject to comprehensive supervision and regulation by the OIR. 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.
The following schedule reconciles statutory net loss and surplus of UPCIC as
reported in the 2003 and 2002 annual statements filed with the OIR, prepared on
the basis of statutory accounting principles, to UPCIC's net loss for the years
ended December 31, 2003 and 2002 and stockholders' equity under GAAP as of
December 31, 2003:
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Net Loss Surplus Net Loss
-------- ------- --------
Balance per statutory financial $ (344,324) $ 4,590,619 $ (475,329)
statement, as originally filed
Balance per statutory financial (344,324) 4,590,619 (475,329)
statement, as adjusted
Deferred policy acquisition costs - - (529,942)
Deferred income taxes (18,889) 105,649 81,232
Policy assessment - 287,332 287,332
Increase non-admitted assets - 675,998 -
Other - (214,922) -
---------------------- --------------------- --------------------
Balance in conformity with GAAP $ (363,213) $ 5,444,676 $ (636,707)
====================== ===================== ====================
NOTE 10 - RELATED PARTY TRANSACTIONS
All underwriting, rating, policy issuance and administration functions for UPCIC
are performed by UPCIC, Universal Risk Advisors, Inc., a wholly owned subsidiary
of the Company, and unaffiliated third parties.
Since December 1997, as a condition of the licensing of the Company's subsidiary
the Company's outside counsel has held $290,000 in trust for the benefit of the
Company in the counsel's escrow account pending resolution of a claim against a
Company director and an unrelated entity. Such funds have been included in the
Company's financial statements as cash and cash equivalents. In October 2003,
the dispute was resolved and the claim was settled on terms including a cash
payment of $201,000, which the Company paid under an indemnification arrangement
with the director. Legal fees related to the settlement were $37,036. These
amounts were recorded as an expense during the fourth quarter of 2003. The
remaining funds, net of settlement cost and attorney fees, were returned to the
Company.
F-17
NOTE 11- INCOME TAX PROVISION
Since its inception, the Company has incurred cumulative tax operating losses.
Therefore, the Company has not incurred any significant income tax liabilities
during that time. As of December 31, 2003, the Company had net operating loss
carryforwards totaling approximately $9,425,000 which are available to offset
future taxable income, if any, through 2023.
The following table reconciles the statutory federal income tax rate to the
Company's effective tax rate for the years ended December 31, 2003 and 2002:
2003 2002
---- ----
Statutory federal income tax rate 34.0% 34.0%
Increases (decreases) resulting from:
Change in valuation allowance (34.0%) (27.7%)
Other 0.0% (6.3%)
---------- ----------
Effective tax rate 0.0% 0.0%
========== ==========
Deferred income taxes as of December 31, 2003 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 $ 3,204,500
Unearned premiums 130,777
Unpaid losses 52,270
------------
3,387,547
Deferred income tax liabilities:
Property and equipment (117,177)
Net deferred income tax asset 3,270,370
Less: valuation allowance (3,270,370)
------------
Net deferred income tax asset $ -
============
The Company has prepared projections that indicate it may generate some amount
of income from operations in the future. However, a valuation allowance is
deemed necessary because management does not believe that it is more likely than
F-18
not that the Company will generate substantial taxable income sufficient to
realize the tax benefits associated with the net deferred income tax asset shown
above in the near future.
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 1,258,000
2022 404,000
2023 449,000
---------------
$ 9,425,000
===============
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 the 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. The Plan does not specify the number of
shares for which options are available for grant. The stock options may be
granted over a period not to exceed 10 years and generally vest as of the date
of grant or upon certain goals attained. The Plan has no provisions for the
exercising of options other than paying the cash exercise price.
F-19
A summary of the option activity for the years ended December 31, 2003 and 2002
is presented below:
Options Exeriseable
------------------- Weighted
Average
Number Option Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2002 6,838,624 $ 0.50 $ 22.00 $ 1.24 6,838,624 $ 1.24
Granted 230,000 $ 0.04 $ 0.50 $ 0.09
------------
Outstanding December 31, 2002 7,068,624 $ 0.04 $ 22.00 $ 1.20 7,068,624 $ 1.20
Cancelled (35,625) $ 6.00 $ 22.00 $ 14.51
------------
Outstanding December 31, 2003 7,032,999 $ 0.04 $ 3.88 $ 1.14 7,032,999 $ 1.14
============
The following table summarizes the information about options under the Plan
outstanding as of December 31, 2003:
Options Outstanding and Exercisable
-----------------------------------
Weighted Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (in years) Exercise Price
--------------- ----------- ---------- --------------
$0.04 - $1.87 6,890,000 4.1 $1.09
$2.88 - $3.88 142,999 1.4 $3.39
-----------
7,032,999
===========
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. All employees, officers, directors and
consultants of the Company or any subsidiary are eligible to participate in the
Plan. The Plan does not specify the number of shares for which options are
available for grant. The stock options may be granted over a period not to
exceed 10 years and generally vest as of the date of grant or upon certain goals
attained. The Plan has no provisions for the exercising of options other than
paying the cash exercise price.
F-20
A summary of the option activity of the Tigerquote.com Plan for the years ended
December 31, 2003 and 2002 is presented below:
Options Exeriseable
------------------- Weighted
Average
Number Option Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2002 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
Granted - $ - $ - $ - - -
------------
Outstanding December 31, 2002 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
Granted - $ - $ - $ - - -
------------
Outstanding December 31, 2003 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
============
The following table summarizes the information about options under the
Tigerquote.com Plan outstanding as of December 31, 2003:
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 6.25 $.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 stock options were
granted in 2003. Accordingly, no compensation expense has been recognized for
the year ended December 31, 2003. No compensation expense was recognized in the
year ended December 31, 2002 for options granted to employees and directors as
the exercise price for the only stock option grant equaled their fair market
value at the time of grant. The Company expenses the fair value (as determined
as of the grant date) of options and warrants granted to non-employees over the
vesting period. Had compensation cost for options granted to employees and
directors been determined in accordance with the fair value provisions of SFAS
123, the Company's net income (loss) and net income (loss) per share would have
been as follows:
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Net income (loss)
As reported $ (281,528) $ 71,051
Compensation expense (552,287) (376,191)
---------- -----------
Pro Forma (833,815) (305,141)
Net income (loss) per share:
Basic
As reported $ (0.01) $ 0.00
Compensation expense $ (0.03) $ (0.02)
---------- -----------
Pro forma $ (0.04) $ (0.02)
Diluted
As reported $ (0.01) $ 0.00
Compensation expense $ (0.03) $ (0.02)
Pro forma ---------- -----------
Pro forma $ (0.04) $ (0.02)
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, 2003 December 31, 2002
----------------- -----------------
Dividend yield N/A 0.00%
Expected life of option N/A 5 years
Risk free interest rate N/A 6.50%
Expected volatility N/A 126.03%
There were no options granted in 2003. Using the Black-Scholes Option Pricing
Model, the estimated weighted average fair value per option granted during the
year ended December 31, 2002 was $0.05.
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, such 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 periodically.
F-22
WARRANTS
A summary of the warrant activity for the years ended December 31, 2003 and 2002
is presented below:
Warrants Exeriseable
-------------------- Weighted Weighted
Average Average
Number Warrant Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2002 4,393,652 $ 0.75 $ 6.00 $ 1.34 4,393,652 $ 1.34
Granted - $ - $ - $ -
------------
Outstanding December 31, 2002 4,393,652 $ 0.75 $ 6.00 $ 1.34 4,393,652 $ 1.34
Cancelled (2,000,000) $ 0.75 $ 1.25 $ 1.00
------------
Outstanding December 31, 2003 2,393,652 $ 0.75 $ 6.00 $ 1.62 2,393,652 $ 1.62
============
The following table summarizes the information about warrants outstanding as of
December 31, 2003:
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 1,614,109 3.4 $1.03
$1.75 - $6.00 779,543 1.9 $2.84
-----------
2,393,652
===========
No warrants were issued in 2002 or 2003.
OTHER STOCK ISSUANCES
The Company issued 4,708,332 and 6,782,330 shares of Common Stock during the
respective years ended December 31, 2003 and 2002 in conjunction with amendments
approved by the Board of Directors to the employment agreement between the
Company and Bradley I. Meier, the Company's President and Chief Executive
Officer, whereby Mr. Meier converted salary and accrued vacation into shares of
Common Stock. The shares were issued to Mr. Meier in private transactions
performed in accordance with the terms of the amendments and pursuant to Section
4(2) of the Securities Act of 1933, as amended. An additional 2,823,529 shares
were issued on February 25, 2004. During the year ended December 31, 2003, the
Company issued 75,000 shares of Common Stock to the Board of Directors as board
compensation.
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-23
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Employment Agreement
As of August 11, 1999, the Company entered into a four-year employment agreement
with Bradley I. Meier, the Company's President and Chief Executive Officer,
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 with a 5% annual increase. Additionally,
pursuant to the employment agreement, and during each year thereof, Mr. Meier 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 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 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
percent (10%). The employment agreement 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 agreement in 1997, Mr. Meier 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. On March 4, 2004, Mr. Meier was
granted ten-year stock options to purchase 1,000,000 shares of Common Stock at
$0.06 per share, which vested immediately. The exercise price of the options
equaled the market price of the Company's Common Stock as of the date of grant.
See Note 12 for disclosure regarding stock issuance under this agreement.
LEASE AGREEMENT
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. Management is currently exploring alternatives upon
expiration of the lease. Rent expense for 2003 was $216,749.
NOTE 14 - LITIGATION
Certain lawsuits have been filed against the Company. In the opinion of
management, none of these lawsuits are material and they are all adequately
reserved for or covered by insurance or, if not so covered, are without merit or
involve such amounts that if disposed of unfavorably would not have a material
adverse effect on the Company's financial position or results of operations.
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. During
2003, the parties settled the matter out of court and a settlement was
finalized. Accordingly, the Company has no further liability with respect to the
management fees claimed by Universal Management. The terms of the settlement
included a cash payment of $250,000 by the Company to Universal Management. This
amount was recorded as an expense and paid during the second quarter of 2003.
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, 2003 and 2002.
Options and warrants totaling 9,382,185 and 11,457,566 were excluded from the
calculation of diluted earnings per share as their effect was anti-dilutive for
the years ended December 31, 2003 and 2002, respectively.
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Loss Income
Available to Available to
Common Common
Stockholders Per Share Stockholders Per Share
Amount Shares Amount Amount Shares Amount
------ ------ ------ ------ ------ ------
Net income (loss) $ (281,528) $ 71,051
Less: Preferred stock dividends (49,948) (49,950)
----------- --------
Income (loss) available
to common stockholders (331,476) 23,777,515 $ (0.01) 21,101 15,600,921 $ 0.00
========= -------
Effect of dilutive securities:
Stock options and warrants - - - - 4,710 -
Preferred stock - - - 49,950 568,325 -
---------- ---------- --------- -------- ---------- -------
Income (loss) available to common
stockholders and assumed
conversion $ (331,476) 23,777,515 $ (0.01) $ 71,051 16,173,956 $ 0.00
========== ========== ========= ========= ========== =======
F-25