UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

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		o		Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-12

Universal Insurance Holdings, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than Registrant)

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April 8, 2011

 

Dear Shareholder:

 

On behalf of the Board of Directors, I invite you to attend the 2011 Annual Meeting of Shareholders (“Annual Meeting”) of Universal Insurance Holdings, Inc. (“Company”). The Annual Meeting will be held at 10:30 a.m., Eastern Daylight Time, on May 11, 2011, at the Westin Fort Lauderdale, 400 Corporate Drive, Fort Lauderdale, Florida 33334.

 

The shareholders will be asked to (i) elect seven directors, each to hold office until the 2012 annual meeting or until their successors have been elected and qualified; (ii) approve the amendment and restatement of the 2009 Omnibus Incentive Plan, including the material terms of the performance goals stated therein; (iii) cast an advisory vote on the Company’s executive compensation; (iv) cast an advisory vote on the frequency for a shareholders’ advisory vote on the Company’s executive compensation; and (v) ratify the appointment of Blackman Kallick, LLP as the independent registered public accounting firm of the Company for the year ending December 31, 2011. The Board of Directors has unanimously approved these proposals and we urge you to vote in favor of these proposals and in accordance with the Board of Director’s recommendation on such other matters as may be submitted to you for a vote at the Annual Meeting.

 

We encourage you to vote, regardless of the number of shares you own. Please sign and return each proxy card that you receive in the enclosed postage-paid envelope, which is provided for your convenience. The return of your proxy card will not prevent you from voting in person but will assure that your vote is counted if you are unable to attend the Annual Meeting. We look forward to seeing you on May 11, 2011.

 

In addition to the proxy materials, enclosed is the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the Securities and Exchange Commission.

 

Sincerely,

 

/s/ Bradley I. Meier

Bradley I. Meier, President, Chief Executive
Officer and Chairman of the Board

 

1110 West Commercial Boulevard, Fort Lauderdale, Florida 33309, (954) 958-1200

 

UNIVERSAL INSURANCE HOLDINGS, INC.
1110 West Commercial Boulevard
Fort Lauderdale, Florida 33309

 

NOTICE

ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD MAY 11, 2011

 

NOTICE IS HEREBY GIVEN that the 2011 Annual Meeting of Shareholders (“Annual Meeting”) of Universal Insurance Holdings, Inc., a Delaware corporation (“Company”), will be held at 10:30 a.m., Eastern Daylight Time, on May 11, 2011, at the Westin Fort Lauderdale, 400 Corporate Drive, Fort Lauderdale, Florida 33334, for the following purposes:

 

1. To elect seven directors, each to hold office until the 2012 annual meeting or until their successors have been elected and qualified;

 

2. To approve the amendment and restatement of the 2009 Omnibus Incentive Plan (“Incentive Plan”), including the material terms of the performance goals stated therein;

 

3. To cast an advisory vote on the Company’s executive compensation;

 

4. To cast an advisory vote on the frequency for a shareholders’ advisory vote on the Company’s executive compensation;

 

5. To ratify the appointment of Blackman Kallick, LLP as the independent registered public accounting firm of the Company for the year ending December 31, 2011; and

 

6. To transact any other business as may properly come before the Annual Meeting or any adjournment thereof.

 

The Board of Directors has fixed the close of business on April 4, 2011 as the record date for the determination of shareholders entitled to notice of, and to vote at, the Annual Meeting and at any adjournment thereof. A complete list of shareholders of record of the Company on the record date will be available for examination by any shareholder, for any purpose germane to the Annual Meeting, during ordinary business hours, for the ten-day period prior to the Annual Meeting, at the executive offices of the Company, 1110 West Commercial Boulevard, Fort Lauderdale, Florida 33309.

 

It is important that your shares be represented at the Annual Meeting. Whether or not you plan to attend, in order to assure proper representation of your shares at the Annual Meeting, we urge you to submit your proxy voting instructions to the Company by mail. By submitting your proxy voting instructions promptly, you can help the Company avoid the expense of follow-up mailings to ensure the presence of a quorum at the Annual Meeting. If you attend the Annual Meeting, you may, if so desired, revoke your prior proxy voting instructions and vote your shares in person.

 

In the event that there are not sufficient votes to approve any one of the foregoing proposals at the time of the Annual Meeting, the Annual Meeting may be adjourned to permit further solicitation of proxies by the Company.

 

IN ORDER TO SUBMIT PROXY VOTING INSTRUCTIONS PRIOR TO THE ANNUAL MEETING, COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED.

 

YOUR PROXY IS BEING SOLICITED BY THE BOARD. THE BOARD RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSED ITEMS.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

/s/ Joel M. Wilentz

Joel M. Wilentz, M.D., Acting Secretary

 

Fort Lauderdale, Florida

April 8, 2011

 

Table of Contents

 

UNIVERSAL INSURANCE HOLDINGS, INC.
1110 West Commercial Boulevard
Fort Lauderdale, Florida 33309

 

PROXY STATEMENT

 

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors (“Board”) of Universal Insurance Holdings, Inc., a Delaware corporation (“Company”), of proxies to be voted at the Annual Meeting of Shareholders of the Company (“Annual Meeting”), to be held at the Westin Fort Lauderdale, 400 Corporate Drive, Fort Lauderdale, Florida 33334, on May 11, 2011 at 10:30 a.m., Eastern Daylight Time, and at any and all postponements or adjournments thereof, for the purposes set forth in the accompanying Notice of Annual Meeting.

 

A copy of the Annual Report of the Company for its fiscal year ended December 31, 2010, including financial statements audited by Blackman Kallick, LLP, is included. This Proxy Statement, Notice of Annual Meeting, accompanying proxy card, and Annual Report are first expected to be posted to http://proxy.universalinsuranceholdings.com on or about April 8, 2011.

 

 

It is your legal designation of another person to vote the stock you own. That other person is called a proxy. If you designate someone as your proxy in a written document, that document also is called a proxy or a proxy card. We have designated George R. De Heer as proxy for the 2011 Annual Meeting.

 

 

It is a document that Securities and Exchange Commission (“SEC”) regulations require us to give you when we ask you to sign a proxy card designating George R. De Heer as proxy to vote on your behalf.

 

 

If your shares are registered directly in your name with the Company’s registrar and transfer agent, Continental Stock Transfer & Trust Company, you are considered a shareholder of record with respect to those shares.

 

If your shares are held in a brokerage account or bank, you are considered the “beneficial owner” of those shares.

 

 

You need to bring a photo ID to gain admission.

 

If you are a beneficial owner, bring your most recent brokerage statement with you to the meeting. We can use that to verify your ownership of shares and admit you to the meeting; however, you will not be able to vote your shares at the meeting without a legal proxy, as described in response to question 5.

 

Please note that cameras, sound or video recording equipment, cellular telephones, blackberries or other similar equipment, electronic devices, large bags, briefcases or packages will not be allowed in the meeting room.

 

 

You will need to ask your broker, bank or other intermediary to furnish you with a legal proxy. You will need to bring the legal proxy with you to the meeting and hand it in with a signed ballot that will be provided to you at the meeting. You will not be able to vote your shares at the meeting without a legal proxy.

Please note that if you request a legal proxy, any previously executed proxy will be revoked, and your vote will not be counted unless you appear at the meeting and vote in person or legally appoint another proxy to vote on your behalf.

 

If you do not receive the legal proxy in time, you can follow the procedures described in the response to question 4 to gain admission to the meeting; however, you will not be able to vote your shares at the meeting.

 

 

By Written Proxy:  All shareholders can vote by written proxy card. If you are a beneficial owner, you will receive a written proxy card or a vote instruction form from your bank or broker.

 

In Person:  All shareholders of record may vote in person at the meeting. Beneficial owners may vote in person at the meeting if they have a legal proxy, as described in response to question 5.

 

 

The record date for the Annual Meeting is April 4, 2011. The record date is established by the Board as required by the Delaware General Corporation Law and the Company’s bylaws. Owners of record at the close of business on the record date are entitled to:

 

 

 

The securities to be voted at the Annual Meeting consist of (i) shares of common stock of the Company, $0.01 par value per share (“Common Stock”), with each share entitling its record owner to one vote, (ii) shares of Series M Preferred Stock of the Company, $0.01 par value per share (“Series M Preferred Stock”), with each share entitling its record owner to one vote and (iii) shares of Series A Preferred Stock of the Company, $0.01 par value per share (“Series A Preferred Stock”), with each share entitling its record owner to one vote. The holders of Series M Preferred Stock, voting separately as a series, are entitled to elect two directors. The holders of Common Stock, Series M Preferred Stock and Series A Preferred Stock, voting together as one class, are entitled to elect the remaining directors.

 

The table below sets forth the number and classes of Company stock entitled to vote at the Annual Meeting.

 

 

The Company had no other voting securities outstanding on the record date.

 

 

If you are a shareholder of Common Stock and/or Series A Preferred Stock, you will receive one proxy card for all the shares of Common Stock and/or Series A Preferred Stock you hold in certificate form and/or in book-entry form.

 

If you are a shareholder of Series M Preferred Stock, you will receive a proxy card for all the shares of Series M Preferred Stock you hold in certificate form and/or in book-entry form.

 

The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of the Series M Preferred Stock entitled to vote at the Annual Meeting for those matters where a separate vote of the Series M Preferred Stock is required, and of at least a majority of the total number of outstanding shares of the Common Stock, Series M Preferred Stock and Series A Preferred Stock entitled to vote at the Annual Meeting for those matters where the Common Stock, Series M Preferred Stock and Series A Preferred Stock, voting together as a class, is required, is necessary to constitute a quorum at the Annual Meeting. If a quorum is not present at the Annual Meeting, a majority of the shares so represented may vote to adjourn the Annual Meeting from time to time without further notice.

 

 

Shareholders can revoke a proxy prior to the completion of voting at the meeting by:

 

 

 

We will continue our practice of holding the votes of all shareholders in confidence from directors, officers and employees except:

 

 

 

With respect to Proposal 1, you may either (i) vote in favor of all nominees; (ii) vote in favor of specific nominees; (iii) vote against all nominees; (iv) vote against specific nominees; (v) abstain from voting with respect to all nominees; or (vi) abstain from voting with respect to specific nominees.

 

With respect to Proposals 2, 3, and 5, you may vote “For” or “Against”, or “Abstain” from voting. With respect to Proposal 4, you may vote for “1 Year”, “2 Years” or “3 Years”, or “Abstain” from voting.

 

 

Each of the director nominees will be elected as a director of the Company if a majority of the votes cast on his election are voted in favor of such election (Item 1 on the Proxy Card).

 

A majority of the votes cast means that the votes cast “for” a director exceed the number of votes cast “against” that director.

 

The favorable vote of a majority of the votes cast on the proposal will be required:

 

 

 

The advisory vote on the frequency of the advisory vote on executive compensation (Item 4 on the Proxy Card) receiving the greatest number of votes (every one, two or three years) will be considered the frequency recommended by shareholders.

 

 

Shareholders should specify their choice for each matter on the enclosed proxy card. If no specific instructions are given, proxies which are signed and returned will be voted:

 

 

 

Abstentions and broker non-votes are included in determining whether a quorum is present. A broker non-vote occurs when a nominee holding shares for a beneficial owner (i.e., a broker) does not vote on a particular proposal because such nominee does not have discretionary voting power for that particular matter and has not received instructions from the beneficial owner.

 

Abstentions and broker non-votes are not considered “votes cast” and thus do not have an effect on the outcome of the vote as to any of the items presented in this proxy statement. Under the rules of the NYSE Amex LLC (“NYSE Amex”), Item 5 is considered a routine matter on which brokers will be permitted to vote in their discretion even if the beneficial owners do not provide voting instructions. However, Items 1, 2, 3 and 4 are not considered routine matters under NYSE Amex rules, and brokers will not be permitted to vote on Items 1, 2, 3 and 4 if the beneficial owners fail to provide voting instructions.

 

 

The Company will bear the cost of soliciting proxies in the enclosed form. Officers and regular employees of the Company may solicit proxies by a further mailing or personal conversations or via telephone or facsimile, provided that they do not receive compensation for doing so. The Company will, upon request, reimburse brokerage firms and others for their reasonable expenses in forwarding solicitation material to the beneficial owners of stock.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE SHAREHOLDER MEETING OF UNIVERSAL INSURANCE HOLDINGS, INC.
TO BE HELD ON MAY 11, 2011

 

The Notice of Annual Meeting, Proxy Statement and Annual Report on Form 10-K for the fiscal year ended December 31, 2010 are available at http://proxy.universalinsuranceholdings.com.

 

The Board has the ultimate authority for the management of the Company’s business, objectives and operations. It selects the Company’s executive officers, delegates responsibilities for the conduct of the Company’s day-to-day operations to those officers and monitors the performance of the officers.

 

Meetings of the Board are held regularly each quarter and as required. The Board held five meetings during 2010. All directors attended at least 80% of the meetings of the Board and the committees on which he served during 2010.

 

The Company encourages its Board members to attend the Company’s Annual Meeting of Shareholders.

 

The Company pays an annual director’s fee equal to $80,000, paid monthly, to each director of the Company except Mr. Bradley Meier and Mr. Sean Downes. The Company also reimburses all directors for costs and expenses for attending Board meetings. 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. Directors are also entitled to receive discretionary grants of non-qualified stock options under the Incentive Plan.

 

The table below summarizes the compensation paid by the Company to its non-executive directors for the fiscal year ended December 31, 2010.

 

 

 

 

The Board has nominated Sean P. Downes, Bradley I. Meier, Norman M. Meier, Michael A. Pietrangelo, Ozzie A. Schindler, Reed J. Slogoff and Joel M. Wilentz, M.D., for election to the Board to serve as directors until the 2012 annual meeting or until their successors are duly elected and qualified. The nominees have consented to be named and have indicated their intent to serve if elected. The Board has no reason to believe that the nominees will be unavailable or that any other vacancy on the Board will occur. If any nominee becomes unavailable for any reason, or if any other vacancy in the class of directors to be elected at the Annual Meeting should occur before the election, the shares represented by the proxy will be voted for the person, if any, who is designated by the Board to replace the nominee or to fill such other vacancy on the Board.

 

The holders of Series M Preferred Stock, voting separately as a series, are entitled to elect directors to fill the seats currently held by Bradley I. Meier and Norman M. Meier, both of whom the Board recommends for reelection; such directors shall be elected by a majority of votes in the affirmative of the Series M Preferred Stock shares cast at the Annual Meeting. The holders of Common Stock, the holders of Series M Preferred Stock and the holders of Series A Preferred Stock, voting together as one class, are entitled to elect directors to fill the seats currently held by Sean P. Downes, Michael A. Pietrangelo, Ozzie A. Schindler, Reed J. Slogoff

and Joel M. Wilentz, M.D., all of whom the Board recommends for reelection; such directors shall be elected by a majority of votes in the affirmative of the Common Stock shares, Series M Preferred Stock shares and Series A Preferred Stock shares, voting together as a class, cast at the Annual Meeting. If elected, all nominees are expected to serve until the 2012 annual meeting or until their successors are duly elected and qualified.

 

THE BOARD UNANIMOUSLY RECOMMENDS THAT THE NOMINEES DESCRIBED ABOVE
BE ELECTED AS DIRECTORS TO SERVE UNTIL THE 2012 ANNUAL MEETING OR UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED.

 

The current directors and executive officers of the Company are as follows:

 

 

 

 

Biographical Information

 

Biographical information regarding the directors and executive officers of the Company is as follows:

 

Directors

 

Sean P. Downes has been Senior Vice President, Chief Operating Officer and a director of the Company since January 2005. He has served as Chief Operating Officer and a director of UPCIC, a wholly-owned subsidiary of the 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 Downes and Associates, a multi-line insurance adjustment corporation.

 

Mr. Downes has over 23 years of experience in the insurance industry. As an experienced financial and operational leader within the insurance industry, Mr. Downes brings a broad understanding of the strategic priorities and operational demands facing the Company.

 

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 since its formation in April 1997. In

1990, Mr. Meier graduated with a B.S. in Economics from the Wharton School of Business at the University of Pennsylvania.

 

Mr. Meier, as the founder of the Company, has a deep understanding of the Company and the Florida insurance market. He has navigated numerous challenges, including the global economic downturn and regulatory challenges in the Florida insurance market. As our Chairman and Chief Executive Officer, he is a key member of our Board.

 

Norman M. Meier has been a director of the Company since July 1992 and Secretary of the Company since January 1, 2008. Presently Mr. Meier serves as Executive Chairman of DermWorx Incorporated, a privately held dermatologic specialty pharmaceutical company. From February 2000 until January 2006, Mr. Meier was President and Chief Executive Officer of PharmaMatrix, Inc., a medical marketing and advertising company. 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 1977 until 1986, Mr. Meier served as a consultant to Key Pharmaceuticals. From 1971 to 1977, Mr. Meier was Vice President of Sales and Marketing for Key Pharmaceuticals.

 

Mr. Meier is an experienced business leader with a broad understanding of the operational, financial and strategic issues facing public companies. This experience gives him valuable knowledge and perspective as a member of our Board.

 

Michael A. Pietrangelo has been a director of the Company since March 2010. Mr. Pietrangelo has practiced law at Pietrangelo Cook PLC since 1998 and is admitted to the New York, Tennessee and District of Columbia bars. He currently serves on the board of directors of Medicis Pharmaceutical Corporation, an independent specialty pharmaceutical company listed on the NYSE, the American Parkinson Disease Association, a not-for-profit organization focused on serving the Parkinson’s community, and SurgiVision, Inc., a developer of next-generation, interventional MRI technologies. Mr. Pietrangelo currently serves as the managing partner of Theraplex Company LLC, a privately held company. From 1994 until 1998, Mr. Pietrangelo served as President of Johnson Products Company, a subsidiary of IVAX Corporation. From 1990 to 1994, Mr. Pietrangelo was the President and Chief Executive Officer of CLEO, Inc., a subsidiary of Gibson Greetings, Inc. and manufacturer of specialized paper products. From 1967 to 1989, he served in a variety of legal and management roles at the Federal Trade Commission, Pfizer, Inc., Schering-Plough Corporation and Western Publishing Group.

 

Mr. Pietrangelo has valuable experience in corporate governance, legal and financial matters as a result of his participation as a lawyer, executive and director of privately held and public companies as well as non-profit companies. This experience gives him perspective and knowledge as a member of our Board.

 

Ozzie A. Schindler has been a director of the Company since January 2007. Mr. Schindler serves as Chairman of the Company’s Audit Committee. Mr. Schindler is a shareholder with the law firm of Greenberg Traurig and specializes in international tax, trusts and succession and planning. He has an LL.M. in Taxation from New York University School of Law and graduated with honors from the University of Florida School of Law. Mr. Schindler graduated with high honors from the University of Florida Fisher School of Accounting. He is admitted to both the Florida and New York Bars.

 

Mr. Schindler provides strong legal, regulatory, accounting, financial, risk analysis, internal audit, compliance, corporate governance and administrative skills and experience to our Board.

 

Reed J. Slogoff has been a director of the Company since March 1997. Mr. Slogoff is currently a principal with Pearl Properties, LLC, a commercial real estate investment 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.

 

Mr. Slogoff provides valuable insight to our Board as a lawyer formerly engaged in private practice and as an experienced businessman in the commercial real estate industry. While practicing law, Mr. Slogoff

advised clients on a variety of corporate, securities and finance matters and was involved in the public offering process, including an initial listing on the NYSE, and with other aspects of public company corporate matters.

 

Over the past approximately 10 years, Mr. Slogoff has been actively engaged in commercial real estate through his ownership and management of Pearl Properties, LLC. His day-to-day responsibilities include a variety of functions such as financial analysis, arranging, negotiating and obtaining financing, sourcing and negotiating acquisitions and managing portfolio insurance coverage. Mr. Slogoff’s responsibility with respect to insurance matters is particularly relevant to the Company’s insurance operations.

 

Mr. Slogoff’s experience in addressing complex issues including corporate, finance and insurance matters translates to valuable insight on matters facing growing companies today.

 

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, founded in 1970, and of the Centers for Cosmetic Enhancement in Florida. He is a former member of the Board of Directors of the Neurological Injury Compensation Association (NICA) for the State of Florida. He is a former member of the Board of Directors of the Broward County Florida Medical Association. He was the former President of the Broward County Dermatological Society. Dr. Wilentz is at present a member of the Board of Governors of Nova Southeastern University.

 

Dr. Wilentz’s general business acumen and deep understanding of the Florida business, professional, and regulatory environment provides independent guidance to the Board on a wide variety of general corporate and strategic matters.

 

Officers are elected annually by the Board of Directors and serve at the discretion of the Board. All directors hold office until the next annual meeting of shareholders or the election and qualification of their successors. Currently, the Company does not have a procedure by which shareholders may recommend nominees to the Company’s Board of Directors.

 

Certain Relationships

 

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. Eric Meier, who is the brother of Bradley I. Meier, works for a subsidiary of the Company.

 

Executive Officers

 

Bradley I. Meier  For biographical information on Bradley I. Meier, see Information Concerning the Board of Directors and Executive Officers, under “Biographical Information, Directors.”

 

Sean P. Downes  For biographical information on Sean P. Downes, see Information Concerning the Board of Directors and Executive Officers, under “Biographical Information, Directors.”

 

James M. Lynch CPA, CPCU became Executive Vice President and Chief Financial Officer of the Company in August 1998. Before joining the Company, Mr. Lynch was Chief Financial Officer of Florida Administrators, Inc., an organization specializing in property and casualty insurance. Prior to working at Florida Administrators, Inc., Mr. Lynch held the position of Senior Vice President of Finance and Comptroller of Trust Group, Inc., which also 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.

 

On September 30, 2010, following an illness, James M. Lynch resigned as Executive Vice President and Chief Financial Officer of the Company and its wholly-owned insurance subsidiaries. There were no disagreements between Mr. Lynch and the Company on any matter relating to the Company’s financial statements, accounting policies or its internal controls. He remains with the Company as its Director of Financial Analysis.

 

George R. De Heer became Chief Financial Officer and Principal Accounting Officer of the Company and its wholly owned insurance subsidiaries effective October 1, 2010. Prior to becoming the Company’s Chief

Financial Officer and Principal Accounting Officer, Mr. De Heer served as the Company’s Vice President — Finance since October 2006. Mr. De Heer has almost 20 years of experience in the property and casualty insurance industry. Prior to joining the Company, Mr. De Heer was employed for 15 years by Bristol West Insurance Group, a national property and casualty insurance company. Mr. De Heer held various financial positions with Bristol West Insurance Group, rising to become its Vice President of Finance and Controller.

 

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.

 

Board Leadership Structure

 

Our bylaws provide that the roles of Board Chairman and Chief Executive Officer may be filled by the same or different individuals, which provides the Board the flexibility to determine whether these roles should be combined or separated based on the Company’s circumstances and needs at any given time. The roles of Chairman and CEO of the Company are currently held by the same person, Bradley I. Meier. The Board believes that the Company and its shareholders are best served by having Mr. Meier serve in both positions. As the founder of the Company, Mr. Meier is most familiar with the business and challenges the Company faces in the current environment. His experience and expertise makes him the most appropriate person to set agendas for, and lead discussions of, strategic matters affecting the Company at this time. Moreover, this structure enables Mr. Meier to act as a bridge between management and the Board, and helps to promote unified leadership and direction.

 

Independence of Our Directors

 

NYSE Amex rules require that at least a majority of our directors be independent of the Company and management. The Board of Directors has determined that each of the following directors is an “independent director,” as such term is defined by NYSE Amex rules: Michael A. Pietrangelo, Ozzie A. Schindler, Reed J. Slogoff and Joel M. Wilentz, M.D.

 

In addition, each of the Compensation Committee and Audit Committee are composed exclusively of non-employee directors that met the relevant independence requirements established by the NYSE Amex.

 

The Board’s Role in Risk Oversight

 

The Board is responsible for ensuring that material risks are identified and managed appropriately. The Board and its committees regularly review material operational, financial, compensation and compliance risks with senior management. As part of its responsibilities as set forth in its charter, the Audit Committee is responsible for discussing with management the Company’s policies and guidelines to govern the process by which risk assessment and risk management is undertaken by management, including guidelines and policies to identify the Company’s major financial risk exposures, and the steps management has taken to monitor and control such exposures. The Audit Committee also performs a central oversight role with respect to financial and compliance risks, and reports on its findings at each regularly scheduled meeting of the Board. The Compensation Committee considers risk in connection with its design of compensation programs for our executives. Each committee regularly reports to the Board. In addition, each year the Board reviews the Company’s reinsurance program by which the Company cedes insurance risk to reinsurers.

 

Audit Committee

 

The Company has a separately designated Audit Committee, whose members are Ozzie A. Schindler, Reed J. Slogoff and Joel M. Wilentz, M.D., each of whom was determined by the Board to be independent under the applicable rules of the SEC and the NYSE Amex. The Company’s Board of Directors has

determined that Ozzie A. Schindler is an “audit committee financial expert” as defined by Item 407(d)(5) of Regulation S-K promulgated by the SEC.

 

The Audit Committee recommends the firm to be appointed as the independent registered public accounting firm of the Company to audit the Company’s financial statements and to perform services related to the audit, reviews the scope and results of the audit with the independent registered public accounting firm, reviews with management and the independent registered public accounting firm the Company’s year-end operating results and considers the adequacy of the internal accounting procedures.

 

The Audit Committee met separately four times during 2010, in addition to 11 telephonic meetings, and the full Board, including the members of the Audit Committee, met four times during the year to discuss the financial position of the Company, provide recommendations and guidance to management and evaluate strategies and financial opportunities and initiatives.

 

The Audit Committee operates under a written charter that was adopted by the Board of Directors on January 9, 2007. The Audit Committee Charter is publicly available at the Company’s headquarters in Fort Lauderdale, Florida and also on the Company’s website at www.universalinsuranceholdings.com. The Audit Committee Charter will be reviewed annually for changes, as appropriate.

 

Audit Committee Report

 

The following is the report of the Audit Committee with respect to the Company’s audited financial statements for the fiscal year ended December 31, 2010, which include the balance sheets of the Company as of December 31, 2010 and 2009, and the related statements of income, changes in shareholders’ equity and cash flows for the years ended December 31, 2010, 2009 and 2008 and the notes thereto. The information contained in this report shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended (“Securities Act”), or the Securities Exchange Act of 1934, as amended (“Exchange Act”), except to the extent that the Company specifically incorporates it by reference in such filing.

 

Composition

 

The Audit Committee of the Board is composed of the three directors named below. Each member of the Audit Committee meets the independence and financial experience requirements under the applicable rules of the SEC and NYSE Amex.

 

Review with Management

 

The Audit Committee has reviewed and discussed the Company’s audited financial statements with management.

 

Review and Discussions with Independent Registered Public Accounting Firm

 

The Audit Committee has discussed with Blackman Kallick, LLP, the Company’s independent registered public accounting firm for 2010, the matters required to be discussed in accordance with the standards of the Public Company Accounting Oversight Board which include, among other items, matters related to the conduct of the audit of the Company’s financial statements.

 

The Audit Committee has received written disclosures and the letter from Blackman Kallick, LLP required by Independence Standards Board Standard No. 1 (which relates to the accountant’s independence from the Company and its related entities) and has discussed with Blackman Kallick, LLP its independence from the Company.

Conclusion

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Board that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

SUBMITTED BY THE AUDIT COMMITTEE OF
THE BOARD OF DIRECTORS

 

Ozzie A. Schindler
Reed J. Slogoff
Joel M. Wilentz, M.D.

 

Director Nominations

 

A director can be nominated by a member of the Board. The Company has not established a Nominating Committee. Given the size of the Company, the Board believes that this is appropriate.

 

The Board maintains no formal policy regarding Board membership but would view diversity expansively and consider among other things, functional areas of experience, educational background, employment experience and leadership performance as well as those intangible factors that it deems appropriate to develop a heterogeneous and cohesive Board such as integrity, achievements, judgment, intelligence, personal character, the interplay of the candidate’s relevant experience with the experience of other Board members, the willingness of the candidate to devote adequate time to Board duties, and likelihood that he or she will be willing and able to serve on the Board for a sustained period.

 

Code of Business Conduct and Ethics

 

The Company adopted a Code of Business Conduct and Ethics on December 5, 2008 that is applicable to all directors, officers and employees of the Company. The code is publicly available at the Company’s headquarters in Fort Lauderdale, Florida and also on the Company’s website at www.universalinsuranceholdings.com. The Code of Business Conduct and Ethics will be reviewed annually for changes, as appropriate.

 

Shareholder Communications

 

The Company has not established a set process for shareholders to send communications to the Board. Given the size of the Company, the Board believes that this is appropriate.

 

The Compensation Committee consists of Reed J. Slogoff and Joel M. Wilentz, M.D., each of whom was determined by the Board to be independent under the applicable rules of the SEC, NYSE Amex and FINRA. Among its duties, the Compensation Committee assists the Board in discharging its responsibilities relating to corporate goals and objectives relevant to the compensation of the Company’s executive officers, evaluating the performance of executive officers in light of those goals and objectives and determining compensation based on such evaluation. The Compensation Committee operates under a written charter that was adopted by the Board on March 13, 2007. The Compensation Committee Charter is publicly available on the Company’s website at www.universalinsuranceholdings.com. The Compensation Committee Charter will be reviewed annually for changes, as appropriate.

 

Downes and Associates, a multi-line insurance adjustment corporation based in Deerfield Beach, Florida performs certain claims adjusting work for UPCIC. Downes and Associates is owned by Dennis Downes, who is the father of Sean P. Downes, Chief Operating Officer and Senior Vice President of UPCIC. During 2010,

2009 and 2008, the Company expensed claims adjusting fees of $480,000, $605,000, and $410,000, respectively, to Downes and Associates.

 

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 arm’s-length basis. Transactions between the Company and any of its executive officers or directors require the approval of a majority of disinterested directors.

 

Please note that the following Compensation Discussion and Analysis is current as of December 31, 2010. The Compensation Committee oversees and reviews the Company’s executive compensation practices. The Compensation Committee is responsible for ensuring that the compensation of the executive officers of the Company aligns with and supports its growth objectives. The Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer may be referred to as “named executive officers” or “executive officers.”

 

Objectives of the Company’s Compensation Practices

 

The Company’s principal business objective is sound, profitable growth. Achievement of this objective requires not only additional insurance volume, but also continued improvements in the Company’s underwriting criteria to identify acceptable risks, development of the Company’s broker network, strengthened claims processing methodologies to improve customer service and accurately pay claims, aggressive product and geographic diversification facilitated by the internal capabilities developed by the Company, flexible but focused reinsurance strategies and prudent strategies for investment of reserves.

 

Over the last several years, the Company added internal underwriting, reinsurance, claims processing and investment capabilities and engaged in extensive negotiation with independent brokers throughout its marketing area. In 2010, the internalized capabilities contributed substantially to the Company’s superior results and the expanding presence in new geographic areas. The Company utilized internal staff to operate its business and expand its broker network in all markets using existing resources. The Compensation Committee understands that the Company’s growth and geographic diversification, while controlling employment costs, forces senior managers to address additional and more diverse obligations year over year.

 

In 2010 and for the longer term, the Company will continue to seek sound profitable growth by:

 

 

As of December 31, 2010, the Compensation Committee believed that the Company’s compensation practices are linked to these business objectives. In setting base pay, the Compensation Committee takes into account past achievements, including the Company’s growth. Incentive programs are intended to meet three principal goals:

 

 

How the Company Determines Each Element of Compensation and Why the Company Pays Each Element

 

General

 

Several years ago, the Company entered into employment agreements with Mr. Meier and Mr. Downes. The agreement with Mr. Meier has evergreen renewal terms. The Company amended the agreement with Mr. Downes to extend the term to December 31, 2013. The employment agreements reflect the entrepreneurial nature of the Company when the agreements were put in place. Despite its consistent growth and geographic expansion, the Company remains largely entrepreneurial in approach. The Compensation Committee has determined that the Company’s and its shareholders’ interests are best served by continuing these employment agreements without additional renegotiation as of December 31, 2010. The Compensation Committee’s judgment is based on its belief that the continuation of sound, profitable growth is dependent on the continued performance and innovation of these two individuals.

 

The Compensation Committee believes that these two individuals possess unique skill sets, are responsible for more functions than senior managers with comparable titles at comparable companies and, jointly, have been the engine driving the Company’s growth and development since its entry into the insurance business. In some respects, the employment arrangements take past performance into account and reward continuity with pre-determined increases in base compensation. The Compensation Committee believes that such employment arrangements benefit the Company and its shareholders by permitting the Company to retain these executive officers and ensure their continued focus on the Company’s progress.

 

The Compensation Committee recognizes that the base salary and incentive opportunities afforded under the employment agreements are at or above the 75% percentile for individual employees with comparable titles of members of the Insurance Group, described below. However, the Compensation Committee also recognizes that Mr. Meier and Mr. Downes have responsibilities beyond those typically included in their respective titles and perform functions usually performed by others at comparable companies. Based on information reviewed by the Compensation Committee, it believes the more appropriate compensation comparison is to the aggregate cost of senior management of individual members of the Insurance Group.

 

Mr. Meier and Mr. Downes individually or jointly have principal responsibility for a number of functions more typically performed by subordinates at comparable companies. For example, Mr. Meier is the officer directly managing the Company’s investment strategies and management, cash management, capital requirements, investment banking and corporate finance relationships and the Company’s mergers and acquisition evaluation function. Mr. Downes directly manages underwriting, marketing, actuarial analysis, premium rate management, claims and insured loss analysis as well as mediation and arbitration and sales, including maintaining and developing the Company’s network of independent agents.

 

Pursuant to the employment agreements, Mr. Meier and Mr. Downes each receive an annual base salary that automatically increases twenty percent (20%) each year. The Compensation Committee believes the increase in base salary reflects the additional management responsibilities undertaken as a result of the growth

of the Company’s internal operations as well as progress in geographic diversification and managing regulatory challenges.

 

The Company’s Chief Executive Officer and the Company’s Chief Operating Officer also receive an annual performance bonus measured as a percentage of the pretax income of the Company. The Company has used this approach to motivate the Company’s executives toward producing pretax income because the Company believes that pretax income is not only the hallmark of sound, profitable growth but that it also provides the resources for the Company’s internal development, diversification efforts and maintenance of its dividend policy. As a result, the Company’s Chief Executive Officer and Chief Operating Officer are paid more if the Company’s pretax income performance warrants it.

 

In the Company’s core insurance business, pretax income is generated through successful management of not only sales but also properly managed underwriting, claims adjudication, investment of reserves and reinsurance. Accordingly, the Compensation Committee believes that the incentive opportunity’s focus on pretax income controls compensation risk. The balance among these elements must be maintained for sound profitable growth and the balance acts as a control on compensation risk.

 

Comparator Companies

 

For 2010, the Compensation Committee used information provided by The Delves Group, a compensation consultant, to compile two distinct comparable groups to frame the Compensation Committee’s discussions on prospective executive compensation for the Company’s executive officers. The Delves Group has no other relationship with the Company and performs no other services for the Company. Accordingly, the Compensation Committee believes that The Delves Group is completely independent of the Company and its advice cannot be colored by any other revenue derived from working with the Company.

 

One group is a conventionally arranged comparator group; that is, 18 casualty insurance carriers that have a market presence in one or more of the states in which the Company is licensed and exhibit a range of premium volume, net revenue and market capitalization that bracket the Company (“Insurance Group”). As compared to the Insurance Group, the Company has the highest relative concentration of policies in Florida and the Company’s results are influenced to a greater degree by legislation and market factors unique to Florida. These factors include state-mandated premium reductions and discounts for wind mitigation and increases in ceded premiums as a result of changes in the reinsurance program as well as a challenging settlement environment. Despite the unique demands facing the Company due to its high concentration of policies in Florida, the Company’s three-year and five-year compound annual growth rates or “CAGR” is three times that of the next fastest growing member of the group and eight times the second and third fastest growing members of the Insurance Group. Similarly, the Company’s five-year total shareholder return including reinvestment of dividends or “TSR” and other relevant growth measures exceeded all members of the Insurance Group by a substantial margin. These five-year results were achieved during a difficult economic period.

 

Because of the extent of the positive difference between the Company’s financial performance and growth and the financial performance of the members of the Insurance Group, the Compensation Committee believed it important to review the practices at companies that reflected the growth characteristics of the Company as nearly as could be determined. Accordingly, the Compensation Committee requested The Delves Group to search public filings for companies beyond the insurance industry with five-year annualized revenue growth of at least 20% and annual revenue that bracketed the Company’s as well as had no more than 2,000 employees as opposed to the Company’s approximately 200 employees (“Growth Group”). The Compensation Committee believed that the dual comparator groups approach is reasonable to accurately assess the performance and compensation of the Chief Executive Officer and the Chief Operating Officer. The Insurance Group informs the Compensation Committee about companies in direct competition with the Company. The Growth Group informs the Compensation Committee about how the Company compared with other companies with similar growth performance. Within this Growth Group, the Company had the highest top quartile results in five-year revenue growth and top half one year and three year TSR while maintaining the most consistent profit margin year over year.

The Compensation Committee does not target any particular percentile among comparator groups or member companies at which to align compensation. The Compensation Committee is confident that its exercise of discretion in choosing pretax income as the determinant of cash bonus payments best serves the goals of the Company and, by using a variable performance measure, cash bonus compensation will vary directly with achievement. When the Compensation Committee cross-checks compensation levels against comparator groups and member companies, the focus is on a broader and more flexible orientation, which provides the ability to address the specific business conditions relevant to the Company, including:

 

 

For the purpose of its evaluation, the Compensation Committee takes into account the differences in the types or nature of businesses of the companies in the comparator groups as well as a comparison of the functions performed by the particular officers. Consideration is also given to the differences in size, scope and complexity between the Company and the various members of the respective comparator groups. Included in this analysis are the complexity and demands placed on the Company’s Chief Executive Officer and Chief Operating Officer by the Company’s growth strategy. These are among the judgment factors the Compensation Committee considers and are not based on a formula or tied to a comparator group.

 

For the surveys of the comparable groups, the Compensation Committee considered peers to be companies, using data reported in 2010 for 2009 performance, that met the following criteria:

 

For the Insurance Group:

 

 

For the Growth Group:

 

 

The Delves Group determined that the following companies met the criteria for the Insurance Group:

 

 

The Delves Group determined that the following companies met the criteria for the Growth Group:

 

 

As in the past, several commonalities stood out among the Insurance Group. 14 of 16 companies that describe metrics for annual bonuses use earnings (definitions of earnings varied) as a principal determinant in annual incentive compensation. The Committee believed that the Company’s focus on pretax income is consistent with that view. Only seven of the 18 put some to significant weight on attainment of individual objectives by named officers. The Compensation Committee believed that separate individual objectives for annual incentive purposes are not necessary because the direction toward internalization and improvement of functions is clear in the Company’s business plan for achieving sound, profitable growth and that plan provides specific guidance to executive officers as to the steps in achieving its goals. Two of the 18 companies

specifically include underwriting results in the bonus formula and three others include underwriting results when setting targets for incentive compensation. The Compensation Committee believed that the requirements for developing the Company’s capabilities in not just underwriting but also claim processing, reinsurance, investment and dealer networks are sufficiently clear prerequisites to sound, profitable growth that separate measures would not be appropriate.

 

With respect to long-term compensation, 15 of the 18 comparable companies in the Insurance Group award time-vested options and/or restricted stock from time to time as long-term incentives. This is consistent with the Company’s past practices. However, it should be noted that the Chief Executive Officer and the Chief Operating Officer accepted restricted stock in lieu of cash compensation in some years and not as separate long-term compensation awards.

 

The compensation consultant’s survey of the Insurance Group indicates that the compensation of the Chief Executive Officer and the Chief Operating Officer was at or above the 90th percentile for the Insurance Group. However, the performance of the Company for the same period defined the 100th percentile for the Insurance Group in five-year net revenue growth and five-year total shareholder return. The Committee also noted that the Company’s net margin was in the second quartile for 2010 and in the first quartile over the last five years in the Insurance Group notwithstanding the relatively conservative reinsurance and investment practices of the Company and the challenging Florida insurance market due to, among other things, state-mandated premium reductions, wind mitigation credits and claims settlement environment. The Compensation Committee believed this net margin result reflects not only the efficiencies of the internalized processes described above but also the development of effective strategies for the Florida market while pursuing geographic diversification.

 

The Growth Group represents the attempt by the Compensation Committee to review the compensation practices of companies that have sustained high levels of growth over a multi-year period. Because the members of the Growth Group come from diverse industries, comparisons of specific skill sets based on industry knowledge are not appropriate. However, this group does indicate how other companies that have been successful in growing their business compensate their senior executives. The compensation consultant’s survey of the Growth Group indicates that total cash compensation over the most recent three years for Mr. Meier and Mr. Downes was above the 60th percentile. The compensation consultant’s report indicated that the Company was substantially above the 75th percentile for the Growth Group in each important measure of longer term growth and profitability. The Compensation Committee believes these findings support the desired linkage between the compensation program and the principal business objective of sound, profitable growth.

 

More specifically, the survey indicated that:

 

 

The Committee believed this balance of very high growth and very high returns to shareholders is the performance that the Company’s compensation arrangements should reward. In this context, the Committee believed the Company’s compensation structure and formulae reinforce the Company’s plans and goals.

 

Base Salary

 

Against these groups, the base salaries of Mr. Meier and Mr. Downes are each relatively high in comparison. However, the Compensation Committee points out that the degree of difference between the Company’s base pay practices for these two individuals and those of the officers of others in the groups is justified when the duties of Messrs. Meier and Downes, as well as the requirements for dealing simultaneously

with growth, geographic diversification and Florida-specific regulatory issues are taken into account. Mr. Meier and Mr. Downes perform a broader range of functions with fewer support staff than the named individuals in the companies in the survey. This is consistent with the Company’s belief that Messrs. Meier and Downes are the entrepreneurial center of the Company’s growth and their individual involvement in the steps toward sound, profitable growth is essential. The Compensation Committee will continue to monitor whether the Company’s compensation structure continues to appropriately reward and incentivize the Company’s executive officers.

 

The principal components of compensation for the Company’s named executive officers were:

 

 

Base Salary

 

The Company pays a base salary to its named executive officers. As noted above, pursuant to employment agreements entered into between the Company and each of the Chief Executive Officer and Chief Operating Officer, each such executive receives an annual base salary that automatically increases twenty percent (20%) each year. The Compensation Committee from time to time reviews the base salaries the Company pays its named executive officers. In doing so, it considers a number of factors, including the individual performance of the executive.

 

Bonus Compensation

 

As noted above, the Company’s Chief Executive Officer and the Company’s Chief Operating Officer also receive an annual performance bonus equal to a percentage of the pretax income of the Company. The Company has used this approach to compensate these executives because the Company believed that successful performance by management would be the primary driver of the Company’s pretax income and that management should have significant portions of compensation at risk for achieving market-oriented results. Mr. Lynch, the Company’s Chief Financial Officer until September 30, 2010, pursuant to his employment agreement in effect prior to September 30, 2010, is entitled to an annual performance bonus determined at the discretion of the Board of Directors of the Company; provided, however, that such bonus shall be no less than $50,000. Mr. De Heer, the Company’s Chief Financial Officer effective October 1, 2010, is entitled to an annual performance bonus determined at the discretion of the Company. The Compensation Committee also has the discretion to increase a bonus beyond the compensation contained in an executive’s employment agreement.

 

Long-term Equity Incentive Compensation and Equity Compensation Plan Information

 

The Compensation Committee does not use a specific formula to calculate the number of options or shares awarded to executives. The Compensation Committee does not explicitly set future award levels or opportunities on the basis of what the executives earned from prior awards. While the Compensation Committee takes past awards into account, it does not base future awards solely in view of those past awards. In determining the specific amounts to be granted to each employee, the Compensation Committee will take into account factors such as the executive’s position, his or her contribution to the Company’s performance and the overall package of cash and equity compensation for the executive.

 

On October 13, 2009, the Company’s Board of Directors approved, and recommended that the Company’s shareholders approve, the Incentive Plan. On November 16, 2009, the Company’s shareholders approved the Incentive Plan by written consent. Awards under the Incentive Plan may include incentive stock options, nonqualified stock options, stock appreciation rights, restricted shares of Common Stock, restricted stock units, performance share or unit awards, other stock-based awards and cash-based incentive awards. Awards under

the Incentive Plan may be granted to employees, directors, consultants or other persons providing services to the Company or its affiliates. The Incentive Plan shall have a term of ten years expiring on November 16, 2019.

 

Perquisites and Fringe Benefits

 

The Company’s executive officers receive health and welfare benefits, such as group medical, group life and long-term disability coverage. The Company provides an automobile allowance of $7,500 per annum to each of Mr. Meier, Mr. Downes, and Mr. De Heer. As of December 31, 2010, the Company believed that its executives should be able to provide for their retirement needs from the total annual compensation they earn based on the Company’s performance. Accordingly, other than an employer matching contribution to the accounts of the named officers under the Company’s 401(k) Plan, which is the same matching contribution rate that the Company provides all of its eligible full time employees, the Company does not offer its executives any qualified or nonqualified pension plans, supplemental executive retirement plans, deferred compensation plans or other forms of compensation for retirement.

 

Employment Agreements

 

The Company entered into employment agreements with the following executive officers: Bradley I. Meier, the Company’s Chief Executive Officer; Sean P. Downes, the Company’s Chief Operating Officer; James M. Lynch, the Company’s Chief Financial Officer until September 30, 2010; and George R. De Heer, the Company’s Chief Financial Officer effective October 1, 2010. These agreements and potential post-employment payments are described in “Employment Agreements and Potential Payments Upon Termination of Employment” below.

 

Tax Considerations

 

Under Section 162(m) of the Internal Revenue Code of 1986, as amended (“Code”), the federal income tax deductibility of compensation paid to Mr. Meier and Mr. Downes may be limited to the extent that it exceeds $1.0 million in any one year. The Company can deduct compensation in excess of that amount if it qualifies as “performance-based compensation” under Section 162(m). For the cash performance bonuses of Messrs. Meier and Downes to qualify as “performance-based compensation,” the performance-based formulas used to determine them must be approved by the Company’s shareholders. The performance-based formulas set forth in the employment agreements of Messrs. Meier and Downes were approved by the shareholders of the Company in May 2007, thereby permitting the Company to receive a federal income tax deduction for the payment of this performance-based compensation. In 2010, Mr. Meier received $674,596 in compensation under his employment agreement (described below) that was in excess of the limitation on federal income tax deductibility and was not performance-based compensation. Therefore, this amount cannot be deducted by the Company for federal income tax purposes on its 2010 return. The Compensation Committee believed the amount to have been appropriate compensation for Mr. Meier’s services. In 2010, Mr. Downes received $1,512,520 in compensation under his employment agreement (described below) that was in excess of the limitation on federal income tax deductibility and was not performance-based compensation. Therefore, this amount cannot be deducted by the Company for federal income tax purposes on its 2010 return. The Compensation Committee believed the amount to have been appropriate compensation for Mr. Downes’ services.

 

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

 

The Compensation Committee

 

Reed J. Slogoff                    Joel M. Wilentz, M.D.

 

The following table sets forth the compensation paid to or earned by the Company’s named executive officers during each of the Company’s last three fiscal years.

 

 

 

 

Salary

 

Salary includes wages, paid time off such as vacation, and company holidays.

 

Bonus

 

Per his employment agreement in effect prior to September 30, 2010, Mr. Lynch is entitled to an annual performance bonus determined at the discretion of the Board; provided, however, that such bonus shall be no less than $50,000.

 

Non-Equity Incentive Plan Stock Awards

 

Effective December 5, 2008, the Company issued 300,000 shares of restricted common stock at a price of $2.31 per share to Sean Downes, Senior Vice President, Chief Operating Officer and director, in consideration for services rendered pursuant to terms of an employment agreement and to provide to Mr. Downes with a

continued incentive to share in the success of the Company. The stock vests over a two-year period as follows: 150,000 shares each on the first and second anniversary dates of the effective date of the award.

 

Option Awards

 

Option awards are reported at grant date fair value.

 

Non-Equity Incentive Plan Compensation

 

Per Mr. Meier’s employment agreement, Mr. Meier is entitled to an annual performance bonus equal to three percent (3%) of the pretax income of the Company up to $5 million and four percent (4%) of the pretax income of the Company in excess of $5 million. Per Mr. Downes’ employment agreement, he is entitled to an annual performance bonus equal to three percent (3%) of the pretax profits of the Company.

 

All Other Compensation

 

All other compensation for the year ended December 31, 2010 consisted of the following:

 

 

 

 

The following table sets forth certain information with respect to grants of executive compensation plan-based awards to the Company’s named executive officers during fiscal year ended December 31, 2010.

 

 

The following table sets forth certain information with respect to the Company’s named executive officers concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2010.

 

 

 

 

The following table sets forth certain information with respect to the Company’s named executive officers concerning options exercised and stock vested during the calendar year 2010.

 

 

The Company does not provide any of its employees with a defined benefit pension plan.

 

Effective January 1, 2009, the Company adopted the “Universal Property & Casualty 401(K) Profit Sharing Plan and Trust” (“401(k) Plan”). The Company makes a matching contribution in cash to the accounts of the participants equal to 100% of the employee’s deferral up to 5% of that employee’s compensation subject to limitations of the plan.

 

Prior to January 1, 2009, the Company made matching contributions to all employees, including the named executive officers, except for Mr. Meier. The Company made matching contributions in cash of 100% of the employees’ elective deferral contributions up to 3.0% of the employees’ pay for those employees who contributed to the Company’s Simple IRA plan in 2008, subject to limitations of the plan.

 

The Company does not provide any of the Company’s employees with any nonqualified deferred compensation plans.

 

The following summaries describe the employment agreements between the Company and its named executive officers and set forth potential payments payable to the Company’s named executive officers upon termination of employment or a change in control under their current employment agreements.

 

Meier Employment Agreement

 

The Company’s employment agreement with Mr. Meier is dated as of August 11, 1999. The Company and Mr. Meier have amended the employment agreement, with the most recent amendment effective as of December 6, 2010 (the employment agreement and the amendments are collectively referred to as the “Meier Employment Agreement”). Under the terms of the Meier Employment Agreement, Mr. Meier will serve as the Company’s President and Chief Executive Officer. Mr. Meier received a base salary of $1,663,713 in 2010, and he is entitled to a twenty percent (20%) increase in base salary each year. Additionally, pursuant to the Meier Employment Agreement, Mr. Meier is entitled to an annual performance bonus equal to three percent (3%) of the pretax income of the Company up to $5 million, and four percent (4%) of the pretax income of the Company in excess of $5 million; provided, however, that any such bonus is contingent upon the Company’s shareholders approving such bonus formula, which they have done.

 

Mr. Meier is also eligible to receive health and welfare benefits, such as group medical, group life and long-term disability coverage. The Meier Employment Agreement contains noncompete and nondisclosure provisions.

In the event that the Company terminates the Meier Employment Agreement, the Company shall pay Mr. Meier 24 months total compensation. In addition, in the event of a change in control of the Company, the Company shall pay Mr. Meier an amount equal to 48 months base salary, plus two times any bonus paid for the preceding fiscal year, including any taxes resulting from such payment in accordance with applicable U.S. tax laws. Further, in the event of a change in control, all options held by Mr. Meier vest and become immediately exercisable. For the purposes of the Meier Employment Agreement, a change in control shall be deemed to have occurred if, at any time, substantially all the assets of the Company shall have been sold or transferred by sale, merger or otherwise, or if any person becomes the beneficial owner, directly or indirectly, of securities of the company representing fifty percent (50%) or more of the combined voting power of the then-existing outstanding securities of the Company.

 

If Mr. Meier dies during the term of his employment, the Company shall pay to his estate compensation which would otherwise be payable to Mr. Meier for the shorter of (i) three (3) years from the date of his death, or (ii) through to the termination date of his employment agreement. If Mr. Meier becomes disabled during the term of his employment for a consecutive period of three hundred sixty five (365) days, the Company may terminate the officership held. In the event of such termination, Mr. Meier shall remain an employee of the Company and receive seventy (70%) percent of his compensation and all of his fringe benefits.

 

The Meier Employment Agreement expires on December 31, 2013; however, the agreement is automatically extended each year thereafter unless the Company or Mr. Meier provides written notice that the agreement is being terminated 60 days in advance of the anniversary date of the Meier Employment Agreement.

 

Downes Employment Agreement

 

The Company’s employment agreement with Mr. Downes is dated as of January 1, 2005, and provides that Mr. Downes will serve as Chief Operating Officer and Senior Vice President of the Company. The Company and Mr. Downes have amended the employment agreement, with the most recent amendment dated February 4, 2010 (the employment agreement and the amendments are collectively referred to as the “Downes Employment Agreement”). Mr. Downes received a base salary of $1,174,376 in 2010, and he is entitled to a twenty percent (20%) increase in base salary each year. Additionally, pursuant to the Downes Employment Agreement, Mr. Downes is entitled to an annual performance bonus equal to three percent (3%) of the pretax profits of the Company; provided, however, that any such bonus is contingent upon the Company’s shareholders approving such bonus formula, which they have done. Under the Downes Employment Agreement, the Company may grant Mr. Downes options or warrants to purchase the Company’s Common Stock.

 

Mr. Downes is also eligible to receive health and welfare benefits, such as group medical, group life and long-term disability coverage. The Downes Employment Agreement contains noncompete and nondisclosure provisions.

 

In the event of a change in control of the Company, the Company shall pay Mr. Downes an amount equal to 48 months base salary, plus an amount equal two times any bonuses paid for the preceding fiscal year. Also, effective January 1, 2009, if a change in control occurs, the Company shall pay Mr. Downes an amount equal to 2.99 times Mr. Downes’ “base amount,” as defined in Section 280G(b)(3) of Code. Further, in the event of a change in control, all options held by Mr. Downes vest and become immediately exercisable. For the purposes of the Downes Employment Agreement, a change in control shall be deemed to have occurred if, at any time, substantially all the assets of the Company shall have been sold or transferred by sale, merger or otherwise, or if any person becomes the beneficial owner, directly or indirectly, of securities of the company representing fifty percent (50%) or more of the combined voting power of the then-existing outstanding securities of the Company.

 

If Mr. Downes dies during the term of his employment, the Company shall pay to his estate compensation which would otherwise be payable to Mr. Downes for the shorter of (i) one (1) years from the date of his death, or (ii) through the termination date of his employment agreement. If Mr. Downes becomes disabled

during the term of his employment for a consecutive period of ninety (90) days, the Company may terminate the officership held. In the event of such termination, Mr. Downes shall remain an employee of the Company and receive fifty (50%) percent of his compensation and all of his fringe benefits for a period ending on the next December 31st or two hundred seventy (270) days, whichever is longer.

 

The Downes Employment Agreement expires on December 31, 2013 unless extended in writing by the Company.

 

Lynch Employment Agreement

 

On September 30, 2010, following an illness, James M. Lynch resigned as Executive Vice President and Chief Financial Officer of the Company and its wholly-owned insurance subsidiaries. Upon Mr. Lynch’s resignation, the employment agreement between the Company and Mr. Lynch was terminated. Mr. Lynch received unpaid base salary accrued up to September 30, 2010, the effective date of termination and a prorated annualized bonus. No other payments were made to Mr. Lynch in connection with the termination of the employment agreement. He remains with the Company as its Director of Financial Analysis. The following summary describes the employment agreement between the Company and Mr. Lynch as in effect until the date of termination.

 

On October 11, 2006, the Company entered into an employment agreement with Mr. Lynch, who had served as the Company’s Executive Vice President and Chief Financial Officer since August 1998. The Company and Mr. Lynch have amended the employment agreement, with the most recent amendment dated September 9, 2009 (the employment agreement and the amendments are collectively referred to as the “Lynch Employment Agreement”). Mr. Lynch received a base salary of $516,477 in 2010, and he is entitled to a twenty percent (20%) increase in base salary each year. Additionally, pursuant to the Lynch Employment Agreement, Mr. Lynch is entitled to an annual performance bonus determined at the discretion of the Board of Directors of the Company; provided, however, that such bonus shall be no less than $50,000.

 

Mr. Lynch is also eligible to receive health and welfare benefits, such as group medical, group life and long-term disability coverage. The Lynch Employment Agreement contains noncompete and nondisclosure provisions.

 

If the Company terminates Mr. Lynch’s employment without cause or Mr. Lynch terminates his employment for good reason, then the Company shall (i) pay Mr. Lynch unpaid base salary accrued up to the effective date of termination; (ii) pay Mr. Lynch a prorated portion of Mr. Lynch’s annualized bonus; (iii) pay Mr. Lynch a lump sum payment equal to Mr. Lynch’s current base salary for period of twelve (12) months; and (iv) pay on Mr. Lynch’s behalf Mr. Lynch’s COBRA premiums for a period of twelve (12) months.

 

For the purposes of the Lynch Employment Agreement “cause” means (i) Mr. Lynch’s abuse of alcohol or any controlled substance; (ii) Mr. Lynch’s willful act of fraud, dishonesty or breach of fiduciary duty with respect to the business or affairs of the Company; (iii) Mr. Lynch’s knowing and material failure to comply with material applicable laws and regulations or professional standards relating to the business of the Company; (iv) Mr. Lynch’s documented and continuing grossly unsatisfactory performance of his duties (as documented in at least one performance improvement plan to Mr. Lynch) or a material breach by Mr. Lynch of the Lynch Employment Agreement except, in each case, where such failure or breach is caused by the illness or other similar incapacity or disability of Mr. Lynch; (v) Mr. Lynch being subject to an inquiry or investigation by a governmental authority or self-regulatory organization such that the existence of such inquiry or investigation may result in damage to the Company’s business interests, licenses, reputation or prospects; or (vi) Mr. Lynch’s conviction of a misdemeanor involving moral turpitude or any felony.

 

For the purposes of the Lynch Employment Agreement “good reason” shall mean and include any of the following without Mr. Lynch’s prior written consent: (i) assignment to Mr. Lynch of duties materially inconsistent with Mr. Lynch’s position under the Lynch Employment Agreement; (ii) failure to pay Mr. Lynch’s base salary or bonus; (iii) requiring Mr. Lynch to move his site of employment more than fifty (50) miles from his site of employment prior to such move; or (iv) the Company’s material breach of the Lynch Employment Agreement.

In addition, if within one year following a change in control of the Company Mr. Lynch’s employment is terminated (i) by the Company or a succeeding entity without cause or (ii) by Mr. Lynch for good reason, then the Company shall (a) pay Mr. Lynch unpaid base salary accrued up to the effective date of termination; (b) pay Mr. Lynch a prorated portion of Mr. Lynch’s annualized bonus; (c) pay Mr. Lynch a lump sum payment equal to the greater of Mr. Lynch’s current base salary (x) through December 31, 2010 or (y) for period of twelve (12) months; and (d) pay on Mr. Lynch’s behalf Mr. Lynch’s COBRA premiums for a period not to exceed eighteen (18) months. For the purposes of the Lynch Employment Agreement, a change in control shall be deemed to have occurred if, (i) there shall be consummated (a) any consolidation or merger in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company’s common stock would be converted into cash, securities or other property, other than a consolidation or a merger having the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger or (b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions other than in the ordinary course of business of the Company) of all, or substantially all, of the assets of the Company to any corporation, person or other entity which is not a direct or indirect wholly-owned subsidiary of the Company, or (ii) any person, group, corporation or other entity shall acquire beneficial ownership (as determined pursuant to Section 13(d) of the Exchange Act and rules and regulations promulgated hereunder) of 50% or more of the Company’s outstanding common stock. In all cases pursuant to the Lynch Employment Agreement, the determination of whether a change of control has occurred shall be made in accordance with Section 409A of the Code, and the regulations, notices and other guidance of general applicability issued there under.

 

If Mr. Lynch dies of natural causes during the term of his employment, the Company shall pay to his estate (i) Mr. Lynch’s unpaid base salary accrued up to the effective date of termination; and (ii) a prorated portion of Mr. Lynch’s annualized bonus. If Mr. Lynch becomes disabled during the term of his employment for (i) a period of three (3) consecutive months, or (ii) for shorter periods aggregating ninety (90) calendar days during any twelve-month period, the Company may at any time after the last day of the three (3) consecutive months of disability or the day on which the shorter periods of disability equal an aggregate of ninety days, suspend the term of Mr. Lynch’s employment and discontinue payments of his base salary for the duration of the disability. Mr. Lynch shall be entitled to the full compensation payable to him hereunder for shorter periods of disability shorter than the periods specified above.

 

De Heer Employment Agreement

 

The Company’s employment agreement with Mr. De Heer is effective as of September 30, 2010, and provides that Mr. De Heer will serve as Chief Financial Officer and Principal Accounting Officer of the Company (“De Heer Employment Agreement”). Mr. De Heer received a base salary of $241,154 in 2010. Additionally, pursuant to the De Heer Employment Agreement, Mr. De Heer is entitled to an annual performance bonus as determined by the Company in its sole discretion.

 

Mr. De Heer is eligible to participate in the Company’s benefit plans generally available to the Company’s employees in similar positions and the Company’s equity incentive plans, including the Incentive Plan, at the Company’s sole discretion. The De Heer Employment Agreement also contains noncompete and nondisclosure provisions.

 

Generally, Mr. De Heer is entitled to severance only if his employment is terminated by the Company without “cause” or if he terminates his employment for “good reason.” “Cause” is generally defined as (i) a material breach by him of his obligations or representations under the De Heer Employment Agreement, (ii) an arrest for, conviction of or plea of nolo contendere to a felony, (iii) acts of dishonesty resulting or intending to result in personal gain or enrichment at the Company’s expense, (iv) fraudulent, unlawful or grossly negligent conduct in connection with his duties under the De Heer Employment Agreement, (v) engaging in personal conduct which seriously discredits or damages the Company, (vi) contravention of the Company’s specific lawful directions or continuing inattention to or continuing failure to adequately perform the duties described in the De Heer Employment Agreement, (vii) a material breach of the Company’s manuals, written policies, codes or procedures, (viii) initiation of a regulatory inquiry, investigation or proceeding regarding his performance of duties on the Company’s behalf if independent counsel, taking into account the relevant

circumstances, concludes and advises the Company that such termination is in the best interests of the Company, or (ix) breach of any covenants set forth the De Heer Employment Agreement before termination of employment. “Good reason” is generally defined as the Company’s material breach of the De Heer Employment Agreement without Mr. De Heer’s consent.

 

In the event of a termination of employment without cause, Mr. De Heer is entitled, subject to executing a release of claims, to a lump-sum cash payment equal to base salary for a period equal to the remaining term of the De Heer Employment Agreement and a lump-sum cash payment calculated to be sufficient to reimburse out-of-pocket costs of COBRA insurance coverage for a period of up to 12 months from the date of such termination. In the event of a termination of employment for good reason, Mr. De Heer is entitled, subject to executing a release of claims, to a lump-sum cash payment equal to base salary for a period equal to the remaining term of the De Heer Employment Agreement.

 

If Mr. De Heer dies during the term of his employment, Mr. De Heer legal representatives will receive a lump-sum cash payment equal to unpaid base salary through the last day of the month in which death occurred in addition to accrued vacation and employee benefits through such period.

 

The following table presents the potential post-employment payments and payments the Company’s named executive officers would be entitled under their employment agreements and assumes that the triggering event took place on December 31, 2010.

 

 

 

 

The following table sets forth certain information with respect to all of the Company’s equity compensation plans in effect as of fiscal year ended December 31, 2010.

 

 

The following tables set forth certain information as of April 4, 2011 relating to the beneficial ownership of the Company’s Series M Preferred Stock, Series A Preferred Stock and Common Stock by (i) all persons that we know beneficially own more than 5% of the Company’s outstanding common stock, (ii) each of our named executive officers and directors, and (iii) all of our executive officers and directors as a group. Knowledge of the beneficial ownership of the Company’s common stock is drawn from statements filed with the SEC pursuant to Section 13(d) or 13(g) of the Exchange Act. Except as otherwise indicated, to our knowledge, each shareholder listed below has sole voting and investment power with respect to the shares beneficially owned by the shareholder.

 

As of April 4, 2011, directors and named executive officers, individually and as a group, beneficially owned Series M Preferred Stock as follows:

 

 

 

 

As of April 4, 2011, 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:

 

 

 

 

As of April 4, 2011, directors and named executive officers, individually and as a group, beneficially owned Series A Preferred Stock as follows:

 

 

 

 

As of April 4, 2011, 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:

 

 

 

 

As of April 4, 2011, directors and Named Executive Officers, individually and as a group, beneficially owned Common Stock as follows:

 

 

 

 

 

As of April 4, 2011, there are no persons, other than those persons listed immediately above, who are known by the Company who beneficially own or exercise voting or dispositive control over 5% or more of the Company’s outstanding Common Stock.

 

The Company currently maintains the 2009 Omnibus Incentive Plan, which was adopted and approved by our shareholders in 2009 (“Incentive Plan”). As of the record date for the 2011 Annual Meeting of Shareholders, there were no shares available for new grants under the Incentive Plan. The Board believes that the use of equity-based compensation is a vital factor in attracting and retaining effective and valuable personnel who contribute to the Company’s growth and success and in establishing a direct link between the financial interests of such individuals and the Company’s shareholders. The Compensation Committee reviewed the Incentive Plan to determine whether it remains a flexible and effective source of incentive compensation in terms of the number of shares of stock available for awards and in terms of its design, as well as whether it generally conforms with best practices in today’s business environment.

 

Based on its review, the Compensation Committee recommended that the Incentive Plan be amended and restated to:

 

 

The Board has approved, and recommends that the Company’s shareholders approve, the amendment and restatement of the Incentive Plan as described herein (“Restated Plan”). Other than as described above, the Restated Plan continues to provide essentially the same substantive terms and provisions as the Incentive Plan. Shareholder approval of the Restated Plan is required to comply with the provisions of Section 162(m) of the Code and to meet the listing requirements of the NYSE Amex. If the Restated Plan is not approved by the Company’s shareholders, the Incentive Plan as approved in 2009 will remain in effect according to its terms.

 

The material features of the Restated Plan as amended are summarized below. The summary is qualified in its entirety by reference to the specific provisions of the Restated Plan, which is attached as Appendix A to this Proxy Statement.

 

The Restated Plan will be administered by the Compensation Committee. The Compensation Committee has the authority to determine, within the limits of the express provisions of the Restated Plan, the individuals to whom awards will be granted, the nature, amount and terms of such awards and the objectives and

conditions for earning such awards. The Compensation Committee generally has discretion to delegate its authority under the Restated Plan to another committee of the Board or a subcommittee, or to such other party or parties, including officers of the Company, as the Compensation Committee deems appropriate.

 

Awards under the Restated Plan may include incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted shares of Common Stock, restricted stock units, performance share or unit awards, other stock-based awards and cash-based incentive awards.

 

Stock Options.  The Compensation Committee may grant to a participant options to purchase Common Stock that qualify as incentive stock options for purposes of Section 422 of the Code (“incentive stock options”), options that do not qualify as incentive stock options (“non-qualified stock options”) or a combination thereof. The terms and conditions of stock option grants, including the quantity, price, vesting periods, and other conditions on exercise will be determined by the Compensation Committee.

 

The exercise price for stock options will be determined by the Compensation Committee in its discretion; provided, however, that in no event may the exercise price be less than 100% of the fair market value of one share of the Common Stock on the date when the stock option is granted. Additionally, in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of stock of the Company on the date of grant, the exercise price may not be less than 110% of the fair market value of one share of Common Stock on the date the stock option is granted. On April 6, 2011, the market price per share of the Common Stock was $5.60 based on the closing price of the Common Stock on the NYSE Amex on such date.

 

Stock options must be exercised within a period fixed by the Compensation Committee that may not exceed ten years from the date of grant, except that in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of stock of the Company on the date of grant, the exercise period may not exceed five years. The Restated Plan provides for earlier termination of stock options upon the participant’s termination of service, unless extended by the Compensation Committee, but in no event may the options be exercised after the scheduled expiration date of the options.

 

At the Compensation Committee’s discretion, payment of the exercise price for shares of Common Stock on the exercise of stock options may be made in cash, shares of the Common Stock held by the participant or in any other form of consideration acceptable to the Compensation Committee (including one or more forms of “cashless” or “net” exercise).

 

Stock Appreciation Rights.  The Compensation Committee may grant to a participant an award of SARs, which entitles the participant to receive, upon its exercise, a payment equal to (i) the excess of the fair market value of a share of Common Stock on the exercise date over the SAR exercise price, times (ii) the number of shares of Common Stock with respect to which the SAR is exercised.

 

The exercise price for a SAR will be determined by the Compensation Committee in its discretion, but may not be less than 100% of the fair market value of one share of the Common Stock on the date when the SAR is granted. Upon exercise of a SAR, payment may be made in cash, shares of the Common Stock or a combination of cash and shares. SARs must be exercised within a period fixed by the Compensation Committee that may not exceed ten years from the date of grant.

 

Restricted Shares and Restricted Units.  The Compensation Committee may award to a participant shares of Common Stock subject to specified restrictions (“restricted shares”). Restricted shares are subject to forfeiture if the participant does not meet certain conditions such as continued employment over a specified forfeiture period and/or the attainment of specified performance targets over the forfeiture period.

 

The Compensation Committee also may award to a participant units representing the right to receive shares of Common Stock in the future subject to the achievement of one or more goals relating to the completion of service by the participant and/or the achievement of performance or other objectives (“restricted

units”). The terms and conditions of restricted share and restricted unit awards are determined by the Compensation Committee.

 

For participants who are subject to Section 162(m) of the Code, the performance targets described in the preceding two paragraphs may be established by the Compensation Committee, in its discretion, based on one or more of the following measures (“Performance Goals”):

 

 

The Performance Goals may be measured with respect to the Company or any one or more of its subsidiaries, divisions or affiliates, either in absolute terms, as compared to another company or companies or an index established or designated by the Compensation Committee, or subject to such objective adjustment factors established by the Compensation Committee at the time the award is granted. The above terms will have the same meaning as in the Company’s financial statements, or if the terms are not used in the Company’s financial statements, as applied pursuant to generally accepted accounting principles, or as used in the industry, as applicable.

 

Performance Awards.  The Compensation Committee may grant performance awards to participants under such terms and conditions as the Compensation Committee deems appropriate. A performance award entitles a participant to receive a payment from the Company, the amount of which is based upon the attainment of predetermined performance targets over a specified award period. Performance awards may be paid in cash, shares of Common Stock or a combination thereof, as determined by the Compensation Committee.

 

Award periods will be established at the discretion of the Compensation Committee. The performance targets will also be determined by the Compensation Committee. With respect to participants subject to Section 162(m) of the Code, the applicable performance targets will be established, in the Compensation Committee’s discretion, based on one or more of the Performance Goals described under the section titled “Restricted Shares and Restricted Units” above. To the extent that a participant is not subject to Section 162(m) of the Code, when circumstances occur that cause predetermined performance targets to be an inappropriate measure of achievement, the Compensation Committee, at its discretion, may adjust the performance targets or the amount or value of the performance award.

 

Other Stock-Based Awards.  The Compensation Committee may grant equity-based or equity-related awards, referred to as “other stock-based awards,” other than options, SARs, restricted shares, restricted units, or performance awards. The terms and conditions of each other stock-based award will be determined by the

Compensation Committee. Payment under any other stock-based awards will be made in Common Stock or cash, as determined by the Compensation Committee.

 

Cash-Based Awards.  The Compensation Committee may grant cash-based incentive compensation awards, which would include performance-based annual cash incentive compensation to be paid to covered employees subject to Section 162(m) of the Code. The terms and conditions of each cash-based award will be determined by the Compensation Committee. The following material terms will be applicable to performance-based cash awards granted to covered executives subject to Section 162(m):

 

 

Dividend Equivalents.  The Compensation Committee may provide for the payment of dividends or dividend equivalents with respect to any shares of Common Stock subject to an award under the Restated Plan.

 

The Compensation Committee may grant awards to any employee, director, consultant or other person providing services to the Company or its affiliates. It is presently contemplated that approximately 260 persons will be eligible to receive awards.

 

The maximum awards that can be granted under the Restated Plan to a single participant in any calendar year will be subject to the following limits:

 

 

The future amounts that will be received by participants under the amended Restated Plan are not determinable. The stock awards granted to the Company’s named executive officers under the Restated Plan and outstanding as of December 31, 2010 are set forth in the Outstanding Equity Awards at Fiscal Year-End Table found under “Executive and Director Compensation.” As of April 4, 2011, (i) the Company’s executive officers as a group (three officers) held outstanding stock option grants for 1,125,000 shares and restricted stock grants for 300,000 shares, (ii) the Company’s non-employee directors as a group (five directors) held

outstanding stock option grants for 225,000 shares, and (iii) all of our employees other than our executive officers (8 employees) held outstanding stock option grants for 315,000 shares.

 

As amended, an aggregate of 4,200,000 shares of the Common Stock has been reserved for issuance under the Restated Plan and 2,235,000 shares of Common Stock are available for awards under the Restated Plan. The shares to be offered under the Restated Plan shall be authorized and unissued Common Stock or issued Common Stock that has been reacquired by the Company.

 

With respect to awards made under the Restated Plan, shares of Common Stock underlying awards that are forfeited or canceled (as a result, for example, of the lapse of an option or a forfeiture of restricted stock), as well as any shares surrendered to or withheld by the Company in payment or satisfaction of the exercise price of a stock option or tax withholding obligation with respect to an award, will be available for additional grants under the Restated Plan. Shares issued with respect to awards assumed by the Company in connection with acquisitions do not count against the total number of shares available for new awards under the Restated Plan.

 

In the event of any corporate event or transaction that results in a change in the capital structure of the Company, including a change resulting from a stock dividend or stock split, or combination or reclassification of shares, the Compensation Committee is empowered to make such equitable adjustments with respect to awards or any provisions of the Restated Plan as it deems necessary and appropriate, including, if necessary, any adjustments in the maximum number of shares of Common Stock subject to the Restated Plan, the number of shares of Common Stock subject to and the exercise price of an outstanding award, or the maximum number of shares that may be subject to one or more awards granted to any one recipient during a calendar year.

 

The Board may at any time amend or terminate the Restated Plan, provided that no such action may be taken that adversely affects any rights or obligations with respect to any awards theretofore made under the Restated Plan without the consent of the recipient. Notwithstanding the foregoing, an outstanding option or SAR may not be (i) amended to reduce its exercise price or (ii) terminated and replaced with a substitute award if the effect of such termination and substitution is to reduce the exercise price, without the approval of the Company’s shareholders. No awards may be made under the Restated Plan after the tenth anniversary of its effective date. Certain provisions of the Restated Plan relating to performance-based awards under Section 162(m) of the Code will expire on the fifth anniversary of the effective date.

 

The federal income tax consequences of the issuance and exercise of awards under the Restated Plan are as described below. The following information is only a summary of the tax consequences of the awards, and participants should consult with their own tax advisors with respect to the tax consequences inherent in the ownership or exercise of the awards, and the ownership and disposition of any underlying securities.

 

Incentive Stock Options.  A participant who is granted an incentive stock option will not recognize any taxable income for federal income tax purposes either on the grant or exercise of the incentive stock option. If the participant disposes of the shares purchased pursuant to the incentive stock option more than two years after the date of grant and more than one year after the exercise of the option (required statutory “holding period”), (i) the participant will recognize long-term capital gain or loss, as the case may be, equal to the difference between the selling price and the option price; and (ii) the Company will not be entitled to a deduction with respect to the shares of stock so issued. If the holding period requirements are not met, any gain realized upon disposition will be taxed as ordinary income to the extent of the excess of the lesser of (a) the excess of the fair market value of the shares at the time of exercise over the option price, and (b) the

gain on the sale. Also in that case, the Company will be entitled to a deduction in the year of disposition in an amount equal to the ordinary income recognized by the participant. Any additional gain will be taxed as short-term or long-term capital gain depending upon the holding period for the stock. A sale for less than the option price results in a capital loss.

 

The excess of the fair market value of the shares on the date of exercise over the option price is, however, includable in the option holder’s income for alternative minimum tax purposes.

 

Nonqualified Stock Options.  A participant who is granted a nonqualified stock option under the Restated Plan will not recognize any income for federal income tax purposes on the grant of the option. Generally, on the exercise of the option, the participant will recognize taxable ordinary income equal to the excess of the fair market value of the shares on the exercise date over the option price for the shares. The Company generally will be entitled to a deduction on the date of exercise in an amount equal to the ordinary income recognized by the participant. Upon disposition of the shares purchased pursuant to the stock option, the participant will recognize long-term or short-term capital gain or loss, as the case may be, equal to the difference between the amount realized on such disposition and the basis for such shares, which basis includes the amount previously recognized by the participant as ordinary income.

 

Stock Appreciation Rights.  A participant who is granted stock appreciation rights will normally not recognize any taxable income on the receipt of the SARs. Upon the exercise of a SAR, (i) the participant will recognize ordinary income equal to the amount received (increase in the fair market value of one share of the Common Stock from the date of grant of the SAR to the date of exercise); and (ii) the Company will be entitled to a deduction on the date of exercise in an amount equal to the ordinary income recognized by the participant.

 

Restricted Shares.  A participant will not be taxed at the date of an award of restricted shares, but will be taxed at ordinary income rates on the fair market value of any restricted shares as of the date that the restrictions lapse, unless the participant, within 30 days after transfer of such restricted shares to the participant, elects under Section 83(b) of the Code to include in income the fair market value of the restricted shares as of the date of such transfer. The Company will be entitled to a corresponding deduction. Any disposition of shares after restrictions lapse will be subject to the regular rules governing long-term and short-term capital gains and losses, with the basis for this purpose equal to the fair market value of the shares at the end of the restricted period (or on the date of the transfer of the restricted shares, if the employee elects to be taxed on the fair market value upon such transfer). To the extent dividends are payable during the restricted period under the applicable award agreement, any such dividends will be taxable to the participant at ordinary income tax rates and will be deductible by the Company unless the participant has elected to be taxed on the fair market value of the restricted shares upon transfer, in which case they will thereafter be taxable to the employee as dividends and will not be deductible by the Company.

 

Restricted Units.  A participant will normally not recognize taxable income upon an award of restricted units, and the Company will not be entitled to a deduction until the lapse of the applicable restrictions. Upon the lapse of the restrictions and the issuance of the earned shares, the participant will recognize ordinary taxable income in an amount equal to the fair market value of the Common Stock received and the Company will be entitled to a deduction in the same amount.

 

Performance Awards, Other Stock-Based Awards and Cash-Based Awards.  Normally, a participant will not recognize taxable income upon the grant of performance awards, other stock-based awards and cash-based awards. Subsequently, when the conditions and requirements of the grants have been satisfied and the payment determined, any cash received and the fair market value of any Common Stock received will constitute ordinary income to the participant. The Company also will then be entitled to a deduction in the same amount.

 

Tax Deductibility of Certain Performance-Based Awards under the Restated Plan.  Section 162(m) of the Code limits the deductibility for federal income tax purposes of certain compensation paid to any “covered employee” in excess of $1 million. For purposes of Section 162(m), the term “covered employee” includes the Company’s Chief Executive Officer and the three other most highly compensated executive officers who are required to be disclosed in the Company’s proxy statement as a “named executive officer” based on the

amount of their total compensation. Certain compensation, including compensation paid based on the achievement of pre-established performance goals, is excluded from this deduction limit if the material terms under which the compensation is to be paid, including the performance goals to be used, are approved by our shareholders. Accordingly, in order to maintain the Company’s ability to fully deduct certain incentive compensation paid pursuant to the Restated Plan, approval of the Restated Plan will qualify as approval of the material terms, including the Performance Goals discussed in the section titled “Restricted Shares and Restricted Units” above, under which qualifying performance-based compensation is to be paid.

 

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE INCENTIVE PLAN, INCLUDING THE MATERIAL TERMS OF THE PERFORMANCE GOALS STATED THEREIN.

 

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) enables the Company’s shareholders to vote to approve, on an advisory (nonbinding) basis, the compensation of the Company’s named executive officers as disclosed in this Proxy Statement in accordance with Item 402 of Regulation S-K promulgated under the Securities Act.

 

As described in detail under the heading “Executive Compensation — Compensation Discussion and Analysis,” the Company’s executive compensation program is designed to provide compensation to retain the executive talent that has been central to the Company’s consistent and high-level growth and to offer incentive-based programs to challenge executives to increase pretax income by balancing the essential elements of the business without imprudent risk. The Company believes the focus on sound, profitable growth best serves the interests of its shareholders. Please read the “Compensation Discussion and Analysis” beginning on page 12 for additional details about the Company’s executive compensation programs, including information about the fiscal year 2010 compensation of the Company’s named executive officers.

 

Highlights of the Company’s executive compensation programs include the following:

 

 

The Compensation Committee reviews the compensation programs for the Company’s named executive officers to ensure they achieve the desired goal of directing management toward sound, profitable growth and recognizing the Company’s growth over time. We are asking the Company’s shareholders to indicate their support for the Company’s named executive officer compensation as described in this Proxy Statement. This proposal, commonly known as a “say-on-pay” proposal, gives the Company’s shareholders the opportunity to express their views on the Company’s named executive officers’ compensation. This vote is not intended to address any specific item of compensation, but rather the overall compensation of the Company’s named executive officers and the philosophy, policies and practices described in this Proxy Statement. Accordingly, we will ask the Company’s shareholders to vote “FOR” the following resolution at the Annual Meeting:

 

“RESOLVED, that the Company’s shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the Company’s Proxy Statement for the 2011 Annual Meeting of Shareholders pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the 2010 Summary Compensation Table and the other related tables and narrative disclosure.”

 

The say-on-pay vote is advisory, and therefore not binding on the Company, the Compensation Committee or the Board. The Board and Compensation Committee value the opinions of the Company’s shareholders and to the extent there is any significant vote against the named executive officer compensation as disclosed in this Proxy Statement, the Company will consider shareholders’ concerns and the Compensation Committee will evaluate whether any actions are necessary to address those concerns.

 

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT PURSUANT TO ITEM 402 OF REGULATION S-K.

 

 

The Dodd-Frank Act also enables the Company’s shareholders to indicate how frequently the Company should seek an advisory vote on the compensation of the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, such as Proposal 3 included on page 37 of this Proxy Statement. By voting on this Proposal 4, shareholders may indicate whether they would prefer an advisory vote on named executive officer compensation once every year, every two years or every three years.

 

After careful consideration of this proposal, the Company’s Board of Directors has determined that an advisory vote on executive compensation that occurs every three years is the most appropriate alternative for the Company at this time, and therefore the Board recommends that you vote for a three-year interval for the advisory vote on executive compensation.

 

In formulating its recommendation, the Board considered that the Company’s executive compensation policies are designed to promote a long-term connection between pay and performance and an advisory vote on executive compensation every three years will allow the Company’s shareholders to provide direct input on the Company’s long-term compensation philosophy, policies and practices. The Company understands that shareholders may have different views as to what is the best approach for the Company and looks forward to hearing from shareholders on this proposal.

 

You may cast your vote on your preferred voting frequency by choosing the option of one year, two years, three years or abstain from voting when you vote in response to the resolution set forth below.

 

“RESOLVED, that the option of once every one year, two years, or three years that receives the highest number of votes cast for this resolution will be determined to be the preferred frequency with which the Company is to hold a shareholder vote to approve the compensation of the named executive officers, as disclosed pursuant to Item 402 of

Regulation S-K (which disclosure shall include the Compensation Discussion and Analysis, the Summary Compensation Table, and the other related tables and narrative disclosure).”

 

The option of one year, two years or three years that receives the highest number of votes cast by shareholders will be the frequency for the advisory vote on executive compensation that has been selected by shareholders. Shareholders are not voting to approve or disapprove of the Board’s recommendation. Because this vote is advisory and not binding on the Board of Directors or the Company in any way, the Board may decide that it is in the best interests of the Company’s shareholders and the Company to hold an advisory vote on executive compensation more or less frequently than the option approved by the Company’s shareholders and may vary its practice based on factors such as discussions with shareholders and the adoption of material changes to the Company’s compensation programs.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE OPTION OF ONCE EVERY THREE YEARS AS THE FREQUENCY WITH WHICH SHAREHOLDERS ARE PROVIDED AN ADVISORY VOTE ON EXECUTIVE COMPENSATION, AS DISCLOSED PURSUANT TO ITEM 402 OF REGULATION S-K.

 

The Audit Committee recommended and the Board approved the appointment of the accounting firm Blackman Kallick, LLP as the Company’s independent registered public accounting firm for the fiscal year 2011, subject to shareholder ratification. Blackman Kallick, LLP audited the Company’s financial statements for the fiscal years ended December 31, 2004, 2005, 2006, 2007, 2008, 2009 and 2010.

 

Audit fees paid to Blackman Kallick, LLP for the fiscal years ended December 31, 2010 and December 31, 2009 were $560,500 and $529,000, respectively.

 

There were no audit related fees paid to Blackman Kallick, LLP for the fiscal years ended December 31, 2010 and December 31, 2009, respectively.

 

Tax fees paid to Blackman Kallick, LLP for the fiscal years ended December 31, 2010 and December 31, 2009 were $49,500 and $43,500, respectively.

 

There were no other fees for products and services provided by Blackman Kallick, LLP for the fiscal years ended December 31, 2010 and December 31, 2009.

 

All audit related services must be pre-approved by the Audit Committee, which concluded that the provision of such services by Blackman Kallick, LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The Board has appointed Blackman Kallick, LLP to

serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2011. Representatives of Blackman Kallick, LLP have been invited to the Annual Meeting.

 

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF BLACKMAN KALLICK, LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2011.