UNIVERSAL AMERICAN FINANCIAL CORP.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 17, 1999
To the Stockholders of
UNIVERSAL AMERICAN FINANCIAL CORP.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
UNIVERSAL AMERICAN FINANCIAL CORP. will be held at The Penn Club, 30 West 44th
Street, New York, New York 10036, at 9:30 A.M. on November 17, 1999, or at any
adjournment thereof (the "Annual Meeting"), for the following purposes:
1. To elect nine directors to hold office until the next
annual election of directors or until their successors are
elected and qualified.
2. To consider and act upon such other business as may properly
come before the meeting or any adjournment thereof.
Only stockholders of record at the close of business on October 6,
1999 will be entitled to vote at the Annual Meeting.
IF YOU DO NOT EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY IN ORDER THAT YOUR SHARES MAY BE VOTED FOR YOU AS SPECIFIED.
By order of the board of directors
JOAN M. FERRARONE
Secretary
Dated: October 26, 1999
Rye Brook, New York
UNIVERSAL AMERICAN FINANCIAL CORP.
6 International Drive
Rye Brook, New York 10573-1068
------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 17, 1999
------------------
The Annual Meeting of Stockholders of UNIVERSAL AMERICAN FINANCIAL
CORP. (the "Company") will be held at The Penn Club, 30 West 44th Street, New
York, New York 10036, at 9:30 A.M. on November 17, 1999 for the purposes set
forth in the accompanying Notice of Annual Meeting of Stockholders. This
statement is furnished in connection with the solicitation by the Company of
proxies to be used at the Annual Meeting or at any and all adjournments of such
meeting.
If a proxy in the accompanying form is duly executed and returned, the
shares represented by such proxy will be voted as specified. Any person
executing the proxy may revoke it prior to its exercise either by letter
directed to the Company at its principal executive office, 6 International
Drive, Rye Brook, New York 10573 or in person at the Annual Meeting. The
approximate date on which this Proxy Statement and the accompanying proxy first
will be sent or given to stockholders is October 26, 1999.
Voting Rights
On October 6, 1999 (the "Record Date"), the Company had outstanding one
class of voting securities, namely 43,101,304 shares of common stock, $.01 par
value. Holders of the common stock are entitled to one vote for each share
registered in their names at the close of business on the Record Date.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 6,
1999 as to the number of shares of common stock beneficially owned by (i) each
person known by the Company to own beneficially more than 5% of the Company's
common stock ("5% Holder"), (ii) each person who is a director of the Company or
a nominee for election as such director, and (iii) all persons as a group who
are directors or a nominee for election as such director and officers of the
Company, and as to the percentage of outstanding shares held by them on that
date. Unless otherwise indicated, each such beneficial owner holds the sole
voting and investment power with respect to shares of common stock outstanding.
The Company's common stock is the only class of voting securities outstanding.
<TABLE>
Beneficial Percent
Name and Address of Beneficial Owner Status Ownership (a) of Class
- ---------------------------------------------- ------------- ------------------ -----------
<S> <C> <C> <C>
Capital Z Financial Services Fund II, L.P. 5% Holder 26,144,060 (b) 60.7%
("Capital Z")
54 Thompson Street
New York, New York 10012
UAFC, L.P. 5% Holder 2,399,415 5.6%
30 North LaSalle Street
Chicago, Illinois 60602
Richard A. Barasch Director 2,704,236 (c) 6.1%
6 International Drive
Rye Brook, NY 10573
Bradley E. Cooper Director - (d) *
54 Thompson Street
New York, New York 10012
Susan S. Fleming Director - (d) *
54 Thompson Street
New York, New York 10012
Mark M. Harmeling Director 19,500 (e) *
108 Chestnut Street
North Reading, MA 01864
Bertram Harnett Director 149,451 (f) *
105 East Palmetto Park Road
Boca Raton, FL 33432
Patrick McLaughlin Director 43,500 (g) *
100 Chetwynd Drive
Rosemont, PA 19010
Robert A. Spass Director - (d) *
54 Thompson Street
New York, New York 10012
Richard Veed Director 7,500 (h) *
30 North LaSalle Street
Chicago, IL 60602
Robert F. Wright Director 429,122 (i) 1.0%
57 West 57th Street
New York, New York 10019
Directors and Officers as a Group (13 persons) 6,905,381 14.9%
</TABLE>
* Percent of class is less than 1%
(a) The Securities and Exchange Commission has defined "beneficial owner" of a
security to include any person who has or shares voting power or
investment power with respect to any such security or who has the right to
acquire beneficial ownership of any security within 60 days. The
percentages are therefore based on the 43,101,304 shares of common stock
outstanding as of October 6, 1999 plus common stock issuable with respect
to options and warrants presently exercisable.
(b) Robert A. Spass and Bradley E. Cooper, who are directors of Universal
American, are partners of Capital Z Partners Ltd., the ultimate general
partner of Capital Z. In addition, Mr. Spass and Mr. Cooper each own 9.9%
of the voting capital stock of Capital Z Partners, Ltd. No person or
entity owns 10% or more of the voting capital stock of Capital Z Partners.
Ltd. Mr. Spass and Mr. Cooper each disclaims beneficial ownership of all
shares of Universal American's common stock that are beneficially owned by
Capital Z.
(c) Includes 813,214 shares of common stock that would be received upon the
exercise of 485,214 warrants and 328,000 stock options held by Richard
Barasch. Also includes the following shares and warrants of which Mr.
Barasch disclaims beneficial ownership: 333,669 shares of common stock
that would be received upon the exercise of 333,669 warrants and 641,811
shares of common stock which are held directly by, or in trust for,
members of his immediate family; and 339,901 shares of common stock that
would be received upon the exercise of 339,901 warrants and 50,000 shares
of common stock which are held in an irrevocable trust for the benefit of
the Harnett family (the "Barasch Universal Trust") of which Richard
Barasch is trustee.
(d) Robert A. Spass and Bradley E. Cooper are partners of Capital Z. Mr. Spass
and Mr. Cooper disclaim beneficial ownership of all shares of common stock
beneficially owned by Capital Z. Ms. Fleming is a principal of Capital Z
and disclaims beneficial ownership of all shares of common stock
beneficially owned by Capital Z.
(e) Includes 11,500 shares of common stock that would be received upon the
exercise of 11,500 stock options.
(f) Includes 35,595 shares of common stock that would be received up on the
exercise of 12,095 warrants and 23,500 stock options held by Bertram
Harnett. Does not include shares and warrants held by the Barasch
Universal Trust, of which Mr. Harnett disclaims beneficial ownership.
(g) Includes 9,500 shares of common stock that would be received upon the
exercise of 9,500 stock options.
(h) Includes 7,500 shares of common stock that would be received upon the
exercise of 7,500 stock options. Does not include any indirect ownership
through UAFC, L.P. by Mr. Veed who is a partner of AAM Capital Partners,
L.P., ("AAM")in a partnership that owns an interest in UAFC, L.P.
(i) Includes 121,551 shares of common stock that would be received upon the
exercise of 99,051 warrants and 22,500 stock options held by Robert
Wright.
ELECTION OF DIRECTORS
The restated Certificate of Incorporation and the By-Laws of the Company
provide for a board of directors of not less than three members, with the number
of members to be as set by the board of directors. Each director is elected for
a term of one year, ending at the next annual meeting of the Shareholders, and
until his or her successor is elected and qualifies, subject to earlier removal.
The number of directors has been fixed by the board at nine. All of the present
directors are nominees for election by the holders of the Company's common
stock.
Shareholders' Agreement
Universal American, AAM, Richard Barasch and several other shareholders
of Universal American entered into a shareholders' agreement on July 30, 1999.
The shareholders' agreement requires that all proposed sales/transfers by the
other shareholders who are party to the shareholders' agreement must first be
offered to Richard Barasch and Capital Z, including its affiliates. However,
pledges and some other transfers by any party to the shareholders' agreement of
less than 2% of Universal American's outstanding common stock at any one time,
or 2.5% when aggregated with the other transfers by the shareholder and his, her
or its permitted transferees of Universal American' s outstanding common stock,
are permitted. In addition, the shareholders' agreement subjects the parties to
tag-along and drag-along rights under some circumstances. "Tag-along rights"
allow the holder of stock to include his, her or its stock in a sale of common
stock initiated by another party to the shareholders' agreement. "Drag-along
rights" permit a selling party to the shareholders' agreement to force the other
parties to the shareholders' agreement to sell a proportion of the other
holder's shares in a sale arranged by the selling shareholder.
Under the terms of the shareholders' agreement, of the nine members of
Universal American's board of directors, the shareholders are permitted to
nominate directors as follows: Capital Z-four, Richard Barasch-two, AAM-one and
Universal American-two. Because of Capital Z's majority stock ownership, Capital
Z also effectively controls the election of the two directors that Universal
American is entitled to nominate. Capital Z, Richard Barasch and AAM are each
required to vote for the director(s) nominated by the others. The ability to
nominate directors may be adjusted based upon the amount of common stock owned
by each such shareholder. The ability of Richard Barasch to nominate directors
is also affected by his continued employment with Universal American. In
addition, the ability to nominated directors is not transferable, except that
Capital Z may transfer its right to a third-party buyer who acquires 10% or more
of the outstanding common stock of Universal American from Capital Z.
Pursuant to the terms of the shareholders' agreement, Capital Z is
entitled to representation on each of the audit committee and the compensation
committee of the board of directors provided that it continues to hold at least
10% of the outstanding common stock of Universal American.
Each party to the shareholders' agreement has agreed for two years
following the closing not to vote his or its shares in favor of a merger where
Universal American's shareholders would receive consideration other than in the
form of shares of the surviving entity.
Change in Control
On July 30, 1999, the Company sold 25,707,552 shares of Universal
common stock to Capital Z for $80,978,790 ($3.15 per share). The sale was
pursuant to a Share Purchase Agreement dated December 31, 1998, as amended by an
Amendment dated July 27, 1999 ("UA Stock Purchase Agreement"). In addition, the
Company issued 436,507 shares of Universal common stock to an affiliated of
Capital Z in part payment of the affiliate's fee under the UA Stock Purchase
Agreement. As a result, Capital Z and affiliates owned 60.7% of the outstanding
common stock of the Company on July 30, 1999.
Director Compensation
Directors who are not employees of the Company receive a fee of $500
for each meeting of the board or committee meeting attended, unless the
committee meeting is held immediately prior to or after a board meeting. In that
case, a non-employee director will receive a $250 fee for the committee meeting.
In addition, directors are reimbursed for their travel and related expenses in
connection with serving as board members.
In 1998, each director was eligible to be granted options under the
1998 Incentive Compensation Plan. On May 28, 1998, each eligible director was
granted options to purchase 4,500 shares of common stock at an exercise price of
$2.62 for a total of 40,500 options granted. In addition, although the 1998 plan
superceded all other incentive compensation plans, options previously granted
under the Stock Option Plan for Directors, adopted in 1992, will remain
outstanding in accordance with their terms. Under the directors' plan, options
were granted on June 30th of each year to each eligible director in office at
that time at the rate of 1,000 options for each year of service on the board
since the last grant. Options under this plan are exercisable one year after
grant.
Committees of the Board of Directors
The board of directors has an audit committee, a transaction
committee, a compensation committee and an executive committee. The audit
committee is empowered to consult with the Company's independent auditors with
respect to their audit plans and to review their audit report and the
accompanying management letters. The transaction committee reviews and
recommends to the board on certain capital transactions entertained by the
Company. The compensation committee reviews and determines compensation,
including incentive stock option grants, of officers of the Company. The
executive committee has the authority to act between board meetings on behalf of
the board, on all matters allowed by law.
During the fiscal year ended December 31, 1998, there were seven
meetings of the board of directors, three meetings of the audit committee and
one meeting of the compensation committee. Each incumbent director attended more
than 75% of the aggregate of the total number of meetings of the board of
directors and of the meetings of each committee of which he was a member.
Listing of Directors
The following table sets forth certain information concerning the directors
of the Company, all of whom are nominees for election as such directors.
<TABLE>
Position with the Company, Present Principal Occupation or
Name Age Employment and the Past Five-Year Employment History
<S> <C> <C>
Richard A. Barasch 45 Director, Chairman of the Board (since December 1997), President and Chief
Executive Officer of the Company; Director and President of American Progressive;
and Chairman of the Board of American Pioneer, WorldNet and the Penn Union
Companies. Mr. Barasch has been a director and executive officer of the Company
since July 1988, President since April 1991 and Chief Executive Officer since June
15, 1995. He has held his positions with the Company's subsidiaries since their
acquisition or organization by the Company.
Bradley E. Cooper 33 Mr. Cooper is a Partner and co-founder of Capital Z. Prior to joining Capital Z,
Mr. Cooper served in similar roles at Insurance Partners, L.P. ("Insurance
Partners") and International Insurance Investors, L.P. Prior to the formation of
Insurance Partners, Mr. Cooper was a Vice President of International Insurance
Advisors, Inc. and was an investment banker in the Financial Institutions Group at
Salomon Brothers, Inc. Mr. Cooper currently serves on the board of directors of
Superior National Insurance Group, Highlands Insurance Group, CERES Group, Inc.,
and American Capital Access Holdings.
Susan S. Fleming 29 Ms. Fleming is a Principal of Capital Z. Prior to joining Capital Z, Ms. Fleming
served as Vice President of Insurance Partners and was an investment banker in the
Mergers and Acquisitions Financial Institutions Group at Morgan Stanley & Co.
Mark M. Harmeling 46 Director of the Company since July 1990 and director of American Progressive since
December 1992. Mr. Harmeling has been President of Bay State Realty Advisors
since January 1994 and previously President of Intercontinental Real Estate
Corporation, a real estate management and development company for more than the
past five years. Mr. Harmeling is also a director of the following companies:
Rochester Shoetree Corporation (since 1988) and Applied Extrusion Technologies
(since 1987).
Bertram Harnett 74 Director of the Company and American Pioneer since June 1996 and had been
a director of the Company previously (July 29, 1988 to February 9, 1989). Mr.
Harnett is President of the law firm of Harnett Lesnick & Ripps P.A., Boca Raton,
and its predecessors since 1988 and a practicing lawyer since 1948. He is the
author of treatises on insurance law and is a former Justice of New York State
Supreme Court.
Patrick J. McLaughlin 39 Director of the Company since January 1995; Mr. McLaughlin has been a
Managing Director of Emerald Capital Group, Ltd., an asset management and
consulting firm specializing in the insurance industry, since April 1993. Prior
to that he was an Executive Vice President and Chief Investment Officer of Life
Partners Group, Inc. (April 1990 to April 1993), Managing Director of Conning &
Company (August 1989 to April 1990) and Senior Vice President and Chief Investment
Officer of ICH Corporation (March 1987 to August 1989).
Robert A. Spass 43 Mr. Spass is a Partner and co-founder of Capital Z. Prior to co-founding Capital
Z, Mr. Spass was the Managing Partner and co-founder of Insurance Partners. Prior
to the formation of Insurance Partners, Mr. Spass was President and CEO of
International Insurance Advisors Inc. Prior to that, Mr. Spass was a Director of
Investment Banking at Salomon Brothers and a Senior Manager for Peat Marwick Main
& Co. Mr. Spass serves on the board of directors of Highlands Insurance Group,
Superior National Insurance Group, CERES Group, Inc and MMI Companies.
Richard Veed 47 Director of the Company since April 25, 1997; Mr. Veed has been a Managing Partner
of AAM Investment Banking Group, Ltd. since October 1993. Prior to that he was
President of Guaranty Reassurance Corp. from September 1992 to May 1993 and a
Partner at Arthur Anderson & Co. from 1987 to August 1992. He is also a director
of HomeVest Financial Group, Inc.
Robert F. Wright 73 Director of the Company since June 1998; Mr. Wright has been President of
Robert F. Wright Associates, Inc. since 1988. Prior to that Mr. Wright was a
partner of the public accounting firm of Arthur Anderson & Co. from 1960 to 1988.
Mr. Wright is director of Hanover Direct, Inc., Reliance Standard Life Insurance
Company and its affiliates, Williams Real Estate Co., Inc. and Norwab North
American Ltd. He is also an advisory director of Quandrant Management, Inc.
</TABLE>
All of the Company's officers and directors are elected annually for
one-year terms. All officers and directors hold office until their successors
are duly elected and qualified.
EXECUTIVE COMPENSATION, RELATED PARTY TRANSACTIONS
AND OTHER INFORMATION
Report of the Compensation Committee on Executive Compensation as of
December 31, 1998
The compensation committee of the board of directors reviews and
approves the compensation of the Company's executive officers (including the
named executive officers listed in the management section below). The committee
is made up of four independent, non-employee members of the board. The objective
of the Company's compensation program is to provide a total compensation package
that will enable the Company to:
-attract, motivate and retain outstanding individuals;
-align the financial interests of those individuals with the interests of the
Company's shareholders;
-reward those individuals for increasing levels of profit and shareholder
value; and
-encourage management's stake in the long-term performance and success of the
Company
In order to achieve these goals, the committee establishes a
competitive and appropriate total compensation package for each executive
officer, consisting primarily of four components-base salary, annual bonus,
stock options and restricted stock awards. The committee conducts an annual
review of compensation relative to other life insurance companies and companies
of similar size in the financial industry.
Base Salaries
The committee establishes base salaries each year at a level
intended to be within the competitive market range of comparable companies.
Other factors considered in determining base salary include the responsibilities
of the executive officer, experience, length of service and individual
performance. During fiscal year 1998, base salaries of the executive officer
group increased an average of 9.8%. The committee believes that the base
salaries of the current executive officers are within or below the competitive
market range of comparable companies.
Cash Bonuses
The committee awards cash bonuses to the executive officers. The
criteria used to determine cash bonus levels include operating profits, new
business production and expenses relative to pre-determined budgets. The
executive officer group's fiscal year 1998 cash bonus was 13.9% of the group's
annual base salary.
Stock Options and Restricted Stock
An important component of the Company's executive compensation
program is the award of stock options and restricted stock. Restricted stock is
stock in Universal American which the executive officer must hold for a period
of time before it can be sold. The committee believes that stock options and
restricted stock motivate the executive officers to remain focused on the
overall long-term performance of the Company. Generally the award of a stock
option creates no financial benefit to the executive unless there is
appreciation in the price of the Company's stock after the award date. The
financial benefit of an award of restricted stock can not be realized by the
executive officer until the restriction can be lifted from the stock, generally
a minimum of two years. The total number of restricted stock and stock options
awarded to the executive officer group during fiscal year 1998 amounted to
51,000 and 423,000, or 0.7% and 5.6% of the average outstanding shares of the
Company during 1998.
The Compensation Committee
Mark M. Harmeling, Chairman
Walter L. Harris (1)
Richard A. Veed
Robert F. Wright
(1) Mr. Harris resigned as a director, effective July 29, 1999
Performance Graph
The Performance Graph compares the Company's cumulative total
shareholder return on its Common Stock for the five year period between December
31, 1993 to December 31, 1998, with the cumulative total returns of The Nasdaq
Stock Market ("NSM") and the Nasdaq Insurance Stocks ("NIS"). The comparison for
each period assumes that $100 was invested on December 31, 1993 in each of the
Company's Common Stock, the stocks included in The Nasdaq Stock Market Total
Return Index and the stocks included in the Nasdaq Insurance Stocks Total Return
Index.
Year Ended UHCO NSM NIS
-------------------- ---- ----- ------
December 31, 1993 100.00 100.00 100.00
December 31, 1994 77.78 97.75 94.13
December 31, 1995 74.07 138.26 133.71
December 31, 1996 62.96 170.01 152.42
December 31, 1997 83.35 208.58 223.58
December 31, 1998 77.78 293.21 198.78
<PAGE>
Management
The following table shows the total compensation paid by the Company
and its subsidiaries to the Company's Chief Executive Officer and the three most
highly compensated executive officers of the Company and its subsidiaries for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended December 31, 1998, 1997 and 1996:
Summary Compensation Table
<TABLE>
Annual Compensation Long-Term Compensation
-----------------------------------------------------------------
Name, Age and Principal Restricted Stock All Other
Position Year Salary Bonus Stock $ (1) Options Compensation(2)
- ------------------------ ---- ------ ----- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Barasch (45) 1998 $ 375,000 $ 60,000 $ 60,000 168,000 $ 3,200
Chairman & Chief Executive 1997 325,555 30,000 27,500 25,000 2,375
Officer 1996 312,000 5,000 14,000 40,000 2,350
Gary W. Bryant (49) 1998 225,000 27,000 27,500 115,000 3,200
Senior Vice President of the 1997 212,000 25,000 22,000 20,000 2,120
Company and President of 1996 203,000 3,000 7,000 30,000 2,030
American Pioneer
William E. Wehner (55) 1998 165,000 20,000 20,000 70,000 3,200
Exec. Vice President & 1997 155,000 15,000 13,750 15,000 1,550
Chief Operating Officer, 1996 140,000 3,000 7,000 30,000 1,400
of American Progressive
Robert A. Waegelein (38) 1998 150,000 20,000 20,000 70,000 1,410
Sr. Vice President & 1997 141,000 15,000 13,750 15,000 1,410
Chief Financial Officer 1996 135,500 3,000 7,000 30,000 1,355
- ------------------
</TABLE>
(1) The executive officers were awarded shares of restricted stock of the
Company on various dates. These shares are shown at the fair market value
of the Company's common stock on the date of the award.
(2) The amounts in this column represent the value of common stock of the
Company contributed by the Company under the 401(k) plan to match
contributions to the plan on behalf of the executive office
Option Grants in Last Fiscal Year
The following table sets forth information about options to purchase
common stock granted to the executive officers named in the summary compensation
table during 1998:
<TABLE>
Number of Percent of
Securities Total
Underlying Options
Options Granted to Exercise of
Granted Employees Base Price
Name (#) in 1998 ($/Share) Expiration Dates
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard A. Barasch 168,000 18.36% 2.25 - 2.625 May 28, 2008; December 8, 2008
Gary W. Bryant 115,000 12.57% 2.25 - 2.625 May 28, 2008; December 8, 2008
William E. Wehner 70,000 7.65% 2.25 - 2.625 May 28, 2008; December 8, 2008
Robert A. Waegelein 70,000 7.65% 2.25 - 2.625 May 28, 2008; December 8, 2008
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information about options to purchase
common stock exercised by the executive officers named in the summary
compensation table and the number and value of options each of those officers
held on December 31, 1998:
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Shares Options at Fiscal Year-End (#) Fiscal Year-End( $)(2)
Acquired on Value ---------------------------- ----------------------------
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- --------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Barasch 50,000 39,750 (1) 92,500 180,500 19,900 10,090
Gary W. Bryant 50,000 46,750 (1) 65,000 125,000 22,500 13,365
William E. Wehner 20,000 18,700 (1) 62,500 77,500 22,500 7,650
Robert A. Waegelein 20,000 18,700 (1) 62,500 77,500 22,500 7,650
- --------------------
</TABLE>
(1) Based on a closing price of $2.375 for the Company's common stock on the
exercise date, July 16, 1998.
(2) Calculated using the market price on December 31, 1998 of $2.625 per share
and exercise prices ranging between $2.00 and $3.33 for exercisable options
and ranging between $2.25 and $3.03 for unexercisable options.
Incentive Stock Option Plan.
The Incentive Stock Option Plan (the "Option Plan"), which was approved
by the shareholders in April 1983 and amended in May 1987, June 1989, June 1994
and June 1995, covers 1,000,000 shares of Common Stock and is intended to
provide an additional means of providing incentive to executives and other "key
salaried employees" of the Company (which is defined under section 422A of the
Internal Revenue Code as employees of the Company and its subsidiaries).
Within the limits of the Option Plan, the Company's board of directors,
in its discretion, determines the participants under the Option Plan, the number
of options to be granted under the Option Plan and the purchase price and terms
of each option. The price for the shares covered by each option is required to
be not less than 100% of the fair market value at the date of grant. Options
expire five years from the date of grant or termination and become exercisable
in installments as determined by the board of directors commencing one year
after date of grant.
During the year ended December 31, 1998, 520,500 Incentive Stock
Options were granted at exercise prices ranging between $2.25 and $2.62.
Incentive Stock Options to purchase 13,000 shares of Common Stock at exercise
prices ranging between $1.25 and $2.00 were canceled or expired. Incentive Stock
Options to purchase 165,000 shares of common stock were exercised at prices
ranging between $1.44 - $1.58. As of August 31, 1999, Incentive Stock Options to
purchase 540,750 shares were exercisable, none of which have since been
exercised.
Other Compensation
Pursuant to the UA Stock Purchase Agreement, the Company sold common
stock at $3.15 to certain members of management of the Company. The Company
agreed to assist members of management in the purchase of this stock on the
following basis:
1. For those whose purchase of shares exceeded $10,000, the Company agreed
to lend the employee an amount equal to the lesser of (i) the excess of
the total purchase price over $10,000 and (ii) 50% of the total
purchase price on the terms set forth below ("the Loan") to a maximum
of $100,000.
2. The terms of the Loan are as follows:
a. The principal of the Loan will be due and payable four years from
the date of the Closing of the Capital Z issuance (the "Closing"),
subject to acceleration or cancellation, as set forth below.
b. The Loan will carry interest at the prime rate published by the
Chase Manhattan Bank as its "prime rate," in effect from time to
time. Interest shall be payable annually, in arrears.
c. If the employee voluntarily terminates employment by Universal or
its subsidiaries prior to the due date of the Loan or fails to pay
interest when due, the Loan shall become immediately due and
payable.
d. The Loan shall be prepayable, in whole or in part, at any time and
from time to time, without penalty, with payment of the interest
accrued on the amount prepaid.
e. The Loan shall be secured by a pledge of all of the Universal
Stock purchased by the employee (the "Pledged Stock"), on the
following terms.
i. A portion of the Universal stock will be subject to the
pledge, regardless of whether it is paid for paid for with
the proceeds of the Loan or out of other funds. Any
distributions with respect to the shares pledged shall
become part of the collateral.
ii. The pledge shall be perfected by the delivery to Universal
of the certificates for all of the pledged stock, together
with executed blank stock powers.
iii.In the event that the principal or interest on the Loan
is not paid when due, Universal may exercise all of the
rights of a pledgee under the New York Uniform Commercial
Code with respect to the pledged stock, in addition to all
other rights it may have to obtain payment of the amount
due to it.
iv. If, while the Pledged Stock is being held as security, the
employee wishes to sell any of it, the certificate or
certificates will be delivered in accordance with the
employee's written instructions, against the prepayment of
at least 125% of the portion of the outstanding balance of
the Loan (and the interest on the amount so prepaid) which
bears the same proportion to the total balance as the
shares delivered bears to the total number of Pledged
Shares.
f. If, while still employed by Universal or one of its subsidiaries
and prior to the due date of the Loan, the closing price reported
for the common stock of Universal on the NASDAQ National Market
for each and every trading day during any period of 60 consecutive
calendar days is at least twice the closing price on the trading
day before the Closing (with appropriate adjustments for stock
splits, stock dividends, and other capital changes), the unpaid
principal balance of the Loan, as well as any interest accrued
since the last interest payment date, will be canceled. The income
resulting from any such cancellation will be treated as additional
compensation paid to the employee
Loans were made to 32 members of management totaling $957,664 including
$78,750 to Richard A. Barasch, $87,500 to Gary W. Bryant, $50,000 to Robert A.
Waegelein, and $126,000 to William E. Wehner.
Employment Agreements
Employment Agreement with Richard A. Barasch
On July 30, 1999 Universal purchased from PennCorp Financial Group, Inc
("PFG") all of the outstanding shares of common stock of certain direct and
indirect subsidiaries of PFG (the "Penn Union Transaction"). To finance part of
the purchase price Capital Z purchased 25,707,552 shares of the Company's common
stock on July 30, 1999 for approximately $80,978,790 (the "Capital Z Issuance").
As a condition of closing the Penn Union Transaction, an employment agreement
was entered into with Richard A. Barasch (the "Employment Agreement"). The
Employee Agreement provides that Mr. Barasch will continue to serve as the
Chairman of the Board and Chief Executive Officer of Universal American for a
period of three years from the closing of the transaction. The Employment
Agreement also provides for an automatic one-year extension unless the Company
or Mr. Barasch provides the other party six months' prior written notice before
the expiration of the original three-year term.
Under the Employment Agreement, Mr. Barasch is entitled to receive an
annual base salary of $475,000 and any annual increases that may be determined
in the sole discretion of the board (the "Salary"). In 1999, Mr. Barasch is
entitled to receive an annual bonus equal to: (i) for the period prior to the
closing of the Capital Z issuance, a pro rated bonus based on the Company's
existing executive bonus plan plus (ii) the product of the Salary times a
fraction, the numerator of which is the number of days from the closing of the
Capital Z Issuance through the end of the fiscal year and the denominator of
which is 365 and shall be based upon the achievement of goals established by the
board in good faith consultation with Mr. Barasch. If goals are not established,
the amount will be determined by reference to the Company's existing executive
bonus plan. Commencing in the year 2000, and for each fiscal year during the
remaining employment term under the Employment Agreement, Mr. Barasch will be
eligible to earn a bonus based on criteria set by the compensation committee of
the board giving him an opportunity to earn a maximum bonus of up to 200% of his
salary.
Mr. Barasch received an initial grant of stock options to purchase
600,000 shares under Universal American Financial Corp.'s 1998 Incentive
Compensation Plan (the "1998 Incentive Plan") on the date of the closing of the
Capital Z Issuance. The options were granted to Mr. Barasch at $3.15 and have a
ten-year term. Options representing the right to purchase 400,000 shares vest
ratably over a five-year period and the remainder will vest on the seventh
anniversary of the grant date. The remainder, however, will become immediately
exercisable if Capital Z has achieved a compounded annual internal rate of
return on its equity interest in the Company of 30% by dates set forth in the
Employment Agreement. In the event that stock options are granted to Mr. Barasch
at prices below the fair market value on the date of the grant, an expense will
be recognized over the vesting period for the difference between the exercise
price of the stock option and the fair market price of the stock on the date of
the grant. The Employment Agreement includes customary severance provisions.
Other Employment Agreements
Simultaneously with the closing of the Penn Union Transaction, the
Company entered into employment agreements with 3 of its senior executives.
Under the terms of the agreements, the executives will serve the Company in a
position consistent with their position prior to the agreement for a period of
two years from the commencement date. The agreements allow for automatic
one-year extensions unless the Company or Executive provides the other party six
months prior written notice before the expiration of any employment term that
the employment term shall not be extended.
Each agreement provides that the executive will be paid an annual
salary as determined by the agreement in regular installments in accordance with
the Company's usual payment practice. Annual increases shall be determined at
the discretion of the board of directors. In addition, the executive will also
receive an annual bonus based on the achievement of goals established by the
board. If goals are not established, the amount will be established by reference
to the Company's existing executive bonus plan. The bonus shall be paid (i) 50%
in cash and (ii) 50% in Company common stock based on the market value of the
shares on the date of issuance. Market value means the 20-day average of the
closing price of the shares on NASDAQ, or, if the shares are not then traded on
NASDAQ, on such other national stock exchange on which the shares are
principally traded.
Each agreement also provides that the executive is entitled to a grant
of initial stock options under the Company's 1998 Incentive Compensation Plan.
The options were granted at $3.15 and have a ten-year term. Options vest ratably
over a four-year period and the remainder will vest on the seventh anniversary
of the grant date. The remainder, however, will become immediately exercisable
if Capital Z has achieved a compounded annual internal rate of return on its
equity interest in the Company of 30% by dates set forth in the employment
agreement. In the event that stock options are granted at prices below the fair
market value on the date of the grant, an expense will be recognized over the
vesting period for the difference between the exercise price of the stock option
and the fair market price of the stock on the date of the grant. The Employment
Agreement includes customary severance provisions.
Salaries and stock options granted under these employment agreements are
summarized as follows:
<TABLE>
Number of Securities
Securities Underlying Exercise of
1999 Options Granted Base Price Expiration
Name Salary (#) ($/Share) Date
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary W. Bryant $250,000 262,500 3.15 August 1, 2009
William E. Wehner $175,000 187,500 3.15 August 1, 2009
Robert A. Waegelein $200,000 225,000 3.15 August 1, 2009
</TABLE>
Under the agreements the executives will be entitled to benefits under
the Company's employee benefit plan on the same basis as those benefits are made
available to other senior executives of the Company. All reasonable business
expenses will be reimbursed to the executives in accordance with Company
policies.
In addition, the agreements outline the executive's and Company's
obligations under the various scenarios of early termination of the agreement.
The agreements also contain a non-compete clause covering the period of
employment and the twelve months following termination of employment.
401(k) Plan
The executives named in the Summary Compensation Table, as well as
substantially all full-time employees of the Company and its subsidiaries, are
eligible to participate in the Universal American Financial Corp. 401(k) Savings
Plan ("Savings Plan"). The Savings Plan is a voluntary contributory plan under
which employees may elect to defer compensation for federal income tax purposes
under Section 401(k) of the Internal Revenue Code of 1986. The employee is
entitled to participate in the Savings Plan by contributing through payroll
deductions up to 20% of the employee's compensation. The Company may match the
employee's contribution up to 50% of the first 4% of the employee's compensation
which contribution will be made with Company common stock.
Certain Relationships and Related Transactions
The Company and Wand Partners, Inc. entered into a financial advisory
agreement, under which the Wand affiliate is to render advisory services to the
Company. Wand Partners will be paid a fee of $100,000 per year for its services
as long as Wand owns 500,000 shares of common stock, or common stock equivalent.
The fee will be reduced by any directors' fees paid to the director designated
by Wand. The agreement expires December 31, 1999.
The Company paid $50,000 in fees to AAM Capital Partners, Inc., an
affiliate of AAM, for its structuring of the Series D Preferred Stock offering.
Bertram Harnett, a director of the Company, is a shareholder in
Harnett, Lesnick & Ripps P.A., which was paid $317,864 in 1998 for its legal
services to, as well as reimbursement for disbursements made, on behalf of the
Company.
Robert F. Wright, a director of the Company, is the sole shareholder
and president of Robert F. Wright Associates, Inc., which has a consulting
arrangement with the Company. Through this consulting arrangement, Mr. Wright
was paid $50,486 in connection with his services as Chairman of the Audit
Committee, as well as reimbursement for disbursements made on behalf of the
Company.
ADDITIONAL INFORMATION
The board of directors does not intend to present to the meeting any
matters not referred to in the form of Proxy. If any proposal not set forth in
the Proxy Statement would be presented for action at the meeting, it is intended
that the shares represented by proxies will vote with respect to such matters in
accordance with the judgment of the persons voting them.
The Company's independent auditors for the fiscal year ended December
31, 1998 were Ernst & Young LLP. Representatives of Ernst & Young LLP are
expected to be present at the Annual Meeting with the opportunity to make a
statement if they desire to do so, and will be available to respond to
appropriate questions.
The Company must receive stockholder proposals with respect to the
Company's next Annual Meeting of Stockholders no later than February 1, 2000 to
be considered for inclusion in the Company's next Proxy Statement.
The cost of soliciting proxies in the accompanying form has been or
will be paid by the Company. In addition to solicitation by mail, arrangements
may be made with brokerage houses and other custodians, nominees and fiduciaries
to send proxy material to their principals, and the Company may reimburse them
for their expenses in so doing. To the extent necessary in order to assure
sufficient representation, officers and regular employees of the Company may
engage (without additional compensation) in the solicitation of proxies
personally, by telephone or telegram.
A copy of the Annual Report has been mailed to every stockholder as of
the Record Date. The Annual Report is not to be considered proxy-soliciting
material.
By order of the board of directors
JOAN M. FERRARONE
Secretary
Dated: October 26, 1999
Rye Brook, New York
