U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED _________________
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM APRIL 30, 1997 TO JANUARY 1, 1998
COMMISSION FILE NUMBER 0-20848
UNIVERSAL HEIGHTS, INC.
(Name of small business issuer in its charter)
DELAWARE 65-0231984
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2875 N.E. 191ST STREET, SUITE 400A
Miami, Florida 33180
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (305) 653-4274
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE NASDAQ
REDEEMABLE COMMON STOCK PURCHASE WARRANTS NASDAQ
(Title of each class) (Name of exchange where registered)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days: YES _X_ NO__
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State issuers revenues for its most recent fiscal year: _$0_
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of December 31, 1997: __$12,869,079__
State the number of shares of Common Stock of Universal Heights, Inc.
issued and outstanding as of December 31, 1997: __14,677,604__
Transitional Small Business Disclosure Format: YES__ NO _X_
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
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THE COMPANY--
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Universal Heights, Inc. (the "Company") was originally organized in 1990
to design and market licensed novelty and souvenir products. In order to expand
its product line, during fiscal 1996, the Company acquired a private company
engaged in the sale of patented, weighted athletic gloves and also acquired
substantially all the assets of another private company engaged in the sale of
pens with sports logos.
During the fiscal year ended April 30, 1997, the Company ceased all
marketing efforts and as of April 30, 1997, discontinued its core product line.
This decision was based on the projected continued losses, inability to
consummate sales and insignificant demand for products. Accordingly, at April
30, 1997, inventories and related patents and trademarks were written down to
their estimated realizable value. As of December 31, 1997, the Company limited
its efforts to the disposition of the remaining inventories and patents and
charged any remaining sport-related assets to operations.
As part of its strategy to take advantage of what management believes to
be profitable business and growth opportunities in the marketplace, in April
1997, the Company organized Universal Property & Casualty Insurance Company
("UPCIC"). UPCIC was formed to participate in the transfer of homeowner
insurance policies from the Florida Residential Property and
Casualty Joint Underwriting Association ("JUA").
The Company was incorporated under the laws of the state of Delaware on
November 13, 1990 and its principal executive offices are located at 2875 N.E.
191st Street, Suite 400A, Miami, Florida 33180, and its telephone number is
(305) 653-4274. The Company has one subsidiary, Universal Insurance Holding
Company, which is wholly-owned. UPCIC is a wholly-owned subsidiary of Universal
Insurance Holding Company.
UNIVERSAL PROPERTY & CASUALTY INSURANCE COMPANY--
- -------------------------------------------------
UPCIC's application to become a Florida licensed property and casualty
insurance company was filed with the Florida Department of Insurance ("DOI") on
May 14, 1997 and approved on October 29, 1997. UPCIC's proposal to begin
operations through the transfer of approximately 45,000 homeowner insurance
policies issued by the JUA was approved by the JUA on June 21, 1997, subject to
certain minimum capitalization and other requirements including approval by the
DOI. Pursuant to its authority, the DOI subsequently approved UPCIC to assume
and service a maximum of 30,000 policies issued by the JUA.
JUA TAKEOUT PROGRAM
The JUA was established in 1992 as a temporary measure to provide
insurance coverage for individuals who could not obtain coverage from private
carriers because of the impact on the private insurance market of Hurricane
Andrew in 1992. Rather than serving as a temporary source of emergency insurance
coverage as was originally intended, the JUA has become a major provider of
original and renewal insurance coverage for Florida residents. In an attempt to
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reduce the number of policies in the JUA, and thus the exposure of the program
to liability, the Florida legislature has approved a number of initiatives to
depopulate the JUA. Recently, the Florida legislature has approved, and the DOI
has implemented, the Market Challenge/Takeout Bonus Program ("Takeout Program"),
which provides additional incentives to private insurance companies to acquire
policies from the JUA.
The Takeout Program is attractive because it provides both substantial
regulatory and financial incentives to private insurer participants. On the
regulatory side, participants will be exempt from regular assessments by the DOI
for the state's emergency insurance coverage programs for a period of three
years. On the financial side, Takeout Program participants will also receive a
bonus payment based upon the number of policies taken out of the JUA portfolio.
UPCIC has received bonus payments of approximately $2,700,000 based upon a
portfolio takeout of approximately 28,000 policies. Bonus payments must be held
in escrow for three years. After the three year period, if certain conditions
are met, including maintaining a minimum number of policies, UPCIC will have
unrestricted use of the bonus payment funds. In addition, UPCIC will have
investment income from the bonus payments which will also be available at the
end of the three years.
UPCIC's initial business and operations will consist of providing property
and casualty coverage through homeowners' insurance policies acquired through
the JUA. UPCIC has acquired approximately 28,000 policies from the JUA.
Thereafter, UPCIC intends to offer homeowners property and casualty insurance in
Florida in the voluntary insurance market through independent agents, as surplus
permits. UPCIC expects to expand its business as market conditions and
opportunities permit. The earnings of UPCIC from policy premiums will be
supplemented by the generation of investment income from investment policies
adopted by the Board of Directors of UPCIC. UPCIC's principal investment goal
will be to maintain safety and liquidity, enhance equity values and achieve an
increased rate of return consistent with regulatory requirements.
OPERATIONS
All marketing, underwriting, rating, policy issuance and administration
functions will be performed for UPCIC by Universal P&C Management, Inc.
("Universal Management") pursuant to a Management Agreement and Addendum.
Universal Management is a wholly-owned subsidiary of American European Group,
Inc. ("AEG"), a Delaware insurance holding company. Universal Management and AEG
both employ Joseph DeAlessandro as a senior officer and director. Mr.
DeAlessandro has over 40 years of experience in the insurance industry having
served as a senior executive with a number of insurance companies including
American International Group, Travelers Insurance Group and its subsidiary, Gulf
Insurance Company, and currently the American European Group of Companies.
Claims handling functions for UPCIC will principally be administered by
independent claims adjustment firms licensed in Florida that are nationally
recognized as experts in claims adjusting and have catastrophe response
capabilities. UPCIC will retain oversight of claims administration by imposing
specified limits of claims settlement authority and by conducting regular audits
of claims practices.
FACTORS AFFECTING OPERATION RESULTS AND MARKET PRICE OF STOCK
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UPCIC operates in a rapidly changing environment that involves a number of
uncertainties, some of which are beyond UPCIC's control. In addition to the
uncertainties described elsewhere in this report, these uncertainties include:
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MANAGEMENT OF EXPOSURE TO CATASTROPHIC LOSSES
UPCIC is exposed to multiple insured losses arising out of a single
occurrence, such as a natural catastrophe. As with all property and casualty
insurers, UPCIC expects to incur some losses related to catastrophes and will
price its policies accordingly. UPCIC's exposure to catastrophic losses arises
principally out of hurricanes and windstorms. UPCIC manages its exposure to such
losses from an underwriting perspective by limiting the accumulation of known
risks in exposed geographic areas. In addition, UPCIC protects itself against
the risk of catastrophic loss by obtaining reinsurance coverage for high levels
of damage that can only be caused by massive storms that are estimated to occur
once every 100 years. UPCIC's reinsurance program consists of excess of loss and
quota share reinsurance and catastrophe reinsurance.
ADEQUACY OF RESERVE
The reserve for losses and loss adjustment expenses to be established by
UPCIC will be estimates of amounts needed to pay reported and unreported claims
and related loss adjustment expenses. The estimates necessarily will be based on
certain assumptions related to the ultimate cost to settle such claims. There is
an inherent degree of uncertainty involved in the establishment of reserves for
losses and loss adjustment expenses and there may be substantial differences
between actual losses and UPCIC's reserve estimates. In the case of UPCIC, this
uncertainty is compounded by UPCIC's absence of historical claims experience.
UPCIC has relied on industry data and JUA data as well as the expertise and
experience of key individuals, referenced herein, in an effort to establish
accurate estimates and adequate reserves. Furthermore, factors such as storms
and weather conditions, inflation, claim settlement patterns, legislative
activity and litigation trends may have an impact on UPCIC's future loss
experience. Accordingly, there can be no assurance that UPCIC's reserves will be
adequate to cover ultimate loss developments. UPCIC's profitability and
financial condition could be adversely affected to the extent that its reserves
are inadequate.
GOVERNMENT REGULATION
Florida insurance companies are primarily subject to regulation and
supervision by the DOI. Notwithstanding the three year regulatory relief
available to UPCIC under the Takeout Program, the DOI has broad regulatory,
supervisory and administrative powers. Such powers relate, among other things,
to the granting and revocation of licenses to transact business; the licensing
of agents; the standards of solvency to be met and maintained; the nature of and
limitations on investments; approval of policy forms and rates; periodic
examination of the affairs of insurance companies; and the form and content of
required financial statements. Such regulation and supervision are primarily for
the benefit and protection of policyholders and not for the benefit of
investors.
In addition, the Florida legislature and the National Association of
Insurance Commissioners from time to time consider proposals that may effect,
among other things, regulatory assessments and reserve requirements. UPCIC
cannot predict the effect that any proposed or future legislation or regulatory
or administrative initiatives may have on the financial condition or operations
of UPCIC.
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REINSURANCE
UPCIC expects to rely on the use of reinsurance to limit the amount of
risk retained under its policies and to increase its ability to write additional
risks. UPCIC's intention is to limit its exposure and therefore protect its
capital, even in the event of catastrophic occurrences, through reinsurance
agreements that transfer the risk of loss in excess of $1 million. The property
and casualty reinsurance industry is subject to the same market conditions as
the direct property and casualty insurance market, and there can be no assurance
that reinsurance will be available to UPCIC to the same extent and at the same
cost as currently anticipated by UPCIC. Reinsurance does not legally discharge
an insurer from its primary liability for the full amount of the risks it
insures, although it does make the reinsurer liable to the primary insurer.
Therefore, UPCIC is subject to credit risk with respect to its reinsurers. A
reinsurer's insolvency or inability to make payments under a reinsurance treaty
could have a material adverse affect on the financial condition and
profitability of UPCIC.
DEPENDENCE ON KEY INDIVIDUALS
UPCIC's operations are materially dependent upon the efforts of Universal
Management, whose key executives include Joseph P. DeAlessandro, Chairman and
Chief Executive Officer; David Asher, Senior Vice President and Chief
Underwriting Officer; Robert Thomas, Chief Financial Officer and Executive Vice
President; and Barry J. Goldstein, Senior Vice President.
In addition, UPCIC's operations depend in large part on the efforts of
Bradley I. Meier, who serves as President of UPCIC. Mr. Meier has also served as
President, Chief Executive Officer and Director of Universal Heights since its
inception in November 1990.
The loss of the services provided by Universal Management's key executives
or Mr. Meier could have a material adverse effect on UPCIC's financial condition
and results of operations.
RELIANCE ON TAKEOUT PROGRAM
All of UPCIC's initial revenues will be derived from insurance policies
obtained through the JUA. Future profitability and growth are dependent upon
UPCIC's ability to renew the policies transferred from the JUA and to obtain
additional policyholders from the JUA or the voluntary insurance market. There
is no assurance that UPCIC will be able to retain the policyholders whose
policies it acquires from the JUA or that UPCIC will be able to attract
additional policyholders. The inability to retain and attract additional
policyholders could impair UPCIC's growth and future financial performance.
COMPETITION
The insurance industry is highly competitive and many companies currently
write homeowner property and casualty insurance. Additionally, UPCIC must
compete with companies that have greater capital resources and longer operating
histories for business both in the Takeout Program and the private insurance
market. Increased competition from other insurance companies could adversely
affect UPCIC's ability to do business profitably.
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EMPLOYEES--
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As of December 31,, 1997, the Company had three employees, the president
and an administrative assistant and the chief executive officer of UPCIC. None
of the Company's employees is represented by a labor union.
The Company has an employment agreement with its president and chief
executive officer. See "Executive Compensation--Employment Agreement."
ITEM 2. DESCRIPTION OF PROPERTY
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During the eight months ended December 31, 1997, the Company leased on a
month-to-month basis, approximately 7,500 square feet of office space and
adjoining warehouse space in Miami Beach, Florida. As of May 1, 1998, the
Company leased approximately 1,300 square feet of office space in North Miami
Beach, Florida under a three-year lease.
ITEM 3. LEGAL PROCEEDINGS
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On May 15, 1997, two former employees of the Company, Johnny Walker and
Larry Martin filed a lawsuit against the Company in the Circuit Court for
Pinellas County, Florida. The Plaintiffs asserted claims for an injunction and
for damages for breach of an Asset Purchase Agreement. The Complaint also
includes breach of employment agreements, breach of royalty agreements and other
relief. In connection therewith, the Plaintiffs demanded unpaid salaries
amounting to approximately $130,000. The Company negotiated a settlement with
the Plaintiffs pursuant to which the Plaintiffs received exclusive use of
certain patents and trademarks, the remaining inventory of baseball gloves, and
10,000 shares of Common Stock, yet to be issued.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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There were no matters submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the eight month period covered by
this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's $.01 par value Common Stock ("Common Stock") is quoted on
the OTC Bulletin Board under the symbol UHTS. The following table sets forth
prices of the Common Stock, as reported by the OTC Bulletin Board. The following
data reflects inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. Per share
prices reflect the one-for-four reverse stock split of the Company's Common
Stock approved on December 2, 1994.
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High Low
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Fiscal Year Ended April 30, 1997
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First Quarter $1.88 $ 0.88
Second Quarter 1.38 1.00
Third Quarter 1.25 0.38
Fourth Quarter 2.75 0.38
Eight Months Ended December 31, 1997
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Quarter ended July 31, 1997 1.31 0.44
Quarter ended October 31, 1997 1.84 0.63
Two months ended December 31, 1997 1.25 0.75
At December 31, 1997, there were 89 shareholders of record of the
Company's Common Stock, although the Company believes that there are
approximately 300 beneficial owners of its Common Stock. In addition, there were
three shareholders of the Company's Preferred Stock.
Beginning May 1, 1995, the Series A Preferred Stock paid a cumulative
dividend of $.25 per quarter. In addition, each share of Series A Preferred
Stock is convertible into 2.5 shares of Common Stock and may be redeemed by the
Company at $10 per share. The liquidation value of the Preferred Stock is $10
per share. There are currently 49,950 shares of Series A Preferred Stock issued
and outstanding. To date, while such dividends have accumulated, the Company has
not declared nor paid any cash or other dividends on such Preferred Stock.
On April 24, 1997, the Company issued to Stephen Guarino 100,000 shares of
Common Stock and warrants to purchase 100,000 shares of Common Stock at an
exercise price of $2.00 per share, warrants to purchase 100,000 shares of Common
Stock at an exercise price of $2.75 per share and warrants to purchase 100,000
shares of Common Stock at an exercise price of $3.50 per share at an aggregate
purchase price of $97,000. Each warrant may be exercised at any time from time
to time beginning on the second anniversary of the date of issuance of such
warrant until April 30, 1999; provided, however, that such warrants must be
exercised in increments of not less than 25,000 shares of Common Stock. The
shares of Common Stock and warrants were issued to Mr. Guarino, an accredited
investor, pursuant to Rule 506 of Regulation D under the Securities Act of 1933,
as amended. The shares of Common Stock and warrants were sold for cash and no
placement agent or underwriter was used.
The Company has never paid a cash dividend on its Common Stock and does
not anticipate the payment of cash dividends in the foreseeable future. The
Company intends to retain any earnings for use in the development and expansion
of its business.
Applicable provisions of the Delaware General Corporation Law may affect
the ability of the Company to declare and pay dividends on its Common Stock. In
particular, pursuant to the Delaware General Corporation Law, a company may pay
dividends out of its surplus, as defined, or out of its net profits, for the
fiscal year in which the dividend is declared and/or the preceding year. Surplus
is defined in the Delaware General Corporation Law to be the excess of net
assets of the company over capital. Capital is defined to be the aggregate par
value of shares issued.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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A number of statements contained in this report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the applicable statements.
These risks and uncertainties include but are not limited to the costs and the
uncertainties associated with the development and introduction of new products;
risks related to technological factors; potential manufacturing difficulties;
competitive market factors and liability risks.
In April 1997 the Company discontinued its souvenir and sports-related
business, changed its strategy and organized UPCIC. UPCIC was formed to
participate in the transfer of homeowner insurance policies from the JUA.
UPCIC's application to become a Florida licensed property and casualty
insurance company was filed with the DOI on May 14, 1997 and approved on October
29, 1997. UPCIC's proposal to begin operations through the acquisition of
approximately 45,000 homeowner insurance policies issued by JUA was approved by
the JUA on May 21, 1997, subject to certain minimum capitalization and other
requirements. One of the requirements imposed by the DOI was to limit the number
of policies UPCIC could assume from the JUA to 30,000.
In June 1997, Mr. Joseph DeAlessandro was named Chairman of the Board and
Chief Executive Officer of UPCIC. Mr. DeAlessandro was a senior key executive at
AIG Insurance Group for over 20 years, before leaving to head the Gulf Insurance
Co. and then Traveler's Insurance Group. In connection with Mr. DeAlessandro's
appointments, the Company entered into an agreement with a turnkey management
group headed by Mr. DeAlessandro to provide underwriting, claims and accounting
services to UPCIC.
In addition, as part of becoming a financial services company, in March
1997, Dr. Irwin Kellner, former chief economist for Chase Manhattan's Regional
Bank, was appointed to the Company's Board of Directors.
The Company has begun to implement its plan to become a financial
services company and, through its wholly-owned insurance subsidiary, UPCIC, has
positioned itself to take advantage of what management believes to be profitable
business and growth opportunities in the marketplace.
On December 4, 1997, the Company raised approximately $6.72 million in a
private offering with various institutional and/or otherwise accredited
investors pursuant to which the Company issued, in the aggregate, 11,208,996
shares of its Common Stock at a price of $0.50 per share ("Private Offering").
The proceeds of the Private Offering have been used to meet the minimum
regulatory capitalization requirements ($5,300,000) required by the DOI to
obtain an insurance company license and for general working capital purposes.
The Company received, a license to engage in underwriting homeowners insurance
in the state of Florida on December 31, 1997.
The Company intends to continue to devote its efforts to the business
plan for UPCIC and has entered into an agreement with the JUA whereby since
February 1998, the Company has assumed and is servicing approximately 28,000
policies. These policies, when renewed, represent approximately $26,000,000 in
estimated annual gross direct written premium revenues. In addition, the Company
has received approximately $89 per policy in bonus incentive money from the JUA
for assuming the policies. The bonus money must be maintained in an escrow
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account for three years. The Company must maintain the policies from the JUA for
this three year period at which point the Company will receive the bonus money.
Cash and cash equivalents as of December 31, 1997, was $1,172,418
(excluding restricted cash) as compared with $35,269 at April 30, 1997. This
increase is primarily the result of capital raised in the Private Offering.
The Company expects that the proceeds from the Private Offering together
with the JUA premiums and renewals will be sufficient to meet the Company's
working capital requirements for the next twelve months. The primary use of the
Private Offering was to provide restricted cash needed for the capitalization of
UPCIC.
The Company believes in the short-term it will continue to be able to
obtain additional policies from the JUA and continue to receive incentive
bonuses. The Company currently has obtained approximately 28,000 policies from
the JUA and can currently receive up to 30,000 policies from the JUA. To
continue to grow its insurance operations, the Company can obtain policies in
the open market and request permission from the JUA and the DOI to take more
than 30,000 policies from the JUA for which it has been approved. This base of
insurance business will also provide renewals of premiums in future periods
which should allow the Company to develop its insurance business beyond the next
twelve months.
SEASONALITY
Sales of the Company's novelty and souvenir products were correlated with
the visibility of the various proprietary marks and their owners. The Company
has not determined the level of seasonality, if any, in the insurance business.
The Company believes that its earnings have the most potential to be effected
negatively during the hurricane windstorm season that begins June 1, 1998, and
ends November 30, 1998.
RESULTS OF OPERATIONS - EIGHT MONTHS ENDED DECEMBER 31, 1997 VERSUS APRIL 30,
1997 AND APRIL 30, 1996
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As of April 30, 1997, the Company ceased all marketing efforts of its
souvenir business and sports-related products and at the time, estimated the
loss on disposed of inventories and patents at approximately $1,308,000.
Subsequently, management's efforts were spent on raising capital for its new
insurance business and was unable to close out the inventory and patents for the
expected realized amounts. In February 1998, the Company determined that its
efforts to commence and coordinate the insurance activity would be more
beneficial to the Company and abandoned its efforts to pursue further recoveries
of its former business. Management disposed of its remaining sports-related
products inventory at closeout prices resulting in losses of an additional
$280,000. Accordingly, all remaining costs attributable to the disposition of
inventory equal to $200,000 have been currently written-off and the Company has
provided for additional costs of approximately $158,000 related to its
discontinued operations.
At December 31, 1997, other income increased as a result of interest
income on the proceeds from the Private Offering.
During 1996 the Company charged $540,000 to interest which represents the
amount attributable to debt conversion.
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During the eight month period from May 1, 1997 to December 31, 1997, the
Company's operating expenses totaled $600,000 as compared to $400,000 for the
fiscal year ended April 30, 1997. This increase in operating expenses is a
result of expenses and legal fees related to the Private Offering as well as an
increase in the annual compensation for the Company's president and chief
executive officer.
ITEM 7. FINANCIAL STATEMENTS
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The financial statements of the Company are annexed to this report and are
referenced as pages F-1 to F-19.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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The directors and executive officers of the Company as of December 31,
1997 are as follows:
NAME AGE POSITION
Bradley I. Meier 30 President, Chief Executive Officer,
Assistant Secretary and Director
Norman M. Meier 59 Director
Irwin I. Kellner 59 Director
Reed J. Slogoff 30 Director
Joel M. Wilentz 64 Director
BRADLEY I. MEIER has been President and Chief Executive Officer of the
Company and a Director since its inception in November 1990. Since the formation
of UPCIC in May 1998, he has served as President of UPCIC. From September 1986
until May 1990, he was a student at the University of Pennsylvania's Wharton
School of Business, from which he graduated in 1990 with a B.S. in Economics.
Mr. Meier lettered and played on the varsity baseball team at the University of
Pennsylvania, E.I.B.L. Champions in 1988, 1989 and 1990, and was selected
All-Ivy League second baseman during his senior year.
NORMAN M. MEIER has been a Director of the Company since July 1992. Since
December 1986, Mr. Meier is and has been President, Chief Executive Officer and
a Director of Columbia Laboratories, Inc., a publicly-traded corporation engaged
in the development, registration, manufacture and sale of pharmaceutical
products. From 1971 to 1977, Mr. Meier was Vice President of Sales and Marketing
for Key Pharmaceuticals ("Key"), a company which had been engaged in the
marketing and sales of pharmaceuticals until its sale to Schering-Plough
Corporation in June 1986. From 1977 until June 1986, Mr.
Meier served as a consultant to Key.
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IRWIN L. KELLNER has been a Director of the Company since March 1997.
Since March 1997, Dr. Kellner has been an independent consultant. From 1996
through February 1997, Dr. Kellner was the Chief Economist for Chase
Manhattan's Regional Bank. From 1991 to 1996, Dr. Kellner held the same
position with Chemical and Manufacturers Hanover, Chase's predecessor
organizations. Dr. Kellner had been employed by the Bank since 1970. Dr.
Kellner, a past president of the Forecasters Club of New York and the New
York Association of Business Economists, holds membership, and has held a
variety of posts, in several professional associations, including the
American Economic Association, American Statistical Association and the
National Association of Business Economists. His other board memberships
include the Children's AIDS Network, North Shore University Hospital, the Don
Monti Memorial Research Foundation and Touro College's Barry Z. Levine School
of Health Sciences. Dr. Kellner is also a director of Columbia Laboratories,
Inc.
REED J. SLOGOFF has been a Director of the Company since March 1997. Since
January 1996, Mr. Slogoff has been an associate with the law firm of
Dilworth, Paxson, Kalish & Kaufmann LLP in Philadelphia. From January 1994
through January 1996, Mr. Slogoff was an associate with the law firm of
Harvey, Pennington, Herding & Dennison in Philadelphia. Mr. Slogoff received
a B.A. from the University of Pennsylvania in 1990, and received a J.D. from
the University of Miami School of Law in 1993.
JOEL M. WILENTZ has been a Director of the Company since March 1997.
Since 1970, Dr. Wilentz has been employed by Dermatology Associates in
Hallendale, Florida.
Except for Norman M. Meier and Bradley I. Meier, who are father and son,
respectively, there are no family relationships among the Company's executive
officers and directors.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Directors receive no
compensation for serving on the Board, except for the receipt of stock options
and the reimbursement of reasonable expenses incurred in attending meetings.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
The Company has entered into indemnification agreements with its executive
officers and directors pursuant to which the Company has agreed to indemnify
such individuals, to the fullest extent permitted by law, for claims made
against them in connection with their positions as officers, directors or agents
of the Company.
ITEM 10. EXECUTIVE COMPENSATION
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The tables and descriptive information set forth below are intended to
comply with the Securities and Exchange Commission compensation disclosure
requirements applicable to, among other reports and filings, annual reports on
Form 10-KSB. This information is only being furnished with respect to the
Company's Chief Executive Officer (CEO) because no other executive officer
earned in excess of $100,000 during the eight month period ended December 31,
1997.
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SUMMARY COMPENSATION TABLE
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Annual Compensation Long-Term Compensation
Name and Securities Underlying
Principal Position Year Salary Bonus Options
- ------------------ ---- ------ ----- -----------------------
Bradley I. Meier 1998* $250,000 $ -- 1,750,000
President and CEO 1997 75,000 -- 90,000
1996 75,000 -- 3,750
*Includes the transition period from May 1, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES AND OPTION VALUES FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997
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Number of Securities Number of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Shares December 31, 1997 December 31, 1997
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bradley I. Meier -- -- 750,000 1,000,000 -- --
</TABLE>
EMPLOYMENT AGREEMENT
- --------------------
As of May 1, 1997, the Company entered into a four year employment
agreement with Bradley I. Meier. Under the terms of the employment agreement,
Mr. Meier will devote substantially all of his time to the Company and will be
paid a base salary of $250,000 per year. Additionally, pursuant to the
employment agreement, and during each year thereof, Mr. Meier will be entitled
to a bonus equal to 3% of pretax profits up to $5 million and 4% of pretax
profits in excess of $5 million. The employment agreement with Mr. Meier
contains non-competition and non-disclosure covenants. Under the terms of the
employment agreement, Mr. Meier was granted ten-year stock options to purchase
1,500,000 shares of Common Stock at $1.06 per share, of which 500,000 options
vest immediately, 500,000 options vest after one year and the remaining options
vest after two years. In addition, the agreement may be extended for an
additional two years at the option of Mr. Meier.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
As of December 31, 1997, directors and named executive officers,
individually and as a group, beneficially owned Common Stock as follows:
Shares, Nature of Interest and
Name of Beneficial Owner(1) Percentage Of Equity Securities (2)
- --------------------------- -----------------------------------
Bradley I. Meier (3) 4,073,484 23.7%
Norman M. Meier (4) 1,965,624 12.1%
Irwin L. Kellner (5) 100,000 0.6%
Reed J. Slogoff (6) 100,000 0.6%
Joel M. Wilentz (7) 100,000 0.6%
Officers and directors as a group
(5 people) (8) 6,339,108 33.5%
-12-
<PAGE>
- ------------------------------
(1) Unless otherwise indicated, the Company believes that all persons named
in the table have sole voting and investment power with respect to the
shares of Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of Common Stock that can be
acquired by such person within 60 days of the date hereof upon the
exercise of warrants or stock options or conversion of Series A and
Series M Preferred Stock or convertible debt. Except as otherwise
specified, each beneficial owner's percentage ownership is determined by
assuming that warrants, stock options, Series A and Series M Preferred
Stock and convertible debt that is held by such person (but not those
held by any other person) and that are exercisable within 60 days from
the date hereof, have been exercised or converted.
(3) Consists of (i) (a) 962,829 shares of Common Stock, (b) options to
purchase 1,875 shares of Common Stock at an exercise price of $9.00,
options to purchase 1,875 shares of Common Stock at an exercise price of
$12.50, ten-year options to purchase 90,000 shares at an exercise price of
$2.88 as to 45,000 shares and $3.88 as to the remaining 45,000 shares
granted pursuant to Mr. Meier's employment agreement, options to purchase
90,000 shares at an exercise price of $1.13 per share and options to
purchase 500,000 shares at $1.25 per share, (c) warrants to purchase
15,429 shares of Common Stock at an exercise price of $1.75, warrants to
purchase 339,959 shares at an exercise price of $3.00 per share, warrants
to purchase 82,000 shares of Common Stock at $1.00 and warrants to
purchase 131,700 shares of Common Stock at a price of $.75 per share, (d)
169,450 shares of Common Stock issuable upon conversion of Series M
Preferred Stock, (e) options to purchase 250,000 shares of Common Stock at
$1.06 per share which vested on November 2, 1997, (f) options to purchase
500,000 shares of Common Stock at $1.06 per share which vested on May 1,
1997 granted pursuant to Mr. Meier's new employment agreement and (ii) an
aggregate of 271,701 shares of Common Stock (including shares of Common
Stock issuable upon exercise of warrants and conversion of Series A and
Series M Preferred Stock) beneficially owned by Belmer Partners, a Florida
general partnership ("Belmer"), of which Mr. Meier is a general partner.
Excludes unvested options to purchase 1,000,000 shares of Common Stock at
$1.06 per share granted pursuant to Mr. Meier's new employment agreement.
Also excludes all securities owned by Norman Meier and Phyllis Meier, Mr.
Meier's father and mother, respectively. Includes 416,666 and 250,000
shares owned by Lynda Meier and Eric Meier, respectively, who are the
sister and brother, respectively, of Bradley I. Meier, which shares are
subject to proxies granting voting rights for such shares to Bradley I.
Meier. Mr. Meier is the President, Chief Executive Officer and a Director
of the Company.
(4) Consists of (i) (a) 457,371 shares of Common Stock, (b) options to
purchase 3,750 shares of Common Stock at an exercise price of $12.50 per
share, and options to purchase 3,750 shares of Common Stock at an exercise
price of $9.00 per share and options to purchase 250,000 shares of Common
Stock at an exercise price of $1.25, (c) warrants to purchase 3,082 shares
of Common Stock at an exercise price of $22.00 per share, warrants to
purchase 2,494 shares of Common Stock at an exercise price of $4.25 per
share, warrants to purchase 28,538 shares of Common Stock at an exercise
price of $1.50 per share, warrants to purchase 120,000 shares of Common
Stock at an exercise price of $3.00 and warrants to purchase 110,000
-13-
<PAGE>
shares of Common Stock at an exercise price of $1.00, (d) 214,938 shares
of Common Stock issuable upon conversion of Series A and Series M
Preferred Stock owned by such person, (e) options to purchase 500,000
shares of Common Stock at $1.06 per share which vested on November 2,
1997, and (ii) an aggregate of 271,701 shares of Common Stock (including
shares of Common Stock issuable upon exercise of warrants and conversion
of Series A and Series M Preferred Stock) beneficially owned by Belmer, of
which Mr. Meier is a general partner. Excludes all securities owned by
Bradley Meier or Phyllis Meier. Mr. Meier is a Director of the Company,
the father of Bradley Meier, the President of the Company and the former
spouse of Phyllis Meier.
(5) Consists of options to purchase 100,000 shares of Common Stock at an
exercise price of $1.06 per share. Dr. Kellner is a Director of the
Company.
(6) Consists of options to purchase 100,000 shares of Common Stock at $1.06
per share. Mr. Slogoff is a Director of the Company.
(7) Consists of options to purchase 100,000 shares of Common Stock at $1.06
per share. Mr. Wilentz is a Director of the Company.
(8) See footnotes (1) - (7) above.
As of December 31, 1997, the following table sets forth information
regarding the number and percentage of Common Stock held by all persons who are
known by the Company to beneficially own or exercise voting or dispositive
control over 5% or more of the Company's outstanding Common Stock:
Number of Shares
Name And Address Beneficially Owned Percent Of Class (1)(2)
- ---------------- ------------------ -----------------------
Phyllis R. Meier (3) 996,426 6.5%
c/o Universal Heights, Inc.
19589 N.E. 10th Avenue
Miami, Florida 33179
Belmer Partners (4) 271,701 1.8%
c/o Phyllis R. Meier
Managing General Partner
Universal Heights, Inc.
19589 N.E. 10th Avenue
Miami, Florida 33179
- ------------------------------
(1) Unless otherwise indicated, the Company believes that all persons named
in the table have sole voting and investment power with respect to the
shares of Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of Common Stock that can be
acquired by such person within 60 days of the date hereof upon the
exercise of warrants or stock options or conversion of Series A and
Series M Preferred Stock or convertible debt. Except as otherwise
-14-
<PAGE>
specified, each beneficial owner's percentage ownership is determined by
assuming that warrants, stock options, Series A and Series M Preferred
Stock and convertible debt that are held by such a person (but not those
held by any other person) and that are exercisable within 60 days from
the date hereof, have been exercised or converted.
(3) Consists of (i) (a) 333,792 shares of Common Stock, (b) 2,880 shares of
Common Stock issuable upon conversion of related party debt, (c) warrants
to purchase 354,115 shares of Common Stock, and (d) 33,938 shares of
Common Stock issuable upon conversion of Series A and Series M Preferred
Stock owned by Ms. Meier, and (ii) an aggregate of 271,701 shares of
Common Stock (including shares of Common Stock issuable upon exercise of
warrants and conversion of Series A and Series M Preferred Stock)
beneficially owned by Belmer. Excludes all securities owned by Bradley
Meier and Norman Meier, the son and former spouse of Ms. Meier,
respectively. Ms. Meier is managing general partner of Belmer.
(4) Consists of (a) 54,533 shares of Common Stock, (b) 67,168 shares of
Common Stock issuable upon exercise of warrants and (c) 150,000 shares of
Common Stock issuable upon conversion of Series A and Series M Preferred
Stock. Belmer Partners is a Florida general partnership in which Phyllis
R. Meier is managing general partner and Bradley I.
Meier and Norman M. Meier are general partners.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
As of April 30, 1997 and December 31, 1997, the Company owed $131,423 and
$214,813, respectively, in accrued salary to Bradley Meier.
FISCAL 1997 TRANSACTIONS
- ------------------------
Transactions between the Company and its affiliates are on terms no less
favorable to the Company than can be obtained from third parties on an arms'
length basis. Transactions between the Company and any of its executive officers
or directors require the approval of a majority of disinterested directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
EXHIBITS
- --------
3.1 Registrant's Restated Amended and Restated Certificate of Incorporation(1)
3.2 Registrant's Bylaws(1)
3.3 Certificate of Designations, Preferences, and Rights of Series M
Convertible Preferred Stock dated August 13, 1997.
4.1 Form of Common Stock Certificate(1)
4.2 Form of Warrant Certificate(1)
4.3 Form of Warrant Agency Agreement(1)
4.4 Form of Underwriter Warrant(1)
4.5 Affiliate Warrant(1)
4.6 Form of Warrant to purchase 100,000 shares of Common Stock at an exercise
price of $2.00 per share issued to Steven Guarino dated as of April 24,
1997. (Substantially similar in form to two additional warrants to
-15-
<PAGE>
purchase 100,000 shares of Common Stock issued to Mr. Guarino dated as of
April 24, 1997, with exercise prices of $2.75 and $3.50 per share,
respectively.)
10.1 Registrant's 1992 Stock Option Plan(1)
10.2 Form of Indemnification Agreement between the Registrant and each of its
directors and executive officers(1)
10.3 General Lease Agreement dated August 28, 1993 by and between AT&T Credit
Corporation and Universal Heights, Inc.(2)
10.4 Loan agreement dated October 23, 1993 by and between Equitable Bank and
Universal Heights, Inc.(3)
10.5 Management Agreements by and between Universal Property & Casualty
Insurance Company and Universal P&C Management, Inc. dated as of June 2,
1997.
10.6 Employment Agreement dated as of May 1, 1997 between Universal Heights,
Inc. and Bradley I. Meier.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-51546) declared effective on December 14, 1992.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended July 31, 1993.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended October 31, 1993.
REPORTS ON FORM 8-K
- -------------------
None.
-16-
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNIVERSAL HEIGHTS, INC.
/s/ Bradley I. Meier
Date: June 8, 1998 _____________________________
Bradley I. Meier, President
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet - December 31, 1997 F-3
Consolidated Statements of Operations for the Eight
Months Ended December 31, 1997 and Years Ended April 30,
1997 and April 27, 1996 F-4
Consolidated Statements of Changes in Stockholders'
Deficiency for the Eight Months Ended December 31, 1997
and Years Ended April 30, 1997 and April 27, 1996 F-5
Consolidated Statements of Cash Flows for the Eight
Months Ended December 31, 1997 and Years Ended April 30,
1997 and April 27, 1996 F-6-F-7
Notes to the Consolidated Financial Statements F-8-F-19
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
---------------------------------------------------
To the Board of Directors and Stockholders
Universal Heights, Inc. and Subsidiary
Miami, Florida
We have audited the accompanying consolidated balance sheet of Universal
Heights, Inc. and Subsidiary as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the eight months ended December 31, 1997 and for
each of the two years in the period ended April 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Universal Heights,
Inc. and Subsidiary as of December 31, 1997, and the results of their
consolidated operations and cash flows for the eight months ended December 31,
1997 and for each of the two years in the period ended April 30, 1997, in
conformity with generally accepted accounting principles.
Millward & Co. CPAs
Fort Lauderdale, Florida
March 6, 1998 (Except for Note 8 as
to which the date is May 7, 1998)
F-2
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
DECEMBER 31, 1997
-----------------
ASSETS
ASSETS:
Cash and cash equivalents $ 1,172,418
Organization costs 118,678
Deposits 9,816
Assets of discontinued operations 30,866
Cash restricted for regulatory capitalization requirements 5,300,000
Total Assets $ 6,631,778
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 1,030,085
Accrued expenses 278,392
Due to related parties 406,000
Other 7,161
Total Liabilities 1,721,638
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value; 1,000,000 shares
authorized; 138,640 shares issued and outstanding 1,387
Common stock, $.01 par value, 20,000,000 shares authorized
14,632,604 shares issued and outstanding 146,326
Additional paid-in capital 14,688,981
Accumulated deficit (9,926,554)
Total Stockholders' Equity 4,910,140
Total Liabilities and Stockholders' Equity $ 6,631,778
F-3
<PAGE>
<TABLE>
<CAPTION>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Eight
Months Ended Year Ended
----------------- ----------------------------------
December 31, 1997 April 30, 1997 April 27, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
OPERATING EXPENSES:
General and administrative $ (613,481) $ (400,903) $ (426,267)
LOSS FROM OPERATIONS (613,481) (400,903) (426,267)
OTHER INCOME (EXPENSE):
Interest income 51,125 -- --
Interest expense (4,155) (14,988) (580,425)
Total Other Income (Expense) 46,970 (14,988) (580,425)
LOSS FROM CONTINUING OPERATIONS (566,511) (415,891) (1,006,692)
DISCONTINUED OPERATIONS:
Loss from operations of the Sports Novelty and
Souvenir business -- (569,996) (990,919)
Loss on disposal of Sports Novelty and Souvenir business (637,877) (1,387,575) --
Loss from discontinued operations (637,877) (1,957,571) (990,919)
NET LOSS $(1,204,388) $(2,373,462) $(1,997,611)
LOSS PER COMMON SHARE:
Basic
Loss from continuing operations $ (0.13) $ (0.24) $ (0.84)
Loss from discontinued operations (0.14) (1.11) (0.83)
Net (loss) $ (0.27) $ (1.35) $ (1.67)
Diluted
Loss from continuing operations $ (0.13) $ (0.24) $ (0.84)
Loss from discontinued operations (0.14) (1.11) (0.83)
Net (loss) $ (0.27) $ (1.35) $ (1.67)
SHARES USED TO COMPUTE NET LOSS PER SHARE 4,512,935 1,767,373 1,197,780
</TABLE>
F-4
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
----------------------------------------------------------------------
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997
--------------------------------------------
AND THE YEARS ENDED APRIL 30, 1997 AND APRIL 27, 1996
-----------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- ---------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, April 29, 1995 49,950 $ 500 913,812 $ 9,138 $ 5,025,707
Issuance of common stock for acquisitions -- -- 268,166 2,681 733,046
Debt exchanged for common stock -- -- 140,904 1,409 220,399
Debt exchanged for warrants -- -- -- -- 37,959
Interest attributable to convertible debt -- -- -- -- 540,000
Issuance of common stock for services -- -- 276,000 2,760 285,540
Net loss, year ended April 27, 1996 -- -- -- -- --
BALANCE, April 27, 1996 49,950 500 1,598,882 15,988 6,842,651
Debt exchanged for capital stock 88,690 887 1,265,800 12,658 691,995
Capital raised on private placement -- -- 354,760 3,548 312,202
Issuance of common stock for services -- -- 10,000 100 20,900
Net loss, year ended April 30, 1997 -- -- -- -- --
BALANCE, April 30, 1997 138,640 1,387 3,229,442 32,294 7,867,748
Proceeds received for subscription -- -- -- -- 3,000
Issuance of common stock for services -- -- 147,666 1,477 205,474
Private placement - 11,208,996 shares
issued at $.60 per share (net of stock
issuance costs of $58,191) -- -- 11,208,996 112,090 6,555,099
Debt exchanged for stock -- -- 46,500 465 57,660
Net loss, eight months ended
December 31, 1997 -- -- -- -- --
BALANCE, December 31, 1997 138,640 $ 1,387 14,632,604 $ 146,326 $14,688,981
F-5
<PAGE>
Accumulated Subscription
Deficit Receivable Total
------------ ------------ -----------
BALANCE, April 29, 1995 $(4,351,093) -- $ 684,252
Issuance of common stock for acquisitions -- -- 735,727
Debt exchanged for common stock -- -- 221,808
Debt exchanged for warrants -- -- 37,959
Interest attributable to convertible debt -- -- 540,000
Issuance of common stock for services -- -- 288,300
Net loss, year ended April 27, 1996 (1,997,611) -- (1,997,611)
BALANCE, April 27, 1996 (6,348,704) -- 510,435
Debt exchanged for capital stock -- -- 705,540
Capital raised on private placement -- (47,000) 268,750
Issuance of common stock for services -- -- 21,000
Net loss, year ended April 30, 1997 (2,373,462) -- (2,373,462)
BALANCE, April 30, 1997 (8,722,166) (47,000) (867,737)
Proceeds received for subscription -- 47,000 50,000
Issuance of common stock for services -- -- 206,951
Private placement - 11,208,996 shares
issued at $.60 per share (net of stock
issuance costs of $58,191) -- -- 6,667,189
Debt exchanged for stock -- -- 58,125
Net loss, eight months ended
December 31, 1997 (1,204,388) -- (1,204,388)
BALANCE, December 31, 1997 $(9,926,554) $ -- $ 4,910,140
The accompanying notes to consolidated financial statements are an integral part of these statements
</TABLE>
F-5A
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Eight
Months Ended For the Year Ended
------------------- ---------------------------------
December 31, 1997 April 30, 1997 April 27, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
CONTINUING OPERATIONS:
Loss from continuing operations $ (566,511) $ (415,891) $(1,006,692)
Adjustments to reconcile net loss from continuing operations
to net cash used in continuing operations:
Stock issued for services 118,201 21,000 164,904
Interest on convertible debt -- -- 540,000
Change in assets and liabilities:
Increase in Accrued Expenses 60,000 -- --
Decrease in deposits -- -- 151
Net cash used in continuing operations (388,310) (394,891) (301,637)
DISCONTINUED OPERATIONS:
Loss from discontinued operations (637,877) (1,957,571) (990,919)
Adjustments to reconcile loss from discontinued operations
to net cash used in discontinued operations:
Stock issued for services 88,750 -- --
Depreciation and amortization 32,722 562,417 263,052
Provision for doubtful accounts -- (8,101) 12,200
Write down of inventories to net realizable value 138,324 952,896 317,988
Loss on disposal of property, equipment and patents 250,257 -- --
Change in assets and liabilities: .
(Increase) decrease in:
Accounts receivable -- 51,982 26,307
Inventories 140,198 (8,647) 78,151
Other assets (116,176) 196,203 10,612
Increase in:
Accounts payable and accrued expenses 207,755 120,355 186,468
Net cash provided by (used in) discontinued operations 103,953 (90,466) (96,141)
Net cash used in operating activities (284,357) (485,357) (397,778)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- (436) (17,963)
Acquisition of patents and trademarks -- (3,339) (11,522)
Acquisition of businesses -- -- (84,400)
Deposit for regulatory capitalization requirements (5,300,000) -- --
Net cash used in investing activities (5,300,000) (3,775) (113,885)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 6,717,189 268,750 --
Net repayments under line of credit -- -- (132,656)
Advances from stockholders 12,500 -- 625,672
Issuance of related party loans -- 237,893 --
Repayment of loans payable -- -- (39,249)
Payment on capital lease obligations (8,183) (12,579) (14,334)
Net cash provided by financing activities 6,721,506 494,064 439,433
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
F-6
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
-----------
<TABLE>
<CAPTION>
For the Eight
Months Ended For the Year Ended
----------------- -------------------------------
December 31, 1997 April 30, 1997 April 27, 1996
----------------- --------------- --------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,137,149 4,932 (72,230)
CASH AND CASH EQUIVALENTS, Beginning of Period 35,269 30,337 102,567
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, End of Period $1,172,418 $ 35,269 $ 30,337
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 4,155 $ 9,479 $ 8,831
========== ========== ==========
SUPPLEMENTAL NONCASH FINANCING AND INVESTING ACTIVITIES:
Preferred stock issued in exchange for debt $ -- $ 887 $ --
========== ========== ==========
Common stock issued in exchange for debt $ 58,125 $ 704,540 $ 259,767
========== ========== ==========
Common stock issued in exchange for services $ 206,951 $ 21,000 $ 288,300
========== ========== ==========
Common stock issued in exchange for acquisitions $ -- $ -- $ 735,728
========== ========== ==========
Write-off of fully depreciated fixed assets $ 184,447 $ -- $ 510,524
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
F-7
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Organization
- ------------
Universal Heights, Inc. (the "Company") was originally incorporated in Delaware
in November 1990 to engage in the design, marketing, distribution and sale of
high-quality, licensed novelty and souvenir products under the trade name
SuperSouvenirs(TM), as well as other sports related products. During the fiscal
year ended April 30, 1997, the Company ceased all marketing efforts and as of
April 30, 1997 discontinued its core product line. This decision was based on
the projected continued losses, inability to consummate sales and insignificant
demand for products. Accordingly, at April 30, 1997, inventories were written
down to their estimated net realizable value resulting in a charge of $952,896
to discontinued operations. Related patents and trademarks were written down to
their estimated fair value resulting in a charge of $434,679 to discontinued
operations. As of December 31, 1997, the Company limited its efforts to the
disposition of the remaining inventories and patents and charged an additional
$637,877 to discontinued operations for the eight-month period ended December
31, 1997. See Note 2 "Discontinued Operators" for additional discussion relating
to the accounting for the discontinued operation.
The Company through its wholly-owned subsidiary, Universal Insurance Holding
Company, formed Universal Property & Casualty Insurance Company. The
subsidiary's application to become a Florida licensed property and casualty
insurance company was filed in May 1997 with the Florida Department of Insurance
and approved on October 29, 1997. In 1998, the subsidiary began operations
through the acquisition of homeowner insurance policies issued by the Florida
Residential Property and Casualty Joint Underwriting Association ("JUA").
The JUA was established in 1992 as a temporary measure to provide insurance
coverage for individuals who could not obtain coverage from private carriers
because of the impact on the private insurance market of Hurricane Andrew in
1992. Rather than serving as a temporary source of emergency insurance coverage
as was originally intended, the JUA has become a major provider of original and
renewal insurance coverage for Florida residents. In an attempt to reduce the
number of policies in the JUA, and thus the exposure of the program to
liability, the Florida legislature has approved a number of initiatives to
depopulate the JUA, which to date has resulted in policies being acquired by
private insurers and provides additional incentives to private insurance
companies to acquire policies from the JUA.
On December 4, 1997, the Company raised approximately $6,700,000 in a private
offering with various institutional and/or otherwise accredited investors
pursuant to which the Company issued, in the aggregate, 11,208,996 shares of its
Common Stock at a price of $.60 per share. The proceeds of this transaction are
being used partially for working capital purposes and to meet the minimum
regulatory capitalization requirements ($5,300,000) required by the Florida
Department of Insurance to engage in this type of homeowners insurance company
business.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and Universal Property & Casualty Insurance Company. All intercompany
accounts and transactions have been eliminated in consolidation.
F-8
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
Fiscal Year
- -----------
On March 10, 1998, the Company made a decision to change its accounting fiscal
year end from April 30 to December 31. Accordingly, the accompanying financial
statements present the Company's financial position at December 31, 1997 and the
statements of operations for each of the years in the two-year period ending
April 30, 1997 and for the eight months ended December 31, 1997.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
- ------------------------------------------
The carrying amount reported in the balance sheet for cash, accounts receivable,
accounts payable and accrued liabilities approximates fair market value due to
the immediate or short-term maturity of these consolidated financial
instruments.
Cash and Cash Equivalents
- -------------------------
For the purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Assets from Discontinued Operations
- -----------------------------------
Inventories, consisting principally of licensed novelty and souvenir products,
are valued at their net realizable value based on management's anticipated
liquidation value.
Property and equipment are stated at cost less accumulated depreciation which
approximates net realizable value. Depreciation is computed by the straight-line
method based on estimated useful lives of the assets.
Depreciation and amortization expense was approximately $221,254 for the eight
months ended December 31, 1997 and $562,417 and $263,052 in 1997 and 1996.
The cost of acquiring patents and trademarks are amortized using the
straight-line method over their estimated ten-year lives. See "Impairment of
Long-Lived Assets."
Revenue Recognition
- -------------------
Revenue from the sale of products is recognized upon shipment to the customer.
Net Loss Per Share
- ------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" which simplifies existing computational guidelines.
Statement No. 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. The basic net loss per share is computed by
dividing the net loss plus preferred dividend requirement by the weighted
average number of shares of common stock outstanding during the period.
F-9
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
Shares to be issued upon the exercise of the outstanding options and warrants or
the conversion of the preferred stock are not required to be included in the
computation, however, as these are losses, their effect would be anti-dilutive,
accordingly, the basic and diluted net loss per share are the same.
Income Taxes
- ------------
The Company's deferred tax asset or liability is determined based on the
difference between the financial statements and tax basis of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred income tax expense is the result of changes
in the liability for deferred taxes. The principal type of difference between
assets and liabilities for financial statement and tax return purposes is the
net operating loss carryforward.
Impairment of Long-lived Assets
- -------------------------------
In May 1996, the Company adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 became effective for fiscal years beginning after December 15, 1995,
and addresses the accounting for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to be disposed
of. The adoption of this pronouncement did not have a significant impact on the
Company's consolidated financial statements.
During fiscal 1997 and the eight months ended December 31, 1997, patents and
trademarks were deemed to be impaired and written down to their fair value. Fair
value, which was determined by reference to the present value of the estimated
future cash inflows of such assets, exceeded their carrying value. Accordingly,
an impairment loss amounting to $434,679 and $188,532 has been included in
discontinued operations in 1997 and for the eight months ended December 31,
1997, respectively.
Use of Estimates
- ----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
- ----------------------------
The Company occasionally maintains deposits in excess of federally insured
limits. Statement of Financial Accounting Standards No. 105 identifies these
items as a concentration of credit risk requiring disclosure, regardless of the
degree of risk. The risk is managed by maintaining all deposits in high quality
financial institutions. The amounts in excess of the insured limit are
approximately $6,100,000.
F-10
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
STOCK OPTIONS
The Company grants options for a fixed number of shares to employees and outside
directors with an exercise price equal to the fair value of the shares at the
grant date. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and accordingly, recognizes no compensation expense for the stock
option grants. The Company has adopted the disclosure only provisions of SFAS
No. 123 (see Note 5b).
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income." The Statement is effective for the Company
beginning in 1998, and establishes standards for the reporting and display of
comprehensive income and its components. The Statement requires that all items
that are income be reported in a financial statement that is displayed with the
same prominence as other financial statements. The Company does not expect the
effect of adoption of Statement No. 130 to be material to the consolidated
financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. The
standard sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers.
NOTE 2 - DISCONTINUED OPERATIONS
-----------------------
As of April 30, 1997, the Company ceased all marketing efforts of its souvenir
business and sports related products and at the time, estimated the loss on
disposed of inventories and patents at approximately $1,388,000. Subsequently,
management's efforts were spent on raising capital for its new insurance
business and was unable to close out the inventory and patents for the expected
realizable amounts. In February 1998, the Company determined that its efforts to
commence and coordinate the insurance activity would be more beneficial to the
Company and abandoned its efforts to pursue further recoveries of its former
business. Management disposed of its sports-related products inventory at
closeout prices resulting in losses of an additional $280,000. In addition,
recovery of the remainder of patents could result in litigation. Accordingly,
all remaining costs attributable to this of $200,000 have been currently written
off and the Company has provided for additional costs of approximately $158,000
related to its discontinued operations.
F-11
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 3 - DUE TO RELATED PARTIES
----------------------
Note payable to an officer and director, with interest at
prime (8.25%) plus 2%, convertible into 15,429 shares of
Common Stock; if the note is converted, warrants to purchase
15,429 shares of Common Stock at $1.75 per share, will be
issued. $ 38,700
Note payable - stockholder 10,000
Deferred salary, due on demand, non-interest bearing. 214,813
Accrued royalties related to acquisition of business. 8,531
Accrued interest, due on demand, non-interest bearing. 133,956
---------
$ 406,000
=========
Interest incurred for debt to related parties is $139,585 and $142,814 for the
years ended April 30, 1996 and 1997, respectively, and $133,956 for the eight
months ended December 31, 1997. 1996 includes $540,000 of charges relating to
the conversion features of related party debt.
NOTE 4 - INCOME TAXES
------------
To date, the Company has incurred tax operating losses and, therefore, has
generated no income tax liabilities. As of December 31, 1997, the Company has
generated net operating loss carryforwards totaling approximately $5,343,000
which are available to offset future taxable income, if any, through 2013. As
the utilization of such operating losses for tax purposes is not assured, the
deferred tax asset has been fully reserved through the recording of a 100%
valuation allowance. Should a cumulative change in ownership of more than 50%
occur within a three-year period, there could be an annual limitation on the use
of the net operating loss carryforward. The deferrals relating to inventories,
patents and trademarks are expected to reverse in the tax year ended April 30,
1998.
The components of the net deferred income taxes are as follows:
Deferred Tax Assets:
Net Operating Loss Carryforward $ 2,057,000
Inventories 440,000
Patents and Trademarks 245,000
Compensation 51,000
-----------
Total Deferred Tax Assets 2,793,000
Valuation Allowance for Deferred Tax Assets (2,793,000)
-----------
Deferred Income Taxes, Net $ -
===========
F-12
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 4 - INCOME TAXES (CONTINUED)
------------------------
The net operating loss carryforwards are scheduled to expire as follows:
Expiration
Date
- -------------
2006 $ 8,000
2007 251,000
2008 722,000
2009 1,010,000
2010 1,116,000
2011 677,000
2012 904,000
2013 655,000
-----------
$ 5,343,000
===========
NOTE 5 - STOCKHOLDERS' EQUITY
--------------------
Cumulative Preferred Stock
- --------------------------
In October 1994, 49,950 shares of Series A Preferred Stock were issued in
repayment of $499,487 of related party debt, 88,690 shares of series M preferred
stock were issued during fiscal year ended April 30, 1997, for repayment of
$88,690 of related party debt. Each share of preferred stock is convertible into
2.5 shares of Common Stock and 5 shares of common stock, respectively, into an
aggregate of 568,326 common shares. Beginning May 1, 1998, the Preferred Stock
pays a cumulative dividend of $.25 per share per quarter. In connection with
this transaction, the Company issued the holders warrants to purchase 12,488
shares of Common Stock at $4.25 per share, exercisable through October 17, 2004.
The Preferred Stock is redeemable by the Company at $10 per share through April
2000 and has a liquidation value of $10 per share. Dividends have not been
declared for any of the periods.
STOCK OPTION PLAN
- -----------------
All employees, officers, directors and consultants of the Company or any
subsidiary are eligible to participate in the Universal Heights, Inc. 1992 Stock
Option Plan (the "Plan"). Under the Plan, as amended, a total of 168,750 shares
of Common Stock have been authorized for issuance upon exercise of the options.
Information on options are as follows:
Number of
Shares Price per Share
---------- ---------------
Outstanding, April 29, 1995 107,625 $ 6.00 - 22.00
Granted - -
Cancelled (9,750) 6.00 - 10.00
--------
Outstanding, April 27, 1996 97,875 6.00 - 22.00
Granted - -
Cancelled (62,250) 6.00 - 22.00
-------- --------------
Outstanding, April 30, 1997 and
December 31, 1997 35,625 $ 6.00 - 22.00
======== ==============
F-13
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
--------------------------------
Options weighted average exercise price pursuant to the Plan exercisable at
December 31, 1997 are as follows:
15,625 $ 22.00
8,750 6.00
5,625 9.00
5,625 12.50
--------
35,625
========
Other Stock Options
- -------------------
(a) In connection with the purchase of the weighted athletic glove company,
options to purchase a total of 112,999 shares of Common Stock were issued
as follows:
. Options to purchase 3,333 shares of common stock at $3 per share,
vesting July 31, 1996 and expiring July 31, 2005 were issued to each of
three prior stockholders.
. Options to purchase 21,500 shares of common stock at $3.50 per share
vesting June 5, 1995 and expiring June 4, 2005 were issued to each of
two prior owners pursuant to their employment agreements.
. Options to purchase 30,000 shares of common stock at $3 per share,
vesting when sales of weighted athletic gloves reach $12.5 million in
any twelve consecutive months, expiring on August 27, 2005 were issued
to each of two prior owners.
(b) In July 1996, the Company granted stock options to officers and directors
to purchase an aggregate of 1,210,000 shares of common stock at $1.25 per
share. On May 1 and 2, 1997, the Company also issued to directors and
officers, 2,550,000 options to purchase common shares at $1.06 per share.
On June 12, 1997, the Company granted 1,250,000 warrants to the president
of its insurance subsidiary to purchase shares at $.63 per share which are
exercisable over a five-year period. All of the exercise prices were at the
market price at the date of grant. These options are exercisable over a
ten-year period.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock options issued to the officers and
directors. Had compensation been determined based on the fair value at the
grant dates for the awards consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per share would have been adjusted to
the pro forma amounts indicated below:
F-14
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
--------------------------------
Information regarding the Company's issuance during the eight-month period ended
December 31, 1997 and for each of the two years in the period ended April 30,
1997:
<TABLE>
<CAPTION>
For the Eight Year Ended
Months Ended --------------------------------------------------
December 31, 1997 April 30, 1997 April 27, 1996
-----------------------------------------------------------------------------
Loss from Loss from Loss from
Continuing Continuing Continuing
Net Loss Operations Net Loss Operations Net Loss Operations
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loss:
As reported $(1,144,388) $ (553,481) $(2,373,462) $ (415,891) $(1,997,611) $(1,006,692)
Pro forma $(4,632,388) $ (4,041,481) (3,811,462) (1,853,891) (1,997,611) (1,006,692)
Loss per share:
Basic and diluted
As reported $ (.25) $ (.11) (1.35) (.24) (1.67) (.84)
Pro forma $ (1.03) $ (.89) (2.16) (1.05) (1.67) (.84)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted assumptions during the periods ended:
December 31, April 30,
1997 1997
------------ ------------
Exercise price $ .92 $ 1.25
Expected life of option 8 years 10 years
Risk free interest rate 6.48% 6.66%
Expected volatility 264.00% 117.00%
See Note 6 - Employment agreement and Note 8 - Subsequent event for additional options.
</TABLE>
Warrants
- --------
During the year ended April 27, 1996, the Company issued warrants to purchase
shares of common stock at the market price on the date of issuance as follows:
. 80,000 and 75,000 shares of common stock at a price of $1 and $3 per
share, exercisable through October 11, 2005 and August 11, 2005,
respectively, to professionals involved in the acquisition of the two
companies (Note 2).
. 82,000 and 339,959 shares of common stock at a price of $1 and $3 per
share, exercisable through October 11, 2005 and August 11, 2005,
respectively, to an officer and director of the Company.
. 276,667 shares of common stock at prices ranging from $1 to $3 per
share, exercisable through July 21, 2005 to October 11, 2005 to
stockholders of the Company.
. 10,000 and 15,429 shares of common stock at a price of $2.25 and $1.75
per share, respectively, upon the conversion of related party debt.
F-15
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
--------------------------------
. 50,000 shares of common stock pursuant to a consulting agreement as
follows:
10,000 shares at $1 per share vested October 23, 1995
10,000 shares at $1.75 per share vested April 23, 1996
10,000 shares at $1.75 per share vesting October 23, 1996
10,000 shares at $1.75 per share vesting April 23, 1997
10,000 shares at $1.75 per share vesting October 23, 1997
In connection with financial consulting services, the Company issued warrants in
March 1997 to purchase 1,000,000 shares of common stock at $.75 per share and
1,000,000 shares at $1.25 per share. The option price represents the fair value.
In connection with the Company's initial public offering in December 1992, the
Company sold units; each unit included warrants (the "IPO Warrants"). Effective
in December 1995, the Company's Board of Directors amended the terms of the IPO
Warrants to reduce the exercise price and extend the expiration date. Each IPO
Warrant entitles its registered owner to purchase, at the exercise price of
$6.00, one share of the Company's Common Stock until December 31, 1998 (the "IPO
Warrant Expiration Date"). The Company may call and redeem all outstanding IPO
Warrants at any time upon 30 days' prior written notice, at the redemption price
of $.01 per IPO Warrant, at such time as the market price of its Common Stock
has exceeded the IPO Warrant exercise price by 20% for the period of 20
consecutive business days, provided that the holder may exercise the IPO Warrant
at any time prior to the expiration of the 30-day period. Customary
anti-dilution provisions protect the IPO Warrants.
Holders of IPO Warrants are not entitled to vote, to receive dividends, or to
exercise any rights of holders of common stock until the warrants have been
fully exercised.
In December 1997, the Company issued 200,000 warrants to purchase 200,000 shares
at $.75 per share, the quoted market at the date of grant. The warrants were
issued in connection with the Company's private placement described in Note 1.
Other Stock Issuances
- ---------------------
In October 1995, 45,000 unregistered shares of common stock were issued for $.70
per share, the fair market value at the date of issuance, for legal services.
In February 1996, in satisfaction of $70,000 of accounts payable, 25,000 shares
of common stock were issued at $3 per share, the fair market value of the shares
as of that date.
In February 1996, 140,904 shares of common stock were issued at $1.27 to $3 per
share upon the conversion of $221,808 of related party debt.
In connection with the two business acquisitions in the year ended April 27,
1996, a total of 178,166 and 90,000 shares of common stock were issued,
respectively. Of these shares, 158,166 unregistered shares were valued at prices
ranging from $.70 to $2.10 per share, 60,000 and 50,000 shares were issued at
$3.75 and $4 per share, the guaranteed values, respectively.
F-16
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
--------------------------------
In connection with a consulting agreement, the Company issued 50,000 shares of
common stock all of which have been issued as of April 27, 1996 and warrants to
purchase 50,000 shares of common stock. The shares are valued at the fair market
value as of the date of the agreement; $.70 per share or an aggregate of
$35,000.
In connection with a consulting agreement, the Company issued 142,000 shares of
common stock all of which have been issued as of April 27, 1996. The shares are
valued at the market value as of the date of the agreement; $1 per share or an
aggregate of $142,000.
In July 1996, a group of investors purchased warrants from the Company at $.05
per warrant entitling the holders to purchase 1,433,333 shares of the Company's
Common Stock at $.70 per share. The warrants were exercisable for six months.
During July 1996, warrants to purchase 254,760 shares were exercised for gross
proceeds of $250,000.
Pursuant to a subscription agreement dated April 22, 1997, the Company sold
100,000 shares of common stock at $.97 per share and issued warrants to purchase
100,000 shares at $2.00 per share; 100,000 shares at $2.75 per share; and
100,000 shares at $3.00 per share. The warrants expire on April 30, 1999. The
Company received $50,000 in the eight-month period ended December 31, 1997 from
the exercise of warrants.
During 1997, 10,000 shares were issued for services at a fair value of $21,000.
The Company issued 46,667 shares of common stock as payment to certain
creditors. The debt and fair market value of the shares approximated $78,500.
In connection with provisions of convertible debt agreements with officers and
directors, the Company issued shares for debt during the year ended April 30,
1997. Pursuant to the position set forth by the Financial Accounting Standards
Board in Emerging Issues Task Force Topic No. D-60, "Accounting for the Issuance
of Convertible Preferred Stock and Debt Securities with a Nondetachable
Conversion Feature," the Company charged $540,000 in 1996. This charge
represents the value of the beneficial conversion feature. In October 1997, the
Company issued 194,166 shares for past services and to pay debt. The shares have
been valued based on the quoted market price at the date of issue, accordingly,
$118,200 has been charged to continuing operations, $88,750 to discontinued
operations and $33,125 to settle debt.
See Note 8 for additional issuances.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
-----------------------------
See Note 5 regarding private placement during the eight-month period ended
December 31, 1997.
Operating Leases
- ----------------
Rent expense for the years ended April 30, 1997 and April 27, 1996 was $41,238
and $42,534, respectively. During the eight months ended December 31, 1997, the
Company operated with a month-to-month lease.
F-17
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
Employment Agreement
- --------------------
The Company had an employment agreement with its president pursuant to which the
president received annual compensation of $75,000, which expired on April 30,
1997. This agreement provides for additional compensation equal to an aggregate
1.0% of gross sales in excess of $3,500,000 annually, 45,000 ten-year options to
purchase shares at $2.88, 45,000 ten-year options to purchase shares at $3.88
and 90,000 ten-year options to purchase shares at $1.125 (see Note 10 -
Subsequent event for renewal terms).
As of May 1, 1997, the Company entered into a new employment agreement with the
president of the Company for a four year term. Under the terms of the employment
agreement, the president will devote substantially all of his time to the
Company and will be paid a base salary of $250,000 per year. Additionally,
pursuant to the employment agreement, and during each year thereof, the
president will be entitled to a bonus equal to 3% of pretax profits up to
$5,000,000 and 4% of pretax profits in excess of $5,000,000. The employment
agreement contains non-competition and non-disclosure covenants. Under the terms
of the agreement, the president was granted ten-year stock options to purchase
1,500,000 shares of common stock at $1.00 per share, of which 500,000 options
vest immediately, 500,000 options vest after one year and the remaining options
vest after two years. In addition, the agreement may be extended for an
additional two years at the option of the president (see Note 5).
In connection with the Company's proposed insurance business, the Company has
granted 1,250,000 options to an officer to purchase common stock depending on
certain conditions at the exercise price of $.63. The officer also will provide
certain insurance management services through an entity owned by the affiliate.
On May 2, 1997, the Company granted options to three new directors and two
existing directors, including the president, to purchase 300,000 and 750,000
shares, respectively, of the Company's common stock at an option price of $1.06
per share (see Note 5 and Note 8).
Licensing Agreements
- --------------------
The Company's existing licensing agreements expire at various times through
March 31, 1998. As of April 27, 1996, the Company has not renewed licensing
agreements with the National Hockey League, Time Warner, Quarterback Club and
Notre Dame. The Company currently has no plans to renew these agreements.
In connection with the purchase of the weighted athletic glove company, a
royalty agreement effective during the life of the patent was signed with the
former owners requiring minimum royalties of $10,000 in 1996, $20,000 in 1997
and $30,000 per year thereafter. If such royalties are not paid or otherwise
satisfied, the patents would be reassigned to the previous owners of the
weighted athletic glove company. The Company negotiated the matter and has since
settled with the owners of the weighted athletic glove company. See "Litigation"
for additional discussion related to the athletic glove inventory and patents.
F-18
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 7 - LITIGATION
----------
On May 15, 1997, two former employees of the Company filed a lawsuit against the
Company. The Plaintiffs asserted claims for an injunction and for damages for
breach of an Asset Purchase Agreement. The Complaint also includes breach of
employment agreements, breach of royalty agreements and other relief. In
connection therewith, the Plaintiffs are demanding unpaid salaries amounting to
approximately $130,000. The Company has negotiated a settlement with the
Plaintiffs pursuant to which the Plaintiffs received exclusive use of certain
patents and trademarks, the remaining inventory of weighted baseball gloves, and
10,000 shares of Common Stock, yet to be issued.
Note 8 - SUBSEQUENT EVENTS
-----------------
On January 14, 1998, the Company agreed to issue 45,000 shares of Common Stock
of the Company at a price of $1.00 per share to Sherman and Fischman, P.A. with
whom the Company has had an ongoing professional relationship, in consideration
for an outstanding liability. These shares were not issued until March 1998. The
Company also issued 600,000 warrants on January 16, 1998 to purchase common
stock at $1.00 per share, the quoted market value. These warrants were issued
for accrued legal services which were valued at $60,000. At December 31, 1997,
the Company recorded the liability for the aforementioned legal services. In
addition, pursuant to an investment banking agreement dated December 24, 1997
between the Company and Hermitage Capital Corp. ("Hermitage"), the Company
agreed to issue 200,000 warrants to purchase shares of Common Stock to Hermitage
at an exercise price of $.75 per share and have been valued at $.35 per share
using a Black-Scholes formula and is to be amortized over twelve months
beginning January 1, 1998. In addition, the Company paid $300,000 in January
1998 for formal services to be provided over a one-year period.
On March 31, 1998, the Company also issued 300,000 warrants to Fortress
Financial Group for services. The value attributable to these warrants,
approximately $100,000, will be amortized beginning April 1, 1998.
On May 7, 1998, the Company granted 1,050,000 options to officers and directors
to purchase stock at $1.63 per share, the quoted market price at that date.
F-19
