U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A#3
AMENDED AND RESTATED
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended April 30, 1997
Commission file number 0-20848
UNIVERSAL HEIGHTS, INC.
(Name of small business issuer in its charter)
Delaware 65-0231984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19589 N.E. 10th Avenue
Miami, Florida 33179
(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. [ ]
State issuers revenues for its most recent fiscal year: $161,312
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of July 31, 1997:
$1,111,731
State the number of shares of Common Stock of Universal Heights, Inc.
issued and outstanding as of July 31, 1997: 3,425,588
Transitional Small Business Disclosure Format: YES ___ NO _X_
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY--
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. The Company is continuing to sell the weighted athletic
gloves; however, due to lack of sales growth, the Company is in the process of
selling off the remaining inventories of the other product lines.
As part of its strategy to diversify its business into a financial
services company positioned 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 19589 N.E.
10th Avenue, Miami, Florida 33179, and its telephone number is (305) 653-4274.
The Company has one subsidiary, Universal Insurance Holding Company, which is
wholly-owned. Universal Property & Casualty Insurance Company 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
(Department) on May 14, 1997 and is pending. UPCIC's proposal to begin
operations through the transfer of approximately 45,000 homeowner insurance
policies issued by JUA was approved by the JUA on June 21, 1997, subject to
certain minimum capitalization and other requirements including approval by the
Florida Department of Insurance.
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
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 approximately 600,000 policies
being acquired by private insurers. Recently, the Florida legislature has
approved, and the Department has implemented, the Market Challenge/Takeout Bonus
Program ("Takeout Program"), which provides additional incentives to private
insurance companies to acquire policies from the JUA.
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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
Department 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 expects to receive a minimum bonus payment of approximately
$4,000,000 based upon a portfolio takeout of 45,000 policies. Bonus payments
must be held in escrow for three years, during which time such funds can be
counted as statutory reserves but may otherwise only be used for certain
prescribed purposes, such as payment of claims. After the three year period,
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 expects to acquire between 30,000 and 60,000 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 De Alessandro as a senior officer and director. Mr. De
Alessandro 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 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.
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. The Company's exposure to catastrophic losses
arises principally out of hurricanes and windstorms. UPCIC expects to manage its
exposure to such losses from an underwriting perspective by limiting the
accumulation of known risks in exposed geographic areas. In addition, UPCIC
intends to protect itself against the risk of catastrophic loss by obtaining
reinsurance coverage. UPCIC expects that its reinsurance program will consist of
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excess of loss and/or quota share reinsurance and catastrophe reinsurance. This
reinsurance program is currently being coordinated by UPCIC, which believes that
quality reinsurance coverage will be available.
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 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, further 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 Department. Notwithstanding the three year regulatory relief
available to UPCIC under the Takeout Program, the Department 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.
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 $5 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 it reinsurers. A
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reinsurer's insolvency or inability to make payments under a reinsurance treaty
could have a material adverse effect on the financial condition and
profitability of UPCIC.
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 Operating 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 and Chief Executive Officer of UPCIC.
Mr. Meier has also served as President and 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.
ATHLETIC GLOVES--
The patented, weighted athletic gloves are used for a variety of sports
including a golf glove, fitness glove, and a baseball batting glove. The
Company's glove products are currently sold primarily by telemarketing of former
customers. In addition, in June 1996, the Company signed Hale Irwin, three-time
winner of the PGA's US Open to a three year consulting and endorsement contract
for the Company's weighted golf glove. The weighted gloves are currently
produced overseas, however, these products could also be obtained domestically
from a variety of different sources. The golf, baseball and fitness markets are
highly competitive. Although the Company's weighted gloves are patented the
Company is competing against many larger companies with substantially greater
financial resources.
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PATENTS AND TRADEMARKS --
In connection with the acquisition of the weighted glove company, the
Company received an assignment of a patent covering the weighted glove. This
patent expires in 2007. In addition, in connection with the acquisition of the
pen company, the Company acquired a patent covering the pens. This patent
expires in 2011.
EMPLOYEES--
As of July 31, 1997, the Company has two employees, the president and an
administrative assistant. None of the Company's employees are 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
The Company leases approximately 7,500 square feet of office space and
adjoining warehouse space in North Miami Beach, Florida under a month to month
lease.
ITEM 3. LEGAL PROCEEDINGS
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 are demanding unpaid salaries
amounting to approximately $130,000. The case is still in the discovery stage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $.01 par value Common Stock ("Common Stock") is quoted on
the NASDAQ Small-Cap Market under the symbol UHTS. The following table sets
forth the high and low bid and ask prices of the Common Stock, as reported by
NASDAQ. The following data reflects inter-dealer prices, without retail mark-up,
mark down or commission and may not necessarily represent actual transactions.
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Per share prices reflect the one-for-four reverse stock split of the Company's
Common Stock approved on December 2, 1994.
HIGH LOW
---- ---
FISCAL YEAR ENDED APRIL 30, 1996
- --------------------------------
First Quarter $4.50 $2.63
Second Quarter 3.88 .50
Third Quarter 4.00 .25
Fourth Quarter 2.25 1.12
FISCAL YEAR ENDED APRIL 30, 1997
- --------------------------------
First Quarter $1.88 $ .88
Second Quarter 1.38 1.00
Third Quarter 1.25 .38
Fourth Quarter 2.75 .38
At July 31, 1997, there were 48 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 pays 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.
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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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Over the past two years, the Company's sales have declined as a result
primarily of labor problems experienced by Major League Baseball (MLB), the
National Hockey League (NHL) and the National Basketball Association (NBA). Such
problems included substantial strikes by both MLB and the NHL and a threatened
strike by the NBA. As a result, the Company has changed its strategy and intends
to become a financial services company positioned to take advantage of what
management believes to be profitable business and growth opportunities in the
marketplace. In connection therewith, 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).
UPCIC's application to become a Florida licensed property and casualty
insurance company was filed with the Florida Department of Insurance
(Department) on May 14, 1997 and is pending. 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.
The Company is currently in the process of a proposed private offering of
debt and/or equity securities in order to meet the minimum capitalization
requirements of the JUA. No assurances can be given whether the Company can
obtain such funds or the terms thereof. Failure to obtain such funds would have
a material adverse affect on the Company.
In June 1997, Mr. Joseph DeAlessandro was named chairman of the board and
chief operating 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.
Historically, the Company's primary demands for cash included payments to
obtain inventory, payments to obtain licenses and royalty payments. To fund such
demands, the Company has generated funds from sales of its products and from
outside sources through the sale of its debt and equity securities, primarily to
related parties. In the future, the Company will attempt to obtain additional
funds from internal cash flow and the raising of additional working capital. The
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Company is also working closely with its vendors on a payment plan for its
accounts payable.
In July 1996, a group of investors purchased warrants at $.05 per warrant
from the Company entitling the holders to purchase 1,433,333 shares of the
Company's Common Stock at $.70 a share. During July, warrants to purchase
254,760 shares were exercised. As a result of these transactions the Company
received gross proceeds of approximately $250,000. The remaining warrants to
purchase shares of common stock expired in January 1997.
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. (See Item 5 for terms of the issuance).
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
does not believe that there will be any seasonality in the insurance business.
RESULTS OF OPERATIONS - YEARS ENDED APRIL 30, 1997 VERSUS APRIL 27, 1996
During the year ended April 30, 1997, the Company did not actively market
its core product line resulting in sales decreasing from $359,712 for the fiscal
year ended April 27, 1996 to $161,312 for the fiscal year ended April 30, 1997.
The loss from the operations of the core product line decreased from $990,919 in
fiscal 1996 to $569,996 in fiscal 1997. The decision to discontinue marketing
efforts was based on the projected continued losses, inability to achieve
critical mass and lessened demand for the products because of market factors.
Accordingly, at April 30, 1997, inventories have been written down to their
estimated net realizable value resulting in a charge of $952,896 to discontinued
operations in 1997. Related patents and trademarks have been written down to
their estimated fair value resulting in a charge of $434,679 to discontinued
operations in 1997. The Company does not expect to incur material losses on the
disposition of these product lines.
During 1996 the Company charged $540,000 to interest which represents the
amount attributable to debt conversion.
The Company is actively pursuing a strategy to enter into the financial
service industry. The Company plans to qualify as a property and casualty
insurer through the state of Florida market challenge program.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS at April 30, 1997 were $35,269 as compared with
$30,337 at April 27, 1996. The increase is primarily the result of $495,358
being used for operating activities offset by $504,065 of financing activities,
consisting of advances from related parties and a private placement of warrants
to purchase Common Stock.
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DUE TO RELATED PARTIES at April 30, 1997 was $315,678 as compared to
$232,325 at April 27, 1996. During fiscal 1997, $627,040 of related party debt
was converted into 1,202,363 shares of Common Stock and 88,690 shares of Series
M Preferred Stock to be issued.
At the Company's present level of sales and operations, the Company does
not have and is not generating sufficient funds from operations or otherwise to
finance its proposed plan of operations for the next twelve months. In order to
finance the proposed operations of UPCIC, the Company is attempting to raise
funds through an additional equity financing or debt financing. Excluding
related party loans, the Company has not secured additional sources of
financing. There is no assurance that any such financing will be available on
commercially reasonable terms or at all. The Company's inability to obtain
future financing on terms acceptable to the Company would have a material
adverse affect on the Company's proposed insurance operations.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are annexed to this report and are
referenced as pages F-1 to F-17.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company as of July 31, 1997
are as follows:
NAME AGE POSITION
---- --- --------
Bradley I. Meier 29 President, Chief Executive Officer,
Assistant Secretary and Director
Norman M. Meier 58 Director
Irwin I. Kellner 58 Director
Reed J. Slogoff 29 Director
Joel M. Wilentz 63 Director
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BRADLEY I. MEIER has been President and Chief Executive Officer of the
Company and a director since inception in November 1990. 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.
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
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made against them in connection with their positions as officers, directors or
agents of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on the Company's review of the copies of such forms
received by it, or oral or written representations from certain reporting
persons, the Company believes that during the period ending April 30, 1997,
Mr. Bradley I. Meier, Mr. Norman M. Meier and Mrs. Phylis Meier each had two
late filings on Form 5 and Messrs. Grossman, Orlinsky and Pietrangelo each
had one late filing on Form 5. In addition, Drs. Kellner and Wilentz and Mr.
Slogoff each had one late filing on Form 3.
ITEM 10. EXECUTIVE COMPENSATION
The tables and descriptive information set forth below are intended to
comply with the Securities and Exchange Commission compensation disclosure
requirements applicable to, among other reports and filings, annual reports on
Form 10-KSB. This information is 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 year ended April 30, 1997.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation
Securities
Name and Underlying
Principal Position Year Salary Bonus Options
- ------------------ ---- ------ ----- -------------
Bradley I. Meier 1997 $ 75,000 $ - 90,000
President and Chief 1996 75,000 - 90,000
Executive Officer 1995 75,000 - 3,750
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES DURING 1997 AND FISCAL YEAR END OPTION VALUES
Number of Securities Number of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Options at
Acquired April 30, 1997 April 30, 1997
On Value Exer- Unexer- Exer- Unexer-
Name Exercise Realized cisable cisable cisable cisable
- ---- -------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Bradley I. Meier - - 937,750 - - -
</TABLE>
-12-
<PAGE>
EMPLOYMENT AGREEMENT
As of May 1, 1997, the Company entered in 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 July 31, 1997, directors and named executive officers, individually
and as a group, beneficially owned Common Stock as follows:
Name of Shares, Nature of Interest and
Beneficial Owner (1) Percentage Of Equity Securities(2)
- -------------------- ----------------------------------
Bradley I. Meier (3) 3,156,818 56.1%
Norman M. Meier (4) 1,465,624 33.0%
Irwin L. Kellner (5) 100,000 2.8%
Reed J. Slogoff (6) 100,000 2.8%
Joel M. Wilentz (7) 100,000 2.8%
Officers and directors
as a group (5 people) (8) 4,404,741 76.6%
- --------
(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
-13-
<PAGE>
90,000 shares at an exercise price of $1.13 per share, and options to
purchase 500,000 shares at $1.25 per share and options to purchase
500,000 shares of Common Stock at $1.06 per share which vest on May 1,
1997, (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 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 options to purchase 250,000 shares of Common Stock at
$1.06 per share which vest on November 2, 1997 and 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 Phylis Meier, Mr. Meier's father and
mother, respectively. 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 shares of Common Stock at an exercise price of $1.00, and (d )
214,938 shares of Common Stock issuable upon conversion of Series A and
Series M Preferred Stock owned by such person 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 options to purchase 500,000 shares of Common
Stock at $1.06 per share which options vest on November 2, 1997. Excludes
all securities owned by Bradley Meier or Phylis Meier. Mr. Meier is a
Director of the Company, the father of Bradley Meier, the President of
the Company and the former spouse of Phylis 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.
-14-
<PAGE>
As of July 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 Percent
Name and Address Beneficially Owned(1)(2) of Class(1)(2)
- ---------------- ------------------------ --------------
Phylis R. Meier (3) 996,426 25.9%
c/o Universal Heights, Inc.
19589 N.E. 10th Avenue
Miami, Florida 33179
Belmer Partners (4) 271,701 7.8%
c/o Phylis R. Meier
Managing General Partner
Universal Heights, Inc.
19589 N.E. 10th Avenue
Miami, Florida 33179
Shephard Lane, Esq. 214,142 6.0%
Slatt & Lane
600 Third Avenue
New York, NY 10016
- -----------
(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 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.
-15-
<PAGE>
(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 Phylis
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 27, 1996 and April 30, 1997, the Company owed $60,873 and
$131,423, respectively, in accrued salary to Bradley Meier. In addition, during
the year ended April 27, 1996, $37,959 of accrued salary for Bradley I. Meier
was forgiven in exchange for the issuance of warrants to purchase 37,959 shares
of Common Stock at $3.00 per share to Mr. Meier, through August 11, 2005.
During fiscal 1995, Phylis Meier and Bradley Meier lent the Company
$17,685 and $27,244, respectively. During fiscal 1996, Bradley Meier lent the
Company an additional $185,256, Phylis Meier lent the Company an additional
$221,800, Norman Meier lent the Company $118,000, Shephard Lane lent the Company
$10,000 and Michael Pietrangelo lent the Company $10,000. These loans bear
interest at 10%. As of April 27, 1996 the Company and debtors approved the
conversion of $212,500 of Bradley Meier's loans to be repaid through the
issuance of 510,096 shares of Common Stock, $150,000 of Phylis Meier's loans to
be repaid through the issuance of 240,000 shares of Common Stock and $100,000 of
Norman Meier's loans to be repaid through the issuance of 266,667 shares of
Common Stock.
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
-16-
<PAGE>
April __, 1997. (Substantially similar in form to two additional
warrants to purchase 100,000 shares of Common Stock issued to Mr.
Guarino dated as of April 24, 1997, with exercise prices of $2.75 and
$3.50 per share, respectively.)
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.
-17-
<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.
Date: March 10, 1998 By: /s/ Bradley I. Meier
---------------------------
Bradley I. Meier, President
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Certified Public Accountants' F-2
Consolidated Balance Sheet - April 30, 1997 F-3
Consolidated Statements of Operations for the Years Ended
April 30, 1997 and April 27, 1996 F-4
Consolidated Statements of Changes in Stockholders'
Deficiency for the Years Ended April 30, 1997 and
April 27, 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1997 and April 27, 1996 F-6 - F-7
Notes to the Consolidated Financial Statements F-8 - F-17
F-1
<PAGE>
REPORT OF 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 April 30, 1997, and the related consolidated
statements of operations, changes in stockholders' deficiency and cash flows 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 April 30, 1997, and the results of their consolidated
operations and cash flows for each of the two years in the period ended April
30, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. The
Company has had continuing operating losses and had a working capital deficiency
and shareholders' deficiency of $867,737 at April 30, 1997. The Company has
discontinued operations of its core product line and is directing its efforts to
become a property and casualty insurance company. As a result, the Company needs
additional funds to enter this business. These factors raise substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
The financial statements have been restated, as discussed in Note 1, to give
effect to a change in accounting for convertible debt securities.
Millward & Co. CPAs
Fort Lauderdale, Florida
July 18, 1997 (March 6, 1998 as to the last paragraph hereof)
F-2
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
APRIL 30, 1997
ASSETS
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED APRIL 30, 1997 AND APRIL 27, 1996
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OPF CASH FLOWS
FOR THE YEARS ENDED
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
APRIL 30, 1997
ASSETS
Cash and cash equivalents $35,269
Prepaid insurance 2,502
Deposits 9,816
Assets from discontinued operations 592,367
----------
Total Current Assets $639,954
--========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable 987,619
Accrued expenses 199,050
Due to related parties 305,678
Capitalized lease obligations 15,344
----------
Total Current Liabilities 1,507,691
==========
STOCKHOLDERS' DEFICIENCY:
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; 3,212,672 shares issued and outstanding 32,294
Additional paid-in capital 7,867,748
Accumulated paid-in capital (8,722,166)
Subscriptions receivable (47,000)
-----------
Total Stockholders' Deficiency (867,737)
-----------
Total Liabilities and Stockholders' Deficiency $639,954
===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
APRIL 30, 1997 APRIL 27, 1996
OPERATING EXPENSES:
General and administrative $(400,903) $(426,267)
----------- ---------
LOSS FROM OPERATIONS (400,903) (426,267)
OTHER EXPENSE
Interest expense (14,988) (580,425)
---------- ---------
LOSS FROM CONTINUING OPERATIONS (415,891) (1,006,692)
---------- ---------
DISCONTINUED OPERATIONS:
Loss from operations of the Sports (569,996) (990,919)
Novelty and Souvenir business
to be disposed of
Estimated loss on disposal of Sports
Novelty and Souvenir business (1,387,575) -
----------- ---------
(1,957,571) (990,919)
---------- ---------
NET LOSS $(2,373,462) $(1,997,611)
============ ===========
LOSS PER COMMON SHARE:
Loss from continuing operations $(0.24) $(0.84)
Loss from discontinued operations (1.11) (0.83)
NET LOSS $(1.35) $(1.67)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,767,373 1,197,780
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED APRIL 30, 1997 AND APRIL 27, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- ------------------ Paid-in Accumulated Subscription
Shares Amount Shares Amount Capital Deficit Receivable Total
---------- --------- --------- -------- ----------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 29, 1995 49,950 $ 500 913,812 $ 9,138 $5,025,707 $(4,351,093) $ 684,252
(as restated)
Issuance of common stock for acquisitions - - 268,166 2,681 733,046 - 735,727
Debt exchanged for common stock - - 140,904 1,409 220,399 - 221,808
Debt exchanged for warrants - - - - 37,959 - 37,959
Interest attributable to convertible debt 540,000 540,000
Issuance of common stock for services - - 276,000 2,760 285,540 - 288,300
Net loss, year ended April 27, 1996 - - - - - (1,997,611) - (1,997,611)
-------- ------- --------- -------- -------- ----------- -------- ----------
BALANCE, April 27, 1996 49,950 500 1,598,882 15,988 6,842,651 (6,348,704) 510,435
Debt exchanged for common stock 88,690 887 1,249,030 12,658 691,995 - 705,540
Capital raised on private placement - - 354,760 3,548 312,202 (47,000) 268,750
Issuance of common stock for services - - 10,000 100 20,900 - 21,000
Net loss, year ended April 30, 1997 - - - - - (2,373,462) - (2,373,462)
-------- -------- --------- ------- --------- ----------- -------- -----------
BALANCE, April 30, 1997 138,640 $ 1,387 3,212,672 $ 32,294 $7,867,748 $(8,102,166) $(47,000) ($867,737)
======== ======== ========= ======== ========== ============ ========= ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
-----------------------------------------------
April 30, 1997 April 27, 1996
-----------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
CONTINUING OPERATION:
Net loss from continuing operations $(415,891) $(1,006,692)
Adjustments to reconcile net loss from continuing operations
to net cash used in continuing operations:
Stock issued for services 21,000 164,904
Interest on convertible debt 540,000
Change in assets and liabilities:
Decrease in deposits - 151
----------- ----------
Net cash used in continuing operations (394,891) (301,637)
----------- ----------
DISCONTINUED OPERATION:
Loss from discontinued operations (1,957,571) (990,919)
Adjustments to reconcile loss from discontinued operations
to net cash used in discontinued operations:
Depreciation and amortization 562,417 263,052
Provision for doubtful accounts (8,101) 12,200
Write down of inventories to net realizable value 952,896 317,988
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable 51,982 26,307
Inventories (8,647) 78,151
Other current assets 196,203 10,612
Increase (decrease) in:
Accounts payable and accrued expenses 120,355 186,468
----------- ----------
Net cash used in discontinued operations (90,466) (96,141)
----------- ----------
Net cash used in operating activities (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)
----------- ----------
Net cash used in investing activities (3,775) (113,885)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 268,750 -
Net repayments under line of credit - (132,656)
Advances from stockholders - 625,672
Issuance of related party loans 237,893 -
Repayment of loans payable - (39,249)
Payment on capital lease obligations (12,579) (14,334)
----------- ----------
Net cash provided by financing activities 494,064 439,433
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,932 (72,230)
CASH AND CASH EQUIVALENTS, Beginning of Year 30,337 102,567
----------- ----------
CASH AND CASH EQUIVALENTS, End of Year $ 35,269 $ 30,337
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
April 30, 1997 April 27, 1996
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 9,479 $ 8,831
======== ========
SUPPLEMENTAL NONCASH OPERATING, FINANCING
AND INVESTING ACTIVITIES:
Preferred stock issued in exchange for debt $ 887 $ -
======== ========
Common stock issued in exchange for debt $704,653 $259,676
======== ========
Common stock issued in exchange for services
provided $ 21,000 $123,396
======== ========
Common stock issued in exchange for
acquisitions $ - $735,728
======== ========
Write-off of fully depreciated fixed
assets $ - $510,524
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
Universal Heights, Inc. (the "Company") was 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 did not actively market its core product line which resulted
in declining sales. This decision was based on the projected continued losses,
inability to achieve critical mass and lessened demand for products because of
market factors. Accordingly, at April 30, 1997, inventories have been written
down to their estimated net realizable value resulting in a charge of $952,896
to discontinued operations for 1997. Related patents and trademarks have been
written down to their estimated fair value resulting in a charge of $434,679 to
discontinued operations. The Company is actively pursuing a strategy to enter
into the financial service industry. The Company plans to qualify as a property
and casualty insurer through the State of Florida market challenge takeout
program.
Principles Of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
Basis Of Presentation And Continued Existence
- ---------------------------------------------
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The basis of accounting contemplates the
recovery of the Company's assets and the orderly satisfaction of its liabilities
in the normal course of conducting business. The Company has had continuing
operating losses and had a stockholders' deficiency and a working capital
deficiency of $867,737 as of April 30, 1997.
F-8
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company does not have and is not generating sufficient funds from operations
or otherwise to finance its proposed plan of reorganization into a property and
casualty insurance company. In order to finance the proposed reorganization, the
Company is presently attempting to raise funds through an equity financing.
There is no assurance that any such financing will be successful on commercially
reasonable terms or at all. The Company's inability to obtain future financing
on terms acceptable to the Company would have a material adverse affect on the
Company's proposed reorganization. Management believes the reorganization of the
Company under the aforementioned activities is a way to achieve profitability.
Fiscal Year
- -----------
As of April 28, 1996, the Company changed its accounting fiscal year from a
52/53-week fiscal year ending on the Saturday closest to April 30 to a year
ending April 30, 1997.
Restatement
- -----------
At the March 13, 1997 meeting of the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board, the SEC staff indicated that there should
be a retroactive change in accounting principles for convertible securities.
This position was set forth in EITF Topic No. D-60, "Accounting for the Issuance
of Convertible Preferred Stock and Debt Securities with a Nondetachable
Conversion Feature."
In connection with the provisions of convertible debt agreements with officers
and directors in the fiscal year ended April 30, 1996 which provided for
conversions into common stock at a discount to the then market price, the
Securities and Exchange Commission staff concluded that this beneficial
conversion feature increases the effective interest rate. Topic D-60 further
concludes that the affected financial statements should be restated,
accordingly, the financial statements for the year ended April 30, 1996 have
been restated. The effect of the restatement to the year ended April 30, 1996
was to increase interest expense, the loss before discontinued operations and
the net loss by $540,000 and to increase the loss per share before discontinued
operations and the net loss per share by $.45.
In addition, the accumulated deficit and additional paid-in capital at April 29,
1995 have been restated and each increase by $80,000 to adjust for debt
conversions prior to that date.
Accordingly, the accumulated effect of the aforementioned was to increase
additional paid-in capital and accumulated deficit at April 30, 1996 and April
30, 1997 by $620,000.
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.
F-9
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization expense was approximately $477,000 and $299,000 in
1997 and 1996, respectively.
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
- ------------------
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. Shares to be issued upon the exercise of the outstanding
options and warrants or the conversion of the preferred stock are not included
in the computation of loss per share as their effect is anti-dilutive.
Income Taxes
- ------------
The Company uses Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under the liability method specified by SFAS 109,
the deferred tax liability is determined based on the difference between the
financial statement and tax bases 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.
F-10
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment Of Long-lived Assets
- -------------------------------
In May 1996, the Company adopted FASB Statement No. 121 (SFAS 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, 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 by $434,679. Accordingly, an impairment loss
amounting to $434,679 has been included in discontinued operations in 1997.
Stock Based Compensation
- ------------------------
In October 1995, the FASB issued Statement No. 123 (SFAS 123), "Accounting for
Stock Based Compensation". The accounting requirements of SFAS 123 are effective
for transactions entered into in fiscal years that begin after December 15,
1995. The disclosure requirements of SFAS 123 are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which this statement is initially adopted for recognizing
compensation costs. The Company believes this pronouncement will not have a
significant impact on the Company's consolidated financial statements.
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.
F-11
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 2 - DISCONTINUED OPERATIONS
As of April 30, 1997, the Company decided to divest itself of its core business
operations and has not renewed any licensing agreements. Accordingly, the
Company is reporting the results of operations of its core business as a
discontinued operation for all periods presented in the consolidated financial
statements. Revenues from discontinued operations were $161,312 and $359,712 for
the fiscal years ended April 30, 1997 and April 27, 1996, respectively. The
Company does not expect to generate income or loss on these operations prior to
their ultimate disposition. In addition, the Company does not anticipate
incurring any additional material losses on the ultimate disposal of the
business.
Assets of the core business to be disposed of, at their expected net realizable
values, consisted of the following at April 30, 1997:
Inventories $ 300,000
Patents and trademarks 200,000
Property, equipment and other assets 92,367
---------
Total assets from discontinued operations $ 592,367
---------
Capitalized Lease Obligations
- -----------------------------
As of April 30, 1997, the Company has approximately $105,000 of furniture and
equipment pursuant to leases which have been accounted for as capital leases.
Interest on these obligations range from 11.1% to 23.1%.
F-12
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 3 - COMPANY INDEBTEDNESS
The future minimum lease payments under capital leases together with the present
value of the minimum lease payments as of April 30, 1997 are as follows:
1998 $ 11,735
1999 3,963
2000 1,289
----------
Total minimum lease payments 16,987
Less: amount representing interest 1,643
----------
Present value of minimum lease payments $ 15,344
==========
The balance has been treated as a current liability as management is attempting
to terminate these leases.
NOTE 4 - 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 note is converted, warrants to purchase
15,429 shares of Common Stock at $1.75 per share, will be
issued. 27,000
Deferred salary, due on demand, non-interest bearing. 131,423
Accrued royalties related to acquisition of business. 7,670
Accrued interest, due on demand, non-interest bearing. 139,585
---------
305,678
Less current portion 305,678
---------
$ -
=========
F-13
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 5 - INCOME TAXES
To date, the Company has incurred tax operating losses and, therefore, has
generated no income tax liabilities. As of April 30, 1997, the Company has
generated net operating loss carryforwards totaling approximately $4,687,900
which are available to offset future taxable income, if any, through 2012. 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 components of the net deferred income taxes are as follows:
Deferred Tax Assets:
Net Operating Loss Carryforward $ 1,809,500
Inventories 367,800
Patents and Trademarks 167,800
Compensation 50,700
------------
Total Deferred Tax Assets 2,395,800
Valuation Allowance for Deferred Tax Assets (2,395,800)
------------
Deferred Income Taxes, Net $ -
============
The net operating loss carryforwards are scheduled to expire as follows:
Expiration
Date
- ----------
2006 $ 8,300
2007 250,800
2008 721,700
2009 1,010,000
2010 1,115,700
2011 677,400
2012 904,000
-----------
$ 4,687,900
===========
F-14
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 6 - STOCKHOLDERS' DEFICIENCY
CUMULATIVE PREFERRED STOCK
- --------------------------
In October 1994, 49,950 shares of Series A Preferred Stock were issued in
repayment of $499,487 of related party debt and another 88,690 shares of series
M preferred stock have been authorized for issuance in the current year 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, 1995,
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. For the
year ended April 30, 1997 dividends have not been declared.
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:
F-15
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 6 - STOCKHOLDERS' DEFICIENCY (CONTINUED)
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 (35,625) $ 6.00 - 22.00
======== ===============
Options exercisable at April 30, 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
- -------------------
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.
F-16
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 6 - STOCKHOLDERS' DEFICIENCY (CONTINUED)
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.
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.
The 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:
OTHER STOCK OPTIONS (CONTINUED)
Information regarding the Company's issuance during the year ended April 30,
1997:
Loss from
Continuing
Net Loss Operations
-------- ----------
Loss:
As reported $(2,373,462) $ (415,891)
Pro forma $(3,811,462) $(1,853,891)
Loss per share:
As reported $ (1.35) $ (.24)
Pro forma $ (2.16) $ (1.05)
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:
Exercise price $ 1.25
Expected life of option 10
Risk free interest rate 6.66%
Expected volatility 117%
F-17
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 6 - STOCKHOLDERS' DEFICIENCY (CONTINUED)
See Note 8 - Employment agreement and Note 10 - Subsequent event for additional
options.
Warrants
- --------
As of April 30, 1997, the following warrants are outstanding:
The Company has issued warrants to purchase a total of 1,256,526 shares of
Common Stock in connection with debt transactions as follows: warrants to
purchase 12,500 shares of Common Stock, exercisable at $22.00 per share through
October 1, 1997; warrants to purchase 12,488 shares of Common Stock, exercisable
at $4.25 per share through October 7, 2004; warrants to purchase 110,409 shares
of Common Stock, exercisable at $1.50 per share through November 29, 2004;
warrants to purchase 10,000 shares of Common Stock, exercisable at $2.25 per
share through March 23, 2005; warrants to purchase 15,429 shares of Common
Stock, exercisable at $1.75 per share through March 31, 2005; warrants to
purchase 120,000 shares of Common Stock, exercisable at $3.00 per share through
July 21, 2005; warrants to purchase 302,000 shares of Common Stock, exercisable
at $3.00 per share through August 11, 2005; warrants to purchase 10,000 shares
of Common Stock, exercisable at $2.50 per share through March 23, 2005; warrants
to purchase 20,000 shares of Common Stock, exercisable at $3.00 per share
through August 14, 2005; warrants to purchase 182,000 shares of Common Stock,
exercisable at $1.00 per share through October 11, 2005; warrants to purchase
30,000 shares of Common Stock, exercisable at $1.00 per share through November
15, 2005; warrants to purchase 300,000 shares of Common Stock, exercisable at
$1.25 per share through March 1, 2006 and warrants to purchase 131,700 shares of
Common Stock, exercisable at $.75 per share through December 3, 2006.
In addition, the Company issued warrants to purchase 37,959 and 16,667 shares of
Common Stock, respectively, to the president of the Company in connection with
the forgiveness of salary and to a former officer in connection with the
conversion of salary into Common Stock. Each such warrant is exercisable at a
price of $3.00 per share through August 11, 2005. The Company has also issued
warrants to purchase a total of 2,185,000 shares of Common Stock in connection
with professional services as follows: warrants to purchase 75,000 shares of
Common Stock, exercisable at $3.00 per share through May 11, 2005; warrants to
purchase 10,000 shares of Common Stock, exercisable at $1.00 per share through
October 23, 1998; warrants to purchase 40,000 shares of Common Stock,
F-18
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 6 - STOCKHOLDERS' DEFICIENCY (CONTINUED)
Warrants (Continued)
- -------------------
exercisable at $1.75 per share through October 23, 1998; warrants to purchase
45,000 shares of Common Stock, exercisable at $1.00 per share through October
11, 2005; warrants to purchase 15,000 shares of Common Stock, exercisable at
$1.00 per share through October 11, 2000; warrants to purchase 1,000,000 shares
of Common Stock, exercisable at $1.25 per share through March 1, 2000. The
Company issued warrants to purchase 60,000 shares of Common Stock, exercisable
at $2.88 per share through August 2005 in connection with an acquisition. The
Company issued warrants to purchase 300,000 shares of Common Stock in connection
with a private placement as follows: warrants to purchase 100,000 shares of
Common Stock, exercisable at $2.00 per share, warrants to purchase 100,000
shares exercisable at $2.75 per share and warrants to purchase 100,000 shares
exercisable at $3.50 per share, each through April 30, 1997. The Company also
issued warrants to purchase 1,250,000 shares of Common Stock, exercisable at
$.63 per share, through June 12, 2002 in connection with a consulting agreement;
however, warrants to purchase 250,000 of such shares are not exercisable until
the Company's insurance subsidiary is licensed by the state of Florida and the
remaining warrants to purchase 1,000,000 shares vest upon achievement of agreed
upon annual pretax profit amounts.
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.
Other Stock Issuance's
- ----------------------
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.
F-19
<PAGE>
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, 153,557 shares of common stock were issued at $1.27 to $3 per
share upon the conversion of $232,362 of related party debt, to include current
year issuance's of the confirmation received.
F-20
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 6 - STOCKHOLDERS' DEFICIENCY (CONTINUED)
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.
None of the warrants has been issued at less than the bid price of the Company's
common stock on the date of grant.
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 were
valued at the market value as of the date of the agreement; $1 per share or an
aggregate of $142,000. This change was prorated over the 12-month period of the
consulting contract.
In July 1996, a group of unrelated private 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.
Other Stock Issuance's (Continued)
- ---------------------------------
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.
Pursuant to a subscription agreement with unrelated private investors 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.
F-21
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
NOTE 7 - PUBLIC RELATIONS AGREEMENT
In March 1995, the Company signed a two-year public relations agreement that
requires payments of $1,000 per month for the first six months, $2,500 per month
for the second six months and $3,000 per month for the final twelve months. As
additional compensation, the Company issued 6,250 shares of Common Stock at
$1.50 per share and issued in October 1995, an option to purchase an additional
6,250 shares of Common Stock at $1.50 per share, exercisable through March 2000.
This agreement was cancelled effective January 1, 1996.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
Operating Leases
- ----------------
The Company leases office and adjoining warehouse space under a noncancelable
operating lease. Future minimum lease payments are as follows:
1997 $ 12,000
============
In addition, future lease payments are subject to adjustment based on annual
changes in the Consumer Price Index (as defined in the lease). Rent expense for
the years ended April 30, 1997 and April 27, 1996 was $41,238 and $42,534,
respectively. The Company is currently operating with a month-to-month lease.
Employment Agreement
- --------------------
The Company has an employment agreement with its President pursuant to which the
President receives annual compensation of $75,000 through 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).
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.
F-22
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
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
company.
NOTE 9 - LITIGATION
The following outlines pending litigation against Universal Heights:
Walker And Martin Vs. Universal Heights
- ---------------------------------------
This is a cause of action in the Circuit Court for Pinellas County, Florida. The
Plaintiffs have asserted claims for an injunction and for damages for breach of
an Asset Purchase Agreement. The amount in controversy is in excess of $15,000,
but no specific amount is claimed. The Complaint includes claims for breach of
employment agreements, breach of royalty agreements and other relief. It is too
early to determine the outcome
Note 10- SUBSEQUENT EVENTS
As of May 1, 1997, the Company entered in a four-year employment agreement with
the president of the Company. Under the terms of the employment agreement, the
president will devote substantially all of his time to the Company and will be
paid a base salary of $250,000 per year. 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.
F-23
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1997 and April 27, 1996
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 $.625.
Subsequent to April 30, 1997, the Company granted options to three new directors
to purchase 300,000 shares of the Company's common stock at an option price of
$1.00 per share.
F-24
