U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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.)
2875 N.E. 191st Street, Suite 400A
Miami, Florida 33180
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (305) 792-4200
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value OTC Bulletin Board
Redeemable Common Stock Purchase Warrants OTC Bulletin Board
(Title of each class) (Name of exchange where registered)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days: YES X NO
-
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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: $9,184,594
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold as of December 31, 1998: $16,506,679
State the number of shares of Common Stock of Universal Heights, Inc.
issued and outstanding as of March 1, 1999: 14,672,604
Transitional Small Business Disclosure Format: YES NO X
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PART I
Item 1. Description of Business
THE COMPANY--
Universal Heights, Inc. ("UHTS" or the "Company") was originally
organized in 1990. In April 1997, the Company organized a subsidiary, Universal
Property & Casualty Insurance Company ("UPCIC"), as part of its strategy to take
advantage of what management believed to be profitable business and growth
opportunities in the marketplace. UPCIC was formed to participate in the
transfer of homeowner insurance policies from the Florida Residential Property
and Casualty Joint Underwriting Association ("JUA"). The Company currently has
various wholly-owned subsidiaries including Universal Insurance Holding Company,
U.S. Insurance Solutions, Inc., Universal Florida Insurance Agency and World
Financial Resources (Barbados) Ltd. UPCIC and Universal Risk Advisors, Inc. are
wholly-owned subsidiaries of Universal Insurance Holding Company. U.S.A.
Insurance Solutions, Inc. is a wholly-owned subsidiary of U.S. Insurance
Solutions, Inc. (The foregoing subsidiaries may be collectively referred to
herein as the "Subsidiaries").
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) 792-4200.
INSURANCE BUSINESS--
On October 29, 1997, the Florida Department of Insurance ("DOI")
approved UPCIC's application for a permit to organize as a domestic property and
casualty insurance company in the State of Florida. On December 4, 1997, UHTS
raised approximately $6.7 million in a private placement of common stock with
various institutional and other accredited investors ("Private Offering"). The
proceeds of the offering were used to meet the minimum regulatory capitalization
requirements ($5.3 million) of the DOI to obtain an insurance company license
and for general working capital purposes. UPCIC received a license to engage in
underwriting homeowners' insurance in the State of Florida on December 31, 1997.
In 1998, UPCIC began operations through the assumption of homeowner insurance
policies issued by the JUA.
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 became a major provider of original
and renewal insurance coverage for Florida residents. In an attempt to reduce
the number of policies in the JUA, and thus the exposure of the program to
liability, the Florida legislature approved a number of initiatives to
depopulate the JUA. The Florida legislature subsequently approved, and the DOI
implemented, a Market Challenge/Takeout Bonus Program ("Takeout Program"), which
provided additional incentives to private insurance companies to acquire
policies from the JUA.
The Takeout Program was attractive because it provided both substantial
regulatory and financial incentives to private insurer participants. On the
regulatory side, participants are exempt from assessments by the DOI for the
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state's emergency insurance coverage programs for a period of three years. On
the financial side, Takeout Program participants 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 30,000 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 payments. In addition, UPCIC will have investment income from the
bonus payments that will also be available at the end of the three years. These
bonus payments will not be included in the Company's assets until receipt at the
end of the three-year period. To date, the Company has substantially complied
with requirements related to the bonus payments.
UPCIC's initial business and operations have consisted of providing
property and casualty coverage through homeowners' insurance policies acquired
from the JUA. Since February 1998, UPCIC has assumed approximately 30,000
policies and is currently servicing approximately 25,000 homeowners insurance
policies covering homes and condominium units. UPCIC believes that the base of
insurance business acquired from the JUA will provide renewal premiums. If
existing policies are renewed, such premiums would represent approximately $24
million in estimated annual gross direct written premium revenues. To date, the
renewal rate of policies acquired by UPCIC is estimated to be approximately 75%.
Although there is no assurance that policy renewals will continue at this rate,
UPCIC is negotiating with insurance agents that are currently writing business
in connection with the JUA policies in an effort to solicit policy renewals.
OPERATIONS
All marketing, underwriting, rating, policy issuance and administration
functions for UPCIC are performed by Universal Property and Casualty Management,
Inc. ("Universal Management"), an outside management company, pursuant to a
management agreement. 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 are administered by an independent
claims adjustment firm licensed in Florida that is nationally recognized as
experts in claims adjusting and have catastrophe response capabilities. UPCIC
retains oversight of claims administration by imposing specified limits of
claims settlement authority and by conducting regular audits of claims
practices.
The earnings of UPCIC from policy premiums are supplemented by the
generation of investment income from investment policies adopted by the Board of
Directors of UPCIC. UPCIC's principal investment goals are to maintain safety
and liquidity, enhance equity values and achieve an increased rate of return
consistent with regulatory requirements.
In an effort to further grow its insurance operations, UPCIC has begun
to solicit business actively in the open market through independent agents. In
determining appropriate guidelines for such open market policy sales, UPCIC
employs standards similar to those used in its selection of JUA policies. Also,
to improve underwriting and manage risk, the Company uses analytical tools and
data currently developed in conjunction with Risk Management Solutions (RMS). To
diversify UPCIC's product lines, management may consider underwriting automobile
and personal umbrella liability policies in the future. Any such program will
require DOI approval. UHTS has also formed a managing general agent ("MGA"),
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Universal Risk Advisors, Inc., to coordinate marketing efforts to independent
agents.
The Company continues to develop into a vertically integrated insurance
holding company performing various aspects of insurance underwriting,
distribution and claims. Universal Risk Advisors, Inc. was incorporated in
Florida on July 2, 1998 and became licensed by the DOI on September 28, 1998 as
the Company's wholly-owned MGA. Through the MGA, the Company will have
underwriting and claims authority for third-party insurance companies. The MGA
seeks to generate revenue through policy fee income and other administrative
fees from the marketing of UPCIC's as well as third party insurance products
through the Company's distribution network. Universal Florida Insurance Agency
was incorporated in Florida on July 2, 1998 and U.S. Insurance Solutions, Inc.
was incorporated in Florida on August 4, 1998 as wholly-owned subsidiaries of
the Company, to solicit voluntary business. These two entities are the
foundation of the Company's agency operations which will seek to generate income
from policy fees, commissions, premium financing referral fees and the marketing
of ancillary services. U.S.A. Insurance Solutions Inc., was incorporated in
Florida on December 10, 1998 as a wholly-owned subsidiary of U.S. Insurance
Solutions, Inc. to acquire the assets of an insurance agency. In addition, on
August 31, 1998 World Financial Resources (Barbados) LTD. ("WFR") was
incorporated as a subsidiary of UHTS in Barbados to participate in the
international insurance and reinsurance markets. Effective September 1, 1998,
WFR entered into an excess and surplus reinsurance arrangement with European
International Reinsurance Company Ltd, as a reinsured for catastrophic events.
The Company markets and distributes UPCIC's products and services
primarily in South Florida, through a network of approximately 175 active
independent agents. The Company believes that it can be distinguished from its
competitors by providing quality service to both its agents and insureds. The
Company's primary product is homeowners insurance.
The Company's criteria for selecting policies includes the use of
specific policy forms, limitations on coverage amounts on buildings and
contents, acceptance of houses constructed only after 1960, acceptance of
policies with no frequency of claims, and required compliance with local
building codes. UPCIC's current portfolio includes approximately 17,000 policies
with coverage for wind risks and 8,000 policies without wind risk. The average
wind premium is approximately $1,000 and the average ex-wind premium is
approximately $800. Approximately 42% of the policies are located in Dade,
Broward and Palm counties.
NOVELTY AND SOUVENIR BUSINESS
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.
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FACTORS AFFECTING OPERATION RESULTS AND MARKET PRICE OF STOCK
The Company and its subsidiaries operate in a rapidly changing
environment that involves a number of uncertainties, some of which are beyond
UPCIC's control. This report contains in addition to historical information,
forward-looking statements that involve risks and uncertainties. The words
"expect," "estimate," "anticipate," "believe," "intend," "plan," and similar
expressions and variations thereof are intended to identify forward-looking
statements. The Company's actual results could differ materially from those set
forth in or implied by any forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
uncertainties discussed below as well as those discussed elsewhere in this
report.
NATURE OF THE COMPANY'S BUSINESS
Factors affecting the sectors of the insurance industry in which the
Company operates may subject the Company to significant fluctuations in
operating results. These factors include competition, catastrophe losses and
general economic conditions including interest rate changes, as well as
legislative initiatives, the frequency of litigation, the size of judgments and
severe weather conditions. Specifically the homeowners insurance market, which
comprises the bulk of the Company's current operations, is influenced by many
factors, including state and federal laws, market conditions for homeowners
insurance and residential plans. Additionally, an economic downturn could result
in fewer homeowner sales and less demand for homeowners insurance.
Historically, the financial performance of the property and casualty
insurance industry has tended to fluctuate in cyclical patterns of soft markets
followed by hard markets. Although an individual insurance company's financial
performance is dependent on its own specific business characteristics, the
profitability of most property and casualty insurance companies tends to follow
this cyclical market pattern.
The Company believes that a substantial portion of its future growth
will depend on its ability, among other things, to successfully implement its
business strategy, including expanding the Company's product offering by
underwriting and marketing additional insurance products and programs through
its distribution network and further penetrating the Florida market by
establishing relationships with additional independent agents in order to expand
its distribution network. Any future growth is contingent on various factors,
including the availability of adequate capital, the Company's ability to hire
and train additional personnel, regulatory requirements and rating agency
considerations. There is no assurance that the Company will be successful in
expanding its business, that the existing infrastructure will be able to support
additional expansion or that any new business will be profitable. Moreover, as
the Company expands its insurance products and programs and the Company's mix of
business changes, there can be no assurance that the Company will be able to
maintain its profit margins or other operating results. There can also be no
assurance that the Company will be able to obtain the required regulatory
approvals to offer additional insurance products. UPCIC also is required to
maintain a minimum capital surplus to support its underwriting program. The
capital surplus requirement impacts UPCIC's potential growth.
LIMITED INSURANCE COMPANY OPERATING HISTORY
UPCIC was incorporated in May 1997 and began operations in February
1998. Accordingly, UPCIC did not generate significant revenue until the second
quarter of 1998 when it had completed the acquisition of, and received premiums
for, the majority of the policies that it now services. UPCIC's growth to date
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may not be an accurate indication of future results of operations in light of
UPCIC's short operating history, the competitive nature of the insurance
industry, and the effects, if any, of seasonality on UPCIC's results of
operations.
Because of UPCIC's limited operating history, there can be no assurance
that UPCIC will achieve or sustain profitability or significant revenues. There
can be no assurance that UPCIC will successfully address these risks by
successfully executing its growth strategy and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations.
MANAGEMENT OF EXPOSURE TO CATASTROPHIC LOSSES
UPCIC is exposed to multiple insured losses arising out of a single
occurrence, such as a natural catastrophe. As with all property and casualty
insurers, UPCIC will incur some losses related to catastrophes and will price
its policies accordingly. UPCIC's exposure to catastrophic losses arises
principally out of hurricanes and windstorms. Through the use of standard
industry modeling techniques, UPCIC manages its exposure to such losses on an
ongoing basis from an underwriting perspective. In addition, UPCIC protects
itself against the risk of catastrophic loss by obtaining reinsurance coverage
up to the 100 year Probable Maximum Loss ("PML"). UPCIC's reinsurance program
consists of excess of loss, quota share and catastrophe reinsurance.
RELIANCE ON THIRD PARTIES AND REINSURERS
UPCIC is dependent upon third parties to perform certain functions
including, but not limited to, claims management, investment management, the
purchase of reinsurance, underwriting, policy origination and risk management
analysis. UPCIC also relies on reinsurers to limit the amount of risk retained
under its policies and to increase its ability to write additional risks.
UPCIC's intention is to limit its exposure and therefore protect its capital,
even in the event of catastrophic occurrences, through reinsurance agreements
that currently transfer the risk of loss in excess of $1 million up to the 100
year PML.
REINSURANCE
The property and casualty reinsurance industry is subject to the same
market conditions as the direct property and casualty insurance market, and
there can be no assurance that reinsurance will be available to UPCIC to the
same extent and at the same cost as currently in place for UPCIC. Reinsurance
does not legally discharge an insurer from its primary liability for the full
amount of the risks it insures, although it does make the reinsurer liable to
the primary insurer. Therefore, UPCIC is subject to credit risk with respect to
its reinsurers. Management evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. A reinsurer's insolvency or
inability to make payments under a reinsurance treaty could have a material
adverse affect on the financial condition and profitability of UPCIC.
ADEQUACY OF RESERVES
The reserves for losses and loss adjustment expenses periodically
established by UPCIC are estimates of amounts needed to pay reported and
unreported claims and related loss adjustment expenses. The estimates
necessarily will be based on certain assumptions related to the ultimate cost to
settle such claims. There is an inherent degree of uncertainty involved in the
establishment of reserves for losses and loss adjustment expenses and there may
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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 relies on industry data and JUA data, as
well as the expertise and experience of key individuals and service providers
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 subject to regulation and supervision
by the DOI. Notwithstanding the three-year assessment 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 affect,
among other things, regulatory assessments and reserve requirements. UPCIC
cannot predict the effect that any proposed or future legislation or regulatory
or administrative initiatives may have on the financial condition or operations
of UPCIC.
DEPENDENCE ON KEY INDIVIDUALS AND THIRD PARTIES
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
To date, substantially all of the Company's revenues have been derived
from the Takeout Program. While the Company is attempting to expand its revenue
base through its Subsidiaries, profitability and growth in the short-term will
depend upon UPCIC's ability to renew the policies transferred from the Takeout
Program and solicit policies written in the voluntary insurance market. There is
no assurance that UPCIC will be able to retain the policyholders whose policies
it acquires from the Takeout Program 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.
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COMPETITION
The insurance industry is highly competitive and many companies
currently write homeowners property and casualty insurance. Additionally, the
Company and its subsidiaries must compete with companies that have greater
capital resources and longer operating histories for business both in the
Takeout Program and the private insurance market. Increased competition from
other insurance companies could adversely affect the Company's ability to do
business profitably. Although the Company's pricing is inevitably influenced to
some degree by that of its competitors, management of the Company believes that
it is generally not in the Company's best interest to compete solely on price,
choosing instead to compete on the basis of underwriting criteria, its
distribution network and high quality service to its agents and insureds.
EMPLOYEES--
As of March 31, 1999, the Company had nineteen employees. None of the
Company's employees is represented by a labor union. The Company has an
employment agreement with its President and Chief Executive Officer. See
"Executive Compensation--Employment Agreement."
ITEM 2. DESCRIPTION OF PROPERTY
As of March 31, 1999, the Company leased approximately 1,300 square
feet of office space for its corporate headquarters in North Miami Beach,
Florida under a three-year lease. As of January 6, 1999 the Company leased
approximately 1,500 square feet of office space in Hallandale, Florida under a
three-year lease to operate its MGA. On January 28, 1999 the Company assumed the
remaining portion of a one-year lease that renewed May 1, 1998 on its Ormond
Beach agency operation for approximately 600 square feet of office space.
ITEM 3. LEGAL PROCEEDINGS
Certain lawsuits have been filed against the Company. In the opinion of
management, none of these lawsuits are material and they are all adequately
reserved for or covered by insurance or, if not so covered, are without merit or
involve such amounts that if disposed of unfavorably would not have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $.01 par value Common Stock ("Common Stock") is quoted on
the OTC Bulletin Board under the symbol 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
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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.
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
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
First Quarter $1.31 $0.69
Second Quarter 2.31 1.00
Third Quarter 2.06 1.00
Fourth Quarter 1.13 0.63
At March 1, 1999, there were 59 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 Series A and Series M Preferred Stock, ("Preferred
Stock").
In October 1994, 49,950 shares of Series A Preferred Stock were issued
in repayment of $499,487 of related party debt and 88,690 shares of Series M
Preferred Stock were issued during fiscal year ended April 30, 1997, for
repayment of $88,690 of related party debt. Each share of Preferred Stock is
convertible into 2.5 shares of Common Stock and 5 shares of Common Stock,
respectively, into an aggregate of 568,326 common shares. The Preferred Stock is
redeemable by the Company at $10 per share through April 2000 and has a
liquidation value of $10 per share. Beginning May 1, 1998, the Series A
Preferred Stock paid a cumulative dividend of $.25 per quarter. In January 1999,
the Company declared and paid accumulated dividends on the Series A Preferred
Stock.
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. Moreover, the ability of the Company
to pay dividends, if and when its Board of Directors determines to do so, may be
restricted by regulatory limits on the amount of dividends which UPCIC is
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permitted to pay the Company. Pursuant to a Consent Order ("Consent Order")
issued in conjunction with the Company's authorization to underwrite homeowners
insurance, during the first four years of operations, UPCIC shall pay only those
dividends which have been approved in advance in writing by the DOI.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
A NUMBER OF STATEMENTS CONTAINED IN THIS REPORT ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE APPLICABLE STATEMENTS.
THESE RISKS AND UNCERTAINTIES INCLUDE BUT ARE NOT LIMITED TO THE COSTS AND THE
UNCERTAINTIES ASSOCIATED WITH THE RISK FACTORS SET FORTH IN ITEM 1 ABOVE.
OVERVIEW
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 the JUA was approved
by the JUA on May 21, 1997, subject to certain minimum capitalization and other
requirements. One of the requirements imposed by the DOI was to limit the number
of policies UPCIC could assume from the JUA to 30,000.
The Florida Department of Insurance requires applicants to have a
minimum capitalization of $5.3 million to be eligible to operate as an insurance
company in the State of Florida. Upon being issued an insurance license,
companies must maintain capitalization of at least $4 million. If an insurance
company's capitalization falls below $4 million, then the company will be deemed
out of compliance with DOI requirements, which could result in revocation of the
participant's license to operate as an insurance company in the State of
Florida. The Company's insurance subsidiary, UPCIC, maintains a separate account
to hold the minimum required capitalization as well as gains in surplus.
In June 1997, the Company named Joseph DeAlessandro Chairman of the
Board and Chief Executive Officer of UPCIC. See Item 9, "Key Employees" for a
description of Mr. DeAlessandro's insurance industry experience. In connection
with Mr. DeAlessandro's appointments, the Company entered into an agreement with
Universal P&C Management Co. 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 continued to implement its plan to become a financial
services company and, through its wholly-owned insurance subsidiaries has
positioned itself to take advantage of what management believes to be profitable
business and growth opportunities in the marketplace.
The Company entered into an agreement with the JUA whereby since
February 1998, UPCIC has assumed approximately 30,000 policies and is servicing
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approximately 25,000 policies. UPCIC expects to solicit renewals of these
policies, which renewals would represent approximately $24 million in estimated
annual gross direct written premium revenues. In addition, UPCIC has received
approximately $90 per policy in bonus incentive funds from the JUA for assuming
the policies. The bonus funds must be maintained in an escrow account for three
years. These bonus payments will not be included in the Company's assets until
receipt at the end of the three year period. UPCIC must not cancel the policies
from the JUA for this three-year period at which point UPCIC will receive the
bonus funds.
The Company expects that the proceeds from JUA premiums and renewals
and new business will be sufficient to meet the Company's working capital
requirements beyond the next twelve months. The primary use of the Private
Offering was to provide cash needed for the capitalization of UPCIC.
UPCIC does not expect to obtain additional policies from the JUA. The
Company believes that UPCIC's existing base of insurance business provides
opportunities for UPCIC to solicit future renewal premiums. If renewed, such
premiums would represent approximately $24 million in estimated annual gross
direct written premium revenues. To date the renewal rate of policies acquired
by UPCIC is estimated to be approximately 75%. Although there is no assurance
that policy renewals will continue at this rate, UPCIC is negotiating with
insurance agents that are currently writing business in connection with the JUA
policies in an effort to obtain policy renewals. In an effort to further grow
its insurance operations, the Company has begun to solicit business actively in
the open market. In determining appropriate guidelines for such open market
policy sales, UPCIC employs standards similar to those used in its selection of
JUA policies. Also, to improve underwriting and manage risk, the Company uses
analytical tools and data currently developed in conjunction with Risk
Management Solutions (RMS). To diversify UPCIC's product lines, management may
consider underwriting inland marine and personal umbrella liability policies in
the future. Any such program will require DOI approval. See "Factors Affecting
Operation Results and Market Price of Stock - RELIANCE ON TAKEOUT PROGRAM and
COMPETITION" for a discussion of the material conditions and uncertainties that
may affect UPCIC's ability to obtain additional policies.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998, EIGHT MONTHS ENDED
DECEMBER 31, 1997 AND FISCAL YEAR ENDED APRIL 30, 1997
YEAR ENDED DECEMBER 31, 1998
The operations for the year ended December 31, 1998 consist of the
Company's newly started insurance business. Accordingly, the operations are not
comparative to the previous period as there were no insurance operations
previously and the Company's former souvenir business was discontinued.
On February 1, 1998, the Company began recognizing earned premiums on
insurance contracts acquired from the JUA. Income is recognized ratably over the
terms of policies. Through December 31, 1998 the Company recognized net premium
revenues of $7,689,058 related to approximately 30,000 policies.
The Company's investment income for 1998 represents primarily interest
income of $664,529 on cash and cash equivalents aggregating $11,987,091, fixed
maturity securities aggregating $2,094,900 and equity securities aggregating
$471,119 at December 31, 1998. Such funds were received for advance premiums and
from the Private Offering.
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<PAGE>
Loss and loss adjustment expenses for the year ended December 31, 1998
were $3,176,538. These costs relate to insurance claims incurred by UPCIC.
General and administrative expenses were $3,875,688. General and administrative
expenses have increased due to the Company's expanding insurance operations.
Catastrophes are an inherent risk of the property-liability insurance
business which may contribute to material year-to-year fluctuations in UPCIC's
results of operations and financial position. The level of catastrophe loss
experienced in any year cannot be predicted and could be material to results of
operations and financial position. During 1998, Florida experienced two
windstorm catastrophes which resulted in substantial industry losses. However,
the Company did not experience significant losses from these events. While
management believes UPCIC's catastrophe management strategies will reduce the
severity of future losses, UPCIC continues to be exposed to similar or greater
catastrophes.
In January 1998, the Company agreed to issue 45,000 shares of Common
Stock at a price of $1.00 per share in consideration for services rendered to
the Company. The Company also issued 600,000 warrants to purchase Common Stock
at $1.00 per share, the quoted market value, to an existing shareholder in
January 1998. These warrants were issued for accrued legal services, which were
valued at $60,000. In addition, pursuant to an investment banking agreement the
Company agreed to issue 200,000 warrants to purchase shares of Common Stock at
an exercise price of $.75 per share. These warrants have been valued at $.35 per
warrant and are being charged to operations. In March 1998, the Company issued
an additional 300,000 warrants. The value attributable to these warrants,
approximately $.35 per warrant, are being charged to operations. In May 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. In August 1998,
the Company granted 50,000 options to an officer of the Company to purchase
Common Stock at $1.87 per share, the quoted market price at that time.
The Company has elected to follow Accounting Principles Board (APB) No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations in
accounting for its stock options granted to employees and directors, and
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, for its stock options granted to non-employees. Under
APB No. 25, because the exercise price of the Company's employee stock options
equals or is greater than the market price of the underlying stock on the date
of grant, no compensation expense is recognized. The Company expenses the fair
value (as determined at the grant date) of options and warrants granted to
non-employees over the vesting period.
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND FISCAL YEAR ENDED APRIL 30, 1997
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 disposal 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 were estimated to be $200,000. The Company provided for these
disposition costs and additional costs of approximately $158,000 related to its
discontinued operations at December 31, 1997.
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<PAGE>
At December 31, 1997, other income increased as a result of interest
income on the proceeds from the Private Offering.
During the eight-month period from May 1, 1997 to December 31, 1997,
the Company's operating expenses totaled $613,481 as compared to $400,903 for
the fiscal year ended April 30, 1997. This increase in operating expenses was a
result of preliminary expenses related to the Company's insurance operations as
well as an increase in the annual compensation for the Company's President and
Chief Executive Officer.
In May 1997, the Company issued 2,550,000 options to purchase the
Company's Common Stock and in June 1997, the Company issued 1,250,000 warrants
to purchase shares of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are premium revenues and
investment income.
For the year ended December 31, 1998, operations generated operating
cash flow of $8 million, and operating cash flow is expected to be positive in
both the short-term and reasonably foreseeable future. In addition, the
Company's investment portfolio is highly liquid as it consists almost entirely
of readily marketable securities.
The Company believes that its current capital resources will be
sufficient to support current operations and expected growth for at least 24
months.
The balance of cash and cash equivalents at December 31, 1998 is
$11,987,091. This amount along with readily marketable debt and equity
securities aggregating $2,566,019 would be available to pay claims in the event
of a catastrophic event pending reimbursement for any aggregate amount in excess
of $1 million up to the 100 year PML which would be covered by reinsurers.
Catastrophic reinsurance is recoverable upon presentation to the reinsurer of
evidence of claim payment.
To retain its certificate of authority, the Florida insurance laws and
regulations require that UPCIC maintain capital surplus equal to the statutory
minimum capital and surplus requirement defined in the Florida Insurance Code.
The Company is also required to adhere to prescribed premium-to-capital surplus
ratios. The Company is in compliance with these requirements.
The maximum amount of dividends, which can be paid by Florida insurance
companies without prior approval of the Florida Commissioner, is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid by the Company without prior approval is limited to the lesser of statutory
net income from operations of the preceding calendar year or 10.0% of statutory
unassigned capital surplus as of the preceding year end. Pursuant to the Consent
Order issued to UPCIC, during UPCIC's first four years of operations, any
dividend would require DOI approval.
The Company is required to comply with the National Association of
Insurance Commissioner's (NAIC) Risk-Based Capital requirements ("RBC"). RBC is
a method of measuring the amount of capital appropriate for an insurance company
to support its overall business operations in light of its size and risk
profile. NAIC's RBC standards are used by regulators to determine appropriate
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regulatory actions relating to insurers who show signs of weak or deteriorating
condition. As of December 31, 1998, based on calculations using the appropriate
NAIC formula, the Company's total adjusted capital is in excess of the amount
which would require any form of regulatory action. Generally accepted accounting
principles differ in some respects from reporting practices prescribed or
permitted by the Florida Department of Insurance. UPCIC's statutory capital and
surplus was $5,597,951 as of December 31, 1998 and $5,315,319 as of December 31,
1997. Statutory net income was $244,704 for the year ended December 31, 1998 and
$15,319 for the year ended December 31, 1997.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with GAAP which requires the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of the general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the cost of paying losses and Loss Adjustment Expenses ("LAE").
Insurance premiums are established before the Company knows the amount
of loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the Company's
investment portfolio and the investment rate of return. Any future economic
changes which result in prolonged and increasing levels of inflation could cause
increases in the dollar amount of incurred loss and LAE and thereby materially
adversely affect future liability requirements.
IMPACT OF THE YEAR 2000
The Company's investment in enhanced technologies and implementation of
new systems to better serve the insured is a continuing process. As part of this
process, the Company has evaluated its internal systems, both hardware and
software, facilities, and interactions with business partners, including
Universal P & C Management, Inc. where risk is concentrated in relation to year
2000 issues. As of December 31, 1998, the Company had completed efforts, which
the Company believes, have brought its systems into compliance. The total cost
incurred to modify existing systems was not material. The Company will continue
to contact its business partners (including agents, banks, reinsurers and rating
agencies) to determine the status of their compliance and to assess the impact
of noncompliance on the Company. The Company believes that it is taking the
necessary measures to mitigate issues that may arise relating to the year 2000.
To the extent that any additional issues arise, the Company will evaluate the
impact on its business, results of operations and financial condition and, if
material, make the necessary disclosures and take appropriate remedial action.
In addition, the Company is in the process of establishing a contingency plan to
address the worst case scenario of its outside management company incurring year
2000 problems. The most reasonably likely worst case scenario would potentially
result in intermittent delays in processing premiums and claims.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are annexed to this report and
are referenced as pages F-1 to F-29. As a result of a change in the Company's
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year-end, the Company presented the transition period from May 1, 1997 to
December 31, 1997 and the fiscal year ended April 30, 1997 as comparatives.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The accounting firm of Millward & Co. CPA's reported on the Company's
financial statements for the transition period from May 1, 1997 to December 31,
1997 and the fiscal year ended April 30, 1997. The Board of Directors of the
Company, upon recommendation of its Audit Committee, unanimously determined to
appoint Deloitte & Touche LLP as the Company's independent accountants to audit
the Company's financial statements for 1998 effective as of February 8, 1999.
During the Company's transition period from May 1, 1997 to December 31,
1997 and the fiscal year ended April 30, 1997 and subsequent interim period
through the date of termination for which Millward & Co. CPA's were the
Company's independent auditors, there were no disagreements between the Company
and Millward & Co. CPA's on any matter of accounting principals or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Millward & Co. CPA's would
have caused it to make reference to the subject matter of the disagreement in
connection with its reports.
Millward & Co. CPAs did not report to the Company any material weakness
in connection with their audits of the Company's financial statements for the
transition period from May 1, 1997 to December 31, 1997 and the fiscal year
ended April 30, 1997, and Millward & Co. CPAs audit report dated March 6, 1998
concerning the Company's financial statements for the transition period from May
1, 1997 to December 31, 1997 and the fiscal year ending April 30, 1997 contained
an unqualified opinion.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT AND KEY EMPLOYEES
The directors and executive officers of the Company as of December 31,
1998 are as follows:
NAME AGE POSITION
---- --- --------
Bradley I. Meier 31 President, Chief Executive Officer,
Assistant Secretary and Director
Norman M. Meier 60 Director
Irwin I. Kellner 60 Director
Reed J. Slogoff 30 Director
Joel M. Wilentz 65 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 1997, 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.
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
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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 December 1998, Mr. Slogoff has been associate counsel to Entercom
Communications Corp., a publicly traded corporation engaged in the radio
broadcasting industry. From January 1996 through December 1998, Mr. Slogoff was
an associate in the business and finance department of the Philadelphia office
of the law firm of Dilworth, Paxson, Kalish & Kaufmann LLP in Philadelphia. Mr.
Slogoff was an associate with the law firm of Harvey, Pennington, Herding &
Dennison in Philadelphia following his graduation from law school until January
1996. 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.
KEY EMPLOYEES
Joseph P. DeAlessandro was named Chairman of the Board and Chief
Executive Officer of UPCIC in June 1997. Mr. DeAlessandro has served as
President and CEO of Rutgers Casualty Insurance Company from July 1995 to
present and President and CEO of Kentucky National Insurance Company from
October 1995 to present. Prior to serving in such capacities, Mr. DeAlessandro
served in executive management positions at both Gulf Insurance Co. and
Traveler's Insurance Group, and was a senior key executive at AIG Insurance
Group for over 20 years. The Company does not currently have key man life
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insurance for any of its key employees.
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 period ended December 31, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Year Ended ------------------- Long-Term Compensation
Principal Position December 31, Salary Bonus Securities Underlying
- ------------------ ------------ ------ ----- Options
-------
<S> <C> <C> <C> <C>
Bradley I. Meier 1998 $250,000 $61,554 250,000
President and CEO 1997* 250,000 -- 1,750,000
CEO 1996 75,000 -- 90,000
*Includes the transition period from May 1, 1997 through December 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
Number of
Securities % of Total Options
Underlying Granted to
Options Employees in Exercise or Base
Name Granted Fiscal Year Price Expiration Date
- ---- ------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
Bradley I. Meier 250,000 83% $1.63 2008
</TABLE>
Aggregated Option Exercises and Option Values for the Year Ended December 31,
1998
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<PAGE>
<TABLE>
<CAPTION>
Number of Securities Number of Unexercised
Underlying Unexercised In-the-Money
Options at Options
December 31, 1998 December 31, 1998
Shares Value
Name Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- Exercise -------- ----------- ------------- ----------- -------------
--------
<S> <C> <C> <C> <C> <C> <C>
Bradley I. Meier -- -- 250,000 -- -- --
</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, as
amended October 1, 1998, 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 March 1, 1999, 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) 4,823,484 23.6%
Norman M. Meier (4) 2,465,624 12.0%
Irwin L. Kellner (5) 200,000 1.0%
Reed J. Slogoff (6) 200,000 1.0%
Joel M. Wilentz (7) 200,000 1.0%
Officers and directors as a group
(5 people) (8) 7,889,108 38.6%
(1) Unless otherwise indicated, the Company believes that all persons named
in the table have sole voting and investment power with respect to the
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shares of Common Stock beneficially owned by them. The address for each
director is 2875 N.E. 191 Street, Suite 400A Miami, FL 33180.
(2) A person is deemed to be the beneficial owner of Common Stock that can
be acquired by such person within 60 days of the date hereof upon the
exercise of warrants or stock options or conversion of Series A 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 employment
agreement, options to purchase 500,000 shares of Common Stock at $1.06
per share which vested on May 1, 1998 granted pursuant to Mr. Meier's
employment agreement and (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, (g) options to
purchase 250,000 shares of Common Stock at an exercise price of $1.63
per share. Excludes unvested options to purchase 500,000 shares of
Common Stock at $1.06 per share granted pursuant to Mr. Meier's
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 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
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Series M Preferred Stock) beneficially owned by Belmer, of which Mr.
Meier is a general partner, (f) options to purchase 500,000 shares of
Common Stock at an exercise price of $1.63 per share. 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 and options to purchase 100,000
shares at an exercise price of $1.63 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 and options to purchase 100,000 shares at an exercise price
of $1.63 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 and options to purchase 100,000 shares at an exercise price
of $1.63 per share. Mr. Wilentz is a Director of the Company.
(8) See footnotes (1) - (7) above.
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As of March 1, 1999, 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 6.4%
C/o Universal Heights, Inc.
2875 N.E. 191st Street,
Suite 400A
Miami, Florida 33180
Belmer Partners (4) 271,701 1.8%
C/o Phyllis R. Meier
Managing General Partner
Universal Heights, Inc.
2875 N.E. 191st Street
Suite 400A
Miami, Florida 33180
(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.
(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.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All marketing, underwriting, rating, policy issuance and administration
functions are performed for UPCIC by Universal Property & Casualty Management,
Inc. pursuant to a Management Agreement dated June 2, 1997 ("Management
Agreement") and Addenda thereto dated June 12, 1997 and June 1, 1998
("Addenda"). Universal Management is a wholly-owned subsidiary of American
European Group, Inc., a Delaware insurance holding company. Universal Management
and AEG both employ UPCIC's CEO as a senior officer and director. During the
year ended December 31, 1998, UPCIC incurred administrative costs to Universal
Management of $751,920.
On August 31, 1998 the Company loaned Norman M. Meier, a director of
the Company, $250,000 in the form of a 10% promissory note due on or before
March 1, 1999. The note was collateralized by publicly traded stock valued in
excess of the note. At December 31, 1998, the aggregate principal and accrued
interest balance on the note of $258,333 is included in other assets in the
accompanying 1998 consolidated balance sheet. The note and accrued interest were
repaid in March 1999.
As of December 31, 1998, corporate counsel held $290,000 in trust, for
the benefit of the Company, which funds were placed in trust in connection with
a dispute involving a Company director and an unrelated entity. These funds are
included in the Company's assets as of December 31, 1998.
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.
22
================================================================================
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
3.1 Registrant's Restated Amended and Restated Certificate of
Incorporation1
3.2 Registrant's Bylaws1
3.3 Certificate of Designations, Preferences, and Rights of Series M
Convertible Preferred Stock dated August 13, 1997.2
4.1 Form of Common Stock Certificate1
4.2 Form of Warrant Certificate1
4.3 Form of Warrant Agency Agreement1
4.4 Form of Underwriter Warrant1
4.5 Affiliate Warrant1
4.6 Form of Warrant to purchase 100,000 shares of Common Stock at an
exercise price of $2.00 per share issued to Steven Guarino dated as of
April 24, 1997. (Substantially similar in form to two additional
warrants to purchase 100,000 shares of Common Stock issued to Mr.
Guarino dated as of April 24, 1997, with exercise prices of $2.75 and
$3.50 per share, respectively.)2
10.1 Registrant's 1992 Stock Option Plan1
10.2 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers1
10.5 Management Agreements by and between Universal Property & Casualty
Insurance Company and Universal P&C Management, Inc. dated as of June
2, 1997.2
10.6 Employment Agreement dated as of May 1, 1997 between Universal Heights,
Inc. and Bradley I. Meier.2
16.1 Letter on change in certifying accountants from Millward & Co. CPA's
dated February 12, 1999, and as amended February 26, 1999.3
27.1 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-51546) declared effective on December 14, 1992.
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended April 30, 1997 filed with the Securities and
Exchange Commission on August 13, 1997, as amended.
(3) Incorporated by reference to the Registrant's Current Report on Form
8-K and Current Report on Form 8-K/A, filed with the Securities and
Exchange Commission on February 12, 1999 and February 26, 1999,
respectively.
REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K relating to the
Company's change in certifying accountants on February 12, 1999, and
filed an amendment to such report on February 26, 1999.
23
================================================================================
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
UNIVERSAL HEIGHTS, INC.
Dated: April 9, 1999 By: /s/ Bradley I. Meier
----------------------------------------------
Bradley I. Meier, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ BradleY I. Meier President, Chief Executive Officer April 9, 1999
- ---------------------- and a Director
Bradley I. Meier
/s/ James M. Lynch Chief Financial Officer April 9, 1999
- ----------------------
James M. Lynch
/s/ Norman M. Meier Director April 9, 1999
- ----------------------
Norman M. Meier
/s/ Irwin I. Kellner Director April 9, 1999
- ----------------------
Irwin I. Kellner
/s/ Reed J. Slogoff Director April 9, 1999
- ----------------------
Reed J. Slogoff
/s/ Joel M. Wilentz Director April 9, 1999
- ----------------------
Joel M. Wilentz
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors Report F-2
Report of Independent Certified Public Accountants -
Eight Months Ended December 31, 1997 and Fiscal
Year Ended April 30, 1997 F-3
Consolidated Balance Sheet - December 31, 1998 F-4
Consolidated Statements of Operations for the Year Ended
December 31, 1998, Eight Months Ended December 31, 1997
and Fiscal Year Ended April 30, 1997 F-5
Consolidated Statements of Changes in Stockholders'
Deficiency for the Year Ended December 31, 1998, Eight
Months Ended December 31, 1997 and Fiscal Year Ended
April 30, 1997 F-6
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1998, Eight Months Ended December 31, 1997
and Fiscal Year Ended April 30, 1997 F-7- F-8
Notes to the Consolidated Financial Statements F-9 -F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
Universal Heights, Inc. and Subsidiaries
Miami, Florida
We have audited the accompanying consolidated balance sheet of Universal
Heights, Inc. and Subsidiaries (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements present fairly in all
material respects the financial position of Universal Heights, Inc. and
Subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Miami, Florida
April 9, 1999
<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
the year 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
the year ended April 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Millward & Co. CPAs
Millward & Co. CPAs
Fort Lauderdale, Florida
March 6, 1998
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS
Debt securities held-to-maturity, at amortized cost
(fair value of $2,084,290) $2,094,900
Equity securities available for sale at fair value (cost of
$445,050) 471,119
Cash and cash equivalents 11,987,091
Prepaid reinsurance premiums 8,012,128
Receivables:
Reinsurance recoverable 1,419,154
Premiums and other receivables 707,056
Deferred policy acquisition costs 1,487,012
Due from related parties 124,325
Note receivable 250,000
Insurance license acquisition costs 127,357
--------
Total assets $26,680,142
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $2,524,056
Unearned premiums 13,812,915
Accounts payable 1,191,046
Other accrued expenses 1,424,315
Accrued taxes, licenses and fees 125,000
Due to related parties 20,041
Note payable 77,000
Other 143,492
-------
Total liabilities 19,317,865
-----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Cumulative convertible preferred stock, $.01 par value, 1,000,000
shares authorized, 138,640 shares issued and outstanding, minimum
liquidation preference of $1,419,700 1,387
Common stock, $.01 par value, 40,000,000 shares authorized,
14,672,604 shares issued and outstanding 146,726
Additional paid-in capital 15,015,581
Accumulated other comprehensive income 26,069
Accumulated deficit (7,827,486)
-----------
Total stockholders' equity 7,362,277
----------
Total liabilities and stockholders' equity $26,680,142
============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
<TABLE>
<CAPTION>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Eight
Year Months Fiscal Year
Ended Ended Ended
December 31, December 31, April 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
PREMIUMS EARNED AND OTHER REVENUES
Premium income - net $7,689,058 $ -- $ --
Net investment income 664,529 -- --
Other income (expense) 831,007 46,970 (14,988)
------- ------ --------
Total revenues 9,184,594 46,970 (14,988)
---------- ------ --------
OPERATING COST AND EXPENSES:
Losses and loss adjustment expenses 3,176,538 -- --
General and administrative expenses 3,875,688 613,481 400,903
--------- ------- --------
Total operating expenses 7,052,226 613,481 400,903
--------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2,132,368 (566,511) (415,891)
--------- -------- --------
DISCONTINUED OPERATIONS
Loss from operations of the sports novelty
and souvenir business -- -- (569,996)
Loss on disposal of sports novelty and souvenir
business -- (637,877) (1,387,575)
--------- -------- -----------
Loss from discontinued operations -- (637,877) (1,957,571)
--------- -------- -----------
NET INCOME (LOSS) $2,132,368 $(1,204,388) $(2,373,462)
========== =========== ===========
INCOME (LOSS) PER COMMON SHARE:
Basic
Income (loss) from continuing operations $ 0.14 $ (0.13) $ (0.24)
Income (loss) from discontinued operations 0.00 (0.14) (1.11)
----- ----------- ----------
Net income (loss) $ 0.14 $ (0.27) $ (1.35)
===== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 14,667,000 4,512,935 1,767,373
========== =========== ==========
INCOME (LOSS) PER COMMON SHARE:
Diluted
Income (loss) from continuing operations $ 0.13 $ (0.13) $ (0.24)
Income (loss) from discontinued operations 0.00 (0.14) (1.11)
---------- ----------- -----------
Net income (loss) $ 0.13 $ (0.27) $ (1.35)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 16,640,000 4,512,935 1,767,373
========== =========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEAR ENDED DECEMBER 31, 1998,
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND FISCAL YEAR ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ---------------------
Shares Amount Shares Amount
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, April 27, 1996 49,950 $500 1,598,882 $15,988
Debt exchanged for common and preferred stock 88,690 887 1,265,800 12,658
Capital raised on private placement - - 354,760 3,548
Issuance of common stock for services - - 10,000 100
Net loss and comprehensive loss, fiscal
year ended April 30, 1997 - - - -
--------- ---------- ----------- ----------
BALANCE, April 30, 1997 138,640 1,387 3,229,442 32,294
Proceeds received for subscription - - - -
Issuance of common stock for services - - 147,666 1,477
Private placement - 11,208,996 shares
issued at $.60 per share (net of stock
issuance costs of $58,191) - - 11,208,996 112,090
Debt exchanged for common stock - - 46,500 465
Net loss and comprehensive loss, eight
months ended December 31, 1997 - - - -
--------- ---------- ----------- ----------
BALANCE, December 31, 1997 138,640 1,387 14,632,604 146,326
Net income, year ended December 31, 1998 - - - -
Net unrealized gain on available-for-sale
securities - - - -
Comprehensive income - - - -
Issuance of common stock for services - - 55,000 550
Fair value of warrants
granted to non-employees - - - -
Preferred stock dividend - - - -
Cancelled shares - - (15,000) (150)
--------- ---------- ----------- ----------
BALANCE, December 31, 1998 138,640 $1,387 14,672,604 $146,726
======= ====== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEAR ENDED DECEMBER 31, 1998,
EIGHT MONTHS ENDED DECEMBER 31, 1997 AND FISCAL YEAR ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-in Accumulated Comprehensive
Capital Deficit Income Total
---------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
BALANCE, April 27, 1996 $6,842,651 $(6,348,704) - $510,435
Debt exchanged for common and preferred stock 691,995 - - 705,540
Capital raised on private placement 265,202 - - 268,750
Issuance of common stock for services 20,900 - - 21,000
Net loss and comprehensive loss, fiscal
year ended April 30, 1997 - (2,373,462) - (2,373,462)
---------- ---------- ------------ ----------
BALANCE, April 30, 1997 7,820,748 (8,722,166) - (867,737)
Proceeds received for subscription 50,000 - - 50,000
Issuance of common stock for services 205,474 - - 206,951
Private placement - 11,208,996 shares
issued at $.60 per share (net of stock
issuance costs of $58,191) 6,555,099 - - 6,667,189
Debt exchanged for common stock 57,660 - - 58,125
Net loss and comprehensive loss, eight
months ended December 31, 1997 - (1,204,388) - (1,204,388)
------------ ---------- ------------ ----------
BALANCE, December 31, 1997 14,688,981 (9,926,554) - 4,910,140
Net income, year ended December 31, 1998 - 2,132,368 - 2,132,368
Net unrealized gain on available-for-sale
securities - - 26,069 26,069
Comprehensive income - - - 2,158,437
---------
Issuance of common stock for services 59,450 - - 60,000
Fair value of warrants
granted to non-employees 312,000 - - 312,000
Preferred stock dividend - (33,300) - (33,300)
Cancelled shares (44,850) - - (45,000)
---------- ---------- ---------- ---------
BALANCE, December 31, 1998 $15,015,581 ($7,827,486) 26,069 $7,362,277
=========== =========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Eight Months Fiscal Year
Ended Ended Ended
December 31, December 31, April 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
CONTINUING OPERATIONS:
Income (loss) from continuing operations $2,132,368 $ (566,511) $ (415,891)
Add (deduct):
Adjustments to reconcile income (loss) from continuing operations
to cash provided by (used in) operations:
Amortization 31,839 --- ---
Warrants issued for services rendered 312,000 --- ---
Stock issued for services --- 118,201 21,000
Gain on sales of equity securities available for sale (12,376) --- ---
Net accretion of bond premiums and discounts 78,202 --- ---
Net change in assets and liabilities relating to continuing operations:
Prepaid reinsurance premiums (8,012,128) --- ---
Other receivables and deposits (666,374) --- ---
Reinsurance recoverable on losses (1,419,154)
Deferred policy acquisition costs (1,487,012) --- ---
Accounts payable 220,961 --- ---
Accrued expenses 1,067,623 --- ---
Accrued taxes, licenses and fees 125,000 --- ---
Unpaid losses and loss adjustment expenses 2,524,056 --- ---
Unearned premiums 13,812,915 --- ---
Due to/from related parties and other (296,953) --- ---
----------- --------- --------
Net cash provided by (used in) continuing operations 8,410,967 (388,310) (394,891)
----------- --------- --------
DISCONTINUED OPERATIONS:
Loss from discontinued operations --- (637,877) (1,957,571)
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
Provision for doubtful accounts --- --- (8,101)
Write down of inventories to net realizable value --- 138,324 952,896
Loss on disposal of property, equipment and patents --- 250,257 ---
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable --- --- 51,982
Inventories --- 140,198 (8,647)
Other current assets --- (116,176) 196,203
Accounts payable and accrued expenses 207,755 120,355
---------- --------- ---------
Net cash provided by (used in) discontinued operations --- 103,953 (90,466)
---------- --------- ---------
Net cash provided by (used in) operating activities 8,410,967 (284,357) (485,357)
---------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
Year Eight Months Fiscal Year
Ended Ended Ended
December 31, December 31, April 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (40,518) $ --- $ (436)
Purchase of equity securities available-for-sale (621,359) --- ---
Proceeds from sale of equity securities available-for-sale 189,492 --- ---
Purchase of debt securities held-to-maturity (3,313,559) --- ---
Proceeds from maturities of debt securities held-to-maturity 1,139,650 --- ---
Acquisition of patents and trademarks --- --- (3,339)
Payments for notes receivable (250,000) --- ---
--------- ---------- ---------
Net cash used in investing activities (2,896,294) --- (3,775)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock --- 6,717,189 268,750
Advances from stockholders --- 12,500 ---
Issuance of related party loans --- --- 237,893
Payment on capital lease obligations --- (8,183) (12,579)
---------- ---------- --------
Net cash provided by financing activities --- 6,721,506 494,064
---------- ---------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,514,673 6,437,149 4,932
CASH AND CASH EQUIVALENTS, Beginning of Period 6,472,418 35,269 30,337
---------- ---------- --------
CASH AND CASH EQUIVALENTS, End of Period 11,987,091 $ 6,472,418 $ 35,269
========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ --- $ 4,155 $ 9,479
SUPPLEMENTAL NONCASH FINANCING AND INVESTING
ACTIVITIES
Common stock issued for services and in satisfaction of liabilities $ 60,000 $ --- $ ---
Fair value of warrants issued for services rendered 312,000 --- ---
Preferred stock issued in exchange for debt --- --- 887
Common stock issued in exchange for debt --- 58,125 704,540
Write off of fully depreciated fixed assets --- 184,447 ---
Common stock issued in exchange for services --- 206,951 21,000
Accrual of preferred stock dividend 33,300 --- ---
Cancellation of common stock shares previously issued for services and
satisfaction of liabilities 45,000 --- ---
The accompanying notes to consolidated financial statements are an
integral part of these statements
</TABLE>
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Universal Heights, Inc. (the "Company") was originally incorporated in Delaware
in November 1990. The Company through its wholly-owned subsidiary, Universal
Insurance Holding Company, formed Universal Property & Casualty Insurance
Company (UPCIC) in 1997. UPCIC's application to become a Florida licensed
property and casualty insurance company was filed in May 1997 with the Florida
Department of Insurance ("DOI") and was approved on October 29, 1997. In 1998,
UPCIC began operations through the acquisition of homeowner insurance policies
issued by the Florida Residential Property and Casualty Joint Underwriting
Association ("JUA").
The JUA was established in 1992 as a temporary measure to provide insurance
coverage for individuals who could not obtain coverage from private carriers
because of the impact on the private insurance market of Hurricane Andrew in
1992. Rather than serving as a temporary source of emergency insurance coverage
as was originally intended, the JUA became a major provider of original and
renewal insurance coverage for Florida residents. In an attempt to reduce the
number of policies in the JUA, and thus the exposure of the program to
liability, the Florida legislature approved a number of initiatives to
depopulate the JUA, which 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.
In February 1998 the Company commenced its insurance business. On March 10,
1998, the Company made a decision to change its accounting fiscal year end from
April 30 to December 31. As a result of the change in accounting year, the eight
months ended December 31, 1997 and the fiscal year ended April 30, 1997 have
been presented for comparative purposes.
The Company continues to develop into a vertically integrated insurance holding
company performing all aspects of insurance underwriting, distribution and
claims. Universal Risk Advisors, Inc. was incorporated in Florida on July 2,
1998 and became licensed by the Florida Department of Insurance on September 28,
1998 as the Company's wholly-owned managing general agent ("MGA"). Through the
MGA, the Company will have underwriting and claims authority for third-party
insurance companies. The MGA will generate revenue through policy fee income and
other administrative fees from the marketing of UPCIC's as well as third party
insurance products through the Company's distribution network and UPCIC.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Universal Florida Insurance Agency was incorporated in Florida on July 2, 1998
and U.S. Insurance Solutions, Inc. was incorporated in Florida on August 4, 1998
as wholly-owned subsidiaries of Universal Heights, Inc. to solicit voluntary
business and generate commission revenue. These two entities are the foundation
of the Company's agency operations, which will generate income from policy fees,
commissions, premium financing referral fees and the marketing of ancillary
services. U.S.A Insurance Solutions, Inc., was incorporated in Florida on
December 10, 1998 as a wholly-owned subsidiary of U.S. Insurance Solutions, Inc.
to acquire the assets of an insurance agency. In addition, on August 31, 1998
World Financial Resources (Barbados) LTD. ("WFR") was incorporated as a
subsidiary of the Company in Barbados to participate in the international
insurance and reinsurance markets. Effective September 1, 1998 WFR entered into
an excess and surplus reinsurance arrangement with European International
Reinsurance Company LTD as a reinsured for catastrophic events.
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are summarized as
follows:
USE OF ESTIMATES. The preparation of financial statements in conformity with
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 financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts, after intercompany eliminations, of the Company and its Subsidiaries.
BASIS OF PRESENTATION. The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles that differ from
statutory accounting practices prescribed or permitted for insurance companies
by regulatory authorities. UPCIC maintains its records in conformity with the
accounting practices prescribed or permitted by the DOI. To the extent that
certain of these practices differ from generally accepted accounting principles
("GAAP"), adjustments have been made in order to present the accompanying
consolidated financial statements on the basis of GAAP.
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
consolidated financial statements present the Company's financial position at
December 31, 1998 and the results of operations and cash flows for the year
ended December 31, 1998, eight months ended December 31, 1997 and the fiscal
year ended April 30, 1997.
Certain reclassifications have been made in the 1997 financial statements to
conform them to and make them consistent with the presentation used in the 1998
financial statements.
SECURITIES HELD TO MATURITY. Securities, which the Company has the intent and
ability to hold to maturity, are reported at amortized cost, adjusted for
amortization of premiums or accretion of discounts and other-than-temporary
declines in fair value.
SECURITIES AVAILABLE FOR SALE. Securities, not classified as held-to-maturity
are reported at fair value, adjusted for other than temporary declines in fair
value, with unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses are determined on the specific
identification method.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH EQUIVALENTS. For the purpose of presentation in the Company's consolidated
statements of cash flows, cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash and have an
original maturity of three months or less.
RECOGNITION OF PREMIUM REVENUES. Property and liability premiums are recognized
as revenue on a pro rata basis over the policy term. The portion of premiums
that will be earned in the future are deferred and reported as unearned
premiums.
DEFERRED POLICY ACQUISITION COSTS. Commissions and other costs of acquiring
insurance that vary with and are primarily related to the production of new and
renewal business are deferred and amortized over the terms of the policies or
reinsurance treaties to which they are related.
INSURANCE LIABILITIES. The liability for losses and loss adjustment expenses
includes an amount determined from loss reports and individual cases and an
amount, based on industry experience, for losses incurred but not reported. Such
liabilities are necessarily based on estimates and, while management believes
that the amount is adequate, the ultimate liability may be in excess of or less
than the amounts provided. In the case of UPCIC, this uncertainty is compounded
by UPCIC's absence of historical claims experience. The methods for making such
estimates and for establishing the resulting liability are continually reviewed,
and any adjustments are reflected in earnings currently.
REINSURANCE. In the normal course of business, the Company seeks to reduce the
loss that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers. Amounts recoverable
from reinsurers are estimated in a manner consistent with the reinsured policy.
INCOME TAXES. Income tax provisions are based on the asset and liability method.
Deferred federal income taxes have been provided for temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the consolidated financial statements.
INCOME (LOSS) PER SHARE OF COMMON STOCK. Basic earnings per share is computed by
dividing the Company's earnings less cumulative Preferred Stock dividends by the
weighted average number of shares of Common Stock outstanding during the period.
Diluted earnings per share is computed by dividing the Company's earnings by the
weighted average number of shares of Common Stock outstanding during the period
and the impact of all dilutive potential common shares, primarily preferred
stock, options and warrants. The dilutive impact of stock options and warrants
is determined by applying the treasury stock method and the dilutive impact of
the Preferred Stock is determined by applying the "if converted" method.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting
Standards ("SFAS") No. 107, Disclosure about Fair Value of Financial
Instruments, requires disclosure of the estimated fair value of all financial
instruments including both assets and liabilities unless specifically exempted.
The Company in estimating the fair value of financial instruments used the
following methods and assumptions. Cash and cash equivalents: the carrying
amount reported in the consolidated balance sheet for cash and cash equivalents
approximate fair value due to the short-term nature of those items. Premiums and
other receivables and accounts and note payable: the carrying amounts reported
in the consolidated balance sheet for premiums and other receivables and
accounts and note payable approximate their fair value due to their short-term
nature.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity securities available-for-sale and debt securities held-to-maturity: fair
values for equity and debt securities are based on quoted market prices.
IMPAIRMENT OF LONG -LIVED ASSETS. 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 for the fiscal year
ended April 30, 1997 and for the eight months ended December 31, 1997,
respectively.
CONCENTRATIONS OF CREDIT RISK. Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash,
investments, premiums receivable and reinsurance recoverables. Concentrations of
credit risk with respect to premium receivable are limited due to the large
number of individuals comprising the Company's customer base. However, all of
the Company's revenues are currently derived from products and services offered
to customers in Florida which could be adversely affected by economic downturns,
an increase in competition or other environmental changes. In order to reduce
credit risk for amounts due from reinsurers, the Company seeks to do business
with financially sound reinsurance companies and regularly evaluates the
financial strength of all reinsurers used.
STOCK OPTIONS. The Company grants options for a fixed number of shares to
employees and outside directors with an exercise price equal to the fair value
of the shares at the grant date. The Company has elected to apply Accounting
Principles Board ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations in accounting for its stock options granted to employees
and directors, and Statement of Financial Accounting Standard No. 123 ("SFAS
No.123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, for its stock options granted
to non employees. Under APB No. 25, because the exercise price of the Company's
employee and director stock options equals the market price of underlying stock
on the date of the grant, no compensation expense is recognized. The Company
expenses the fair value (as determined at the grant date) of options and
warrants granted to nonemployees. The Company has adopted the disclosure only
provisions of SFAS No. 123 (see Note 10).
NEW ACCOUNTING PRONOUNCEMENTS. In June, 1997, SFAS Statement No. 130, "Reporting
Comprehensive Income," was issued. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components. SFAS No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which currently are reported in shareholders' equity, to be included
in other comprehensive income and the disclosure of total comprehensive income.
The Company has adopted SFAS No. 130 and disclosed other comprehensive income in
the consolidated statements of stockholders' equity.
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. The Company has one reportable
segment during each period reported in the accompanying consolidated financial
statements, based upon management reporting. The Company's reportable segment
during the year ended December 31, 1998 was insurance services. The Company's
reportable segment during the fiscal year ended April 30, 1997 and the eight
month period ended December 31, 1997 was souvenirs and sports related products.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, ACCOUNTING BY INSURANCE AND OTHER
ENTERPRISES FOR INSURANCE AND REINSURANCE-RELATED ASSESSMENTS ("SOP 97-3"). SOP
97-3 provides guidance on the recognition and measurement of liabilities for
guaranty-fund and other insurance related assessments. SOP 97-3 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
effect of the initial adoption of SOP 97-3 is required to be reported in a
manner similar to the reporting of a cumulative effect of a change in accounting
principle. The adoption of SOP 97-3 is not expected to have a material impact on
the Company's financial condition or results of operations or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities". This Statement of Position ("SOP") provides
guidance on the financial reporting of start-up costs and organization costs and
requires such costs to be expensed as incurred. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company adopted SOP 98-5 effective January 1, 1999 through a cumulative effect
charge to earnings of $127,357.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (the "Statement"
or "SFAS No. 133"). The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 will be effective for the Company on January 1, 2000 and cannot be
applied retroactively. The Company has not yet quantified the impact of adopting
SFAS No. 133 on its financial statements.
In October 1998, the AICPA issued Statement of Position 98-7 DEPOSIT ACCOUNTING:
ACCOUNTING FOR INSURANCE AND REINSURANCE CONTRACTS THAT DO NOT TRANSFER
INSURANCE RISK ("SOP 98-7"). SOP 98-7 provides guidance on the accounting for
insurance and reinsurance contracts that do not transfer insurance risk. SOP
98-7 is effective for financial statements for fiscal years beginning after June
15, 1999, with earlier adoption encouraged. The effect of the initial adoption
of SOP 98-7 is required to be reported as a cumulative effect of a change in
accounting principle. The adoption of SOP 98-7 is not expected to have a
material impact on the Company's financial position, results of operations or
cash flows.
NOTE 2 - INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the JUA. UPCIC received the unearned premiums and is servicing such
policies. Unearned premiums represent amounts that UPCIC would refund
policyholders if their policies were canceled. UPCIC has acquired policies from
the JUA at various stages in the life of such policies. Accordingly, UPCIC
determines unearned premiums by calculating the pro-rata amount that would be
due to the policyholder at a given point in time based upon the premiums owed
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INSURANCE OPERATIONS, Continued
over the life of each policy. At December 31, 1998, the Company has direct and
assumed unearned premiums of $13,812,915.
UPCIC's obligation for liabilities for policies assumed from the JUA began at
11:59 p.m. on the date of assumption of the policies. UPCIC has no liability for
assumed policies prior to the assumption date nor does UPCIC have any liability
for claims made to the JUA. Similarly, the JUA has no liability for assumed
liabilities subsequent to the assumption date.
The Company incurred $151,461 in legal costs in connection with UPCIC's efforts
to acquire the insurance license from the DOI for the insurance subsidiary. As
discussed in Note 1, the Company adopted SOP 98-5 on January 1, 1999 and
wrote-off the insurance license costs through a cumulative effect charge to
earnings of $127,357. Insurance license acquisition costs reported at December
31, 1998 were reported net of accumulated amortization of $24,104.
UPCIC's chief executive officer is affiliated with companies that provide UPCIC
with management and personnel for underwriting, claims and accounting functions
together with support offices, equipment and services. The fees for such
services for the year ended December 31, 1998 were $751,920.
The JUA's incentive program (Note 1) has provided approximately $2,700,000 to an
escrow account. These funds will be released to UPCIC when certain conditions
are met including assuming and retaining for a three-year period a minimum
number of policies acquired from the JUA. Three years after UPCIC assumes the
Takeout Program policies, the JUA will confirm UPCIC's compliance with
applicable JUA requirements, and instruct the escrow agent to transfer to UPCIC
an amount equal to the per policy takeout bonus times the number of policies
that UPCIC has held for the requisite three year period. Pursuant to the Takeout
Program, if an insured voluntarily terminates or elects not to renew a policy,
the Company will still be entitled to the bonus money held in escrow for such
policy. To date, the Company has substantially complied with the requirements
related to the bonus payments. The escrow account is not included in the
accompanying consolidated financial statements.
Premiums earned/received from the JUA are included in earnings on a pro-rata
basis over the terms of the policies. UPCIC does not have policies that provide
for retroactive premium adjustments.
Policy acquisition costs, consisting of commissions and other costs that vary
with and are directly related to the production of business, net of ceding
commissions are deferred and amortized over the terms of the policies, but only
to the extent that unearned premiums are sufficient to cover all related costs
and expenses. At December 31, 1998, deferred policy acquisition costs amounted
to $1,487,012.
Claims and claim adjustment expenses, less related reinsurance, are provided for
as claims are incurred. The provision for unpaid claims and claim adjustment
expenses includes: (1) the accumulation of individual case estimates for claims
and claim adjustment expenses reported prior to the close of the accounting
period; (2) estimates for unreported claims based on industry data; and (3)
estimates of expenses for investigating and adjusting claims based on the
experience of the Company and the industry.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INSURANCE OPERATIONS, Continued
Inherent in the estimates of ultimate claims is expected trends in claim
severity, frequency and other factors that may vary as claims are settled. The
amount of uncertainty in the estimates for casualty coverage is significantly
affected by such factors as the amount of claims experience relative to the
development period, knowledge of the actual facts and circumstances and the
amount of insurance risk retained. In the case of UPCIC, this uncertainty is
compounded by UPCIC's absence of historical claims experience. In addition,
UPCIC's policyholders are currently concentrated in South Florida, which is
periodically subject to adverse weather conditions such as hurricanes and
tropical storms.
NOTE 3 - REINSURANCE
UPCIC commenced its insurance activity by assuming policies from the JUA. In the
normal course of business, UPCIC also seeks to reduce the loss that may arise
from catastrophes or other events that cause unfavorable underwriting results by
reinsuring certain levels of risk in various areas of exposure with other
insurance enterprises or reinsures.
UPCIC limits the maximum net loss that can arise from large risks or risks in
concentrated areas of exposure by reinsuring (ceding) certain levels of risks
with other insurers or reinsurers, either on an automatic basis under general
reinsurance contracts known as "treaties" or by negotiation on substantial
individual risks. The reinsurance arrangements are intended to provide UPCIC
with the ability to maintain its exposure to loss within its capital resources.
Such reinsurance includes quota share, excess of loss and catastrophe forms of
reinsurance.
QUOTA SHARE
Effective February 1, 1998, UPCIC entered into a quota share reinsurance treaty
with various reinsurers, including certain foreign reinsurance companies. Under
the quota share treaty, UPCIC cedes fifty percent of its gross written premiums,
losses and loss adjustment expenses. The quota share treaty has limits of
$500,000 each dwelling for property losses and $300,000 each occurrence for
casualty losses. In addition, the quota share treaty has a limitation for any
one occurrence of the greater of $9,000,000 or 200% of premiums earned for the
contract year in which the occurrence commences. The Company earns a ceding
commission of twenty-seven percent. In addition, the quota share treaty provides
for a contingent commission payable to UPCIC equal to 50% of net profits, as
defined, after a 20% reinsurers' expense factor.
EXCESS PER RISK
Effective February 1, 1998, UPCIC entered into an excess per risk reinsurance
treaty with various reinsurers, including certain foreign reinsurance companies.
The excess per risk treaty excludes losses arising from the peril of wind. The
excess per risk treaty provides coverage of $1,250,000 in excess of $500,000,
for any one risk, each loss. In addition, the excess per risk treaty provides a
$2,500,000 limit as respects all risks involved in any one-loss occurrence. The
excess per risk treaty requires an annual deposit premium of $185,000, subject
to a minimum premium of $138,750. The deposit premium is adjustable to 2.176% of
the subject written premium.
<PAGE>
EXCESS CATASTROPHE
Effective February 1, 1998, UPCIC entered into an excess catastrophe reinsurance
treaty with various reinsurers, including certain foreign reinsurance companies.
The excess catastrophe reinsurance agreement provides three layers of excess
catastrophe coverage as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
First Layer Second Layer Third Layer
- -------------------------------------------------- -----------------------------------------------------------------------------
Coverage $5,000,000 in excess of $9,000,000 in excess $27,000,000 in excess of $53,000,000 each loss
$2,000,000 each loss of $7,000,000 each occurrence (see discussion of coverage provided by
occurrence loss occurrence Florida Hurricane Catastrophe Fund below)
- --------------------------------------------------------------------------------------------------------------------------------
Deposit premium $1,620,000 $1,440,000 $2,205,000
- --------------------------------------------------------------------------------------------------------------------------------
Minimum premium $1,458,000 $1,296,000 $1,822,500
- --------------------------------------------------------------------------------------------------------------------------------
Premium rate .05015% .04458% .06269%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Loss occurrence is defined as all individual losses directly occasioned by any
one disaster, accident or loss or series of disasters, accidents or losses
arising out of one event which occurs within the area of one state of the United
States or province of Canada and states or provinces contiguous thereto and to
one another.
Effective June 1, 1998, UPCIC entered a reimbursement agreement with the Florida
Hurricane Catastrophe Fund (the "Fund") which is administered by the Florida
State Board of Administration. Under the reimbursement agreement, the Fund will
reimburse the Company, with respect to each Loss Occurrence during the contract
year for 90% of the ultimate loss paid by the Company in excess of the Company's
retention plus 5% of the reimbursed losses to cover loss adjustment expenses. A
covered event means any one storm declared to be a hurricane by the National
Hurricane Center for losses incurred in Florida, both while it is a hurricane
and through subsequent downgrades. The Fund has provided UPCIC with estimates of
its current coverage of $45,000,000 in excess of $12,600,000. The premium for
this coverage is $1,899,322. In the event of depletion of the Fund due to losses
arising from catastrophic events, the Fund would assess homeowners' insurers
writing business in the state of Florida. Under UPCIC's assumption agreements
with the JUA, the Takeout Program policies are exempt from such catastrophic
assessments for a three-year period.
In the event that a loss occurrence were to decrease the coverage available to
UPCIC under the Fund, UPCIC has purchased contingency coverage to replace the
coverage provided by the Fund for 100% of losses of $42,300,000 in excess of
$42,300,000 otherwise recoverable in excess of $10,600,000. Various foreign
reinsurers provide this coverage. The premium for this coverage is $370,531.
However, should the paid losses exceed the third layer of UPCIC's excess
catastrophe coverage or if the coverage under the Fund is depleted on an
incurred basis, UPCIC shall immediately pay an additional premium to the
reinsurers of $1,066,772.
Effective November 1, 1998, UPCIC entered into an excess catastrophe treaty with
various Lloyds underwriting syndicates. This excess catastrophe treaty provides
coverage of $7,400,000 in excess of $80,000,000 for each loss occurrence for a
premium of $124,000.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the reinsurance contract. Reinsurance premiums, losses and loss adjustment
expenses ("LAE") are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Reinsurance ceding commissions received are deferred and amortized
over the effective period of the related insurance policies.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REINSURANCE, Continued
The preceding reinsurance arrangements had the following effect on certain items
in the accompanying 1998 consolidated financial statements:
PREMIUMS:
WRITTEN EARNED
Direct $ 15,802,520 $ 3,343,257
Assumed 17,008,572 15,654,920
Ceded (19,321,247) (11,309,119)
------------- ------------
Net $ 13,489,845 $ 7,689,058
============ ============
OTHER AMOUNTS:
Reinsurance recoverable on unpaid losses
and loss adjustment expenses $ 1,271,528
Unearned premiums reserve ceded $ 8,012,129
UPCIC's reinsurance contracts do not relieve UPCIC from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to UPCIC; consequently, allowances are established for amounts deemed
uncollectable. UPCIC evaluates the similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. UPCIC currently has reinsurance
contracts with various reinsurers located throughout the United States and
internationally. UPCIC believes that this distribution of reinsurance contracts
adequately minimizes UPCIC's risk from any potential operating difficulties of
its reinsurers.
NOTE 4 - INVESTMENTS
Major categories of net investment income for the year ended December 31, 1998
are summarized as follows:
Debt securities held-to-maturity $ 71,685
Short term investments 622,873
----------
694,558
Investment expenses 30,029
----------
$ 664,529
==========
Proceeds from the sale of securities during 1998 were $189,482; gross gains of
$12,376 were realized on those sales.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENTS (continued)
The aggregate fair value, gross unrealized holding gains, gross unrealized
holding losses, and amortized cost for available-for-sale and held-to-maturity
securities by major security type at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale securities:
Equity securities $ 445,050 $ 26,069 $ --- $ 471,119
======= ======== ========= =======
Held-to-maturity securities:
U.S. Government Agencies $1,878,854 $ 5,265 $ 13,016 $1,871,103
Mortgage-backed securities 216,046 --- 2,859 213,187
---------- -------- ----------
Total $2,094,900 $ 5,265 $ 15,875
========== ======== ==========
</TABLE>
The scheduled maturities of held-to-maturity securities at December 31, 1998
were as follows:
Amortized
Cost Fair Value
--------- ----------
Due after five years through ten years $ 134,012 $ 131,605
Due after ten years 1,960,888 1,952,685
--------- ---------
Total $2,094,900 $2,084,290
The preceding data is based on the stated maturities of the securities. Actual
maturities may differ as borrowers may have the right to call or prepay
obligations.
At December 31, 1998, investments with a carrying value of $300,000 were on
deposit with regulatory authorities.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
As described in Note 2, UPCIC establishes liabilities for claims and claims
adjustment expense on reported and unreported claims of insured losses. These
liability estimates are based on known facts and interpretation of factors such
as claim payment patterns, loss payments, pending levels of unpaid claims,
product mix and industry experience. The establishment of appropriate
liabilities, including liabilities for catastrophes, is an inherently uncertain
process. This uncertainty is compounded by UPCIC's absence of historical claims
experience. UPCIC regularly updates its estimates as new facts become known and
further events occur which may impact the resolution of unsettled claims.
The level of catastrophe loss experienced in any year cannot be predicted and
could be material to results of operations and financial position. UPCIC's
policyholders are concentrated in South Florida, which is periodically subject
to adverse weather conditions such as hurricanes and tropical storms. UPCIC's
in-force policyholder coverage for windstorm exposures as of December 31, 1998
was approximately $2.6 billion. UPCIC continuously evaluates alternative
business strategies to more effectively manage its exposure to catastrophe
losses, including the maintenance of catastrophic reinsurance coverage as
discussed at Note 3.
Management believes that the liabilities for claims and claims expense at
December 31, 1998 is appropriately established in the aggregate and adequate to
cover the ultimate net cost of reported and unreported claims arising from
losses which had occurred by that date.
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
Balance at January 1, 1998 $ -
Incurred related to:
Current year 3,176,538
Prior years -
---------
Total incurred 3,176,538
Paid related to:
Current year 1,924,010
Prior years -
---------
Total paid 1,924,010
---------
Net balance at December 31, 1998 1,252,528
Plus reinsurance recoverable 1,271,528
---------
Balance at December 31, 1998 $2,524,056
=========
NOTE 6 - REGULATORY REQUIREMENTS AND RESTRICTIONS
UPCIC is subject to comprehensive supervision and regulation by the DOI. The
Florida Insurance Code (the "Code") requires that UPCIC maintain minimum
statutory surplus of $4,000,000 as of December 31, 1998. UPCIC is also required
to adhere to prescribed premium-to-surplus ratios under the Code and to maintain
approved securities on deposit with the State of Florida.
On December 31, 1997, UPCIC entered into a consent order with the DOI related to
the issuance of its certificate of authority (the "Consent Order"). Under the
terms of the Consent Order, during its first four years of operations, UPCIC may
only pay dividends approved in advance and in writing by the DOI. No dividends
were declared or paid by UPCIC during 1998. The Consent Order also requires that
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - REGULATORY REQUIREMENTS AND RESTRICTIONS - (Continued)
UPCIC obtain prior written approval of the DOI before amending, updating, or
changing any managing general agent contracts.
On January 16, 1998, UPCIC entered into a consent order with the DOI related to
it proposed participation in the JUA depopulation program (the "Depopulation
Consent Order"). Under the Depopulation Consent Order, UPCIC is required to
maintain catastrophe reinsurance up to its 100 year Probable Maximum Loss with
reinsurers who are authorized and/or approved or approved in advance and in
writing by the DOI. The Depopulation Consent Order also requires UPCIC to
materially abide by its depopulation plan submitted to the DOI, which limits
UPCIC's depopulation assumptions to 30,000 policies. The premium limits and
surplus requirements impact UPCIC's potential growth. UPCIC's ability to exceed
these limitations will be subject to its ability to renew policies transferred
from the Takeout Program and attract additional policyholders from the voluntary
insurance market as well as maintaining capital and surplus to support its
underwriting program. As of December 31, 1998, UPCIC is in compliance with
requirements of the Code, the Consent Order and the Depopulation Consent Order.
The Company is required to comply with NAIC risk-based capital ("RBC")
requirements. RBC is a method of measuring the amount of capital appropriate for
an insurance company to support its overall business operations in light of its
size and risk profile. NAIC RBC standards are used by regulators to determine
appropriate regulatory actions relating to insurers who show signs of weak or
deteriorating conditions. As of December 31, 1998, based on calculations using
appropriate NAIC formula, the Company's total adjusted capital is in excess of
ratios which would require any form of regulatory action.
The following schedule reconciles statutory net income and surplus of UPCIC as
reported in the 1998 annual statement filed with the DOI, prepared on the basis
of statutory accounting principles to UPCIC's net income for the year ended
December 31, 1998 and stockholder's equity under generally accepted accounting
principles at December 31, 1998:
NET INCOME SURPLUS
---------- -------
Balance per statutory
financial statements $1,511,661 $6,864,908
Adjustment of earned
premiums 232,873 232,873
Adjustment of losses incurred 335,000 335,000
Adjustment of other
underwriting expenses (2,314,114) (2,314,114)
Adjustment of provision
for income taxes 479,284 479,284
------- -------
Adjusted balance per
statutory financial statements 244,704 5,597,951
Unrealized gain on securities
available for sale --- 16,293
Deferred policy
acquisition costs 1,487,012 1,487,012
Deferred income taxes (75,417) (75,417)
Adjustment of securities
held to maturity --- (26,901)
--------- ---------
Balance in conformity with general
accepted accounting principles $1,656,299 $6,998,938
========== ==========
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - 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
disposal 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 written off and
the Company provided for additional costs of approximately $158,000 related to
its discontinued operations as of December 31, 1997. As of December 31, 1998,
the remaining reserve for discontinued operations was approximately $235,000.
NOTE 8 - RELATED PARTY TRANSACTIONS
All marketing, underwriting, rating, policy issuance and administration
functions are performed for UPCIC by Universal Property & Casualty Management,
Inc. ("Universal Management") pursuant to a Management Agreement dated June 2,
1997 ("Management Agreement") and Addenda thereto dated June 12, 1997 and June
1, 1998 ("Addenda"). Universal Management is a wholly-owned subsidiary of
American European Group, Inc. ("AEG") , a Delaware insurance holding company.
Universal Management and AEG both employ UPCIC's CEO as a senior officer and
director. During the year ended December 31, 1998, UPCIC incurred administrative
costs to Universal Management of $751,920.
On August 31, 1998 the Company loaned a director of the Company $250,000 in the
form of a 10% promissory note due on or before March 1, 1999. The note is
collateralized by publicly traded stock valued in excess of the note. At
December 31, 1998, the aggregate principal and accrued interest balance on the
note of $258,333 is included in other receivables in the accompanying
consolidated balance sheet. The note and accrued interest were repaid in March
1999.
As of December 31, 1998, corporate counsel held $290,000 in trust, for the
benefit of the Company, which funds were placed in trust in connection with a
dispute involving a Company director and an unrelated entity. These funds are
included in the Company's assets as of December 31, 1998.
Interest incurred for debt to related parties was $142,814 for the year ended
April 30, 1997.
NOTE 9 - INCOME TAXES
Since its inception, the Company has incurred tax-operating losses and,
therefore, generated no income tax liabilities. As of December 31, 1998, the
Company generated net operating loss carryforwards totaling approximately
$6,737,500 which are available to offset future taxable income, if any, through
2014. As the utilization of such operating losses for tax purposes is not
assured, the deferred tax asset is 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.
<PAGE>
The components of the net deferred income taxes at December 31, 1998 are as
follows:
Deferred income tax assets:
Net operating loss carry forward $ 2,594,000
Unearned premium 447,000
Unpaid losses 43,000
--------------
Total deferred income tax assets 3,084,000
--------------
Deferred income tax liabilities:
Deferred acquisition costs 573,000
--------------
Total deferred income tax assets, net 2,511,000
Valuation allowance for deferred income tax assets, net (2,511,000)
--------------
Deferred income taxes, net $ -
==============
The remaining 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 1,570,000
2013 1,379,000
2014 4,500
--------------
$ 6,737,500
==============
NOTE 10 - STOCKHOLDERS' EQUITY
Cumulative Preferred Stock
- --------------------------
In October 1994, 49,950 shares of Series A Preferred Stock were issued in
repayment of $499,487 of related party debt, and 88,690 shares of Series M
Preferred Stock were issued during fiscal year ended April 30, 1997, for
repayment of $88,690 of related party debt. Each share of Series A and M
Preferred Stock is convertible by the Company into 2.5 shares of Common Stock
and 5 shares of Common Stock, respectively, into an aggregate of 568,326 common
shares. Beginning May 1, 1998, the Series A Preferred Stock pays a cumulative
dividend of $.25 per share per quarter. In connection with this issuance of the
Series A Preferred Stock, the Company issued the holders warrants to purchase
12,488 shares of Common Stock at $4.25 per share, exercisable through October
17, 2004. The Series A and Series M Preferred Stock is redeemable by the Company
at $10 per share through April 2000 and has a liquidation value of $10 per share
plus accrued dividends. On January 26, 1999, accrued dividends of $33,300 were
paid on the Series A Preferred Stock.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Stock Options
- -------------
The Company adopted a 1992 Stock Option Plan (the "Plan") under which shares of
Common Stock are reserved for issuance upon the exercise of the options. The
Plan is designed to serve as an incentive for attracting and retaining qualified
and competent employees, officers, directors and consultants of the Company. All
employees, officers, directors and consultants of the Company or any subsidiary
are eligible to participate in the Plan.
A summary of the status of the options as of and for the changes during the
fiscal years ended December 31, 1998 and April 30, 1997 and the eight month
period ended December 31, 1997 is presented below:
<TABLE>
<CAPTION>
Options Exercisable
-------------------
Weighted
Number Option Price Per Share Average
--------- ------------------------------------------ Number Exercise
of Shares Low High Weighted of Shares Price
--------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding April 27, 1996 300,874 $ 2.88 $ 22.00 $ 5.15 300,874 $5.15
Granted 1,300,000 $ 1.13 $ 1.25 $ 1.24
Cancelled (62,250) $ 6.00 $ 22.00 $ 16.60
---------
Outstanding April 30, 1997 1,538,624 $ 1.13 $ 22.00 $ 1.77 1,478,624 $1.77
Granted 3,050,000 $ 0.63 $ 1.06 $ 0.99
---------
Outstanding December 31, 1997 4,588,624 $ 0.63 $ 22.00 $ 1.24 4,028,624 $1.69
Granted 1,100,000 $ 1.63 $ 1.87 $ 1.64
Cancelled (60,000) $ 3.00 $ 3.00 $ 3.00
---------
Outstanding December 31, 1998 5,628,624 $ 0.63 $ 22.00 $ 1.32 5,078,624 $1.34
=========
</TABLE>
The following table summarizes the information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exercisable Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.63-$1.87 5,450,000 8.5 $ 1.18 4,900,000 $ 1.19
$2.88- 3.88 142,999 6.6 $ 3.39 142,999 $ 3.39
$6.00-22.00 35,625 5.0 $ 14.52 35,625 $ 14.52
</TABLE>
As described in Note 1, the Company accounts for stock-based compensation using
the provisions of APB No. 25 and related interpretations. No compensation
expense has been recognized in the fiscal years ended December.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
31, 1998 and April 27, 1997 or for the eight month period ended December 31,
1997 as the exercise prices for stock options granted are equal to their fair
market value at the time of grant. The Company expenses the fair value (as
determined at the grant date) of options and warrants granted to nonemployees.
The Company has adopted the disclosure only provisions of SFAS No. 123. Had
compensation cost for options granted to employees and directors been determined
in accordance with the fair value provisions of SFAS 123, the Company's net
income (loss) and net income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
Eight Fiscal
Year Ended Months Ended Year Ended
December 31, 1998 December 31, 1997 April 30, 1997
----------------- ----------------- --------------
Income from Loss from Loss from
Continuing Continuing Continuing
Net Income Operations Net Loss Operations Net Loss Operations
---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss)
As reported $ 2,132,368 $ 2,132,368 $ (1,204,388) $ (566,511) $(2,373,462) $(415,891)
Pro forma $ 1,951,009 $ 1,951,009 (4,632,388) (4,044,481) (3,811,462) (1,853,891)
Income (loss) per share:
Basic
As reported $ .14 $ .14 $ (.27) $ (.13) $ (1.35) $ (.24)
Pro forma $ .13 $ .13 $ (1.03) $ (.89) $ (2.16) $ (1.05)
Diluted
As reported $ .13 $ .13 $ (.27) $ (.13) $ (1.35) $ (.24)
Pro forma $ .12 $ .12 $ (1.03) $ (.89) $ (2.16) $ (1.05)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option Pricing Model with the following weighted-average
assumptions during the periods ended:
December 31, December 31, April 30,
1998 1997 1997
------------ ------------ ---------
Dividend yield 0.00% 0.0% 0.0%
Expected life of option 5 years Years 10 years
Risk free interest rate 6.50% 6.48% 6.66%
Expected volatility 105.31% 264.00% 117.00%
Using the Black-Scholes Pricing Model, the estimated weighted average fair value
per option granted during the fiscal years ended December 31, 1998 and April 30,
1997 and for the eight month period ended December 31, 1997 was $1.31, $1.25 and
$0.92, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
The pro forma amounts may not be representative of the future effects on
reported net income and net income per share that will result from the future
granting of stock options, since the pro forma compensation expense is allocated
over the periods in which options become exercisable and new option awards are
granted each year.
WARRANTS
A summary of the status of the warrants as of and for the changes during the
fiscal years ended December 31, 1998 and April 30, 1997 and the eight month
period ended December 31, 1997 is presented below:
<TABLE>
<CAPTION>
Warrants Exercisable
--------------------
Weighted
Number Warrant Price Per Share Average
--------- ------------------------------------------ Number Exercise
of Shares Low High Weighted of Shares Price
--------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding April 27, 1996 1,039,606 $ 1.00 $ 6.00 $ 2.59 1,039,606 $ 2.59
Granted 3,733,333 $ 0.05 $ 3.00 $ 1.20
Exercised (363,943) $ 0.05 $ 0.05 $ 0.05
Cancelled (1,069,390) $ 0.05 $ 0.05 $ 0.05
-----------
Outstanding April 30, 1997 3,339,606 $ 1.00 $ 6.00 $ 1.53 3,339,606 $ 1.53
Granted 200,000 $ 0.75 $ 0.75 $ 0.75
Cancelled (25,000) $ 1.34 $ 1.34 $ 1.34
-----------
Outstanding December 31, 1997 3,514,606 $ 0.75 $ 6.00 $ 1.48 3,514,606 $ 1.48
Granted 1,200,000 $ 0.75 $ 3.00 $ 1.44
-----------
Outstanding December 31, 1998 4,714,606 $ 0.75 $ 6.00 $ 1.47 4,714,606 $ 1.47
===========
</TABLE>
The following table summarizes the information about warrants outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exercisable Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75-$1.50 3,603,667 5.7 $ 1.00 3,603,667 $ 0.90
$1.75-$6.00 1,110,939 7.4 $ 3.01 1,110,939 $ 3.29
</TABLE>
The Company issued warrants to purchase 1,000,000 shares of Common Stock at $.75
per share and 1,000,000 shares at $1.25 per share during the fiscal year ended
April 30, 1997 in connection with financial consulting services.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
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 entitled 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 could 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 of its Common Stock exceeded
the IPO Warrant price by 20% for the period of 20 consecutive business days,
provided that the holder could exercise the IPO Warrant at any time prior to the
expiration of the 30-day period. Customary anti-dilution provisions protected
the IPO Warrants.
Holders of IPO Warrants were not entitled to vote, to receive dividends, or to
exercise any rights of holders of Common Stock until the warrants were fully
exercised.
During the eight month period ended December 31, 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.
During the year ended December 31, 1998, the Company issued 1,200,000 warrants
to purchase Common Stock at prices ranging from $.75 to $2.00 per share in
relation to various investor relation, investment banking and legal services.
OTHER STOCK ISSUANCES
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 the fiscal year ended April 30, 1997, 10,000 shares were issued for
services at a fair value of $21,000.
During the fiscal year ended April 30, 1997, the Company issued 46,667 shares of
Common Stock as payment to certain creditors. The debt and fair 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 fiscal 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 to earnings 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 repay
debt obligations.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The shares were valued based on the quoted market price at the date of issue.
Accordingly, $118,200 was charged to continuing operations, $88,750 to
discontinued operations and $33,125 to settle debt obligations.
During the year ended December 31, 1998, the Company issued 45,000 shares of
Common Stock of the Company at a price of $1.00 per share in consideration for
legal services. The shares were value based on the quoted market price at the
date of issue. In addition, in connection with a settlement agreement and mutual
release related to a previously pending lawsuit, the Company issued an aggregate
of 10,000 shares at a fair value of $1.50 per share. The shares were value based
on the quoted market price at the date of issue.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
The Company had an employment agreement with its President pursuant to which the
President received annual compensation of $75,000 through April 30, 1997. The
agreement provided 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. This agreement expired
on April 30, 1997.
During the eight month period ended December 31, 1997, the Company entered into
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 vested immediately, 500,000 options vested after one year
and the remaining options vest after two years. The exercise price of the
options equaled the market price of the Company's Common Stock. In addition, the
agreement may be extended for an additional two years at the option of the
President.
During the eight month period ended December 31, 1997, in connection with the
establishment of the Company's 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 per share. The exercise price of the
options equaled the market price of the Company's Common Stock. The officer also
will provide certain insurance management services through Universal Management,
Inc.
During the eight month period ended December 31, 1997, the Company granted
options to directors, including the President, to purchase 1,050,000 shares of
the Company's Common Stock at an option price of $1.06 per share. The exercise
price of the options equaled the market price of the Company's Common Stock.
During the year ended December 31, the Company granted options to existing
directors, including the President, to purchase 1,050,000 shares of the
Company's Common Stock at an option price of $1.63 per share. The exercise price
of the options equaled the market price of the Company's Common Stock.
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - LITIGATION
Certain lawsuits have been filed against the Company. In the opinion of
management, none of these lawsuits are material and they are all adequately
reserved for or covered by insurance or, if not so covered, are without merit or
involve such amounts that if disposed of unfavorably would not have a material
adverse effect on the Company.
NOTE 13 - EARNINGS PER SHARE
The following table reconciles the numerator (earnings) and denominator (shares)
of the basic and diluted earnings per share computations for net income for the
year ended December 31, 1998. There were no differences between basic and
diluted earnings per share for the eight months ended December 31, 1997 or the
fiscal year ended April 30, 1997.
Income
Available
to Common Per-Share
Stockholders Shares Amount
Net income $2,132,368
Less: Preferred stock dividends (33,300)
-------
Income available
To common stockholders 2,009,068 14,667,000 0.14
=======
Effect of dilutive securities:
stock options and warrants --- 1,404,000 ---
Preferred stock 33,300 569,000 ---
------ ------- -------
Income available to common
Stockholders and assumed
conversion $2,132,368 16,640,000 $ 0.13
========== ========== =======
Options and warrants totalling 5,953,909 were excluded from the calculation of
earnings per share EPS as their effect was anti-dilutive were 5,953,909 for the
year ended December 31, 1998.
NOTE 14 - SUBSEQUENT EVENT
On January 28, 1999, the Company purchased the assets, including policy
renewals, of an insurance agency located in Ormond Beach, Florida for $18,000.
In conjunction with the purchase, the Company entered into an employment
agreement with the former agency principal.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial infomraiton extracted from
Universal Heights, Inc. and subsidiaries Form 10-KSB for the year ended
December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000891166
<NAME> Universal Heights, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 11,987,091
<SECURITIES> 2,566,019
<RECEIVABLES> 2,126,210
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,000,822
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,680,142
<CURRENT-LIABILITIES> 19,317,865
<BONDS> 0
0
1,387
<COMMON> 146,726
<OTHER-SE> 7,214,164
<TOTAL-LIABILITY-AND-EQUITY> 26,680,142
<SALES> 7,689,058
<TOTAL-REVENUES> 9,184,594
<CGS> 0
<TOTAL-COSTS> 7,052,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,132,368
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,132,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,132,368
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
