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, 1999
[ ] 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 (I.R.S. Employer
incorporation or 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 Exchange 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: $8,779,195
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, 1999: $18,493,230
State the number of shares of Common Stock of Universal Heights, Inc.
issued and outstanding as of March 1, 1999: 14,794,584
Transitional Small Business Disclosure Format: YES NO X
<PAGE>
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 has since evolved into a
vertically integrated insurance holding company which, through its various
subsidiaries, covers substantially all aspects of its insurance underwriting,
distribution and claims process.
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
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. Through December 31,
1999, UPCIC has received bonus payments of approximately $2,700,000 based upon a
<PAGE>
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 consisted of providing property
and casualty coverage through homeowners' insurance policies acquired from the
JUA. The insurance business acquired from the JUA provided a base for renewal
premiums. Approximately 65% of these policies subsequently renewed with the
Company. Through renewal of the JUA business combined with business solicited in
the market through independent agents, UPCIC is currently servicing
approximately 31,000 homeowners' insurance policies covering homes and
condominium units.
The Company's primary product is homeowners insurance. The Company's
criteria for selecting insurance policies includes the use of specific policy
forms, limitations on coverage amounts on buildings and contents, acceptance of
policies with low frequency of claims, and required compliance with local
building codes. UPCIC's portfolio at December 31, 1999 includes approximately
20,800 policies with coverage for wind risks and 7,700 policies without wind
risk. The average wind premium is approximately $850 and the average ex-wind
premium is approximately $520. Approximately 41% of the policies are located in
Dade, Broward and Palm Beach counties.
OPERATIONS
All 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.
Claims handling functions for UPCIC were initially 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 retained oversight of claims administration by imposing
specified limits of claims settlement authority and by conducting regular audits
of claims practices. During 1999, the Company formed Universal Adjusting
Corporation, a wholly-owned subsidiary, which is initially performing claims
adjustment in certain geographic areas as well as managing independent claims
adjustment firm utilized by the Company. This gives the Company greater command
over its loss control and expenditures.
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.
<PAGE>
In an effort to further grow its insurance operations, in 1998 UPCIC began
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).
MANAGEMENT OPERATIONS
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., the Company's
wholly-owned Managing General Agent ("MGA")., was incorporated in Florida on
July 2, 1998 and became licensed by the DOI on September 28, 1998. Through the
MGA, the Company has underwriting and claims authority for UPCIC as well as
third-party insurance companies. In addition, Universal Risk Life Advisors, Inc.
was incorporated in Florida on June 1, 1999 as the Company's wholly-owned
managing general agent for life insurance products. 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. The Company markets and distributes UPCIC's
products and services primarily in Florida, through a network of approximately
860 active independent agents. The Company believes that it can be distinguished
from its competitors by providing quality service to both its agents and
insureds.
AGENCY OPERATIONS
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 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.
DIRECT SALES OPERATIONS
The Company has formed two subsidiaries, both internet start-up
companies, that will specialize in selling insurance via the Internet.
Tigerquote.com Insurance & Financial Services, Inc. and Tigerquote.com
Insurance Solutions, Inc. were incorporated in Delaware on June 6, 1999 and
August 23, 1999, respectively. Tigerquote.com Insurance & Financial
Services, Inc. will be an internet insurance company while Tigerquote.com
Insurance Solutions, Inc. will be a network of internet insurance agencies.
To date, agencies have been established in Pennsylvania, Texas, Arizona,
Nevada, Oregon, Washington and California. Separate legal entities are being
formed for each state and will be governed by the respective states'
department of insurance.
<PAGE>
OTHER OPERATIONS
On August 31, 1998 World Financial Resources (Barbados) LTD. ("WFR") was
incorporated as a subsidiary of UHTS to participate in the international
insurance and reinsurance markets. The Company has also formed a claims
adjusting company, Universal Adjusting Corporation, which was incorporated in
Delaware on August 9, 1999. Universal Adjusting Corporation currently has claims
authority for Universal Property & Casualty Insurance Company claims.
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.
<PAGE>
LIMITED INSURANCE COMPANY OPERATING HISTORY
UPCIC was incorporated in April 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
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.
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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
be substantial differences between actual losses and UPCIC's reserve estimates.
In the case of UPCIC, this uncertainty is compounded by UPCIC's limited
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.
<PAGE>
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. 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 1, 2000, the Company had 24 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
The Company leases approximately 1,300 square feet of office space for its
corporate headquarters in North Miami Beach, Florida under a three-year lease
expiring April 30, 2001. The Company leases approximately 1,500 square feet of
office space in Hallandale, Florida under a three-year lease expiring January 5,
2002, to operate its MGA. The Company also leases approximately 600 square feet
of office space in its Ormond Beach agency operation under a lease expiring
April 30, 2000. In addition, the Company has leased offices for its internet
insurance agencies on a month to month basis in executive office suites located
in various states.
ITEM 3. LEGAL PROCEEDINGS
Certain lawsuits have been filed against the Company. In the opinion of
management, none of these lawsuits (1) involve claims for damages exceeding 10%
of the current assets of the Company, (2) involve matters that are not routine
litigation incidental to the business, (3) involve bankruptcy, receivership, or
similar proceeding, (4) involve material federal, state, or local environmental
laws, involve damages claim for more than 10% of the current assets of the
Company, or potentially involve more than $100,000 in sanctions and a
governmental authority is a party, or (5) are material proceedings to which any
director, officer, affiliate of the Company, any owner of record or beneficially
of more than 5% of any class of voting securities of the Company, or security
holder is a party adverse to the Company or has a material interest adverse to
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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
commission and may not necessarily represent actual transactions.
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
---------------------------- ---- ---
First Quarter $1.31 $0.69
Second Quarter 2.31 1.00
Third Quarter 2.06 1.00
Fourth Quarter 1.13 0.63
YEAR ENDED DECEMBER 31, 1999
----------------------------
First Quarter $1.25 $0.70
Second Quarter 1.19 0.88
Third Quarter 1.25 0.88
Fourth Quarter 1.81 0.94
At March 1, 2000, there were 51 shareholders of record of the Company's
Common Stock. There were 344 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.
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 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.
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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
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
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 sought
to position 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 during 1998,
UPCIC assumed approximately 30,000 policies from the JUA. 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. To date, the Company has substantially complied with
requirements related to the bonus payments.
The Company expects that premiums from 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.
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UPCIC does not expect to obtain additional policies from the JUA.
The policies obtained from the JUA provided the opportunity for UPCIC to solicit
future renewal premiums. Approximately 65% of the policies obtained from the JUA
subsequently renewed with the Company. In an effort to further grow its
insurance operations, in 1998 the Company began to solicit business actively in
the open market. Through renewal of JUA business combined with business
solicited in the market through independent agents, UPCIC is currently servicing
approximately 31,000 homeowners insurance policies. 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 -
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, 1999 AND YEAR ENDED DECEMBER
31, 1998.
Gross premiums written decreased 33.4% to $21,837,777 for the year ended
December 31, 1999 from $32,811,092 for the year ended December 31, 1998. The
decrease in gross premiums written is primarily attributable to policies assumed
from the JUA as part of the Takeout Program that did not renew with the Company.
Approximately 65% of the policies assumed from the JUA renewed with the Company.
The Company's commencement to solicit business in the open market through
independent agents offset some of the policies that did not renew. Subsequent to
year end, continued efforts have resulted in the policy count exceeding the
approximately 30,000 level which was the number originally assumed from the JUA.
Net premiums written decreased 51.0% to $6,608,597 for the year ended
December 31, 1999 from $13,489,845 for the year ended December 31, 1998. The
decrease in rates for gross and net premiums written reflects the impact of
reinsurance since $15,229,180 or 69.7% of premiums written were ceded to
reinsurers for the year ended December 31, 1999 as compared to $19,321,247 or
58.9% for the year ended December 31, 1998. Net premiums written decreased at a
higher rate than gross premiums as a result of the costs of the reinsurance
program relative to the smaller premium base in 1999 as well as due to the fact
the catastrophe reinsurance program was not required and was not put in place
until June 1, 1998 while it was in place for the entire year ended December 31,
1999.
Net premiums earned decreased 11.8% to $6,782,476 for the year ended
December 31, 1999 from $7,689,058 for the year ended December 31, 1998.
Commission income increased 64.4% to $1,365,811 for the year ended
December 31, 1999 from $831,007 for the year ended December 31, 1998. Commission
income is comprised mainly of the managing general agent's policy fee income on
all new and renewal insurance policies and commissions generated from agency
operations. The increase is primarily due to the fact the managing general agent
did not commence operations until the fourth quarter of 1998.
Investment income consists of net investment income and net realized gains
(losses). Investment income decreased 5.3% to $630,908 for the year ended
December 31, 1999 from $664,529 for the year ended December 31, 1998.
<PAGE>
Losses and loss adjustment expenses ("LAE") incurred increased 17.8% to
$3,864,309 for the year ended December 31, 1999 from $3,176,538 for the year
ended December 31, 1998 as compared to net premiums earned which decreased 11.8%
to $6,782,476 for the year ended December 31, 1999 from $7,689,058 for the year
ended December 31, 1998. The Company's loss ratio, in accordance with GAAP, for
the year ended December 31, 1999 was 60.0% compared to 41.3% for the year ended
December 31, 1998. Losses and LAE, the Company's most significant expense,
represent actual payments made and changes in estimated future payments to be
made to or on behalf of its policyholders, including expenses required to settle
claims and losses. Losses and LAE are influenced by loss severity and frequency.
Because the loss ratio is dependent on net premiums earned and the fact that the
ratio of net premiums earned over gross premiums written increased to 31.1% for
the year ended December 31, 1999 from 23.4% for the year ended December 31,
1998, the loss ratio increased compared to the increase in the ratio of net
premiums earned to gross premiums written. Additionally, during 1999, Florida
experienced one windstorm catastrophe which resulted in losses. As a result of
this storm, the Company incurred approximately $800,000 in losses prior to
reinsurance and $400,000 net of reinsurance. These losses resulted in 5.9% of
the 1999 loss ratio. Except for these claims, the Company believes that the
severity and frequency of claims remained relatively stable for the years under
comparison.
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 the results
of operations and financial position. 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.
General and administrative expenses decreased 3.6% to $3,739,443 for the
year ended December 31, 1999 from $3,875,688 for the year ended December 31,
1998. This was partially due to the higher ceding commission obtained in 1999 to
offset expenses on the Company's quota share reinsurance contract.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are premium revenues and
investment income.
For the year ended December 31, 1999, cash flows from operating
activities were $4,863,491, 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.
<PAGE>
The balance of cash and cash equivalents at December 31, 1999 is
$16,272,982. This amount along with readily marketable debt and equity
securities aggregating $3,308,058 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
regulatory actions relating to insurers who show signs of weak or deteriorating
condition. As of December 31, 1999, 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 $5,469,308 as of December 31, 1999 and $5,597,951 as of December 31,
1998. Statutory net income (loss) was ($276,339) for the year ended December 31,
1999 and $244,704 for the year ended December 31, 1998.
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 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.
<PAGE>
YEAR 2000
The Company did not experience any interruptions or disruptions relating
to the year 2000. Although additional issues may arise, the Company will
evaluate the impact on its business, results of operations and financial
conditions and, if material, make the necessary disclosures and take appropriate
remedial action.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are annexed to this report and
are referenced as pages F-1 to F-25.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT AND KEY EMPLOYEES
The directors and executive officers of the Company as of December 31,
1999 are as follows:
NAME AGE POSITION
---- --- --------
Bradley I. Meier 32 President, Chief Executive Officer,
Assistant Secretary and Director
Norman M. Meier 61 Director
Irwin I. Kellner 61 Director
Reed J. Slogoff 31 Director
Joel M. Wilentz 66 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 April 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. From
December 1986 until January 2000, Mr. Meier was President, Chief Executive
Officer and a Director of Columbia Laboratories, Inc., a publicly-traded
corporation engaged in the development, registration, manufacture and sale of
pharmaceutical products. From 1971 to 1977, Mr. Meier was Vice President of
Sales and Marketing for Key Pharmaceuticals ("Key"), a company which had been
engaged in the marketing and sales of pharmaceuticals until its sale to
Schering-Plough Corporation in June 1986. From 1977 until June 1986, Mr. Meier
served as a consultant to Key. Mr. Meier is currently Chairman Emeritus of the
Board of Directors of Columbia Laboratories, Inc.
IRWIN L. KELLNER has been a Director of the Company since March 1997. Since
March 1997, Dr. Kellner has been chief economist for CBS MarketWatch, the
leading interactive financial news Web site, as well as president of Kellner
Economic Advisers, a business and financial consulting firm. From 1996 through
February 1997, Dr. Kellner was the Chief Economist for Chase Manhattan's
<PAGE>
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 sits on a number of corporate boards, among them, Claire's
Stores, Inc., DataTreasury Corporation, International Bioimmune Systems and
Universal Heights. He belongs to many pro bono boards, including the North Shore
Health System, the Don Monti Memorial Research Foundation, the Long Island
Venture Group, the Nassau County Council of the Boy Scouts of America and the
Variety Pre-Schooler's Workshop. In academia, he is a member of the board of
advisers of Touro College's School of Health Sciences and the Greenwich
Institute for American Education.
In the public sector, Dr. Kellner serves on the New York State Comptroller's
Economic Advisory Committee. Previously, he was a member of New York City's
Economists Roundtable, the New York District Advisory Council of the Small
Business Administration, Region II, and the Long Island Regional Transportation
Advisory Committee of the New York State Senate.
Dr. Irwin L. Kellner holds the Augustus B. Weller Distinguished Chair of
Economics at Hofstra University, and is the author of Hofstra University's
Economic Report. Dr. Kellner also belongs to several professional
organizations. A past president of the Forecasters Club of New York and
governor of the Money Marketeers, he also served as president of the New York
Association of Business Economists -- the largest economic organization in
New York. Among his other professional membership are the American Economic
Association, American Statistical Association, and the National Association
for Business Economics.
REED J. SLOGOFF has been a Director of the Company since March 1997. Mr.
Slogoff is associate counsel to Entercom Communications Corp., a publicly
traded corporation engaged in the radio broadcasting industry. Prior to
joining the Entercom management team, Mr. Slogoff was in the business and
finance department of the Philadelphia office of the law firm of Dilworth,
Paxson where he practiced mergers and acquisitions, corporate finance and
real estate. Mr. Slogoff received a B.A. with honors 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
Hallandale, Florida.
Except for Norman M. Meier and Bradley I. Meier, who are father and son,
respectively, there are no immediate 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.
<PAGE>
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.
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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
Long-Term Compensation
Name and Year Ended Securities Underlying
PRINCIPAL POSITION DECEMBER 31, SALARY BONUS OPTIONS
- ------------------ ------------ ------- ----- -------
<S> <C> <C> <C> <C>
Bradley I. Meier 1999 $257,800 $40,000 775,000
President and CEO 1998 250,000 66,215 250,000
1997 250,000 -0- 1,750,000
James M. Lynch 1999 113,000 15,000 45,000
Vice President and CFO
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
<S> <C> <C> <C> <C>
Number of
Securities % of Total Options
Underlying Granted to
Options Employees in Exercise or Base
NAME GRANTED FISCAL YEAR PRICE EXPIRATION
DATE ------- ----------- ----- ----------
- ----
Bradley I. Meier 150,000 75% $1.25 2009
625,000* 95% $0.50 2009
James M. Lynch 25,000 13% $1.25 2009
20,000* 3% $0.50 2009
</TABLE>
*Options Granted Under Tigerquote.com Non-Qualified Stock Option Plan in
January 2000
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES AND OPTION VALUES FOR THE YEAR ENDED DECEMBER 31,
1999
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF SECURITIES NUMBER OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS
ACQUIRED ON DECEMBER 31, 1999 DECEMBER 31, 1999
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------- ----------- ------------- ----------- ------------- ----------- -----------
Bradley I. -- -- 775,000 -- -- --
Meier
James M. Lynch -- -- 45,000 -- -- --
</TABLE>
EMPLOYMENT AGREEMENT
As of August 11, 1999, the Company entered into a four-year employment
agreement with Bradley I. Meier. Under the terms of the employment agreement,
Mr. Meier will devote substantially all of his time to the Company and will be
paid a base salary of $250,000 per year which shall be increased by 5% each year
beginning with the first anniversary of the effective date. 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. In addition, the
agreement shall be extended automatically for one year at each anniversary at
the option of Mr. Meier. Under the terms of the employment agreement dated May
1, 1997, 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 vested
immediately, 500,000 options vested after one year and the remaining options
vested after two years.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 1, 2000, 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) 5,473,484 25.6%
Norman M. Meier (4) 2,540,624 11.9%
Irwin L. Kellner (5) 220,000 1.0%
Reed J. Slogoff (6) 220,000 1.0%
Joel M. Wilentz (7) 220,000 1.0%
James M. Lynch (8) 75,000 0.5%
Officers and directors as a group
(5 people) (9) 8,749,108 41.0%
(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. The address for each
director is 2875 N.E. 191st Street, Suite 400A Miami, FL 33180.
<PAGE>
(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 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
options to purchase 500,000 shares of Common Stock at $1.06 per share
which vested on May 1, 1999 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. (h) options to
purchase 150,000 shares of Common Stock at $1.25 per share which vested on
December 23, 1999. Excludes options to purchase 625,000 shares of Common
Stock of Tigerquote.com at an exercise price of $.50 per share. 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
<PAGE>
shares of Common Stock at $1.06 per share which vested on November 2,
1997, and (ii) an aggregate of 271,701 shares of Common Stock (including
shares of Common Stock issuable upon exercise of warrants and conversion
of Series A and Series M Preferred Stock) beneficially owned by Belmer, of
which Mr. Meier is a general partner, (f) options to purchase 500,000
shares of Common Stock at an exercise price of $1.63 per share. Also (g)
options to purchase 75,000 shares of Common Stock at an exercise price of
$1.25 per share. Excludes options to purchase 100,000 shares of Common
Stock of Tigerquote.com at an exercise price of $.50 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, options to purchase 100,000 shares of
Common Stock at an exercise price of $1.63 per share and options to
purchase 20,000 shares of Common Stock at an exercise price of $1.25 per
share. Excludes options to purchase 20,000 shares of Common Stock of
Tigerquote.com at an exercise price of $.50 per share. Dr.
Kellner is a Director of the Company.
(6) Consists of options to purchase 100,000 shares of Common Stock at an
exercise price of $1.06 per share, options to purchase 100,000 shares of
Common Stock at an exercise price of $1.63 per share and options to
purchase 20,000 shares of Common Stock at an exercise price of $1.25 per
share. Excludes options to purchase 20,000 shares of Common Stock of
Tigerquote.com at an exercise price of $.50 per share. Mr. Slogoff is a
Director of the Company.
(7) Consists of options to purchase 100,000 shares of Common Stock at an
exercise price of $1.06 per share, options to purchase 100,000 shares of
Common Stock at an exercise price of $1.63 per share and options to
purchase 20,000 shares of Common Stock at an exercise price of $1.25 per
share. Excludes options to purchase 20,000 shares of Common Stock of
Tigerquote.com at an exercise price of $.50 per share. Mr. Wilentz is a
Director of the Company.
(8) Consists of options to purchase 50,000 shares of Common Stock at an
exercise price of $1.87 per share and options to purchase 25,000 shares of
Common Stock at an exercise price of $1.25 per share. Excludes options to
purchase 20,000 shares of Common Stock of Tigerquote.com at an exercise
price of $.50 per share. Mr. Lynch is Vice President and Chief Financial
Officer of the Company.
(9) See footnotes (1) - (8) above
As of March 1, 2000, 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:
<PAGE>
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 1.7%
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.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All, 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 years ended December
31, 1999 and 1998, UPCIC incurred administrative costs to Universal Management
of $1,426,574 and $751,920 respectively.
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. The note and accrued interest were repaid in March 1999.
As of December 31, 1999, 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, 1999.
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.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
3.1 Registrant's Restated Amended and Restated Certificate of Incorporation(1)
3.2 Registrant's Bylaws(1)
3.3 Certificate of Designations, Preferences, and Rights of Series M
Convertible Preferred Stock dated August 13, 1997. (2)
4.1 Form of Common Stock Certificate(1)
4.2 Form of Warrant Certificate(1)
4.3 Form of Warrant Agency Agreement(1)
4.4 Form of Underwriter Warrant(1)
4.5 Affiliate Warrant(1)
4.6 Form of Warrant to purchase 100,000 shares of Common Stock at an
exercise price of $2.00 per share issued to Steven Guarino dated as of
April 24, 1997. (Substantially similar in form to two additional warrants
to 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 Plan(1)
10.2 Form of Indemnification Agreement between the Registrant and each of its
directors and executive officers(1)
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 certaccountants on February 12, 1999, and filed an amendment to
such report on February 26, 1999.
<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: March 30, 2000 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 March 30, 2000
- -------------------- Officer and a Director
Bradley I. Meier
/s/ JAMES M. LYNCH Chief Financial Officer March 30, 2000
- --------------------
James M. Lynch
/s/ NORMAN M. MEIER Director March 30, 2000
- --------------------
Norman M. Meier
/s/ IRWIN I. KELLNER Director March 30, 2000
- --------------------
Irwin I. Kellner
/s/ REED J. SLOGOFF Director March 30, 2000
- --------------------
Reed J. Slogoff
/s/ JOEL M. WILENTZ Director March 30, 2000
- --------------------
Joel M. Wilentz
<PAGE>
<TABLE>
<CAPTION>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C>
PAGE
----
Independent Auditors' Report F-2
Consolidated Balance Sheet - December 31, 1999 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 F-6-F-7
Notes to Consolidated Financial Statements F-8-F-25
</TABLE>
<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, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Universal Heights,
Inc. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for each of the two years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 24, 2000
F-2
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Debt securities held-to-maturity (fair value of $2,707,813) $2,830,904
Equity securities available for sale (cost of $253,927) 477,154
Cash and cash equivalents 16,272,982
Prepaid reinsurance premiums and reinsurance recoverable 6,868,425
Premiums and other receivables 881,837
Deferred policy acquisition costs 2,520,876
Property, plant and equipment, net 243,361
-----------
Total assets $30,095,539
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $3,064,388
Unearned premiums 14,794,572
Accounts payable 1,582,243
Other accrued expenses 1,649,738
Accrued taxes, licenses and fees 214,262
Due to related parties 20,041
-----------
Total liabilities 21,325,244
-----------
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,
14,794,584 shares issued and outstanding 147,946
Additional paid-in capital 15,089,741
Accumulated deficit (6,702,006)
Accumulated other comprehensive income 233,227
-----------
Total stockholders' equity 8,770,295
-----------
Total liabilities and stockholders' equity $30,095,539
===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
PREMIUMS EARNED AND OTHER REVENUES:
Premium income, net $6,782,476 $7,689,058
Net investment income 630,908 664,529
Commission revenue 1,365,811 831,007
--------- ---------
Total revenues 8,779,195 9,184,594
--------- ---------
OPERATING COST AND EXPENSES:
Losses and loss adjustment expenses 3,864,309 3,176,538
General and administrative expenses 3,739,443 3,875,688
Total operating expenses 7,603,752 7,052,226
---------- ----------
NET INCOME $1,175,443 $2,132,368
========== =========
INCOME PER COMMON SHARE:
Basic $ 0.08 $ 0.14
=========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 14,747,000 14,667,000
========== ==========
INCOME PER COMMON SHARE:
Diluted $ 0.07 $ 0.13
========= ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 15,904,000 16,640,000
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated
Preferred Stock Common Stock Additional Other
--------------- --------------- Paid-in Accumulated Comprehensive
Share Amount Shares Amount Capital Deficit Income Total
----- ------ ------ ------ ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 138,640 $1,387 14,674,584 $146,746 $14,683,941 ($9,926,567) - $4,905,507
Net income - - - - - 2,132,368 - 2,132,368
Net unrealized gain on available-for-sale - - - - - - 26,069 26,069
securities ------
Comprehensive income - - - - - - - 2,158,437
Issuance of common stock for services - - 55,000 550 59,450 - - 60,000
Fair value of warrants
granted to non-employees - - - - 312,000 - - 312,000
Preferred stock dividend - - - - - (33,300) - (33,330)
Cancelled shares - - (15,000) (150) (44,850) - - (45,000)
-------- ------- --------- -------- -------- --------- ------- ---------
BALANCE, December 31, 1998 138,640 1,387 14,714,584 147,146 15,010,541 (7,827,499) 26,069 7,357,644
Net income - - - - - 1,175,443 - 1,175,443
Net change in unrealized gain - - - - - - 207,158 207,158
on available-for-sale securities ---------
Comprehensive income - - - - - - - 1,382,601
Preferred stock dividend - - - - - (49,950) - (49,950)
Issuance of common stock for services - - 80,000 800 79,200 - - 80,000
-------- ------- --------- -------- -------- --------- ------- ---------
BALANCE, December 31, 1999 138,640 $1,387 14,794,584 $147,946 $15,089,741 ($6,702,006) $233,227 $8,770,295
======= ====== ========== ======== =========== ============ ======== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,175,443 $2,132,368
Adjustments to reconcile net income
to cash provided by operations:
Amortization and depreciation 151,356 31,839
Gain on sales of equity securities
available-for-sale (41,765) (12,376)
Net accretion of bond premiums and
discounts 17,174 78,202
Net change in assets and liabilities relating to operating activities:
Prepaid reinsurance premiums and 1,143,703 (8,012,128)
reinsurance recoverable
Premiums and other receivables (174,781) (666,374)
Reinsurance recoverable on losses 1,419,154 (1,419,154)
Deferred policy acquisition costs (1,033,864) (1,487,012)
Accounts payable 466,564 566,261
Other accrued expenses 225,423 1,067,623
Accrued taxes, licenses and fees 89,262 125,000
Unpaid losses and loss adjustment expenses 540,332 2,524,056
Unearned premiums 981,657 13,812,915
Due to/from related parties (96,167) (296,953)
---------- ---------
Net cash provided by operating activities 4,863,491 8,444,267
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (267,360) (40,518)
Purchase of equity securities available-
for-sale - (621,359)
Proceeds from sale of equity securities
available-for-sale 235,232 189,492
Purchase of debt securities held-to-maturity (2,173,920) (3,313,559)
Proceeds from maturities of debt securities
held-to-maturity 1,428,398 1,139,650
Collections on (payments for) notes 250,000 (250,000)
receivable --------- ----------
Net cash used in investing activities (527,650) (2,896,294)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (49,950) (33,300)
------- ------
Net cash used in financing activities (49,950) (33,300)
------- ------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 4,285,891 5,514,673
CASH AND CASH EQUIVALENTS, Beginning of year 11,987,091 6,472,418
---------- ---------
CASH AND CASH EQUIVALENTS, End of year $16,272,982 $11,987,091
----------- -----------
F-6
<PAGE>
<TABLE>
<CAPTION>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
<S> <C> <C>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ ------------
SUPPLEMENTAL NONCASH FINANCING AND INVESTING
ACTIVITIES:
Common stock issued for services rendered $ 80,000 $ 60,000
Fair value of warrants issued for services rendered - 312,000
Cancellation of common stock shares previously issued for
services rendered - 45,000
The accompanying notes to consolidated financial statements are an integral
part of these statements
</TABLE>
F-7
<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 resulted in policies being acquired by private
insurers and provided 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 were
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. Since then the
Company has developed 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 has underwriting and claims authority for UPCIC as well as third-party
insurance companies. The MGA seeks to generate revenue through policy fee income
and other administrative fees from the marketing of UPCIC and third party
insurance products through the Company's distribution network and UPCIC.
F-8
<PAGE>
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 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. On August 31,
1998, World Financial Resources (Barbados) LTD. ("WFR") was incorporated as a
subsidiary of the Company to participate in the international insurance and
reinsurance markets. In addition, Universal Risk Life Advisors, Inc. was
incorporated in Florida on June 1, 1999 as the Company's wholly-owned managing
general agent for life insurance products. The Company has also formed a claims
adjusting company, Universal Adjusting Corporation, which was incorporated in
Delaware on August 9, 1999. Universal Adjusting Corporation currently has claims
authority for Universal Property & Casualty Insurance Company claims. The
Company has also formed subsidiaries that will specialize in selling insurance
via the Internet. Tigerquote.com Insurance & Financial Services, Inc. and
Tigerquote.com Insurance Solutions, Inc. were incorporated in Delaware on June
6, 1999 and August 23, 1999, respectively. Tigerquote.com Insurance & Financial
Services, Inc. will be an internet insurance company while Tigerquote.com
Insurance Solutions, Inc. will be a network of internet insurance agencies. As
of December 31, 1999, agencies have been established in Pennsylvania, Texas,
Arizona, Nevada, Oregon, Washington and California.
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
accounting principles generally accepted in the United States of America
("GAAP") 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 GAAP that differs from statutory accounting practices
prescribed or permitted for insurance companies by regulatory authorities.
SECURITIES HELD TO MATURITY. Debt 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. Equity securities 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.
CASH AND CASH EQUIVALENTS. The Company includes all short-term, highly liquid
investments that are readily convertible to known amounts of cash and have an
original maturity of three months or less in cash equivalents.
F-9
<PAGE>
PROPERTY, PLANT AND EQUIPMENT. Property plant and equipment is recorded at cost.
Depreciation is provided on the straight-line basis over the estimated useful
life of the assets. Estimated useful life of all property, plant and equipment
is five years. Routine repairs and maintenance are expensed as incurred.
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 limited history of 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 PER SHARE OF COMMON STOCK. Basic earnings per share is computed by
dividing the Company's net income 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 net
income minus Preferred Stock dividend 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 uses the following methods and assumptions in estimating the fair
value of financial instruments.
Cash and cash equivalents: the carrying amount reported in the
consolidated balance sheet for cash and cash equivalents approximates fair
value due to the short-term nature of those items.
Premiums and other receivables and accounts payable: the carrying amounts
reported in the consolidated balance sheet for premiums and other
receivables and accounts payable approximate their fair value due to their
short-term nature.
Equity securities available-for-sale and debt securities
held-to-maturity: fair values for equity and debt securities are based
on quoted market prices.
F-10
<PAGE>
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 premiums receivable are limited due to the large
number of individuals comprising the Company's customer base. However, the
majority 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 ("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 non-employees in accordance with SFAS No. 123. The Company
has adopted the disclosure only provisions of SFAS No. 123 (see Note 9).
NEW ACCOUNTING PRONOUNCEMENTS. In December 1997, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
97-3, ACCOUNTING BY INSURANCE AND OTHER ENTERPRISES FOR INSURANCE AND
REINSURANCE-RELATED ASSESSMENTS. 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
did not have a material impact on the Company's financial condition or results
of operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES. This 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Among
other provisions, SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It also requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In July 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133, which changes the effective date of SFAS No. 133 for
financial statements for fiscal years beginning after June 15, 2000.
Management has not determined the effect, if any, of adopting SFAS No. 133.
In October 1998, the AICPA issued SOP 98-7, DEPOSIT ACCOUNTING: ACCOUNTING FOR
INSURANCE AND REINSURANCE CONTRACTS THAT DO NOT TRANSFER INSURANCE RISK. 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.
F-11
<PAGE>
NOTE 2 - INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the JUA. UPCIC received the unearned premiums and began servicing the
policies. Subsequently, UPCIC was successful in renewing approximately 65% of
these policies while commencing solicitation of business in the voluntary market
through independent agents. Unearned premiums represent amounts that UPCIC would
refund policyholders if their policies were canceled. 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
over the life of each policy. At December 31, 1999, the Company has direct and
assumed unearned premiums of $14,794,572.
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 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. As of December 31, 1999, 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 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, 1999, deferred policy acquisition costs amounted
to $2,520,876.
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.
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 limited history of 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.
F-12
<PAGE>
NOTE 3 - REINSURANCE
UPCIC commenced its insurance activity by assuming policies from the JUA.
UPCIC's in-force policyholder coverage for windstorm exposures as of December
31, 1999 was approximately $3.4 billion. 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 ceded 50% of its gross written premiums, losses
and loss adjustment expenses. The quota share treaty had limits of $500,000 each
dwelling for property losses and $300,000 each occurrence for casualty losses.
In addition, the quota share treaty had 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 commenced. The Company earned a ceding commission of 27%.
In addition, the quota share treaty provided for a contingent commission payable
to UPCIC equal to 50% of net profits, as defined, after a 20% reinsurers'
expense factor.
Effective June 1, 1999, UPCIC revised and enhanced its reinsurance program.
UPCIC entered into a quota share agreement with Swiss Reinsurance America
Corporation, rated A+ by A.M. Best. Under the quota share treaty, UPCIC
currently cedes 50% of its gross written premiums, losses and loss adjustment
expenses with a ceding commission of 35%. The Company has the option to increase
the annual cession to 75% or reduce the cession to 45%. In addition, the quota
share treaty has a limitation for any one occurrence of $15,000,000.
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 excluded losses arising from the peril of wind. The
excess per risk treaty provided coverage of $1,250,000 in excess of $500,000
each loss, for any one risk. In addition, the excess per risk treaty provided a
$2,500,000 limit with respect to all risks involved in any one-loss occurrence.
The excess per risk treaty required an annual deposit premium of $185,000,
subject to a minimum premium of $138,750. The deposit premium was adjustable to
2.176% of the subject written premium.
Effective June 1, 1999, UPCIC revised and enhanced its reinsurance program.
UPCIC entered into an excess per risk agreement with Swiss Reinsurance America
Corporation, rated A+ by A.M. Best. Under the excess per risk agreement, UPCIC
obtained coverage of $1,300,000 in excess of $500,000 ultimate net loss for each
risk, each loss, excluding losses arising from the peril of wind to the extent
such wind related losses are the result of a hurricane. A $2,600,000 limit
applies to any one-loss occurrence.
F-13
<PAGE>
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
First Layer Second Layer Third Layer
- ---------------------------------------------------------------------------------------------
Coverage $5,000,000 in $9,000,000 in $27,000,000 in excess of
excess of excess of $53,000,000 each loss occurrence
$2,000,000 each $7,000,000 (see discussion of coverage
loss occurrence each loss provided by Florida Hurricane
occurrence 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 -% of .05015% .04458% .06269%
total insured value
- ---------------------------------------------------------------------------------------------
</TABLE>
Effective November 1, 1998, UPCIC entered into an excess catastrophe treaty with
various Lloyd's underwriting syndicates. This excess catastrophe treaty provided
coverage of $7,400,000 in excess of $80,000,000 for each loss occurrence for a
premium of $124,000.
Effective June 1, 1999, UPCIC revised and enhanced its excess catastrophe
reinsurance program. The current 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 $13,000,000 in $14,000,000 in excess of
excess of excess of $73,000,000 each loss occurrence
$2,000,000 each $7,000,000 (see discussion of coverage
loss occurrence each loss provided by Florida Hurricane
occurrence Catastrophe Fund below)
- ----------------------------------------------------------------------------------------------
Deposit premium $1,500,000 $2,080,000 $1,120,000
- ----------------------------------------------------------------------------------------------
Minimum premium $1,350,000 $1,872,000 $1,008,000
- ----------------------------------------------------------------------------------------------
Premium rate -% of 2.0568% 2.8521% 7.0%
probable maximum loss
- ----------------------------------------------------------------------------------------------
</TABLE>
UPCIC also obtained variable coverage of $2,000,00 in excess of the Company's
100-year probable maximum loss for a premium of $110,000.
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 would
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 provided UPCIC with coverage of
$45,024,232 in excess of $12,595,678. The premium for this coverage was
$1,899,323. Effective June 1, 1999, UPCIC entered a subsequent reimbursement
agreement with the Fund under the same terms. The Fund has provided UPCIC with
F-14
<PAGE>
current coverage of $59,464,312 in excess of $14,123,079. The premium for this
coverage was $2,128,794. 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, effective June 1, 1998 UPCIC 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 provided this coverage. The premium for
this coverage was $370,531. However, if the paid losses exceeded the third layer
of UPCIC's excess catastrophe coverage or if the coverage under the Fund was
depleted on an incurred basis, UPCIC would have immediately paid an additional
premium to the reinsurers of $1,066,772. Effective June 1, 1999, UPCIC purchased
similar contingency coverage to replace the coverage provided by the fund for
100% of losses of $47,600,000 in excess of $47,600,000 otherwise recoverable in
excess of $11,300,000. The premium for this coverage is $714,000, 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 pay an additional premium to the reinsurers of $1,523,200.
Amounts recoverable from reinsurers are estimated in accordance 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.
The preceding reinsurance arrangements had the following effect on certain items
in the accompanying consolidated financial statements:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
UNPAID LOSS UNPAID LOSS
AND LOSS AND LOSS
ADJUSTMENT PREMIUMS PREMIUMS ADJUSTMENT PREMIUMS PREMIUMS
EXPENSES WRITTEN EARNED EXPENSES WRITTEN EARNED
-------- ------- --------- -------- ------- ------
Direct $7,093,063 $21,947,270 $19,611,962 $5,853,019 $15,802,520 $ 3,343,257
Assumed 643,332 (109,493) 1,244,192 519,056 17,008,572 15,654,920
Ceded (3,872,086) (15,229,180) (14,073,678) (3,195,537) (19,321,247) (11,309,119)
----------- ------------ ------------ ----------- ------------ -------------
Net $3,864,309 $ 6,608,597 6,782,476 $3,176,538 $13,489,845 $ 7,689,058
========== =========== =========== ========== =============== =============
</TABLE>
OTHER AMOUNTS:
December 31,
1999
------------
Reinsurance recoverable on unpaid losses
and loss adjustment expenses $1,532,194
Unearned premiums reserve ceded 5,336,231
---------
$6,868,425
==========
F-15
<PAGE>
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 are summarized as follows:
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
Debt securities held-to-maturity $ 135,829 $ 71,685
Cash and cash equivalents 510,325 622,873
----------- ------------
646,154 694,558
Investment expenses 15,246 30,029
----------- ------------
$ 630,908 $ 664,529
============ ============
Proceeds from the sale of securities during 1999 and 1998 were $235,232 and
$189,482, respectively. Gross gains on the sale of securities during 1999 and
1998 were $41,765 and $12,376, respectively.
The aggregate amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value as of December 31, 1999 for available-for-sale and
held-to-maturity securities by major security type are as follows:
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available-for-sale securities:
Equity securities $253,927 $223,227 $ -- $477,154
======== ======== ====== ========
Held-to-maturity securities:
U.S. government agencies $2,492,866 $ -0- 117,556 $ 2,375,310
Mortgage backed securities 338,038 - 5,535 332,503
---------- --------- -------- -----------
Total $2,830,904 $ -0- $123,091 $ 2,707,813
========== ========= ======== ===========
The scheduled maturities of held-to-maturity securities at December 31, 1999
were as follows:
Amortized
Cost Fair Value
--------- ----------
Due after five years through ten years $ 101,595 $ 99,321
Due after ten years 2,729,309 2,608,492
--------- ---------
Total $ 2,830,904 $ 2,707,813
========= =========
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, 1999, investments with a carrying value of $300,000 were on
deposit with regulatory authorities.
F-16
<PAGE>
NOTE 5 - PROPERTY PLANT AND EQUIPMENT
Property plant and equipment at December 31, 1999 consisted of the following:
Computers $ 62,187
Furniture 17,152
Automobiles 25,125
Software 157,855
---------
Total cost 262,319
Less: accumulated depreciation 18,958
----------
Net book value $ 243,361
==========
NOTE 6 -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 limited history of 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, 1999
was approximately $3.4 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 in Note 3.
Management believes that the liabilities for claims and claims expense at
December 31, 1999 is appropriately established in the aggregate and adequate to
cover the ultimate cost of reported and unreported claims arising from losses
which had occurred by that date.
F-17
<PAGE>
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
Balance at beginning of year $2,524,056 $ -
---------- ---------
Incurred related to:
Current year 4,385,309 3,176,538
Prior year (521,000) -
--------- ---------
Total incurred 3,864,309 3,176,538
--------- ---------
Paid related to:
Current year 2,656,000 1,924,010
Prior year 928,643 -
--------- ---------
Total paid 3,584,643 1,924,010
--------- ---------
Net balance at end of year 2,803,722 1,252,528
Plus reinsurance recoverable 260,666 1,271,528
--------- ---------
Balance at end of year $3,064,388 $2,524,056
========== ==========
The Company's liabilities for unpaid losses and LAE net of related reinsurance
recoverables, at December 31, 1998, were decreased in the following year by
$521,000 for claims that had occurred on or prior to the balance sheet date.
This favorable loss emergence resulted principally from settling reserves
established in the prior year for amounts that were less than expected.
NOTE 7 - 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. 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 on its common stock approved in advance and in writing by the
DOI. No dividends were declared or paid by UPCIC on its common stock during 1999
or 1998. The Consent Order also requires that 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
the 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 continue 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, 1999 and 1998, UPCIC was in
compliance with requirements of the Code, the Consent Order and the Depopulation
Consent Order.
F-18
<PAGE>
The Company is required to comply with The National Association of Insurance
Commissioners ("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, 1999 and 1998, based on calculations using appropriate NAIC
formulas, 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 1999 and 1998 annual statements filed with the DOI, prepared on
the basis of statutory accounting principles, to UPCIC's net income for the
years ended December 31, 1999 and 1998 and stockholders' equity under GAAP at
December 31, 1999:
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
NET INCOME SURPLUS NET INCOME
---------- ------- ----------
Balance per statutory
financial statements $(276,339) $5,469,308 $1,511,661
Adjustment of earned
premiums - - 232,873
Adjustment of losses incurred - - 335,000
Adjustment of other
underwriting expenses - - (2,314,114)
Adjustment of provision
for income taxes - - 479,284
---------- ----------- ----------
Adjusted balance per
statutory financial statements (276,339) 5,469,308 244,704
Deferred policy
acquisition costs 1,033,864 2,520,876 1,487,012
Deferred income taxes (361,307) (488,418) (75,417)
Other - (9,777) -
---------- --------- ----------
Balance in conformity with GAAP $ 396,218 $7,511,543 $1,656,299
========== ========== ==========
NOTE 8 - RELATED PARTY TRANSACTIONS
All 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 years ended December 31, 1999 and 1998, UPCIC incurred administrative
costs to Universal Management of $1,426,574 and $751,920, respectively.
F-19
<PAGE>
As of December 31, 1999 and 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 cash and cash equivalents as of December 31, 1999.
NOTE 9 - INCOME TAX PROVISION
Since its inception, the Company has incurred tax-operating losses or offset
taxable income with operating loss carryforwards. Therefore, the Company has not
incurred any significant income tax liabilities during that time. As of December
31, 1999, the Company had net operating loss carryforwards totaling
approximately $6,011,400 which are available to offset future taxable income, if
any, through 2014.
The following table reconciles the statutory federal income tax rate to the
Company's effective tax rate for the years ended December 31, 1999 and 1998:
1999 1998
---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increases (decrease) resulting from:
Change in valuation allowance (34.4%) (34.0%)
Other 0.4% 0.0%
----- ------
Total 0.0% 0.0%
----- ------
Deferred income taxes at December 31, 1999 are provided for the temporary
differences between financial reporting basis and the tax basis of the Company's
assets and liabilities under SFAS 109. The tax effects of temporary differences
are as follows:
Deferred tax assets:
Net operating loss carryforward $2,259,000
Unearned premiums 424,000
Unpaid losses 65,000
Organizational costs 48,000
------------
2,796,000
---------
Deferred tax liabilities:
Deferred acquisition costs (949,000)
----------
(949,000)
----------
Subtotal 1,847,000
Less: valuation allowance (1,847,000)
------------
Net deferred income tax asset $ -
============
A valuation allowance is deemed necessary because management cannot be certain
that is more likely than not that the Company will generate taxable income
sufficient to realize the tax benefits associated with the net deferred tax
asset shown above.
F-20
<PAGE>
The remaining net operating loss carryforwards will expire as follows:
Expiration
2008 $ 254,000
2009 1,010,000
2010 1,116,000
2011 677,000
2012 1,570,000
2013 1,379,000
2014 5,400
-------
$ 6,011,400
-----------
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.
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 option activity for the years ended December 31, 1999 and 1998
is presented below:
<TABLE>
<CAPTION>
OPTIONS
-------
EXERCISABLE
- -----------
Weighted
Average
<S> <C> <C> <C> <C> <C> <C>
OPTION PRICE PER SHARE
Exercise Number Number
OF SHARES LOW HIGH WEIGHTED OF SHARES PRICE
--------- --- ---- -------- --------- -----
Outstanding January 1, 1998 4,723,624 $ 0.63 $ 22.00 $ 1.24 4,723,624 $ 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 5,763,624 $ 0.63 $ 22.00 $ 1.32 5,763,624 $ 1.34
Granted 50,000 $ 0.75 $ 0.75 $ 0.75
---------
Outstanding December 31, 1999 5,813,624 $ 0.63 $ 22.00 $ 1.32 5,813,624 $ 1.32
=========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the information about options outstanding at
December 31, 1999:
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 5,635,000 7.5 $ 1.18 5,635,000 $ 1.18
$2.88-$3.88 142,999 5.9 $ 3.39 142,999 $ 3.39
$6.00-$22.00 35,625 4.0 $14.52 35,625 $ 14.52
--------- ---------
5,813,624 5,813,624
========= =========
</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 years ended December 31, 1999 and 1998 for
options granted to employees and directors 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 non-employees. 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 and net income per share would
have been as follows:
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
NET INCOME NET INCOME
---------- ----------
Net income:
As reported $1,175,443 $2,132,368
Pro forma $ 882,420 $1,951,009
Net income per share:
Basic
As reported $ 0.08 $ 0.14
Pro forma $ 0.06 $ 0.13
Diluted
As reported $ 0.07 $ 0.13
Pro forma $ 0.05 $ 0.12
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.
Year Ended Year Ended
December 31, December 31,
1999 1998
---- ----
Dividend yield 0.00% 0.00%
Expected life of option 5 years 5 years
Risk free interest rate 6.50% 6.50%
Expected volatility 103.36% 105.31%
F-22
<PAGE>
Using the Black-Scholes Pricing Model, the estimated weighted average fair value
per option granted during the years ended December 31, 1999 and 1998 was $.60
and $1.31, 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.
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 warrant activity for the years ended December 31, 1999 and 1998
is presented below:
<TABLE>
<CAPTION>
WARRANTS EXERCISABLE
--------------------
Weighted Weighted
Warrant Price Per Share Average Average
Number ------------------------- Number Exercise
Of Shares Low High Weighted of Shares Price
--------- ------------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
Cancelled 320,954
--------- $ 2.00 $ 3.50 $ 2.75
Outstanding December 31, 1999 4,393,652 $ .75 $ 6.00 $ 1.34 4,393,652 $ 1.34
=========
</TABLE>
The following table summarizes the information about warrants outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
-------------------- --------------------
<S> <C> <C> <C> <C> <C>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------ ----------- ----------- -------- ----------- --------
$0.75- $1.50 3,614,109 7.2 $ 1.01 3,614,109 $ 1.01
$1.75- $6.00 779,543 5.9 $ 2.84 779,543 $ 2.84
---------- ----------
4,393,652 4,393,652
========= =========
</TABLE>
During the year ended December 31, 1998, the Company issued 1,200,000 warrants
with a total fair value of $312,000 to purchase Common Stock at prices ranging
from $.75 to $2.00 per share for various investor relation, investment banking
and legal services. No warrants were issued in 1999.
F-23
<PAGE>
OTHER STOCK ISSUANCES
- ---------------------
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 value of the shares was based on the quoted market price at
the date of issuance. 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 value of the
shares was based on the quoted market price at the date of issuance.
During the year ended December 31, 1999, the Company issued 80,000 shares of
Common Stock at a price of $1.00 per share in connection with a settlement
agreement and mutual release related to a previously pending lawsuit. The shares
were valued based on the quoted market price at the date of issuance.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
- --------------------
In 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 is 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 vested after two years. The
exercise price of the options equaled the market price of the Company's Common
Stock at the date of grant. In addition, the agreement may be extended for an
additional two years at the option of the President.
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's financial position or results of operations.
F-24
<PAGE>
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
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME INCOME
AVAILABLE AVAILABLE
TO COMMON TO COMMON
STOCKHOLDERS PER-SHARE STOCKHOLDERS PER-SHARE
AMOUNT SHARES AMOUNT AMOUNT SHARES AMOUNT
------ ------ ------ ------------ ------ ------
Net income $1,175,443 $2,132,368
Less: Preferred stock dividends (49,950) (33,300)
------------
Income available
To common stockholders 1,125,493 14,747,000 $0.08 2,099,068 14,667,000 $ 0.14
===== ======
Effect of dilutive securities:
Stock options and warrants - 588,000 (0.01) - 1,404,000 (0.01)
Preferred stock 49,950 569,000 - 33,300 569,000 -
--------- ------- ------- ---------- --------- ------
Income available to common
stockholders and assumed
conversion $1,175,443 15,904,000 $0.07 $ 2,132,368 16,640,000 $ 0.13
=========== ========== ===== ============ ========== =======
</TABLE>
Options and warrants totaling 9,619,276 and 5,953,909 were excluded from the
calculation of diluted earnings per share as their effect was anti-dilutive for
the years ended December 31, 1999 and 1998, respectively.
F-25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Universal
Heights, Inc. and subsidiaries form 10-KSB for the year ended December 31, 1999
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 16,272,982
<SECURITIES> 3,308,058
<RECEIVABLES> 7,750,262
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,520,876
<PP&E> 243,361
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,095,539
<CURRENT-LIABILITIES> 21,325,244
<BONDS> 0
0
1,387
<COMMON> 147,946
<OTHER-SE> 8,620,962
<TOTAL-LIABILITY-AND-EQUITY> 30,095,539
<SALES> 6,782,476
<TOTAL-REVENUES> 8,779,195
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,603,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,175,443
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,175,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,175,443
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.07
</TABLE>
