SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER 0-20848
UNIVERSAL HEIGHTS, INC.
(Name of small business issuer in its charter)
DELAWARE 65-0231984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2875 N.E. 191 STREET
SUITE 400 A
MIAMI, FLORIDA 33180
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (305) 792-4200
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of the Common Stock of Universal Heights, Inc. issued
and outstanding as of September 30, 1998: 14,687,604.
Transitional Small Business Disclosure Format Yes __ No X
<PAGE>
UNIVERSAL HEIGHTS, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited, condensed consolidated financial statements of
the Company have been prepared in accordance with the instructions to Form
10-QSB and, therefore, omit or condense certain footnotes and other information
normally included in financial statements prepared in accordance with generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial information for the interim periods reported have been made.
Results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results for the year ending December 31, 1998.
2
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
------------------ ----------------
<S> <C> <C>
Equity securities available for sale at market (cost of $470,857) $ 449,945 $ -
Fixed maturity securities held-to-maturity at amortized cost -
(fair value of $2,487,845) 2,484,294
Cash and cash equivalents 6,977,597 1,172,418
Prepaid reinsurance premiums 5,126,186 -
Prepaid other 108,000 -
Receivables:
Reinsurance recoverable on losses 1,433,554 -
Other receivables (171,705) 21,478
Deferred policy acquisition cost 1,066,179 -
Property and equipment, net 2,105 9,388
Deposits 9,816 9,816
Insurance license acquisition costs 135,317 118,678
Cash restricted for regulatory capitalization requirements 5,300,000 5,300,000
---------- ---------
Total assets $ 22,921,288 $ 6,631,778
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses 2,875,108 -
Unearned premiums 9,850,961 -
Accounts payable 1,600,162 1,030,085
Other accrued expenses 1,190,324 278,392
Accrued tax, licenses and fees 155,000 -
Due to related parties 19,721 406,000
Other 3,155 7,161
----- -----
Total liabilities 15,694,431 1,721,638
========== ---------
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value, 1,000,000 shares authorized, 138,640 1,387 1,387
shares issued and outstanding
Common stock, $.01 par value, 40,000,000 shares authorized, 14,687,604 shares 146,876 146,326
issued and outstanding
Additional paid-in capital 15,067,571 14,688,981
Accumulated deficit (7,988,977) (9,926,554)
----------- -----------
Total stockholders' equity 7,226,857 4,910,140
--------- ---------
Total liabilities and stockholders' equity $ 22,921,288 $ 6,631,778
============= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
3
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For Nine Months Ended For Three Months Ended
September 30, October 31, September 30, October 31,
1998 1997 1998 1997
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
PREMIUMS EARNED AND OTHER REVENUES
Premium income $6,034,007 $ $1,837,651 $
- -
Net investment income 530,577 - 190,794 -
Other income (expense) 50,328 (9,622) 49,754 (1,430)
------------ ----------- ------- -----------
Total revenues 6,614,912 (9,622) 2,078,199 (1,430)
OPERATING COST AND EXPENSES:
Losses and loss adjustment expenses 2,377,901 - 749,087 -
General and administrative expenses 2,029,814 679,332 669,430 350,167
--------- --------- ------- ---------
Total operating expenses 4,407,715 679,332 1,418,517 350,167
INCOME FROM CONTINUING OPERATIONS 2,207,197 (688,954) 659,682 (351,597)
DISCONTINUED OPERATIONS
Loss from operations of the sports novelty and
souvenir business - (348,275) - (120,953)
Loss on disposal of sports novelty and souvenir
business - (1,387,575) - -
------------- ----------- ------------ ----------
Loss from discontinued operations - (1,735,850) - (120,953)
INCOME (LOSS) BEFORE INCOME TAXES 2,207,197 (2,424,804) 659,682 (472,550)
Federal income tax provision 216,720 - 216,720 -
------- ------------ ------- ----------
NET INCOME (LOSS) 1,990,477 (2,424,804) 442,962 (472,550)
=========== =========== ======== =========
INCOME (LOSS) PER COMMON SHARE:
Basic
Income (loss) from continuing operations $ 0.14 $ (0.21) $ 0.03 $ (0.11)
Income (loss from discontinued operations - (0.51) - (0.04)
-------- ----------- -------- -----------
Net income (loss) $ 0.14 $ (0.72) $ 0.03 $ (0.15)
========== =========== ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
14,680,000 3,368,000 14,688,000 3,251,000
========== ========= ========== =========
INCOME (LOSS) PER COMMON SHARE:
Diluted
Income (loss) from continuing operations $ 0.11 $ (0.21) $ 0.02 $ (0.11)
Income (loss) from discontinued operations - (0.51) - (0.04)
------------- --------------- ------------ -------------
Net income (loss) $ 0.11 $ (0.72) $ 0.02 $ (0.15)
--------- -------------- ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,391,000 3,368,000 17,949,000 3,251,000
========== ========= ========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For Nine Months Ended
September 30, October 31,
1998 1997
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
CONTINUING OPERATIONS:
Net income (loss) from continuing operations $ 1,990,477 $(688,954)
Add (deduct):
Adjustments to reconcile net income to cash provided
by operations:
Amortization and depreciation 78,248 ---
Net change in non-cash balances relating to continuing operations:
Prepaid reinsurance premiums (5,126,186) ---
Other receivables and deposits 193,183 ---
Insurance license acquisition costs (24,823) ---
Reinsurance recoverable on losses (1,433,554) ---
Deferred policy acquisition cost (1,066,179) ---
Prepaid other (24,000) ---
Accounts payable 690,116 ---
Accrued expenses 907,953 ---
Accrued tax, licenses & fees 155,000 ---
Unpaid losses and loss adjustment expenses 2,875,108 ---
Unearned premiums 9,850,961 ---
Due to related parties and other (308,282) ---
Stock issued for services 139,201
---------- -------
Net cash provided by (used in) continuing operations 8,758,022 (549,753)
---------- ---------
DISCONTINUED OPERATIONS:
Loss from discontinued operations --- (1,735,850)
Adjustments to reconcile loss from discontinued operations
to net cash used in discontinued operations:
Stock issued for services --- 108,784
Depreciation and amortization --- 587,680
Write down of inventories to net realizable value --- (94,308)
Loss on disposal of property, equipment and patents 952,896
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable --- (22,483)
Inventories --- 151,868
Other current assets --- 312,071
Accounts payable and accrued expenses: 295,501
----------- --------
Net cash provided by discontinued operations 0 556,159
----------- --------
Net cash provided by operating activities 8,758,022 6,406
5
<PAGE>
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) cont'd.
For Nine Months Ended
September 30, October 31,
1998 1997
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment --- 7,251
Purchase of equity securities (470,857) ---
Purchase of debt securities (2,481,986) ---
Acquisition of patents and trademarks --- (17,112)
----------- --------
Net cash used in investing activities (2,952,843) (9,861)
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock --- (141,250)
Advances from stockholders --- (85,345)
Issuance of related party loans --- 237,893
Payment on capital lease obligations (9,310)
----------- --------
Net cash provided by financing activities 0 1,988
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,805,179 (1,467)
CASH AND CASH EQUIVALENTS, Beginning of Period 1,172,418 1,507
----------- -------
CASH AND CASH EQUIVALENTS, End of Period $ 6,977,597 $ 40
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid --- 9,178
SUPPLEMENTAL NONCASH FINANCING AND INVESTING ACTIVITIES
Common stock issued for liabilities 60,000 ---
Valuation of warrants issued for liabilities 60,000 ---
Valuation of warrants issued for prepaid expenses 274,000 ---
Preferred stock issued in exchange for debt 887
Common stock issued in exchange for debt 503,011
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Universal Heights, Inc. ("Company"), its wholly-owned subsidiary, Universal
Property & Casualty Insurance Company ("UPCIC") and other entities which are
under common control through common ownership. All intercompany accounts and
transactions have been eliminated in consolidation.
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 approved on October 29, 1997. In 1998, the subsidiary began operations
through the acquisition of homeowner insurance policies issued by the Florida
Residential Property and Casualty Joint Underwriting Association ("JUA").
The JUA was established in 1992 as a temporary measure to provide insurance
coverage for individuals who could not obtain coverage from private carriers
because of the impact on the private insurance market of Hurricane Andrew in
1992. Rather than serving as a temporary source of emergency insurance coverage
as was originally intended, the JUA has become a major provider of original and
renewal insurance coverage for Florida residents. In an attempt to reduce the
number of policies in the JUA, and thus the exposure of the program to
liability, the Florida legislature has approved a number of initiatives to
depopulate the JUA, which to date has resulted in policies being acquired by
private insurers and provides additional incentives to private insurance
companies to acquire policies from the JUA.
On December 4, 1997, the Company raised approximately $6,700,000 in a private
offering with various institutional and/or otherwise accredited investors
pursuant to which the Company issued, in the aggregate, 11,208,996 shares of its
Common Stock at a price of $.60 per share. The proceeds of this transaction are
being used partially for working capital purposes and to meet the minimum
regulatory capitalization requirements ($5,300,000) required by the Florida
Department of Insurance to engage in this type of homeowners insurance company
business.
On March 10, 1998, the Company made a decision to change its accounting fiscal
year end from April 30 to December 31 and in February 1998 commenced its
insurance business. As a result of the change in accounting year, the three and
nine month periods ended September 30, 1998 and October 31, 1997 have been
presented for comparative purposes. There would not have been a material
difference if the Company had presented the three and nine month periods ended
September 30, 1997.
The Company continues to develop into a vertically integrated insurance holding
company performing all aspects of insurance underwriting, distribution and
claims. Universal Risk Advisors, Inc. was incorporated in Florida on July 2,
1998 and became licensed by the Florida Department of Insurance on September 28,
1998 as the Company's wholly-owned Managing General Agent ("MGA"). Through the
MGA, the Company will have underwriting and claims authority for third-party
insurance companies. The MGA will generate revenue through policy
7
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES, Continued
fee income and other administrative fees from the marketing of third party
insurance products through the Company's distribution network. Universal Florida
Insurance Agency was incorporated in Florida on July 2, 1998 and Universal
Insurance Solutions, Inc. was incorporated in Florida on August 4, 1998 as
wholly-owned subsidiaries of Universal Heights, Inc. to assume acquired agency
business. These two entities are the foundation of the Company's agency
operations which will generate income from policy fees, commissions, premium
financing referral fees and the marketing of ancillary services. In addition, on
August 31, 1998 World Financial Resources (Barbados) LTD. ("WFR") was
incorporated in Barbados to participate in the international insurance and
reinsurance markets. Effective September 1, 1998 WFR, entered into an excess and
surplus arrangement for catastrophic events.
The consolidated balance sheet of the Company, as of September 30, 1998, and the
related consolidated statements of operations for the three and nine months
ended September 30, 1998 and October 31, 1997 and cash flows for nine months
ended September 30, 1998 and October 31, 1997 are unaudited.
The interim financial statements reflect all adjustments (consisting of only
normal and recurring accruals and adjustments) which are, in the opinion of
management, necessary to a fair statement of the results for the interim periods
presented. The Company's operating results for any particular interim period may
not be indicative of results for the full year and thus should be read in
conjunction with the Company's annual statements.
Certain reclassifications have been made in the 1997 financial statements to
conform them to and make them consistent with the presentation used in the 1998
financial statements.
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 following methods
and assumptions were used by the Company in estimating the fair value of
financial instruments. Cash and cash equivalents: the carrying amount reported
in the consolidated balance sheets for cash and cash equivalents approximate
fair value due to the short-term nature of those items. Accounts receivable and
accounts payable: the carrying amounts reported in the consolidated balance
sheets for accounts receivable and accounts payable approximate their fair
value. Investment securities: fair values for fixed maturity securities and
other invested assets are based on quoted market prices.
NOTE 2 - INSURANCE OPERATIONS
UPCIC maintains its records in conformity with the accounting practices
prescribed or permitted by the DOI. To the extent that certain of these
practices differ from generally accepted accounting principles ("GAAP"),
adjustments have been made in order to present the accompanying financial
statements on the basis of GAAP.
8
<PAGE>
NOTE 2 - INSURANCE OPERATIONS, Continued
The preparation of financial statements in conformity with 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 period. Actual results could differ from those
estimates.
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the JUA. UPCIC received the unearned premiums and is servicing such
policies. Unearned premiums represent amounts that UPCIC would refund
policyholders if their policies were canceled. UPCIC has acquired policies from
the JUA at various stages in the life of such policies. Accordingly, UPCIC
determines unearned premiums by calculating the pro-rata amount that would be
due to the policyholder at a given point in time based upon the premiums owed
over the life of each policy. At September 30, 1998, the Company recorded
$9,850,961 in connection with unearned premiums.
UPCIC's obligation for liabilities for policies assumed from the JUA begins at
11:59 p.m. on the date of assumption of the policies. UPCIC has no liability for
assumed policies prior to the assumption date nor does UPCIC have any liability
for claims made to the JUA. Similarly, the JUA has no liability for assumed
liabilities subsequent to the assumption date.
The Company incurred $151,461 in legal costs in connection with UPCIC's efforts
to acquire the insurance license from the DOI for the insurance subsidiary. The
Company is amortizing the costs associated with acquiring the insurance license
over a five year period as they benefit future periods. Insurance license
acquisition costs reported at September 30, 1998 was reported net of accumulated
amortization of $16,144.
The insurance subsidiary's chief executive officer is affiliated with companies
that provide the Company with management and personnel for the subsidiary's
underwriting claims and financial requirements, together with support offices,
equipment and services. The fees for such services for the nine months ended
September 30, 1998 have been recorded at $520,860.
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 maintaining for a three-year period a minimum
number of policies acquired from the JUA. The escrow account is not included in
the financial statements.
Premiums earned/received from the JUA are included in earnings evenly 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 will be deferred and amortized over the terms of the policies, but
only to the extent that unearned premiums are sufficient to
9
<PAGE>
NOTE 2 - INSURANCE OPERATIONS, Continued
cover all related costs and expenses. At September 30, 1998, deferred policy
acquisition costs amounted to $1,066,179.
An allowance for uncollectible premiums receivable will be established when it
becomes evident collection is doubtful.
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 past experience modified
for current trends; and (3) estimates of expenses for investigating and
adjusting claims based on past experience.
Liabilities for unpaid claims and claim adjustment expenses are based on
estimates of ultimate cost of settlement. Changes in claim estimates resulting
from the continuous review process and differences between estimates and
ultimate payments are reflected in expense for the year in which the revision of
these estimates first became known.
UPCIC estimates claims and claims expenses based on historical experience of
similar entities and payment and reporting patterns for the type of risk
involved. These estimates are reviewed quarterly by UPCIC's affiliated
management professionals and any resulting adjustments are reflected in
operations for the period in which they are determined.
Inherent in the estimates of ultimate claims are 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 historical claims experience relative
to the development period, knowledge of the actual facts and circumstances, and
the amount of insurance risk retained.
In the normal course of business, UPCIC 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.
NOTE 3 - REVENUE RECOGNITION
Amounts recoverable from reinsurers are estimated in a manner consistent with
the reinsurers policy. Reinsurance premiums, losses and loss adjustment expenses
("LAE") are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contracts.
Reinsurance ceding commissions received are deferred and amortized over the
effective period of the related insurance policies.
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
10
<PAGE>
NOTE 3 - REVENUE RECOGNITION, Continued
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.
Effective February 1, 1998, UPCIC entered into quota share, excess per risk and
excess catastrophe agreements with various reinsurers, rated A- or better by
A.M. Best. Under the quota share treaty, UPCIC cedes fifty percent of its gross
written premiums, losses and loss adjustment expenses with a ceding commission
of twenty-seven percent. Under the excess per risk agreement, UPCIC obtained
coverage of $1,250,000 in excess of $500,000 ultimate net loss for each risk,
each loss, excluding losses arising from the peril of wind. A $2,500,000 limit
applies to any one loss occurrence. Under the excess catastrophe reinsurance
contract, UPCIC obtained coverage of $23,300,000 in excess of $2,000,000.
Effective June 1, 1998, with respect to losses arising out of loss occurrences
commencing on or after that date, UPCIC obtained coverage of $41,000,000 in
excess of $2,000,000. UPCIC also has coverage from the Florida Hurricane
Catastrophe Fund which is estimated to be $38,000,000. In addition, in the event
a hurricane were to decrease the limits of catastrophe cover, UPCIC has
purchased contingency coverage to replace the Florida Hurricane Catastrophe
Cover for 100% of losses of $42,300,000 in excess of $42,300,000 otherwise
recoverable excess of $10,600,000.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
PREMIUMS:
Written Earned
------- ------
Direct $ 7,486,366 $ 725,807
Assumed 13,589,998 10,499,596
Ceded (10,313,582) (5,191,396)
------------- -----------
Net $10,762,782 $ 6,034,007
=========== ============
OTHER AMOUNTS:
Reinsurance recoverable on losses $ 1,437,554
Unearned premiums reserve ceded $ 5,122,186
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,
11
<PAGE>
NOTE 3 - REVENUE RECOGNITION, Continued
allowances are established for amounts deemed uncollectible. 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 - ISSUANCE OF STOCK
Pursuant to an agreement approved by the board of directors on July 9, 1998
between the Company and Value Management Research ("Value Management"), the
Company agreed to issue 100,000 warrants to purchase shares of common stock to
Value Management at an exercise price of $2.00 per share in connection with
investor relation services. On August 3, 1998, the Company granted 50,000
options to an officer of the Company to purchase stock at $1.87 per share, the
quoted market price at that date.
NOTE 5 - RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Company to classify items of
other comprehensive income by their nature in a separate financial statement or
as a component of the statement of operations or the statement of shareholders'
equity and display the accumulated balance of other comprehensive income
separately in the shareholders' equity section of the consolidated balance
sheets. The Company adopted SFAS No. 130 on January 1, 1998 as required. For the
period ended September 30, 1998, the Company has an investment portfolio with
unrealized holding gains and losses which are reported pursuant to FAS 130.
Also in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. The
standard sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. For the period ended September
30, 1998, there were no items as defined in FAS 131 that should be reported
separately. In the future, if the Company establishes operating segments,
disclosures about segments and related information will be reported pursuant to
FAS 131.
12
<PAGE>
NOTE 6 - OTHER RELATED-PARTY TRANSACTION:
On August 31, 1998 the Company loaned a director of the Company $250,000 in the
form of a 10% promissory note due on or before March 1, 1999. The note is
collateralized by publicly traded stock valued in excess of the note. At
September 30, 1998, the aggregate principal and accrued interest balance on the
note of $252,083 is included in other assets in the accompanying 1998
consolidated balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and results of operations should be read in conjunction with
the Company's Condensed Consolidated Financial Statements and Notes thereto.
This document may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements.
OVERVIEW
The Company has continued to implement its plan to become a financial
services company and, through its wholly-owned insurance subsidiary, Universal
Property & Casualty Insurance Company ("UPCIC"), has begun to take advantage of
what management believes to be profitable business and growth opportunities in
the marketplace.
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 approved on October 29, 1997. In 1998, the subsidiary began
operations through the acquisition of homeowner insurance policies issued by the
Florida Residential Property and Casualty Joint Underwriting Association
("JUA").
The JUA was established in 1992 as a temporary measure to provide
insurance coverage for individuals who could not obtain coverage from private
carriers because of the impact on the private insurance market of Hurricane
Andrew in 1992. Rather than serving as a temporary source of emergency insurance
coverage as was originally intended, the JUA has become a major provider of
original and renewal insurance coverage for Florida residents. In an attempt to
reduce the number of policies in the JUA, and thus the exposure of the program
to liability, the Florida legislature has approved a number of initiatives to
depopulate the JUA, which to date has resulted in policies being acquired by
private insurers and provides additional incentives to private insurance
companies to acquire policies from the JUA.
On December 4, 1997, the Company raised approximately $6,700,000 in a
private offering with various institutional and/or otherwise accredited
investors pursuant to which the Company issued, in the aggregate, 11,208,996
shares of its Common Stock at a price of $.60 per share. The proceeds of this
transaction are being used partially for working capital purposes and to meet
13
<PAGE>
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.
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 will maintain a separate account to
hold the minimum continued capitalization required.
UPCIC's initial business and operations consist of providing property and
casualty coverage through homeowners' insurance policies acquired through the
JUA. UPCIC has entered into agreements with the JUA whereby since February 1998
UPCIC has assumed and is currently servicing approximately 29,000 policies.
These policies, if renewed, represent approximately $28,000,000 in estimated
annual gross direct written premium revenues. In addition, UPCIC has received
approximately $89 per policy in bonus incentive money paid to UPCIC by the JUA
for assuming the policies. The bonus money must be maintained in an escrow
account for 3 years. UPCIC must maintain the policies from the JUA for the 3
year period at which point UPCIC will receive the bonus money.
The Company continues to develop into a vertically integrated insurance
holding company. The Company, through its subsidiaries, is currently engaged in
insurance underwriting, distribution and claims. UPCIC generates revenue from
the collection and investment of premiums. The Company's newly formed agency
operations which include Universal Florida Insurance Agency and Universal
Insurance Solutions, Inc. will generate income from policy fees, commissions,
premium financing referral fees and the marketing of ancillary services.
Universal Risk Advisors, Inc., the Company's managing general agent, will
generate revenue through policy fee income and other administrative fees from
the marketing of third party insurance products through the Company's
distribution network.
SEASONALITY
The Company has not determined the level of seasonality, if any, in the
insurance business. However, the Company believes that its earnings have the
most potential to be effected negatively during the hurricane windstorm season
that begins in June and ends in November.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS at September 30, 1998 aggregated $6,977,597.
The source of liquidity for possible claims payments consists of net premiums,
after deductions for expenses.
The primary use of the private offering was to provide restricted cash
needed for the JUA. UPCIC expects that JUA premiums and renewals are sufficient
to meet UPCIC's current working capital requirements. Amounts considered to be
14
<PAGE>
in excess of current working capital requirements have been invested. UPCIC
believes that the JUA premiums, renewals and the excess working capital will be
sufficient to meet UPCIC's working capital needs. At September 30, 1998, UPCIC's
investments were comprised of $10,443,875 in cash and repurchase agreements,
$1,109,245 in short term investments, $2,481,986 in mortgage backed securities
and $243,563 in equities.
UPCIC believes in the short-term it will continue to be able to obtain
additional policies from the JUA and continue to receive incentive bonuses.
UPCIC currently has obtained approximately 29,000 policies from the JUA and the
JUA has granted UPCIC approval to receive up to 30,000 policies. UPCIC expects
to obtain most, if not all, of the 30,000 policies for which it has been granted
approval to receive under the JUA program. UPCIC believes that this base of
insurance business will provide opportunities for UPCIC to solicit renewals of
premiums in future periods which, if obtained, would allow UPCIC to develop its
insurance business beyond the next twelve months. The renewal rate of policies
acquired by UPCIC is approximately eighty percent. Although there is no
assurance that policy renewals will continue at this rate, UPCIC is negotiating
with insurance agents that are currently writing business in connection with the
JUA policies in an effort to obtain policy renewals. UPCIC is also seeking to
establish relationships with insurance agents outside of the JUA program to
write new business.
To continue to grow its insurance operations, UPCIC can obtain additional
policies in the open market and, upon achieving certain additional
capitalization requirements, UPCIC may request permission from the JUA and the
DOI to increase the number of policies that UPCIC can obtain under the JUA
program. UPCIC recently commenced selling policies in the open market through
independent agents. In determining appropriate guidelines for such open market
policy sales, UPCIC employs standards similar to those used by UPCIC when
selecting policies from the JUA.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS
ENDED OCTOBER 31, 1997
The operations for the nine months ended September 30, 1998 consist of the
Company's newly started insurance business, accordingly, the operations are not
comparative to the previous period as there were no insurance operations
previously and the Company's former souvenir business was discontinued.
On February 1, 1998, the Company began recognizing earned premiums on
insurance contracts acquired from JUA. Income is recognized evenly over the
terms of policies. Through September 30, 1998 the Company recognized revenues of
$6,034,007 after reinsurance on approximately 29,000 policies. See MD&A section
entitled, "Financial Condition - Cash and Cash Equivalents" for a discussion of
the short-term and long-term resources for the insurance subsidiary.
The Company's investment income represents primarily interest income of
$530,577 in cash and cash equivalents aggregating $6,977,597, fixed maturity
securities aggregating $2,484,294 and equity securities aggregating $449,945 at
15
<PAGE>
September 30, 1998. Such funds were received for advance premiums and from the
Company's private offering.
Loss and loss adjustment expenses for the nine months ended September 30,
1998 were $2,377,901. These costs relate to insurance claims incurred by UPCIC.
General and administrative expenses were $2,029,814 as compared to $679,332 for
the nine months ended October 31, 1997. General and administrative expenses have
increased due to the Company's insurance operations.
As a result of a change in the Company's year end, the Company presented
the nine months ended October 31, 1997 as comparatives.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE
MONTHS ENDED OCTOBER 31, 1997
The operations for the three months ended September 30, 1998 reflect the
Company's second full quarter of the Company's newly started insurance business.
Revenues, loss and loss adjustment expenses and general and administrative
expenses have increased significantly when compared to the prior year period as
a result of the development of the insurance company's operations.
As a result of a change in the Company's fiscal year end, the Company
presented the three months ended October 31, 1997 as comparatives.
IMPACT OF THE YEAR 2000
The Company's investment in enhanced technologies and implementation of new
systems to better serve the insured is a continuing process. As part of this
process, the Company has evaluated its internal systems, both hardware and
software, facilities, and interactions with business partners in relation to
year 2000 issues. As of September 30, 1998, the Company had completed efforts
which, the Company believes, have brought its systems into substantial
compliance. The total cost incurred to modify existing systems was not material.
The Company continually evaluates computer hardware and software upgrades and,
therefore, many of the costs to replace existing items with year 2000 compliant
upgrades are not likely to be incremental costs to the Company. The Company will
continue to contact its business partners (including agents, banks and rating
agencies) to determine the status of their compliance and to assess the impact
of noncompliance on the Company. The Company believes that it is taking the
necessary measures to mitigate issues that may arise relating to the year 2000.
To the extent that any additional issues arise, the Company will evaluate the
impact on its business, results of operations and financial condition and, if
material, make the necessary disclosures and take appropriate remedial action.
16
<PAGE>
UNIVERSAL HEIGHTS, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain claims and complaints have been filed or are pending against the
Company with respect to various matters. In the opinion of management and
counsel, all such matters are adequately reserved for or covered by insurance
or, if not so covered, are without any or have little merit or involve such
amounts that if disposed of unfavorably would not have a material adverse effect
on the Company.
ITEM 2. CHANGES IN SECURITIES
Pursuant to an agreement approved by the board of directors on July 9,
1998 between the Company and Value Management Research ("Value Management"), the
Company agreed to issue 100,000 warrants to purchase shares of common stock to
Value Management at an exercise price of $2.00 per share ("Warrants") in
connection with investor relation services. On August 3, 1998, the Company
granted 50,000 options to an officer to purchase stock at $1.87 per share, the
quoted market price at that date. The Options and Warrants were issued in
reliance on an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
UNIVERSAL HEIGHTS, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNIVERSAL HEIGHTS, INC.
Date: November 12, 1998 /s/ Bradley I. Meier
----------------------------
Bradley I. Meier, President
18
Exhibit 11
Universal Heights, Inc.
Statement Regarding the Computation of Per Share Income (Loss)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, OCTOBER 31, SEPTEMBER 30, OCTOBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computation of Net Income (Loss) Per Share:
Weighted average number of
shares outstanding 14,688,000 3,251,000 14,680,000 3,368,000
Income (loss) applicable to
common stock:
From continuing operations $ 442,962 $ (351,597) $ 1,990,477 $ (688,954)
=========== =========== =========== ============
From discontinued operations $ - $ (120,953) $ - $(1,735,850)
=========== =========== =========== ============
Net income (loss) $ 442,962 $ (472,550) $ 1,990,477 $(2,424,804)
=========== =========== =========== ============
Basic Income (loss) Per Share:
From continuing operations $ 0.03 $(0.11) $ 0.14 $(0.21)
====== ======= ====== =======
From discontinued operations $ - $(0.04) $ - $(0.51)
====== ======= ====== =======
Net income (loss) $ 0.03 $(0.15) $ 0.14 $(0.72)
====== ======= ====== =======
</TABLE>
The dilutive effect of options and warrants increased the weighted shares by
3,261,000 shares for the three months ended September 30, 1998 and 2,711,000
shares for the nine months ended September 30, 1998 resulting in diluted
earnings per share of $0.02 and $0.11, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-1-1998 JUL-1-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 12,277,597 12,277,597
<SECURITIES> 2,934,239 2,934,239
<RECEIVABLES> 1,261,849 1,261,849
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,445,498 6,445,498
<PP&E> 2,105 2,105
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 22,921,288 22,921,288
<CURRENT-LIABILITIES> 15,694,431 15,694,431
<BONDS> 0 0
0 0
1,387 1,387
<COMMON> 146,876 146,876
<OTHER-SE> 7,078,594 7,078,594
<TOTAL-LIABILITY-AND-EQUITY> 22,921,288 22,921,288
<SALES> 6,034,007 1,837,651
<TOTAL-REVENUES> 6,614,912 2,078,199
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,407,715 1,418,517
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,207,197 659,682
<INCOME-TAX> 216,720 216,720
<INCOME-CONTINUING> 1,990,477 442,962
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,990,477 442,962
<EPS-PRIMARY> .14 .03
<EPS-DILUTED> .11 .02
</TABLE>
