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 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 UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (Unaudited) ASSETS September 30, December 31, 1998 1997 ------------------ ---------------- 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 ============= =========== The accompanying notes to consolidated financial statements are an integral part of these statements. 3 UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For Nine Months Ended For Three Months Ended September 30, October 31, September 30, October 31, 1998 1997 1998 1997 ------------- ----------- ------------- ----------- 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 ========== ========= ========== ========= The accompanying notes to consolidated financial statements are an integral part of these statements. 4 UNIVERSAL HEIGHTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For Nine Months Ended September 30, October 31, 1998 1997 ------------- ----------- 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 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 The accompanying notes to consolidated financial statements are an integral part of these statements. 6 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 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 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 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 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 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 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 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 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 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 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 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