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, 1999
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 October 15, 1999: 14,672,604.
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, 1999 are not
necessarily indicative of the results for the year ending December 31, 1999.
2
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
ASSETS
Debt securities held-to-maturity, at amortized cost
(fair value of $2,534,260) $2,620,780
Equity securities available for sale at fair value (cost of $233,166) 463,709
Cash and cash equivalents 10,623,819
Property, plant and equipment 87,184
Receivables:
Reinsurance recoverable 7,054,920
Premiums and other receivables 1,296,516
Deferred policy acquisition costs 1,937,170
---------
Total assets $24,084,098
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $2,153,849
Unearned premiums 10,288,409
Accounts payable 919,674
Other accrued expenses 1,419,115
Accrued taxes, licenses and fees 200,000
Due to related parties 52,232
------
Total liabilities 15,033,279
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative convertible preferred stock, $.01 par value, 1,000,000
shares authorized, 138,640 shares issued and outstanding, minimum
liquidation preference of $1,419,700 1,387
Common stock, $.01 par value, 40,000,000 shares authorized,
14,672,604 shares issued and outstanding 146,726
Additional paid-in capital 15,015,581
Accumulated other comprehensive income 230,543
Accumulated deficit (6,343,418)
-----------
Total stockholders' equity 9,050,819
---------
Total liabilities and stockholders' equity $24,084,098
===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For Nine Months Ended For Three Months Ended
September September 30, September 30, September 30,
30, 1999 1998 1999 1998
---- ---- ---- ----
PREMIUMS EARNED AND OTHER REVENUES
Premium income - net $5,209,931 $4,704,496 $1,641,903 $1,714,214
Net investment income 409,234 530,577 122,135 190,794
Commission revenue 643,832 - 106,074 -
Other income 5,068 50,328 364 49,754
----------- ------------ ------------- ----------
Total revenues 6,268,065 5,285,401 1,870,476 1,954,762
OPERATING COST AND EXPENSES:
Losses and loss adjustment expenses 2,221,804 2,377,901 846,754 749,087
General and administrative expenses 2,473,036 700,303 510,162 545,993
--------- ----------- ------------- -------
Total operating expenses 4,694,840 3,078,204 1,356,916 1,295,080
INCOME BEFORE INCOME TAXES 1,573,225 2,207,197 513,560 659,682
Federal income tax provision - 216,720 - 216,720
------------ ------- ------------ -------
NET INCOME $1,573,225 $1,990,477 $513,560 $442,962
========== ============ ======== ========
INCOME PER COMMON SHARE:
Basic
Net income $ 0.10 $ 0.14 $ 0.03 $ 0.03
======== ========== ======== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 14,673,000 13,930,000 14,673,000 13,938,000
============ ========== ========== ==========
INCOME PER COMMON SHARE:
Diluted
Net income $ 0.10 $ 0.11 $ 0.03 $ 0.02
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 15,823,000 17,391,000 15,930,000 17,949,000
============ ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
For Nine Months For Three Months
Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
NET INCOME $1,573,225 $1,990,447 $513,560 $442,962
OTHER COMPREHENSIVE INCOME:
Net unrealized gain on available-for-sale
securities 204,474 - (85,237) - -
------------ ---------- ---------- --------
COMREHENSIVE INCOME $1,777,699 $1,990,477 $428,323 $442,962
========== ========== ======== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements
5
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For Nine Months Ended
September, 30 September, 30
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 1,573,225 $ 1,990,477
Add (deduct):
Adjustments to reconcile income from continuing operations
to cash provided by (used in) operations:
Amortization and depreciation --- 78,248
Net change in assets and liabilities relating to continuing operations:
Prepaid reinsurance premiums 8,012,128 (5,126,186)
Other receivables and deposits (589,460) 193,183
Reinsurance recoverable on losses (5,635,766) (1,433,554)
Deferred policy acquisition costs (450,158) (1,066,179)
Accounts payable (271,372) 690,116
Accrued expenses (5,200) 907,953
Accrued taxes, licenses and fees 75,000 155,000
Unpaid losses and loss adjustment expenses (370,207) 2,875,108
Unearned premiums (3,524,506) 9,850,961
Due to/from related parties and other (115,670) (357,105)
Net cash provided by (used in) operating activities (1,301,986) 8,758,022
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures 40,173 ---
Purchase of equity securities available-for-sale --- (470,857)
Proceeds from sale of equity securities available-for-sale 235,232 ---
Purchase of debt securities held-to-maturity (1,692,414) (2,481,986)
Proceeds from maturities of debt securities held-to-maturity 1,143,186 ---
Payments for notes receivable 250,000 ---
------- ----------
Net cash provided by (used in) investing activities (23,823) (2,952,843)
-------- -----------
-------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (37,463) ---
-------- -----------
Net cash provided by (used in) financing activities (37,463) 0
-------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
EQUIVALENTS (1,363,272) 5,805,179
CASH AND CASH EQUIVALENTS, Beginning of Period 11,987,091 1,172,418
---------- ---------
CASH AND CASH EQUIVALENTS, End of Period $ 10,623,819 $ 6,977,597
============ =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
6
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND 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 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 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 has underwriting authority for third-party insurance companies.
The MGA currently generates revenue through policy fee income and other
administrative fees from the marketing of UPCIC's and third party insurance
products through the Company's distribution network and UPCIC. 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 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 an independent claims adjusting
company, Universal Adjusting Corporation ("UAC"), which was incorporated in
Delaware on August 9, 1999. UAC currently adjusts Universal Property & Casualty
Insurance Company claims in certain geographic areas. In the future, UAC plans
to expand its authority to third-party insurance companies. The Company has also
formed subsidiaries that expect to specialize in selling insurance via the
Internet.
The use of the terms "plans to" and "expect to" indicate that these sentences
are forward-looking statements that reflect the Company's current plans, all of
which are in the early stages of implementation.
7
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, (continued)
The consolidated balance sheet of the Company, as of September 30, 1999, and the
related consolidated statements of operations for the nine months ended
September 30, 1999 and 1998 and cash flows for nine months ended September 30,
1999 and 1998 are unaudited. The accounting policies followed for quarterly
financial reporting are the same as those disclosed in the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998. 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 1998 financial statements to
conform them to and make them consistent with the presentation used in the 1999
financial statements.
In June, 1997, SFAS Statement No. 130, "Reporting Comprehensive Income," was
issued. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires unrealized gains
or losses on the Company's available-for-sale securities, which currently are
reported in shareholders' equity, to be included in other comprehensive income
and the disclosure of total comprehensive income. The Company has adopted SFAS
No. 130 and disclosed other comprehensive income in the consolidated statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. The
standard sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. The Company has one reportable
segment, insurance services, during the period reported in the accompanying
consolidated financial statements, based upon management reporting.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, ACCOUNTING BY INSURANCE AND OTHER
ENTERPRISES FOR INSURANCE AND REINSURANCE-RELATED Assessments ("SOP 97-3"). SOP
97-3 provides guidance on the recognition and measurement of liabilities for
guaranty-fund and other insurance related assessments.
8
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, (continued)
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 currently
impact the Company's financial condition or results of operations or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities." This Statement of Position ("SOP") provides
guidance on the financial reporting of start-up costs and organization costs and
requires such costs to be expensed as incurred. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company adopted SOP 98-5 effective January 1, 1999 through a charge to earnings
of $127,357.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (the "Statement"
or "SFAS No. 133"). The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. In July 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards 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. The Company
has not yet quantified the impact of adopting SFAS No. 133 on its financial
statements.
In October 1998, the AICPA issued Statement of Position 98-7 DEPOSIT ACCOUNTING:
ACCOUNTING FOR INSURANCE AND REINSURANCE CONTRACTS THAT DO NOT TRANSFER
INSURANCE RISK ("SOP 98-7"). SOP 98-7 provides guidance on the accounting for
insurance and reinsurance contracts that do not transfer insurance risk. SOP
98-7 is effective for financial statements for fiscal years beginning after June
15, 1999, with earlier adoption encouraged. The effect of the initial adoption
of SOP 98-7 is required to be reported as a cumulative effect of a change in
accounting principle. The adoption of SOP 98-7 is not expected to have a
material impact on the Company's financial position, results of operations or
cash flows.
NOTE 2 - INSURANCE OPERATIONS
UPCIC maintains its records in conformity with the accounting practices
prescribed or permitted by the Florida Department of Insurance ("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.
9
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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. In addition, UPCIC has been renewing these policies as well as
soliciting business actively in the open market through independent agents.
Unearned premiums represent amounts that UPCIC would refund policyholders if
their policies were canceled. 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,
1999, the Company recorded $10,288,409 in connection with unearned premiums.
Universal Property and Casualty Management, Inc., an outside management company,
provides 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, 1999 have been recorded at $768,367.
The JUA's incentive program provided approximately $2,700,000 to an escrow
account. These funds will be released to UPCIC when certain conditions are met,
including not canceling policies acquired from the JUA for a three year period.
To date, the Company has substantially complied with the requirements related to
the bonus payments. The escrow account is not included in the financial
statements.
Premiums earned 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 unearned
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 September 30, 1999, deferred policy acquisition
costs amounted to $1,937,170.
10
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 2 - INSURANCE OPERATIONS (Continued)
An allowance for uncollectible premiums receivable will be established when it
becomes evident collection is doubtful. No allowance is deemed necessary at
September 30, 1999.
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 continuously reviewed 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.
NOTE 3 - REINSURANCE
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.
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 on an automatic basis under general
11
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 3 - REINSURANCE (continued)
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 ceded 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
applied 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 obtained coverage from the Florida Hurricane
Catastrophe Fund which amount was approximately $32,400,000. In addition, in the
event a hurricane were to decrease the limits of catastrophe cover, UPCIC
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.
Effective November 1, 1998, UPCIC entered into an excess catastrophe treaty with
various Lloyds underwriting syndicates. This excess catastrophe treaty provided
coverage of $7,400,000 in excess of $80,000,000 for each loss occurrence.
Effective June 1, 1999, UPCIC revised and enhanced its reinsurance program.
UPCIC entered into quota share and excess per risk agreements with Swiss
Reinsurance America Corporation, rated A++ by A.M. Best. Under the quota share
treaty, UPCIC currently cedes fifty percent of its gross written premiums,
losses and loss adjustment expenses with a ceding commission of thirty-five
percent. The Company has the option to retroactively increase the annual cession
to 75% or retroactively reduce the cession to 45%. 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.
Effective June 1, 1999, under an excess catastrophe contract, UPCIC obtained
coverage of $39,000,000 in excess of $2,000,000. UPCIC also obtained variable
coverage of $2,000,000 in excess of the Company's 100-year probable maximum
loss.
12
UNIVERSAL HEIGHTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 3 - REINSURANCE (continued)
UPCIC also obtained coverage from the Florida Hurricane Catastrophe Fund, which
is estimated to be $45,300,000. In addition, in the event a hurricane were to
decrease the limits of catastrophe cover, UPCIC purchased contingency coverage
to replace the Florida Hurricane Catastrophe Cover for losses of $47,600,000
excess of $47,600,000 otherwise recoverable excess of $11,300,000.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
PREMIUMS:
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------- ------------------
Written Earned Written Earned
------- ------ ------- ------
Direct $11,821,024 $13,991,878 $ 7,486,366 $ 725,807
Assumed (60,548) 1,293,137 13,589,998 10,499,596
Ceded (8,572,846) (10,075,084) (11,643,093) (6,520,907)
----------- ------------ ----------- -----------
Net $3,187,630 $ 5,209,931 $ 9,433,271 $ 4,704,496
========== ============ ============ ===========
OTHER AMOUNTS:
September 30, September 30,
1999 1998
---- ----
Reinsurance recoverable on unpaid losses
and loss adjustment expenses $ 194,603 $ 1,437,554
Unearned premiums reserve ceded $ 1,502,205 $ 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, allowances are established for amounts deemed
uncollectible. No allowance is deemed necessary at September 30, 1999. 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.
13
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 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 approved by the Florida Department of Insurance ("DOI") 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 had 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 approved a number of initiatives to
depopulate the JUA, which 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 the 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. UPCIC's surplus at September 30, 1999 is $6,381,443.
14
UPCIC's initial business and operations consisted of providing property
and casualty coverage through homeowners' insurance policies acquired through
the JUA. UPCIC entered into agreements with the JUA whereby since February 1998
UPCIC assumed approximately 30,000 policies. These policies, as renewed,
represent approximately $19,000,000 in estimated annual gross direct written
premium revenues. In addition, UPCIC has received approximately $90 per policy
in bonus incentive funds from the JUA for assuming the policies. The bonus funds
must be maintained in an escrow account for three years. UPCIC must not cancel
the policies from the JUA for this three 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 U.S. Insurance
Solutions, Inc. 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, generates revenue through policy fee
income and other administrative fees from the marketing of UPCIC's and third
party insurance products through the Company's distribution network and UPCIC.
World Financial Resources (Barbados) Ltd. was formed to participate in the
international insurance and reinsurance markets. Universal Risk Life Advisors,
Inc. was formed to be the Company's managing general agent for life insurance
products. The Company has also formed subsidiaries that will specialize in
selling insurance via the Internet. In addition, the Company has formed an
independent claims adjusting company, Universal Adjusting Corporation, which
adjusts UPCIC claims in certain geographic areas.
FINANCIAL CONDITION
Cash and cash equivalents at September 30, 1999 aggregated $10,623,819.
The source of liquidity for possible claims payments consists of net premiums,
after deductions for expenses.
UPCIC expects that premiums will be sufficient to meet UPCIC's working
capital requirements for at least the next twelve months. Amounts considered to
be in excess of current working capital requirements have been invested. At
September 30, 1999, UPCIC's investments were comprised of $10,623,819 in cash
and repurchase agreements, $2,620,780 in fixed maturity securities and $463,709
in equities.
UPCIC does not expect to obtain additional policies from the JUA under
the previous JUA take-out program. UPCIC has obtained approximately 30,000
policies from the JUA. 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.
The renewal rate of policies acquired by UPCIC has been approximately
seventy-five percent. UPCIC is also establishing relationships with insurance
agents outside of the JUA program to write new business. UPCIC has been selling
policies in the open market through these 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.
15
RESULTS OF OPERATIONS -NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE MONTHS
ENDED SEPTEMBEr 30, 1998
The operations for the nine months ended September 30, 1999 consist of
the Company's newly started insurance business. The operations are not directly
comparative to the previous period as there were no insurance operations until
February 1998.
Revenues and general administrative expenses have increased
significantly when compared to the prior period as a result of the development
of the insurance company operations.
Through September 30, 1999, the Company recognized revenues of
$5,209,931, after reinsurance, on approximately 25,000 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
$409,234 in cash and cash equivalents aggregating $10,623,819, fixed maturity
securities aggregating $2,620,780 and equity securities aggregating $463,709 at
September 30, 1999. Such funds for investing were received from advance premiums
and from the Company's private offering.
Loss and loss adjustment expenses for the nine months ended September
30, 1999 were $2,221,804. These costs relate to insurance claims incurred by
UPCIC. General and administrative expenses were $2,473,036 as compared to
$700,303 for the nine months ended September 30, 1998. General and
administrative expenses have increased due to further development of the
Company's insurance operations.
IMPACT OF THE YEAR 2000
The Company's investment in enhanced technologies and implementation of
new systems to better serve the insured is a continuing process. As part of this
process, the Company has evaluated its internal systems, both hardware and
software, facilities, and interactions with business partners, including
Universal P & C Management, Inc. where risk is concentrated in relation to year
2000 issues. As of March 31, 1999, the Company had completed efforts, which the
Company believes, have brought its systems into compliance. The total cost
incurred to modify existing systems was not material. The Company will continue
to contact its business partners (including agents, banks, reinsurers and rating
agencies) to determine the status of their compliance and to assess the impact
of noncompliance on the Company. The Company believes that it is taking the
necessary measures to mitigate issues that may arise relating to the year 2000.
To the extent that any additional issues arise, the Company will evaluate the
impact on its business, results of operations and financial condition and, if
material, make the necessary disclosures and take appropriate remedial action.
In addition, the Company has established a contingency plan to address the worst
case scenario of its outside management company incurring year 2000 problems.
The most reasonably likely worst case scenario would potentially result in
intermittent delays in processing premiums and claims.
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 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
- ------- ---------------------
None.
Item 3. Defaults upon Senior Securities
- ------ -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None.
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 15, 1999 /s/ Bradley I. Meier
---------------------------
Bradley I. Meier, President
18
Universal Heights, Inc.
Statement Regarding the Computation of Per Share Income
The following table reconciles the numerator (earnings) and denominator (shares)
of the basic and diluted earnings per share computations for net income for the
quarters ended September 30, 1999 and 1998.
Nine Months Ended Nine Months Ended
September 30, 1999 September1998
------------------ -------------
Income Income
Available Available
to Common Per-Share to Common Per -Share
Stockholders Shares Amount Stockholders Shares Amount
------------ ------ --------- ------------ ------ -------
Net income $1,573,225 $1,990,477
Less: Preferred stock dividends (37,463) (20,812)
-------- -------
Income available to common
stockholders 1,535,762 14,673,000 $ 0.10 $1,969,665 13,930,000 $0.14
=====
Effect of dilutive securities:
Stock options and warrants --- 582,000 --- 2,893,000 (0.03)
Preferred stock 37,463 568,000 --- 20,812 568,000 ---
------ ------- ------ ------ -------- ------
Income available to common
stockholders and assumed
conversion $1,573,225 15,823,000 $ 0.07 $1,990,477 17,391,000 $0.11
========== ========== ====== ========== ========== =====
Options and warrants totaling 9,625,000 and 6,686,000 were excluded from the
calculation of diluted earnings per share as their effect was anti-dilutive for
the nine months ended September 30, 1999 and 1998.
Three Months Ended Three Months Ended
September 30, 1999 September 1998
------------------ -------------
Income Income
Available Available
to Common Per-Share to Common Per -Share
Stockholders Shares Amount Stockholders Shares Amount
------------ ------ --------- ------------ ------ -------
Net income $513,560 $442,962
Less: Preferred stock dividends (12,488) (12,488)
-------- -------
Income available to common
stockholders 501,072 14,673,000 $0.03 $430,474 13,938,000 $0.03
===== =====
Effect of dilutive securities:
Stock options and warrants --- 689,000 --- --- 3,443,000 (0.01)
Preferred stock 12,488 568,000 --- 12,488 568,000 ---
------ ------- ------ ------ -------- ------
Income available to common
stockholders and assumed
conversion $513,560 15,930,000 $ 0.03 $442,962 17,949,000 $0.02
========== ========== ======= ========== ========== =====
Options and warrants totaling and 9,518,000 and 7,385,000 were excluded from the
calculation of diluted earnings per share as their effect was anti-dilutive for
the three months ended September 30, 1999 and 1998.
19
Data Schedule
Form 10-QSB EXHIBIT 27
Universal Heights, Inc.
September 30, 1999
-------------------------------------------------- --------------------
PERIOD-TYPE 9 Months Ended
-------------------------------------------------- --------------------
FISCAL-YEAR-END DEC. 31, 1999
-------------------------------------------------- --------------------
PERIOD START JAN. 1, 1999
-------------------------------------------------- --------------------
PERIOD END SEPT. 30, 1999
-------------------------------------------------- --------------------
CASH 10,623,819
-------------------------------------------------- --------------------
SECURITIES 3,084,489
-------------------------------------------------- --------------------
RECEIVABLES 8,351,436
-------------------------------------------------- --------------------
ALLOWANCES 0
-------------------------------------------------- --------------------
INVENTORY 0
-------------------------------------------------- --------------------
CURRENT-ASSETS 1,937,170
-------------------------------------------------- --------------------
PP&E 87,184
-------------------------------------------------- --------------------
DEPRECIATION 0
-------------------------------------------------- --------------------
TOTAL-ASSETS 24,084,098
-------------------------------------------------- --------------------
CURRENT LIABILITIES 15,033,279
-------------------------------------------------- --------------------
BONDS 0
-------------------------------------------------- --------------------
PREFERRED-MANDATORY 0
-------------------------------------------------- --------------------
PREFERRED STOCK 1,387
-------------------------------------------------- --------------------
-------------------------------------------------- --------------------
COMMON STOCK 146,726
-------------------------------------------------- --------------------
OTHER STOCKHOLDER'S EQUITY 8,902,706
-------------------------------------------------- --------------------
TOTAL-LIABILITY-AND-EQUITY 24,084,098
-------------------------------------------------- --------------------
SALES 5,209,931
-------------------------------------------------- --------------------
TOTAL-REVENUE 6,268,065
-------------------------------------------------- --------------------
COST OF GOODS SOLD 0
-------------------------------------------------- --------------------
TOTAL-COSTS 0
-------------------------------------------------- --------------------
OTHER-EXPENSES 4,694,840
-------------------------------------------------- --------------------
LOSS-PROVISION 0
-------------------------------------------------- --------------------
INTEREST-EXPENSE 0
-------------------------------------------------- --------------------
INCOME-PRETAX 1,573,225
-------------------------------------------------- --------------------
INCOME TAX 0
-------------------------------------------------- --------------------
INCOME-CONTINUING 1,573,225
-------------------------------------------------- --------------------
DISCONTINUED 0
-------------------------------------------------- --------------------
EXTRAORDINARY 0
-------------------------------------------------- --------------------
CHANGES 0
-------------------------------------------------- --------------------
20