<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1997
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: 0-18823
UNIVERSAL INTERNATIONAL, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0776502
--------- ----------
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5000 Winnetka Avenue North, New Hope, Minnesota 55428
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(612) 533-1169
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes | | No |x|
On April 30, 1997 there were 4,893,328 shares of the registrant's $.05 par value
Common Stock outstanding.
1
<PAGE>
UNIVERSAL INTERNATIONAL, INC.
INDEX
PART I FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations
for the three months ended March 31,
1997 and 1996............................................ 3
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996..................... 4
Consolidated Statements of Cash Flows
for the three months ended March 31,
1997 and 1996............................................ 5
Notes to Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............ 7
PART II OTHER INFORMATION................................................. 12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
UNIVERSAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three months ended
------------------------
March 31, March 31,
1997 1996
-------- --------
Net sales $ 21,964 $ 16,557
Cost of goods sold 14,372 10,889
-------- --------
Gross margin 7,592 5,668
Selling, general and
administrative expenses 9,711 7,228
-------- --------
Operating loss (2,119) (1,560)
Other expense:
Miscellaneous expense, net (14) (6)
Interest expense (307) (212)
-------- --------
(321) (218)
-------- --------
Loss before non-controlling
interest in subsidiary (2,440) (1,778)
Non-controlling interest in
subsidiary's net loss -- 433
-------- --------
Net loss $ (2,440) $ (1,345)
======== ========
Net loss per common share $ (.50) $ (.27)
======== ========
Weighted average number of common
shares outstanding 4,893 4,893
======== ========
See accompanying notes to unaudited
consolidated financial statements
3
<PAGE>
UNIVERSAL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
1997 1996
-------- --------
ASSETS (unaudited)
Current assets:
Cash $ 337 $ 521
Accounts receivable, less
allowance for doubtful
accounts of $230 for 1997
and $200 for 1996 6,169 3,707
Inventories 22,937 26,458
Other current assets 1,439 1,313
Deferred income taxes 666 666
-------- --------
Total current assets 31,548 32,665
Equipment and improvements, net 9,731 10,056
Other assets, net 148 152
-------- --------
Total assets $ 41,427 $ 42,873
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit
agreement $ 10,400 $ 7,791
Current portion of long-term debt 1,475 556
Accounts payable 12,330 12,606
Accrued expenses 2,066 3,008
-------- --------
Total current liabilities 26,271 23,961
Deferred income taxes 693 693
Long-term debt, less current portion 415 1,731
-------- --------
Total liabilities 27,379 26,385
-------- --------
Shareholders' equity:
Common stock, $.05 par value,
75,000 shares authorized;
4,893 shares issued and
outstanding for 1997 and 1996 245 245
Additional paid-in capital 22,917 22,917
Accumulated deficit (9,114) (6,674)
-------- --------
Total shareholders'equity 14,048 16,488
-------- --------
Total liabilities and
shareholders' equity $ 41,427 $ 42,873
======== ========
See accompanying notes to unaudited
consolidated financial statements
4
<PAGE>
UNIVERSAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (In thousands)
Three months ended
---------------------
March 31, March 31,
1997 1996
-------- --------
Cash flows from operating activities:
Net loss $(2,440) $(1,345)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Depreciation and amortization 369 238
Provision for losses on accounts
receivable 30 36
Provision for inventory obsolescence
and shrinkage 271 219
Non-controlling interest in
subsidiary's net loss -- (433)
Changes in operating assets and
liabilities:
Accounts receivable (2,492) (1,040)
Inventories 3,250 (1,239)
Other current assets (126) (112)
Accounts payable (276) (1,050)
Other current liabilities (942) (511)
------- -------
Net cash used by operating
activities (2,356) (5,237)
------- -------
Cash flows from investing activities:
Additions to equipment and
improvements (40) (583)
------- -------
Net cash used by investing
activities (40) (583)
------- -------
Cash flows from financing activities:
Net change in borrowings under
revolving credit agreement 2,609 5,473
Payments of long-term debt (397) (366)
------- -------
Net cash provided by financing
activities 2,212 5,107
------- -------
Net decrease in cash (184) (713)
Cash, beginning of period 521 811
------- -------
Cash, end of period $ 337 $ 98
======= =======
Schedule of noncash investing transactions:
Writeoff of equipment and improvements
related to store closings $ -- $ 74
See accompanying notes to unaudited
consolidated financial statements
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Basis of Presentation
The financial statements included in this Form 10-Q have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to such rules and regulations. These
financial statements should be read in conjunction with the financial
statements and related notes included in the Company's 1996 Form 10-K.
The financial statements presented herein as of March 31, 1997 and for the
three months then ended reflect, in the opinion of management, all
adjustments necessary, consisting of normal recurring items, for a fair
presentation of financial position and the results of operations for the
periods presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.
2. Revolving Credit Agreement
During 1995, the Company entered into a borrowing arrangement whereby a
financial institution agreed to lend the Company up to $16,000 under a
revolving credit agreement originally expiring in January 1998. The
Company may borrow against a borrowing base derived from the level of
qualifying accounts receivable and inventory. During 1996, the lender
waived certain technical defaults under the agreement, and the expiration
date of the agreement was amended to March 31, 1997.
During the first quarter of 1997, the Company was in technical default on
several provisions of the amended loan agreement. As a result of these
defaults, the lender reduced the credit line to $12,500 and increased the
interest rate on the outstanding borrowings from prime plus 1.5% (the
prime rate at March 31, 1997, was 8.25%) to prime plus 3.5%. The loan
agreement is continuing subject to monthly renewals; however, the lender
has further reduced the credit line to $11,000 as of April 30, 1997 and
$10,000 as of May 31, 1997. The amount available at March 31, 1997, based
on the borrowing base, was $12,500, of which there were outstanding
borrowings of $10,400 and outstanding letters of credit of $51.
The Company is currently in the process of negotiating financing with a
number of new potential lenders to replace its current credit line and to
refinance the Odd's-N-End's bank notes payable which currently include
balloon payments of $1,275 on January 2, 1998.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Universal International, Inc. ("Universal" or the "Company") buys and
sells quality "close-out" merchandise at the wholesale level (see "Liquidity and
Capital Resources" with respect to downsizing of wholesale operations). The
Company, through its wholly owned subsidiary, Only Deals, Inc. ("Only Deals"),
owns and operates 50 retail stores offering close-out merchandise in 8 states in
the Upper Midwest. The Company, through its 40.5% ownership of Odd's-N-End's,
Inc. ("Odd's-N-End's"), also operates 22 close-out retail stores in New York
state. The Company's wholesale and retail operations sell consumer goods in a
variety of categories including toys, food, health and beauty aids, housewares,
and many others. In addition, the Company's 95% owned subsidiary, Universal
Asset-Based Services, Inc. ("Asset-Based Services"), which commenced operations
in April 1996, provides inventory valuation and liquidation services to a wide
range of financial institutions, retailers and manufacturers.
Forward Looking Information
Information contained in this Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology.
There are certain important factors that could cause results to differ
materially from those anticipated by some of these forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. The factors, among others, that could cause actual results to
differ materially include: the ability of the Company to obtain new financing,
the Company's ability to execute its business plan, continuity of a relationship
with or purchases from major vendors, competitive pressures on sales and
pricing, increases in other costs which cannot be recovered through improved
pricing of merchandise, and the adverse effect of weather conditions on retail
sales.
7
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain items from
the Company's statement of operations expressed as a percentage of net sales.
Three Months
Ended March 31,
-----------------
1997 1996
---- ----
(unaudited)
Net sales.............................................. 100.0% 100.0%
Cost of goods sold .................................... 65.4 65.8
----- -----
Gross margin .......................................... 34.6 34.2
Selling, general and administrative
expenses ............................................ 44.2 43.6
----- -----
Loss from operations .............................. (9.6)% (9.4)%
===== =====
Net loss............................................... (11.1)% (8.1)%
===== =====
First Three Months of Fiscal 1997 versus 1996
Net Sales
Net sales for the quarter ended March 31, 1997 increased by $5,407,000 or 32.7%
from the corresponding period last year. Net sales in the first quarter in the
wholesale business increased $1,913,000, or 31.0%, from the same period last
year. The increase in wholesale sales resulted primarily from selling
merchandise at reduced margins to substantially reduce wholesale inventories in
the first quarter of 1997 (see "Liquidity and Capital Resources"). Net sales for
the first quarter for Only Deals increased by $3,253,000, or 56.9%, from the
same period last year. The increase in net sales by Only Deals was primarily due
to the addition of 19 new stores since March 31, 1996. At March 31, 1997, the
Company had 50 Only Deals retail stores in operation compared to 32 (including
one store reserved for closing) at March 31, 1996. Net sales by Odd's-N-End's
for the first quarter of 1997 were $4,604,000, a 1.4% decrease from sales of
$4,669,000 from the same period of 1996. Net sales for Asset-Based Services for
the first quarter of 1997 were $306,000.
Gross Margins
Gross margins for the first quarter of 1997 increased to $7.6 million (34.6% of
net sales), a 33.9% increase over gross margins of $5.7 million (34.2% of net
sales) for the first quarter of 1996. Gross margins for the first quarter of
1997 in the wholesale business decreased 23.4% from gross margins for the same
period
8
<PAGE>
last year. Wholesale gross margins were 12.5% of sales for the first quarter
of 1997 compared to 22.2% for the first quarter of 1996. The substantial
decrease in wholesale gross margins is directly related to selling merchandise
at reduced margins to substantially reduce wholesale inventories (see "Liquidity
and Capital Resources"). Management expects that wholesale gross margins will
continue to be negatively impacted by the downsizing during 1997. Gross margins
for the first quarter of 1997 for Only Deals were $4.1 million, a 69.9% increase
from gross margins for the first quarter of 1996 due primarily to increased
sales. Gross margins for Only Deals increased as a percent of sales from 42.4%
to 45.9%. Gross margins for Odd's-N-End's, excluding the impact of intercompany
profit under the supply agreement with Universal, increased $229,000 for the
first quarter of 1997, an 11.9% increase from the first quarter of 1996. Gross
margins for Odd's-N-End's as a percent of sales increased to 46.8% for the first
quarter of 1997 compared to 41.2% for the same period of the prior year. Retail
gross margins improved primarily due to a significant reduction of seasonal
markdowns in the first quarter of 1997 as compared to the first quarter of 1996.
In addition, the Company's change in merchandise mix has resulted in lower
product costs and improved margins. Management expects that retail gross margins
for the remainder of 1997 will continue to exceed 1996 gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $9.7 million or 44.2% of net
sales in the first quarter of 1997 compared to $7.2 million or 43.6% of net
sales in the first quarter of 1996. Selling, general and administrative expenses
were 25.7% of net sales for the Company's wholesale business, 59.3% of net sales
for Only Deals and 43.9% of net sales for Odd's-N-End's in the first quarter of
1997, compared to 30.2% of net sales for the wholesale business, 57.0% of net
sales for Only Deals and 45.0% of net sales for Odd's-N-End's for the first
quarter of 1996. The decrease in selling, general and administrative expenses as
a percent of sales in the wholesale business was due to the increase in
wholesale sales. The increase in selling, general and administrative expenses
for Only Deals was primarily due to increased labor costs resulting from the
October 1996 increase in the minimum wage and from competitive pressures to
increase wages in certain markets. The decrease in selling, general and
administrative expenses for Odd's-N-End's resulted from the elimination of
certain corporate overhead costs associated with the Buffalo, New York office
and warehouse, which was sold during the third quarter of 1996. These expenses
are lower for Odd's-N-End's as a percent of sales compared to Only Deals due to
the elimination of the warehousing and transportation functions at
Odd's-N-End's, since those functions are provided by the Company. Selling,
general and administrative expenses for Asset-Based Services were $294,000 for
the first quarter of 1997.
9
<PAGE>
Interest
Interest expense increased to $307,000 in the first quarter of 1997 compared to
$212,000 in the first quarter of 1996 due to an increase in borrowings under the
revolving credit facility.
Net Loss
The Company incurred a net loss of $2.4 million during the first quarter of 1997
as compared to a net loss of $1.3 million during the first quarter of 1996. The
net loss in the first quarter was primarily the result of lower wholesale gross
margins and seasonally typical lower net sales in the retail business in the
first quarter.
Liquidity and Capital Resources
During 1995, the Company entered into a borrowing arrangement whereby a
financial institution agreed to lend the Company up to $16 million under a
revolving credit agreement originally expiring in January 1998. The Company may
borrow against a borrowing base derived from the level of qualifying accounts
receivable and inventory. During 1996, the lender waived certain technical
defaults under the agreement, and the expiration date of the agreement was
amended to March 31, 1997.
During the first quarter of 1997, the Company was in technical default on
several provisions of the amended loan agreement. As a result of these defaults,
the lender reduced the credit line to $12.5 million and increased the interest
rate on the outstanding borrowings from prime plus 1.5% (the prime rate at March
31, 1997, was 8.25%) to prime plus 3.5%. The loan agreement is continuing
subject to monthly renewals; however, the lender has further reduced the credit
line to $11 million as of April 30, 1997 and $10 million as of May 31, 1997. The
amount available at March 31, 1997, based on the borrowing base, was
$12,500,000, of which there were outstanding borrowings of $10,400,000 and
outstanding letters of credit of $51,000.
The Company is currently in the process of negotiating financing with a number
of new potential lenders to replace its current credit line and to refinance the
Odd's-N-End's bank notes payable, which currently include balloon payments of
$1,275,000 on January 2, 1998. The above described conditions, as well as the
Company's operating results for 1996, raise substantial doubt about the
Company's ability to continue as a going concern. The Company is also in the
process of substantially reducing the wholesale inventories and restructuring
and downsizing wholesale operations to minimize the impact of the reduction of
the credit line and to focus more Company resources on retail operations.
Management expects that reduced sales from the downsizing of wholesale
operations will be substantially offset by increasing sales from retail
10
<PAGE>
operations for 1997. Management believes that a significant reduction in
inventories together with a new credit facility will be sufficient to satisfy
the Company's planned operating requirements through December 31, 1997. However,
there can be no assurance that the Company will obtain replacement financing or,
if available, that the amount obtained will be equal to the present line of
credit or that the terms will be satisfactory.
Net cash used by operating activities was $2.4 million for the quarter ended
March 31, 1997 principally due to a $2.4 million net loss, a $2.5 million
increase in accounts receivable, a $3.3 million decrease in inventories, and a
$1.2 million decrease in accounts payable and other current liabilities.
Payments of long-term debt totaling $0.4 million and the $2.4 million net cash
used by operating activities were funded primarily by a $2.6 million increase in
borrowings under the revolving credit facility.
The Company has an agreement which, as amended, provides for advances of up to
$5.0 million to Odd's-N-End's, collateralized by a secondary interest in
substantially all assets, with interest payable at prime plus 2.5%. There were
advances totaling $4,904,000 under this agreement as of March 31, 1997.
In March 1997, the Company entered into a purchase agreement to acquire the
leases and inventory of approximately 90 retail stores and a warehouse from
Perry Brothers, Inc., of Lufkin, Texas. The purchase agreement is contingent
upon further due diligence and the Company obtaining both equity and debt
financing to complete the transaction.
To complete the Perry Brothers acquisition, the Company will need an investor
who will purchase a significant equity position in the Company. The Company has
retained Price Waterhouse LLP to assist in raising equity for the proposed
acquisition. If the Company issues equity securities to such an investor,
existing shareholders will experience dilution.
The Company does not intend to open any new Only Deals stores in 1997. The
Company expects to focus its attention on obtaining new financing, managing the
substantial growth in new Only Deals stores from 1996, and pursuing the
potential acquisition of Perry Brothers. The Company does not expect to have any
significant capital expenditures in 1997.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
Since December 31, 1996, the Company has been in default of covenants
under its Loan and Security Agreement with BankAmerica Business Credit,
Inc. (the "Lender"), primarily relating to minimum net worth and excess
borrowings made to Odd's-N-End's. The Company is not in default of
principal or interest payments on the line of credit. As a result of these
defaults, the Lender reduced the line of credit to $11 million at April
30, 1997 and further intends to reduce the credit line to $10 million at
May 31, 1997. Further, the Lender increased the interest rate on
outstanding borrowings from prime plus 1.5% to prime plus 3.5%. The
Company is currently negotiating with several potential lenders for a
replacement line of credit.
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.
The Company filed a Form 8-K dated March 6, 1997 stating that the Company
was in technical default of several covenants with its lender.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL INTERNATIONAL, INC.
DATE: May 14, 1997 By: /s/
-----------------------------
James A. Patineau
Chief Financial Officer
(principal financial
officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 337
<SECURITIES> 0
<RECEIVABLES> 6,169
<ALLOWANCES> 0
<INVENTORY> 22,937
<CURRENT-ASSETS> 31,548
<PP&E> 9,731
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,427
<CURRENT-LIABILITIES> 26,271
<BONDS> 1,890
0
0
<COMMON> 245
<OTHER-SE> 13,803
<TOTAL-LIABILITY-AND-EQUITY> 41,427
<SALES> 21,964
<TOTAL-REVENUES> 21,964
<CGS> 14,372
<TOTAL-COSTS> 14,372
<OTHER-EXPENSES> 9,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307
<INCOME-PRETAX> (2,440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,440)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
