<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: June 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: 0-18823
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 X No
------- -------
On August 10, 1998 there were 9,393,328 shares of the registrant's $.05 par
value Common Stock outstanding.
1
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UNIVERSAL INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations
for the three and six months ended
June 30, 1998 and 1997................................ 3
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997................... 4
Consolidated Statements of Cash Flows
for the six months ended June 30,
1998 and 1997......................................... 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.......................................... 11
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
</TABLE>
2
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UNIVERSAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $17,631 $13,613 $33,132 $27,192
Cost of goods sold 9,946 7,468 18,532 14,769
------- ------- ------- -------
Gross margin 7,685 6,145 14,600 12,423
Selling, general and
administrative expenses 8,357 7,872 16,480 15,913
------- ------- ------- -------
Operating loss (672) (1,727) (1,880) (3,490)
Interest expense and other (362) (327) (707) (648)
------- ------- ------- -------
Loss from continuing
operations (1,034) (2,054) (2,587) (4,138)
Loss from discontinued
operations - (1,176) - (1,532)
------- ------- ------- -------
Net loss $(1,034) $(3,230) $(2,587) $(5,670)
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted loss per common share:
From continuing
operations $ (.11) $ (.42) $ (.28) $ (.85)
From discontinued
operations - (.24) - (.31)
------- ------- ------- -------
$ (.11) $ (.66) $ (.28) $ (1.16)
------- ------- ------- -------
------- ------- ------- -------
Weighted average number
of common shares
outstanding 9,393 4,893 9,393 4,893
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to unaudited
consolidated financial statements
3
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UNIVERSAL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash $ 474 $ 1,053
Accounts receivable, less
allowance for doubtful
accounts of $398 for 1998
and $480 for 1997 225 312
Inventories 23,388 18,901
Other current assets 1,227 2,105
-------- --------
Total current assets 25,314 22,371
Equipment and improvements, net 8,134 8,880
Other assets, net 130 137
-------- --------
Total assets $ 33,578 $ 31,388
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit
agreement $11,462 $ 9,270
Current portion of long-term debt 1,612 634
Accounts payable 4,105 7,014
Accrued expenses 3,050 4,348
Due to related party 7,119 -
------- --------
Total current liabilities 27,348 21,266
Deferred income taxes 27 27
Long-term debt, less current portion 189 1,494
------- --------
Total liabilities 27,564 22,453
------- --------
Shareholders' equity:
Common stock, $.05 par value,
75,000 shares authorized;
9,393 shares issued and
outstanding for 1998 and 1997 470 470
Additional paid-in capital 26,692 26,692
Accumulated deficit (21,148) (18,561)
------- --------
Total shareholders' equity 6,014 8,601
------- --------
Total liabilities and
shareholders' equity $33,578 $ 31,388
------- --------
------- --------
</TABLE>
See accompanying notes to unaudited
consolidated financial statements
4
<PAGE>
UNIVERSAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
June 30, June 30,
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,587) $(5,670)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Loss from discontinued operations - 1,532
Depreciation and amortization 764 773
Changes in operating assets and
liabilities:
Inventories (4,487) (1,917)
Other current assets 965 (662)
Accounts payable (2,909) 2,754
Other current liabilities (1,147) (1,671)
------- -------
Net cash used by operating
activities (9,401) (4,861)
------- -------
Cash flows from investing activities:
Additions to equipment and
improvements (162) (70)
------- -------
Net cash used by investing
activities (162) (70)
------- -------
Cash flows from financing activities:
Net change in borrowings under
revolving credit agreement 2,192 281
Proceeds from long-term debt - 1,872
Payments of long-term debt (327) (1,773)
Advances from related party 7,119 -
------- -------
Net cash provided by financing
activities 8,984 380
------- -------
Cash provided by discontinued operations - 4,334
------- -------
Net decrease in cash (579) (217)
Cash, beginning of period 1,053 521
------- -------
Cash, end of period $ 474 $ 304
------- -------
------- -------
Schedule of noncash investing transactions:
Writeoff of equipment and improvements
related to store closings $ 151 $ -
</TABLE>
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 1997 Form 10-K, as
amended.
The financial statements presented herein as of June 30, 1998 and for the
six 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. Discontinued Operations
During 1997, the Company liquidated its wholesale inventory and eliminated
its wholesale business. Also during 1997, the Company adopted a plan to
sell its 95%-owned subsidary, Universal Asset-Based Services, which sale
was completed in January 1998 with no material financial impact to the
Company. These business segments have been accounted for as discontinued
operations, and the June 30, 1997 financial statements have been restated
to reflect the discontinuation of these segments. Revenues were $5,646 and
$13,725 for the wholesale business and $215 and $521 for Asset-Based
Services for the three and six months ended June 30, 1997, respectively.
3. Subsequent Event
During July 1998 the Company acquired an additional 1,500 shares of
Odd's-N-End's, Inc. common stock through the conversion of $450 of its
revolving note receivable from Odd's-N-End's at a conversion rate of
$.30 per share. This transaction increased the Company's ownership
interest in Odd's-N-End's from 40.5% to 54.8%.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Universal International, Inc. ("Universal" or the "Company"), through
its wholly owned subsidiary, Only Deals, Inc. ("Only Deals"), owns and
operates 51 retail stores offering close-out merchandise in five states
in the Upper Midwest and in Texas. The Company, through its 54.8%
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 retail
operations sell consumer goods in a variety of categories including
toys, food, health and beauty aids, housewares, and many others.
During July 1998 the Company acquired an additional 1.5 million shares
of Odd's-N-End's, Inc. common stock through the conversion of $450,000
of its revolving note receivable from Odd's-N-End's. This transaction
increased the Company's ownership interest in Odd's-N-End's from 40.5%
to 54.8%.
RECENT DEVELOPMENTS
In February 1998, 99CENTS Only Stores, which owns 48% of the Company's
common stock, made a proposal to the Company's Board of Directors to
acquire the remaining shares of the Company's common stock in exchange
for shares of common stock of 99CENTS Only Stores. 99CENTS Only Stores
commenced the exchange offer on August 7, 1998 pursuant to an effective
registration statement. The exchange offer provides for an exchange of
one share of 99CENTS Only Stores common stock for each 16 shares of the
Company's common stock. The exchange offer is subject to approval of the
shareholders of the Company. The meeting of the Company's shareholders
will be held on September 15, 1998.
FORWARD LOOKING INFORMATION
Information contained in this Form 10-Q includes "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 additional financing from 99CENTS Only
Stores, 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
<TABLE>
<CAPTION>
Three Months Six Months
ENDED JUNE 30, ENDED JUNE 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......... 56.4 54.9 55.9 54.3
----- ----- ----- -----
Gross margin................ 43.6 45.1 44.1 45.7
Selling, general and
administrative expenses... 47.4 57.8 49.8 58.5
----- ----- ----- -----
Loss from operations........ (3.8)% (12.7)% (5.7)% (12.8)%
Interest expense and other.. 2.1 2.4 2.1 2.4
----- ----- ----- -----
Loss from continuing
operations................ (5.9) (15.1) (7.8) (15.2)
Loss from discontinued
operations................ - (8.6) - (5.6)
----- ----- ----- -----
Net loss.................... (5.9)% (23.7)% (7.8)% (20.8)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 1997
Net sales for the second quarter and six months ended June 30, 1998 increased
by $4,018,000 or 29.2% and $5,940,000 or 21.8%, respectively, from the
corresponding periods last year. The increase was due to increases in
comparable store sales of 17.8% for the second quarter and 11.7% for the six
months ended June 30, 1998 and due to the addition of eight stores in Texas
in October 1997. These increases were offset by decreases from closing eight
stores since the first quarter of 1997, including six stores which were
closed in the first half of 1998. At June 30, 1998, the Company had 51 Only
Deals stores and 22 Odd's-N-End's stores in operation compared to 50 and 22,
respectively, at June 30, 1997.
Gross margins decreased as a percent of sales to 43.6% for the second quarter
and 44.1% for the six months ended June 30, 1998 compared to 45.1% and 45.7%
from the corresponding periods of 1997. This change is primarily due to an
increase in the sale of lower margin consumable merchandise.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses were $8.4 million or 47.4% of
net sales in the second quarter of 1998 compared to $7.9 million or 57.8% of
net sales in the second quarter of 1997 and were $16.5 million or 49.8% of
net sales for the six months ended June 30, 1998 compared to $15.9 million or
58.5% of net sales for the six months ended June 30, 1997. The decrease in
selling, general and administrative expenses as a percent of sales was
primarily due to implementation of cost reduction programs affecting
corporate overhead and store operations. In addition, expenses decreased as
a percent of sales due to the increase in sales, since many of the Company's
costs are fixed.
Interest expense and other increased to $362,000 in the second quarter and
$707,000 for the six months ended June 30, 1998 compared to $327,000 and
$648,000, respectively in the corresponding periods of 1997 due to an
increase in outstanding borrowings under the current revolving credit
facility.
The loss from discontinued operations was $1,532,000 during the six months
ended June 30, 1997 on sales of $13.7 million for the wholesale business and
$521,000 for Universal Asset-Based Services, Inc., both of which discontinued
operations during 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a revolving credit agreement which provides for borrowings up
to $14 million against a borrowing base derived from the level of qualifying
accounts receivable and inventory. The agreement expires in June 1999, but
may be automatically renewed each year thereafter at the option of both the
lender and the Company. Borrowings under the agreement are collateralized by
substantially all assets of the Company, and outstanding borrowings bear
interest at prime plus 2% (the prime rate at June 30, 1998 was 8.5%). The
Company also obtained $1.9 million of term loan financing, which is included
in the total line limit. The term note is payable in monthly installments of
$39,000 plus interest at prime plus 2% through June 30, 1999, at which time
the remaining balance is due. The term note is collateralized by the
Company's equipment and fixtures. The amount available under the revolving
credit agreement at June 30, 1998, based on the borrowing base, was $14
million, of which there were outstanding borrowings of $11.5 million and
outstanding borrowings on the term loan of $1.4 million.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In February 1998, 99CENTS Only Stores, which owns 48% of the Company's common
stock, made a proposal to the Company's Board of Directors to acquire the
remaining shares of the Company's common stock in exchange for shares of
common stock of 99CENTS Only Stores. 99CENTS Only Stores commenced the
exchange offer on August 7, 1998 pursuant to an effective registration
statement. The exchange offer provides for an exchange of one share of
99CENTS Only Stores common stock for each 16 shares of the Company's common
stock. The exchange offer is subject to approval of the shareholders of the
Company. The meeting of the Company's shareholders will be held on September
15, 1998. The Company expects that 99CENTS Only Stores will continue to
provide financial support to the Company through the closing date through
trade credits and other advances. There can be no assurance that the
acquisition will be completed or that 99CENTS Only Stores will provide
sufficient financing to operate the Company through the closing date.
In addition, 99CENTS Only Stores anticipates distribution of proxy materials
related to a previously announced proposed merger with Odd's-N-End's promptly
after final approval by the Securities Exchange Commission with subsequent
closing expected to be in September 1998. The Company currently owns 54.8% of
the outstanding common stock of Odd's-N-End's. The Company has given 99CENTS
Only Stores a proxy to vote its shares in the merger.
Net cash used by operating activities was $9.4 million for the six months
ended June 30, 1998 principally due to a $2.6 million net loss, a $4.5
million increase in inventories, and a $2.9 million decrease in accounts
payable. The $9.4 million net cash used by operating activities was funded
primarily by a $2.2 million increase in borrowings under the revolving credit
facility and $7.1 million advanced by 99CENTS Only Stores.
The Company has an agreement which provides for advances 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 $10.7
million under this agreement as of June 30, 1998.
The Company currently plans to open one new Only Deals store during the
remainder of 1998. The Company does not expect to have any significant
capital expenditures in 1998.
10
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
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.
Exhibit 10.12.3 Agreement with Odd's-N-End's Relating to Conversion of
Note.
11
<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: August 13, 1998 By: /s/
-----------------------------------
Dennis A. Hill
Chief Financial Officer
(principal financial
officer)
12
<PAGE>
Exhibit 10.12.3
AGREEMENT
This Agreement, dated as of July 24, 1998, is entered into by and
between Universal International, Inc., a Minnesota corporation ("Universal")
and Odd's-N-End's, Inc., a Delaware corporation ("Odds"), with reference to
the following facts:
RECITALS
A. Universal and Odd's are currently parties to that certain Amended and
Restated Loan and Security dated as of June 6, 1997.
B. Odd's is the maker of a Revolving Note in favor of Universal in the amount
of $10 million dated June 6, 1997, the outstanding balance of which is
currently $10.9 million.
C. The Revolving Note is payable on demand.
D. On July 24, 1998, Universal called $450,000.30 of the Revolving Note.
E. Odd's is presently unable to pay the $450,000.30 to Universal in cash.
NOW, THEREFORE, for an in consideration of the loans, advances and other
extensions of credit made to Odd's by Universal, and for other good and
valuable consideration, the parties hereto agree as follows:
AGREEMENT
1. CONVERSION OF NOTE: The parties hereto agree that in full satisfaction
of the $450,000.30 due and payable immediately to Universal by Odd's,
Odd's shall issue to Universal 1,500,000 shares of the common stock of
odd's, representing a conversion ratio of $.30 per share.
2. AMOUNT DUE: The parties hereto agree that upon payment in full of the
$450,000.30 of the Revolving Note pursuant to Section 1, the balance of
the Revolving Note shall be $10,450,000.
3. COVENANT OF ODD'S: Upon execution of this Agreement, Odd's hereby agrees
to instruct its transfer agent to issue 1,500,000 shares of the common
stock of Odd's in the name of Universal.
4. AMENDMENT OF NOTE: The parties agree that this Agreement shall be
attached to the Revolving Note as evidence of the payment in full of
$450,000.30 under such Revolving Note.
<PAGE>
5. FURTHER ASSURANCES: The parties agree to execute and deliver such other
instruments and take such other actions necessary to consummate the
transactions contemplated herehby.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first above written.
UNIVERSAL INTERNATIONAL, INC.
By: /s/ Richard Ennen
-----------------------------
Richard Ennen
President
ODD'S-N-END'S, INC.
By: /s/ Richard Ennen
-----------------------------
Richard Ennen
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 474
<SECURITIES> 0
<RECEIVABLES> 225
<ALLOWANCES> 0
<INVENTORY> 23,388
<CURRENT-ASSETS> 25,314
<PP&E> 8,134
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,578
<CURRENT-LIABILITIES> 27,348
<BONDS> 189
0
0
<COMMON> 470
<OTHER-SE> 5,544
<TOTAL-LIABILITY-AND-EQUITY> 33,578
<SALES> 33,132
<TOTAL-REVENUES> 33,132
<CGS> 18,532
<TOTAL-COSTS> 18,532
<OTHER-EXPENSES> 16,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (707)
<INCOME-PRETAX> (2,587)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,587)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,587)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
