<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, 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.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0776502
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(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5000 Winnetka Avenue North, New Hope, Minnesota 55428
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(Address of principal executive offices) (Zip Code)
(612) 533-1169
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(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
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On May 8, 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>
<S> <C> <C>
PART I FINANCIAL INFORMATION Page
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Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations
for the three months ended March 31,
1998 and 1997.............................................. 3
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997....................... 4
Consolidated Statements of Cash Flows
for the three months ended March 31,
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
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March 31, March 31,
1998 1997
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<S> <C> <C>
Net sales $15,501 $13,579
Cost of goods sold 8,586 7,301
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Gross margin 6,915 6,278
Selling, general and
administrative expenses 8,123 8,041
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Operating loss (1,208) (1,763)
Interest expense and other (345) (321)
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Loss from continuing operations (1,553) (2,084)
Loss from discontinued operations - (356)
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Net loss $(1,553) $(2,440)
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Basic and diluted loss per common share:
From continuing operations $ (.17) $ (.43)
From discontinued operations - (.07)
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$ (.17) $ (.50)
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Weighted average number of common
shares outstanding 9,393 4,893
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</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>
March 31, December 31,
1998 1997
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash $ 885 $ 1,053
Accounts receivable, less
allowance for doubtful
accounts of $462 for 1998
and $480 for 1997 416 312
Inventories 22,099 18,901
Other current assets 927 2,105
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Total current assets 24,327 22,371
Equipment and improvements, net 8,351 8,880
Other assets, net 134 137
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Total assets $32,812 $31,388
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit
agreement $11,573 $ 9,270
Current portion of long-term debt 637 634
Accounts payable 8,018 7,014
Accrued expenses 3,223 4,348
Due to related party 918 -
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Total current liabilities 24,369 21,266
Deferred income taxes 27 27
Long-term debt, less current portion 1,368 1,494
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Total liabilities 25,764 22,453
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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 (20,114) (18,561)
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Total shareholders' equity 7,048 8,601
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Total liabilities and
shareholders' equity $32,812 $31,388
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</TABLE>
See accompanying notes to unaudited
consolidated financial statements
4
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UNIVERSAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (In thousands)
<TABLE>
<CAPTION>
Three months ended
---------------------
March 31, March 31,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,553) $ (2,440)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Loss from discontinued operations - 356
Depreciation and amortization 385 369
Provision for inventory obsolescence
and shrinkage 251 271
Changes in operating assets and
liabilities:
Inventories (3,449) (4,628)
Other current assets 1,074 (126)
Accounts payable 1,004 3,171
Other current liabilities (974) (942)
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Net cash used by operating
activities (3,262) (3,969)
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Cash flows from investing activities:
Additions to equipment and
improvements (4) (40)
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Net cash used by investing
activities (4) (40)
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Cash flows from financing activities:
Net change in borrowings under
revolving credit agreement 2,303 2,609
Payments of long-term debt (123) (397)
Advances from related party 918 -
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Net cash provided by financing
activities 3,098 2,212
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Cash provided by discontinued operations - 1,613
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Net decrease in cash (168) (184)
Cash, beginning of period 1,053 521
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Cash, end of period $ 885 $ 337
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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
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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 March 31, 1998 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. 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 subsidiary, Universal Asset-Based Services,
Inc., 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 March 31, 1997
financial statements have been restated to reflect the discontinuation
of these segments. Revenues were $8,079 for the wholesale business and
$306 for Asset-Based Services for the three months ended March 31, 1997.
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 52 retail stores offering close-out merchandise in six states in the
Upper Midwest and in Texas. 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 retail operations sell consumer goods
in a variety of categories including toys, food, health and beauty aids,
housewares, and many others.
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 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
Ended March 31,
----------------
1998 1997
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(unaudited)
<S> <C> <C>
Net sales..................................... 100.0% 100.0%
Cost of goods sold............................ 55.4 53.8
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Gross margin.................................. 44.6 46.2
Selling, general and administrative
expenses.................................... 52.4 59.2
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Loss from operations.......................... (7.8)% (13.0)%
Interest expense and other.................... 2.2 2.4
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Loss from continuing operations............... (10.0) (15.4)
Loss from discontinued operations............. - (2.6)
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Net loss...................................... (10.0)% (18.0)%
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</TABLE>
FIRST THREE MONTHS OF FISCAL 1998 VERSUS 1997
Net sales for the quarter ended March 31, 1998 increased by $1,922,000 or 14.2%
from the corresponding period last year. The increase was due to a 5.6%
increase in comparable store sales and due to the addition of eight stores in
Texas in October 1997. These increases were offset by decreases from closing
six stores since March 31, 1997, including four stores which were closed in the
first quarter of 1998. At March 31, 1998, the Company had 52 Only Deals stores
and 22 Odd's-N-End's stores in operation compared to 50 and 22, respectively, at
March 31, 1997.
Gross margins for the first quarter of 1998 decreased as a percent of sales to
44.6% from 46.2% in the same quarter last year. 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 $8.1 million or 52.4% of
net sales in the first quarter of 1998 compared to $8.0 million or 59.2% of
net sales in the first quarter of 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 $345,000 in the first quarter of 1998
compared to $321,000 in the first quarter of 1997 due to an increase in
outstanding borrowings under the current revolving credit facility.
The loss from discontinued operations was $356,000 during the first quarter
of 1997 on sales of $8.1 million for the wholesale business and $306,000 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 March 31, 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 March 31, 1998, based on the borrowing base, was $14
million, of which there were outstanding borrowings of $11.6 million and
outstanding borrowings on the term loan of $1.6 million.
9
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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 filed a
registration statement in April 1998 with respect to an exchange offer 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 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.
Net cash used by operating activities was $3.5 million for the quarter ended
March 31, 1998 principally due to a $1.8 million net loss, a $3.4 million
increase in inventories, and a $1.0 million increase in accounts payable.
The $3.5 million net cash used by operating activities was funded primarily
by a $2.3 million increase in borrowings under the revolving credit facility
and $1.1 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 $10.4
million under this agreement as of March 31, 1998.
The Company currently plans to open one new Only Deals store in 1998. The
Company does not expect to have any significant capital expenditures in 1998.
10
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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.
The Company filed a Form 8-K/A dated January 8, 1998 relating to the
change in certifying accountants. The Company filed a Form 8-K dated
February 10, 1998 relating to the sale of Universal Asset-Based
Services, Inc. In addition, the Company filed a Form 8-K dated April
24, 1998 regarding an amendment to its Shareholders Rights Agreement.
11
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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, 1998 By: /s/
-----------------------------------
Dennis A. Hill
Chief Financial Officer
(principal financial
officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 885
<SECURITIES> 0
<RECEIVABLES> 416
<ALLOWANCES> 0
<INVENTORY> 22,099
<CURRENT-ASSETS> 24,327
<PP&E> 8,351
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,812
<CURRENT-LIABILITIES> 24,369
<BONDS> 1,368
0
0
<COMMON> 470
<OTHER-SE> 6,578
<TOTAL-LIABILITY-AND-EQUITY> 32,812
<SALES> 15,501
<TOTAL-REVENUES> 15,501
<CGS> 8,586
<TOTAL-COSTS> 8,856
<OTHER-EXPENSES> 8,123
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (345)
<INCOME-PRETAX> (1,553)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,553)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
