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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2002
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 00019774
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United Retail Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 51 0303670
- ------------------------------ --------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
365 West Passaic Street, Rochelle Park, NJ 07662
- ------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 845-0880
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 (the "Exchange Act") 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 _______
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
YES _______ NO ___X____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Exchange Act subsequent to the distribution of securities under a plan
confirmed by a court.
YES _______ NO _______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date.
As of November 2, 2002, 12,937,304 units, each consisting of one
share of the registrant's common stock, $.001 par value per share, and one
stock purchase right, were outstanding. The units are referred to herein as
"shares."
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
November 2, February 2, November 3,
2002 2002 2001
--------------- --------------- ---------------
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $17,584 $27,812 $18,234
Accounts receivable 3,677 1,455 3,319
Inventory 70,080 61,793 68,886
Prepaid rents 5,002 4,860 4,785
Other prepaid expenses 4,117 3,454 4,996
--------------- --------------- ---------------
Total current assets 100,460 99,374 100,220
Property and equipment, net 89,270 88,621 87,658
Deferred charges and other intangible assets,
net of accumulated amortization of $2,809, $2,761
and $3,033 6,184 6,232 7,484
Deferred income taxes 2,106 1,184 1,206
Other assets 918 1,871 200
--------------- --------------- ---------------
Total assets $198,938 $197,282 $196,768
=============== =============== ===============
LIABILITIES
Current liabilities:
Short-term distribution center financing $1,439 $1,435 $1,407
Short-term capital leases 1,742 1,491
Accounts payable and other 41,928 32,963 38,567
Accrued expenses 21,048 20,339 22,291
Deferred income taxes 743 423 185
--------------- --------------- ---------------
Total current liabilities 66,900 56,651 62,450
Long-term distribution center financing 4,112 5,181 5,551
Long-term capital leases 6,123 7,213
Other long-term liabilities 6,803 6,433 6,372
--------------- --------------- ---------------
Total liabilities 83,938 75,478 74,373
--------------- --------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized
1,000,000 shares; none issued
Series A junior participating preferred stock, $.001
par value; authorized 150,000 shares; none issued
Common stock, $.001 par value; authorized
30,000,000 shares; issued 14,248,200; 14,236,000;
14,236,000 shares; outstanding 12,937,304;
13,203,633; 13,191,133 shares 14 14 14
Additional paid-in capital 83,524 80,408 80,375
Retained earnings 39,138 46,133 46,757
Treasury stock (1,310,896; 1,032,367; 1,044,867
shares) at cost (7,676) (4,751) (4,751)
--------------- --------------- ---------------
Total stockholders' equity 115,000 121,804 122,395
--------------- --------------- ---------------
Total liabilities and stockholders' equity $198,938 $197,282 $196,768
=============== =============== ===============
The accompanying notes are an integral part of the Consolidated Financial Statements.
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------------- ---------------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $97,019 $96,641 $326,267 $312,790
Cost of goods sold, including
buying and occupancy costs 79,693 75,858 257,091 238,455
----------- ----------- ----------- -----------
Gross profit 17,326 20,783 69,176 74,335
General, administrative and
store operating expenses 25,013 24,323 79,168 72,945
----------- ----------- ----------- -----------
Operating (loss) income (7,687) (3,540) (9,992) 1,390
Interest (expense) income, net (211) 45 (599) 453
----------- ----------- ----------- -----------
(Loss) income before income taxes (7,898) (3,495) (10,591) 1,843
(Benefit from) provision for income taxes (2,666) (1,209) (3,596) 789
----------- ----------- ----------- -----------
Net (loss) income ($5,232) ($2,286) ($6,995) $1,054
=========== =========== =========== ===========
Net (loss) income per share
Basic ($0.40) ($0.17) ($0.53) $0.08
=========== =========== =========== ===========
Diluted ($0.40) ($0.17) ($0.53) $0.08
=========== =========== =========== ===========
Weighted average number of
shares outstanding
Basic 12,937,304 13,213,441 13,082,989 13,246,968
Common stock equivalents
(stock options) 0 0 0 242,089
----------- ----------- ----------- -----------
Diluted 12,937,304 13,213,441 13,082,989 13,489,057
=========== =========== =========== ===========
The accompanying notes are an integral part of the Consolidated Financial Statements.
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
Thirty-Nine Weeks Ended
-------------------------------
November 2, November 3,
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Net (loss) income ($6,995) $1,054
Adjustments to reconcile net (loss) income to net cash
provided from (used in) operating activities:
Depreciation and amortization of property and equipment 9,194 8,004
Amortization of deferred charges and other
intangible assets 448 395
Loss on disposal of assets 356 60
Deferred compensation 234 233
Provision for deferred income taxes (602) (715)
Deferred lease assumption revenue amortization (108) (229)
Changes in operating assets and liabilities:
Accounts receivable (2,222) (746)
Income taxes (1,153) 995
Inventory (8,287) (9,884)
Accounts payable and accrued expenses 10,774 3,648
Prepaid expenses (805) (1,801)
Other assets and liabilities 923 (1,102)
------------ ------------
Net Cash Provided from (Used in) Operating Activities 1,757 (88)
------------ ------------
Investing Activities:
Capital expenditures (10,108) (18,199)
Deferred payment for property and equipment 534 1,325
Proceeds from sale of lease - 128
------------ ------------
Net Cash Used in Investing Activities (9,574) (16,746)
------------ ------------
Financing Activities:
Repayments of long-term debt (1,065) (1,025)
Payments on capital lease obligations (1,303) -
Issuance of loans to officers (52) (141)
Treasury stock acquired - (561)
Proceeds from exercise of stock options 49 26
Other (40) (12)
------------ ------------
Net Cash Used in Financing Activities (2,411) (1,713)
------------ ------------
Net decrease in cash and cash equivalents (10,228) (18,547)
Cash and cash equivalents, beginning of period 27,812 36,781
------------ ------------
Cash and cash equivalents, end of period $17,584 $18,234
============ ============
The accompanying notes are an integral part of the Consolidated Financial Statements.
UNITED RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of United
Retail Group, Inc. and its subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated.
The consolidated financial statements as of and for the thirteen and
thirty-nine weeks ended November 2, 2002 and November 3, 2001 are unaudited
and are presented pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, the consolidated financial statements should
be read in conjunction with the financial statement disclosures contained in
the Company's 2001 Annual Report and 2001 Form 10-K. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments necessary (which are of a normal recurring nature) to present
fairly the financial position and results of operations and cash flows for the
interim periods, but are not necessarily indicative of the results of
operations for a full fiscal year.
Certain prior year balances have been reclassified to conform with
the current year presentation.
2. Net (Loss) Income Per Share
---------------------------
Basic per share data has been computed based on the weighted average
number of shares of common stock outstanding. Diluted per share data has been
computed on the basic plus the dilution of stock options with the exception of
the thirteen and thirty-nine weeks ended November 2, 2002 and the thirteen
weeks ended November 3, 2001, where the effect of stock options is
anti-dilutive.
Options to purchase shares of common stock which were not included in
the computation of diluted net income per share because the exercise prices
were greater than the average market price of the common shares were as
follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ --------------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Options 1,671,172 840,072 916,872 842,472
Range of option prices per share $5.13 - $15.13 $7.56 - $15.13 $7.19 - $15.13 $7.56 - $15.13
3. Financing Arrangements
----------------------
In 1993, the Company executed a ten-year $7.0 million note bearing
interest at 7.3%. Interest and principal are payable in equal monthly
installments beginning November 1993. The note is collateralized by the
material handling equipment in the distribution center.
In 1994, the Company executed a fifteen-year $8.0 million loan
bearing interest at 8.64%. Interest and principal are payable in equal monthly
installments beginning May 1994. The loan is collateralized by a mortgage on
the national distribution center owned by the Company in Troy, Ohio.
The Company and certain of its subsidiaries (collectively, the
"Companies") are parties to a Financing Agreement, dated August 15, 1997 (the
"Financing Agreement"), with The CIT Group/Business Credit, Inc.("CIT"). The
Financing Agreement provides a revolving line of credit for a term ending
August 15, 2005 in the aggregate amount of $40 million for the Companies,
subject to availability of credit according to a borrowing base computation.
The line of credit may be used on a revolving basis by any of the Companies to
support trade letters of credit and standby letters of credit and to finance
loans.
The Companies are required to maintain unused at all times combined
availability of at least $5 million. Except for the maintenance of a minimum
availability of $5 million and a limit on capital expenditures, the Financing
Agreement does not contain any significant financial covenants.
In the event a loan is made to one of the Companies, interest is
payable monthly based on a 360-day year at the prime rate or at two percent
plus the LIBOR rate on a per annum basis, at the borrower's option.
The line of credit is secured by a security interest in inventory and
proceeds and by the balance on deposit from time to time in a bank account
that has been pledged to the lenders.
The Financing Agreement also includes certain restrictive covenants
that impose limitations (subject to certain exceptions) on the Companies with
respect to, among other things, making certain investments, declaring or
paying dividends, making loans, engaging in certain transactions with
affiliates, or consolidating, merging or making acquisitions outside the
ordinary course of business.
At November 2, 2002, the combined availability of the Companies was
$20.4 million, no balance was in the pledged account, the aggregate
outstanding amount of letters of credit, including $1.3 million of standby
letters of credit, arranged by CIT was $19.6 million and no loan had been
drawn down. The Company's cash on hand was unrestricted.
In January 2002, the Company executed a five-year $8.2 million sale
and lease back agreement for certain fixtures in new and remodeled stores. The
lease bears an interest rate of 7.0% per annum. The Company was required to
pay sales tax as part of the agreement. The agreement provides for equal
monthly rent payments beginning February 2002 and gives the Company the option
of buying back the fixtures at the end of the term for a nominal price.
Between January 2002 and October 2002, the Company executed a series
of three-year capital lease agreements bearing interest at rates from 6.09% to
6.44% per annum in the aggregate of approximately $1.0 million for call center
systems at the Company's national distribution center in Troy, Ohio. The
Company has the option of buying the systems at the end of the term for a
nominal price.
4. Income Taxes
------------
The (benefit from) provision for income taxes consists of (dollars in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------ ------------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Currently payable:
Federal ($3,087) ($1,213) ($3,243) $1,270
State 83 (21) 249 234
----------- ----------- ----------- -----------
(3,004) (1,234) (2,994) 1,504
----------- ----------- ----------- -----------
Deferred:
Federal 279 20 (495) (589)
State 59 5 (107) (126)
----------- ----------- ----------- -----------
338 25 (602) (715)
----------- ----------- ----------- -----------
($2,666) ($1,209) ($3,596) $789
=========== =========== =========== ============
Reconciliation of the (benefit from) provision for income taxes from
the U.S. Federal statutory rate to the Company's effective rate is as follows
(dollars in thousands):
Thirteen Weeks Ended
-------------------------------------
November 2, 2002 November 3, 2001
----------------- ----------------
Tax at Federal rate ($2,764) (35.0%) ($1,222) (35.0%)
State income taxes, net of
Federal benefit 92 (1.1%) (10) (0.3%)
Other 6 0.1% 18 0.5%
Goodwill amortization - 0.0% 5 0.2%
------- ------ -------- ------
($2,666) (33.8%) ($1,209) (34.6%)
======= ====== ======== ======
Thirty-Nine Weeks Ended
-------------------------------------
November 2, 2002 November 3, 2001
----------------- ----------------
Tax at Federal rate ($3,707) (35.0%) $647 35.0%
State income taxes, net of
federal benefit 92 0.8% 70 3.8%
Goodwill amortization - 0.0% 54 3.0%
Other 19 0.2% 18 1.0%
------- ------ -------- ------
($3,596) (34.0%) $789 42.8%
======== ====== ======== ======
The net deferred tax asset reflects the tax impact of temporary
differences. The components of the net deferred tax asset as of November 2,
2002 are as follows (dollars in thousands):
Net long-term asset:
Accruals and reserves $3,235
State NOL's 1,360
Compensation 534
Depreciation (3,023)
-------
$2,106
-------
Net current liability:
Prepaid rent $1,861
Accruals and reserves (468)
Inventory (650)
-------
$743
-------
Net deferred tax asset $1,363
-------
Future realization of the tax benefits attributable to the existing
deductible temporary differences and NOL carryforwards ultimately depends on
the existence of sufficient taxable income within the carryforward period
available under the tax law at the time of the tax deduction. Based on
management's assessment, it is more likely than not that the net deferred tax
asset will be realized through future taxable earnings or available
carrybacks. The NOL's are scheduled to expire beginning in tax years fiscal
2002 through fiscal 2017.
5. Advances To Officers
--------------------
Advances were made by the Company in February 1998, February 1999 and
November 1999 to Raphael Benaroya, the Company's Chairman of the Board,
President and Chief Executive Officer. The purpose of the advances was to
finance payment of income taxes incurred in connection with the exercise of
stock options, totaling approximately $2.3 million. Cumulative interest on the
advances at the prime rate through November 30, 2001 was approximately $0.5
million. On November 30, 2001, Mr. Benaroya signed a consolidated promissory
note in the amount of approximately $2.8 million, representing the cumulative
advances and accrued interest as of that date, with a term of two years. Mr.
Benaroya repaid the note with accrued interest as of July 1, 2002 by
surrendering 278,529 shares of Company common stock. The surrendered shares
had a value equivalent to the consolidated note based on the closing price on
the NASDAQ Stock Market on the preceding trading day. The Compensation
Committee of the Board of Directors, which administers the stock option
program, met on the morning of July 1, 2002 and approved the transaction.
6. Stock Appreciation Rights Plan
------------------------------
In May 2000, May 2001 and May 2002, each non-management Director
received an annual award (a "SAR Award") under the Company's Stock
Appreciation Rights Plan that provides for a cash payment by the Company when
the Director exercises the stock option granted to him contemporaneously. The
payment will be an amount equivalent to the after tax equity in the option
that is being exercised, that is, the excess of the then current market price
of the shares issued over the exercise price of the corresponding option net
of any personal income tax withholding on the gain arising from the exercise.
7. Segment Information
-------------------
The Company operates its business in two reportable segments: Avenue
Retail and Shop @ Home (see Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Quarterly Report on Form 10-Q for
the period ended November 2, 2002). In deciding how to allocate resources and
assess performance, the Company regularly evaluates the performance of its
operating segments on the basis of net sales and earnings from operations.
Certain information relating to the Company's reportable operating
segments is set forth below (dollars in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- ----------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
------------- ----------- ------------ -------------
Net sales:
Avenue Retail $95,080 $94,586 $320,200 $303,397
Shop @ Home 1,939 2,055 6,067 9,393
------------- ----------- ------------ -------------
$97,019 $96,641 $326,267 $312,790
------------- ----------- ------------ -------------
(Loss) earnings from operations*:
Avenue Retail ($3,525) ($767) $1,662 $12,459
Shop @ Home (1,108) (1,230) (3,621) (4,554)
------------- ----------- ------------ -------------
($4,633) ($1,997) ($1,959) $7,905
============= =========== ============ =============
* Represents (loss) earnings from operations before unallocated
corporate expenses.
The Company evaluates the performance of its assets on a consolidated
basis. Therefore, separate financial information for the Company's assets on a
segment basis is not available.
The following table sets forth a reconciliation of the reportable
segment's (loss) earnings from operations to the Company's consolidated (loss)
income before income taxes (dollars in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- --------------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Loss) earnings from operations
for reportable segments ($4,633) ($1,997) ($1,959) $7,905
Unallocated
corporate expenses (3,054) (1,543) (8,033) (6,515)
Interest (expense) income, net (211) 45 (599) 453
------------ ------------ ------------ ------------
(Loss) income before
income taxes ($7,898) ($3,495) ($10,591) $1,843
============ ============ ============ ============
8. New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). This
statement is effective for fiscal years beginning after December 15, 2001 and
may not be retroactively applied to financial statements of prior periods.
Companies are required to reassess the useful lives of all intangible assets
and will no longer amortize goodwill. Additionally, goodwill will be subject
to an impairment test initially and annually thereafter. The impairment test
for goodwill is a two-step process. The first step of the transitional
impairment test consists of comparing the carrying amount of the net assets of
each reporting unit identified (a concept introduced within SFAS No. 142),
including goodwill, to its fair value. If the carrying amount exceeds the fair
value, the second step of the goodwill impairment test must be completed as
soon as possible, but no later than the end of the year of adoption. The
second impairment test consists of comparing the implied fair value (as
defined in SFAS No. 142) of the reporting unit's goodwill to its carrying
value.
The Company adopted SFAS No. 142 in the first quarter of fiscal 2002.
The Company has approximately $5,611,000 in goodwill as of February 2, 2002
and amortized approximately $206,000 in fiscal 2001. As a result of the
adoption of SFAS No. 142, the Company will no longer amortize its goodwill,
which will reduce operating expense. (The Company does not have any intangible
assets with indefinite lives, other than goodwill.) Management has completed
the transitional goodwill impairment test and has determined that no
impairment exists as a result of the adoption of SFAS No. 142. The Company
will continue to test goodwill for impairment in the fourth quarter of each
year and between annual tests if events occur or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying value.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This statement is
effective for fiscal years beginning after December 15, 2001. The objectives
of SFAS No. 144 are to address significant issues relating to the
implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed Of," establish a single accounting model for
the disposal of long-lived assets, provide impairment criteria for all
amortizable intangible assets and eliminate the exception to consolidation for
a subsidiary for which control is likely to be temporary. SFAS No. 144 extends
discontinued operations reporting to any component of an entity with
operations and cash flows that can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity. SFAS No. 144
was adopted by the Company at the beginning of fiscal 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement rescinds or amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. SFAS No.
145 is effective for transactions occurring after May 15, 2002. The Company
has adopted the provisions of this standard and such adoption had no impact on
the Company's financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. This statement nullifies EITF No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is
incurred. FASB Concept Statement No. 6, "Elements of Financial Statements"
defines when a liability is incurred.
9. Supplemental Cash Flow Information
----------------------------------
Non-cash financing activities include the repayment of an officer
loan with accrued interest as of July 1, 2002 with the repayment made by
surrendering 278,529 shares of Company common stock with a market value equal
to the principal and interest, in lieu of cash payment.
Non-cash investing activities include $0.5 million related to capital
lease obligations incurred during fiscal 2002.
10. Contingencies
-------------
The Company is involved in legal actions and claims arising in the
ordinary course of business. Management believes (based on advice of legal
counsel) that such litigation and claims will not have a material adverse
effect on the Company's financial position, annual results of operations or
cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third quarter of fiscal 2002 versus third quarter of fiscal 2001
- ----------------------------------------------------------------
Net sales for the third quarter of fiscal 2002 increased 0.4% from the third
quarter of fiscal 2001, to $97.0 million from $96.6 million from an increase
in units sold. Comparable store sales for the third quarter of fiscal 2002
decreased 1.9%. Average stores open increased from 546 to 555. (There is no
assurance that average stores open will continue to increase.) Internet and
catalog (collectively, "shop@home") sales were $1.9 million in the third
quarter of fiscal 2002 compared with $2.1 million in the third quarter of
fiscal 2001, primarily from a reduction in the number of catalogs mailed.
Gross profit was $17.3 million in the third quarter of fiscal 2002 compared
with $20.8 million in the third quarter of fiscal 2001, decreasing as a
percentage of net sales to 17.9% from 21.5%. The decrease in gross profit as a
percentage of net sales was primarily from lower merchandise margins. Gross
profit levels in the future will be subject to the uncertainties and other
risk factors referred to under the caption "Future Results."
General, administrative and store operating expenses increased to $25.0
million in the third quarter of fiscal 2002 from $24.3 million in the third
quarter of fiscal 2001, primarily from increases in group health insurance
claims, one-time professional fees and disbursements in connection with a
review of a corporate acquisition possibility (see, "Other Matters - Corporate
Acquisition Reviews") and insurance expense as percentages of net sales
partially offset by an increase in private label credit card program royalties
from World Financial Network National Bank and a reduction in shop@home
expenses. As a percentage of net sales, general, administrative and store
operating expenses increased to 25.8% from 25.2%.
The Company incurred operating losses of $7.7 million in the third quarter of
fiscal 2002 and $3.5 million in the third quarter of the previous year.
Operating losses reflect the combined results of two business segments, retail
store sales and shop@home sales. During the third quarter of fiscal 2002, the
loss from operations before unallocated corporate expenses was $3.5 million
from retail store sales and $1.1 million from shop@home sales. During the
third quarter of fiscal 2001, the loss from operations before unallocated
corporate expenses was $0.8 million from retail store sales and $1.2 million
from shop@home sales.
Net interest expense was $0.2 million in the third quarter of fiscal 2002 and
was zero in the third quarter of fiscal 2001, as a result of higher
borrowings, lower interest rates on cash balances and lower cash balances.
The Company had a benefit from income taxes of $2.7 million in the third
quarter of fiscal 2002 and $1.2 million in the third quarter of fiscal 2001.
The Company incurred net losses of $5.2 million in the third quarter of fiscal
2002 and $2.3 million in the third quarter of fiscal 2001.
See, "Critical Accounting Policies" for a discussion of estimates made by
management in preparing financial statements in accordance with generally
accepted accounting principles.
First 39 weeks of fiscal 2002 versus first 39 weeks of fiscal 2001
- ------------------------------------------------------------------
Net sales for the first 39 weeks of fiscal 2002 increased 4.3% from the first
39 weeks of fiscal 2001 to $326.3 million from $312.8 million from an increase
in units sold. Comparable store sales for the first 39 weeks of fiscal 2002
increased 1.6%. Average stores open increased from 537 to 555. Shop@home sales
were $6.1 million in the first 39 weeks of fiscal 2002 compared with $9.4
million in the first 39 weeks of fiscal 2001, primarily from a reduction in
the number of catalogs mailed.
Gross profit was $69.2 million in the first 39 weeks of fiscal 2002 compared
with $74.3 million in the first 39 weeks of fiscal 2001, decreasing as a
percentage of net sales to 21.2% from 23.8%. The decrease in gross profit as a
percentage of net sales was primarily from lower merchandise margins.
General, administrative and store operating expenses increased to $79.2
million in the first 39 weeks of fiscal 2002 from $72.9 million in the first
39 weeks of fiscal 2001, primarily from increases in insurance expense, store
payroll and group health insurance claims as percentages of net sales
partially offset by lower shop@home expenses. (There is no assurance that
insurance expense, store payroll and group health insurance claims will not
continue to increase as percentages of net sales.) As a percentage of net
sales, general, administrative and store operating expenses increased to 24.3%
from 23.3%.
The Company incurred an operating loss of $10.0 million in the first 39 weeks
of fiscal 2002 compared with operating income of $1.4 million in the first 39
weeks of the previous year. Operating results reflect the combined results of
two business segments, retail store sales and shop@home sales. During the
first 39 weeks of fiscal 2002, the income (loss) from operations before
unallocated corporate expenses was $1.7 million from retail store sales and
($3.6 million) from shop@home sales. During the first 39 weeks of fiscal 2001,
the income (loss) from operations before unallocated corporate expenses was
$12.5 million from retail store sales and ($4.6 million) from shop@home sales.
Net interest expense was $0.6 million in the first 39 weeks of fiscal 2002 and
net interest income was $0.5 million in the first 39 weeks of fiscal 2001, as
a result of lower interest rates on cash balances, higher borrowings and lower
cash balances.
The Company had a (benefit from) provision for income taxes of ($3.6 million)
in the first 39 weeks of fiscal 2002 and $0.8 million in the first 39 weeks of
fiscal 2001.
The Company incurred a net loss of $7.0 million in the first 39 weeks of
fiscal 2002 and had net income of $1.1 million in the first 39 weeks of
fiscal 2001.
November Sales
- --------------
Net sales for November 2002 decreased 3.2% from November 2001 to $33.2 million
from $34.3 million. Comparable store sales for the month decreased 4.5%.
Liquidity and Capital Resources
- -------------------------------
Net Cash from Operations
During the 39 weeks ended November 2, 2002, net cash provided from operating
activities was $1.8 million.
Balance Sheet Sources of Liquidity
The Company's cash and cash equivalents were substantially unchanged at $17.6
million at November 2, 2002 compared with $18.2 million at November 3, 2001.
Cash and cash equivalents were $27.8 million at February 2, 2002.
Inventory increased to $70.1 million at November 2, 2002 from $68.9 million at
November 3, 2001 and $61.8 million at February 2, 2002 principally as a result
of a 2.2% increase in the average retail selling square footage during the
12-month period ended November 2, 2002. (See, "Critical Accounting Policies -
Inventory" for a discussion of estimates made by management in stating
inventory in financial statements prepared in accordance with generally
accepted accounting principles.)
Property and equipment, net increased to $89.3 million at November 2, 2002
from $87.7 million at November 3, 2001 and $88.6 million at February 2, 2002,
primarily from a new shop@home call center and fulfillment capability at the
Company's national distribution center in Troy, Ohio, and from constructing
new stores and remodeling existing stores.
Other Liquidity Sources
Import purchases by the Company are made in U.S. dollars, are generally
financed by trade letters of credit and constituted approximately 54% of total
purchases in fiscal 2001.
United Retail Group, Inc. and certain of its subsidiaries (collectively, the
"Companies") are parties to a Financing Agreement, dated August 15, 1997, as
amended (the "Financing Agreement"), with The CIT Group/Business Credit, Inc.
("CIT"). The Financing Agreement provides a revolving line of credit for a
term ending August 15, 2005 in the aggregate amount of $40 million for the
Companies, subject to availability of credit as described in the following
paragraphs. The line of credit may be used on a revolving basis by any of the
Companies to support trade letters of credit and standby letters of credit and
to finance loans. As of November 2, 2002, trade letters of credit for the
account of the Companies and supported by CIT were outstanding in the amount
of $18.3 million and standby letters of credit were outstanding in the amount
of $1.3 million, principally in connection with insurance policies issued to
the Company.
Subject to the following paragraph, the availability of credit (within the
aggregate $40 million line of credit) to any of the Companies at any time is
the excess of its borrowing base over the sum of (x) the aggregate outstanding
amount of its letters of credit and its revolving loans, if any, and (y) at
CIT's option, the sum of (i) unpaid sales taxes, and (ii) up to $500,000 in
total liabilities of the Companies under permitted encumbrances (as defined in
the Financing Agreement). The borrowing base, as to any of the Companies, is
the sum of (x) a percentage of the book value of its eligible inventory (both
on hand and unfilled purchase orders financed with letters of credit), ranging
from 60% to 65% depending on the season, and (y) the balance from time to time
in an account in its name that has been pledged to the lenders (a "Pledged
Account"). (At November 2, 2002, the combined availability of the Companies
was $20.4 million; the Pledged Account had a zero balance; the Companies' cash
on hand was unrestricted; and no loan had been drawn down.)
The provisions of the preceding paragraph to the contrary notwithstanding, the
Companies are required to maintain unused at all times combined availability
of at least $5 million. Except for the maintenance of a minimum availability
of $5 million and a limit on capital expenditures, the Financing Agreement
does not contain any financial covenants.
The line of credit is secured by a security interest in inventory and proceeds
and by the balance from time to time in the Pledged Account.
The Financing Agreement includes certain restrictive covenants that impose
limitations (subject to certain exceptions) on the Companies with respect to,
among other things, making certain investments, declaring or paying dividends,
making loans, engaging in certain transactions with affiliates, or
consolidating, merging or making acquisitions outside the ordinary course of
business. In the event a revolving loan is made to one of the Companies,
interest is payable monthly based on a 360-day year at the prime rate or at
LIBOR plus two percent on a per annum basis, at the borrower's option.
Short-term trade credit represents a significant source of financing for
domestic merchandise purchases. Trade credit arises from the willingness of
the Company's domestic vendors to grant extended payment terms for inventory
purchases and is generally financed either by the vendor or a third-party
factor. The availability of trade credit depends on the Company's liquidity in
general and the amount of its cash and cash equivalents and availability of
unused credit under the Financing Agreement in particular.
As of July 1, 2002, an outstanding loan to a Company officer in the principal
amount of approximately $2.8 million plus accrued interest was paid by the
surrender of 278,529 shares of Company stock that the officer owned. The
repurchased shares became treasury stock. The repurchased shares had a value
equivalent to the loan based on the closing price on the NASDAQ Stock Market
on the preceding trading day. (The exchange was approved in advance by the
Compensation Committee of the Board of Directors on the morning of July 1,
2002.)
Certain Contractual Obligations and Certain Other Commercial Commitments
Certain contractual obligations of the Company and certain other commercial
commitments at November 2, 2002 (see, also "Critical Accounting Policies -
Incurred But Not Reported Claims For Personal Injuries and Medical Benefits")
are summarized in the following charts:
------------------------------------------------------------------------------------------------
Payments Due by Period (000's omitted)
Certain Contractual Obligations Item Total Less than After
(000's omitted) 1 Year 1-3 Years 4-5 Years 5 Years
- ---------------------------------- ------------------ ------------------ ------------------- ------------------- ------------------
Fixture Sale and Lease Back $ 7,066 $ 1,423 $ 3,453 $ 2,190 $ 0
- ---------------------------------- ------------------ ------------------ ------------------- ------------------- ------------------
Distribution Center Note $ 868 $ 868 $ 0 $ 0 $ 0
- ---------------------------------- ------------------ ------------------ ------------------- ------------------- ------------------
Distribution Center Mortgage $ 4,683 $ 571 $ 1,300 $ 1,545 $ 1,267
- ---------------------------------- ------------------ ------------------ ------------------- ------------------- ------------------
Call Center Capital Lease $ 799 $ 319 $ 480 $ 0 $ 0
- ---------------------------------- ------------------ ------------------ ------------------- ------------------- ------------------
Total $13,416 $ 3,181 $ 5,233 $ 3,735 $ 1,267
- -----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Amount of Commitment per Period (000's omitted)
- ---------------------------------- ----------------- ------------------- ------------------ ------------------- --------------------
Certain Other Commercial Item Total Less than Over
Commitments (000's omitted) 1 Year 1-3 Years 4-5 Years 5 Years
- ---------------------------------- ----------------- ------------------- ------------------ ------------------- --------------------
Operating Leases $ 303,010 $ 44,338 $ 77,004 $ 61,593 $ 120,075
- ---------------------------------- ----------------- ------------------- ------------------ ------------------- --------------------
Trade Letters of Credit* $ 18,309 $ 18,309 $ 0 $ 0 $ 0
- ---------------------------------- ----------------- ------------------- ------------------ ------------------- --------------------
Standby Letters of Credit $ 1,250 $ 1,250 $ 0 $ 0 $ 0
- ---------------------------------- ----------------- ------------------- ------------------ ------------------- --------------------
Total $ 322,569 $ 63,897 $ 77,004 $ 61,593 $ 120,075
- -----------------------------------------------------------------------------------------------------------------------------------
_________
*Trade letters of credit support certain Company obligations under purchase orders for merchandise imports for which
payment is not yet due. (Other purchase orders are not supported by trade letters of credit.)
Total Cash Requirements
The Company expects that net cash will be provided from operating activities
during the next 12 months. On that assumption, the Company believes that its
cash on hand and the availability of short-term trade credit and of credit
under the Financing Agreement on a revolving basis will be adequate for the
next 12 months to meet its cash requirements, including (i) anticipated
working capital needs, including seasonal inventory financing, (ii) investing
activities, including construction costs for the stores that it is committed
to open (see, "Stores") and (iii) financing activities, including payments due
on its principal contractual obligations. This paragraph constitutes
forward-looking information under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act") and is subject to the uncertainties and other risk
factors referred to under the caption "Future Results."
Critical Accounting Policies
- ----------------------------
Introduction
Financial statements prepared by companies in accordance with generally
accepted accounting principles are affected by the policies followed by their
managements in preparing them. Some accounting policies require difficult,
subjective or complex judgments by corporate management, often as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. Among the most important accounting policies of the Company that
involve such management judgments are (i) the use of the retail method of
accounting for inventory, (ii) the use of estimates of incurred but not
reported claims for uninsured damages for personal injuries, for self-insured
workers' compensation benefits and for benefits under the Company's
self-insured medical, dental and prescription plans for its associates, as
well as future development costs of reported claims (collectively, "IBNR
Claims") and (iii) the treatment of tax benefits from the Company's net
deferred tax asset.
Inventory
The margins at which the Company's inventories can be sold are central to its
business. In accordance with generally accepted accounting principles,
inventories are stated at the lower of cost or market. At November 2, 2002,
inventories were stated at $70.1 million. The Company utilizes the retail
method, under which a cost-to-price relationship is developed on the basis of
original cost as compared to initial retail selling price. The valuation of
inventories at cost and the resulting margins are calculated by applying this
cost-to-price relationship to the retail value of inventories. Permanent
markdowns, when taken, reduce both the price and cost components of inventory
on hand, which maintains the established cost-to-price relationship.
Consequently, the use of the retail inventory method results in valuing
inventories at lower of cost or market.
Inherent in the retail inventory method are management estimates on current
and future selling value of the inventory which can significantly impact the
ending inventory valuation at cost, as well as resulting margins. The
necessity for management estimates, coupled with the fact that the retail
inventory method is an averaging process, can produce inventory valuations at
any point in time that are inexact.
Further, deferred markdowns can result in an overstatement of inventory cost
under the lower of cost or market principle. Accordingly, at the end of each
fiscal quarter, management conducts a thorough review of inventory on hand
and, based on its business judgment, may reduce further the carrying value of
inventory by recording a markdown reserve for inventory with sales performance
below expectations and/or unsold quantities in excess of expectations.
Taking a markdown reserve reduces the inventory recorded on the Company's
balance sheet and is charged against the Company's cost of goods sold for the
quarter just ended. If inventories, net of reserves, were overestimated at the
end of a quarter, assets and income for that quarter would be overstated and
margins for the beginning of the next quarter would come in lower. (The
opposite would be true if inventories were underestimated.)
Consistency in inventory valuation practices is one of the Company's important
accounting objectives.
The Company's management believes that the inventory shown on the balance
sheets at November 2, 2002 and November 3, 2001 included in the financial
statements contained in this Quarterly Report (this "Report") were properly
stated in all material respects, subject to (i) changes in consumer spending
patterns, consumer preferences and overall economic conditions, (ii) changes
in weather patterns, (iii) the seasonality of the retail industry, (iv) risks
related to consumer acceptance of the Company's products, and (v) war risks.
Incurred But Not Reported Claims For Personal Injuries and Medical Benefits
In accordance with generally accepted accounting principles, the Company
records a liability for IBNR Claims, which is reflected in general,
administrative and store operating expenses as at the end of each fiscal
quarter. This liability is based on (i) the number and size of outstanding
claims, (ii) a comparison between the dates claims were incurred in prior
years and the dates they were paid, (iii) an analysis of the amounts
previously paid, (iv) projections of inflation in medical costs and (v) advice
from time to time from its insurance broker and carriers with respect to
damages for personal injuries and for workers' compensation benefits. (The
Company has insurance policies with coverage for personal injury claims but it
remains liable for a self-insured retention. The Company is self-insured for
most workers' compensation benefits and for its medical, dental and
prescription plans for associates but it has stop loss insurance policies to
limit its liability.)
If the subsequent outcome of IBNR Claims were to exceed the recorded IBNR
liability as at the end of a fiscal quarter, the liabilities on the balance
sheet would have been understated and income would have been overstated for
the quarter in question. (The opposite would be true if the subsequent outcome
were less than the recorded IBNR liability.)
A consistent approach to estimating liability for IBNR Claims reflected in the
Company's balance sheet is one of the Company's important accounting
objectives.
The estimates underlying the liability for IBNR Claims are matters of judgment
on which insurance experts may differ. The use of different estimates or
assumptions would change the amount recorded.
The Company's management believes that the liability for IBNR Claims reflected
in the balance sheets at November 2, 2002 and November 3, 2001 included in the
financial statements contained in this Report were fairly stated in all
material respects, subject to the uncertainties of litigation and the risk of
greater than anticipated inflation in medical costs and delays in receiving
claims.
Realization of Net Deferred Tax Asset
Future realization of the tax benefits, which totaled $1.4 million at November
2, 2002, attributable to the Company's net deferred tax asset ultimately
depends on the existence of sufficient taxable income in the pertinent tax
jurisdictions within the carryback and/or carryforward period available under
the relevant tax law at the time of the tax deduction. Management's assessment
is that the Company's net deferred tax asset will be realized through future
taxable earnings or available carrybacks, subject to (i) changes in consumer
spending patterns, consumer preferences and overall economic conditions, (ii)
the impact of competition and pricing, (iii) changes in weather patterns, (iv)
the seasonality of the retail industry, (v) risks related to consumer
acceptance of the Company's products, and (vi) war risks.
In assessing the likelihood of future taxable income, management analyzes
taxable income (loss) reported in recent years, current national retail
industry sales trends and long term national economic trends. Management's
assessment is most reliable with respect to the assets with expiration dates
farthest in the future because of the longer time in which income can be
earned to make the tax benefits from those assets available. (The state tax
net operating loss carryforwards included in the Company's net deferred tax
asset expire in 2003 through 2017.)
In the event new circumstances make the future realization of these tax
benefits less likely than not, the asset will be written off and charged to
income.
Private Label Credit Cards Issued By The Bank
- ---------------------------------------------
The Company and World Financial Network National Bank (the "Bank") are parties
to a Private Label Credit Card Program Agreement, dated January 27, 1998 (as
amended, the "Credit Card Program Agreement").
Under the Credit Card Program Agreement, the Bank issues credit cards to
Company customers who apply to the Bank. Net credit transaction volume with
the Bank was $78.6 million in the first 39 weeks of fiscal 2002 and $74.1
million in the first 39 weeks of fiscal 2001. Customers must meet standards
for creditworthiness set by the Bank with the approval of the Company,
provided, however, that the Bank shall take any actions required to prevent
unsafe and unsound banking practices. The credit cards issued by the Bank are
co-branded with both the Company's AVENUE(R) service mark and the Bank's name.
The credit cards are used only for merchandise offered by the Company. Credit
card holders remit payments to the Bank, generally by mailing personal checks.
The Bank also handles all statement processing, payment processing, cardholder
customer service and collections from delinquent cardholders.
In accordance with generally accepted accounting principles, the Company does
not include the receivable asset created under the Credit Card Program
Agreement in the Company's accounts receivable on its balance sheets because
the Company has no interest in the customer accounts or receivables and,
depending on the circumstances, might not purchase the accounts from the Bank
upon the expiration of the contractual term. In this connection, it should be
noted that the Credit Card Program Agreement states that (i) the Bank is the
sole and exclusive owner of all customer accounts, (ii) the Company has no
interest in the customer accounts and (iii) the Bank is the creditor in
respect of receivables (defined in the Credit Card Program Agreement as
amounts owed with respect to retail purchases, finance charges, deferred
finance charges, other fees and charges for sales tax). Receivables as defined
in the Credit Card Program Agreement were $74.0 million at November 2, 2002
and $75.4 million at November 3, 2001. Also, when the Credit Card Program
Agreement expires, currently scheduled for February 28, 2007, the Company
shall have the right to purchase the customer accounts from the Bank for a
price equal to the receivables and the Bank shall have the right to require
the Company to purchase the customer accounts at that price if the Company
decides to commence a private label credit card program on its own or through
another issuer of credit cards.
As to the Company's statements of operations, general, administrative and store
operating expenses were offset in part by premiums received from the Bank of
$2.3 million in the first 39 weeks of fiscal 2002 and $1.8 million in the
first 39 weeks of fiscal 2001. The increase in premiums from the Bank was due
to a decrease in bad debt write-offs by the Bank.
The credit card program premium (or discount) reflected in general,
administrative and store operating expenses is an amount equal to royalties
paid to the Company by the Bank minus costs charged by the Bank based on the
volume of credit card program processing activities performed by the Bank.
Royalties are based on program revenues minus receivables written off by the
Bank and the cost of funds for the program, which, for up to the first $85
million of receivables, means the one-year Constant Maturities Treasury
("CMT") rate plus 25 basis points to be reset every three months (the
published CMT rate was 1.65% per annum at November 2, 2002), provided,
however, that the total contractual interest rate shall not be more than 7.00%
per annum and shall not be less than 5.25% per annum. (The Bank's receivables
for the program were less than $85 million at November 2, 2002, but, if they
grew larger than that amount, the cost of funds for the excess would be based
primarily on the cost of borrowing of a trust for the purpose of securitizing
receivables.)
Stores
- ------
The Company leased 557 stores at November 2, 2002, of which 409 stores were in
strip shopping centers, 121 stores were in malls, 21 stores were in downtown
shopping districts and 6 stores were in outlet malls. Retail selling space was
2.4 million square feet both at November 2, 2002 and November 3, 2001.
In the first 39 weeks of fiscal 2002, the Company opened 18 new stores with an
average of approximately 4,700 square feet of retail selling space and closed
16 smaller stores. Retailing selling space opened after fiscal 1998
constitutes approximately 30% of the total square footage at present.
Substantially all the construction cost of new stores has been capitalized.
Depreciation and amortization of property and equipment were related
principally to assets in stores and amounted to $9.6 million in the first 39
weeks of fiscal 2002 and $8.4 million in the first 39 weeks of fiscal 2001.
The Company has made commitments to lease and open approximately six new
stores during the fourth quarter of fiscal 2002 and approximately five new
stores during fiscal 2003. Start-up costs will be expensed but are not
expected to have a material effect on general, administrative and store
operating expenses. This paragraph constitutes forward-looking information
under the Reform Act, which is subject to the uncertainties and other risk
factors referred to under the caption "Future Results."
Shop@Home
- ---------
The Company has a supplemental channel of distribution for its merchandise
through Internet and catalog (collectively, "shop@home") sales.
The Company has mailed AVENUE catalogs since September 2000. The Company has
operated an Internet site (www.avenue.com) since November 2000. The catalog
and website feature the Company's proprietary brands, AVENUE(R) apparel and
accessories, AVENUE BODY(R) lingerie and CLOUDWALKERS(R) footwear.
CLOUDWALKERS(R) footwear is also available at another Internet site
(www.cloudwalkers.com) operated by the Company.
The Company operates a call center and fulfillment operation at its national
distribution center in Troy, Ohio.
The Company has budgeted a loss from shop@home operations before unallocated
corporate expenses during the fourth quarter of fiscal 2002. There is no
assurance that shop@home operations will begin to generate income before
unallocated corporate expenses in fiscal 2003.
Seasonality
- -----------
The fourth quarter of the fiscal year generally has higher sales for the
Company than other quarters.
Other Matters
- -------------
Corporate Acquisition Reviews
As a matter of routine, the Company from time to time conducts "due diligence"
reviews of businesses that are either for sale as a going concern or are in
liquidation. The Company would consider making a bid on a suitable corporate
acquisition at an opportune price if adequate financing at acceptable rates
were available. Professional fees and related disbursements of approximately
$0.5 million were incurred in connection with such reviews that were completed
during the third quarter of fiscal 2002.
Tax Matters
The Company's federal income tax returns for fiscal 1994, fiscal 1995 and
fiscal 1996 were audited by the Internal Revenue Service and settled except
for the disallowance of a refund claim. The disallowance by the auditor was
affirmed by an IRS appeals officer and was the subject of mediation but is
still unresolved. The refund claim, which has not been recorded, would affect
stockholders' equity positively rather than increasing the Company's earnings,
if the disallowance were reversed or reduced as a result of judicial
proceedings or a negotiated settlement.
Future Results
The Company cautions that any forward-looking statements (as such term is
defined in the Reform Act) contained in this Report or otherwise made by
management of the Company involve risks and uncertainties and are subject to
change based on various important factors, many of which may be beyond the
Company's control. Accordingly, the Company's future performance and financial
results may differ materially from those expressed or implied in any such
forward-looking statements. The following factors, among others, could affect
the Company's actual results and could cause actual results to differ
materially from those expressed or implied in any forward-looking statements
included in this Report or otherwise made by management: war risk; changes in
consumer spending patterns, consumer preferences and overall economic
conditions; the impact of competition and pricing; changes in weather
patterns; the seasonality of the retail industry; risks related to consumer
acceptance of the Company's products and the ability to develop new
merchandise; risks associated with the financial performance of the World
Financial Network National Bank private label credit card program; increases
in interest rates; the ability to retain, hire and train key personnel; risks
associated with the ability of the Company's manufacturers to deliver products
in a timely manner; labor trouble and other risks associated with
international shipping; political instability and other risks associated with
foreign sources of production; postal rate increases; increases in paper and
printing costs; and availability of suitable store locations on appropriate
terms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold or issue financial instruments for trading purposes.
Management of the Company believes that its exposure to interest rate and
market risk associated with financial instruments is not material. See,
however, (i) the last paragraph under the Item 2 caption "Private Label Credit
Cards Issued By The Bank" for a discussion of the cost of funds associated
with the credit cards that are co-branded with the Company's AVENUE(R) service
mark and the name of the issuer of the cards, World Financial Network National
Bank, and (ii) the sixth paragraph under the Item 2 caption "Liquidity and
Capital Resources - Other Liquidity Sources" for a description of the variable
interest rate that would be payable if a revolving loan were outstanding (none
is outstanding at present).
The Company has no foreign currency exchange rate risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company performed an evaluation, in which the Company's Chief
Executive Officer and Chief Financial Officer participated, of its
disclosure controls and procedures (as defined by Exchange Act Rule
13a-14(c)) with respect to information required to be disclosed by
the Company in filings with the Securities and Exchange Commission
(the "Commission"). The evaluation was performed on a date (the
"Evaluation Date") within 90 days prior to the filing of this
Report. Based on this evaluation, the Company's Chief Executive
Officer and Chief Financial Officer each concluded that these
controls and procedures were effective in all material respects in
ensuring that this information is (i) recorded, accumulated,
processed, summarized and communicated to him on a timely basis and
(ii) reported within the time periods specified in the Commission's
rules and forms.
(b) There have not been any significant changes in the Company's
internal controls or in other factors that could significantly
affect its internal controls subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed herewith:
Number in Filing Description
---------------- -----------
10.1* Amendment, dated December 6, 2002, to Employment Agreement, dated November 20,
1998 between the Corporation and Raphael Benaroya ("Benaroya Employment
Agreement")
10.2* Amendment, dated December 6, 2002, to Employment Agreement, dated November 20,
1998, between the Corporation and George R. Remeta ("Remeta Employment Agreement")
10.3* Amendment, dated December 6, 2002, to Employment Agreement, dated November 20,
1998, between the Corporation and Kenneth P. Carroll ("Carroll Employment
Agreement")
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended August 3, 2002 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated August 2, 2002, to Financing Agreement among the Corporation,
United Retail Incorporated, Cloudwalkers, Inc. and The CIT Group/Business Credit,
Inc., as Agent and Lender ("CIT")
10.2 Amendment to Restated Supplemental Retirement Savings Plan
10.3 Purchase and Sale Agreement, dated as of July 1, 2002, between Raphael Benaroya
and the Corporation
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended May 4, 2002 is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Amendment, dated May 30, 2002, to Benaroya Employment
Agreement
The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended February 2, 2002 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated April 5, 2002, to Private Label Credit Card Program Agreement,
dated January 27, 1998, between the Corporation, United Retail Incorporated and
World Financial Network National Bank ("Private Label Credit Card Program
Agreement")
10.2 Amendment, dated December 29, 1999, to Private Label Credit Card Program Agreement
10.3 Amendment, dated August 19, 1999, to Private Label Credit Card Program Agreement
10.4* Letter, dated March 1, 2002, from the Corporation to Raphael Benaroya with
respect to the cost of living adjustment under the Benaroya Employment Agreement
10.5 Financial Statements of the Corporation's Retirement Savings Plan for the year
ended December 31, 2001
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended November 3, 2001 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Amendment, dated November 29, 2001, to Benaroya Employment Agreement
10.2* Amendment, dated November 29, 2001, to Remeta Employment Agreement
10.3* Amendment, dated November 29, 2001, to Carroll Employment Agreement
10.4* Summary Plan Description for United Retail Group, Inc. Incentive Compensation
Program for Executives
10.5 Amendment, dated October 1, 2001, to Private Label Credit Card Program Agreement
(Confidential portions filed separately with the Secretary of the Commission)
10.6* Promissory note, dated November 30, 2001, from Raphael Benaroya to the
Corporation (paid as of July 1, 2002)
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended August 4, 2001 is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Restated Stock Appreciation Rights Plan
The 2001 Stock Option Plan set forth as an appendix to the Corporation's proxy statement on Schedule 14A for its 2001
annual meeting of stockholders is incorporated herein by reference.*
The following exhibit to the Corporation's Registration Statement on Form S-8 (Registration No. 333-44868) is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10 Amendment, dated August 21, 2000, to Financing Agreement among the
Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended October 28, 2000 are incorporated
herein by reference:
Number in Filing Description
---------------- -----------
10.1* Amendment, dated August 18, 2000, to Benaroya Employment Agreement
10.2* Amendment, dated August 18, 2000, to Carroll Employment Agreement
The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended January 29, 2000 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.2 Amendment, dated December 28, 1999, to Financing
Agreement among the Corporation, United Retail Incorporated and
CIT ("Financing Agreement")
10.3 Amendment, dated January 31, 2000, to Financing Agreement among the
Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended October 30, 1999 is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated October 6, 1999, to Financing Agreement
The following exhibit to the Corporation's Current Report on Form 8-K, filed September 23, 1999, is incorporated herein
by reference:
Number in Filing Description
---------------- -----------
3 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock
The following exhibit to the Corporation's Current Report on Form 8-K, filed September 17, 1999, is incorporated
herein by reference:
Number in Filing Description
---------------- -----------
3 Restated By-Laws of the Corporation
The stockholders' rights plan filed as the exhibit to the Corporation's Registration Statement on Form 8-A, dated
September 15, 1999, is incorporated herein by reference.
The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended January 30, 1999 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated March 29, 1999, to Financing Agreement
21 Subsidiaries of the Corporation
The 1999 Stock Option Plan set forth as the Appendix to the Corporation's proxy
statement on Schedule 14A for its 1999 annual meeting of stockholders is incorporated herein by
reference.*
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended October 31, 1998 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Benaroya Employment Agreement
10.2* Remeta Employment Agreement
10.3* Carroll Employment Agreement
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended May 2, 1998 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* 1998 Stock Option Agreement, dated May 21, 1998, between the Corporation and
Raphael Benaroya
10.2* 1998 Stock Option Agreement, dated May 21, 1998, between the Corporation and
George R. Remeta
The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended January 31, 1998 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Restated Stockholders' Agreement, dated December 23, 1992, between the
Corporation and certain of its stockholders and Amendment No. 1, Amendment No. 2
and Amendment No. 3 thereto
10.2 Private Label Credit Card Program Agreement
10.4* Restated 1990 Stock Option Plan as of March 6, 1998
10.5* Restated 1990 Stock Option Plan as of May 28, 1996
10.6* Restated 1996 Stock Option Plan as of March 6, 1998
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended November 1, 1997 is
incorporated herein by reference:
Number in Filing Description
---------------- ------------
10.1 Amendment, dated September 15, 1997, to Financing Agreement
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended August 2, 1997 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Financing Agreement
10.2* Amendment to Restated Supplemental Retirement Savings Plan
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended November 2, 1996 is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Restated Supplemental Retirement Savings Plan
The following exhibits to the Corporation's Registration Statement on Form S-1 (Registration No. 33-44499), as amended,
are incorporated herein by reference:
Number in Filing Description
---------------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Corporation
4.1 Specimen Certificate for Common Stock of the Corporation
10.2.1 Software License Agreement, dated as of April 30, 1989, between The Limited
Stores, Inc. and Sizes Unlimited, Inc. (now known as United Retail Incorporated)
("Software License")
10.2.2 Amendment, dated December 10, 1991, to Software License
____________________
*A compensatory plan for the benefit of the Corporation's management or a management contract.
(b) A Current Report on Form 8-K was filed by the Corporation on September 9, 2002 that disclosed that the Company's principal
executive officer and principal financial officer had submitted certifications to the Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant) UNITED RETAIL GROUP, INC.
Date: December 9, 2002
By: /s/ GEORGE R. REMETA
________________________________________________________
George R. Remeta, Vice Chairman of the Board and Chief
Administrative Officer - Authorized Signatory
By: /s/ JON GROSSMAN
________________________________________________________
Jon Grossman, Vice President - Finance and Chief
Accounting Officer
CERTIFICATIONS
I, Raphael Benaroya, Chief Executive Officer of United Retail
Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
United Retail Group, Inc.;
2. based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report;
3. based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented
in this quarterly report;
4. the registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 9, 2002 /s/ RAPHAEL BENAROYA
-----------------------
Chief Executive Officer
I, George R. Remeta, Chief Administrative Officer and Chief
Financial Officer of United Retail Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
United Retail Group, Inc.;
2. based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report;
3. based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented
in this quarterly report;
4. the registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 9, 2002 /s/ GEORGE R. REMETA
-----------------------
Chief Financial Officer
EXHIBIT INDEX
The following exhibits are filed herewith:
Number in Filing Description
---------------- -----------
10.1* Amendment, dated December 6, 2002, to Employment Agreement, dated November 20,
1998 between the Corporation and Raphael Benaroya ("Benaroya Employment
Agreement")
10.2* Amendment, dated December 6, 2002, to Employment Agreement, dated November 20,
1998, between the Corporation and George R. Remeta ("Remeta Employment Agreement")
10.3* Amendment, dated December 6, 2002, to Employment Agreement, dated November 20,
1998, between the Corporation and Kenneth P. Carroll ("Carroll Employment
Agreement")
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended August 3, 2002 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated August 2, 2002, to Financing Agreement among the Corporation,
United Retail Incorporated, Cloudwalkers, Inc. and The CIT Group/Business Credit,
Inc., as Agent and Lender ("CIT")
10.2 Amendment to Restated Supplemental Retirement Savings Plan
10.3 Purchase and Sale Agreement, dated as of July 1, 2002, between Raphael Benaroya
and the Corporation
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended May 4, 2002 is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Amendment, dated May 30, 2002, to Benaroya Employment
Agreement
The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended February 2, 2002 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated April 5, 2002, to Private Label Credit Card Program Agreement,
dated January 27, 1998, between the Corporation, United Retail Incorporated and
World Financial Network National Bank ("Private Label Credit Card Program
Agreement")
10.2 Amendment, dated December 29, 1999, to Private Label Credit Card Program Agreement
10.3 Amendment, dated August 19, 1999, to Private Label Credit Card Program Agreement
10.4* Letter, dated March 1, 2002, from the Corporation to Raphael Benaroya with
respect to the cost of living adjustment under the Benaroya Employment Agreement
10.5 Financial Statements of the Corporation's Retirement Savings Plan for the year
ended December 31, 2001
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended November 3, 2001 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Amendment, dated November 29, 2001, to Benaroya Employment Agreement
10.2* Amendment, dated November 29, 2001, to Remeta Employment Agreement
10.3* Amendment, dated November 29, 2001, to Carroll Employment Agreement
10.4* Summary Plan Description for United Retail Group, Inc. Incentive Compensation
Program for Executives
10.5 Amendment, dated October 1, 2001, to Private Label Credit Card Program Agreement
(Confidential portions filed separately with the Secretary of the Commission)
10.6* Promissory note, dated November 30, 2001, from Raphael Benaroya to the
Corporation (paid as of July 1, 2002)
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended August 4, 2001 is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Restated Stock Appreciation Rights Plan
The 2001 Stock Option Plan set forth as an appendix to the Corporation's proxy statement on Schedule 14A for its 2001
annual meeting of stockholders is incorporated herein by reference.*
The following exhibit to the Corporation's Registration Statement on Form S-8 (Registration No. 333-44868) is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10 Amendment, dated August 21, 2000, to Financing Agreement among the
Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended October 28, 2000 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Amendment, dated August 18, 2000, to Benaroya Employment Agreement
10.2* Amendment, dated August 18, 2000, to Carroll Employment
Agreement
The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended January 29, 2000 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.2 Amendment, dated December 28, 1999, to Financing Agreement among the Corporation,
United Retail Incorporated and CIT ("Financing Agreement")
10.3 Amendment, dated January 31, 2000, to Financing Agreement among the Corporation,
United Retail Incorporated, Cloudwalkers, Inc. and CIT
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended October 30, 1999 is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated October 6, 1999, to Financing Agreement
The following exhibit to the Corporation's Current Report on Form 8-K, filed September 23, 1999, is incorporated herein
by reference:
Number in Filing Description
---------------- -----------
3 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock
The following exhibit to the Corporation's Current Report on Form 8-K, filed September 17, 1999, is incorporated herein
by reference:
Number in Filing Description
---------------- -----------
3 Restated By-Laws of the Corporation
The stockholders' rights plan filed as the exhibit to the Corporation's Registration Statement on Form 8-A, dated
September 15, 1999, is incorporated herein by reference.
The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended January 30, 1999 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated March 29, 1999, to Financing Agreement
21 Subsidiaries of the Corporation
The 1999 Stock Option Plan set forth as the Appendix to the Corporation's proxy
statement on Schedule 14A for its 1999 annual meeting of stockholders is incorporated herein by
reference.*
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended October 31, 1998 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Benaroya Employment Agreement
10.2* Remeta Employment Agreement
10.3* Carroll Employment Agreement
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended May 2, 1998 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* 1998 Stock Option Agreement, dated May 21, 1998, between the Corporation and
Raphael Benaroya
10.2* 1998 Stock Option Agreement, dated May 21, 1998, between the Corporation and
George R. Remeta
The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended January 31, 1998 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Restated Stockholders' Agreement, dated December 23, 1992, between the
Corporation and certain of its stockholders and Amendment No. 1, Amendment No. 2
and Amendment No. 3 thereto
10.2 Private Label Credit Card Program Agreement
10.4* Restated 1990 Stock Option Plan as of March 6, 1998
10.5* Restated 1990 Stock Option Plan as of May 28, 1996
10.6* Restated 1996 Stock Option Plan as of March 6, 1998
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended November 1, 1997 is
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Amendment, dated September 15, 1997, to Financing Agreement
The following exhibits to the Corporation's Quarterly Report on Form 10-Q for the period ended August 2, 1997 are
incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1 Financing Agreement
10.2* Amendment to Restated Supplemental Retirement Savings Plan
The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period
ended November 2, 1996 is incorporated herein by reference:
Number in Filing Description
---------------- -----------
10.1* Restated Supplemental Retirement Savings Plan
The following exhibits to the Corporation's Registration Statement on Form S-1 (Registration No. 33-44499), as amended,
are incorporated herein by reference:
Number in Filing Description
---------------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Corporation
4.1 Specimen Certificate for Common Stock of the Corporation
10.2.1 Software License Agreement, dated as of April 30, 1989, between The Limited
Stores, Inc. and Sizes Unlimited, Inc. (now known as United Retail Incorporated)
("Software License")
10.2.2 Amendment, dated December 10, 1991, to Software License
____________________
*A compensatory plan for the benefit of the Corporation's management or a management contract.