Back to GetFilings.com

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 August 2, 2003

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

United Retail Group, Inc.

(Exact name of registrant as specified in its charter)

365 West Passaic Street, Rochelle Park, New Jersey 07662
(Address of principal executive offices) (Zip Code)

(201) 845-0880
Registrant's telephone number, including area code

_______________________________________________________________

(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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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.

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 August 2, 2003, 12,937,304 units, each consisting of one share of the registrant’s common stock, $.001 par value per share, and one attached stock purchase right, were outstanding. The units are referred to herein as “shares.”

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

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)

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)

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 twenty-six weeks ended August 2, 2003 and August 3, 2002 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 2002 Annual Report and 2002 Form 10-K, as amended. 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 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 shares because for the thirteen and twenty-six weeks ended August 2, 2003 and August 3, 2002, the effect of stock options is anti-dilutive.

Options to purchase shares of common stock which were not included in the computation of diluted per share data were as follows:

The Company uses the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting For Stock Issued To Employees” (Opinion No. 25) and has adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting For Stock-Based Compensation.” Under Opinion No. 25, compensation expense, if any, is measured as the excess of the market price of the stock over the exercise price on the measurement date. In accordance with Opinion No. 25, compensation expense is recorded ratably over the five-year vesting period of the options.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting For Stock-Based Compensation” to stock-based employee compensation:

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 August 2, 2003, the combined borrowing capacity of the Companies, after satisfying the $5 million minimum availability requirement, was $5.1 million, no balance was in the pledged account, the aggregate outstanding amount of letters of credit, including $5.5 million of standby letters of credit, arranged by CIT was $26.7 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 through January 2003, the Company executed a series of three-year capital lease agreements for call center systems at the Company’s national distribution center in Troy, Ohio, bearing interest at rates between 6.09% to 6.64% per annum aggregating approximately $1.4 million. The Company has the option of buying the systems at the end of the term for a nominal price.

4. Income Taxes

        The provision for (benefit from) income taxes consists of (dollars in thousands):

Reconciliation of the provision for (benefit from) income taxes from the U.S. Federal statutory rate to the Company’s effective rate is as follows (dollars in thousands):

Significant components of the Company’s net deferred tax assets as of August 2, 2003 are summarized below (dollars in thousands):

The Company recorded a $7.3 million non-cash charge to establish a valuation allowance for its net deferred tax assets and net operating loss carryforwards in the fourth quarter of fiscal 2002. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109), which places primary importance on the Company’s operating results in the most recent three-year period when assessing the need for a valuation allowance. The Company’s cumulative loss in the three-year period, which included the net loss reported in the fourth quarter of fiscal 2002, was sufficient to require a full valuation allowance under the provisions of SFAS No. 109.

The Company recorded additional valuation allowances in the first and second quarters of fiscal 2003 of $2.1 million and $1.9 million, respectively. Accordingly, the valuation allowance as of August 2, 2003 is $11.2 million. The Company intends to maintain a valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support its reversal.

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. 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, May 2002 and May 2003, 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. Supplemental Cash Flow Information

Non-cash investing activities include $1.4 million related to capital lease obligations incurred between January 2002 and January 2003.

Non-cash financing activities include the repayment of officer advances 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.

8. 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.

On May 1, 2003, a suit in California Superior Court styled Erik Stanford vs. United Retail Incorporated was served on the Company by a former manager in California. The suit is purportedly a class action on behalf of certain current and former associates in California in the past four years.

The plaintiff asserts state wage and hour claims.

Based on a very preliminary factual review, management believes there are meritorious procedural defenses available that the plaintiff does not adequately represent the classes identified in the lawsuit. The Company intends to vigorously oppose class certification. Nevertheless, successful procedural defenses might not be dispositive of all the claims if a more adequate class representative replaced Mr. Stanford in the case.

The Company also intends to defend the case vigorously on the merits.

Although counsel is unable at this early stage to predict the ultimate outcome of the case and the amount of any potential liability with any accuracy, management does not believe that the case will have a material impact on the Company’s financial condition or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Second Quarter Of Fiscal 2003 Versus Second Quarter Of Fiscal 2002

Net sales for the second quarter of fiscal 2003 decreased 7.8% from the second quarter of fiscal 2002, to $104.8 million from $113.7 million from a decrease in units sold. Comparable store sales for the second quarter of fiscal 2003 decreased 7.2%. (Comparable store sales are at stores that were open at least 12 months; this measure of sales performance is commonly used by specialty retail industry analysts.) Average stores open decreased from 555 to 546. See, “Stores.” Internet and catalog (“Shop @ Home”) sales declined to $1.3 million in the second quarter of fiscal 2003 from $1.7 million in the second quarter of fiscal 2002, primarily from the suspension of catalog mailings. See, “Suspension of Catalog Operations.”

Gross profit was $21.7 million in the second quarter of fiscal 2003 compared with $21.1 million in the second quarter of fiscal 2002, increasing as a percentage of net sales to 20.7% from 18.5%. Gross profit as a percentage of net sales increased principally because of higher merchandise margins and lower in-store “shrinkage.” 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 decreased to $25.6 million in the second quarter of fiscal 2003 from $28.1 million in the second quarter of fiscal 2002. As a percentage of net sales, general, administrative and store operating expenses decreased to 24.4% from 24.8% principally because of lower Shop @ Home expenses and higher private label credit card royalties from World Financial Network National Bank (See “Private Label Credit Cards Issued By The Bank”). This decrease was partially offset by higher health insurance expense as a percentage of net sales and by a higher store payroll percentage resulting from lower net sales.

The Company incurred operating losses of $3.9 million in the second quarter of fiscal 2003 and $7.1 million in the second quarter of the previous year.

Net interest expense was $0.2 million in the second quarter of both fiscal 2003 and fiscal 2002.

The Company had a provision for income taxes of $0.1 million in the second quarter of fiscal 2003 and a benefit from income taxes of $2.6 million in the second quarter of fiscal 2002.

The Company incurred net losses of $4.2 million in the second quarter of fiscal 2003 and $4.6 million in the second quarter of fiscal 2002.

In the fourth quarter of fiscal 2002, the Company established a valuation allowance for all its net deferred tax assets and net operating loss carryforwards (“NOL’s”). In the second quarter of fiscal 2003, the tax valuation allowance was increased by $1.9 million.

See, “Critical Accounting Policies” for a discussion of estimates made by management in preparing financial statements in accordance with generally accepted accounting principles.

First Half Of Fiscal 2003 Versus First Half Of Fiscal 2002

Net sales for the first half of fiscal 2003 decreased 10.0% from the first half of fiscal 2002, to $206.3 million from $229.2 million from a decrease in units sold. Comparable store sales for the first half of fiscal 2003 decreased 9.5%. Average stores open decreased from 555 to 548. Shop @ Home sales declined to $2.8 million in the first half of fiscal 2003 from $4.1 million in the first half of fiscal 2002, primarily from the suspension of catalog mailings. The Company mailed AVENUE catalogs from September 2000 to March 2003, when the Company suspended catalog operations indefinitely.

Gross profit was $43.8 million in the first half of fiscal 2003 compared with $51.9 million in the first half of fiscal 2002, decreasing as a percentage of net sales to 21.2% from 22.6%. Gross profit as a percentage of net sales decreased principally because occupancy costs were negatively leveraged by the decline of net sales. This decrease was partially offset by a reduction in the in-store “shrinkage” percentage.

General, administrative and store operating expenses decreased to $52.0 million in the first half of fiscal 2003 from $54.2 million in the first half of fiscal 2002. As a percentage of net sales, however, general, administrative and store operating expenses increased to 25.2% from 23.6% principally because of a higher store payroll percentage resulting from lower net sales and of higher health insurance expense as a percentage of net sales.

The Company incurred operating losses of $8.2 million in the first half of fiscal 2003 and $2.3 million in the first half of the previous year.

Net interest expense was $0.5 million in the first half of fiscal 2003 and $0.4 million in the first half of fiscal 2002, as a result of lower cash balances and lower interest rates on cash balances.

The Company had a provision for income taxes of $0.2 million in the first half of fiscal 2003 and a benefit from income taxes of $0.9 million in the first half of fiscal 2002.

The Company incurred net losses of $8.8 million in the first half of fiscal 2003 and $1.8 million in the first half of fiscal 2002.

In the fourth quarter of fiscal 2002, the Company established a valuation allowance for all its net deferred tax assets and “NOL’s”. In the first half of fiscal 2003, the tax valuation allowance was increased by $4.0 million to $11.2 million.

August Sales

Net sales for the month of August 2003 decreased 8.7% from August 2002 to $24.9 million from $27.3 million. Comparable store sales for the month decreased 8.2%. Net sales for the month were impacted by an electrical power failure in the Northeast and Midwest regions of the country.

Liquidity and Capital Resources

Cash Flow

Cash provided from operating activities increased to $9.8 million in the first half of fiscal 2003 from $9.3 million in the first half of fiscal 2002. The principal differences in cash provided from operating activities in the two semi-annual periods were a decrease in inventory during the first half of fiscal 2003 that exceeded the corresponding decrease in inventory during the first half of fiscal 2002 by $13.0 million, partially offset by a decrease in accounts payable and accrued expenses during the first half of fiscal 2003 that exceeded the corresponding decrease in accounts payable and accrued expenses during the first half of fiscal 2002 by $8.2 million. The decrease in inventory during the first half of fiscal 2003 resulted principally from lower inventory receipt plans intended to increase inventory turns. The decrease in accounts payable and accrued expenses during the first half of fiscal 2003 was composed of a decrease in accounts payable, partially offset by an increase in accrued expenses. The decrease in accounts payable was principally the result of the decrease in inventory.

Capital expenditures were $1.8 million in the first half of fiscal 2003 and $7.1 million in the first half of fiscal 2002, principally because (i) in fiscal 2002, the Company incurred $2.4 million in construction costs for the fulfillment center at its national distribution center, and (ii) the Company plans to open only five new stores in fiscal 2003 as a whole compared with the 24 stores that were opened in fiscal 2002 (see,“Stores”).

Capital Expenditure Budget

Capital expenditures for fiscal 2003 as a whole are budgeted at approximately $5.0 million. The Company funded capital expenditures from net cash provided from operating activities during the first half of fiscal 2003 but expects to fund them principally from cash reserves during the year as a whole. The largest category of annual capital expenditures will be new store construction. See, “Stores.” 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.”

Balance Sheet Sources of Liquidity

The Company’s cash and cash equivalents were $23.9 million at August 2, 2003 compared with $29.0 million at August 3, 2002. Cash and cash equivalents were $17.5 million at February 1, 2003.

During the first half of fiscal 2003, a decrease in inventories was planned. Inventories were stated at $44.9 million at August 2, 2003 compared with $58.1 million at August 3, 2002, principally as a result of fewer units. At February 1, 2003, inventories were stated at $61.6 million. (See, “Critical Accounting Policies – Inventory” for a discussion of estimates made by management in stating inventories in financial statements prepared in accordance with generally accepted accounting principles.)

Property and equipment decreased to $83.0 million at August 2, 2003 from $89.4 million at August 3, 2002 and $87.7 million at February 1, 2003, principally from depreciation.

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 2002.

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 August 2, 2003, trade letters of credit for the account of the Companies and supported by CIT were outstanding in the amount of $21.1 million and standby letters of credit were outstanding in the amount of $5.5 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 month, and (y) the balance from time to time in an account in its name that has been pledged to the lenders (a “Pledged Account”).

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. (At August 2, 2003, the combined borrowing capacity of the Companies , after satisfying the $5 million minimum availability requirement, was $5.1 million; the Pledged Account had a zero balance; the Companies’ cash on hand was unrestricted; and no loan was outstanding.)

The line of credit is