-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HYduykD2YR5GrRJeZt2IijSPqzG2FcjSRvxLHEcOwKBiwlOIi55kmcKBRdRGUCjj ieJgkKonn9EfcFShyjZ3Mg== 0000950123-98-008287.txt : 19980916 0000950123-98-008287.hdr.sgml : 19980916 ACCESSION NUMBER: 0000950123-98-008287 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980801 FILED AS OF DATE: 19980915 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED RETAIL GROUP INC/DE CENTRAL INDEX KEY: 0000881905 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 510303670 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19774 FILM NUMBER: 98709486 BUSINESS ADDRESS: STREET 1: 365 WEST PASSAIC ST CITY: ROCHELLE PARK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2018450880 MAIL ADDRESS: STREET 1: 365 W PASSAIC STREET STREET 2: 365 W PASSAIC STREET CITY: ROCHELLE PARK STATE: NJ ZIP: 07662 10-Q 1 FORM 10-Q RE: UNITED RETAIL GROUP, INC. 1 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 1, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _____________________ Commission file number 00019774 _______ United Retail Group, Inc. (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) 2 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 "1934 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 ------- ------ 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 1934 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 August 1, 1998, 13,086,988 shares of the registrant's common stock, $.001 par value per share, were outstanding. 3
ITEM 1. FINANCIAL STATEMENTS UNITED RETAIL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands) AUGUST 1, JANUARY 31, AUGUST 2, 1998 1998 1997 ASSETS (UNAUDITED) (UNAUDITED) Current assets: Cash and cash equivalents $50,641 $31,122 $19,806 Accounts receivable 766 571 1,351 Inventory 38,040 38,003 38,655 Prepaid rents 3,987 3,999 4,351 Other prepaid expenses 2,442 2,607 2,854 -------- -------- -------- Total current assets 95,875 76,302 67,017 Property and equipment, net 46,146 48,231 51,237 Deferred charges and other intangible assets, net of accumulated amortization of $1,971, $1,784 and $1,609 6,866 7,058 7,105 Deferred income taxes 1,172 2,685 - Other assets 363 451 251 -------- -------- -------- Total assets $150,423 $134,727 $125,610 ======== ======== ======== LIABILITIES Current liabilities: Current portion of distribution center financing $1,093 $1,052 $1,012 Accounts payable, trade 12,107 12,596 11,731 Accrued expenses 21,202 17,400 14,472 Income taxes payable 4,758 1,379 1,133 -------- -------- -------- Total current liabilities 39,160 32,427 28,348 Distribution center financing 9,751 10,308 10,844 Other long-term liabilities 6,625 6,948 7,443 -------- -------- -------- Total liabilities 55,536 49,683 46,635 -------- -------- -------- STOCKHOLDERS' EQUITY Preferred stock, $.001 par value; authorized 1,000,000; none issued Common stock, $.001 par value; authorized 14 13 13 30,000,000; issued (13,760,300, 12,680,375 and 12,680,375); outstanding (13,086,988, 12,190,375, and 12,190,375) Additional paid-in capital 77,370 78,259 78,259 Retained earnings 19,162 7,354 1,285 Treasury stock (673,312, 490,000, and 490,000) (1,659) (582) (582) shares at cost -------- -------- -------- Total stockholders' equity 94,886 85,044 78,975 -------- -------- -------- Total liabilities and stockholders' equity $150,423 $134,727 $125,610 ======== ======== ======== The accompanying notes are an integral part of the Consolidated Financial Statements.
4 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED --------------------------------- --------------------------------- AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net sales $ 102,175 $ 93,076 $ 197,118 $ 180,098 Cost of goods sold, including buying and occupancy costs 73,419 72,728 141,242 141,543 ------------ ------------ ------------ ------------ Gross profit 28,756 20,348 55,876 38,555 General, administrative and store operating expenses 20,947 19,800 40,854 39,480 ------------ ------------ ------------ ------------ Operating income (loss) 7,809 548 15,022 (925) Non-operating income 3,113 -- 3,113 -- Interest (income) expense, net (355) 11 (495) 113 ------------ ------------ ------------ ------------ Income (loss) before income taxes 11,277 537 18,630 (1,038) Provision for income taxes 4,039 186 6,822 200 ------------ ------------ ------------ ------------ Net income (loss) $ 7,238 $ 351 $ 11,808 ($ 1,238) ============ ============ ============ ============ Net income (loss) per share Basic $ 0.55 $ 0.03 $ 0.91 ($ 0.10) ============ ============ ============ ============ Diluted $ 0.52 $ 0.03 $ 0.85 ($ 0.10) ============ ============ ============ ============ Weighted average number of shares outstanding Basic 13,086,645 12,190,375 13,022,015 12,190,375 Common stock equivalents (stock options) 873,867 718,977 842,654 -- ------------ ------------ ------------ ------------ Diluted 13,960,512 12,909,352 13,864,669 12,190,375 ============ ============ ============ ============ The accompanying notes are an integral part of the Consolidated Financial Statements.
5
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) TWENTY-SIX WEEKS ENDED ------------------------- AUGUST 1, AUGUST 2, 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 11,808 ($ 1,238) Adjustments to reconcile net income (loss) to net cash provided from operating activities: Depreciation and amortization of property and equipment 3,742 4,505 Amortization of deferred charges and other intangible assets 178 119 (Gain) loss on disposal of assets (75) 162 Gain on sale of investments (3,113) (43) Compensation expense 61 -- Benefit from deferred income taxes 1,513 -- Deferred lease assumption revenue amortization (425) (259) Changes in operating assets and liabilities: Accounts receivable (195) (54) Income taxes 3,379 229 Inventory (37) 2,123 Accounts payable and accrued expenses 3,816 (2,598) Prepaid expenses 177 (64) Other assets and liabilities (233) (501) -------- -------- Net Cash Provided From Operating Activities 20,596 2,381 -------- -------- INVESTING ACTIVITIES: Capital expenditures (1,802) (1,012) Deferred payment for property and equipment (78) 144 Proceeds from sale of investment and lease 3,345 506 -------- -------- Net Cash Provided From (Used For) Investing Activities 1,465 (362) -------- -------- FINANCING ACTIVITIES: Repayments of long-term debt (516) (477) Issuance of loans to officers (2,033) -- Exercise of stock options 7 -- -------- -------- Net Cash Used In Financing Activities (2,542) (477) -------- -------- Net increase in cash and cash equivalents 19,519 1,542 Cash and cash equivalents, beginning of period 31,122 18,264 -------- -------- Cash and cash equivalents, end of period $ 50,641 $ 19,806 ======== ======== The accompanying notes are an integral part of the Consolidated Financial Statements.
6 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 accounts and transactions have been eliminated. The consolidated financial statements as of and for the thirteen and twenty-six weeks ended August 1, 1998 and August 2, 1997 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 1997 Annual Report and 1997 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 fiscal 1997 presentation. 2. NET INCOME (LOSS) PER SHARE At the end of fiscal 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings 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. Shares issuable upon the exercise of stock options have not been included in the diluted earnings per share computation for the twenty-six weeks ended August 2, 1997 because the effect would be anti-dilutive. For the thirteen and twenty-six weeks ended August 1, 1998, the net income per share would have been $0.40 and $0.76 basic, and $0.38 and $0.71 diluted, respectively, if the non-operating income, net of taxes, was excluded (see Note 7). 7 3. FINANCING ARRANGEMENTS 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 1, 1994. The loan is collateralized by a mortgage on the national distribution center owned by the Company in Troy, Ohio. 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. The Company and United Retail Incorporated, its subsidiary, (collectively, the "Companies") are parties to a Financing Agreement, dated August 15, 1997, as amended September 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 of three years 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 either 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 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. At August 1, 1998, the combined availability of the Companies was $9.7 million, no balance was in the pledged account, the aggregate outstanding amount of letters of credit arranged by CIT was $20.5 million and no loan had been drawn down. The Company's cash on hand was unrestricted. 8 4. INCOME TAXES The provision for income taxes consists of (dollars in thousands):
Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------ ------------------------ August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ------- ------- ------- ------- Currently payable: Federal $ 4,033 $ 128 $ 5,045 128 State 208 58 264 72 ------- ------- ------- ------- 4,241 186 5,309 200 ------- ------- ------- ------- Deferred: Federal (166) 0 1,245 0 State (36) 0 268 0 ------- ------- ------- ------- (202) 0 1,513 0 ------- ------- ------- ------- $ 4,039 $ 186 $ 6,822 $ 200 ======= ======= ======= =======
Reconciliation of the 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 ----------------------------------------------------- August 1, 1998 August 2, 1997 ---------------------- ---------------------- Tax at Federal rate $ 3,947 35.0% $ 182 34.0% State income taxes, net of 112 1.0% 21 3.9% federal benefit Goodwill amortization 18 0.1% 18 3.3% Other (38) (0.3%) 7 1.3% Change in valuation allowance 0 0.0% (42) (7.9%) ------- ---- ------- ---- $ 4,039 35.8% $ 186 34.6% ======= ==== ======= ====
Twenty-Six Weeks Ended ------------------------------------------------------- August 1, 1998 August 2, 1997 ---------------------- ------------------------ Tax at Federal rate $ 6,520 35.0% ($ 353) (34.0%) State income taxes, net of 346 1.9% (15) (1.4%) federal benefit Goodwill amortization 36 0.2% 35 3.4% Other (80) (0.5%) 11 1.0% Change in valuation allowance 0 0.0% 522 50.2% ------- ---- ------- ----- $ 6,822 36.6% $ 200 19.2% ======= ==== ======= =====
9 The net deferred tax asset reflects the tax impact of temporary differences. The components of the net deferred tax asset as of August 1, 1998 are as follows (dollars in thousands): Assets: Inventory $ 184 Accruals and reserves 2,061 Credit carryforwards 1,479 ------ 3,724 ------ Liabilities: Depreciation 2,534 Compensation 18 ------ 2,552 ------ Net deferred tax asset $1,172 ======
Future realization of the tax benefits attributable to these existing deductible temporary differences 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. As of August 1, 1998, the Company has pre-acquisition net operating loss carryforwards, aggregating approximately $0.5 million, available to reduce future taxable income in certain states, expiring through 2004. The Company's federal income tax returns for fiscal 1994, fiscal 1995 and fiscal 1996 are being audited by the Internal Revenue Service. Management believes that the results of the audits will not have a material adverse effect on the Company's financial condition or results of operations. 5. ADVANCES TO OFFICERS Advances were made on February 13, 1998 in the amount of $1.6 million to Raphael Benaroya, the Company's Chairman of the Board, President and Chief Executive Officer, and $0.2 million to George R. Remeta, the Company's Vice Chairman and Chief Financial Officer. The purpose of the advances was to finance payment of income taxes incurred in connection with their exercise of stock options. Interest is payable annually in cash at the prime rate. The advances have a term of four years subject to acceleration under certain circumstances and to a call by the Company after two years with respect to half of the principal amount. Payment of the advances is secured by a pledge of the shares of the Company's Common Stock issued upon the option exercises in the amount of 777,925 shares issued to Mr. Benaroya and 116,888 shares issued to Mr. Remeta. Each advance is a full recourse obligation of the borrower. 10 6. SUPPLEMENTAL CASH FLOW INFORMATION Net cash flow from operating activities includes cash payments for interest and income taxes as follows (dollars in thousands):
Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------- ------------------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ------- ------- ------- ------- Cash interest: Interest expense (income), net per statements of operations ($ 355) $ 11 ($ 495) $ 113 Less: Non-cash interest expense 6 3 17 13 ------- ------- ------- ------- Net cash interest, including interest income of $616, $260, $1,054 and $437 ($ 361) $ 8 ($ 512) $ 100 ======= ======= ======= ======= Income tax payments $ 1,481 $ 54 $ 1,930 $ 70 ======= ======= ======= =======
Financing activities include the non-cash exercise of 1,076,955 stock options, with the exercise price paid by reducing the number of shares of common stock issued in lieu of cash payment. 7. OTHER INCOME In May 1998, the Company realized a capital gain of $3.1 million on the sale of its minority interest in a privately held apparel design and manufacturing firm for cash. The gain is reported as non-operating income. 8. CONTINGENCY FOOTNOTE 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 effect on the Company's financial condition or results of operations. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND QUARTER FISCAL 1998 VERSUS SECOND QUARTER FISCAL 1997 Net sales for the second quarter of Fiscal 1998 increased 9.8% from the second quarter of Fiscal 1997, to $102.2 million from $93.1 million, principally from an increase in average price. Average stores open decreased 7.9% from 560 to 516 as underperforming stores were closed. (For the month of August 1998, net sales decreased 4.2% from August 1997, to $22.1 million from $23.1 million.) Comparable store sales for the second quarter of Fiscal 1998 increased 15.5%. (For the month of August 1998, comparable store sales increased 1.6%.) There is no assurance that comparable store sales will continue to increase. Gross profit increased by $8.4 million to $28.8 million in the second quarter of Fiscal 1998 from $20.3 million in the second quarter of Fiscal 1997, increasing as a percentage of net sales to 28.1% from 21.9%. The increase in gross profit as a percentage of net sales was primarily attributable to a decrease in buying and occupancy costs as a percentage of net sales and an increase in the merchandise margin rate. (The merchandise margin rate increased substantially in August 1998 compared with August 1997.) General, administrative and store operating expenses were $20.9 million in the second quarter of Fiscal 1998, compared to $19.8 million in the second quarter of Fiscal 1997, principally as a result of increases in bonus compensation and computer software expenses, partially offset by premiums received by the Company from a bank on proprietary credit card purchases of Company merchandise (see, "-Proprietary Credit Card"). As a percentage of net sales, general, administrative and store operating expenses decreased to 20.5% from 21.3%. During the second quarter of Fiscal 1998, the Company had operating income of $7.8 million (7.6% of sales), which excludes the capital gain referred to below, compared to operating income of $0.5 million in the second quarter of Fiscal 1997. Net interest income was $0.4 million in the second quarter of Fiscal 1998 compared to net interest expense of $11,000 in the second quarter of Fiscal 1997, primarily from interest earned on a higher level of cash and cash equivalents. The Company had a provision for income taxes of $4.0 million in the second quarter of Fiscal 1998 and of $0.2 million in the second quarter of Fiscal 1997. The Company had net income of $7.2 million for the second quarter of Fiscal 1998 compared with net income of $0.4 million in the second quarter of Fiscal 1997. There is no assurance that the Company will continue to be profitable. Net income for the second quarter of Fiscal 1998 included a capital gain on the sale of the Company's minority interest in a privately held apparel design and manufacturing firm of $3.1 million ($2.0 million after tax). 12 FIRST HALF FISCAL 1998 VERSUS FIRST HALF FISCAL 1997 Net sales for the first half of Fiscal 1998 increased 9.5% from the first half of Fiscal 1997, to $197.1 million from $180.1 million, principally from an increase in average price. Average stores open decreased 7.8% from 563 to 519 as underperforming stores were closed. Comparable store sales for the first half of Fiscal 1998 increased 15.2%. Gross profit increased by $17.3 million to $55.9 million in the first half of Fiscal 1998 from $38.6 million in the first half of Fiscal 1997, increasing as a percentage of net sales to 28.3% from 21.4%. The increase in gross profit as a percentage of net sales was primarily attributable to a decrease in buying and occupancy costs as a percentage of net sales and an increase in the merchandise margin rate. General, administrative and store operating expenses were $40.9 million in the first half of Fiscal 1998, compared to $39.5 million in the first half of Fiscal 1997, principally as a result of increases in bonus compensation and computer software expenses, partially offset by premiums received by the Company from a bank on proprietary credit card purchases of Company merchandise. As a percentage of net sales, general, administrative and store operating expenses decreased to 20.7% from 21.9%. During the first half of Fiscal 1998, the Company had operating income of $15.0 million (7.6% of sales), which excludes the capital gain referred to below, compared to an operating loss of $0.9 million in the first half of Fiscal 1997. Net interest income was $0.5 million in the first half of Fiscal 1998 compared to net interest expense of $0.1 million in the first half of Fiscal 1997, primarily from interest earned on a higher level of cash and cash equivalents. The Company had a provision for income taxes of $6.8 million in the first half of Fiscal 1998 and of $0.2 million in the first half of Fiscal 1997. The Company had net income of $11.8 million for the first half of Fiscal 1998, including a $2.0 million after tax capital gain, compared with a net loss of $1.2 million in the first half of Fiscal 1997. 13 LIQUIDITY AND CAPITAL RESOURCES Net cash provided from operating activities in the first half of Fiscal 1998 was $20.6 million. The Company's cash on hand was $50.6 million at August 1, 1998, $19.8 million at August 2, 1997 and $31.1 million at January 31, 1998. Inventory decreased to $38.0 million at August 1, 1998 from $38.7 million at August 2, 1997 and was $38.0 million at January 31, 1998. The Company's inventory levels peak in early May and November/December. During Fiscal 1997, the highest inventory level was $52.1 million. Import purchases are made in U.S. dollars and are generally financed by trade letters of credit. Import purchases constituted approximately 48% of total purchases in Fiscal 1997. 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. United Retail Group, Inc. and United Retail Incorporated, its subsidiary (collectively, the "Companies"), are parties to a Financing Agreement, dated August 15, 1997, as amended September 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 of three years 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 either of the Companies to support trade letters of credit and standby letters of credit and to finance loans. As of August 1, 1998, trade letters of credit for the account of the Company and supported by CIT were outstanding in the amount of $17.8 million. (A standby letter of credit supported by CIT was also outstanding for $2.0 million as collateral for obligations in the ordinary course of business under casualty insurance policies.) Subject to the following paragraph, the availability of credit (within the aggregate $40 million line of credit) to either 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 either 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 in an account in its name that has been pledged to the lenders (a "Pledged Account"). (At August 1, 1998, the combined availability of the Companies was $9.7 million; no balance was in a Pledged Account; no loan had been drawn down; and the Company's cash on hand was unrestricted.) 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. 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 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 from time to time in the Pledged Account. 14 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, acquiring Common Stock or preferred stock of the Company, making loans, engaging in certain transactions with affiliates, or consolidating, merging or making acquisitions outside the ordinary course of business. The Company believes that its cash on hand, the availability of credit under the Financing Agreement and cash flows from operating activities will be adequate to meet anticipated working capital needs, including seasonal financing needs, for the next 12 months. This paragraph constitutes forward-looking information under the Reform Act and is subject to the uncertainties and other risk factors referred to under the caption "Future Results." In May 1998, the Company sold its minority equity interest in a privately held apparel design and manufacturing firm for $3.1 million cash. PROPRIETARY CREDIT CARD Purchases of Company merchandise made by customers with the Company's proprietary credit cards were paid for daily at a discount by a bank through November 30, 1997. Commencing December 1, 1997, however, the bank has paid a premium, instead of taking a discount, on proprietary credit card purchases. During the first half of Fiscal 1998, premiums paid to the Company by the bank had a material favorable effect on the Company's general, administrative and store operating expenses. The Credit Plan Agreement between the Companies and the bank (the "Credit Agreement") provides for the issuance of the Company's proprietary credit cards by the bank and contains financial covenants that require that the Company's (i) consolidated tangible net worth not be less than the sum of $32 million plus for each complete fiscal year ended after February 1, 1992 for which net income has been positive, 50% of net income, and (ii) consolidated fixed charges ratio for the four preceding fiscal quarters combined not be less than 1.0:1.0. The Companies terminated the Credit Agreement effective January 30, 1999 and entered into a contract with another bank to issue the Company's proprietary credit cards after January 30, 1999 and to purchase from the first bank the accounts receivable from credit card customers. There is no assurance either that discounts will not be taken by the bank on proprietary credit card purchases in Fiscal 1999 or that such discounts will not have a material adverse effect on the Company's general, administrative and store operating expenses in Fiscal 1999. STORES The Company leased 509 retail stores at August 1, 1998, of which 300 stores were located in strip shopping centers, 185 stores were located in malls and 24 stores were located in downtown shopping districts. Total retail square footage was 2.0 million square feet at August 1, 1998 and August 29, 1998 compared to 2.2 million square feet at the respective dates a year earlier. The Company intends to pay the costs of opening new stores and remodeling existing stores from its cash on hand. New stores and newly remodeled stores will use the Avenue Plus trade name. 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". 15 TAX MATTERS The Company's federal income tax returns for Fiscal 1994, Fiscal 1995 and Fiscal 1996 are being audited by the Internal Revenue Service. Management believes that the results of the audits will not have a material adverse effect on the Company's financial condition or results of operations. RENOVATING COMPUTERIZED SYSTEMS AND REPLACING EMBEDDED TECHNOLOGY The Company operates a nationwide chain of specialty apparel retail stores, imports a significant portion of its inventory, and makes a proprietary credit card available to its customers. The Company's operations are heavily dependent on date sensitive computerized systems and embedded technology, including (i) its management information systems, (ii) the technology, including microcontrollers, embedded in equipment at the Company's national distribution center, (iii) the system for issuing and processing trade letters of credit used by the bank (the "Letter of Credit Provider") that finances the Company's purchases of inventory abroad and (iv) links that will be established to the bank (the "Credit Card Bank") that will finance purchasers using the Company's proprietary credit card after 1999 (see, "-Proprietary Credit Card"). The Company's headquarters uses a date sensitive voicemail system. The Company's headquarters and stores are generally affected by date sensitive embedded technology used to control heating and ventilation and lighting. Computer programs and embedded technology, including the programs and technology on which the Company's operations depend, often will mishandle data that includes a year with digits after "99" (referred to below as "Year 2000 risks"). The Company's management information systems department (the "MIS Department") is modifying the applications software programs that are essential to its management information systems to accommodate dates after 1999. The MIS Department has identified 268 projects to analyze and, if necessary, modify applications software programs to ensure that they are Year 2000 compliant. After being modified, programs are validated and implemented as part of each project. As of August 1, 1998, 198 projects were completed and 39 projects were underway. The Company's vendor has analyzed the operating systems used by the Company and is modifying those that were not Year 2000 compliant. (Year 2000 remediation of the applications software programs and operating systems essential to the Company's management information systems is referred to below as the "Year 2000 Project.") All work by the MIS Department and the Company's vendor is scheduled to be completed by late Fiscal 1998. Integrated testing of the Company's management information systems, including operating systems, is scheduled to be completed in late Fiscal 1998. There is no assurance, however, that integrated testing will not reveal the need for further modifications in the Company's management information systems. The Company has obtained written certification from the manufacturers of the equipment that performs essential functions at the national distribution center stating that the equipment is Year 2000 compliant. There is no assurance, however, that all the essential equipment at the national distribution center will function properly after 1999 or that any malfunctions that occur will not have a material adverse effect on the Company's logistics operations. The Company has no reason to believe that the trade letter of credit system used by the Letter of Credit Provider will be unable to accommodate dates after 1999. The Credit Card Bank has assessed its systems and is in the process of modifying its systems to make them Year 2000 compliant. There is no assurance, however, that these banking systems will function properly after 1999 or that any malfunctions that occur will not have a material adverse effect on the Company's sales. The Company has requested both banks to provide written statements describing the Year 2000 risks associated with the systems that will be used in connection with the Company's transactions. 16 The Company believes that the embedded technology used in energy management systems to control heating and ventilation and lighting at its headquarters and its stores can quickly be bypassed manually in the event of a malfunction because of an inability to accommodate dates after 1999. There is no assurance, however, that any malfunctions that occur will not have a material adverse effect on the Company's operations. Early in Fiscal 1999, the Company will replace its voicemail system with one that is guaranteed to be Year 2000 compliant by the manufacturer. The cost of special purchases for the Year 2000 Project accrued through August 1, 1998 was approximately $0.3 million, substantially all of which was accrued in the first half of Fiscal 1998. Amounts equal to the internal and external costs of the Year 2000 Project, however, probably would have been spent on other software development projects, if the Year 2000 Project had not been necessary. Other software development projects deferred because of the Year 2000 Project probably would have improved the Company's operational efficiency but management does not believe that any of the deferred operational improvements would have been material to its operations. Budgeted costs of special purchases for the Year 2000 Project in the second half of Fiscal 1998 and in Fiscal 1999, respectively, are not material in relation to the Company's general, administrative and store operating expenses in the comparable previous six and twelve month periods. However, there is no assurance that unexpected additional costs will not be incurred. The budgeted cost of replacing the Company's voicemail system is not material. The inability of computerized systems and embedded technology in general to accommodate dates after 1999 may cause disruptions in the United States and abroad in the telecommunications, banking, credit card, transportation, utilities and apparel manufacturing industries and in government services. If such disruptions occur, they could have a material adverse effect on the entire specialty apparel retail industry, including the Company. The Company has not assessed industry-wide Year 2000 risks. The Company's contingency plan for Year 2000 risks that might affect the entire industry is to have multiple, geographically diverse vendors of each major category of goods, to the extent feasible. The Company will address industry-wide Year 2000 risks on an ad hoc basis as problems arise, principally by shifting purchase orders to vendors that are less troubled by Year 2000 problems than their competitors. The Company intends to modify its management information systems to make them Year 2000 compliant in all material respects and intends to ensure that the heating and ventilation, lighting and elevator controls at its headquarters will be Year 2000 compliant. There is no commercially viable alternative course of action, so the Company will not develop contingency plans for such Year 2000 risks. The Company's contingency plan for Year 2000 risks at its national distribution center is to replace as quickly as possible any essential equipment that has malfunctioned because of inability to accommodate dates after 1999. The Company has contingency plans with respect to heating and ventilation and lighting controls in its stores that have malfunctioned because of an inability to accommodate dates after 1999. For stores located in strip shopping centers, the Company will arrange as quickly as possible for local maintenance contractors to bypass manually any controls that have malfunctioned. For stores located in malls and downtown shopping districts, the Company will promptly notify landlords of systems that have malfunctioned and request immediate restoration of service. In the case of any unheated stores that have lights, the Company will also ask store managers to keep the stores open if weather conditions permit. 17 There is no assurance that Year 2000 risks will not have a material adverse effect on the Company's operations and financial condition regardless of the Company's remediation efforts and contingency plans. The preceding paragraphs contain forward-looking information under the Reform Act, which is subject to the uncertainties and other risk factors referred to under the caption "Future Results." FUTURE RESULTS Future results could differ materially from those currently anticipated by the Company due to unforeseeable problems that might arise and (i) miscalculation of fashion trends, (ii) shifting shopping patterns, both within the specialty store sector and in other channels of distribution, (iii) extreme or unseasonable weather conditions, (iv) imposition by the bank that now issues the Company's proprietary credit cards of more onerous fees and finance charges to be paid by credit card customers (the late fees charged to delinquent credit card customers were increased substantially by the bank in February 1998), (v) disruptions in the telecommunications, banking, credit card, transportation, utilities and apparel manufacturing industries in the United States and abroad caused by the inability of their computerized systems and embedded technology to accommodate dates after 1999, (vi) economic downturns, weakness in overall consumer demand, and variations in the demand for women's fashion apparel, (vii) imposition by vendors, or their third-party factors, of more onerous payment terms for domestic merchandise purchases, (viii) acceleration in the rate of business failures and inventory liquidations in the specialty store sector of the women's apparel industry, and (ix) disruptions in the sourcing of merchandise abroad, including (a) political instability and economic distress in South Asia, (b) China's claims to sovereignty over Taiwan, (c) North Korea's claims to sovereignty over South Korea, (d) exchange rate fluctuations, (e) trade sanctions or restrictions, (f) changes in quota and duty regulations, (g) delays in shipping, (h) increased costs of transportation or (i) disruptions in government services in the United States and abroad caused by the inability of computerized systems and embedded technology to accommodate dates after 1999, including delays in the issuance by the United States Customs Service of clearances on imported merchandise. 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS The following exhibit is filed herewith:
Number Description ------ ----------- 27 Financial Data Schedule
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 ---------------- ----------- 4.1 Amended By-Laws of the Corporation 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 Program Agreement, dated January 27, 1998, between the Corporation, United Retail Incorporated and World Financial Network National Bank (Confidential portions have been deleted and filed separately with the Secretary of the Commission) 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 10.7* Restated 1989 Performance Option Plan as of March 6, 1998 13 Sections of 1997 Annual Report to Stockholders (including opinion of Independent Public Accountants) that are incorporated by reference in response to the items of the Annual Report on Form 10-K
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 among the Corporation, United Retail Incorporated and The CIT Group/Business Credit, Inc. ("CIT")
19 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, dated August 15, 1997, among the Corporation, United Retail Incorporated and CIT 10.2* Amendment No. 1 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 Quarterly Report on Form 10-Q for the period ended May 4, 1996 are incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.3 Amended and Restated Term Sheet Agreement for Hosiery, dated as of December 29, 1995, between The Avenue, Inc. and American Licensing Group, Inc. (Confidential portions have been deleted and filed separately with the Secretary of the Commission)
The following exhibit to the Corporation's Current Report on Form 8-K, dated March 22, 1996, is incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.3* Employment Agreement, dated March 1, 1996, between the Corporation and Kenneth P. Carroll
The following exhibits to the Corporation's Amended Current Report on Form 8-KA, dated May 22, 1995, are incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.1 Amended and Restated Gloria Vanderbilt Intimate Apparel Sublicense Agreement, dated May 22, 1995, between United Retail Incorporated and American Licensing Group Limited Partnership ("ALGLP") 10.2 Gloria Vanderbilt Sleepwear Sublicense Agreement, dated May 22, 1995, between United Retail Incorporated and ALGLP
20 The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended January 28, 1995 are incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.1* Incentive Compensation Program Summary 21 Subsidiaries of the Corporation
The following exhibits to the Corporation's amended Annual Report on Form 10-KA for the year ended January 29, 1994 are incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.3 Amendment, dated December 6, 1993, to Credit Agreement between the Corporation and Citibank 10.4 Term Sheet Agreement, dated as of May 4, 1993, with respect to Amended and Restated Gloria Vanderbilt Hosiery Sublicense Agreement
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 Registrant 4.1 Specimen Certificate for Common Stock of Registrant 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) 10.2.2 Amendment to Software License Agreement, dated December 10, 1991 10.7 Amended and Restated Gloria Vanderbilt Hosiery Sublicense Agreement, dated as of April 30, 1989, between American Licensing Group, Inc. (Licensee) and Sizes Unlimited, Inc. (Sublicensee) 10.12 Amended and Restated Master Affiliate Sublease Agreement, dated as of July 17, 1989, among Lane Bryant, Inc., Lerner Stores, Inc. (Landlord) and Sizes Unlimited, Inc. (Tenant) and Amendment thereto, dated July 17, 1989 10.23* Restated Employment Agreement, dated November 1, 1991, between the Corporation and Raphael Benaroya 10.25* Restated Employment Agreement, dated November 1, 1991, between the Corporation and George R. Remeta 10.33* 1991 Stock Option Agreement, dated November 1, 1991, between the Corporation and Raphael Benaroya 10.34* 1991 Stock Option Agreement, dated November 1, 1991, between the Corporation and George R. Remeta 10.38 Management Services Agreement, dated August 26, 1989, between American Licensing Group, Inc. and ALGLP 10.39 First Refusal Agreement, dated as of August 31, 1989, between the Corporation and ALGLP
21 10.43 Credit Plan Agreement, dated June 3, 1992, among the Corporation, Sizes Unlimited, Inc. and Citibank ------------- *A compensatory plan for the benefit of the Corporation's management or a management contract. (b) No Current Reports on Form 8-K were filed by the Corporation during the fiscal quarter ended August 1, 1998. 22 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. By: /S/ GEORGE R. REMETA ------------------------------------------------------ George R. Remeta, Vice Chairman of the Board and Chief Financial Officer - Authorized Signatory By: /S/ JON GROSSMAN ------------------------------------------------------- Jon Grossman, Vice President - Finance and Chief Accounting Officer Date: September 11, 1998 23 EXHIBIT INDEX The following exhibit is filed herewith: Number Description ------ ----------- 27 Financial Data Schedule 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 ---------------- ----------- 4.1 Amended By-Laws of the Corporation 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 Program Agreement, dated January 27, 1998, between the Corporation, United Retail Incorporated and World Financial Network National Bank (Confidential portions have been deleted and filed separately with the Secretary of the Commission) 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 10.7* Restated 1989 Performance Option Plan as of March 6, 1998 13 Sections of 1997 Annual Report to Stockholders (including opinion of Independent Public Accountants) that are incorporated by reference in response to the items of the Annual Report on Form 10-K
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 among the Corporation, United Retail Incorporated and The CIT Group/Business Credit, Inc. ("CIT")
24 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, dated August 15, 1997, among the Corporation, United Retail Incorporated and CIT 10.2* Amendment No. 1 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 Quarterly Report on Form 10-Q for the period ended May 4, 1996 are incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.3 Amended and Restated Term Sheet Agreement for Hosiery, dated as of December 29, 1995, between The Avenue, Inc. and American Licensing Group, Inc. (Confidential portions have been deleted and filed separately with the Secretary of the Commission)
The following exhibit to the Corporation's Current Report on Form 8-K, dated March 22, 1996, is incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.3* Employment Agreement, dated March 1, 1996, between the Corporation and Kenneth P. Carroll
The following exhibits to the Corporation's Amended Current Report on Form 8-KA, dated May 22, 1995, are incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.1 Amended and Restated Gloria Vanderbilt Intimate Apparel Sublicense Agreement, dated May 22, 1995, between United Retail Incorporated and American Licensing Group Limited Partnership ("ALGLP") 10.2 Gloria Vanderbilt Sleepwear Sublicense Agreement, dated May 22, 1995, between United Retail Incorporated and ALGLP
25 The following exhibits to the Corporation's Annual Report on Form 10-K for the year ended January 28, 1995 are incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.1* Incentive Compensation Program Summary 21 Subsidiaries of the Corporation
The following exhibits to the Corporation's amended Annual Report on Form 10-KA for the year ended January 29, 1994 are incorporated herein by reference:
Number in Filing Description ---------------- ----------- 10.3 Amendment, dated December 6, 1993, to Credit Agreement between the Corporation and Citibank 10.4 Term Sheet Agreement, dated as of May 4, 1993, with respect to Amended and Restated Gloria Vanderbilt Hosiery Sublicense Agreement
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 Registrant 4.1 Specimen Certificate for Common Stock of Registrant 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) 10.2.2 Amendment to Software License Agreement, dated December 10, 1991 10.7 Amended and Restated Gloria Vanderbilt Hosiery Sublicense Agreement, dated as of April 30, 1989, between American Licensing Group, Inc. (Licensee) and Sizes Unlimited, Inc. (Sublicensee) 10.12 Amended and Restated Master Affiliate Sublease Agreement, dated as of July 17, 1989, among Lane Bryant, Inc., Lerner Stores, Inc. (Landlord) and Sizes Unlimited, Inc. (Tenant) and Amendment thereto, dated July 17, 1989 10.23* Restated Employment Agreement, dated November 1, 1991, between the Corporation and Raphael Benaroya 10.25* Restated Employment Agreement, dated November 1, 1991, between the Corporation and George R. Remeta 10.33* 1991 Stock Option Agreement, dated November 1, 1991, between the Corporation and Raphael Benaroya 10.34* 1991 Stock Option Agreement, dated November 1, 1991, between the Corporation and George R. Remeta 10.38 Management Services Agreement, dated August 26, 1989, between American Licensing Group, Inc. and ALGLP 10.39 First Refusal Agreement, dated as of August 31, 1989, between the Corporation and ALGLP
26 10.43 Credit Plan Agreement, dated June 3, 1992, among the Corporation, Sizes Unlimited, Inc. and Citibank ------------- *A compensatory plan for the benefit of the Corporation's management or a management contract. EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JAN-30-1999 MAY-03-1998 AUG-01-1998 50,641 0 765 0 38,040 95,875 107,957 61,811 150,422 39,160 9,751 0 0 14 94,872 150,422 102,175 102,175 73,419 73,419 20,947 0 (355) 11,277 4,039 7,238 0 0 0 7,238 0.55 0.52
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