NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2004,
filed with the Securities and Exchange Commission on April 15, 2004.
The retail portion of the Company's business is subject to seasonal variations
in which a greater percent of the Company's net sales and net income typically
occur during the period from August 1 through December 31 of the fiscal year.
Accordingly, the results of operations for the three and nine months ended
October 31, 2004 are not necessarily indicative of the results to be expected
for the full year.
2. Equity and Stock Splits
On August 14, 2003, our Board of Directors authorized a two-for-one split of our
common shares in the form of a 100% stock dividend. The additional shares issued
as a result of the stock split were distributed on September 19, 2003 to
shareholders of record as of September 5, 2003.
In addition, on June 1, 2004, our Board of Directors authorized a two-for-one
split of our common shares in the form of a 100% stock dividend. The additional
shares issued as a result of the stock split were distributed on or about July
9, 2004 to shareholders of record as of June 22, 2004.
All relevant amounts in the accompanying unaudited condensed consolidated
financial statements and the notes thereto have been restated to reflect the
stock splits for all periods presented.
3. Reclassification
Certain auction rate securities have been reclassified from cash equivalents to
short-term marketable securities. Auction rate securities are variable rate
bonds tied to short term interest rates with maturities on the face of the
securities in excess of 90 days. Auction rate securities have interest rate
resets through a modified Dutch auction, at predetermined short term intervals,
usually every 7, 28 or 35 days. They trade at par and are callable at par on any
interest payment date at the option of the issuer. Interest paid during a given
period is based upon the interest rate determined during the prior auction.
Although these securities are issued and rated as long term bonds, they are
priced and traded as short term instruments because of the liquidity provided
through the interest rate reset. The Company had historically classified these
instruments as cash equivalents if the period between interest rate resets was
90 days or less, which was based on our ability to either liquidate our holdings
or roll our investment over to the next reset period.
Based upon the Company's re-evaluation of the maturity dates associated with the
underlying bonds, the Company has reclassified its auction rate securities,
previously classified as cash equivalents, as short-term marketable securities
for each of the periods presented in the accompanying condensed consolidated
balance
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URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
sheets. In addition, "Purchases of marketable securities" and "Sales and
maturities of marketable securities", included in the accompanying Condensed
Consolidated Statements of Cash Flows, have been revised to reflect the purchase
and sale of auction rate securities during the periods presented.
4. Marketable Securities
During all periods presented, marketable securities are classified as available
for sale. The amortized cost, gross unrealized gains (losses) and fair value of
available-for-sale securities by major security type and class were as follows:
Unrealized
Amortized Gains Fair
Cost (Losses) Value
As of October 31, 2004
Municipal bonds:
Maturing in less than one year $ 23,605 $ (102 ) $ 23,503
Maturing after one year through four years 64,105 (6 ) 64,099
87,710 (108 ) 87,602
Auction rate instruments:
Maturing in less than one year 57,999 - 57,999
Maturing after one year through two years 3,000 - 3,000
60,999 - 60,999
$ 148,709 $ (108 ) $ 148,601
As of January 31, 2004
Municipal bonds:
Maturing in less than one year $ 11,567 $ 12 $ 11,579
Maturing after one year through four years 45,347 (32 ) 45,315
56,914 (20 ) 56,894
Auction rate instruments:
Maturing in less than one year 38,450 - 38,450
Maturing after one year through two years 7,000 - 7,000
45,450 - 45,450
$ 102,364 $ (20 ) $ 102,344
As of October 31, 2003
Municipal bonds:
Maturing in less than one year $ 9,127 $ 17 $ 9,144
Maturing after one year through four years 46,735 (21 ) 46,714
55,862 (4 ) 55,858
Auction rate instruments:
Maturing in less than one year 35,350 - 35,350
Maturing after one year through four years 2,000 - 2,000
37,350 - 37,350
$ 93,212 $ (4 ) $ 93,208
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URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Line of Credit Facility
On September 30, 2004, we renewed and amended our line of credit facility (the
"Line"). The Line is a three-year $35.0 million revolving credit facility with
an accordion feature allowing an increase to $50.0 million at the Company's
discretion. The Line contains a sub-limit for borrowings by our European
subsidiaries that are guaranteed by the Company. Cash advances bear interest at
LIBOR plus 0.50% to 1.60% based on our achievement of prescribed adjusted debt
ratios. The Line subjects us to various restrictive covenants, including
maintenance of certain financial ratios and covenants such as fixed charge
coverage and adjusted debt. The covenants also include limitations on our
capital expenditures, ability to repurchase shares and the payment of cash
dividends. As of October 31, 2004, the Company is in compliance with all
covenants under the Line. As of and during the nine months ended October 31,
2004, there were no borrowings under the Line. Outstanding letters of credit and
stand-by letters of credit under the Line totaled approximately $23.4 million as
of October 31, 2004. The available borrowing under the Line was $11.6 million as
of October 31, 2004.
6. Commitments and Contingencies
On March 26, 2004, an employee filed an employment related suit seeking class
action status, unspecified monetary damages and equitable relief against
Anthropologie, Inc., a subsidiary of the Company, in the Superior Court of
California for Orange County. The complaint alleges that, under California law,
the plaintiff and certain other employees were misclassified as employees exempt
from overtime and seeks recovery of unpaid wages, penalties and damages. The
Company believes the claim is frivolous and without merit and intends to defend
it vigorously.
The Company is party to various other legal proceedings arising from normal
business activities. Management believes that the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
7. Stock Based Employee Compensation
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In 1995, the FASB issued SFAS No. 123, which established a fair
value based method of accounting for stock-based employee compensation. The
Company has adopted the disclosure requirements of SFAS No. 123.
The Company may make restricted stock awards to employees, non-employee
directors and consultants. A restricted stock award is an award of common shares
that is subject to certain restrictions during a specified period, such as an
employee's continued employment with the Company or the Company achieving
certain financial goals. The Company holds the common shares during the
restriction period, and the grantee cannot transfer the shares before the
termination of that period. The grantee is, however, generally entitled to vote
the common shares and receive any dividends declared and paid on the Company's
common shares during the restriction period. Unearned compensation is recorded
as a component of shareholders' equity and amortized over the vesting period of
the award as stock compensation expense in the Company's results of operations.
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URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Had compensation costs for the Company's stock-based employee compensation plans
been determined under SFAS No. 123, the Company's net income and net income per
common share would have decreased to the following pro forma amounts:
Three Months Ended Nine Months Ended
October 31, October 31,
2004 2003 2004 2003
Net income-as reported $ 26,036 $ 14,087 $ 63,413 $ 29,947
Add: Stock based employee compensation
expense included in the determination of net
income as reported, net of related tax effect 177 - 248 -
Deduct: Total stock-based employee
compensation expense determined under fair
value-based method for all grants, net of
related tax effects (11,493 ) (1,463 ) (17,442 ) (3,281 )
Net income-pro forma $ 14,720 $ 12,624 $ 46,219 $ 26,666
Net income per common share-basic-as reported $ 0.32 $ 0.18 $ 0.79 $ 0.38
Net income per common share-basic-pro forma $ 0.18 $ 0.16 $ 0.57 $ 0.34
Net income per common share-diluted-as
reported $ 0.31 $ 0.17 $ 0.76 $ 0.37
Net income per common share-diluted-pro forma $ 0.18 $ 0.16 $ 0.56 $ 0.33
8. Net Income Per Common Share
The following is a reconciliation of the weighted average shares outstanding
used for the computation of basic and diluted net income per common share:
Three Months Ended Nine Months Ended
October 31, October 31,
2004 2003 2004 2003
Basic weighted average shares outstanding 81,047,615 78,888,858 80,563,086 78,248,780
Effect of dilutive options 3,028,641 2,618,968 2,844,910 2,008,518
Diluted weighted average shares outstanding 84,076,256 81,507,826 83,407,996 80,257,298
For the three months ended October 31, 2004 and 2003, there were no options
outstanding that were not included in our computation of diluted "weighted
average common shares and common share equivalents outstanding". Options to
purchase 701,000 and 100,000 common shares were outstanding for the nine months
ended October 31, 2004 and 2003, respectively, but were not included in our
computation, as their effect would have been anti-dilutive.
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URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. Segment Reporting
Urban Outfitters is a national retailer of lifestyle-oriented general
merchandise consisting of 134 stores as of October 31, 2004, operating under the
retail names "Urban Outfitters," "Anthropologie" and "Free People" and through
two catalogs and three web sites. Net sales from this retail segment accounted
for over 96% of total consolidated net sales for the three and nine months ended
October 31, 2004 and 2003. The remainder was derived from our wholesale division
that manufactures and distributes apparel to the Company's retail segment and to
approximately 1,100 specialty retailers and department stores worldwide.
The Company has separated its operations into these two reportable segments
based upon their unique management, customer base and economic characteristics.
Reporting in this format provides management with the financial information
necessary to evaluate the success of the segments and the overall business. The
Company evaluates the performance of the segments based on the net sales and
pre-tax income from operations (excluding intercompany royalty and interest
charges) of the segment. Corporate expenses, which include expenses incurred in
and directed by the corporate office, are not allocated to segments. The
principal identifiable assets for each operating segment are inventories and
property and equipment. Other assets are comprised primarily of general
corporate assets, principally consisting of cash and cash equivalents,
marketable securities and other assets, which are typically not allocated to the
segments. The Company accounts for inter-segment sales and transfers as if the
sales and transfers were made to third parties making similar volume purchases.
Both the retail and wholesale segment are highly diversified. No customer
comprises more than 10% of sales.
Three Months Ended Nine Months Ended
October 31, October 31,
2004 2003 2004 2003
Net sales
Retail operations $ 208,072 $ 137,101 $ 555,268 $ 357,842
Wholesale operations 9,062 5,946 22,491 16,138
Intersegment elimination (781 ) (716 ) (1,632 ) (1,742 )
Total net sales $ 216,353 $ 142,331 $ 576,127 $ 372,238
Income from operations
Retail operations $ 42,930 $ 23,991 $ 107,734 $ 51,096
Wholesale operations 2,005 376 4,286 1,240
Intersegment elimination (77 ) (128 ) (230 ) (291 )
Total segment operating income 44,858 24,239 111,790 52,045
General corporate expenses (1,676 ) (761 ) (6,092 ) (2,406 )
Total income from operations $ 43,182 $ 23,478 $ 105,698 $ 49,639
9
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URBAN OUTFITTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
October 31, January 31, October 31,
2004 2004 2003
Property and equipment, net
Retail operations $ 146,970 $ 120,948 $ 122,146
Wholesale operations 1,056 971 877
Total property and equipment, net $ 148,026 $ 121,919 $ 123,023
Inventories
Retail operations $ 109,359 $ 60,571 $ 70,389
Wholesale operations 3,534 2,676 1,824
Total inventories $ 112,893 $ 63,247 $ 72,213
The Company has foreign operations in Europe and Canada. Revenues and long-term
assets, based upon our domestic and foreign operations, are as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
2004 2003 2004 2003
Net sales
Domestic operations $ 203,908 $ 136,172 $ 546,879 $ 356,372
Foreign operations 12,445 6,159 29,248 15,866
Total net sales $ 216,353 $ 142,331 $ 576,127 $ 372,238
October 31, January 31, October 31,
2004 2004 2003
Property and equipment, net
Domestic operation $ 131,684 $ 109,485 $ 112,307
Foreign operations 16,342 12,434 10,716
Total property and equipment, net $ 148,026 $ 121,919 $ 123,023
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