-----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, PIU5eJV5gEK/fzKTSuLiAx1k4saeDS7wrz0R4AVKi0wv0Z4iSEqSjtr1qu37c8GN wjrccQXX5qIf64aNTztVkA== 0000950123-98-003976.txt : 19980421 0000950123-98-003976.hdr.sgml : 19980421 ACCESSION NUMBER: 0000950123-98-003976 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980420 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-K SEC ACT: SEC FILE NUMBER: 000-19774 FILM NUMBER: 98597312 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-K 1 FORM 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1998 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ___________________ to ______________________ Commission file number 019774 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 Securities registered pursuant to Section 12(b) of the 1934 Act: Title of each class Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the 1934 Act: Common Stock, $.001 par value per share (Title of class) 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 31, 1998, the aggregate market value of the voting stock of the registrant (also referred to herein as the "Company") held by non-affiliates of the registrant was approximately $48.2 million. For purposes of the preceding sentence only, affiliate status was determined on the basis that all stockholders of the registrant are non-affiliates except stockholders who have filed statements with the Securities and Exchange Commission (the "SEC") under Section 16(a) of the 1934 Act. APPLICABLE ONLY TO REGISTRANTS 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 REGISTRANTS: Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 31, 1998, 13,085,188 shares of the registrant's common stock, $.001 par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The registrant's annual report for the year ended January 31, 1998 (the "1997 Annual Report to Stockholders") is incorporated in part by reference in Part I and Part II of this Form 10-K. The registrant's proxy statement on Schedule 14A for its 1998 annual meeting of stockholders (the "1998 Proxy Statement") is incorporated in part by reference in Part I and Part III of this Form 10-K. 2 3 PART I Item 1. Business. OVERVIEW The Company is a leading nationwide specialty retailer of large-size women's apparel and accessories, offering private label merchandise using the AVENUE trademark. The Company's merchandising strategy is to offer its customers merchandise of the same quality and variety available in smaller sizes. The Company operates stores principally under the names THE AVENUE(R) and Sizes Unlimited. CUSTOMER BASE The Company serves the mass market and targets fashion-conscious women between 18 and 50 years of age who wear size 14 or larger. The Company believes that this market is underserved by many department and specialty retail stores that do not offer wide selections of fashionable large-size women's apparel. In addition, the large-size customer often has fewer store alternatives in nearby shopping malls and strip shopping centers than her smaller-size counterpart. HISTORY The Company was incorporated in 1987 and completed its initial public offering in 1992. The Company's current business resulted from an internal reorganization at The Limited, Inc. ("The Limited") in 1987, in which The Limited combined its underperforming The Avenue(R) store group (then operating under the Lerner Woman trade name) with the Sizes Unlimited store group. Raphael Benaroya, the Company's Chairman of the Board, President and Chief Executive Officer, and his management team were selected to manage the combined businesses. MERCHANDISING AND MARKETING The Company's strategy is to offer its customers a proprietary brand in moderately priced private label merchandise. It emphasizes consistency of merchandise quality and fit and updates its merchandise selections to reflect customer demand and fashion trends. The apparel industry is subject to rapidly changing consumer fashion preferences and the Company's performance depends on its ability to respond quickly to changes in fashion. Each store operated by the Company offers selections of casual wear, career apparel, specialty items and accessories. The casual wear assortment includes comfortably fitted jeans, slacks, T-shirts, skirts, active wear and sweaters. Casual wear comprises the majority of the Company's sales. The career assortment includes skirts, soft blouses, dresses and coats. Specialty items include sleepwear and lingerie. Accessories include earrings, pins, scarves, socks, hosiery and a selection of gift items. The Company offers most of its merchandise at popular or moderate price points, including blouses in the $20 to $40 price range, jeans and slacks in the $20 to $35 price range and dresses and suits in the $49 to $99 price range. The Company promotes its own proprietary label merchandise, which generally has higher gross profit margins than national brands would have. The Company believes that its brand, AVENUE, creates an image that helps distinguish it from competitors. Through careful brand management, including consistent imaging of its private label merchandise, the Company believes it enhances brand recognition and the customer's perception of value. Garments are tagged, packaged and presented at the Company's stores in a manner consistent with more expensive garments with national brand names. 3 4 The Company develops new merchandise assortments on average six times each year. Merchandise selection is allocated to each store based on many factors, including store location, store profile and sales experience. The Company regularly updates each store's profile based on its customers' fashion and price preferences and local demographics. The Company's point-of-sale systems gather financial, credit, inventory and other statistical information from each store on a daily basis. This information is then used to evaluate and adjust each store's merchandise mix on a weekly basis. The Company uses creative merchandise displays, distinctive signage and upscale packaging to create an attractive store atmosphere. To further stimulate store traffic, the Company frequently uses credit card inserts with announcements of upcoming events. MERCHANDISE DISTRIBUTION AND INVENTORY MANAGEMENT The Company believes that short production schedules and rapid movement of merchandise from manufacturers to its stores are vital to minimize business risks arising from changing fashion trends. The Company uses a centralized distribution system, under which all merchandise is received, processed and distributed through a distribution complex located in Troy, Ohio. Merchandise received at the distribution center is promptly assigned to individual stores, packed for delivery and shipped to the stores. The Company maintains a worldwide logistics network of agents and space availability arrangements to support the in-bound movement of merchandise into the distribution complex. The out-bound system consists of common carrier line haul routes connecting the distribution complex to a network of delivery agents. This system enables the Company to provide every store with frequent deliveries. The Company does not own or operate trucks or trucking facilities. The Company manages its inventory levels, merchandise allocation to stores and sales replenishing for each store through its computerized management information systems, which enable the Company to profile each store and evaluate and adjust each store's merchandise mix on a weekly basis. New merchandise is allocated by style, color and size immediately before shipment to stores to achieve a merchandise assortment that is suited to each store's customer base. The Company's inventory management strategy is designed to maintain targeted inventory turnover rates and minimize the amount of unsold merchandise at the end of a season by closely comparing sales and fashion trends with on-order merchandise and making necessary purchasing adjustments. Additionally, the Company uses markdowns and promotions as necessary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." ("Management's Discussion and Analysis of Financial Condition and Results of Operations" is a section in the Company's 1997 Annual Report to Stockholders.) MANAGEMENT INFORMATION SYSTEMS The applications software for the Company's management information systems was acquired by the Company from The Limited. The Company's management information systems consist of a full range of store, financial and merchandising systems, including credit, inventory distribution and control, sales reporting, accounts payable, cash/credit, merchandise reporting and planning. All of the Company's stores have point-of-sale terminals that transmit daily information on sales by merchandise category as well as style, color and size. The Company evaluates this information, together with its report on merchandise shipments to the stores, to implement merchandising decisions regarding markdowns, reorders of fast-selling items and allocation of merchandise. In addition, the Company's headquarters and distribution center are linked through an interactive computer network. 4 5 Company employees located at its headquarters maintain and support the applications software, operations, networking and point-of-sale functions of the Company's management information systems. The hardware and systems software for the Company's management information systems are maintained by Integrated Systems Solutions Corporation, a wholly-owned subsidiary of IBM. See, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Computer Systems." PURCHASING Separate groups of merchants are responsible for different categories of merchandise. Most of the merchandise purchased by the Company consists of principally custom designed garments produced for the Company by contract manufacturing, under the Company's private label. An item of merchandise is test marketed, whenever possible, in limited quantities prior to mass production to help identify the current fashion preferences of the Company's customers. The Company provides manufacturers with strict guidelines for size specifications and gradings to ensure proper, consistent fit across product categories. The Company and independent sourcing agents monitor production by manufacturers in the United States and abroad to ensure that size specifications, grading requirements and other specifications are met. In Fiscal 1997, each of two vendors accounted for more than 5% but less than 10% of the Company's merchandise purchases. The loss of these vendors would not have a materially adverse effect on the Company's operations. Domestic purchases (some of which are foreign-made products) are executed by Company purchase orders. Import purchases are made in U.S. dollars and are generally supported by letters of credit. See, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." CREDIT SALES The Company permits its customers to use several methods of payment, including cash, personal checks, third-party credit cards, layaways and its own credit cards. See, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources and - Future Results." COMPETITION All aspects of the women's retail apparel business are highly competitive. Many of the competitors are units of large national chains that have substantially greater resources than the Company. Management believes its principal competitors include all major national and regional department stores, specialty retailers (including Lane Bryant, Inc. which is a subsidiary of The Limited, and which management believes is the largest specialty retailer of large-size women's apparel), discount stores, mail order companies, television shopping channels and interactive electronic media. Management believes its merchandise selection, prices, consistency of merchandise quality and fit, and appealing shopping experience emphasizing strong merchandise presentations, together with its experienced management team, management information systems and logistics capabilities, enable it to compete in the marketplace. OPERATIONAL FACTORS The Company's operations may be adversely affected by circumstances beyond its control. See, "Management's Discussion and Analysis of Financial Condition and Results of Operation - Future Results." 5 6 TRADE NAMES AND TRADEMARKS The Company is the owner in the United States of its principal trademarks, THE AVENUE, used on store fronts, and AVENUE, used on garment labels. The Company is also the sublicensee of a national brand name of hosiery, sleepwear and foundations. See, "Certain Transactions" in the 1998 Proxy Statement. The Company is not aware of any use of its principal trademarks by its competitors that has a material effect on the Company's operations or any material claims of infringement or other challenges to the Company's right to use its principal trademarks in the United States. EMPLOYEES As of March 31, 1998, the Company employed approximately 4,600 associates, of whom approximately 1,800 worked full-time and the balance of whom worked part-time. Considerable seasonality is associated with employment levels. Approximately 60 store associates are covered by collective bargaining agreements. The Company believes that its relations with its associates are good. Item 2. Properties. As of March 31, 1998, the Company operated stores in 36 states: Alabama 6 Nevada 2 Arizona 4 New Hampshire 2 Arkansas 1 New Jersey 41 California 78 New Mexico 1 Connecticut 11 New York 52 Delaware 2 North Carolina 9 Florida 18 Ohio 21 Georgia 20 Oklahoma 3 Illinois 38 Oregon 7 Indiana 12 Pennsylvania 20 Iowa 2 Rhode Island 1 Kentucky 4 South Carolina 8 Louisiana 11 Tennessee 10 Maine 1 Texas 35 Maryland 16 Utah 1 Massachusetts 20 Virginia 12 Michigan 27 Washington 13 Missouri 6 Wisconsin 7 Total: 522 The Company leases its executive offices, which consist of approximately 56,000 square feet in an office building at 365 West Passaic Street, Rochelle Park, New Jersey. The office lease has a term ending in August 2006. The Company owns a 128-acre site on Interstate 75 in Troy, Ohio, on which its national distribution center is located. The national distribution center is equipped to service 900 stores. The site is adequate for a total of four similar facilities. 6 7 Item 3. Legal Proceedings. The Company is defending various routine legal proceedings incidental to the conduct of its business and is maintaining reserves that include, among other things, the estimated cost of uninsured payments to accident victims and payments to landlords and vendors of goods and services resulting from certain disputes. Based on legal advice that it received, management believes that, giving effect to reserves and insurance coverage, these legal proceedings are not likely to have a material adverse effect on the financial condition or results of operations of the Company. No material pending legal proceeding to which the Company was a party was terminated during the fourth quarter of the fiscal year ended January 31, 1998. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 7 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The section captioned "Shareholder Information" in the 1997 Annual Report to Stockholders is incorporated herein by reference. (Only those portions of the 1997 Annual Report to Stockholders incorporated by reference in another document filed with the SEC shall be deemed "filed" in accordance with the rules and regulations promulgated by the SEC.) On February 13, 1998, the Company issued to two officers stock options that have not been registered under the Securities Act of 1933. See, the section captioned "Approval of Management Stock Options" in the 1998 Proxy Statement, which is incorporated herein by reference. The options were issued subject to stockholder approval in reliance on the exemption from registration contained in Section 4(2) of the Securities Act. The Company intends to register them under the Securities Act promptly after stockholder approval is obtained. Item 6. Selected Financial Data. The section captioned "Selected Financial Data" in the 1997 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 Annual Report to Stockholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. The Consolidated Financial Statements in the 1997 Annual Report to Stockholders are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 8 9 PART III Item 10. Directors and Executive Officers of the Registrant. The subsection captioned "Election of Directors - Business Experience" in the 1998 Proxy Statement is incorporated herein by reference. In addition to the nominees identified under the subsection captioned "Election of Directors - Business Experience" in the 1998 Proxy Statement, Christina A. Mohr is serving as a Director but is not standing for reelection. She has been a Director since February 1994. Ms. Mohr has been a Managing Director at Salomon Bros., Inc. since February 1997 and was a Managing Director at Lazard Freres & Co. LLC from January 1997 to before 1993. She is a director of Loehmanns, Inc. In addition to Raphael Benaroya and George R. Remeta, the executive officers of the registrant or its subsidiaries are: Kenneth P. Carroll, age 55, was the Company's Vice President - General Counsel from before 1993 to March 1996, when he was elected the Senior Vice President - General Counsel. Ellen Demaio, age 40, was a Vice President - Merchandise of United Retail Incorporated from before 1993 to March 1994, when she was elected the Senior Vice President - Merchandise of United Retail Incorporated. Carrie Cline-Tunick, age 37, has been the Vice President - Product Design and Development of United Retail Incorporated since April 1996. Previously, she was the Design Director of Norton McNaughton, Inc., a garment manufacturer, from April 1996 to before 1993. Julie L. Daly, age 43, has been the Vice President - Strategic Planning of United Retail Incorporated since December 1996. Previously, she was the Vice President - Planning and Distribution of United Retail Incorporated since prior to 1993. Kent Frauenberger, age 51, has been the Vice President - Logistics of United Retail Logistics Operations Incorporated since May 1993. Previously, he was Manager of Business Development of Exel Logistics Inc., a logistics firm. Jon Grossman, age 40, has been the Vice President - Finance of the Company since before 1993. Alan R. Jones, age 50, has been the Vice President - Real Estate of United Retail Incorporated since November 1994. Previously, he was Vice President - Real Estate of Payless Shoesource, a division of May Department Stores, Inc., since before 1993. Charles E. Naff, age 54, has been the Vice President - Sales of United Retail Incorporated since August 1996 and was the Director of Stores of United Retail Incorporated from March 1994 to November 1993. He was the Vice President - Store Operations of Leejay Bed and Bath, a retail chain, between August 1996 and March 1994 and was the Senior Vice President - Operations of The Children's Place, a retail chain, from November 1993 to before 1993. Bradley Orloff, age 40, has been the Vice President - Marketing of United Retail Incorporated since before 1993. Robert Portante, age 46, has been the Vice President - MIS of United Retail Incorporated since November 1994. Previously, he was Vice President - MIS of Brooks Fashion Stores, Inc. ("Brooks"), a retail store chain, since before 1993. Brooks filed as debtor-in-possession under the United States Bankruptcy Code. 9 10 Fredric E. Stern, age 49, has been the Vice President - Controller of United Retail Incorporated since before 1993. The term of office of these executive officers will expire at the 1998 annual meeting of stockholders, scheduled to be held in May 1998. The section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the 1998 Proxy Statement is incorporated herein by reference. Item 11. Executive Compensation. The sections captioned "Executive Compensation" and "Report of Compensation Committee" in the 1998 Proxy Statement are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The sections captioned "Security Ownership of Principal Stockholders" and "Security Ownership of Management" in the 1998 Proxy Statement are incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The section captioned "Certain Transactions" in the 1998 Proxy Statement is incorporated herein by reference. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. The following exhibits are filed herewith: Number 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) 10.3 Financial Statements of Retirement Savings Plan for year ended December 31, 1997 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 23.1 Consent of Independent Public Accountants for the Corporation 23.2 Consent of Independent Public Accountants for Retirement Savings Plan 27 Financial Data Schedule The form of Additional Options set forth as the Appendix to the Corporation's proxy statement on Schedule 14A for its 1998 annual meeting of stockholders is incorporated herein by reference.* 10 11 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") 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 - ---------------- ----------- 10.1* Severance Pay Agreement, dated May 28, 1996, between the Corporation and Raphael Benaroya 10.2* Severance Pay Agreement, dated May 28, 1996, between the Corporation and George R. Remeta 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 Corporation's 1996 Stock Option Plan set forth as Exhibit A to the Corporation's proxy statement on Schedule 14A for its 1996 annual meeting of stockholders is incorporated herein by reference.* 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 11 12 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 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 exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended July 30, 1994 is incorporated herein by reference: Number in Filing Description - ---------------- ----------- 10.2* Letter from the Corporation to Raphael Benaroya and George R. Remeta, dated May 20, 1994, regarding their respective Restated Employment Agreements, dated November 1, 1991 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 Corporation's Restated 1990 Stock Option Plan set forth as Exhibit A to the Corporation's proxy statement on Schedule 14A for its 1993 annual meeting of stockholders is incorporated herein by reference.* 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) 12 13 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 10.29* Restated 1989 Management Stock Option Plan, dated November 1, 1991 10.30* Performance Option Agreement, dated July 17, 1989, between the Corporation, then known as Lernmark, Inc., and Raphael Benaroya and First Amendment thereto dated November 1, 1991 10.31* Performance Option Agreement, dated July 17, 1989, between the Corporation and George R. Remeta and First Amendment thereto dated November 1, 1991 10.32* Second Amendment, dated November 1, 1991, to Performance Option Agreements with Raphael Benaroya 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 10.43 Credit Plan Agreement, dated June 3, 1992, among the Corporation, Sizes Unlimited, Inc. and Citibank - ------------- (b) No Current Reports on Form 8-K were filed by the Corporation during the fiscal quarter ended January 31, 1998. 13 14 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/ RAPHAEL BENAROYA ---------------------------------------- RAPHAEL BENAROYA Raphael Benaroya, Chairman of the Board, President and Chief Executive Officer Date: April 15, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ RAPHAEL BENAROYA - -------------------------------- Raphael Benaroya Chairman of the Board, April 15, 1998 Principal Executive Officer President, Chief Executive Officer and Director /s/ GEORGE R. REMETA - -------------------------------- George R. Remeta Vice Chairman, April 15, 1998 Principal Financial Officer Chief Financial Officer, Secretary and Director /s/ JON GROSSMAN - -------------------------------- Jon Grossman Vice President - Finance April 15, 1998 Principal Accounting Officer /s/ JOSEPH A. ALUTTO - -------------------------------- Joseph A. Alutto Director April 15, 1998 /s/ RUSSELL BERRIE - -------------------------------- Russell Berrie Director April 15, 1998 /s/ JOSEPH CIECHANOVER - -------------------------------- Joseph Ciechanover Director April 15, 1998 /s/ ILAN KAUFTHAL - -------------------------------- Ilan Kaufthal Director April 15, 1998 /s/ VINCENT P. LANGONE - -------------------------------- Vincent P. Langone Director April 15, 1998 /s/ CHRISTINA A. MOHR - -------------------------------- Christina A. Mohr Director April 15, 1998 /s/ RICHARD W. RUBENSTEIN - -------------------------------- Richard W. Rubenstein Director April 15, 1998 14 15 UNITED RETAIL GROUP, INC. EXHIBIT INDEX The following exhibits are filed herewith: Number 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) 10.3 Financial Statements of Retirement Savings Plan for year ended December 31, 1997 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 23.1 Consent of Independent Public Accountants for the Corporation 23.2 Consent of Independent Public Accountants for Retirement Savings Plan 27 Financial Data Schedule The form of Additional Options set forth as the Appendix to the Corporation's proxy statement on Schedule 14A for its 1998 annual meeting of stockholders is incorporated herein by reference.* 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") 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 15 16 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 - ---------------- ----------- 10.1* Severance Pay Agreement, dated May 28, 1996, between the Corporation and Raphael Benaroya 10.2* Severance Pay Agreement, dated May 28, 1996, between the Corporation and George R. Remeta 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 Corporation's 1996 Stock Option Plan set forth as Exhibit A to the Corporation's proxy statement on Schedule 14A for its 1996 annual meeting of stockholders is incorporated herein by reference.* 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 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 16 17 The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended July 30, 1994 is incorporated herein by reference: Number in Filing Description - ---------------- ----------- 10.2* Letter from the Corporation to Raphael Benaroya and George R. Remeta, dated May 20, 1994, regarding their respective Restated Employment Agreements, dated November 1, 1991 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 Corporation's Restated 1990 Stock Option Plan set forth as Exhibit A to the Corporation's proxy statement on Schedule 14A for its 1993 annual meeting of stockholders is incorporated herein by reference.* 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 10.29* Restated 1989 Management Stock Option Plan, dated November 1, 1991 10.30* Performance Option Agreement, dated July 17, 1989, between the Corporation, then known as Lernmark, Inc., and Raphael Benaroya and First Amendment thereto dated November 1, 1991 17 18 10.31* Performance Option Agreement, dated July 17, 1989, between the Corporation and George R. Remeta and First Amendment thereto dated November 1, 1991 10.32* Second Amendment, dated November 1, 1991, to Performance Option Agreements with Raphael Benaroya 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 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. 18 EX-4.1 2 RESTATED BY-LAWS 1 Exhibit 4.1 RESTATED BY-LAWS OF UNITED RETAIL GROUP, INC. (a Delaware Corporation) (as restated by the Board of Directors on April 9, 1998) ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of, the corporation by the Chairman or Vice-Chairman of the board of directors, if any, or by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation certifying the number of shares owned by him in the corporation. Any and all signatures on any such certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the -1- 2 date of issue. The corporation may issue a new certificate of stock in place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the board of directors may require the owner of any lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate. 2. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share shall, but script or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation, in each case to the extent of such fraction. The board of directors may cause scrip or warrants to be issued -2- 3 subject to the conditions that they shall become void if not exchanged for certificates representing full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the board of directors may impose. 3. STOCK TRANSFER. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers of shares of stock of the corporation shall be made only by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. 4. RECORD DATE FOR STOCKHOLDERS. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting (if authorized by the provisions of the certificate of incorporation or a certificate filed under Section 151(g) of the General Corporation Law), or entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other -3- 4 lawful action, the directors may fix, in advance a record date which shall not be more than 60 days nor less then 10 days before the date of such meeting, nor more than 60 days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting (if authorized by the provisions of the certificate of incorporation or a certificate filed under Section 151(g) of the General Corporation Law), when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed; and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date of the adjourned meeting. 5. MEANING OF CERTAIN TERMS. As used herein in respect of the right to participate or vote thereat or to consent or dissent in writing in lieu of a meeting (if -4- 5 authorized by the provisions of the certificate of incorporation or a certificate filed under Section 151(g) of the General Corporation Law), as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation has only one class of shares of stock outstanding; and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of incorporation or a certificate filed under Section 151(g) of the General Corporation Law confers the right to vote on matters presented to the stockholders where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation or a certificate filed under Section 151(g) of the General Corporation Law may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof the terms "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to any outstanding share or shares of stock or holder or holders of record of outstanding shares of stock, regardless of whether such stock or holder of stock -5- 6 possesses the right to vote. 6. STOCKHOLDER MEETINGS. - TIME OF ANNUAL MEETINGS. The annual meeting shall be held on the date and at the time fixed, from time to time, by vote of the directors, provided, that each successive annual meeting shall be held on a date within 13 months after the date of the preceding annual meeting. - CALL OF SPECIAL MEETINGS. Special meetings may be called by the Chairman of the board of directors, by at least four directors or by any officer instructed by at least four directors to call the meeting. - PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the board of directors may, from time to time, fix. Whenever the board of directors shall fail to fix such place, the meeting shall be held at the headquarters office of the corporation. - NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders (whether or not entitled to vote at the meeting) and warrant holders of the corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be -6- 7 taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state clearly the purpose or purposes for which the meeting is to be called. The notice of any meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the General Corporation Law. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than 10 days nor more than 60 days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder and warrant holder, whether or not such stockholder is entitled to vote at a meeting of stockholders, at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States mail. If a meeting is adjourned to another time, not more than 30 days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the board of directors, after adjournment, fixes a new record date for the adjourned meeting. Notice need not be given to any stockholder or warrant holder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder or warrant holder at a meeting of stockholders shall constitute a -7- 8 waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders need be specified in any written waiver of notice. - STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for period of at least 10 days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders. -8- 9 - CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting: the Chairman of the board, if any, the Vice-Chairman of the board, if any, the President, or the Executive Vice-Presidents in order of seniority, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. - NOMINATIONS. Nominations for the election of directors may be made by the board of directors or by any stockholder entitled to vote for the election of directors. Such nominations, if not made by the board of directors, shall be made by notice in writing, delivered or mailed by United States mail, postage prepaid, to the Secretary of the corporation not less than 14 days nor more than 50 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed to the secretary of the corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to stockholders. Each such notice shall set forth (i) the name, age, business address -9- 10 and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of stock of the corporation beneficially owned by each such nominee. Notice of nominations which are proposed by the board of directors shall be given on behalf of the Board by the Chairman of the meeting. - PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provided for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. - INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more -10- 11 inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. - QUORUM. The holders of shares representing a majority of votes of the outstanding shares shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn to a later time despite the absence of quorum. -11- 12 - VOTING. Each share of stock shall entitle the holder thereof to such number of votes as set forth in the certificate of incorporation or a certificate filed under Section 151(g) of the General Corporation Law. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation or a certificate filed under Section 151(g) of the General Corporation Law or these By-laws. In the election of directors, and for any other action, voting need not be by ballot. 7. STOCKHOLDER ACTION WITHOUT MEETINGS. If, and only if, authorized by the provisions of the certificate of incorporation or a certificate filed under Section 151(g) of the General Corporation Law, any action required by the General Corporation Law or by the Restated Stockholders' Agreement dated as of December 23, 1992 by and among the corporation and certain holders of shares of capital stock of the corporation, as amended from time to time (the "Stockholders' Agreement"), to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, including any action with respect to the election or removal of directors, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so -12- 13 taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing (whether or not such stockholder is entitled to vote at a meeting of stockholders). ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the direction of the board of directors of the corporation. The board of directors shall have the authority to fix the compensation of the members thereof. The use of the phrase "whole board" herein refers to the total number of directors which the corporation would have if there were no vacancies. 2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, or a citizen or resident of the United States or the State of Delaware. The number of directors constituting the whole board shall be nine, in accordance with the terms of the Stockholders' Agreement, provided, however, that when required by the terms of the Stockholders' Agreement, the number of directors constituting the whole board (i) shall be increased to 10, or decreased to eight, without any action by the board of directors or the -13- 14 stockholders and (ii) shall be changed back to nine when so required without any action by the board of directors or the stockholders, provided that no decrease in the number of directors shall shorten the term of office of any incumbent director. 3. ELECTION AND TERM. (a) RESIGNATION. Any director may resign at any time upon written notice to the corporation. (b) TERM. Directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders or until their successors are elected and qualified or until their earlier resignation or removal. (c) VACANCIES. In the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the filling of any vacancies in that connection, newly created directorships and any vacancies in the board of directors may be filled, except as otherwise required by the terms of the Stockholders' Agreement, by the vote of a majority of all the remaining directors then in office although less than a quorum, or by the sole remaining director. 4. MEETINGS. (a) TIME. Meetings shall be held at such time as the board of directors or person calling the meeting shall fix, except that the first meeting of a newly elected board of -14- 15 directors shall be held as soon after its election as the directors may conveniently assemble. Regular meetings for the following year shall be scheduled at the first meeting of a newly elected board of directors. (b) PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the board or person calling the meeting. (c) CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the board, if any, the Vice-Chairman of the board, if any, or the President, or by at least one-third of the directors in office or by any officer instructed by at least one-third of the directors in office to call the meeting. (d) NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written notice of the time, place and purpose shall be given for special meetings at least 72 hours in advance. Written notice shall be sent to each director by United States mail postage prepaid, overnight delivery service or telecopier transmission and shall be effective upon receipt. Notice shall be sent to the respective addresses designated in writing by the respective directors or, in the absence of such designation, to the last known addresses. Notice need not be given to any director or to any member of a committee of directors who submits a written waiver of notice -15- 16 signed by him before or after the time for the meeting stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice, provided, however, that a waiver of notice shall be effective only with respect to the purpose stated in the notice of the meeting. (e) QUORUM AND ACTION. A majority of the whole board shall constitute a quorum. A majority of the directors present, whether or not a quorum is present, may adjourn to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law, the certificate of incorporation, the Stockholders' Agreement and these By-laws which govern a meeting of directors held to fill vacancies and newly created directorships in the board of directors or action of disinterested directors. -16- 17 (f) INTEREST. A director of the corporation, in the exercise of his fiduciary duty to the corporation, shall disqualify himself from a vote of the board of directors with respect to a transaction in which a potential conflict of interest exists between (i) the director and the corporation, or (ii) the stockholder that designated the director pursuant to the Stockholders' Agreement, or any affiliate of such stockholder, and the corporation. A director shall disqualify himself from any vote of the board of directors with respect to transactions including, but not limited to, the following: (i) the hiring of such director as an employee of the corporation; (ii) the approval of an employment agreement of a director as an employee of the corporation; (iii) the increase in compensation of such director in his capacity as an employee of the corporation; (iv) the termination of employment of such director as an employee of the corporation, whether or not such employment is pursuant to an employment agreement; (v) the making of a loan to such director by the corporation; (vi) the prepayment or extension or modification of the terms of any promissory note or other indebtedness of the Corporation to such director or to the stockholder that designated such director pursuant to the Stockholders' Agreement, or to any affiliate of such stockholder; (vii) entering into, amending, modifying, waiving or terminating any contract between the corporation and such director, or the stockholder that designated such director pursuant to the Stockholders' Agreement, or any affiliate of such stockholder (a "Related Party Agreement"); (viii) establishing the terms and provisions of a Related Party Agreement; or -17- 18 (ix) entering into, or establishing the terms and provisions of, any contract replacing or superceding a Related Party Agreement. Any director designated to serve on the board of directors solely by Benaroya pursuant to Section 2 of the Stockholders' Agreement (without action by the Nominating Committee) shall disqualify himself from any vote of the board to approve the adoption of a resolution removing Benaroya from office as the Chairman of the board or President of the Corporation. (g) HIGHER VOTE FOR CERTAIN ACTIONS BY THE BOARD OF DIRECTORS. (i) The affirmative vote of all the directors in office who have not disqualified themselves because of a potential conflict of interest shall be required to approve the adoption of a resolution proposing an amendment to or a repeal of any provision of, or the adoption of any new provision of, the certificate of incorporation of the corporation, of any certificate filed under Section 151(g) of the General Corporation Law, or of these By-laws or the filing of any certificate under Section 151(g) of the General Corporation Law. (ii) The affirmative vote of a majority of the directors in office who have not disqualified themselves because of a potential conflict of interest, which majority must include at least one Public Director (as that term is defined in the Stockholders' Agreement), shall be required to approve the adoption of a resolution removing either the Chairman of the -18- 19 board or the President of the corporation from office. (h) CHAIRMAN OF THE MEETING. The Chairman of the board of directors, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the board of directors, if any and if present and acting, or the President, if present and acting, or any other director chosen by the board of directors, shall preside. 5. COMMITTEES. (a) MEMBERSHIP. The board of directors by majority vote of the whole board shall designate the following standing committees: a nominating committee, a finance committee, a compensation committee, a benefits committee and an audit committee. Until the termination of Section 2 of the Stockholders' Agreement and subject to the two sentences that follow: (i) the nominating committee shall consist of the Chairman of the board of directors, the Limited Director and one of the Public Directors named by the nominating committee to serve, provided, however, that in the event (A) Raphael Benaroya shall cease to serve as Chairman of the board prior to the termination of Section 2 of the Stockholders' Agreement, (B) he shall continue to serve as a Director and (C) he and his Permitted Transferees at all times own at least 400,000 shares of Common Stock then, until the termination of Section 2 of the Stockholders' Agreement: (x) Mr. Benaroya shall remain a member of the nominating committee, (y) the nominating committee shall be increased from three to four members, and (z) the vacancy created on the nominating committee by the increase in its size shall be filled by a Director who is not an affiliate of either Limited or Benaroya named to serve on the nominating committee by the affirmative vote of at least two of the Directors that comprise the nominating committee; (ii) the finance committee shall consist of one of the Management Directors named by the Chairman of the -19- 20 board of directors to serve and three Directors who are not Management Directors named by the nominating committee to serve; and (iii) each of the audit committee, the benefits committee and the compensation committee shall consist of two or more Directors who are not Management Directors named by the nominating committee to serve. In the event, however, that Limited owns less than 400,000 shares of Common Stock at any time, the Limited Director shall not thereafter be entitled to serve as a member of any committee and the committee memberships that would otherwise be filled by the Limited Director pursuant to the preceding sentence shall be filled instead by a Public Director named by the nominating committee to serve. In the event that Raphael Benaroya shall cease to serve as Chairman of the board, the membership on the finance committee that he otherwise would fill by designation pursuant to the penultimate sentence by virtue of his office as Chairman shall thereafter be filled instead by a Director named by the nominating committee to serve, provided, however, that, if Mr. Benaroya continues to serve as a Director, the board, in its discretion, shall have the right to name Mr. Benaroya to serve on the finance committee for so long as he shall continue to serve as a Director after ceasing to serve as Chairman of the board. -20- 21 Stockholders' Agreement, the Board of Directors in its discretion shall determine whether to designate committees and the makeup and membership of all the committees that it designates. (Capitalized terms that are used in this Section 5(a) are defined in the Stockholders' Agreement.) (b) QUORUM. The majority of the authorized number of Directors that comprises a standing committee, which majority must include the Management Director, if one is serving on the Committee, shall constitute a quorum of that committee. No alternate members of committees shall be designated. (c) AUTHORITY. To the extent provided in the resolution of the board of directors establishing such committee, a committee shall have and may exercise the powers and authority of the board of directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, no committee may (i) exercise the powers and authority of the board of directors in contravention of Section 141 of the General Corporation Law, (ii) take any action which requires higher than a majority vote (as provided in Article II, Section 4 of these By-laws) of the board of directors or (iii) repeal or amend any resolution adopted by the board of directors. (d) VOTE. Each committee shall act by vote of a majority of a quorum of the Directors that comprise that -21- 22 committee. (e) MEETINGS. (i) Meetings of standing committees shall be held at such time as the committee or person calling the meeting shall fix. Regular meetings for the following year shall be scheduled at the first meeting of a year. (ii) Meetings of standing committees shall be held at such place within or without the State of Delaware as shall be fixed by the committee or person calling the meeting. (iii) No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of any committee member or by any officer instructed by any committee member. (iv) No notice shall be required for regular meetings for which the time and place have been fixed. Written notice of the time, place and purpose shall be given for special meetings at least 72 hours in advance to each committee member with a copy to the Secretary. Written notice shall be sent to each committee member by United States mail postage prepaid, overnight delivery service or telecopier transmission and shall be effective upon receipt. Notice shall be sent to the respective addresses designated in writing by the respective committee members or, in the absence of such designation, to the last known addresses. Notice need not be given to any committee member who submits a written waiver of notice signed by him before or after the time for the meeting stated therein. -22- 23 Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of a committee need be specified in any written waiver of notice, provided, however, that a waiver of notice shall be effective only with respect to the purpose stated in the notice of the meeting. (v) One committee member may adjourn a meeting to another time and place. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law, the certificate of incorporation, the Stockholders' Agreement and these By-Laws which govern action of disinterested directors. (vi) A committee member, in the exercise of his fiduciary duty to the corporation, shall disqualify himself from a vote of a committee with respect to a transaction in which a potential conflict of interest exists between (i) the committee member and the corporation, or (ii) the stockholder that designated the committee member pursuant to the Stockholders' Agreement or any affiliate of such stockholder, and the corporation. (f) REPORTS. The chairman of each committee shall make a report on its activities at each meeting of the -23- 24 board of directors. 6. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the board of directors or any committee thereof may be taken without a meeting if all members of the board of directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board of directors or committee. 7. ELECTRONIC COMMUNICATION. Any member or members of the board of directors or of any committee designated by the board of directors may participate in a meeting of the board of directors, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. 8. REMOVAL. Subject to the rights of the holders of shares of any class or series of preferred stock and to the provisions of the Stockholders' Agreement, any director or the entire board of directors may be removed as provided in the certificate of incorporation and any certificate filed under Section 151(g) of the General Corporation Law. ARTICLE III OFFICERS The officers of the corporation shall consist of a Chairman of the Board, a President, a Secretary, and, if deemed necessary, expedient or desirable by the board of directors, a -24- 25 Vice-Chairman of the Board, Executive Vice-Presidents, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the board of directors choosing them shall designate. Except as may otherwise be provided in the resolution of the board of directors choosing him, no officer other than the Chairman or Vice-Chairman of the Board, if any, need be a director. Any number of offices may be held by the same person. Unless otherwise provided in the resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the board of directors following the next annual meeting of stockholders and until his successor shall have been chosen and qualified. Any officer may be removed, with or without cause, by such vote of the directors as may be prescribed in the by-laws. Any vacancy in any office may be filled by the board of directors. The Chairman of the Board shall be the Chief Executive Officer of the corporation and shall have general supervision over the property, business and affairs of the corporation and over its several officers, subject, however, to the control of the board of directors. He shall, if present, preside at all meetings of the stockholders and of the board of directors and of all committees of which he is a member. He may sign, with the Secretary, Treasurer or any other proper officer of the corporation thereunto authorized by the board of directors, -25- 26 certificates for shares in the corporation. He may sign, execute and deliver in the name of the corporation, or authorize other employees to sign, execute and deliver, all deeds, mortgages, bonds, leases, contracts, or other instruments either when specially authorized by the board of directors or when required or deemed necessary or advisable by him in the ordinary conduct of the corporation's normal business, except in cases where the signing and execution thereof shall be required by law or otherwise to be signed or executed by some other officer or agent, and he may cause the seal of the corporation, if any, to be affixed to any instrument requiring the same. The Secretary or Assistant Secretary of the corporation shall record all of the proceedings of all meetings and the actions in writing of stockholders, directors and committees of directors, and shall exercise such additional authority and perform such additional duties as the board of directors shall assign to him. All other officers of the corporation shall perform such duties in the management and operation of the corporation as are assigned to them by the Chairman of the board of directors or by the board of directors. ARTICLE IV INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS 1. INDEMNIFICATION RESPECTING THIRD PARTY CLAIMS. The corporation, to the full extent permitted and in the manner required by the laws of the State of Delaware as in effect at -26- 27 the time of the adoption of this Article or as such laws may be amended from time to time, shall indemnify any person who was or is made a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including any appeal thereof), whether civil, criminal, administrative or investigative in nature (other than an action by or in the right of the corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or, if at a time when he was a director, officer employee or agent of the corporation, is or was serving at the request of, or to represent the interests of, the corporation as a director, officer, partner, fiduciary, employee or agent (a "Subsidiary Officer") of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise (an "Affiliated Entity"), against expenses (including attorneys' fees and disbursements), costs, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his or her conduct was unlawful; provided, however, that the corporation shall not be obligated to indemnify against any amount paid in settlement unless the corporation has consented to such settlement, which consent -27- 28 shall not be unreasonably withheld. The termination of any action, suit or proceeding by judgment, order, settlement or conviction or upon a plea or nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. Notwithstanding anything to the contrary in the foregoing provisions of this paragraph, a person shall not be entitled, as a matter of right, to indemnification pursuant to this paragraph against costs or expenses incurred in connection with any action, suit or proceeding commenced by such person against any person who is or was a director, officer, fiduciary, employee or agent of the corporation or a Subsidiary Officer of any Affiliated Entity, but such indemnification may be provided by the corporation in a specific case as permitted by Section 6 of this Article. 2. INDEMNIFICATION RESPECTING DERIVATIVE CLAIMS. The corporation, to the full extent permitted, and in the manner required, by the laws of the State of Delaware as in effect at the time of the adoption of this Article or as such laws may be amended from time to time, shall indemnify any person who was or is made a party to or is threatened to be made a party to any threatened, pending or completed action or suit (including any appeal thereof) brought in the right of the corporation to -28- 29 procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or, if at a time when he was a director, officer, employee or agent of the corporation, is or was serving at the request of, or to represent the interests of, the corporation as a Subsidiary Officer of an Affiliated Entity against expenses (including attorneys' fees and disbursements) and costs actually and reasonably incurred by such person in connection with such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless, and except to the extent that, the Court of Chancery of the State of Delaware or the court in which such judgment was rendered shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses and costs as the Court of Chancery of the State of Delaware or such other court shall deem proper. Notwithstanding anything to the contrary in the foregoing provisions of this paragraph, a person shall not be entitled, as a matter of right, to indemnification pursuant to this paragraph against costs and expenses incurred in connection with any action or suit in the right of the corporation commenced by such person, but such indemnification -29- 30 may be provided by the corporation in any specific case as permitted by Section 6 of this Article. 3. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. Any indemnification under Section 1 or 2 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification is proper under the circumstances because such person has met the applicable standard of conduct set forth in Section 1 or 2 of this Article. Such determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding in respect of which indemnification is sought or by majority vote of the members of a committee of the board of directors composed of at least three members each of whom is not a party to such action, suit or proceeding, or (ii) if such a quorum is not obtainable and/or such a committee is not established or obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. In the event a request for indemnification is made by any person referred to in Section 1 or Section 2, the corporation shall cause such determination to be made not later than 60 days after such request is made. 4. RIGHT TO INDEMNIFICATION UPON SUCCESSFUL DEFENSE AND FOR SERVICE AS A WITNESS. (a) Notwithstanding the other provisions of this -30- 31 Article, to the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 or 2 of this Article, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees and disbursements) and costs actually and reasonably incurred by such person in connection therewith. (b) To the extent any person who is or was a director or officer of the corporation has served or prepared to serve as a witness in any action, suit or proceeding (whether civil, criminal, administrative or investigative in nature) or in any investigation by the corporation or the board of directors thereof or a committee thereof or by any securities exchange on which securities of the corporation are or were listed by reason of his services as a director or officer of the corporation or as a Subsidiary Officer of any Affiliated Entity (other than in a suit commenced by such person), the corporation shall indemnify such person against expenses (including attorneys' fees and disbursements) and costs actually and reasonably incurred by such person in connection therewith within 30 days after receipt by the corporation from such person of a statement requesting such indemnification, averring such service and reasonably evidencing such expenses and costs. The corporation may indemnify any employee or agent of the corporation to the same extent it may indemnify any director or -31- 32 officer of the corporation pursuant to the foregoing sentence of this paragraph. 5. ADVANCE OF EXPENSES. Expenses and costs incurred by any person referred to in Section 1 or Section 2 of this Article in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized by this Article. 6. INDEMNIFICATION NOT EXCLUSIVE. The provision of indemnification to or the advancement of expenses and costs to any person under this Article, or the entitlement of any person to indemnification or advancement of expenses and costs under this Article, shall not limit or restrict in any way the power of the corporation to indemnify or advance expenses and costs to such person in any other way permitted by law or be deemed exclusive of, or invalidate, any right to which any person seeking indemnification or advancement of expenses and costs may be entitled under any law, agreement vote of stockholders or disinterested directors or otherwise, both as to action in such person's capacity as an officer, director, employee or agent of the corporation and as to action in any other capacity while holding any such position. -32- 33 7. ACCRUAL OF CLAIMS; SUCCESSOR. The indemnification provided or permitted under this Article shall apply in respect of any expense, cost, judgment, fine, penalty or amount paid in settlement, whether or not the claim or cause of action in respect thereof accrued or arose before or after the effective date of this Article. The right of any person who is or was a director, officer, employee or agent of the corporation to indemnification under this Article shall continue after he shall have ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, distributees, executors, administrators and other legal representatives of such person. 8. CORPORATE OBLIGATIONS; SUCCESSORS. This Article shall be deemed to create a binding obligation on the part of the corporation to its current and former officers and directors and their heirs, distributees, executors, administrators and other legal representatives, and such persons in acting in such capacities shall be entitled to rely on the provisions of this Article, without giving notice thereof to the corporation. 9. INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of, or to represent the interests of, the corporation as a Subsidiary Officer of any Affiliated Entity, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of -33- 34 such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article or applicable law. 10. DEFINITIONS OF CERTAIN TERM. (a) For purposes of this Article, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its corporate existence had continued, would have been permitted under applicable law to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request, or to represent the interests of, such constituent corporation as a director, officer, employee or agent of any Affiliated Enterprise shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if this separate existence had continued. (b) For purposes of this Article, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; references to "serving at the request of the corporation" shall include any service as a director, officer, fiduciary, employee or agent of the -34- 35 corporation which imposes duties on, or involves services by, such director, officer, fiduciary, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article. ARTICLE V CORPORATE SEAL The corporate seal shall be in such form as the board of directors shall prescribe. ARTICLE VI FISCAL YEAR The fiscal year of the corporation shall begin on the Sunday which follows the Saturday which is closest to January 31st in any calendar year and shall end on the Saturday closest to January 31st in the following calendar year, or shall be for such other period as the board of directors from time to time may designate. -35- 36 ARTICLE VII CONTROL OVER BY-LAWS Subject to the provisions of the certificate of incorporation, any certificate filed under Section 151(g) of the General Corporation Law and Article II, Section 4 of these By-laws, the Stockholders' Agreement and the provisions of the General Corporation Law, the power to amend, alter or repeal these By-laws and to adopt new By-laws may be exercised by the board of directors. -36- EX-10.1 3 RESTATED STOCKHOLDERS AGREEMENT 1 Exhibit No. 10.1 RESTATED STOCKHOLDERS' AGREEMENT -------------------------------- RESTATED STOCKHOLDERS' AGREEMENT, dated as of December 23, 1992, by and among United Retail Group, Inc., a Delaware corporation (the "Corporation"), and the Stockholders (as hereinafter defined) and Centre Capital Investors L.P. ("CCI"). W I T N E S S E T H: ------------------- WHEREAS, CCI owns 2,500,000 Shares, Limited Direct Associates, L.P., a Delaware limited partnership, owns 2,500,000 Shares, Raphael Benaroya ("Benaroya") owns 1,500,000 Shares and the other Stockholders own an aggregate of 513,000 Shares; WHEREAS, the Corporation has reserved 1,187,500 Shares for issuance upon the exercise of the stock options that have been granted to Benaroya under the 1991 Stock Option Agreement and the Restated 1989 Management Stock Option Plan and an aggregate of 862,000 additional Shares has been reserved for issuance upon the exercise of stock options that have been or may be granted to other employees of the Corporation; and WHEREAS, it is deemed to be in the best interests of the Corporation and the Stockholders that provision be made for the continuity and stability of the business and management of the Corporation and, to that end, the Corporation and the Stockholders hereby set forth their agreement with respect to the Shares owned or which may hereafter be acquired by the Stockholders. 2 NOW, THEREFORE, in consideration of the mutual convenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: SECTION 1. Definitions. In addition to the terms defined elsewhere herein, when used herein the following terms shall have the meanings indicated: (a) Affiliate shall mean, with respect to any Stockholder, (i) any Person who, directly or indirectly, is in control of, is controlled by or is under common control with, the Stockholder, and (ii) any Person who is a director or officer of the Stockholder or of any Person described in clause (i) above. (b) Assigns shall mean, with respect to CCI, the partners of CCI and any distributees of such partners in any transaction not involving a sale and any donees or Permitted Transferees of any of the foregoing. (c) Board of Directors shall mean the Board of Directors of the Corporation. (d) CCI Tansferees shall mean Michel David-Weil, Lester Pollack, Paul F. Balser, Mark E. Jennings, Gaz et Eaux SA, Eliane David-Weil, LF Centre LP, Philippe Meyer, Damon Mezzacappa, Pearson Inc., Dreyfus Acquisition Corp. and Park Road Corp. (e) Common Stock shall mean the Corporation's Common Stock, par value $.001 per share. (f) Demand Registration Right shall mean the right of a Selling Stockholder to require the filing of a registration 2 3 statement under the 1933 Act with respect to its Shares pursuant to Section 5(a). (g) Director shall mean a member of the Board of Directors. (h) Exempt Sale shall mean any of the following sales of Shares: (i) a sale of Shares by Limited to any Affiliate of Limited; (ii) a sale of Shares in an underwritten public offering (as the term "public offering" is used in Section 4(2) of the 1933 Act) registered under the 1933 Act pursuant to the seller's registration rights provided by Section 5 hereof (excluding any offering solely to qualified institutional buyers as that term is defined in Rule 144A(a)(1) under the 1933 Act); (iii) a sale of Shares to the Corporation; (iv) a sale of Shares by a Stockholder pursuant to Rule 144 under the 1933 Act; or (v) a sale of Shares by a Management Investor to one of his Permitted Transferees. (i) Incumbent Chairman of the Board shall mean Benaroya for so long as he retains the position of Chairman of the Board of the Corporation and not afterwards. (j) Limited shall mean Limited Direct Associates, L.P. and any Affiliate of Limited Direct Associates, L.P. to which Limited Direct Associates, L.P. or any such Affiliate shall transfer Shares. (k) Management Investor shall mean (i) Benaroya (regardless of whether he is employed with the Corporation) and his Permitted Transferees and (ii) any other Stockholder who is employed by the Corporation or any of its subsidiaries (but only during the term of 3 4 such other Stockholder's employment with the Corporation) and his or her Permitted Transferees. (l) Management Stock Transfer Agreements shall mean collectively, the following agreements as amended from time to time: (i) the Management Stock Transfer Agreements, dated as of July 17, 1989, between Sized Unlimited Acquisition Corporation (the predecessor by merger of the Corporation) and Raphael Benaroya and George R. Remeta, respectively; (ii) the Management Stock Transfer Agreement, dated as of November 20, 1989 by and among the Corporation and Ellen Demaio, Mary Jo Slater, Julie Stodolak, Jean Srour, Fredric Stern, Bradley Orloff, James Hufford and Cheryl A. Lutz; (iii) the Management Stock Transfer Agreement, dated as of October 22, 1990, by and between the Corporation and James F. Wimpress; (iv) the Management Stock Transfer Agreements, dated as of May 31, 1991, by and between the Corporation and Charles R. Wilkinson and Jerry Silverman, respectively; and (v) the Management Stock Transfer Agreement, dated July 30, 1992, by and between the Corporation and Mort Greenberg. 4 5 (m) 1991 Stock Option Agreements shall mean the Stock Option Agreements, dated November 1, 1991, between the Corporation and Raphael Benaroya and George R. Remeta, respectively, as amended from time to time. (n) 1934 Act shall mean the Securities Exchange Act of 1934, as amended. (o) 1933 Act shall mean the Securities Act of 1933, as amended. (p) Nominating Committee shall mean the nominating committee of the Board of Directors as constituted in accordance with the Corporation's By-laws, as amended from time to time. (q) Permitted Transferees shall mean a natural Person's executor or heirs at law, or his spouse, parents or children (including adopted children) or the children of his spouse or a trust, the beneficiaries of which include only such Person and such Person's spouse or parents or such children, and over which such Person has the right, power and authority to exercise control as to investment decisions and distributions, as trustee or otherwise, or a corporation or partnership, the stockholders or limited and general partners of which include only such Person and such Person's spouse or parents or such children; provided that no transfer of Shares to a Permitted Transferee shall be an Exempt Sale unless and until such Person's executor, heir, spouse, parent, child, trust, corporation or partnership executes and delivers to the Corporation an appropriate instrument, in form and substance reasonably satisfactory to the Corporation, confirming and 5 6 acknowledging that he or she has acquired and will hold Shares subject to all of the terms, conditions and provisions of this Agreement, which instrument shall specify that the executor, heir, spouse, parent, child, trust, corporation or partnership will have the same rights, privileges, duties and obligations of the transferor of such Shares under this Agreement, other than as otherwise expressly specified herein. Upon the execution and delivery of such instrument to the Corporation, a transferee of a Stockholder shall be deemed a "Stockholder" for purposes of this Agreement, with the same rights, privileges, duties and obligations of the transferor of such Shares (provided that there shall be no requirement that such transferee be employed by the Corporation), except as otherwise expressly specified herein. Notwithstanding anything to the contrary contained in this Section 1(q), no transfer to any Permitted Transferee shall be made if the Corporation would be required to register any Shares under the 1933 Act, the 1934 Act or any applicable state securities laws except to the extent that such registration is effected in accordance with Section 5 hereof. (r) Person shall mean any natural person, corporation, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, and a government or agency or political subdivision thereof. 6 7 (s) Public Directors shall have the meaning set forth in Section 2(b). (t) Registrable Securities shall mean any Shares owned of record by any Stockholder or CCI Transferee. (u) Selling Stockholder shall have the meaning set forth in Section 5(a). (v) Restated 1989 Management Stock Option Plan shall mean the Lernmark, Inc. Management Stock Option Plan, as amended and restated from time to time. (w) Restated 1990 Stock Option Plan shall mean the Corporation's 1990 Stock Option Plan, as amended and restated from time to time. (x) Sale of the Corporation shall mean the consummation of a merger or consolidation of the Corporation with or into another Person that is not a parent or subsidiary of the Corporation as a result of which those Persons who were stockholders of the Corporation immediately prior to such transaction own, in the aggregate, less than a majority of the outstanding voting capital stock of the surviving or resulting corporation or the consummation of the sale of all or substantially all of the Corporation's assets to a Person that is not a parent or subsidiary of the Corporation. (y) Shares (with respect to the holding of any Stockholder or CCI or its Assigns or the CCI Transferees) shall mean the lesser of (A) the number of shares of Common Stock that were originally issued to the Stockholder prior to November 1, 1991 and shall be originally issued thereafter to such Stockholder pursuant to the 7 8 exercise of options granted under the Restated 1989 Management Stock Option Plan and the 1991 Stock Option Agreements, and granted and to be granted under the Restated 1990 Stock Option Plan, minus the number of shares of Common Stock that such Stockholder sold either in an underwritten public offering registered under the 1933 Act pursuant to such Stockholder's registration rights provided by Section 5 hereof or pursuant to the exercise of his "bring along" rights under Section 4(a) hereof, and (B) the lowest number of shares of Common Stock held combined with shares underlying unexercised options granted as aforesaid at any time by (as the case may be) a Management Investor and his Permitted Transferees, combined, or Limited Direct Associates, L.P. and its Affiliates, combined. (z) Stock Purchase Agreements shall mean, collectively, the Stock Purchase Agreements, dated July 14, 1989, between Sizes Unlimited Acquisition Corporation and CCI and Limited, respectively. (aa) Stockholder shall mean any of the signatories to this Agreement other than CCI and the Company. (bb) Third Party Demander shall have the meaning set forth in Section 5(f). SECTION 2. Election and Removal of Directors. (a) Voting. Each of the Stockholders shall vote all Shares and other shares of Common Stock owned or controlled by such Stockholder (i) at any annual or special meeting of Stockholders of the Corporation called for the purpose of voting on the election or 8 9 removal of Directors or amendment of the By-laws of the Corporation or (ii) by consensual action of Stockholders of the Corporation with respect to the election or removal of Directors or amendment of the By-laws of the Corporation, in favor of the election or removal of Directors in accordance with, and only in accordance with, this Section 2 and against any amendment of the By-laws of the Corporation not approved in advance by the Board of Directors, provided, however, that all the rights and obligations under this Section 2 of each of Limited and Benaroya shall terminate permanently in the event the number of shares of Common Stock owned by it or by him and his Permitted Transferees as a group shall be less than 100,000 shares of Common Stock at any time after the date of this Agreement. (b) Initial Board of Directors. The Board of Directors of the Corporation shall consist of two Persons nominated by the Incumbent Chairman of the Board (the "Management Directors"), two Persons nominated by Limited (the "Limited Directors"), and five persons who are not Affiliates of any Management Investor or Limited ("Public Directors") named by the Nominating Committee and approved by the Board of Directors. (c) Subsequent Nominations. Until March 17, 1997, the Stockholders shall, at any time that Directors of the Corporation are to be elected, take such action as may be necessary to nominate or to cause the Board of Directors to nominate and recommend to the Stockholders, as the proposed members of the Board of Directors: 9 10 (i) for as long as Limited at all times after the date of this Agreement owns at least 500,000 shares of Common Stock - two Persons designated by Limited, two Persons designated by the Incumbent Chairman of the Board and five Public Directors approved by the Nominating Committee and the Board of Directors; (ii) for as long as Limited at all times after the date of this Agreement owns at least 100,000 shares of Common Stock but at any time owns less than 500,000 shares of Common Stock - one Person designated by Limited, two Persons designated by the Incumbent Chairman of the Board and six Public Directors approved by the Nominating Committee and the Board of Directors; and (iii) if at any time Limited owns less than 100,000 shares of Common Stock - two Persons designated by the Incumbent Chairman of the Board and seven Public Directors approved by the Nominating Committee and the Board of Directors; provided, however, that in the event the total number of shares of Common Stock held by the Management Investors as a group shall increase to 3,010,000 or more at any time after the date of this Agreement (and the increase in the total number of shares of Common Stock includes an increase of at least 500,000 shares of Common Stock by Benaroya and his Permitted Transferees), then, so long as (i) the Incumbent Chairman of the Board and his Permitted Transferees at all times after the date of this Agreement own at 10 11 least 500,000 shares of Common Stock, and (ii) the Management Investors at all times after the date of this Agreement own at least 2,010,000 shares of Common Stock, the Incumbent Chairman of the Board shall designate three Persons, instead of two Persons, to be nominated as proposed members of the Board of Directors, and the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to increase the total membership of the Board from nine to 10 and provided, further, that in the event the total numbers of shares of Common Stock owned by the Incumbent Chairman and his Permitted Transferees and by the Management Investors, respectively, shall at any time after the date of this Agreement be less than those required by clauses (i) and (ii) of the preceding proviso, the Incumbent Chairman of the Board shall thereafter designate two Persons, instead of three Persons, to be nominated as proposed members of the Board of Directors and the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to decrease the total membership of the Board from 10 to nine. In the event Benaroya shall cease to serve as Chairman of the Board, regardless of the circumstances of such cessation, he, or his executor in the event of his death or the committee of his property in the event of his legal incompetence, shall retain the right to designate one Person to be nominated as a proposed member of the Board of Directors but one other Person who would otherwise have been designated by the Incumbent Chairman of the Board shall be designated instead by the Nominating Committee, and, if the Board 11 12 of Directors then has 10 members, the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to decrease the total membership of the Board from 10 to nine, provided, however, that, after having ceased to serve as Chairman of the Board, Benaroya, or his executor or committee, shall have no right to designate if Benaroya and his Permitted Transferees own less than 100,000 shares of Common Stock at any time, and the Person or Persons who would otherwise have been nominated by the Incumbent Chairman of the Board shall then be designated instead by the Nominating Committee. (d) Adjustments. The numbers of shares of Common Stock referred to in Section 2(c) shall be adjusted in proportion in order to give effect to any stock dividends, splits, reverse splits, combinations, recapitalizations and the like. (e) Removal. After the date hereof, Limited shall be entitled at any time with or without cause to designate any Limited Director for removal as a Director, the Incumbent Chairman of the Board shall be entitled at any time with or without cause to designate any Management Director for removal as a Director and Benaroya (or Benaroya's executor in the event of his death), in the event he shall have ceased to serve as Chairman of the Board but shall have retained the right to designate, shall be entitled at any time with or without cause to require the removal of his designee as a Director. The Stockholders agree to take such action, and to cause the remaining Directors to take such action, within 20 days after such designation, as is necessary to remove a 12 13 Director designated for removal in accordance with the foregoing. Except as set forth in this Section 2(e), no Stockholder shall take any action, or cause any Director to take any action, to remove a Limited Director, a Management Director or a Director designated by Benaroya after he shall have ceased to serve as Chairman of the Board. (f) Filling Vacancies. If at any time a vacancy is created on the Board of Directors by reason of the death, removal or resignation of any Director, the Stockholders agree to take such action, and to cause the remaining Directors to take such action, within 20 days after such occurrence, to approve and elect a Person to fill such vacancy, which Person shall be designated for election as a Director by Limited, if the Person who has ceased to be a Director was a Limited Director; designated by the Incumbent Chairman of the Board, if the Person who has ceased to be a Director was a Management Director; designated by Benaroya (or Benaroya's executor in the event of his death), if the Person who has ceased to be a Director was designated by him; or approved by the Nominating Committee and the Board of Directors, if the Person who has ceased to be a Director was a Public Director, or designated by the Nominating Committee, if such Person had otherwise been designated by the Nominating Committee. (g) Subsidiaries. The Corporation agrees to take all action necessary to ensure that (i) the directors of each subsidiary shall be four in number and shall include (A) three Persons designated by the Incumbent Chairman of the Board and (B) if there is one or two 13 14 Limited Directors then in office, one Person designated by Limited or, if there is no Limited Director then in office, four Persons designated by the Incumbent Chairman of the Board and (ii) the directors of each company organized in a jurisdiction other than a state of the United States in which the Corporation is a stockholder shall include one Person designated by the Incumbent Chairman of the Board and, if there is one or more Limited Directors then in office, one Person designated by Limited. If the Incumbent Chairman of the Board fails to make a designation authorized by the preceding sentence, the designation shall be made instead by the Nominating Committee. If Limited fails to make a designation authorized by the penultimate sentence, the designation may (but need not) be made instead by the Incumbent Chairman of the Board and such designee(s) of the Incumbent Chairman of the Board shall serve until Limited makes a designation authorized by the penultimate sentence. The Corporation further agrees to take all action necessary to ensure that the by-laws of all the Corporation's subsidiaries other than The Avenue, Inc. are substantially identical to the Corporation's by-laws except with respect to quorum requirements and the number of directors. (h) Termination. All the provisions of this Section 2 shall terminate on March 17, 1997. (i) Observer Status. At any time that there is one or more Limited Directors on the Board of Directors pursuant to Section 2(b) or Section 2(c) of this Agreement, Limited shall be entitled to have one representative (in addition to such Limited Director or Directors) admitted to each meeting of the Board of Directors, of any committee of the Board of Directors of which a Limited Director 14 15 is a member and of the board of directors of any of the Corporation's subsidiaries or any committee thereof. The Corporation shall furnish Limited, to the attention of such person as Limited may designate in writing to the Corporation from time to time and at the same time as furnished to the Directors (i) notice of each such meeting and (ii) all materials and information furnished to Directors. Such representative shall treat all information received by such representation pursuant to this Section 2(i) in accordance with applicable law and such duties as would be applicable to a Director receiving such information. SECTION 3. Other Arrangements. No Stockholder shall grant any proxy or enter into or agree to be bound by any voting trust with respect to any Shares, or other shares of Common Stock nor shall any Stockholder or the Corporation enter into any stockholder agreements or arrangements of any kind with any Person with respect to any Shares, or other shares of Common Stock inconsistent with the provisions of this Agreement (whether or not such agreements and arrangements are with other Stockholders or holders of shares of Common Stock that are not bound by this Agreement), or act, for any reason, as a member of a group or in concert with any other Persons in connection with the voting of Shares, or other shares of Common Stock in any manner which is inconsistent with the provisions of this Agreement. No Stockholder shall enter into any agreement or arrangement of any kind with any Person (whether or not such agreement or arrangement is with other Stockholders or holders of shares of Common Stock that are not bound by this 15 16 Agreement) to exercise such Stockholder's rights under Section 2(c) in order to designate a nominee of such Person as a Director. The obligations of a Stockholder under this Section 3 shall terminate at the same time as his obligations under Section 2. SECTION 4. Bring Along. (a) If a Stockholder (a "Transferor") wishes to transfer Shares to any Person except pursuant to (i) an Exempt Sale, (ii) pursuant to the exercise of the rights granted under this Section 4(a), (iii) pursuant to a bona fide gift to a charity or a charitable foundation, or (iv) pursuant to a bona fide pledge to secure indebtedness to a financial institution, including a commercial bank or a broker-dealer (provided that if Benaroya pledges Shares, he shall within 15 days after the pledge, give written notice to Limited of the number of Shares pledged and the amount of indebtedness secured by the pledge at the time but he shall not be required to update the amount of indebtedness secured), then the Transferor shall, as a condition to such transfer, permit each of the other Stockholders and each of the CCI Transferees (or cause the other Stockholders and the CCI Transferees to be permitted) to sell (either to the prospective purchaser of the Shares or to other financially reputable purchasers reasonably acceptable to the Stockholders electing to be brought along pursuant to this Section 4(a)), at the same price and otherwise on the same terms and conditions as those actually received by the Transferor in such sale, a number of Shares that bears the same proportion to the number of Shares then held by the 16 17 other Stockholders and the CCI Transferees as the number of Shares previously sold (including pursuant to Exempt Sales) and proposed to be sold by the Transferor bears to the number of Shares acquired by the Transferor in the first transaction in which the Transferor first acquired Shares and pursuant to the exercise of any option granted by the Corporation; provided, however, that if the Transferor is a Management Investor and if, after giving effect to such transfer (excluding Exempt Sales), either (a) the Management Investors as a group would have transferred to transferees other than their Permitted Transferees more than one-half (1/2) of the Shares acquired by them on or before the date hereof and any Shares acquired by them pursuant to the exercise of options granted by the Corporation, or (b) Benaroya would have transferred to transferees other than his Permitted Transferees more than one-half (1/2) of the Shares he acquired on or before the date hereof and pursuant to the exercise of options granted by the Corporation, then the Transferor who is a Management Investor must, as an additional condition precedent to such transfer, permit the Stockholders that are not Management Investors and the CCI Transferees (or cause them to be permitted) to sell at the same price and otherwise on the same terms and conditions as those actually received by the Transferor in such sale, all of the Shares then owned by the other Stockholders and the CCI Transferees. (b) Anything to the contrary in Section 4(c) notwithstanding, the event any Person exercises his "bring along" rights pursuant to Section 4(a), and the number of Shares to be sold by the 17 18 Stockholder who initiated the transfer of Shares and those Stockholders electing to be "brought along" in such transfer pursuant to Section 4(a) exceeds the number of shares of Common Stock the prospective purchaser or purchasers thereof desire to acquire, the number of Shares each such Stockholder shall be permitted to sell to such prospective purchaser or purchasers shall be reduced, on a pro rata basis, based on the number of Shares each such Stockholder is offering to such purchaser or purchasers pursuant to Section 4(a) and the CCI Transferees shall not be permitted to sell any Shares pursuant to Section 4(a). (c) In the event any Person exercises his "bring along" rights pursuant to Section 4(a), and the number of Shares to be sold by the Stockholder who initiated the transfer of Shares and those Stockholders and CCI Transferees electing to be "brought along" in such transfer pursuant to Section 4(a) exceeds the number of shares of Common Stock the prospective purchaser or purchasers thereof desire to acquire, then, subject to Section 4(b) above, all the Shares to be sold by Stockholders shall be purchased and any remaining Shares to be sold shall be allocated, on a pro rata basis, to the CCI Transferees based on the number of Shares each CCI Transferee is offering to such purchaser or purchasers pursuant to Section 4(a). (d) A Person must exercise his "bring along" rights pursuant to Section 4(a) within 10 days after receipt of a written notice setting forth the material terms of the proposed transfer. Such rights shall be exercised by written reply, sent by registered 18 19 mail, return receipt requested, to the person named in such notice. The "bring along" rights contained in this Section 4 may be exercised or waived solely at the option of the party entitled thereto. SECTION 5. Registration Rights. (a) If the Corporation shall receive a written request to file a registration statement (a "Registration Request") with respect to Shares held by either CCI or its Assigns (who may include one or more CCI Transferees), Limited or Benaroya and his Permitted Transferees (each of CCI or its Assigns, of Limited and of Benaroya and his Permitted Transferees as a group being referred to as a "Selling Stockholder"), the Corporation shall at its expense (which shall include, without limitation, all registration and filing fees, printing and mailing expenses, fees and disbursements of counsel to, and independent accountants for, the Corporation, fees and expenses incident to compliance with state securities laws, and fees and expenses of any special experts retained in connection with the requested registration ("Registration Expenses") but shall exclude underwriting discounts and commissions, fees and expenses of counsel to the Selling Stockholder, and transfer taxes, if any, properly allocable to securities included in such registration statement): (i) use its best efforts to effect promptly registration, qualification or compliance under the 1933 Act and under any other applicable federal law and any applicable securities or blue sky laws of such jurisdictions within the United States as the Selling Stockholder may request as shall be necessary to enable the Selling Stockholder to sell all the Shares owned by CCI or its Assigns, all the Shares owned by Limited and all the Shares 19 20 owned by Benaroya and his Permitted Transferees, as the case may be, and offered for sale; provided, however, that in no event shall the Corporation be obligated to qualify to do business in any jurisdiction where it is not so qualified or to take any action that would subject it to tax or the service of process (other than process in connection with such registration) in any state where it is not subject thereto; (ii) furnish to the Selling Stockholder such number of copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits), the prospectus in the registration statement filed under the 1933 Act (including each preliminary and summary prospectus) in conformity with the requirements of the 1933 Act and such other documents as the Selling Stockholder may reasonably request in order to facilitate the disposition of the Shares covered by the registration statement; (iii) notify the Selling Stockholder, at any time when a prospectus relating to the Shares covered by such registration statement is required to be delivered under the 1933 Act, of the Corporation's becoming aware that the prospectus in such registration statement, as then in effect, includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and at the request of the Selling Stockholder, prepare and furnish to it any reasonable number of copies of any supplement to or amendment of such prospectus necessary so that, as thereafter delivered to any purchaser of the Shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (iv) prepare and file with the Securities and Exchange Commission (the "SEC") such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until three months after the effective date of the registration statement or the earlier sale by the Selling Stockholder of all the Shares that shall have been registered, provided, however, that in the case of a registration statement for Shares held by Benaroya and his Permitted Transferees the Corporation shall prepare and file with the SEC such amendments and supplements as may be necessary to keep such registration statement effective until six months and one business day after the effective date of the registration statement if the Shares being registered were obtained upon the exercise 20 21 of options granted by the Corporation and Benaroya shall deliver to the Corporation an opinion of counsel to the effect that the sale of the Shares within six months after the effective date of the registration statement would be subject to the provisions of Section 16(b) of the 1934 Act; (v) otherwise use its efforts to comply with all applicable rules and regulations of the SEC, and, if required, make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first day of the Corporation's first fiscal quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder; provided, however, that the Corporation shall not be required to conduct a special audit in order to satisfy its obligations under this subsection (v); (vi) use it best efforts to cause all Shares covered by such registration statement to be listed on the principal securities exchange on which similar equity securities issued by the Corporation are then listed or eligible for listing, or on the NASDAQ National Market System if the listing of such Shares is then permitted under the rules of such exchange or NASDAQ, as the case may be; (vii) provide a transfer agent and registrar for all Shares covered by such registration statement not later than the effective date of such registration statement; (viii) in connection with any underwritten offering, enter into an underwriting agreement with the underwriter of such offering in the form customary for such underwriter for similar offerings, including such representations and warranties by the Corporation, provisions regarding the delivery of opinions of counsel for the Corporation and accountants' letters, provisions regarding indemnification and contribution, and such other terms and conditions as are at the time customarily contained in such underwriter's underwriting agreements for similar offerings (and, the representations and warranties by, and the other agreements on the part of, the Corporation to and for the benefit of such underwriter shall also be made to and for the benefit of the Selling Stockholder); (ix) upon receipt of such confidentiality agreements as the Corporation may reasonably request, make available for inspection by the Selling Stockholder and by any attorney, accountant or other agent retained by it, all pertinent financial and other records, pertinent corporate documents and properties of the Corporation and its 21 22 subsidiaries, and cause all of the Corporation's and its subsidiaries' officers, directors and employees to supply all information reasonably requested by it or its attorney, accountant or agent in connection with such registration statement; and (x) permit the Selling Stockholder, if, in its sole judgment, exercised in good faith, it might be deemed to be a controlling person of the Corporation, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Corporation in writing, that in its judgment, as aforesaid, should be included. Notwithstanding any other provision of this Section 5(a), the Corporation shall not register any Shares in response to a Registration Request (other than pursuant to a Registration Request for an underwritten public offering of more than 250,000 shares) if the Corporation receives an opinion of counsel satisfactory to the Board of Directors stating that the proposed method of distribution of such Shares would be exempt from the registration requirements of the 1933 Act. (b) As a condition to registering a Selling Stockholder's Shares under the 1933 Act, the Corporation may require (i) that it furnish to the Corporation such information regarding itself and the contemplated distribution of its Shares as is required to be included in the registration statement, and (ii) that such information be furnished to the Corporation in writing and signed by it and stated to be specifically for use in the related registration statement, prospectus, offering circular or other document incident thereto. Except for the foregoing and as otherwise provided by Sections 5(a), 5(k) and 5(m) the Selling Stockholder shall not be required to make any representations or 22 23 warranties to or agreements with the Corporation as a condition to the registration of such Shares under the 1933 Act. (c) Demand Registration Rights shall be exercisable on only four occasions: on two occasions by Limited, on one occasion by CCI (on behalf of CCI and its Assigns) and on one occasion by Benaroya and his Permitted Transferees as a group (the "Benaroya Registration Statement"). In the case of CCI's Assigns, a Registration Request may be made only by CCI or by CCI's general partner. In the case of Benaroya's Permitted Transferees, a Registration Request may be made only by Benaroya or by his executor in the event of his death or by the committee of his property in the event of his legal incompetence. Registration statements filed upon the exercise of Demand Registration Rights by Limited shall not become effective prior to March 10, 1993, and the Benaroya Registration Statement shall not become effective prior to the earlier of January 1, 1996 and three months after the effective date of a registration of Shares by Limited pursuant to its Demand Registration Rights, provided, however, that no registration of Shares held by a Selling Stockholder shall become effective within three months after the effective date of a prior registration of Shares held by another Selling Stockholder or of Shares, or securities convertible into or exchangeable for shares of Common Stock, issued in an offering for the account of the Corporation. (d) No registration of shares of Common Stock, or securities convertible into or exchangeable for shares of Common 23 24 Stock, offered for the account of the Corporation shall become effective within three months after the effective date of a prior registration of Shares held by a Selling Stockholder. (e) A Selling Stockholder may withdraw its exercise of Demand Registration Rights by notifying the Corporation in writing prior to the effective date of the registration statement. A withdrawn exercise of Demand Registration Rights shall not be deemed to be an exercise of Demand Registration Rights if the Selling Stockholder shall reimburse the Corporation for the Registration Expenses at the time it notifies the Corporation of the withdrawal. (f) If the Corporation shall receive a Registration Request pursuant to Section 5(a) or from another Person that has the right to demand such registration pursuant to any contract with the Corporation (such other Person is referred to as the "Third Party Demander"), or if the Corporation shall determine to effect any registration under the 1933 Act for an offering for its own account of shares of Common Stock or securities convertible into shares of Common Stock, the Corporation will, at its expense (which shall include all expenses referred to in Section 5(a)): (i) promptly give written notice thereof to each Stockholder and CCI Transferee, provided, however, that CCI Transferees shall not be given notice of a Registration Request by CCI; and (ii) subject to Section 5(g), include in the registration (in addition to the shares of Common Stock that 24 25 the Corporation, Selling Stockholder or Third Party Demander is entitled to register) such portion of the Registrable Securities held by each Stockholder (including Benaroya and his Permitted Transferees) and CCI Transferee as shall be specified in a written request or requests received by the Corporation from such Stockholder or CCI Transferee within 15 days after the date upon which the Corporation gave the aforementioned notice and, upon receipt of any such written request and in respect of Registrable Securities in such request, take the action specified in clauses (i) through (x) of Section 5(a) (such action is referred to as "piggyback registration".) Other than as provided in this Agreement, the Corporation shall not grant piggyback registration rights to any Person unless such rights give absolute priority to the rights of the Stockholders and CCI Transferees hereunder. (g) If the offering referred to Section 5(f) is underwritten, Stockholders and CCI Transferees selling Shares pursuant to Section 5(f) shall sell such Shares to or through the underwriter or underwriters (who, if the offering is made pursuant to a Registration Request, shall be selected by the Selling Stockholder or Third Party Demander, in its sole discretion) of the securities being registered for the account of the Corporation, Third Party Demander and/or Selling Stockholder upon terms generally comparable to the terms applicable to the Corporation, Third Party Demander and/or Selling Stockholder. If 25 26 any lead underwriter reasonably determines that the number of securities to be included in the registration statement exceeds the number (the "Saleable Number") that can be sold in an orderly fashion within a price range acceptable to the Corporation, if such registration is being effected at the Corporation's determination, or the Selling Stockholder or Third Party Demander, if such registration is being effected pursuant to a Registration Request, then the number of securities offered shall be limited to the Saleable Number and shall be allocated as follows: (i) if such registration is being effected at the Corporation's determination to sell for its own account shares of Common Stock or securities convertible into shares of Common Stock, (A) first, all the securities the Corporation proposes to register, (B) second, the difference between the Saleable Number and the number to be included pursuant to clause (i) (A) allocated among all Stockholders pro rata on the basis of the relative number of Shares offered for sale by each Stockholder on a "piggyback" basis and (C) third, if the Saleable Number shall not have been fully allocated, the difference between the Saleable Number and the amount to be included pursuant to clause (i)(A) and (B) to the CCI Transferees pro rata on the basis of the relative number of Shares offered for sale by each on a "piggyback" basis. 26 27 (ii) if the registration is being effected pursuant to a Registration Request by a Third Party Demander, (A) first, all the shares of Common Stock that the Third Party Demander is entitled to register, (B) second, the difference between the Saleable Number and the amount to be included pursuant to clause (ii)(A) hereof to all Stockholders pro rata on the basis of the relative number of Shares offered for sale by each Stockholder on a "piggyback" basis and (C) third, if the Saleable Number shall not have been fully allocated, the difference between the Saleable Number and the amount to be included pursuant to clauses (ii) (A) and (B) to the CCI Transferees pro rata on the basis of the relative number of Shares offered for sale by each on a "piggyback" basis. (iii) if the registration is being effected pursuant to a Registration Request by Limited, the Saleable Number to be allocated as follows: (A) first, up to 50% of the Saleable Number to Limited and up to 50% of the Saleable Number to the Management Investors pro rata on the basis of the relative number of Shares offered for sale by each Management Investor, (B) second, the difference between the Saleable Number and the number to be included pursuant to clause (iii) (A), if any, to whichever of Limited or the Management Investors offered for sale a number of shares greater than 50% of the Saleable Number pro rata in the case of the Management Investors on the basis of the relative number of Shares offered for sale by each Management 27 28 Investor on a "piggyback" basis and (C) third, if the Saleable Number shall not have been fully allocated, the difference between the Saleable Number and the amount to be included pursuant to clauses (iii) (A) and (B) to the CCI Transferees pro rata on the basis of the relative number of Shares offered for sale by each on a "piggyback" basis, provided that Limited shall be entitled to elect that 100% of the Saleable Number be allocated to it in connection with one Registration Request by Limited; (iv) if the registration is being effected pursuant to a Registration Request by CCI, the Saleable Number to be allocated as follows: first, all the securities CCI and its Assigns propose to register to CCI and its Assigns, provided that if the offering pursuant to the Registration Request by CCI pursuant to this clause (iv) is not consummated prior to July 1, 1993, Limited may at its option elect to make one of its Demand Registration Rights available to CCI and (y) if Limited so elects the Saleable Number of the additional offering by CCI in lieu of Limited shall be allocated as follows: (A) first, up to 50% of the Saleable Number to CCI and its Assigns, up to 25% of the Saleable Number to the Management Investors pro rata on the basis of the number of shares offered for sale by each Management Investor on a "piggyback" basis, and up to 25% of the Saleable Number to Limited, (B) second, the difference between the Saleable Number and the number to be included pursuant to clause (iv) 28 29 (A) among all Stockholders pro rata on the basis of the relative number of Shares offered for sale by each Stockholder on a "piggyback" basis and (C) third, if the Saleable Number shall not have been fully allocated, the difference between the Saleable Number and the amount to be included pursuant to clauses (iv) (A) and (B) to CCI and its Assigns pro rata on the basis of the relative number of Shares offered for sale by each on a "piggyback" basis and (z) if Limited so elects the first Registration Request exercised by CCI pursuant to this clause (iv) shall on and after July 1, 1993 allocate the Saleable Number as follows: (D) first, up to 50% of the Saleable Number to CCI and its Assigns and up to 50% of the Saleable Number to Limited, (E) second, the difference between the Saleable Number and the number to be included pursuant to clause (iv) (D), if any, to whichever of CCI and its Assigns or Limited offered for sale a number of Shares greater than 50% of the Saleable Number, (F) third, if the Saleable Number shall not have been fully allocated, the difference between the Saleable Number and the amount to be included pursuant to clauses (iv) (D) and (E) to the Management Investors pro rata on the basis of the relative number of Shares offered for sale by each Management Investor on a "piggyback" basis and (G) fourth, if the Saleable Number shall not have been fully allocated, the difference between the Saleable Number and the amount to be included pursuant to clauses (iv) (D), (E) and (F) to CCI 29 30 and its Assigns pro rata on the basis of the relative number of Shares offered for sale by each on a "piggyback" basis; and (v) if the registration is being effected pursuant to a Registration Request by Benaroya, the Saleable Number to be allocated as follows: (A) first, all the securities that Benaroya proposes to register, to him and his Permitted Transferees, (B) second, the difference between the Saleable Number and the number to be included pursuant to clause (v) (A), if any, to the other Stockholders pro rata on the basis of the relative number of Shares offered for sale by each and (C) third, if the Saleable Number shall not have been fully allocated, the difference between the Saleable Number and the amount to be included pursuant to clauses (v) (A) and (B) to the CCI Transferees pro rata on the basis of the relative number of Shares offered for sale by each on a "piggyback" basis. The number of securities required to satisfy any underwriters' overallotment option shall be allocated pro rata on the basis of the relative number of securities otherwise to be included by each Person in the registration. If as a result of the proration provisions of this Section 5(g), any Stockholder or CCI Transferee is not entitled to include all its Shares in such registration, such holder may elect to withdraw its request to include any Shares in such registration (a "Withdrawal Election"), provided, however, that a Withdrawal Election shall be irrevocable and a Stockholder or CCI Transferee who has made 30 31 a Withdrawal Election shall no longer have any right to include any Registrable Shares in the registration as to which such Withdrawal Election was made. (h) If requested in writing by the Corporation or the lead underwriter, if any, of any offering effected pursuant to registration rights granted under this Section 5, each Stockholder owning beneficially or of record (including Shares a Stockholder has the right to acquire upon exercise of options or otherwise) more than 1% of the shares of Common Stock then outstanding agrees not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the 1933 Act, of any shares of Common Stock (other than as part of such underwritten public offering) within 7 days before or three months after the effective date of a registration statement filed pursuant to this Section 5. (i) As a condition to including any Shares held by a Stockholder, CCI or its Assigns in a registration pursuant to Section 5(f), (i) such holder shall furnish to the Corporation such information regarding it and the contemplated distribution of its Shares as is required to be included in the registration statement, and such information shall be furnished to the Corporation in writing and signed by such holder and stated to be specifically for use in the related registration statement, prospectus, offering circular or other document incident thereto and (ii) such holder shall furnish to the Corporation in writing an agreement that such holder shall not prior to March 17, 1997 31 32 or the earlier termination of such agreement in accordance with its terms grant any proxy to vote against the proposed members of the Board of Directors recommended by the Board of Directors or enter into or agree to be bound by any voting trust with respect to any shares of Common Stock or act, for any reason, as a member of a group or in concert with any other Persons to vote against the proposed members of the Board of Directors recommended by the Board of Directors, provided, however, that such agreement shall not restrict the transferability of shares held by the signatory thereto. Except for the foregoing and as otherwise provided by Sections 5(f), 5(k) and 5(m) Stockholders and CCI or CCI Transferees shall not be required to make any representations or warranties to or agreements with the Corporation or the underwriters as a condition to the inclusion of such Shares in a registration. (j) Each holder of Shares participating in an offering shall, as a condition to participation, upon receipt of any notice from the Corporation pursuant to Section 5(a)(iii), forthwith discontinue disposition of Shares pursuant to the registration statement covering such Shares until its receipt of copies of the supplemented or amended prospectus contemplated by Section 5(a)(iii) and, if so directed by the Corporation, it shall deliver to the Corporation (at the Corporation's expense) all copies other than permanent file copies then in its possession, of the prospectus covering such Shares that was in effect prior to such amendment or supplement. 32 33 (k) In the event of the filing of any registration statement under the 1933 Act with respect to Shares pursuant to Section 5(a) or 5(f), the Corporation will indemnify and hold each holder participating in such registration and the directors, officers, general and limited partners and controlling Persons (within the meaning of the 1933 Act ("Controlling Persons")) of each such holder (each such holder together with its Controlling Persons is collectively referred to as an "Indemnified Party") harmless, from and against any losses, claims, damages or liabilities, joint or several, to which each Indemnified Party may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which the Shares were registered under the 1933 Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arise out of or are based upon the failure by the Corporation to file any amendment or supplement thereto that was required to be filed under the 1933 Act, and will reimburse the Indemnified Party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, 33 34 damage, liability or action; provided, however, that the Corporation will not be liable to the Indemnified Party in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made (i) in such registration statement, preliminary prospectus, final prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to the Corporation through an instrument duly executed by the holder specifically for use in the preparation thereof, or (ii) in any preliminary prospectus or any final prospectus later amended or supplemented if (A) the holder failed to deliver a copy of the final prospectus or the final prospectus as then amended or supplemented, as the case may be, to the Person asserting such loss, claim, damage or liability at or prior to the written confirmation of such sale, (B) such delivery was required by the 1933 Act and (C) the untrue statement or alleged untrue statement or omission or alleged omission in such preliminary prospectus or final prospectus was corrected in the final prospectus or the final prospectus as then amended or supplemented, respectively. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the holder and shall survive the transfer of such Shares. The Corporation's obligation to take any action with respect to registration and any holder's right to participate in a registration is specifically conditioned on the Corporation's receipt from each 34 35 holder participating in the offering of an undertaking satisfactory to the Corporation to indemnify and hold harmless (in the same manner and to the same extent as set forth in the first sentence of this Section 5(k)) the Corporation, all other holders of shares of Common Stock included in such offering and any underwriter of such offering, and their respective directors, officers, general and limited partners and Controlling Persons (each, an "Indemnitee"), with respect to any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under the 1933 Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and in conformity with written information furnished to the Corporation through an instrument duly executed by such holder specifically for use in the preparation of such registration statement, preliminary prospectus or final prospectus or amendment or supplement; provided, however, that such holder will not be liable in any such case to any Indemnitee to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus or any final prospectus later amended or supplemented if (i) such Indemnitee failed to deliver a copy of 35 36 the final prospectus or the final prospectus as then amended or supplemented, as the case may be, to the Person asserting such loss, claim, damage or liability at or prior to the written confirmation of such sale, (ii) such delivery was required by the 1933 Act and (iii) the untrue statement or alleged untrue statement or omission or alleged omission in such preliminary prospectus or final prospectus was corrected in the final prospectus or the final prospectus as then amended or supplemented, respectively. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any such Indemnitee and shall survive the transfer of such Shares. (1) As soon as possible after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it 36 37 wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; provided that the indemnifying party shall not be entitled to so participate or so assume the defense if, in the indemnified party's reasonable judgment, a conflict of interest between the indemnified party and the indemnifying party exists in respect of such claim. After notice from the indemnifying party to such indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that an indemnified party (the CCI Assigns being collectively considered a single indemnified party) shall have the right to employ one counsel to represent such indemnified party and its officers, directors, general and limited partners and Controlling Persons if, in such indemnified party's reasonable judgment, a conflict of interest between such indemnified parties and the indemnifying parties exists in respect of such claim, and in that event the fees and expenses of such separate counsel shall be paid by the indemnifying party; and provided further that if, in the reasonable judgment of any indemnified party (the CCI Assigns being collectively considered a single indemnified party), a conflict of interest between such indemnified party and any other indemnified parties exists in respect of such claim, such indemnified party shall be entitled 37 38 to additional counsel or counsels and the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel of counsels. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to all indemnified parties of a release from all liability in respect to such claim or litigation. (m) Indemnification similar to that specified in Section 5(k) (with appropriate modifications) shall be given by the Corporation and, at the Corporation's request and as a condition to participation, each holder participating in an offering with respect to any registration or other qualification of securities under any state securities and "blue sky" laws. (n) If the indemnification provided for in the preceding paragraphs of this Section 5 is unavailable or insufficient to hold harmless an indemnified party, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in the preceding paragraphs of this Section 5 in such proportion as is appropriate to reflect the relative fault of the indemnifying party, on the one hand, and the indemnified party, on the other hand, in connection with statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by 38 39 reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statements or omissions. The parties hereto agree that it would not be just and equitable if contributions pursuant to this paragraph were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this paragraph. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this paragraph shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim (which shall be limited as provided above if the indemnifying party has assumed the defense of any such action) which is the subject of this paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Promptly after receipt by an indemnified party under this paragraph of notice of the commencement of any action against such party in respect of which a claim for contribution may be made against an indemnifying party under this paragraph, such 39 40 indemnified party shall notify the indemnifying party in writing of the commencement thereof if the notice specified with respect to indemnification has not been given with respect to such action; provided that the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to an indemnified party otherwise under this paragraph, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. Notwithstanding anything in this paragraph to the contrary, no indemnifying party (other than the Corporation) shall be required pursuant to this paragraph to contribute any amount in excess of the proceeds received by such indemnifying party from the sale of Shares in the offering to which the losses, claims, damages or liabilities of the indemnified parties relate. SECTION 6. Provision of Financial Information. The Corporation will furnish to each Director, as soon as available and in any event within 15 days after the end of each fiscal month in each Fiscal Year, the consolidated balance sheet of the Corporation and its subsidiaries as at the end of such month, the related consolidated statements of income and retained earnings for such fiscal month as well as (in the case of each monthly period after the first fiscal month of each Fiscal Year) such balance sheet, financial statements and reports for the period from the beginning of the current Fiscal Year to the end of such fiscal month, setting forth in comparative form the consolidated figures for the corresponding previous Fiscal Year (or, in the 40 41 case of such balance sheet, at the end of the previous Fiscal Year), all determined in accordance with GAAP applied on a consistent basis and all in reasonable detail and certified as complete and correct by the chief financial officer of the Corporation. SECTION 7. Termination. (a) This Agreement may be terminated at any time by an instrument in writing signed by (i) the Corporation, (ii) Stockholders that own of record 90% or more of the issued and outstanding Shares then owned by Stockholders, and (iii) each of Limited and Benaroya, if then a Stockholder, and of CCI and a majority in interest of the CCI Transferees copies of which instrument shall be delivered to each Stockholder and CCI Transferee and to the Corporation. (b) This Agreement shall terminate on the earlier to occur of: (i) the Sale of the Corporation, or (ii) July 17, 1999, provided, however, that, unless a Sale of the Corporation shall have occurred, the provisions of Section 5 shall survive the termination of this Agreement until neither of Limited, or of Benaroya and his Permitted Transferees as a group, holds more than 2% of the shares of Common Stock then outstanding. SECTION 8. Legend. Each Stockholder acknowledges that each certificate representing Shares owned by the Stockholder, and any 41 42 other Person who becomes a party to this Agreement, shall bear the following legend (or other legend incorporating such legend): "THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF THE STOCKHOLDERS' AGREEMENT BETWEEN THE CORPORATION AND THE HOLDER OF THIS CERTIFICATE. NO TRANSFER, SALE, ASSIGNMENT, OR OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT AS PERMITTED BY SUCH STOCKHOLDERS' AGREEMENT AND (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ANY APPLICABLE STATE SECURITIES AND 'BLUE SKY' LAWS, OR (B) IF THE CORPORATION HAS PREVIOUSLY BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE HOLDER, WHICH OPINION AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT SUCH TRANSFER, SALE, ASSIGNMENT, OR OTHER DISPOSITION IS EXEMPT FORM THE PROVISIONS OF SECTION 5 OF THE ACT AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND SUCH STATE SECURITIES AND 'BLUE SKY' LAWS. THE RIGHT OF THE HOLDER OF THESE SECURITIES IN RESPECT OF THE ELECTION AND REMOVAL OF DIRECTORS AND OTHERWISE RELATING TO VOTING RIGHTS ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE STOCKHOLDERS' AGREEMENT. COPIES OF THE STOCKHOLDERS' AGREEMENT ARE ON FILE WITH THE SECRETARY OF THE CORPORATION AND WILL BE MAILED TO A STOCKHOLDER WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT BY THE CORPORATION OF A WRITTEN REQUEST THEREFOR FROM SUCH STOCKHOLDER." SECTION 9. Severability; Governing Law. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. This Agreement 42 43 shall be governed by, and construed in accordance with, the laws of the State of Delaware. SECTION 10. Benefits of Agreement. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns, legal representatives and heirs; Section 4 of this Agreement shall inure to the benefit of the CCI Transferees and such benefits shall not be assignable by them; this Agreement does not create, and shall not be construed as creating, any rights enforceable by any other Person. The rights and obligations of the Stockholders hereunder shall not be assignable except to Permitted Transferees. The right of CCI to make a Registration Request may be assigned only to the general partner of CCI and further assignment shall not be permitted. The right to include Shares in a Registration Request by CCI may be assigned to CCI's Assigns. SECTION 11. Notices. All notices and communications to be given or to otherwise be made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by first class registered or certified mail or by a recognized national courier service, 43 44 postage or charges prepaid, addressed to: (a) If to the Corporation: United Retail Group, Inc. 365 West Passaic Street Rochelle Park, New Jersey 07662-6563 Attention: Chief Executive Officer (b) If to any Stockholder to its address as it appears on the stock books of the Corporation or such other address as may be designated in writing by the addressee to the addressor (c) If to any CCI Transferee, in care of Lester Pollack at his last known address with a copy to the address of such CCI Transferee at its address on the records of the Company's transfer agent. All such notices and communications shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of mailing, on the fifth business day following such mailing or (c) in the case of delivery by a courier service, on the date of confirmation of delivery, except notices of change of address which shall only be effective upon receipt. SECTION 12. Modification; Amendment. Except as otherwise provided herein, neither this Agreement nor any provision hereof can be modified, changed, or discharged except by an instrument in writing signed by the Corporation and Stockholders owning of record at least 90% of the Shares then owned by Stockholders, in which event such amendment or modification shall be binding upon all Stockholders, CCI and its assigns and CCI Transferees in accordance with its terms (and, provided, that no such amendment 44 45 shall modify, change or otherwise affect the rights under this Agreement of any of CCI and its Assigns, Limited or Benaroya and his Permitted Transferees without its or his written consent or shall impose obligations on any CCI Transferees). This Agreement shall automatically be deemed amended to delete any Stockholder who no longer owns any Shares (and such Person shall thereafter not be deemed a "Stockholder" or entitled to the rights, or subject to the obligations, of a Stockholder under this Agreement, regardless of whether such Person thereafter acquires other Shares). SECTION 13. Recapitalizations, Exchanges, Etc. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to Shares, to any and all shares of capital stock of the Corporation that may be issued in respect of, in exchange for, or in substitution of, Shares and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. SECTION 14. Captions and References to Sections. The captions herein are inserted for convenience only and shall not define, limit, extend or describe the scope of this Agreement or affect the construction hereof. Sections mentioned by number only are the respective sections of this Agreement. SECTION 15. Availability of Equitable Remedies. Each Stockholder acknowledges that a breach of the provisions of this Agreement could not adequately be compensated by money damages. 45 46 Accordingly, any party hereto shall be entitled, in addition to any other right or remedy available to it, to an injunction restraining such breach or a threatened breach and to specific performance of any such provision of this Agreement, and in either case no bond or other security shall be required in connection therewith. SECTION 16. Prohibition on Transfer of Limited Interest. Limited Direct Associates L.P. and The Limited, Inc. ("TLI") covenant and agree that Limited Direct Associates, L.P. will not sell any shares of capital stock or partnership interest in or comparable equity interest in Limited Direct Associates L.P. other than to any direct or indirect wholly-owned subsidiary of TLI or any partnership, the partners of which include only TLI or one or more direct or indirect wholly-owned subsidiaries of TLI; provided, that such transferee shall acquire such shares of capital stock, partnership interest or comparable equity interest subject to Section 16. SECTION 17. Entire Agreement; References Hereto. This Agreement, the Management Stock Transfer Agreements, the Stock Purchase Agreements, any stock option agreement between the Corporation and a Management Investor, the Certificate of Incorporation, as amended and restated from time to time, and the By-Laws of the Corporation, as amended and restated from time to time, set forth the entire understanding of the parties with respect to the subject matter hereof. There are no restrictions, agreements, promises, representations, warranties, covenants or 46 47 undertakings with respect to the subject matter hereof other than those expressly set forth in this Agreement, the Management Stock Transfer Agreements, the Stock Purchase Agreements, such stock option agreements, the Certificate of Incorporation and the By-Laws of the Corporation. This Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter other than such agreements and understandings set forth in the Certificate of Incorporation and the By-Laws of the Corporation. SECTION 18. Waiver. Any waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of that provision or of any breach of any other provision of this Agreement. The failure of a party to insist on strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be evidenced by a writing signed by the party against whom the waiver is sought to be enforced. SECTION 19. Pronouns. Any masculine personal pronoun shall be considered to mean the corresponding feminine or neuter personal pronoun, and vice versa, as the context requires. SECTION 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. 47 48 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. UNITED RETAIL GROUP, INC. By: /s/ George R. Remeta ------------------------ Name: George R. Remeta Title: Executive Vice President /s/ George Remeta LIMITED DIRECT ASSOCIATES L.P. - ------------------------ By: LIMITED DIRECT, INC., George R. Remeta as general partner By: - ------------------------ ------------------------- Charles R. Wilkinson President - ------------------------ CENTRE CAPITAL INVESTORS L.P. Bradley Orloff By: CENTRE PARTNERS L.P., as general partner - ------------------------ By: PARK ROAD CORPORATION Jerry Silverman as general partner By: /s/ Paul F. Balser ------------------------ President ------------------------ Mort Greenberg /s/ Raphael Benaroya - ------------------------ ------------------------ Frederic Stern Raphael Benaroya - ------------------------ ------------------------ James F. Wimpress Jean Srour - ------------------------ ------------------------ Ellen Demaio Julie Stodolak - ------------------------ ------------------------ James Hufford Cheryl A. Lutz - ------------------------ Mary Jo Slater 48 49 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. UNITED RETAIL GROUP, INC. By:_______________________________ Name: George R. Remeta Title: Executive Vice President __________________________________ LIMITED DIRECT ASSOCIATES L.P. George R. Remeta By: LIMITED DIRECT, INC., as general partner __________________________________ By: /s/ William K. Gerber Charles R. Wilkinson __________________________________ Vice President __________________________________ CENTRE CAPITAL INVESTORS L.P. Bradley Orloff By: CENTRE PARTNERS L.P., as general partner __________________________________ By: PARK ROAD CORPORATION Jerry Silverman as general partner By:______________________ President _________________________________ Mort Greenberg __________________________________ _________________________________ Frederic Stern Raphael Benaroya __________________________________ _________________________________ James F. Wimpress Jean Srour __________________________________ _________________________________ Ellen Demaio Julie Stodolak __________________________________ _________________________________ James Hufford Cheryl A. Lutz __________________________________ Mary Jo Slater 48 50 The undersigned agrees to comply with the requirements of Section 16 above. Dated: December 23, 1992 THE LIMITED, INC. By: /s/ William K. Gerber William K. Gerber Vice President 49 51 Exhibit No. 10.1 AMENDMENT NO. 1 RESTATED STOCKHOLDERS' AGREEMENT -------------------------------- This AMENDMENT NO. 1, dated as of June 1, 1993, to the RESTATED STOCKHOLDERS' AGREEMENT, dated as of December 23, 1992 (the "Original Agreement" and as amended, the "Amended Agreement"), by and among United Retail Group, Inc., a Delaware corporation (the "Corporation"), and the Stockholders and Centre Capital Investors L.P. ("CCI"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, all capitalized terms herein shall have the respective meanings set forth in the Original Agreement; WHEREAS, CCI has transferred all the Shares it held; WHEREAS, there exists one vacancy on the Corporation's Board of Directors; WHEREAS, the undersigned stockholders believe it to be in the best interests of the Corporation and its stockholders to reduce the number of Directors from nine to eight during the period from June 1, 1993 through July 31, 1993; NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Original Agreement shall continue in full force and effect in accordance with its terms, except as expressly amended hereby. 52 2. Section 2(c) shall be amended to read in its entirety as follows: (c) Subsequent Nominations. Until March 17, 1997, the Stockholders shall, at any time that Directors of the Corporation are to be elected, take such action as may be necessary to nominate or to cause the Board of Directors to nominate and recommend to the Stockholders, as the proposed members of the Board of Directors: (i) for as long as Limited at all times after December 23, 1992 owns at least 500,000 shares of Common Stock - two Persons designated by Limited, two Persons designated by the Incumbent Chairman of the Board and four Public Directors approved by the Nominating Committee and the Board of Directors, provided, however, that after July 31, 1993 the number of Public Directors approved by the Nominating Committee and the Board of Directors shall be five; (ii) for as long as Limited at all times after December 23, 1992 owns at least 100,000 shares of Common Stock but at any time owns less than 500,000 shares of Common Stock - one Person designated by Limited, two Persons designated by the Incumbent Chairman of the Board and five Public Directors approved by the Nominating Committee and the Board of Directors, provided, however, that after July 31, 1993 the number of Public Directors approved by the Nominating Committee and the Board of Directors shall be six; and 2 53 (iii) if at any time Limited owns less than 100,000 shares of Common Stock - two Persons designated by the Incumbent Chairman of the Board and six Public Directors approved by the Nominating Committee and the Board of Directors, provided, however, that after July 31, 1993 the number of Public Directors approved by the Nominating Committee and the Board of Directors shall be seven; provided, however, that in the event the total number of shares of Common Stock held by the Management Investors as a group shall increase to 3,010,000 or more at any time after July 31, 1993 (and the increase in the total number of shares of Common Stock includes an increase of at least 500,000 shares of Common Stock by Benaroya and his Permitted Transferees), then, so long as (i) the Incumbent Chairman of the Board of his Permitted Transferees at all times after December 23, 1992 own at least 500,000 shares of Common Stock, and (ii) the Management Investors at all times after December 23, 1992 own at least 2,010,000 shares of Common Stock, the Incumbent Chairman of the Board shall designate three Persons, instead of two Persons, to be nominated as proposed members of the Board of Directors, and the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to increase the total membership of the Board from nine to 10 and provided, further, that in the event the total numbers of shares of Common Stock owned by the Incumbent Chairman and his Permitted Transferees and by the Management Investors, 3 54 respectively, shall at any time after July 31, 1993 be less than those required by clauses (i) and (ii) of the preceding proviso, the Incumbent Chairman of the Board shall thereafter designate two Persons, instead of three Persons, to be nominated as proposed members of the Board of Directors and the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to decrease the total membership of the Board from 10 to nine. In the event Benaroya shall cease to serve as Chairman of the Board, regardless of the circumstances of such cessation, he, or his executor in the event of his death or the committee of his property in the event of his legal incompetence, shall retain the right to designate one Person to be nominated as a proposed member of the Board of Directors but one other Person who would otherwise have been designated by the Incumbent Chairman of the Board shall be designated instead by the Nominating Committee, and, if the Board of Directors then has 10 members, the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to decrease the total membership of the Board from 10 to nine, provided, however, that, after having ceased to serve as Chairman of the Board, Benaroya, or his executor or committee, shall have no right to designate if Benaroya and his Permitted Transferees own less than 100,000 shares of Common Stock at any time, and the Person or Persons who would otherwise have been nominated by the Incumbent Chairman of the Board shall then be designated instead by the Nominating Committee. 4 55 IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date first above written. UNITED RETAIL GROUP, INC. By: /s/ George R. Remeta --------------------------------- Name: George R. Remeta Title: Executive Vice President /s/ George R. Remeta - ----------------------------------- LIMITED DIRECT ASSOCIATES L.P. George R. Remeta By: LIMITED DIRECT, INC., as general partner /s/ Charles R. Wilkinson By: /s/ William K. Gerber - ----------------------------------- ---------------------------------- Charles R. Wilkinson Vice President /s/ Bradley Orloff /s/ Raphael Benaroya - ----------------------------------- ---------------------------------- Bradley Orloff Raphael Benaroya /s/ Jerry Silverman - ----------------------------------- Jerry Silverman - ----------------------------------- Frederic E. Stern /s/ James F. Wimpress - ----------------------------------- James F. Wimpress /s/ Ellen Demaio - ----------------------------------- Ellen Demaio /s/ Mary Jo Slater - ----------------------------------- Mary Jo Slater 5 56 IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date first above written. UNITED RETAIL GROUP, INC. By: --------------------------------- Name: George R. Remeta Title: Executive Vice President - ----------------------------------- LIMITED DIRECT ASSOCIATES L.P. George R. Remeta By: LIMITED DIRECT, INC., as general partner /s/ Charles R. Wilkinson By: /s/ William K. Gerber - ----------------------------------- ---------------------------------- Charles R. Wilkinson Vice President /s/ Bradley Orloff /s/ Raphael Benaroya - ----------------------------------- ---------------------------------- Bradley Orloff Raphael Benaroya /s/ Jerry Silverman - ----------------------------------- Jerry Silverman /s/ Frederic E. Stern - ----------------------------------- Frederic E. Stern /s/ James F. Wimpress - ----------------------------------- James F. Wimpress /s/ Ellen Demaio - ----------------------------------- Ellen Demaio /s/ Mary Jo Slater - ----------------------------------- Mary Jo Slater 5 57 EXHIBIT NO. 10.1 AMENDMENT NO. 2 TO RESTATED STOCKHOLDERS' AGREEMENT AMENDMENT NO. 2, dated as of February 1, 1997, to the RESTATED STOCKHOLDERS' AGREEMENT, dated as of December 23, 1992 as amended by Amendment No. 1 to Restated Stockholders' Agreement dated as of June 1, 1993 (as so amended, the "Agreement") by and among United Retail Group, Inc., a Delaware corporation (the "Corporation") and the Stockholders (as therein defined) and Centre Capital Investors L.P. WHEREAS, it is deemed to be in the best interests of the Corporation and the Stockholders that the provision originally made for the continuity and stability of the business and management of the Corporation be modified. NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: SECTION 1. Section 2(h) of the Agreement is restated to read in its entirety as follows: "Termination. All the provisions of this Section 2 shall terminate on July 17, 1999." SECTION 2. The date in the introductory phrase of Section 2(c) is changed from March 17, 1997 to July 17, 1999. SECTION 3. All the other provisions of the Agreement shall remain in full force and effect in accordance with their terms. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date first above written. UNITED RETAIL GROUP, INC. /s/ Raphael Benaroya By: /s/ George R. Remeta - ----------------------------------- ----------------------------------- Raphael Benaroya Name: George R. Remeta Title: Vice Chairman /s/ George R. Remeta - ----------------------------------- LIMITED DIRECT ASSOCIATES L.P. George R. Remeta By: LIMITED DIRECT, INC., as general partner /s/ Bradley Orloff - ----------------------------------- Bradley Orloff By: /s/ William K. Gerber ---------------------------------- /s/ Fredric E. Stern Vice President - ----------------------------------- Frederic E. Stern 58 EXHIBIT 10.1 AMENDMENT NO. 3 RESTATED STOCKHOLDERS' AGREEMENT This AMENDMENT NO. 3, dated as of April 6, 1998, to the RESTATED STOCKHOLDERS' AGREEMENT, dated as of December 23, 1992 (the "Original Agreement" and as amended, the "Amended Agreement"), by and among United Retail Group, Inc., a Delaware corporation (the "Corporation"), and the Stockholders and Centre Capital Investors L.P. ("CCI"). WITNESSETH: WHEREAS, all capitalized terms herein shall have the respective meanings set forth in the Original Agreement; WHEREAS, CCI has transferred all the Shares it held; WHEREAS, the undersigned stockholders believe it to be in the best interests of the Corporation and its stockholders to reduce the number of Directors from nine to eight during the period from May 21, 1998 through July 31, 1998 (the "Interim Period"); NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Original Agreement shall constitute in full force and effect in accordance with its terms, except as expressly amended hereby. 2. Section 2(c) shall be amended to read in its entirety as follows: (c) Subsequent Nominations. Until July 17, 1999, the Stockholders shall, at any time that Directors of the Corporation are to be elected, take such action as may be necessary to nominate or to cause the Board of Directors to nominate and recommend to the Stockholders, as the proposed members of the Board of Directors: (i) if Limited at all times prior to May 21, 1998 owns at least 100,000 shares of Common Stock - one Person designated by Limited, two Persons designated by the Incumbent Chairman of the Board and five Public Directors approved by the Nominating Committee and the Board of Directors, provided, however, that after July 31, 1998 the number of Public Directors approved by the Nominating Committee and the Board of Directors shall be six; Page 1 of 3 59 (ii) if at any time Limited owns less than 100,000 shares of Common Stock - two Persons designed by the Incumbent Chairman of the Board and six Public Directors approved by the Nominating Committee and the Board of Directors, provided, however, that after July 31, 1998 the number of Public Directors approved by the Nominating Committee of the Board of Directors shall be seven; provided, however, that in the event the total number of shares of Common Stock held by the Management Investors as a group shall increase to 3,010,000 or more at any time, then, so long as (i) the Incumbent Chairman of the Board and his Permitted Transferees at all times after July 31, 1998 own at least 500,000 shares of Common Stock, and (ii) the Management Investors at all times after July 31, 1998 own at least 2,010,000 shares of Common Stock, the Incumbent Chairman of the Board shall designate three Persons, instead of two Persons, to be nominated as proposed members of the Board of Directors, and the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to increase the total membership of the Board from nine to 10 and provided, further, that in the event the total number of shares of Common Stock owned by the Incumbent Chairman and his Permitted Transferees and by the Management Investors, respectively, shall at any time after July 31, 1998 be less than those required by clauses (i) and (ii) of the preceding proviso, the Incumbent Chairman of the Board shall thereafter designate two Persons, instead of three Persons, to be nominated as proposed members of the Board of Directors and the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to decrease the total membership of the board from 10 to nine. In the event Benaroya shall cease to serve as Chairman of the Board, regardless of the circumstances of such cessation, he, or his executor in the event of his death or the committee of his property in the event of his legal incompetence, shall retain the right to designate one Person to be nominated as a proposed member of the Board of Directors and the one other Person who would otherwise have been designated by the Incumbent Chairman of the Board shall be designated instead by the Nominating Committee, provided that, if the Board of Directors then has 10 members, the Stockholders shall take such action, and shall cause the Directors to take such action, as may be necessary to decrease the total membership of the Board from 10 to nine, and provided further that, notwithstanding any of the foregoing, after having ceased to serve as Chairman of the Board, Benaroya, or his executor or committee, shall have no right to designate if Benaroya and his Permitted Transferees own less than 100,000 shares of Common Stock at any time, and in such case the Person or Persons who would otherwise have been nominated by the Incumbent Chairman of the Board shall then be designated instead by the Nominating Committee. Page 2 of 3 60 IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the date first above written. UNITED RETAIL GROUP, INC. By: GEORGE R. REMETA Name: George R. Remeta Title: Vice Chairman GEORGE R. REMETA LIMITED DIRECT ASSOCIATES, L.P., George R. Remeta By: LIMITED DIRECT, INC., as general partner BRADLEY ORLOFF Bradley Orloff By: KENNETH GILMAN Name: Kenneth Gilman FREDRIC E. STERN Title: President Fredric E. Stern RAPHAEL BENAROYA Raphael Benaroya Page 3 of 3 EX-10.2 4 PRIVATE LABEL CREDIT PROGRAM AGREEMENT 1 EXHIBIT 10.2 PRIVATE LABEL CREDIT CARD PROGRAM AGREEMENT BY AND BETWEEN WORLD FINANCIAL NETWORK NATIONAL BANK AND UNITED RETAIL GROUP, INC. AND UNITED RETAIL INCORPORATED DATED AS OF JANUARY 27, 1998 2 PRIVATE LABEL CREDIT CARD PROGRAM AGREEMENT This Private Label Credit Card Program Agreement is made as of January 27, 1998 by and among World Financial Network National Bank ("Bank"), United Retail Group, Inc. ("URGI") and United Retail Incorporated (the latter two entities being collectively referred to herein as "Retailer"). Capitalized terms used herein have the meanings given to them in Article I (Definitions) hereof. W I T N E S S E T H: WHEREAS, Retailer is engaged in the business of selling women's clothing and other merchandise at retail; and WHEREAS, Bank is engaged in the business of establishing private label consumer credit card programs for retailers and providing credit to consumers under credit card accounts established in connection therewith; and WHEREAS, Bank and Retailer have been engaged in discussions regarding the establishment and operation by Bank of a private label credit card program for Retailer's customers under the terms and conditions set forth below; and WHEREAS, Bank understands that (i) Retailer currently is a party to that certain Credit Plan Agreement with Citibank (as hereinafter defined), dated June 3, 1992, as amended by that certain Amendment to Credit Plan Agreement, dated December 6, 1993 (the "Existing Agreement"); (ii) Retailer may terminate the Existing Agreement as of January 30, 1999 and designate a bank to purchase the Transferred Assets (as hereinafter defined) in connection with such termination, provided that notice of termination and the bank designation (collectively, the "Termination Notice") are provided by January 30, 1998, and (iii) the Termination Notice (including the designation provided therein) is irrevocable; and WHEREAS, Retailer wishes to terminate the Existing Agreement, designate Bank as the purchaser of the Transferred Assets and have Bank operate the Program (as hereinafter defined); and WHEREAS, Bank wishes Retailer to terminate the Existing Agreement, designate Bank as the purchaser of the Transferred Assets and have Bank to operate the Program; and WHEREAS, on January 30, 1999 (or such other date prior to March 31, 1999 agreed to by the parties), Bank shall purchase the Transferred Assets and thereafter establish and operate the Program in accordance with the terms hereof; 3 NOW, THEREFORE, in consideration of the terms, conditions and mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Retailer hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Definitions. As used in this Agreement, the following capitalized terms shall have the following meanings: "Account" means and includes the following: (i) any open-end revolving Credit Card Agreement, between a Cardholder and Bank under the Program, pursuant to which such Cardholder may finance Purchases on credit, including all Existing Accounts; (ii) all Receivables, contract rights, general intangibles, chattel paper, and instruments related to, comprising, securing or evidencing the obligation, or the receivables therefrom; and (iii) any and all other rights, remedies, benefits, interests and titles, both legal and equitable, to which Bank may now or at any time hereafter be entitled in respect of the foregoing. "Account Documentation" means, with respect to an Account, Credit Cards, Credit Card Applications and Credit Card Agreements. "Actual Royalty Payment" shall mean, for any six-month period, an amount equal to (i) the Net Transaction Volume for that six-month period, multiplied by (ii) the Actual Royalty Payment Index applicable to that six-month period "Actual Royalty Payment Index" shall mean during the period from the Conversion Date to July 31, 1999 and during every six-month period thereafter, a fraction, converted to a percentage, the numerator of which is the total Monthly Program Revenues, minus the total Monthly Program Costs for such six-month period, and the denominator of which is Net Transaction Volume for that six-month period. "Affiliate" means, with respect to any Person, each Person that controls, is controlled by, or is under common control with, such Person. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Private Label Credit Card Program Agreement, including all amendments, modifications, supplements, annexes, exhibits and schedules. 2 4 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY "Approval Rate" means the percentage of Credit Card Applications submitted by applicants that are approved by Bank. "Approval-Related Percentage" shall mean, for any 12- month period, the percentage opposite the Approval Rate for that period in the following table: Approval Rate Approval-Related Percentage ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** or more ** "Bank" shall have the meaning assigned to such term in the introductory paragraph hereto. "Bankruptcy Code" means Title 11 of the United States Code, as amended, or any other applicable state or federal bankruptcy, insolvency, moratorium or other similar Laws. "BDIP" means the parties' bad debt incentive program. "BDIP Base Write-Off Percentage" means any BDIP Write- Off Percentage between ** and **. "BDIP Incentive Percentage" means, the percentage opposite the BDIP Write-Off Percentage for the year at issue in the following table: BDIP Write-Off BDIP Incentive Percentage Percentage ------------------------- - ---------- Year Year Year Year Year Ending Ending Ending Ending Ending 1/31/2000 1/31/2001 1/31/2002 1/31/2003 2/29/2004 --------- --------- --------- --------- --------- ** and over N/A ** ** ** ** ** to ** N/A ** ** ** ** ** to ** N/A ** ** ** ** ** to ** 0 0 0 0 0 ** to ** ** 0 0 0 0 ** to ** ** ** ** ** ** 3 5 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY ** to ** ** ** ** ** ** less than ** ** ** ** ** ** "BDIP Lagged AR" means, with respect to the period from February 1, 1999 through January 31, 2000, the sum of the Receivables (excluding all late fees billed on Receivables), as of the end of each Billing Cycle during the period from July 1, 1997 through June 30, 1998, and, for each February 1 to January 31 thereafter, the sum of the Receivables (excluding all late fees billed on Receivables), for the comparable July 1 through June 30 period, divided by twelve (12). "BDIP Net Write-Off Amount" means, for any 12-month period, an amount equal to (a) the amount of Receivables (excluding all late fees billed on Receivables) written off by Bank in accordance with the Write-Off Policy in such period, less (b) an amount equal to (i) the gross amount of cash recoveries in respect of written-off Receivables (including Receivables from Existing Accounts written off prior to or after the Conversion Date) received in such period (including in connection with any sale by Bank of written-off Receivables), less (ii) with respect to the collection of such write-offs, attorneys' fees, collection agency fees and other out-of-pocket collection fees paid by Bank. "BDIP Write-Off Percentage" means, for the 12-month period preceding January 31, 2000 and each 12-month period thereafter, a fraction, converted to a percentage (rounded to the nearest tenth), the numerator of which is the BDIP Net Write-Off Amount for that 12-month period, and the denominator of which is the BDIP Lagged AR for that 12-month period. "Billing Cycle" means Bank's practice of posting Consumer Charges, Cardholder payments and credits to Accounts on a monthly basis. "Business Day" means any day, except Saturday, Sunday, or a day on which banks are required or permitted to be closed in Ohio. "Cardholder" means any natural Person who has entered into a Credit Card Agreement with Bank or who is or may become obligated under or with respect to an Account. "Cardholder List" shall mean an identification (in magnetic tape format) of (i) all Cardholders (including those obligated in respect of Existing Accounts), and (ii) all applicants for Accounts (including Existing Accounts), including the name, address, telephone number and social security number of any such Person, and, in the case of a Cardholder, the date on which and Store trade name in which she last made a Purchase. The foregoing notwithstanding, the parties acknowledge and agree that the Cardholder List shall not contain identifications or other information with respect to Existing Accounts or applicants 4 6 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY for Existing Accounts unless such identifications or information were received by Bank from Citibank or are accepted by Bank after the Conversion Date. "Charge Data" means identification and transaction information reviewed and balanced by Retailer with regard to each Purchase by Cardholders and each return of a Purchase for credit to an Account. "Charge Slip" means a sales receipt, register receipt tape or other invoice or documentation, whether in hard copy or electronic draft capture form, in each case evidencing a Purchase. "Citibank" means Citibank (South Dakota), N.A. and its successors and assigns. "Collateral Account" shall have the meaning assigned to such term in Section 13.9(a) (Collateral Account). "Collateral Amount" shall have the meaning assigned to such term in Section 13.8 (Alternative to Termination). "Collection Policies and Procedures" shall have the meaning assigned to such term in Section 4.9(a) (Collections). "Consumer Charges" means late fees, finance charges and return payment fees as set forth in Exhibit 2.3 with such changes therein and additions thereto as may be proposed, reviewed and approved in accordance with Section 2.3(a) (Consumer Terms and Policies). "Conversion Date" shall mean the date on which Bank purchases the Transferred Assets or such later date agreed to by the parties. "Cost of Funds" means, for any period, the following: (a) for up to the first ** tranche of Receivables, the cost of financing such Receivables for the three (3) month period commencing February 1, 1999 and for each three (3) month period thereafter will be based on one-year treasuries plus ** basis points to be reset every three (3) months, with one (1) year treasuries not to be more than ** per annum and not to be less than ** per annum for the purpose of this calculation, and (b) for the balance of the Receivables, the cost of financing such Receivables for that period, based on the following: the average annualized cost of borrowings of the Master Trust(s) for that period (weighted at ** of the cost of financing) and the average annualized cost of Bank's borrowings for that period (weighted at ** of the cost of financing), it being understood that Bank shall use its best efforts to obtain appropriate derivative instruments in respect of tranches of Receivables other than the first ** tranche of Receivables for amounts acceptable to Retailer 5 7 ("Appropriate Derivative Instruments"), provided that such amounts shall be treated as Pass Through Expenses. "Credit Card" means the plastic card owned by Bank under the Program exclusively for use with the Program, which card evidences a Cardholder's right to make Purchases. "Credit Card Agreement" means the open-end revolving credit agreement between Bank and each Cardholder pursuant to which such Cardholder may make Purchases, on credit provided by Bank, together with any modifications or amendments which may be made to such agreement. "Credit Card Application" means Bank's credit application which must be submitted to Bank by applicants who wish to become Cardholders for review and approval or disapproval by Bank. "Credit Documentation" means, with respect to an Account, any and all documentation relating to the Account, including, without limitation, Credit Cards, Credit Card Applications, Credit Card Agreements, Charge Data, Charge Slips, Credit Slips, checks and stubs, credit bureau reports, adverse action information, change of terms notices and correspondence. "Credit Sales Day" means any day, whether or not a Business Day, on which Goods and/or Services are sold by Retailer. "Credit Slip" means a sales credit receipt or other documentation, whether in hard copy or electronic draft capture form, evidencing a return or exchange of Goods or a credit on an Account as an adjustment for Services rendered or not rendered to a Cardholder by (i) Retailer or (ii) a Person authorized by Retailer and approved by Bank (such approval not to be unreasonably withheld). "Damages" shall have the meaning assigned to such term in Section 14.1 (Indemnification by Retailer). "Direct Marketing Program" means the sale of Goods and/or Services outside of Stores, including sales through direct mail, Internet, and bill stuffers. "Estimated Royalty Payment" shall mean, for any six-month period, an amount equal to (i) the Net Transaction Volume for that six-month period, multiplied by (ii) the Estimated Royalty Payment Index applicable to that six-month period. "Estimated Royalty Payment Index" shall mean: (i) for any calendar month or portion thereof during the period from the Conversion Date through July 31, 6 8 1999, a pro forma percentage, calculated using data that arose in connection with the Existing Agreement, that is a fraction, converted to a percentage, the numerator of which is the monthly program revenues under the Existing Agreement for the six-month period immediately preceding the Conversion Date minus the monthly program costs under the Existing Agreement for the six-month period immediately preceding the Conversion Date, which costs shall be adjusted to reflect the estimated Cost of Funds as of the Conversion Date, and the denominator of which is the net transaction volume under the Existing Agreement for the six-month period immediately preceding the Conversion Date; and (ii) for any calendar month during any six-month period thereafter, the Actual Royalty Payment Index for the immediately preceding six-month period. "Event of Bankruptcy" means, with respect to any Person, the occurrence of any of the following events: (a) a decree or order, by a Governmental Authority having jurisdiction, is entered with respect to such Person and is not vacated, discharged, stayed or bonded within 60 days after the date of entry thereof, (i) for relief in respect of such Person pursuant to the Bankruptcy Code, (ii) appointing a custodian, receiver, liquidator, assignee, trustee, or sequestrator (or similar official) of such Person or of any substantial part of its properties, or (iii) ordering the winding-up or liquidation of the affairs of such Person, or (b) a person or entity other than such Person files a petition seeking the institution of any proceedings specified in clauses (a)(i), (ii) or (iii) in respect of such Person, and such petition shall not be discharged or dismissed within 60 days after the date of filing thereof, or (c) such Person (i) files a petition seeking relief pursuant to the Bankruptcy Code, (ii) consents to the institution of proceedings pursuant thereto or to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of such Person or of any substantial part of its properties, or the winding up or liquidation of its affairs or (iii) takes corporate action in furtherance of any such action. "Existing Accounts" means those private label credit card accounts bearing the names or trademarks, tradenames or logos of Retailer owned by Citibank, which shall be conveyed to Bank by Citibank in accordance with Section 2.1 (Existing Accounts: Purchase and Conversion). "Existing Agreement" shall have the meaning assigned to such term in the fourth recital hereto. 7 9 "Extended Term" has the meaning assigned to such term in Section 13.1(a) (Term of Agreement). "Final Liquidation Date" shall mean the date on which Bank no longer owns any Accounts that have a balance outstanding which has not been written off under the Write-Off Policy. "Force Majeure Event" shall have the meaning assigned to such term in Section 12.6 (Force Majeure). "Goodwill Adjustments" means credits to Accounts that are neither payments, returns or other in-store adjustments, write-offs nor chargebacks. "Goods and/or Services" means all merchandise and services which may be purchased by Cardholders from Retailer or a Person authorized by Retailer and approved by Bank (such approval not to be unreasonably withheld) or pursuant to Value-Added Programs or through Direct Marketing Programs. "Governmental Authority" means any government, any state, or any other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, in each case whether federal, state or local. "Indebtedness" means liability for borrowed money. "Initial Term" has the meaning assigned to such term in Section 13.1(a) (Term of Agreement). "Insert Fees" means those fees set forth on Exhibit 4.4. "Law" means all laws, codes, statutes, ordinances, rules, regulations, decrees and orders of any Governmental Authority. "Lien" means any mortgage, pledge, assignment, claim, lien (statutory or other), right of first refusal, charge or encumbrance, imperfection of title or other matters affecting title, and any rights of third parties whatsoever, including, without limitation, any liens or encumbrances (whether choate or inchoate) arising in respect of taxes. "Master Trust" means any trust to which Bank sells any Receivables (including Receivables from Existing Accounts) set up for purpose of securitization pursuant to a Master Trust Agreement. "Measurement Notice" shall have the meaning assigned to such term in Section 4.1(b) (Bank's Responsibilities). 8 10 "Monthly Net Revenue" shall have the meaning assigned to such term in Section 13.7(b) (Failure of Retailer to Purchase Accounts Following Termination). "Monthly Net Revenue Requirement" shall have the meaning assigned to such term in Section 13.7(b) (Failure of Retailer to Purchase Accounts Following Termination). "Monthly Program Costs" shall have the meaning assigned to such term in Section 6.1(a) (Program Economics). "Monthly Program Revenues" shall have the meaning assigned to such term in Section 6.1(a) (Program Economics). "Net Transaction Volume" means, with respect to any period, an amount equal to the aggregate amount of Purchases (including all applicable shipping, handling and taxes) on Accounts for such period (as reflected in Charge Data) less the aggregate amount of Credit Slips for such period (as reflected in Charge Data). "Non-Compliance Notice" shall have the meaning assigned to such term in Section 4.1(b) (Bank's Responsibilities). "Non-Permitted Credit Program" means any consumer credit, debit or charge program which may be utilized for the purchase of Goods and Services, other than a program which the Retailer is permitted to accept, utilize, market or promote pursuant to Section 12.1 (Retailer Acquisitions). "Operating Procedures" means the instructions and procedures to be followed by the parties in connection with the Program, as such instructions and procedures may be provided by Bank to Retailer from time to time in accordance herewith. "Other Clients' Policies and Procedures" shall have the meaning assigned to such term in Section 4.9 (Collections). "Other Credit Terms and Criteria" shall have the meaning assigned to such term in Section 2.3(b) (Consumer Terms and Policies). "Owner" shall have the meaning assigned to such term in Section 12.4(a) (Use of Retailer Marks). "Pass Through Expenses" means those expenses incurred by Bank in servicing the Accounts which are listed on Exhibit 5.2 hereto. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or Governmental Authority. 9 11 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY "Pooling and Servicing Agreement" means a Pooling and Servicing Agreement entered into in connection with a Master Trust by Bank and a trustee, including each supplement thereunder, as the same may be amended, supplemented or otherwise modified from time to time. "Principal Balance" means Receivables less billed Consumer Charges, including delinquent Consumer Charges. "Program" means the credit card program established pursuant to this Agreement and made available to qualified customers of Retailer to make Purchases. "Program Assets" shall have the meaning assigned to such term in Section 13.6(a) (Purchase Following Termination). "Purchase(s)" means purchase(s), for personal, family or household purposes, by a Cardholder of any Goods and/or Services on an Account, whether such purchase occurs in a Store, by mail order, through a catalogue, by telephone order, by computer or other direct access method or by any other medium or method through which a purchase can be effected. "Put Notice" shall have the meaning assigned to such term in Section 13.6(b) (Purchases Following Termination). "Receivable" means any and all amounts owed from time to time with respect to the Purchases on an Account including, without limitation, any unpaid balances, Consumer Charges (including finance charges, deferred finance charges, fees and other charges), and charges for sales tax, regardless of whether such Receivable consists of an "account," "chattel paper," an "instrument" or a "general intangible" under and as defined in Article or Division 9 of the UCC applicable to such Receivable, and all proceeds of any of the foregoing. "Retailer" shall have the meaning assigned to such term in the introductory paragraph hereto. "Retailer Marks" means the various tradenames, trademarks, servicemarks and logos of Retailer set forth on Exhibit A hereto. "Securitization Fees" means Bank's actual cost incurred with respect to any securitization of the Accounts and/or Receivables (including costs related to the establishment of the securitization of Receivables), including, without limitation, outside legal fees, due diligence costs, underwriting and other out-of-pocket costs, provided, however, that the total of such costs incurred from time to time for which Retailer is responsible pursuant to Section 6.3(c) (Other Payments) does not exceed **. 10 12 "Service Fee" means, with respect to any month, the amount payable by Retailer for Bank's servicing of the portfolio for such month, calculated as set forth on Exhibit 6.1(b). "Service Fee Adjustment" shall mean, with respect to any service identified on Exhibit 4.1(b)(2), the amount specified as such on Exhibit 4.1(b)(2). "Servicer" shall have the meaning assigned to such term in Section 4.3(b) (In-Store Payments). "Solvent" means, when used with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that shall be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it shall, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged. "Store Account" shall have the meaning assigned to such term in Section 4.3(b) (In-Store Payments). "Store Payment Notice" shall have the meaning assigned to such term in Section 4.3(b) (In-Store Payments). "Stores" means any and all stores which are operated, conduct business or make sales under a Retailer Mark. "Termination Notice" shall have the meaning assigned to such term in the fourth recital hereto. "Transferred Assets" shall have the meaning assigned to such term in Section 2.1 (Existing Accounts: Purchase and Conversion). "UCC" means the Uniform Commercial Code (or analogous personal property security Law) of the jurisdiction with respect to which such term is used as in effect from time to time. "Unsafe and Unsound Banking Practice" means an unsafe and unsound banking practice as defined in banking laws and 11 13 regulations applicable to federally chartered credit card banks located in the State of Ohio. "URGI" shall have the meaning assigned to such term in the introductory paragraph hereto. "Value-Added Program" shall have the meaning assigned to such term in Section 3.4 (Value-Added Programs). "Write-Off Amount" shall mean, for any period, an amount equal to (a) the Principal Balances written off by Bank in accordance with the Write-Off Policy in such period, less (b) the gross amount (without deduction for attorneys' fees, collection agency fees or other collection fees) of cash recoveries in respect of written-off Receivables (including Receivables from Existing Accounts written off prior to and after the Conversion Date) received in respect of such period (including in connection with any sale by Bank of such written-off receivables). "Write-Off Policy" shall mean the policy by which Bank writes off, as of the last day of every Billing Cycle, Accounts: (i) that are 180 days contractually past due during that Billing Cycle, (ii) as to which Bank has received official notice that the Cardholders obligated in respect thereof have filed petitions for relief under the Bankruptcy Code at least fifteen (15) days prior to the last day of that Billing Cycle, (iii) as to which the Cardholders are deceased, and/or (iv) which contain fraudulent charges, as such write-off policy may be modified in accordance with Section 4.9(c) (Collections). ARTICLE II THE PROGRAM 2.1. Existing Accounts: Purchase and Conversion. (a) As of the date of termination of the Existing Agreement (or such other date prior to March 31, 1999 as may be agreed to by the parties): (i) without recourse to Retailer or Citibank, except as provided, respectively, herein, or in any agreement between Bank and Citibank, Bank shall purchase and Retailer shall designate Bank as purchaser with respect to all of Citibank's right, title and interest in and to the Existing Accounts (including accrued finance charges) and credit agreements and credit cards relating thereto, all records maintained by Citibank in connection with the Existing Agreement, the names, addresses and credit history of persons obligated in respect of Existing Accounts and, to the extent of Citibank's ownership, the credit standards used by Citibank in evaluating credit card applications under the Existing Agreement (collectively, the "Transferred Assets"); and (ii) Bank shall assume liability for any credit balances as set forth in such records and shall refund credit balances in accordance with 12 14 applicable legal requirements. Bank shall pay to Citibank for the Transferred Assets an amount equal to the aggregate outstanding balances of the Existing Accounts on the purchase date, less the amount of such balances written off by Citibank as of the purchase date. (b) Retailer represents and warrants to Bank as of the Conversion Date that: (i) Citibank (or its assignor) has previously issued to each person obligated in respect of the Existing Account a credit card in full compliance with all federal and applicable state laws and regulations relating to the issuance of credit cards or requests therefor; (ii) Citibank (or its assignor) has entered into a valid, binding and enforceable credit agreement signed or otherwise accepted by each person obligated in respect of the Existing Account; (iii) each periodic billing statement rendered prior to and as of the last billing date in respect of the Existing Account was in full compliance with federal and all applicable state laws and regulations relating to truth-in-lending and the computation, disclosure, explanation and adjustment of credit accounts and finance charges thereof; and (iv) the Existing Account has been incurred in accordance with the operating procedures in effect under the Existing Agreement at the time it was incurred, and, whether or not such procedures so provided, the following shall be true: (1) the Receivables thereon were incurred by a charge customer solely as consideration for a bona fide sale of goods or services by Retailer or an authorized third party provider under the Existing Agreement (in connection with which neither such charge customer nor any person on his or her behalf received any cash refund or rebate). (2) If a credit card was used, the card appeared to be valid on its face and showed no signs of having been altered, defaced or tampered with and the last name of the name signed on the card was the same as the last name of the name embossed or otherwise placed on the card by the issuer, and the signature of the customer signed on the sales slip or loan order form compared favorably with the signature on the signature panel of the credit card. 13 15 (3) The charge customer was given or sent a sales slip or loan order setting forth a description of the goods or services, the date of the transaction, and the full price including taxes, and any other information required by Law. (c) It is acknowledged and agreed that the costs associated with the purchase of Transferred Assets and the conversion of the Existing Accounts shall be borne solely by Bank. (d) Bank shall use commercially reasonable efforts to convert the Existing Accounts in a manner designed to minimize any adverse effects on Cardholders. Retailer shall use commercially reasonable efforts to assist Bank in such conversion, including by asking for the cooperation of Citibank with respect thereto. (e) Retailer shall ask Citibank to allow Bank to continue to use the account numbers and credit cards of the Existing Accounts. If such permission is obtained, Bank shall not reissue credit cards in respect of the Existing Accounts and, instead, at Bank's expense, Bank shall provide active Cardholders of Existing Accounts with decals identifying Bank for application to their Credit Cards. 2.2. Retailer to Honor Credit Card. (a) Pursuant to the terms and conditions of this Agreement, Retailer and Bank hereby establish the Program for the purpose of making open-end credit available (up to such credit limits as from time to time may be established and/or modified in accordance herewith) to qualified customers of Retailer for Purchases. (b) Retailer shall participate in the Program and honor any valid Credit Cards for Purchases. Only the cash selling price of Goods and Services (which shall include all applicable shipping, handling and taxes) shall be charged to Accounts. Retailer shall permit customers with Accounts to charge Goods and Services to their Accounts, subject to and in accordance with the Operating Procedures. (c) With respect to each applicant under the Program who qualifies for credit under Bank's credit standards as established under this Agreement, Bank shall open an Account, issue to such qualified applicant a Credit Card, activate such applicant's Credit Card in accordance with the Operating Procedures and grant credit to such applicant for Purchases. The terms and conditions upon which a Cardholder may use the Credit Card and upon which Bank may extend credit to a Cardholder shall be governed by the Credit Card Agreement between the Cardholder and Bank. 14 16 2.3. Consumer Terms and Policies. (a) The initial Consumer Charges applicable to Accounts are set forth in Exhibit 2.3 hereto. Except as provided in subsection (d) below, Bank shall consult with Retailer concerning whether and when to impose other charges under Credit Card Agreements and the amount of such additional charges. Such additional charges shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. Except as provided in subsection (d) below, Bank shall consult with Retailer concerning any future changes to any Consumer Charges (including Consumer Charges specified on Exhibit 2.3 hereto), which changes shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion; provided, however, that Bank in its reasonable discretion on an individual Cardholder basis, may reduce and/or waive any such Consumer Charges in the ordinary course of providing customer service in respect of, and collecting, Accounts. (b) Bank shall set the credit standards used in connection with the issuance of Credit Cards, the range of credit limits to be made available to individuals, the standards for increasing credit limits, the standards for termination or suspension of credit privileges, the terms for soliciting preapproved customers, the grace periods applicable to Accounts, the amount of minimum payments on Accounts and the other terms and conditions (other than Consumer Charges) under which credit is extended to Cardholders (collectively referred to herein as the "Other Credit Terms and Criteria"), all of which Other Credit Terms and Criteria shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. Except as provided in subsection (d) below, any changes made by Bank to Other Credit Terms and Criteria also shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. (c) Exhibit 2.3(c) hereto sets forth certain of the initial terms and conditions relating to Accounts. (d) Notwithstanding any other provision of this subsection to the contrary, (i) each party, without the other's approval, may take any actions at any time that it in good faith determines are required by law or demand of any Governmental Authority and (ii) Bank may take any actions that it in good faith determines are required to prevent the operation of the Program from becoming an Unsafe and Unsound Banking Practice and shall give such notice to Retailer as is reasonable under the circumstances. The determinations made by the parties in accordance with the preceding sentence shall take into account, if pertinent, the overall economics of the Program, including (among other things) the semi-annual reconciliation provided for in Section 6.4 (Semi-Annual Reconciliation). Any changes so made by any party shall be made in a manner designed to ameliorate any negative impact on the other party or Cardholders. 15 17 2.4. Bank to Extend Credit. Subject to (i) the terms of this Agreement, (ii) the credit limits applicable to each Account and (iii) the terms and conditions in the Credit Card Agreement, Bank shall extend credit to Cardholders in amounts set forth as the total for any Purchases reflected in Charge Data received and accepted by Bank. 2.5. Commencement of Program. The Program shall commence on the Conversion Date. ARTICLE III ADMINISTRATION 3.1. Program Documents; Related Materials. (a) Bank and Retailer shall cooperate and assist each other in the preparation of all documents to be used in connection with the Program. Bank shall, following consultation with Retailer, provide Retailer with Credit Cards, credit card mailers and such other documents as are necessary for the operation of the Program, as well as forms of Credit Card Applications and Credit Card Agreements, all of which documents shall contain the Consumer Charges and Other Credit Terms and Criteria established pursuant to Section 2.3 (Consumer Terms and Policies). (b) All Credit Card Applications, Credit Card Agreements and Credit Cards shall clearly disclose that credit is being extended to Cardholders by Bank except as otherwise agreed by Bank. No Account Documentation shall be utilized unless Bank and Retailer have expressly approved the form and content of such documents in writing; provided, however, that if changes to Account Documentation are required by Law, then Bank shall not be required to obtain Retailer's approval for any such change. (c) The foregoing subsections notwithstanding, Bank acknowledges and agrees that: (i) all Program documents and related materials needed to operate the Program (except in-store signage, temporary cards and applications) shall be provided by Bank at Bank's expense and be in a form and of a quality substantially similar to that being used by Retailer immediately prior to the date hereof, and (ii) Bank, at Bank's expense, shall accept electronic applications in the form currently used by Retailer and provide the dial-in networks to receive such forms. 3.2. Credit Rejection. The rejection for credit of any applicant under the Program in accordance with the terms hereof shall not give rise to any claim, liability, demand, offset, defense, counterclaim or other right or action by Retailer against Bank and Retailer hereby waives and releases any such claim that it may have against Bank, provided, however, that Bank shall indemnify Retailer in accordance with Section 14.2(vi) (Indemnification by Bank). 16 18 3.3. Ownership of Accounts. Bank shall be the sole and exclusive owner of all Accounts, Receivables and Account Documentation and shall be entitled to receive all payments made by Cardholders on Accounts, and Retailer acknowledges and agrees that it has no right, title or interest in any of the foregoing and no right to any payments made by Cardholders on Accounts or any proceeds in respect of the Accounts. 3.4. Value-Added Programs. Retailer or its designees, at Retailer's expense, may solicit Cardholders for credit insurance programs and other products and services including, without limitation, products and services that enhance Accounts and/or the Program such as travel clubs, extended warranties, legal services, auto clubs, renters' insurance and membership clubs (collectively referred to herein as "Value-Added Programs"). All proceeds of Value-Added Programs shall be the property of Retailer. Bank and Retailer shall agree, for each Value-Added Program, on the amount to be paid by Retailer to Bank to reimburse Bank for its reasonable costs to set-up, manage and administer the Value-Added Program (which amounts to be paid by Retailer shall constitute Pass Through Expenses). Bank shall have the right to disapprove any proposed program only if (i) Bank does not have the ability to support such program, it being understood that such support shall not unreasonably be withheld, or (ii) such Value-Added Program, if conducted, likely would, in the Bank's reasonable opinion, damage the reputation of Bank. 3.5. Cardholder List and Other Cardholder Information. Retailer acknowledges and agrees that Bank is the sole and exclusive owner of the Cardholder List. Bank hereby grants to Retailer for the term of this Agreement an exclusive and royalty-free license to use (or sublicense or assign the right to use) the Cardholder List for all purposes, including for advertisements, solicitations or other marketing efforts, regardless of the manner or media through which the marketing effort is made, and regardless of whether the product or service has previously been marketed by Retailer, except that Bank shall have the exclusive right (even as to Retailer) to use the Cardholder List (or any other lists including information relating to Cardholders or applicants for Accounts obtained in connection herewith) to operate the Program in accordance with this Agreement. Bank shall not use the Cardholder List (or any other lists including information relating to Cardholders or applicants for Accounts obtained in connection herewith) except in connection with the Program in accordance with this Agreement. Bank shall maintain, update and provide Retailer with a Cardholder List monthly at no charge to Retailer. If requested by Retailer, Bank also shall (a) update and provide Retailer with the Cardholder List more frequently than monthly, and/or (b) provide Retailer with any other lists including information relating to Cardholders or applicants for Accounts obtained in connection herewith, at costs to be agreed upon by the parties. 17 19 3.6. Publicity. Any press releases, advertisements, publicity or other materials which promote the Program shall not be publicly distributed or disseminated without the prior written consent of Retailer and Bank; provided, however, that (i) neither party shall be required to obtain the other's consent for any portion of a document containing disclosures or other information which in such person's judgment is required by or appropriate to comply with, any applicable Law; and (ii) Retailer shall not be required to obtain Bank's consent for any materials that do not contain or reference credit terms, the Program or the Bank. 3.7. Promotions. Retailer shall use its reasonable efforts to promote the use of Credit Cards and to acquire new Cardholders through, for example, making available to new Cardholders "instant credit," "quick credit," pre-approved solicitations and applications and the use of promotional material displayed in stores and special offers to Cardholders. ARTICLE IV OPERATING RESPONSIBILITIES OF THE PARTIES 4.1. Bank's Responsibilities. (a) Bank, itself or through its Affiliates, shall operate all credit operations and facilities with respect to the Accounts. Bank's responsibilities shall include, without limitation, providing the following services during the term of this Agreement: (i) Account approval (including scoring methodology) and set-up (including approval and set-up in respect of electronic quick-credit applications and quick-credit referral applications); (ii) purchase authorizations (including pursuant to downtime procedures or floor limits reasonably acceptable to Retailer); (iii) customer service; (iv) systems services; (v) billing statement processing and mailing; (vi) credit card embossing and mailing; (vii) payment processing; (viii) ensuring legal compliance of Account Documentation and other Program documents; (ix) maintaining disaster recovery plan sufficient to protect the interests of Retailer; 18 20 (x) providing a real time open-to-buy functionality (i.e., providing availability of credit based upon In-Store Payments immediately after receipt of notice of such In-Store Payments); (xi) risk management (including credit limit management, collection strategy and collection management); (xii) conducting periodic Cardholder satisfaction surveys and using commercially reasonable efforts to respond to the results of such surveys; (xiii) referring Cardholder inquiries to the providers of the Value-Added Program subject to inquiry (or to such other Person as Retailer may designate), provided, however, that Bank shall do no more than make such referrals; (xiv) approving credit marketing materials submitted by Retailer in respect of the Program within five (5) days after receipt thereof; and (xv) replying in writing to the authors of presidential complaints and providing Retailer with a copy of each such reply. In the event that Bank operates the Program through its Affiliate(s), Bank shall be and remain responsible for the conduct of such Affiliate(s) hereunder. (b) Bank shall perform its services hereunder in accordance with the service standards set forth on Exhibit 4.1(b)(1) (the "Service Standards"). Not later than ten (10) Business Days after each calendar month, Bank shall advise Retailer in writing of the extent to which it has complied with the Service Standards during the preceding full calendar month (a "Measurement Notice"). If any Measurement Notice provided after the third full calendar month following the Conversion Date indicates that Bank failed to meet or exceed the Service Standard for any service identified on Exhibit 4.1(b)(1), Retailer shall be entitled to notify Bank in writing within ten (10) Business Days thereafter whether it shall seek a Service Fee Adjustment (as indicated on Exhibit 4.1(b)(2)) for such non-compliance (the "Non-Compliance Notice"). If (i) Retailer sends a Non-Compliance Notice in respect of any Service Standard(s) during the previous calendar month and (ii) Bank fails to meet the indicated Service Standard(s) in the calendar month in which the Non-Compliance Notice was delivered, then, commencing for the calendar month in which the Non-Compliance Notice was delivered and continuing for each consecutive calendar month thereafter in respect of which Bank fails to meet Service Standard(s) and Retailer, delivers a Non-Compliance Notice, the Service Fee for such calendar month(s) 19 21 shall be modified to reflect the Service Fee Adjustment(s) applicable to the failure(s) to meet the indicated Service Standard(s). (For example, if Retailer properly sends Bank a Non-Compliance Notice in May stating that Bank failed to meet the Service Standards applicable for collections during April and Bank still fails to meet those standards in May, the Service Fee for May Collections would be decreased to reflect the applicable Service Fee Adjustment.) If Retailer delivers a Non-Compliance Notice in any month and receives any Service Fee Adjustment pursuant to this subsection, Retailer shall have no right to terminate this Agreement pursuant to Section 13.4(c) (Retailer Termination Events) or to seek any other remedy, based on conduct during the month for which it received the Service Fee Adjustment. (c) Bank may, from time to time, provide special services relating to the Program, including, without limitation, consulting services, gift certificate calls and fulfillment, rebate fulfillment, telemarketing, and special processing or accounting reports required in connection with promotional activities. Bank agrees that if it offers any such special services to other retailers, it shall offer such services to Retailer. Bank shall be entitled to a fee from Retailer for any such additional services as agreed to by Bank and Retailer on a program-by-program basis, which fee shall be reasonably comparable to those charges for substantially similar services in the open market. (d) Bank shall designate a manager to serve as Bank's coordinator of the Program with Retailer. Such manager shall be knowledgeable about this Agreement, the Program and Bank's practices in connection herewith, as well as Bank's private label programs generally, and shall serve as a liaison to Retailer with regard to the day-to-day operation of the Program. 4.2. Retailer's Responsibilities. (a) Retailer shall perform the following in-store activities: (i) permitting Cardholders to purchase Goods and Services on Accounts, in accordance with the Operating Procedures; (ii) promoting and accepting Credit Card Applications, and communicating credit information therefrom about prospective Cardholders to Bank; (iii) providing Cardholders with appropriate instructions in respect of notifying Bank of Cardholders' changes in billing addresses; (iv) obtaining electronic credit authorizations from Bank unless the network is down (in which event 20 22 Retailer shall follow floor limits or other downtime authorization procedures); (v) assisting Cardholders in communication with Bank; (vi) displaying promotional material related to Accounts; (vii) obtaining proper identification from all Cardholders (1) in connection with all Purchases where Credit Cards are not presented or (2) when requested to do so by Bank in its reasonable discretion in individual instances as part of the authorization process; (viii) obtaining the Cardholder's account number where a Cardholder does not have her Credit Card in her possession; (ix) providing Bank with copies of presidential complaints related to the Program, Cardholders or Accounts; and (x) subject to Section 4.3 (In-Store Payments), accepting In-Store Payments, if applicable, and forwarding to Bank complete information regarding all such In-Store Payments. (b) Retailer shall retain a legible copy of each Charge Slip for six (6) months following the date of each Purchase and shall provide such copy to Bank within fifteen (15) days of Bank's request therefor. Retailer shall arrange for Bank to have access to all electronically captured data and information related to the Program, including, without limitation, all electronically captured sales data and Cardholder signatures. (c) Retailer shall designate a manager to serve as Retailer's coordinator of the Program with Bank. Such manager shall be knowledgeable about this Agreement, the Program and Retailer's practices in connection herewith and shall serve as a liaison to Bank with regard to the day-to-day operations of the Program. Bank shall provide adequate workspace for such manager at the Bank during such times that such manager visits the Bank. 4.3. In-Store Payments. (a) Retailer may accept cash payments from Cardholders for amounts due on Accounts ("In-Store Payments"). (b) Notwithstanding the provisions of Section 4.3(a) (In-Store Payments), if any Event of Bankruptcy has occurred with respect to Retailer (and so long as the same has not been 21 23 dismissed), Retailer shall promptly comply with any written instruction (a "Store Payment Notice") received by Retailer from Bank or any successor to Bank as "Servicer" under the Pooling and Servicing Agreement (Bank or any such successor being the "Servicer") to take either of the following actions (as specified in such instruction): (i) cease accepting In-Store Payments and thereafter inform Cardholders who wish to make In-Store Payments that payment should instead be sent to Servicer; or (ii) (A) deposit an amount equal to all In-Store Payments received by each Store, not later than the Business Day following receipt, into a segregated trust account (the "Store Account") established by Retailer for this purpose and, pending such deposit, to hold all In-Store Payments in trust for Bank and its assigns, (B) use commercially reasonable efforts not to permit any amounts or items not constituting In-Store Payments to be deposited in the Store Account and (C) cause all available funds in each Store Account to be transferred on a daily basis to an account designated in the Store Payment Notice; provided that Retailer need not take the actions specified in clause (i) or clause (ii) if Retailer or any of its Affiliates provides the Servicer or the Trustee under (and as defined in) the Pooling and Servicing Agreement with a letter of credit, surety bond or other similar instrument covering collection risk with respect to In-Store Payments. (c) Within one (1) day after receiving any payment for an Account, Retailer shall notify Bank of such payment by electronic data transmission (including payment date, amount, and account number) and Bank shall deduct such amount from any amounts due Retailer hereunder unless such amount shall be deposited in the Store Account in accordance with Section 4.3(b)(ii) above. 4.4. Statement Messages and Inserts. Subject to the right of Bank to include in mailings to Cardholders periodic billing statements and any legal notices necessary to send to Cardholders, Retailer shall have the sole right to have materials advertising its Goods and Services and any Value-Added Programs included in the envelopes containing the periodic statements. Bank shall not include with any periodic statements any materials other than legal notices necessary to send to Cardholders. Such materials shall conform to size requirements reasonably established from time to time by Bank with reasonable prior notice of any changes. Retailer shall use reasonable efforts to (i) notify Bank at least fifteen (15) days before the proposed billing cycle of any such statement insert, and (ii) provide Bank 22 24 with a draft copy of any such advertising material at the time it notifies Bank of such mailing for Bank and, with respect to any references to Bank, the Credit Card or the Accounts, provide Bank with the opportunity to review and approve or disapprove such draft copy in its reasonable discretion. Retailer shall provide Bank with the materials to be included in the mailing not less than two (2) Business Days prior to the initial insertion date. The initial five (5) inserts provided by Retailer for inclusion in each periodic billing statement shall be without charge to Retailer. Each additional insert shall be subject to a charge by Bank as described on Exhibit 4.4 (the "Insert Fee"). Retailer shall also have the right, without charge, to have messages printed on billing statements, provided that Retailer meets any reasonable specifications of Bank in respect thereof. 4.5. Scoring and Credit Management. Bank shall consult with Retailer concerning the initial scoring and credit limit management policies and procedures, which policies and procedures shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. Bank shall consult with Retailer concerning any changes to the scoring and credit limit management policies and procedures, which changes shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. In the event that the scoring and credit limit management policies and procedures used in connection with the Program are less favorable to Retailer than the scoring and credit limit management policies and procedures used in connection with any of Bank's other retail client programs in similar industries, Bank shall so advise Retailer promptly and, if Retailer so requests, shall revise the scoring and credit limit management policies and procedures of the Program to reflect the favorable elements of the other retail client policies and procedures. In addition, upon Retailer's request, Bank shall review with Retailer the performance of the Accounts and Receivables and shall provide Retailer on a monthly basis with such reports as shall be mutually agreed upon regarding the ongoing performance of the Accounts and Receivables. Notwithstanding any other provision of this subsection to the contrary, (i) each party, without the other's approval, may take any actions at any time that it in good faith determines are required by Law or demand of any Governmental Authority and (ii) Bank may take any actions that it in good faith determines are required to prevent the operation of the Program from becoming an Unsafe and Unsound Banking Practice and shall give such notice as is reasonable under the circumstances. The determinations made by the parties in accordance with the preceding sentence shall take into account, if pertinent, the overall economics of the Program, including (among other things) the semi-annual reconciliation provided for in Section 6.4 (Semi-Annual Reconciliation). Any changes so made by any party shall be made in a manner designed to ameliorate any negative impact on the other party or Cardholders. 23 25 4.6. Operation of the Program. (a) During the term of this Agreement, Bank shall operate, maintain and promote the Program for all Stores and Direct Marketing Programs in a professional manner in accordance with the Operating Procedures. Bank shall consult with Retailer concerning the initial Operating Procedures, which Operating Procedures shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. In this connection, Bank and Retailer shall meet prior to the Conversion Date in order to discuss the initial Operating Procedures. Bank shall consult with Retailer concerning any changes to the Operating Procedures, which changes shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. The parties shall cooperate in the operation of the Program and in developing and implementing procedures necessary for the operation of the Program. Notwithstanding any other provision of this subsection to the contrary, (i) each party, without the other's approval, may take any actions at any time that it in good faith determines are required by Law or demand of any Governmental Authority and (ii) Bank may take any actions that it in good faith determines are required to prevent the operation of the Program from becoming an Unsafe and Unsound Banking Practice and shall give such notice as is reasonable under the circumstances. The determinations made by the parties in accordance with the preceding sentence shall take into account, if pertinent, the overall economics of the Program including (among other things) the semi-annual reconciliation provided for in Section 6.4 (Semi-Annual Reconciliation). Any changes so made by any party shall be made in a manner designed to ameliorate any negative impact on the other party or Cardholders. (b) Bank shall operate the Program as separate programs for each separate group of Stores of Retailer to the following extent. To the extent that the name, trademark or tradename used by United Retail Incorporated or one or more of its groups of Stores appears on the credit cards, billing and dunning statements, customer correspondence, applications, etc., Bank shall divide the Cardholders into not more than eight groups and use for each group the name or mark specified by Retailer for such group, but unless otherwise agreed Bank shall administer the Program uniformly for all groups. All Accounts (for all groups) will be billed in no more than three consecutive Billing Cycles within the same calendar week each month. 4.7. Reports. Bank shall provide Retailer with the reports specified on Exhibit 4.7 hereto in the frequency specified on Exhibit 4.7, and with such other reports as Retailer reasonably may request from time to time. If such other reports are not readily available, Retailer shall pay Bank for customization in accordance with Exhibit 5.2. 4.8. Equipment; Systems. (a) Retailer shall maintain at its own expense the point of sale and authorization terminals, 24 26 credit card imprinters and other items of equipment as used by it prior to the date hereof to receive authorizations, transmit Charge Slip and Credit Slip information, process Credit Card Applications and perform its obligations under this Agreement. (b) Bank shall maintain at its own expense the equipment and computer systems needed to perform its obligations hereunder in accordance with the standards set forth herein. (c) The computer programs and telecommunications protocols to facilitate communications between Bank and Retailer shall be mutually agreed upon from time to time subject to reasonable prior notice of any change in such programs, equipment or protocols. 4.9. Collections. (a) Certain collection policies and procedures to be used in connection with the Program are summarized on Exhibits 4.1(b)(1) and 4.9 hereto. Except as may be provided in subsection (d) below, Bank shall consult with Retailer concerning any changes to the collection policies and procedures, which changes shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. (b) In the event that the collection policies and procedures used in connection with the Program (including timing of collection calls, collector experience levels and collection technology but excluding the average number of delinquent accounts assigned to a collector) are less favorable to Retailer than the comparable collection policies and procedures used in connection with Bank's other retail clients in similar industries ("Other Client Policies and Procedures"), Bank shall advise Retailer within thirty (30) days and shall promptly thereafter improve the collection policies and procedures used in connection with the Program (excluding the average number of delinquent accounts assigned to a collector) to a level and quality at least equal to the Other Client Policies and Procedures without any additional cost to Retailer. (c) In the event that the average number of delinquent accounts assigned to a collector for the Program is higher than the average number assigned to a collector for any of Bank's other retail clients in similar industries, Bank shall advise Retailer within thirty (30) days and shall promptly deliver to Retailer an estimate of Bank's additional cost that would be incurred if the average number of delinquent accounts assigned to a collector for the Program were reduced to the average assigned to a collector for such other client of Bank. Upon request by Retailer and at Retailer's expense, Bank shall promptly reduce the average number of delinquent accounts assigned to a collector for the Program to the number requested by Retailer and the fee associated therewith shall be adjusted by Bank accordingly. 25 27 (d) Notwithstanding any other provision of this subsection to the contrary, (i) each party, without the other's approval, may take any actions at any time that it in good faith determines are required by Law or demand of any Governmental Authority and (ii) Bank may take any actions that it in good faith determines are required to prevent the operation of the Program from becoming an Unsafe and Unsound Banking Practice, and shall give such notice as is reasonable under the circumstances. The determinations made by the parties in accordance with the preceding sentence shall take into account, if pertinent, the overall economics of the Program including (among other things) the semi-annual reconciliation provided for in Section 6.4 (Semi-Annual Reconciliation). Any changes so made by any party shall be made in a manner designed to ameliorate any negative impact on the other party or Cardholders. 4.10. Costs of the Program. Except to the extent of Pass Through Fees and other fees expressly provided for herein, Bank shall bear all costs associated with the administration of the Program. ARTICLE V SETTLEMENT PROCEDURES 5.1. Daily Settlement For Charge Data. (a) Retailer shall electronically transmit all Charge Data to Bank in a format mutually agreed upon by the parties. Upon receipt, Bank shall promptly verify and process such Charge Data, and in the time frames specified herein, Bank shall remit to Retailer an amount equal to the remainder of the Net Transaction Volume indicated by such Charge Data for the Credit Sales Day(s) for which such remittance is made less any In-Store Payments received on that day and not deposited in a Store Account. In the event Bank discovers any discrepancies in the amount of Charge Data submitted by Retailer or paid by Bank to Retailer, Bank shall notify Retailer in detail of the discrepancy, and credit or debit Retailer, as the case may be, in a subsequent daily settlement. Bank shall transfer funds via wire transfer to an account designated in writing by Retailer to Bank. If Charge Data is received by Bank's processing center before noon Eastern time on a Business Day, Bank shall pay the amount owed to Retailer by 9:00 a.m. Eastern time on the next Business Day thereafter. In the event that the Charge Data is received in the afternoon Eastern time on a Business Day, then Bank shall pay the amount owed to Retailer no later than 9:00 a.m. Eastern time on the second Business Day thereafter. (b) Notwithstanding the foregoing, if any Event of Bankruptcy has occurred with respect to Retailer (and so long as the same has not been dismissed), Credit Slips payable by Retailer to Bank as part of the Net Transaction Volume shall no longer be netted against Purchases on Accounts, but instead 26 28 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY Retailer shall transfer the amount of such Credit Slips to Bank by wire transfer of immediately available funds (or, if the aggregate amount to be transferred pursuant to this Section is less than **, by check sent to Bank by overnight delivery service), not later than the second Business Day following the date on which the events giving rise to such credits occur (and amounts payable by Bank for Purchases on Accounts shall be made without deduction for Credit Slips). If Retailer does not pay to Bank the amount of all Credit Slips as required by the immediately preceding sentence, Bank shall have the right to set off all such amounts against daily settlements or other amounts to be paid to Retailer. 5.2. Pass-Through Expenses and Insert Fees. Bank shall invoice Retailer monthly for the Pass-Through Expenses and Insert Fees payable by Retailer pursuant to this Agreement. Retailer shall pay Bank within fifteen (15) Business Days of receipt of each such invoice. 5.3. Taxes. Retailer shall be responsible for, and shall either pay or reimburse Bank for, any and all federal, state and local taxes or assessments of any kind levied on or with respect to the Program, except for any franchise or income taxes of Bank, its parent or other affiliates, or those assessed on the net worth of Bank or its parent or other Affiliates. 5.4. Settlement Reports. Bank shall provide a daily settlement report to Retailer documenting each day's settlement under Section 5.1 (Daily Settlement for Charge Data) hereof. Bank shall provide a monthly report to Retailer, prior to or with each invoice under Section 5.2 (Pass-Through Expenses and Insert Fees) hereof containing detailed documentation of all fees and expenses. ARTICLE VI PROGRAM ECONOMICS 6.1. Monthly Statements. (a) On or about the fourteenth (14th) Business Day of each calendar month, Bank shall provide Retailer with a statement (each a "Monthly Statement") setting forth with respect to the preceding calendar month (i) the Monthly Program Costs incurred by Bank for such calendar month, (ii) the Monthly Program Revenues for such calendar month, and (iii) such other data which may reasonably be requested by Retailer to document and substantiate the foregoing. For purposes hereof, Monthly Program Costs are defined as: (A) the Cost of Funds with respect to the calendar month at issue, plus (B) the Write-Off Amount for the calendar month at issue, plus (C) all Consumer Charges written off by Bank in accordance with the Write-Off Policy with respect to the calendar month at issue. Monthly Program Revenues are Consumer Charges billed by Bank with respect to the calendar month at issue (including any real-time 27 29 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY adjustments made by Bank during that month), excluding revenues in respect of Value-Added Programs. (b) On or about the fourteenth (14th) Business Day of each calendar month, Bank also shall provide Retailer with a statement (each a "Monthly Retailer Statement") setting forth with respect to the preceding calendar month (i) the Service Fees incurred for such calendar month, calculated in accordance with Exhibit 6.1(b) hereto, (ii) Pass Through Expenses, (iii) the amounts charged back pursuant to Article VII (Chargebacks) and (iv) such other data which may reasonably be requested by Retailer to document and substantiate the foregoing. 6.2. Royalty Payments. Within fifteen (15) days after the end of each calendar month, Bank shall pay to Retailer an amount equal to the product of the Estimated Royalty Payment Index applicable to that calendar month multiplied by Net Transaction Volume for that calendar month (except that, if such amount is a negative, Retailer shall pay the amount to Bank). 6.3. Other Payments. (a) Within thirty days after receipt by Retailer of the Monthly Retailer Statement, Retailer shall pay to Bank, an amount equal to the sum of the Service Fee and the charged back amount, all for the applicable month as set forth on the Retailer Monthly Statement for such month. (b) Retailer shall pay to Bank on the date hereof ** as an inducement fee. (c) Bank shall bill Retailer an amount equal to the Securitization Fees upon the initial sale of Receivables hereunder to the Master Trust. Retailer shall pay such amount within ten (10) days after receipt of such bill 6.4. Semi-Annual Reconciliation. As of July 31, 1999 and each January 31 and July 31 thereafter, Bank shall calculate the Actual Royalty Payment for the preceding six-month period. In the event that the Actual Royalty Payment for the six-month period exceeds the Estimated Royalty Payment during the six-month period, Bank shall pay the difference between the two such amounts to Retailer within fifteen (15) Business Days after receipt of the Monthly Statement for the last month in the six-month period. In the event that the Estimated Royalty Payment exceeds the Actual Royalty Payment, Retailer shall pay the difference between the two such amounts to Bank within fifteen (15) Business Days after receipt of the Monthly Statement for the last month in the six-month period. The foregoing notwithstanding, the parties acknowledge and agree that: (a) in the event that this Agreement shall expire in accordance with Section 13.1(a) (Term of Agreement), calculations in respect of the period from the preceding August through the scheduled termination date shall be made for that seven-month period with such adjustments hereto as may be necessary to accommodate such 28 30 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY change, and (b) if this Agreement terminates on any date other than January 31 or July 31 except in accordance with Section 13.1(a) (Term of Agreement), the foregoing calculation shall take place on the scheduled calculation date but the payments shall be adjusted to reflect only the period during which this Agreement was in effect. 6.5. Service Fee Adjustment. (a) The Parties agree that the Service Fees set forth on Exhibit 6.1(b) shall remain in effect without adjustment during the first twelve (12) months of the Initial Term, except as provided in subsection (b) below. Commencing with each 12-month anniversary thereafter, Bank may increase or shall decrease the Service Fees for such year by an amount not to exceed ** of the prior year's actual CPI-U percentage increase or decrease, provided that the amount of any postage costs or bank clearing fees shall not be subject to the CPI-U increase or decrease. For the purposes of this Section 6.5, "CPI-U percentage increase or decrease" shall mean the average percentage increase or decrease in the Consumer Price Index for all Urban Consumers ("CPI-U"), published by the Bureau of Labor Statistics of the U.S. Department of Labor, over or below the then most recent twelve (12)-month period for which such statistics are available; provided that, if the CPI-U is no longer being published, the parties shall agree upon use of the most comparable consumer price index being published at such time. (b) Exhibit 6.5(b) sets out the assumptions used to calculate certain Service Fees. In the event that, within three months after the purchase of the Existing Accounts, Bank demonstrates material variances from such assumptions, such Service Fees shall be adjusted as indicated on Exhibit 6.5(b). Such fee adjustments shall be effective between the dates three (3) months and fifteen (15) months after such demonstration. Bank shall provide Retailer with information reasonably requested by Retailer to determine whether adjustments are warranted. 6.6. Program Incentive Payment. Bank shall make a non-refundable payment of ** for the initial year of the Agreement. The payment shall be made on January 31, 2000. 6.7. Postage. Postage costs for Credit Card statements that exceed one ounce shall be a direct Pass Through Expense to Retailer. However, Bank promptly shall notify Retailer of each instance in which inserts provided to Bank in accordance with Section 4.4 (Statement Messages and Inserts), when taken together with a one-page statement, envelope and remittance envelope, will exceed one ounce. Unless, within eight (8) hours after receipt of such notice, Retailer advises Bank to exclude any insert(s) from its mailings, the additional postage cost shall be passed through as a Pass Through Expense in accordance herewith. Any additional out-of-pocket expenses incurred by Bank in postage to mail billing statements and other 29 31 correspondence due to an increase in the cost of postage from the United States Postal Service after the date hereof also shall be borne by Retailer and Bank shall increase the fees for statement generation, embossing and letters (all as indicated on Exhibit 6.1(b)) accordingly. Adjustments shall be made for any subsequent decreases in such expenses. 6.8. Bad Debt Incentive Program. The parties acknowledge and agree that it is in the best interest of the Program and the parties hereto that the BDIP Write-Off Amount for any and all periods be carefully monitored and kept as low as possible (within the parameters of this Agreement and keeping in mind customer relations concerns). To that end, in the event that, during the 12-month period preceding January 31, 2000 or any 12-month period thereafter, the BDIP Write-Off Percentage is less than the BDIP Base Write-Off Percentage, Retailer shall pay to Bank in respect of such year an amount equal to: the product of (a) the BDIP Incentive Percentage for that period, multiplied by (b) the BDIP Lagged AR for that period, which product shall then be multiplied by (c) the Approval-Related Percentage. In the event that, during the 12-month period preceding January 31, 2001 or any 12-month period thereafter, the BDIP Write-Off Percentage is higher than the BDIP Base Write-Off Percentage, Bank shall pay to Retailer in respect of such year an amount equal to: (a) the applicable BDIP Incentive Percentage, multiplied by (b) BDIP Lagged AR. The parties agree that, if this Agreement terminates on February 29, 2004, the foregoing calculation shall be made for the 13-month period preceding February 29, 2004 and appropriate adjustments shall be made to reflect such fact. 6.9. Reconciliation of Disputes. (a) Each party agrees to cooperate fully with the other parties in furnishing any information or performing any action reasonably requested of such party to enable the requesting party to perform its obligations under this Agreement and to comply with applicable Laws and regulations. (b) The parties agree that it is their desire to use their best efforts to resolve amicably any and all disputes or disagreements that may arise between them with respect to the interpretation or application of any provision of this Agreement or with respect to the performance by each party of its obligations under this Agreement, in order to avoid an early termination of this Agreement and in order to avoid litigation between the parties. Toward that end, the parties agree that in the event any dispute or disagreement arises that cannot be resolved at the operating level by the employees of each party having direct responsibility for the performance or operating function in question, each of the parties shall promptly appoint a senior officer to confer for the purpose of endeavoring to resolve such dispute or negotiate an adjustment to such provision. Any disputes that, if not resolved, may lead to an 30 32 allegation by one party that it has a right to terminate this Agreement early, shall be referred to the Chief Financial Officer of Retailer and the Chief Financial Officer of Bank, who shall confer and diligently attempt to find reasonable methods of correcting the condition giving rise to the anticipated early termination event. No legal proceedings for the resolution of any such dispute shall be commenced or notice of termination of this Agreement shall be served until such officers have so conferred, and unless and until a party concludes, in good faith, that amicable resolution through continued negotiation of the matter at issue does not appear likely and such party provides written notice of same to the other parties. (c) All disputes about financial computations under this Agreement which cannot be resolved in accordance with the terms of subsection 6.9(b) above shall be resolved by an arbitrator in New York, New York (but, at the parties' request, the arbitrator shall travel to the relevant books and records), in accordance with the rules of the American Arbitration Association then obtaining, unless the parties mutually agree in writing to the contrary. Such arbitrator shall be an active or retired partner of a major accounting firm. The award rendered by the arbitrator shall be final and judgment may be entered upon it in accordance with the applicable law in any court having jurisdiction thereof. Retailer and Bank and their respective accountants shall make readily available to the arbitrator all relevant books, records, work papers and personnel reasonably requested by the arbitrator. The resolution of all disputes about financial computations by the arbitrator shall be final and binding on Retailer and Bank upon written notice thereof to each such party. The fees and expenses of the arbitrator shall be borne by the party found accountable by the arbitrator. ARTICLE VII CHARGEBACK 7.1. Bank's Right to Chargeback. Bank shall have the right, at its option, to chargeback to Retailer the amount of any Charge Slip or Credit Slip in accordance with the chargeback procedures set forth in the Operating Procedures if with respect thereto: (a) a Cardholder asserts any claim or defense against Bank as a result of any act or omission of Retailer, any other Person authorized to accept Credit Cards or any Person providing Value-Added Programs or Direct Marketing Programs allegedly in violation of any applicable law, statute, ordinance, rule or regulation; (b) an Cardholder disputes the amount or existence of the transaction covered by such Charge Slip or refuses to pay alleging dissatisfaction with Goods and Services received, a 31 33 breach of any warranty or representation by Retailer, any other Person authorized to accept Credit Cards or any Person providing Value-Added Programs or Direct Marketing Programs in connection with the transaction, or an offset or counterclaim against Bank based on an act or omission of Retailer, any other Person authorized to accept Credit Cards or any Person providing Value- Added Programs or Direct Marketing Programs; and (c) Retailer fails to promptly retrieve and deliver to Bank within fifteen (15) days after a request by Bank, a hard copy of such Charge Slip (unless such Charge Slip arose in connection with a mail order sale, in which event, no hard copy need be provided by Retailer). 7.2. Exercise of Chargeback. Bank shall provide to Retailer a reasonably detailed explanation of the basis of chargebacks from time to time during each month. Retailer shall pay Bank in respect of charged back amounts monthly in accordance with Section 6.3 (Service Fee Payment). Upon receipt of such amount, Bank shall assign, without recourse, all right to payment for such Charge Slip or portion thereof to Retailer. ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF RETAILER 8.1. Representations and Warranties of Retailer. To induce Bank to establish and administer this Program, Retailer makes the following representations and warranties to Bank, each of which shall survive the execution and delivery of this Agreement, and each of which shall be deemed to be restated and remade on each day on which any Account is opened or Charge Data is submitted to Bank: (a) Existence. Each of Retailer (i) is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware; (ii) is duly qualified and in good standing under the Laws of each jurisdiction where its ownership or lease of property or the conduct of its business require such qualification except where failure to so qualify or the lapse of such qualification has not or is not expected to have a material adverse effect on its ability to perform its obligations hereunder; (iii) has the requisite power and authority and the legal right to own and operate its properties, to lease the properties it operates under lease, and to conduct its business as now conducted and hereafter contemplated to be conducted; (iv) has all necessary licenses, permits, consents, or approvals from or by, and has made all necessary notices to all governmental authorities having jurisdiction, the absence of which would have a material adverse effect on its operation; and (v) is in compliance with its organizational documents in all material respects. 32 34 (b) Power, Authorization; Enforceable Obligation. The execution, delivery, and performance of this Agreement and all instruments and documents to be delivered by each of Retailer hereunder: (i) is within its corporate power; (ii) has been duly authorized by all necessary or proper corporate action; (iii) does not and shall not contravene any provisions of its organizational documents; (iv) shall not violate any Law or regulation or any order or decree of any court or governmental instrumentality; (v) shall not conflict with or result in the breach of, or constitute a default under, any indenture, mortgage, deed of trust, lease, agreement, or other instrument to which it is a party or by which it or any of its assets or property are bound; and (vi) does not require any filing or registration with or the consent or approval of any governmental authority or any other person which has not been made or obtained previously. This Agreement has been duly executed and delivered by each of Retailer, and constitutes a legal, valid, and binding obligation of each of Retailer, enforceable against Retailer in accordance with its terms (except as such enforceability may be limited by equitable principles of general application and subject to applicable bankruptcy and other laws affecting the rights of creditors generally). (c) Litigation. As of the date of this Agreement, there is no claim, litigation, proceeding, arbitration, investigation or material controversy pending before any court, tribunal, governmental body or governmental agency to which either of Retailer is a party and by which it is bound, which is likely to have a material adverse effect on the ability of that Retailer to consummate the transactions contemplated hereby, and, to the best of each Retailer's knowledge and information, no such claim, litigation, proceeding, arbitration, investigation or controversy has been threatened or is contemplated and to the best of its knowledge no facts exist which would provide a basis for any such claim, litigation, proceeding, arbitration, investigation or controversy. (d) Executive Office and Name. The legal name and address of the chief executive office and principal place of business of each of Retailer is and shall continue to be set forth on Exhibit 8.1(d) hereto (as modified from time to time by notice from Retailer to Bank). (e) Solvency. Retailer is Solvent. ARTICLE IX COVENANTS OF RETAILER Retailer covenants to do the following during the term of this Agreement: 33 35 9.1. Cooperation. Retailer shall respond to, and cooperate with, Bank promptly in connection with the resolution of disputes with Cardholders. 9.2. Exchange Policy. Retailer shall maintain a policy for the exchange and return of Goods and adjustments for Services rendered or not rendered that is in accordance with all applicable Laws and, to the extent the adjustment took place at a Store, shall promptly deliver a Credit Slip to the Cardholder and include credit for such return or adjustment in the Charge Data in accordance with the Operating Procedures in the event the return/exchange has been authorized in accordance with Retailer's policies. 9.3. Treatment of Cardholders. Retailer shall not seek or obtain any special agreement or condition from, nor discriminate in any way against, Cardholders with respect to the terms of any transaction. 9.4. Financial Reporting. (a) So long as Retailer is subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (i) as soon as reasonably available and in any event within ninety (90) days after the close of its fiscal year, Retailer shall submit to Bank an audited annual report of Retailer's annual earnings, including its audited consolidated balance sheets, income statements and statement of cash flows and changes in financial position and (ii) promptly after the filing thereof, Retailer shall submit to Bank copies of all proxy statements, and all reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission by Retailer. (b) If Retailer is not subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (i) as soon as reasonably available and in any event within ninety (90) days after the close of its fiscal year, Retailer shall submit to Bank an audited annual report of Retailer's annual earnings, including its audited consolidated balance sheets, income statements and statement of cash flows and changes in financial position together with the opinion of its independent accountants, and (ii) as soon as reasonably available and in any event within 45 days after the close of each of its fiscal quarters, Retailer shall submit to Bank an unaudited quarterly report of Retailer's earnings, including its consolidated balance sheets, income statements and statement of cash flows and changes in financial position, accompanied by the certification on behalf of Retailer by Retailer's chief financial officer that such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and present fairly the consolidated financial position of URGI as of the end of such fiscal quarter and the results of its operations. 34 36 9.5. Compliance with Law. Each of Retailer shall comply in all material respects with all Laws applicable to it, its business and its properties (it being understood that this covenant in no event imposes on either Retailer liability for any elements of the Program for which Bank is responsible hereunder). 9.6. Communications. Promptly after receipt, each of Retailer shall deliver to Bank copies of any communications relating to an Account from a Cardholder or any Governmental Authority. 9.7. Audit and Access. Retailer shall permit Bank, during normal business hours and upon reasonable notice, to visit the offices of Retailer from time to time, and shall permit Bank from time to time to discuss the Program with Retailer and its officers and employees and to examine the books and records of Retailer relating to the Program or have the same examined by Bank's attorneys and/or accountants. In connection therewith, Retailer agrees, subject to applicable privacy and other laws, to make all documents and data regarding the Program available to Bank, and in connection therewith to permit Bank to make copies of all such documents and data. 9.8. Use of Credit Cards. Retailer shall not permit Cardholders to effect Purchases of goods or services not otherwise sold by Retailer in its Stores or through Direct Marketing Programs or Value-Added Programs. 9.9. Application Processing. Retailer shall accept and transmit Credit Card Applications only at Stores or, to the extent Bank agrees, in connection with Direct Marketing Programs and Retailer shall not otherwise authorize any Person to accept or transmit Credit Card Applications. ARTICLE X REPRESENTATIONS AND WARRANTIES OF BANK 10.1. Representations and Warranties of Bank. Bank makes the following representations and warranties to Retailer, each of which shall survive the execution and delivery of this Agreement, and each of which shall be deemed to be restated and remade on each day on which any Account is opened or Charge Data is submitted to Bank: (a) Corporate Existence. Bank (i) is, and at all times during the term of this Agreement shall remain, a national banking association duly organized, validly existing, and in good standing under the laws of the United States; (ii) has the requisite power and authority and the legal right to own, pledge, mortgage, and operate its properties, to lease the properties it operates under lease, and to conduct its business as now 35 37 conducted and hereafter contemplated to be conducted; and (iii) is in compliance with its articles of association and bylaws. (b) Power, Authorization; Enforceable Obligations. The execution, delivery, and performance of this Agreement and all instruments and documents to be delivered by Bank hereunder: (i) are within Bank's corporate power; (ii) have been duly authorized by all necessary or proper corporate action; (iii) do not and shall not contravene any provision of Bank's articles of association or bylaws; (iv) shall not violate any Law or regulation or an order or decree of any court or governmental instrumentality to which Bank is subject; (v) shall not conflict with or result in the breach of, or constitute a default under, any indenture, mortgage, deed of trust, lease agreement, or other instrument to which Bank is a party or by which Bank or any of its property is bound; and (vi) do not require any filing or registration by Bank with or the consent or approval of any Governmental Authority or any other Person which has not been made or obtained previously. This Agreement, and the consummation by Bank of the transactions contemplated herein, have been duly authorized and duly executed and delivered by Bank, and constitute the legal, valid, and binding obligation of Bank, enforceable against Bank in accordance with their terms (except as such enforceability may be limited by equitable principles of general application and subject to applicable bankruptcy and other laws affecting the rights of creditors generally). (c) Litigation. As of the date of this Agreement, there is no claim, litigation, proceeding, arbitration, investigation or material controversy pending before any court, tribunal, governmental body or governmental agency to which Bank is a party and by which it is bound, which is likely to have a material adverse effect on the ability of Bank to consummate the transactions contemplated hereby, and, to the best of Bank's knowledge and information, no such claim, litigation, proceeding, arbitration, investigation or controversy has been threatened or is contemplated and to the best of Bank's knowledge no facts exist which would provide a basis for any such claim, litigation, proceeding, arbitration, investigation or controversy. (d) Solvency. Bank is Solvent. (e) Bank as Creditor; Compliance with Law. Bank is the owner and creditor in respect of Accounts and Receivables and will export Consumer Charges in accordance with all applicable Laws, including all applicable banking and consumer credit laws and regulations. Except to the extent of Retailer's representations in respect of Existing Accounts, the terms, conditions and structure of the Program and Accounts comply with all such applicable laws and regulations (it being understood that this representation in no event imposes on Bank liability 36 38 CONFIDENTIAL TREATMENT REQUESTED for any elements of the Program for which Retailer is responsible hereunder). (f) Integrity of Computer Systems. For each calendar month during 1997, Bank's computer processing system relating to Bank's customized revolving credit programs was operational and performed its functions for which it is intended for at least ** of the time such system was scheduled to be operational during such month. ARTICLE XI COVENANTS OF BANK Bank covenants to do the following during the term of this Agreement: 11.1. Compliance with Law. Except to the extent of Retailer's representations in respect of Existing Accounts, the Program and all (i) actions taken by Bank, (ii) agreements with Cardholders, forms, letters, notices, statements or other materials used by Bank in connection with the performance of its duties and obligations in connection with the Accounts and Receivables, (iii) actions taken by Bank in connection with each sale of Goods and Services resulting in an Account or Receivable, and (iv) Account Documentation and other Program documents, to the extent such documentation has been prepared by or at the direction of Bank, in each case taken as a whole, shall materially comply with all applicable Laws, including, without limitation, the federal Consumer Credit Protection Act and Regulation Z under Title I thereof and federal and state banking and rate exportation laws. Bank shall comply in all material respects with all Laws with respect to Bank, its business, the Program and its properties. 11.2. Audit and Access. Bank shall permit Retailer, during normal business hours and upon reasonable notice, to visit the offices of Bank from time to time, and shall permit Retailer from time to time to discuss the Program with Bank and its officers and employees, monitor calls, including collection and customer service calls (except to the extent prohibited by applicable Law or otherwise requested by a Cardholder) and examine the books and records of Bank relating to the Program or have the same examined by Retailer's attorneys and/or accountants (it being understood that the books and records referenced in this sentence shall not include Bank's internal profit and loss statements unless Bank has taken the position that the operation of the Program is or may become an Unsafe and Unsound Banking Practice). In connection therewith, Bank agrees, subject to applicable Laws, to make all documents and data regarding the Program (including documents and data needed to verify fees and payments made hereunder as well as documents and data necessary to determine that the Service Standards and standards in respect 37 39 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY of collections are being met) available to Retailer, and in connection therewith to permit Retailer to make copies of all such documents and data. Without limiting the generality of the foregoing, Bank agrees to provide to Retailer, upon Retailer's request, (a) documents indicating the forms of statement messages sent to Cardholders with delinquent Accounts at each stage of delinquency, (b) copies of collection and customer service scripts and training manuals provided by Bank to its employees for use in connection with the Program, and (c) information indicating the circumstances under and times at which the scripts and manuals described in subsection (b) are used. It is acknowledged and agreed that (i) any documents or information described in subsection (b) or (c) of the preceding sentence that are provided to Retailer is confidential information of Bank subject to the terms of Section 12.7 (Confidentiality) and (ii) none of the documents and information described in the preceding sentence shall constitute Program Assets. All audits shall be at Bank's expense if material discrepancies in amounts paid or charged by Bank or in services and activities provided by Bank are discovered. Bank acknowledges that Retailer intends to conduct a formal audit in respect of the Program on an annual basis. 11.3. Financial Information. Within thirty (30) days after first publicly available, Bank shall provide Retailer with copies of all publicly available portions of its quarterly call reports. 11.4. Operating Procedures. Bank shall comply with the Operating Procedures. 11.5. Cooperation. Bank shall respond to and cooperate with Retailer promptly in connection with the resolution of disputes with Cardholders. 11.6. Communications Concerning Litigations. Promptly after receipt, Bank shall deliver to Retailer any communications relating to litigation involving the Program. ARTICLE XII OTHER AGREEMENTS 12.1. Retailer Acquisitions. In the event that Retailer or any of its Affiliates, directly or indirectly, acquires (i) all or substantially all of the assets of any other Person engaged in the business of retail sales, (ii) more than ** of the outstanding voting securities of such a Person or (iii) the power to direct or cause the direction of such a Person's management or policies, whether through the ownership of securities, control of its board of directors, contract or otherwise, then (1) Retailer or any of its Affiliates may determine not to operate a private label credit card program in 38 40 connection with such acquired business, (2) if such acquired Person maintains or utilizes a private label credit card program at the time the acquisition by Retailer is consummated, Retailer or any of its Affiliates may maintain such program (except that at the time (if any) that such acquired Person entertains bids in respect of such program, Bank shall be provided with a right of first refusal with respect thereto, exercisable on thirty (30) days' notice to Retailer, and (3) if such acquired Person does not maintain a credit program but Retailer or its Affiliates determine to establish such a program, Retailer or such Affiliates may establish such a program inhouse or with a third party (except that Bank shall have a right of first refusal with respect to a proposed third party program, exercisable on thirty (30) days notice to Retailer). 12.2. Exclusivity. During the term of this Agreement, Retailer shall not, directly or indirectly, advertise, promote, sponsor, solicit, permit solicitation of, or make available to customers of Retailer for Purchases or otherwise provide at any Store any credit program, credit facility, credit card program, charge program or debit or secured card program or facility which is similar in purpose or effect to this Program, other than (i) credit provided in connection with the Program hereunder, (ii) credit provided by generally accepted multi-purpose credit or charge cards such as American Express, Mastercard, Visa and the Discover card or by any generally accepted multi-purpose debit or secured cards (provided that none of the cards referred to in this clause (ii) may be "co-branded," "sponsored" or "co-sponsored" with Retailer) and (iii) those authorized pursuant to Section 12.1 (Retailer Acquisitions). 12.3. Grant of Security Interest; UCC Matters. (a) The parties hereto agree that the transactions contemplated herein shall constitute a program for the extension of consumer credit and service to customers of Retailer. Notwithstanding the foregoing, in the event that Article 9 of the UCC applies or may apply to the transactions contemplated hereby, and to otherwise secure payment of and performance by Retailer of any and all indebtedness, liabilities or obligations, now existing or hereafter arising whatsoever pursuant to this Agreement, Retailer hereby grants to Bank a continuing security interest in and to all of Retailer's right, title and interest now owned or existing or hereafter acquired or arising in, to and under the following property (in each case, existing at any time, past, present or future) together with the proceeds thereof: (A) all Accounts, Receivables and Account Documentation; (B) any deposits, credit balances and reserves on Bank's books relative to any Accounts; and (C) all proceeds of the foregoing. All creditors of Retailer seeking to obtain a security interest in any of the foregoing collateral shall be required to subordinate their security interests to the security interest of Bank in the foregoing collateral as a condition precedent to obtaining any such security interest. Retailer agrees to cooperate fully with Bank 39 41 as Bank may reasonably request in order to give effect to the security interest granted by this Section 12.3, including, without limitation, the filing of UCC-1 or comparable statements in order to perfect such security interest. (b) Retailer shall give Bank not less than thirty (30) days' written notice prior to (i) Retailer transferring its executive offices to any location other than that set forth in Exhibit 8.1(d) hereto, and (ii) Retailer changing its corporate name; and, notwithstanding (i) and (ii) hereof, no such change may be effected before the Retailer shall have furnished to Bank signed copies of all filings and all actions as Bank may reasonably determine to be necessary or appropriate to preserve and maintain at all times the perfection and priority of the Liens granted or purported to be granted to Bank hereunder with respect to the Accounts and the Receivables. (c) Retailer shall not change its name, identity or structure in any manner that might make any financing statement filed to preserve and maintain the perfection and priority of any Liens, if any, granted or purported to be granted to Bank hereunder seriously misleading within the meaning of Section 9-402(7) (or comparable provision) of the UCC unless Retailer shall have given Bank at least thirty (30) days' prior written notice thereof and shall have furnished to Bank signed copies of any amendments to such financing statements and all other filings and all other actions as may be necessary to preserve and maintain at all times the perfection and priority of the security interests granted or purported to be granted to Bank hereunder. 12.4. Use of Retailer Marks. (a) Retailer hereby shall cause The Avenue, Inc. ("Owner") to grant to Bank a non-exclusive, royalty-free, non-transferable right and license to use the Retailer Marks in the United States in connection with the creation, establishment, marketing and administration of, and the provision of services related to, the Program, all pursuant to, and in accordance with, this Agreement. Those services shall be the solicitation of Cardholders, acceptance of Credit Card Applications, issuance and reissuance of Credit Cards, the provision of accounting services to Cardholders, the provision of billing statements and other correspondence relating to Accounts to Cardholders, the extension of credit to Cardholders, and the advertisement or promotion of the Program. The license hereby granted is solely for the use of Bank and shall not be sublicensed by Bank. (b) The license granted hereunder shall terminate upon the later of (i) the termination of this Agreement or (ii) the Final Liquidation Date, but in no event later than five (5) years after the effective date of termination of this Agreement. 40 42 (c) Upon the termination of the license as provided in subsection (b) above, all rights in the Retailer Marks shall revert to Owner, the goodwill connected therewith shall remain the property of Owner and Bank shall: (i) discontinue immediately all use of the Retailer Marks, or any of them, and any colorable imitation thereof; and (ii) at its option, delete the Retailer Marks from, destroy or return to Retailer unused all Credit Cards, Credit Card Applications, Account Documentation, periodic statements, materials, displays, advertising and sales literature and any other items bearing any of the Retailer Marks. (d) Bank acknowledges that (1) the Retailer Marks, all rights therein, and the goodwill associated therewith, are, and shall remain, the exclusive property of Owner, (2) it shall take no action which shall adversely affect Owner's exclusive ownership of the Retailer Marks or the goodwill associated with the Retailer Marks, and (3) any and all goodwill arising from use of the Retailer Marks by Bank shall inure to the benefit of Owner. Nothing herein shall give Bank any proprietary interest in or to the Retailer Marks, except the right to use the Retailer Marks in accordance with this Agreement and Bank shall not contest Retailer's title in and to the Retailer Marks. (e) Bank shall use the Retailer Marks as set forth in this Section and shall provide services under the Retailer Marks in accordance with the standards set forth herein. Bank shall provide Retailer with representative samples of Credit Cards, card mailing materials, displays, advertising and sales literature and any other items bearing or intended to bear any of the Retailer Marks (the "Materials"), which Materials shall be reviewed and may be approved or disapproved by Retailer in its reasonable discretion. (f) Bank shall not use the Retailer Marks, or any colorable imitation thereof, other than as provided herein. In addition, Bank shall not adopt or use as a trademark, service mark, logo or tradename, or claim any rights in or to, any of the Retailer Marks or other marks confusingly similar to any of the Retailer Marks. (g) If any of the Retailer Marks is infringed, Owner alone has the right, in its sole discretion, to take whatever action it deems necessary to prevent such infringing use. Bank shall reasonably cooperate with and assist Owner in the prosecution of those actions that Owner determines, in its sole discretion, are necessary or desirable to prevent the infringing use of any of the Retailer Marks. 12.5. Power of Attorney. Retailer authorizes and empowers Bank and grants to Bank a power of attorney to sign and endorse Retailer's name on all checks, drafts, money orders or other forms of payment in respect of Accounts under the Agreement. This limited power of attorney conferred hereby is 41 43 deemed a power coupled with an interest and shall be irrevocable prior to the Final Liquidation Date. 12.6. Force Majeure. Notwithstanding any other provision of this Agreement, neither party shall be liable in any manner to the other for any delay, failure in performance, loss or damage due to fire, industry-wide strike, embargo, explosion, earthquake, flood, war, industry-wide labor disputes, civil or military authority, acts of God or the public enemy, inability to secure fuel or acts or omissions of telecommunications carriers (each, a "Force Majeure Event"), except that (a) to the extent the Force Majeure Event affects Bank's performance hereunder in such a manner as would warrant any Service Fee Adjustments, the Service Fee owed by Retailer in respect of periods during the Force Majeure Event shall be decreased to reflect such Service Fee Adjustments, (b) to the extent that the Force Majeure Event causes Bank to fail to provide any services to be paid for by the Service Fee, Retailer shall have no obligation to pay that portion of the Service Fee to Bank during the period of the Force Majeure Event, (c) the defaulting party shall take all steps to alleviate the impact of the Force Majeure Event on the non-defaulting party that it is taking with respect to any other Person with whom it does business, and (d) the non-defaulting party shall have a right of termination as and to the extent provided in Section 13.2(h) (Bank Termination Events) or 13.4(j) (Retailer Termination Events), as the case may be. 12.7. Confidentiality. (a) All proprietary and non-public material and information (i) supplied by Retailer to Bank or learned by Bank from Retailer, (ii) supplied by Bank to Retailer or learned by Retailer from Bank, or (iii) relating to the Program including, without limitation, the terms of this Agreement, marketing plans and test results relating to the Program, information relating to the performance of Accounts, the Cardholder List and any other lists of information related to Cardholders or applicants for Accounts obtained in connection herewith, are confidential and proprietary ("Confidential Information"); provided, however, that this Agreement may be filed with the Securities and Exchange Commission by URGI provided that URGI shall request confidential treatment of all percentage numbers and dollars figures contained herein. Confidential Information shall not include any information which (A) at the time of disclosure by one party hereto is generally available or known to the public (other than as a result of an unauthorized disclosure by the disclosing party); (B) was available to one party on a non-confidential basis from a source other than the other party (provided that such source, to the best of such party's knowledge, was not obligated to the other party to keep such information confidential); or (C) was in one party's possession prior to disclosure by the other party to it. (b) Confidential Information shall be used by each party solely in the performance of its obligations or exercise of 42 44 its rights pursuant to this Agreement, provided, however, that if Retailer purchases the Program Assets after termination of this Agreement, Retailer may use the Program Assets in any way permitted by Law. Each party shall receive Confidential Information in confidence and not disclose Confidential Information to any third party, except (i) as may be necessary to perform its obligations or exercise its rights pursuant to this Agreement or, in the case of Bank, to effect a securitization or participation of the Accounts or Receivables, (ii) as may be agreed upon in writing by the other party, or (iii) as otherwise required by Law or judicial or administrative process, provided, however, that if Retailer purchases the Program Assets after termination of this Agreement, Retailer may use the Program Assets in any way permitted by Law. Each party shall use its best efforts to ensure that its officers, employees and agents take such action as shall be necessary or advisable to preserve and protect the confidentiality of Confidential Information. Upon written request or upon the termination of this Agreement, each party shall destroy or return to the other party all Confidential Information other than Program Assets in its possession or control, subject to the each party's respective document retention policies with respect to information required to be maintained by regulatory authorities (it being understood that any information so retained shall be held in confidence and not disclosed except as in the circumstances described in subsections (i) through (iii) above). Each party acknowledges that the other party's Confidential Information is such other party's valuable asset and any breach of the confidentiality obligations with respect thereto shall result in damage to such other party. ARTICLE XIII TERM AND TERMINATION 13.1. Term of Agreement. (a) Unless otherwise sooner terminated pursuant to this Article XIII (Term and Termination), this Agreement shall remain in full force and effect for a period (the "Initial Term") commencing on the date hereof through and including February 29, 2004. Thereafter, this Agreement shall be automatically renewed for successive three (3) year terms (the term of this Agreement, as so renewed, being referred to herein as the "Extended Term") thereafter unless either Retailer, on the one hand, or Bank, on the other hand, shall have delivered written notice to the other party in accordance with the provisions of Section 13.1(b) hereof of its election to terminate this Agreement at the expiration of the Initial Term or the Extended Term, as the case may be. (b) In order to be effective, any notice of an election to terminate this Agreement at the expiration of the Initial Term or of an Extended Term, as the case may be, must be delivered at least one hundred and eighty (180) Business Days 43 45 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY prior to the expiration of the Initial Term or of any Extended Term, as the case may be. 13.2. Bank Termination Events. The occurrence of any one or more of the following events (regardless of the reason therefor) shall constitute a "Bank Termination Event": (a) Retailer shall fail to pay Bank any undisputed amount when due and payable (it being understood that any undisputed portion of any disputed amount shall be paid) or any amount determined to be due and payable pursuant to Section 6.9(c) (Reconciliation of Disputes), and such failure to pay shall remain unremedied for a period of thirty (30) days after delivery of written demand therefor by Bank to Retailer. (b) Any representation or warranty of Retailer contained in this Agreement shall fail to be true and correct either as of the date hereof or on the date when made or remade and such failure shall remain unremedied for a period of thirty (30) days after delivery of written notice thereof by Bank to Retailer and have (or with the passage of time, likely will have) a material adverse effect on Bank. (c) Retailer shall fail to perform any of the covenants or agreements required to be complied with and performed by Retailer pursuant to this Agreement and such failure shall remain uncured for sixty (60) days after delivery of written notice thereof by Bank to Retailer and have (or with the passage of time, likely will have) a material adverse effect on Bank. (d) An Event of Bankruptcy shall have occurred with respect to Retailer. (e) One or more defaults shall have occurred under any agreement, indenture or instrument under which Retailer then has outstanding Indebtedness in excess of **, and, in any such case, such default (i) continues beyond any period of grace provided with respect thereto, (ii) has not been waived, and (iii) results in such Indebtedness becoming due prior to its stated maturity. (f) A judgment shall have been entered against Retailer by a Governmental Authority, which judgment creates a liability of ** or more in excess of insured amounts and has not been stayed (by appeal or otherwise), vacated, discharged, or otherwise satisfied within sixty (60) days of the entry of such judgment. (g) Retailer shall implement or participate in, directly or indirectly, any Non-Permitted Credit Program and fail to cease such participation for sixty (60) days after delivery of written notice thereof by Bank to Retailer. 44 46 (h) A Force Majeure Event shall have occurred and be continuing for a period of more than one hundred eighty (180) days and such Force Majeure Event has had or likely shall have a material adverse effect on Bank, Cardholders and/or the Program unless Retailer diligently shall have taken all steps to cure all negative impact from the Force Majeure Event on Bank, Cardholders and/or the Program and demonstrates that such Event shall be cured within thirty (30) days thereafter. (i) The Conversion Date shall not have occurred on or prior to March 1, 1999. 13.3. Bank's Rights Following a Bank Termination Event. Subject to Section 13.8 (Alternative to Termination), if any Bank Termination Event shall have occurred and, in the case of Bank Termination Events described in Section 13.2(e) or (f) (Bank Termination Events), shall be continuing, Bank, in its sole discretion, may (i) terminate this Agreement by delivering written notice to Retailer setting forth the basis for termination and the effective date of termination and/or (ii) exercise any other rights or remedies available to it at Law or in equity, subject to the terms of this Agreement. 13.4. Retailer Termination Events. The occurrence of any one or more of the following events (regardless of the reason therefor) shall constitute a "Retailer Termination Event": (a) Bank shall fail to pay to Retailer any undisputed amount when due and payable (it being understood that any undisputed portion of any disputed amount shall be paid) or any amount determined to be due and payable pursuant to Section 6.9(c) (Reconciliation of Disputes), and such failure to pay shall remain unremedied for a period of three (3) days after delivery of written demand therefor by Retailer to Bank. (b) Any representation or warranty of Bank contained in this Agreement shall fail to be true and correct either as of the date hereof or on the date when made or remade and have (or with the passage of time, likely will have) a material adverse effect on Retailer, Cardholders or the Program. (c) Bank shall fail to perform any of the covenants or agreements required to be complied with and performed by Bank pursuant to this Agreement and such failure shall not have been cured within sixty (60) days after delivery of written notice thereof by Retailer to Bank and have (or with the passage of time, likely will have) a material adverse effect on Retailer, Cardholders or the Program. (d) An Event of Bankruptcy shall have occurred with respect to Bank. 45 47 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY (e) One or more defaults shall have occurred under any agreement, indenture or instrument under which Bank then has outstanding Indebtedness in excess of **, and, in any such case, such default (i) continues beyond any period of grace provided with respect thereto, (ii) has not been waived and (iii) results in such Indebtedness becoming due prior to its stated maturity. (f) A judgment shall have been entered against Bank by a Governmental Authority which judgment creates a liability of ** or more in excess of insured amounts and has not been stayed (by appeal or otherwise), vacated, discharged, or otherwise satisfied within sixty (60) days of the entry of such judgment. (g) Bank, without Retailer's prior written approval, shall make a change to Consumer Charges, Other Consumer Terms and Criteria, the Operating Procedures or the collection policies necessary to comply with Law that applies only to banks located in the State of Ohio and such change has or likely will have a material adverse effect on Retailer, Cardholders and/or the Program, unless Bank shall have demonstrated that it can remedy such effect within twelve (12) months and at all times has taken all available steps to do so. (h) The BDIP Write-Off Percentage for the twelve-month period preceding January 31, 2000 or any 12-month period thereafter shall exceed **. (i) The Approval Rate shall be less than ** for any period of four (4) consecutive calendar months. (j) A Force Majeure Event shall have occurred and be continuing for a period of more than one hundred and eighty (180) days and such Force Majeure Event has had or likely shall have a material adverse effect on Retailer, Cardholders and/or the Program, unless Bank diligently shall have taken all steps to cure all negative impact of the Force Majeure Event on Retailer, Cardholders and/or the Program, and demonstrates that such cure shall occur within thirty (30) days thereafter. (k) The Conversion Date shall not have occurred on or before March 1, 1999. 13.5. Retailer's Rights Following a Retailer Termination Event. If any Retailer Termination Event shall have occurred, Retailer, in its sole discretion, may (i) terminate this Agreement by delivering written notice to Bank setting forth the basis for termination and the effective date of termination and/or (ii) exercise any other rights or remedies available to it at Law or in equity, subject to the terms of this Agreement. 13.6. Purchase Following Termination. (a) In the event that this Agreement expires by its terms or is terminated earlier for any reason, Retailer or a designee shall have the 46 48 right, exercisable by delivery of written notice to Bank, to purchase all of the Accounts and Receivables (including those Accounts and Receivables that have been written off by Bank and inactive accounts) owned by Bank as of such purchase date, the Credit Cards, the Cardholder List, all records and other data obtained in connection with the operation of the Program (including any lists other than the Cardholder List containing information relating to Cardholders or applicants for Accounts obtained in connection herewith), all credit scores and methodologies and algorithms needed to implement such scores obtained by Bank from Citibank or provided to Bank by Retailer, including any modifications made thereto by Bank (unless Bank is contractually prohibited from transferring such modifications) and, if Bank independently developed or purchased credit scores and the methodologies and algorithms needed to implement such scores specifically for the Program, those independently developed or purchased scores, methodologies and algorithms (unless Bank is contractually prohibited from transferring such scores, methodologies and algorithms (it being understood that Bank shall use commercially reasonable efforts to avoid such contractual prohibitions)) (all of the foregoing items being collectively referred to herein as the "Program Assets"), all for a purchase price as determined in accordance with Section 13.6(c). In connection with such purchase, Bank agrees that (i) it shall make to Retailer or its designee representations and warranties in respect of the Program Assets comparable to those made by Retailer or Citibank in respect of the Transferred Assets and (ii) unless required by Law, it will not require Retailer or its designee to reissue Credit Cards provided Cardholders are sent decals for application to their Credit Cards indicating the change of ownership of their Credit Cards. Upon such purchase, Bank no longer shall use any Program Assets in any manner. In order to be effective, any notice of an election to purchase pursuant to this Section 13.6(a) must be irrevocable and delivered by Retailer to Bank (i) in the event this Agreement is terminated by Retailer other than as a result of a Retailer Termination Event, within ninety (90) Business Days after delivery of Retailer's written notice of termination, (ii) in the event this Agreement is terminated by Bank as a result of a Bank Termination Event, within sixty (60) Business Days after delivery of Bank's written notice of termination and (iii) in the event this Agreement otherwise terminates, within one hundred seventy (170) Business Days after notice of termination is given. (b) If this Agreement terminates or expires and Retailer has not exercised its rights under subsection (a) above, Retailer promptly shall notify Bank of any determination to commence itself or through another issuer a proprietary credit card program within two (2) years after expiration or termination of this Agreement. If Retailer provides such a notice, Bank shall have the right to require Retailer to purchase all of the Program Assets for a purchase price as determined in accordance with Section 13.6(c). Bank may exercise this right by delivering 47 49 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY written notice to Retailer of Bank's election to require Retailer to purchase the Program Assets (a "Put Notice") within a period of three (3) months from the date of termination if such Program commences on termination or, if Bank receives notice of commencement of such a program after termination, for a period of three (3) months following the date upon which notice was received. If Bank delivers a Put Notice to Retailer pursuant to this Section 13.6(b), Retailer shall be obligated to close the purchase of the Program Assets not later than one hundred eighty (180) days after the effective date of termination of this Agreement or ninety (90) days after receiving a Put Notice, whichever comes later. (c) The purchase price to be paid by Retailer for the Program Assets purchased by it pursuant to Section 13.6(a) or 13.6(b) shall be equal to the sum of (i) the aggregate of Receivables on the date of purchase (excluding the amounts of any Receivables written off by Bank in accordance with the Write-Off Policy) plus (ii) if the Program Assets include credit scores and methodologies and algorithms needed to implement such scores independently developed or purchased by Bank specifically for the Program, an amount not to exceed the lesser of (1) ** per scorecard for each scorecard developed by Bank or (2) the amount paid by Bank for each scorecard purchased by Bank. The foregoing notwithstanding, Retailer may determine to exclude any or all scorecards developed or purchased by Bank from the Program Assets and no payment shall be owed in respect of scorecards so excluded. (d) Bank shall cooperate in good faith with Retailer and/or its designee in transferring the Program Assets and the operation of the Program Assets and shall make available to Retailer and/or its designee in advance the master file tape and other records necessary to assist the Retailer and/or its designee in analyzing such Receivables and in establishing its own records for operations. On the purchase date, Bank will deliver one or more computer tapes containing all of the information normally maintained by Bank with respect to the Program Assets for purposes of billing, credit review, dunning and collection, and a description of the format in which such information is recorded on tape, and all of the written records and documents maintained by Bank with respect to the foregoing. Bank shall provide such additional cooperation and information as the purchaser shall reasonably request provided that Bank shall not be required to incur expense to do so. Without limitation to the foregoing, Bank shall use good faith efforts to assist any successor provider to any to analyze pertinent account information and portfolio assistance and documentation that Bank has required or requested of Citibank and Retailer in connection with the conversion hereunder. 13.7. Failure of Retailer to Purchase Accounts Following Termination. (a) Upon any termination of this 48 50 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY Agreement, if Retailer does not elect to purchase the Program Assets pursuant to Section 13.6(a) (Purchase Following Termination) and Bank does not deliver the Retailer Put Option, Bank shall have the right, in addition to and retaining all other rights it may have under the terms of this Agreement or applicable Law, to liquidate the Accounts and Receivables (using the Cardholder List to do so) in any such lawful manner which may be expeditious or economically advantageous to Bank including, without limitation, the issuance of replacement or substitute credit cards and the sale of such Accounts and Receivables to any Person not a party to this Agreement, provided that in no event shall any replacement or substitute card, whether issued by Bank or a purchaser of the Accounts bear on its face a trademark, service mark or name of a retail competitor of Retailer and provided further that Bank shall continue to hold (and ensure that any purchaser of Accounts holds) confidential all Confidential Information of Retailer. The foregoing and any other provision to the contrary contained herein notwithstanding, if Retailer does not purchase the Program Assets, Bank may use the Cardholder List (or any other lists of information relating to Cardholders) only to liquidate Accounts and Retailer shall retain the exclusive right (without any fee being payable to Bank and with all revenue and income derived therefrom belonging to Retailer) to use (or sublicense or assign the right to use) the Customer List for all purposes, including for advertisement, solicitations or other marketing efforts, regardless of the manner or media through which the marketing effort is made, regardless of whether the product or service was previously marketed by Retailer. (b) If Retailer does not elect to purchase the Program Assets pursuant to Section 13.6(a) (Purchase Following Termination) and Bank does not deliver to Retailer a Put Notice, Retailer shall pay to Bank in connection with Bank's liquidation of the Accounts and Receivables an amount to be determined as follows. Upon liquidation of the Accounts, Bank shall determine the "Net Revenue" for the Program. The "Net Revenue" shall be equal to (i) the sum of the Monthly Program Revenues for each month during the liquidation period, minus (ii) the sum of the Monthly Program Costs for each month during the liquidation period. The Net Revenue Requirement shall be an amount equal to ** of the average outstanding balances of the Receivables, excluding amounts written off by Bank in accordance with the Write-Off Policy, during the liquidation period. If the cumulative average monthly Net Revenue after the date of termination of this Agreement is less than the Net Revenue Requirement after the date of termination of this Agreement, Bank shall invoice Retailer for the difference, less any amounts previously paid by Retailer to Bank in accordance with this sentence, and Retailer shall pay such amount within fifteen (15) days from receipt of such invoice. 49 51 13.8. Alternative to Termination. Bank shall not exercise its right to terminate this Agreement pursuant to Section 13.3 (Bank's Rights Following A Bank Termination Event) so long as (i) no Bank Termination Event has occurred and is continuing except one or more of those described in this section, (ii) Retailer shall within two (2) Business Days after receiving notice of termination pursuant to Section 13.2(b) or (c) (Bank Termination Events) establish and thereafter maintain the Collateral Account pursuant to Section 13.9(a) (Collateral Account) or the Letter of Credit pursuant to Section 13.10 (Letter of Credit) and the aggregate amount of such Collateral Account and the undrawn amount of such Letter of Credit (collectively, the "Collateral Amount") shall equal or exceed the sum of all amounts required by this section, and (iii) Retailer is diligently taking all action necessary to correct such event promptly (whether or not such failure can be corrected in a reasonable time). The Collateral Amount shall be the amount of damages which Bank would suffer if this Agreement were terminated immediately. 13.9. Collateral Account. (a) For the purposes of complying with Section 13.8 (Alternative to Termination), Retailer may open and maintain, with a bank, the deposits of which are F.D.I.C.-insured, a collateral account pledged to Bank (the "Collateral Account") to secure payment by Retailer of all of its obligations then or thereafter existing under this Agreement. Retailer shall be entitled to the interest that accrues and is earned on the Collateral Account and Bank shall authorize Retailer to withdraw such amount on the last Business Day of each month. (b) Upon the payment in full of Retailer's obligations hereunder, Bank shall pay to Retailer such of the collateral as shall not have been applied pursuant to the terms hereof. To the extent that the amount of the Collateral Account exceeds the amount required by Section 13.8 (Alternative to Termination) Bank shall return the excess to Retailer or if no Retailer Termination Event is continuing and the Agreement has not otherwise terminated, Bank shall return the full amount of the Collateral Account to Retailer. 13.10. Letter of Credit. In lieu of any amount required to be paid into or maintained in the Collateral Account, Retailer may deliver to Bank a Letter of Credit in favor of Bank issued by a bank organized in the United States or another financial institution, whose debt obligations are rated at least comparable to Bank and which is otherwise acceptable to Bank, payable (i) from time to time upon certification by Bank that obligations in excess of the funds in the Collateral Account are due and payable and unpaid by Retailer after demand and that the funds drawn shall be applied to such obligations, and (ii) up to the full amount upon certification by Bank, within the 60 day period prior to the expiry date of the Letter of Credit, that the 50 52 funds in the Collateral Account are less than Bank's good faith estimate of the obligations expected thereafter to accrue and become due, and that the funds drawn shall be added to the Collateral Account and held and applied in accordance with the terms of this Agreement. The undrawn amount of such Letter of Credit shall be added to the amount of the Collateral Account in determining whether additional payments into or refunds from the Collateral Account are required under Section 13.8 (Alternative to Termination). ARTICLE XIV INDEMNIFICATION 14.1. Indemnification by Retailer. Retailer shall indemnify and hold Bank, each of its Affiliates, and all officers, directors, employees and other agents of Bank and/or its Affiliates, harmless from and against any actions, suits, losses, liabilities, settlements, costs and expenses, including any reasonable attorneys' fees (collectively, "Damages"), relating to, arising out of, or in connection with: (i) the failure of any representation or warranty of Retailer hereunder to be true and correct when made or remade; (ii) the breach by Retailer of any of its covenants or agreements hereunder; (iii) the failure of Retailer, or any of its employees, agents or designees (including those working at Retailer's fulfillment center), to comply with the Operating Procedures or other policies and procedures established hereunder applicable to its, or any of their, conduct; (iv) any misrepresentation by Retailer or any of its employees, agents or designees relating to credit terms; (v) any and all advertising conducted by or on behalf of Retailer, other than credit marketing materials approved by Bank; and (vi) any Goods or Services, including, without limitation, any product liability claims with respect thereto. 14.2. Indemnification by Bank. Bank shall indemnify and hold the Retailer and each of its Affiliates, and all officers, directors, employees and other agents of the Retailer and/or its Affiliates, harmless from and against any Damages relating to, arising out of, or in connection with: 51 53 (i) the failure of any representation or warranty of Bank hereunder to be true and correct when made or remade; (ii) the breach by Bank of any of its covenants or agreements hereunder; (iii) the failure of Bank, or any of its employees, agents or designees, to comply with the Operating Procedures, the Service Standards or other policies and procedures established hereunder applicable to its conduct; (iv) any misrepresentation by Bank or any of its employees, agents or designees relating to credit terms; (v) credit marketing materials approved by Bank; and (vi) the rejection for credit of any applicant by Bank under the Program except to the extent it results from any action or omission of Retailer. 14.3. Effect of Knowledge or Materiality. For purposes of indemnification under Sections 14.1 and 14.2 hereof, a breach or inaccuracy of a representation, warranty, covenant or agreement contained in this Agreement shall be deemed to occur or exist if such representation, warranty, covenant or agreement would have been so breached or inaccurate if it had not contained (i) any limitation or qualification as to materiality or material and adverse effect, or any limitation or qualification as to a party's knowledge. 14.4. Notice. Each party shall promptly notify the other party of any claim, demand, suit or threat of suit of which that party becomes aware (except with respect to a threat of suit either party might institute against the other) which may give rise to a right of indemnification pursuant to this Agreement. The indemnifying party shall be entitled to participate in the settlement or defense thereof and, if the indemnifying party elects, to take over and control the settlement or defense thereof with counsel satisfactory to the indemnified party. In any case, the indemnifying party and the indemnified party shall cooperate (at no cost to the indemnified party) in the settlement or defense or any such claim, demand, suit or proceeding. ARTICLE XV MISCELLANEOUS 15.1. Assignability. Neither Bank nor Retailer may assign its rights and obligations under this Agreement without 52 54 the prior written consent of the other party, provided that Bank may assign all or part of its rights and obligations under this Agreement to an Affiliate without such prior written consent if such Affiliate shall enter into an agreement with Retailer, in form and substance reasonably satisfactory to Retailer, assuming all of Bank's obligations hereunder that shall have been assigned by Bank to such Affiliate. No assignment by Bank shall release Bank from liability for Damages relating to, arising out of or in connection with this Agreement, whether incurred prior to assignment or thereafter. 15.2. Amendment. This Agreement may not be amended except by written instrument signed by the parties hereto. 15.3. Non-Waiver. No delay by any party hereto in exercising any of its rights hereunder, or the partial or single exercise of such rights, shall operate as a waiver of that or any other right. The exercise of one or more of any party's rights hereunder shall not be a waiver of, nor preclude the exercise of, any rights or remedies available to such party under this Agreement or in Law or equity. 15.4. Severability. If any provision of this Agreement is held to be invalid, void or unenforceable, all other provisions shall remain valid and be enforced and construed as if such invalid provision were never a part of this Agreement. 15.5. Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of Ohio without regard to internal principles of conflict of Laws. 15.6. Captions. Captions of the Sections of this Agreement are for convenient reference only and are not intended as a summary of such Sections and do not affect, limit, modify or construe the contents thereof. 15.7. Further Assurances. Each party hereto agrees to execute all such further documents and instruments and to do all such further things as the other party may reasonably request in order to give effect and to consummate the transactions contemplated hereby. 15.8. Entire Agreement. This Agreement is the entire agreement of the parties with respect to the subject matter hereof and supersedes all other prior understandings and agreements whether written or oral. 15.9. Notices. All notices, demands and other communications hereunder shall be in writing and shall be sent by hand, by first class mail (return receipt requested), facsimile (with verbal confirmation of receipt) or by nationally recognized overnight courier service addressed to the party to whom such notice or other communication is to be given or made at such 53 55 party's address as set forth below, and shall be deemed given when received as follows: if to Retailer: United Retail Group, Inc. 365 West Passaic Street Rochelle Park, NJ 07662 Attention: Chief Financial Officer Fax: (201) 909-2122 if to Bank: World Financial Network National Bank 800 Techcenter Drive Columbus, OH 43213 Attention: Chief Financial Officer Fax: (614) 729-4299 provided, however, that if either of the above parties shall have designated a different address by notice to the other, notice shall be sent to the last address so designated. 15.10. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns. 15.11. Independent Contractor. Nothing contained in this Agreement shall be construed to constitute Bank and Retailer as partners, joint venturers, principal and agent, or employer and employee. Bank shall act hereunder solely as an independent contractor and shall exercise exclusive control over any and all persons hired by it. 15.12. Press Releases. Except as may be required by Law or a court or regulatory authority or any stock exchange, neither Bank nor Retailer, nor their respective parent, subsidiary or affiliated companies, shall issue a press release or make any public announcement relating to the Program without the prior consent of all parties hereto, which consent shall not unreasonably be withheld or delayed. 15.13. Jurisdiction. Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated thereby may be brought against any of the parties in the United States District Court for the Southern District of Ohio or any state court sitting in the City of Columbus, Ohio, and each of the parties hereby consents to the exclusive jurisdiction of such court (and of the appropriate appellate courts) in any such suit, action or proceeding and waives any objection to venue laid therein. Process in any such suit, action or proceeding may be served on any party anywhere in the world. Without limiting the foregoing, the parties agree that service of process upon such party at the address referred 54 56 to in Section 15.9 (Notices), together with written notice of such service to such party, shall be deemed effective service of process upon such party. 15.14. Counterparts. This Agreement may be executed in any number of multiple counterparts, all of which shall constitute but one and the same original. 15.15. Agreement Executed by Facsimile. This Agreement may be executed by facsimile originals and each copy of this Agreement bearing the facsimile transmitted signature of the authorized representatives of each party shall be deemed to be an original. Notwithstanding the validity of the facsimile originals, it is intended that two copies of the Agreement shall be manually executed by each party and delivered to the other party hereunder. 15.16. Waiver of Jury Trial. EACH OF THE PARTIES HERETO KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY EXHIBIT OR SCHEDULE HERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING OR STATEMENTS (WHETHER VERBAL OR WRITTEN) MADE BY THE PARTIES. 15.17. Survival. No termination (regardless of cause or procedure) of this Agreement shall in any way affect or impair the powers, obligations, duties, rights, indemnities, liabilities, undertakings, covenants, warranties and/or representations of the parties with respect to times and/or events occurring prior to such termination, including the obligation to make payments in respect of obligations (including indemnification obligations) arising prior to the termination date. No powers, obligations, duties, rights, indemnities, liabilities, undertakings, covenants, warranties and/or representations of the parties with respect to times and/or events occurring after termination shall survive termination except 6.4 (Semi-Annual Reconciliation), 6.7 (Postage), 6.9(c) (Reconciliation of Disputes), 12.4 (Use of Retailer Marks), 12.7 (Confidentiality), 13.3 Bank's Rights Following a Bank Termination Event), 13.5 (Retailer's Rights Following a Retailer Termination Event), 13.6 (Purchase Following Termination), 13.7 (Failure of Retailer to Purchase Accounts Following Termination), 15.4 (Severability), 15.5 (Governing Law), 15.6 (Captions), 15.8 (Entire Agreement), 15.9 (Notices), 15.10 (Binding Effect), 15.12 (Press Releases), 15.13 (Jurisdiction), 15.14 (Counterparts), 15.15 (Agreement Executed by Facsimile), 15.16 (Waiver of Jury Trial), 15.17 (Survival), Article 7 (Chargebacks) and Article 14 (Indemnification). IN WITNESS WHEREOF, Bank and Retailer have caused this Agreement to be executed by their respective officers thereunto duly authorized as the date first above written. 55 57 WORLD FINANCIAL NETWORK NATIONAL BANK By: /s/ DANIEL T. GROOMES ----------------------------- Name: Daniel T. Groomes Title: President UNITED RETAIL GROUP, INC. By: /s/ GEORGE R. REMETA ----------------------------- Name: George R. Remeta Title: Vice Chairman UNITED RETAIL INCORPORATED By: /s/ JON GROSSMAN ----------------------------- Name: Jon Grossman Title: Vice President - Finance 56 58 Exhibit A Licensed Marks THE AVENUE(R) AVENUE PLUS SIZES UNLIMITED SIXTEEN PLUS(R) SIZES WOMAN SMART SIZE SIZES GOLD 59 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY Exhibit 2.3 Initial Account Terms and Conditions o Annual Percentage Rate: ** o Period for Assessing Late Fee: 5 Days after due date o Method of Computing the Balance for Purchases: Average Daily Balance (including new purchases, finance charges and fees) o Grace Period for finance charges if Account paid in full before the next billing date: 25 days o Annual Fee: None o Minimum Finance Charge: ** o Late Fee: ** o Return Payment Fee: ** o Minimum Payment: Greater of ** or ** of the balance due 60 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY Exhibit 4.1(b)(1) Bank Service Standards ========================================================================= Service Service Level Standard - ------------------------------------------------------------------------- Voice Authorization o Average Speed of Answer ** within 20 seconds (Including account number lookups) as measured from time of switch presentment to a live agent ** o Percentage of Calls Abandoned - ------------------------------------------------------------------------- Customer Service Phone Inquiry o Average Speed of Answer ** within 20 seconds o Percentage of Calls ** Abandoned - ------------------------------------------------------------------------- Mail Response Time o All (including FCB) ** within 7 Days Cardholder correspondence ** within 30 Days responses o Presidential Complaints - Attempt Cardholder contact within 1 Day - ------------------------------------------------------------------------- Statement Processing o Number of days elapsed from 4 days or less billing date to mailed date - ------------------------------------------------------------------------- Payment Processing o Number of days to process ** deposited same day, and deposit ** within 2 days o Number of errors per 10,000 1 payments (except to the extent of payments to Citibank, which shall be processed in accordance with the above on Bank's receipt) - ------------------------------------------------------------------------- Plastic Turnaround o Elapsed time from date 3 days application approved until credit card is mailed - ------------------------------------------------------------------------- 1 61 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY - ------------------------------------------------------------------------- Collection Standards o attempts per autodial o average of 6 attempts matrixed account per autodial matrixed account o minimum 7 attempts in respect of Accounts moving from CA1 to CA2 (as defined on Exhibit 4.9)** o minimum 15 attempts in respect of Accounts moving from CA2 to CA3 (as defined on Exhibit 4.9)** o matrixed accounts per o 500-550 accounts per midrange collector midrange collector ========================================================================= ** Accounts rolling from one category to another in respect of which there has been a broken promise shall be excluded when determining whether this standard has been met. NOTE: Service level standard shall be measured using a simple average for each calendar month, except that Collection Standards shall be measured using a simple average for each cycle billing period. 2 62 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY Exhibit 4.1(b)(2) Service Fee Adjustments ================================================================================ Service Fee Adjustment ---------------------- (as decrease to fees on Exhibit 6.1(b)) - -------------------------------------------------------------------------------- Consecutive Months Thereafter Category of First Month Subject to Failure Service Subject to Adjustment Adjustment --------------- --------------------- ---------- - ------------------------------------------------------------------------------ Voice Authorization ** ** - ------------------------------------------------------------------------------ Customer Service ** ** - ------------------------------------------------------------------------------ Mail Response ** ** - ------------------------------------------------------------------------------ Statement Processing ** ** - ------------------------------------------------------------------------------ Payment Processing ** ** - ------------------------------------------------------------------------------ Plastic Turnaround ** ** - ------------------------------------------------------------------------------ Collections (Accounts Accts per Per Midrange Collector) Collector Adjustment Adjustment --------- ---------- ---------- >550,<575 ** >=575,<600 ** >=600,<625 ** SAME >=625,<650 ** >=650,<675 ** >=675,<700 ** >=700,<725 ** 725 or more ** ============================================================================== 3 63 Exhibit 4.4 Insert Fees and Specifications INSERTS FOR BILLING ENVELOPES Creative Specifications Mailing Piece needs to be at .95 oz. or Less; this allows for humidity, etc. - The total weight of the mail piece needs to be determined prior to the creation of the scheduler file to ensure the piece is within this weight limit. Inserts should always have a minimum of 3/8" clearance on all sides from envelope. Finished Size: Minimum Maximum Height 3" 3 5/8" Horizontal Length 5 1/2" 6 3/4" Thickness .004" 1/16" Recommended Paper Properties: 1. Single Panel 70# or 60# 2. Multiple Panels: Minimum 50# Maximum 70# Preferred 60# 3. Paper preferences: White Wove White semi-gloss White matte Folding: The preferred method is to fold the insert in half with a single fold. If the insert is tri-folded, the method requires folding 1 64 the first panel inside and the second panel should fold over to ensure that the leading edge is solid as it is pulled from the select feed station to the track. NO "accordion" fold should be used. Note: If the design for the mail piece package is not within the above specifications, the Retailer must get approval from Bank's Mail Services Department. Multiple fold inserts may have stacking problems not only in the machine hoppers but in the cartons if not packed properly. Staples cannot be used. INSERTS FOR EMBOSSING PACKAGE Creative Specifications: Embossing piece needs to be at .95 ozs. or less; this allows for humidity. The total weight of the embossing piece needs to be determined prior to production to ensure the price is within this weight limit. Inserts should always have a minimum of 3/8" clearance on all sides from envelope. Finished Size: Minimum 3 1/4" x 5" Maximum 3 1/2" x 8 1/4" Recommended Paper Properties: 1. Single Panel 70# 2. Multiple Panels: Minimum 50# Maximum 70# Preferred 60# 2 65 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY 3. Paper Preferences White Wove White semi-gloss White matte Folding: The preferred method is to fold the insert in half with a single fold. If the insert is tri-folded, the method requires folding the first panel inside and the second panel should fold over to ensure that the leading edge is solid as it is pulled from the select feed station to the track. NO "accordion" fold should be used Note: If the design for the embossing piece package is not within the above specifications, the Retailer must get approval from Bank's Embossing Office. Multiple fold inserts may have stacking problems not only in the machine hoppers but in the cartons if not packed properly. Staples cannot be used. See packing instructions for inserts. INSERT FEES: Retailer shall pay the excess costs of postage when Statements with Retailers inserts, in the aggregate, weigh over one ounce. Retailer shall pay ** for each insert in excess of five inserts per Statement. 3 66 Exhibit 4.7 Reports ================================================================================ REPORT LISTING FREQUENCY ================================================================================ - -------------------------------------------------------------------------------- I. Statement and Letter Production - -------------------------------------------------------------------------------- A. Number of statements mailed Cycle, Monthly - -------------------------------------------------------------------------------- B. Days to produce and mail statements Monthly - -------------------------------------------------------------------------------- C. Number of letters mailed by type Monthly - -------------------------------------------------------------------------------- II. Payments - -------------------------------------------------------------------------------- A. Dollars and items processed Monthly - -------------------------------------------------------------------------------- B. Average number of days to process Monthly ================================================================================ III. Queues - -------------------------------------------------------------------------------- A. Accounts with bills held more than Monthly two consecutive months - -------------------------------------------------------------------------------- B. Accounts with excessive credits (to Daily be defined and agreed upon) - -------------------------------------------------------------------------------- IV. Non-Compliance - -------------------------------------------------------------------------------- A. Authorization not called in by store, Monthly division - -------------------------------------------------------------------------------- V. Statements of Policy - -------------------------------------------------------------------------------- A. Control of system security Annually - -------------------------------------------------------------------------------- B. Disaster recover/emergency Annually procedures available - -------------------------------------------------------------------------------- VI. Collection Reports - -------------------------------------------------------------------------------- A. Cycle aging report number of accounts Cycle and balances by age category - -------------------------------------------------------------------------------- B. Delinquency roll rates by age Monthly - -------------------------------------------------------------------------------- C. Number of dollars of accounts Monthly entering collections this month and total in this month - -------------------------------------------------------------------------------- D. Number of matrixed accounts per Monthly collector by type (power dial, midrange) - -------------------------------------------------------------------------------- 1 67 - -------------------------------------------------------------------------------- E. Average number of attempts per Monthly matrixed autodial account - -------------------------------------------------------------------------------- F. Number of accounts in collection Monthly without a phone number - -------------------------------------------------------------------------------- G. Number of accounts with returned mail Monthly or to be skip traced - -------------------------------------------------------------------------------- H. Bankruptcy liquidation - numbers, Monthly dollars and Chapter 13 payments - -------------------------------------------------------------------------------- I. Number of accounts coded bankrupt Monthly this month, # pending, oldest date - -------------------------------------------------------------------------------- J. Recover: Agency inventory, In-house Monthly inventory (if applicable) - liquidation - -------------------------------------------------------------------------------- VII. Communications - Results for Each Function Authorization/Account lookup, Customer Service, Inbound Collections - -------------------------------------------------------------------------------- A. Number of calls (manually handled Weekly/Monthly versus ARU) - -------------------------------------------------------------------------------- B. Number of calls abandoned Weekly/Monthly - -------------------------------------------------------------------------------- C. Average length of conversation Weekly/Monthly - -------------------------------------------------------------------------------- D. Average speed of answer (seconds) - Monthly Authorizations, Customer Services - -------------------------------------------------------------------------------- E. Reasons for Cardholder inquiries Monthly - -------------------------------------------------------------------------------- VIII. New Accounts - -------------------------------------------------------------------------------- A. New accounts by source, store, Monthly geographic region, division - -------------------------------------------------------------------------------- B. Number approval/decline by store, Monthly geographic region, division - -------------------------------------------------------------------------------- C. Electronic report of declines Monthly - -------------------------------------------------------------------------------- IX. Authorizations - -------------------------------------------------------------------------------- A. Total all transactions - number and Monthly dollars - -------------------------------------------------------------------------------- B. Total all transactions automatically Monthly approved - -------------------------------------------------------------------------------- C. Total referrals number and dollars Monthly - -------------------------------------------------------------------------------- D. Approved referrals - number and Monthly dollars, percentage of those referred - -------------------------------------------------------------------------------- 2 68 - -------------------------------------------------------------------------------- E. Declined referrals - number and Monthly dollars, percentage of those referred - -------------------------------------------------------------------------------- F. "Soft referrals" - number and dollars Monthly (i.e. Check ID) - -------------------------------------------------------------------------------- X. Customer Service - -------------------------------------------------------------------------------- A. Number of address changes by type Monthly (phone or mail) average days to turn, number pending, oldest item - -------------------------------------------------------------------------------- B. Customer correspondence by type, Monthly number, average days to turn, pending, oldest item - -------------------------------------------------------------------------------- C. President complaints number average Monthly days to turn - -------------------------------------------------------------------------------- XI. Financial Reports - -------------------------------------------------------------------------------- A. Financial Summary - sales, payments, Monthly returns, finance charge reversals, late fees, write-off - -------------------------------------------------------------------------------- B. Cycle charge off recovery - number Monthly and dollars of accounts charged off, number and dollars recovered averages - -------------------------------------------------------------------------------- C. Number and dollars of accounts Monthly charged off in a rolling 12 months - -------------------------------------------------------------------------------- D. Sales on deferred billing - Monthly transactions and dollars: All other promo sales by type - -------------------------------------------------------------------------------- E. Balances deferred - number of Monthly accounts and dollars - -------------------------------------------------------------------------------- F. Number of accounts purchases active Monthly last 12 month's - By type (i.e. Instant Credit, Mail ins, etc.) - -------------------------------------------------------------------------------- G. Chargeback reversals - number and Monthly dollars by type - -------------------------------------------------------------------------------- H. Chargeback number and dollars by type Monthly - -------------------------------------------------------------------------------- I. Value-Added Program income by program Monthly - number of accounts, number with transactions this month, sales, returns - -------------------------------------------------------------------------------- 3 69 - -------------------------------------------------------------------------------- J. Fraud by type (i.e. application by Monthly type, unauthorized use, etc.) #$ of accounts, dollars - -------------------------------------------------------------------------------- K. Late fees by cycle, number of Monthly accounts assessed, dollars, reversed, number reversed - -------------------------------------------------------------------------------- XII. Risk - -------------------------------------------------------------------------------- A. Credit limit distribution reports - Monthly new accounts seasoned accounts - -------------------------------------------------------------------------------- B. Credit limit utilization new account, Monthly seasoned accounts - -------------------------------------------------------------------------------- C. Credit limit maintenance by agent Daily - -------------------------------------------------------------------------------- D. Maximum delinquency by score range Monthly (to be defined and agreed upon) - -------------------------------------------------------------------------------- E. Bad debt by score range (to be Monthly defined and agreed upon) - -------------------------------------------------------------------------------- 4 70 Exhibit 4.9 Initial Collection Policies ================================================================================ Account Status (Amount billed and unpaid) Activity -------------------------- -------- - -------------------------------------------------------------------------------- 0-29 days (CAO) None - -------------------------------------------------------------------------------- 30-59 days (CA1) Autodial collection calls - -------------------------------------------------------------------------------- 60-89 days (CA2) Autodial collection calls - -------------------------------------------------------------------------------- 90-120 days (CA3) Midrange collector assigned and calls - -------------------------------------------------------------------------------- 121-149 days (CA4) Midrange collector assigned and calls - -------------------------------------------------------------------------------- 150-179 days (CA5) Midrange collector assigned and calls - -------------------------------------------------------------------------------- 180-209 days (CA6) Midrange collector assigned and calls - -------------------------------------------------------------------------------- > 210 days (CA7) Write-Off ================================================================================ Note: Bank and Retailer shall agree on each matrix used in connection with the implementation of these policies. 71 Exhibit 5.2 Pass-Through Expenses o Collection agency commissions, Consumer Credit Counseling costs and outside attorneys' fees related to the collection of Accounts o Postage cost for customer statements that exceed one ounce o Credit Bureau products (i.e. pre-approved listings, New Account scoring products, warning mechanisms, etc.), to the extent requested by Retailer and excluding standard in file credit bureau reports for basic processing of applications and inquiries o Cardholder Goodwill Adjustments and any other finance charge or late fee reversals or adjustments (to the extent authorized by the Operating Procedures) o Costs related to a mass Credit Card reissue (i.e. embossing, card carrier, plastic and postage) o Telecommunications cost such as additional toll free lines (other than those required in connection with New Accounts, Customer Service, Authorizations, Collections to enable Bank to perform its obligations thereunder) (to the extent requested by Retailer) o In-Store signage, applications and temporary Credit Cards (to the extent Retailer requests that Bank purchase) o Customized reporting and systems enhancements (to the extent requested by Retailer) o The amounts owed to Bank pursuant to Section 3.4 (Value- Added Programs) o The amounts paid by Bank for Appropriate Derivative Instruments (as defined in the definition of "Cost of Funds") 72 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY Exhibit 6.1(b) Service Fees A. New Account Acquisition - ------------------------------------------------------------------------ Mail-In per application ** Applications - ------------------------------------------------------------------------ Quick Credit per application ** Referrals - ------------------------------------------------------------------------ Quick Credit per application ** - ------------------------------------------------------------------------ Embossing per card ** (Including Postage of **) - ------------------------------------------------------------------------ B. Processing and Servicing Fees - ------------------------------------------------------------------------ Statement Per statement based Generation on monthly volume (Including Postage of **) - ------------------------------------------------------------------------ 500,001 - and over ** - ------------------------------------------------------------------------ 400,001 - 500,000 ** - ------------------------------------------------------------------------ 300,001 - 400,000 ** - ------------------------------------------------------------------------ 250,001 - 300,000 ** - ------------------------------------------------------------------------ 200,001 - 250,000 ** - ------------------------------------------------------------------------ 150,001 - 200,000 ** - ------------------------------------------------------------------------ Remittance per remittance ** processing - ------------------------------------------------------------------------ Customer service phone (800# included) per inquiry ** Written per inquiry ** Automated per inquiry ** response - ------------------------------------------------------------------------ 1 73 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY - ------------------------------------------------------------------------ Letters (Including Postage of ***) Collection per letter mailed ** Customer Service per letter mailed ** Decline per letter mailed ** Retailer's per letter mailed ** adverse action regret letter - ------------------------------------------------------------------------ Voice per inquiry ** Authorizations (800# included) - ------------------------------------------------------------------------ Collection Accounts Collector accounts per collector ** account worked Dialer accounts per dialer account ** worked - ------------------------------------------------------------------------ Network per transaction ** Authorization ======================================================================== Notes: o Quick Credit Referrals - Pricing for quick credit referrals (**) assume that if a referral charge is incurred that a quick credit charge is not incurred (**). o Statement Generation - Pricing for statement generation assumes that zero balance statements are not generated. If Retailer decides to use zero balance statements as a marketing tool, Bank will provide separate pricing. o Remittance Processing - In-Store Payments do not count as chargeable remittance processing transactions (**). o Network Authorizations - Authorization pricing assumes that if a Credit Card is swiped at the POS, dials the ADS host for authorization and the host returns a "call center" message, both a voice authorization (**) and network authorization (**) fee will be incurred. 2 74 **CONFIDENTIAL TREATMENT REQUESTED OF INFORMATION FILED SEPARATELY Exhibit 6.5(b) Service Fee Assumptions and Adjustments ================================================================================ Fee Base Assumptions Service Fee Adjustments ================================================================================ Average length of customer o If average length of service phone inquiry expected customer service phone to be 2.5 minutes during any inquiry exceeds 3.5 month minutes, an additional ** will be added to the Service Fee o If average length of customer service phone inquiry is less than 1.5 minutes, ** will be subtracted from the Service Fee - -------------------------------------------------------------------------------- Average length of voice o If average length of authorization expected to be 2 voice authorization minutes during any month exceeds 2.5 minutes, an additional ** will be added to the Service Fee o If average length of voice authorization is less than 1.5 minutes, ** will be subtracted from the Service Fee ================================================================================ 75 Exhibit 8.1(d) Legal Name and Executive Office of Retailer Retailer: United Retail Group, Inc. 365 West Passaic Street Rochelle Park, NJ 07662 United Retail Incorporated 365 West Passaic Street Rochelle Park, NJ 07662 EX-10.3 5 FINANCIAL STATEMENTS OF RETIREMENT SAVINGS PLAN 1 EXHIBIT 10.3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of United Retail Group, Inc. and the Plan Administrator of the United Retail Group Retirement Savings Plan: We have audited the accompanying statements of net assets available for benefits of the United Retail Group Retirement Savings Plan as of December 31, 1997 and 1996, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1997 and 1996, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of investments held for investment purposes, loans or fixed income obligations, and reportable transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. Columbus, Ohio, February 26, 1998. 2 UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997
COMPANY BALANCED FIXED EQUITY AGGRESSIVE INT'L LOAN TOTAL STOCK FUND FUND FUND FUND FUND FUND OTHER FUND ASSETS INVESTMENTS, AT FAIR VALUE: COMMON STOCK: UNITED RETAIL GROUP, INC. $ 287,503 $287,503 $ -- $ -- $ -- $ -- $ -- $ -- $ -- OTHER 5,973 -- -- -- -- -- -- 5,973 -- SHARES OF REGISTERED INVESTMENT COMPANIES: SCUDDER BALANCED FUND 1,665,349 -- 1,665,349 -- -- -- -- -- -- SCUDDER CASH INVESTMENT TRUST 1,821,467 -- -- 1,821,467 -- -- -- -- -- SCUDDER GROWTH AND INCOME FUND 1,945,426 -- -- -- 1,945,426 -- -- -- -- JANUS ENTERPRISE FUND 685,536 -- -- -- -- 685,536 -- -- -- WARBURG PINCUS INTERNATIONAL EQUITY 349,042 -- -- -- -- -- 349,042 -- -- OTHER 196,955 -- -- -- -- -- -- 196,955 -- PARTICIPANT LOANS 351,094 -- -- -- -- -- -- -- 351,094 ---------- -------- ---------- ---------- ---------- -------- -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS $7,308,345 $287,503 $1,665,349 $1,821,467 $1,945,426 $685,536 $349,042 $202,928 $351,094 ========== ======== ========== ========== ========== ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. F-1 3 UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996
COMPANY BALANCED FIXED EQUITY AGGRESSIVE INTERNATIONAL LOAN TOTAL STOCK FUND FUND FUND FUND FUND FUND FUND ASSETS INVESTMENTS, AT FAIR VALUE: COMMON STOCK: UNITED RETAIL GROUP, INC. $ 176,306 $ 176,306 $ -- $ -- $ -- $ -- $ -- $ -- SHARES OF REGISTERED INVESTMENT COMPANIES: WARBURG PINCUS INTERNATIONAL EQUITY FUND 342,048 -- -- -- -- -- 342,048 -- SCHWAB MONEY MARKET FUND 12,198 -- -- 12,198 -- -- -- -- SCHWAB GOVERNMENT MONEY MARKET FUND 190 -- -- 190 -- -- -- -- PARTICIPANT LOANS 334,515 -- -- -- -- -- -- 334,515 ---------- --------- ----------- ---------- ----------- -------- -------- -------- TOTAL INVESTMENTS 865,257 176,306 -- 12,388 -- -- 342,048 334,515 INTERFUND TRANSFERS -- (1,231) (818) 108 (834) 1,405 1,370 -- CASH 5,514,267 -- 1,497,827 2,055,557 1,439,275 521,608 -- -- ---------- --------- ----------- ---------- ----------- -------- -------- -------- TOTAL ASSETS 6,379,524 175,075 1,497,009 2,068,053 1,438,441 523,013 343,418 334,515 LIABILITIES ADMINISTRATIVE EXPENSE PAYABLE 52,208 2,413 16,185 22,763 7,281 1,800 1,766 -- ---------- --------- ----------- ---------- ----------- -------- -------- -------- NET ASSETS AVAILABLE FOR BENEFITS $6,327,316 $ 172,662 $ 1,480,824 $2,045,290 $ 1,431,160 $521,213 $341,652 $334,515 ========== ========= =========== ========== =========== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. F-2 4 UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1997
COMPANY BALANCED FIXED EQUITY AGGRESSIVE TOTAL STOCK FUND FUND FUND FUND FUND Investment Income: Net Appreciation (Depreciation) IN Fair Value of Investments $ 467,300 $ 52,323 $ 223,334 $ -- $ 269,056 $ 33,065 Mutual Funds 386,344 -- 99,124 -- 183,248 40,969 Interest 122,364 -- -- 94,079 -- -- Dividend 53 -- -- -- -- -- ----------- --------- ----------- ----------- ----------- --------- Total Investment Income (Loss) 976,061 52,323 322,458 94,079 452,304 74,034 ----------- --------- ----------- ----------- ----------- --------- Contributions: Employer 181,440 15,589 38,579 40,455 48,318 27,264 Participants 828,786 33,852 178,529 164,277 256,517 139,379 ----------- --------- ----------- ----------- ----------- --------- Total Contribution 1,010,226 49,441 217,108 204,732 304,835 166,643 ----------- --------- ----------- ----------- ----------- --------- Loan Repayments -- 5,748 36,654 40,508 41,436 16,280 Loans Issued -- (2,825) (80,204) (41,703) (38,317) (17,426) Interfund Transfers -- 35,670 (7,945) (313,701) 90,854 (19,483) Administrative Expense (40,411) -- (11,225) (23,970) (4,962) -- Benefits to Participants (964,847) (25,516) (292,321) (183,768) (331,884) (55,725) ----------- --------- ----------- ----------- ----------- --------- Increase (Decrease) in Net Assets Available for Benefits 981,029 114,841 184,525 (223,823) 514,266 164,323 Beginning Net Assets Available for Benefits 6,327,316 172,662 1,480,824 2,045,290 1,431,160 521,213 ----------- --------- ----------- ----------- ----------- --------- Ending Net Assets Available for Benefits $ 7,308,345 $ 287,503 $ 1,665,349 $ 1,821,467 $ 1,945,426 $ 685,536 =========== ========= =========== =========== =========== =========
INT'L LOAN FUND OTHER FUND Investment Income: NET APPRECIATION (DEPRECIATION) in Fair Value of Investments $ (68,476) $ (42,002) $ -- Mutual Funds 49,793 13,210 -- Interest -- 2,973 25,312 Dividend -- 53 -- --------- --------- --------- Total Investment Income (Loss) (18,683) (25,766) 25,312 --------- --------- --------- Contributions: Employer 11,235 -- -- Participants 56,232 -- -- --------- --------- --------- Total Contribution 67,467 -- -- --------- --------- --------- Loan Repayments 11,124 -- (151,750) Loans Issued (7,003) -- 187,478 Interfund Transfers (14,089) 228,694 -- Administrative Expense (254) -- -- Benefits to Participants (31,172) -- (44,461) --------- --------- --------- Increase (Decrease) in Net Assets Available for Benefits 7,390 202,928 16,579 Beginning Net Assets Available for Benefits 341,652 -- 334,515 --------- --------- --------- Ending Net Assets Available for Benefits $ 349,042 $ 202,928 $ 351,094 ========= ========= =========
The accompanying notes are an integral part of this financial statement. F-3 5 UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1996
COMPANY BALANCED FIXED TOTAL STOCK FUND FUND FUND ----------- ----------- ----------- ----------- Investment Income: Net Appreciation (Depreciation) in Fair Value of Investments $ 175,706 $ (53,745) $ 19,714 $ -- Mutual Funds 255,316 -- 126,428 -- Interest 131,073 -- -- 108,864 ----------- ----------- ----------- ----------- Total Investment Income (Loss) 562,095 (53,745) 146,142 108,864 ----------- ----------- ----------- ----------- Contributions: Employer 53,786 3,141 11,464 10,826 Participants 827,229 37,653 171,907 262,203 ----------- ----------- ----------- ----------- Total Contribution 881,015 40,794 183,371 273,029 ----------- ----------- ----------- ----------- Loan Repayments -- 5,343 28,271 31,559 Loans Issued -- (1,912) (46,542) (133,414) Interfund Transfers -- 31,554 (32,855) (345,119) Administrative Expense (47,408) (3,958) (11,064) (16,793) Benefits to Participants (1,162,356) (22,317) (356,865) (367,425) ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets Available for Benefits 233,346 (4,241) (89,542) (449,259) Beginning Net Assets Available for Benefits 6,093,970 176,903 1,570,366 2,494,549 ----------- ----------- ----------- ----------- Ending Net Assets Available for Benefits $ 6,327,316 $ 172,662 $ 1,480,824 $ 2,045,290 =========== =========== =========== =========== EQUITY AGGRESSIVE INTERNATIONAL LOAN FUND FUND FUND FUND ------------ ----------- ----------- ----------- Investment Income: Net Appreciation (Depreciation) in Fair Value of Investments $ 146,628 $ 52,570 $ 10,539 $ -- Mutual Funds 115,497 -- 13,391 -- Interest -- -- -- 22,209 ------------ ----------- ----------- ----------- Total Investment Income (Loss) 262,125 52,570 23,930 22,209 ------------ ----------- ----------- ----------- Contributions: Employer 17,002 8,339 3,014 -- Participants 204,029 97,671 53,766 -- ------------ ----------- ----------- ----------- Total Contribution 221,031 106,010 56,780 -- ------------ ----------- ----------- ----------- Loan Repayments 26,793 20,324 6,341 (118,671) Loans Issued (19,455) (13,407) (3,849) 218,579 Interfund Transfers 141,231 85,631 119,558 -- Administrative Expense (9,494) (3,360) (2,739) -- Benefits to Participants (243,514) (78,701) (17,530) (76,004) ------------ ----------- ----------- ----------- Increase (Decrease) in Net Assets Available for Benefits 378,717 169,067 182,491 46,113 Beginning Net Assets Available for Benefits 1,052,443 352,146 159,161 288,402 ------------ ----------- ----------- ----------- Ending Net Assets Available for Benefits $ 1,431,160 $ 521,213 $ 341,652 $ 334,515 ============ =========== =========== ===========
The accompanying notes are an integral part of this financial statement. F-4 6 UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS (1) DESCRIPTION OF THE PLAN General The United Retail Group Retirement Savings Plan (the "Plan") is a defined contribution plan covering certain employees of United Retail Group, Inc. and its affiliates (the "Employer") who are at least 21 years of age and have completed 1,000 or more hours of service during their first consecutive twelve months of employment or any calendar year beginning in or after their first consecutive twelve months of employment. Certain employees of the Employer, who are covered by a collective bargaining agreement, are not eligible to participate in the Plan. The following description of the Plan provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) as amended. Amendments Effective January 1, 1997, the Plan was amended and restated to, among other things, (1) allow in-service withdrawals as noted under "Payment of Benefits" below, and (2) make certain changes in the Plan as were required by law. Contributions Employer Contributions: The Employer may provide a 50% matching contribution on the first 3% of a participant's voluntary contributions. Participant Voluntary Contribution: A participant may elect to make a voluntary tax-deferred contribution of 1% to 12% of his or her annual compensation up to the maximum permitted under Section 402(g) of the Internal Revenue Code adjusted annually ($9,500 at December 31, 1997). The annual compensation of each participant taken into account under the Plan is limited to the maximum amount permitted under Section 401(a)(17) of the Internal Revenue Code. The annual compensation limit for the Plan year ended December 31, 1997, was $160,000. This voluntary tax-deferred contribution may be limited by Section 401(k) of the Internal Revenue Code. Vesting A participant is fully and immediately vested for voluntary and rollover contributions and is credited with a year of vesting service in the Employer's contributions for each Plan year that they are credited with a least 500 hours of service. A summary of vesting percentages in the Employer's contributions follows:
Years of Vesting Service Percentage ------------------------ ---------- Less than 3 years 0% 3 years 20 4 years 40 5 years 60 6 years 80 7 years 100
F-5 7 Payment of Benefits The full value of participants' accounts becomes payable upon retirement, disability, or death. Upon termination of employment for any other reason, participants' accounts, to the extent vested, become payable. Participants will receive any benefit to which they are entitled in the form of, (1) lump-sum cash distribution, with those participants holding more than 100 shares of Employer Securities receiving shares for the portion of their account invested in Employer Securities, (2) if eligible a payment directly to an eligible retirement plan specified by the Participant or (3) if the account balance is greater than $3,500 and the Participant has attained age 70-1/2, cash installments over a period not extending beyond the life expectancy of the Participant or the joint and last survivor life expectancies of the Participant and a designated Beneficiary. Those participants with vested account balances more than $3,500 have the option of leaving their accounts invested in the Plan until age 65. Participants may make in-service withdrawals from their account if they have obtained the age of 65, based on the terms of the plan. Participant Loans Participants are permitted to borrow from their account the lesser of $50,000 or 50% of the vested balance of their account for a term of not more than five years with repayment made from payroll deductions. All loans become due and payable in full upon a participant's termination of employment with the Employer. The borrowing constitutes a separate earmarked investment of the participant's account. Interest on the borrowing is based on a formula using the published money call rate on the date of application. Amounts Allocated to Participants Withdrawn from the Plan The vested portion of net assets available for plan benefits allocated to participants withdrawn from the Plan as of December 31, 1997 and 1996, is set forth below:
1997 1996 ------- ------- Stock Fund $ - $ 928 Balanced Fund 3,661 16,680 Fixed Fund 6,258 5,585 Equity Fund 27,812 17,911 Aggressive Fund 21,694 6,477 International Fund 17,480 9,248 ------- ------- $76,905 $56,829 ======= =======
Forfeitures Forfeitures are used to reduce the Employer's required contributions. Utilized forfeitures for 1997 and 1996, is set forth below:
1997 1996 -------- -------- Stock Fund $ 2,141 $ 8,899 Balanced Fund 9,643 33,028 Fixed Fund 6,508 44,021 Equity Fund 17,501 39,644 Aggressive Fund 5,781 17,935 International Fund 2,148 7,544 -------- -------- $ 43,722 $151,071 ======== ========
F-6 8 Expenses Brokerage fees, transfer taxes, and other expenses incurred in connection with the investment of the Plan's assets will be added to the cost of such investments or deducted from the proceeds thereof, as the case may be. Administrative expenses of the Plan will be allocated to participants' accounts, unless the Employer elects to pay any or all of such costs. Tax Determination The Plan obtained its latest determination letter on February 23, 1998, in which the Internal Revenue Service stated that the Plan, as amended and restated January 1, 1997, was in compliance with the applicable requirements of the Internal Revenue Code. Accordingly, the following Federal income tax rules will apply to the Plan: Voluntary tax-deferred contributions made under the Plan by a participant and contributions made by the Employer to participant accounts are generally not taxable until such amounts are distributed. The participants are not subject to Federal income tax on interest, dividends, or gains in their particular accounts until distributed. The foregoing is only a brief summary of certain tax implications and applies only to Federal tax regulations currently in effect. (2) SUMMARY OF ACCOUNTING POLICIES The Plan's financial statements are prepared on the accrual basis of accounting. Assets of the Plan are valued at fair value. If available, quoted market prices are used to value investments. The amounts for investments that have no quoted market price are shown at their estimated fair value, which is determined based on yields equivalent for such securities or for securities of comparable maturity, quality, and type as obtained from market makers. Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date. Realized gains or losses on the distribution or sale of securities represent the difference between the average cost of such securities held and the market value on the date of distribution or sale. Reclassification of Prior Year Information Certain prior year information has been reclassified to conform with current year presentation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the plan administrator to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates. F-7 9 (3) INVESTMENTS During the year ended December 31, 1996 the Employer adopted a resolution to change the Plan's trustee effective January 1, 1997. Simultaneous with the change in trustee the investments held under the Balanced Fund, the Fixed Fund, the Equity Fund, and the Aggressive Fund were sold December 30, 1996. These funds were transferred in 1997 and reinvested in funds of like investment objectives. The prior investment options were as follows: (1) the Balanced Fund, invested in Vanguard Wellesley Income Fund, (2) the Fixed Fund, invested in the Schwab Money Market Fund, (3) the Equity Fund, invested in the Fidelity Contra Fund, and (4) the Aggressive Fund, invested in the Columbia Special Fund. The Plan's investments are held by Scudder Trust Company, a subsidiary of Scudder Kemper Investments, Inc., manager of certain mutual funds in which the Plan invests. The following table presents balances for 1997 and 1996 for the Plan's current investment options. No balances are shown at December 31, 1996 for the investment options started on January 1, 1997 (as explained in the preceding paragraph). Investments that represent 5 percent or more of the Plan's net assets are separately identified.
December 31, December 31, 1997 1996 ----------- ----------- Investments at Fair Value as Determined by Quoted Market Price: Common Stock: United Retail Group, Inc. (71,029 and 54,248 Shares at a Cost of $503,325 and 509,200 for 1997 and 1996, Respectively) $ 287,503 $ 176,306 Other 5,973 - Shares of Registered Investment Companies: Scudder Balanced Fund 1,665,349 - Scudder Cash Investment Trust 1,821,467 - Scudder Growth and Income Fund 1,945,426 - Janus Enterprise Fund 685,536 - Warburg Pincus International Equity 349,042 342,048 Other 196,955 12,388 Investments at Estimated Fair Value: Participant Loans 351,094 334,515 ----------- ----------- $ 7,308,345 $ 865,257 =========== ===========
The Plan's investments (including investments bought, sold, and held during the year) appreciation in value for the years ended December 31, 1997 and 1996, is set forth below:
1997 1996 -------- -------- Investments at Fair Value as Determined by Quoted Market Price: Shares of Registered Investment Companies $414,999 $229,451 Common Stock 52,301 (53,745) -------- -------- $467,300 $175,706 ======== ========
Contributions under the Plan may be invested in any one or more of seven investment options: (1) The Company Stock Fund, consisting of common stock of United Retail Group, Inc., (2) the Balanced Fund, which is invested in the Scudder Balanced Fund, (3) the Fixed Fund, which is invested in the Scudder Cash Investment Trust, (4) the Equity Fund, which is invested in the Scudder Growth and Income Fund, (5) the Aggressive Fund, which is invested in the Janus Enterprise Fund, subsequent to year end this investment was liquidated and the monies invested in the Franklin Small Cap Growth Fund, (6) the International Fund, which invests in the Warburg Pincus International Equity Fund, and (7) effective January 1, 1997 a self-directed brokerage account. Participants' voluntary and the Employer's contributions may be invested in any one or more of the options, at the election of the participant. F-8 10 (4) PLAN ADMINISTRATION The Plan is administered by a Committee, the members of which are appointed by the Board of Directors of the Employer. (5) PLAN TERMINATION Although the Employer has not expressed any intent, the Employer has the right under the Plan to discontinue their contributions at any time. United Retail Group, Inc. has the right at any time, by action of its Board of Directors, to terminate the Plan subject to the provisions of ERISA. Upon Plan termination or partial termination, participants will become fully vested in their accounts. (6) RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500 The following is a reconciliation of net assets available for benefits per the financial statements to Form 5500:
1997 1996 ---------- ---------- Net Assets Available for Benefits Per The Financial Statements $7,308,345 $6,327,316 Amounts Allocated to Withdrawing Participants (76,905) (56,829) ---------- ---------- Net assets Available for Benefits Per Form 5500 $7,231,440 $6,270,487 ========== ==========
The following is a reconciliation of benefits paid to participants per the financial statements to Form 5500:
1997 -------- Benefits Paid to Participants Per the Financial Statements $964,847 Amounts Allocated to Withdrawing Participants at: December 31, 1997 (76,905) December 31, 1996 56,829 -------- Benefits Paid to Participants Per Form 5500 $944,771 ========
Amounts allocated to withdrawing participants are recorded on Form 5500 for benefit claims that have been processed and approved for payment prior to December 31, but not yet paid as of that date. F-9 11 SCHEDULE I UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN EIN #51-0303670 PLAN #003 ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES DECEMBER 31, 1997
Identity of Issue, Borrower, Description of Investment Including Maturity Lessor, or Similar Party Date, Rate of Interest, Collateral, Par or Current Maturity Value Cost Value - ----- ------------------------------ ---------------------------------------------- ---------- ---------- * United Retail Group, Inc. 71,029 Shares of Common Stock, Par Value $0.001 $ 503,325 $ 287,503 * Scudder Kemper Investments, 98,833.744 Shares of Scudder Balanced Fund, Par 1,484,984 1,665,349 Inc. Value $0.01 * Scudder Kemper Investments, 1,821,466.84 Shares of Scudder Cash Investment 1,821,467 1,821,467 Inc. Trust, Par Value $.01, 7 Day Net Annualized Yield on 12/30/97 of 4.91% * Scudder Kemper Investments, 71,182.807 Shares of Scudder Growth and Income 1,730,199 1,945,426 Inc. Fund, Par Value $0.01 * Scudder Kemper Investments, 1,290.31 Shares of Scudder U.S. Treasury Money 1,290 1,290 Inc. Market Fund, Par Value $.01, 7 Day Net Annualized Yield on 12/30/97 of 4.72% Janus Capital 22,491.340 Shares of Janus Enterprise Fund, Par 653,937 685,536 Value $0.01 Warburg Pincus Funds 20,519.832 Shares of Warburg Pincus 400,562 349,042 International Equity, Par Value $0.01 Fidelity Investments 1,332.958 of Select Electronics, Par Value $0.01 63,530 41,068 T. Rowe Price Associates, Inc. 1,726.697 Shares of T. Rowe Price Science & 60,441 47,070 Technology, Par Value $0.01
* Represents a party in interest The accompanying notes are an integral part of this schedule. F-10 12 SCHEDULE I UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN EIN #51-0303670 PLAN #003 ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES DECEMBER 31, 1997
Description of Investment Including Maturity Identity of Issue, Borrower, Date, Rate of Interest, Collateral, Par or Current Lessor, or Similar Party Maturity Value Cost Value - ----------------------------- ---------------------------------------------- --------- ------------ Fred Alger Management 2,964.922 Shares of Spectra Fund, Inc., Par 56,382 50,819 Value $0.01 Stein Roe 2,411.125 Shares of Stein Roe Young Investor 56,739 56,155 Fund, Par Value $0.01 Philip Morris, Inc. 132 Shares of Common Stock, Par Value $0.33 1/3 5,995 5,973 State Street 553.01 Shares of Seven Seas Money Market Fund, 553 553 Par Value $0.01, 7 Day Net Annualized Yield on 12/30/97 of 5.42% Participant Loans Interest from 7.5% - 9.25% - 351,094 ---------- ---------- $6,839,404 $7,308,345 ========== ==========
* Represents a party in interest The accompanying notes are an integral part of this schedule. F-11 13 SCHEDULE II UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN EIN #51-0303670 PLAN #003 ITEM 27b - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS DECEMBER 31, 1997
Detail Description of Loan Including Dates of Making and Maturity, Interest Rate, The Type and Value of Collateral, Any Principal Interest Unpaid Renegotiation of the Loan Original Received Received Balance and the Terms of the Identity and Amount of During During End of Renegotiation and Other Principal Interest Address of Obligor Loan Year Year Year Material Items Overdue Overdue - -------------------- ---------- --------- -------- -------- ----------------------------- --------- --------- Charlene Macaluso $ 1,142 $ - $ - $ 1,142 Participant loan secured by $ 1,142 $ 151 331 West 75th Place account balance, issued Merrillville, In. 5/23/95 at 9.25%. Balance SS# ###-##-#### and accrued interest reported as deemed distribution in prior years. Karen Denoyer 4,200 - - 4,071 Participant loan secured by 4,071 17 305 N. 59th Street account balance, issued Milwaukee, Wi. 8/5/95 at 9.25%. Reported as SS# ###-##-#### deemed distribution in prior years.
The accompanying notes are an integral part of this schedule. F-12 14 SCHEDULE III UNITED RETAIL GROUP RETIREMENT SAVINGS PLAN EIN #51-0303670 PLAN #003 ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1997
Purchases Sales -------------------------- -------------------------------------------------- Current Current Value Value Description of Asset of Asset on of Asset on Identity of (Include Interest Rate and Purchase Transaction Selling Cost of Transaction Net Gain Party Involved Maturity in Case of a Loan Price Date Price Assets Date or (Loss) - ----------------- -------------------------- ---------- ---------- ---------- ---------- ---------- ---------- *Scudder Kemper Scudder Balanced Fund $1,897,868 $1,897,868 $455,853 $412,884 $455,853 $42,969 Investments, Inc. *Scudder Kemper Scudder Growth and Income 2,104,588 2,104,588 428,216 374,388 428,216 53,828 Investments, Inc. Fund *Scudder Kemper Scudder Cash Investment 2,515,832 2,515,832 694,365 694,365 694,365 -- Investments, Inc. Trust Janus Capital Janus Enterprise Fund 815,402 815,402 162,931 161,465 162,931 1,466
*Represents a party in interest The accompanying notes are an integral part of this schedule. F-13 EX-10.4 6 RESTATED STOCK OPTION PLAN 1 EXHIBIT 10.4 RESTATED UNITED RETAIL GROUP, INC. 1990 STOCK OPTION PLAN (DATED MARCH 6, 1998) WHEREAS, United Retail Group, Inc., a Delaware corporation (the "Company"), desires to attract and retain the best available directors, executives, and key management associates for itself and its direct and indirect subsidiaries, to provide long range inducements for them to remain associated with the Company and its direct and indirect subsidiaries, to provide the highest level of performance by such directors, executives and associates, and to acquire a permanent stake in the Company with the interest and outlook of owners; and WHEREAS, the Board of Directors of the Company adopted the United Retail Group, Inc. 1990 Stock Option Plan and the stockholders of the Company approved the same; and WHEREAS, the Plan was restated as of May 28, 1996; and WHEREAS, the Compensation Committee of the Board of Directors adopted certain amendments to the provisions of the 1990 Plan, effective March 6, 1998, and authorized Optionees to amend their Option Agreements to incorporate the provisions of the Plan contained herein; NOW, THEREFORE, the Company hereby approves and adopts the Restated United Retail Group, Inc. 1990 Stock Option Plan on the following terms and conditions, which shall apply to Option Agreements that are amended to incorporate the provisions contained herein: SECTION 1. DEFINITIONS. The following terms have the following meanings when used in this Plan, in both singular and plural forms: "ASSIGNEE" means a member of the immediate family of an Optionee to whom the Optionee has assigned an Option. "ASSOCIATE" means any full-time associate of an Employer. "CHANGE IN CONTROL" means (a) the acquisition after the Effective Date by any person (defined for the purposes of this Section to mean any person within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), other than the Company, the Chief Executive Officer of the Company, or an employee benefit plan created by the Board of Directors of the Company for the benefit of its Associates, either directly or indirectly, of the beneficial ownership (determined under Rule 13d-3 of the Regulations promulgated by the Securities and Exchange Commission ("SEC") under Section 13(d) of the Exchange Act) of any securities issued by the Company if, after such acquisition, such person is the beneficial owner of securities issued by the Company having 20% or more of the voting power in the election of Directors at the next meeting of the holders of voting securities to be held for such purpose of all of the voting 2 securities issued by the Company, if such person acquired such beneficial ownership without the prior consent of the Board of Directors of the Company; (b) the election of a majority of the Directors, elected at any meeting of the holders of voting securities of the Company, who were not nominated for such election by the Board of Directors or a duly constituted committee of the Board of Directors; or (c) the merger or consolidation with or transfer of substantially all of the assets of the Company to another person if the Board of Directors does not adopt a resolution, before the Company enters into any agreement for such merger, consolidation or transfer, determining that it is not a Change in Control. "CODE" means the Internal Revenue Code of 1986, as now in effect or hereafter amended and as now or hereafter interpreted, construed and applied by regulations, rulings and cases. "COMMITTEE" means (a) the members of the Compensation Committee of the Board of Directors of the Company who are non-employee directors within the meaning of SEC Rule 16b-3(b)(3)(i), who, if they are fewer than all the members, shall constitute an ad hoc committee of the Board of Directors, or (b) if the Compensation Committee has fewer than two members who are such non-employee directors, such other committee of the Board of Directors of the Company having at least two members who are such non-employee directors as may be designated from time to time by the Board of Directors of the Company, provided, however, that if any such Committee is not composed exclusively of such non-employee directors, the Committee will consist only of those members who are such non-employee directors. "COMPANY" means United Retail Group, Inc., a Delaware corporation. "DATE OF GRANT" means (a) in the case of a formula grant to a Director under Section 2, the date of the annual meeting of stockholders of the Company to which the grant relates, (b) in the case of a discretionary Committee grant under Section 3, generally, the date action was taken by the Committee to grant an Option, or (c) in the case of a discretionary Committee grant under Section 3 where the grant was made to an Associate being hired by the Employer, in the sole discretion of the Committee, the Associate's date of hire rather than the date on which the Committee subsequently or previously approved the grant of an Option to him or her; provided, however, that the Date of Grant for purposes of determining whether or not an Option is an Incentive Option will be the later of the date of such action or the date of hire. "DIRECTOR" means a duly elected and acting member of the Board of Directors of the Company. "DISABILITY" means a disability as defined under the Company's long-term disability benefits plan in effect on the Effective Date. "EFFECTIVE DATE" means May 21, 1993. "EMPLOYER" means the Company and any corporation which is a subsidiary corporation of the Company, as defined in Section 424(f) of the Code. "HOLDER" means the person who is, at the time of reference, entitled to exercise an Option. 2 3 "INCENTIVE OPTION" means an Option which meets the requirements of Section 422 of the Code. "NONINCENTIVE OPTION" means any Option which is not an Incentive Option. "NOTICE OF EXERCISE" means a notice of exercise of any Option in a form determined by the Committee. "OPTION" means any right to purchase Shares granted under the Plan. "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms of an Option. "OPTION PRICE" means the price per Share at which an Option is exercisable. "OPTIONEE" means an Associate or Director to whom an unexercised Option has been granted under the Plan. "PLAN" means this Restated United Retail Group, Inc. 1990 Stock Option Plan. "PUBLIC DIRECTOR" means a Director who is neither an Associate nor an LDA Director (as such term is defined in the Restated Stockholders' Agreement dated December 23, 1992 among the Company and certain of its stockholders). "RETIREMENT" means the Termination of an Associate after the Associate's 65th birthday. "SHARES" means shares of Common Stock, with par value equal to $.001 per share, of the Company. "TAX PAYMENT LOAN GUARANTY" shall mean a guaranty of payment made by the Company in the amount and under the circumstances described in Section 5. "TERMINATION" means the termination of the Optionee's relationship with the Company including termination of the Optionee's employment and status as Director. An Optionee who is absent from employment or other relationship with the Company for a reason or purpose and for a period of time approved by the Committee, in its sole discretion, shall not for the period of such absence be deemed, solely because of such absence, to have suffered a Termination, unless and until the Committee otherwise determines. "TERMINATION DATE" means June 8, 2000. "VALUE" means (a) if the Shares are listed or admitted to trading on a national securities exchange (including the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ")), the closing price of Shares on the principal securities exchange on which the Shares are listed or admitted to trading on the day prior to the 3 4 date of determination, or if no closing price can be determined for the date of determination, the most recent date for which such price can reasonably be ascertained, or (b) if the Shares are not listed or admitted to trading on a national securities exchange but are publicly traded, the mean between the representative bid and asked prices of the Shares in the over-the-counter market at the closing of the day prior to the date of determination or the most recent such bid and asked prices then available, as reported by NASDAQ or if the Shares are not then quoted by NASDAQ as furnished by any market maker selected from time to time by the Company for that purpose, or (c) if neither (a) nor (b) is applicable, the fair market value on the applicable date as determined by the Committee in good faith using factors the Committee deems to be relevant including but not limited to any sale of Shares to an independent third party. SECTION 2. FORMULA GRANTS TO DIRECTORS. 2.1. ELIGIBILITY AND FORMULA. All Public Directors elected at each year's annual meeting of the stockholders were automatically granted an Option to purchase 3,000 Shares. All Options granted under this Section were intended to be formula awards under SEC Rule 16b-3 and will not be subject to any provision of the Plan that gives the Committee discretion to change the terms of such Options to the extent that such Committee discretion will cause the Options granted under this Section to cease to be formula awards under SEC Rule 16b-3. 2.2. TERMS. All Options granted to Directors under this Section 2 were on the following terms: 2.2.1. Each Option was a Nonincentive Option. 2.2.2. Each Option has an Option Price equal to the Value of a Share as of the Date of Grant. 2.2.3. Each Option is exercisable as to 20% of the Shares subject to the Option on the completion of the first full year after the Date of Grant and as to an additional 20% of such Shares on the completion of each full year thereafter prior to Termination. 2.2.4. Notwithstanding Section 2.2.3, each Option will become immediately exercisable as to 100% of the Shares subject to the Option upon (a) a Change in Control or (b) the Optionee's death or Disability. 2.2.5. Each Option will lapse on the earliest of (a) the date 10 years and one day after the Date of Grant, or (b) the date one year after the Termination of the Optionee if the Termination is due to death or Disability or if the Optionee dies within 90 days of Termination, or (c) the date 90 days after Termination if the Termination is for any reason other than death or Disability. 4 5 SECTION 3. DISCRETIONARY GRANTS TO ASSOCIATES. 3.1. DISCRETIONARY AWARDS. The Committee granted Options to Associates whom the Committee determined to be executive and key management Associates of the Employer. 3.2. TERMS OF ASSOCIATE OPTIONS. 3.2.1. The Committee determined the terms and conditions of any Options granted to an Associate. 3.2.2. In the absence of any provision in the grant of an Option to the contrary, each Option will lapse on the earliest of (i) for an Incentive Option, the date 10 years after the Date of Grant, and for a Nonincentive Option, the date 10 years and one day after the Date of Grant, (ii) the date one year after the Termination of the Optionee if the Termination is due to death or Disability or if the Optionee dies within 90 days of the date of Termination, or (iii) the date 90 days after Termination for any other reason. 3.2.3. Each Option granted under Section 3 will become immediately exercisable as to 100% of the Shares subject to the Option upon (a) a Change in Control, or (b) the Optionee's death, Disability, or Retirement. 3.2.4. Nonincentive Options may be amended to provide that if the Optionee shall so direct at least 60 days prior to the date of exercise, either (i) the Shares issued upon exercise of the Option shall be issued and registered on the Company's stockholder list as follows: the number of Shares having a Value on the date of exercise equal to the exercise price paid in connection with the exercise shall be issued to and registered in the name of the Optionee and the remainder of the Shares shall be issued to and registered in the name of the trustee under the Company's Supplemental Retirement Savings Plan, or (ii) the number of Shares otherwise issuable upon exercise of the Option shall be reduced by the number of Shares having a Value on the date of exercise equal in the aggregate to the exercise price of the gross number of Options and the net number of Shares after such reduction shall be issued to and registered in the name of the trustee under the Company's Supplemental Retirement Savings Plan. SECTION 4. RESTRICTIONS ON ALL OPTIONS. 4.1. OPTION AGREEMENTS. Any action taken after the Date of Grant may be reflected in an amendment to or restatement of such Option Agreement. 4.2. RESTRICTIONS ON TERMS OF OPTIONS. No Shares will be issued under the Plan unless and until all applicable requirements imposed by federal and state securities laws and by any stock exchanges or NASDAQ upon which the Shares may be listed have been fully met. 4.3. SIX MONTH RULE. Nothing in the Plan will permit an Option to be exercisable within six months of the Date of Grant except in the case of the Optionee's death. 5 6 SECTION 5. TAX PAYMENT LOAN GUARANTY. The Committee will have authority on the exercise by the Optionee of an Option which is not taxed as an Incentive Option, to authorize an unconditional guaranty of payment by the Company of a full recourse loan on terms acceptable to the Committee obtained by the Optionee who exercised the Option from a commercial bank or a registered broker-dealer for the exclusive purpose of paying personal income or excise taxes incurred as a result of such exercise. Loan guaranties will be issued if the Committee, in its sole discretion, determines them to be appropriate and in the best interests of the Employer to assist in the payment of income and excise taxes incurred on exercise of such Option. SECTION 6. EXERCISE OF OPTIONS. 6.1. NOTICE OF EXERCISE. Options may be exercised only by delivery to the Vice President-Human Resources or such other person designated by the Committee of a Notice of Exercise and payment under Section 6.2 for the Shares. Except as specifically provided, an Option shall be exercisable during the Optionee's lifetime only by the Optionee or his or her Assignee. 6.2. DELIVERIES ON EXERCISE. 6.2.1. Any Notice of Exercise will be effective only if the Holder pays to the Company the Option Price for the portion of any Option being exercised and pays the Company an amount equal to any tax withholding required to be made. 6.2.2. The Holder may, in his or her sole discretion, pay all or a portion of the Option Price for the portion of an Option being exercised by surrender and delivery of Shares already owned by the Holder for not less than six months. Any such Shares delivered in full or partial payment of the Option Price shall be valued at the Value as of the date of receipt of the Shares by the Company. 6.2.3. The Committee may, in its sole discretion, permit all or a portion of any amount required to be withheld for taxes to be paid by surrendering and delivering Shares already owned by the Holder or by withholding a portion of the Shares that otherwise would be issued to the Holder upon exercise of the Option. Any such Shares surrendered or withheld will be valued at the Value as of the date of receipt for surrendered Shares or as of the date of exercise of the Option for withheld Shares. Any election to have Shares withheld from the Shares that would otherwise be issued to the Holder upon exercise must be made during or as of the period beginning on the third business day following the date of release of quarterly or annual financial data of the Company and ending on the twelfth business day following such date. 6.3. TIME AND MANNER RESTRICTIONS. The Committee has the right to limit the time and manner of exercise of Options to comply with applicable law including but not limited to federal securities laws. 6 7 6.4. DELIVERY OF SHARES. As soon as reasonably practicable following exercise, a certificate representing the Shares purchased will be registered in the name of the Holder and will be delivered to the Holder or, at the direction of the Holder in accordance with Section 3.2.4, will be registered in the name of the trustee under the Company's Supplemental Retirement Savings Plan and delivered to the trustee. SECTION 7. THE COMMITTEE. 7.1. POWERS OF COMMITTEE. The Committee will have the power to do the following: 7.1.1. To maintain records relating to Optionees, Assignees and Holders; 7.1.2. To prepare and furnish to Optionees, Assignees and Holders all information required by applicable law or the Plan; 7.1.3. To construe and apply the provisions of the Plan and to correct defects and omissions therein; 7.1.4. To engage assistants and professional advisers; 7.1.5. To provide procedures for determination of claims under the Plan; 7.1.6. To make any factual determinations necessary or useful under the Plan; and 7.1.7. To adopt and revise rules, regulations and policies under the Plan. 7.2. DELEGATION. The Committee may delegate to any one or more of its number authority to sign any documents on its behalf or to perform ministerial acts, but no person to whom such authority is delegated shall perform any act involving the exercise of any discretion without first obtaining the concurrence of a majority of the members of the Committee, even though he or she alone may sign any document required by third parties. The Committee may designate a secretary, who may be a member of the Committee. All third parties may rely on any communication signed by the secretary, acting as such, as an official communication from the Committee. 7.3. BINDING EFFECT OF ACTIONS. All actions taken by the Committee under the Plan will be final and binding on all persons. 7.4. INDEMNIFICATION. No member of the Committee, nor any Associate to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to the Plan or awards made thereunder, and each member of the Committee shall be fully indemnified and protected by the Company with respect to any liability he or she may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company's Certificate of Incorporation and By-laws, as amended from time to time. 7 8 SECTION 8. ACTIONS BY COMMITTEE AFTER GRANT. 8.1. GENERAL. The Committee may, subject to the consent of the Holder under Section 9.2, where the action impairs or adversely alters the rights of the Holder, at any time and from time to time after the Date of Grant of any Option, modify the terms of any grant to terms which would have been permitted for such grant on the Date of Grant. 8.2. ANTIDILUTION PROVISIONS. If, as a result of a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, redesignation, recapitalization or other such change, the Shares are increased or decreased or changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another corporation; then: 8.2.1. The number and kind of shares of stock or other securities into which each outstanding Share is changed or for which each such Share may be exchanged, will automatically be substituted for each Share subject to an unexercised Option and for each Share available for additional grants. 8.2.2. The Option Price will be increased or decreased proportionately so that the aggregate Option Price for the securities subject to the Option remains the same as immediately prior to such event and the ratio of the Option Price to the Value of the securities subject to the Option is no more favorable to the Holder than the ratio of the Option Price to the Value immediately before such event. 8.2.3. The Committee shall make such other adjustments to Options and the provisions of the Plan and Option Agreements as may be appropriate and equitable, and not confer on the Holder more favorable benefits than those of the Holder before the event, which adjustments may provide for the elimination of fractional shares or units. 8.3. MERGER OF THE COMPANY. If, directly or indirectly, (a) the Company is a party to a merger or consolidation agreement with a corporation that is not a subsidiary of the Company, (b) the Company is a party to an agreement to sell substantially all of its assets to any person other than a subsidiary of the Company, or (c) any person other than the Company or one of its subsidiaries has publicly announced an offer to purchase more than 5% of the outstanding voting securities of the Company, the Committee, in its sole discretion, may provide that, for a period beginning on the later of the date six months after the Date of Grant or 15 days before the closing of any such proposed transaction, and not extending beyond the earlier of the date on which the Options would otherwise lapse and the date of the closing of such proposed transaction, notwithstanding the provisions of any Option Agreement, all Options granted under the Plan may be exercised by the Holders in whole or in part during such period, and that upon the closing of such proposed transaction, all Options under the Plan will expire and be null and void. At least 15 days prior to the closing of such proposed transaction, the Company must notify each Holder that the Option is exercisable under this Section. If the agreement for such proposed transaction is terminated, (a) all exercises under this Section of Options will be void ab initio (from the outset), 8 9 (b) the Company will refund the applicable Option Price and withholding tax and the Holder will return any Shares issued, and (c) the Option will be reinstated and exercisable thereafter on the terms of the Options without regard to that application of this Section. 8.4. AUTHORITY TO ACCELERATE. Notwithstanding anything else in the Plan to the contrary the Committee may at any time or from time to time, accelerate the time at which Options become exercisable or waive any provisions of the Plan relating to the manner of payment or procedures for the exercise of any Options. Any such acceleration or waiver may be made effective (a) with respect to one or more or all Optionees under the Plan, (b) with respect to some or all of the Shares subject to an Option of any Optionee or (c) for a period of time ending at or before the expiration date of any Option. If the waiver of any provisions constitutes a new grant of an Option or the grant of an additional derivative security for purposes of SEC Rule 16b-3, the date of the waiver will be deemed to be a new Date of Grant for purposes of Section 4.3. If the waiver of any provisions constitutes a new grant of an Option for purposes of Code Section 424, the Committee must determine if the Option retains its status as an Incentive Option. 8.5. SURRENDERS. The Committee may permit the voluntary surrender of all or a portion of any Option granted under the Plan. Upon surrender, the Options surrendered will be canceled and the Shares or units previously subject to them will be available for the grant of other Options in exchange. SECTION 9. AMENDMENT OF THE PLAN. 9.1. RIGHT TO AMEND, ETC. The Company may amend, suspend or terminate the Plan at any time, provided that, unless first approved by the stockholders of the Company, no amendment may be made in the Plan which materially increases the benefits accruing to participants under the Plan. 9.2. IMPAIRMENT OF RIGHTS OF HOLDERS. No amendment to the Plan or the terms of any grant hereunder shall be made so as to impair or adversely alter the rights of any Holder without such Holder's consent. Actions by the Committee under Section 8.2 or 8.3 do not constitute an amendment of the Plan or of any grant. SECTION 10. SHARES RESERVED. The maximum number of Shares which may be issued under the Plan after March 6, 1998 will be 625,700 Shares, subject to adjustment under Section 8.2, and such number of Shares will be reserved for issuance under the Plan. In accordance with the provisions of the Restated 1996 Stock Option Plan, no additional options may be granted hereunder. The Shares issued on exercise of Options may be authorized and unissued Shares or Shares held by the Company as treasury stock. SECTION 11. MISCELLANEOUS. 11.1 REGISTRATION. The Company shall (i) prepare and file with the SEC amendments to the Registration Statement with respect to the Plan as may be necessary or advisable to permit the continued and uninterrupted exercise of Options and the resale of Shares purchased pursuant 9 10 to the exercise of Options or as may be required by the SEC, (ii) execute such other documents, and take such other actions, as may be necessary or advisable to cause the Registration Statement, as the same may be amended, to comply with the Securities Act of 1933 (the "Securities Act") and the Rules and Regulations thereunder, and (iii) register and qualify all Shares purchased pursuant to the exercise of Options for resale by the Holder in the State of New Jersey and in each state adjacent to the State of New Jersey. An amendment to the Registration Statement necessary for the resale of Shares purchased pursuant to the exercise of Options shall be filed by the Company within five business days after the Secretary of the Company receives a written request from a Holder to file an amendment. The Registration Statement shall not be withdrawn by the Company until all the Options shall have lapsed, or until all Shares purchased upon the exercise of Options shall have been resold, as the case may be. 11.2. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or in any Option or Option Agreement will confer upon any Associate or Director any right to continue in the employment or other relationship of any Employer or to be entitled to any remuneration or benefits not set forth in the Plan or such Option Agreement or interfere with or limit the right of any Employer to terminate such Associate's employment or Director's relationship at any time. 11.3. SUCCESSORS AND ASSIGNS. The obligations of the Company under the Plan will be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company. 11.4. RIGHTS AS STOCKHOLDER. No Holder will have any of the rights of a stockholder of the Company with respect to the Shares issuable under the Plan until certificates for such Shares have been issued. 11.5. EXPENSES. All expenses and costs in connection with administration of the Plan will be borne by the Company. 11.6. SECTION 16. Any provision of this Plan will be deemed amended and void to the extent it causes a violation under Section 16 of the Exchange Act and the rules thereunder. 11.7. LIMITATION OF LIABILITY. The liability of the Company under this Plan or in connection with any exercise of an Option is limited to the obligations expressly set forth in the Plan and in any of the Option Agreements and no term or provision of this Plan or any Option Agreement will be construed to impose any further or additional duties, obligations or costs on the Employer not expressly set forth in the Plan and the Option Agreement. 11.8. BENEFICIARIES AND ASSIGNMENT OF RIGHTS. No Option or other right under the Plan may be assigned, pledged, hypothecated, given, or otherwise transferred by the Holder, except that (a) an Optionee will be entitled to designate a beneficiary of the Option upon the Optionee's death by delivering such designation in writing to the Committee, (b) if no such designation is made by the Optionee, the Option will be transferred upon the Optionee's death as determined under the applicable laws of descent and distribution, (c) an Option shall be transferred in 10 11 accordance with a qualified domestic relations order (as defined in the Code), and (d) an Optionee will be entitled to assign an Option to a member of his immediate family, who, after such assignment, shall have all the rights and obligations of the Optionee with respect to the Option, provided, however, that the provisions of the Plan relating to death, Disability, Retirement, Termination and employment, including vesting provisions, shall remain unchanged and shall continue to refer to the Optionee. If an Optionee suffers a Disability and does not have the capacity to exercise an Option, such Option will be exercisable by the Optionee's guardian or attorney-in-fact during the Optionee's lifetime. 11.9. NOTICES. Notices required or permitted to be made under the Plan will be sufficiently made if personally delivered or sent by first-class, registered, or certified mail addressed (a) to the Holder at the Holder's address as set forth in the books and records of the Employer, or (b) to the Company or the Committee at the principal office of the Company to the attention of the Vice President-Human Resources. Any party may change its address through the method described above. 11.10. CAPTIONS. The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit, construe or describe the scope or intent of the provisions of the Plan. 11.11. APPLICABLE LAW. The Plan will be governed by and interpreted, construed, and applied in accordance with the laws of the State of New Jersey to the extent that they apply. 11.12. SEVERABILITY. If any provisions of the Plan are held illegal or invalid for any reason, such illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included. 11 EX-10.5 7 RESTATED STOCK OPTION PLAN 1 EXHIBIT 10.5 RESTATED UNITED RETAIL GROUP, INC. 1990 STOCK OPTION PLAN (DATED MAY 28, 1996) WHEREAS, United Retail Group, Inc., a Delaware corporation (the "Company"), desires to attract and retain the best available directors, executives, and key management associates for itself and its direct and indirect subsidiaries, to provide long range inducements for them to remain associated with the Company and its direct and indirect subsidiaries, to provide the highest level of performance by such directors, executives and associates, and to acquire a permanent stake in the Company with the interest and outlook of owners; and WHEREAS, the Board of Directors of the Company adopted the United Retail Group, Inc. 1990 Stock Option Plan and the stockholders of the Company approved the same; and WHEREAS, the adoption of the 1996 Stock Option Plan required certain amendments to the provisions of the 1990 Plan; NOW, THEREFORE, the Company hereby approves and adopts the Restated United Retail Group, Inc. 1990 Stock Option Plan on the following terms and conditions: SECTION 1. DEFINITIONS. The following terms have the following meanings when used in this Plan, in both singular and plural forms: "ASSOCIATE" means any full-time associate of an Employer. "CHANGE IN CONTROL" means (a) the acquisition after the Effective Date by any person (defined for the purposes of this Section to mean any person within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), other than the Company, the Chief Executive Officer of the Company, or an employee benefit plan created by the Board of Directors of the Company for the benefit of its Associates, either directly or indirectly, of the beneficial ownership (determined under Rule 13d-3 of the Regulations promulgated by the Securities and Exchange Commission ("SEC") under Section 13(d) of the Exchange Act) of any securities issued by the Company if, after such acquisition, such person is the beneficial owner of securities issued by the Company having 20% or more of the voting power in the election of Directors at the next meeting of the holders of voting securities to be held for such purpose of all of the voting securities issued by the Company, if such person acquired such beneficial ownership without the prior consent of the Board of Directors of the Company; (b) the election of a majority of the Directors, elected at any meeting of the holders of voting securities of the Company, who were not nominated for such election by the Board of Directors or a duly constituted committee of the Board of Directors; or (c) the merger or consolidation with or transfer of substantially all of the assets of the Company to another person if the Board of Directors does not adopt a resolution, before the Company enters into any agreement for such merger, consolidation or transfer, determining that it is not a Change in Control. 2 "CODE" means the Internal Revenue Code of 1986, as now in effect or hereafter amended and as now or hereafter interpreted, construed and applied by regulations, rulings and cases. "COMMITTEE" means (a) the members of the Compensation Committee of the Board of Directors of the Company who are non-employee directors within the meaning of SEC Rule 16b-3(b)(3)(i), who, if they are fewer than all the members, shall constitute an ad hoc committee of the Board of Directors, or (b) if the Compensation Committee has fewer than two members who are such non-employee directors, such other committee of the Board of Directors of the Company having at least two members who are such non-employee directors as may be designated from time to time by the Board of Directors of the Company, provided, however, that if any such Committee is not composed exclusively of such non-employee directors, the Committee will consist only of those members who are such non-employee directors. "COMPANY" means United Retail Group, Inc., a Delaware corporation. "DATE OF GRANT" means (a) in the case of a formula grant to a Director under Section 2, the date of the annual meeting of stockholders of the Company to which the grant relates, (b) in the case of a discretionary Committee grant under Section 3, generally, the date action was taken by the Committee to grant an Option, or (c) in the case of a discretionary Committee grant under Section 3 where the grant was made to an Associate being hired by the Employer, in the sole discretion of the Committee, the Associate's date of hire rather than the date on which the Committee subsequently or previously approved the grant of an Option to him or her; provided, however, that the Date of Grant for purposes of determining whether or not an Option is an Incentive Option will be the later of the date of such action or the date of hire. "DIRECTOR" means a duly elected and acting member of the Board of Directors of the Company. "DISABILITY" means a disability as defined under the Company's long-term disability benefits plan in effect on the Effective Date. "EFFECTIVE DATE" means May 21, 1993. "EMPLOYER" means the Company and any corporation which is a subsidiary corporation of the Company, as defined in Section 424(f) of the Code. "HOLDER" means the person who is, at the time of reference, entitled to exercise an Option. "INCENTIVE OPTION" means an Option which meets the requirements of Section 422 of the Code. "NONINCENTIVE OPTION" means any Option which is not an Incentive Option. "NOTICE OF EXERCISE" means a notice of exercise of any Option in a form determined by the Committee. 2 3 "OPTION" means any right to purchase Shares granted under the Plan. "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms of an Option. "OPTION PRICE" means the price per Share at which an Option is exercisable. "OPTIONEE" means an Associate or Director to whom an unexercised Option has been granted under the Plan. "PLAN" means this Restated United Retail Group, Inc. 1990 Stock Option Plan. "PUBLIC DIRECTOR" means a Director who is neither an Associate nor an LDA Director (as such term is defined in the Restated Stockholders' Agreement dated December 23, 1992 among the Company and certain of its stockholders). "RETIREMENT" means the Termination of an Associate after the Associate's 65th birthday. "SHARES" means shares of Common Stock, with par value equal to $.001 per share, of the Company. "TAX PAYMENT LOAN GUARANTY" shall mean a guaranty of payment made by the Company in the amount and under the circumstances described in Section 5. "TERMINATION" means the termination of the Optionee's relationship with the Company including termination of the Optionee's employment and status as Director. An Optionee who is absent from employment or other relationship with the Company for a reason or purpose and for a period of time approved by the Committee, in its sole discretion, shall not for the period of such absence be deemed, solely because of such absence, to have suffered a Termination, unless and until the Committee otherwise determines. "TERMINATION DATE" means June 8, 2000. "VALUE" means (a) if the Shares are listed or admitted to trading on a national securities exchange (including the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ")), the closing price of Shares on the principal securities exchange on which the Shares are listed or admitted to trading on the day prior to the date of determination, or if no closing price can be determined for the date of determination, the most recent date for which such price can reasonably be ascertained, or (b) if the Shares are not listed or admitted to trading on a national securities exchange but are publicly traded, the mean between the representative bid and asked prices of the Shares in the over-the-counter market at the closing of the day prior to the date of determination or the most recent such bid and asked prices then available, as reported by NASDAQ or if the Shares are not then quoted by NASDAQ as furnished by any market maker selected from time to time by the Company for that purpose, or (c) if neither (a) nor (b) is applicable, the fair market value on the applicable date as determined by 3 4 the Committee in good faith using factors the Committee deems to be relevant including but not limited to any sale of Shares to an independent third party. SECTION 2. FORMULA GRANTS TO DIRECTORS. 2.1. ELIGIBILITY AND FORMULA. All Public Directors elected at each year's annual meeting of the stockholders were automatically granted an Option to purchase 3,000 Shares. All Options granted under this Section were intended to be formula awards under SEC Rule 16b-3 and will not be subject to any provision of the Plan that gives the Committee discretion to change the terms of such Options to the extent that such Committee discretion will cause the Options granted under this Section to cease to be formula awards under SEC Rule 16b-3. 2.2. TERMS. All Options granted to Directors under this Section 2 were on the following terms: 2.2.1. Each Option was a Nonincentive Option. 2.2.2. Each Option has an Option Price equal to the Value of a Share as of the Date of Grant. 2.2.3. Each Option is exercisable as to 20% of the Shares subject to the Option on the completion of the first full year after the Date of Grant and as to an additional 20% of such Shares on the completion of each full year thereafter prior to Termination. 2.2.4. Notwithstanding Section 2.2.3, each Option will become immediately exercisable as to 100% of the Shares subject to the Option upon (a) a Change in Control or (b) the Optionee's death or Disability. 2.2.5. Each Option will lapse on the earliest of (a) the date 10 years and one day after the Date of Grant, or (b) the date one year after the Termination of the Optionee if the Termination is due to death or Disability or if the Optionee dies within 90 days of Termination, or (c) the date 90 days after Termination if the Termination is for any reason other than death or Disability. SECTION 3. DISCRETIONARY GRANTS TO ASSOCIATES. 3.1. DISCRETIONARY AWARDS. The Committee granted Options to Associates whom the Committee determined to be executive and key management Associates of the Employer. 3.2. TERMS OF ASSOCIATE OPTIONS. 3.2.1. The Committee determined the terms and conditions of any Options granted to an Associate. 4 5 3.2.2. In the absence of any provision in the grant of an Option to the contrary, each Option will lapse on the earliest of (i) for an Incentive Option, the date 10 years after the Date of Grant, and for a Nonincentive Option, the date 10 years and one day after the Date of Grant, (ii) the date one year after the Termination of the Optionee if the Termination is due to death or Disability or if the Optionee dies within 90 days of the date of Termination, or (iii) the date 90 days after Termination for any other reason. 3.2.3. Each Option granted under Section 3 will become immediately exercisable as to 100% of the Shares subject to the Option upon (a) a Change in Control, or (b) the Optionee's death, Disability, or Retirement. SECTION 4. RESTRICTIONS ON ALL OPTIONS. 4.1. OPTION AGREEMENTS. Any action taken after the Date of Grant may be reflected in an amendment to or restatement of such Option Agreement. 4.2. RESTRICTIONS ON TERMS OF OPTIONS. No Shares will be issued under the Plan unless and until all applicable requirements imposed by federal and state securities laws and by any stock exchanges or NASDAQ upon which the Shares may be listed have been fully met. 4.3. SIX MONTH RULE. Nothing in the Plan will permit an Option to be exercisable within six months of the Date of Grant except in the case of the Optionee's death. SECTION 5. TAX PAYMENT LOAN GUARANTY. The Committee will have authority on the exercise by the Optionee of an Option which is not taxed as an Incentive Option, to authorize an unconditional guaranty of payment by the Company of a full recourse loan on terms acceptable to the Committee obtained by the Optionee who exercised the Option from a commercial bank or a registered broker-dealer for the exclusive purpose of paying personal income or excise taxes incurred as a result of such exercise. Loan guaranties will be issued if the Committee, in its sole discretion, determines them to be appropriate and in the best interests of the Employer to assist in the payment of income and excise taxes incurred on exercise of such Option. SECTION 6. EXERCISE OF OPTIONS. 6.1. NOTICE OF EXERCISE. Options may be exercised only by delivery to the Vice President-Human Resources or such other person designated by the Committee of a Notice of Exercise and payment under Section 6.2 for the Shares. Except as specifically provided, an Option shall be exercisable during the Optionee's lifetime only by the Optionee. 6.2. DELIVERIES ON EXERCISE. 6.2.1. Any Notice of Exercise will be effective only if the Holder pays to the Company the Option Price for the portion of any Option being exercised and pays the Company an amount equal to any tax withholding required to be made. 5 6 6.2.2. The Holder may, in his or her sole discretion, pay all or a portion of the Option Price for the portion of an Option being exercised by surrender and delivery of Shares already owned by the Holder for not less than six months. Any such Shares delivered in full or partial payment of the Option Price shall be valued at the Value as of the date of receipt of the Shares by the Company. 6.2.3. The Committee may, in its sole discretion, permit all or a portion of any amount required to be withheld for taxes to be paid by surrendering and delivering Shares already owned by the Holder or by withholding a portion of the Shares that otherwise would be issued to the Holder upon exercise of the Option. Any such Shares surrendered or withheld will be valued at the Value as of the date of receipt for surrendered Shares or as of the date of exercise of the Option for withheld Shares. Any election to have Shares withheld from the Shares that would otherwise be issued to the Holder upon exercise must be made during or as of the period beginning on the third business day following the date of release of quarterly or annual financial data of the Company and ending on the twelfth business day following such date. 6.3. TIME AND MANNER RESTRICTIONS. The Committee has the right to limit the time and manner of exercise of Options to comply with applicable law including but not limited to federal securities laws. 6.4. DELIVERY OF SHARES. As soon as reasonably practicable following exercise, a certificate representing the Shares purchased registered in the name of the Holder will be delivered to the Holder. SECTION 7. THE COMMITTEE. 7.1. POWERS OF COMMITTEE. The Committee will have the power to do the following: 7.1.1. To maintain records relating to Optionees and Holders; 7.1.2. To prepare and furnish to Optionees and Holders all information required by applicable law or the Plan; 7.1.3. To construe and apply the provisions of the Plan and to correct defects and omissions therein; 7.1.4. To engage assistants and professional advisers; 7.1.5. To provide procedures for determination of claims under the Plan; 7.1.6. To make any factual determinations necessary or useful under the Plan; and 7.1.7. To adopt and revise rules, regulations and policies under the Plan. 6 7 7.2. DELEGATION. The Committee may delegate to any one or more of its number authority to sign any documents on its behalf or to perform ministerial acts, but no person to whom such authority is delegated shall perform any act involving the exercise of any discretion without first obtaining the concurrence of a majority of the members of the Committee, even though he or she alone may sign any document required by third parties. The Committee may designate a secretary, who may be a member of the Committee. All third parties may rely on any communication signed by the secretary, acting as such, as an official communication from the Committee. 7.3. BINDING EFFECT OF ACTIONS. All actions taken by the Committee under the Plan will be final and binding on all persons. 7.4. INDEMNIFICATION. No member of the Committee, nor any Associate to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to the Plan or awards made thereunder, and each member of the Committee shall be fully indemnified and protected by the Company with respect to any liability he or she may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company's Certificate of Incorporation and By-laws, as amended from time to time. SECTION 8. ACTIONS BY COMMITTEE AFTER GRANT. 8.1. GENERAL. The Committee may, subject to the consent of the Holder under Section 9.2, where the action impairs or adversely alters the rights of the Holder, at any time and from time to time after the Date of Grant of any Option, modify the terms of any grant to terms which would have been permitted for such grant on the Date of Grant. 8.2. ANTIDILUTION PROVISIONS. If, as a result of a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, redesignation, recapitalization or other such change, the Shares are increased or decreased or changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another corporation; then: 8.2.1. The number and kind of shares of stock or other securities into which each outstanding Share is changed or for which each such Share may be exchanged, will automatically be substituted for each Share subject to an unexercised Option and for each Share available for additional grants. 8.2.2. The Option Price will be increased or decreased proportionately so that the aggregate Option Price for the securities subject to the Option remains the same as immediately prior to such event and the ratio of the Option Price to the Value of the securities subject to the Option is no more favorable to the Holder than the ratio of the Option Price to the Value immediately before such event. 7 8 8.2.3. The Committee shall make such other adjustments to Options and the provisions of the Plan and Option Agreements as may be appropriate and equitable, and not confer on the Holder more favorable benefits than those of the Holder before the event, which adjustments may provide for the elimination of fractional shares or units. 8.3. MERGER OF THE COMPANY. If, directly or indirectly, (a) the Company is a party to a merger or consolidation agreement with a corporation that is not a subsidiary of the Company, (b) the Company is a party to an agreement to sell substantially all of its assets to any person other than a subsidiary of the Company, or (c) any person other than the Company or one of its subsidiaries has publicly announced an offer to purchase more than 5% of the outstanding voting securities of the Company, the Committee, in its sole discretion, may provide that, for a period beginning on the later of the date six months after the Date of Grant or 15 days before the closing of any such proposed transaction, and not extending beyond the earlier of the date on which the Options would otherwise lapse and the date of the closing of such proposed transaction, notwithstanding the provisions of any Option Agreement, all Options granted under the Plan may be exercised by the Holders in whole or in part during such period, and that upon the closing of such proposed transaction, all Options under the Plan will expire and be null and void. At least 15 days prior to the closing of such proposed transaction, the Company must notify each Holder that the Option is exercisable under this Section. If the agreement for such proposed transaction is terminated, (a) all exercises under this Section of Options will be void ab initio (from the outset), (b) the Company will refund the applicable Option Price and withholding tax and the Holder will return any Shares issued, and (c) the Option will be reinstated and exercisable thereafter on the terms of the Options without regard to that application of this Section. 8.4. AUTHORITY TO ACCELERATE. Notwithstanding anything else in the Plan to the contrary the Committee may at any time or from time to time, accelerate the time at which Options become exercisable or waive any provisions of the Plan relating to the manner of payment or procedures for the exercise of any Options. Any such acceleration or waiver may be made effective (a) with respect to one or more or all Optionees under the Plan, (b) with respect to some or all of the Shares subject to an Option of any Optionee or (c) for a period of time ending at or before the expiration date of any Option. If the waiver of any provisions constitutes a new grant of an Option or the grant of an additional derivative security for purposes of SEC Rule 16b-3, the date of the waiver will be deemed to be a new Date of Grant for purposes of Section 4.3. If the waiver of any provisions constitutes a new grant of an Option for purposes of Code Section 424, the Committee must determine if the Option retains its status as an Incentive Option. 8.5. SURRENDERS. The Committee may permit the voluntary surrender of all or a portion of any Option granted under the Plan. Upon surrender, the Options surrendered will be canceled and the Shares or units previously subject to them will be available for the grant of other Options in exchange. 8 9 SECTION 9. AMENDMENT OF THE PLAN. 9.1. RIGHT TO AMEND, ETC. The Company may amend, suspend or terminate the Plan at any time, provided that, unless first approved by the stockholders of the Company, no amendment may be made in the Plan which materially increases the benefits accruing to participants under the Plan. 9.2. IMPAIRMENT OF RIGHTS OF HOLDERS. No amendment to the Plan or the terms of any grant hereunder shall be made so as to impair or adversely alter the rights of any Holder without such Holder's consent. Actions by the Committee under Section 8.2 or 8.3 do not constitute an amendment of the Plan or of any grant. SECTION 10. SHARES RESERVED. The maximum number of Shares which may be issued under the Plan after May 28, 1996 will be 665,000 Shares, subject to adjustment under Section 8.2, and such number of Shares will be reserved for issuance under the Plan. In accordance with the provisions of the 1996 Stock Option Plan, no additional options may be granted hereunder. The Shares issued on exercise of Options may be authorized and unissued Shares or Shares held by the Company as treasury stock. SECTION 11. MISCELLANEOUS. 11.1 REGISTRATION. The Company shall (i) prepare and file with the SEC amendments to the Registration Statement with respect to the Plan as may be necessary or advisable to permit the continued and uninterrupted exercise of Options and the resale of Shares purchased pursuant to the exercise of Options or as may be required by the SEC, (ii) execute such other documents, and take such other actions, as may be necessary or advisable to cause the Registration Statement, as the same may be amended, to comply with the Securities Act of 1933 (the "Securities Act") and the Rules and Regulations thereunder, and (iii) register and qualify all Shares purchased pursuant to the exercise of Options for resale by the Holder in the State of New Jersey and in each state adjacent to the State of New Jersey. An amendment to the Registration Statement necessary for the resale of Shares purchased pursuant to the exercise of Options shall be filed by the Company within five business days after the Secretary of the Company receives a written request from a Holder to file an amendment. The Registration Statement shall not be withdrawn by the Company until all the Options shall have lapsed, or until all Shares purchased upon the exercise of Options shall have been resold, as the case may be. 11.2. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or in any Option or Option Agreement will confer upon any Associate or Director any right to continue in the employment or other relationship of any Employer or to be entitled to any remuneration or benefits not set forth in the Plan or such Option Agreement or interfere with or limit the right of any Employer to terminate such Associate's employment or Director's relationship at any time. 9 10 11.3. SUCCESSORS AND ASSIGNS. The obligations of the Company under the Plan will be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company. 11.4. RIGHTS AS STOCKHOLDER. No Holder will have any of the rights of a stockholder of the Company with respect to the Shares issuable under the Plan until certificates for such Shares have been issued. 11.5. EXPENSES. All expenses and costs in connection with administration of the Plan will be borne by the Company. 11.6. SECTION 16. Any provision of this Plan will be deemed amended and void to the extent it causes a violation under Section 16 of the Exchange Act and the rules thereunder. 11.7. LIMITATION OF LIABILITY. The liability of the Company under this Plan or in connection with any exercise of an Option is limited to the obligations expressly set forth in the Plan and in any of the Option Agreements and no term or provision of this Plan or any Option Agreement will be construed to impose any further or additional duties, obligations or costs on the Employer not expressly set forth in the Plan and the Option Agreement. 11.8. BENEFICIARIES AND ASSIGNMENT OF RIGHTS. No Option or other right under the Plan may be assigned, pledged, hypothecated, given, or otherwise transferred by the Holder, except that (a) an Optionee will be entitled to designate a beneficiary of the Option upon the Optionee's death by delivering such designation in writing to the Committee, and (b) if no such designation is made by the Optionee, the Option will be transferred upon the Optionee's death as determined under the applicable laws of descent and distribution, and (c) if an Optionee suffers a Disability and does not have the capacity to exercise an Option, such Option will be exercisable by the Optionee's guardian or attorney-in-fact during the Optionee's lifetime. 11.9. NOTICES. Notices required or permitted to be made under the Plan will be sufficiently made if personally delivered or sent by first-class, registered, or certified mail addressed (a) to the Holder at the Holder's address as set forth in the books and records of the Employer, or (b) to the Company or the Committee at the principal office of the Company to the attention of the Vice President-Human Resources. Any party may change its address through the method described above. 11.10. CAPTIONS. The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit, construe or describe the scope or intent of the provisions of the Plan. 11.11. APPLICABLE LAW. The Plan will be governed by and interpreted, construed, and applied in accordance with the laws of the State of New Jersey to the extent that they apply. 10 11 11.12. SEVERABILITY. If any provisions of the Plan are held illegal or invalid for any reason, such illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included. 11 EX-10.6 8 RESTATED STOCK OPTION PLAN 1 EXHIBIT 10.6 RESTATED UNITED RETAIL GROUP, INC. 1996 STOCK OPTION PLAN (DATED MARCH 6, 1998) WHEREAS, United Retail Group, Inc., a Delaware corporation (the "Company"), desires to attract and retain the best available directors, executives, and key management associates for itself and its direct and indirect subsidiaries, to provide long range inducements for them to remain associated with the Company and its direct and indirect subsidiaries, to provide the highest level of performance by such directors, executives and associates, and to acquire a permanent stake in the Company with the interest and outlook of owners; and WHEREAS, the Board of Directors of the Company adopted the United Retail Group, Inc. 1996 Stock Option Plan and the stockholders of the Company approved the same; and WHEREAS, the Compensation Committee of the Board of Directors adopted certain amendments to the provisions of the United Retail Group, Inc. 1996 Stock Option Plan, effective March 6, 1998; NOW, THEREFORE, the Company hereby approves and adopts the Restated United Retail Group, Inc. 1996 Stock Option Plan on the following terms and conditions: SECTION 1. DEFINITIONS. The following terms have the following meanings when used in this Plan, in both singular and plural forms: "ASSIGNEE" means a member of the immediate family of an Optionee to whom the Optionee has assigned an Option. "ASSOCIATE" means any full-time associate of an Employer. "CHANGE IN CONTROL" means (a) the acquisition after the Effective Date by any person (defined for the purposes of this Section to mean any person within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), other than the Company, the Chief Executive Officer of the Company, or an employee benefit plan created by the Board of Directors of the Company for the benefit of its Associates, either directly or indirectly, of the beneficial ownership (determined under Rule 13d-3 of the Regulations promulgated by the Securities and Exchange Commission ("SEC") under Section 13(d) of the Exchange Act) of any securities issued by the Company if, after such acquisition, such person is the beneficial owner of securities issued by the Company having 20% or more of the voting power in the election of Directors at the next meeting of the holders of voting securities to be held for such purpose of all of the voting securities issued by the Company, if such person acquired such beneficial ownership without the prior consent of the Board of Directors of the Company; (b) the election of a majority of the Directors, elected at any meeting of the holders of voting securities of the Company, who were not nominated for such election by the Board of Directors or a duly constituted committee of the 2 Board of Directors; or (c) the merger or consolidation with or transfer of substantially all of the assets of the Company to another person if the Board of Directors does not adopt a resolution, before the Company enters into any agreement for such merger, consolidation or transfer, determining that it is not a Change in Control. "CODE" means the Internal Revenue Code of 1986, as now in effect or hereafter amended and as now or hereafter interpreted, construed and applied by regulations, rulings and cases. "COMMITTEE" means (a) the members of the Compensation Committee of the Board of Directors of the Company who are non-employee directors within the meaning of SEC Rule 16b-3(b)(3)(i), who, if they are fewer than all the members, shall constitute an ad hoc committee of the Board of Directors, or (b) if the Compensation Committee has fewer than two members who are such non-employee directors, such other committee of the Board of Directors of the Company having at least two members who are such non-employee directors as may be designated from time to time by the Board of Directors of the Company, provided, however, that if any such Committee is not composed exclusively of such non-employee directors, the Committee will consist only of those members who are such non-employee directors. "COMPANY" means United Retail Group, Inc., a Delaware corporation. "DATE OF GRANT" means (a) in the case of a formula grant to a Director under Section 2, the date of the annual meeting of stockholders of the Company to which the grant relates, (b) in the case of a discretionary Committee grant under Section 3, generally, the date action is taken by the Committee to grant an Option, or (c) in the case of a discretionary Committee grant under Section 3 where the grant is being made to an Associate being hired by the Employer, in the sole discretion of the Committee, the Associate's date of hire rather than the date on which the Committee subsequently or previously approves the grant of an Option to him or her; provided, however, that the Date of Grant for purposes of determining whether or not an Option is an Incentive Option will be the later of the date of such action or the date of hire. "DIRECTOR" means a duly elected and acting member of the Board of Directors of the Company. "DISABILITY" means a disability as defined under the Company's long-term disability benefits plan in effect on the Effective Date. "EFFECTIVE DATE" means May 28, 1996. "EMPLOYER" means the Company and any corporation which is a subsidiary corporation of the Company, as defined in Section 424(f) of the Code. "HOLDER" means the person who is, at the time of reference, entitled to exercise an Option. "INCENTIVE OPTION" means an Option which meets the requirements of Section 422 of the Code. "NONINCENTIVE OPTION" means any Option which is not an Incentive Option. 2 3 "NOTICE OF EXERCISE" means a notice of exercise of any Option in a form determined by the Committee. "OPTION" means any right to purchase Shares granted under the Plan. "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms of an Option. "OPTION PRICE" means the price per Share at which an Option is exercisable. "OPTIONEE" means an Associate or Director to whom an unexercised Option has been granted under the Plan. "PLAN" means this Restated United Retail Group, Inc. 1996 Stock Option Plan. "PUBLIC DIRECTOR" means a Director who is neither an Associate nor a Director proposed for nomination by Limited Direct Associates, L.P. (pursuant to the Restated Stockholders' Agreement dated December 23, 1992 among the Company and certain of its stockholders, as amended, or any similar arrangement that may replace such Agreement). "RETIREMENT" means the Termination of an Associate after the Associate's 65th birthday. "SHARES" means shares of Common Stock, with par value equal to $.001 per share, of the Company. "TAX PAYMENT LOAN GUARANTY" shall mean a guaranty of payment made by the Company in the amount and under the circumstances described in Section 5. "TERMINATION" means the termination of the Optionee's relationship with the Company including termination of the Optionee's employment and status as Director. An Optionee who is absent from employment or other relationship with the Company for a reason or purpose and for a period of time approved by the Committee, in its sole discretion, shall not for the period of such absence be deemed, solely because of such absence, to have suffered a Termination, unless and until the Committee otherwise determines. "TERMINATION DATE" means May 28, 2006. "VALUE" means (a) if the Shares are listed or admitted to trading on a national securities exchange (including the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ")), the closing price of Shares on the principal securities exchange on which the Shares are listed or admitted to trading on the day prior to the date of determination, or if no closing price can be determined for the date of determination, the most recent date for which such price can reasonably be ascertained, or (b) if the Shares are not listed or admitted to trading on a national securities exchange but are publicly traded, the mean between the representative bid and asked prices of the Shares in the over-the-counter market at 3 4 the closing of the day prior to the date of determination or the most recent such bid and asked prices then available, as reported by NASDAQ or if the Shares are not then quoted by NASDAQ as furnished by any market maker selected from time to time by the Company for that purpose, or (c) if neither (a) nor (b) is applicable, the fair market value on the applicable date as determined by the Committee in good faith using factors the Committee deems to be relevant including but not limited to any sale of Shares to an independent third party. SECTION 2. FORMULA GRANTS TO DIRECTORS. 2.1. ELIGIBILITY AND FORMULA. Beginning on the Effective Date and until the Termination Date, all Public Directors elected at each year's annual meeting of the stockholders will automatically be granted an Option to purchase 3,000 Shares. All Options granted under this Section are intended to be formula awards under SEC Rule 16b-3 and will not be subject to any provision of the Plan that gives the Committee discretion to change the terms of such Options to the extent that such Committee discretion will cause the Options granted under this Section to cease to be formula awards under SEC Rule 16b-3. 2.2. TERMS. All Options granted to Directors under this Section 2 will be on the following terms: 2.2.1. Each Option will be a Nonincentive Option. 2.2.2. Each Option will have an Option Price equal to the Value of a Share as of the Date of Grant. 2.2.3. Each Option will become exercisable as to 20% of the Shares subject to the Option on the completion of the first full year after the Date of Grant and as to an additional 20% of such Shares on the completion of each full year thereafter prior to Termination. 2.2.4. Notwithstanding Section 2.2.3 but subject to Section 4.5, each Option will become immediately exercisable as to 100% of the Shares subject to the Option upon (a) a Change in Control or (b) the Optionee's death or Disability, provided, however, that the Committee within 90 days after the Termination of an Optionee for a reason other than death or Disability may make his Option(s)) immediately exercisable as to 100% of the Shares subject to the Option. 2.2.5. Each Option will lapse on the earliest of (a) the date 10 years and one day after the Date of Grant, or (b) the date one year after the Termination of the Optionee if the Termination is due to death or Disability or if the Optionee dies within 90 days of Termination, or (c) the date 90 days after Termination if the Termination is for any reason other than death or Disability, provided, however, that the Committee within 90 days after the Termination of an Optionee may defer the lapse of his Option (s) to the date 10 years and one day after the Date of the Grant. 4 5 SECTION 3. DISCRETIONARY GRANTS TO ASSOCIATES. 3.1. ELIGIBILITY AND DISCRETIONARY AWARDS. Subject to the limitations contained in the Plan, the Committee may, at any time prior to the Termination Date, grant Options to Associates whom the Committee determines to be executive and key management Associates of the Employer. In determining the Associates to whom Options may be granted and the terms and conditions of such grants, the Committee may take into account the nature of the services rendered by such Associates, their past, present and potential contributions to the success of the Employer, and such other factors as the Committee deems relevant. In no event, however, shall the Committee grant Options to any Associate who is also a Director on the Date of the Grant. 3.2. TERMS OF ASSOCIATE OPTIONS. 3.2.1. Subject to the provisions of the Plan and applicable law, the Committee will, in its sole discretion, determine the terms and conditions of any Options granted to an Associate at the time of grant. 3.2.2. In the absence of any provision in the grant of an Option to the contrary, the Option will have the following terms: (a) The Options will be Incentive Options with respect to the maximum number of Shares that may be Incentive Options and Nonincentive Options with respect to all other Shares. (b) Each Option will have an Option Price equal to the Value of a Share as of the Date of Grant. (c) Each Option will become exercisable as to 20% of the Shares subject to the Option on completion of the first full year of employment of the Optionee after the Date of Grant and as to an additional 20% of such Shares on the completion of each full year of such employment thereafter until Termination. (d) Each Option will lapse on the earliest of (i) for an Incentive Option, the date 10 years after the Date of Grant, and for a Nonincentive Option, the date 10 years and one day after the Date of Grant, (ii) the date one year after the Termination of the Optionee if the Termination is due to death or Disability or if the Optionee dies within 90 days of the date of Termination, or (iii) the date 90 days after Termination for any other reason. 3.2.3. Subject to Section 4.5, each Option granted under Section 3 will become immediately exercisable as to 100% of the Shares subject to the Option upon (a) a Change in Control, or (b) the Optionee's death, Disability, or Retirement. 5 6 3.2.4. Nonincentive Options granted after March 5, 1998 shall provide, and Nonincentive Options granted prior to March 6, 1998 may be amended to provide, that if the Optionee shall so direct at least 60 days prior to the date of exercise, either (i) the Shares issued upon exercise of the Option shall be issued and registered on the Company's stockholder list as follows: the number of Shares having a Value on the date of exercise equal to the exercise price paid in connection with the exercise shall be issued to and registered in the name of the Optionee and the remainder of the Shares shall be issued to and registered in the name of the trustee under the Company's Supplemental Retirement Savings Plan, or (ii) the number of Shares otherwise issuable upon exercise of the Option shall be reduced by the number of Shares having a Value on the date of exercise equal in the aggregate to the exercise price of the gross number of Options and the net number of Shares after such reduction shall be issued to and registered in the name of the trustee under the Company's Supplemental Retirement Savings Plan. SECTION 4. RESTRICTIONS ON ALL OPTIONS. 4.1. OPTION AGREEMENTS. Each grant of an Option must be reduced to writing in an Option Agreement, in such form as the Committee determines, within a reasonable period after the Date of Grant. Any action taken after the Date of Grant may be reflected in an amendment to or restatement of such Option Agreement. 4.2. CORPORATE MERGERS; ACQUISITIONS. The Committee may grant Options having terms and provisions which vary from those specified in the Plan if such Options are granted in substitution for, or in connection with the assumption of, existing options granted by another corporation and assumed or otherwise agreed to be provided for by the Company in connection with a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which any Employer is a party. 4.3. RESTRICTIONS ON TERMS OF OPTIONS. Each Option shall be subject to the following restrictions: 4.3.1. No Shares will be issued under the Plan unless and until all applicable requirements imposed by federal and state securities laws and by any stock exchanges or NASDAQ upon which the Shares may be listed have been fully met. 4.3.2. No Option will have an Option Price less than 100% of the Value of a Share as of the Date of Grant. 4.3.3. Each Option will lapse no later than the date 10 years and one day after the Date of Grant. 4.3.4. Subject to Sections 2.2.4, 3.2.3 and 8, no more than 25% of the Shares subject to each Option may become exercisable before completion of the first full year of employment of the Optionee after the Date of Grant and no more than an additional 25% of such 6 7 Shares may become exercisable before the completion of each full year of such employment thereafter until Termination. 4.4. MAXIMUM NUMBER. In no event shall the Committee grant Options to an Associate to purchase a total of more than 60,000 Shares under the Plan, including any Options that lapse or are surrendered for cancellation. 4.5. SIX MONTH RULE. Nothing in the Plan will permit an Option to be exercisable within six months of the Date of Grant except in the case of the Optionee's death. SECTION 5. TAX PAYMENT LOAN GUARANTY. The Committee will have authority, at the time of grant of a Nonincentive Option or on the exercise by the Optionee of an Option which is not taxed as an Incentive Option, to authorize an unconditional guaranty of payment by the Company of a full recourse loan on terms acceptable to the Committee obtained by the Optionee who exercised the Option from a commercial bank or a registered broker-dealer for the exclusive purpose of paying personal income or excise taxes incurred as a result of such exercise. Loan guaranties will be issued if the Committee, in its sole discretion, determines them to be appropriate and in the best interests of the Employer to assist in the payment of income and excise taxes incurred on exercise of such Option. SECTION 6. EXERCISE OF OPTIONS. 6.1. NOTICE OF EXERCISE. Options may be exercised only by delivery to the Vice President- Human Resources or such other person designated by the Committee of a Notice of Exercise and payment under Section 6.2 for the Shares. Except as specifically provided, an Option shall be exercisable during the Optionee's lifetime only by the Optionee or his or her Assignee. 6.2. DELIVERIES ON EXERCISE. 6.2.1. Any Notice of Exercise will be effective only if the Holder pays to the Company the Option Price for the portion of any Option being exercised and pays the Company an amount equal to any tax withholding required to be made. 6.2.2. The Holder may, in his or her sole discretion, pay all or a portion of the Option Price for the portion of an Option being exercised by surrender and delivery of Shares already owned by the Holder for not less than six months. Any such Shares delivered in full or partial payment of the Option Price shall be valued at the Value as of the date of receipt of the Shares by the Company. 6.2.3. The Committee may, in its sole discretion, permit all or a portion of any amount required to be withheld for taxes to be paid by surrendering and delivering Shares already owned by the Holder or by withholding a portion of the Shares that otherwise would be issued to the Holder upon exercise of the 7 8 Option. Any such Shares surrendered or withheld will be valued at the Value as of the date of receipt for surrendered Shares or as of the date of exercise of the Option for withheld Shares. Any election to have Shares withheld from the Shares that would otherwise be issued to the Holder upon exercise must be made during or as of the period beginning on the third business day following the date of release of quarterly or annual financial data of the Company and ending on the twelfth business day following such date. 6.3. TIME AND MANNER RESTRICTIONS. The Committee has the right to limit the time and manner of exercise of Options to comply with applicable law including but not limited to federal securities laws. 6.4. DELIVERY OF SHARES. As soon as reasonably practicable following exercise, a certificate representing the Shares purchased will be registered in the name of the Holder and will be delivered to the Holder or, at the direction of the Holder in accordance with Section 3.2.4, will be registered in the name of the trustee under the Company's Supplemental Retirement Savings Plan and will be delivered to the trustee. SECTION 7. THE COMMITTEE. 7.1. POWERS OF COMMITTEE. The Committee will have the power to do the following: 7.1.1 To grant Options on such terms not inconsistent with the Plan as the Committee determines; 7.1.2. To maintain records relating to Optionees, Assignees and Holders; 7.1.3. To prepare and furnish to Optionees, Assignees and Holders all information required by applicable law or the Plan; 7.1.4. To construe and apply the provisions of the Plan and to correct defects and omissions therein; 7.1.5. To engage assistants and professional advisers; 7.1.6. To provide procedures for determination of claims under the Plan; 7.1.7. To make any factual determinations necessary or useful under the Plan; and 7.1.8. To adopt and revise rules, regulations and policies under the Plan. 7.2. DELEGATION. The Committee may delegate to any one or more of its number authority to sign any documents on its behalf or to perform ministerial acts, but no person to whom such authority is delegated shall perform any act involving the exercise of any discretion without first obtaining the concurrence of a majority of the members of the Committee, even though he or she alone may sign any document required by third parties. The Committee may designate a secretary, who may be a member of the Committee. All third parties may rely on any communication signed by the secretary, acting as such, as an official communication from the Committee. 8 9 7.3. BINDING EFFECT OF ACTIONS. All actions taken by the Committee under the Plan will be final and binding on all persons. 7.4. INDEMNIFICATION. No member of the Committee, nor any Associate to whom ministerial duties have been delegated, shall be personally liable for any action, interpretation or determination made with respect to the Plan or awards made thereunder, and each member of the Committee shall be fully indemnified and protected by the Company with respect to any liability he or she may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law and to the extent provided in the Company's Certificate of Incorporation and By-laws, as amended from time to time. SECTION 8. ACTIONS BY COMMITTEE AFTER GRANT. 8.1. GENERAL. The Committee may, subject to the consent of the Holder under Section 9.2, where the action impairs or adversely alters the rights of the Holder, at any time and from time to time after the Date of Grant of any Option, modify the terms of any grant to terms which would have been permitted for such grant on the Date of Grant. 8.2. ANTIDILUTION PROVISIONS. If, as a result of a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, redesignation, recapitalization or other such change, the Shares are increased or decreased or changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another corporation; then: 8.2.1. The number and kind of shares of stock or other securities into which each outstanding Share is changed or for which each such Share may be exchanged, will automatically be substituted for each Share subject to an unexercised Option and for each Share available for additional grants. 8.2.2. The Option Price will be increased or decreased proportionately so that the aggregate Option Price for the securities subject to the Option remains the same as immediately prior to such event and the ratio of the Option Price to the Value of the securities subject to the Option is no more favorable to the Holder than the ratio of the Option Price to the Value immediately before such event. 8.2.3. The Committee shall make such other adjustments to Options and the provisions of the Plan and Option Agreements as may be appropriate and equitable, and not confer on the Holder more favorable benefits than those of the Holder before the event, which adjustments may provide for the elimination of fractional shares or units. 8.3. MERGER OF THE COMPANY. If, directly or indirectly, (a) the Company is a party to a merger or consolidation agreement with a corporation that is not a subsidiary of the Company, (b) the Company is a party to an agreement to sell substantially all of its assets to any person other than a subsidiary of the Company, or (c) any person other than the Company or one of its 9 10 subsidiaries has publicly announced an offer to purchase more than 5% of the outstanding voting securities of the Company, the Committee, in its sole discretion, may provide that, for a period beginning on the later of the date six months after the Date of Grant or 15 days before the closing of any such proposed transaction, and not extending beyond the earlier of the date on which the Options would otherwise lapse and the date of the closing of such proposed transaction, notwithstanding the provisions of any Option Agreement, all Options granted under the Plan may be exercised by the Holders in whole or in part during such period, and that upon the closing of such proposed transaction, all Options under the Plan will expire and be null and void. At least 15 days prior to the closing of such proposed transaction, the Company must notify each Holder that the Option is exercisable under this Section. If the agreement for such proposed transaction is terminated, (a) all exercises under this Section of Options will be void ab initio (from the outset), (b) the Company will refund the applicable Option Price and withholding tax and the Holder will return any Shares issued, and (c) the Option will be reinstated and exercisable thereafter on the terms of the Options without regard to that application of this Section. 8.4. AUTHORITY TO ACCELERATE. Notwithstanding anything else in the Plan to the contrary other than Section 4.5, the Committee may, at the time of grant or at any time or from time to time thereafter, accelerate the time at which Options become exercisable or waive any provisions of the Plan relating to the manner of payment or procedures for the exercise of any Options. Any such acceleration or waiver may be made effective (a) with respect to one or more or all Optionees under the Plan, (b) with respect to some or all of the Shares subject to an Option of any Optionee or (c) for a period of time ending at or before the expiration date of any Option. If the waiver of any provisions constitutes a new grant of an Option or the grant of an additional derivative security for purposes of SEC Rule 16b-3, the date of the waiver will be deemed to be a new Date of Grant for purposes of Section 4.5. If the waiver of any provisions constitutes a new grant of an Option for purposes of Code Section 424, the Committee must determine if the Option retains its status as an Incentive Option. 8.5. SURRENDERS. The Committee may permit the voluntary surrender of all or a portion of any Option granted under the Plan. Upon surrender, the Options surrendered will be canceled and the Shares or units previously subject to them will be available for the grant of other Options. SECTION 9. AMENDMENT OF THE PLAN. 9.1. RIGHT TO AMEND, ETC. The Company may amend, suspend or terminate the Plan at any time, provided that, unless first approved by the stockholders of the Company, no amendment may be made in the Plan which: 9.1.1. Materially increases the benefits accruing to participants under the Plan; 9.1.2. Materially increases the number of securities which may be issued under the Plan; or 10 11 9.1.3. Materially modifies the requirements as to eligibility for participation in the Plan. 9.2. IMPAIRMENT OF RIGHTS OF HOLDERS. No amendment to the Plan or the terms of any grant hereunder shall be made so as to impair or adversely alter the rights of any Holder without such Holder's consent. Actions by the Committee under Section 8.2 or 8.3 do not constitute an amendment of the Plan or of any grant. SECTION 10. SHARES RESERVED; PREVIOUS PLANS. The maximum number of Shares which may be issued under the Plan will be 440,000 Shares, subject to adjustment under Section 8.2, and such number of Shares will be reserved for issuance under the Plan. Each previous stock option plan of the Company is hereby amended so that no additional options may be granted thereunder on or after the Effective Date except in exchange for the surrender and cancellation of an equal number of outstanding options issued thereunder, provided, however, all Options granted under any previous stock option plan will remain in full effect. The Shares issued on exercise of Options may be authorized and unissued Shares or Shares held by the Company as treasury stock. If any Option under this Plan terminates, expires, lapses or is canceled as to any Shares, new Options may thereafter be granted for the purchase of such Shares. SECTION 11. MISCELLANEOUS. 11.1 REGISTRATION. The Company shall (i) prepare and file with the SEC amendments to the Registration Statement with respect to the Plan as may be necessary or advisable to permit the continued and uninterrupted exercise of Options and the resale of Shares purchased pursuant to the exercise of Options or as may be required by the SEC, (ii) execute such other documents, and take such other actions, as may be necessary or advisable to cause the Registration Statement, as the same may be amended, to comply with the Securities Act of 1933 (the "Securities Act") and the Rules and Regulations thereunder, and (iii) register and qualify all Shares purchased pursuant to the exercise of Options for resale by the Holder in the State of New Jersey and in each state adjacent to the State of New Jersey. An amendment to the Registration Statement necessary for the resale of Shares purchased pursuant to the exercise of Options shall be filed by the Company within five business days after the Secretary of the Company receives a written request from a Holder to file an amendment. The Registration Statement shall not be withdrawn by the Company until all the Options shall have lapsed, or until all Shares purchased upon the exercise of Options shall have been resold, as the case may be. 11.2. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or in any Option or Option Agreement will confer upon any Associate or Director any right to continue in the employment or other relationship of any Employer or to be entitled to any remuneration or benefits not set forth in the Plan or such Option Agreement or interfere with or limit the right of any Employer to terminate such Associate's employment or Director's relationship at any time. 11.3. SUCCESSORS AND ASSIGNS. The obligations of the Company under the Plan will be binding upon any successor corporation or organization resulting from the merger, consolidation 11 12 or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company. 11.4. RIGHTS AS STOCKHOLDER. No Holder will have any of the rights of a stockholder of the Company with respect to the Shares issuable under the Plan until certificates for such Shares have been issued. 11.5. EXPENSES. All expenses and costs in connection with administration of the Plan will be borne by the Company. 11.6. SECTION 16. Any provision of this Plan will be deemed amended and void to the extent it causes a violation under Section 16 of the Exchange Act and the rules thereunder. 11.7. LIMITATION OF LIABILITY. The liability of the Company under this Plan or in connection with any exercise of an Option is limited to the obligations expressly set forth in the Plan and in any of the Option Agreements and no term or provision of this Plan or any Option Agreement will be construed to impose any further or additional duties, obligations or costs on the Employer not expressly set forth in the Plan and the Option Agreement. 11.8. BENEFICIARIES AND ASSIGNMENT OF RIGHTS. No Option or other right under the Plan may be assigned, pledged, hypothecated, given, or otherwise transferred by the Holder, except that (a) an Optionee will be entitled to designate a beneficiary of the Option upon the Optionee's death by delivering such designation in writing to the Committee, (b) if no such designation is made by the Optionee, the Option will be transferred upon the Optionee's death as determined under the applicable laws of descent and distribution, (c) an Option shall be transferred in accordance with a qualified domestic relations order (as defined in the Code), and (d) an Optionee will be entitled to assign an Option to a member of his immediate family, who, after such assignment, shall have all the rights and obligations of the Optionee with respect to the Option, provided, however, that the provisions of the Plan relating to death, Disability, Retirement, Termination and employment, including vesting provisions, shall remain unchanged and shall continue to refer to the Optionee. If an Optionee suffers a Disability and does not have the capacity to exercise an Option, such Option will be exercisable by the Optionee's guardian or attorney-in-fact during the Optionee's lifetime. 11.9. NOTICES. Notices required or permitted to be made under the Plan will be sufficiently made if personally delivered or sent by first-class, registered, or certified mail addressed (a) to the Holder at the Holder's address as set forth in the books and records of the Employer, or (b) to the Company or the Committee at the principal office of the Company to the attention of the Vice President-Human Resources. Any party may change its address through the method described above. 11.10. CAPTIONS. The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit, construe or describe the scope or intent of the provisions of the Plan. 12 13 11.11. APPLICABLE LAW. The Plan will be governed by and interpreted, construed, and applied in accordance with the laws of the State of New Jersey to the extent that they apply. 11.12. SEVERABILITY. If any provisions of the Plan are held illegal or invalid for any reason, such illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included. 13 EX-10.7 9 RESTATED PERFORMANCE PLAN 1 EXHIBIT 10.7 UNITED RETAIL GROUP, INC. RESTATED 1989 MANAGEMENT STOCK OPTION PLAN (as of May 6, 1998) 1. Purpose. The United Retail Group, Inc. Restated 1989 Management Stock Option Plan (the "Plan") is intended to further the best interest of United Retail Group, Inc. (the "Corporation"), formerly known as Lernmark, Inc., by encouraging key employees of the Corporation to continue association with the Corporation and by providing additional incentive for unusual industry and efficiency through offering an opportunity to acquire an additional proprietary stake in the Corporation and its future growth. The Corporation believes that this goal may best be achieved by granting stock options to key employees of the Corporation ("Optionees"). 2. Restatement: Tax Status. (a) This Plan supercedes and restates the Lernmark, Inc. Management Stock Option Plan (the "Original Plan") that took effect and came into force on July 17, 1989 (the "Original Effective Date"). The stock options granted pursuant to the Original Plan (the "Options") shall remain in full force and effect but shall be subject to and governed by the terms of this Plan rather than the Original Plan. 2 (b) Options shall not be Incentive Stock Options (as defined in Section 422A of the Internal Revenue Code of 1986, as amended). 3. Shares Subject to Plan. There are reserved for issue upon the exercise of Options 1,128,125 Shares. If any Option shall expire or terminate pursuant to Section 7(a) without having been exercised in full, the unissued Shares subject thereto shall not be available again for the purposes of the Plan and the related stock option reserve shall terminate. 4. Effective Date of the Plan. The Plan shall become effective and come into force on the Effective Date. 5. Administration of the Plan. The Compensation Committee of the Board of Directors (the "Committee") shall administer the Plan. 3 6. No Further Grant of Options. The outstanding Options are evidenced by written agreements (each, as amended from time to time, a "Performance Option Agreement") executed by the Chairman of the Board of the Corporation or the Secretary of the Corporation. No further Options shall be granted pursuant to the Plan. 7. Duration of Options. (a) The period for which each Option is effective commenced upon the date of the grant of the Option and shall continue (the "Option Period") until December 31, 1999. (b) The termination of the Optionee's employment with the Corporation by death, Disability, Retirement, Involuntary Termination (regardless of the circumstances of such Involuntary Termination), Voluntary Resignation or otherwise shall not limit the Option Period, or otherwise affect the exercisability, of any Option in any way. (c) Nothing contained herein shall limit whatever right the Corporation or its subsidiaries might otherwise have to terminate the employment of any Optionee. 4 (d) If an Option shall be exercised by the executor or heir at law of a deceased Optionee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such executor or heir to exercise such Option. 8. Exercisability of Options. Options that have not otherwise been terminated pursuant to Section 7(a), cancelled or exercised pursuant to Section 12 or cancelled pursuant to Section 14 shall be exercisable at any time and from time to time during the Option Period commencing on the Effective Date. 9. Beneficiaries and Assignment of Rights. (a) No Option or other right under the Plan may be assigned, pledged, hypothecated, given, or otherwise transferred, except that (a) an Optionee will be entitled to designate a beneficiary of the Option upon the Optionee's death by delivering such designation in writing to the Committee, (b) if no such designation is made by the Optionee, the Option will be transferred upon the Optionee's death as determined under the applicable laws of descent and distribution, (c) an Option shall be transferred in accordance with a qualified domestic relations order (as defined in the Code), and (d) an Optionee will be entitled to assign an Option to a member of his immediate family, who, after such assignment, shall have all the rights and obligations of the Optionee with respect to the Option, provided, however, that the provisions of the Plan relating to death, Disability, Retirement, Termination and employment, including vesting provisions, shall remain unchanged and shall continue to refer to the Optionee (the Optionee and any permitted transferee being referred to as a "Holder"). If an Optionee suffers a Disability and does not have the capacity to exercise an Option, such Option will be exercisable by the Optionee's guardian or attorney-in-fact during the Optionee's lifetime. (b) Subparagraph (a) above to the contrary notwithstanding, if the Optionee shall so direct at least 60 days prior to the date of exercise, either (i) the Shares issued upon exercise of the Option shall be issued and registered on the Corporation's stockholder list as follows: the number of Shares having a Value on the date of exercise equal to the exercise price paid in connection with the exercise shall be issued to and registered in the name of the Optionee and the remainder of the Shares shall be issued to and registered in the name of the trustee under the Corporation's Supplemental Retirement Savings Plan, or (ii) the number of Shares otherwise issuable upon exercise of the Option shall be reduced by the number of Shares having a Value on the date of exercise equal in the aggregate to the exercise price of the gross number of Options and the net number of Shares after such reduction shall be issued to and registered in the name of the trustee under the Corporation's Supplemental Retirement Savings Plan. (c) Subparagraph (a) above to the contrary notwithstanding, the Options may be transferred by the Holder to a public charity or to a Code Section 501(c) private foundation meeting the requirements of Code Section 170(c), provided, however, that the expiration of the term of such Options shall be advanced so as to expire 30 days after the transfer is recorded on the Corporation's books, after which time the transferred options shall be null and void. 5 10. Procedure for Exercise and Payment for Shares. Exercise of an Option shall be made from time to time by the giving of written notice to the Corporation by the Holder. Such written notice shall be deemed sufficient for this purpose only if delivered to the Corporation at its principal offices and only if such written notice states the number of Shares with respect to which the Option is being exercised at the time and, further, states the date, not more than 90 days after the date of such notice, upon which the Shares shall be purchased and payment therefor shall be made. The payments for Shares purchased pursuant to exercise of an Option shall be made at the principal offices of the Corporation. Upon the exercise of the Option, in compliance with the provisions of this Section 10 and Sections 11 and 13(c) and immediately upon receipt by the Corporation of the payment for the Shares so purchased together with the payment of the amount of any taxes required to be collected or withheld as a result of the exercise of the Option, the Corporation shall deliver or cause to be delivered to the Holder so exercising an Option (or to the trustee in accordance with Section 9(b)) a certificate or certificates for the number of Shares with respect to which the Option is so exercised and payment is so made. The Shares shall be registered in the name of the exercising Holder (or to the trustee in accordance with Section 9(b)); provided, however, that in no event shall any Shares be issued pursuant to exercise of an Option until full payment therefor shall have been made by cash or certified or bank cashier's check and not until the Shares have been issued shall the 6 exercising Optionee have any of the rights of a stockholder. For purposes of this Section 10, the date of issuance shall be the date upon which payment in full of the Option Price has been received by the Corporation as provided herein. 11. Requirements of Law. If any law or any regulation of any commission or agency of competent jurisdiction shall require the Corporation or the exercising Optionee to take any action with respect to the Shares acquired by the exercise of an Option, then the date upon which the Corporation shall issue or cause to be issued the certificate or certificates for the Shares shall be postponed until full compliance has been made with all such requirements of law or regulation; provided, however, that the Corporation shall promptly take all necessary action to comply with such requirements of law or regulation. 7 12. Adjustments. (a) In the event that the outstanding shares of the Corporation should, as a result of a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, redesignation, recapitalization or other such change, be increased or decreased or changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation, other than in connection with a Transfer Event then (i) there shall automatically be substituted for each Share subject to an unexercised option (in whole or in part) granted under the Plan the number and kind of shares of stock or other securities into which each outstanding share 8 shall be changed or for which each such Share shall be exchanged, and (ii) the option price per Share or unit of securities shall be increased or decreased proportionately so that the aggregate purchase price of the securities subject to the Option shall remain the same as immediately prior to such event. Any such adjustment may provide for the elimination of fractional shares. Any adjustment to the Options or Option Prices contemplated by this Section 12 may be by action of the Committee. (b) The Corporation shall give the Optionees not less than 15 days' notice of any Transfer Event. (c) If an Option shall not have been exercised and a Sale of the Corporation shall close after at least 15 days' notice has been given to the Optionees, the Options then outstanding shall automatically be cancelled, effective upon the closing of the Sale of the Corporation, in exchange for either (i) a cash payment per Share to the respective Optionees equal to the difference between the Option Price and the cash price (or the fair market value of non-cash consideration) per share of Common Stock to be received in the Sale of the Corporation (the "Option Value"), or (ii), if outstanding shares of Common Stock will be converted into or exchanged for different shares of stock or other securities in accordance with the Sale of the Corporation, delivery to the Optionee of the number of such shares of stock or other securities having a fair market value equal to the product of 9 the Option Value multiplied by the number of Shares. In the event an Option is cancelled pursuant to the preceding sentence, the Committee shall determine, in its sole discretion, whether the Corporation shall pay cash to the Optionee in accordance with clause (i) of the preceding sentence or deliver securities having an equivalent value in accordance with clause (ii) of the preceding sentence. 13. Termination, Amendment, Discontinuance of the Plan; Reimbursement for Taxes. (a) This Plan shall terminate at the end of the Option Period of all the Options unless it shall have sooner terminated by the entire 1,128,125 Shares subject to the Plan having been issued or cancelled pursuant to Section 7(a), 12 or Section 14. (b) The Board of Directors may not alter or amend or discontinue or revoke or otherwise impair any outstanding Options which remain unexercised. (c) The Corporation may require an Optionee exercising an Option granted hereunder to reimburse the Corporation for any taxes required by any government to be withheld or otherwise deducted and paid by the Corporation in respect of the issuance or disposition of Shares. In lieu thereof, the Corporation shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Corporation to the Optionee upon such terms and conditions as the Committee shall prescribe. The Corporation may, in its discretion, hold the stock certificate to which 10 such Optionee is entitled upon the exercise of an Option as security for the payment of such withholding tax liability, until cash sufficient to pay that liability has been accumulated. In addition, the Corporation shall be authorized to effect any such withholding upon exercise of an Option by retention of Shares issuable upon such exercise having a fair market value at the date of exercise which is equal to the amount to be withheld. 14. Liquidation of the Corporation. In the event of the complete liquidation or dissolution of the Corporation other than as incident to a merger or reorganization, any Options remaining unexercised shall be deemed cancelled without regard to or limitation by any other provision of the Plan. 15. Definitions. For purpose of the Plan, the following terms have the meanings indicated below: (a) Affiliate shall mean, with respect to any Stockholder, (i) any Person who, directly or indirectly, is in control of, is controlled by or is under common control with, the Stockholder, and (ii) any Person who is a director or officer of the Stockholder or of any Person described in clause (i) above. (b) Board of Directors shall mean the Board of Directors of the Corporation. 11 (c) Common Stock shall mean shares of the Corporation's common stock, $.001 par value per share. (d) Disability. The term "Disability," with respect to an Optionee, shall have the meaning set forth in the Restated Employment Agreement between the Corporation and the Optionee. (e) Effective Date shall be March 17, 1992. 12 (f) Involuntary Termination shall mean termination of the Optionee's employment with the Corporation by the Corporation, which termination is not the result of the Optionee's Retirement, death, Disability or Voluntary Resignation. 13 (g) Option Value shall have the meaning set forth in Section 12(c). (h) Option Price shall mean the exercise price per Share set forth in a Performance Option Agreement. (i) Performance Option Agreement shall have the meaning set forth in Section 6. 14 (j) Retirement shall mean, with respect to any Optionee, such Optionee's termination of employment at or after attainment of age 65 if the Optionee has been continuously 15 employed by the Corporation (including any predecessor corporation) or any of its subsidiaries for at least 10 years. (k) Shares shall mean shares of Common Stock issuable upon exercise of Options. (l) Transfer Event shall mean either of the following: (i) the completion of the sale of that number of shares of Common Stock pursuant to an effective registration statement under the 1933 Act (other than a registration statement relating to shares issuable upon exercise of employee stock options or in connection with any employee benefit plan maintained by the Corporation or any of its subsidiaries) representing, when taken together with all shares of Common Stock sold under previous registration statements which were not in connection with employee stock options or employee benefit plans, at least 50% of the then outstanding shares of Common Stock, or (ii) the consummation of a merger or consolidation of the Corporation with or into another person that is not a parent or subsidiary of the Corporation as a result of which those persons who were stockholders of the Corporation immediately prior to such transaction own, in the aggregate, less than a majority of the outstanding voting capital stock of the surviving or resulting corporation or the 16 consummation of the sale of all or substantially all of the Corporation's assets to a person that is not a parent or subsidiary of the Corporation (a "Sale of the Corporation"). (m) Voluntary Resignation shall mean voluntary termination of the Optionee's employment with the Corporation by the Optionee, excluding termination of employment by Retirement, death, Disability or Involuntary Termination. * * * EX-13 10 SECTIONS OF 1997 ANNUAL REPORT 1 EXHIBIT 13
TABLE OF CONTENTS Page ---- Management's Discussion and Analysis of Financial Condition and Results of Operations 3 Report of Independent Accountants 8 Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997 9 Consolidated Statements of Operations for each of the three fiscal years ended January 31, 1998 10 Consolidated Statements of Cash Flows for each of the three fiscal years ended January 31, 1998 11 Consolidated Statements of Stockholders' Equity for each of the three fiscal years ended January 31, 1998 12 Notes to the Consolidated Financial Statements 13 Selected Financial Data 23
[LOGO] UNITED RETAIL GROUP, INC. is a leading nationwide specialty retailer of private label large-size women's apparel and accessories featuring the AVENUE brand. The Company seeks to create a fashion-current, upscale image at prices that appeal to the middle mass market. [LOGO] UNITED RETAIL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) [LOGO]
Fiscal Year Fiscal Year Ended Ended Feb. 1, 1997 Jan. 31, 1998 ------------ ------------- Net sales $363,074 $361,751 (Loss) income before income taxes (6,823) 3,050 Benefit from income taxes (1,018) (828) Provision for (benefit from) write-down (write-up) of the compensation related deferred tax asset 342 (953) Net (loss) income (6,147) 4,831 Net (loss) income per common share: Basic (0.50) 0.40 Diluted (0.50) 0.37 Weighted average number of outstanding shares (in thousands): Basic 12,190 12,190 Diluted 12,190 13,187 Stores open at end of period 569 522
2 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL 1997 VERSUS FISCAL 1996 Net sales for fiscal 1997 decreased 0.4% from fiscal 1996, to $361.8 million from $363.1 million, principally from a decrease in unit sales volume partially offset by an increase in average price. Average stores open decreased from 581 to 557 as underperforming stores were closed. (For the two-month period ended April 4, 1998, net sales increased 6.7% from the comparable period in the previous year, to $61.6 million from $57.7 million, but the comparison does not take into consideration that Easter occurred in the two-month period in fiscal 1997 but not in the same period in fiscal 1998. There is no assurance that annual net sales will increase.) Comparable store sales for fiscal 1997 increased 2.8%. (For the two-month period ended April 4, 1998, comparable store sales increased 12.7% but there is no assurance that comparable store sales will continue to increase.) Gross profit increased by $10.0 million to $83.7 million in fiscal 1997 from $73.7 million in fiscal 1996, increasing as a percentage of net sales to 23.1% from 20.3%. The increase in gross profit as a percentage of net sales was primarily attributable to an increase in the merchandise margin rate. (The merchandise margin rate increased substantially for the two-month period ended April 4, 1998 compared to the comparable period in the previous year, but there is no assurance that the merchandise margin rate will continue to increase.) General, administrative and store operating expenses were $80.5 million in fiscal 1997, compared to $80.1 million in the previous year. As a percentage of net sales, general, administrative and store operating expenses increased to 22.2% from 22.1%. During fiscal 1997, the Company had operating income of $3.2 million, equivalent to 0.9% of sales, compared to an operating loss of $6.4 million in the previous year. Net interest expense was $0.2 million in fiscal 1997 and $0.4 million in the previous year. The net expense reduction resulted primarily from lower fees to lenders for credit facilities. The Company had an income tax benefit of $0.8 million in fiscal 1997 and of $1.0 million in the previous year. Included in the fiscal 1997 income tax benefit is the reversal of the $1.8 million valuation allowance with respect to the deferred tax asset established in fiscal 1996. As part of certain non-recurring charges in fiscal 1992, the Company incurred a non-cash compensation expense of $15.6 million because the stock options ("Performance Options") previously granted to Raphael Benaroya, Chairman of the Board, President and Chief Executive Officer of the Company, and George R. Remeta, Vice Chairman and Chief Financial Officer of the Company, vested in March 1992 and became exercisable until December 1999. The non-cash compensation expense resulted in the recognition of certain future tax benefits realizable at the time Performance Options are exercised based on an assumption that the market price of the Common Stock at the time of exercise will be $15 per share (the price of the initial public offering in March 1992). A write-down of $0.3 million was taken in fiscal 1996 based on the market price of Common Stock at the end of fiscal 1996. A write-up of $1.0 million was taken in fiscal 1997 based on the market price of Common Stock at the end of fiscal 1997. The Company had net income of $4.8 million for fiscal 1997, which included the write-up of the compensation related deferred tax asset and the reversal of the valuation allowance. There is no assurance that the Company will continue to be profitable. The Company incurred a net loss of $6.1 million for fiscal 1996, which reflected the write-down of the compensation related deferred tax asset, and the valuation allowance. The write-down and the allowance, net of certain other tax entries, totaled $1.4 million for fiscal 1996. Excluding the write-up, the write-down and the allowance, net of certain other tax entries, the Company would have had net income of $2.0 million for fiscal 1997 and the Company would have incurred a net loss of $4.7 million for fiscal 1996. 1 3 FISCAL 1996 VERSUS FISCAL 1995 Net sales for fiscal 1996 (52 weeks) decreased to $363.1 million from $369.2 million in fiscal 1995 (53 weeks), principally from a decrease in unit sales volume rather than a change in average price. Average stores open increased from 552 to 581. Comparable store sales for the comparable 52-week periods decreased 3.6% for fiscal 1996. In fiscal 1996, the Company replaced its older proprietary brands of clothing with its new AVENUE brand. (Substantially all clothing carried a proprietary brand.) The transition from the older proprietary brands of clothing may have had an adverse effect on sales. Gross profit decreased by $2.7 million to $73.7 million in fiscal 1996 from $76.4 million in fiscal 1995, decreasing as a percentage of net sales to 20.3% from 20.7%. The decrease in gross profit as a percentage of net sales was primarily attributable to higher occupancy costs as a percentage of net sales, partially offset by a reduction in payroll costs for merchants and planners. General, administrative and store operating expenses were $80.1 million in fiscal 1996, compared to $80.2 million in the previous year. As a percentage of net sales, general, administrative and store operating expenses increased to 22.1% from 21.7%, principally from higher store payroll costs as a percentage of net sales partially offset by lower administrative costs and insurance costs. During fiscal 1996, the Company incurred an operating loss of $6.4 million compared to an operating loss of $3.8 million for fiscal 1995. The fiscal 1996 operating loss was 1.8% of net sales. Net interest expense was $0.4 million for fiscal 1996, compared to net interest income of $0.1 million in 1995, principally as a result of lower interest income in fiscal 1996. The Company had an income tax benefit of $1.0 million both in fiscal 1996 and in fiscal 1995 and recorded write-downs of the compensation related deferred tax asset of $0.3 million in fiscal 1996 and $1.9 million in fiscal 1995. The income tax benefit in fiscal 1996 and fiscal 1995 resulted from operating losses, the effect of which was partially offset in fiscal 1996 by a $1.8 million valuation allowance in the full amount of the net deferred tax asset remaining after the write-down taken in fiscal 1996. The Company incurred a net loss of $6.1 million in fiscal 1996 and of $4.6 million in fiscal 1995. BRANDED MERCHANDISING The Company believes that certain other chains in the women's apparel specialty store industry experienced declines in average transactions per store in recent years, partly as a result of increased competition from other channels of distribution, including catalogues, mass merchants, discounters and off-price stores. The Company's average number of transactions per store also declined in each of the last five fiscal years. The cumulative adverse effect on net sales per store has been material. Further, the decline in the Company's average transactions during the last three fiscal years was accelerated by increased competition within the industry, including "going out of business" sales that accompanied the liquidation of retail specialty store chains that failed. Commencing in fiscal 1996, the Company has been implementing a branded merchandising strategy that is intended, among other things, to reverse the annual declines in average transactions. The strategy is expected to take several more years to complete. The brand identity is being defined, new marketing materials expressing that identity are being created and direct marketing of the brand is being increased. This paragraph contains forward-looking information under the 1995 Private Securities Litigation Reform Act (the "Reform Act"), which is subject to the uncertainties and other risk factors referred to under the caption "Future Results." 2 4 LIQUIDITY AND CAPITAL RESOURCES Net cash provided from operating activities in fiscal 1997 was $16.0 million. The Company's cash on hand was $31.1 million at January 31, 1998 and $18.3 million at February 1, 1997. Inventory declined to $38.0 million at January 31, 1998 from $40.8 million at February 1, 1997. The Company's inventory levels peak in early May and November. 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. As of January 31, 1998, trade letters of credit for the account of the Company were outstanding in the amount of $19.4 million. (A standby letter of credit was also outstanding for $2.0 million as collateral for obligations in the ordinary course of business under casualty insurance policies.) 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. 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 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. 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 January 31, 1998, the combined availability of the Companies was $8.9 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. 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. 3 5 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. Premiums paid by the bank are expected to have a material favorable effect on the Company's general, administrative and store operating expenses in fiscal 1998. The preceding sentence 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." 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 current bank the accounts receivable from credit card customers. 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." STORES The Company leased 522 retail stores at January 31, 1998, of which 301 stores were located in strip shopping centers, 198 stores were located in malls and 23 stores were located in downtown shopping districts. Total retail square footage was 2.1 million square feet. During fiscal 1997, the Company closed 49 stores (generally at the expiration of their leases) and opened 2 new stores. The Company believes that these store closings will have a favorable effect on the Company's operating income as a percentage of net sales. In fiscal 1998, 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. The preceding two 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." TAX MATTERS The exercise of certain Performance Options in February 1998 provides income tax deductions for the Company that, management expects, will reduce income tax payments by approximately $1.8 million in fiscal 1998 or thereafter based on current tax laws. This paragraph contains forward-looking information under the Reform Act, which is subject to the uncertainties and other risk factors referred to under the caption "Future Results." The Company's federal income tax returns for fiscal 1994, fiscal 1995 and fiscal 1996 are being audited by the Internal Revenue Service. 4 6 COMPUTER SYSTEMS The Company is modifying the applications software programs that are essential to its operations to accommodate dates after 1999, and its vendor is modifying the operating systems used by the Company. The cost of future modifications is expected to be less than $1.0 million. The Company has scheduled 268 projects to analyze and, if necessary, modify applications software programs to ensure that all its systems are Year 2000 compliant. As of March 31, 1998, 159 projects were completed, 51 projects were underway and 58 projects were scheduled to begin later in fiscal 1998. The programs being modified are being installed as part of each project. Integrated testing of all the Company's systems is scheduled to be completed before fiscal 1999. There is no assurance, however, that integrated testing will not reveal the need for further modifications. 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 (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) inability of the computer links between the Company and certain of its banks 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, (ix) disruptions in the sourcing of merchandise abroad, including (a) China's claims to sovereignty over Taiwan, (b) North Korea's claims to sovereignty over South Korea, (c) exchange rate fluctuations, (d) political instability, (e) trade sanctions or restrictions, (f) changes in quota and duty regulations, (g) delays in shipping or (h) increased costs of transportation, and (x) disruptions in the telecommunications, banking, transportation and utilities industries caused by the inability of their computer systems to accommodate dates after 1999. 5 7 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of United Retail Group, Inc., We have audited the accompanying consolidated balance sheets of United Retail Group, Inc. and Subsidiaries (the "Company") as of January 31, 1998 and February 1, 1997 and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three fiscal years ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Retail Group, Inc. and Subsidiaries as of January 31, 1998 and February 1, 1997 and the consolidated results of their operations and their cash flows for each of the three fiscal years ended January 31, 1998 in conformity with generally accepted accounting principles. Coopers & Lybrand, L.L.P. New York, New York February 13, 1998 6 8 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
FEB. 1, 1997 JAN. 31, 1998 - ------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 18,264 $ 31,122 Income taxes receivable 229 -- Accounts receivable 1,297 571 Inventory 40,778 38,003 Prepaid rents 4,485 3,999 Other prepaid expenses 2,656 2,607 - ------------------------------------------------------------------------------- Total current assets 67,709 76,302 Property and equipment, net 54,892 48,231 Deferred charges and other intangible assets, net of accumulated amortization of $1,490 and $1,784 7,031 7,058 Deferred income taxes -- 2,685 Other assets 715 451 - ------------------------------------------------------------------------------- TOTAL ASSETS $ 130,347 $ 134,727 =============================================================================== LIABILITIES CURRENT LIABILITIES: Current portion of distribution center financing $ 978 $ 1,052 Accounts payable, trade 16,543 12,596 Accrued expenses 13,247 18,779 - ------------------------------------------------------------------------------- Total current liabilities 30,768 32,427 Distribution center financing 11,355 10,308 Other long-term liabilities 8,011 6,948 - ------------------------------------------------------------------------------- TOTAL LIABILITIES 50,134 49,683 =============================================================================== Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, $.001 par value; authorized 1,000,000; none issued Common stock, $.001 par value; authorized 30,000,000; issued 12,680,375; and outstanding 12,190,375 13 13 Additional paid-in capital 78,259 78,259 Retained earnings 2,523 7,354 Treasury stock (490,000 shares) at cost (582) (582) - ------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 80,213 85,044 - ------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 130,347 $ 134,727 ===============================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements. 7 9 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share amounts)
53 WEEKS 52 WEEKS 52 WEEKS FISCAL YEAR ENDED FEB. 3, 1996 FEB. 1, 1997 JAN. 31, 1998 - --------------------------------------------------------------------------------------------------- NET SALES $ 369,173 $ 363,074 $ 361,751 Cost of goods sold, including buying and occupancy costs 292,790 289,421 278,078 - --------------------------------------------------------------------------------------------------- Gross profit 76,383 73,653 83,673 General, administrative and store operating expenses 80,170 80,063 80,469 - --------------------------------------------------------------------------------------------------- Operating (loss) income (3,787) (6,410) 3,204 Interest (income) expense, net (119) 413 154 - --------------------------------------------------------------------------------------------------- (Loss) income before income taxes (3,668) (6,823) 3,050 Benefit from income taxes (957) (1,018) (828) Provision for (benefit from) write-down (write-up) of the compensation related deferred tax asset 1,928 342 (953) - --------------------------------------------------------------------------------------------------- Net (loss) income ($4,639) ($6,147) $4,831 =================================================================================================== Net (loss) income per share Basic ($0.38) ($0.50) $0.40 =================================================================================================== Diluted ($0.38) ($0.50) $0.37 =================================================================================================== Weighted average number of shares outstanding Basic 12,190,294 12,190,375 12,190,375 Diluted 12,190,294 12,190,375 13,187,609
The accompanying notes are an integral part of the Consolidated Financial Statements. 8 10 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
FISCAL YEAR ENDED FEB. 3, 1996 FEB. 1, 1997 JAN. 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ($ 4,639) ($ 6,147) $ 4,831 Adjustments to reconcile net (loss) income to net cash provided from operating activities: Depreciation and amortization of property and equipment 10,101 9,983 8,540 Amortization of deferred charges and other intangible assets 224 225 287 Loss on disposal of assets 379 463 496 Gain on sale of investments -- -- (43) Compensation expense 246 77 -- Provision for (benefit from) deferred income taxes 3,645 811 (2,685) Deferred lease assumption revenue amortization (455) (531) (655) Lease assumption proceeds 3,523 -- -- Changes in operating assets and liabilities: Accounts receivable 647 473 726 Income taxes receivable (2,719) 2,490 229 Inventory (2,883) (377) 2,775 Accounts payable and accrued expenses 2,194 656 223 Prepaid expenses (1,004) 268 535 Income taxes payable (1,627) -- 1,379 Other assets and liabilities 505 (768) (606) - ----------------------------------------------------------------------------------------------------- Net Cash Provided from Operating Activities 8,137 7,623 16,032 - ----------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital expenditures (10,523) (4,602) (2,375) Deferred payment for property and equipment 934 (896) 40 Proceeds from sale of investment -- -- 410 - ----------------------------------------------------------------------------------------------------- Net Cash Used for Investing Activities (9,589) (5,498) (1,925) - ----------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Debt issuance costs -- -- (276) Net proceeds from issuance of common stock 4 -- -- Repayments of long-term debt (832) (901) (973) - ----------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (828) (901) (1,249) - ----------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (2,280) 1,224 12,858 Cash and cash equivalents, beginning of period 19,320 17,040 18,264 - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 17,040 $ 18,264 $ 31,122 =====================================================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements. 9 11 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (shares and dollars in thousands)
COMMON COMMON STOCK STOCK ADDITIONAL TREASURY TOTAL SHARES $.001 PAID-IN RETAINED STOCK, STOCKHOLDERS' OUTSTANDING PAR VALUE CAPITAL EARNINGS AT COST EQUITY - ------------------------------------------------------------------------------------------------------------- Balance, January 28, 1995 12,189 $13 $77,932 $ 13,309 ($582) $90,672 - ------------------------------------------------------------------------------------------------------------- Exercise of stock options 1 4 4 Compensation expense 246 246 Net loss (4,639) (4,639) - ------------------------------------------------------------------------------------------------------------- Balance, February 3, 1996 12,190 13 78,182 8,670 (582) 86,283 - ------------------------------------------------------------------------------------------------------------- Compensation expense 77 77 Net loss (6,147) (6,147) - ------------------------------------------------------------------------------------------------------------- Balance, February 1, 1997 12,190 13 78,259 2,523 (582) 80,213 - ------------------------------------------------------------------------------------------------------------- Net income 4,831 4,831 - ------------------------------------------------------------------------------------------------------------- Balance, January 31, 1998 12,190 $13 $78,259 $ 7,354 ($582) $85,044 =============================================================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements. 10 12 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION On July 17, 1989, Sizes Unlimited Acquisition Corporation was merged with and into Lernmark, Inc. ("Lernmark"), a wholly-owned subsidiary of The Limited, Inc. ("The Limited"), with Lernmark being the surviving corporation. Lernmark was the holding company for Lerner Woman/Sizes Unlimited, a division of The Limited. Lernmark subsequently changed its name to United Retail Group, Inc. ("United Retail"). The Limited, through an affiliate, initially retained a one-third interest in United Retail through its acquisition of 2.5 million shares of United Retail's Common Stock. For financial reporting purposes, the acquisition was accounted for using the purchase method and, accordingly, the results of operations have been included in the financial statements from April 30, 1989, which is considered to be the effective date. The total cost of the acquisition, which includes costs directly related to the acquisition, was allocated among the net assets acquired on the basis of the respective fair values of such net assets adjusted for the one-third interest initially retained by The Limited. The consolidated financial statements include the accounts of United Retail and its subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances have been reclassified to conform with the fiscal 1997 presentation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the financial statements and notes by the calendar year in which the fiscal year commences. Fiscal year 1997 consisted of 52 weeks and ended on January 31, 1998. Fiscal year 1996 consisted of 52 weeks and ended on February 1, 1997. Fiscal year 1995 consisted of 53 weeks and ended on February 3, 1996. NET RETAIL SALES AND REVENUES Sales are net of returns and exclude sales tax. Revenues include sales from all stores operating during the period. MARKETING COSTS The Company expenses marketing costs when the event occurs. Marketing expense, included in cost of goods sold in the accompanying consolidated statements of operations, was $6.7 million, $6.5 million, and $4.9 million in fiscal 1997, 1996 and 1995, respectively. CASH AND CASH EQUIVALENTS Cash and cash equivalents include amounts on deposit with financial institutions with maturities of less than 90 days. INVENTORY Inventory is stated at the lower of cost or market, on a first-in, first-out basis, utilizing the retail method. 11 13 PROPERTY AND DEPRECIATION Depreciation and amortization of property and equipment are computed for financial reporting purposes on a straight-line basis, using service lives of 40 years for the distribution center building, the life of the lease for leaseholds, improvements, furniture and fixtures, 20 years for material handling equipment and 5 years for other property. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net income. Maintenance, repairs and minor renewals are charged to expense as incurred. Renewals and betterments which extend service lives are capitalized. COMPUTATION OF INCOME (LOSS) PER COMMON 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 fiscal 1995 and fiscal 1996 because the effect would be anti-dilutive. For fiscal 1995, 1996 and 1997, the diluted net (loss) income per share would have been ($0.22), ($.48) and $0.29 per share, respectively, if the provision for (benefit from) the write-down (write-up) of the compensation related deferred tax asset of $1.9 million, $0.3 million, and ($1.0) million, respectively, was excluded (see Note 8). DEFERRED CHARGES AND OTHER INTANGIBLE ASSETS Certain loan facility fees and other costs of obtaining financing are being amortized on a straight-line basis over the term of the related loan. Goodwill, as of January 31, 1998, of $6.4 million represents the excess cost over the fair market value of the net assets of the businesses acquired. Goodwill is being amortized over a 40-year period using the straight-line method. The Company acquired certain trademarks during fiscal 1996 in the total amount of $410,000. These amounts are being amortized over 10 and 15 year periods using the straight-line method. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of deferred charges and other intangible assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that the asset should be evaluated for possible impairment, the Company will use an estimate of the related business segment's undiscounted net cash flows over the remaining life of the asset in measuring whether the asset is recoverable. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OTHER ACCOUNTING MATTERS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) and No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses)in a full set of general-purpose financial statements. SFAS No. 131 establishes standards for the way that public business companies report information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in interim financial reports issued to stockholders. 12 14 Both statements are effective for financial statements for periods beginning after December 15, 1997. Neither statement will have an impact on the Company's financial statements taken as a whole. STORE OPENING COSTS All costs associated with the opening of new stores are expensed as incurred. 3. PROPERTY AND EQUIPMENT Property and equipment, at cost, consists of (dollars in thousands):
FEBRUARY 1, JANUARY 31, 1997 1998 ----------- ----------- Land $ 2,176 $ 2,176 Buildings 10,574 10,574 Furniture, fixtures and equipment 61,414 58,947 Leasehold improvements 31,348 26,905 Beneficial leaseholds 10,005 9,811 Construction in progress 228 651 --------- --------- 115,745 109,064 --------- --------- Accumulated depreciation and amortization, including beneficial leaseholds of $8,339 and $8,683 (60,853) (60,833) --------- --------- Property and equipment, net $ 54,892 $ 48,231 ========= =========
4. ACCRUED EXPENSES Accrued expenses consist of (dollars in thousands):
FEBRUARY 1, JANUARY 31, 1997 1998 ----------- ----------- Fixed asset payable $ 38 $ 77 Occupancy expenses 3,308 3,514 Payroll related expenses 2,855 4,404 Insurance payable 2,905 3,140 Sales taxes payable 770 1,208 Other 3,371 6,436 -------- ------- $ 13,247 $18,779 ======== =======
5. LEASED FACILITIES AND COMMITMENTS Annual store rent is composed of a fixed minimum amount, plus contingent rent based upon a percentage of sales exceeding a stipulated amount. Store lease terms generally require additional payments to the landlord covering taxes, maintenance, and certain other expenses. Rent expense was as follows (dollars in thousands):
FISCAL FISCAL FISCAL 1995 1996 1997 ------- ------- ------- Store rent Fixed minimum $39,300 $40,546 $39,423 Percentage 41 (26) 32 ------- ------- ------- Total store rent 39,341 40,520 39,455 Equipment and other 517 424 411 ------- ------- ------- Total rent expense $39,858 $40,944 $39,866 ======= ======= =======
13 15 At January 31, 1998, the Company was committed under store leases with initial terms ranging from 1 to 20 years and with varying renewal options. At February 3, 1996, February 1, 1997, and January 31, 1998, accrued rent expense amounted to $5.5 million, $5.7 million, and $5.7 million, respectively, of which $5.9 million, $5.5 million, and $5.3 million, respectively, is included in "Other long-term liabilities." A summary of approximate rent commitments under leases follows (dollars in thousands) for the fiscal years: 1998 $ 32,846 1999 28,124 2000 24,548 2001 21,777 2002 19,824 Thereafter 60,505 -------- Total minimum obligations $187,624 ========
In July 1995, the Company agreed to assume the lease obligations of 21 stores previously operated by another retail chain. In order to induce the Company to assume the leases, the assignor of the leases paid the Company approximately $3.5 million. This payment has been recorded as accrued rent payable and is being amortized against rent expense over the life of the assumed leases. As of January 31, 1998, the unamortized balance was $1.9 million. 6. LONG-TERM DEBT Long-term debt consists of (dollars in thousands):
FEBRUARY 1, JANUARY 31, 1997 1998 ----------- ----------- Distribution center financing: Current portion $ 978 $ 1,052 Long-term portion 11,355 10,308 ------- ------- Total distribution center financing $12,333 $11,360 ======= =======
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 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 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. 14 16 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 an account that has been pledged to the lenders. At January 31, 1998, the combined availability of the Companies was $8.9 million, no balance was in the pledged account, the aggregate outstanding amount of letters of credit arranged by CIT was $21.0 million and no loan had been drawn down. The Company's cash on hand was unrestricted. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The following represents the fair value of the Company's financial instruments:
FEBRUARY 1, JANUARY 31, 1997 1998 ----------- ----------- Assets ---------------------------------------------------------------------- Cash and cash equivalents Carrying amount $18,264 $31,122 Fair value $18,264 $31,122 Liabilities ---------------------------------------------------------------------- Long-term debt including current portion Carrying amount $12,333 $11,360 Fair value $12,084 $11,466
The carrying amounts of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. The fair value of long-term debt, including current portion, is estimated based on the current rates quoted to the Company for debt of the same or similar issues. 8. INCOME TAXES The Company provides for income taxes, in accordance with SFAS No. 109, "Accounting for Income Taxes." This statement requires the use of the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax expense represents the change in the deferred tax asset/liability balance. The provision (benefit) for income taxes, together with the write-down (write-up) of the deferred tax asset, consists of (dollars in thousands):
FISCAL FISCAL FISCAL 1995 1996 1997 ------- ------- ------- Currently payable Federal $(2,523) $(1,584) $ 722 State (151) 97 182 ------- ------- ------- (2,674) (1,487) 904 ------- ------- ------- Deferred Federal 2,850 696 (2,419) State 795 115 (266) ------- ------- ------- 3,645 811 (2,685) ------- ------- ------- $ 971 $ (676) $(1,781) ======= ======= =======
15 17 Reconciliation of the provision (benefit) for income taxes, together with the provision for (benefit from) write-down (write-up) of the compensation related deferred tax asset, from the U.S. Federal statutory rate to the Company's effective rate is as follows:
FISCAL FISCAL FISCAL 1995 1996 1997 ------ ------ ------ Statutory Federal income tax rate (34.0%) (34.0%) 34.0% State income taxes, net of Federal benefit 5.3 0.4 3.9 Goodwill amortization 1.9 1.0 2.3 Other 0.7 (1.0) 0.7 ---- ---- ----- Sub-total (26.1) (33.6) 40.9 Charitable contribution benefit 0.0 (3.0) 0.0 Write-down (write-up) of the compensation related deferred tax asset 52.6 5.0 (31.3) Valuation allowance 0.0 21.7 (68.0) ---- ---- ----- 26.5% (9.9%) (58.4%) ==== ==== =====
The Company's net deferred tax asset reflects the tax impact of temporary differences. The components of the net deferred tax asset as of January 31, 1998 are as follows: Assets: Inventory $ 184 Accruals and reserves 1,820 Compensation 1,839 Credit carryforwards 1,479 ------ 5,322 Liabilities: Depreciation 2,637 ------ Net deferred tax asset $2,685 ======
Future realization of the tax benefits attributable to these existing deductible temporary differences ultimately depends on the existence of sufficient taxable income within the carryback and/or carryforward period available under the tax law at the time of the tax deduction. Based on management's assessment, it is more likely than not that the net deferred tax asset will be realized through future taxable earnings or available carrybacks. Because of this assessment, the fiscal 1997 benefit reflects the reversal of the valuation allowance established in the prior year. In fiscal 1995, fiscal 1996 and fiscal 1997, the Company took a $1.9 million write-down, a $0.3 million write-down, and a $1.0 million write-up of the compensation related deferred tax asset, respectively, which had been recorded in fiscal 1992 based upon the initial public offering price of $15 per share. On February 13, 1998, employee stock options relating to $1.822 million of the compensation related deferred tax asset were exercised. At February 1, 1997 and January 31, 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. 9. RELATED PARTY TRANSACTIONS The Company shared certain store locations with subsidiaries of The Limited and was charged by The Limited for occupancy costs. 16 18 The impact on the statements of operations of these occupancy charges was as follows (dollars in thousands):
FISCAL FISCAL FISCAL 1995 1996 1997 ------ ------ ------ Costs of goods sold, including buying and occupancy costs $537 $367 $123
An affiliate of the Chairman of the Board of the Company (in which he holds an 80% interest)provides management and administrative services to a subsidiary of The Limited for a base annual fee and profit sharing fee, the profit sharing fee being the lower of one-third of net profits or $150,000 per annum. During fiscal 1995, fiscal 1996, and fiscal 1997, the aforementioned affiliate was paid $114,000, $105,000, and $160,000, respectively, by that subsidiary of The Limited. During fiscal 1995, fiscal 1996, and fiscal 1997, the Company incurred expenses under certain Sublicensing Agreements with respect to trademarks to the subsidiary of The Limited referred to above in the amounts of $308,000, $416,000, and $395,000, and to the affiliate of the Chairman of the Board of the Company referred to above in the amounts of $331,000, $593,000 and $599,000, respectively. In fiscal 1994 and fiscal 1996, the Company made investments in a vendor from which the Company purchased apparel. The investments totaled $12,500 for approximately 22% of the outstanding common stock of the vendor and an unsecured loan facility in the amount of $400,000, which expired on January 31, 1997. Purchases during fiscal 1995, fiscal 1996, and fiscal 1997 totaled $1.8 million, $2.7 million, and $0.6 million, respectively. In fiscal 1997, the Company exercised its option to sell its shares of common stock to the vendor. The price to be received on the aforementioned common stock can not be estimated at this time. During fiscal 1995, the Company made an investment in one of the purchasing agents that acted on the Company's behalf in contracting for apparel with foreign vendors. The investment made during fiscal 1995 (which is the only investment made in the purchasing agent by the Company) was $463,000 for 25% of the outstanding common stock of the purchasing agent. Fees paid to the purchasing agent during fiscal 1995 and fiscal 1996 totaled $844,000 and $497,000, respectively, principally as percentage commissions on apparel purchases. In fiscal 1995, the Company extended to the purchasing agent a loan of $125,000 with interest at 2 percentage points over the prime rate, which was repaid in full in fiscal 1996. In fiscal 1997 the Company sold its entire investment in the purchasing agent at a purchase price of $505,000, of which $95,000 is a receivable as of January 31, 1998, resulting in a gain of $43,000. 10. RETIREMENT PLAN The Company maintains a defined qualified contribution pension plan. Generally, an employee is eligible to participate in the plan if the employee has completed one year of full-time continuous service. The Company makes a 50% match of a portion of employee savings contributions. The Company also maintains a non-qualified defined contribution pension plan, known as the Supplemental Retirement Savings Plan ("SRSP"). The Company makes a 50% match of a portion of employee savings contributions for those associates whose contributions to the qualified plan are limited by IRS regulations, as well as retirement contributions for certain grandfathered associates equal to 6% of those associates' compensation. Pension costs for all benefits charged to income during fiscal 1995, fiscal 1996, and fiscal 1997 were $248,000, $335,000, and $278,000, respectively. 17 19 11. STOCKHOLDERS' EQUITY Coincident with the completion of its initial public offering on March 17, 1992, the Company's certificate of incorporation was amended to provide for only one class of Common Stock, par value $.001 per share, with 30 million shares authorized. The Company also authorized 1,000,000 shares of Preferred Stock, par value $.001 per share, to be issued from time to time,in one or more classes or series, each such class or series to have such preferences, voting powers, qualifications and special or relative rights and privileges as shall be determined by the Board of Directors in a resolution or resolutions providing for the issue of such class or series of Preferred Stock. The Company has paid no cash dividends and expects to retain any future earnings for expansion of its business rather than to pay cash dividends in the foreseeable future. Additionally, the Financing Agreement imposes restrictions on the payment of cash dividends. 12. STOCK OPTIONS Under the 1989 Management Stock Option Plan (the "1989 Plan") established on July 17, 1989, options to purchase 1,078,125 shares and 50,000 shares at exercise prices of $1.00 and $5.00 per share, respectively, have been granted and are outstanding as of January 31, 1998. All options granted under the 1989 Plan became vested and exercisable upon completion of the initial public offering and the payment of certain obligations to The Limited Inc. On February 13, 1998, 1,078,125 of the 1989 Plan options were exercised by management. Under 1991 Stock Option Agreements between the Company and certain executive officers (the "1991 Options"), the Board of Directors approved and granted, on July 24, 1991, options to purchase 300,000 shares at an exercise price of $5.00 per share which are outstanding as of January 31, 1998. These options became vested and excercisable upon completion of the initial public offering and the payment of certain obligations to The Limited Inc. The options outstanding under the 1989 Plan and the 1991 Options expire on December 31, 1999. The voluntary resignation of an optionee does not limit the options' expiration date or otherwise affect the excercisability of these options in any way. The Restated 1990 Stock Option Plan (as amended, the "1990 Plan") was established in June 1990, amended in November 1991, December 1992 and May 1993, and terminated in May 1996. Exercise prices were not less than fair market value of the Company's stock on the date of grant. The options granted under the 1990 Plan expire between seven and ten years after the date of grant. As of February 1, 1997 and January 31, 1998, outstanding options to purchase 658,000 and 625,700, respectively, were granted under the 1990 Plan at average exercise prices of $6.78 and $6.89 per share, respectively. The options vest beginning one year from the date of grant, and vest fully after four or five years, subject to acceleration under certain circumstances. Options were granted, and the 1990 Plan is administered by the Compensation Committee of the Board of Directors, composed of non-employees of the Company. The Company recorded compensation expense pursuant to the 1990 Plan in fiscal 1996 of $77,000. A summary of stock option transactions under the 1990 Plan is as follows:
Fiscal Fiscal Fiscal 1995 1996 1997 ------------ ------------- ------------- Options outstanding at beginning of period 636,750 665,000 658,000 Options granted (a) 111,500 99,000 0 Options exercised 1,000 0 0 Options expired 0 0 22,500 Options canceled (a) 82,250 106,000 9,800 Options outstanding at end of period 665,000 658,000 625,700 Options available for grant at end of period 94,625 0 0 Options vested and outstanding at end of period 141,900 102,895 198,783 Options excercisable at end of period and having an exercise price that is less than the respective year end common stock closing price 0 0 86,500 Range of option prices per share for outstanding options $4.50-$26.75 $4.125-$26.75 $4.125-$26.75
(a) Options granted and options canceled do not include the reissuance in fiscal 1995 and fiscal 1996 of 210,000 and 271,500 options at exercise prices of $8.50 and $5.125 per share, respectively. 18 20 The 1996 Stock Option Plan (the "1996 Plan") was established in May 1996. Exercise prices are required by the 1996 Plan not to be less than fair market value of the Company's stock on the date of grant. The total number of shares that may be optioned under the 1996 plan is 440,000 shares. The options granted under the 1996 Plan expire ten years after the date of grant. As of February 1, 1997 and January 31, 1998, outstanding options to purchase 45,000 and 163,000 shares have been granted under the Plan at an average exercise price of $3.00 and $3.22 per share. The options granted vest beginning one year from the date of grant, and vest fully after five years, subject to acceleration under certain circumstances. Employees of the Company whose judgment, initiative and efforts may be expected to contribute materially to the successful performance of the Company are eligible to receive options. Public Directors will receive annual grants of options under the 1996 Plan. Options are granted, and the 1996 Plan is administered, by the Compensation Committee of the Board of Directors, composed of non-employees of the Company. A summary of stock option transactions under the 1996 Plan follows:
Fiscal Fiscal 1996 1997 ------ ------ Options outstanding at beginning of period 0 45,000 Options granted 45,000 145,000 Options exercised 0 0 Options canceled 0 27,000 Options outstanding at end of period 45,000 163,000 Options available for grant at end of period 395,000 277,000 Options vested and outstanding at end of period 0 4,000 Options excercisable at end of period and having an exercise price that is less than the respective year end common stock closing price 0 4,000 Range of option prices per share for outstanding options $3.00 $2.625-$5.625
The Company records compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." 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 October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which encourages companies to recognize expense for stock-based awards based on their estimated value on the date of grant. SFAS No. 123, which is first effective for fiscal year 1996, does not require companies to change their existing accounting for stock-based awards. The Company continues to account for stock-based compensation plans using the intrinsic value method, and has supplementally disclosed pro forma information required by SFAS No. 123.
Fiscal Fiscal 1996 1997 ------ ------ Net (loss) income - as reported $(6,147) $4,831 Net (loss) income - pro forma $(6,416) $4,532 (Loss) earnings per share - as reported $ (0.50) $ 0.37 (Loss) earnings per share - pro forma $ (0.53) $ 0.34
19 21 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Fiscal Fiscal 1996 1997 ------ ------ Expected dividend yield 0.00% 0.00% Expected stock price volatility 50.00% 50.00% Risk-free interest rate 5.72% 5.39% Expected life of options 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 13. SUPPLEMENTAL CASH FLOW INFORMATION Net cash flow from operating activities reflects cash payments for interest and income taxes as follows (dollars in thousands):
Fiscal Fiscal Fiscal 1995 1996 1997 ------ ------ ------ Interest (income) expense, net per statements of operations $(119) $ 413 $154 Less: Non-cash interest (expense) income (41) 50 (63) ----- ------- ---- Net cash interest (income) expense including interest income of $1,425, $924, and $984 $(160) $ 463 $ 91 ===== ======= ==== Income taxes paid (refunded) $ 474 $(3,990) $531 ===== ======= ====
14. 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. 20 22 UNITED RETAIL GROUP, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (shares and dollars in thousands)
Fiscal Year Ended Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997 Jan. 31,1998 - ----------------- ------------- ------------- ------------ ------------ ------------ OPERATING STATEMENT DATA Net sales $ 344,090 $ 357,684 $ 369,173 $ 363,074 $ 361,751 Cost of goods sold, including buying and occupancy costs 261,920 276,038 292,790 289,421 278,078 Gross profit 82,170 81,646 76,383 73,653 83,673 General, administrative and store operating expenses 75,744 74,986 80,170 80,063 80,469 Operating income (loss) 6,426 6,660 (3,787) (6,410) 3,204 Interest (income) expense, net (143) 491 (119) 413 154 Income (loss) before taxes 6,569 6,169 (3,668) (6,823) 3,050 Provision for (benefit from) income taxes 2,522 2,276 (957) (1,018) (828) Provision for (benefit from) write-down (write-up) of the compensation related deferred tax asset 2,479 917 1,928 342 (953) Net income (loss) 1,568 2,976 (4,639) (6,147) 4,831 Net income (loss) per common share: Basic $ 0.13 $ 0.24 $ (0.38) $ (0.50) $ 0.40 Diluted $ 0.12 $ 0.22 $ (0.38) $ (0.50) $ 0.37 Weighted average number of common shares outstanding: Basic 12,126 12,169 12,190 12,190 12,190 Diluted 13,372 13,313 12,190 12,190 13,187 BALANCE SHEET DATA (at period end) Working capital $ 24,533 $ 37,614 $ 38,394 $ 36,941 $ 43,875 Total assets 141,607 138,434 139,033 130,347 134,727 Long-term debt 0 0 0 0 0 Distribution center financing 6,293 13,233 12,333 11,355 10,308 Total stockholders' equity 87,320 90,672 86,283 80,213 85,044
The Selected Financial Data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Company's Consolidated Financial Statements, including the notes thereto. The data for the periods indicated has been derived from the Company's Consolidated Financial Statements, which have been audited by Coopers & Lybrand, L.L.P., independent accountants, whose report for the three fiscal years ended January 31, 1998 appears elsewhere in this Annual Report. 21 23 UNITED RETAIL GROUP, INC EXECUTIVE OFFICERS AND DIRECTORS RAPHAEL BENAROYA Chairman of the Board, President and Chief Executive Officer* GEORGE R. REMETA Vice Chairman - Chief Financial Officer, Secretary and Director* KENNETH P. CARROLL Senior Vice President - General Counsel* ELLEN DEMAIO Senior Vice President - Merchandise CARRIE CLINE-TUNICK Vice President - Product Design and Development JULIE L. DALY Vice President - Strategic Planning KENT FRAUENBERGER Vice President - Logistics JON GROSSMAN Vice President - Finance* ALAN R. JONES Vice President - Real Estate CHARLES E. NAFF Vice President - Sales BRADLEY ORLOFF Vice President - Marketing ROBERT PORTANTE Vice President - MIS FREDRIC E. STERN Vice President - Controller JOSEPH A. ALLUTO A Director of the Company, is the Dean of Max M. Fisher School of Business at Ohio State University RUSSELL BERRIE A Director of the Company, is the Chairman of the Board and Chief Executive Officer of Russ Berrie and Company, Inc., an international toy manufacturer JOSEPH CIECHANOVER A Director of the Company, is the Chairman of the Board of El Al Israel Airlines Ltd. ILAN KAUFTHAL A Director of the Company, is a Vice Chairman of Schroder & Co., Inc., an investment banking firm VINCENT P. LANGONE A Director of the Company, is Chairman of the Board of Interbuild International Inc., a venture capital firm CHRISTINA A. MOHR A Director of the Company, is a Managing Director of Salomon Brothers, Inc., an investment banking firm RICHARD W. RUBENSTEIN A Director of the Company, is a Partner of Squire, Sanders & Dempsey, a law firm SHAREHOLDER INFORMATION The Company's Annual Report on Form 10-K, including financial statements, filed with the Securities and Exchange Commission ("SEC"), is available without charge upon written request to Kenneth P. Carroll, Esq., Senior Vice President - General Counsel, at the Company's headquarters. Mail should be addressed to 365 West Passaic Street, Rochelle Park, New Jersey 07662; E-mail should be addressed to kencarroll@ibm.net.The Annual Report on Form 10-K is also available through the SEC at http://www.sec.gov. The Common Stock is quoted on the NASDAQ National Market under the symbol "URGI." The last reported sale price of the Common Stock on the NASDAQ National Market on April 3, 1998 was 6 9/16. The following table sets forth the reported high and low sale prices of the Common Stock as reported by NASDAQ for each calendar quarter indicated.
HIGH LOW ---- --- 1996 First Quarter $5 1/2 $3 7/8 Second Quarter $5 1/4 $4 Third Quarter $4 7/8 $2 3/8 Fourth Quarter $3 3/8 $1 1/2 1997 First Quarter $4 3/4 $2 7/8 Second Quarter $4 1/8 $2 1/2 Third Quarter $3 9/16 $2 9/16 Fourth Quarter $6 1/8 $2 5/8
The Company has paid no cash dividends and expects to retain any earnings in the foreseeable future for expansion of its business rather than to pay cash dividends. The Company's transfer agent and registrar is Continental Stock Transfer & Trust Co., 2 Broadway New York, New York 10004 At March 31, 1998 there were approximately 1,500 beneficial owners of Common Stock, not including participants in the Company's stock purchase and retirement savings plans. * An officer of the parent holding company rather than the operating subsidiary, United Retail Incorporated or United Retail Logistics Operations Incorporated. 22 EX-23.1 11 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 COOPERS & LYBRAND LETTERHEAD CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by the reference in the registration statements of United Retail Group, Inc. and Subsidiaries (the "Company") on Forms S-8 (File No. 33-48500, No. 33-48501, No. 33-67288 and No. 333-47407) of our report dated February 13, 1998, on our audits of the consolidated financial statements of the Company as of January 31, 1998 and February 1, 1997 and for each of the three fiscal years ended January 31, 1998, which report is incorporated by reference in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. New York, New York April 20, 1998 EX-23.2 12 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS The undersigned hereby consents to the inclusion as an exhibit to this Annual Report on Form 10-K for the year ended January 31, 1998 of our report dated February 26, 1998, on our audits of the statements of net assets available for benefits of the United Retail Group Retirement Savings Plan (the "Plan") as of December 31, 1997 and 1996, and the related statements of changes in net assets available for benefits for each of the years then ended. The undersigned also hereby consents to the incorporation of such report by reference in the Registration Statement on Form S-8 of United Retail Group, Inc. (The "Company") with respect to the Plan and its investment in shares of common stock of the Company. ARY, EARMAN AND ROEPCKE Columbus, Ohio April 15, 1998 EX-27 13 FINANCIAL DATA SCHEDULE
5 12-MOS JAN-31-1998 FEB-02-1997 JAN-31-1998 31,122 0 571 0 38,003 76,302 109,064 60,833 134,727 32,427 10,308 0 0 13 78,259 134,727 361,751 361,751 278,078 83,673 80,469 0 154 3,050 (1,781) 4,831 0 0 0 4,831 0.40 0.37
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