FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
(X) Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 1-11998
FAC REALTY TRUST, INC.
(Exact name of Registrant as specified in its charter)
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Maryland 56-1819372
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11000 Regency Parkway
Third Floor, East Tower
Cary, North Carolina 27511
(Address of Principal Executive Offices) (Zip Code)
(919) 462-8787
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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 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[ ].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 31, 1998, was approximately $115.5 million.
As of March 23, 1998, there were 14,275,820 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
Documents Incorporated by Reference
None.
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FAC Realty Trust, Inc.
Index to Form 10-K
For the Year Ended December 31, 1997
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Page
PART I
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Item 1 - Business 4
Item 2 - Properties 12
Item 3 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of
Security Holders 20
PART II
Item 5 - Market for the Registrant's Common Equity
and Related Stockholder Matters 21
Item 6 - Selected Financial Data 21
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation 24
Item 8 - Financial Statements and Supplementary
Data 35
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 35
PART III
Item 10 - Directors and Executive Officers of
the Registrant 35
Item 11 - Executive Compensation 38
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 45
Item 13 - Certain Relationships and Related
Transactions 46
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 47
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PART I
Item 1 - Business
General
FAC Realty Trust, Inc. (the "Company"), is a self-administered and
self-managed real estate investment trust ("REIT"). The Company is vertically
integrated, providing acquisition, development, construction, leasing, marketing
and asset management to community and outlet center properties. As of December
31, 1997, the Company owned and operated 28 community shopping centers in 15
states aggregated 3.1 million square feet of gross leasable area ("GLA"), 10
outlet centers in 9 states aggregating approximately 2.1 million square feet;
two outlet centers aggregating approximately 0.1 million square feet and one
former outlet center which has been converted to commercial office use with
approximately 0.2 million square feet that are held for sale; and approximately
182 acres of outparcel land located near or adjacent to certain of the Company's
centers. The Properties are tenanted primarily by large widely recognized
retailers and/or manufacturers of traditional brand-name merchandise such as
Winn Dixie, Food Lion, K Mart, VF Factory Outlet, Inc. (Lee, Wrangler, Jantzen,
Jansport, Vanity Fair and Health-tex), 9 West (Easy Spirit and Enzo), Sara Lee
Corporation (L'eggs, Hanes, Bali, Playtex, Coach and Champion), Levi Strauss &
Co. (Levi's), Nike, Inc., Revlon Inc. (Prestige Fragrance), Bugle Boy
Industries, Inc., Reebok International, Ltd., LCI Holdings (Liz Claiborne),
Dinnerware Plus, Inc. (Mikasa) and WestPoint Stevens (Martex).
In June 1993, the Company completed its initial public offering
(the "IPO") which combined (i) four partnerships, each of which had developed,
acquired and owned one factory outlet center (collectively, the "CP
Properties"), (ii) a fifth partnership formed to develop an additional factory
outlet center, and (iii) certain assets of North-South Management Corporation,
which had managed the CP Properties since 1988. Prior to or concurrently with
the completion of the IPO, the Company (i) acquired the CP Properties and (ii)
acquired 21 outlet centers from VF Corporation (the "VF Properties") totaling
approximately 1.7 million square feet. In December 1993, the Company used the
proceeds of a secondary public offering to purchase six additional outlet
centers totaling approximately 0.9 million square feet from entities and
individuals constituting the Willey Creek Group, at that time one of the largest
private owners and operators of outlet centers in the country. In addition, in
June 1994, the Company purchased three additional properties totaling
approximately 0.5 million square feet from the Willey Creek Group and in
December 1994 acquired an expansion of one of the initial six Willey Creek
properties. During 1995, the Company opened one additional outlet center and
completed expansions of several others. In 1996, the Company completed the
outlet center opened in 1995 and expanded four other centers. The Company ended
1996 with approximately 4.9 million square feet of GLA, up 5.1% from 4.6 million
at December 31, 1995.
The Company has elected to be treated as a REIT for Federal income tax
purposes. The Company intends to continue to operate in the manner required to
maintain its REIT status.
In March, 1997, the Company purchased five community shopping
centers located in the Raleigh, North Carolina area for $32.4 million from an
unrelated third party. The centers total approximately 606,000 square feet and
feature anchor tenants such as Winn-Dixie, Food Lion, Inc., K-Mart Corporation
and Eckerd Drug. The acquisition was funded from the Company's line of credit
facility. As a result of the acquisition, the Company ended 1997 with 41
shopping centers containing an aggregate of approximately 5.5 million square
feet of GLA.
On September 22, 1997, the Company and Atlantic Real Estate Corporation,
("ARC") a privately held real estate development company based in Durham, North
Carolina, jointly created a limited liability company named Atlantic Realty LLC
to develop and manage retail community and neighborhood shopping centers in
North Carolina. The Company and ARC will own Atlantic Realty LLC equally, with
the Company serving as managing member overseeing its operations. Atlantic
Realty LLC currently has plans to develop approximately one million square feet,
including outparcels, over the next several years.
The development of the above properties are subject to, among other
things, completion of due diligence and various contingencies, including those
inherent in development projects, such as zoning, leasing and financing. There
can be no assurance that all of the above transactions will be consummated.
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On October 7, 1997, the Company entered into an agreement to purchase
nine shopping centers ("Kane/Rodwell Centers") located in North Carolina and
Virginia, totaling 1.0 million square feet, and to assume third party management
of an additional 1.2 million square feet of community shopping centers. The
centers to be purchased are owned primarily by Roy O. Rodwell, Chairman and
Co-Founder of ARC and John M. Kane, Chairman of Kane Realty Corporation, a real
estate development and brokerage company based in Raleigh, North Carolina, in a
transaction valued at $63.3 million. The purchase of the shopping centers was
subject to the final approval of respective partnerships holding the properties
which has been received, as well as holders of mortgage notes on the shopping
centers which has been received on all properties except one. The remaining
shopping center will be managed by the Company until either approval is received
or the mortgage is retired.
In exchange for their equity ownership interests in the community
centers, the sellers will receive approximately 1.2 million share-equivalent
partnership units in the Operating Partnership and approximately $2.6 million in
cash. The number of Units to be issued to the sellers was based on a $9.50 price
per share of the Company's Common Stock. Of the Units to be issued,
approximately 0.5 million will remain unissued until the completion of certain
performance requirements and acquisition of the remaining shopping center noted
above. As part of the purchase price, the Company will also assume approximately
$49.4 million of primarily fixed rate debt on the properties to be acquired.
During 1997, the Company completed construction of a 32,000 square foot
expansion at its Crossville, Tennessee outlet center. In addition, the Company
began construction on a 44,000 square foot Winn Dixie at its Wilson, North
Carolina center. The Company is currently in the pre-development and marketing
stage for a "power" outlet mall located in Lake Carmel, New York and a
retail/entertainment shopping center in Mt. Pleasant, South Carolina. These
projects are planned to contain in excess of 300,000 and 425,000 square feet of
GLA, respectively. If appropriate tenant interest is obtained and the
appropriate agreements, permits and approvals are received, the Company intends
to commence construction in the Fall and Spring of 1998, respectively. No
assurance can be given, however, that the expansions or project will be
developed and/or completed.
On December 17, 1997, following shareholder approval, the Company
changed its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary FAC Realty Trust, Inc., (the "Company"). Following the
reincorporation, on December 18, 1997, the Company reorganized as an umbrella
partnership real estate investment trust (an "UPREIT"). The Company then
contributed to FAC Properties, L.P., a Delaware limited partnership (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties, which remains in a wholly owned subsidiary of
the Company. In exchange for the Company's assets, the Company received limited
partnership interest ("Units") in the Operating Partnership in an amount and
designation that corresponded to the number and designation of outstanding
shares of capital stock of the Company at the time. The Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the Operating Partnership in exchange for the contribution of
properties, the Company's percentage ownership in the Operating Partnership will
decline. As the Company issues additional shares of capital stock, it will
contribute the proceeds for that capital stock to the Operating Partnership in
exchange for a number of Units equal to the number of shares that the Company
issues. The Company conducts substantially all of its business and owns
substantially all of its assets (either directly or through subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.
The purpose of reincorporating in Maryland and of becoming an UPREIT was
as follows:
(bullet) The Company will realize a cost savings in annual franchise
tax payments of approximately $150,000 by changing its state of
incorporation from Delaware to Maryland
(bullet) By adopting an UPREIT structure, the Company will realize annual cost
savings of approximately $188,000 beginning in 1998 related to state
franchise tax payments on its assets located in certain states; and
(bullet) An UPREIT may allow the Company to offer Units in the Operating
Partnership in exchange for ownership interests from tax-motivated
sellers. Under certain circumstances, the exchange of Units for a
seller's ownership interest will enable the Operating Partnership to
acquire assets while allowing the seller to defer the tax liability
associated with the sale of such assets. Effectively, this allows
the Company to use Units instead of sock to acquire properties, which
provide an advantage over non-UPREIT entities.
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Recent Developments
Lazard Freres Transaction
On February 24, 1998, Prometheus Southeast Retail, LLC, ("PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC
entered into a definitive agreement with the Company to make a $200 million
strategic investment in the Company. PSR has committed to purchase $200 million
in newly issued common shares of the Company at a purchase price of $9.50. The
investment will be made in stages through the end of 1999 allowing the Company
to obtain capital as needed to fund its future acquisition and development plans
as well as retire debt. On March 23, 1998, the Company received the first
installment totaling $22.3 million which represents 2.35 million common shares.
Upon completion of funding, PSR will own an equity interest of the Company of
approximately 60%, on a fully diluted basis, not including any further issuance
of Units for transactions under contract or transactions the Company may enter
into in the future.
As part of the PSR transaction described above, three representatives
of Lazard will be nominated to FAC Realty's Board of Directors, bringing the
total number of directors to nine.
Konover & Associates South Transaction
On February 24, 1998, the Company entered into definitive agreements
with affiliates of Konover & Associates South ("Konover"), a privately held real
estate development firm based in Boca Raton, Florida, to acquire 11 community
shopping centers totaling approximately 2.0 million square feet and valued at
nearly $100 million. The purchase equates to approximately $24 million in
equity, consisting of the issuance of Units, at $9.50 per Unit, and/or cash,
plus the assumption of approximately $76 million in debt. At closing, $17
million of the equity will be paid in the form of Units or cash. The remaining
$7 million will be paid in cash over a three-year period with interest at 7.75%
per annum.
As part of the transaction, the Company intends to operate under the
name "Konover Property Trust". The Company will remain listed on the New York
Stock Exchange and intends to change its ticker symbol from FAC to KPT, pending
formal approval by shareholders in June, 1998. Additionally, the current
employees of Konover will join the Company as a result of the transaction. The
new employees include development, leasing, property management, administrative
and accounting professionals. The Company will continue to operate the Konover
office in Boca Raton due to its strategic location in the Southeast.
Simon Konover, founder of Konover & Associates, a $500 million plus
real estate company headquartered in West Hartford, Connecticut, will become
Chairman of the Board of the Company upon completion of the transaction. He will
not become an executive officer of the Company.
Other
On January 7, 1998, the Company completed the purchase of a 55,909
square foot shopping center located in Danville, VA. This Food Lion anchored
center was purchased for $3.1 million.
On March 11, 1998, the Company closed on a $75 million, 15-year
permanent credit facility secured by 11 properties previously securing its $150
million revolving credit facility. The loan is at an effective rate of 7.73% and
is amortized on a 338-month basis. The proceeds were used to pay down certain
outstandings on the $150 million Nomura credit facility.
As of March 31, 1998, seven of the nine Kane/Rodwell Centers had
closed. An eighth center is expected to close in second quarter of 1998. The
ninth and final center will be managed by the Company and is expected to be
acquired in the year 2000. The loan assumption fee is currently considered
unreasonable, however, the loan is prepayable in the year 2000.
Business Strategy
The Company's business strategy is to increase overall shareholder
value through acquiring and selectively developing new properties, expanding its
existing centers and by increasing the value of its assets in
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the portfolio through proactive asset management, leasing, marketing and
financial controls. The following is a brief description of the Company's
current business strategy and philosophy.
Management. The Company's management team consists of a group of
highly experienced real estate professionals with a wide variety of shopping
center experience. The team is headed by its Chief Executive Officer, C. Cammack
Morton. Since joining the Company, Mr. Morton has assembled a management team of
seasoned veterans in finance/accounting, asset management, law, development,
leasing and marketing. These members of management bring to the Company years of
experience and professional accreditations from shopping center industry
organizations. They also bring the Company relationships with retail shopping
and manufacturer tenants, and the financial and investment community.
Acquisition and Portfolio Diversification. The Company believes
that retail concepts within the retail shopping center industry are merging, and
that a diversified shopping center portfolio will provide the best opportunities
for growth and overall return to shareholders. To implement this strategy, the
Company intends to focus on selective acquisitions and development of retail
centers. Retail centers may include, but are not limited to, community shopping
centers, retail/entertainment centers, "power strip" centers and "power outlet"
centers. The Company believes that many opportunities for the acquisition of
retail centers exist, particularly in the southeastern United States. In such
acquisitions, the Company looks for strong demographics and traffic counts, good
visibility and access, and the potential for enhancing cash flows through
increasing rents, re-tenanting, remerchandising or future expansions. The
Company intends to use its existing tenant relationships to assist in
accomplishing its objectives.
The 1997 acquisition of five community shopping centers from North
Hills, Inc. was the beginning of the implementation of the Company's
diversification strategy. This portfolio of properties meets the Company's
acquisition criteria. Their proximity to the Company's headquarters, together
with the Company's knowledge of the market, has allowed the Company to manage
them very efficiently. The estimated annualized return on the acquisition is in
excess of 13%. Most importantly, the Company has already utilized its existing
tenant relationships to remerchandise the existing centers at better market
rates.
As the Company pursues its diversification strategy, it also
intends to focus on attracting new tenants to its portfolio to offer a wider
range of merchandise and amenities to consumers. These may include, but are not
limited to, full-service restaurants, theaters, entertainment and hotels.
Expansion and Improvements to Existing Centers. The Company
intends to hold the majority of its properties for long-term investment and,
therefore, intends to continue selective expansion of its existing centers. The
Company's philosophy is to expand its existing centers in response to tenant
demand. Prior to commencement of an expansion, the Company requires a
significant percentage of lease commitments. The Company believes that selective
expansion allows it to take advantage of management's development experience and
tenant relationships. During the past three years, the Company has added
approximately 0.4 million square feet of expansion space to its centers. The
Company intends to fund future expansions and improvements primarily through
internally generated cash flow and its revolving credit facility.
The Company's asset management team, which includes development,
leasing, marketing, finance and property management personnel, continually
evaluates potential opportunities at its existing centers for further expansion,
remerchandising, capital improvements and renovation, all in an effort to
increase property value. The Company also monitors each center's sales,
occupancy and overall performance. Properties which may be underperforming are
considered for re-tenanting, change of use or in some cases sale. In addition,
the Company has an ongoing program of regular maintenance, periodic renovation
and capital improvement of existing facilities in an effort to increase property
values and tenants' sales.
Development of New Properties. The Company believes that
opportunities continue to exist to attract tenants to newly developed retail
centers. The Company intends to selectively develop centers on new sites in high
growth areas with easy access, good visibility and strong demographics, where a
substantial percentage of lease commitments have been obtained from tenants. The
Company looks for sites where it believes there is potential to expand.
Accordingly, the Company generally acquires a minimum site area sufficient to
develop the initial, and at least one additional phase of a project, plus
sufficient contiguous property to be sold or otherwise developed for
complementary uses.
The Company is currently in the pre-development stage of several
retail community centers in the North Carolina area. The centers are proposed to
be anchored primarily by well-known grocery and drug
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chains. If appropriate tenant interest and necessary approvals are obtained, the
Company intends to pursue development. No assurance can be given, however, that
the projects will be developed.
Strategic Alliances. The Company has entered into several
strategic alliances with well-known and experienced developers, primarily in the
Raleigh, North Carolina area. The philosophy is to align itself with big
developers whose reputation and/or knowledge in certain markets enhances the
ability to complete development projects. These alliances may also lead to new
tenant relationships and/or larger portfolio acquisitions.
Atlantic Real Estate Corporation (ARC). As a result of the
Company's relationship with Roy Rodwell, on September 22, 1997, the Company and
ARC formed a limited liability company known as Atlantic Realty, LLC to develop
and manage retail community and neighborhood shopping centers in North Carolina.
Of the nearly one million square feet of planned development the LLC has
completed development of a 38,600 square foot center in Pembroke, North Carolina
anchored by Food Lion. A second project known as Park Place is under development
and if tenant interest continues the project is expected to be complete in
Spring, 1998. Two other projects are in development.
Wakefield. Much like the Company's alliance with ARC, this
strategic alliance known as Wakefield Commercial LLC, was formed primarily to
develop two community shopping centers. The two retail centers, one 200,000
square feet and the other 300,000 square feet will be located on 65 acres within
a 500-acre parcel of land zoned for commercial use. The Company will perform all
leasing, property management and marketing functions for the two centers. This
is the fourth project to be jointly developed and managed by Atlantic Realty
LLC. The Company will hold a 50% interest in the venture.
Wakefield Commercial, LLC purchased the 500-acre parcel of land in
February, 1998. The shopping centers will be directly adjacent to Wakefield's
residential community, a 2,200-acre upscale, mixed-use development of 3,400
homes priced from $225,000 to $1 million; 75% of the community has been pre-sold
to nationally recognized builders. The exclusive community is expected to
include a Wake County public school campus, public library, city park and an
18-hole TPC golf course.
Mount Pleasant. The Company has entered into a strategic joint
venture, known as Mount Pleasant, LLC, with AJS Group, to develop a 425,000
square foot retail/entertainment shopping center in Mt. Pleasant, South
Carolina. Construction on the center, to be named Mt. Pleasant Towne Centre, is
slated to begin in May, 1998, with completion targeted for May, 1999. Belk
Department Stores will anchor the center with a new fashion department store
concept.
Mt. Pleasant Towne Centre will be a unique retail and
entertainment shopping center featuring upscale, nationally recognized fashion
and specialty tenants, restaurants and a movie theater in a quaint village
setting. The center's "Main Street" buildings and pedestrian mall area have been
designed to replicate and complement the distinctive architectural styles found
throughout the Carolinas' Low Country region.
The Company is a 50% owner and provides all leasing, management
and development pertaining to this joint venture.
Financing. The Company's policy is to finance its acquisitions,
expansions and developments with the source of capital believed by management to
be most appropriate, which may include undistributed cash flow, borrowings from
institutional lenders, newly-issued equity securities, and debt securities on a
secured or unsecured basis. The Company's philosophy is to use its Funds
Available for Distribution, which the Company refers to as Funds Available for
Reinvestment, to their greatest potential as a key source of financing. The
Company's decision to use its cash flow in this fashion will result in a
decrease in dividend distributions (See "Item 5 - Market for the Registrant's
Common Equity and Related Stockholder Matters").
Previous sources of financing alternatives for the Company have
included the issuance by the Company in 1996 of $20 million of equity in the
form of convertible preferred stock. In early 1997, a $150 million credit
facility with Nomura Asset Capital Corporation was completed and secured by 21
of the Company's properties, plus an assignment of the excess cash flow from 18
additional properties. This facility was used during 1997 to fund the repayment
of approximately $84.5 million in debt, $30.4 million for the North Hills
portfolio, and $11.1 million invested in income-producing properties.
Additionally, the Company loaned $8.5 million to Davie Plaza Associates, a
related entity of Konover & Associates South.
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On March 11, 1998, the Company closed on a $75 million, 15-year
permanent credit facility secured by 11 properties previously securing its $150
million revolving credit facility. The loan is at an effective rate of 7.73%, is
amortized on a 338-month basis. The proceeds were used to pay down certain
outstandings on the $150 million Nomura credit facility.
The Company also entered into a line of credit for $2.5 million
with First Union National Bank. The line is tied to the Company's operating
accounts and is utilized to maximize the Company's cashflow on a daily basis.
The Company may enter into additional mortgage indebtedness
related to certain joint venture development projects. The Company's philosophy
is that any joint venture borrowings would be based upon terms and conditions as
its own.
Any additional debt financing, including additional lines of
credit, may be secured by mortgages on the Properties. Such mortgages may be
recourse or non-recourse or cross-collateralized or may contain cross-default
provisions. The Company does not have a policy limiting the number of mortgages
that may be placed on, or the amount of indebtedness that may be secured by, any
particular property, however; current mortgage financing instruments do limit
additional indebtedness on such properties.
Marketing. Management believes that the major goal of marketing is
to maximize sales and increase the net asset value of the Properties. The
Company has analyzed the Properties based on net operating income (NOI) and
created a marketing strategy to prioritize the marketing and leasing needs of
each center to better utilize marketing dollars. The marketing efforts are
primarily focused on the larger centers located in markets with regional
customer draw. Each of the Properties has a marketing manager responsible for
developing and implementing marketing strategies.
Marketing plans for each center are prepared by the marketing
manager for use by the merchants, as well as for internal use by the Company's
leasing department. Each marketing plan details goals, strategies and tactics to
create awareness, generate traffic and maximize sales at the Properties.
Marketing efforts also include utilizing an advertising agency specializing in
shopping center marketing, television, radio and print advertising, billboards,
special events, promotions and a public relations program.
On a corporate level, information packages and the Company's
internet web site are continually updated in an effort to communicate more
effectively with the investment community. The web site includes a guest book to
monitor investment community interest.
Operating Practices. The Company is a vertically integrated,
providing acquisition, development, construction, leasing, marketing and asset
management services. The Company believes it can increase value to its
shareholders by conducting the vast majority of these services in-house. Each
area has been set up along functional lines, with the Company's property
management and marketing areas being staffed by individuals with industry
accreditations such as CSM (Certified Shopping Center Manager) and CMD
(Certified Marketing Director).
The Company's leasing department has also been staffed to address
the Company's philosophy regarding the changing retail environment and the
Company's diversification strategy. The staff has individuals experienced in all
areas of retail leasing, such as outlets, power centers, community centers,
regional malls and specialty centers. This breadth of experience has brought to
the Company a broader range of tenant relationships to position the Company for
growth.
The Company believes that increased focus on financial controls
and information systems (IS) will be critical over the next several years to
enhance the analysis and communication of financial data. In order to accomplish
this, the Company has staffed its finance area with professionals with
specialized knowledge in real estate finance and acquisition analysis. The IS
department is continually focused on processes which will enhance the Company's
systems to allow all personnel easy access to all financial and lease data in a
concise format.
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Policies with Respect to Certain Activities
The following supplements the discussion of the Company's primary
management, portfolio diversification, expansion and improvements, development,
financing, marketing and operations strategies set forth elsewhere in this
report. The Company's policies with respect to those activities and the matters
discussed below have been determined by the Board of Directors of the Company
and may be amended or revised from time to time at the discretion of the Board
of Directors without a vote of the shareholders of the Company. No assurance can
be given that the Company's investment objectives will be attained or that the
value of the Company will not decrease.
Investment Policies. The Company may expand existing properties,
develop new properties, purchase or lease income-producing properties for
long-term investment, expand and improve the properties it owns or sell such
properties, in whole or in part, when circumstances warrant. The Company also
may participate with other entities in property ownership through joint ventures
or other types of co-ownership. Equity investments may be subject to existing
mortgage financing and other indebtedness which have priority over the equity
interest of the Company. While the Company intends to emphasize equity real
estate investments, it may, in its discretion, invest in mortgages and other
real estate interests. The Company does not intend to invest in mortgages or
deeds of trust unless such investment is intended to be part of a future
acquisition by the Company. Subject to the percentage of ownership limitations
and gross income tests which must be satisfied to qualify as a REIT, the Company
also may invest in securities of concerns engaged in real estate activities or
in securities of other issuers. The Company does not intend to invest in the
securities of any other issuer for the purpose of exercising control; however,
the Company may in the future acquire all or substantially all of the securities
or assets of other REITs, management companies or similar entities where such
investments would be consistent with the Company's investment policies. In any
event, the Company does not intend that its investments in securities would
require the Company to register as an investment company under the Investment
Company Act of 1940, and the Company would divest securities before any such
registration would be required.
Certain Other Activities. The Company may make investments other
than as previously described but has no present intention to do so. The Company
has authority to offer shares of Common Stock or other securities in exchange
for property, to repurchase or otherwise reacquire outstanding shares of Common
Stock or other securities and may engage in such activities in the future. At
all times the Company intends to make investments in such a manner as to be
consistent with the requirements of the Code to qualify as a REIT unless,
because of changed circumstances, the Board determines that it is no longer in
the best interests of the Company to qualify as a REIT.
Major Tenant
VF Corporation, which is one of the world's largest apparel
manufacturers, has the largest number of stores and square footage in the
Company's property portfolio with 34 stores (25 of which anchor the Company's
centers) and approximately 1,226,000 square feet representing 25% of the
Company's total square footage. VF Corporation, through its operating
subsidiaries and divisions, designs, manufactures and markets clothing apparel.
Rental revenues from VF Factory Outlet, Inc. ("VFFO"), a subsidiary of VF
Corporation, represented approximately 11% of the Company's 1997 rental
revenues. The Company could be adversely affected in the event of the bankruptcy
or insolvency of, or a downturn in the business of, VFFO or in the event that
VFFO does not renew its leases as they expire. Since VFFO is the anchor tenant
in 25 of the Company's 41 centers, the failure of VFFO to renew its leases or
otherwise to continue to operate in one or more of the centers could have a
material adverse impact on the performance of other tenants in the affected
center (and may permit some tenants to terminate their leases) and on the
Company. No other tenant accounted for more than 6.0% of the Company's base
rental revenues or aggregate leased GLA during 1997.
VFFO has 21 leases with the Company for initial terms of 10 years
which were executed in June 1993. These leases with VFFO provide that if the
expansions of certain of the Company's outlet centers are completed as
scheduled, the initial terms of these leases will expire ten years from the date
such expansions are completed. To date, seven of those leases had been amended
to extend their maturity dates between July 2004 and March 2006. Pursuant to
these leases, VFFO is obligated to pay certain increases in common area
maintenance expenses and its pro rata share of insurance expenses and real
estate taxes, and certain operating expenses. Additionally, certain stores (six
in total) may cease operations during the term of their leases if VFFO does not
meet a break-even point in these locations for three consecutive years. No more
than two of these VFFO stores may close in any year and the tenant is still
obligated for the payment of all rental obligations for
10
<PAGE>
the remaining term. As of December 31, 1997 all six locations had income in
excess of the break-even point. See "Item 2 - Properties - Planned Expansions"
for a discussion of the Company's satisfaction of obligations to expand VFFO
Properties.
Competition
In seeking new investment opportunities, the Company competes with
other real estate investors, including pension funds, foreign investors, real
estate partnerships, other real estate investment trusts and other domestic real
estate companies. On properties presently owned by the Company or in which it
has investments, the Company and its tenants and borrowers compete with other
owners of like properties for tenants and/or customers depending on the nature
of the investment. Management believes that the Company is well positioned to
compete effectively for new investments and tenants.
Environmental Matters
Phase I environmental site assessments and when applicable, Phase
II assessments (which generally did not include environmental sampling,
monitoring or laboratory analysis) have been completed by the Company with
respect to all of its properties either as required by a lender or upon
acquisition/development. No studies are dated prior to 1995.
The Company's policy going forward is to obtain new environmental
site assessments on all acquisition or development properties prior to purchase.
None of these environmental assessments or subsequent updates
revealed any environmental liability that management believes would have a
material adverse effect on the Company. No assurances can be given that (i) the
environmental assessments detected all environmental hazards, (ii) future laws,
ordinances or regulations will not impose any material environmental liability,
or (iii) current environmental conditions of the Properties will not be affected
by tenants, by properties in the vicinity of the Properties, or by third persons
unrelated to the Company.
The Vacaville, California property and one of the community
shopping centers have conditions which may pose a risk of environmental
liability at these properties. The Company believes that releases of petroleum
products from underground storage tanks located at adjacent properties may have
affected these properties. In each instance where remediation has been
determined to be necessary, the Company believes that the third parties
responsible for any contamination have accepted responsibility therefor and
intend to remediate the effects of any such contamination. The Company also
believes that these responsible parties have sufficient resources to conduct
such remediation. There can be no assurance, however, that the responsible
parties will adequately complete remediation of any contamination. However, due
to the potential environmental issues associated with the property and the
properties adjacent to the Company's property, the Company has accrued $500,000
for the potential remediation cost of the property. If the responsible parties
do not complete such remediation, the Company may be required to do so, and the
expenses associated with such remediation may be material. In addition, the
investigation or remediation of such contamination (by the responsible parties
or by the Company) may impose limitations upon the Company's ability to use the
properties. Additionally, the lender on the Vacaville property required that
$150,000 be deposited into an escrow account, together with $4,200 in monthly
deposits, to be used, if necessary, to perform certain possible remediation
work.
The Company believes that it is in compliance in all material
respects with Federal, state and local ordinances and regulations regarding
hazardous or toxic substances. Neither the Company, nor, to the Company's
knowledge, any of its predecessor entities or transferors have been notified by
any governmental authority as to it being designated as a potential responsible
party or of any material non-compliance, liability or other environmental claim
in connection with any of the Properties. The Company is not aware of any other
environmental condition with respect to any of its properties that it believes
would involve any substantial expenditure.
Insurance
Management believes that each of the Properties is covered by
adequate fire, flood, property and, in the case of the Vacaville and Lathrop
centers, earthquake insurance provided by reputable companies and with
commercially reasonable deductibles and limits.
11
<PAGE>
Employees
As of March 31, 1998, the Company employed 207 persons, 90 of whom
are located primarily at the Company's headquarters in Cary, North Carolina. The
remaining 117 employees are property management, marketing and maintenance
personnel located at the Properties. The Company believes that its relations
with its employees are good.
Item 2 - Properties
As of December 31, 1997, the properties (the "Properties") owned by the
Company consist of: (1) 28 community shopping centers in 15 states aggregating
approximately 3,090,000 square feet; (2) 10 outlet centers in 9 states
aggregating approximately 2,120,000 square feet; (3) two outlet centers
aggregating approximately 150,000 square feet and one former factory outlet
center which has been converted to commercial office use with approximately
150,000 square feet that are held for sale; and (4) approximately 182.3 acres of
outparcel land located near or adjacent to certain of the Company's centers and
are being marketed for lease or sale.
The following table sets forth the location of, and certain
information relating to, the Properties as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total Total Percentage Percentage
State Number GLA of Total Of Total Rental Percentage of GLA
Of Centers (Sq. Ft.) GLA Revenue (1) in Leased
- ------------------------------- -------------- ------------- ------------- -------------------- -------------------
Operating Properties:
Community Centers
Arizona 2 294,788 5.4% 4.4% 90.0%
Florida 1 83,962 1.5% 1.0% 100.0%
Georgia 1 140,025 2.5% 1.5% 71.9%
Illinois 1 91,063 1.7% 0.7% 73.2%
Iowa 1 112,405 2.0% 1.3% 92.3%
Kentucky 3 304,402 5.5% 4.3% 98.7%
Louisiana 2 220,281 4.0% 3.5% 97.7%
Mississippi 1 124,412 2.3% 0.8% 93.7%
Missouri 1 83,464 1.5% 1.0% 100.0%
Nebraska 1 89,646 1.6% 1.2% 93.3%
Nevada 1 229,958 4.2% 4.0% 69.6%
North Carolina 5 605,485 11.0% 10.7% 98.1%
Tennessee 2 193,137 3.5% 2.0% 95.1%
Texas 6 515,412 9.4% 6.8% 89.7%
-------------- ------------- ------------- -------------------- -------------------
Subtotal (Community
Centers 28 3,088,440 56.1% 43.2% 96.3%
Outlet Centers
Alabama 1 111,909 2.0% 1.5% 97.7%
California 1 447,725 8.1% 16.6% 96.6%
Maine 1 24,620 0.5% 1.0% 100.0%
Missouri 1 287,522 5.2% 5.1% 81.2%
New York 1 43,650 0.8% 1.2% 100.0%
North Carolina 1 355,756 6.5% 8.0% 99.7%
Tennessee 2 437,064 7.9% 11.0% 96.1%
Utah 1 185,281 3.4% 3.5% 100.0%
Washington 1 223,383 4.1% 6.7% 100.0%
-------------- ------------- ------------- -------------------- -------------------
Subtotal (Outlet Centers) 10 2,116,910 38.5% 54.6% 96.3%
-------------- ------------- ------------- -------------------- -------------------
Subtotal (Operating
Properties) 38 5,205,350 94.6% 97.8% 93.4%
-------------- ------------- ------------- -------------------- -------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Properties Held for Sale:
<S> <C> <C> <C> <C> <C>
Arizona 1 141,828 2.6% 1.4% 64.8%
California 1 131,400 2.4% 0.6% 34.1%
New Hampshire 1 24,740 0.4% 0.2% 54.2%
-------------- ------------- ------------- -------------------- -------------------
Subtotal 3 297,968 5.4% 2.2% 50.4%
-------------- ------------- ------------- -------------------- -------------------
Total (All Properties) 41 5,503,318 100.0% 100.0% 91.1%
============== ============= ============= ==================== ===================
</TABLE>
(1) Total rental revenue consists of base and percentage rent plus
recoveries from tenants for the year ended December 31, 1997.
The following table sets forth certain information as of December 31,
1997 relating to the Company's 41 centers. All of the Properties are owned fee
simple by the Company, except for the outlet center located in Boaz, Alabama,
which the Company holds pursuant to a lease which has renewal options through
2027. The Company has the right to purchase the land and building during any
term for a total of $25,000 plus the present value of any future rental payments
due during the remaining term. The Company's monthly rental payments during the
current term are $350 through and including January 31, 1998; $500 from February
1, 1998 through and including January 31, 1999; $750 from February 1, 1999
through and including January 31, 2002; and $1,000.00 throughout the remainder
of the term and any renewal terms. The current term expires January 31, 2007.
Additionally, the Company holds a ground lease at its Iowa, Louisiana center
which has renewal options through 2087.
<TABLE>
<CAPTION>
Date
Developed/
(Expanded Gross Percentage Average Percentage
or Land Leasable of Total Rental of GLA in
Renovated) Area Area Rental Revenue Per Operation
Property Location (1) (Acres) (Sq. Ft.) Revenue (2) Sq. Ft. (3) Leased
- -------------------- ------------------------------- ----------- --------- ----------- ------------ -------------- -------------
Operating Properties:
Community Centers:
<S> <C> <C> <C> <C> <C> <C> <C>
Mesa, AZ Situated along U.S. Highways 1987
60 and 89 (1995) 26.9 167,213 3.0% 12.99 88.1%
Tucson, AZ Situated along Interstate 10 1984 12.5 127,575 1.4% 8.07 92.6%
Graceville, FL Situated along U.S. Highway 77 1985 25.0 83,962 1.0% 8.51 100.0%
Lake Park, GA Situated along Interstate 75 1989
(1992) 12.5 140,025 1.5% 12.20 71.9%
West Frankfort, IL Situated along Interstate 57 1990 20.0 91,063 0.7% 9.64 73.2%
Story City, IA Situated along Interstate 35 1990
(1996) 20.0 112,405 1.3% 8.68 92.3%
Carrollton, KY Situated along Highway 22 1989 21.2 63,896 0.7% 12.54 100.0%
Georgetown, KY Situated along Interstate 75 1991 16.7 176,615 3.0% 12.75 97.7%
Hanson, KY Situated along U.S. Highway 41 1989 21.3 63,891 0.6% 7.27 100.0%
Arcadia, LA Situated along Interstate I-20 1989
(1994) 28.7 89,528 1.3% 12.48 100.0%
Iowa, LA Situated along Interstate 10 1989
(1994) Lease 130,753 2.2% 12.85 96.2%
Tupelo, MS Situated along Interstate 44 1987
(1996) 16.8 124,412 0.8% 3.24 93.7%
Lebanon, MO Near Interstate 44 and State
Highways 5, 32 and 64 1985 23.7 83,464 1.0% 9.18 100.0%
Nebraska City, NE Intersection of U.S. Highway 1990
75 and State Highway 2 (1996) 21.4 89,646 1.1% 11.58 93.3%
Las Vegas, NV Situated along Las Vegas Blvd.
1992 25.7 229,958 3.9% 13.59 69.6%
Raleigh, NC Wake Forest Rd. 1966 6.0 54,375 1.1% 13.51 100.0%
Eastgate
Wilson, NC U.S. Highway 264 1992 18.5 91,266 1.2% N/A 100.0%
Gateway Plaza
Cary, NC U.S. Highway 64 1986 21.1 142,378 3.1% 12.34 97.2%
MacGregor Village
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Date
Developed/
(Expanded Gross Percentage Average Percentage
or Land Leasable of Total Rental of GLA in
Renovated) Area Area Rental Revenue Per Operation
Property Location (1) (Acres) (Sq. Ft.) Revenue (2) Sq. Ft. (3) Leased
- -------------------- ------------------------------- ----------- --------- ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Raleigh, NC Falls of the Neuse Rd. 1980 19.5 165,309 3.4% 12.78 97.7%
North Ridge
Raleigh, NC-Tower U.S. Highway 64 1976 19.3 152,157 2.0% 7.44 97.4%
Tri-Cities, TN Situated along Interstate 81
and State Highway 125 1990 23.3 132,908 1.4% 8.81 92.9%
Union City, TN Situated along U.S. Highway
51 1988 23.3 60,229 0.6% 9.29 100.0%
Corsicana, TX Intersection of Interstate
45/287 and State Highway 32 1989 20.0 63,605 0.6% 8.27 100.0%
Hempstead, TX Situated along U.S. Highway
290 1989 14.8 63,605 0.6% 13.89 94.0%
La Marque, TX Situated along Interstate 45 1990 19.2 176,071 3.2% 15.35 73.5%
Livingston, TX Situated along U.S. Highway 59
1989 15.0 63,605 0.7% 10.70 100.0%
Mineral Wells, TX Situated along U.S. Highway
180 1989 15.5 63,609 0.7% 8.42 100.0%
Sulphur Springs, TX Situated along Interstate 30 1986 13.3 84,917 1.1% 8.97 100.0%
--------- ----------- ------------ -------------- -------------
Subtotal (Community Centers) 521.2 3,088,440 43.2% 11.25 91.4%
Outlet Centers:
Boaz, AL Situated along U.S. Highway 61 1982
(1994) Lease 111,909 1.5% $12.23 97.7%
Vacaville, CA Situated along Interstate 84 1988 52.6 447,725 16.6% 22.12 96.6%
Kittery, ME Situated along U.S. Highway 1 1987 5.3 24,620 1.0% 22.32 100.0%
Branson, MO Situated along U.S. Highway 1995 24.4 287,522 5.1% 12.73 81.2%
248
Lake George, NY Intersection of Rt. 9 and 49 1988 4.6 43,650 1.2% 15.10 100.0%
Smithfield, NC At the junction of 1988
Interstate 95 and U.S. (1995)
Highway 70 and 70-A (1996) 51.6 355,756 8.0% 15.68 99.7%
Crossville, TN Intersection of Interstate 40 1988
and Genesis Road (1994)
(1997) 16.5 151,256 2.4% 13.56 100.0%
Nashville, TN Across from Opryland 1993
(1995) 33.1 285,808 8.6% 16.78 98.3%
Draper, UT Situated along 1986
Interstate 15 (1995) 28.9 185,281 3.5% 12.40 100.0%
North Bend, WA Situated along 1990
Interstate 90 (1994) 16.0 223,383 6.7% 18.86 100.0%
--------- ----------- ------------ -------------- -------------
Subtotal (Outlet Centers): 233.0 2,116,910 54.6% 17.02 96.3%
--------- ----------- ------------ -------------- -------------
Subtotal (Operating Properties): 754.2 5,205,350 97.8% 14.28 93.4%
========= =========== ============ ============== =============
Properties Held for
Sale:
Casa Grande, AZ Situated along Interstate 10 1991 14.9 141,828 1.4% 8.72 64.8%
Lathrop, CA Situated along Interstate 5 1993 14.3 131,400 0.6% 10.46 34.1%(4)
Conway, NH Intersection of Rt. 16 & 153 1985 2.1 24,740 0.2% 6.20 54.2%
--------- ----------- ------------ -------------- -------------
Subtotal (Properties Held for Sale) 31.3 297,968 2.2% 8.92 50.4%
--------- ----------- ------------ -------------- -------------
Total (All Properties) 785.5 5,503,318 100.0% $14.08 91.1%
========= ========== ============= ============= ==============
</TABLE>
1) Reflects the year in which the outlet center was developed or re-developed.
2) Total Rental Revenue consists of base and percentage rent plus recoveries
from tenants for the year ended December 31, 1997.
3) Average Rental Revenue per square foot is defined as Total Rental Revenue
divided by GLA in operation, exclusive of anchors, at December 31, 1997.
The average rental revenue paid by the Company's anchor tenants
(Books-A-Million, Carolina Pottery, Food Lion, K-Mart, VF Corporation,
West Point Stevens and Winn Dixie), including base and percentage rents
plus recoveries, was $6.93, $4.55, $6.81, $5.65, $5.63, $5.28 and $6.65
per square foot, respectively, in 1997.
4) The Company has converted this property to general office use and is
currently under contract for sale.
14
<PAGE>
Properties Held for Sale
As part of the Company's ongoing strategic evaluation of its portfolio
of assets, management has been authorized to pursue the sale of certain
properties that currently are not fully consistent with or essential to the
Company's long-term strategies. Management plans to evaluate all properties on a
regular basis in accordance with its strategy for growth and in the future may
identify other properties for disposition or may decide to defer the pending
disposition of those assets now held for sale. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", assets held for sale are valued at the lower of carrying value
or fair value less selling costs. Accordingly, in the fourth quarters of 1996
and 1995, the Company recorded a non-cash $5.0 million and $8.5 million
adjustment to the carrying value of the properties held for sale. The Company
continues to operate the properties and is actively marketing these properties.
As of December 31, 1997, two of the properties held for sale are under contract.
After recording the $5.0 million and $8.5 million valuation adjustment
in 1996 and 1995, respectively, the net carrying value of assets currently being
marketed for sale at December 31, 1997 and 1996 are $12.5 million and $11.4
million, respectively. There is $12.2 million of debt associated with these
properties held for sale at December 31, 1997. In March, 1998, the Company
repaid debt associated with one property held for sale in the amount of $5.7
million.
The following summary financial information pertains to the properties held for
sale for the year ended December 31 (in millions):
1997 1996 1995
---- ---- ----
Revenues $ 1.1 $ 2.1 $ 3.0
Net loss after operating
and interest expenses $ (1.1) $ (1.0) $ (0.5)
========= ============ =============
Planned Expansions
For the year ended December 31, 1997 the Company had delivered
approximately 32,470 square feet of expansion space to tenants in Crossville,
Tennessee. The following table sets forth certain information relating to the
Company's proposed 1998 expansion activities:
<TABLE>
<CAPTION>
Current Post-Expansion Percentage of Estimated
Center GLA Expansion GLA GLA Expansion GLA Planned Cost of
Location (Sq. Ft.) (Sq. Ft.) (Sq. Ft.) Committed* Completion Date Expansion
- -------------------- --------------- -------------- ------------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Wilson, NC 91,266 45,464 136,730 100% April 1998 $2,450,000
Smithfield, NC 355,756 54,000 409,756 100% Summer 1999 $8,000,000
</TABLE>
* The percentage of expansion GLA committed reflects the percentage of
the proposed GLA for which leases or lease commitments have been obtained from
tenants as of December 31, 1997.
In undertaking developments and expansions, the Company will incur
certain risks, including the expenditure of funds on, and the devotion of
management's time to, projects which may not come to fruition. In addition,
completion of planned developments and expansions will be subject to the
availability of adequate debt or equity financing. Other risks inherent in
development and expansion activities include possible cost-overruns, work
stoppages and delays beyond the reasonable control of the Company. Accordingly,
there can be no assurance if or when any or all of the Company's planned
expansions or any other development or expansion project will be completed or,
if completed, that the costs of construction will not exceed, by a material
amount, estimated costs.
In addition, the agreement pursuant to which the Company acquired the VF
Properties required, subject to certain conditions, that the Company complete,
during the three years following the acquisition, the expansion of ten
properties by an aggregate of at least 320,000 square feet of gross building
area (approximately 288,000 square feet of GLA). The agreement provided for
periodic payments to VF Corporation, aggregating up to approximately $21.7
million if the expansions are not completed on a timely basis. This amount was
reduced as
15
<PAGE>
the expansions of the VF Properties were completed. Three expansions totaling
approximately 97,000 square feet were completed in 1994, two additional
expansions approximating 100,000 square feet were completed in 1995 and three
additional expansions totaling approximately 106,000 square feet in Story City,
Iowa, Nebraska City, Nebraska and Tupelo, Mississippi were completed in 1996. In
December 1996 the Company and VFFO entered into an amendment which set forth a
framework to resolve the outstanding issues related to the expansion
requirements. The amendment deleted the requirement that the Company expand the
Hempstead, Texas, Livingston, Texas and Lebanon, Missouri centers and
substituted therefor: (i) the now-completed expansion of the Tupelo, Mississippi
center; (ii) the existing arrangement whereby the Company's center and an
adjacent center in Sulphur Springs, Texas are operated as a single property; and
(iii) the completed requirement that the Company enter into contracts to provide
for the benefit of VFFO, for at least three years, three billboards each near
the Draper, Utah; Crossville, Tennessee and Tupelo, Mississippi centers. In
addition, the Company paid to VFFO the $2,016,000 final installment due under
the agreement referenced above. As of February 28, 1997, the Company had
satisfied all remaining obligations under the agreement.
Additional Information about Certain Centers
As of December 31, 1997, the Company's outlet center at Vacaville,
California, had a book value of 9% of the total assets of the Company and
generated gross revenue in 1997 that accounted for approximately 18% of the
Company's 1997 aggregate gross revenue. No other center accounts for greater
than 10% of the Company's 1997 aggregate gross revenue. The following sets forth
information relating to this center:
The Vacaville, California outlet center is located on 53 acres at the
intersection of Interstate 80 and Nut Tree Road, approximately 60 miles east of
San Francisco and 30 miles west of Sacramento, the state capital. Phase I of the
center, which opened in 1988, contains approximately 206,000 square feet of GLA.
Phase II, which opened in 1992, contains approximately 120,000 square feet of
GLA. Phase III, which also opened in 1992, contains approximately 122,000 square
feet of GLA. As of December 31, 1997, 1996 and 1995, Vacaville was 97%, 89% and
88%, respectively, leased to approximately 100 tenants with an average effective
annual rental revenue per square foot of $22.12, $22.58 and $25.97,
respectively. Major tenants at the center include, The GAP, Nike, VF Factory
Outlet, Levi's, Reebok, Mikasa, 9 West, and Carter Childrenswear outlet.
The following table shows the lease expirations for tenants in occupancy
as of December 31, 1997 for the Vacaville outlet center (assuming that none of
the tenants exercise renewal options).
<TABLE>
<CAPTION>
Pro Forma Average
Annualized % of Annual Base
Leases to Leased GLA Base Rental Total Rent
Year Expire(2) (sq. ft.)(1) Revenue Revenue Per Sq. Ft.
--------- ------------- ------------------ -------------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1998 30 114,669 1,870,603 26.8% $16.31
1999 20 67,513 908,756 13.0% 13.46
2000 19 60,146 1,106,659 15.9% 18.40
2001 27 86,103 1,383,223 19.8% 16.06
2002 6 29,645 531,603 7.6% 17.93
2003 7 63,079 933,178 13.4% 14.79
2004 2 8,400 140,800 2.0% 16.76
2005 0 0 0 0.0% 0.00
2006 1 6,000 108,000 1.5% 18.00
2007+ 0 0 0 0.0% 0.00
============= ================== ==================== =========== ===============
Total 112 432,555 $6,982,822 100.0% $16.14
============= ================== ==================== =========== ===============
</TABLE>
(1) Total leased GLA is not equal to leasable GLA due to vacancies.
(2) Expirations assume no renewals or releasing for tenants in occupancy as of
December 31, 1997.
16
<PAGE>
Undeveloped Parcels
The Company owns approximately 182 acres of undeveloped parcels located
near certain of the Company's shopping centers. The Company has a marketing
program to lease, develop or sell the parcels it owns through third party
brokers. During 1997, 27.6 acres were sold at $1.3 million which equaled the
cost of the acreage. Because property held for sale by a REIT is subject to
significant restrictions imposed by the Code, the Company has formed a
non-qualified REIT subsidiary under Section 356 of the Code. By using a
non-qualified REIT subsidiary, the Company anticipates it will be not be subject
to the 100% tax imposed on the gain derived from the sale of certain outparcels
of land owned by the Company.
Tenants
General. Management believes the Properties offer tenants a diverse
tenant mix which includes many well-known manufacturers/retailers. The majority
of the Company's current tenants are large, publicly-traded companies. The
Company's current core tenant mix at its Properties features such well-known
brands as Nike, The Gap, Liz Claiborne, Lee, Wrangler, Jantzen, Jansport, Bass,
Reading China and More, Vanity Fair, Health-tex, Easy Spirit, 9 West, Enzo,
Casual Corner, L'eggs, Hanes, Bali, Champion, Levi's, Revlon, Mikasa,
Sunbeam/Oster.
Tenant Leases. The majority of the leases with the Company's tenants
have terms of between five and ten years which expire between 1998 and 2017.
While many of these leases are triple-net leases which require tenants to pay
their pro rata share of utilities, real estate taxes, insurance and operating
expenses, as of December 31, 1997, 21% of the aggregate GLA of its shopping
centers was leased to tenants under gross leases, pursuant to which the Company
is obligated to pay all utilities and other operating expenses of the applicable
center. VFFO is the Company's largest tenant. See "Item 1 -- Business -- Major
Tenant" for a discussion of the Company's leases with VFFO.
Lease Expiration
The following table shows tenant lease expirations for tenants in
occupancy as of December 31, 1997 for the next ten years at the Properties
(assuming that none of the tenants exercises any renewal option):
<TABLE>
<CAPTION>
Pro Forma Average
Leased Annualized Annual Base
Leases to GLA Base Rental % of Rent Per
Year Expire (1) (sq. ft.)(2) Revenue Total Sq. Ft.
- --------------- ------------ -------------------- ----------------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
1998 244 919,280 $8,910,000 21.9% $ 9.69
1999 144 490,375 5,489,879 13.4% 11.20
2000 186 698,148 7,852,768 19.3% 11.25
2001 106 437,826 4,842,505 11.9% 11.06
2002 65 280,460 2,738,874 6.7% 9.77
2003 71 1,334,110 5,936,296 14.5% 4.45
2004 11 196,256 1,005,992 2.5% 5.13
2005 11 210,451 1,350,395 3.3% 6.42
2006 13 200,684 1,416,834 3.5% 7.06
2007+ 7 243,722 1,223,713 3.0% 5.02
------------ -------------------- ----------------------- --------------- -----------------
Total 858 5,011,312 $40,767,256 100.0% $ 8.14
============ ==================== ======================= =============== =================
</TABLE>
(1) Expirations assume no renewals or releasing for tenants in occupancy as of
December 31, 1997.
(2) Total leased GLA is not equal to leasable GLA due to vacancies.
17
<PAGE>
Tenant Concentrations
The following table provides certain information regarding the ten
largest tenants (based upon total GLA leased) and other tenants for the year
ended December 31, 1997.
<TABLE>
<CAPTION>
Percentage
of Total Number Actual
Total GLA GLA of Base Rental % of
Tenant Leased(1) Leased Stores Revenue Total
- --------------------------------------- ----------------- -------------- ----------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
VF Factory Outlet, Inc. 1,225,655 24.5% 34 $5,809,614 15.1%
Carolina Pottery Retail Group, Inc. 278,458 5.6% 4 1,116,335 2.9%
Phillips-Van Heusen Corporation 253,182 5.1% 59 2,682,570 7.0%
The Dress Barn, Inc. 139,604 2.8% 27 1,879,631 4.9%
Nine West Group, Inc. 135,555 2.7% 30 1,353,207 3.5%
Bugle Boy Industries, Inc. 129,120 2.6% 23 985,966 2.6%
US Factory Outlet 100,957 2.0% 3 102,912 0.3%
The Paper Factory of Wisconsin, Inc. 94,088 1.9% 24 1,446,686 3.8%
Designs, Inc./Levi Strauss & Co. 85,111 1.7% 9 1,220,521 3.2%
WestPoint Stevens Stores, Inc. 82,840 1.7% 4 348,537 0.9%
----------------- -------------- ----------- ---------------- --------------
2,524,570 50.4% 217 16,945,978 44%
Others 2,486,742 49.6% 641 21,589,050 56%
----------------- -------------- ----------- ---------------- --------------
Total 5,011,312 100.0% 858 $38,535,028 100.0%
================= ============== =========== ================ ==============
</TABLE>
(1) Total leased GLA is not equal to leasable GLA due to vacancies.
Mortgage Debt
The following table sets forth, as of December 31, 1997, certain
information regarding the mortgages encumbering certain of the Properties (in
thousands).
<TABLE>
<CAPTION>
1997 Estimated
Annual Balloon
Principal Interest Debt Payment at
Amount Rate Type Service Maturity Maturity Secured By
- ------------- ---------------------- --------------------------- --------- ------------ ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
$54,583 7.51% Collateralized Mortgage Notes $ 1,324 $ 46,716 2002 Arcadia, LA; Carrollton, KY;
Casa Grande, AZ; Conway, NH;
Crossville, TN; Draper, UT;
Hanson, KY; Iowa, LA; Kittery,
ME; La Marque, TX; Lake
George, NY; Las Vegas, NV;
Mesa, AZ; North Bend, WA;
Tucson, AZ; Union City, TN;
Vacaville, CA; and West
Frankfort, IL (collectively
"FSA Finance Properties"
20,000 7.87 Collateralized Mortgage Notes -- 20,000 2002 FSA Finance Properties
17,000 8.39 Collateralized Mortgage Notes -- 17,000 2002 FSA Finance Properties
- ---------- -------------------- ------------------------------ --------- ------------ ---------- -----------------------
91,583 Total Fixed Rate Debt 1,324 83,716
- ---------- --------------------- ------------------------------ --------- ------------ ---------- -----------------------
Prime + 1/2 % Line of Credit - 736 Eastgate
736
5,711 Prime + 2.25% (1) Mortgage 77 5,719 1998 Lathrop, CA
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
134,545 LIBOR + 2.25% (2) Revolving Credit Facility 134,545 1999 Georgetown, KY; Lake Park, GA;
Nashville, TN; Smithfield, NC;
Tri-Cities, TN; Story City,
IA; Sulphur Springs, TX ;
Nebraska City, NE; Boaz, AL;
Graceville, FL; Tupelo, MS;
Lebanon, MO; Corsicana, TX;
Hempstead, TX; Livingston, TX;
and Mineral Wells, TX;
MacGregor, North Ridge,
Gateway, Tower
- ------------- ---------------------- --------------------------- --------- ------------ ---------- -----------------------
140,992 Total Variable Rate Debt 77 140,264
============= ================================================== ========= ============ ========== =======================
$232,575 Total Mortgage Debt $1,401 $223,980
============= ================================================== ========= ============ ========== =======================
</TABLE>
(1) The Company has repaid this mortgage debt as of March 25, 1998.
(2) This facility was reduced by $73.4 million on March 11, 1998 from a $75
million securitization with Nomura Asset Capital. Eleven of the
properties which secure this revolving facility now secure the $75
million securitization.
Taxes
Because the acquisitions of all of the Properties were taxable
transactions to the sellers of those properties, the Company has a "stepped-up"
aggregate cost basis in these real estate assets for Federal income tax
purposes. Depreciation is calculated using the straight line method over the
estimated useful lives of the assets, for which buildings and improvements range
from 15 to 31.5 years and equipment ranges from five to 10 years.
The Company's aggregate real estate tax obligation for the Properties
during the fiscal year ended December 31, 1997, was approximately $5.9 million,
or $1.07 per square foot of GLA. The real estate obligation and rates per square
foot of GLA for Vacaville, the Company's largest outlet center, was
approximately $1.4 million or $3.13 per square foot of GLA.
Executive Offices
The Company currently leases its 31,800 square foot executive offices in
Cary, North Carolina.
Item 3 - Legal Proceedings
In August 1995, the Company executed written agreements ("Agreements")
to acquire both the outlet centers owned by The Public Employees Retirement
System of Ohio ("OPERS") and the management and business operations of the
Charter Oak Group Ltd., a subsidiary of Rothschild Realty, Inc., ("RRI"),
subject to certain terms and conditions. In December 1995, the Company reported
that RRI had terminated the Agreements and thus, the acquisitions did not take
place.
Subsequent to the termination of the Agreements, RRI for itself and on
behalf of OPERS made a demand for payment with respect to a $5 million
promissory note (the "Note") issued by the Company in connection with its
proposed acquisition. The Note was payable only upon the occurrence of certain
conditions and a dispute rose as to whether those conditions had been met.
After an unsuccessful attempt at mediation of the dispute, RRI filed for
arbitration of the matter in New York. The Company thereafter sought a
preliminary injunction in North Carolina, seeking, among other things, a stay of
the New York arbitration. The North Carolina court entered an order requiring
the parties to arbitrate in North Carolina. Thereafter, the Company OPERS' and
RRI reached a settlement of the dispute. After an unsuccessful attempt at
mediation of the dispute, RRI filed for binding arbitration of the matter to
settle the dispute. Following the arbitration hearing held in late April 1997,
the Company agreed to pay $2.9 million to RRI on behalf of related entities of
OPERS in settlement of all outstanding issues between the Company and OPERS/RRI
relating to the terminated merger. The settlement was payable and was fully paid
on December 31,1997. The Company previously recorded a charge of $1.7 million in
December 1995 in connection with the termination. The remaining $1.2 million of
the $2.9 million, plus an estimated for the Company's legal fees, has been
accrued for as of December 1997 and is included in general and administrative
expenses. All amounts due to OPERS/RRI have been paid and the deed of trust has
been released. The Company considers the matter closed.
19
<PAGE>
In July 1996, a purported class action lawsuit was filed in the United
States District Court for the Eastern District of North Carolina against the
Company, its former chairman and chief executive officer, J. Dixon Fleming, Jr.,
and a former president of the Company, David A. Hodson. The complaint sought
certification of a class consisting of all persons (with certain exclusions) who
purchased common stock of the Company between December 16, 1993 and April 17,
1996, inclusive (the "Class Period"). The complaint alleged that, during the
Class Period, defendants made certain false or misleading statements to the
public concerning (1) earnings and funds from operations; (2) the Company's
ability to maintain dividends at prior levels; (3) the alleged maintenance of
dividends through borrowings rather than funds from operations; (4) the
Company's ability to close a proposed acquisition; (5) the alleged purchase of
certain properties from affiliates of the individual defendants at inflated
prices; and (6) alleged improper accounting practices.
In October, 1996, a second purported class action lawsuit was filed in
the United States District Court for the Eastern District of North Carolina
against the Company and Messrs. Fleming and Hodson, containing factual
allegations and legal claims similar to those asserted in the prior purported
class action. The plaintiffs in both actions seek unspecified monetary damages.
The cases were consolidated and the Company filed motions to dismiss both
lawsuits.
On November 5, 1997, the court granted the motions to dismiss and
entered judgment for defendants related to the above. The time for plaintiffs to
file appeals has expired without appeal.
In addition, the Company is a party to certain legal proceedings
relating to its ownership, management and leasing of the properties, arising in
the ordinary course of business.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Stockholders on December 15, 1997
at its corporate office in Cary, North Carolina.
The purpose of the meeting was to obtain the approval from stockholders
of record as of October 31, 1997 pertaining to the following:
(bullet) Reincorporation of the Company from the State of Delaware to the State
of Maryland
The reincorporation was approved as follows:
For 6,196,916 50.7%
Against 1,153,019 9.4%
Abstentions 96,371 0.8%
--------------------------- -------------- -----------------
Total Voted 7,446,306 60.9%
--------------------------- -------------- -----------------
Total Shares Outstanding 12,224,229 100.0%
=========================== ============== =================
No other business was conducted at this Special Meeting
The reincorporation required an affirmative vote of the stockholders
owning a majority of the outstanding shares. The reincorporation took place on
December 17, 1997. As a result of the reincorporation, the Company reorganized
itself into an umbrella partnership structure (an "UPREIT") through the
contribution of substantially all of its assets into a limited partnership known
as FAC Properties, LP, which is controlled by the Maryland company.
The Company felt those events were strategic for the Company for the
following reasons:
(bullet) The Company will realize a cost savings in annual
franchise tax payments of approximately $150,000 by changing its
state of incorporation from Delaware to Maryland.
(bullet) By adopting an UPREIT structure, the Company will realize
annual cost savings of approximately $188,000 beginning in 1998
related to state franchise tax payments on its assets located in
certain states; and
20
<PAGE>
(bullet) An UPREIT structure may enable the Company to acquire
properties under more favorable economic terms.
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock began trading on the NYSE on June 3, 1993, under the
symbol "FAC." As of March 23, 1998, there were approximately 609 stockholders of
record.
The following table sets forth the quarterly high and low sales prices
of the Common Stock and dividends paid per share for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------- ---------------------------------
High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
First Quarter $6 3/4 $ 5 3/4 $ 0.00 $ 13 5/8 $ 9 7/8 $ 0.25
Second Quarter 7 5 1/4 0.00 10 1/8 9 0.25
Third Quarter 8 7/16 6 1/16 0.00 9 1/2 8 1/2 0.25
Fourth Quarter 8 7/16 6 3/4 0.00 8 7/8 6 5/8 0.00
--------------- --------------- --------------- --------------- -------------- ---------------
</TABLE>
Distributions
The Company intends to make a determination regarding its dividend
distributions annually following review of the Company's year end financial
results. The Company's policy is to declare dividends in amounts equal to 95% of
the Company's taxable income which is the minimum dividend required to maintain
REIT status. Based upon previous losses, the Company will have approximately
$____ million of net operating loss carry forwards for 1998 which could result
in no dividend payment requirement to maintain its REIT status. Under the
Company's line of credit with Nomura, the Company may not make distributions if
it is in monetary default under the line of credit. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity."
The Company provides a Dividend Reinvestment Plan for stockholders
of record. Information on the Plan can be obtained from the Company's transfer
agent and registrar, First Union National Bank at (800) 829-8432.
Item 6 - Selected Financial Data
The following information should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 8 of this
report and "Management's Discussion and Analysis of Results of Operations and
Financial Condition" included in Item 7 of this report.
Industry analysts generally consider Funds from Operations ("FFO")
an appropriate measure of performance for an equity REIT. FFO means net income
(computed in accordance with generally accepted accounting principles) excluding
gains or losses from debt restructuring and sales of property plus depreciation
and amortization and adjustments for unusual items. Management believes that
FFO, as defined herein, is an appropriate measure of the Company's operating
performance because reductions for depreciation and amortization charges are not
meaningful in evaluating the operating results of the Properties which have
historically been appreciating assets.
Beginning in 1996 the Company adopted a change in the definition
of FFO as promulgated by the National Association of Real Estate Investment
Trusts (NAREIT). Under the new definition, amortization of deferred financing
costs and depreciation of non-real estate assets, as defined, are not included
in the calculation of FFO. All prior period FFO results have been retroactively
restated so that reported FFO in 1997 is comparable to prior periods.
"EBITDA" is defined as revenues less operating costs, including
general and administrative expenses, before interest, depreciation and
amortization and unusual items. As a REIT, the Company is generally not subject
to Federal income taxes. Management believes that EBITDA provides a meaningful
indicator of operating performance for the following reasons: (i) it is industry
practice to evaluate the
21
<PAGE>
performance of real estate properties based on net operating income ("NOI"),
which is generally equivalent to EBITDA; and (ii) both NOI and EBITDA are
unaffected by the debt and equity structure of the property owner.
FFO and EBITDA (i) do not represent cash flow from operations as
defined by generally accepted accounting principles, (ii) are not necessarily
indicative of cash available to fund all cash flow needs and (iii) should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance or as an alternative to cash flow as a measure
of liquidity.
Other data that management believes is important in understanding
trends in its business and properties are also included in the following table
(in thousands, except per share data).
The earnings per share amounts prior to 1997, have been restated
as required to comply with Statement of Financial Accounting Standards No. 128
"Earnings Per Share." For further discussion of earnings per share and the
impact of Statement No. 128, see Note 2 to the consolidated financial
statements.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993 (a)
--------------- ---------------- --------------- --------------- --------------
Operating Data:
<S> <C> <C> <C> <C> <C>
Rental revenues $ 53,726 $ 47,170 $47,129 $42,077 $12,135
Property operating costs 15,671 13,975 13,648 10,454 3,371
--------------- ---------------- --------------- --------------- --------------
38,055 33,195 33,481 31,623 8,764
Depreciation and amortization 15,652 13,802 11,900 8,511 1,997
General and administrative 6,397 6,199 15,279 5,567 1,615
Interest 16,436 14,175 10,903 4,435 13
Adjustment to carrying value of assets - (5,000) (8,500) - -
Extraordinary (loss) on early
extinguishment of debt (986) (103) - (884) -
--------------- ---------------- --------------- --------------- --------------
Net income (loss) $ (1,416) $ (6,084) $(13,101) $12,226 $5,139
(Loss) income before extraordinary
item $ (1,416) $ (6,349) $(13,101) $13,110 $5,139
applicable to common shareholders
=============== ================ =============== =============== ==============
Per common share data:
Income (loss) before extraordinary $ (0.04) $ (0.54) $(1.11) $1.11 $ 0.86
item
Extraordinary item (0.08) (0.01) - (0.07) -
--------------- ---------------- --------------- --------------- --------------
Net income (loss) $ (0.12) $ (0.55) $(1.11) $1.04 $ 0.86
=============== ================ =============== =============== ==============
Weighted average common shares 11,824 11,817 11,814 11,811 5,989
outstanding
=============== ================ =============== =============== ==============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 (a)
---------------------------------------------- -------------- ----------- ------------ ----------- -----------
Other Data:
============== =========== ============ =========== ===========
EBITDA $ 33,695 $ 28,278 $ 24,357 $ 26,056 $ 7,149
============== =========== ============ =========== ===========
Funds from Operations (FFO):
Net income (loss) $ (1,416) $ (6,084) $ (13,101) $ 12,226 $ 5,139
Adjustments:
Straight line rent (619) 383 (626) (922) (355)
Depreciation and amortization 15,254 13,513 11,722 8,428 1,953
Interest on exchangeable notes - 553 - - -
Compensation under restricted stock 537 392 - - -
award
Gain on sale of real estate - (37) (345) - -
Unusual items:
Non-recurring administrative costs 250 927 6,500 - -
Merger termination costs 1,250 - - - -
Adjustment to carrying value of - 5,000 8,500 - -
assets
Extraordinary loss on early
extinguishment of debt 986 103 - 884 -
-------------- ----------- ------------ ----------- -----------
Funds from Operations $ 16,242 $ 14,750 $ 12,650 $ 20,616 $ 6,737
============== =========== ============ =========== ===========
Weighted average shares outstanding diluted 14,158 13,399 11,814 11,811 5,989
(b)
============== =========== ============ =========== ===========
Funds from Operations per share assuming $ 1.15 $ 1.10 $ 1.07 $ 1.75 $ 1.12
dilution
============== =========== ============ =========== ===========
Funds Available for Distribution/Reinvestment:
Funds from Operations $ 16,242 $ 14,750 $ 12,650 $ 20,616 $ 6,737
============== =========== ============ =========== ===========
Adjustments:
Non-recurring administrative costs (250) (927) (6,500) - -
Merger termination costs (1,250) - - - -
Capitalized tenant allowances (1,418) (316) (1,380) (1,340) (156)
Capitalized leasing costs (1,054) (549) (407) (402) (68)
Recurring capital expenditures (845) (312) (796) (1,314) (233)
-------------- ----------- ------------ ----------- -----------
Funds Available for $ 11,425 $ 12,646 $ 3,567 $ 17,560 $ 6,280
Distribution/Reinvestment
============== =========== ============ =========== ===========
Funds Available for Distribution/Reinvestment $ 0.81 $ 0.94 $ 0.30 $ 1.49 $ 1.05
per share
============== =========== ============ =========== ===========
Dividends declared on annual earnings $ 0.00 $ 10,142 $ 24,101 $ 22,681 $ 9,469
============== =========== ============ =========== ===========
Dividends declared on annual earnings per $ 0.00 $ 0.75 $ 2.04 $ 1.92 $ 1.58
share
============== =========== ============ =========== ===========
Balance Sheet Data:
Income-producing properties (before $ 395,325 $ 354,029 $ 357,034 $ 321,088 $ 236,383
accumulated depreciation and
amortization)
Total assets 403,626 358,612 355,095 326,270 245,457
Debt on income properties 232,575 173,695 170,067 101,193 33,968
Total liabilities 240,289 194,020 194,609 122,930 38,808
============== =========== ============ =========== ===========
Total stockholders' equity 163,337 164,592 160,486 203,340 206,649
Portfolio Property Data:
Total GLA (at end of period) 5,503 4,865 4,626 4,234 3,502
Weighted average GLA 5,341 4,674 4,336 3,768 2,474
Number of properties (at end of 41 36 36 35 32
period)
Occupancy (at end of year):
Operating 93.4% 91.4% 92.3% 92.9% 93.5%
Development 0.0% 69.1% 52.1% - -
Held for sale 50.4% 42.9% 66.3% - -
</TABLE>
(a) Represents actual results of operations for the Company from March 31, 1993
(inception) to December 31, 1993, and actual balance sheet data at December
31, 1993.
(b) The following table sets forth the computation of the denominator to be
used in calculating the weighted-average shares outstanding for FFO and
funds available for distribution/reinvestment per share based on Statement
of Financial Accounting Standard No. 128, "Earnings Per Share":
<TABLE>
Denominator:
<S> <C> <C> <C> <C> <C>
Denominator- weighted average shares 11,824 11,817 11,814 11,811 5,989
Effect of dilutive securities:
Preferred stock 2,222 1,582 - - -
Employee stock options 69 - - - -
Restricted stock 43 - - - -
----------- ----------- ----------- ------------ -----------
Dilutive potential common shares 2,334 1,582 - - -
----------- ----------- ----------- ------------ -----------
Denominator- adjusted weighted average shares and
assumed conversions 14,158 13,399 11,814 11,811 5,989
=========== =========== =========== ============ ===========
23
</TABLE>
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation
The following discussion should be read in conjunction with the selected
financial data included in Item 6 of this report, and the consolidated financial
statements and notes thereto included in Item 8 of this report. Certain
comparisons between the periods have been made on a percentage basis and on a
weighted average square foot basis, which adjusts for square footage added at
different times during the year.
Certain statements under this caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," constitute
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). See "Forward-Looking Statements" included under this
section.
General Overview
The Company was incorporated on March 31, 1993 and completed an Initial
Public Offering ("IPO") on June 10, 1993. Prior to completion of the IPO, the
Company owned four outlet centers in four states aggregating 701,000 square feet
of gross leasable area ("GLA"). Upon completion of the IPO, 21 outlet centers
(the "VF Properties") in eleven states were acquired from VF Corporation
totaling 1,725,000 square feet of GLA. On November 1, 1993, the Company acquired
a 167,000 square foot center located near Opryland in Nashville, Tennessee. On
December 23, 1993, the Company completed a secondary offering of Common Stock
and used the proceeds to purchase six outlet centers in six states from the
Willey Creek Group aggregating 908,000 square feet. As of December 31, 1993, the
Company owned 32 outlet centers in 21 states totaling 3,502,000 square feet of
GLA.
During 1994, the Company began development of a 288,000 square foot
outlet center in Branson, Missouri, acquired three additional properties
totaling 449,000 square feet of GLA from the Willey Creek Group, and completed
expansions comprising 283,000 square feet of GLA in Iowa, Louisiana; Crossville,
Tennessee; North Bend, Washington; Arcadia, Louisiana; Boaz, Alabama; and
Nashville, Tennessee. By the end of 1994, the Company owned 35 outlet centers
totaling 4,234,000 square feet of GLA, which represented a 21% increase over the
prior year end, and had one center under development.
During 1995, the Company delivered 109,000 square feet of expansion
space to tenants in Mesa, Arizona and Draper, Utah. In September, 1995, the
Company completed an expansion of 28,000 square feet of GLA in Nashville,
Tennessee. Throughout 1995, the Company continued development of its 288,000
square foot outlet center in Branson, Missouri, with 207,000 square feet
available for delivery to tenants by December 31, 1995. The Company also began a
103,000 square foot expansion of its Smithfield, North Carolina factory outlet
center, with 48,000 square feet of the expansion space opening in November,
1995; and had commenced two additional expansions totaling 48,000 square feet in
Nebraska City, Nebraska and Story City, Iowa which were being constructed
pursuant to commitments made to VF Corporation in connection with the purchase
of the VF Properties in June, 1993. As of December 31, 1996, the Company had
satisfied its obligations to VF Corporation. The Company ended 1995 with
4,626,000 square feet of GLA, up 9% from the prior year end.
During 1996, the Company completed the remaining 81,000 square feet of
its 288,000 square foot outlet center in Branson, Missouri, and completed
expansions aggregating 158,000 square feet in Story City, Iowa; Nebraska City,
Nebraska; Smithfield, North Carolina; and Tupelo, Mississippi. The Company ended
1996 with 4,865,000 square feet of GLA, up 5.1% from the end of 1995.
In March, 1997, the Company purchased five retail community shopping
centers located in the Raleigh, North Carolina area for $32.3 million. The
centers totaling approximately 606,000 square feet and feature anchor tenants
such as Winn Dixie, Food Lion, K-Mart and Eckerd Drug. These centers contributed
revenues in excess of operating expenses, exclusive of interest, depreciation,
amortization and general and administrative expenses of $2.5 million from the
date acquired to December 31, 1997.
On September 22, 1997, the Company and Atlantic Real Estate Corporation
("ARC"), a privately held real estate development company based in Durham, North
Carolina jointly created a limited liability company named Atlantic Realty LLC
to develop and manage retail community and neighborhood shopping centers in
North Carolina. The Company and ARC will own Atlantic Realty LLC equally, with
the Company serving as
24
<PAGE>
managing member overseeing its operations. Atlantic Realty LLC currently has
plans to develop nearly one million square feet, including outparcels, over the
next several years.
The acquisition and development of the above properties are subject to,
among other things, completion of due diligence and various contingencies,
including those inherent in development projects, such as zoning, leasing and
financing. There can be no assurance that all of the above transactions will be
consummated.
On October 7, 1997, the Company entered into an agreement to purchase
nine shopping centers ("Kane/Rodwell Centers") located in North Carolina and
Virginia, totaling approximately 1.0 million square feet, and to assume third
party management of an additional 1.2 million square feet of community shopping
centers. The centers to be purchased are owned primarily by Roy O. Rodwell,
Chairman and Co-Founder of ARC and John M. Kane, Chairman of Kane Realty
Corporation, a real estate development and brokerage company based in Raleigh,
North Carolina, in a transaction valued at $63.3 million. The purchase of the
shopping centers was subject to the final approval of respective partnerships
holding the properties which has been received, as well as holders of mortgage
notes on the shopping centers which has been received on all properties but for
one. The remaining shopping center will be managed by the Company until either
approval is received or the mortgage is retired.
In exchange for their equity ownership interests in the community
centers, the sellers will receive approximately 1.2 million share-equivalent
partnership units in the Operating Partnership and approximately $2.6 million in
cash. The number of Units to be issued to the sellers was based on a $9.50 price
per share of the Company's Common Stock. Of the Units to be issued,
approximately 0.5 million will remain unissued until the completion of certain
performance requirements and the acquisition of the remaining shopping centers
noted above. As part of the purchase price, the Company will also assume
approximately $49.4 million of primarily fixed rate debt on the properties to be
acquired.
During 1997, the Company completed construction of a 32,000 square foot
expansion at its Crossville, Tennessee outlet center. In addition, the Company
began construction on a 44,000 square foot Winn Dixie at its Wilson, North
Carolina center. The Company also entered the pre-development and marketing
stages for a "power" outlet mall located in Lake Carmel, New York and a
retail/entertainment shopping center in Mt. Pleasant, South Carolina. These
projects are planned to contain in excess of 300,000 and 425,000 square feet of
GLA, respectively. If appropriate tenant interest is obtained and the
appropriate agreements, permits and approvals are received, the Company intends
to commence construction in the Fall and Spring of 1998, respectively. No
assurance can be given, however, that the projects will be developed and/or
completed.
On December 17, 1997, following shareholder approval, the Company
changed its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary FAC Realty Trust, Inc., (the "Company"). Following the
reincorporation, on December 18, 1997, the Company reorganized as an umbrella
partnership real estate investment trust (an "UPREIT"). The Company then
contributed to FAC Properties, L.P., a Delaware limited partnership (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties, which remains in a wholly owned subsidiary of
the Company. In exchange for the Company's assets, the Company received limited
partnership interest ("Units") in the Operating Partnership in an amount and
designation that corresponded to the number and designation of outstanding
shares of capital stock of the Company at the time. The Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the Operating Partnership in exchange for the contribution of
properties, the Company's percentage ownership in the Operating Partnership will
decline. As the Company issues additional shares of capital stock, it will
contribute the proceeds for that capital stock to the Operating Partnership in
exchange for a number of Units equal to the number of shares that the Company
issues. The Company conducts substantially all of its business and owns
substantially all of its assets (either directly or through subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.
The purpose of reincorporating in Maryland and of becoming an UPREIT was
as follows:
(bullet)The Company will realize a cost savings in annual franchise tax payments
of approximately $150,000 by changing its state of incorporation from
Delaware to Maryland
(bullet)By adopting an UPREIT structure, the Company will realize annual cost
savings of approximately $188,000 beginning in 1998 related to state
franchise tax payments on its assets located in certain states; and
25
<PAGE>
(bullet)An UPREIT may allow the Company to offer Units in the Operating
Partnership in exchange for ownership interests from tax-motivated
sellers. Under certain circumstances, the exchange of Units for a
seller's ownership interest will enable the Operating Partnership to
acquire assets while allowing the seller to defer the tax liability
associated with the sale of such assets. Effectively, this allows the
Company to use Units instead of sock to acquire properties, which
provide an advantage over non-UPREIT entities.
The Company receives rental revenue through base rent, percentage rent,
and expense recoveries from tenants and through other income including tenant
lease buyouts and management fee income. Base rent represents a minimum amount
set forth in the leases for which the tenants are contractually obligated,
including the amounts tenants are obligated to pay based on a percentage of the
tenants' gross sales in lieu of base rent. Percentage rent is a function of the
sales volumes of various tenants in excess of a negotiated sales "break point".
For sales in excess of the break point, tenants pay a specified percentage of
these sales as percentage rent in addition to their base rent and other charges.
Expense recoveries from tenants relate to the portion of the property's
operating costs for which the tenants are obligated to reimburse the Company,
and may include, real estate taxes, insurance, and common area maintenance
charges. Pursuant to leases with the Company's two major anchor tenants, VF
Factory Outlet, Inc. ("VFFO") and Carolina Pottery Retail Group, Inc., these
anchor tenants are obligated to pay only certain increases in common area
maintenance expenses and their pro-rata share of insurance expense and real
estate taxes, and certain of the operating expenses. While many of the Company's
leases are triple net leases, whereby the tenants are obligated for their
pro-rata share of the real estate taxes, insurance, common area maintenance
charges and contribute to the marketing fund, as of December 31, 1997,
approximately 21% of the leased GLA of the Company's factory outlet centers is
leased to tenants who are not obligated to reimburse the Company for real estate
taxes, insurance, utilities and common area maintenance expenses. In such
instances, the Company has allocated a portion of the base rent to expense
recoveries.
The Company has approximately 182 acres of outparcels located near or
adjacent to certain centers which may be marketed for sale or as ground leases
from time to time. As outparcels are sold and cash received, these revenues are
available for reinvestment.
Results of Operations
Year Ended December 31, 1997 compared to the Year Ended December 31, 1996.
The Company reported a net loss of $1.4 million, or $0.12 per common
share, for the year ended December 31, 1997 compared to a net loss of $6.1
million, or $0.55 per common share, for the comparable period in 1996. The loss
for 1997 resulted primarily from the following factors: (a) an increase in
depreciation and amortization of $1.9 million as described below; (b) increased
interest expense of $2.2 million, as a result of higher borrowing levels; and
(c) the Company incurred an extraordinary loss on the early extinguishment of
debt of $1.0 million in 1997 compared to $0.1 million in 1996. These amounts
were offset by increases in NOI of $4.9 million as described below. In 1996, the
Company recorded a $5 million charge to operations as a result of an adjustment
to the carrying value of a certain property as described below.
FFO for the year ended December 31, 1997 was $16.2 million, or $1.15 per
share compared to $14.8 million, or $1.10 per share, for the same period in
1996. The factors that had a positive impact on 1997 FFO were an increase in NOI
of $3.9 million before the adjustment for straight line rent (net $1.0 million),
or $0.28 per share and a $0.5 million or $0.04 per share decrease in general and
administrative expenses exclusive of compensation under restricted stock awards
and non-recurring administrative and merger termination costs, as described
below. The factor that had a negative impact on 1997 FFO was $2.8 million in
higher interest expense due to higher average borrowing levels, or $0.20 per
share net of interest on exchangeable notes of $0.6 million in 1996.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
was $33.7 million for the year ended December 31, 1997, an increase of $5.4
million or 19%, from $28.3 million for the same period in 1996. The increase was
due to the increase in NOI of $4.9 million, including adjustment for straight
line rent and a decrease of $0.5 million in the general and administrative
expenses from 1996 exclusive of compensation under restricted stock awards and
non-recurring administrative and merger termination costs, described below.
Base rent increased to $38.5 million for the year ended December 31,
1997 from $34.1 million for the same period in 1996. Base rent before the
adjustment for straight line rent increased $3.4 million to $37.9
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million for the year ended December 31, 1997 when compared to 1996, while the
Company's weighted average square feet of GLA in operation increased 13%. The
increase in base rents resulted from increased GLA in operation and from
increased occupancy at the operating and development centers and was offset by
declining rents on renewals at certain properties. Base rental revenue in each
of the years ending December 31, 1997 and 1996 included a charge to the reserve
for uncollectible tenant accounts of $0.5 million.
Percentage rent increased 33% to $0.8 million in 1997 from $0.6 million
in 1996. The increase is due primarily to the percentage rent attributable to
the community centers acquired in March 1997.
Recoveries from tenants, representing contractual reimbursements from
tenants of certain common area maintenance, real estate taxes and insurance
costs, increased in the year ended December 31, 1997 to $12.7 million from $11.8
million in the same period in 1996. On a weighted average square-foot basis,
recoveries from tenants decreased 6% to $2.38 in 1997 from $2.52 in 1996. The
average recovery of property operating expenses for the year ended December 31,
1997 decreased to 81% from 84% for the same period in 1996. With respect to
approximately 21% of the leased GLA, the Company is obligated to pay all
utilities and operating expenses of the applicable center.
Total tenant retail sales at the Company's centers increased 4.9% for
the year ended December 31, 1997 compared to the same period in 1996. Tenant
sales on a comparative store basis increased approximately 1.2% in 1997 compared
to 1996.
Other income increased $1.0 million to $1.7 million in 1997 compared to
1996 primarily as a result of increased tenant lease buyouts of $0.7 million and
third party property management fee income of $0.3 million.
Operating expenses increased $1.7 million, or 12%, to $15.7 million in
1997 from $14.0 million in 1996. The increase in operating expenses was
principally due to the increase in the weighted average square feet in operation
in 1997, which rose 13% to 5.3 million square feet in 1997 from 4.7 million
square feet in 1996. On a weighted average square-foot basis, operating expenses
decreased 1% to $2.96 in 1997 from $2.98 in 1996.
General and administrative expenses for the year ended December 31, 1997
included a charge of $1.3 million related to the settlement of the termination
of agreements entered into in 1995 to acquire the factory outlet centers owned
by Public Employees Retirement System of Ohio (OPERS), $0.3 million in other
non-recurring charges and $0.5 million in compensation under restricted stock
awards. General and administrative expenses in 1996 included $0.9 million in
non-recurring administrative expenses and $0.4 million in compensation under
restricted stock awards. Exclusive of these charges in 1997 and 1996, general
and administrative expense decreased $0.5 million, or 10% to $4.4 million in
1997 from $4.9 million in 1996.
Depreciation increased $1.7 million in 1997 primarily as a result of the
completion in 1996 of the center in Branson, Missouri, the expansions of the
Company's properties in Story City, Iowa; Nebraska City, Nebraska; Smithfield,
North Carolina and Tupelo, Mississippi, and the acquisition in March 1997 of the
five community shopping centers. Amortization of deferred leasing and other
charges increased $0.1 million in 1997 primarily as a result of increased tenant
improvements. On a weighted average square-foot basis, depreciation and
amortization of income-producing properties decreased 1% to $2.86 in 1997 from
$2.89 in 1996.
Interest expense for the year ended December 31, 1997, net of interest
income of $0.6 million, increased by $2.2 million or 15%, to $16.4 million
compared to $14.2 million, net of interest income of $0.6 million, in 1996. This
increase resulted from higher borrowing levels in 1997 compared to 1996. On a
weighted average basis, debt outstanding and the average interest cost were
approximately $211 million and 8.0%, respectively, in 1997 compared to $180.0
million and 8.2%, respectively, in 1996. Amortization of deferred financing
costs amounted to $1.6 million in 1997 and $1.4 million in 1996. The Company
capitalized interest cost associated with its development projects of $1.5
million in 1997 and $2.0 million in 1996. In conjunction with the early
extinguishment of debt, the Company expensed the related unamortized loan costs
of $1.0 million in 1997 as compared to $0.1 million in 1996, which has been
classified as an extraordinary item in the Consolidated Statements of
Operations.
As part of the Company's ongoing strategic evaluation of its portfolio
of assets, the Company determined in 1995 to pursue the sale of certain
properties that currently are not fully consistent with or essential to the
Company's long-term strategies. Accordingly, in 1995 and 1996 the Company
recorded an $8.5 and $5.0 million adjustment to the carrying value of three
assets ultimately held for disposition. After recording the $13.5 million
valuation adjustment, the net carrying value of such assets at December 31, 1997
is $12.5 million.
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There is also $12.3 million of debt secured by the properties which is expected
to be retired primarily from the sale proceeds. For the year ended December 31,
1997, these properties contributed approximately $1.1 million of revenue and
incurred a loss of $1.1 million after deducting related interest expense on the
debt associated with the properties. For the year ended December 31, 1996, such
properties contributed approximately $2.1 million of revenue and incurred a loss
of $1.0 million after deducting related interest expense. The reduction in the
performance is principally due to the lower average occupancy level in 1997 as
compared to 1996.
As of December 31, 1997, two of these properties were under contract.
Management periodically evaluates income producing properties for potential
impairment when circumstances indicate that the carrying amount of such assets
may not be recoverable.
Year ended December 31, 1996 compared to year ended December 31, 1995.
The Company reported a net loss of $6.1 million, or $0.55 per common
share, for the year ended December 31, 1996 compared to a net loss of $13.1
million, or $1.11 per common share, for the comparable period in 1995. The loss
for 1996 resulted in part from three factors. First, the Company took a charge
against earnings of $5.0 million to reduce the carrying amount of a certain
property. Second, the Company accrued severance costs and other non-recurring
administrative costs of $0.9 million. Third, the Company incurred an
extraordinary loss on the early extinguishment of debt of $0.1 million.
Excluding similar charges for 1995 and the charge of $4.5 million related to the
termination of agreements to acquire the factory outlet centers owned by the
OPERS in 1995, net income for 1995 exceeded that of 1996 by $2.0 million. As
more fully described below, the differential is primarily due to an increase in
depreciation and amortization of $1.9 million in 1996 over 1995.
FFO for 1996 was $14.8 million, or $1.10 per share, assuming full
dilution for the issuance of convertible preferred stock in 1996. This compares
to $12.7 million, or $1.07 per share, for 1995. Factors that had a positive
impact on 1996 FFO were: (a) $1.1 million, or $0.08 per share, in improved
property level performance as described below and (b) $3.8 million, or $0.29 per
share, in lower general and administrative expenses also as described below.
Factors that had a negative impact on 1996 FFO were: (a) $2.7 million, or $0.20
per share, in higher interest expense due to a higher average borrowing level;
(b) $0.1 million, or $0.01 per share, in higher depreciation and amortization
expense on non real estate assets; plus (c) the dilutive effect, equal to $0.13
per share, of the increase in the weighted average shares outstanding due to
principally the result of the issuance of convertible preferred stock. The
issuance of the convertible preferred stock for $20 million can be attributed to
the excess ($20.5 million) of the dividend declared on 1995 earnings ($24.1
million) over the funds available for distribution in 1995 ($3.6 million).
Earnings before interest, taxes, depreciation and amortization (EBITDA)
was $28.3 million in 1996, an increase of $3.9 million, or 16%, from $24.4
million for the same period in 1995. The increase was due primarily to the
decrease in the general and administrative expenses from 1995 after adjustment
for non-recurring administrative costs for both years.
Base rent decreased slightly, to $34.1 million in 1996 from $34.6
million in 1995. However, base rent before the adjustment for straight line rent
increased $0.5 million or 1.5% to $34.5 million in 1996 when compared to 1995,
while the Company's weighted average square feet of GLA in operation increased
8%. The increase in base rents from increased occupancy at certain of the
Company's properties was offset by declining rents on renewals at certain other
properties and lower average center occupancy levels in the centers held for
sale. Base rental revenue for 1996 includes a charge to the reserve for
uncollectible tenant accounts of $0.5 million compared to $0.6 million in 1995.
Percentage rent remained unchanged at $0.6 million in 1996 compared to
the same amount in 1995.
Recoveries from tenants, representing contractual reimbursements from
tenants of certain common area maintenance, real estate taxes, and insurance
costs, increased in 1996 to $11.8 million from $11.1 million in 1995. On a
weighted average square foot basis, recoveries from tenants decreased to $2.52
in 1996 from $2.55 in 1995, or 1%. The average recovery of property operating
expenses increased from 81% in 1995 to 84% in 1996. The increase in the recovery
percentage was the result of new development and expansions which were leased
primarily on a triple net basis. Approximately 21% of the Company's GLA is
leased whereby the Company is obligated to pay all utilities and operating
expenses of the applicable factory outlet center as compared to 18% in 1995.
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Although total tenant retail sales at Company centers increased 7.6% in
the year ended December 31, 1996 compared to 1995, tenant sales on a comparative
store basis decreased approximately 1.8% in 1996 compared to 1995, as compared
to a 1.3% increase for the industry as reported by the International Council of
Shopping Centers. Lower tenant sales may have a continuing adverse effect on
tenant plans for new store openings or lease renewals.
Other income was approximately $0.7 million in 1996 compared to $0.9
million in 1995. The decrease was primarily due slightly higher lease
termination settlements and a decrease in gain on sale of real estate ($0.3
million in 1995).
Operating expenses increased $0.4 million, or 3%, to $14.0 million in
1996 from $13.6 million in 1995. The increase in operating expenses was
principally due to the increase in the weighted average square feet in operation
in 1996 which rose 8% from 4.3 million square feet in 1995 to 4.7 million square
feet in 1996. On a weighted average square-foot basis, operating expenses
actually decreased 5% from $3.15 in 1995 to $2.98 in 1996. This was due
principally to a $0.21 per square foot decrease in marketing costs, which are
recorded net of tenant contributions to the marketing of the Company's centers.
General and administrative expenses in 1996 included non-recurring
administrative costs of $0.9 million and a non-cash charge of $0.4 million for
restricted stock issued principally for bonuses, whereas 1995 included a charge
of $6.5 million related to the termination of agreements entered into in 1995 to
acquire the factory outlet centers owned by OPERS and certain other
non-recurring charges. Exclusive of these charges, general and administrative
cost decreased $3.9 million, or 44%, to $4.9 million in 1996 from $8.8 million
in 1995. The decrease was due principally to the savings of $3.7 million
associated with the termination of the Company's sponsorship of a NASCAR
motorsports program and $0.2 million related to the termination of the lease on
the Company's airplane.
Of the $0.9 million in non-recurring administrative costs incurred in
1996, $0.8 million related to severance costs accrued as of December 31, 1996 in
conjunction with the resignation of the Company's chief executive officer. Such
costs were accrued pursuant to the terms of his employment agreement entered
into in December 1995. Concurrently, the Company settled a $0.6 million
valuation issue related to the Company's purchase in 1993 of a 19-acre tract of
land, acquired in a non-monetary transaction from a partnership in which the
former officer was a general partner, by agreeing to resell the land to him for
the original purchase price in an all-cash transaction. The consummation of this
transaction is secured by the unpaid severance amounts due to the former
officer. Also in settling the terms of the former officer's severance and
non-competition restrictions, $0.25 million of his severance was applied to
certain advertising expenses incurred by the Company.
Depreciation increased $0.9 million in 1996, primarily as a result of
the completion of the Nebraska outlet center in Branson, Missouri and the
expansions of the Company's properties in Nebraska City, Nebraska, Smithfield,
North Carolina and Tupelo, Mississippi. Buildings and improvements classified as
income-producing properties increased $36.9 million in 1996 from 1995.
Amortization of deferred leasing and other charges increased $1.0 million in
1996 and deferred leasing and other charges classified as income-producing
properties increased $4.2 million in 1996 from 1995. On a weighted average
square foot basis, depreciation and amortization of income-producing properties
increased 7% to $2.89 in 1996 from $2.70 in 1995.
Interest expense for the year ended December 31, 1996, net of interest
income of $0.6 million, increased by $3.3 million, or 30%, to $14.2 million
compared to $10.9 million, net of interest income of $0.2 million, in 1995. This
increase resulted from higher borrowing levels in 1996 compared to 1995 and $0.6
million from the infusion in April, 1996 of $20 million in capital from Gildea
Management Company, initially in the form of Exchangeable Notes, as more fully
described in Note 7 of the "Notes to Consolidated Financial Statements". On a
weighted average basis, excluding the Exchangeable Notes, debt outstanding and
the average interest cost were approximately $180.0 million and 8.2%,
respectively, in 1996 compared to $147.1 million and 8.3%, respectively, in
1995. Amortization of deferred financing cost amounted to $1.4 million in 1996
and $1.6 million in 1995. The Company capitalized interest cost associated with
its development projects of $2.0 million in 1996 and $2.6 million in 1995.
Associated with the refinancing of the Company's existing line of credit, the
Company expensed the related unamortized loan costs of $0.1 million which has
been classified as an extraordinary item in the Consolidated Statements of
Operations.
As part of the Company's ongoing strategic evaluation of its portfolio
of assets, the Company determined in 1995 to pursue the sale of certain
properties that currently are not fully consistent with or essential to the
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Company's long-term strategies. Accordingly, in 1995 the Company recorded an
$8.5 million adjustment to the carrying value of three of the properties held
for sale. In 1996 the Company recorded an additional $5.0 million adjustment to
the carrying value of one of the assets held for sale. This non-cash adjustment
was charged to operations and represents the difference between the fair value
less costs to sell and net book value of the assets. After recording the $13.5
million valuation adjustment, the net carrying value of assets currently being
marketed for sale at December 31, 1996 is $11.4 million. There was also $15.8
million of debt secured by the properties at December 31, 1996 which is expected
to be retired from the sale proceeds. For the year ended December 31, 1996,
these properties contributed approximately $2.1 million of revenue and incurred
a loss of $1.0 million after deducting related interest expense on the debt
associated with the properties. For the year ended December 31, 1995 these
properties contributed approximately $3.0 million of revenue and incurred a loss
of $0.5 million after deducting related interest expense. The reduction in the
performance is principally due to the lower occupancy level in 1996 as compared
to 1995 existing at certain centers held for sale.
The Company began the process of marketing the properties and no sales
agreements had been completed at December 31, 1996. Management plans to evaluate
all properties on a regular basis in accordance with its strategy for growth and
in the future may identify other properties for disposition or may decide to
defer the pending disposition of those assets now held for sale.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance at December 31, 1997 was
$4.9 million. Restricted cash, as reported in the financial statements, as of
such date, was $3.9 million. In connection with the Company's $95 million rated
debt securitization, the Company is required to escrow a portion of the loan
proceeds to fund certain environmental and engineering work and to make certain
lease related payments that may be required in connection with the renewal or
termination of certain leases by a tenant at most of the factory outlet centers.
Net cash provided by operating activities was $13.0 million for the year
ended December 31, 1997. Net cash used in investing activities was $62.2 million
for 1997. The primary use of these funds included: $32.4 million to acquire the
five North Carolina community shopping centers as previously described, $15.0
million invested in income-producing properties as follows: $1.6 million for
completion of a development project in 1997, $3.9 million in construction and
development of projects in process, $5.7 million towards normal recurring
capital expenditures; and $3.8 million for re-tenanting, lease renewal and
leasing costs. The Company loaned $8.5 million against a property to be acquired
from Konover & Associates South and $2.3 million to a joint venture partner as
an advance against development projects to be contributed to five joint
ventures. During 1997, the Company also invested $4.3 million in a newly created
joint ventures. Net cash provided by financing activities was $47.1 million for
the year ended December 31, 1997. The principal source of such funds was $135.9
million of new borrowing, as described below, net of $2.3 million in fees and
other costs related thereto. Funds generated through financing activities were
offset by payments of $86.5 million towards scheduled debt principal repayment.
Capital Resources. The Company's management anticipates that cash
generated from operating performance will provide the necessary funds for
operating expenses, interest expense on outstanding indebtedness, dividends and
distributions in accordance with REIT federal income tax requirements and to
fund re-tenanting and lease renewal tenant improvement costs, as well as,
capital expenditures to maintain the quality of its existing centers. The
Company also believes that it has capital and access to capital resources,
including additional borrowings and issuances of debt or equity securities,
sufficient to pursue its strategic plans.
In February 1997, the Company obtained a $150 million credit facility
with Nomura Asset Capital corporation. The credit facility with Nomura is
secured by 21 of the Company's centers plus an assignment of excess cash flow
from the properties currently secured under the $95 million rated debt
securitization. The credit facility is for a term of 2 years with a 1 year
renewal option and bears interest at the rate of 1 month LIBOR (London Interbank
Offered Rate) plus 2.25%. The proceeds from the credit facility were used to
fund acquisitions, expansions of existing centers, repay indebtedness, and fund
operating activities, including the repurchase of the Company's stock. The
indebtedness repaid included a $75 million credit facility, $7.4 million of
Senior Notes and a $2.0 million note payable incurred in connection with the
acquisition of the VF Properties. The new credit facility contains financial
covenants relating to debt to total asset value and net operating income to debt
service coverage.
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On February 24, 1998, Prometheus Southeast Retail, LLC, ("PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC
entered into a definitive agreement with the Company to make a $200 million
strategic investment in the Company. PSR has committed to purchase $200 million
in newly issued common shares of the Company at a purchase price of $9.50. The
investment will be made in stages through the end of 1999 allowing the Company
to obtain capital as needed to fund its future acquisition and development plans
as well as retire debt. Upon completion of funding, PSR will own an equity
interest of the Company of approximately 60%, on a fully diluted basis, not
including any further issuance of Units for transactions under contract or
transactions the Company may enter into the future.
Capital Expenditures. The Company's capital expenditures have included
expansions of existing centers and acquisitions of new properties.
Management's view of the current state of the shopping center industry
and its future direction is that value-oriented retail concepts are merging; for
example, outlet centers are including off-price tenants as well as outlet
tenants, off-price centers have manufacturers' outlets, community centers have
destination tenants, and other community centers have outlet or off-price
tenants. With this backdrop, management believes that a diversified shopping
center portfolio will provide an opportunity for growth. As part of the
Company's diversification strategy, a portion of the availability under the
Nomura credit facility was used to purchase five community centers in the
Raleigh, NC area on March 27, 1997 for a total purchase price of $32.4 million.
The centers total approximately 606,000 square feet of GLA, are well-located and
feature well-known regional tenants. Management will continue to pursue similar
opportunities for the acquisition of community shopping centers in the United
States, and in particular, the southeastern region of the country as evidenced
by the announcement of the Konover & Associates South transaction described
below.
In 1997, the Company completed construction on a 32,000 square foot
expansion at its Crossville, Tennessee Center. The Company began construction on
an expansion at its Wilson, North Carolina Center consisting of a 44,000 square
foot Winn Dixie. The cost of this project was estimated at $2.45 million of
which $1.8 million has been expanded as of December 31, 1997. During 1996, the
Company delivered a 288,000 square foot outlet center in Branson, Missouri and
expansions of approximately 158,000 square feet at Story City, Iowa, Nebraska
City, Nebraska, Smithfield, North Carolina, and Tupelo, Mississippi. The cost of
these projects was $42.5 million all of which has been expended as of December
31, 1997.
During 1997, the Company also entered into a joint venture with AJS
Group, known as Mount Pleasant, FAC LLC, to develop a 425,000 square foot
retail/entertainment shopping center in Mount Pleasant, South Carolina.
Construction on the center is expected to begin May, 1998, with completion
targeted for May, 1999. As of December 31, 1997, the Company has invested $2.8
million in this joint venture. This 50% investment in the joint venture will be
accounted for under the equity method of accounting. The joint venture had
approximately $2.8 million of assets and $0.6 of debt at December 31, 1997. The
joint venture had no other operations.
During 1997, the Company and Atlantic Real Estate Corporation ("ARC")
jointly created a limited liability company named Atlantic Realty LLC
("Atlantic") to develop and manage retail community and neighborhood shopping
centers in North Carolina. Atlantic currently has plans to develop nearly one
million square feet, including outparcels over the next several years. The
Company and ARC own Atlantic equally, with the Company serving as managing
member overseeing its operations. The investment in Atlantic will be accounted
for under the equity method of accounting. As of December 31, 1997, Atlantic had
purchased land and building for development totaling approximately $3.5 million
and did not have any other operations. Atlantic had total assets of
approximately $3.7 million and debt.
During 1998, the Company entered into a joint venture known as Wakefield
Commercial LLC, primarily to develop two community shopping centers. The two
retail centers, one 200,000 square feet and the other 300,000 square feet will
be located on 65 acres within a 500-acre parcel of land zoned for commercial
use. The Company will perform all leasing, property management and marketing
functions for the two centers. The Company will hold a 50% interest in the
venture and expects to invest approximately $6.0 million in this joint venture
in 1998.
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The Company is currently in the pre-development and marketing stage for
a property located Lake Carmel, New York. If appropriate tenant interest is
obtained and the appropriate agreements, permits and approvals are received, the
Company intends to commence construction in the Fall of 1998.
The Company's current acquisition, expansion and development plans are
subject to certain risk and uncertainties; including, but not limited to
economic conditions in the retail industry, future real estate market
conditions; the availability of financing; and the risk associated with the
Company's property development activities, such as the potential for cost
overruns, delays and the lack of predictability with respect to the financial
returns associated with these development activities. There can be no assurance
that the planned development and expansions will occur according to current
schedules or that, once commenced, such development and expansions will be
completed.
Based on current market conditions, the Company believes it will have
access to the capital resources or has adequate financial resources to fund
operating expenses, distributions to stockholders, acquisitions and planned
development and construction activities. At December 31, 1997, the Company has
$15 million available under its $150 million Nomura credit facility following
the retirement of $84.5 million of debt which existed at December 31, 1997 and
the funding of the acquisition of the five community centers in March 1997. See
"Recent Developments" below for additional sources and uses of capital.
The Company is in the process of reviewing various financing
alternatives for its planned development of the "power" outlet mall located in
Lake Carmel, New York, including a potential joint venture arrangement. The
planned development of a retail/entertainment shopping center in Mt. Pleasant,
South Carolina will be a joint venture with the land owner and will be financed
in part by a traditional bank construction loan.
The Board of Directors determined that the Company would not pay a
fourth quarter dividend for 1996. In addition, the Company announced that future
dividends will be equal to 95% of the Company's taxable income which is the
minimum dividend required to maintain its REIT status. Determination of any
dividends will be made annually following the review of the Company's year-end
financial results. The Company's decision is driven by its goal to increase the
total return to its shareholders through the use of internal cash flow to
"self-fund" some of its growth, such as expansions at existing centers and
strategic acquisitions. The Company also will strive to reduce its borrowing
levels and interest expense. No dividends were declared for the year ended
December 31, 1997, as the taxable income of the Company for calendar 1997 has
yet to be determined. However, the Company does not anticipate that there will
be taxable income for 1997, inclusive of the use of net operating loss
carryovers.
Impact of Year 2000 Issue
The "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and calculations
involving years by many computers throughout the world as the Year 2000 is
approached and reached. The Company has reviewed the impact of Year 2000 issues
and does not expect any remedial actions taken with respect thereto to
materially adversely affect its business, operations or financial condition.
FASB Statement No. 128
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share," which is effective for financial
statements for periods ending after December 15, 1997. FASB Statement No. 128
requires the restatement of prior period earnings per share and requires the
disclosure of additional supplemental information detailing the calculation of
earnings per share.
FASB Statement No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. It is computed using the weighted average number of shares of Common
Stock and the dilutive effect of options, warrants and convertible securities
outstanding, using the "treasury stock" method. Earnings per share data is
required for all periods for which an income statement or summary of earnings is
presented, including summaries outside the basic financial statements. All
earnings per share amounts for all periods presented have, where appropriate,
been restated to conform to the FASB Statement No. 128 requirements.
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Recent Developments
Lazard Freres Transaction
On February 24, 1998, Prometheus Southeast Retail, LLC, ("PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC
entered into a definitive agreement with the Company to make a $200 million
strategic investment in the Company. PSR has committed to purchase $200 million
in newly issued common shares of the Company at a purchase price of $9.50. The
investment will be made in stages through the end of 1999 allowing the Company
to obtain capital as needed to fund its future acquisition and development plans
as well as retire debt. Upon completion of funding, PSR will own an equity
interest of the Company of approximately 60%, on a fully diluted basis, not
including any further issuance of operating partnership units for transactions
under contract or transactions the Company may enter into the future.
As part of the PSR transaction described above, three representatives
of Lazard will be nominated to FAC Realty's Board of Directors, bringing the
total number of directors to nine.
Konover & Associates South Transaction
On February 24, 1998, the Company entered into definitive agreements
with affiliates of Konover & Associates South ("Konover"), a privately held real
estate development firm based in Boca Raton, Florida, to acquire 11 community
shopping centers totaling approximately 2.0 million square feet and valued at
nearly $100 million. The purchase equates to approximately $24 million in
equity, consisting of the issuance of Units, at $9.50 per Unit, and/or cash,
plus the assumption of approximately $76 million in debt. At closing, $17
million of the equity will be paid in the form of Units or cash. The remaining
$7 million will be paid in cash over a three-year period with interest at 7.75%
per annum.
As part of the transaction, the Company intends to operate under the
name "Konover Property Trust". The Company will remain listed on the New York
Stock Exchange and intends to change its ticker symbol from FAC to KPT, pending
formal approval by shareholders in June, 1998. Additionally, the current
employees of Konover will join the Company as a result of the transaction. The
new employees include development, leasing, property management, administrative
and accounting professionals. The Company will continue to operate the Konover
office in Boca Raton due to its strategic location in the Southeast.
Simon Konover, founder of Konover & Associates, a $500 million plus
real estate company headquartered in West Hartford, Connecticut, will become
Chairman of the Board of the Company upon completion of the transaction. He will
not become an executive officer of the Company.
Other
On January 7, 1998, the Company completed the purchase of a 55,909
square foot shopping center located in Danville, VA. This Food Lion anchored
center was purchased for $3.1 million.
On March 11, 1998, the Company closed on a $75 million, 15-year
permanent credit facility secured by 11 properties previously securing its $150
million revolving credit facility. The loan is at an effective rate of 7.73% and
is amortized on a 338-month basis. The proceeds were used to pay down certain
outstandings on the $150 million Nomura credit facility.
As of March 31, 1998, seven of the nine Kane/Rodwell Centers had
closed. An eighth center is expected to close in second quarter of 1998. The
ninth and final center will be managed by the Company and is expected to be
acquired in the year 2000. The loan assumption fee is currently unreasonable,
however, the loan is prepayable in the year 2000.
33
<PAGE>
Economic Conditions
Inflation has remained relatively low during the past three years with
certain segments of the economy experiencing disinflation, such as, apparel
pricing which has slowed the growth of tenant sales which adversely impacts the
Company's revenue due to lower percentage and overage rents on some properties.
Additionally, weakness in the overall retail environment as it relates to tenant
sales volumes may have an impact on the Company's ability to renew leases at
current rental rates or to release space to other tenants. Although the decline
in sales does not effect base rental, aside from renewals, this weakness could
result in reduced revenue from percentage rent tenants, as well as, overage rent
paid to the Company. Both revenue items are directly impacted by sales volumes
and represented 5.4% of the Company's total revenue in 1997. Continuance of this
trend may affect the Company's operating centers (the "Properties") occupancy
rate and the rental rates obtained and concessions, if any, granted on new
leases or re-leases of space, which may cause fluctuations in the cash flow from
the operation and performance of the Properties. In the event of higher
inflation, however, a majority of the tenants' leases contain provisions
designed to protect the Company from the impact of inflation. Such provisions
include clauses enabling the Company to receive percentage rentals based on
tenants' gross sales, which generally increase as prices rise, and/or escalation
clauses, which generally increase rental rates during the terms of the leases.
In addition, many of the leases are for terms of less than ten years, which may
enable the Company to replace existing leases with new leases at higher base
and/or percentage rentals if rents of the existing leases are below the
then-existing market rate.
The majority of the Company's leases, other than those for anchors,
require the tenants to pay a proportionate share of operating expenses,
including marketing, common area maintenance, real estate taxes and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. The Company's leases with two of its anchor
tenants, VF Factory Outlet and Carolina Pottery, which were executed prior to
June 1993, require the tenants to pay certain operating expenses and increases
in common area maintenance expenses, which reduces the Company's exposure to
increases in costs and operating expenses resulting from inflation. At December
31, 1997, 21% of the aggregate GLA of its factory outlet centers was leased to
non-anchor tenants under gross leases, pursuant to which the Company is
obligated to pay all utilities and other operating expenses of the applicable
factory outlet center. The Properties are subject to operating risks common to
commercial real estate in general, any and all of which may adversely affect
occupancy or rental rates. The Properties are subject to increases in operating
expenses such as cleaning; electricity; heating, ventilation and air
conditioning ("HVAC"); insurance and administrative costs; and other general
costs associated with security, landscaping, repairs and maintenance. While the
Company's tenants generally are currently obligated to pay a portion of these
escalating costs, there can be no assurance that tenants will agree to pay such
costs upon renewal or that new tenants will agree to pay such costs. If
operating expenses increase, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates.
Additionally, inflation may have a negative impact on some of the
Company's other operating items. Interest and general and administrative
expenses may be adversely affected by inflation as these specified costs could
increase at a rate higher than rents. Approximately 61% of the Company's debt on
income properties and notes payable as of December 31, 1997 bore interest at
rates that adjust periodically based on market conditions. Following the closing
of the $75 million permanent debt facility described above, and the receipt of
proceeds from sale of common shares to PSR, also described above, the Company's
exposure to floating rate debt will be significantly reduced. Also, for tenant
leases with stated rent increases, inflation may have a negative effect as the
stated rent increases in these leases could be lower than the increase in
inflation at any given time.
Substantially all of the Company's existing tenants have met their lease
obligations and the Company continues to attract and retain quality tenants. The
Company intends to reduce operating and leasing risks by continually improving
its tenant mix, rental rates and lease terms by attracting creditworthy national
brand-name manufacturers, upscale, high-fashion manufacturers and new tenants
that offer a wide range of merchandise and amenities not previously offered.
Forward-Looking Statements
Certain statements in this Form 10-K and in the future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases, and in oral statements made by or with the approval of an authorized
executive officer constitute "forward-looking statements" under the Reform Act.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
34
<PAGE>
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: real estate
market conditions; availability of financing; general economic conditions,
including conditions in the retail segments of the economy such as, inflation,
consumer confidence, unemployment rates and consumer tastes and preferences; the
amount of, and rate of growth in, the Company's ability to reduce, or limit the
increase in, such expenses, and the impact of unusual items resulting from the
Company's ongoing evaluation of its business strategies, portfolio and
organizational structure; difficulties or delays in the completion of expansions
of existing projects or development of new projects; and, the effect of
competition from other factory outlet centers. With respect to the Company's
expansion and development activities (including the potential development of a
site at Lake Carmel, New York), such forward looking statements are subject to a
number of risks and uncertainties, including the availability of financing on
favorable terms, the consummation of related property acquisitions, receipt of
zoning, land use, occupancy, government and other approvals, and the timely
completion of construction and leasing activities. With respect to the Company's
acquisition activities), such forward looking statements are subject to risks
and uncertainties, including accuracy of representations made in connection with
such acquisitions, continuation of occupancy levels, changes in economic
conditions (including interest rate levels) and real estate markets.
Item 8 - Financial Statements and Supplementary Data
The response to this Item is submitted in a separate section of this
report.
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
<TABLE>
<CAPTION>
Name Age Principal Occupation Director Since
----------------------------- -------- --------------------------------- --------------------
<S> <C> <C> <C>
C. Cammack Morton 46 President and Chief Executive 1996
Officer of the Company
Patrick M. Miniutti 50 Executive Vice President and 1996
Chief Financial Officer of the
Company
Robert O. Amick 65 President of The Amick Group 1993
William D. Eberle 74 Chairman of Manchester 1997
Associates, LTD.
J. Richard Futrell, Jr. 67 Former Chairman and Chief 1993
Executive Officer of Centura
Banks, Inc.
John W. Gildea 54 Managing Director of Gildea 1996
Management Company and Advisor
for The Network Funds
Theodore E. Haigler, Jr. 73 Former President and Chief 1993
Executive Officer of
Burroughs-Wellcome Co.
</TABLE>
35
<PAGE>
For information on the business experience of Messrs. Morton and
Miniutti, see "Executive Officers."
Robert O. Amick is the President of The Amick Group, a financial
consulting firm that he founded in 1992. Mr. Amick served as Vice President and
Controller of J.C. Penney Co., Inc. from 1982 to 1992 and was a director of J.C.
Penney Business Services, Inc. from 1985 to 1992. Mr. Amick also is a director
of Protection Mutual Insurance Company and Park P.M. Company.
William D. Eberle, was a founder of Boise Cascade and is Chairman of
Manchester Associates, Ltd. a venture of capital and international consulting
firm and Of Counsel to the law firm of Kaye, Scholer, Fireman, Hay & Handler.
Mr. Eberle is also Chairman of the Board of America Service Group Inc., a health
care services company, Showscan Entertainment, Inc., a movie-based software and
technology company, and Barry's Jewelry, Inc., a retail jewelry chain, and is a
director of Ampco-Pittsburgh Corp., a steel fabrication equipment company,
Fiberboard Corporation, a timber manufacturer, Mitchell Energy and Development,
a gas and oil company, and Mid-States PLC, an auto parts distributor
headquartered in Nashville, Tennessee.
J. Richard Futrell, Jr. is the retired Chairman and Chief Executive
Officer of Centura Banks, Inc., a position he held from 1989 to 1993. He
currently serves as a member of Centura's board of directors and its executive
committee.
John W. Gildea has been Managing Director of Gildea Management Company
and affiliates since 1990. From 1986 to 1990, he was Senior Vice President of
Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Gildea also has been
President of Gildea Investment Co, an investment advisory firm, since 1983. He
is a director of America Service Group, Inc., UNC, Inc., and Barry's Jewelers.
Theodore E. Haigler, Jr. served as the President, Chief Executive
Officer and a director of Burroughs-Wellcome Co. (now Glaxo Wellcome, Inc.), a
pharmaceutical company, from 1986 until his retirement in 1989. Mr. Haigler was
a director of Tenax Corporation and CCB Financial Corporation, a bank holding
company, from 1974 to 1995.
Executive Officers
The following table sets forth certain information with respect to the
current executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
------------------------------------- -------------- --------------------------------------
<S> <C> <C>
C. Cammack Morton 46 President and Chief Executive Officer
Patrick M. Miniutti 50 Executive Vice President and Chief
Financial Officer
William H. Neville 53 Executive Vice President and Chief
Operating Officer
Christopher G. Gavrelis 44 Executive Vice President -
Management
Connell L. Radcliff 43 Senior Vice President - Development
Linda M. Swearingen 33 Senior Vice President - Finance/
Investor Relations
Sona A. Thorburn 32 Vice President and Chief Accounting
Officer
</TABLE>
C. Cammack Morton joined the Company in December 1995 as Chief Operating
Officer and was elected President and a Director in January 1996. Effective
January 1, 1997, Mr. Morton became the Company's Chief Executive Officer. Prior
to his affiliation with the Company, Mr. Morton served as the Managing Director
of Rothschild Realty, Inc. ("Rothschild") and President and Chief Executive
Officer of the Charter Oak Group, Ltd.
36
<PAGE>
(the "Charter Oak Group"), a subsidiary of Rothschild engaged in the development
and management of factory outlet centers. He joined Rothschild in 1987 as Vice
President, was promoted to Senior Vice President in 1989 and to Managing
Director in 1991. To resolve certain personal financial matters arising out of a
limited partner obligation to the general partner of a real estate partnership,
Mr. Morton filed a petition for relief under Chapter 11 of the United States
Bankruptcy Code in March 1994. After settling with the general partner, the
bankruptcy case was dismissed in June 1994.
Patrick M. Miniutti joined the Company as Executive Vice President,
Chief Financial Officer and Director in August 1996. Prior to his affiliation
with the Company, Mr. Miniutti served for three years as Executive Vice
President, Chief Financial Officer and Trustee of Crown American Realty Trust, a
public REIT that owns regional shopping malls. Prior thereto, Mr. Miniutti held
senior financial positions for a combined 12 years with New Market Companies,
Inc., Western Development Corporation (predecessor to The Mills Corporation) and
Cadillac Fairview Corporation Limited, which was preceded by ten years in public
accounting, principally with national firms. Mr. Miniutti is a member of the
American Institute of Certified Public Accountants and a former member of its
Real Estate Accounting Committee, which was responsible for promulgating most of
the real estate accounting rules in practice today.
William H. Neville, has served as Executive Vice President and Chief
Operating Officer since September 1997. Before joining the Company, Mr. Neville
was Regional President of Horizon Group Realty, a real estate investment trust
specializing in outlet centers, from January 1996 to July 1997. Prior to joining
Horizon, Mr. Neville was President of Charter Oak Partners a subsidiary of
Rothschild, the largest privately held developer of outlet centers. He also
served as Executive Vice President and early in the Company's history was Vice
President of leasing. Mr. Neville spent nearly ten years at The Rouse Company, a
mall developer, most notably as the first Vice President, General Manager of
South Street Seaport. During his shopping center career, he also served as a
Vice President of leasing at L. J. Hooker Corporation, a mall developer.
Christopher G. Gavrelis joined the Company in December 1995. Mr.
Gavrelis was named Senior Vice President in January 1996 and promoted to
Executive Vice President in January 1998. Prior to his affiliation with the
Company, Mr. Gavrelis was Vice President - Property Management of the Charter
Oak Group for approximately four years. From 1989 to 1991, Mr. Gavrelis served
as regional property manager for McArthur/Glen Realty Corporation (now HGI
Realty, Inc.), a company engaged in the development and operation of factory
outlet centers. From 1986 to 1989, Mr. Gaverlis worked for May Centers, Inc. as
General Manager and later as Development Director for a super regional mall
located in Annapolis, Maryland. He started his career in 1978 with Developers
General Corporation, a Baltimore, Maryland firm engaged in commercial and
residential real estate. Mr. Gavrelis is responsible for the Company's
management and administration activities.
Connell L. Radcliff has served as Senior Vice President of Development
since its organization in April 1993. Mr. Radcliff joined North-South Management
Corporation (a predecessor company) as Vice President - Leasing in 1989. From
1987 to 1989, Mr. Radcliff was a partner with The Shopping Center Group, a real
estate brokerage firm specializing in national tenant representation. Prior to
his duties there, Mr. Radcliff was with New Market Development (now Cousins
Market Centers) as regional leasing director. Mr. Radcliff is responsible for
the Company's development activities.
Linda M. Swearingen was promoted from Vice President to Senior Vice
President of Finance/Investor Relations in January 1998. Prior to being named
Vice President in May 1996, Ms. Swearingen was Director of Leasing for the
Company, a position she had held since July 1993. From 1990 to 1993, Ms.
Swearingen served as Assistant Vice President - Commercial Real Estate for Bank
One Dayton.
Sona A. Thorburn has served as Vice President and Chief Accounting
Officer since joining the Company in 1997. Prior to joining the Company, Ms.
Thorburn was a manager with the accounting firm of Ernst & Young LLP, where she
was employed for eight years. At Ernst & Young, Ms. Thorburn supervised audits
for a variety of clients, including the Company.
Compliance With Section 16 of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and owners of more than 10% of the Company's Common Stock
("10% beneficial owners") to file with the Securities and Exchange Commission
(the "SEC") and the New York Stock Exchange initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Executive officers,
37
<PAGE>
directors and 10% beneficial owners are required by SEC regulations to furnish
the Company with copies of all forms they file pursuant to Section 16(a). To the
Company's knowledge, based solely on the information furnished to the Company
and written representations that no other reports were required, during the
fiscal year ended December 31, 1997, all such filing requirements were complied
with, except that the exchange of unvested shares of Restricted Stock for
Repurchase Options described at "Executive Compensation - Executive Compensation
Committee Report - Restricted Stock" was reported late by Messrs. Morton,
Miniutti, Neville, Gavrelis, and Radcliff and Ms. Thorburn.
Item 11. Executive Compensation
The following table sets forth the compensation of the Chief Executive
Officer and the four most highly compensated executive officers other than the
Chief Executive Officer who were serving as executive officers at December 31,
1997 (collectively, the Named Executive Officers).
<TABLE>
<CAPTION>
Summary Compensation Table
<S> <C> <C> <C> <C> <C> <C>
Annual Long-Term
Compensation Compensation Awards
--------------------------------------------
Restricted Securities All Other
Salary Bonus Stock Underlying Compensation
Name and Principal Position Year ($) ($) Awards($) Options(#)(10) ($)
- --------------------------- ---- ---- ---- --- ---- --------- -------------- -------------
C. Cammack Morton 1997 336,072 (4) 670,538(5) (11) 33,467(12)
President and Chief 1996 287,692 (4) 1,019,250(5) 300,000(11) 3,570(13)
Executive Officer 1995 11,458(1) -- -- -- --
Patrick M. Miniutti 1997 230,871 (4) 346,726(6) (11) 19,000(12)
Executive Vice President 1996 70,769(2) (4) 819,313(6) 200,000(11) 50,000(13)
and Chief Financial Officer -- -- -- -- --
William H. Neville 1997 65,059(3) (4) 205,800(7) 50,000 --
Executive Vice President 1996 -- -- -- -- --
and Chief Operating Officer 1995 -- -- -- -- --
Christopher G. Gavrelis 1997 160,962 (4) 94,163 (11) 11,915(12)
Executive Vice President - 1996 129,742 (4) 214,750(8) 35,000(11) 1,163(13)
Management 1995 5,208(1) -- -- -- --
Connell L. Radcliff 1997 185,555 (4) 101,138 (9) -- 13,712(12)
Senior Vice President - 1996 181,923 (4) 39,750 (9) -- 3,750(13)
Development 1995 158,654 41,250 -- 18,000 3,332(14)
</TABLE>
(1) Messrs. Morton and Gavrelis joined the Company in December 1995 and,
therefore, their salary for 1995 represents only a portion of the year.
(2) Mr. Miniutti joined the Company in August 1996 and, therefore, his
salary for 1996 represents only a portion of the year.
(3) Mr. Neville joined the Company in September, 1997 and, therefore, his
salary for 1997 represents only a portion of the year.
(4) Bonuses for all of the officers of the Company for 1997 and 1996 were
paid in the form of shares of restricted Common Stock ("Restricted
Stock") or options to purchase Restricted Stock based on the market
price of Common Stock on the last day of the applicable calendar year.
The shares of Restricted Stock paid as bonuses vest all at once ("cliff
vesting") after three years. In consideration of the three-year vesting
period, Restricted Stock bonus amounts are set at 150% of an equivalent
cash bonus determined under the Company's MBO Plan. See "--Executive
Compensation Committee Report."
(5) Mr. Morton receives a portion of his base annual salary, his periodic
increases in base annual salary, his annual bonus and his long-term
incentive compensation in the form of Restricted Stock or options to
purchase Restricted Stock, as follows:
(a) 30,000 shares, with a value of $198,750 ($6.625 per share), were
granted on March 1, 1997, subject to a one-year cliff vest, as
part of Mr. Morton's base annual salary;
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were
granted on March 1, 1997, subject to a three-year cliff vest, as
an increase in Mr. Morton's base annual salary;
(c) An option to purchase 48,500 shares, with a value of $338,288
($7.75 per share) net of a 10% exercise price, was granted as of
December 31, 1997, subject to a three-year cliff vest, as Mr.
Morton's 1997 bonus;
38
<PAGE>
(d) 18,000 shares, with a value of $119,250 ($6.625 per share), were
granted as of December 31, 1996, subject to a three-year cliff
vest, as Mr. Morton's 1996 bonus;
(e) 90,000 shares, with a value of $900,000 ($10.00 per share), were
granted in 1996 to Mr. Morton as long-term incentive
compensation. These shares were replaced with a grant of 150,000
shares, with a value of $993,750 ($6.625 per share), on March 1,
1997. These restricted shares vest in ten equal installments
commencing March 1, 1997.
(f) On November 11, 1997, Mr. Morton was awarded an additional 21,000
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Morton was exchanged for an option to
repurchase a share of Restricted Stock at an exercise price of
10% of the fair market value of a share of Common Stock on the
date awarded (the Repurchase Options). The additional 21,000
shares of Restricted Stock were awarded so that, after taking
into account the exercise price of the Repurchase Options, the
value of such options would equal the value of Mr. Morton's
unvested Restricted Shares prior to the exchange. See --
Executive Compensation Committee Report, "Restricted Stock."
During 1997 the Company repurchased, pursuant to provisions in its 1996
Restricted Stock Plan (the "Restricted Plan"), 7,500 shares of
Restricted Stock to cover the income tax liability on Restricted Stock
that vested in 1997. At December 31, 1997, the aggregate number of Mr.
Morton's shares of Restricted Stock and shares issuable upon exercise
of his Repurchase Options was 266,000 with a value of $1,860,788 ($7.75
per share) net of the cost to exercise. Dividends or dividend
equivalents are payable on such Restricted Stock and shares underlying
such Repurchase Options with the exception of the unvested portion of
the 150,000 Repurchase Options granted as long-term compensation.
(6) Mr. Miniutti receives a portion of his base annual salary, his
periodic increases in base annual salary, his annual bonus and
his long-term incentive compensation in the form of Restricted
Stock or options to repurchase restricted stock, as follows:
a) 15,000 shares, with a value of $99,375 ($6.625 per share), were
granted on March 1, 1997, subject to a one-year cliff vest, as
part of Mr. Miniutti's base annual salary;
(b) 4,500 shares, with a value of $29,813 ($6.625 per share), were
granted on March 1, 1997, subject to a three-year cliff vest, as
an increase in Mr. Miniutti's base annual salary;
(c) An option to purchase 28,500 shares, with a value of $198,788
($7.75 per share) net of a 10% exercise price, was granted as of
December 31, 1997, subject to a three-year cliff vest, as Mr.
Miniutti's 1997 bonus;
(d) 6,500 shares, with a value of $43,063 ($6.625 per share), were
granted as of December 31, 1996, subject to a three-year cliff
vest, as Mr. Miniutti's 1996 bonus;
(e) 90,000 shares, with a value of $776,250 ($8.625 per share), were
granted in 1996 to Mr. Miniutti as long-term incentive
compensation. These shares were replaced with a grant of 120,000
shares, with a value of $795,000 ($6.625 per share), on March 1,
1997. These restricted shares vest in ten equal installments
commencing March 1, 1997.
(f) On November 11, 1997, Mr. Miniutti was awarded an additional
15,000 shares of Restricted Stock, and each unvested share of
Restricted Stock then owned by Mr. Miniutti was exchanged for a
Repurchase Option. The additional 15,000 shares of Restricted
Stock were awarded so that, after taking into account the
exercise price of the Repurchase Options, the value of such
options would equal the value of Mr. Morton's unvested Restricted
Shares prior to the exchange. See -- Executive Compensation
Committee Report, "Restricted Stock."
During 1997 the Company repurchased, pursuant to its Restricted Plan,
6,000 shares of Restricted Stock to cover the income tax liability on
Restricted Stock that vested in 1997. At December 31, 1997, the
aggregate number of Mr. Miniutti's shares of Restricted Stock and
shares issuable upon exercise of his Repurchase Options was 183,500
with a value of $1,283,788 ($7.75 per share) net of the cost to
exercise. Dividends or dividend equivalents are payable on such
Restricted Stock and shares underlying such Repurchase Options with the
exception of the unvested portion of the 120,000 Repurchase Options
granted as long-term compensation.
(7) Mr. Neville receives his annual bonus and his long-term incentive
compensation in the form of restricted stock or an option to purchase
restricted stock, as follows:
(a) An option to purchase 8,000 shares, with a value of $55,800
($7.75 per share) net of a 10% exercise price, was granted as of
December 31, 1997, subject to a three-year cliff vest, as Mr.
Neville's proportionate 1997 bonus;
(b) 20,000 shares, with a value of $150,000 ($7.50 per share), were
granted on September 8, 1997 to Mr. Neville as long-term
incentive compensation. These restricted shares vest in three
equal installments commencing March 1, 1998.
(C) On November 11, 1997, Mr. Neville was awarded an additional 2,250
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Neville was exchanged
39
<PAGE>
for a Repurchase Option. The additional 2,250 shares of
Restricted Stock were awarded so that, after taking into account
the exercise price of the Repurchase Options, the value of such
options would equal the value of Mr. Neville's unvested
Restricted Shares prior to the exchange. See -- Executive
Compensation Committee Report, "Restricted Stock."
At December 31, 1997, the aggregate number of shares of Restricted Stock
issuable upon exercise of Mr. Neville's Repurchase Options was 30,250 with a
value of $211,550 ($7.75 per share) net of the cost to exercise. Dividend
equivalents are payable on all of the shares underlying Mr. Neville's
Repurchase Options.
(8) Mr. Gavrelis receives his annual bonus and his long-term incentive
compensation in the form of Restricted Stock or options to purchase
Restricted Stock, as follows:
(a) An option to purchase 13,500 shares, with a value of $94,163
($7.75 per share) net of a 10% exercise price, was granted as
of December 31, 1997, subject to a three-year cliff vest, as
Mr. Gavrelis's 1997 bonus;
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were
granted as of December 31, 1996, subject to a three-year cliff
vest, as Mr. Gavrelis's 1996 bonus;
(c) 16,667 shares, with a value of $175,000 ($10.50 per share), were
granted on February 28, 1996 to Mr. Gavrelis as long-term
incentive compensation. These restricted shares vest in three
equal installments commencing January 1, 1997.
(d) On November 11, 1997, Mr. Gavrelis was awarded an additional
1,350 shares of Restricted Stock, and each unvested share of
Restricted Stock then owned by Mr. Gavrelis was exchanged for
Repurchase Options. The additional 1,350 shares of Restricted
Stock were awarded so that, after taking into account the
exercise price of the Repurchase Options, the value of such
options would equal the value of Mr. Gavrelis's unvested
Restricted Shares prior to the exchange. See -- Executive
Compensation Committee Report, "Restricted Stock."
During 1997 the Company repurchased, pursuant to provisions in its Restricted
Plan, 2,778 shares of Restricted Stock to cover the income tax liability on
Restricted Stock that vested in 1997. At December 31, 1997, the aggregate number
of Mr. Gavrelis's shares of Restricted Stock and shares issuable upon exercise
of Repurchase Options was 34,739 with a value of $249,086 ($7.75 per share) net
of the cost to exercise. Dividends or dividend equivalents are payable on all
of such Restricted Stock and the shares underlying Mr. Gavrelis's Repurchase
Options.
(9) Mr. Radcliff received his annual bonus in the form of Restricted
Stock or an option to purchase Restricted Stock, as follows:
(a) An option to purchase 14,500 shares, with a value of $101,138
($7.75 per share), was granted as of December 31, 1997 net of a
10% exercise price, subject to a three-year cliff vest, as Mr.
Radcliff's 1997 bonus;
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were
granted as of December 31, 1996, subject to a three-year cliff
vest, as Mr. Radcliff's 1996 bonus.
(C) On November 11, 1997, Mr. Radcliff was awarded an additional 700
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Radcliff was exchanged for Repurchase
Options. The additional 700 shares of Restricted Stock were
awarded so that, after taking into account the exercise price of
the Repurchase Options, the value of such options would equal the
value of Mr. Radcliff's unvested Restricted Shares prior to the
exchange. See -- Executive Compensation Committee Report,
"Restricted Stock."
At December 31, 1997, the aggregate number of shares of Restricted Stock
issuable upon exercise of Mr. Radcliff's Repurchase Options was 21,200 with a
value of $148,038 ($7.75 per share) net of the cost to exercise. Dividend
equivalents are payable on all of the shares underlying Mr. Radcliff's
Repurchase Options.
(10) Excludes options to purchase shares of Restricted Stock, which options
have an exercise price equal to 10% of a share's fair market value on
the date of grant. Such options are reported under the "Restricted
Stock Awards" column of the Summary Compensation Table.
(11) Stock options granted in 1996 were canceled in 1997 and new options for
the same number of shares were issued in 1997. See "--Executive
Compensation Committee Report--Report on Repricing of Options" for
additional information.
(12) In 1997 Messrs. Morton, Miniutti, Gavrelis and Radcliff received
distributions from the cancellation of a Split Dollar Insurance Plan in
the amounts of $29,746, $15,000, $10,000 and $10,000, respectively, as
well as matching contributions to the Company's 401(k) Retirement and
Savings Plan of $3,721, $4,000, $1,915 and $3,712, respectively.
(13) In 1996 Messrs. Morton, Gavrelis and Radcliff received matching
contributions to the Company's 401(k) Retirement and Savings Plan of
$3,570, $1,163 and $3,750, respectively. In addition, in 1996, Mr.
Miniutti received an allowance for relocation expenses of $50,000.
40
<PAGE>
(14) In 1995 Mr. Radcliff received matching contributions to the Company's
401(k) Retirement and Savings Plan of $3,332.
The following table provides information regarding the stock options
granted during 1997 to the Named Executive Officers:
Option Grants in Last Fiscal Year(1)
Individual Grants
<TABLE>
<CAPTION>
Number of Potential Realizable
Securities Percent of Value at Assumed
Underlying Total Options Annual Rates of Stock
Options Granted Exercise Price Appreciation for
Granted to Employees Price Expiration Option Term ($)(2)
Name (#) in Fiscal Year ($) Date ----------------------
5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
C. Cammack Morton 300,000(3) 46.5 $5.625 4/1/07 1,061,260 2,689,44,
Patrick M. Miniutti 200,000(4) 31.0 $5.625 4/1/07 707,506 1,792,960
William H. Neville 50,000(5) 7.8 $7.50 9/7/07 235,835 597,653
Christopher G. 35,000(4) 5.4 $5.625 4/1/07 123,814 313,768
Gavrelis
</TABLE>
(1) Excludes Repurchase Options, which options have an exercise price equal
to 10% of a share's fair market value on the date of grant. Such
options are reported under the "Restricted Stock Awards" column of the
Summary Compensation Table.
(2) In accordance with SEC rules, these columns show gains that might exist
for the respective options, assuming the market price of the Company's
Common Stock appreciates from the date of grant over a period of ten
years at annualized rates of five and ten percent, respectively. The
actual value, if any, on stock option exercises will depend on the
future performance of the Company?s Common Stock, as well as the option
holders continued employment through the four-year vesting period.
There can be no assurance that the value, if any, ultimately realized
by the executive will be at or near the values shown above.
(3) 100,000 option shares vested upon grant with the remainder at 25% per
year. These stock options represent the replacement of option shares
issued in 1996 and canceled in 1997. See "-- Executive Compensation
Committee Report -- Report on Repricing of Options" for additional
information.
(4) 20% vested upon grant with the remainder at 25% per year. These stock
options represent the replacement of option shares issued in 1996 and
canceled in 1997. See ""-- Executive Compensation Committee
Report--Report on Repricing of Options" for additional information.
The following table sets forth certain information concerning the
number of shares of Common Stock underlying options held by each of the Named
Executive Officers and the value of such options at December 31, 1997:
<TABLE>
<CAPTION>
Fiscal Year-End Option Values(1)
Number of Value of Unexercised
Securities Underlying In-the-money
Unexercised Options Options at
at Fiscal Fiscal Year-End
Year-End (#) ($)
Exercisable/ Exercisable/
Name Unexercisable (2) Unexercisable (3)
- ---- ------------- -------------
<S> <C> <C>
C. Cammack Morton 100,000/200,000 212,500/425,000
Patrick Miniutti 40,000/160,000 85,000/340,000
William H. Neville 10,000/40,000 2,500/10,000
Christopher G. Gavrelis 7,000/28,000 14,875/59,500
Connell L. Radcliff 43,400/19,850 --/--
</TABLE>
41
<PAGE>
(1) Excludes Repurchase Options, which options have an exercise price equal
to 10% of a share's fair market value on the date of grant. Such
options are reported under the "Restricted Stock Awards" column of the
Summary Compensation Table.
(2) Future exercisability is subject to vesting and the optionee remaining
employed by the Company.
(3) Value is calculated by subtracting the exercise price from the fair
market value of the securities underlying the option at fiscal year-end
and multiplying the results by the number of in-the-money options held.
Fair market value was based on closing market price of the Common Stock
at December 31, 1997 ($7.75).
Employment Agreements
Annual Compensation and Basic Terms. The Company is a party to employment
agreements with Messrs. Morton, Miniutti, Gavrelis and Neville. The agreements
with Messrs. Morton, Miniutti and Neville currently continue through February
29, 2001. The term is automatically extended for an additional year on March 1,
1999 and each year thereafter, subject to the right of either party to terminate
as of the end of the then-existing three-year term by giving written notice at
least 30 days before the March 1 extension date. The agreement with Mr. Gavrelis
continues through March 1, 1999. If the employment of any executive is
terminated due to the change of control of the Company, an additional two years
will be added to the unexpired term of the respective agreements. Pursuant to
their respective agreements, each executive is required to devote his entire
business time to the Company and is prohibited from competing with the Company
for a period of one year following termination of employment. The employment
agreements provide for base annual cash salaries as follows: Mr. Morton -
$330,000; Mr. Miniutti - $225,000; Mr. Neville - $225,000; and Mr. Gavrelis -
$170,000. In addition, Messrs. Morton and Miniutti receive Restricted Stock as
part of their base annual compensation, based on an equivalent cash value of
approximately $200,000 and $100,000, respectively. The number of restricted
shares issued annually is adjusted on March 1st of each year based on the
previous year-end market price of the stock. Such Restricted Stock is subject to
a one-year cliff vest. The base annual salaries are subject to periodic
increases based upon the performance of the Company and the executive. Messrs.
Morton and Miniutti each agreed to take the raises in their base salaries for
1997 in the form of Restricted Stock, which is subject to a three-year cliff
vest, in the amounts of 6,000 shares and 4,500 shares, respectively. In
addition, they have agreed to take all future raises in the form of Restricted
Stock subject to similar vesting provisions. If the employment of any executive
is terminated without cause (as defined in the respective agreements), such
executive will be entitled to the greater of (i) the base salary payable to the
executive for the remainder of the then existing employment term or one year's
base salary, (ii) in the case of Messrs. Morton, Miniutti and Neville, the
product of the number of years representing the unexpired term of the agreement
and an amount equal to the average bonus paid to such executive over the three
years immediately prior to termination, and in the case of Mr. Gavrelis, a pro
rata portion of any incentive compensation or bonus payable for the years of
termination and (iii) certain other accrued benefits.
Long-Term Compensation. As of March 1, 1997, in recognition of the increases in
their responsibilities and after consultation with an independent executive
compensation consultant, the Independent Directors replaced the previous
long-term incentive plan awards of 90,000 shares of Restricted Stock for Messrs.
Morton and Miniutti with grants of 150,000 shares and 120,000 shares,
respectively. These grants were issued pursuant to the Company's 1996 Restricted
Stock Plan. These restricted shares vest in ten equal annual installments
commencing on March 1, 1997, provided each executive continues to be employed by
the Company. If the Company (i) does not extend the executive's employment
agreement beyond its initial three-year term; or (ii) terminates the executive
without cause (as defined in their respective employment agreements) all
unvested shares of restricted stock will become fully vested. The executives
will be entitled to receive dividends on only the vested shares. Mr. Neville was
awarded 20,000 shares of Restricted Stock, which vests in three equal annual
installments commencing March 1, 1998, provided he continues to be employed by
the Company. Mr. Gavrelis was awarded 16,667 shares of Restricted Stock, which
vest in three equal annual installments commencing December 14, 1996, provided
that he continues to be employed by the Company.
In addition, the employment agreements for Messrs. Morton, Miniutti,
Neville and Gavrelis provide for the grant of options to purchase 300,000,
200,000, 50,000 and 35,000 shares of Common Stock, respectively. For information
regarding such options, see the table captioned "Option Grants in Last Fiscal
Year" above and "-- Executive Compensation Committee Report--Report on Repricing
of Options" below.
42
<PAGE>
Change in Control Arrangements
Under the employment agreements, termination without cause includes any
termination resulting from a change in control of the Company. The term change
in control generally is defined under the employment agreements to include the
first to occur of the following: (i) any person or group owns or controls 50% or
more of the outstanding Common Stock, (ii) any person or group who owned less
than 5% of the outstanding Common Stock on the date of the agreement owns 20% or
more of the outstanding Common Stock or (iii) the stockholders of the Company
approve a business combination that will result in a change in ownership of 20%
or more of the outstanding Common Stock. Upon the occurrence of a change in
control of the Company, all non-vested Restricted Stock will become immediately
vested.
In addition, upon the occurrence of a change in control of the Company
(as defined in the Stock Incentive Plan), all non-vested stock options granted
thereunder become immediately vested and exercisable in full. Change in control
generally is defined under the Stock Incentive Plan to occur at such time as any
person or group beneficially owns at least 25% of the outstanding Common Stock.
Each of the five executive officers who have employment agreements with
the Company have entered into waivers providing that the Lazard Investment and
the Konover Transaction will not trigger any obligation under their employment
agreements except to the extent that such transactions automatically extend the
term of their employment agreements.
Executive Compensation Committee Report
Executive Officer Compensation Policies. The goals of the Executive
Compensation Committee (the "Committee") with respect to the compensation of the
Company's executive officers are to (i) provide a competitive total compensation
package that enables the Company to attract and retain qualified executives,
(ii) align the compensation of such executives with the Company's overall
business strategies and (iii) provide each executive officer with a significant
equity stake in the Company, which serves to align compensation with the
interests of stockholders. To this end, the Committee determines executive
compensation consistent with a philosophy of compensating executive officers
based on their responsibilities and the Company's performance in attaining
financial and non-financial objectives.
The primary components of the Company's executive compensation program
are: (i) base salaries, (ii) performance-based annual bonuses, (iii) stock
options and (iv) restricted stock. The more senior the position the greater the
compensation that varies with performance and the greater the portion that is in
the form of options or restricted stock.
Base Salaries. Base salaries for the Companys Named Executive Officers, as well
as changes in such salaries, are based upon recommendations of the Chief
Executive Officer, taking into account such factors as competitive industry
salaries; a subjective assessment of the nature of the position; the
contribution and experience of the officer; and the length of the officer's
service. Under the Chief Executive Officer's direction, the Chief Operating
Officer reviews all salary recommendations with the Committee, which then
approves or disapproves such recommendations. The Chief Executive Officer
reviews any salary recommendations for the Chief Operating Officer with the
Committee. The Committee has engaged a national executive compensation
consultant for the purpose of obtaining comparative information and advice on
each of the components of executive compensation. The Committee believes that
the majority of the Company's executive officers are at or near the average for
base salaries and total compensation as compared to that of the Company's peers.
The Committee would like to increase base salaries to the 75th percentile level
in the future. See Employment Agreements - Annual Compensation and Basic Terms.
Bonuses. Annual bonuses are determined under a Management By Objectives (MBO)
plan based on Company and individual performance. The weighting between Company
performance and individual performance is determined on the basis of position
and responsibilities. Performance targets are determined for both Company
performance and individual performance. Achieving the targets would ordinarily
result in bonuses ranging from 5% to 60% of base salary, with maximum bonuses
ranging from 10% to 70% of base salary for performance achievements greater than
the targets. All officers of the Company receive 100% of their bonus in the form
of restricted stock with a three-year cliff vest. In consideration therefor,
each officer receives shares equal to 150% of the value of the appropriate cash
bonus; the number of shares is determined using the total bonus amount divided
by the stock price at the day of issuance.
43
<PAGE>
Stock Options. The Company established an Employee Stock Incentive Plan ("The
Stock Incentive Plan) in 1993 for the purpose of attracting and retaining the
Company's executive officers and other employees. A maximum of 1,100,000 shares
of Common Stock are currently reserved for issuance under the Stock Incentive
Plan (see "Proposal Five" below relating to the proposed increase to 2,800,000
shares). The Stock Incentive Plan allows for the grant of incentive and
nonqualified options (within the meaning of the Internal Revenue Code) that are
exercisable at a price equal to the closing price of the Common Stock on the New
York Stock Exchange on the trading day immediately preceding the date of grant.
All of the Company's executive officers are eligible to receive options to
purchase shares of Common Stock granted under the Stock Incentive Plan. The
Committee believes that stock option grants are a valuable motivating tool and
provide a long-term incentive to management. The Committee also believes that
issuing stock options to executives benefits the Company's stockholders by
encouraging executives to own the Company's stock, thus aligning executive
compensation with stockholder interests. Options for 645,000 shares were granted
during 1997. (See Option Grants in Last Fiscal Year" above.)
Restricted Stock. The Company established a restricted stock plan (the
"Restricted Plan") in 1996, reserving 350,000 shares of Common Stock for
issuance thereunder, to give the Committee more flexibility in designing
equity-based compensation arrangements to attract, motivate and retain
executives and other key employees. Such equity-based compensation is designed
to align more closely the financial interests of management with that of the
stockholders. In 1998 and 1997, the Company reserved in the aggregate an
additional 1,150,000 shares of Common Stock for issuance under the Restricted
Plan. The Restricted Plan, which is administered by the Committee, provides for
the grant of restricted stock awards to any new or existing employee of the
Company, including executive officers. Awards under the Restricted Plan
typically will be subject to various vesting schedules ranging from one to ten
years from the date of grant. The Restricted Plan permits the Committee to
customize the vesting schedule by deferring the commencement date, lengthening
the vesting period and/or conditioning vesting upon the achievement of specified
performance goals. During 1997, the Company granted 248,752 shares of Restricted
Stock, net of replacement shares, to officers and other key employees.
In 1997, the Company amended the Restricted Plan so that officers would
not have to sell their shares of Restricted Stock to meet their tax obligations
incurred upon the vesting of such shares. The amendment provides that Restricted
Stock may be awarded to certain officers in the form of an option to purchase
Restricted Stock at 10% of the market price of the Common Stock on the date of
grant of the option. Under the Restricted Plan all of the officers' previously
unvested shares of Restricted Stock as of November 11, 1997 were replaced with
options to purchase such shares. The options vest on the same schedules as the
shares of Restricted Stock that they replaced. Under the Restricted Plan,
holders of options to purchase Restricted Stock will also be entitled to cash
payments equal to the value of the dividends that would have been paid on the
shares underlying such options. The executives may exercise the options at any
time after vesting and within 15 years of the date of grant. All future grants
to officers under the Restricted Plan will be in the form of an option to
purchase Restricted Stock.
Chief Executive Officer's Compensation. C. Cammack Morton's compensation for
1997 as the Company's President and Chief Executive Officer consisted of an
annual base cash salary of $330,000, which is subject to periodic increases in
the form of Restricted Stock, subject to three-year cliff vesting, to be
determined by the Committee in its discretion based upon (i) a qualitative and
quantitative review of the performance of the Company (including consideration
of factors such as funds from operations) and Mr. Morton and (ii) the
compensation of executives with similar responsibilities employed by companies
similar in size and generally considered to be comparable to the Company.
Mr. Morton has agreed to take such raises. In addition, Mr. Morton was granted
36,000 shares of Restricted Stock in 1997 as part of his base compensation,
which had a market value at date of grant of $238,500. Such shares are subject
to one-year (30,000 shares) and three-year (6,000 shares) cliff vesting. Also,
consistent with the intent of the bonus plan discussed above, the Committee
granted a bonus to Mr. Morton for 1997 in the form of an option to purchase
48,500 shares of Restricted Stock subject to a three-year cliff vest, which had
a market value at date of grant of $338,288, net of a 10% exercise price. The
bonus was based on the Companys exceeding the target increase in FFO for 1997.
Section 162(m) of the Internal Revenue Code. The Company does not expect Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), to affect
the deductibility for federal income tax purposes of the compensation of the
Company's executive officers in 1997. In the future, the Company intends to
review periodically the applicability of Section 162(m) to the Company's
compensation programs, including its potential impact on stock options and
Restricted Stock awarded to executive officers, and, if considered appropriate,
to develop a policy with respect to the Company's compliance with
Section 162(m).
44
<PAGE>
Report on Reproaching of Options. The Executive Compensation Committee
determined that the granting of new stock options to certain senior executives
would promote its goals of aligning executive and stockholder interests and
retaining qualified executives. However, due in part to the issuance of stock
options to former officers, the Company did not have sufficient unreserved
options under the Stock Incentive Plan to grant new stock options. Therefore,
the Company requested that certain officers allow their previously granted stock
options, of which in the aggregate 37% had vested, to be canceled in exchange
for new options. The executive officers accepted the Company's re-issuance
offer although their proportion of vested versus unvested stock options
decreased by 28% on average.
<TABLE>
<CAPTION>
Market Price Length of
Number of of Stock at Original Option
Securities Time of Exercise Price Term Remaining
Underlying Reproaching at Time of New at Date of
Options Reprised or Amendment Reproaching or Exercise Reproaching or
Name Date or Amended (#) ($) Amendment ($) Price ($) Amendment
- ---- ---- -------------- ------------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
C. Cammack Morton 4/97 300,000 5.625 10.25 5.625 8.8 years
Patrick M. Miniutti 4/97 200,000 5.625 8.625 5.625 9.4 years
Christopher G. 4/97 35,000 5.625 10.25 5.625 8.8 years
Gavrelis
Michaela M. Twomey 4/97 35,000 5.625 8.875 5.625 9.4 years
Susan M. Cruse 4/97 25,000 5.625 10.25 5.625 8.8 years
</TABLE>
The Executive Compensation Committee consists of John W. Gildea, Chairman,
William D. Eberle, J. Richard Futrell, Jr., Robert O. Amick, and Theodore E.
Haigler, Jr.
The foregoing report should not be deemed incorporated by reference by
any general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act of 1933, as amended, or under the
Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference and shall not
otherwise be deemed filed under such acts.
Compensation Committee Interlocks and insider Participation
During 1997, the following individuals (none of whom was or had been an
officer or employee of the Company) served on the Company's Executive
Compensation Committee: Messrs. Gildea, Eberle, Futrell, Amick and Haigler. No
member of the Executive Compensation Committee was or is an officer or employee
of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of March 23, 1998 by: (a)
each Named Executive Officer; (b) each director; (c) current executive officers
and directors as a group; and (d) each person or group known by the Company to
beneficially own more than five percent of the Common Stock. Except as otherwise
described in the notes below, the following beneficial owners have sole voting
power and sole investment power with respect to all shares of Common Stock set
forth opposite their name.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Beneficial Ownership of Class (1)
-------------------- --------------
<S> <C> <C>
C. Cammack Morton........................ 214,715 1.5%
Patrick M. Miniutti...................... 118,400 *
William H. Neville....................... 17,417 *
Christopher G. Gavrelis.................. 19,671 *
Connell L. Radcliff...................... 128,541 *
Robert O. Amick.......................... 5,544 *
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent
Beneficial Ownership of Class (1)
-------------------- ------------
<S> <C> <C>
William D. Eberle........................ 6,095 *
J. Richard Futrell, Jr................... 5,044 *
John W. Gildea........................... 886,777(2) 5.9%
Theodore E. Haigler, Jr.................. 5,354 *
All current executive officers and
directors as a group (12)................ 1,421,229 9.1%
Jeffrey B. Citron........................ 807,222(3) 5.4%
Prometheus Southeast Retail LLC(4)....... 2,350,000 16.5%
</TABLE>
(1) An asterisk (*) indicates less than one percent. The total number of
shares outstanding used in calculating this percentage assumes that (i)
no options to purchase shares of Common Stock are exercised; (ii) no
warrants to purchase shares of common stock are exercised and (iii) no
shares of Preferred Stock are converted to shares of Common Stock;
provided that the following shares of Common Stock are deemed
outstanding: (x) those Isabel within 60 days upon exercise of options
or warrants held by the persons(s) shown in this table and (y) those
Isabel upon conversion of Preferred Stock held by the person(s) shown
in this table.
(2) Includes (i) 4,000 shares held by Mr. Glide's spouse as custodian for
their children as to which Mr. Gildea has sole voting power only and as
to which he disclaims beneficial ownership, (ii) 111,111 shares of
Common Stock presently Isabel upon conversion of Preferred Stock as to
which Mr. Gildea has sole voting and dispositive power, and (iii)
766,666 shares of Common Stock presently issuable upon conversion of
Preferred Stock and warrants owned by Network Fund III, Ltd. (Network),
with respect to which Mr. Gildea has shared dispositive power only. Mr.
Gildea is a director of Network and a Managing Director of Gildea
Management Company, which has an investment advisory agreement with
Network.
(3) Includes 547,222 shares issuable upon conversion of outstanding
preferred stock and 260,000 shares issuable upon conversion of
outstanding warrants. Jeffery B. Citrin possesses only investment
control with respect to 272,222 of such shares. Mr. Citrin's address is
950 Third Avenue, 17th Floor, New York, New York 10022. Information
based on Schedule 13D dated July 22, 1996.
(4) As discussed at "Proposal Two," Investor purchased 2,350,000 shares on
March 23, 1998 pursuant to the Stock Purchase Agreement. If the
Stockholders approve Proposal Two, Investor will be obligated to
purchase an additional 18,602,632 shares of Common Stock. Assuming no
other changes in the number of outstanding shares of Common Stock, the
Investor would then own 62.6% of the outstanding shares of Common
Stock. Investor's address is 30 Rockefeller Plaza, 63rd Floor, New
York, New York 10020.
Item 13. Certain Relationships and Related Transactions
During 1993, the Company acquired a 19 acre tract of land in a
non-monetary transaction from a partnership whose partners include two former
executive officers of the Company. The recorded value of the land was $748,000.
In return for the land, the Company assumed certain outstanding debt and the
remaining purchase price was settled by reducing amounts owed to the Company by
a tenant whose majority owners were also partners in the partnership. A review
of this transaction resulted in J. Dixon Fleming, Jr., the Company's former
Chairman and Chief Executive officer, agreeing to permit the Company to satisfy
a $0.6 million asset valuation issue by offsetting amounts otherwise owed to Mr.
Fleming pursuant to his employment agreement (see "Item 11 -- Executive
Compensation -- Severance Agreements") or by the acceptance from Mr. Fleming of
some other cash or value equivalent. The Company has recently entered into an
agreement with Mr. Fleming to sell to him the 19 acre land tract for the sum of
$750,000 which would satisfy the asset valuation issue. The consummation of this
transaction is secured by the unpaid severance amounts due to Mr. Fleming. Also
in settling the terms of Mr. Fleming's severance and non-competition
restrictions, $0.25 million of his severance was applied to certain advertising
expenses incurred by the Company. During the fourth quarter of 1997, the Company
sold to Mr. Fleming, the 19 acre tract for the sum of $750,000, which
substantially satisfied the asset valuation issues.
46
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following consolidated financial statements are filed as part of
the report:
<TABLE>
<CAPTION>
Page
------
<S> <C>
Reports of independent auditors F-2
Consolidated balance sheets as of December 31, 1997 and 1996 F-4
Consolidated statements of operations for the years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated statements of stockholders' equity for years
ended December 31, 1997, 1996 and 1995 F-6
Consolidated statements of cash flows for the years
ended December 31, 1997, 1996 and 1995 F-7
Notes to consolidated financial statements F-8
(a)(2) Included with this report is the following consolidated financial
statement schedule:
Schedule III - Real Estate and Accumulated Depreciation F-23
</TABLE>
All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not required
under the related instructions or are inapplicable and,
therefore, have been omitted.
(a)(3) Included with this report are the following exhibits:
FAC 10K Exhibit List
Exhibit # Title
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws of the Company
3.3 Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
4.1 Specimen Common Stock Certificate
4.2 Warrant Agreement between the Company and Blackacre (2)
4.3 Warrant Agreement between the Company and Blackacre (2)
4.4 Warrant Agreement between the Company and National Union Fire
Insurance Company of Pittsburgh (2)
4.5 Warrant Agreement between the Company and Network Fund III, Ltd. (2)
4.6 Indenture by and between FSA Finance, Inc., as issuer, Bank One,
Columbus, National Association, as trustee, and Fleet Management and
Recovery Corporation, as master servicer (3)
4.7 Master Servicing Agreement by and between FSA Finance, Inc., as
issuer, Bank One, Columbus, National Association, as trustee(FN1), and
Fleet Management and Recovery Corporation, as master servicer (3)
4.8 Specimen copies of the various types of Class A, B, C and R Notes (3)
4.9 Mortgage Note given by FSA Properties, Inc., as maker, in favor of the
Travelers Insurance Company, as payee (3)
4.10 Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing
Statement and Assignment of Leases and Rents by and between FSA
Properties, Inc., as mortgagor, and The Travelers Insurance Company,
as mortgagee (3)
- ----------
(FN1) Bank One, Columbus, resigned as trustee effective December 10, 1997, and
the issuer has appointed First Union National Bank as the successor
trustee effective December 10, 1997.
47
<PAGE>
4.11 Gap Note given by FSA Properties, Inc., as maker, in favor of The
Travelers Insurance Company, as payee (3)
4.12 Mortgage Loan Purchase Agreement by and between The Travelers
Insurance Company, as seller, and FSA Finance, Inc., as purchaser (4)
4.13 Loan Agreement Between FAC Mortgage LLC as Borrower and Nomura Asset
Capital Corporation as Lender
4.14 Agreement to Furnish Certain Instruments Defining the Rights of
Long-Term Debt Holders
10.1 Employment Agreement between the Company and C. Cammack Morton
10.2 Employment Agreement between the Company and Patrick M. Miniutti
10.3 Employment Agreement between the Company and William H. Neville
10.4 Employment Agreement between the Company and Sona A. Thorburn
10.5 Employment Agreement between the Company and Christopher G. Gavrelis
10.6 Factory Stores of America, Inc. Amended and Restated 1993 Employee
Stock Option Plan (4)
10.7 1995 Outside Directors' Stock Award Plan
10.8 Factory Stores of America, Inc. 1996 Restricted Stock Plan (4)
10.9 Restricted Stock Agreement between the Company and C. Cammack Morton
10.10 Restricted Stock Agreement between the Company and Patrick M. Miniutti
10.11 Restricted Stock Agreement between the Company and Christopher G.
Gavrelis
10.12 Incentive Stock Option Agreement Between the Company and C. Cammack
Morton
10.13 Incentive Stock Option Agreement between the Company and Patrick M.
Miniutti
10.14 Nonqualified Stock Option Agreement between the Company and Patrick M.
Miniutti
10.15 Line of Credit Agreement between FAC Realty, Inc. and Nomura Asset
Capital Corporation, dated February 19, 1997 (5)
48
<PAGE>
10.16 First Amendment to the Master and Exchange Option Agreement, dated as
of March 16, 1998 by and among the Company, FAC Realty, L.P. and the
Contributors listed therein (6)
10.17 Assignment of Interest in Master Agreement and Exchange Option
Agreement, and Consent of Limited Partners dated December 22, 1997 (6)
10.18 Exchange Option Agreement dated as of October 1, 1997, by and among
Carolina FAC, Limited Partnership, FAC Realty, Inc. and the Owners of
the Properties and Interests listed therein (6)
10.19 Master Agreement, dated as of October 1, 1997, by and among FAC
Realty, Inc., Carolina FAC, Limited Partnership, and the other
signatories listed therein (6)
10.20 Amended and Restated Stock Purchase Agreement, dated as of March 23,
1998, between the Company and the Investor (6)
10.21 Stockholders Agreement, dated February 24, 1998, among the Company and
the Investor (6)
10.22 Registration Rights Agreement, dated February 24, 1998, between the
Company and the Investor (6)
10.23 Contingent Value Right Agreement, dated February 24, 1998, among the
Company and the Investor (6)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Arthur Anderson, LLP
27.1 Financial Data Schedule (electronic filing only)
27.2 Restated 1996 Financial Data Schedules (electronic filing only)
27.3 Restated Fourth Quarter 1997 Financial Data Schedule (electronic
filing only)
- ----------
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (File No. 333-39491).
(2) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1995.
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K dated May 22, 1995.
(4) Incorporated herein by reference to the Company's annual report on Form 10K
for the
49
<PAGE>
year ended December 31, 1996.
(5) Incorporated herein by reference to the Company's Current Report on Form
8-K dated February 19, 1997.
(6) Incorporated herein by reference to the Company's Current Report on Form
8-K dated March 23, 1998.
50
<PAGE>
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.
FAC Realty Trust, Inc.
/s/ C. Cammack Morton
---------------------------------
C. Cammack Morton, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated on 15th of April, 1998.
<TABLE>
<CAPTION>
<S> <C>
C. Cammack Morton
--------------------- Director, President and
C. Cammack Morton Chief Executive Officer
(principal executive officer)
Patrick M. Miniutti
--------------------- Director, Exec. Vice President and
Patrick M. Miniutti Chief Financial Officer
(principal financial officer and
accounting officer)
Robert O. Amick
--------------------- Director
Robert O. Amick
William D. Eberle Director
---------------------
William D. Eberle
J. Richard Futrell, Jr.
---------------------- Director
J. Richard Futrell, Jr.
Theodore E. Haigler, Jr.
------------------------ Director
Theodore E. Haigler, Jr.
John W. Gildea
------------------------ Director
John W. Gildea
</TABLE>
51
<PAGE>
FAC REALTY TRUST, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Reports of Independent Auditors.......................................................................F-2 - F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996..........................................F-4
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995......................................................................................F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and1995....................................................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................................................................F-7
Notes to Consolidated Financial Statements............................................................F-8
Schedule III - Real Estate and Accumulated Depreciation...............................................F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FAC Realty Trust, Inc.:
We have audited the accompanying consolidated balance sheet of FAC Realty Trust,
Inc. (a Maryland corporation) as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FAC Realty Trust,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Our audit of FAC Realty Trust, Inc. was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. Schedule III
included with consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule as of, and for the year ended
December 31, 1997, has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Raleigh, North Carolina,
February 11, 1998 (except for the matters discussed in
Note 15, as to which date is March 31, 1998).
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
FAC Realty Trust, Inc.
We have audited the accompanying consolidated balance sheet of FAC Realty Trust,
Inc. as of December 31, 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 FAC
Realty Trust, Inc. at December 31, 1996 and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Raleigh, North Carolina,
January 31, 1997, except for the first paragraph
of Note 11 and the last two sentences of the first
paragraph of Note 13 as to which the date is
March 27, 1997.
F-3
<PAGE>
FAC REALTY TRUST, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------------------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
INCOME PRODUCING PROPERTIES:
Land $ 81,233 $ 77,011
Buildings and improvements 292,726 259,383
Deferred leasing and other charges 21,366 17,635
--------------------------------------------
395,325 354,029
Accumulated depreciation and amortization (50,134) (36,027)
--------------------------------------------
345,191 318,002
Properties under development 6,456 2,538
Properties held for sale 12,490 11,438
Investment in joint ventures 4,283 -
OTHER ASSETS:
Cash and cash equivalents 4,872 7,034
Restricted cash 3,858 3,860
Tenant and other receivables 7,167 5,864
Deferred charges and other assets 8,851 9,876
Notes receivable 10,458 -
============================================
$ 403,626 $358,612
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Debt on income properties $ 232,575 $ 173,695
Unsecured senior notes - 7,420
Other unsecured notes 197 2,542
Capital lease obligations 1,131 826
Accounts payable and other liabilities 6,796 9,537
--------------------------------------------
240,699 194,020
--------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A, 5,000,000 shares authorized, and 19,162 19,162
800,000 issued and outstanding in 1997 and 1996
Stock purchase warrants 9 9
Common stock, $0.01 par value, 45,000,000 shares authorized and 119 121
11,904,182 and 12,100,955 issued and outstanding in 1997 and 1996,
respectively
Additional paid-in capital 145,332 147,346
Accumulated deficit (1,416) -
Deferred compensation - Restricted Stock Plan (279) (2,046)
--------------------------------------------
162,927 164,592
============================================
$ 403,626 $ 358,612
============================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
FAC REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Base rents $ 38,535 $ 34,099 $ 34,584
Percentage rents 755 633 616
Property operating cost recoveries 12,726 11,757 11,065
Other income 1,710 681 864
-------------------------------------------------------
53,726 47,170 47,129
-------------------------------------------------------
Property operating costs:
Common area maintenance 6,609 5,864 5,549
Utilities 1,173 1,074 939
Real estate taxes 5,863 5,098 4,733
Insurance 616 684 589
Marketing 1,294 1,001 1,838
Other 116 254 -
-------------------------------------------------------
15,671 13,975 13,648
Depreciation and amortization 15,652 13,802 11,900
-------------------------------------------------------
31,323 27,777 25,548
-------------------------------------------------------
22,403 19,393 21,581
-------------------------------------------------------
OTHER EXPENSES:
General and administrative 6,397 6,199 15,279
Interest 16,436 14,175 10,903
-------------------------------------------------------
22,833 20,374 26,182
-------------------------------------------------------
(430) (981) (4,601)
-------------------------------------------------------
PROPERTY ADJUSTMENTS:
Adjustment to carrying value of assets - (5,000) (8,500)
-------------------------------------------------------
(5,981) (8,500)
-------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM (430) (5,981) (13,101)
Extraordinary loss on early extinguishment of debt (986) (103) -
=======================================================
NET LOSS $ (1,416) $ (6,084) $ (13,101)
=======================================================
LOSS BEFORE EXTRAORDINARY ITEM APPLICABLE TO COMMON
STOCKHOLDERS $ (430) $ (6,349) $ (13,101)
=======================================================
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss before extraordinary item applicable to common
stockholders $ (0.04) $ (0.54) $ (1.11)
Extraordinary item (0.08) (0.01) -
=======================================================
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (0.12) $ (0.55) $ (1.11)
=======================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 11,824 11,817 11,814
=======================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
FAC REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CONVERTIBLE STOCK ADDITIONAL
PREFERRED STOCK PURCHASE COMMON STOCK PAID IN CAPITAL ACCUMULATED
WARRANTS DEFICIT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ - $ - $ 118 $ 203,222 $ -
Issuance of directors stock awards - - - 18 -
Net loss - - - - (13,101)
Common dividends declared ($2.52 per share) - - - (42,872) 13,101
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 - - 118 160,368 -
Issuance of convertible preferred stock 19,162 - - - -
Issuance of directors stock awards - - - 29 -
Issuance of restricted stock awards - - 4 3,334 -
Issuance of stock purchase warrants - 9 - - -
Compensation under restricted stock plan - - - - -
Cancellation of restricted stock awards - - (1) (899) -
Net loss - - - - (6,084)
Preferred dividends declared ($.46 per - - - (368) -
share)
Common dividends declared ($.75 per share) - - - (15,118) 6,084
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 19,162 9 121 147,346 -
----------------------------------------------------------------------------
Issuance of directors stock awards - - - 45 -
Issuance of restricted stock awards - - 3 2,600 -
Compensation under restricted stock plan, - - - - -
net
Cancellation of restricted stock award - - (2) (1,641) -
Exchange of restricted stock for options to
repurchase restricted stock - - (3) (2,641) -
Repurchase of common stock - - - (377) -
Net loss - - - - (1,416)
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 19,162 $ 9 $ 119 $ 145,332 $ (1,416)
============================================================================
<CAPTION>
DEFERRED
COMPENSATION
RESTRICTED STOCK
PLAN TOTAL
---------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ - $ 203,340
Issuance of directors stock awards - 18
Net loss - (13,101)
Common dividends declared ($2.52 per share) - (29,771)
---------------------------------------
BALANCE AT DECEMBER 31, 1995 - 160,486
Issuance of convertible preferred stock - 19,162
Issuance of directors stock awards - 29
Issuance of restricted stock awards (3,338) -
Issuance of stock purchase warrants - 9
Compensation under restricted stock plan 392 392
Cancellation of restricted stock awards 900 -
Net loss - (6,084)
Preferred dividends declared ($.46 per - (368)
share)
Common dividends declared ($.75 per share) - (9,034)
---------------------------------------
BALANCE AT DECEMBER 31, 1996 (2,046) 164,592
---------------------------------------
Issuance of directors stock awards - 45
Issuance of restricted stock awards (2,603) -
Compensation under restricted stock plan, 493 493
net
Cancellation of restricted stock award 1,643 -
Exchange of restricted stock for options to
repurchase restricted stock 2,234 (410)
Repurchase of common stock - (377)
Net loss - (1,416)
---------------------------------------
BALANCE AT DECEMBER 31, 1997 $ (279) $ 162,927
=======================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
FAC REALTY TRUST, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,416) $ (6,084) $ (13,101)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Adjustment to carrying value of assets - 5,000 8,500
Depreciation and amortization 15,652 13,802 11,900
Extraordinary loss on early extinguishment of debt 986 103 -
Amortization of deferred financing costs 1,562 1,422 1,552
Compensation under restricted stock plan 493 392 -
Net changes in:
Tenant and other receivables (1,303) (619) 828
Deferred charges and other assets 139 122 3,968
Accounts payable and other liabilities (3,151) (6,489) 8,431
----------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,962 7,649 22,078
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income-producing properties (15,025) (18,234) (46,048)
Acquisition of income-producing properties (32,421) - -
Investment in joint ventures (4,283) - -
Increase in notes receivable (10,458) - -
Change in restricted cash 2 946 (4,806)
----------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (62,185) (17,288) (50,854)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt on income properties 135,856 5,061 139,672
Proceeds from exchangeable notes - 20,000 -
Proceeds from other debt - 9,580 582
Deferred financing charges (1,947) (2,289) (4,361)
Debt repayments (86,516) (1,936) (71,294)
Payable related to acquisition of properties - - (11,737)
Repurchase of common stock (360) - -
Distributions to stockholders - (15,427) (23,746)
Other 28 29 18
----------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,061 15,018 29,134
----------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,162) 5,379 358
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,034 1,655 1,297
====================================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,872 $ 7,034 $ 1,655
====================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
interest (net of interest capitalized of $1,525
in 1997, $1,974 in 1996 and $2,567 in 1995) $ 14,505 $ 15,347 $ 9,848
====================================================
Dividend declared not paid $ - $ - $ 6,025
====================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
FAC Realty Trust, Inc. (the "Company"), formerly Factory Stores of America,
Inc., and FAC Realty, Inc., was incorporated on March 31, 1993 as a
self-administrated and self-managed real estate investment trust (REIT). The
Company is principally engaged in the acquisition, development, ownership and
operation of community and outlet shopping centers. The Company's revenues are
primarily derived from real estate leases with national, regional and local
retailing companies.
On December 17, 1997, the following shareholder approval, the Company changed
its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, inc. into its
Maryland subsidiary, FAC Realty Trust, Inc. (the "Company"). Following the
reincorporation on December 18, 1997, the Company reorganized as an umbrella
partnership real estate investment trust (an "UPREIT)"). The Company then
contributed to FAC Properties, L.P., a Delaware, limited partnership (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties, which remains in a wholly owned subsidiary of
the Company. In exchange for the Company's assets, the Company received limited
partnership interest ("Units") in the Operating Partnership in an amount and
designation that corresponded to the number and designation of outstanding
shares of capital stock of the Company at the time. The Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the Operating Partnership in exchange for the contribution of
properties, the Company's percentage ownership in the Operating Partnership will
decline. As the Company issues additional shares of capital stock, it will
contribute the proceeds for that capital stock to the Operating Partnership in
exchange for a number of Units equal to the number of shares that the Company
issues. The Company conducts substantially all of its business and owns
substantially all of its assets (either directly or through subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.
An UPREIT may allow the Company to offer Units in the Operating Partnership in
exchange for ownership interests from tax-motivated sellers. Under certain
circumstances, the exchange of Units for a seller's ownership interest will
enable the Operating Partnership to acquire assets while allowing the seller to
defer the tax liability associated with the sale of such assets. Effectively,
this allows the Company to use Units instead of stock to acquire properties,
which provides an advantage over non-UPREIT entities.
As of December 31, 1997, the properties owned by the Company consist of: (1) 28
community shopping centers in 15 states aggregating approximately 3,090,000
square feet; (2) 10 outlet centers in 9 states aggregating approximately
2,120,000 square feet; (3) two outlet centers aggregating approximately 150,000
square feet and one former factory outlet center which has been converted to
commercial office use with approximately 150,000 square feet that are held for
sale; and (4) approximately 182 acres of outparcel land located near or adjacent
to certain of the Company's centers and are being marketed for lease or sale.
As the owner of real estate, the Company is subject to risks arising in
connection with the underlying real estate, including defaults under or
non-renewal of tenant leases, competition, inability to rent unleased space,
failure to generate sufficient income to meet operating expenses, as well as
debt service, capital expenditures and tenant improvements, environmental
matters, financing availability and changes in real estate and zoning laws. The
success of the Company also depends upon certain key personnel, the Company's
ability to maintain its qualification as a REIT, compliance with the terms and
conditions of the debt on its income properties and other debt instruments, and
trends in the national and local economy, including income tax laws,
governmental regulations and legislation and population trends.
F-8
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Minority interests in entities that
are not wholly owned are not significant. All significant intercompany balances
have been eliminated in consolidation.
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.
2. SIGNIFICANT ACCOUNTING POLICIES
INCOME-PRODUCING PROPERTIES
Income-producing properties are recorded at cost less accumulated depreciation.
Included in such costs are acquisition, development, construction and tenant
improvement expenditures, interest incurred during construction, certain
capitalized improvements and replacements and certain allocated overhead.
Allocated overhead is computed primarily on the basis of time spent by certain
departments in various operations and represents direct costs of the development
department which meet the definition of "indirect costs" in Statement of
Financial Accounting Standards (SFAS) No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects."
Leasing charges, including tenant construction allowances and direct costs
incurred by the Company to obtain a lease, are deferred and amortized over the
related leases or terms appropriate to the expenditure.
Depreciation is provided utilizing the straight-line method over the estimated
useful life of 31.5 years for building and improvements, 5 to 15 years for land
improvements.
Certain improvements and replacements are capitalized when they extend the
useful life, increase capacity, or improve the efficiency of the asset. All
other repair and maintenance items are expensed as incurred.
Substantially all of the income-producing properties have been pledged to secure
the Company's debt.
The Company periodically reviews its income producing properties for potential
impairment when circumstances indicate that the carrying amount of such assets
may not be recoverable.
Properties under development include costs related to new development and
expansions in process totaling approximately $6.5 million and $2.5 million at
December 31, 1997 and 1996, respectively. The pre-construction stage of project
development involves certain costs to secure land and zoning and to complete
other initial tasks which are essential to the development of the project. These
costs are transferred to developments under construction when the
pre-construction tasks are completed. The Company charges operations for the
costs of unsuccessful development projects.
PROPERTIES HELD FOR SALE
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, management has been authorized to pursue the sale of certain properties
that currently are not fully consistent with or essential to the Company's
long-term strategies. Management plans to evaluate all properties on a regular
basis in accordance with its strategy for growth and in the future may identify
other properties for disposition or may decide to defer
F-9
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the pending disposition of those assets now held for sale. In accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", assets held for sale are valued at the
lower of carrying value or fair value less selling costs. Accordingly, in 1996
and 1995, the Company recorded a non-cash $5.0 million and $8.5 million
adjustment to the carrying value of the properties held for sale. The Company
continues to operate the properties and has begun the process of marketing these
properties. As of December 31, 1997, two of the properties held for sale are
under contract.
After recording the $5.0 million and $8.5 million valuation adjustment in 1996
and 1995, respectively, the net carrying value of assets currently being
marketed for sale at December 31, 1997 and 1996 are $12.5 million and $11.4
million, respectively. There is also $12.2 million of debt associated with these
properties held for sale.
The following summary financial information pertains to the properties held for
sale for the year ended December 31 (in thousands):
1997 1996 1995
---- ---- ----
Revenues $ 1,100 $ 2,100 $ 3,000
Net loss after operating
and interest expenses $ (1,100) $ (1,000) $ (500)
============= =============== ==============
INTEREST COSTS
Interest costs are capitalized related to income-producing properties under
construction, to the extent such assets qualify for capitalization. Total
interest capitalized was $1.5 million, $2.0 million and $2.6 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Interest expense
includes amortization of deferred financing costs (see Note 4) and is net of
miscellaneous interest income on cash and escrow deposit balances.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
RESTRICTED CASH
In connection with the sale of the $95 million securitized debt offering, the
lender required a holdback of a portion of the loan proceeds to fund certain
environmental and engineering work and to make certain lease related payments
that may be required in connection with the renewal or termination of certain
leases by a tenant at most of the factory outlet centers. Such holdback amounts
were approximately $3.9 million at December 31, 1997 and 1996.
REVENUE RECOGNITION
The Company, as a lessor, has retained substantially all of the risks and
benefits of ownership and accounts for its leases as operating leases. Minimum
rental income is recognized on a straight-line basis over the term of the lease
and unpaid rents are included in tenant and other receivables in the
accompanying balance sheets. Certain lease agreements contain provisions which
provide for rents based on a percentage of sales that are recognized ratably on
an estimated basis throughout the year. In addition, certain leases provide for
additional rents based on a percentage of sales volume above a specified
breakpoint and reimbursement of real estate taxes, insurance, advertising,
utilities and certain common area maintenance (CAM) costs. These additional
rents are reflected on the accrual basis. In lease agreements where the tenant
is not required to reimburse the Company for real estate taxes, insurance and
CAM costs, the Company has allocated a portion of the rental amount to tenant
recoveries.
F-10
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amounts allocated to property operating cost recoveries from base rent were $3.8
million in 1997, $3.1 million in 1996 and $3 million in 1995. For tenants who
are not obligated to pay directly or reimburse the Company for utility costs
related to their store, the Company has allocated a portion of their rental
revenue to offset the utility expense.
The Company's principal financial instrument subject to potential concentration
of credit risk is tenant accounts receivable which are unsecured. Although the
tenants are primarily in the retail industry, the properties are geographically
diverse. The Company's exposure to credit loss in the event that payment is not
received for revenue recognized equals the outstanding accounts receivable
balance. The Company provides an allowance for estimated uncollectible amounts.
ENVIRONMENTAL MATTERS
Substantially all of the Properties have been subjected to Phase I environmental
audits. Such audits have not revealed nor is management aware of any
environmental liability that management believes would have a material adverse
impact on the Company's financial position or results of operations. In
accordance with a certain mortgage agreement, the Company has placed in escrow
$281,000 to be used, if necessary, to perform possible remediation work on a
property.
EARNINGS/(LOSS) PER COMMON SHARE
The Company has adopted the provisions of SFAS No. 128, "Earnings Per Share".
Under SFAS No. 128, basic earnings per share ("EPS") and diluted EPS replace
primary EPS and fully diluted EPS. Basic EPS is calculated by dividing the
income available to common stockholders by the weighted-average number of shares
outstanding. Diluted EPS reflects the potential dilution that could occur if
options or warrants to purchase common shares were exercised and preferred stock
was converted into common shares ("potential common shares"). All prior periods
presented have been restated. For the years ended December 31, 1997, 1996 and
1995, basic and diluted EPS are computed based on a weighted-average number of
shares outstanding of 11,824,000, 11,817,000 and 11,814,000, respectively.
Potential common shares have been excluded from diluted EPS for 1997, 1996 and
1995 because the effect would be antidilutive.
INCOME TAXES
The Company is taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, commencing with the tax year ending December
31, 1993. As a REIT, the Company generally is not subject to federal income tax.
To maintain qualification as a REIT, the Company must distribute at least 95% of
its REIT taxable income to its stockholders and meet certain other requirements.
If the Company fails to qualify as a REIT in any taxable year, the Company will
be subject to federal income tax on its taxable income at regular corporate
rates. The Company may also be subject to certain state and local taxes on its
income and property and federal income and excise taxes on its undistributed
taxable income.
DIVIDENDS
During 1996 and 1995, distributions were paid of $0.75 per share and $2.52 per
share, respectively. The ordinary income, return of capital and long-term gain
portions of such distributions for each year are indicated in the table below:
1996 1995
---------------- ---------------
Ordinary income 24.7% 0.0%
Return of capital 74.9 98.8
Long-term gains 0.4 1.2
================ ===============
100.0% 100.0%
================ ===============
There were no dividends paid or accrued for the year ended December 31, 1997.
F-11
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain 1996 and 1995 financial statement amounts have been reclassified to
conform with 1997 classifications. These reclassifications had no effect on net
loss or stockholders' equity as previously reported.
3. INVESTMENT IN JOINT VENTURES
The Company and Atlantic Real Estate Corporation ("ARC") jointly created a
limited liability company named Atlantic Realty LLC ("Atlantic") to develop and
manage retail community and neighborhood shopping centers in North Carolina.
Atlantic currently has plans to develop nearly one million square feet,
including outparcels over the next several years. The Company and ARC own
Atlantic equally, with the Company serving as managing member overseeing its
operations. The investment in Atlantic will be accounted for under the equity
method of accounting. As of December 31, 1997, Atlantic had purchased land and
building for development totaling approximately $3.5 million and did not have
any other operations. Atlantic had total assets of approximately $3.7 million
and debt of approximately $2.3 million at December 31, 1997.
The Company has entered into a joint venture with an unrelated third party,
known as Mount Pleasant FAC, LLC, to develop a 425,000 square foot
retail/entertainment shopping center in Mount Pleasant, South Carolina.
Construction on the center is expected to begin May, 1998, with completion
targeted for May, 1999. As of December 31, 1997, the Company has invested $2.8
million in this joint venture. This 50% investment in the joint venture will be
accounted for under the equity method of accounting. The joint venture had
approximately $2.8 million of assets and $0.6 of debt at December 31, 1997. The
joint venture had no other operations.
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets, net of accumulated amortization of $4,267 and
$2,892 at December 31, 1997 and 1996 as of December 31, are summarized as
follows (in thousands):
1997 1996
---------------------------------------
Deferred financing costs, net $ 5,531 $ 5,915
Prepaid expenses 248 518
Other assets, net 3,072 3,443
=======================================
$ 8,851 $ 9,876
=======================================
DEFERRED FINANCING COSTS
Deferred financing costs, including fees and costs incurred to obtain financing,
are being amortized on a straight line basis over the terms of the respective
agreements. Unamortized deferred financing costs are charged to expense when the
associated debt is retired before the maturity date.
OTHER ASSETS
During 1993, as part of the VF acquisition (see Note 12), the Company acquired a
favorable lease agreement for land and buildings which has been capitalized as
an intangible asset. This asset is being amortized over the remaining life of
the lease. The carrying value of the intangible asset, approximating $2.8 and
$3.1 million at December 31, 1997 and 1996, respectively, is reviewed if the
facts and circumstances suggest that it may be impaired. If such a review
indicates that the carrying amount of the asset may not be recoverable, the
Company will reduce the carrying value by the amount of the impairment.
F-12
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES RECEIVABLE
In December 1997, the Company advanced $8.5 million to Konover & Associates
South ("Konover") (see Note 15) which was used to prepay certain Konover debt on
a shopping center at a discount. The note receivable is secured by the shopping
center and will be repaid upon the purchase of the shopping center from Konover.
Additionally, in October, 1997, the Company advanced $2.3 million to the
partners in ARC who control certain land parcels which the Company plans to
co-develop in joint ventures with ARC (see Note 3). The note receivable is
secured by the partners' interest in properties to be acquired by the Company
(see Note 11) and will be converted to equity in the joint ventures formed.
6. DEBT ON INCOME PROPERTIES
Debt on income properties consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
$150,000 credit facility with Nomura Asset Capital Corporation, interest at a rate of
LIBOR plus 2.25% (7.9% at December 31, 1997) (a) $ 134,545 $ -
Class A Mortgage Notes - payable in 85 monthly principal payments ranging from
approximately $104 to $173 determined using various parameters plus weighted
average monthly interest payments at 7.51%. Unpaid principal and accrued interest
due June, 2002 (b) 54,583 55,907
Class B Mortgage Notes - monthly interest payments at 7.87% with entire balance
due June, 2002 (b) 20,000 20,000
Class C Mortgage Notes - monthly interest payments at 8.4% with entire balance due
June, 2002 (b) 17,000 17,000
Note payable to a financial institution with 45 monthly principal and interest
payments of approximately $59 with interest of prime rate (8.5% at December
31, 1997) plus 2 1/4% with entire balance repaid from proceeds from PSR
funding (see Note 15) 5,711 5,788
$2,500 credit facility with a financial institution, interest at prime rate plus 1/2% 736 -
$75,000 credit facility with a financial institution repaid in February 1997 (c) - 75,000
----------------------------
$ 232,575 $ 173,695
============================
</TABLE>
(a) The Company obtained a $150 million credit facility with Nomura Asset
Capital Corporation ("Nomura") in February 1997. The credit facility with
Nomura is secured by 21 of the Company's centers plus an assignment of
excess cash flow from the properties held by FSA Properties, Inc. The
Nomura credit facility is for a term of 2 years with a 1 year renewal
option. The proceeds from the credit facility were used to fund
acquisitions, expansions of existing centers, repay indebtedness, and fund
operating activities, including the purchase of the common stock. The
indebtedness repaid included $75 million of debt on income properties, $7.5
million of unsecured senior notes and $2.0 million of other unsecured notes
outstanding at December 31, 1996. As a result of this transaction, the
Company expensed the unamortized deferred financing costs of $986,000
related to its previous credit facility as an extraordinary item in the
accompanying consolidated statements of operations for the year ended
December 31, 1997. The new credit facility contains financial covenants
relating to debt to total asset value and net operating income to debt
service coverage. All financial convenants were satisfactorily met for the
year ended December 31, 1997. The balance was repaid in part subsequent to
December 31, 1997 and 11 centers were released as collateral to secure the
new permanent facility (see Note 15).
(b) In 1995, the Company's wholly owned subsidiary, FSA Finance, Inc. closed a
$95 million rated debt securitization (the "Mortgage Notes"). The total
offering of $95 million consisted of $58 million of Class A Mortgage Notes
rated "AA"; $20 million of Class B Mortgage Notes rated "A"; and $17
million of Class C Mortgage Notes rated "BBB". The Mortgage Notes are
secured by a cross-collateralized mortgage which covers 18 factory outlet
centers owned by FSA Properties, Inc.
F-13
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT ON INCOME PROPERTIES (CONTINUED)
(b) Mortgage Notes are subject to Optional Redemption (as defined) in whole or
in part on any payment date beginning on June 1, 1998. Any Optional
Redemption occurring on or prior to December 1, 2001 is subject to the
payment of a yield maintenance premium.
(c) In April, 1996, the Company closed on a $75 million credit facility from
Bank One, Dayton, The facility was used to refinance the Company's existing
credit line and repay $5 million in short-term promissory notes. As a
result, the Company expensed the unamortized deferred financing costs of
$103,000 as an extraordinary item in the accompanying consolidated
statements of operations for the year ended December 31, 1996.
Combined aggregate principal maturities of notes payable are as follows (in
thousands):
1998 $ 8,007
1999 136,226
2000 1,810
2001 1,952
2002 84,580
=================
$ 232,575
=================
The Company estimates that the fair value of notes payable approximates the
carrying value based upon its effective current borrowing rate for debt with
similar terms and remaining maturities. Disclosure about fair value of financial
instruments is based upon information available to management as of December 31,
1997. Although management is not aware of any factors that would significantly
affect the fair value of amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date.
7. CONVERTIBLE PREFERRED STOCK AND UNSECURED SENIOR NOTES
On April 2, 1996, the Company executed a Note Purchase Agreement and other
related documents (collectively the "Agreements") with Gildea Management Company
("Gildea") and Blackacre Bridge Capital, L.L.C. ("Blackacre"), whereby Gildea
and Blackacre agreed to purchase in a private placement up to $25.0 million of
the Company's Exchangeable Notes (the "Exchangeable Notes") and $5.0 million of
its Senior Notes, both of which were unsecured. On April 3 and 29, 1996,
Exchangeable Notes with an aggregate principal amount of $10.0 million each were
sold pursuant to the Agreements.
Holders of the Exchangeable Notes, subject to certain conditions, were required
to exchange them for shares of the Company's Series A Convertible Preferred
Stock (the "Series A Preferred") at the rate of one share of Series A Preferred
for each $25 in principal amount of Exchangeable Notes, upon stockholder
approval of necessary amendments to the Company's Certificate of Incorporation
and authorization of the Series A Preferred. Each share of Series A Preferred is
convertible into shares of the Company's Common Stock at a conversion price
equal to the lower of $9 per share or the 30-day average price of the Company's
Common Stock following an announcement by the Company of the initial funding,
subject to certain limitations. Dividends on the Series A Preferred will be paid
quarterly on each Common Stock dividend payment date in an amount equal to the
dividends that would have been paid on the Common Stock then issuable upon
conversion of the Series A Preferred.
F-14
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE PREFERRED STOCK AND UNSECURED SENIOR NOTES (CONTINUED)
On August 1, 1996, the Company issued holders of the Exchangeable Notes 800,000
shares of the Company's Series A Preferred Stock in exchange for notes with an
aggregate principal amount of $20 million (net of issue cost of $838,000). The
800,000 shares of the Series A Preferred Stock are convertible, at the option of
the holders, into an aggregate of 2,222,222 shares of the Company's Common
Stock. No dividends were accrued or paid on the Series A Preferred Stock in
1997.
On April 29, 1996, $5 million of the Senior Notes were placed at 97% of their
face amount. On November 12, 1996, $2.5 million of the Senior Notes were placed
at 100% of their face amount. In March 1997, the Company repaid the Senior Notes
at their face amounts from the proceeds of the Nomura credit facility.
In connection with the issuance of the Exchangeable Notes and the initial $5
million of Senior Notes, on April 3, 1996 the Company issued the holder
detachable warrants for the purchase of 200,000 shares of Common Stock of the
Company. Each warrant entitles the holder, subject to certain conditions, to
purchase on or before April 3, 2003 one share of Common Stock of the Company at
a price equal to $9.50 per share, subject to adjustment under certain
conditions. The warrants were valued at an aggregate value of $6,000 at the
issuance date. The $2.5 million of Senior Notes have detachable warrants for the
purchase of 100,00 shares of Common Stock of the Company that were issued with
terms and conditions similar to the existing Senior Notes, except that each
warrant entitles the holder to purchase one share of Common Stock at a price
equal to $8.375 per share. These warrants were valued at an aggregate value of
$3,000 at the issuance date.
8. STOCK OPTION AND COMPENSATION PLANS
EMPLOYEE STOCK INCENTIVE PLAN
The Company has established a stock option plan which provides for the issuance
of 1,100,000 shares through the grant of qualified and nonqualified options to
officers and employees at exercise prices not less than market value on the date
of grant. Generally, options vest proportionately over a period of four to five
years from the date of grant and are exercisable for 10 years from the date of
grant.
A summary of changes in outstanding options is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ----------------------- ------------------------
AVG. PRICE AVG. AVG. PRICE
SHARES SHARES PRICE SHARES
------------ ----------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 1,047,500 $ 15.01 432,500 $ 22.72 330,500 $ 23.00
Options granted, at market 645,000 $ 5.78 615,000 $ 23.00 102,000 $ 21.50
Canceled (949,250) $ 13.43 - - - -
Exercised - - - - - -
============ =========== ============ ========== ============ ===========
Balance, end of year 743,250 $ 9.29 1,047,500 $ 15.01 432,500 $ 22.65
============ =========== ============ ========== ============ ===========
Exercisable, end of year 281,800 $ 13.14 512,820 $ 13.14 317,080 $ 22.72
============ =========== ============ ========== ============ ===========
Weighted Average Fair Value of
Options Granted During the Year $ 4.80 $ 5.34 $ 11.32
============ =========== ============ ========== ============ ===========
</TABLE>
F-15
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION AND COMPENSATION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ --------------------------
Weighted Average
Remaining Contractual
Exercise Prices Shares Life in Years Shares
- --------------------- -------------------- --------------------------- --------------------------
<S> <C> <C> <C>
$ 23.00 123,250 5.5 114,200
$ 21.50 18,000 7.1 7,200
$ 7.50 50,000 9.3 10,000
$ 5.63 552,000 9.8 150,400
-------------------- --------------------------
743,250 281,800
==================== ==========================
</TABLE>
The fair value of each option granted in 1997, 1996, and 1995 is estimated using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 10.40% 10.40% 10.40%
Risk-free interest rate 6.80% 6.99% 7.74%
Expected life in years 5 10 10
</TABLE>
RESTRICTED STOCK PLAN
The Company's shareholders' approved a restricted stock plan in 1996 whereby the
Company can award up to 500,000 shares of common stock to employees. Generally,
awards under the plan vest at the end of the restriction period, which is
typically three years. The awards are recorded at market value on the date of
grant as unearned compensation expense and amortized over the restriction
periods. Generally, recipients are eligible to receive dividends on restricted
stock issued. Restricted stock and annual expense information is as follows (in
thousands, except share amounts):
<TABLE>
<CAPTION>
1997 1996
---------------- ------------------
<S> <C> <C>
Number of restricted shares awarded 444,852 42,592
Award date - average fair value per share $ 6.62 $ 10.73
Number of restricted shares exchanged for options to
repurchase restricted stock 390,884 -
Restricted shares repurchased 17,353 -
Restricted shares outstanding at December 31, 1997 79,207 42,592
Annual expense, net $ 493 $ 392
================ ==================
</TABLE>
On November 11, 1997, the Company adopted a plan whereby members of the
Company's executive management exchanged a total of 390,884 shares of restricted
stock previously awarded to them for the right to repurchase such shares.
Holders of these repurchase rights have no voting rights, but are entitled to
receive a dividend equivalent, an amount equal to any cash dividends paid to
common stockholders. Recipients of the repurchase rights may exercise their
rights at any time beginning the date the restricted stock subject to the
repurchase right becomes vested and ending 15 years from the date of vesting.
The exercise price is 10% of the fair market value of the restricted stock
subject to the repurchase right determined on the date of grant of the
repurchase right. At December 31, 1997, no repurchase rights were exercisable.
F-16
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION AND COMPENSATION PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Company adopted an Employee Stock Purchase Plan (ESPP) to
provide all full-time employees an opportunity to purchase shares of its common
stock through payroll deductions over a six-month subscription period. A total
of 25,000 shares are available for award under this plan. The purchase price is
equal to 85% of the fair market value on either the first or last day of the
subscription period, which ever is lower. The initial subscription period began
July 1, 1997 and ended on December 31, 1997 on which date 6,530 shares of common
stock were issued to employees at a price of $5.21 per common share.
PRO FORMA INFORMATION
During 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123). In accordance
with the provisions of SFAS No. 123, the Company has elected to apply APB
Opinion No. 25 and related Interpretations in accounting for its stock option,
restricted stock, and employee stock purchase plan. Had the Company elected to
recognize compensation cost for these plans based on the fair value at the date
of grant, as prescribed by SFAS No. 123, net income and net income per share
would have been reduced by the pro forma amounts indicated in the table below
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net loss available to
common stockholders $ (1,416) $ (2,481) $ (6,349) $(7,481) $(13,101) $ (13,860)
Net loss per share $ (0.12) $ (0.21) $ (0.55) $ (0.63) $ (1.11) $ (1.17)
</TABLE>
OTHER PLANS
The Company offers the FAC Realty Trust, Inc. 401(k) and Profit Sharing Plan
(the "Plan"), a tax qualified defined contribution plan to its employees. The
Plan covers substantially all employees of the Company who have attained 21
years of age and completed at least one year of service. Eligible employees may
elect to contribute 1% to 15% of their compensation to the Plan. The Company may
elect to match a certain percentage of each employees contribution and may also
elect to make a profit sharing contribution. For the years ended December 31,
1997, 1996 and 1995, the Company contributed $102,579, $64,084 and $59,710,
respectively, as a matching contribution and there was no profit sharing
contribution made by the Company.
9. LEASES
The Company leases certain signage and equipment under capital lease agreements
which expire beginning in 1998 through 2007. Amortization of assets acquired
through capital leases is included with depreciation and amortization expense in
the accompanying statements of operations.
The Company leased an airplane under an operating lease beginning in January
1994 through December 1995. Total lease payments under this lease were
approximately $659,000 for the year ended December 31, 1995. As of December 31,
1995, the lease was canceled at a cost of approximately $180,000.
F-17
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEASES (CONTINUED)
Aggregate future minimum lease payments under capital and operating leases
having remaining terms in excess of one year as of December 31, 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------------------------------------
<S> <C> <C>
1998 $ 404 $ 356
1999 304 276
2000 280 206
2001 248 154
2002 167 100
Thereafter 48 72
---------------------------------------
1,451 $ 1,164
===================
Less amounts representing interest ranging from 8% to 13% 320
====================
Present value of minimum lease payments $ 1,131
====================
</TABLE>
10. TENANT LEASE AGREEMENTS
The Company is the lessor of retail stores under operating leases with initial
terms that expire from 1998 to 2017. Many leases are renewable for five years at
the lessee's option.
Expected future minimum rents to be received from tenants, excluding renewal
options and contingent rentals, under operating leases in effect at December 31,
1997, are as follows (in thousands):
1998 $ 35,659
1999 30,998
2000 24,748
2001 18,281
2002 14,048
Thereafter 28,806
=================
$ 152,540
=================
For the years ended December 31, 1997, 1996 and 1995 rental revenue from a
single major tenant, VF Corporation, comprised approximately 11%, 14% and 14%,
respectively, of total rental revenue.
11. ACQUISITIONS
On March 27, 1997, the Company purchased five community centers located in the
Raleigh, North Carolina area for $32.3 million. Pro forma results of operations
for the years ended December 31, 1997 and 1996 are set forth below which assume
the acquisition of the five properties aggregating 606,000 square feet of retail
and office space had been completed as of January 1, 1996. The pro forma
condensed statements of operations are not necessarily indicative of what actual
results of operations of the Company would have been assuming such transaction
had been completed as of January 1, 1996, nor does it purport to represent
results of operations of future periods (in thousands, except for per share
data).
F-18
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED DECEMBER 31,
1997 1996
---------------------- -----------------------
(Unaudited) (Unaudited)
---------------------- -----------------------
<S> <C> <C>
Revenues $ 55,019 $ 52,302
Property Operating Costs 16,042 15,279
Depreciation 15,854 14,610
General and administrative 6,422 6,338
Interest 17,062 16,678
Property sales and adjustments - 4,963
====================== =======================
LOSS BEFORE EXTRAORDINARY ITEM $ (361) $ (5,566)
====================== =======================
LOSS PER SHARE $ (0.03) $ (0.47)
====================== =======================
</TABLE>
On October 7, 1997, the Company entered into an agreement to purchase
nine shopping centers located in North Carolina and Virginia, totaling 1.0
million square feet, and to assume third party management of an additional 1.2
million square feet of community shopping centers. The centers to be purchased
are valued at $63.3 million. The purchase of the shopping centers was subject to
the final approval of respective partnerships holding the properties which has
been received, as well as holders of mortgage notes on the shopping centers
which has been received on all properties except for one. The remaining shopping
center will be managed by the Company until either approval is received or the
mortgage is retired.
In exchange for their equity ownership interests in the community
centers, the sellers will receive approximately 1.2 million share-equivalent
partnership units in the Operating Partnership and approximately $2.9 million in
cash. The number of Units to be issued to the sellers was based on a $9.50 price
per share of the Company's Common Stock. Of the Units to be issued,
approximately 0.5 million will remain unissued until the completion of certain
performance requirements and the acquisition of the remaining shopping center
noted above. As part of the purchase price, the Company will also assume
approximately $49.4 million of primarily fixed rate debt on the properties to be
acquired.
As of October 1997, the Company has been managing the properties and, in return,
receives a management fee, as defined. In 1997, the Company recorded net
management fees of approximately $300,000 (see Note 15).
12. COMMITMENTS AND CONTINGENCIES
Under the terms of its 1993 purchase agreement to acquire the VF Properties from
VF Corporation, the Company committed to expand certain of these properties by
an aggregate of at least 320,000 square feet in the 36 months following the
acquisition. Through December 31, 1996, the Company completed eight expansions
totaling approximately 303,000 square feet. On December 10, 1996, the Company
and VF Factory Outlet, Inc. ("VFFO"), an operating subsidiary of VF Corporation,
entered into an Amendment and Waiver Agreement ("Amendment Agreement") whereby
the requirement to complete the final two expansions was waived. The Company
remained obligated to pay a tenant allowance for two centers and will provide
for VFFO's benefit nine additional billboards at three center locations selected
by VFFO for at least three years ending July, 2000. Pursuant to the Amendment
Agreement, the obligation, under the terms of the original commitment, to pay
$9.5 million to VF Corporation in the event all of the expansions were not
completed as planned, has been extinguished. In 1997, the Company paid VFFO
$2,016,000 for tenant allowances (see Note 4).
F-19
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently in the pre-development and marketing stage for a
property located in Lake Carmel, New York. If the appropriate tenant interest is
obtained and the appropriate agreements, permits and approvals have been
received, the Company intends to commence construction in the Fall of 1998.
On July 19 and October 30, 1996, two purported class action lawsuits were filed
in the United States District Court for the Eastern District of North Carolina
against the Company, its former chairman and chief executive officer, J. Dixon
Fleming, Jr., and a former president of the Company David A. Hodson. The
complaints sought certification of a class consisting of all persons (with
certain exclusions) who purchased common stock of the Company between December
16, 1993 and April 17, 1996, inclusive (the "Class Period"). The complaints
alleged that, during the Class Period, defendants made certain false or
misleading statements to the public concerning (1) earnings and funds from
operations; (2) the Company's ability to maintain dividends at prior levels; (3)
the alleged maintenance of dividends through borrowings rather than funds from
operations; (4) the Company's ability to close a proposed acquisition; (5) the
alleged purchase of certain properties from affiliates of the individual
defendants at inflated prices; and (6) alleged improper accounting practices.
The cases were consolidated and the Company filed motions to dismiss both
lawsuits.
In November, 1997, the court granted the motions to dismiss and entered judgment
for defendants. The time for plaintiffs to file appeals has expired without
appeal.
The Company is a party to certain legal proceedings relating to its ownership,
management and leasing of the properties, arising in the ordinary course of
business. Management does not expect the resolution of these matters to have a
significant impact on the Company's financial position or results of operations.
13. OTHER RELATED PARTY TRANSACTIONS
During 1993, the Company acquired a 19-acre tract of land in a non-monetary
transaction from a partnership whose partners include two former executive
officers of the Company. The recorded value of the land was $748,000. In return
for the land, the Company assumed certain outstanding debt and the remaining
purchase price was settled by reducing amounts owed to the Company by a tenant
whose majority owners were also partners in the partnership. A review of this
and other transactions resulted in J. Dixon Fleming, Jr., the Company's former
Chairman and Chief Executive Officer, agreeing to permit the Company to satisfy
certain asset valuation issues by offsetting amounts otherwise owed to Mr.
Fleming pursuant to his employment agreement or by the acceptance from Mr.
Fleming of some other cash or value equivalent. In 1997, the Company entered
into an agreement with Mr. Fleming and sold to him the 19-acre land tract for
the sum of $750,000.
In 1997, J. Dixon Fleming, Jr. resigned as Chairman and Chief Executive Officer
of the Company. Pursuant to his three year employment agreement entered into on
December 15, 1995, he was entitled to a lump sum distribution of the value of
the remaining term of the agreement. The Company charged $767,000 to general and
administrative expense in 1996 for the remaining value of his contract.
F-20
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 14. TERMINATED ACQUISITION
On August 25, 1995, the Company executed definitive written agreements
("Agreements") to acquire both the factory outlet centers owned by the Public
Employees Retirement System of Ohio ("OPERS") and the management and business
operations of the Charter Oak Group Ltd., a subsidiary of Rothschild Realty,
Inc., ("RRI"), subject to certain terms and conditions. On December 7, 1995, the
Company reported that RRI had terminated the Agreements and thus, the
acquisitions did not take place.
Subsequent to the termination of the Agreements, RRI for itself on behalf of
OPERS made a demand for payment with respect to a $5 million promissory note
(the "Note") issued by the Company in connection with its proposed purchase of
the OPERS' centers and the management and business operations of RRI's Charter
Oak Group, Ltd. The Note was payable only upon the concurrence of certain
conditions relating to the termination of the Agreements and the Company
asserted that certain of the required conditions were not met. After an
unsuccessful attempt at mediation of the dispute, RRI filed for binding
arbitration of the matter to settle the dispute. Following the arbitration
hearing held in late April 1997, the Company agreed to pay $2.9 million to RRI
on behalf of related entities of OPERS in settlement of all outstanding issues
between the Company and OPRES/RRI relating to the terminated merger. The Company
recorded a charge of $1.7 million in December 1995 in connection with the
termination. The remaining $1.2 million of the $2.9 million settlement, plus an
estimate for the Company's legal fees was charged to operations in 1997. All
amounts due to OPERS/RRI have been paid.
15. SUBSEQUENT EVENTS
On January 7, 1998, the Company completed the purchase of a 55,909 square foot
shopping center located in Danville, VA. This Food Lion anchored center was
purchased for $3.1 million.
On February 24, 1998, Prometheus Southeast Retail, LLC, ("PSR") a real estate
investment affiliate of Lazard Freres Real Estate Investors, LLC entered
into a definitive agreement with the Company to make a $200 million strategic
investment in the Company. PSR has committed to purchase $200 million in newly
issued common shares of the Company at a purchase price of $9.50. The investment
will be made in stages through the end of 1999 allowing the Company to obtain
capital as needed to fund its future acquisition and development plans as well
as retire debt. On March 23, 1998, the Company received the first installment
totaling $22.3 million which represents 2,350,000 common shares. Upon completion
of funding, PSR will own an equity interest in the Company of approximately 60%,
on a fully diluted basis, not including any further issuance of Units for
transactions under contract or transactions the Company may enter into in the
future. As part of the transaction, three representatives of Lazard will be
nominated to the Company's Board of Directors, bringing the total number of
directors to nine.
On February 24, 1998, the Company announced the execution of definitive
agreements with Konover, a privately held real estate development firm based in
Boca Raton, Florida, to acquire 11 community shopping centers totaling
approximately 2.0 million square feet and valued at nearly $100 million. The
purchase equates to approximately $24 million in equity consisting of the
issuance of Units at $9.50 per unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum.
As part of the transaction, the Company intends to operate under the name
"Konover Property Trust". The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol, from FAC to KPT pending formal
approval by shareholders in June, 1998. Additionally, the current employees of
Konover will join the Company as a result of the transaction. The new employees
include development, leasing, property management, administrative and accounting
professionals. The Company will continue to operate the Konover office in Boca
Raton due to its strategic location in the Southeast.
F-21
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
Simon Konover, founder of Konover & Associates, a $500 million real estate plus
company headquartered in West Hartford, Connecticut, will become Chairman of the
Board of the Company upon completion of the transaction. He will not be an
executive officer of the Company.
On March 11, 1998, the Company closed on a $75 million, 15-year permanent credit
facility secured by 11 properties previously securing the $150 million revolving
credit facility. The loan is at an effective rate of 7.73% and is amortized on a
338-month basis. The proceeds were used to pay down certain outstandings on the
$150 million Nomura credit facility.
As of March 31, 1998, seven of the nine centers discussed in Note 11 had closed.
An eighth center is expected to close in second quarter of 1998. The ninth and
final center will be managed by the Company and is expected to be acquired in
the year 2000. The loan assumption fee is currently unreasonable, however, the
loan is prepayable in the year 2000.
16. QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly financial data for the four quarters in 1997 and 1996 is as
follows (in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Total revenue $ 11,922 $ 13,475 $ 13,614 $ 14,715
====================================================================
Net (loss) income applicable
to common shareholders $ (2,422) $ 119 $ 329 $ 558
====================================================================
Basic earnings (loss) per common share:
(Loss) income before extraordinary items $ (0.12) $ 0.01 $ 0.03 $ 0.04
Extraordinary item (0.08) - - -
====================================================================
Net (loss) income $ (0.20) $ 0.01 $ 0.03 $ 0.04
====================================================================
Diluted earnings (loss) per common share:
(Loss) income before extraordinary item $ (0.12) $ 0.01 $ 0.02 $ 0.04
Extraordinary item (0.08) - - -
====================================================================
Net (loss) income $ (0.20) $ 0.01 $ 0.02 $ 0.04
====================================================================
1996:
Total revenue $ 11,261 $ 11,736 $ 12,065 $ 12,108
====================================================================
Net income (loss) applicable
to common shareholders $ 412 $ (94) $ (510) $ (6,260)
====================================================================
BASIC AND DILUTED Earnings per common share:
Income (loss) before extraordinary items $ 0.03 $ (0.01) $ (0.04) $ (0.52)
Extraordinary item - - - (0.01)
====================================================================
Net income (loss) $ 0.03 $ (0.01) $ (0.04) $ (0.53)
====================================================================
</TABLE>
F-22
<PAGE>
FAC REALTY TRUST, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Cost Capitalized Adjustment to Net Gross Amount at which
Initial Cost to Subsequent to Realizable Value Carried at Close of
Companany Acquisition Period
- ----------------------------------------------------------------------------------------------------------------------------
Description Encumbrances Land Bldg. and Land Bldg. Land Bldg. and Land Bldg. and
Imprvmts. and Imprvmts. Imprvmts.
Imprvmts.
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Boaz, AL 5,193,054 34,998 42,004 4,232 1,138,129 39,230 1,180,133
- ----------------------------------------------------------------------------------------------------------------------------
Casa Grande, AZ 5,751,418 2,220,397 10,557,446 390,154 (1,362,190) (6,037,810) 858,207 4,909,790
- ----------------------------------------------------------------------------------------------------------------------------
Mesa, AZ 2,986,648 1,399,858 7,060,705 47,797 3,379,757 1,447,655 10,440,462
- ----------------------------------------------------------------------------------------------------------------------------
Tucson, AZ 1,117,314 772,231 3,572,837 20,215 156,035 792,446 3,728,872
- ----------------------------------------------------------------------------------------------------------------------------
Lathrop, CA 5,711,373 2,842,636 7,048,844 1,465,246 (1,148,083) (3,751,917) 1,694,553 4,762,173
- ----------------------------------------------------------------------------------------------------------------------------
Vacaville, CA 35,675,827 30,008,142 49,464,506 872,040 30,008,142 50,336,546
- ----------------------------------------------------------------------------------------------------------------------------
Graceville, FL 2,539,121 556,765 2,544,654 201,068 556,765 2,745,722
- ----------------------------------------------------------------------------------------------------------------------------
Lake Park, GA 3,806,559 1,128,056 4,801,250 39,827 1,128,056 4,841,077
- ----------------------------------------------------------------------------------------------------------------------------
West Frankfort, 952,464 471,041 2,130,358 8,945 471,041 2,139,303
IL
- ----------------------------------------------------------------------------------------------------------------------------
Story City, IA 2,646,945 601,802 2,737,481 22,653 2,032,760 624,455 4,770,241
- ----------------------------------------------------------------------------------------------------------------------------
Carrollton, KY 1,034,889 340,190 1,555,641 70,865 340,190 1,626,506
- ----------------------------------------------------------------------------------------------------------------------------
Georgetown, KY 8,722,314 937,490 6,510,116 40,761 937,490 6,550,877
- ----------------------------------------------------------------------------------------------------------------------------
Hanson, KY 833,406 308,876 1,408,641 3,300 308,876 1,411,941
- ----------------------------------------------------------------------------------------------------------------------------
Arcadia, LA 1,263,847 404,864 1,856,173 3,492 1,561,120 408,356 3,417,293
- ----------------------------------------------------------------------------------------------------------------------------
Iowa, LA 3,443,524 627,061 2,860,591 2,382,847 627,061 5,243,438
- ----------------------------------------------------------------------------------------------------------------------------
Kittery, ME 2,108,930 355,080 2,485,826 98,547 355,080 2,584,373
- ----------------------------------------------------------------------------------------------------------------------------
Branson, MO 13,486,815 5,702,365 24,600,479 31,999 686,237 5,734,364 25,286,716
- ----------------------------------------------------------------------------------------------------------------------------
Lebanon, MO 2,142,765 403,915 1,889,710 16,109 403,915 1,905,819
- ----------------------------------------------------------------------------------------------------------------------------
Tupelo, MS 1,424,309 430,765 1,956,158 11,484 1,106,554 442,249 3,062,712
- ----------------------------------------------------------------------------------------------------------------------------
Nebraska City, NE 2,457,878 400,684 1,813,050 16,225 1,728,151 416,909 3,541,201
- ----------------------------------------------------------------------------------------------------------------------------
Las Vegas, NV 9,826,865 7,158,719 18,761,605 162,387 7,158,719 18,923,992
- ----------------------------------------------------------------------------------------------------------------------------
Conway, NH 701,910 324,652 2,277,122 107,941 (151,997) (1,048,003) 172,655 1,337,060
- ----------------------------------------------------------------------------------------------------------------------------
Lake George, NY 1,815,483 975,466 4,441,445 328,567 975,466 4,770,012
- ----------------------------------------------------------------------------------------------------------------------------
Smithfield, NC 24,553,566 77,667 9,064,651 1,262,314 7,290,072 1,339,981 16,354,723
- ----------------------------------------------------------------------------------------------------------------------------
Crossville, TN 2,665,068 519,239 2,415,619 11,389 2,255,001 530,628 4,670,620
- ----------------------------------------------------------------------------------------------------------------------------
Nashville, TN 25,877,039 5,947,579 10,078,170 665,849 5,024,214 6,613,428 15,102,384
- ----------------------------------------------------------------------------------------------------------------------------
Tri-Cities, TN 3,340,193 353,983 5,648,812 651,897 26,479 1,005,880 5,675,291
- ----------------------------------------------------------------------------------------------------------------------------
Union City, TN 970,781 296,580 1,343,859 2,983 88,011 299,563 1,431,870
- ----------------------------------------------------------------------------------------------------------------------------
Corsicana, TX 1,172,219 336,335 1,533,169 37,892 336,335 1,571,061
- ----------------------------------------------------------------------------------------------------------------------------
Hempstead, TX 1,235,241 375,487 1,711,282 (99,997) 20,000 275,490 1,731,282
- ----------------------------------------------------------------------------------------------------------------------------
LaMarque, TX 7,647,188 4,066,414 11,864,248 26,711 4,066,414 11,890,959
- ----------------------------------------------------------------------------------------------------------------------------
Livingston, TX 1,474,727 354,381 1,615,979 35,331 354,381 1,651,310
- ----------------------------------------------------------------------------------------------------------------------------
Mineral Wells, TX 1,487,331 315,944 1,441,675 2,819 315,944 1,444,494
- ----------------------------------------------------------------------------------------------------------------------------
Sulphur Springs, 2,357,042 512,898 2,326,326 62 88,308 512,960 2,414,634
TX
- ----------------------------------------------------------------------------------------------------------------------------
Draper, UT 3,330,163 718,188 4,294,019 54,556 4,286,444 772,744 8,580,463
- ----------------------------------------------------------------------------------------------------------------------------
North Bend, WA 9,597,907 8,428,229 12,052,296 41,432 13,542,535 8,469,661 25,594,831
- ----------------------------------------------------------------------------------------------------------------------------
Eastgate, NC 736,000 688,256 3,153,235 (416,436) 4,310 271,820 3,157,545
- ----------------------------------------------------------------------------------------------------------------------------
Tower, NC 4,487,202 659,677 4,459,411 7,087 67,106 666,764 4,526,517
- ----------------------------------------------------------------------------------------------------------------------------
Northridge, NC 7,966,044 1,428,493 8,872,975 14,774 102,472 1,443,267 8,975,447
- ----------------------------------------------------------------------------------------------------------------------------
Gateway, NC 3,062,894 816,566 3,246,925 8,628 32,619 825,194 3,279,544
- ----------------------------------------------------------------------------------------------------------------------------
MacGregor, NC 6,667,781 1,428,513 7,694,110 14,742 89,251 1,443,255 7,783,361
- ----------------------------------------------------------------------------------------------------------------------------
224,272,044 85,730,482 255,193,403 2,377,377 50,996,922 (2,662,270) (10,837,730) 85,445,589 295,352,595
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------
Life on
Which
Depreciation
in Latest
- ---------------------------------------------------------------------------- Income
Statements
Description Total Accumulated Date of Date if
Depreciation Construction Acquired Computed
(1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Boaz, AL 1,219,363 224,514 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Casa Grande, AZ 5,767,997 1,482,293 1994 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Mesa, AZ 11,888,117 1,478,046 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Tucson, AZ 4,521,318 548,286 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Lathrop, CA 6,456,726 564,141 1994 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Vacaville, CA 80,344,688 7,065,284 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Graceville, FL 3,302,487 391,731 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Lake Park, GA 5,969,133 2,035,470 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
West Frankfort, 2,610,344 308,527 1993 5-31.5
IL yrs.
- -----------------------------------------------------------------------------------------
Story City, IA 5,394,696 582,748 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Carrollton, KY 1,966,696 228,231 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Georgetown, KY 7,488,367 1,532,353 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Hanson, KY 1,720,817 203,579 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Arcadia, LA 3,825,649 558,650 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Iowa, LA 5,870,499 778,227 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Kittery, ME 2,939,453 299,903 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Branson, MO 31,021,080 1,649,746 1995 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Lebanon, MO 2,309,734 281,594 1993 5-31.5
- -----------------------------------------------------------------------------------------
Tupelo, MS 3,504,961 387,316 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Nebraska City, NE 3,958,110 455,907 1993 5-31.5
- -----------------------------------------------------------------------------------------
yrs.
Las Vegas, NV 26,082,711 2,666,995 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Conway, NH 1,509,715 230,560 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Lake George, NY 5,745,478 491,518 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Smithfield, NC 17,694,704 4,377,840 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Crossville, TN 5,201,248 785,367 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Nashville, TN 21,715,812 2,366,330 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Tri-Cities, TN 6,681,171 1,555,967 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Union City, TN 1,731,433 207,867 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Corsicana, TX 1,907,396 224,199 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Hempstead, TX 2,006,772 246,694 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
LaMarque, TX 15,957,373 1,632,396 1994 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Livingston, TX 2,005,691 234,544 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Mineral Wells, TX 1,760,438 213,454 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Sulphur Springs, 2,927,594 349,440 1993 5-31.5
TX yrs.
- -----------------------------------------------------------------------------------------
Draper, UT 9,353,207 1,259,813 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
North Bend, WA 34,064,492 3,479,677 1993 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Eastgate, NC 3,429,365 81,001 1997 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Tower, NC 5,193,281 114,990 1997 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Northridge, NC 10,418,714 232,987 1997 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
Gateway, NC 4,104,738 86,311 1997 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
MacGregor, NC 9,226,616 204,561 1997 5-31.5
yrs.
- -----------------------------------------------------------------------------------------
380,798,184 42,099,057
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Buildings and improvements are depreciated based on a 15-31.5 year life.
Tenant improvements are depreciated over the estimated terms of the leases,
which range from 5 to 10 years.
(2) Aggregate cost of the real estate property for federal income tax purposes
is approximately $304, 877,000.
F-23
<PAGE>
FAC REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The changes in total real estate for years ended December 31, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 345,890,739 $ 340,166,756 $ 308,586,835
Developed or acquired properties 30,619,827 10,339,504 24,819,456
Improvements 6,550,712 547,694 15,474,668
Adjustment to net realizable value - (5,000,000) (8,500,000)
Sales (2,263,094) (163,215) (214,203)
---------------------------------------------------------------
Balance, end of period $ 380,798,184 $ 345,890,739 $ 340,166,756
===============================================================
</TABLE>
The changes in accumulated depreciation for years ended December 31, 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 31,198,623 $ 20,386,741 $ 12,561,252
Developed or acquired properties 7,561,802 8,865,743 6,857,428
Improvements 3,684,308 1,946,139 968,061
Sales (345,676) - -
---------------------------------------------------------------
Balance, end of period $ 42,099,057 $ 31,198,623 $ 20,386,741
===============================================================
</TABLE>
F-24
<PAGE>
FAC REALTY TRUST, INC.
1997 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Executive Compensation Committee
of the Board of Directors of
FAC Realty Trust, Inc.:
We have audited the accompanying statement of net assets available for plan
benefits of FAC Realty Trust, Inc. 1997 Qualified Employee Stock Purchase Plan
as of December 31, 1997, and the related statement of changes in net assets
available for plan benefits for the period from inception (July 1, 1997) to
December 31, 1997. 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 audit.
We conducted our audit 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 audit provides 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 plan benefits of FAC Realty
Trust, Inc. 1997 Qualified Employee Stock Purchase Plan at December 31, 1997,
and the changes in net assets available for plan benefits for the period from
inception (July 1, 1997) to December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Raleigh, North Carolina,
April 9, 1998.
<PAGE>
FAC REALTY TRUST, INC.
1997 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AS OF DECEMBER 31, 1997
RECEIVABLE FROM FAC REALTY TRUST, INC. $34,081
=======
NET ASSETS AVAILABLE FOR PLAN BENEFITS $34,081
=======
The accompanying notes to financial statements
are an integral part of this statement.
<PAGE>
FAC REALTY TRUST, INC.
1997 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
PERIOD ENDED FROM INCEPTION (JULY 1, 1997) TO DECEMBER 31, 1997
EMPLOYEE CONTRIBUTIONS $34,081
-------
NET INCREASE 34,081
NET ASSETS AVAILABLE FOR PLAN BENEFITS, beginning of period 0
-------
NET ASSETS AVAILABLE FOR PLAN BENEFITS, end of period $34,081
=======
The accompanying notes to financial statements
are an integral part of this statement.
<PAGE>
FAC REALTY TRUST, INC.
1997 QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION:
The accompanying financial statements of the FAC Realty Trust, Inc. 1997
Qualified Employee Stock Purchase Plan (the Plan) have been prepared on the
accrual basis.
2. PLAN DESCRIPTION AND SUMMARY OF SIGNIFICANT PLAN PROVISIONS:
The Board of Directors of FAC Realty Trust, Inc. (the Company) adopted the Plan
on May 29, 1997. The Plan became effective as of July 1, 1997. The maximum
number of shares available under the Plan is 50,000, subject to certain
adjustments, as defined.
The purpose of this Plan is to provide the Company's employees with an
additional opportunity to share in the ownership of the Company. Under terms of
the Plan, all regular full-time employees of the Company may make voluntary
payroll contributions thereby enabling them to purchase Common Stock of the
Company at 85 % of the lower of the fair market value as of the beginning or
end of the six-month offering periods, which commence on January 1 and July 1.
Contributions to the Plan are maintained by the Company in a non-interest
bearing account until such time as the participant exercises the option to
purchase shares of Common Stock from his or her available contributions, or
withdraws from the account. Employee contributions, which represent all net Plan
assets, are considered general assets of the Company and may be subject to the
claims of creditors.
The Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974 (ERISA) and is not qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended which relates to qualification of
certain pension, profit-sharing and stock bonus plans.
All costs to administer the Plan are paid by the Company.
3. SUBSEQUENT EVENT:
On January 2, 1998, 6,530 shares of common stock of the Company were purchased
by the Plan and such shares were transferred to an independent broker that holds
the shares in the name of the respective employees.
<PAGE>
SIGNATURE PAGE
FAC Realty Trust, Inc. 1997 Qualified Employee Stock Purchase Plan. Pursuant
to the requirements of the Securities Exchange Act of 1934, the members of the
Executive Compensation Committee have duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
FAC REALTY TRUST, INC. 1997 QUALIFIED
EMPLOYEE STOCK PURCHASE PLAN
By: Date:
/s/ John W. Gildea
-------------- April 15, 1998
John W. Gildea
Chairman of the Executive Compensation Committee
<PAGE>
FAC 10K Exhibit List
Exhibit # Title
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws of the Company
3.3 Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
4.1 Specimen Common Stock Certificate
4.2 Warrant Agreement between the Company and Blackacre (2)
4.3 Warrant Agreement between the Company and Blackacre (2)
4.4 Warrant Agreement between the Company and National Union Fire
Insurance Company of Pittsburgh (2)
4.5 Warrant Agreement between the Company and Network Fund III, Ltd. (2)
4.6 Indenture by and between FSA Finance, Inc., as issuer, Bank One,
Columbus, National Association, as trustee, and Fleet Management and
Recovery Corporation, as master servicer (3)
4.7 Master Servicing Agreement by and between FSA Finance, Inc., as
issuer, Bank One, Columbus, National Association, as trustee(FN1), and
Fleet Management and Recovery Corporation, as master servicer (3)
4.8 Specimen copies of the various types of Class A, B, C and R Notes (3)
4.9 Mortgage Note given by FSA Properties, Inc., as maker, in favor of the
Travelers Insurance Company, as payee (3)
4.10 Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing
Statement and Assignment of Leases and Rents by and between FSA
Properties, Inc., as mortgagor, and The Travelers Insurance Company,
as mortgagee (3)
- ----------
(FN1) Bank One, Columbus, resigned as trustee effective December 10, 1997, and
the issuer has appointed First Union National Bank as the successor
trustee effective December 10, 1997.
<PAGE>
4.11 Gap Note given by FSA Properties, Inc., as maker, in favor of The
Travelers Insurance Company, as payee (3)
4.12 Mortgage Loan Purchase Agreement by and between The Travelers
Insurance Company, as seller, and FSA Finance, Inc., as purchaser (4)
4.13 Loan Agreement Between FAC Mortgage LLC as Borrower and Nomura Asset
Capital Corporation as Lender
4.14 Agreement to Furnish Certain Instruments Defining the Rights of
Long-Term Debt Holders
10.1 Employment Agreement between the Company and C. Cammack Morton
10.2 Employment Agreement between the Company and Patrick M. Miniutti
10.3 Employment Agreement between the Company and William H. Neville
10.4 Employment Agreement between the Company and Sona A. Thorburn
10.5 Employment Agreement between the Company and Christopher G. Gavrelis
10.6 Factory Stores of America, Inc. Amended and Restated 1993 Employee
Stock Option Plan (4)
10.7 1995 Outside Directors' Stock Award Plan
10.8 Factory Stores of America, Inc. 1996 Restricted Stock Plan (4)
10.9 Restricted Stock Agreement between the Company and C. Cammack Morton
10.10 Restricted Stock Agreement between the Company and Patrick M. Miniutti
10.11 Restricted Stock Agreement between the Company and Christopher G.
Gavrelis
10.12 Incentive Stock Option Agreement Between the Company and C. Cammack
Morton
10.13 Incentive Stock Option Agreement between the Company and Patrick M.
Miniutti
10.14 Nonqualified Stock Option Agreement between the Company and Patrick M.
Miniutti
10.15 Line of Credit Agreement between FAC Realty, Inc. and Nomura Asset
Capital Corporation, dated February 19, 1997 (5)
<PAGE>
10.16 First Amendment to the Master and Exchange Option Agreement, dated as
of March 16, 1998 by and among the Company, FAC Realty, L.P. and the
Contributors listed therein (6)
10.17 Assignment of Interest in Master Agreement and Exchange Option
Agreement, and Consent of Limited Partners dated December 22, 1997 (6)
10.18 Exchange Option Agreement dated as of October 1, 1997, by and among
Carolina FAC, Limited Partnership, FAC Realty, Inc. and the Owners of
the Properties and Interests listed therein (6)
10.19 Master Agreement, dated as of October 1, 1997, by and among FAC
Realty, Inc., Carolina FAC, Limited Partnership, and the other
signatories listed therein (6)
10.20 Amended and Restated Stock Purchase Agreement, dated as of March 23,
1998, between the Company and the Investor (6)
10.21 Stockholders Agreement, dated February 24, 1998, among the Company and
the Investor (6)
10.22 Registration Rights Agreement, dated February 24, 1998, between the
Company and the Investor (6)
10.23 Contingent Value Right Agreement, dated February 24, 1998, among the
Company and the Investor (6)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Arthur Anderson, LLP
27.1 Financial Data Schedule (electronic filing only)
27.2 Restated 1996 Financial Data Schedules (electronic filing only)
27.3 Restated Fourth Quarter 1997 Financial Data Schedules (electronic
filing only)
- ----------
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (File No. 333-39491).
(2) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1995.
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K dated May 22, 1995.
(4) Incorporated herein by reference to the Company's annual report on Form 10K
for the
<PAGE>
year ended December 31, 1996.
(5) Incorporated herein by reference to the Company's Current Report on Form
8-K dated February 19, 1997.
(6) Incorporated herein by reference to the Company's Current Report on Form
8-K dated March 23, 1998.
AMENDED AND RESTATED BYLAWS
OF
FAC REALTY TRUST, INC.
ARTICLE I
Stockholders
Section 1. MEETINGS OF STOCKHOLDERS.
(a.) Annual Meeting. The annual meeting of the stockholders of the
Corporation for the election of directors and the receiving of reports shall be
held at such date and time as shall be determined by the Board of Directors.
Upon due notice, there may also be considered and acted upon at an annual
meeting any matter that could properly be considered and acted upon at a special
meeting.
(b.) Special Meetings.
(1) Special meetings of the stockholders of the Corporation for any
purpose may be held on any day when called at any time by the holders of
shares entitling them to exercise a majority of the voting power of the
Corporation entitled to vote at such a meeting, the Board of Directors, the
Chairman of the Board, the President or by a committee of the Board of
Directors that has been duly designated by the Board of Directors and whose
powers and authority, as provided in a resolution of the Board of
Directors, include the power to call such meetings, but special meetings
may not be called by any other person or persons.
(2) In order that the Corporation may determine the stockholders
entitled to request a special meeting, the Board of Directors may fix a
record date to determine the stockholders entitled to make such a request
(the "Request Record Date"). The Request Record Date shall not precede the
date upon which the resolution fixing the Request Record Date is adopted by
the Board of Directors and shall not be more than 10 days after the date
upon which the resolution fixing the Request Record Date is adopted by the
Board of Directors. Any stockholder of record seeking to have stockholders
request a special meeting shall, by sending written notice to the Secretary
of the Corporation by certified or registered mail, return receipt
requested, request the Board of Directors to fix a Request Record Date. The
Board of Directors shall within 10 days after the date on which a valid
request to fix a Request Record Date is received, adopt a resolution fixing
the Request Record Date and shall make a public announcement of such
Request Record Date, the Request Record Date shall be the 10th day after
the first date on which a valid written request to set a Request Record
Date is received by the Secretary. To be valid, such written request shall
set forth the purpose or purposes for which the special meeting
<PAGE>
is to be held, shall be signed by one or more stockholders of record (or
their duly authorized proxies or other representatives), shall bear the
date of signature of each such stockholder (or proxy or other
representative) and shall set forth all information relating to such
stockholder that is required to be disclosed in solicitations of proxies
for election of directors in an election contest, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder.
(3) In order for a stockholder or stockholders to request a special
meeting, a written request or requests for a special meeting by the holders
of record as of the Request Record Date of at least a majority of the
issued and outstanding shares of stock that would be entitled to vote at
such a meeting must be delivered to the Corporation. To be valid, each
written request by a stockholder for a special meeting shall set forth the
specific purpose or purposes for which the special meeting is to be held
(which purpose or purposes shall be limited to the purpose or purposes set
forth in the written request to set a Request Record Date received by the
Corporation pursuant to paragraph (2) of this Section 1(b)), shall be
signed by one or more persons who as of the Request Record Date are
stockholders of record (or their duly authorized proxies or other
representatives), shall bear the date of signature of each such stockholder
(or proxy or other representative) and shall set forth the name and
address, as they appear in the Corporation's books, of each stockholder
signing such request and the class and number of shares of the Corporation
which are owned of record and beneficially by each such stockholder, shall
be sent to the Secretary by certified or registered mail, return receipt
requested, and shall be received by the Secretary within 60 days after the
Request Record Date.
(4) The Corporation shall not be required to call a special meeting
upon stockholder request unless, in addition to the documents required by
paragraph (3) of this Section 1(b), the Secretary receives a written
agreement signed by each Soliciting Stockholder (as defined below),
pursuant to which each Soliciting Stockholder, jointly and severally,
agrees to pay the Corporation's costs of holding the special meeting,
including the costs of preparing and mailing proxy materials for the
Corporation's own solicitation, provided that if each of the resolutions
introduced by any Soliciting Stockholder at such meeting is adopted, and
each of the individuals nominated by or on behalf of any Soliciting
Stockholder for election as a director at such meeting is elected, then the
Soliciting Stockholders shall not be required to pay such costs. For
purposes of this paragraph (4), the following terms shall have the meanings
set forth below:
(i) "Affiliate" of any Person (as defined herein) shall mean any
Person controlling, controlled by or under common control with such
first Person.
(ii) "Participant" shall have the meaning assigned to such term
in Rule 14a-11 promulgated under the Exchange Act.
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<PAGE>
(iii) "Person" shall mean any individual, firm, corporation,
partnership, limited liability company, joint venture, association,
trust, unincorporated organization or other entity.
(iv) "Proxy" shall have the meaning assigned to such term in Rule
14a-1 promulgated under the Exchange Act.
(v) "Solicitation" shall have the meaning assigned to such term
in Rule 14a-11 promulgated under the Exchange Act.
(vi) "Soliciting Stockholder" shall mean, with respect to any
special meeting requested by a stockholder or stockholders, any of the
following Persons:
(a) if the number of stockholders signing the request or
requests of meeting delivered to the Corporation pursuant to
paragraph (3) of this Section 1(b) is 10 or fewer, each
stockholder signing any such request;
(b) if the number of stockholders signing the request or
requests of meeting delivered to the Corporation pursuant to
paragraph (3) of this Section 1(b) is more than 10, each Person
who either (I) was a Participant in any Solicitation of such
request or requests or (II) at the time of the delivery to the
Corporation of the documents described in paragraph (3) of this
Section 1(b) had engaged or intended to engage in any
Solicitation of Proxies for use at such special meeting (other
than a Solicitation of Proxies on behalf of the Corporation); or
(c) any Affiliate of a Soliciting Stockholder, if a majority
of the directors then in office determine that such Affiliate
should be required to sign the written notice described in
paragraph (3) of this Section 1(b) and/or the written agreement
described in this paragraph (4) in order to prevent the purposes
of this Section 1(b) from being evaded.
(5) Except as provided in the following sentence, any special meeting
shall be held at such hour and day as may be designated by whichever of the
Board of Directors, Chairman, President or committee shall have called such
meeting. In the case of any special meeting called by the Chairman or the
Secretary upon the request of stockholders (a "Request Special Meeting"),
such meeting shall be held at such hour and day as may by designated by the
Board of Directors; provided, however, that the date of any Request Special
Meeting shall be not more than 60 days after the Meeting Record Date (as
defined in Section 2(c)); and provided further that in the event that the
directors then in office fail to designate an hour and date for a Request
Special Meeting within 10 days after the date that valid written requests
for such meeting by the holders of record as of the Request Record Date of
at least a majority of the issued and outstanding shares of stock that
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<PAGE>
would be entitled to vote at such meeting are delivered to the Corporation
(the "Delivery Date"), then such meeting shall be held at 2:00 p.m. local
time on the 90th day after the Delivery Date or, if such 90th day is not a
Business Day (as defined below), on the first preceding Business Day. In
fixing a meeting date for any special meeting, the Board of Directors,
Chairman, President or committee may consider such factors as they deem
relevant within the good faith exercise of their business judgment,
including, without limitation, the nature of the action proposed to be
taken, the facts and circumstances surrounding any request of such meeting,
and any plan of the Board of Directors to call an annual meeting or a
special meeting for the conduct of related business.
(6) The Corporation may engage regionally or nationally recognized
independent inspectors of elections to act as an agent of the Corporation
for the purpose of promptly performing a ministerial review of the validity
of any purported written request or requests for a special meeting received
by the Secretary. For the purpose of permitting the inspectors to perform
such review, no purported request shall be deemed to have been delivered to
the Corporation until the earlier of (i) five Business Days following
receipt by the Secretary of such purported request and (ii) such date as
the independent inspectors certify to the Corporation that the valid
requests received by the Secretary represent at least a majority of the
issued and outstanding shares of stock that would be entitled to vote at
such meeting. Nothing contained in this paragraph (6) shall in any way be
construed to suggest or imply that the Board of Directors or any
stockholder shall not be entitled to contest the validity of any request,
whether during or after such five- Business Day period, or to take any
other action (including, without limitation, the commencement, prosecution
or defense of any litigation with respect thereto, and the seeking of
injunctive relief in such litigation).
(7) For purposes of these by-laws, "Business Day" shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions in
the State of North Carolina are authorized or obligated by law or executive
order to close.
(c.) Place of Meetings. Any meeting of the stockholders may be held at such
place within or without the State of Maryland as may be determined by the Board
of Directors and stated in the notice of said meeting, provided that if the
Board of Directors does not designate a location, such meeting shall be held at
the executive office of the Corporation in Cary, North Carolina.
(d.) Notice of Meeting and Waiver of Notice.
(1) Notice. Written notice of the place, date and hour of every
meeting of the stockholders, whether annual or special, shall be given to
each stockholder of record entitled to vote at the meeting not less than 10
nor more than 90 days before the date of the meeting. Every notice of a
special meeting shall state the purpose or purposes thereof. Such notice
shall be given in writing to each stockholder entitled thereto by mail,
addressed to the stockholder at his address as it appears on the records of
the Corporation.
4
<PAGE>
Notice shall be deemed to have been given at the time when it was deposited
in the mail.
(2) Record Holder of Shares. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claims to or interests in such share or shares on the part of any other
person, whether or not the Corporation shall have express or other notice
thereof, except as otherwise provided by the laws of Maryland.
(3) Waiver. Whenever any written notice is required to be given under
the provisions of the Articles of Incorporation, these Bylaws, or by
statute, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice. Neither the
business to be transacted at nor the purpose of any meeting of the
stockholders need be specified in any written waiver of notice of such
meeting. Attendance of a person, either in person or by proxy, at any
meeting, shall constitute a waiver of notice of such meeting, except where
a person attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting was not lawfully called or
convened.
(e.) Quorum, Manner of Acting and Adjournment. The holders of record of
shares entitled to cast a majority of the votes entitled to vote at any meeting,
present in person or represented by proxy, shall constitute a quorum for the
transaction of business thereat, except as otherwise provided by statute, by the
Articles of Incorporation, or by these Bylaws. Whether or not a quorum is
present, the holders of shares entitled to cast a majority of the votes present
in person or represented by proxy at the meeting shall have the power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At any such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. When a quorum is present at any meeting, the vote of a
majority of the votes entitled to be cast by the holders of all issued and
outstanding shares present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which, by
express provision of the applicable statute or the Articles of Incorporation or
these Bylaws, a different vote is required, in which case such express provision
shall govern. Except upon those questions governed by the aforesaid express
provisions, the stockholders present in person or by proxy at a meeting at which
a quorum is at any time present or represented shall have the power to continue
to do business until adjournment, notwithstanding a subsequent reduction in the
number of shares present or represented to leave less than would constitute a
quorum.
(f.) Organization of Meetings.
5
<PAGE>
(1) Presiding Officer. Any "executive officer" of the Corporation, as
that term is defined in section 3(f) of Article III of these Bylaws, may
call meetings of the stockholders to order and act as chairman thereof.
(2) Minutes. The Secretary of the Corporation, or, in his absence or
by his designation, an Assistant Secretary, or, in the absence of both, a
person appointed by the chairman of the meeting, which person need not be
an officer of the Corporation, shall act as secretary of the meeting and
shall make and keep a record of the proceedings thereat.
(3) Stockholder's 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 entitled to
vote at the meeting. The list shall be arranged in alphabetical order
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 a period of at least 10 days prior to the meeting
either at a place within the city 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.
(4) Voting Procedures and Inspectors of Elections.
(A) The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more inspectors to act at the meeting and
make a written report thereof. The Board of Directors may designate
one or more persons as alternate inspectors to replace any inspector
who fails to act at such meeting. If no inspector or alternate is able
to act at a meeting of stockholders, the chairman of the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector,
before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his ability.
(B) The inspectors shall (i) determine those stockholders
entitled to vote at the meeting, (ii) ascertain the number of shares
outstanding and the voting power of each, (iii) determine the shares
represented at a meeting and the validity of proxies and ballots, (iv)
count all votes and ballots, (v) determine and retain for a reasonable
period a record of the disposition of any challenges made to any
determination by the inspectors, and (vi) certify their determination
of the number of shares represented at the meeting and their count of
all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the
duties of the inspectors.
6
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(C) The date and time of the opening and the closing of the polls
for each matter upon which the stockholders will vote at a meeting
shall be announced at the meeting. No ballot, proxies or votes, nor
any revocations thereof or changes thereto, shall be accepted by the
inspectors after the closing of the polls unless judicially determined
otherwise upon application by a stockholder.
(D) In determining the validity and counting of proxies and
ballots, the inspectors shall be limited to an examination of the
proxies, any envelopes submitted with those proxies, ballots and the
regular books and records of the Corporation, except that the
inspector may consider other reliable information for the limited
purpose of reconciling proxies and ballots submitted by or on behalf
of banks, brokers, their nominees or similar persons which represent
more votes than the holder of proxy is authorized by the record owner
to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for the limited purpose
permitted herein, the inspectors at the time they make their
certification pursuant to clause (B) (vi) of this subsection 1(f) (4)
shall specify the precise information considered by them, including
the person or persons from whom they obtained the information, when
the information was obtained, the means by which the information was
obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
(E) The provisions of subsections 1(f)(4)(A) through (D) of this
Article I shall not apply at any time that the Corporation does not
have a class of voting stock that is (i) listed on a national
securities exchange, (ii) authorized for quotation on an interdealer
quotation system, or (iii) held of record by more than 2,000
stockholders.
(5) Order of Business. Unless otherwise determined by the Board of
Directors prior to the meeting, the chairman of any meeting of stockholders
shall determine the order of business and shall have the authority in his
discretion to regulate the conduct of any such meeting, including, without
limitation, by imposing restrictions on the persons (other than
stockholders of the Corporation or their duly appointed proxies) who may
attend any such meeting of stockholders, whether any stockholder or his
proxy may be excluded from any stockholders' meeting based upon any
determination by the chairman of the meeting, in his sole discretion, that
any such person has unduly disrupted or is likely to disrupt the
proceedings thereat, and the circumstances in which any person may make a
statement or ask questions at any meeting of stockholders.
(g.) Voting. Except as otherwise provided by statute or the Articles of
Incorporation, every stockholder entitled to vote shall be entitled to cast the
vote per share to which such share is entitled, in person or by proxy, on each
proposal submitted to the meeting for each share held f record by him on the
record date for the determination of the stockholders entitled to vote at
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the meeting. At any meeting at which a quorum is present, all questions and
business that may come before the meeting shall be determined by a majority of
votes cast, except when a greater proportion is required by law, the Articles of
Incorporation, or these Bylaws.
(h.) Proxies. A person is entitled to attend a meeting of the stockholders,
to vote thereat, and execute consents, waivers and releases, may be represented
at such meetings or vote thereat, and execute consents, waivers and releases and
exercise any of his rights by proxy or proxies appointed by a legally sufficient
writing assigned by such person, or by hid duly authorized attorney, as provided
by the laws of the State of Maryland.
Section 2. DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or entitled to receive payment of any dividend or other distribution or
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 lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than 60 or less than 10 days before the date of such meeting, or more than
60 days prior to any other action. If no record date is fixed:
(a.) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders or entitled to receive payment
of any dividend or other distribution or 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 lawful action shall be at
the close of business on the day next preceding the day on which notice is
given.
(b.) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a
new record date for the adjourned meeting.
Notwithstanding anything to the contrary in these Bylaws, in the case of
any Request Special Meeting, (i) the record date for such meeting (the "Meeting
Record Date") shall be no later than the 30th day after the Delivery Date and
(ii) if the Board of Directors fails to fix the Meeting Record Date within 30
days after the Delivery Date, then the close of business on such 30th day shall
be the Meeting Record Date.
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ARTICLE II
Directors
Section 1. GENERAL POWERS.
The business and affairs, power and authority of the Corporation shall be
exercised, conducted and controlled by the Board of Directors, except where the
law, the Articles of Incorporation, or these Bylaws require any power or action
to be authorized or taken by the stockholders. In addition to the powers and
authorities expressly conferred by these Bylaws, the Board of Directors may do
all such lawful things and acts as are not by statute, the Articles of
Incorporation or these Bylaws directed or required to be done by the
stockholders.
Section 2. NUMBER, NOMINATION AND ELECTION OF DIRECTORS.
(a.) Number. The Board of Directors from time to time shall consist of not
less than the minimum required by the Maryland General Corporation Law nor more
than fifteen members. The Board of Directors may increase or decrease the number
of the members of the Board of Directors within the limitations set forth above.
No reduction in the number of directors shall of itself have the effect of
shortening the term of any incumbent director.
(b.) Election. The directors shall be elected at the annual meeting of
stockholders, or if not so elected, at a special meeting of stockholders called
for that purpose. At any meeting of stockholders at which directors are to be
elected (an "Election Meeting"), only persons nominated as candidates shall be
eligible for election, and the candidates receiving the greatest number of votes
entitled to be cast shall be elected.
(c.) Nominations.
(1) Qualification. Directors of the Corporation need not be
stockholders or residents of Maryland. No person shall be appointed or
elected a director of the Corporation unless:
(A) such person is elected to fill a vacancy in the Board of
Directors pursuant to Section 3(c) of this Article II; or
(B) such person is nominated for election as a director of the
Corporation in accordance with this section.
(2) Eligibility to Make Nominations. Nominations of candidates for
election as directors at any Election Meeting may be made by the Board of
Directors or a committee thereof.
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(3) Procedure for Nominations. Nominations shall be made not fewer
than 30 days prior to the date of an Election Meeting. At the request of
the Secretary or, in his absence, an Assistant Secretary, each proposed
nominee shall provide the Corporation with such information concerning
himself as is required under the rules of the Securities and Exchange
Commission (the "Commission") to be included in the Corporation's proxy
statement soliciting proxies for the election of such nominee as a
director.
(4) Substitution of Nominees. In the event that a person is validly
designated as a nominee in accordance with these Bylaws and shall
thereafter become unable or unwilling to stand for election to the Board of
Directors, the Board of Directors or a committee thereof may designate a
substitute nominee upon delivery, not fewer than five days prior to the
date of an Election Meeting, of a written notice to the Secretary setting
forth such information regarding such substitute nominee as would have been
required to be delivered to the Secretary pursuant to these Bylaws had such
substitute nominee been initially proposed as a nominee. Such notice shall
include a signed consent to serve as a director of the Corporation, if
elected, of each such substitute nominee.
(5) Compliance with Procedures. If the chairman of the Election
Meeting determines that a nomination of any candidate for election as a
director was not made in accordance with the applicable provisions of these
Bylaws, he shall so declare to the meeting and such nomination shall be
void.
(d.) Chairman of the Board of Directors. The Chairman, if any is elected,
shall, subject to the to the provisions of these Bylaws, preside at all meetings
of the stockholders, of the Board of Directors and of the Executive Committee.
Section 3. TERM OF OFFICE OF DIRECTORS.
(a.) Term. Each director shall hold office until the annual meeting next
succeeding his election and until his successor is elected and qualified, or
until his earlier resignation, removal from office or death.
(b.) Resignation. Any director of the Corporation may resign at any time by
giving written notice to the Chairman or to the President or the Secretary of
the Corporation. A resignation from the Board of Directors shall be deemed to
take effect immediately or at such other time as the director may specify.
(c.) Vacancy. If there shall be any vacancy in the Board of Directors for
any reason, including, but not limited to, death, resignation or as provided by
law, the Articles of Incorporation or these Bylaws (including any increase in
the authorized number of directors), the remaining directors shall constitute
the Board of Directors until such vacancy is filled. The remaining directors may
fill any vacancy in the Board of Directors for the unexpired term.
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Section 4. MEETINGS OF DIRECTORS.
(a.) Meetings. Meetings of the Board of Directors may be held at any time
upon call by the Chairman or by the President or by any two directors. Unless
otherwise indicated in the notice thereof, any business may be transacted at any
such meeting.
(b.) Place of Meeting. Any meeting of directors may be held at such place
within or without the State of Maryland as may be designated in the notice of
such meeting.
(c.) Notice of Meeting and Waiver of Notice. No notice of regular meetings
of the Board of Directors need be given. Special meetings of the Board of
Directors may be called by the Chairman, or by the President on notice to each
director, given either in person or by mail, telephone, telegram, telex or
similar medium of communication; special meetings shall be called on like notice
by the Chairman, the President or the Secretary, on the written request of two
directors. At least 24 hours notice of special meetings shall be given to each
director.
Section 5. QUORUM AND VOTING.
Except as otherwise provided in the Articles of Incorporation, at any
meeting of directors, not less than one-half (1/2) of the directors then in
office (or, in the event that the directors then in office are an uneven number,
the nearest full number of directors less than one-half (1/2) of such number) is
necessary to constitute a quorum for such meeting, except that any meeting duly
called, whether a quorum is present or otherwise, may, by vote of a majority of
the directors present, be adjourned from time to time. At any meeting at which a
quorum is present, all acts, questions and business which may come before the
meeting shall be determined by a majority of votes cast by the directors present
at such meeting, unless the vote of a greater number is required by statute, the
Articles of Incorporation or these Bylaws.
Section 6. ACTION OF BOARD OF DIRECTORS WITHOUT A MEETING.
Any action that may be authorized or taken at a meeting of the Board of
Directors may be authorized or taken without a meeting if approved and
authorized by a writing or writings, signed by all of the directors, which are
filed with the minutes of proceedings of the Board of Directors.
Section 7. COMPENSATION.
The Board of Directors is authorized to fix a reasonable salary for
directors or a reasonable fee for attendance at any meeting of the Board of
Directors, the Executive or Audit Committee, or other committees appointed by
the Board of Directors, or any combination of salary and attendance fee. In
addition, directors may be reimbursed for any expenses incurred by them in
traveling to and from such meetings.
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Section 8. COMMITTEES.
(a.) Appointment. The Board of Directors, by resolution passed by a
majority of the whole Board of Directors, may, from time to time, appoint one or
more of its members to act as a committee of the Board of Directors. A committee
shall have and exercise the powers of the Board of Directors in the direction of
the management of the business and affairs of the Corporation to the extent
provided in the resolution appointing such committee. Each committee shall have
such name as may be determined by the Board of Directors. A committee shall keep
minutes of its proceedings and shall report its proceedings to the Board of
Directors when required or when requested by a director to do so. Each such
committee and each member thereof shall serve at the pleasure of the Board of
Directors. Vacancies occurring in any such committee may be filled by the Board
of Directors.
(b.) Executive Committee. In particular, the Board of Directors may create
from its membership an Executive Committee, the members of which shall hold
office during the pleasure of the Board of Directors, and may be removed at any
time, with or without cause, by action thereof. During the intervals between
meetings of the Board of Directors, the Executive Committee shall possess and
may exercise all of the powers and authority of the Board of Directors in the
management and control of the business and affairs of the Corporation to the
extent permitted by law. All action taken by the Executive Committee shall be
reported to the Board of Directors. Each of the Chairman and the President shall
be a member of the Executive Committee, unless such person is not a director or
shall decline in writing.
(c.) Committee Action. Unless otherwise provided by the Board of Directors,
a majority of the members of any committee appointed by the Board of Directors
pursuant to this section shall constitute a quorum at any meeting thereof, and
the act of a majority of the members present at a meeting at which a quorum is
present shall be the act of such committee. Action may also be taken by any such
committee without a meeting by a writing or writings, signed by all of its
members, which is filed with the minutes of proceedings of the committee. Any
such committee shall appoint one of its own number as chairman (provided that
the Chairman or the President, if the Chairman declines or is not a member of
the Executive Committee, shall be the chairman of any Executive Committee), who
shall preside at all meetings and may appoint a Secretary (who need not be a
member of the committee) who shall hold office during the pleasure of such
committee. Meetings of any such committee may be held without notice of the
time, place or purposes thereof and may be held at such times and places within
or without the State of Maryland, as the committee may from time to time
determine, at the call of the chairman of the committee or any two members
thereof. Any such committee may prescribe such other rules as it shall determine
for calling and holding meetings and its method of procedure, subject to any
rules prescribed by the Board of Directors.
Section 9. CONFERENCE TELEPHONE MEETINGS.
One or more directors may participate in a meeting of the Board, or of a
committee of the
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Board of Directors, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in a meeting pursuant to this section shall constitute
presence in person at such meeting.
ARTICLE III
Officers
Section 1. GENERAL PROVISIONS.
The Board of Directors at such time as it determines may elect such
executive officers, as defined in Section 3(f) of this Article III, as the Board
of Directors deems necessary. The Board of Directors may assign such additional
titles to one or more of the officers as they shall deem appropriate. Any two or
more executive offices may be held by the same person. Other officers may be
appointed in the manner provided for in these Bylaws. The election or
appointment of an officer for a given term, or a general provision in the
Articles of Incorporation or in these Bylaws with respect to term of office,
shall not be deemed to create any contract rights.
Section 2. TERM OF OFFICE, REMOVAL, AND VACANCIES.
(a.) Term. Each officer of the Corporation shall hold office during the
pleasure of the Board of Directors and until his successor is elected and
qualified, unless he sooner dies or resigns or is removed.
(b.) Removal. Subject to the terms of any agreement relating to the
employment or service of any officer of the Corporation, the Board of Directors
by a vote of two-thirds of the members present at a meeting at which a quorum is
present may remove any executive officer at any time, with or without cause, and
the Board of Directors by a vote of a majority of its members present at a
meeting at which a quorum is present may remove any other officer at any time,
with or without cause.
(c.) Vacancies. Any vacancy in any executive office may be filled by the
Board of Directors.
Section 3. POWERS AND DUTIES.
(a.) In general. Subject to the specific provisions of these Bylaws, all
officers, as between themselves and the Corporation, shall respectively have
such authority and perform such duties as are customarily incident to their
respective offices, and as may be specified from time to time by the Board of
Directors, regardless of whether such authority and duties are customarily
incident to such office. In the absence of any officer of the Corporation, or
for any other reason the Board of Directors may deem sufficient, the Board of
Directors may delegate from time to
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time the powers or duties of such officer, or any of them, to any other officer
or to any Director.
(b.) President. The President shall, in the absence of the Chairman or upon
the determination of the Board of Directors, preside at all meetings of the
stockholders. The President shall be the chief executive officer of the
Corporation and shall have general supervision over its property, business and
affairs, and shall perform all the duties usually incident to such office,
subject to the direction of the Board of Directors. He may execute all
authorized deeds, mortgages, bonds, contracts and other obligations in the name
of the Corporation and, subject to the provisions of these Bylaws, shall have
such other powers and duties as may be prescribed by the Board of Directors.
(c.) Vice Presidents. The Vice Presidents shall have such powers, duties
and titles as may be prescribed by the Board of Directors or as may be delegated
by the President.
(d.) Secretary. The Secretary shall attend and shall keep the minutes of
all meetings of the stockholders and the Board of Directors (and perform similar
duties for the committees of the Board of Directors when required). He shall
keep such books as may be required by the Board of Directors, shall have charge
of the seal, if any, of the Corporation and shall be permitted, subject to the
provisions of these Bylaws, to give notices of stockholders' and directors'
meetings required by law or by these Bylaws, or otherwise, and have such other
powers and duties as may be prescribed by the Board of Directors.
(e.) Treasurer. The Treasurer shall receive and have charge of all money,
bills, notes, bonds, stock in other corporations and similar property belonging
to the Corporation, and shall do with the same as shall be ordered by the Board
of Directors. He shall disburse the funds and pledge the credit of the
Corporation as may be directed by the Board of Directors. He shall keep accurate
financial accounts and hold the same open for inspection and examination by the
directors. On the expiration of his term of office, he shall turn over to his
successors, or the Board of Directors, all property, books, papers and money of
the Corporation in his hands, and shall possess such other powers and duties as
may be prescribed by the Board of Directors.
(f.) Executive Officers. The officers referred to in subparagraphs (b),
(c), (d) and (e) of this section, and such other officers as the Board of
Directors may by resolution identify as such shall be executive officers of the
Corporation and may be referred to as such.
(g.) Other Officers. The Assistant Vice Presidents, Assistant Secretaries,
Assistant Treasurers, if any, and any other subordinate officers shall be
appointed and removed by the President or the Board of Directors at whose
pleasure each shall serve and shall have such powers and duties as they may
prescribe.
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Section 4. COMPENSATION.
The Board of Directors is authorized to determine or to provide the method
of determining the compensation of all officers.
Section 5. BONDS.
If required by the Board of Directors, any and every officer or agent shall
give the Corporation a bond in a sum and with one or more sureties satisfactory
to the Board of Directors for the faithful performance of the duties of his
office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the Corporation.
ARTICLE IV
Securities Held by Corporation
Section 1. TRANSFER OF SECURITIES OWNED BY THE CORPORATION.
All endorsements, assignments, transfers, share powers or other instruments
of transfer of securities standing in the name of the Corporation shall be
executed for and in the name of the Corporation by the President or by any Vice
President, or by the Secretary or Treasurer or by any additional person or
Persons as may be thereunto authorized by the Board of Directors.
Section 2. VOTING SECURITIES HELD BY THE CORPORATION.
The President, any Vice President, or the Secretary or Treasurer, in person
or by another person thereunto authorized by the Board of Directors, in person
or by proxy or proxies appointed by him, shall have full power and authority on
behalf of the Corporation to vote, act and execute consents, waivers and
releases with respect to any securities issued by other corporations which the
Corporation may own.
ARTICLE V
Share Certificates
Section 1. TRANSFER AND REGISTRATION OF CERTIFICATES.
The Board of Directors shall have authority to make such rules and
regulations, not inconsistent with law, the Articles of Incorporation or these
Bylaws, as it deems expedient
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concerning the issuance, transfer and registration of certificates for shares
and the shares represented thereby.
Section 2. CERTIFICATES FOR SHARES.
Each holder of shares is entitled to one or more certificates for shares of
the Corporation in such form not inconsistent with law and the Articles of
Incorporation as shall be approved by the Board of Directors. Each such
certificate shall be signed by the President or any Vice President, and by the
Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer of
the Corporation, which certificate shall certify the number and class of shares
held by such stockholder in the Corporation, but no certificates for shares
shall be executed or delivered until such shares are fully paid. Any or all of
the signatures upon such certificate may be a facsimile, engraved or printed. In
case any officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer, transfer agent or registrar, before the certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent or
registrar at the date of its issue.
Section 3. TRANSFER AGENTS, REGISTRARS AND DIVIDEND DISBURSING AGENTS.
The Board of Directors may from time to time by resolution appoint one or
more incorporated transfer agents and registrars (which may or may not be the
same corporation) for the shares of the Corporation, and the Board of Directors
from time to time by resolutions may appoint a dividend disbursing agent to
disburse any and all dividends authorized by the Board of Directors payable upon
the shares of the Corporation.
Section 4. TRANSFERS.
Subject to restrictions on the transfer of stock, upon surrender to the
Corporation or the duly appointed transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books. No transfer shall
be made which would be inconsistent with the applicable provisions of the
Uniform Commercial Code.
Section 5. LOST, STOLEN OR DESTROYED CERTIFICATES.
The Corporation may issue a new certificate for shares in place of any
certificate or certificates heretofore issued by the Corporation alleged to have
been lost, stolen or destroyed upon the making of an affidavit of that fact by
the person claiming the certificate of stock to have been lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors or any duly authorized executive officer may, in its or his
discretion, and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed
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certificate or certificates, or his legal representatives, to attest the same in
such manner as it shall require and to indemnify the Corporation, its directors,
officers, employees, agents and representatives, and in connection therewith to
give the Corporation a bond in such sum and containing such terms as the Board
of Directors or such executive officer may direct, against any claim that may be
made against the Corporation with respect to the certificate or certificates
alleged to have been lost, stolen or destroyed or the issuance of the new
certificate.
Section 6. PROTECTION OF THE CORPORATION.
The Corporation may treat a fiduciary as having capacity and authority to
exercise all rights of ownership in respect of shares of record in the name of
the decedent holder, person, firm or corporation in conservation, receivership
or bankruptcy, minor, incompetent person, or person under disability, as the
case may be, for whom he is acting, or a fiduciary acting as such, and the
Corporation, its transfer agent and registrar, upon presentation of evidence of
appointment of such fiduciary shall be under no duty to inquire as to the powers
of such fiduciary and shall not be liable to any firm, person or corporation for
loss caused by any act done or omitted to be done by the Corporation or its
transfer agent or registrar in reliance thereon.
ARTICLE VI
Indemnification of Directors, Officers and Other Authorized Representatives
Section 1. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN THIRD-PARTY
PROCEEDINGS.
The Corporation shall indemnify any person who was or is an "authorized
representative" of the Corporation (which shall mean for purposes of this
Article a director or officer of the Corporation, or a person serving at the
request of the Corporation as a director, officer, employee, agent or trustee,
of another corporation, partnership, joint venture, trust or other enterprise,
including employee benefit plans) and who was or is a "party" (which shall
include, for purposes of this Article, the giving of testimony or similar
involvement) or is threatened to be made a party to any "third-party proceeding"
(which shall mean for purposes of this Article any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, other than an action by or in the right of the Corporation) by
reason of the fact that such person was or is an authorized representative of
the Corporation, from and against expenses (which shall include, for purposes of
this Article, attorneys' fees), judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such third-party 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 third-party proceedings (which
could or does lead to a criminal third-party proceeding) had no reasonable cause
to believe such conduct was unlawful. The termination of any third-party
proceeding by judgment, order, settlement,
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conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the authorized representative 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 third-party proceeding, had reasonable cause to believe that such
conduct was unlawful.
Section 2. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN CORPORATE
PROCEEDINGS.
The Corporation shall indemnify any person who was or is an authorized
representative of the Corporation and who was or is a party or is threatened to
be made a party to any "corporate proceeding" (which shall mean, for purposes of
this Article, any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor or investigative
proceeding by the Corporation) by reason of the fact that such person was or is
an authorized representative of the Corporation, against expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such corporate 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, 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 only to the extent that the court in which
such corporate proceeding was pending shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such authorized representative is fairly and reasonably entitled to
indemnity for such expenses that such court shall deem proper.
Section 3. MANDATORY INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES.
To the extent that an authorized representative of the Corporation has been
successful on the merits or otherwise in defense of any third-party or corporate
proceedings or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses actually and reasonably incurred by such
person in connection therewith.
Section 4. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
Any indemnification under Section 1, 2 or 3 of this Article VI (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the authorized
representative is proper in the circumstances because such person has either met
the applicable standard of conduct set forth in Section 1 or 2 or has been
successful on the merits or otherwise as set forth in Section 3 and that the
amount requested has been actually and reasonably incurred. Such determination
shall be made:
(1) by the Board of Directors by a majority of a quorum consisting of
directors who were not parties to such third-party or corporate
proceedings; or
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(2) if such a quorum is not obtainable, or, even if obtainable, a
majority vote of such a quorum so directs, by independent legal counsel in
a written opinion; or
(3) by the stockholders.
Section 5. ADVANCING EXPENSES.
Expenses actually and reasonably incurred in defending a third-party or
corporate proceeding shall be paid on behalf of an authorized representative by
the Corporation in advance of the final disposition of such third-party or
corporate proceeding upon receipt of an undertaking by or on behalf of the
authorized representative to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the Corporation
as authorized in this Article VI.
Section 6. EMPLOYEE BENEFIT PLANS.
For purposes of this Article, the Corporation shall be deemed to have
requested an authorized representative to serve an employee benefit plan where
the performance by such person of duties to the Corporation also imposes duties
on, or otherwise involves services by, such person to the plan or participants
or beneficiaries of the plan; excise taxes assessed on an authorized
representative with respect to an employee benefit plan pursuant to applicable
law shall be deemed "fines"; and action taken or omitted by such person with
respect to an employee benefit plan in the performance of duties for a purpose
reasonably believed to be in the interest of the participants and beneficiaries
of the plan shall be deemed to be for a purpose that is not opposed to the best
interests of the Corporation.
Section 7. SCOPE OF ARTICLE.
The indemnification of and the advancement of expenses to authorized
representatives, provided by, or granted pursuant to, this Article, shall (i)
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any statute,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in other capacities, (ii)
continue as to a person who has ceased to be an authorized representative, and
(iii) inure to the benefit of the heirs, personal representatives, executors,
and administrators of such person.
Section 8. RELIANCE ON PROVISIONS.
Each person who shall act as an authorized representative of the
Corporation shall be deemed to be doing so in reliance upon rights of
indemnification provided by this Article VI.
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Section 9. INSURANCE.
The Corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, trustee or
agent of or for the Corporation, or is or was serving at the request or with the
prior approval of the Corporation as a director, officer, employee, trustee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including employee benefit plans), against any liability asserted
against him and incurred by him in any capacity or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of these Bylaws.
ARTICLE VII
General
Section 1. CONTRACTS, CHECKS, ETC.
All contracts, agreements, checks, drafts, notes, bonds, bills of exchange
and orders for the payment of money shall be signed or endorsed by the persons
whom the Board of Directors prescribes therefor.
Section 2. FISCAL YEAR.
The fiscal year of the Corporation shall commence on January 1 of each year
and end on December 31 of the following year, unless otherwise determined by the
Board of Directors.
Section 3. FORM OF NOTICES.
Whenever notice is required to be given to any director or officer or
stockholder, such notice may be given either in person or by mail, telephone or
telegram, facsimile transmission, telex or similar medium of communication,
except as expressly provided otherwise in these Bylaws. Except as provided in
Article II, Section 4(c), if mailed, the notice will be deemed given when
deposited in the United States mail, postage prepaid, addressed to the
stockholder, officer or director at such address as appears on the books of the
Corporation. If given in person or by telephone, notice will be deemed given
when communicated. If given by telegram, facsimile transmission, telex or
similar medium of communication, notice will be deemed given when properly
dispatched.
Section 4. SEAL.
The Corporation may, but shall not be required to, have a corporate seal,
which shall have inscribed thereon the name of the Corporation, the year of its
organization and the words
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"Incorporated Maryland." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise. The Secretary
shall have custody of the corporate seal of the Corporation and shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by the Secretary's signature. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. Whenever the Corporation is permitted
or required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
Section 5. CONSISTENCY WITH ARTICLES OF INCORPORATION.
If any provision of these Bylaws shall be inconsistent with the
Corporation's Articles of Incorporation (and as it may be amended from time to
time), the Articles of Incorporation (as so amended at the time) shall govern.
ARTICLE VIII
Amendments
Except as otherwise provided in the Articles of Incorporation, these Bylaws
may be altered, amended, or repealed or new bylaws may be adopted by the
affirmative vote of the directors of the Corporation or by the affirmative vote
of the holders of a majority of the shares of the Corporation entitled to vote
in the election of directors, voting as one class at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting.
ARTICLE IX
Applicability of the Maryland Control Shares Acquisition Statute
The Maryland Control Shares Acquisition Statute shall not apply to the
voting rights of stock acquired pursuant to the Stock Purchase Agreement by and
between the Corporation and Prometheus Southeast Retail LLC dated as of February
24, 1998, and any amendment thereto.
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AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP OF
FAC PROPERTIES, L.P.
As of this 18th day of December, 1997, the Agreement of Limited Partnership
of FAC Properties, L.P. dated December 12, 1997 (the "Agreement"), is hereby
amended as follows:
Section 1. Definitions.
Article I is hereby amended to add the following new definitions:
"Common Partnership Unit" means a Partnership Unit that is not a
Preferred Partnership Unit.
"Preferred Partnership Unit" means any Partnership Unit issued from
time to time pursuant to Section 4.2 hereof that is designated by the
General Partner at the time of its issuance as a Preferred Partnership
Unit. Each Preferred Partnership Unit shall have such designations,
preferences and relative, participating, optional or other special rights,
powers and duties, including rights, powers and duties senior to Limited
Partner Interests and Common Partnership Units, all as shall be determined
by the General Partner subject to the requirements of Section 4.2 hereof.
"Series A Preferred Partnership Unit" means a Partnership Unit issued
by the Partnership to FAC Properties Holding Corp. The Series A Preferred
Partnership Units shall constitute Preferred Partnership Units. Holders of
the Series A Preferred Partnership Units shall have the same voting powers,
designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions with respect
to the Series A Preferred Partnership Units as holders of the Series A
Preferred Stock have with respect to such Series A Preferred Stock. It is
the intention of the General Partner, in establishing the Series A
Preferred Partnership Units, that each Series A Preferred Partnership Unit
shall be substantially the economic equivalent of a share of Series A
Preferred Stock.
"Series A Preferred Stock" means the Series A Convertible Preferred
Stock, par value $25.00 per share, having a liquidation preference
equivalent to $25.00 per share, issued by the General Partner.
In addition, the definitions of "Partnership Unit," "Partnership Interest" and
"REIT Shares Amount" appearing in Article I are hereby deleted in their entirety
and the following definitions are inserted in their place:
"Partnership Unit" means a fractional, undivided share of the
Partnership Interests of all Partners issued pursuant to Sections 4.1 and
4.2. The number of Partnership Units
<PAGE>
outstanding and the Percentage Interests in the Partnership represented by
such Units are set forth in Exhibit A attached hereto, as such Exhibit may
be amended from time to time. The ownership of Partnership Units shall be
evidenced by such form of certificate for units as the General Partner
adopts from time to time unless the General Partner determines that the
Partnership Units shall be uncertificated securities. Fractional Units may
be held and counted by the General Partner as necessary to meet the
requirements of Section 4.1. Without limitation on the authority of the
General Partner as set forth in Section 4.2 hereof, the General Partner may
designate any Partnership Units, when issued, as Common Partnership Units
or as Preferred Partnership Units, may establish any other class of
Partnership Units, and may designate one or more series of any class of
Partnership Units.
"Percentage Interest" means, as to a Partner, with respect to any
class of Partnership Units held by such Partner, its interest in such class
of Partnership Units as determined by dividing the number of Partnership
Units in such class owned by such Partner by the total number of
Partnership Units in such class then outstanding.
"REIT Shares Amount" shall mean a number of REIT Shares equal to the
product of the number of Common Partnership Units offered for redemption by
a Redeeming Partner, multiplied by the Conversion Factor; provided that in
the event the General Partner issues to all holders of REIT Shares rights,
options, warrants or convertible or exchangeable securities entitling the
shareholders to subscribe for or purchase REIT Shares, or any other
securities or property (collectively, the "rights") then the REIT Shares
Amount shall also include such rights that a holder of that number of REIT
Shares would be entitled to receive.
Section 2. Requirement and Characterization of Distributions.
Section 5.1 of the Agreement is hereby deleted in its entirety and the
following new Section 5.1 is inserted in its place:
"Section 5.1 Requirement and Characterization of Distributions
The General Partner shall cause the Partnership to distribute at least
annually all, or such portion as the General Partner may in its discretion
determine, of Available Cash generated by the Partnership during such year
to the Partners who are Partners on the Partnership Record Date with
respect to such year, (1) first, with respect to any Partnership Interests
that are entitled to any preference in distribution, in accordance with the
rights of such class of Partnership Interests (and within such class, pro
rata in proportion to the respective Percentage Interests on such
Partnership Record Date), and, (2) second, with respect to Partnership
Interests that are not entitled to any preference in distribution, pro rata
to each such class in accordance with the terms of such class (and within
each such class, pro rata in proportion with the respective Percentage
Interests on such Partnership Record Date). Unless otherwise expressly
provided for herein, no Partnership Interest shall be entitled to a
distribution in preference to any other
<PAGE>
Partnership Interest.
Section 3. Tax Provisions.
Section 6.1 of the Agreement is hereby deleted in its entirety and the
following new Section 6.1 is inserted in its place:
"Section 6.1 Allocations For Capital Account Purposes
For purposes of maintaining the Capital Accounts and in determining
the rights of the Partners among themselves, the Partnership's items of
income, gain, loss and deduction (computed in accordance with Exhibit B
hereof) shall be allocated among the Partners in each taxable year (or
portion thereof) as provided herein below.
A. Net Income. After giving effect to the special allocations set
forth in Section 1 of Exhibit C attached hereto, Net Income shall be
allocated (i) first, to the General Partner to the extent that Net Losses
previously allocated to the General Partner pursuant to the last sentence
of Section 6.1.B exceed Net Income previously allocated to the General
Partner pursuant to this clause (i) of Section 6.1.A, and (ii) thereafter,
Net Income shall be allocated to the Partners who hold Common Partnership
Units in proportion to their respective Percentage Interests as holders of
Common Partnership Units.
B. Net Losses. After giving effect to the special allocations set
forth in Section 1 of Exhibit C attached hereto, Net Losses shall be
allocated to the Partners who hold Common Partnership Units in accordance
with their respective Percentage Interests as holders of Common Partnership
Units; provided, however, that Net Losses shall not be allocated to any
Limited Partner pursuant to this Section 6.1.B to the extent that such
allocation would cause such Limited Partner to have an Adjusted Capital
Account Deficit at the end of such taxable year (or increase any existing
Adjusted Capital Account Deficit). All Net Losses in excess of the
limitations set forth in this Section 6.1.B shall be allocated to the
General Partner."
In addition, Exhibit C to the Agreement is hereby amended to add the following
new Section 1.G.:
"G. Priority Allocation With Respect To Preferred Partnership Units.
All or a portion of the remaining items of Partnership gross income or gain
for the Partnership Year, if any, shall be specially allocated to FAC
Properties Holding Corp. in an amount equal to the excess, if any, of the
cumulative distributions received by FAC Properties Holding Corp. pursuant
to Section 5.1(i) hereof for the current Partnership Year and all prior
Partnership Years (other than any distributions that are treated as being
in satisfaction of the Liquidation Preference Amount for any Preferred
Partnership Units) over the cumulative allocations of Partnership gross
income and gain to FAC Properties Holding Corp. under this Section 1.G for
all prior Partnership Years."
<PAGE>
Section 4. Redemption Right.
The Agreement is hereby amended by adding the following new Sections 8.6.D
and 8.6.E to the Agreement, immediately following Section 8.6.C:
"D. Notwithstanding anything contained in Sections 8.6.A, 8.6.B and
8.6.C, no Partner shall be entitled to exercise the Redemption Right
pursuant to Section 8.6.A with respect to any Preferred Partnership Unit
unless (i) such Preferred Partnership Unit has been issued to and is held
by a Partner other than the General Partner or a Subsidiary, and (ii) the
General Partner has expressly granted to such Partner the right to redeem
such Preferred Partnership Units pursuant to Section 8.6.A.
E. Preferred Partnership Units shall be redeemed, if at all, only in
accordance with such redemption rights or options as are set forth with
respect to such Preferred Partnership Units (or class or series thereof) in
the instruments designating such Preferred Partnership Units (or class or
series thereof)."
Section 5. Exhibits to Agreement.
The General Partner shall maintain the information set forth in Exhibit A
to the Agreement, as such information shall change from time to time, in such
form as the General Partner deems appropriate for the conduct of the Partnership
affairs, and Exhibit A shall be deemed amended from time to time to reflect the
information so maintained by the General Partner, whether or not a formal
amendment to the Agreement has been executed amending such Exhibit A. Such
information shall reflect (and Exhibit A shall be deemed amended from time to
time to reflect) the issuance of any additional Partnership Units to the General
Partner or any other Person, the transfer of Partnership Units and the
redemption of any Partnership Units, all as contemplated in the Agreement.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Amendment as of the
date first written above.
FAC REALTY TRUST, INC.,
By:
----------------------------------------
C. Cammack Morton
President and Chief Executive Officer
FAC PROPERTIES HOLDING CORP.
By:
----------------------------------------
C. Cammack Morton
President and Chief Executive Officer
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
FAC PROPERTIES, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
ARTICLE 1 DEFINED TERMS............................................................................................1
ARTICLE 2 ORGANIZATIONAL MATTERS..................................................................................10
Section 2.1 Organization and Continuation..............................................................10
Section 2.2 Name ......................................................................................10
Section 2.3 Registered Office and Agent; Principal Office..............................................11
Section 2.4 Power of Attorney..........................................................................11
Section 2.5 Term ......................................................................................12
ARTICLE 3 PURPOSE.................................................................................................12
Section 3.1 Purpose and Business.......................................................................12
Section 3.2 Powers ....................................................................................13
ARTICLE 4 CAPITAL CONTRIBUTIONS...................................................................................13
Section 4.1 Capital Contributions of the Partners......................................................13
Section 4.2 Issuances of Additional Partnership Interests..............................................14
ARTICLE 5 DISTRIBUTIONS...........................................................................................14
Section 5.1 Requirement and Characterization of Distributions..........................................14
Section 5.2 Amounts Withheld...........................................................................14
Section 5.3 Distributions Upon Liquidation.............................................................14
ARTICLE 6 ALLOCATIONS.............................................................................................15
Section 6.1 Allocations For Capital Account Purposes...................................................15
Section 6.2 Other Allocation Rules.....................................................................15
ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS...................................................................15
Section 7.1 Management.................................................................................15
Section 7.2 Certificate of Limited Partnership.........................................................19
Section 7.3 Restrictions on General Partner Authority..................................................20
Section 7.4 Reimbursement of the General Partner.......................................................20
Section 7.5 Outside Activities of the General Partner..................................................20
Section 7.6 Contracts with Affiliates..................................................................21
Section 7.7 Indemnification............................................................................21
Section 7.8 Liability of the General Partner...........................................................23
Section 7.9 Other Matters Concerning the General Partner...............................................24
Section 7.10 Title to Partnership Assets................................................................25
Section 7.11 Reliance by Third Parties..................................................................25
ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNER...............................................................26
Section 8.1 Limitation of Liability....................................................................26
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 8.2 Management of Business....................................................................26
Section 8.3 Outside Activities of Limited Partners....................................................26
Section 8.4 Return of Capital.........................................................................26
Section 8.5 Rights of Limited Partners Relating to the Partnership....................................27
Section 8.6 Redemption Right..........................................................................28
ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS.................................................................29
Section 9.1 Records and Accounting....................................................................29
Section 9.2 Partnership Year..........................................................................29
Section 9.3 Reports ..................................................................................29
ARTICLE 10 TAX MATTERS............................................................................................30
Section 10.1 Preparation of Tax Returns................................................................30
Section 10.2 Tax Elections.............................................................................30
Section 10.3 Tax Matters Partner.......................................................................30
Section 10.4 Organizational Expenses...................................................................31
Section 10.5 Withholding...............................................................................32
ARTICLE 11 TRANSFERS AND WITHDRAWALS..............................................................................32
Section 11.1 Transfer .................................................................................32
Section 11.2 Transfer of General Partner's Partnership Interests.......................................33
Section 11.3 Limited Partners' Rights to Transfer......................................................33
Section 11.4 Substituted Limited Partners..............................................................34
Section 11.5 Assignees.................................................................................35
Section 11.6 General Provisions........................................................................35
ARTICLE 12 ADMISSION OF PARTNERS..................................................................................36
Section 12.1 Admission of Successor General Partner....................................................36
Section 12.2 Admission of Additional Limited Partners..................................................36
Section 12.3 Amendment of Agreement and Certificate of Limited Partnership.............................37
ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION...............................................................37
Section 13.1 Dissolution...............................................................................37
Section 13.2 Winding Up................................................................................38
Section 13.3 Negative Capital Accounts.................................................................39
Section 13.4 Deemed Distribution and Recontribution....................................................39
Section 13.5 Rights of Limited Partners................................................................39
Section 13.6 Notice of Dissolution.....................................................................40
Section 13.7 Termination of Partnership and Cancellation of Certificate
of Limited Partnership......................................................40
Section 13.8 Reasonable Time for Winding-Up............................................................40
Section 13.9 Waiver of Partition.......................................................................40
ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS...........................................................40
Section 14.1 Amendments................................................................................40
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE 15 GENERAL PROVISIONS.....................................................................................41
Section 15.1 Addresses and Notice......................................................................41
Section 15.2 Titles and Captions.......................................................................41
Section 15.3 Pronouns and Plurals......................................................................41
Section 15.4 Further Action............................................................................41
Section 15.5 Binding Effect............................................................................41
Section 15.6 Creditors.................................................................................41
Section 15.7 Waiver ...................................................................................42
Section 15.8 Counterparts..............................................................................42
Section 15.9 Applicable Law............................................................................42
Section 15.10 Invalidity of Provisions.................................................................42
Section 15.11 Entire Agreement.........................................................................42
</TABLE>
EXHIBIT A PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
EXHIBIT B CAPITAL ACCOUNT MAINTENANCE
EXHIBIT C SPECIAL ALLOCATION RULES
EXHIBIT D VALUE OF CONTRIBUTED PROPERTY
EXHIBIT E NOTICE OF REDEMPTION
EXHIBIT F INDEMNIFICATION UNDER SECTION 7.7(I)
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
FAC PROPERTIES, L.P.
THIS AGREEMENT OF LIMITED PARTNERSHIP OF FAC PROPERTIES, L.P. (the
"Agreement"), dated as of December 12, 1997, is entered into by and among FAC
Realty Trust, Inc., a Maryland corporation, as the General Partner, and FAC
Properties Holding Corp., as a Limited Partner (as such terms are defined
hereinafter).
WHEREAS, the Partnership was organized on December 4, 1997 by FAC Realty
Trust, Inc., as general partner, and FAC Outparcels, Inc., as Organizational
Limited Partner;
WHEREAS, FAC Properties Holding Corp. is making a contribution to the
capital of the Partnership and the Organizational Limited Partner is hereby
withdrawing from the Partnership;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
and other valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto do hereby agree as follows:
ARTICLE 1
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Act" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time, and any successor to such statute.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 12.2 hereof and who is shown as such on
the books and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each Partnership Year (i) increased by any amounts
which such Partner is obligated to restore pursuant to any provision of this
Agreement or is deemed to be obligated to restore pursuant to the penultimate
sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), and (ii)
decreased by the items described in Regulations Sections
1.704-1(b)(2)(ii)(d)(4), (5), and (6). The foregoing definition of Adjusted
Capital Account is intended to comply with the provisions of Regulations Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
<PAGE>
"Adjusted Capital Account Deficit" means, with respect to any Partner, the
deficit balance, if any, in such Partner's Adjusted Capital Account as of the
end of the relevant Partnership Year.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Exhibit B hereof. Once an Adjusted Property is deemed
distributed by, and recontributed to, the Partnership for federal income tax
purposes upon a termination thereof pursuant to Section 708 of the Code, such
property shall thereafter constitute a Contributed Property until the Carrying
Value of such property is further adjusted pursuant to Exhibit B hereof.
"Affiliate" means, with respect to any Person, (i) any Person directly or
indirectly controlling, controlled by or under common control with such Person,
(ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests, or
(iv) any officer, director, general partner or trustee of such Person or of any
Person referred to in clauses (i), (ii), (iii) above.
"Agreed Value" means (i) in the case of any Contributed Property set forth
in Exhibit D and as of the time of its contribution to the Partnership, the
Agreed Value of such property as set forth in Exhibit D or if no value is set
forth in Exhibit D, the fair market value of such property or other
consideration at the time of contribution as determined by the General Partner
using such method of valuation as it may adopt, which value in any event shall
reflect any liabilities either assumed by the Partnership upon such contribution
or to which such property is subject when contributed, (ii) in the case of any
Contributed Property not set forth in Exhibit D and as of the time of its
contribution to the Partnership, the 704(c) Value of such property, reduced by
any liabilities either assumed by the Partnership upon such contribution or to
which such property is subject when contributed, and (iii) in the case of any
property distributed to a Partner by the Partnership, the Partnership's Carrying
Value of such property at the time such property is distributed, reduced by any
indebtedness either assumed by such Partner upon such distribution or to which
such property is subject at the time of distribution as determined under Section
752 of the Code and the Regulations thereunder.
"Agreement" means this Agreement of Limited Partnership, as it may be
amended, supplemented or restated from time to time.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of the General Partner filed in the State of Maryland on December
12, 1997 and amended or restated from time to time.
"Assignee" means a Person to whom one or more Partnership Units have been
transferred in a manner permitted under this Agreement, but who has not become a
Substituted Limited Partner, and who has the rights set forth in Section 11.5.
"Available Cash" means, with respect to any period for which such
calculation is being
2
<PAGE>
made, (i) the sum of:
(a) the Partnership's Net Income or Net Loss (as the case may be) for
such period;
(b) Depreciation and all other noncash charges deducted in determining
Net Income or Net Loss for such period;
(c) the amount of any reduction in the reserves of the Partnership
referred to in clause (ii)(f) below (including, without limitation,
reductions resulting because the General Partner determines such amounts
are no longer necessary);
(d) the excess of proceeds from the sale, exchange, disposition, or
refinancing of Partnership property for such period over the gain, if any,
recognized from such sale, exchange, disposition, or refinancing during
such period (excluding Terminating Capital Transactions); and
(e) all other cash received by the Partnership for such period that
was not included in determining Net Income or Net Loss for such period;
(ii) less the sum of:
(a) all principal debt payments made by the Partnership during such
period;
(b) capital expenditures made by the Partnership during such period;
(c) investments in any entity (including loans made thereto) to the
extent that such investments are not otherwise described in clause (ii)(a)
or (ii)(b);
(d) all other expenditures and payments not deducted in determining
Net Income or Net Loss for such period;
(e) any amount included in determining Net Income or Net Loss for such
period that was not received by the Partnership during such period;
(f) the amount of any increase in reserves during such period which
the General Partner determines to be necessary or appropriate in its sole
and absolute discretion;
(g) the amount of any working capital accounts and other cash or
similar balances which the General Partner determines to be necessary or
appropriate, in its sole and absolute discretion; and
(h) the amount which is not available for distribution due to
regulatory, legal or other restrictions.
3
<PAGE>
Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements made
or reserves established, after commencement of the dissolution and liquidation
of the Partnership.
"Book-Tax Disparities" means, with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or Adjusted
Property and the adjusted basis thereof for federal income tax purposes as of
such date. A Partner's share of the Partnership's Book-Tax Disparities in all of
its Contributed Property and Adjusted Property will be reflected by the
difference between such Partner's Capital Account balance as maintained pursuant
to Exhibit B and the hypothetical balance of such Partner's Capital Account
computed as if it had been maintained strictly in accordance with federal income
tax accounting principles.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by law
to close.
"Capital Account" means the Capital Account maintained for a Partner
pursuant to Exhibit B hereof.
"Capital Contribution" means, with respect to any Partner, any cash, cash
equivalents or the Agreed Value of Contributed Property which such Partner
contributes or is deemed to contribute to the Partnership pursuant to Sections
4.1, 4.2, or 4.3 hereof.
"Carrying Value" means (i) with respect to a Contributed Property or
Adjusted Property, the 704(c) Value of such property, reduced (but not below
zero) by all Depreciation with respect to such Property charged to the Partners'
Capital Accounts following the contribution of or adjustment with respect to
such Property, and (ii) with respect to any other Partnership property, the
adjusted basis of such property for federal income tax purposes, all as of the
time of determination. The Carrying Value of any property shall be adjusted from
time to time in accordance with Exhibit B hereof, and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cash Amount" means an amount of cash per Partnership Unit equal to the
Value on the Valuation Date of the REIT Shares Amount.
"Certificate" means the Certificate of Limited Partnership relating to the
Partnership filed in the office of the Delaware Secretary of State, as amended
from time to time in accordance with the terms hereof and the Act.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time, as interpreted by the applicable regulations thereunder. Any
reference herein to a specific section or sections of the Code shall be deemed
to include a reference to any corresponding provision of future law.
4
<PAGE>
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Act, but excluding cash, contributed or deemed
contributed to the Partnership (including deemed contributions to the
Partnership on termination and reconstitution thereof pursuant to Section 708 of
the Code). Once the Carrying Value of a Contributed Property is adjusted
pursuant to Exhibit B hereof, such property shall no longer constitute a
Contributed Property for purposes of Exhibit B hereof, but shall be deemed an
Adjusted Property for such purposes.
"Conversion Factor" means 1.0, provided that in the event that the General
Partner (i) declares or pays a dividend on its outstanding REIT Shares in REIT
Shares or makes a distribution to all holders of its outstanding REIT Shares in
REIT Shares; (ii) subdivides its outstanding REIT Shares; or (iii) combines its
outstanding REIT Shares into a smaller number of REIT Shares, the Conversion
Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the
numerator of which shall be the number of REIT Shares issued and outstanding on
the record date for such dividend, distribution, subdivision or combination
assuming for such purpose that such dividend, distribution, subdivision or
combination has occurred as of such time, and the denominator of which shall be
the actual number of REIT Shares (determined without the above assumption)
issued and outstanding on the record date for such dividend, distribution,
subdivision or combination. Any adjustment to the Conversion Factor shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
"Depreciation" means, for each Partnership Year an amount equal to the
federal income tax depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year, except that if the Carrying
Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of such year or other period, Depreciation shall be an
amount which bears the same ratio to such beginning Carrying Value as the
federal income tax depreciation, amortization, or other cost recovery deduction
for such year bears to such beginning adjusted tax basis; provided, however,
that if the federal income tax depreciation, amortization, or other cost
recovery deduction for such year is zero, Depreciation shall be determined with
reference to such beginning Carrying Value using any reasonable method selected
by the General Partner.
"Dissolution Event" has the meaning set forth in Section 13.1.
"General Partner" means FAC Realty Trust, Inc., in its capacity as the
general partner of the Partnership, or its successors as general partner of the
Partnership.
"General Partner Interest" means a Partnership Interest held by the General
Partner that is a general partnership interest. A General Partner Interest may
be expressed as a number of Partnership Units.
"IRS" means the Internal Revenue Service, which administers the internal
revenue laws of the United States.
5
<PAGE>
"Immediate Family" means, with respect to any natural Person, such natural
Person's spouse and such natural Person's natural or adoptive parents,
descendants, nephews, nieces, brothers, and sisters.
"Incapacity" or "Incapacitated" means, (i) as to any individual Partner,
death, total physical disability or entry by a court of competent jurisdiction
adjudicating him incompetent to manage his Person or his estate; (ii) as to any
corporation which is a Partner, the filing of a certificate of dissolution, or
its equivalent, for the corporation or the revocation of its charter; (iii) as
to any partnership which is a Partner, the dissolution and commencement of
winding up of the partnership; (iv) as to any estate which is a Partner, the
distribution by the fiduciary of the estate's entire interest in the
Partnership; (v) as to any trustee of a trust which is a Partner, the
termination of the trust (but not the substitution of a new trustee); or (vi) as
to any Partner, the bankruptcy of such Partner. For purposes of this definition,
bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner
commences a voluntary proceeding seeking liquidation, reorganization or other
relief under any bankruptcy, insolvency or other similar law now or hereafter in
effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and
nonappealable order for relief under any bankruptcy, insolvency or similar law
now or hereafter in effect has been entered against the Partner, (c) the Partner
executes and delivers a general assignment for the benefit of the Partner's
creditors, (d) the Partner files an answer or other pleading admitting or
failing to contest the material allegations of a petition filed against the
Partner in any proceeding of the nature described in clause (b) above, (e) the
Partner seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator for the Partner or for all or any substantial part of the
Partner's properties, (f) any proceeding seeking liquidation, reorganization or
other relief of or against such Partner under any bankruptcy, insolvency or
other similar law now or hereafter in effect has not been dismissed within one
hundred twenty (120) days after the commencement thereof, (g) the appointment
without the Partner's consent or acquiescence of a trustee, receiver or
liquidator has not been vacated or stayed within ninety (90) days of such
appointment, or (h) an appointment referred to in clause (g) which has been
stayed is not vacated within ninety (90) days after the expiration of any such
stay.
"Indemnitee" means (i) any Person made a party to a proceeding by reason of
(A) his status as the General Partner, or a director or officer of the
Partnership or the General Partner, or (B) his or its liabilities, pursuant to a
loan guarantee or otherwise, for any indebtedness of the Partnership or any
Subsidiary of the Partnership (including, without limitation, any indebtedness
which the Partnership or any Subsidiary of the Partnership has assumed or taken
assets subject to), and (ii) such other Persons (including Affiliates of the
General Partner or the Partnership) as the General Partner may designate from
time to time (whether before or after the event giving rise to potential
liability), in its sole and absolute discretion.
"Limited Partner" means any Person named as a Limited Partner in Exhibit A
attached hereto, as such Exhibit may be amended from time to time, or any
Substituted Limited Partner or Additional Limited Partner, in such Person's
capacity as a Limited Partner in the Partnership.
"Limited Partner Interest" means a Partnership Interest of a Limited
Partner in the Partnership representing a fractional part of the Partnership
Interests of all Partners and includes
6
<PAGE>
any and all benefits to which the holder of such a Partnership Interest may be
entitled as provided in this Agreement, together with all obligations of such
Person to comply with the terms and provisions of this Agreement. A Limited
Partner Interest may be expressed as a number of Partnership Units.
"Liquidator" has the meaning set forth in Section 13.2.
"Net Income" means, for any Partnership Year or any portion of a
Partnership Year, the excess, if any, of the Partnership's items of income and
gain for such Partnership Year over the Partnership's items of loss and
deduction for such Partnership Year. The items included in the calculation of
Net Income shall be determined in accordance with Exhibit B. Once an item of
income, gain, loss or deduction that has been included in the initial
computation of Net Income is subjected to the special allocation rules in
Exhibit C, Net Income or the resulting Net Loss, whichever the case may be,
shall be recomputed without regard to such item.
"Net Loss" means, for any Partnership Year, the excess, if any, of the
Partnership's items of loss and deduction for such Partnership Year over the
Partnership's items of income and gain for such Partnership Year. The items
included in the calculation of Net Loss shall be determined in accordance
Exhibit B. Once an item of income, gain, loss or deduction that has been
included in the initial computation of Net Loss is subjected to the special
allocation rules in Exhibit C, Net Loss or the resulting Net Income, whichever
the case may be, shall be recomputed without regard to such item.
"New Securities" has the meaning set forth in Section 4.2.B.
"Nonrecourse Built-in Gain" means, with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or negative
pledge securing a Nonrecourse Liability, the amount of any taxable gain that
would be allocated to the Partners pursuant to Section 2.B of Exhibit C if such
properties were disposed of in a taxable transaction in full satisfaction of
such liabilities and for no other consideration.
"Nonrecourse Deductions" has the meaning set forth in Regulations Section
1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership Year
shall be determined in accordance with the rules of Regulations Section
1.704-2(c).
"Nonrecourse Liability" has the meaning set forth in Regulations Section
1.752-l(a)(2).
"Notice of Redemption" means the Notice of Redemption substantially in the
form of Exhibit E to this Agreement.
"Organizational Limited Partner" means FAC Outparcels, Inc.
"Partner" means a General Partner or a Limited Partner, and "Partners"
means the General Partner and the Limited Partners collectively.
7
<PAGE>
"Partner Minimum Gain" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"Partner Nonrecourse Debt" has the meaning set forth in Regulations Section
1.704-2(b)(4).
"Partner Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with
respect to a Partner Nonrecourse Debt for a Partnership Year shall be determined
in accordance with the rules of Regulations Section 1.704-2(i)(2).
"Partnership" means the limited partnership formed under the Act and
pursuant to this Agreement and any successor thereto.
"Partnership Interest" means an ownership interest in the Partnership
representing a Capital Contribution by either a Limited Partner or the General
Partner and includes any and all benefits to which the holder of such a
Partnership Interest may be entitled as provided in this Agreement, together
with all obligations of such Person to comply with the terms and provisions of
this Agreement. A Partnership Interest may be expressed as a number of
Partnership Units.
"Partnership Minimum Gain" has the meaning set forth in Regulations Section
1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net
increase or decrease in a Partnership Minimum Gain, for a Partnership Year shall
be determined in accordance with the rules of Regulations Section 1.704-2(d).
"Partnership Record Date" means the record date established by the General
Partner for the distribution of Available Cash pursuant to Section 5.1 hereof,
which record date shall be the same as the record date established by the
General Partner for a distribution to its shareholders of some or all of its
portion of such distribution.
"Partnership Unit" means a fractional, undivided share of the Partnership
Interests of all Partners issued pursuant to Sections 4.1, 4.2 and 4.3. The
number of Partnership Units outstanding and the Percentage Interest in the
Partnership represented by such Units are set forth in Exhibit A attached
hereto, as such Exhibit may be amended from time to time. The ownership of
Partnership Units shall be evidenced by such form of certificate for Units as
the General Partner adopts from time to time unless the General Partner
determines that the Partnership Units shall be uncertificated securities.
Fractional Units may be held and counted by the General Partner as necessary to
meet the requirements of Section 4.1.
"Partnership Year" means the fiscal year of the Partnership, which shall be
the calendar year.
"Percentage Interest" means, as to a Partner, its interest in the
Partnership as determined
8
<PAGE>
by dividing the Partnership Units owned by such Partner by the total number of
Partnership Units then outstanding and as specified in Exhibit A attached
hereto, as such Exhibit may be amended from time to time.
"Person" means an individual or a corporation, partnership, limited
liability company, trust, unincorporated organization, association or other
entity.
"Recapture Income" means any gain recognized by the Partnership upon the
disposition of any property or asset of the Partnership, which gain is
characterized for federal income tax purposes as ordinary income because it
represents the recapture of deductions previously taken with respect to such
property or asset.
"Redeeming Partner" has the meaning set forth in Section 8.6 hereof.
"Redemption Right" shall have the meaning set forth in Section 8.6 hereof.
"Regulations" means the Income Tax Regulations promulgated under the Code,
as such regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).
"REIT" means a real estate investment trust under Section 856 of the Code.
"REIT Share" shall mean a share of common stock of the General Partner.
"REIT Shares Amount" shall mean a number of REIT Shares equal to the
product of the number of Partnership Units offered for redemption by a Redeeming
Partner, multiplied by the Conversion Factor, provided that in the event the
General Partner issues to all holders of REIT Shares rights, options, warrants
or convertible or exchangeable securities entitling the shareholders to
subscribe for or purchase REIT Shares, or any other securities or property
(collectively, the "rights"), then the REIT Shares Amount shall also include
such rights that a holder of that number of REIT Shares would be entitled to
receive.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of Contributed Property or
Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 2.B.l(a) or 2.B.2(a) of Exhibit C to eliminate Book-Tax
Disparities.
"704(c) Value" of any Contributed Property means the value of such property
as set forth in Exhibit D or if no value is set forth in Exhibit D, the fair
market value of such property or other consideration at the time of contribution
as determined by the General Partner using such reasonable method of valuation
as it may adopt; provided, however, that the 704(c) Value of any property deemed
contributed to the Partnership for federal income tax purposes upon termination
and reconstitution thereof pursuant to Section 708 of the Code shall be
determined in accordance with Exhibit B hereof. Subject to Exhibit B hereof, the
General Partner shall, in its sole and absolute discretion, use such method as
it deems reasonable and appropriate to allocate the
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aggregate of the 704(c) Values of Contributed Properties in a single or
integrated transaction among the separate properties on a basis proportional to
their respective fair market values.
"Specified Redemption Date" means the tenth (10th) Business Day after
receipt by the General Partner of a Notice of Redemption.
"Subsidiary" means, with respect to any Person, any corporation,
partnership or other entity of which a majority of either (i) the voting power
of the voting equity securities or (ii) the outstanding equity interests is
owned, directly or indirectly, by such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 11.4.
"Terminating Capital Transaction" means any sale or other disposition of
all or substantially all of the assets of the Partnership or a related series of
transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Partnership.
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (i) the fair market
value of such property (as determined under Exhibit B hereof) as of such date,
over (ii) the Carrying Value of such property (prior to any adjustment to be
made pursuant to Exhibit B hereof) as of such date.
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (i) the Carrying Value
of such property (prior to any adjustment to be made pursuant to Exhibit B
hereof) as of such date, over (ii) the fair market value of such property (as
determined under Exhibit B hereof) as of such date.
"Valuation Date" means the date of receipt by the General Partner of a
Notice of Redemption or, if such date is not a Business Day, the first Business
Day thereafter.
"Value" means, with respect to a REIT Share, the market price for the
trading day immediately preceding the Valuation Date. The market price for each
such trading day shall be the closing price, regular way, on such day, or if no
such sale takes place on such day, the average of the closing bid and asked
prices on such day.
ARTICLE 2
ORGANIZATIONAL MATTERS
Section 2.1 Organization and Continuation
The Partnership is a limited partnership organized pursuant to the
provisions of the Act and upon the terms and conditions set forth herein. Except
as expressly provided herein to the contrary, the rights and obligations of the
Partners and the administration and termination of the Partnership shall be
governed by the Act. The Partnership Interest of each Partner shall be personal
property for all purposes.
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Section 2.2 Name
The name of the Partnership shall be FAC Properties, L.P. The Partnership's
business may be conducted under any other name or names deemed advisable by the
General Partner, including the name of the General Partner or any Affiliate
thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or
letters shall be included in the Partnership's name where necessary for the
purposes of complying with the laws of any jurisdiction that so requires. The
General Partner in its sole and absolute discretion may change the name of the
Partnership at any time and from time to time and shall notify the Limited
Partners of such change in the next regular communication to the Limited
Partners.
Section 2.3 Registered Office and Agent; Principal Office
The name and address of the registered agent for service of process on the
Partnership in the State of Delaware is Corporation Trust Center, 1209 Orange
Street, Wilmington, County of New Castle. The principal office of the
Partnership shall be located at 11000 Regency Parkway, Cary, North Carolina
27511, or such other place as the General Partner may from time to time
designate by notice to the Limited Partners. The address of the registered
office of the Partnership in the State of North Carolina is the address of the
principal office. The Partnership may maintain offices at such other place or
places within or outside the State of Delaware as the General Partner deems
advisable.
Section 2.4 Power of Attorney
A. Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner, any Liquidator, and authorized officers and
attorneys-in-fact of each, and each of those acting singly, in each case with
full power of substitution, as its true and lawful agent and attorney-in-fact,
with full power and authority in its name, place and stead to:
(1) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and other
instruments (including, without limitation, this Agreement and the
Certificate and all amendments or restatements thereof) that the
General Partner or the Liquidator deems appropriate or necessary to
form, qualify or continue the existence or qualification of the
Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and
in all other jurisdictions in which the Partnership may or plans to
conduct business or own property; (b) all instruments that the General
Partner deems appropriate or necessary to reflect any amendment,
change, modification or restatement of this Agreement in accordance
with its terms; (c) all conveyances and other instruments or documents
that the General Partner or the Liquidator deems appropriate or
necessary to reflect the dissolution
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and liquidation of the Partnership pursuant to the terms of this
Agreement, including, without limitation, a certificate of
cancellation; (d) all instruments relating to the admission,
withdrawal, removal or substitution of any Partner pursuant to, or
other events described in, Articles 11, 12 or 13 hereof or the Capital
Contribution of any Partner; and (e) all certificates, documents and
other instruments relating to the determination of the rights,
preferences and privileges of a Partnership Interest; and
(2) execute, swear to, seal, acknowledge and file all ballots, consents,
approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of the General Partner
or any Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action which is made or
given by the Partners hereunder or is consistent with the terms of
this Agreement or appropriate or necessary, in the sole discretion of
the General Partner or any Liquidator, to effectuate the terms or
intent of this Agreement.
Nothing contained herein shall be construed as authorizing the General Partner
or any Liquidator to amend this Agreement except in accordance with Article 14
hereof or as may be otherwise expressly provided for in this Agreement.
B. The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, in recognition of the fact that each of the
Partners will be relying upon the power of the General Partner and any
Liquidator to act as contemplated by this Agreement in any filing or other
action by it on behalf of the Partnership, and it shall survive and not be
affected by the subsequent Incapacity of any Limited Partner or Assignee and the
transfer of all or any portion of such Limited Partner's or Assignee's
Partnership Units and shall extend to such Limited Partner's or Assignee's
heirs, successors, assigns and personal representatives. Each such Limited
Partner or Assignee hereby agrees to be bound by any representation made by the
General Partner or any Liquidator, acting in good faith pursuant to such power
of attorney, and each such Limited Partner or Assignee hereby waives any and all
defenses which may be available to contest, negate or disaffirm the action of
the General Partner or any Liquidator, taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within fifteen (15) days after receipt of the
General Partner's or Liquidator's request therefor, such further designation,
powers of attorney and other instruments as the General Partner or the
Liquidator, as the case may be, deems necessary to effectuate this Agreement and
the purposes of the Partnership.
Section 2.5 Term
The term of the Partnership commenced on December 4, 1997, the date the
Certificate was filed in the office of the Secretary of State of Delaware in
accordance with the Act, and shall continue until December 31, 2097, unless the
Partnership is dissolved sooner pursuant to the
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provisions of Article 13 or as otherwise provided by law.
ARTICLE 3
PURPOSE
Section 3.1 Purpose and Business
The purpose and nature of the business to be conducted by the Partnership
is (i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act, provided, however, that such business
shall be limited to and conducted in such a manner as to permit the General
Partner at all times to be classified as a REIT, unless the General Partner
ceases to qualify as a REIT for reasons other than the conduct of the business
of the Partnership, (ii) to enter into any partnership, joint venture or other
similar arrangement to engage in any of the foregoing or to own interests in any
entity engaged in any of the foregoing, and (iii) to do anything necessary or
incidental to the foregoing. In connection with the foregoing, and without
limiting the General Partner's right, in its sole discretion, to cease
qualifying as a REIT, the Partners acknowledge the General Partner's current
status as a REIT inures to the benefit of all of the Partners and not solely the
General Partner.
Section 3.2 Powers
The Partnership is empowered to do any and all acts and things necessary,
appropriate, proper, advisable, incidental to or convenient for the furtherance
and accomplishment of the purposes and business described herein and for the
protection and benefit of the Partnership, provided that the Partnership shall
not take, or refrain from taking, any action which, in the judgment of the
General Partner, in its sole and absolute discretion, (i) could adversely affect
the ability of the General Partner to continue to qualify as a REIT, (ii) could
subject the General Partner to any additional taxes under Section 857 or Section
4981 of the Code, or (iii) could violate any law or regulation of any
governmental body or agency having jurisdiction over the General Partner or its
securities, unless such action (or inaction) shall have been specifically
consented to by the General Partner in writing.
ARTICLE 4
CAPITAL CONTRIBUTIONS
Section 4.1 Capital Contributions of the Partners
At the time of the execution of this Agreement, the Partners shall make
Capital Contributions as set forth in Exhibit A to this Agreement. The Partners
shall own Partnership Units in the amounts set forth for each such Partner in
Exhibit A and shall have a Percentage Interest in the Partnership as set forth
in Exhibit A, which Percentage Interest shall be adjusted in Exhibit A from time
to time by the General Partner to the extent necessary to reflect accurately
redemptions, Capital Contributions, the issuance of additional Partnership
Units, or similar events having an effect on any Partner's Percentage Interest.
The number of Partnership
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Units held directly by the General Partner (equal to one percent (1%) of all
outstanding Partnership Units from time to time) shall be deemed to be the
General Partner Interest. Except as provided in Sections 4.2, 7.7(I) and 10.5,
the Partners shall have no obligation to make any additional Capital
Contributions or loans to the Partnership. The General Partner shall maintain
the information set forth in Exhibit A to the Agreement, as such information
shall change from time to time, in such form as the General Partner deems
appropriate for the conduct of the Partnership affairs, and Exhibit A shall be
deemed amended from time to time to reflect the information so maintained by the
General Partner, whether or not a formal amendment to the Agreement has been
executed amending such Exhibit A. Such information shall reflect (and Exhibit A
shall be deemed amended from time to time to reflect) the issuance of any
additional Partnership Units to the General Partner or any other Person, the
transfer of Partnership Units and the redemption of any Partnership Units, all
as contemplated in the Agreement.
Section 4.2 Issuances of Additional Partnership Interests
The General Partner is hereby authorized to cause the Partnership from time
to time to issue to the Partners (including the General Partner) or other
Persons additional Partnership Units or other Partnership Interests in one or
more classes, or one or more series of any of such classes, with such
designations, preferences and relative, participating, optional or other special
rights, powers and duties, including rights, powers and duties senior to Limited
Partner Interests, all as shall be determined by the General Partner in its sole
and absolute discretion subject to Delaware law, including, without limitation,
(i) the allocations of items of Partnership income, gain, loss, deduction and
credit to each such class or series of Partnership Interests; (ii) the right of
each such class or series of Partnership Interests to share in Partnership
distributions; and (iii) the rights of each such class or series of Partnership
Interests upon dissolution and liquidation of the Partnership.
ARTICLE 5
DISTRIBUTIONS
Section 5.1 Requirement and Characterization of Distributions
The General Partner shall distribute at least annually an amount equal to
100% of Available Cash generated by the Partnership during such annual or
shorter period to the Partners who are Partners on the Partnership Record Date
with respect to such annual or shorter period in accordance with their
respective Percentage Interests on such Partnership Record Date; provided that
in no event may a Partner receive a distribution of Available Cash with respect
to a Partnership Unit if such Partner is entitled to receive a distribution out
of such Available Cash with respect to a REIT Share for which such Partnership
Unit has been redeemed or exchanged.
Section 5.2 Amounts Withheld
All amounts withheld pursuant to the Code or any provisions of any state or
local tax law and Section 10.5 hereof with respect to any allocation, payment or
distribution to the General Partner, the Limited Partners or Assignees shall be
treated as amounts distributed to the General Partner, Limited Partners, or
Assignees pursuant to Section 5.1 for all purposes under this
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Agreement.
Section 5.3 Distributions Upon Liquidation
Proceeds from a Terminating Capital Transaction and any other cash received
or reductions in reserves made after commencement of the liquidation of the
Partnership shall be distributed to the Partners in accordance with Section
13.2.
ARTICLE 6
ALLOCATIONS
Section 6.1 Allocations For Capital Account Purposes
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Exhibit B hereof) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided hereinbelow.
A. Net Income. After giving effect to the special allocations set forth in
Section 1 of Exhibit C attached hereto, Net Income shall be allocated (i) first,
to the General Partner to the extent that Net Losses previously allocated to the
General Partner pursuant to the last sentence of Section 6.1.B exceed Net Income
previously allocated to the General Partner pursuant to this clause (i) of
Section 6.1.A, and (ii) thereafter, Net Income shall be allocated to the
Partners in accordance with their respective Percentage Interests.
B. Net Losses. After giving effect to the special allocations set forth in
Section 1 of Exhibit C attached hereto, Net Losses shall be allocated to the
Partners in accordance with their respective Percentage Interests; provided,
however, that Net Losses shall not be allocated to any Limited Partner pursuant
to this Section 6.1.B to the extent that such allocation would cause such
Limited Partner to have an Adjusted Capital Account Deficit at the end of such
taxable year (or increase any existing Adjusted Capital Account Deficit). All
Net Losses in excess of the limitations set forth in this Section 6.1.B shall be
allocated to the General Partner.
Section 6.2 Other Allocation Rules.
A. Excess Nonrecourse Liabilities. Solely for purposes of determining a
Partner's proportionate share of the "excess nonrecourse liabilities" of the
Partnership within the meaning of Regulations Section 1.752-3(a)(3), such
"excess nonrecourse liabilities" first shall be allocated to those Partners who
have, and in an amount equal to, such Partners' built-in gain under Regulations
Section 1.704-3(a)(3)(ii) less any Nonrecourse Built-in Gain, and then shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
B. Recapture Income. Recapture Income shall be allocated in accordance with
Regulations Sections 1.1245-1(c) or 1.1250-1(f) as applicable.
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ARTICLE 7
MANAGEMENT AND OPERATIONS OF BUSINESS
Section 7.1 Management
A. Except as otherwise expressly provided in this Agreement, all management
powers over the business and affairs the Partnership are and shall be
exclusively vested in the General Partner, and no Limited Partner shall have any
right to participate in or exercise control or management power over the
business and affairs of the Partnership. The General Partner may not be removed
by the Limited Partners with or without cause. In addition to the powers now or
hereafter granted to a general partner of a limited partnership under applicable
law or which are granted to the General Partner under any other provision of
this Agreement, the General Partner, subject to Section 7.3 hereof, shall have
full power and authority to do all things deemed necessary or desirable by it to
conduct the business of the Partnership, to exercise all powers set forth in
Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1
hereof, including, without limitation:
(1) the making of any expenditures, the lending or borrowing of money
(including, without limitation, making prepayments on loans and
borrowing money to permit the Partnership to make distributions to its
Partners in such amounts as will permit the General Partner (so long
as the General Partner qualifies as a REIT) to avoid the payment of
any federal income tax (including, for this purpose, any excise tax
pursuant to Section 4981 of the Code) and to make distributions to the
General Partner such that the General Partner can distribute to its
shareholders amounts sufficient to permit the General Partner to
maintain REIT status), the assumption or guarantee of, or other
contracting for, indebtedness and other liabilities, the issuance of
evidence of indebtedness (including the securing of same by deed to
secure debt, mortgage, deed of trust or other lien or encumbrance on
the Partnership's assets) and the incurring of any obligations it
deems necessary for the conduct of the activities of the Partnership;
(2) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(3) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any assets of the Partnership (including
the exercise or grant of any conversion, option, privilege or
subscription right or other right available in connection with any
assets at any time held by the Partnership) or the combination of the
Partnership with or into another entity (all of the foregoing subject
to any prior approval only to the extent required by Section 7.3
hereof);
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(4) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of
this Agreement and on any terms it sees fit, including, without
limitation, the financing of the conduct of the operations of the
General Partner, the Partnership or any of the Partnership's
Subsidiaries, the lending of funds to other Persons (including,
without limitation, the Subsidiaries of the Partnership and/or the
General Partner) and the repayment of obligations of the Partnership
and its Subsidiaries and any other Person in which it has an equity
investment, and the making of capital contributions to its
Subsidiaries;
(5) the management, operation, leasing, landscaping, repair, alteration,
demolition or improvement of any real property or improvements owned
by the Partnership or any Subsidiary of the Partnership;
(6) the negotiation, execution, and performance of any contracts,
conveyances or other instruments that the General Partner considers
useful or necessary to the conduct of the Partnership's operations or
the implementation of the General Partner's powers under this
Agreement, including contracting with contractors, developers,
consultants, accountants, legal counsel, other professional advisors
and other agents and the payment of their expenses and compensation
out of the Partnership's assets;
(7) the distribution of Partnership cash or other Partnership assets in
accordance with this Agreement;
(8) holding, managing, investing and reinvesting cash and other assets of
the Partnership;
(9) the collection and receipt of revenues and income of the Partnership;
(10) the establishment of one or more divisions of the Partnership, the
selection and dismissal of employees of the Partnership, any division
of the Partnership, or the General Partner (including, without
limitation, employees having titles such as "president," "vice
president," "secretary" and "treasurer" of the Partnership, any
division of the Partnership, or the General Partner), and agents,
outside attorneys, accountants, consultants and contractors of the
General Partner or the Partnership or any division of the Partnership,
and the determination of their compensation and other terms of
employment or hiring;
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(11) the maintenance of such insurance for the benefit of the Partnership
and the Partners as it deems necessary or appropriate;
(12) the formation of, or acquisition of an interest in, and the
contribution of property to, any further limited or general
partnerships, joint ventures or other relationships that it deems
desirable (including, without limitation, the acquisition of interests
in, and the contributions of property to, its Subsidiaries and any
other Person in which it has an equity investment from time to time);
(13) the control of any matters affecting the rights and obligations of the
Partnership, including the settlement, compromise, submission to
arbitration or any other form of dispute resolution, or abandonment
of, any claim, cause of action, liability, debt or damages, due or
owing to or from the Partnership, the commencement or defense of
suits, legal proceedings, administrative proceedings, arbitration or
other forms of dispute, resolution, and the representation of the
Partnership in all suits or legal proceedings, administrative
proceedings, arbitrations or other forms of dispute resolution, the
incurring of legal expense, and the indemnification of any Person
against liabilities and contingencies to the extent permitted by law;
(14) the undertaking of any action in connection with the Partnership's
direct or indirect investment in its Subsidiaries or any other Person
(including, without limitation, the contribution or loan of funds by
the Partnership to such Persons);
(15) the determination of the fair market value of any Partnership property
distributed in kind using such reasonable method of valuation as the
General Partner may adopt;
(16) the exercise, directly or indirectly, through any attorney-in-fact
acting under a general or limited power of attorney, of any right,
including the right to vote, appurtenant to any asset or investment
held by the Partnership;
(17) the exercise of any of the powers of the General Partner enumerated in
this Agreement on behalf of or in connection with any Subsidiary of
the Partnership or any other Person in which the Partnership has a
direct or indirect interest, or jointly with any such Subsidiary or
other Person;
(18) the exercise of any of the powers of the General Partner
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enumerated in this Agreement on behalf of any Person in which the
Partnership does not have an interest pursuant to contractual or other
arrangements with such Person; and
(19) the making, execution and delivery of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties,
indemnities, waivers, releases or legal instruments or agreement in
writing necessary or appropriate in the judgment of the General
Partner for the accomplishment of any of the powers of the General
Partner enumerated in this Agreement.
B. Each of the Limited Partners agrees that the General Partner is
authorized to execute, deliver and perform the above-mentioned agreements and
transactions on behalf of the Partnership without any further act, approval or
vote of the Partners, notwithstanding any other provision of this Agreement
(except as provided in Section 7.3), the Act or any applicable law, rule or
regulation, to the fullest extent permitted under the Act or other applicable
law. The execution, delivery or performance by the General Partner or the
Partnership of any agreement authorized or permitted under this Agreement shall
not constitute a breach by the General Partner of any duty that the General
Partner may owe the Partnership or the Limited Partners or any other Persons
under this Agreement or of any duty stated or implied by law or equity.
C. At all times from and after the date hereof, the General Partner may
cause the Partnership to obtain and maintain (i) casualty, liability and other
insurance on the properties of the Partnership and (ii) liability insurance for
the Indemnities hereunder.
D. At all times from and after the date hereof, the General Partner may
cause the Partnership to establish and maintain at any and all times working
capital accounts and other cash or similar balances in such amounts as the
General Partner, in its sole and absolute discretion, deems appropriate and
reasonable from time to time.
E. In exercising its authority under this Agreement and except as provided
at Section 5.1, the General Partner may, but shall be under no obligation to,
take into account the tax consequences to any Partner of any action taken by it.
The General Partner and the Partnership shall not have liability to a Limited
Partner under any circumstances as a result of an income tax liability incurred
by such Limited Partner as a result of an action (or inaction) by the General
Partner pursuant to its authority under this Agreement.
Section 7.2 Certificate of Limited Partnership
The General Partner has previously filed the Certificate with the Secretary
of State of Delaware as required by the Act. The General Partner shall use all
reasonable efforts to cause to be filed such other certificates or documents as
may be reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of Delaware and any
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other state, or the District of Columbia, in which the Partnership may elect to
do business or own property. To the extent that such action is determined by the
General Partner to be reasonable and necessary or appropriate, the General
Partner shall file amendments to and restatements of the Certificate and do all
the things to maintain the Partnership as a limited partnership (or a
partnership in which the limited partners have limited liability) under the laws
of the State of Delaware and each other state or the District of Columbia in
which the Partnership may elect to do business or own property. Subject to the
terms of Section 8.5.A(4) hereof, the General Partner shall not be required,
before or after filing, to deliver or mail a copy of the Certificate or any
amendment thereto to any Limited Partner.
Section 7.3 Restrictions on General Partner Authority
The General Partner may not take any action in contravention of an express
prohibition or limitation of this Agreement without the written consent of all
of the Limited Partners.
Section 7.4 Reimbursement of the General Partner
A. Except as provided in this Section 7.4 and elsewhere in this Agreement
(including the provisions of Articles 5 and 6 regarding distributions, payments,
and allocations to which it may be entitled), the General Partner shall not be
compensated for its services as general partner of the Partnership.
B. The General Partner shall be reimbursed on a monthly basis, or such
other basis as the General Partner may determine in its sole and absolute
discretion, for all expenses that it incurs relating to the ownership and
operation of, or for the benefit of, the Partnership; provided that the amount
of any such reimbursement shall be reduced by any interest earned by the General
Partner with respect to bank accounts or other instruments or accounts held by
it on behalf of the Partnership as permitted in Section 7.5.A. The Limited
Partners acknowledge that, for purposes of this Section 7.4.B, all expenses of
the General Partner are deemed incurred for the benefit of the Partnership. Such
reimbursements shall be in addition to any reimbursement to the General Partner
as a result of indemnification pursuant to Section 7.7 hereof.
C. As set forth in Section 4.3, the General Partner shall be treated as
having made a Capital Contribution in the amount of all expenses that it incurs
relating to the organization and/or reorganization of the Partnership and the
General Partner, and any other issuance of additional Partnership Interests or
REIT Shares pursuant to Section 4.2 hereof.
Section 7.5 Outside Activities of the General Partner
Nothing herein contained shall prevent or prohibit the General Partner or
any employee or other Affiliate of the General Partner from entering into,
engaging in or conducting any other activity or performing for a fee any service
including (without limiting the generality of the foregoing) engaging in any
business dealing with real property of any type or location, including, without
limitation, property of a type similar to those properties owned by the
Partnership, its Subsidiaries or any other Person in which the Partnership has
an equity investment; acting as a
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director, officer or employee of any corporation, as a trustee of any trust, as
a general partner of any partnership, as a managing member of any limited
liability company, or as an administrative official of any other business
entity; or receiving compensation for services to, or participating in profits
derived from, the investments of any such corporation, trust, partnership,
limited liability company or other entity, regardless of whether such activities
are competitive with the Partnership, and nothing herein shall require the
General Partner or any employee or Affiliate thereof to offer any interest in
such activities to the Partnership or any Partner.
Section 7.6 Contracts with Affiliates
A. The Partnership may lend or contribute funds or other assets to its
Subsidiaries or other Persons in which it has an equity investment and such
Persons may borrow funds from the Partnership, on terms and conditions
established in the sole and absolute discretion of the General Partner. The
foregoing authority shall not create any right or benefit in favor of any
Subsidiary or any other Person.
B. Except as provided in Section 7.5.A, the Partnership may transfer assets
to joint ventures, other partnerships, corporations or other business entities
in which it is or thereby becomes a participant upon such terms and subject to
such conditions consistent with this Agreement and applicable law as the General
Partner, in its sole and absolute discretion, believes are advisable.
C. The Partnership may enter into agreements with Affiliates for the
provision of services to the Partnership upon such terms and subject to such
conditions consistent with this Agreement and applicable law as the General
Partner, in its sole and absolute discretion, believes are advisable.
D. The General Partner is expressly authorized to enter into, in the name
and on behalf of the Partnership, a right of first opportunity arrangement and
other conflict avoidance agreements with various Affiliates of the Partnership
and the General Partner, on such terms as the General Partner, in its sole and
absolute discretion, believes are advisable.
Section 7.7 Indemnification
A. Except as provided at Section 7.7(I), hereof, the Partnership shall
indemnify each Indemnitee from and against any and all losses, claims, damages,
liabilities, joint or several, expenses (including, without limitation,
attorneys fees and other legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or investigative,
that relate to the operations of the Partnership, the General Partner as set
forth in this Agreement in which such Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, unless it is established
that: (i) the act or omission of the Indemnitee was material to the matter
giving rise to the proceeding and either was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the Indemnitee actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the Indemnitee had reasonable cause to
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believe that the act or omission was unlawful. Without limitation, the foregoing
indemnity shall extend to any liability of any Indemnitee, pursuant to a loan
guaranty or otherwise for any indebtedness of the Partnership or any Subsidiary
of the Partnership (including without limitation, any indebtedness which the
Partnership or any Subsidiary of the Partnership has assumed or taken subject
to), and the General Partner is hereby authorized and empowered, on behalf of
the Partnership, to enter into one or more indemnity agreements consistent with
the provisions of this Section 7.7 in favor of any Indemnitee having or
potentially having liability for any such indebtedness. The termination of any
proceeding by judgment, order or settlement does not create a presumption that
the Indemnitee did not meet the requisite standard of conduct set forth in this
Section 7.7.A with respect to the subject matter of such proceeding. The
termination of any proceeding by conviction of an Indemnitee or upon a plea of
nolo contendere or its equivalent by an Indemnitee, or an entry of an order of
probation against an Indemnitee prior to judgment, creates a rebuttable
presumption that such Indemnitee acted in a manner contrary to that specified in
this Section 7.7.A. Any indemnification pursuant to this Section 7.7 shall be
made only out of the assets of the Partnership, and neither the General Partner
nor any Limited Partner shall have any obligation to contribute to the capital
of the Partnership or otherwise provide funds, to enable the Partnership to fund
its obligations under this Section 7.7.
B. Reasonable expenses incurred by an Indemnitee who is a party to a
proceeding may be paid or reimbursed by the Partnership in advance of the final
disposition of the proceeding upon receipt by the Partnership of (i) a written
affirmation by the Indemnitee of the Indemnitee's good faith belief that the
standard of conduct necessary for indemnification by the Partnership as
authorized in Section 7.7.A. has been met, and (ii) a written undertaking by or
on behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met.
C. The indemnification provided by this Section 7.7 shall be in addition to
any other rights to which an Indemnitee or any other Person may be entitled
under any agreement, pursuant to any vote of the Partners, as a matter of law or
otherwise, and shall continue as to an Indemnitee who has ceased to serve in
such capacity unless otherwise provided in a written agreement pursuant to which
such Indemnitee is indemnified.
D. The Partnership may, but shall not be obligated to, purchase and
maintain insurance, on behalf of the Indemnities and such other Persons as the
General Partner shall determine, against any liability that may be asserted
against or expenses that may be incurred by such Person in connection with the
Partnership's activities, regardless of whether the Partnership would have the
power to indemnify such Person against such liability under the provisions of
this Agreement.
E. Any liabilities which an Indemnitee incurs as a result of acting on
behalf of the Partnership or the General Partner (whether as a fiduciary or
otherwise) in connection with the operation, administration or maintenance of an
employee benefit plan or any related trust or funding mechanism (whether such
liabilities are in the form of excise taxes assessed by the Internal Revenue
Service, penalties assessed by the Department of Labor, restitutions to such a
plan or trust or other funding mechanism or to a participant or beneficiary of
such plan, trust of
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other funding mechanism, or otherwise) shall be treated as liabilities or
judgments or fines under this Section 7.7 unless such liabilities arise as a
result of (i) such Indemnitee's intentional misconduct or knowing violations of
the law, or (ii) any transaction in which such Indemnitee received a personal
benefit in violation or breach of any provision of this Agreement or applicable
law.
F. In no event may an Indemnitee subject any of the Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
G. An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
H. The provisions of this Section 7.7 are for the benefit of the
Indemnities, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons. Any
amendment, modification or repeal of this Section 7.7 or any provision hereof
shall be prospective only and shall not in any way affect the limitations on the
Partnership's liability to any Indemnitee under this Section 7.7 as in effect
immediately prior to such amendment, modification, or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when such claims may
arise or be asserted.
I. The Partners hereby acknowledge that, in conjunction with the financing
and the refinancing of the property owned by the Partnership, the General
Partner may agree to guarantee part or all of such debt. The Partners understand
that, pursuant to Regulations Section 1.752-(2)(b)(3)(i), such guaranty
obligation would, absent the indemnification provided hereinafter, serve to
increase the General Partner's share of such debt pursuant to Regulations
Section 1.752-2(a). Inasmuch as, notwithstanding such guaranty obligation, each
of the Limited Partners desires to increase his share of such debt and the
General Partner desires to decrease its share of such debt (for purposes of
Regulations Section 1.752-2(a)), each of the Limited Partners, to the extent
provided in Exhibit F, attached hereto, hereby agrees to indemnify the General
Partner in the event and to the extent that the General Partner both is required
to make a payment to the lender under any such guaranty obligation and is unable
to sell any or all of the assets of the Partnership for money or moneys worth to
make the General Partner whole on account of such payment. This indemnification
is effective only at the time, in the event and to the extent that upon a
dissolution and liquidation of the Partnership, the General Partner is a
creditor of the Partnership due to its guaranty of Partnership debt and the
proceeds of sale in such dissolution and liquidation are insufficient to
reimburse the General Partner for any amounts paid on such guaranty obligation
as contemplated in this Section 7.7(I). As provided in Exhibit F, this
indemnification is limited on a per Unit basis to Units owned by an indemnifying
Limited Partner at the time an indemnification is due to the General Partner as
provided by this Section 7.7(I), such that each Limited Partner's obligation is
reduced upon a redemption of Units as provided in Section 8.6 or upon any other
transfer or disposition of Units.
Section 7.8 Liability of the General Partner
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A. Notwithstanding anything to the contrary set forth in this Agreement,
the General Partner shall not be liable for monetary damages to the Partnership,
any Partners or any Assignees for losses sustained or liabilities incurred as a
result of errors in judgment or of any act or omission if the General Partner
acted in good faith and with due care and loyalty.
B. The Limited Partners expressly acknowledge that the General Partner is
acting on behalf of the Partnership and the General Partner's shareholders
collectively, that the General Partner is under no obligation to consider the
separate interests of the Limited Partners (including, without limitation, the
tax consequences to Limited Partners or Assignees) in deciding whether to cause
the Partnership to take (or decline to take) any actions, and that the General
Partner shall not be liable for monetary damages for losses sustained,
liabilities incurred, or benefits not derived by Limited Partners in connection
with such decisions, provided that the General Partner has acted in good faith.
C. Subject to its obligations and duties as General Partner set forth in
Section 7.1.A hereof, the General Partner may exercise any of the powers granted
to it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents. The General Partner shall not be
responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
D. Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the General Partner's liability to the Partnership and the
Limited Partners under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
Section 7.9 Other Matters Concerning the General Partner
A. The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture, or other
paper or document believed by it in good faith to be genuine and to have been
signed or presented by the proper party or parties.
B. The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers, architects, engineers,
environmental consultants and other consultants and advisers selected by it, and
any act taken or omitted to be taken in reliance upon the opinion of such
Persons as to matters which such General Partner reasonably believes to be
within such Person's professional or expert competence shall be conclusively
presumed to have been done or omitted in good faith and in accordance with such
opinion.
C. The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers and a duly appointed attorney or attorneys-in-fact. Each such attorney
shall, to the extent provided by the General Partner in the power of attorney,
have full power and authority to do and perform all and every
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act and duty which is permitted or required to be done by the General Partner
hereunder.
D. Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision of
the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the good faith belief that such action or omission is necessary or
advisable in order (i) to protect the ability of the General Partner to continue
to qualify as a REIT or (ii) to avoid the General Partner incurring any taxes
under Section 857 or Section 4981 of the Code, is expressly authorized under
this Agreement and is deemed approved by all of the Limited Partners.
E. As of the date hereof, the General Partner holds its Limited Partnership
Interests through a Subsidiary, FAC Properties Holding Corp. As a result, where
the Partnership Agreement refers to (i) contributions from the General Partner
to the Partnership, (ii) the General Partner's ownership of Partnership
Interests, (iii) issuances of Units to the General Partner, (iv) repurchases of
Units by the Partnership from the General Partner or (v) similar matters, it is
understood that such actions may involve the General Partner directly or
indirectly through a Subsidiary.
Section 7.10 Title to Partnership Assets
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner, individually or collectively, shall have any ownership
interest in such Partnership assets or any portion thereof. Title to any or all
of the Partnership assets may be held in the name of the Partnership, the
General Partner or one or more nominees, as the General Partner may determine,
including Affiliates of the General Partner. The General Partner hereby declares
and warrants that any Partnership assets for which legal title is held in the
name of the General Partner or any nominee or Affiliate of the General Partner
shall be held by the General Partner or such nominee or Affiliate for the use
and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in the
Partnership as soon as reasonably practicable. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held.
Section 7.11 Reliance by Third Parties
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner has full power and authority, without consent or approval of any other
Partner or Person, to encumber, sell or otherwise use in any manner any and all
assets of the Partnership and to enter into any contracts on behalf of the
Partnership, and take any and all actions on behalf of the Partnership and such
Person shall be entitled to deal with the General Partner as if the General
Partner were the Partnership's sole party in interest, both legally and
beneficially. Each Limited Partner hereby waives any and all defenses or other
remedies which may be available against such Person to contest, negate or
disaffirm any action of the General Partner in connection with any such dealing.
In no event
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shall any Person dealing with the General Partner or its representatives be
obligated to ascertain that the terms of this Agreement have been complied with
or to inquire into the necessity or expedience of any act or action of the
General Partner or its representatives. Each and every certificate, document or
other instrument executed on behalf of the Partnership by the General Partner or
its representatives shall be conclusive evidence in favor of any and every
Person relying thereon or claiming thereunder that (i) at the time of the
execution and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (ii) the Person executing and delivering
such certificate, document or instrument was duly authorized and empowered to do
so for and on behalf of the Partnership and (iii) such certificate, document or
instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
ARTICLE 8
S RIGHTS AND OBLIGATIONS OF LIMITED PARTNER
Section 8.1 Limitation of Liability
The Limited Partners shall have no liability under this Agreement except as
expressly provided in this Agreement, including Sections 7.7(I) and 10.5 hereof,
or under the Act.
Section 8.2 Management of Business
No Limited Partner or Assignee (other than the General Partner, any of its
Affiliates or any officer, director, employee, partner, agent or trustee of the
General Partner, the Partnership or any of their Affiliates, in their capacity
as such) shall take part in the operation, management or control (within the
meaning of the Act) of the Partnership's business, transact any business in the
Partnership's name or have the power to sign documents for or otherwise bind the
Partnership. The transaction of any such business by the General Partner, any of
its Affiliates or any officer, director, employee, partner, agent or trustee of
the General Partner, the Partnership or any of their Affiliates, in their
capacity as such, shall not affect, impair or eliminate the limitations on the
liability of the Limited Partners or Assignees under this Agreement.
Section 8.3 Outside Activities of Limited Partners
Subject to any agreements entered into pursuant to Section 7.6.E hereof and
any other agreements entered into by a Limited Partner or its Affiliates with
the Partnership or a Subsidiary, any Limited Partner (other than the General
Partner) and any officer, director, employee, agent, trustee, Affiliate or
shareholder of any Limited Partner (other than the General Partner) shall be
entitled to and may have business interests and engage in business activities in
addition to those relating to the Partnership, including business interests and
activities that are in direct competition with the Partnership or that are
enhanced by the activities of the Partnership. Neither the Partnership nor any
Partners shall have any rights by virtue of this Agreement in any business
ventures of any Limited Partner or Assignee. None of the Limited Partners (other
than the General Partner) nor any other Person shall have any rights by virtue
of this Agreement or the Partnership relationship established hereby in any
business ventures of any other Person (other
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than the General Partner to the extent expressly provided herein) and such
Person shall have no obligation pursuant to this Agreement to offer any interest
in any such business ventures to the Partnership, any Limited Partner or any
such other Person, even if such opportunity is of a character which, if
presented to the Partnership, any Limited Partner or such other Person, could be
taken by such Person.
Section 8.4 Return of Capital
Except pursuant to the right of redemption set forth in Section 8.6, no
Limited Partner shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent of distributions made pursuant to this
Agreement or upon termination of the Partnership as provided herein. Except to
the extent provided by Exhibit C hereof or as permitted by Section 4.2.B, or
otherwise expressly provided in this Agreement, no Limited Partner or Assignee
shall have priority over any other Limited Partner or Assignee either as to the
return of Capital Contributions or as to profits, losses or distributions.
Section 8.5 Rights of Limited Partners Relating to the Partnership
A. In addition to other rights provided by this Agreement or by the Act,
and except as limited by Section 8.5.C hereof, each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon written demand with a statement of
the purpose of such demand and at such Limited Partner's own expense (including
such copying and administrative charges as the General Partner may establish
from time to time):
(1) to obtain a copy of the most recent annual and quarterly reports filed
with the Securities and Exchange Commission by the General Partner
pursuant to the Securities Exchange Act of 1934;
(2) to obtain a copy of the Partnership's federal, state and local income
tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known business,
residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and all
amendments thereto, together with executed copies of all powers of
attorney pursuant to which this Agreement, the Certificate and all
amendments thereto have been executed; and
(5) to obtain true and full information regarding the amount of cash and a
description and statement of any other property or services
contributed by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner.
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B. The Partnership shall notify each Limited Partner upon request of the
then current and applicable Conversion Factor.
C. Notwithstanding any other provision of this Section 8.5, the General
Partner may keep confidential from the Limited Partners, for such period of time
as the General Partner determines in its sole and absolute discretion to be
reasonable, any information that (i) the General Partner reasonably believes to
be in the nature of trade secrets or other information the disclosure of which
the General Partner in good faith believes is not in the best interests of the
Partnership or could damage the Partnership or its business or (ii) the
Partnership is required by law or by agreements with an unaffiliated third party
to keep confidential.
Section 8.6 Redemption Right
A. Subject to Sections 8.6.B and 8.6.C, each Limited Partner, other than
the General Partner or a Subsidiary of the General Partner, shall have the right
(the "Redemption Right") to require the Partnership to redeem on a Specified
Redemption Date all or a portion of the Partnership Units held by such Limited
Partner at a redemption price equal to and in the form of the Cash Amount to be
paid by the Partnership. The Redemption Right shall be exercised pursuant to a
Notice of Redemption delivered to the Partnership (with a copy to the General
Partner) by the Limited Partner who is exercising the redemption right (the
"Redeeming Partner"); provided, however, that the Partnership shall not be
obligated to satisfy such Redemption Right if the General Partner elects to
purchase the Partnership Units subject to the Notice of Redemption pursuant to
Section 8.6.B. A Limited Partner may not exercise the Redemption Right for less
than the lesser of (i) all of the Partnership Units held by such Partner or (ii)
1,000 of the Partnership Units held by such Partner. The Redeeming Partner shall
have no right, with respect to any Partnership Units so redeemed, to receive any
Partnership distributions paid on or after the Specified Redemption Date. The
Assignee of any Limited Partner may exercise the rights of such Limited Partner
pursuant to this Section 8.6, and such Limited Partner shall be deemed to have
assigned such rights to such Assignee and shall be bound by the exercise of such
rights by such Assignee. In connection with any exercise of such rights by such
Assignee on behalf of such Limited Partner, the Cash Amount shall be paid by the
Partnership directly to such Assignee and not to such Limited Partner.
B. Notwithstanding the provisions of Section 8.6.A, a Limited Partner that
exercises the Redemption Right shall be deemed to have offered to sell the
Partnership Units described in the Notice of Redemption to the General Partner
and the General Partner may, in its sole and absolute discretion, elect to
purchase directly and acquire such Partnership Units by paying to the Redeeming
Partner either the Cash Amount or the REIT Shares Amount, as elected by the
General Partner (in its sole and absolute discretion), on the Specified
Redemption Date, whereupon the General Partner shall acquire the Partnership
Units offered for redemption by the Redeeming Partner and shall be treated for
all purposes of this Agreement as the owner of such Partnership Units. If the
General Partner shall elect to exercise its right to purchase Partnership Units
under this Section 8.6.B with respect to a Notice of Redemption, it shall so
notify the Redeeming Partner within five (5) Business Days after the receipt by
the General Partner of such Notice of Redemption. Unless the General Partner (in
its sole and absolute discretion) shall
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exercise its right to purchase Partnership Units from the Redeeming Partner
pursuant to its right to purchase Partnership Units under this Section 8.6.B,
the General Partner shall not have any obligation to the Redeeming Partner or
the Partnership with respect to the Redeeming Partner's exercise of the
Redemption Right. In the event the General Partner shall exercise its right to
purchase Partnership Units with respect to the exercise of a Redemption Right in
the manner described in the first sentence of this Section 8.6.B, the
Partnership shall have no obligation to pay any amount to the Redeeming Partner
with respect to such Redeeming Partner's exercise of such Redemption Right, and
each of the Redeeming Partner, the Partnership, and the General Partner shall
treat the transaction between the General Partner and the Redeeming Partner for
federal income tax purposes as a sale of the Redeeming Partner's Partnership
Units to the General Partner. Each Redeeming Partner agrees to execute such
documents as the General Partner may reasonably require in connection with the
issuance of REIT Shares upon exercise of the Redemption Right.
C. Notwithstanding the provisions of Section 8.6.A and Section 8.6.B, a
Partner shall not be entitled to exercise the Redemption Right pursuant to
Section 8.6.A if the delivery of REIT Shares to such Partner on the Specified
Redemption Date by the General Partner pursuant to Section 8.6.B (regardless of
whether or not the General Partner would in fact exercise its rights under
Section 8.6.B) would be prohibited under the Articles of Incorporation.
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.1 Records and Accounting
The General Partner shall keep or cause to be kept at the principal office
of the Partnership those records and documents required to be maintained by the
Act and other books and records deemed by the General Partner to be appropriate
with respect to the Partnership's business, including, without limitation, all
books and records necessary to provide to the Limited Partners any information,
lists and copies of documents required to be provided pursuant to Sections 8.5.A
and 9.3 hereof. Any records maintained by or on behalf of the Partnership in the
regular course of its business may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, micrographics or any other information
storage device, provided that the records so maintained are convertible into
clearly legible written form within a reasonable period of time. The books of
the Partnership shall be maintained, for financial and tax reporting purposes,
on an accrual basis in accordance with generally accepted accounting principles,
or such other basis as the General Partner determines to be necessary or
appropriate.
Section 9.2 Partnership Year
The fiscal year of the Partnership shall be the calendar year.
Section 9.3 Reports
A. As soon as practicable, but in no event later than the date when mailed
to the shareholders of the General Partner, the General Partner shall cause to
be mailed to each Limited
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Partner, as of the close of the Partnership Year, an annual report containing
financial statements of the Partnership, or of the General Partner if such
statements are prepared solely on a consolidated basis with the General Partner,
for such Partnership Year, presented in accordance with generally accepted
accounting principles, such statements to be audited by a nationally recognized
firm of independent public accountants selected by the General Partner.
B. As soon as practicable, but in no event later than the date when mailed
to the shareholders of the General Partner, the General Partner shall cause to
be mailed to each Limited Partner, as of the last day of the calendar quarter, a
report containing unaudited financial statements of the Partnership or of the
General Partner, if such statements are prepared solely on a consolidated basis
with the General Partner, and such other information as may be required by
applicable law or regulation, or as the General Partner determines to be
appropriate.
ARTICLE 10
TAX MATTERS
Section 10.1 Preparation of Tax Returns
The General Partner shall arrange for the preparation and timely filing of
all returns of Partnership income, gains, deductions, losses and other items
required of the Partnership for federal and state income tax purposes and shall
use all reasonable efforts to furnish, within ninety (90) days of the close of
each taxable year, the tax information reasonably required by Limited Partners
for federal and state income tax reporting purposes.
Section 10.2 Tax Elections
Except as otherwise provided herein, the General Partner shall, in its sole
and absolute discretion, determine whether to make any available election
pursuant to the Code. The General Partner shall have the right to seek to revoke
any such election (including, without limitation, the election under Section 754
of the Code) upon the General Partner's determination in its sole and absolute
discretion that such revocation is in the best interests of the Partners.
Section 10.3 Tax Matters Partner
A. The General Partner shall be the "tax matters partner" of the
Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the
Code, upon receipt of notice from the IRS of the beginning of an administrative
proceeding with respect to the Partnership, the tax matters partner shall
furnish the IRS with the name, address, taxpayer identification number, and
profit interest of each of the Limited Partners and the Assignees; provided,
however, that such information is provided to the Partnership by the Limited
Partners and the Assignees.
B. The tax matters partner is authorized, but not required:
(1) to enter into any settlement with the IRS with respect to any
administrative or judicial proceedings for the adjustment of
Partnership items required to
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be taken into account by a Partner for income tax purposes (such
administrative proceedings being referred to as a "tax audit" and such
judicial proceedings being referred to as "judicial review"), and in
the settlement agreement the tax matters partner may expressly state
that such agreement shall bind all Partners, except that such
settlement agreement shall not bind any Partner (i) who (within the
time prescribed pursuant to the Code and Regulations) files a
statement with the IRS providing that the tax matters partner shall
not have the authority to enter into a settlement agreement on behalf
of such Partner or (ii) who is a "notice partner" (as defined in
Section 6231(a)(8) of the Code) or a member of a "notice group" (as
defined in Section 6223(b)(2) of the Code);
(2) in the event that a notice of a final administrative adjustment at the
Partnership level of any item required to be taken into account by a
Partner for tax purposes (a "final adjustment") is mailed to the tax
matters partner, to seek judicial review of such final adjustment,
including the filing of a petition for readjustment with the Tax Court
or the filing of a complaint for refund with the United States Claims
Court or the District Court of the United States for the district in
which the Partnership's principal place of business is located;
(3) to intervene in any action brought by any other Partner for judicial
review of a final adjustment;
(4) to file a request for an administrative adjustment with the IRS and,
if any part of such request is not allowed by the IRS, to file an
appropriate pleading (petition or complaint) for judicial review with
respect to such request;
(5) to enter into an agreement with the IRS to extend the period for
assessing any tax which is attributable to any item required to be
taken into account by a Partner for tax purposes, or any item affected
by such item; and
(6) to take any other action on behalf of the Partners or the Partnership
in connection with any tax audit or judicial review proceeding to the
extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by the tax
matters partner in connection with any such proceeding, except to the extent
required by law, is a matter in the sole and absolute discretion of the tax
matters partner and the provisions relating to indemnification of the General
Partner set forth in Section 7.7 of this Agreement shall be fully applicable to
the tax matters partner in its capacity as such.
C. The tax matters partner shall receive no compensation for its services.
All third
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party costs and expenses incurred by the tax matters partner in performing its
duties as such (including legal and accounting fees and expenses) shall be borne
by the Partnership. Nothing herein shall be construed to restrict the
Partnership from engaging an accounting firm to assist the tax matters partner
in discharging its duties hereunder, so long as the compensation paid by the
Partnership for such services is reasonable.
Section 10.4 Organizational Expenses
The Partnership shall elect to deduct expenses, if any, incurred by it in
organizing the Partnership ratably over a sixty (60) month period as provided in
Section 709 of the Code.
Section 10.5 Withholding
Each Limited Partner hereby authorizes the Partnership to withhold from or
pay on behalf of or with respect to such Limited Partner any amount of federal,
state, local, or foreign taxes that the General Partner determines that the
Partnership is required to withhold or pay with respect to any amount
distributable or allocable to such Limited Partner pursuant to this Agreement,
including, without limitation, any taxes required to be withheld or paid by the
Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any such
amount paid on behalf of or with respect to a Limited Partner shall constitute a
loan by the Partnership to such Limited Partner, which loan shall be repaid by
such Limited Partner within fifteen (15) days after notice from the General
Partner that such repayment must be made, unless (i) the Partnership withholds
such repayment from a distribution which would otherwise be made to the Limited
Partner or (ii) the General Partner determines, in its sole and absolute
discretion, that such repayment may be satisfied out of the available funds of
the Partnership which would, but for such repayment, be distributed to the
Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or
(ii) shall be treated as having been distributed to such Limited Partner. Each
Limited Partner hereby unconditionally and irrevocably grants to the Partnership
a security interest in such Limited Partner's Partnership Interest to secure
such Limited Partner's obligation to pay to the Partnership any amounts required
to be paid pursuant to this Section 10.5. In the event that a Limited Partner
fails to pay any amounts owed to the Partnership pursuant to this Section 10.5
when due, the General Partner may, in its sole and absolute discretion, elect to
make the payment to the Partnership on behalf of such defaulting Limited
Partner, and in such event shall be deemed to have loaned such amount to such
defaulting Limited Partner. Without limitation, in such event the General
Partner (i) shall have the right to receive distributions that would otherwise
be distributable to such defaulting Limited Partner until such time as such
loan, together with all interest thereon, has been paid in full, and any such
distributions so received by the General Partner shall be treated as having been
distributed to the defaulting Limited Partner and immediately paid by the
defaulting Limited Partner to the General Partner in repayment of such loan and
(ii) shall succeed to all rights and remedies of the Partnership as against such
defaulting Limited Partner. Any amounts payable by a Limited Partner hereunder
shall bear interest at the lesser of (A) the base rate on corporate loans at
large United States money center commercial banks, as published from time to
time in the Wall Street Journal, plus four (4) percentage points, or (B) the
maximum lawful rate of interest on such obligation, such interest to accrue from
the date such amount is due (i.e., fifteen (15) days after demand) until such
amount
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is paid in full. Each Limited Partner shall take such actions as the Partnership
or the General Partner shall request in order to perfect or enforce the security
interest created hereunder.
ARTICLE 11
TRANSFERS AND WITHDRAWALS
Section 11.1 Transfer
A. The term "transfer", when used in this Article 11 with respect to a
Partnership Unit, shall be deemed to refer to a transaction by which the General
Partner purports to assign all or any part of its General Partner Interest to
another Person or by which a Limited Partner purports to assign all or any part
of its Limited Partner Interest to another Person, and includes a sale,
assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any
other disposition by law or otherwise. The term "transfer" when used in this
Article 11 does not include any redemption of Partnership Interests by the
Partnership from a Limited Partner or any acquisition of Partnership Units from
a Limited Partner by the General Partner or from the General Partner pursuant to
Section 8.6.
B. No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article 11.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article 11 shall be null and void.
Section 11.2 Transfer of General Partner's Partnership Interests
A. Without the written consent of the Limited Partners, the General Partner
may not transfer any of its General Partner Interest (other than any transfer to
an entity in which the General Partner owns beneficially 100 percent) other than
in connection with a transaction permitted under Section 11.2.B or Section
11.2.C. Any transfer or purported transfer of the General Partner's Interest in
violation of this Section 11.2 shall be null and void.
B. Except as permitted elsewhere in this Agreement, the General Partner
shall not engage in any merger, consolidation or other business combination with
or into another Person or sale of all or substantially all of its assets, or any
reclassification, or recapitalization or change of outstanding REIT Shares
(other than a change in par value, or from par value to no par value, or as a
result of a subdivision or combination as described in the definition of
Conversion Factor) ("Transaction"), unless as a result of the Transaction the
Limited Partner thereafter remains entitled to exchange each Partnership Unit
owned by the Limited Partner (after application of the Conversion Factor) for an
amount of cash, securities, or other property equal to the greatest amount of
cash, securities or other property paid to a holder of one REIT Share in
consideration of one REIT Share at any time during the period from and after the
date on which the Transaction is consummated which the Limited Partner would
have received after such Transaction, as if the Limited Partner had exercised
its Redemption Right immediately prior to the Transaction, provided that if, in
connection with the Transaction, a purchase, tender or exchange offer shall have
been made to and accepted by the holders of more than 50 percent of the
outstanding REIT
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Shares, the holders of Partnership Units shall receive the greatest amount of
cash, securities, or other property which the Limited Partner would have
received had it exercised the Redemption Right and received REIT Shares in
exchange for its Partnership Units immediately prior to the expiration of such
purchase, tender or exchange offer.
C. With the written consent of the Limited Partners, the General Partner
may withdraw as general partner or instate a substitute general partner.
Section 11.3 Limited Partners' Rights to Transfer
A. No transfer of a Limited Partner Interest by any Limited Partner is
permitted without the prior written consent of the General Partner, which the
General Partner may withhold in its sole and absolute discretion.
B. If a Limited Partner is subject to Incapacity, the executor,
administrator, trustee, committee, guardian, conservator or receiver of such
Limited Partner's estate shall have all the rights of a Limited Partner, but not
more rights than those enjoyed by other Limited Partners, for the purpose of
selling or managing the estate and such power as the Incapacitated Limited
Partner possessed to transfer all or any part of his or its interest in the
Partnership. The Incapacity of a Limited Partner, in and of itself, shall not
dissolve or terminate the Partnership.
C. The General Partner may prohibit any transfer by a Limited Partner of
its Partnership Units if, in the opinion of legal counsel to the Partnership,
such transfer would (i) require filing of a registration statement under the
Securities Act of 1933; (ii) otherwise violate any federal or state securities
laws or regulations applicable to the Partnership or the Partnership Unit; or
(iii) cause the Partnership to register the Partnership Units under Section
12(g) of the Securities Exchange Act of 1934, as amended or any successor
provision.
D. No transfer by a Limited Partner of its Partnership Units may be made to
any Person if (i) in the opinion of legal counsel for the Partnership, it would
result in the Partnership being treated as an association taxable as a
corporation, or (ii) such transfer is effectuated through an "established
securities market" or a "secondary market" (or the substantial equivalent
thereof) within the meaning of Section 7704 of the Code.
E. No transfer of any Partnership Units may be made to a lender to the
Partnership or any Person who is related (within the meaning of Regulations
Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a
Nonrecourse Liability, without the consent of the General Partner, in its sole
and absolute discretion, provided that as a condition to such consent the lender
will be required to enter into an arrangement with the Partnership and the
General Partner to exchange or redeem for the Cash Amount any Partnership Units
in which a security interest is held simultaneously with the time at which such
lender would be deemed to be a partner in the Partnership for purposes of
allocating liabilities to such lender under Section 752 of the Code.
Section 11.4 Substituted Limited Partners
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A. No Limited Partner shall have the right to substitute a transferee as a
Limited Partner in his place. The General Partner shall, however, have the right
to consent to the admission of a transferee of the interest of a Limited Partner
pursuant to this Section 11.4 as a Substituted Limited Partner, which consent
may be given or withheld by the General Partner in its sole and absolute
discretion. The General Partner's failure or refusal to permit a transferee of
any such interests to become a Substituted Limited Partner shall not give rise
to any cause of action against the Partnership or any Partner.
B. A transferee who has been admitted as a Substituted Limited Partner in
accordance with this Article 11 shall have all the rights and powers and be
subject to all the restrictions and liabilities of a Limited Partner under this
Agreement.
C. Upon the admission of a Substituted Limited Partner, the General Partner
shall amend Exhibit A to reflect the name, address, number of Partnership Units,
and Percentage Interest of such Substituted Limited Partner and to eliminate or
adjust, if necessary, the name, address and interest of the predecessor of such
Substituted Limited Partner.
Section 11.5 Assignees
If the General Partner, in its sole and absolute discretion, does not
consent to the admission of any permitted transferee under Section 11.3 as a
Substituted Limited Partner, as described in Section 11.4, such transferee shall
be considered an Assignee for purposes of this Agreement. An Assignee shall be
deemed to have had assigned to it, and shall be entitled to receive
distributions from the Partnership and the share of Net Income, Net Losses,
Recapture Income, and any other items, gain, loss deduction and credit of the
Partnership attributable to the Partnership Units assigned to such transferee,
but shall not be deemed to be a holder of Partnership Units for any other
purpose under this Agreement, and shall not be entitled to vote such Partnership
Units in any matter presented to the Limited Partners for a vote (such
Partnership Units being deemed to have been voted on such matter in the same
proportion as all other Partnership Units held by Limited Partners are voted).
In the event any such transferee desires to make a further assignment of any
such Partnership Units, such transferee shall be subject to all the provisions
of this Article 11 to the same extent and in the same manner as any Limited
Partner desiring to make an assignment of Partnership Units.
Section 11.6 General Provisions
A. No Limited Partner may withdraw from the Partnership other than as a
result of a permitted transfer of all of such Limited Partner's Partnership
Units in accordance with this Article 11 or pursuant to redemption of all of its
Partnership Units under Section 8.6.
B. Any Limited Partner who shall transfer all of its Partnership Units in a
transfer permitted pursuant to this Article 11 shall cease to be a Limited
Partner upon the admission of all Assignees of such Partnership Units as
Substituted Limited Partners. Similarly, any Limited Partner who shall transfer
all of its Partnership Units pursuant to a redemption of all of its Partnership
Units under Section 8.6 shall cease to be a Limited Partner.
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<PAGE>
C. Transfers pursuant to this Article 11 may only be made on the first day
of a fiscal quarter of the Partnership, unless the General Partner otherwise
agrees.
D. If any Partnership Interest is transferred or assigned during any
quarterly segment of the Partnership Year in compliance with the provisions of
this Article 11 or redeemed or transferred pursuant to Section 8.6, on any day
other than the first day of a Partnership Year, then Net Income, Net Losses,
each item thereof and all other items attributable to such interest for such
Partnership Year shall be divided and allocated between the transferor Partner
and the transferee Partner by taking into account their varying interests during
the Partnership Year in accordance with Section 706(d) of the Code, using the
interim closing of the books method. Solely for purposes of making such
allocations, each of such items for the calendar month in which the transfer or
assignment occurs shall be allocated to the transferee Partner, and none of such
items for the calendar month in which a redemption occurs shall be allocated to
the Redeeming Partner. All distributions of Available Cash attributable to such
Partnership Unit with respect to which the Partnership Record Date is before the
date of such transfer, assignment, or redemption shall be made to the transferor
Partner or the Redeeming Partner, as the case may be, and in the case of a
transfer or assignment other than a redemption, all distributions of Available
Cash thereafter attributable to such Partnership Unit shall be made to the
transferee Partner.
ARTICLE 12
ADMISSION OF PARTNERS
Section 12.1 Admission of Successor General Partner
A successor to all of the General Partner Interest pursuant to Section 11.2
hereof who is proposed to be admitted as a successor General Partner shall be
admitted to the Partnership as the General Partner, effective upon such
transfer. Any such transferee shall carry on the business of the Partnership
without dissolution. In each case, the admission shall be subject to the
successor General Partner executing and delivering to the Partnership an
acceptance of all of the terms and conditions of this Agreement and such other
documents or instruments as may be required to effect the admission. In the case
of such admission on any day other than the first day of a Partnership Year, all
items attributable to the General Partner Interest for such Partnership year
shall be allocated between the transferring General Partner and such successor
as provided in Section 11.6.D hereof.
Section 12.2 Admission of Additional Limited Partners
A. After the date hereof, a Person who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the General
Partner (i) evidence of acceptance in form satisfactory to the General Partner
of all of the terms and conditions of this Agreement, including, without
limitation, the power of attorney granted in Section 2.4 hereof and (ii) such
other documents or instruments as may be required in the discretion of the
General
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<PAGE>
Partner in order to effect such Person's admission as an Additional Limited
Partner.
B. Notwithstanding anything to the contrary in this Section 12.2, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General Partner's
sole and absolute discretion. The admission of any Person as an Additional
Limited Partner shall become effective on the date upon which the name of such
Person is recorded on the books and records of the Partnership, following the
consent of the General Partner to such admission.
C. If any Additional Limited Partner is admitted to the Partnership on any
day other than the first day of a Partnership Year, then Net Income, Net Losses,
each item thereof and all other items allocable among Partners and Assignees for
such Partnership Year shall be allocated among such Additional Limited Partner
and all other Partners and Assignees by taking into account their varying
interests during the Partnership Year in accordance with Section 706(d) of the
Code, using the interim closing of the books method. Solely for purposes of
making such allocations, each of such items for the calendar month in which an
admission of any Additional Limited Partner occurs shall be allocated among all
the Partners and Assigns including such Additional Limited Partner. All
distributions of Available Cash with respect to which the Partnership Record
Date is before the date of such admission shall be made solely to Partners and
Assignees other than the Additional Limited Partner and all distributions of
Available Cash thereafter shall be made to all of the Partners and Assignees
including such Additional Limited Partner.
Section 12.3 Amendment of Agreement and Certificate of Limited Partnership
For the admission to the Partnership of any Partner, the General Partner
shall take all steps necessary and appropriate under the Act to amend the
records of the Partnership and, if necessary, to prepare as soon as practical an
amendment of this Agreement (including an amendment of Exhibit A) and, if
required by law, shall prepare and file an amendment to the Certificate and may
for this purpose exercise the power of attorney granted pursuant to Section 2.4
hereof.
ARTICLE 13
DISSOLUTION, LIQUIDATION AND TERMINATION
Section 13.1 Dissolution
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the withdrawal of the General Partner, any successor General Partner shall
continue the business of the Partnership. The Partnership shall dissolve, and
its affairs shall be wound up, upon the first to occur of any of the following
("Dissolution Events"):
A. the expiration of its term as provided in Section 2.5 hereof.
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<PAGE>
B. an event of withdrawal of the General Partner, as defined in the Act
(other than an event of bankruptcy), unless within ninety (90) days after such
event of withdrawal a majority in interest of the remaining Partners agree in
writing to continue the business of the Partnership and to the appointment,
effective as of the date of withdrawal, of a successor General Partner;
C. an election to dissolve the Partnership made by the General Partner, in
its sole and absolute discretion;
D. entry of a decree of judicial dissolution of the Partnership pursuant to
the provisions of the Act;
E. the sale of all or substantially all of the assets and properties of the
Partnership; or
F. a final and non-appealable judgment is entered by a court of competent
jurisdiction ruling that the General Partner is bankrupt or insolvent, or a
final and non-appealable order for relief is entered by a court with appropriate
jurisdiction against the General Partner, in each case under any federal or
state bankruptcy or insolvency laws as now or hereafter in effect, unless prior
to the entry of such order or judgment all of the remaining Partners agree in
writing to continue the business of the Partnership and to the appointment,
effective as of a date prior to the date of such order or judgment, of a
substitute General Partner.
Section 13.2 Winding Up
A. Upon the occurrence of a Dissolution Event or a Terminating Capital
Transaction, the Partnership shall continue solely for the purposes of winding
up its affairs in an orderly manner, liquidating its assets, and satisfying the
claims of its creditors and Partners. No Partner shall take any action that is
inconsistent with, or not necessary to or appropriate for, the winding up of the
Partnership's business and affairs. The General Partner, or, in the event there
is no remaining General Partner, any Person elected by a majority in interest of
the Limited Partners (the General Partner or such other Person being referred to
herein as the "Liquidator"), shall be responsible for overseeing the winding up
and dissolution of the Partnership and shall take full account of the
Partnership's liabilities and property and the Partnership property shall be
liquidated as promptly as is consistent with obtaining the fair value thereof,
and the proceeds therefrom (which may, to the extent determined by the General
Partner, include shares of stock in the General Partner) shall be applied and
distributed in the following order:
(1) First, to the payment and discharge of all of the Partnership's debts
and liabilities to creditors other than the Partners;
(2) Second, to the payment and discharge of all of the Partnership's debts
and liabilities to the General Partner;
(3) Third, to the payment and discharge of all of the Partnership's debts
and liabilities to the other Partners; and
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(4) The balance, if any, after giving effect to all contributions,
distributions, and allocations for all periods, to those Partners with
positive Capital Account balances, to the extent of such positive
Capital Account balances.
The General Partner shall not receive any additional compensation for any
services performed pursuant to this Article 13.
B. Notwithstanding the provisions of Section 13.2.A hereof which require
liquidation of the assets of the Partnership, but subject to the order of
priorities set forth therein, if prior to or upon dissolution of the
Partnership, the Liquidator determines that an immediate sale of part or all of
the Partnership's assets would be impractical or would cause undue loss to the
Partners, the Liquidator may, in its sole and absolute discretion, defer for a
reasonable time the liquidation of any assets except those necessary to satisfy
liabilities of the Partnership (including those to Partners as creditors) and/or
distribute to the Partners, in lieu of cash, as tenants in common and in
accordance with the provisions of Section 13.2.A hereof, undivided interests in
such Partnership assets as the Liquidator deems not suitable for liquidation.
Any such distributions in kind shall be made only if, in the good faith judgment
of the Liquidator, such distributions in kind are in the best interest of the
Partners, and shall be subject to such conditions relating to the disposition
and management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties at
such time. The Liquidator shall determine the fair market value of any property
distributed in kind using such reasonable method of valuation as it may adopt.
C. In the discretion of the Liquidator, a pro rata portion of the
distributions that would otherwise be made to the General Partner and Limited
Partners pursuant to this Article 13 may be:
(1) distributed to a trust established for the benefit of the General
Partner and Limited Partners for the purposes of liquidating
Partnership assets, collecting amounts owed to the Partnership, and
paying any contingent or unforeseen liabilities or obligations of the
Partnership or the General Partner arising out of or in connection
with the Partnership. The assets of any such trust shall be
distributed to the General Partner and Limited Partners from time to
time, in the reasonable discretion of the Liquidator, in the same
proportions as the amount distributed to such trust by the Partnership
would otherwise have been distributed to the General Partner and
Limited Partners pursuant to this Agreement; or
(2) withheld or escrowed to provide a reasonable reserve for Partnership
liabilities (contingent or otherwise) and to reflect the unrealized
portion of any installment obligations owed to the Partnership,
provided that such withheld or escrowed amounts shall be distributed
to the General Partner and Limited Partners in the manner and order of
priority set forth in Section 13.2.A as soon as practicable.
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Section 13.3 Negative Capital Accounts
No Partner, General or Limited, shall be liable to the Partnership or to
any other Partner for any negative balance outstanding in each such Partner's
Capital Account, whether such negative Capital Account results from the
allocation of Net Losses or other items of deduction and loss to such Partner or
from distributions to such Partner.
Section 13.4 Deemed Distribution and Recontribution
Notwithstanding any other provision of this Article 13, in the event the
Partnership is considered liquidated within the meaning of Regulations Section
1.704-l(b)(2)(ii)(g), but no Dissolution Event has occurred, the Partnership's
property shall not be liquidated, the Partnership's liabilities shall not be
paid or discharged, and the Partnership's affairs shall not be wound up.
Section 13.5 Rights of Limited Partners
Except as otherwise provided in this Agreement, each Limited Partner shall
look solely to the assets of the Partnership for the return of its Capital
Contributions and shall have no right or power to demand or receive property
other than cash from the Partnership. Except as otherwise provided in this
Agreement, no Limited Partner shall have priority over any other Partner as to
the return of its Capital Contributions, distribution or allocations.
Section 13.6 Notice of Dissolution
In the event a Dissolution Event occurs or an event occurs that would, but
for the provisions of an election or objection by one or more Partners pursuant
to Section 13.1, result in a dissolution of the Partnership, the General Partner
shall provide within thirty (30) days thereafter written notice thereof to each
of the Partners.
Section 13.7 Termination of Partnership and Cancellation of Certificate of
Limited Partnership
Upon the completion of the liquidation of the Partnership cash and property
as provided in Section 13.2 hereof, the Partnership shall be terminated, a
certificate of cancellation shall be filed, and all qualifications of the
Partnership as a foreign limited partnership in jurisdictions other than the
State of Delaware shall be canceled and such other actions as may be necessary
to terminate the Partnership shall be taken.
Section 13.8 Reasonable Time for Winding-Up
A reasonable time shall be allowed for the orderly winding-up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 13.2 hereof, in order to minimize any losses otherwise
attendant upon such winding-up, and the provisions of this
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Agreement shall remain in effect between the Partners during the period of
liquidation.
Section 13.9 Waiver of Partition
Each Partner hereby waives any right to partition of the Partnership
property.
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
Section 14.1 Amendments
A. Except as set forth in Section 14.1.B, the General Partner shall have
the power, without the consent of the Limited Partners, to amend any provision
of this Agreement other than Section 7.3 in its sole and absolute discretion.
The General Partner will provide ten (10) days prior written notice to the
Limited Partners when any action under this Section 14.1.A is taken.
B. Notwithstanding Section 14.1.A hereof, this Agreement shall not be
amended without the consent of each Partner adversely affected if such amendment
would (i) convert a Limited Partner's interest in the Partnership into a General
Partner Interest, (ii) alter rights of the Partner to receive distributions
pursuant to Article 5 or Article 13, or the allocations specified in Article 6
(except as permitted pursuant to Section 4.2 and Section 14.1.B(3) hereof),
(iii) alter or modify the Redemption Right and REIT Shares Amount as set forth
in Section 8.6, and the related definitions, in a manner adverse to such
Partner, or (iv) amend this Section 14.1.B. Further, no amendment may alter the
restrictions on the General Partner's authority set forth in Section 7.3 without
the consent specified in that section.
ARTICLE 15
GENERAL PROVISIONS
Section 15.1 Addresses and Notice
Any notice, demand, request or report required or permitted to be given or
made to a Partner or Assignee under this Agreement shall be in writing and shall
be deemed given or made when delivered in person or when sent by first class
United States mail or by other means of written communication to the Partner or
Assignee at the address set forth in Exhibit A or such other address of which
the Partner shall notify the General Partner in writing.
Section 15.2 Titles and Captions
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 15.3 Pronouns and Plurals
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Whenever the context may require, any pronoun used in this Agreement shall
include the plural and vice versa.
Section 15.4 Further Action
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purpose of this Agreement.
Section 15.5 Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 15.6 Creditors
Other than as expressly set forth herein with respect to the Indemnities,
none of the provisions of this Agreement shall be for the benefit of, or shall
be enforceable by, any creditors of the Partnership.
Section 15.7 Waiver
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
Section 15.8 Counterparts
This Agreement may be executed in counterparts, all of which together shall
constitute one agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto.
Section 15.9 Applicable Law
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware, without regard to the principles
of conflicts of law.
Section 15.10 Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
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Section 15.11 Entire Agreement
This Agreement contains the entire understanding and agreement among the
Partners with respect to the subject matter hereof and supersedes any other
prior written or oral understandings or agreement among them with respect
thereto.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
FAC REALTY TRUST, INC.
By: ___________________________
LIMITED PARTNER:
FAC PROPERTIES HOLDING CORP.
By: ____________________________
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EXHIBIT A
PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
Name and Address Agreed Value of Partnership Percentage
of Partners Contributed Property Units Interest
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
<S> <C> <C> <C>
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
General Partner
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
FAC Realty Trust, Inc.
11000 Regency Parkway
Suite 300 $1.00 1%
Cary, North Carolina 27511
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
Limited Partners
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
FAC Properties Holding Corp.
11000 Regency Parkway
Suite 300 $99.00 99%
Cary, North Carolina 27511
- ----------------------------------- ----------------------------- ------------------------- ------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
CAPITAL ACCOUNT MAINTENANCE
1. Capital Accounts of the Partners
A. The Partnership shall maintain for each Partner a separate Capital
Account in accordance with the rules of Regulations Section 1.704-l(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions and any other deemed contributions made by such Partner to the
Partnership pursuant to this Agreement and (ii) all items of Partnership income
and gain (including income and gain exempt from tax) computed in accordance with
Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.A of
the Agreement and Exhibit C hereof, and decreased by (x) the amount of cash or
Agreed Value of all actual and deemed distributions of cash or property made to
such Partner pursuant to this Agreement and (y) all items of Partnership
deduction and loss computed in accordance with Section 1.B hereof and allocated
to such Partner pursuant to Section 6.1.B of the Agreement and Exhibit C hereof.
B. For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, unless
otherwise specified in this Agreement, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes determined in
accordance with Section 703(a) of the Code (for this purpose all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be included in taxable income or loss), with
the following adjustments:
(1) Except as otherwise provided in Regulations Section
1.704-l(b)(2)(iv)(m), the computation of all items of income, gain,
loss and deduction shall be made without regard to any election under
Section 754 of the Code which may be made by the Partnership, provided
that the amounts of any adjustments to the adjusted bases of the
assets of the Partnership made pursuant to Section 734 of the Code as
a result of the distribution of property by the Partnership to a
Partner (to the extent that such adjustments have not previously been
reflected in the Partners' Capital Accounts) shall be reflected in the
Capital Accounts of the Partners in the manner and subject to the
limitations prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4).
(2) The computation of all items of income, gain, and deduction shall be
made without regard to the fact that items described in Section
705(a)(2)(B) of the Code are not includible in gross income or are
neither currently deductible nor capitalized for federal income tax
purposes.
(3) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis
of such property as of such date of disposition were equal in amount
to the Partnership's Carrying Value with respect to such property as
of such date.
<PAGE>
(4) In lieu of the depreciation, amortization and other cost recovery
deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such fiscal
year.
(5) In the event the Carrying Value of any Partnership Asset is adjusted
pursuant to Section 1.D hereof, the amount of any such adjustment
shall be taken into account as gain or loss from the disposition of
such asset.
(6) Any items specifically allocated under Section 2 of Exhibit C hereof
shall not be taken into account.
C. Generally, a transferee (including an Assignee) of a Partnership Unit
shall succeed to a pro rata portion of the Capital Account of the transferor.
D. (1) Consistent with the provisions of Regulations Section
1.704-l(b)(2)(iv)(f), and as provided in Section l.D(2), the Carrying
Value of all Partnership assets shall be adjusted upward or downward
to reflect any Unrealized Gain or Unrealized Loss attributable to such
Partnership property, as of the times of the adjustments provided in
Section l.D(2) hereof, as if such Unrealized Gain or Unrealized Loss
had been recognized on an actual sale of each such property and
allocated pursuant to Section 6.1 of the Agreement.
(2) Such adjustments shall be made as of the following times: (a)
immediately prior to the acquisition of an additional interest in the
Partnership by any new or existing Partner in exchange for more than a
de minimis Capital Contribution; (b) immediately prior to distribution
by the Partnership to a Partner of more than a de minimis amount of
property as consideration for an interest in the Partnership; and (c)
immediately prior to the liquidation of the Partnership within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g), provided,
however, that adjustments pursuant to clauses (a) and (b) above shall
be made only if the General Partner determines that such adjustments
are necessary or appropriate to reflect the relative economic
interests of the Partners in the Partnership.
(3) In accordance with Regulations Section 1.704-l(b)(2)(iv)(e), the
Carrying Value of Partnership assets distributed in kind shall be
adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as of the
time any such asset is distributed.
(4) In determining Unrealized Gain or Unrealized Loss for purposes of this
Exhibit B, the aggregate cash amount and fair market value of all
Partnership assets (including cash or cash equivalents) shall be
determined
<PAGE>
by the General Partner using such reasonable method of valuation as it
may adopt, or in the case of a liquidating distribution pursuant to
Article 13 of the Agreement, shall be determined and allocated by the
Liquidator using such reasonable methods of valuation as it may adopt.
The General Partner, or the Liquidator, as the case may be, shall
allocate such aggregate value among the assets of the Partnership (in
such manner as it determines in its sole and absolute discretion to
arrive at a fair market value for individual properties).
E. The provisions of this Agreement (including this Exhibit B and other
Exhibits to this Agreement) relating to the maintenance of Capital Accounts are
intended to comply with Regulations Section 1.704-1(b), and shall be interpreted
and applied in a manner consistent with such Regulations. In the event the
General Partner shall determine that it is prudent to modify the manner in which
the Capital Accounts, or any debits or credits thereto (including, without
limitation, debits or credits relating to liabilities which are secured by
contributed or distributed property or which are assumed by the Partnership, the
General Partner, or the Limited Partners) are computed in order to comply with
such Regulations, the General Partner may make such modification without regard
to Article 14 of the Agreement, provided that it is not likely to have a
material effect on the amounts distributable to any Person pursuant to Article
13 of the Agreement upon the dissolution of the Partnership. The General Partner
also shall (i) make any adjustments that are necessary or appropriate to
maintain equality between the Capital Accounts of the Partners and the amount of
Partnership capital reflected on the Partnership's balance sheet, as computed
for book purposes in accordance with Regulations Section 1.704-1(b)(2)(iv)(q),
and (ii) make any appropriate modifications in the event unanticipated events
might otherwise cause this Agreement not to comply with Regulations Section
1.704-1(b).
2. No Interest
No interest shall be paid by the Partnership on Capital Contributions or on
balances in Partners' Capital Accounts.
3. No Withdrawal
No Partner shall be entitled to withdraw any part of his Capital
Contribution or his Capital Account or to receive any distribution from the
Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement.
<PAGE>
EXHIBIT C
SPECIAL ALLOCATION RULES
1. Special Allocation Rules
Notwithstanding any other provision of the Agreement or this Exhibit C, the
following special allocations shall be made in the following order:
A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1
of the Agreement or any other provisions of this Exhibit C, if there is a net
decrease in Partnership Minimum Gain during any Partnership Year, each Partner
shall be specially allocated items of Partnership income and gain for such year
(and, if necessary, subsequent years) in an amount equal to such Partner's share
of the net decrease in Partnership Minimum Gain, as determined under Regulations
Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made
in proportion to the respective amounts required to be allocated to each Partner
pursuant thereto. The items to be so allocated shall be determined in accordance
with Regulations Section 1.704-2(f)(6). This Section 1.A is intended to comply
with the minimum gain chargeback requirements in Regulations Section 1.704-2(f)
and shall be interpreted consistently therewith. Solely for purposes of this
Section 1.A, each Partner's Adjusted Capital Account Deficit shall be determined
prior to any other allocations pursuant to Section 6.1 during such Partnership
Year.
B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of
Section 6.1 of this Agreement or any other provisions of this Exhibit C (except
Section l.A hereof), if there is a net decrease in Partner Minimum Gain
attributable to a Partner Nonrecourse Debt during any Partnership Year, each
Partner who has a share of the Partner Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5), shall be specially allocated items of Partnership income and gain
for such year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partner Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Partner
pursuant thereto. The items to be so allocated shall be determined in accordance
with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply
with the minimum gain chargeback requirement in such Section of the Regulations
and shall be interpreted consistently therewith. Solely for purposes of this
Section l.B, each Partner's Adjusted Capital Account Deficit shall be determined
prior to any other allocations pursuant to Section 6.1 of the Agreement or this
Exhibit with respect to such Partnership Year, other than allocations pursuant
to Section l.A hereof.
C. Qualified Income Offset. In the event any Partner unexpectedly receives
any adjustments, allocations or distributions described in Regulations Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-l(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6), and
after giving effect to the allocations required under Sections l.A and l.B
hereof, such Partner has an Adjusted Capital Account Deficit, items of
Partnership income and gain (consisting of a pro rata portion of each
<PAGE>
item of Partnership income, including gross income and gain for the Partnership
Year) shall be specifically allocated to such Partner in an amount and manner
sufficient to eliminate, to the extent required by the Regulations, its Adjusted
Capital Account Deficit created by such adjustments, allocations or
distributions as quickly as possible.
D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership Year
shall be allocated to the Partners in accordance with their respective
Percentage Interests. If the General Partner determines in its good faith
discretion that the Partnership's Nonrecourse Deductions must be allocated in a
different ratio to satisfy the safe harbor requirements of the Regulations
promulgated under Section 704(b) of the Code, the General Partner is authorized,
upon notice to the Limited Partners, to revise the prescribed ratio to the
numerically closest ratio for such Partnership Year which would satisfy such
requirements.
E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for
any Partnership Year shall be specially allocated to the Partner who bears the
economic risk of loss with respect to the Partner Nonrecourse Debt to which such
Partner Nonrecourse Deductions are attributable in accordance with Regulations
Section 1.704-2(i).
F. Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b)
of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.
2. Allocations for Tax Purposes
A. Except as otherwise provided in this Section 2, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated among
the Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 6.1 of the Agreement and
Section 1 of this Exhibit C.
B. In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss, and
deduction shall be allocated for federal income tax purposes among the Partners
as follows:
(1) (a) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners consistent with the
principles of Section 704(c) of the Code to take into account the
variation between the 704(c) Value of such property and its
adjusted basis at the time of contribution; and
(b) any item of Residual Gain or Residual Loss attributable to a
<PAGE>
Contributed Property shall be allocated among the Partners in the
same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1 of the Agreement and Section 1
of this Exhibit C.
(2) (a) In the case of an Adjusted Property, such items shall
(1) first, be allocated among the Partners in a manner
consistent with the principles of Section 704(c) of the Code
to take into account the Unrealized Gain or Unrealized Loss
attributable to such property and the allocations thereof
pursuant to Exhibit B, and
(2) second, in the event such property was originally a
Contributed Property, be allocated among the Partners in a
manner consistent with Section 2.B(1) of this Exhibit C; and
(b) any item of Residual Gain or Residual Loss attributable to an
Adjusted Property shall be allocated among the Partners in the
same manner its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1 of the Agreement and Section 1
of this Exhibit C.
(3) all other items of income, gain loss and deduction shall be allocated
among the Partners the same manner as their correlative item of "book"
gain or loss is allocated pursuant to Section 6.1 of the Agreement and
Section 1 of the Exhibit C.
C. To the extent Treasury Regulations promulgated pursuant to Section
704(c) of the Code permit a partnership to utilize alternative methods to
eliminate the disparities between the Carrying Value of property and its
adjusted basis, the General Partner may elect, in its sole discretion, the
traditional method without curative allocations to be used by the Partnership
(or the remedial method) or any other permitted alternative method, and such
election shall be binding on all Partners.
3. No Withdrawal
No Partner shall be entitled to withdraw any part of his Capital
Contribution or his Capital Account or to receive any distribution from the
Partnership, except as provided in Articles 4, 5, 8 and 13 of the Agreement.
<PAGE>
EXHIBIT D
VALUE OF CONTRIBUTED PROPERTY
DELIBERATELY OMITTED
<PAGE>
EXHIBIT E
NOTICE OF REDEMPTION
The undersigned Limited Partner hereby irrevocably (i) redeems Limited
Partnership Units in FAC Properties, L.P. in accordance with the terms of the
Amended and Restated Agreement of Limited Partnership of FAC Properties, L.P.
and the Redemption Right referred to therein, (ii) surrenders such Limited
Partnership Units and all right, title and interest therein, and (iii) directs
that the Cash Amount of REIT Shares Amount (as determined by the General
Partner) deliverable upon exercise of the Redemption Right be delivered to the
address specified below, and if REIT Shares are to be delivered, such REIT
Shares be registered or placed in the name(s) and at the address(es) specified
below. The undersigned hereby, represents, warrants, and certifies that the
undersigned (a) has marketable and unencumbered title to such Limited
Partnership Units, free and clear of the rights or interests of any other person
or entity, (b) has the full right, power, and authority to redeem and surrender
such Limited Partnership Units as provided herein, and (c) has obtained the
consent or approval of all person or entities, if any, having the right to
consent or approve such redemption and surrender.
Dated:__________________________
Name of Limited Partner:___________________________________
Please Print
_________________________________
(Signature of Limited Partner)
_________________________________
(Street Address)
_________________________________
(City) (State) (Zip Code)
<PAGE>
If REIT Shares are to be issued, issue to:
Name:_____________________________________
Please insert social security or identifying number:____________
2
<PAGE>
EXHIBIT F
INDEMNIFICATION UNDER SECTION 7.7(I)
<TABLE>
<CAPTION>
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Indemnification DELIBERATELY OMITTED
Limited Partner Per Unit
- -------------------------------------------- ----------------------------- ------------------------
<S> <C> <C>
- -------------------------------------------- ----------------------------- ------------------------
- -------------------------------------------- ----------------------------- ------------------------
- -------------------------------------------- ----------------------------- ------------------------
- -------------------------------------------- ----------------------------- ------------------------
- -------------------------------------------- ----------------------------- ------------------------
- -------------------------------------------- ----------------------------- ------------------------
- -------------------------------------------- ----------------------------- ------------------------
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- -------------------------------------------- ----------------------------- ------------------------
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- -------------------------------------------- ----------------------------- ------------------------
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</TABLE>
TEMPORARY CERTIFICATE - EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE
WHEN READY FOR DELIVERY
------------ COMMON STOCK
NUMBER
------------ ------------
SHARES
THIS CERTIFICATE IS TRANSFERABLE IN ------------
THE CITIES OF CHARLOTTE, NORTH CAROLINA
OR NEW YORK, NEW YORK
CUSIP 301953 10 5
SEE REVERSE FOR CERTAIN DEFINITIONS
67265 92
FAC REALTY TRUST, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
- --------------------------------------------------------------------------------
This certifies
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE
PAR VALUE OF $.01 EACH OF
CERTIFICATE OF STOCK
FAC Realty Trust, Inc. (the Corporation), transferable on the books of the
Corporation by the owner hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate is not valid
until countersigned and registered by the Transfer Agent and Registrar.
Witness the signatures of its duly authorized officers.
Dated /s/ C. Cammack Morton
PRESIDENT
COUNTERSIGNED AND REGISTERED
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
TRANSFER AGENT AND REGISTRAR
BY /s/ Robin W. Malphrus
AUTHORIZED SIGNATURE SECRETARY
<PAGE>
FAC REALTY TRUST, INC.
The shares represented by this certificate are subject to restrictions on
Beneficial and Constructive Ownership and Transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate Investment Trust under
the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain
further restrictions and except as expressly provided in the Corporation's
charter; (i) no Person may Beneficially or Constructively Own shares of the
Corporation's Common Stock in excess of 9.8 percent in value of the outstanding
shares of Common Stock of the Corporation; (ii) no Person may Beneficially or
Constructively Own shares of Equity Stock of the Corporation in excess of 9.8
percent of the value of the total outstanding shares of Equity Stock of the
Corporation; (iii) no Person may Beneficially or Constructively Own Equity Stock
that would result in the Corporation being "closely held" under Section 856(h)
of the Code or otherwise cause the Corporation to fail to qualify as a REIT; and
(iv) no Person may Transfer shares of Equity Stock if such Transfer would result
in the Equity Stock of the Corporation being owned by fewer than 100 Persons.
Any person who Beneficially or Constructively Owns or attempts to Beneficially
or Constructively Own shares of Equity Stock which causes or will cause a person
to Beneficially or Constructively Own shares of Equity Stock in excess or in
violation of the above limitations must immediately notify the Corporation, if
the restrictions on transfer are violated, the shares represented hereby will be
automatically converted into shares of Excess Stock, which will be held in trust
by the Corporation. In addition, upon the occurrence of certain events,
attempted Transfers in violation of the restrictions described above may be void
ab initio. All capitalized terms in this legend have the meanings defined in the
charter of the Corporation, as the same may be amended from time to time, a copy
of which, including the restrictions on transfer and ownership, will be
furnished to each holder of Capital Stock of the Corporation on request and
without charge.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT - ________ Custodian _______ Under Uniform Gifts to
(Cust) (Minor)
Minors Act _________
(State)
UNIF TRANS MIN ACT - ________ Custodian _______ Under Uniform Transfers
(Cust) (Minor)
to Minors Act - Illinois
Additional abbreviations may also be used though not in the above list.
For Value Received, ____________________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of Stock represented by the within certificate, and do hereby irrevocably
constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated_________________________________ ________________________________________
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION, ENLARGEMENT OR ANY CHANGE
WHATEVER
Signature(s) Guaranteed:
______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad - 15.
LOAN AGREEMENT
Dated as of March 11, 1998
Between
FAC MORTGAGE LLC,
as Borrower
AND
NOMURA ASSET CAPITAL CORPORATION,
as Lender
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION..................................................................1
1.1 Specific Definitions............................................................................1
1.2 Index of Other Definitions......................................................................9
1.3 Principles of Construction.....................................................................10
II. GENERAL.................................................................................................10
2.1 The Loan.......................................................................................10
2.2 Interest; Monthly Payments.....................................................................11
2.2.1 Generally.........................................................................11
2.2.2 Accrued Interest..................................................................11
2.2.3 Property Cash Flow Allocation.....................................................11
2.2.4 Default Rate......................................................................12
2.3 Loan Repayment and Defeasance..................................................................12
2.3.1 Repayment.........................................................................12
2.3.2 Mandatory Prepayments.............................................................12
2.3.3 Voluntary Defeasance of the Note..................................................13
2.4 Release of Property............................................................................15
2.4.1 Release on Defeasance.............................................................15
2.4.3 Release on Payment in Full........................................................16
2.4.4 Substitution of Properties.....................................................................16
2.5 Payments and Computations......................................................................18
2.5.1 Making of Payments................................................................18
2.5.2 Computations......................................................................18
2.5.3 Late Payment Charge...............................................................18
2.6 Structuring Fee................................................................................18
2.7 Special Prepayment Compensation................................................................18
III. CASH MANAGEMENT; ESCROWS AND RESERVES...................................................................19
3.1 Cash Management Arrangements...................................................................19
3.2 Required Repairs; Required Repair Funds........................................................19
3.2.1 Required Repairs: Deposits........................................................19
3.2.2 Release of Required Repair Funds..................................................20
3.3 Tax and Insurance Escrow Fund..................................................................20
3.4 Capital Reserve Fund...........................................................................21
3.4.1 Capital Reserve Fund..............................................................21
3.4.2 Payment of Capital Expenses.......................................................21
3.5 Rollover Reserve Fund..........................................................................21
3.5.1 Rollover Reserve Fund.............................................................21
3.5.2 Payment of Leasing Expenses.......................................................22
3.6 Payment of Approved Operating Expenses.........................................................22
3.7 Security Deposits..............................................................................23
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.8 Grant of Security Interest; Application of Funds...............................................23
IV. REPRESENTATIONS AND WARRANTIES..........................................................................24
4.1 Borrower Representations.......................................................................24
4.1.1 Organization; Special Purpose.....................................................24
4.1.2 Proceedings; Enforceability.......................................................24
4.1.3 No Conflicts......................................................................24
4.1.4 Litigation........................................................................24
4.1.5 Agreements........................................................................25
4.1.6 Title.............................................................................25
4.1.7 Survey............................................................................25
4.1.8 No Bankruptcy Filing..............................................................25
4.1.9 Full and Accurate Disclosure......................................................25
4.1.10 No Plan Assets....................................................................25
4.1.11 Compliance........................................................................25
4.1.12 Contracts.........................................................................26
4.1.13 Financial Information.............................................................26
4.1.14 Condemnation......................................................................26
4.1.15 Federal Reserve Regulations.......................................................26
4.1.16 Utilities and Public Access.......................................................26
4.1.17 Not a Foreign Person..............................................................27
4.1.18 Separate Lots.....................................................................27
4.1.19 Assessments.......................................................................27
4.1.20 Enforceability....................................................................27
4.1.21 Insurance.........................................................................27
4.1.22 Use of Property; Licenses.........................................................27
4.1.23 Flood Zone........................................................................27
4.1.24 Physical Condition................................................................27
4.1.25 Encroachments.....................................................................27
4.1.26 Leases............................................................................28
4.1.27 Filing and Recording Taxes........................................................28
4.1.28 Investment Company Act............................................................28
4.1.29 Fraudulent Transfer...............................................................28
4.1.30 Ownership of Borrower.............................................................29
4.1.31 Management Agreement..............................................................29
4.1.32 Hazardous Substances...................................................................29
4.1.33 Ground Lease............................................................................30
4.1.34 Out-Parcels.............................................................................30
4.2 Survival of Representations....................................................................30
V. AFFIRMATIVE COVENANTS...................................................................................30
5.1 Existence......................................................................................30
5.2 Taxes and Other Charges........................................................................30
5.3 Repairs; Maintenance and Compliance............................................................31
5.4 Litigation.....................................................................................31
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
5.5 Performance of Other Agreements................................................................31
5.6 Notice of Default..............................................................................31
5.7 Cooperate in Legal Proceedings.................................................................31
5.8 Further Assurances.............................................................................31
5.9 Financial Reporting............................................................................32
5.9.1 Bookkeeping.......................................................................32
5.9.2 Annual Reports....................................................................32
5.9.3 Monthly Reports...................................................................32
5.9.4 Other Reports.....................................................................33
5.9.5 Annual Budget.....................................................................33
5.9.6 Breach............................................................................33
5.10 Environmental Matters..........................................................................33
5.10.1 Hazardous Substances..............................................................33
5.10.2 Environmental Monitoring.......................................................................34
5.11 Title to the Properties........................................................................35
5.12 Estoppel Statement.............................................................................35
5.13 Principal Place of Business....................................................................35
5.14 Property Management............................................................................35
5.14.1 Management Agreement..............................................................35
5.14.2 Termination of Manager............................................................35
5.15 Special Purpose Bankruptcy Remote Entity.......................................................35
5.16 Assumptions in Non-Consolidation Opinion.......................................................37
5.17 Expenses.......................................................................................37
5.18 Indemnity......................................................................................38
VI. NEGATIVE COVENANTS .....................................................................................39
6.1 Management Agreement...........................................................................39
6.2 Liens..........................................................................................39
6.3 Dissolution....................................................................................39
6.4 Change In Business.............................................................................39
6.5 Debt Cancellation..............................................................................39
6.6 Assets.........................................................................................39
6.7 Transfers......................................................................................40
6.8 Debt...........................................................................................40
6.9 Assignment of Rights...........................................................................40
6.10 Operation of the Properties....................................................................40
VII. INSURANCE; CASUALTY; AND CONDEMNATION...................................................................40
7.1 Insurance......................................................................................40
7.1.1 Coverage..........................................................................40
7.1.2 Policies..........................................................................42
7.2 Casualty.......................................................................................42
7.2.1 Notice; Restoration...............................................................43
7.2.2 Settlement of Proceeds............................................................43
7.3 Condemnation. ................................................................................43
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
7.3.1 Notice; Restoration...............................................................43
7.3.2 Collection of Award...............................................................43
7.4 Application of Proceeds or Award...............................................................44
7.4.1 Application to Restoration........................................................44
7.4.2 Application to Debt...............................................................44
7.4.3 Procedure for Application to Restoration..........................................45
VIII. DEFAULTS................................................................................................45
8.1 Events of Default..............................................................................45
8.2 Remedies.......................................................................................47
8.2.1 Acceleration......................................................................47
8.2.2 Remedies Cumulative...............................................................47
8.2.3 Severance.........................................................................48
8.2.4 Delay.............................................................................48
IX. SPECIAL PROVISIONS......................................................................................48
9.1 Sale of Note and Securitization................................................................48
9.1.1 Cooperation.......................................................................48
9.1.2 Use of Information................................................................49
9.1.3 Borrower Obligations Regarding Disclosure Documents...............................50
9.1.4 Borrower Indemnity Regarding Filings..............................................51
9.1.5 Indemnification Procedure.........................................................51
9.1.6 Contribution......................................................................51
9.1.7 Rating Surveillance...............................................................52
X. MISCELLANEOUS...........................................................................................52
10.1 Exculpation....................................................................................52
10.2 Notices........................................................................................53
10.3 Brokers and Financial Advisors.................................................................54
10.4 Retention of Servicer..........................................................................54
10.5 Survival.......................................................................................54
10.6 Lender's Discretion............................................................................54
10.7 Governing Law..................................................................................55
10.8 Modification, Waiver in Writing................................................................56
10.9 Delay Not a Waiver.............................................................................56
10.10 Trial by Jury..................................................................................56
10.11 Headings.......................................................................................56
10.12 Severability...................................................................................56
10.13 Preferences....................................................................................57
10.14 Waiver of Notice...............................................................................57
10.15 Remedies of Borrower...........................................................................57
10.16 Prior Agreements...............................................................................57
10.17 Offsets, Counterclaims and Defenses............................................................57
10.18 Publicity......................................................................................58
10.19 No Usury.......................................................................................58
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
10.20 Conflict; Construction of Documents............................................................58
10.21 No Third Party Beneficiaries...................................................................58
10.22 Cross Default; Cross Collateralization.........................................................58
SCHEDULES
Schedule 1 - List of Properties
Schedule 2 - Matters Regarding Representations
Schedule 3 - Rent Rolls
Schedule 4 - Required Repairs
Schedule 5 - Existing Anchor Leases
Schedule 6 - Eligible Out-Parcels
Schedule 7 - Form of Rent Roll
</TABLE>
v
<PAGE>
LOAN AGREEMENT
LOAN AGREEMENT dated as of March 11, 1998 between FAC MORTGAGE LLC, a
Delaware limited liability company (together with its permitted successors and
assigns, "Borrower"), and NOMURA ASSET CAPITAL CORPORATION, a Delaware
corporation (together with its successors and assigns, "Lender").
I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION
I.1 Specific Definitions. The following terms have the meanings set forth
below:
"Affiliate": as to any Person, any other Person that, directly or
indirectly, is in Control of, is Controlled by or is under common Control with
such Person.
"Allocated Loan Amount": With respect to each Property, as of any date of
determination, the product of (i) the then unpaid Principal multiplied by (ii)
an amount, expressed as a percentage, computed by dividing (A) the Net Operating
Income attributable to such Property, by (B) the Net Operating Income
attributable to the Properties.
"Anchor Leases": the leases listed on Schedule 5 hereto and any comparable
major leases of space in Properties that the Lender hereafter reasonably
determines to be anchor leases.
"Approved Capital Expenses": Capital Expenses incurred by Borrower which
(i) are included in the approved Capital Budget for the Current Month or (ii)
have been reasonably approved by Lender.
"Approved Leasing Expenses": expenses incurred in leasing space at a
Property pursuant to Leases entered into in accordance with the Loan Documents,
including brokerage commissions, tenant improvements and other inducements
(including cash and landlord work), which expenses (i) are (A) specifically
approved by Lender in connection with approving the applicable Lease, which
approvals shall not be unreasonably withheld or delayed, (B) incurred in the
ordinary course of business and on market terms and conditions in connection
with Leases which do not require Lender's approval under the Loan Documents, or
(C) otherwise approved by Lender, which approval shall not be unreasonably
withheld or delayed, and (ii) are substantiated by executed Lease documents and
brokerage agreements.
"Approved Operating Expenses": Operating Expenses incurred by Borrower
which (i) are included in the approved Operating Budget for the Current Month,
(ii) are for electric, gas, oil, water, sewer or other utility service to a
Property or (iii) have been approved by Lender.
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"Business Day": any day other than a Saturday, Sunday or any other day on
which national banks in New York are not open for business.
"Capital Expenses": expenses that are required under GAAP to be
capitalized.
"Code": the Internal Revenue Code of 1986, as amended, any successor
statutes thereto, and applicable U.S. Department of Treasury regulations issued
pursuant thereto in temporary or final form.
"Control": with respect to any Person, either (i) ownership directly or
through other entities of more than 50% of all beneficial equity interest in
such Person, or (ii) the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
through the ownership of voting securities, by contract or otherwise.
"Current Month": as of any date of determination, the then current calendar
month.
"Debt": the unpaid Principal, all interest accrued and unpaid thereon, the
Yield Maintenance Premium and all other sums due to Lender in respect of the
Loan, or under any Loan Document.
"Debt Service": with respect to any particular period, scheduled Principal
and interest payments under the Note in such period.
"Debt Service Coverage Ratio": as of any date, the ratio of (i) the Net
Operating Income for the 12-month period ending with the most recently completed
calendar month to (ii) the Debt Service (exclusive of any payments due under the
Defeased Note, if any) with respect to such period.
"Default": the occurrence of any event under any Loan Document which, with
the giving of notice or passage of time, or both, would be an Event of Default.
"Default Rate": a rate per annum equal to the lesser of (i) the maximum
rate permitted by applicable law, or (ii) 5% above the Interest Rate or the
Revised Interest Rate, as applicable, compounded monthly.
"Defeasance Deposit": an amount equal to the sum of (i) an amount
sufficient to purchase U.S. Obligations which provide payments that will meet
the Scheduled Defeasance Payments, (ii) any costs and expenses incurred or to be
incurred in the purchase of such U.S. Obligations and (iii) any revenue,
documentary stamp or intangible taxes or any other tax or charge due in
connection with the transfer of the Note, the creation of the Defeased Note and
the Undefeased Note, if applicable, any transfer of the Defeased Note or
otherwise required to accomplish the agreements of Sections 2.3 and 2.4.
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"Deposit Bank": a bank or other depository selected by Lender in its sole
discretion, which holds and disburses Funds and other deposits required
hereunder.
"Eligible Account": (i) an account maintained with a federal or state
chartered depository institution or trust company whose (x) commercial paper,
short-term debt obligations or other short-term deposits are rated at least A-1
by the applicable Rating Agencies if the deposits in such account are to be held
in such account for 30 days or less or (y) long-term unsecured debt obligations
are rated at least AA- by the applicable Rating Agencies if the deposits in such
account are to be held in such account for more than 30 days; or (ii) a
segregated trust account maintained with the trust department of a federal or
state chartered depository institution or trust company acting in its fiduciary
capacity which institution or trust company is subject to regulations regarding
fiduciary funds on deposit substantially similar to 12 C.F.R. ss. 9.10(b); or
(iii) an account otherwise acceptable to the applicable Rating Agencies, as
confirmed in writing that such account would not, in and of itself, result in a
downgrade, qualification or withdrawal of the then current ratings assigned to
any Security.
"Eligible Out-Parcels": the unimproved separate out-parcels that are part
of the Properties, which are listed on Schedule 6 hereto.
"Fiscal Year": each twelve month period commencing on January 1 and ending
on December 31 during each year of the Term.
"GAAP": generally accepted accounting principles in the United States of
America as of the date of the applicable financial report.
"Governmental Authority": any court, board, agency, commission, office or
authority of any nature whatsoever for any governmental unit (federal, state,
county, district, municipal, city or otherwise) now or hereafter in existence.
"Ground Lease": the Consolidated, Amended and Restated Lease Agreement
dated as of December 1, 1996 between The Boaz Downtown Development Authority and
the Borrower's predecessor in interest, covering the Leased Property, as amended
by that certain First Amendment to Consolidated, Amended and Restated Lease
Agreement dated as of January 28, 1998, as it may further be modified and
amended from time to time in accordance herewith.
"Independent Director": an individual reasonably satisfactory to Lender who
shall not have been at the time of such individual's appointment as a director,
and may not have been at any time during the preceding five years (i) a
shareholder of, or an officer or employee of, Borrower or any of its
shareholders, subsidiaries or Affiliates, (ii) a customer of, or supplier to,
Borrower or any of its shareholders, subsidiaries or Affiliates, (iii) a Person
Controlling any such shareholder, supplier or customer, or (iv) a member of the
immediate family of any such shareholder, officer, employee, supplier or
customer or of any other director of the Managing Member.
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"Interest Period": the period from the date hereof through the first day
thereafter that is the tenth day of a calendar month, and each period thereafter
from the eleventh day of a calendar month through the tenth day of the following
calendar month; except that the Interest Period, if any, that would otherwise
commence before and end after the Maturity Date shall end on the Maturity Date.
"Interest Rate": a rate of interest equal to 9.10% per annum.
"Leased Property": the Property located in Boaz, Alabama.
"Legal Requirements": statutes, laws, rules, orders, regulations,
ordinances, judgments, decrees and injunctions of Governmental Authorities
affecting all or part of each Property or the construction, use, alteration or
operation thereof, whether now or hereafter enacted and in force (unless
"grandfathered"), and all permits, licenses and authorizations and regulations
relating thereto, and all covenants, agreements, restrictions and encumbrances
contained in any instrument, either of record or known to Borrower, at any time
in force affecting all or part of each Property, including any that may (i)
require repairs, modifications or alterations in or to all or part of each
Property, or (ii) in any way limit the use and enjoyment thereof.
"Lien": any mortgage, deed of trust, lien, pledge, hypothecation,
assignment, security interest or any other encumbrance, charge or transfer of,
on or affecting all or part of each Property or any interest therein, or in
Borrower, including any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, the filing of any financing statement, and mechanic's, materialmen's
and other similar liens and encumbrances.
"Loan Documents": this Agreement and all other documents, agreements and
instruments evidencing, securing or delivered to Lender in connection with the
Loan, including the following, each of which is dated as of the date hereof: (i)
Note made by Borrower to Lender in the principal amount of the Loan (the
"Note"), (ii) each Mortgage, Assignment of Leases and Rents and Security
Agreement made by Borrower in favor of Lender or Deed of Trust or similar
instrument (collectively the "Mortgages"), which covers the Properties, (iii)
each Assignment of Leases and Rents from Borrower to Lender (collectively the
"Assignments of Leases"), and (iv) each Assignment of Agreements from Borrower
to Lender (collectively the "Assignments of Agreements"), as each of the
foregoing may be (and each of the foregoing defined terms shall refer to such
documents as they may be) amended, restated, replaced, supplemented or otherwise
modified from time to time.
"Major Leases": each of the Leases at the Properties to which (i) VF
Factory Outlet, Inc. and (ii) Carolina Pottery is a party.
"Major Lease Rollover Date": the expiration date of each of the Major
Leases, or
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such earlier date on which any of the Major Leases may terminate.
"Management Agreement": the management agreement dated the date hereof
between Borrower and Manager, pursuant to which Manager is to manage each
Property.
"Management Fee": the fee payable to Manager under the Management
Agreement.
"Manager": FAC Properties, L.P., a Delaware limited partnership.
"Managing Member": FAC Mortgage Formation, Inc., a Delaware corporation.
"Maturity Date": the date on which the final payment of principal of the
Note (or the Defeased Note, if applicable) becomes due and payable as therein
provided, whether at the Stated Maturity Date, by declaration of acceleration,
or otherwise.
"NACC": Nomura Asset Capital Corporation, a Delaware corporation.
"Net Operating Income": for any period, all Operating Income during such
period minus all Operating Expenses during such period; determined by audit or
in accordance with other agreed-upon procedures determined by Lender; provided
that, in determining Net Operating Income, (i) Operating Expenses shall be
adjusted to reflect (A) a normalized allowance for Lease rollovers based on the
rent roll for each Property and then current market conditions, including costs
for downtime, tenant improvements and leasing commissions, (B) a reserve for
capital expenditures equal to at least $0.15 per square foot of rentable space
per annum, exclusive of square footage attributable to Anchor Leases, and (C) a
vacancy allowance at the market vacancy rate (but not less than 5%) if actual
vacancy is less than such market rate (or less than 5%), and (ii) Operating
Income shall be adjusted (A) to exclude Rents from temporary or month-to-month
tenants or tenants operating under bankruptcy protection, (B) to mark any
above-market Leases to market Rent, (C) to include the annualized base rent for
executed leases with tenants in occupancy which are open for business and
actually paying rent for at least three months, and (D) to reflect any Rent
adjustments or cancellation options in any Leases; and provided further, that
Net Operating Income shall not include payments to be received in respect of
U.S. Obligations purchased in connection with a Defeasance. All adjustments to
determine Net Operating Income shall be made in a consistent manner throughout
the Term and shall be subject to Lender's approval, in its reasonable discretion
after due diligence.
"Officers' Certificate": a certificate delivered to Lender by Borrower
which is signed by a senior executive officer of the Managing Member.
"Operating Expenses": for any period, all expenditures by or on behalf of
Borrower as and to the extent required to be expensed or allowed to be expensed
and in fact expensed under GAAP during such period in connection with the
ownership, operation, maintenance, repair or leasing of each Property, including
(i) Management Fees (or if self-
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managed, the actual cost of managing the Property); Insurance Premiums; bank
charges; expenses for accounting, advertising, marketing, architectural
services, utilities, extermination, cleaning, trash removal, window washing,
landscaping and security; and reasonable and necessary legal expenses incurred
in connection with the operation of each Property; (ii) Taxes and Other Charges
(excluding fines, penalties, interest or Taxes or Other Charges payable by
reason of Borrower's failure to pay an imposition timely); (iii) wages,
benefits, payroll taxes, uniforms, insurance costs and all other related
expenses for employees of Borrower or its Affiliates engaged in the repair,
operation or maintenance of each Property; and (iv) the cost of routine interior
and exterior maintenance, repairs and minor alterations; provided that Operating
Expenses will not include Debt Service, Capital Expenses, non-cash items such as
depreciation and amortization or any extraordinary one-time expenditures not
considered operating expenses under GAAP.
"Operating Income": for any period, all regular on-going revenues actually
received by Borrower from the operation of each Property during such period,
including (i) Rents (including base rents, percentage rents, common area
maintenance charges and property tax, insurance and utility recoveries from
tenants), (ii) all other amounts received which in accordance with GAAP are
required to be or are included in Borrower's annual financial statements as
operating income of each Property and (iii) proceeds from business interruption
insurance and rental loss insurance; provided, that Operating Income will not
include (1) income from non-recurring income sources, (2) advance Rents or other
payments, (3) deposits or escrows, (4) any income otherwise includable in
Operating Income but paid to a Person other than Borrower, (5) proceeds of
Casualty insurance or Condemnation Awards or (6) income from a sale, financing
or other capital transaction.
"Optional Prepayment Date": March 11, 2013.
"Other Charges": all ground rents, maintenance charges, impositions other
than Taxes, and any other charges, including vault charges and license fees for
the use of vaults, chutes and similar areas adjoining each Property, now or
hereafter levied or assessed or imposed against each Property or any part
thereof.
"Payment Date": the 11th day of each calendar month or, if in any month the
11th day is not a Business Day, then the Payment Date for such month shall be
the first Business Day thereafter.
"Permitted Encumbrances": (a) the Liens created by the Loan Documents, (b)
all Liens and other matters disclosed in the Title Insurance Policy, (c) Liens,
if any, for Taxes or Other Charges not yet payable or delinquent, and (d) such
other title and survey exceptions as Lender approves in writing in Lender's sole
discretion.
"Permitted Investments": any of a list of low-risk, liquid, short term
investment alternatives designated from time to time by Lender in its sole
discretion (which may be based, among other things, on standards applied by the
Rating Agencies).
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"Permitted Transfers": (i) a Lease (or an amendment, extension,
modification, waiver or renewal thereof) entered into in accordance with the
Loan Documents, (ii) a Special Transfer, (iii) a Transfer of a membership
interest in Borrower by a member other than the Managing Member, a direct or
indirect interest in a member of Borrower or stock in the Managing Member if
either (A) such Transfer would not cause the transferee to acquire Control of
Borrower or the Managing Member or to increase its direct or indirect interest
in Borrower or its stock in the Managing Member to an amount which equals or
exceeds 49%, or (B) Borrower shall have delivered (or caused to be delivered)
(1) to Lender, written confirmation from the applicable Rating Agencies that
such Transfer will not cause a qualification, withdrawal or downgrading of the
ratings in effect immediately prior to such Transfer for the Securities then
outstanding and (2) to Lender and the applicable Rating Agencies, a substantive
non-consolidation opinion with respect to Borrower in form and substance
satisfactory to Lender and the applicable Rating Agencies or (iv)
notwithstanding anything to the contrary contained in clause (iii) above, a
transfer of stock in FAC Realty Trust, Inc. to (x) Prometheus Southeast Retail
LLC, an Affiliate of Lazard Freres Real Estate Investors, LLC ("Lazard"), (y)
Lazard or (z) any other Affiliate of Lazard.
"Person": any individual, corporation, partnership, limited liability
company, joint venture, estate, trust, unincorporated association, any federal,
state, county or municipal government or any bureau, department or agency
thereof and any fiduciary acting in such capacity on behalf of any of the
foregoing.
"Pooling and Servicing Agreement": the Servicing Agreement entered into
with the Servicer in connection with any Securitization.
"Properties": collectively, the parcels of real property and improvements
thereon owned by Borrower (and shall also mean Borrower's leasehold interest
therein in the case of the Leased Property) and encumbered by the Mortgages
(including any Substitute Property), together with all rights pertaining to each
such property and improvements, as more particularly described in the Granting
Clauses of the Mortgages and referred to therein as the "Mortgaged Property". A
List of the Properties (other than the Substitute Property(ies)) is set forth in
Schedule 1.
"Rating Agency": each of Standard & Poor's Ratings Group, a division of
McGraw-Hill, Inc., Moody's Investors Service, Inc., Duff & Phelps Credit Rating
Co. and Fitch Investors Service, Inc. or any other nationally-recognized
statistical rating agency which has been approved by Lender.
"Related Person": with respect to any specified Person, any other Person
that is an Affiliate of the specified Person or any limited partner of the
specified Person (if such Person is a limited partnership) or any shareholder of
the specified Person (if such Person is a corporation).
"Release": any satisfaction, release, assignment instrument, deed of
reconveyance
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or similar instrument or instruments, each in recordable form and otherwise in
form reasonably satisfactory to Borrower, but without any representation or
warranty of Lender necessary to release any Property (or portion thereof) from
the Lien of all applicable Loan Documents
"Release Amount": (i) for each of the Special Release Properties, the
product of the Allocated Loan Amount for such Property and one hundred fifteen
percent (115%), (ii) for the Property located in Smithfield, North Carolina, the
product of the Allocated Loan Amount for such Property and one thirty five
percent (135%), (iii) for each other Property, the product of the Allocated Loan
Amount for such Property and one hundred twenty-five percent (125%) and (iv)
notwithstanding the foregoing, with respect to any mandatory prepayment made
pursuant to Section 2.3.2, the Allocated Loan Amount for the applicable
Property.
"Release Date": the earlier of (i) three years after the date hereof and
(b) two years from the "start-up day" (within the meaning of Section 860G(a)(9)
of the Code) of the REMIC Trust.
"REMIC": a "real estate mortgage investment conduit" within the meaning of
Section 860D of the Code.
"REMIC Trust": a REMIC that holds the Note.
"Revised Interest Rate": the per annum rate of interest that is the greater
of (i) the Interest Rate plus 5% and (ii) the Treasury Rate on the Optional
Prepayment Date plus 6.85%.
"Servicer": the entity appointed by Lender to service the Loan or its
successor in interest, or if any successor servicer is appointed pursuant to the
Pooling and Servicing Agreement, such successor servicer.
"Special Release Properties": the Properties located in (i) Nebraska City,
Nebraska, (ii) Lebanon, Missouri, (iii) Graceville, Florida, (iv) Story City,
Iowa and (v) Sulphur Springs, Texas.
"Special Transfer": the sale or transfer of the Properties after a
Securitization by the original Borrower and the assumption in writing by the
purchaser of all of the obligations of Borrower under the Loan Documents;
provided Lender shall have received evidence in writing from the applicable
Rating Agencies to the effect that such a sale or transfer and assumption will
not result in a qualification, withdrawal or downgrading of the ratings in
effect immediately prior to such sale for the Securities then outstanding.
"State": any state in which a Property is located.
"Stated Maturity Date": March 11, 2028.
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"Taxes": all real estate and personal property taxes, assessments, water
rates or sewer rents, now or hereafter levied or assessed or imposed against all
or part of each Property.
"Term": the entire term of this Agreement, which shall expire upon
repayment in full of the Debt and full performance of each and every obligation
to be performed by Borrower pursuant to the Loan Documents.
"Title Insurance Policy": a mortgagee title insurance policy, in form
acceptable to Lender, issued with respect to each Property and insuring the lien
of each Mortgage.
"Transfer": any sale, conveyance, transfer, Lease (including any amendment,
extension, modification, waiver or renewal thereof), assignment, mortgage,
pledge, grant of a security interest or hypothecation, whether by law or
otherwise, of or in (i) all or part of any Property (including any legal or
beneficial direct or indirect interest therein), (ii) any direct or indirect
interest in Borrower, or (iii) any stock in the Managing Member.
"Treasury Rate": as of the Optional Prepayment Date, the linear
interpolation of the bond equivalent yields as reported in Federal Reserve
Statistical Release H.15-Selected Interest Rates under the heading "U.S.
Government Securities/Treasury Constant Maturities" for the week ending prior to
the Optional Prepayment Date of U.S. Treasury constant maturities with maturity
dates (one longer and one shorter) most nearly approximating the remaining term
of the Note as of the Optional Prepayment Date.
"UCC": the Uniform Commercial Code as in effect in the applicable State.
"U.S. Obligation": direct non-callable obligations of the United States of
America.
"Yield Maintenance Premium": the amount (if any) which, when added to the
unpaid Principal or the principal amount of the Defeased Note, as applicable,
will be sufficient to purchase U.S. Obligations providing the required Scheduled
Defeasance Payments.
I.2 Index of Other Definitions. The following terms are defined in the
sections or Loan Documents indicated below:
"Accrued Interest" - 2.2.2
"Annual Budget" - 5.9.5
"Award" - 7.3.2
"Capital Budget" - 5.9.5
"Capital Reserve Fund" - 3.4.1
"Casualty" - 7.2.1
"Casualty/Condemnation Prepayment" - 2.3.2
"Clearing Accounts" - 3.1
"Clearing Banks" - 3.1
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"Condemnation" - 7.3.1
"Defeasance" - 2.3.3
"Defeasance Date" - 2.3.3
"Defeased Note" - 2.3.3
"Disclosure Document" - 9.1.2
"Environmental Laws" - 4.1.32
"Equipment" - Mortgage
"Event of Default" - 8.1
"Exchange Act" - 9.1.2
"Funds" - 3.8
"Hazardous Substances" - 4.1.32
"Improvements" - Mortgage
"Insurance Premiums" - 7.1.2
"Insured Casualty" - 7.2.2
"Leases" - Mortgage
"Lender's Consultant" - 5.10.1
"Liabilities" - 9.1.3
"Licenses" - 4.1.22
"Loan" - 2.1
"Lockbox Event" - 3.1
"Lockbox Termination" - 3.1
"Monthly Debt Service Payment Amount"- 2.2.1
"Nomura" - 9.1.2
"Nomura Group" - 9.1.2
"Operating Budget" - 5.9.5
"Policies" - 7.1.2
"Premium" - 2.1
"Principal" - 2.1
"Proceeds" - 7.2.2
"Provided Information" - 9.1
"Registration Statement" - 9.1.3
"Remedial Work" - 5.10.2
"Rents" - Mortgage
"Required Records" - 5.9.6
"Required Repair Fund" - 3.2.1
"Required Repairs" - 3.2.1
"Restoration" - 7.4.1
"Rollover Reserve Fund" - 3.5.1
"Scheduled Defeasance Payments" - 2.3.3
"Securities" - 9.1
"Securities Act" - 9.1.2
"Securitization" - 9.1
"Security Agreement" - 2.3.3
"Special Purpose Bankruptcy Remote Entity" - 5.15
"Subaccounts" - 3.1
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"Substitute Property" - 2.4.4
"Successor Borrower" - 2.3.3
"Tax and Insurance Escrow Fund" - 3.3
"Undefeased Note" - 2.3.3
"Underwriter Group" - 9.1.2
I.3 Principles of Construction. Unless otherwise specified, (i) all
references to sections and schedules are to those in this Agreement, (ii) the
words "hereof," "herein" and "hereunder" and words of similar import refer to
this Agreement as a whole and not to any particular provision, (iii) all
definitions are equally applicable to the singular and plural forms of the terms
defined, (iv) the word "including" means "including but not limited to," and (v)
accounting terms not specifically defined herein shall be construed in
accordance with GAAP.
II. GENERAL
II.1 The Loan. Lender is making a loan (the "Loan") to Borrower on the date
hereof, in the aggregate original principal amount (the "Principal") of
$67,174,650, which shall mature on the Stated Maturity Date. To induce Borrower
to agree to the Interest Rate, Lender is paying to Borrower on the date hereof
an interest rate buy-up premium (the "Premium") in the amount of $7,825,351.
Borrower acknowledges receipt of the Loan and the Premium in the aggregate
amount of $75,000,000, the proceeds of which are being and shall be used solely
to (i) repay and discharge any existing loans relating to the Properties, (ii)
fund the Tax and Insurance Escrow Fund and the Required Repair Fund, and (iii)
pay approved costs and expenses incurred in connection with the Loan. No amount
repaid in respect of the Loan may be reborrowed.
II.2 Interest; Monthly Payments.
II.2.1 Generally. (a) From the date hereof to but not including the
Optional Prepayment Date, Borrower shall pay interest on the unpaid Principal at
the Interest Rate. From and after the Optional Prepayment Date, interest on the
unpaid Principal shall accrue at the Revised Interest Rate and be payable as
provided in Sections 2.2.2 and 2.2.3(b).
(b) On April 11, 1998 and each Payment Date thereafter through and
including the Maturity Date, the Principal and interest thereon at the Interest
Rate shall be payable in equal monthly installments of $545,342.88 (the "Monthly
Debt Service Payment Amount"); which is based on the Interest Rate and a
360-month amortization schedule. The Monthly Debt Service Payment Amount due on
any Payment Date shall first be applied to the payment of interest accrued from
the 11th day of the month preceding the Payment Date through the 10th day of the
month in which the Payment Date occurs, notwithstanding that the Payment Date
may not have been the 11th day of such month because the 11th day of such month
is not a Business Day. The remainder of such Monthly Debt Service Payment Amount
shall be applied to the reduction of the unpaid Principal.
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II.2.2 Accrued Interest. From and after the Optional Prepayment Date, all
interest accruing in respect of the unpaid Principal in excess of the Interest
Rate ("Accrued Interest") shall, to the extent not paid, be deferred, be added
to the Debt each month and, to the extent permitted by applicable law, accrue
interest at the Revised Interest Rate, compounded monthly. All Accrued Interest
shall be due and payable on the Maturity Date.
II.2.3 Property Cash Flow Allocation. (a) Commencing on April 11, 1998 and
continuing on each Payment Date thereafter through and including the Optional
Prepayment Date, except during the continuance of an Event of Default, any Rents
received by Borrower (and, after a Lockbox Event, Rents deposited into the
Deposit Account) during the immediately preceding Interest Period shall be
applied as follows in the following order of priority: (i) First, to make
required payments to the Tax and Insurance Escrow Fund; (ii) Second, to Lender
to pay the Monthly Debt Service Payment Amount (plus, if applicable, interest at
the Default Rate); (iii) Third, to make required payments to the Capital Reserve
Fund; (iv) Fourth, to make required payments to the Rollover Reserve Fund; (v)
Fifth, after a Lockbox Event (unless and until a Lockbox Termination occurs),
payments for Approved Operating Expenses; and (vi) Lastly, payments to Borrower
of any excess amounts.
(b) Commencing on the first Payment Date after the Optional Prepayment Date
and continuing on each Payment Date thereafter until the entire Debt has been
paid in full, except during the continuance of an Event of Default, any Rents
deposited into the Deposit Account (or otherwise received by Borrower) during
the immediately preceding Interest Period shall be applied by Lender as follows
in the following order of priority: (i) First, to make required payments to the
Tax and Insurance Escrow Fund; (ii) Second, to Lender to pay the Monthly Debt
Service Payment Amount (plus, if applicable, interest at the Default Rate);
(iii) Third, to make required payments to the Capital Reserve Fund; (iv) Fourth,
to make required payments to the Rollover Reserve Fund; (v) Fifth, payments for
Approved Operating Expenses; (vi) Sixth, payments to Lender to prepay the unpaid
Principal until paid in full; (vii) Seventh, payments to Lender to be applied
against Accrued Interest and interest accrued thereon; and (viii) Lastly,
payments to Borrower of any excess amounts.
(c) The failure of Borrower to make all of the payments required under
clauses (i) through (v) of Section 2.2.3(a) or (b) in full on each Payment Date
shall constitute a Default under this Agreement. However, the failure of
Borrower to prepay any unpaid Principal or to pay any Accrued Interest under
clause (vi) or (vii) of Section 2.2.3(b) on a Payment Date as a result of
insufficient Rents for such payment shall not constitute a Default hereunder.
All Accrued Interest shall nonetheless be due and payable on the Maturity Date.
(d) During the continuance of an Event of Default, Lender may, in its sole
discretion, permit the application of Rents in the order of priority set forth
in Section 2.2.3(b) or any other order, and to any portion or portions of the
Debt, as Lender shall determine.
II.2.4 Default Rate. After the occurrence and during the continuance of an
Event of Default, the entire unpaid Principal shall bear interest at the Default
Rate, and shall be
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payable upon demand from time to time, to the extent permitted by applicable
law. Payment or acceptance of interest at the Default Rate is not a permitted
alternative to timely payment and shall not constitute a waiver of any Default
or Event of Default or an amendment to this Agreement or any other Loan Document
and shall not otherwise prejudice or limit any rights or remedies of Lender.
II.3 Loan Repayment and Defeasance.
II.3.1 Repayment. Borrower shall repay any unpaid Principal in full on the
Maturity Date, together with interest thereon to (but excluding) the date of
repayment. Other than as set forth in Sections 2.3.2 and 2.3.3 below, Borrower
shall have no right to prepay all or any portion of the Principal before the
third Payment Date immediately preceding the Optional Prepayment Date. From and
after the third Payment Date immediately preceding the Optional Prepayment Date,
the Principal may be prepaid in whole or in part without penalty or premium.
II.3.2 Mandatory Prepayments. The Loan is subject to mandatory prepayment,
without premium or penalty, in certain instances of Insured Casualty or
Condemnation (each a "Casualty/Condemnation Prepayment"), in the manner and to
the extent set forth in Section 7.4.2. Each Casualty/Condemnation Prepayment
shall be made on a Payment Date and include all accrued and unpaid interest on
the Principal prepaid up to but not including such Payment Date or, if not paid
on a Payment Date, include interest that would have accrued on the Principal
prepaid to but not including the next Payment Date.
II.3.3 Voluntary Defeasance of the Note. (a) Subject to the terms and
conditions set forth in this Section 2.3.3, Borrower may defease all or any
portion of the Principal (hereinafter, a "Defeasance"); provided, that no such
Defeasance may occur prior to the Release Date or from and after the Optional
Prepayment Date. Each Defeasance shall be subject, in each case, to the
satisfaction of the following conditions precedent:
(i) Borrower shall provide not less than 30 days prior notice to
Lender specifying a Payment Date (the "Defeasance Date") on which the
Defeasance is to occur. Such notice shall indicate the Principal to be
defeased.
(ii) Borrower shall pay to Lender (A) all accrued and unpaid interest
on the unpaid Principal to but not including the Defeasance Date, (B) all
other sums, not including scheduled interest or Principal payments, then
due under the Loan Documents, (C) the required Defeasance Deposit for such
Defeasance, and (D) all reasonable costs and expenses of Lender incurred in
the Defeasance, including any costs and expenses associated with a release
of Lien as provided in Section 2.4 and reasonable attorney's fees and
expenses. If for any reason the Defeasance Date is not a Payment Date,
Borrower shall also pay interest that would have accrued on the Note to but
not including the next Payment Date.
(iii) No Event of Default shall exist.
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(iv) If only a portion of the unpaid Principal is the subject of the
Defeasance, Borrower shall execute and deliver all necessary documents to
amend and restate the Note and issue two substitute notes: one having a
principal balance equal to the defeased portion of the original Note (the
"Defeased Note") and the other having a principal balance equal to the
undefeased portion of the original Note (the "Undefeased Note") and the
original Note shall be returned to Borrower. The Defeased Note and
Undefeased Note shall have terms identical to the terms of the Note, except
for the principal balance, the Monthly Debt Service Payment Amount (which
amount will be prorated with the relative principal amounts) and the
collateral referred to in such notes. A Defeased Note cannot be the subject
of any further Defeasance.
(v) Borrower shall execute and deliver a security agreement, in form
and substance satisfactory to Lender, creating a first priority lien on the
Defeasance Deposit and the U.S. Obligations purchased with the Defeasance
Deposit in accordance with this Section 2.3.3 (the "Security Agreement").
(vi) Borrower shall deliver (A) an opinion of counsel for Borrower in
form satisfactory to Lender in its sole discretion stating, among other
things, that (1) Lender has a perfected first priority security interest in
the Defeasance Deposit and the U.S. Obligations delivered by Borrower and
(2) such U.S. Obligations have been validly assigned to the REMIC Trust,
(B) if required by the applicable Rating Agencies, a non-consolidation
opinion with respect to the Successor Borrower in form and substance
satisfactory to Lender and the applicable Rating Agencies, (C) an Officer's
Certificate certifying that the requirements set forth in this Section
2.3.3(a) have been satisfied, (D) a certificate from an independent
certified public accountant certifying that the amounts of the U.S.
Obligations comply with all of the requirements of this Agreement, and (E)
such other certificates, documents or instruments as Lender may reasonably
request.
(vii) Lender shall receive evidence in writing from the applicable
Rating Agencies to the effect that such Defeasance will not result in a
qualification, withdrawal or downgrading of the ratings in effect
immediately prior to such Defeasance for the Securities then outstanding.
(b) In connection with each Defeasance, Borrower hereby appoints Lender as
its agent and attorney-in-fact for the purpose of using the Defeasance Deposit
to purchase U.S. Obligations (which purchases, if made by Lender, shall be made
by Lender on an arms-length basis at then prevailing market rates) which provide
payments on or prior to, but as close as possible to, all successive Payment
Dates after the Defeasance Date through and including the Optional Prepayment
Date, for the entire unpaid Principal in the case of a Defeasance, or for the
principal amount of the Defeased Note, in the case of a Defeasance for only a
portion of the unpaid Principal (including, on the Optional Prepayment Date, the
unpaid Principal of either the Note or the Defeased Note), and in amounts equal
to the scheduled payments due on such dates under the Note or the Defeased Note,
as applicable (the "Scheduled Defeasance Payments"). Borrower, pursuant to the
Security Agreement or other appropriate document, shall irrevocably authorize
and direct that the payments received from the U.S. Obligations be made directly
to
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Lender and applied to satisfy the obligations of Borrower under the Note or the
Defeased Note, as applicable. Any portion of the Defeasance Deposit in excess of
the amount necessary to purchase the U.S. Obligations required by this Section
2.3.3(b) and satisfy Borrower's obligations under Section 2.3 shall be remitted
to Borrower. Any amounts received in respect of the U.S. Obligations in excess
of the amounts necessary to make monthly payments pursuant to Section 2.2 shall
be retained by Lender until payment in full of the Debt, at which time, the same
shall be remitted to Borrower. Semi-annual payments in respect of U.S.
Obligations shall be applied to payments under the Note or the Defeased Note, as
applicable, as the same become due thereunder.
(c) If requested by Borrower in connection with any Defeasance under this
Section 2.3.3, NACC shall establish or designate a successor entity (the
"Successor Borrower") and Borrower shall transfer and assign all obligations,
rights and duties under and to the Note or the Defeased Note, as applicable,
together with the pledged U.S. Obligations, to such Successor Borrower. The
obligation of NACC to establish or designate a Successor Borrower shall be
retained by NACC notwithstanding the sale or transfer of this Agreement unless
such obligation is specifically assumed by the transferee. Such Successor
Borrower shall assume the obligations under the Note or the Defeased Note, as
applicable, and the Security Agreement, and Borrower shall be relieved of its
obligations thereunder. Borrower shall pay $1,000 to any such Successor Borrower
as consideration for assuming the obligations under the Note or the Defeased
Note, as applicable, and the Security Agreement. Notwithstanding anything in
this Agreement to the contrary, no other assumption fee shall be payable upon a
transfer of the Note or the Defeased Note in accordance with this Section 2.3.3,
but Borrower shall pay all costs and expenses incurred by Lender, including
Lender's reasonable attorneys' fees and expenses, incurred in connection
therewith.
II.4 Release of Property. Except as set forth in this Section 2.4, no
repayment, prepayment or defeasance of all or any portion of the Note shall
cause, give rise to a right to require, or otherwise result in, the release of
the Lien of a Mortgage on any Property.
II.4.1 Release on Defeasance. If Borrower has elected to defease the Note
in its entirety, and the requirements of Section 2.3.3 have been satisfied, the
Properties shall be released from the Liens of the Mortgages, and the U.S.
Obligations pledged pursuant to the Security Agreement shall be the sole source
of collateral securing the Debt. In connection with such release, Borrower shall
submit to Lender, not less than 20 days prior to the Defeasance Date, a form of
release for execution by Lender appropriate in the applicable State and
satisfactory to Lender in its sole discretion, and all other documentation
Lender reasonably requires to be delivered by Borrower, together with an
Officer's Certificate certifying that such documentation (i) is in compliance
with all Legal Requirements, and (ii) will effect such release in accordance
with the terms of this Agreement.
II.4.2 Release of Individual Properties. Borrower on one or more occasions
may obtain (i) the release of an individual Property from the Lien of the
Mortgage thereon (and related Loan Documents) and (ii) the release of Borrower's
obligations under the Loan Documents with respect to such Property (other than
those expressly stated to survive), upon
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satisfaction of each of the following conditions:
(a) Either, (i) in connection with a Defeasance of the Note under Section
2.3.3, (x) the principal balance of the Defeased Note shall equal or exceed the
Release Amount and (y) the requirements of Section 2.3.3 shall have been
satisfied or (ii) in connection with a substitution of Properties under Section
2.4.4, (x) the Debt Service Coverage Ratio and the Net Operating Income (for the
immediately preceding 12-month period) for the Substitute Property(ies)
replacing the individual Property(ies) to be released shall equal or exceed 115%
of the Debt Service Coverage Ratio and Net Operating Income (for the immediately
preceding 12-month period) of such individual Property(ies) as of the date
hereof and as of the date immediately preceding the substitution and (y) the
requirements of Section 2.4.4 shall have been satisfied. For purposes of this
Section 2.4.2(a), the determination of the Debt Service Coverage Ratio for an
individual Property shall be calculated on the basis of the Principal
attributable thereto, prorated in the same proportion that its Allocated Loan
Amount bears to the aggregate original principal balance of the Loan.
(b) Borrower shall submit to Lender, not less than twenty (20) days prior
to the date of such release, a release of Lien (and related Loan Documents) for
such Property (for execution by Lender) in a form appropriate in the
jurisdiction in which such Property is located and satisfactory to Lender in its
reasonable discretion, and all other documentation Lender requires to be
delivered by Borrower in connection with such release, together with an
Officer's Certificate certifying that such documentation (i) is in compliance
with all Legal Requirements, (ii) will effect such release in accordance with
the terms of this Agreement, and (iii) will not impair or otherwise adversely
affect the Liens, security interests and other rights of Lender under the Loan
Documents not being released (or as to the parties to the Loan Documents and
Properties subject to the Loan Documents not being released).
(c) With respect to any release of an individual Property, after giving
effect to such release, the Debt Service Coverage Ratio for all of the
Properties then remaining subject to the Liens of the Mortgage shall be equal to
the greater of (i) the Debt Service Coverage Ratio on the date hereof and (ii)
the Debt Service Coverage Ratio on the date of the release of such Property.
(d) Upon the release of an individual Property, any amounts previously
deposited by Borrower into any Fund with respect to such released Property shall
be returned to Borrower.
II.4.3 Release on Payment in Full. Lender shall, upon the written request
and at the expense of Borrower, upon payment in full of the Debt in accordance
herewith, release the Liens of the Mortgages if not theretofore released.
II.4.4 Substitution of Properties. (a) Subject to the terms and conditions
set forth in Section 2.4.2 and this Section 2.4.4, Borrower may obtain a release
of Lender's Lien against one or more individual Properties by substituting
therefor other property(ies) (a "Substitute Property"), provided that such
substitution of Properties shall not be allowed more
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than once per year during the Term. Any such substitution shall be subject, in
each case, to the satisfaction of the following conditions precedent:
(i) Lender shall have received any due diligence materials reasonably
requested by Lender with respect to the Substitute Property(ies) and the
same are satisfactory to Lender in all respects.
(ii) The Substitute Property(ies) are satisfactory to Lender in all
respects in Lender's sole discretion (after Lender's due diligence
investigation).
(iii) After giving effect to the substitution, the overall Debt
Service Coverage Ratio for the Loan is not less than the overall Debt
Service Coverage Ratio for the Loan as of the date hereof and as of the
date immediately preceding the substitution.
(iv) Lender shall have received evidence in writing from the
applicable Rating Agencies to the effect that such substitution will not
result in a qualification, withdrawal or downgrading of the ratings in
effect immediately prior to such substitution for the Securities issued in
connection with the Securitization which are then outstanding.
(v) If required by the applicable Rating Agencies, Borrower shall also
deliver or cause to be delivered a non-consolidation opinion with respect
to the Borrower in form and substance satisfactory to Lender and the
applicable Rating Agencies.
(vi) No Event of Default shall exist.
(vii) Lender shall have received from Borrower fully executed and
acknowledged counterparts of Mortgages, the Assignment of Leases and the
Assignments of Agreements relating to each of the Substitute Properties and
evidence that counterparts of the Mortgages and Assignment of Leases have
been delivered to the title company for recording, in the reasonable
judgment of Lender, so as to effectively create upon such recording valid
and enforceable Liens upon such Substitute Properties, of the requisite
priority, in favor of Lender (or such other trustee as may be required or
desired under local law), subject only to the Permitted Encumbrances and
such other Liens as are permitted pursuant to the Loan Documents.
(viii) Lender shall have received with respect to each Substitute
Property (A) a Title Insurance Policy and evidence that all premiums in
respect of such Title Insurance Policy has been paid, (B) an "ALTA Survey"
satisfactory to Lender, (C) valid certificates of insurance for the
policies of insurance required hereunder and evidence of the payment of all
premiums payable for the existing policy period which period shall not be
less than one month in advance, (D) an environmental report reasonably
satisfactory to Lender indicating that there are no hazardous materials
present at the Substitute Property and no environmental condition affecting
the Substitute Property requiring remediation, (E) an engineering report
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reasonably satisfactory to Lender, (F) an appraisal reasonably satisfactory
to Lender, and (G) one of the following, in form and substance reasonably
satisfactory to Lender: (i) letters or other evidence from the appropriate
municipal authorities (or other Persons) concerning applicable zoning and
building laws, (ii) an ALTA 3.1 zoning endorsement for the applicable Title
Insurance Policy, or (iii) a zoning opinion letter.
(ix) Borrower shall deliver an opinion of counsel for Borrower in form
and substance satisfactory to Lender and the applicable Rating Agencies
stating, among other things, that the substitution does not violate the
rules applicable to a REMIC.
(x) Borrower shall deliver an Officer's Certificate certifying that
the requirements set forth in this Section 2.4.4 and Section 2.4.2 have
been satisfied.
(xi) Borrower shall deliver such other certificates, documents or
instruments as Lender may reasonably request.
(xii) Borrower shall pay all reasonable costs and expenses of Lender
incurred in connection with the substitution.
(b) Notwithstanding anything to the contrary contained in this Section
2.4.4, upon the substantial completion of the proposed expansion of the Property
located in Smithfield, North Carolina, subject to the satisfaction of the
conditions contained above, Borrower may obtain a release of Lender's Lien
against any two of the Special Release Properties, and the completed expansion
of the Property located in Smithfield, North Carolina shall be deemed the
Substitute Property for such released Property(ies) for all purposes contained
herein.
II.5 Payments and Computations.
II.5.1 Making of Payments. Each payment by Borrower hereunder or under the
Note shall be made in funds settled through the New York Clearing House
Interbank Payments System or other funds immediately available to Lender by
11:00 a.m., New York City time, on the date such payment is due, to Lender by
deposit to such account as Lender may designate by written notice to Borrower.
Whenever any payment hereunder or under the Note shall be stated to be due on a
day that is not a Business Day, such payment shall be made on the first Business
Day thereafter.
II.5.2 Computations. Interest payable hereunder or under the Note shall be
computed on the basis of the actual number of days elapsed and a 360-day year.
II.5.3 Late Payment Charge. If any Principal, interest or other sum due
under any Loan Document is not paid by Borrower on the date on which it is due,
Borrower shall pay to Lender upon demand an amount equal to the lesser of 5% of
such unpaid sum or the maximum amount permitted by applicable law, in order to
defray the expense incurred by Lender in handling and processing such delinquent
payment and to compensate Lender for the loss of the use of such delinquent
payment. Such amount shall be secured by the Loan Documents.
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II.6 Structuring Fee. On the date hereof, Borrower shall pay to Lender a
structuring fee of $187,500.
II.7 Special Prepayment Compensation. If the Loan is prepaid in whole or in
part prior to the Optional Prepayment Date in circumstances where, pursuant to
the applicable provisions of the Loan Documents (such as, for example, Section
7.4.2 in certain events), no Yield Maintenance Premium is due (i.e., without a
Defeasance pursuant to Section 2.3.3), then Borrower shall nevertheless pay to
Lender (in addition to the prepaid Principal and accrued interest), as a refund
of the unearned portion of the Premium, an amount (a "Premium Refund") equal to
the Relevant Percentage of (i) the Hypothetical Principal minus (ii) the unpaid
Principal (before accounting for such prepayment). For purposes of the
foregoing, (x) the "Relevant Percentage" shall mean the percentage of the unpaid
Principal that is being so prepaid, and (y) the "Hypothetical Principal" shall
mean the principal balance of the Loan that would be outstanding on the date of
such prepayment immediately prior to such prepayment (after taking into account
the amount and timing of all payments actually made by Borrower on account of
the Loan prior to such date, including any partial prepayments of Principal and
Premium Refunds actually made by Borrower prior to such date) if the original
Principal had been $75,000,000 (rather than $67,174,650), the Interest Rate had
been 7.73% (rather than 9.10%), the constant monthly payment due and payable on
each Payment Date was an amount that would fully amortize the Loan over 338 such
monthly payments (rather than 360), and all other terms of the Loan were
otherwise the same as set forth in the Loan Documents.
III. CASH MANAGEMENT; ESCROWS AND RESERVES
III.1 Cash Management Arrangements. All Rents shall be transmitted directly
by tenants of each Property into one or more accounts (the "Clearing Accounts")
maintained by Borrower but controlled by Lender at one or more local banks
selected by Borrower (the "Clearing Banks"). All Rents received by Borrower or
Manager shall be deposited into a Clearing Account within two Business Days of
receipt. Funds deposited into the Clearing Accounts shall be swept by the
Clearing Banks on a daily basis into Borrower's operating account at a Clearing
Bank, unless a Lockbox Event shall have occurred; in which event, until a
Lockbox Termination, such funds shall be swept by the Clearing Banks on a daily
basis into an account at the Deposit Bank controlled by Lender (a "Deposit
Account") and applied and disbursed in accordance with this Agreement and,
pending such application and disbursement, will be invested in Permitted
Investments selected by Borrower, with any earnings thereon accruing for the
benefit of Borrower. Within 15 days after Lender's request following a Lockbox
Event, Borrower shall enter into one or more deposit account agreements among
Borrower, Lender and the Deposit Bank, in Lender's then current form, providing
for the receipt and disbursement of Rents by the Deposit Bank in accordance
herewith. The Deposit Account and all subaccounts thereof shall at all times be
Eligible Accounts (such subaccounts, and any other accounts or subaccounts at
the Deposit Bank, other than the Deposit Account, are referred to herein as
"Subaccounts"). A "Lockbox Event" shall mean (i) either (A) the occurrence of
the Optional Prepayment Date or (B) the occurrence of either (x) an Event of
Default, or (y) the
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failure of the Properties to maintain a Debt Service Coverage Ratio of at least
1.15, which shall be measured quarterly, and (ii) the giving by Lender to the
Clearing Banks of notice of such occurrence. "Lockbox Termination" shall mean
the giving by Lender to the Clearing Banks of notice that such sweeping of funds
into the Deposit Account may cease, which notice Lender shall only be required
to give if (1) the Optional Prepayment Date shall not yet have occurred and (2)
for one year after a Lockbox Event of the type described in the foregoing clause
(x), no Event of Default shall occur and, as of the end of such one-year period,
the Debt Service Coverage Ratio is at least equal to 1.15.
III.2 Required Repairs; Required Repair Funds.
III.2.1 Required Repairs: Deposits. Borrower shall perform and complete
each item of the repairs at the Properties described on Schedule 4 (the
"Required Repairs") on or before the deadline for such item set forth on
Schedule 4. On the date hereof, Borrower shall deposit with Lender the amount
set forth on Schedule 4 (the "Required Repair Fund").
III.2.2 Release of Required Repair Funds. Lender shall disburse amounts out
of the Required Repair Fund to Borrower within 30 days after the delivery by
Borrower to Lender of a request therefor, accompanied by the following items,
provided that on the date such request is received by Lender and on the date
such payment is to be made, no Default or Event of Default shall exist: (i) an
Officer's Certificate (A) certifying that all Required Repairs have been
completed in a good and workmanlike manner, (B) identifying each Person that
supplied materials or labor in connection with the Required Repairs and (C)
stating that each such Person has been or, upon receipt of the requested
disbursement, will be paid in full, (ii) with respect to any Required Repair,
the cost of which equals or exceeds $10,000, copies of appropriate Lien waivers
or other evidence of payment satisfactory to Lender, (iii) at Lender's option, a
title search for the applicable Property indicating that it is free from all
Liens not previously approved by Lender, and (iv) such other evidence as Lender
shall reasonably request that the Required Repairs at the applicable Property
have been completed and paid for.
III.3 Tax and Insurance Escrow Fund. Borrower shall pay to Lender on each
Payment Date (i) one-twelfth of the Taxes that Lender estimates will be payable
during the next 12 months in order to accumulate with Lender sufficient funds to
pay all such Taxes at least 30 days prior to their respective due dates, and
(ii) one-twelfth of the Insurance Premiums that Lender estimates will be payable
for the renewal of the coverage afforded by the Policies upon the expiration
thereof in order to accumulate with Lender sufficient funds to pay all such
Insurance Premiums at least 30 days prior to the expiration of the Policies (the
amounts paid under the foregoing clauses (i) and (ii), less disbursements
thereof pursuant hereto, being called the "Tax and Insurance Escrow Fund").
Lender will apply the Tax and Insurance Escrow Fund to payments of Taxes and
Insurance Premiums required to be made by Borrower pursuant to Sections 5.2 and
7.1, or to promptly reimburse Borrower for such amounts upon presentation of
evidence of payment and an Officer's Certificate in form and substance
satisfactory to Lender; subject, however, to Borrower's right to contest Taxes
in accordance with Section 5.2 In making any payment relating to the Tax and
Insurance Escrow Fund, Lender may do so according to any
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bill, statement or estimate procured from the appropriate public office (with
respect to Taxes) or insurer or agent (with respect to Insurance Premiums),
without inquiry into the accuracy of such bill, statement or estimate or into
the validity of any tax, assessment, sale, forfeiture, tax lien or title or
claim thereof. Lender will use all reasonable efforts to make payments on time
and before a penally attaches, if adequate funds then exist. Lender will pay any
penalties assessed if, due to its negligence, it fails to make payments on time
if adequate funds then exist. If the amount of the Tax and Insurance Escrow Fund
shall exceed the amounts next coming due for Taxes and Insurance Premiums
pursuant to Sections 5.2 and 7.1, Lender shall return any excess to Borrower. If
at any time Lender determines that the Tax and Insurance Escrow Fund is not or
will not be sufficient to pay the Taxes or Insurance Premiums next coming due,
Lender shall notify Borrower of such determination (which notice shall be
accompanied with reasonable documentation supporting such determination) and
Borrower shall increase its monthly payments to Lender by the amount that Lender
estimates is sufficient to make up the deficiency at least 30 days prior to
delinquency of the Taxes and/or expiration of the Policies, as the case may be.
III.4 Capital Reserve Fund.
III.4.1 Capital Reserve Fund. Borrower shall pay to Lender on each Payment
Date (in addition to other payments required hereunder) an amount equal to
one-twelfth of the product obtained by multiplying $0.15 by the aggregate number
of rentable square feet of space in the Property (such payments, less
disbursements thereof pursuant hereto, being called the "Capital Reserve Fund").
If the amount of the Capital Reserve Fund shall exceed the amounts due for
Approved Capital Expenses pursuant to the terms hereof, Lender shall, in its
discretion, return any excess to Borrower or, if future Capital Reserve Fund
payments are then required, credit such excess against such future payments.
III.4.2 Payment of Capital Expenses. From time to time (but not more often
than once per month), Lender shall disburse funds held in the Capital Reserve
Fund to Borrower, within 15 days after the delivery by Borrower to Lender of a
request therefor, in increments of at least $1,000 provided (i) no Event of
Default shall have occurred and be continuing; (ii) such disbursement is for a
Capital Expense (provided that during the continuance of a Lockbox Event, such
disbursement shall only be for an Approved Capital Expense); (iii) Lender shall,
within such 15 day period, have (if it desires) verified (by an inspection,
which during the continuance of an Event of Default or a Lockbox Event, shall be
conducted at Borrower's expense) performance of the work associated with such
Capital Expense or Approved Capital Expense, as the case may be; and (iv) the
request for disbursement is accompanied by (A) an Officer's Certificate
certifying (v) the amount of funds to be disbursed, (w) that such funds will be
used to pay Capital Expenses or Approved Capital Expenses, as the case may be,
and a description thereof, (x) that all outstanding trade payables (other than
those to be paid from the requested disbursement or those otherwise permitted to
be outstanding under Section 6.8) have been paid in full, (y) that the same has
not been the subject of a previous disbursement, and (z) that all previous
disbursements have been used to pay the previously identified Capital Expenses
or Approved Capital Expenses, as the case may be, and (B) reasonably detailed
documentation as to the amount, necessity and purpose therefor.
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III.5 Rollover Reserve Fund.
III.5.1 Rollover Reserve Fund. Borrower shall pay to Lender on each Payment
Date until the Major Lease Rollover Date, the sum of $35,000 (in addition to
other payments required hereunder) (such payments, less disbursements thereof
pursuant hereto, being called the "Rollover Reserve Fund"). Without limiting
Lender's rights hereunder, if any sums in the Rollover Reserve Fund are applied
to payment of Approved Leasing Expenses, Borrower shall make deposits into the
Rollover Reserve Fund on each Payment Date in an amount from time to time
determined by Lender to be the minimum monthly amount necessary to be deposited
such that, after taking into account all payments from the Rollover Reserve
Fund, the amount on deposit in the Rollover Reserve Fund on the Major Lease
Rollover Date shall be not less than $2,000,000. Borrower shall also deposit
into the Rollover Reserve Fund all payments received from tenants in connection
with the early termination or cancellation of any of the Major Leases. Lender
will apply such payments to payment of Approved Leasing Expenses pursuant to the
terms hereof. If the amount of the Rollover Reserve Fund shall exceed the
amounts due for Approved Leasing Expenses pursuant to the terms hereof, Lender
shall return any excess to Borrower. If Lender determines in its reasonable
judgment that the amount of the Rollover Reserve Fund will be insufficient to
pay the amounts due or to become due for Approved Leasing Expenses, Lender may
adjust the monthly amounts required to be deposited into the Rollover Reserve
Fund upon 30 days' notice to Borrower. Alternatively, Lender may in its
discretion determine that the amount of the Rollover Reserve Fund will exceed
the amounts due or to become due for Approved Leasing Expenses, in which case
Lender may reduce the monthly amounts to be deposited therein. In determining
whether (i) to reduce the monthly amounts to be deposited into the Rollover
Reserve Fund or (ii) to return any excess to Borrower, Lender shall take into
account any extensions of the originally scheduled expiration dates of the Major
Leases. For any Major Lease which is extended beyond the Major Lease Rollover
Date applicable thereto, Lender will either return to Borrower that portion of
the Rollover Reserve Fund corresponding to such Major Lease or reduce the
monthly amount required to be deposited into the Rollover Reserve Fund which
corresponds to such Major Lease.
III.5.2 Payment of Leasing Expenses. From time to time (but not more than
once per month) Lender shall disburse funds held in the Rollover Reserve Fund to
Borrower, within 10 days after the delivery by Borrower to Lender of a request
therefor, in increments of at least $1,000, provided (i) no Event of Default
shall have occurred and be continuing; (ii) such disbursement is for an Approved
Leasing Expense; (iii) Lender shall have (if it desires) verified (by an
inspection conducted at Borrower's expense) performance of any construction work
associated with such Approved Leasing Expense; and (iv) the request for
disbursement is accompanied by (A) an Officer's Certificate certifying (v) the
amount of funds to be disbursed, (w) that such funds will be used only to pay
(or reimburse Borrower for) Approved Leasing Expenses and a description thereof,
(x) that all outstanding trade payables (other than those to be paid from the
requested disbursement or those otherwise permitted to be outstanding under
Section 6.8) have been paid in full, (y) that the same has not been the subject
of a previous disbursement, and (z) that all previous disbursements have been
used only to pay (or reimburse Borrower for) the previously identified Approved
Leasing Expenses, and (B) reasonably detailed supporting documentation as to the
amount, necessity and purpose therefor.
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III.5.3 Release of Rollover Reserve Fund. Lender shall return any funds
held in the Rollover Reserve Fund to Borrower if (i) FAC Realty Trust, Inc.
receives a credit rating by one of the Rating Agencies of "BBB-" or better and
(ii) Lender receives a guaranty of payment, in form and substance satisfactory
to Lender, from FAC Properties, L.P. guaranteeing the payment and performance of
Borrower's obligations under Section 3.5.1 hereof.
III.6 Payment of Approved Operating Expenses. From time to time after the
occurrence of a Lockbox Event and prior to a Lockbox Termination (but not more
than once per month) Lender shall disburse funds held in the Operating Expense
Subaccount to Borrower, provided (i) no Event of Default shall have occurred and
be continuing; (ii) such disbursement is for an Approved Operating Expense; and
(iii) such disbursement is requested by Borrower in writing, accompanied by (A)
an Officer's Certificate certifying (v) the amount of funds to be disbursed, (w)
that such funds will be used to pay Approved Operating Expenses and a
description thereof, (x) that all outstanding trade payables (other than those
to be paid from the requested disbursement or those otherwise permitted to be
outstanding under Section 6.8) have been paid in full, (y) that the same has not
been the subject of a previous disbursement, and (z) that all previous
disbursements have been or will be used to pay the previously identified
Approved Operating Expenses, and (B) reasonably detailed documentation as to the
amount, necessity and purpose therefor. Subject to satisfaction of the preceding
conditions, if Lender receives from Borrower a valid request for a disbursement
for payment of Approved Operating Expenses for the then Current Month at least
five Business Days prior to the Payment Date occurring in such Current Month,
then the disbursement in respect of such Approved Operating Expenses shall be
made to Borrower on such Payment Date. If Borrower shall fail to validly request
a disbursement for payment of Approved Operating Expenses for the then Current
Month at least five Business Days prior to the Payment Date in such Current
Month, then Lender shall retain in the Operating Expense Subaccount an amount
equal to the anticipated Operating Expenses for the then Current Month as set
forth in the approved Operating Budget for such month, and Lender shall, subject
to satisfaction of the preceding conditions, disburse the same to Borrower five
Business Days after Lender receives a valid request therefor. Upon a Lockbox
Termination, Lender shall return to Borrower any funds held by it in the
Operating Expense Subaccount.
III.7 Security Deposits. Security deposits under Leases shall not be
commingled with any other funds of Borrower, and, if cash, shall be deposited by
Borrower at a bank reasonably satisfactory to Lender. After the occurrence of a
Lockbox Event, and prior to a Lockbox Termination, Borrower shall, upon Lender's
request, if permitted by applicable Legal Requirements, turn over to Lender the
security deposits (and any interest theretofore earned thereon) under Leases, to
be held by Lender subject to the terms of the Leases. Upon a Lockbox
Termination, Lender shall return to Borrower such security deposits.
Any letter of credit or other instrument that Borrower receives in lieu of
a cash security deposit shall (i) be maintained in full force and effect in the
full amount unless replaced by a cash deposit as hereinabove described, (ii) if
the letter of credit exceeds $150,000, be issued by an institution reasonably
satisfactory to Lender, (iii) if permitted pursuant to any Legal
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Requirements and if the letter of credit exceeds $150,000, name Lender as payee
or mortgagee thereunder (or at Lender's option, be fully assignable to Lender)
and (iv) in all respects, comply with any applicable Legal Requirements and
otherwise be reasonably satisfactory to Lender. Borrower shall, upon request,
provide Lender with evidence reasonably satisfactory to Lender of Borrower's
compliance with the foregoing.
III.8 Grant of Security Interest; Application of Funds. As security for
payment of the Debt and the performance by Borrower of all other terms,
conditions and provisions of the Loan Documents, Borrower hereby pledges and
assigns to Lender, and grants to Lender a security interest in, all Borrower's
right, title and interest in and to the Required Repair Fund, the Tax and
Insurance Escrow Fund, the Capital Reserve Fund and the Rollover Reserve Fund
(collectively, the "Funds"). Borrower shall not, without obtaining the prior
written consent of Lender, further pledge, assign or grant any security interest
in any Fund, or permit any Lien to attach thereto, or any levy to be made
thereon, or any UCC-l Financing Statements, except those naming Lender as the
secured party, to be filed with respect thereto. This Agreement is, among other
things, intended by the parties to be a security agreement for purposes of the
UCC. Upon the occurrence and during the continuance of an Event of Default,
Lender may apply any sums in any Fund to the payment of the Debt and/or to the
payment of Required Repairs, Taxes, Insurance Premiums, Capital Expenses,
Approved Leasing Expenses and/or Operating Expenses, in any order in its sole
discretion. No Fund shall constitute a trust fund and may be commingled with
other monies held by Lender. Sums in each Fund shall be held by Lender in a
Subaccount and invested in Permitted Investments. Earnings or interest, if any,
on each Fund shall become part of such Fund and shall be disbursed as provided
herein for such Fund. Lender shall not be liable for any loss sustained on the
investment of any funds constituting any Fund, except for Lender's gross
negligence or wilful misconduct. Amounts disbursed to Borrower under Sections
3.2 through 3.7 shall be used by Borrower solely to pay the expenses for which
such disbursement is requested.
IV. REPRESENTATIONS AND WARRANTIES
IV.1 Borrower Representations. Borrower represents and warrants as of the
date hereof that, except to the extent (if any) disclosed on Schedule 2 with
reference to a specific subsection of this Section 4.1:
IV.1.1 Organization; Special Purpose. Borrower has been duly organized and
is validly existing and in good standing, with requisite power and authority,
and all rights, licenses, permits and authorizations, governmental or otherwise,
necessary to own its properties and to transact the business in which it is now
engaged. Borrower is duly qualified to do business and is in good standing in
each jurisdiction where it is required to be so qualified in connection with its
properties, business and operations. Borrower is a Special Purpose Bankruptcy
Remote Entity, and the sole business of Borrower is the ownership, management
and operation of the Properties.
IV.1.2 Proceedings; Enforceability. Borrower has taken all necessary action
to
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authorize the execution, delivery and performance of the Loan Documents. The
Loan Documents have been duly executed and delivered by Borrower and constitute
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency and similar laws affecting rights of creditors generally, and general
principles of equity.
IV.1.3 No Conflicts. The execution, delivery and performance of the Loan
Documents by Borrower will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, or result in the creation
or imposition of any Lien (other than pursuant to the Loan Documents) upon any
of the property of Borrower pursuant to the terms of, any agreement or
instrument to which Borrower is a party or by which its property is subject,
nor, to Borrower's knowledge, will such action result in any violation of the
provisions of any statute or any order, rule or regulation of any Governmental
Authority having jurisdiction over Borrower or any of its properties. Borrower's
rights under the Licenses and the Management Agreement will not be adversely
affected by the execution and delivery of the Loan Documents, Borrower's
performance thereunder or the recordation of the Mortgages. Any consent,
approval, authorization, order, registration or qualification of or with any
Governmental Authority required for the execution, delivery and performance by
any Borrower of the Loan Documents has been obtained and is in full force and
effect.
IV.1.4 Litigation. There are no actions, suits or proceedings at law or in
equity by or before any Governmental Authority now pending or, to Borrower's
knowledge, threatened against or affecting Borrower or any Property, which, if
determined against Borrower or any such Property, might materially adversely
affect the condition (financial or otherwise) or business of Borrower or the
condition or ownership of such Property.
IV.1.5 Agreements. To Borrower's knowledge, Borrower is not a party to any
agreement or instrument or subject to any restriction which might materially
adversely affect Borrower or any Property, or Borrower's business, properties,
operations or condition, financial or otherwise. To Borrower's knowledge,
Borrower is not in default in any material respect in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in any Permitted Encumbrance or any other agreement or instrument to
which it is a party or by which it or any Property is bound.
IV.1.6 Title. Borrower has good and indefeasible title in fee to the real
property comprising part of each Property and good and valid leasehold interest
in the Leased Property, and good title to the balance of each such Property,
free and clear of all Liens except the Permitted Encumbrances. The Mortgages,
when properly recorded in the appropriate records, together with any UCC
financing statements required to be filed in connection therewith, will create
(i) a valid, perfected first priority lien on each such Property and (ii)
perfected security interests in and to, and perfected collateral assignments of,
all personalty included in the Property (including the Leases), all in
accordance with the terms thereof, in each case subject only to any applicable
Permitted Encumbrances. To Borrower's knowledge, the Permitted Encumbrances do
not materially adversely affect the value or use of any Property, or Borrower's
ability to repay the
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Loan. There are no claims for payment for work, labor or materials affecting any
Property which are or may become a Lien prior to, or of equal priority with, the
Liens created by the Loan Documents.
IV.1.7 Survey. To Borrower's knowledge, the survey for each Property
delivered to Lender does not fail to reflect any matter which could materially
adversely affect such Property or the title thereto.
IV.1.8 No Bankruptcy Filing. Borrower is not contemplating either the
filing of a petition by it under any state or federal bankruptcy or insolvency
law or the liquidation of all or a major portion of its property, and Borrower
has no knowledge of any Person contemplating the filing of any such petition
against it.
IV.1.9 Full and Accurate Disclosure. No statement of fact made by Borrower
in any Loan Documents contains any untrue statement of a material fact or omits
to state any material fact necessary to make statements contained therein not
misleading. There is no material fact presently known to Borrower that has not
been disclosed to Lender which materially adversely affects, or, as far as
Borrower can foresee, might materially adversely affect, any Property or the
business, operations or condition (financial or otherwise) of Borrower.
IV.1.10 No Plan Assets. Borrower is not an "employee benefit plan," as
defined in Section 3(3) of ERISA, subject to Title I of ERISA, and none of the
assets of Borrower constitutes or will constitute "plan assets" of one or more
such plans within the meaning of 29 C.F.R. Section 2510.3-101.
IV.1.11 Compliance. Borrower and each Property and the use thereof comply
in all material respects with all applicable Legal Requirements. To Borrower's
knowledge, Borrower is not in default or violation of any order, writ,
injunction, decree or demand of any Governmental Authority, the violation of
which might materially adversely affect the condition (financial or otherwise)
or business of Borrower. To Borrower's knowledge, there has not been and shall
never be committed by Borrower any act or omission affording any Governmental
Authority the right of forfeiture as against any Property or any part thereof or
any monies paid in performance of Borrower's obligations under any Loan
Document.
IV.1.12 Contracts. There are no service, maintenance or repair contracts
affecting any Property that are not terminable on one month's notice or less
without cause and without penalty or premium. All service, maintenance or repair
contracts affecting each Property have been entered into at arms-length in the
ordinary course of Borrower's business and provide for the payment of fees in
amounts and upon terms comparable to existing market rates.
IV.1.13 Financial Information. All financial data, including the statements
of cash flow and income and operating expense, that have been delivered to
Lender in respect of the Properties (i) are true, complete and correct in all
material respects, (ii) accurately represent the financial condition of the
Properties as of the date of such reports, and (iii) to the extent prepared by
an independent certified public accounting firm, have been prepared in
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accordance with GAAP consistently applied throughout the periods covered, except
as disclosed therein. Borrower has no contingent liabilities, liabilities for
delinquent taxes, unusual forward or long-term commitments or unrealized or
anticipated losses from any unfavorable commitments that are known to Borrower
and reasonably likely to have a materially adverse effect on any Property or the
operation thereof, except as referred to or reflected in such financial
statements. Since the date of such financial statements, there has been no
materially adverse change in the financial condition, operations or business of
Borrower from that set forth in said financial statements.
IV.1.14 Condemnation. No Condemnation or other proceeding has been
commenced or, to Borrower's knowledge, is contemplated with respect to all or
part of any Property or for the relocation of roadways providing access to any
Property.
IV.1.15 Federal Reserve Regulations. No part of the proceeds of the Loan
will be used for the purpose of purchasing or acquiring any "margin stock"
within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System or for any other purpose that would be inconsistent with such
Regulation U or for any purpose prohibited by Legal Requirements or any Loan
Document.
IV.1.16 Utilities and Public Access. To Borrower's knowledge, each Property
has rights of access to public ways and is served by water, sewer, sanitary
sewer and storm drain facilities adequate to service it for its intended uses.
To Borrower's knowledge, all public utilities necessary or convenient to the
full use and enjoyment of each Property are located in the public right-of-way
abutting such Property, and all such utilities are connected so as to serve such
Property without passing over other property. To Borrower's knowledge, all roads
necessary for the use of each Property for its current purpose have been
completed and dedicated to public use and accepted by all Governmental
Authorities.
IV.1.17 Not a Foreign Person. Borrower is not a "foreign person" within the
meaning ofss. 1445(f)(3) of the Code.
IV.1.18 Separate Lots. Each parcel comprising each Property is a separate
tax lot and is not a portion of any other tax lot that is not a part of such
Property.
IV.1.19 Assessments. There are no pending or proposed special or other
assessments for public improvements or otherwise affecting any Property, or any
contemplated improvements to any Property that may result in such special or
other assessments.
IV.1.20 Enforceability. The Loan Documents are not subject to, and Borrower
has not asserted, any right of rescission, claims of set-off, counterclaim or
defense, including the defense of usury. No exercise of any of the terms of the
Loan Documents, or any right thereunder, will render any Loan Document
unenforceable.
IV.1.21 Insurance. Borrower has obtained and has delivered to Lender
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insurance policies reflecting the insurance coverages, amounts and other
requirements set forth in this Agreement.
IV.1.22 Use of Property; Licenses. Each Property is used exclusively as a
shopping center, other than the Property located in Cary, North Carolina, which
has an appurtenant office use, and other appurtenant and related uses. To
Borrower's knowledge, all certifications, permits, licenses and approvals,
including certificates of completion and occupancy permits and any applicable
liquor licenses required for the legal use, occupancy and operation of each
Property (collectively, the "Licenses"), have been obtained and are in full
force and effect. The use being made of each Property is in conformity with the
certificate of occupancy issued for such Property.
IV.1.23 Flood Zone. None of the Improvements on any Property is located in
an area as identified by the Federal Emergency Management Agency as an area
having special flood hazards.
IV.1.24 Physical Condition. To Borrower's knowledge, each Property,
including all Improvements, parking facilities, systems, Equipment and
landscaping, are in good condition, order and repair in all material respects;
there exists no structural or other material defect or damages to any Property,
whether latent or otherwise. Borrower has not received notice from any insurance
company or bonding company of any defect or inadequacy in any Property, or any
part thereof, which would adversely affect its insurability or cause the
imposition of extraordinary premiums or charges thereon or any termination of
any policy of insurance or bond.
IV.1.25 Encroachments. To Borrower's knowledge, all of the improvements
included in determining the appraised value of each Property lie wholly within
the boundaries and building restriction lines of such Property, and no
improvement on an adjoining property encroaches upon any Property, and no
easement or other encumbrance upon any Property encroaches upon any of the
Improvements, so as to materially affect the value or marketability of any
Property, except those insured against by a Title Insurance Policy.
IV.1.26 Leases. Attached hereto as Schedule 3 is a true, correct and
complete rent roll for each Property (the "Rent Roll"), which includes all
Leases affecting each Property. Except as set forth in Schedule 3: (i) each
Lease is in full force and effect; (ii) the tenants under the Leases have
accepted possession of and are in occupancy of all of their respective demised
premises, have commenced the payment of rent under such Leases, and, to
Borrower's knowledge, there are no material offsets, claims or defenses to the
enforcement thereof; (iii) all rents due and payable under the Leases have been
paid and no portion thereof has been paid for any period more than 30 days in
advance; (iv) the rent payable under each Lease is the amount of fixed rent set
forth in the Rent Roll, and, to Borrower's knowledge, there is no claim or basis
for a claim by the tenant thereunder for an adjustment to the rent; (v) no
tenant has made any claim against the landlord under the Leases which remains
outstanding, and to Borrower's knowledge, (a) there are no defaults on the part
of the landlord under any Lease, and (b) no event has occurred which, with the
giving of notice or passage of time, or both, would
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constitute such a default; (vi) to Borrower's knowledge, there is no present
material default by the tenant under any Lease; and (vii) Borrower does not hold
any security deposits under the Leases. None of the Leases contains any option
to purchase or right of first refusal to purchase the Property or any part
thereof. Neither the Leases nor the Rents have been assigned or pledged except
to Lender, and no other Person has any interest therein except the tenants or
subtenants thereunder.
IV.1.27 Filing and Recording Taxes. All transfer taxes, deed stamps,
intangible taxes or other amounts in the nature of transfer taxes required to be
paid by any Person under applicable Legal Requirements in connection with the
transfer of the Properties to Borrower have been paid. All mortgage, mortgage
recording, stamp, intangible or other similar taxes required to be paid by any
Person under applicable Legal Requirements in connection with the execution,
delivery, recordation, filing, registration, perfection or enforcement of any of
the Loan Documents have been paid.
IV.1.28 Investment Company Act. Borrower is not (i) an "investment company"
or a company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended; (ii) a "holding company" or a
"subsidiary company" of a "holding company" or an "affiliate" of either a
"holding company" or a "subsidiary company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended; or (iii) subject to any other
federal or state law or regulation which purports to restrict or regulate its
ability to borrow money.
IV.1.29 Fraudulent Transfer. Borrower has not entered into the Loan or any
Loan Document with the actual intent to hinder, delay, or defraud any creditor,
and Borrower has received reasonably equivalent value in exchange for its
obligations under the Loan Documents. Giving effect to the transactions
contemplated by the Loan Documents, the fair saleable value of Borrower's assets
exceeds and will, immediately following the execution and delivery of the Loan
Documents, exceed Borrower's total liabilities, including subordinated,
unliquidated, disputed or contingent liabilities. The fair saleable value of
Borrower's assets is and will, immediately following the execution and delivery
of the Loan Documents, be greater than Borrower's probable liabilities,
including the maximum amount of its contingent liabilities or its debts as such
debts become absolute and matured. Borrower's assets do not and, immediately
following the execution and delivery of the Loan Documents will not, constitute
unreasonably small capital to carry out its business as conducted or as proposed
to be conducted. Borrower does not intend to, and does not believe that it will,
incur debts and liabilities (including contingent liabilities and other
commitments) beyond its ability to pay such debts as they mature (taking into
account the timing and amounts to be payable on or in respect of obligations of
Borrower).
IV.1.30 Ownership of Borrower. The sole managing member of Borrower is the
Managing Member. FAC Realty Trust, Inc. is the owner of all of the issued and
outstanding capital stock of the Managing Member, all of which capital stock has
been validly issued and fully paid and is nonassessable. The only other member
of Borrower is FAC
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Properties, L.P. The stock of the Managing Member and the membership interests
in Borrower are owned free and clear of all Liens, warrants, options and rights
to purchase. Borrower has no obligation to any Person to purchase, repurchase or
issue any ownership interest in it.
IV.1.31 Management Agreement. The Management Agreement is in full force and
effect. There is no default, breach or violation existing thereunder, and no
event has occurred (other than payments due but not yet delinquent) that, with
the passage of time or the giving of notice, or both, would constitute a
default, breach or violation thereunder, by either party thereto.
IV.1.32 Hazardous Substances. To the best of Borrower's knowledge and
except as disclosed to Lender in reports furnished to Lender, (i) no Property is
in violation of any Legal Requirement pertaining to or imposing liability or
standards of conduct concerning environmental regulation, contamination or
clean-up, including the Comprehensive Environmental Response, Compensation and
Liability Act, the Resource Conservation and Recovery Act, the Emergency
Planning and Community Right-to-Know Act of 1986, the Hazardous Substances
Transportation Act, the Solid Waste Disposal Act, the Clean Water Act, the Clean
Air Act, the Toxic Substance Control Act, the Safe Drinking Water Act, the
Occupational Safety and Health Act, any state super-lien and environmental
clean-up statutes and all amendments to and regulations in respect of the
foregoing laws (collectively, "Environmental Laws"); (ii) no Property is subject
to any private or governmental Lien or judicial or administrative notice or
action or inquiry, investigation or claim relating to hazardous, toxic,
dangerous and/or regulated substances, wastes, materials, raw materials which
include hazardous constituents, pollutants or contaminants, including asbestos,
asbestos containing materials, petroleum, tremolite, anthlophylite, actinolite,
polychlorinated biphenyls and any other substances or materials which are
included under or regulated by Environmental Laws or which are considered by
scientific opinion to be otherwise dangerous in terms of the health, safety and
welfare of humans (collectively, "Hazardous Substances"); (iii) no Hazardous
Substances are or have been (including the period prior to Borrower's
acquisition of a Property), discharged, generated, treated, disposed of or
stored on, incorporated in, or removed or transported from any Property other
than in compliance with all Environmental Laws; (iv) no Hazardous Substances are
present in, on or under any nearby real property which could migrate to or
otherwise affect any Property; and (v) no underground storage tanks exist on any
Property.
IV.1.33 Ground Lease. The Ground Lease is in full force and effect and has
not been modified or amended. There are no defaults under the Ground Lease and
no event has occurred, which with the passage of time, the giving of notice, or
both, would constitute a default under the Ground Lease. All rents, additional
rents and other sums due and payable under the Ground Lease have been paid in
full. Neither Borrower nor the landlord under the Ground Lease has commenced any
action or given or received any notice for the purpose of terminating the Ground
Lease.
IV.1.34 Out-Parcels. None of the Eligible Out-Parcels (which has not been
released pursuant to Section 6.7) generates any revenue or income.
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IV.2 Survival of Representations. All of the representations and warranties
in Section 4.1 and elsewhere in the Loan Documents (i) shall survive for so long
as any portion of the Debt remains owing to Lender and (ii) shall be deemed to
have been relied upon by Lender notwithstanding any investigation heretofore or
hereafter made by Lender or on its behalf.
V. AFFIRMATIVE COVENANTS
Until the earlier to occur of the end of the Term or the Defeasance of the
entire unpaid Principal, Borrower hereby covenants and agrees with Lender that:
V.1 Existence. Borrower shall (i) do or cause to be done all things
necessary to preserve, renew and keep in full force and effect its existence,
rights, and franchises, (ii) continue to engage in the business presently
conducted by it, (iii) obtain and maintain all Licenses, and (iv) qualify to do
business and remain in good standing under the laws of each jurisdiction, in
each case as and to the extent required for the ownership, maintenance,
management and operation of each Property.
V.2 Taxes and Other Charges. Borrower shall pay all Taxes and Other Charges
as the same become due and payable, and deliver to Lender receipts for payment
or other evidence satisfactory to Lender that the Taxes and Other Charges have
been so paid no later than 15 days before they would be delinquent if not paid
(provided, however, that Borrower need not furnish such receipts for payment of
Taxes paid by Lender pursuant to Section 3.3). Borrower shall not suffer and
shall promptly cause to be paid and discharged any Lien against any Property,
and shall promptly pay for all utility services provided to any Property. After
prior notice to Lender, Borrower, at its own expense, may contest by appropriate
legal proceeding, promptly initiated and conducted in good faith and with due
diligence, the amount or validity or application of any Taxes or Other Charges,
provided that (i) no Default or Event of Default has occurred and remains
uncured, (ii) such proceeding shall suspend the collection of the Taxes or Other
Charges, (iii) such proceeding shall be permitted under and be conducted in
accordance with the provisions of any other instrument to which Borrower is
subject and shall not constitute a default thereunder, (iv) no part of or
interest in such Property will be in danger of being sold, forfeited,
terminated, canceled or lost, (v) Borrower shall have furnished such security as
may be required in the proceeding, or as may be reasonably requested by Lender,
to insure the payment of any such Taxes or Other Charges, together with all
interest and penalties thereon, and (vi) Borrower shall promptly upon final
determination thereof pay the amount of such Taxes or Other Charges, together
with all costs, interest and penalties. Lender may pay over any such cash
deposit or part thereof held by Lender to the claimant entitled thereto at any
time when, in the judgment of Lender, the entitlement of such claimant is
established.
V.3 Repairs; Maintenance and Compliance. Borrower shall cause each Property
to be maintained in good condition and repair and shall not remove, demolish or
materially alter the Improvements or Equipment (except for normal replacement of
the Equipment) without the prior written consent of Lender; provided, however,
that Lender's
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consent shall not be unreasonably withheld if in Lender's reasonable judgment
any such alteration (or erection of new buildings, structures or building
additions) will not materially interfere with the operation of the applicable
Property or diminish the overall value thereof. Borrower shall promptly comply
with all Legal Requirements and cure properly any violation of a Legal
Requirement within 30 days after Borrower receives notice of such violation.
Borrower shall promptly repair, replace or rebuild any part of any Property that
becomes damaged, worn or dilapidated and shall complete and pay for any
Improvements at any time in the process of construction or repair.
V.4 Litigation. Borrower shall give prompt written notice to Lender of any
litigation or governmental proceedings pending or threatened against Borrower
which might materially adversely affect Borrower's condition (financial or
otherwise) or business or any Property.
V.5 Performance of Other Agreements. Borrower shall observe and perform
each and every term to be observed or performed by it pursuant to the terms of
any agreement or recorded instrument affecting or pertaining to each Property.
V.6 Notice of Default. Borrower shall promptly advise Lender of any
material adverse change in Borrower's condition, financial or otherwise, or of
the occurrence of any Default or Event of Default of which Borrower has
knowledge.
V.7 Cooperate in Legal Proceedings. Borrower shall cooperate fully with
Lender with respect to, and permit Lender, at its option, to participate in, any
proceedings before any Governmental Authority which may in any way affect the
rights of Lender under any Loan Document.
V.8 Further Assurances. Borrower shall, at Borrower's sole cost and
expense, (i) furnish to Lender all instruments, documents, boundary surveys,
"as-built" surveys, certificates, plans and specifications, appraisals, title
and other insurance reports and agreements, reasonably requested by Lender; (ii)
execute and deliver to Lender such documents, instruments, certificates,
assignments and other writings, and do such other acts necessary or desirable,
to evidence, preserve and/or protect the collateral at any time securing or
intended to secure the Debt, as Lender may reasonably require; and (iii) do and
execute all and such further lawful and reasonable acts, conveyances and
assurances for the better and more effective carrying out of the intents and
purposes of the Loan Documents, as Lender shall reasonably require from time to
time.
V.9 Financial Reporting.
V.9.1 Bookkeeping. Borrower shall keep on a Fiscal Year basis, in
accordance with GAAP, proper and accurate books, records and accounts reflecting
all of the financial affairs of Borrower and all items of income and expense and
any services, equipment or furnishings provided in connection with the operation
of each Property, whether such income or expense is
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realized by Borrower or by any other Person, except lessees under Leases who are
not Affiliates of Borrower. Lender shall have the right from time to time during
normal business hours upon reasonable notice to examine such books, records and
accounts at the office of Borrower or other Person maintaining them, and to make
such copies or extracts thereof as Lender shall desire. After an Event of
Default, Borrower shall pay any costs incurred by Lender to examine Borrower's
accounting records, as Lender shall determine to be necessary or appropriate in
the protection of Lender's interest.
V.9.2 Annual Reports. Borrower shall furnish to Lender annually, (i) within
45 days after each Fiscal Year, unaudited financial statements of Borrower, and
(ii) within 90 days after each Fiscal Year, a complete copy of Borrower's annual
financial statements audited by a nationally recognized accounting firm or
another independent certified public accountant reasonably acceptable to Lender,
in accordance with GAAP, and containing balance sheets and statements of profit
and loss for Borrower and the Properties in such detail as Lender may request.
Each such statement (x) shall set forth the financial condition and the income
and expenses for the Properties for the immediately preceding calendar year,
including statements of annual Net Operating Income, and (y) shall be
accompanied by an Officer's Certificate certifying (1) that such statement
presents fairly the financial condition of the Properties and has been prepared
in accordance with GAAP and (2) whether there exists a Default or Event of
Default, and if so, the nature thereof, the period of time it has existed and
the action then being taken to remedy it.
V.9.3 Monthly Reports. Borrower shall furnish to Lender within 20 days
after the end of each calendar month the following items, accompanied by an
Officer's Certificate certifying that such items are true, correct, accurate,
and complete and fairly present the financial condition and results of the
operations of Borrower and the Properties in accordance with GAAP (subject to
normal year-end adjustments) as applicable: (i) monthly and year-to-date
operating statements, noting Net Operating Income and other information
necessary and sufficient under GAAP to fairly represent the financial position
and results of operation of the Properties during such calendar month, all in
form satisfactory to Lender; (ii) a balance sheet for each such month; (iii) a
comparison of the budgeted income and expenses and the actual income and
expenses for each month and year-to-date for the Properties, together with a
detailed explanation of any variances of 10% or more between budgeted and actual
amounts for such period and year-to-date; (iv) a statement of the actual Capital
Expenses made by Borrower during each calendar quarter as of the last day of
such calendar quarter; (v) a calculation reflecting the annual Debt Service
Coverage Ratio as of the last day of such calendar month; (vi) a statement that
Borrower has not incurred any indebtedness other than indebtedness permitted
hereunder; and (vii) occupancy rates, rent rolls (substantially in the form
attached hereto as Schedule 7) and a delinquency report for the Property.
V.9.4 Other Reports. Borrower shall furnish to Lender, within ten Business
Days after request, such further detailed information with respect to the
operation of any of the Properties and the financial affairs of Borrower as may
be reasonably requested by Lender or any applicable Rating Agency.
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V.9.5 Annual Budget. Borrower shall prepare and submit (or shall cause
Manager to prepare and submit) to Lender (i) prior to the occurrence of a
Lockbox Event, by December 31 of each year during the Term, a proposed pro forma
budget for the Property for the succeeding Fiscal Year (the "Annual Budget"),
and, promptly after preparation thereof, any revisions to such Annual Budget and
(ii) within 30 days after the occurrence of a Lockbox Event and thereafter by
November 30 of each year during the Term (until a Lockbox Termination occurs),
for approval by Lender, which approval shall not be unreasonably withheld or
delayed, the Annual Budget, and, promptly after preparation thereof, any
revisions to such Annual Budget. Lender's failure to approve or disapprove any
Annual Budget (where Lender's approval thereof is required) within 30 days after
Lender's receipt thereof shall be deemed to constitute Lender's approval
thereof. The Annual Budget shall consist of (i) an operating expense budget (the
"Operating Budget") showing, on a month-by-month basis, in reasonable detail,
each line item of the Borrower's anticipated Operating Income and Operating
Expenses (on a cash and accrual basis), including amounts required to establish,
maintain and/or increase reserves, and (ii) a Capital Expense budget (the
"Capital Budget") showing, on a month-by-month basis, in reasonable detail, each
line item of anticipated Capital Expenses. The approved Annual Budget for the
period commencing on the date hereof and ending on December 31, 1998 has been
submitted to and approved by Lender.
V.9.6 Breach. If, prior to a Securitization, Borrower fails to provide to
Lender or its designee any of the financial statements, certificates, reports or
information (the "Required Records") required by this Section 5.9 within 30 days
after the date upon which such Required Record is due, Borrower shall pay to
Lender, at Lender's option and in its sole discretion, an amount equal to $5,000
for each Required Record that is not delivered; provided Lender has given
Borrower at least 15 days prior notice of such failure.
V.10 Environmental Matters.
V.10.1 Hazardous Substances. So long as Borrower owns or is in possession
of the Properties, Borrower (i) shall keep the Properties free from Hazardous
Substances and in compliance in all material respects with all Environmental
Laws, (ii) shall promptly notify Lender if Borrower shall become aware that (A)
any Hazardous Substance is on or near any Property, (B) any Property is in
direct or indirect violation of any Environmental Laws or (C) any condition on
or near any Property shall pose a threat to the health, safety or welfare of
humans, (iii) shall remove such Hazardous Substances and/or cure such violations
and/or remove such threats, as applicable, as required by law (or as shall be
required by Lender in the case of removal which is not required by law, but in
response to the opinion of a licensed hydrogeologist, licensed environmental
engineer or other qualified consultant engaged by Lender ("Lender's
Consultant")), promptly after Borrower becomes aware of same, at Borrower's sole
expense and (iv) shall comply with all of the recommendations contained in the
environmental report delivered to Lender in connection with the origination of
the Loan. Nothing herein shall prevent Borrower from recovering such expenses
from any other party that may be liable for such removal or cure.
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V.10.2 Environmental Monitoring. Borrower shall give prompt written notice
to Lender of (i) any proceeding or inquiry by any party with respect to the
presence of any Hazardous Substance on, under, from or about any Property, (ii)
all claims made or threatened by any third party against Borrower or any
Property relating to any loss or injury resulting from any Hazardous Substance,
and (iii) Borrower's discovery of any occurrence or condition on any real
property adjoining or in the vicinity of any Property that could cause such
Property to be subject to any investigation or cleanup pursuant to any
Environmental Law. Borrower shall permit Lender to join and participate in, as a
party if it so elects, any legal proceedings or actions initiated with respect
to the Property in connection with any Environmental Law or Hazardous Substance,
and Borrower shall pay all reasonable attorneys' fees and disbursements incurred
by Lender in connection therewith. Upon an Event of Default or if Lender has
reason to suspect the presence of Hazardous Substances on, in or near any
Property, upon Lender's request, Borrower shall provide an inspection or audit
of any Property prepared by a licensed hydrogeologist, licensed environmental
engineer or qualified environmental consulting firm approved by Lender
indicating the presence or absence of Hazardous Substances on, in or near such
Property. The cost and expense of such audit or inspection shall be paid by
Borrower not more frequently than once every five calendar years after the
occurrence of a Securitization, unless Lender, in its good faith judgment,
determines that reasonable cause exists for the performance of an environmental
inspection or audit of such Property, in which case such inspections or audits
shall be at Borrower's sole expense. If Borrower fails to provide any such
inspection or audit within 45 days after such request, Lender may order same,
and Borrower hereby grants to Lender and its employees and agents access to each
Property and a license to undertake such inspection or audit. The cost of such
inspection or audit may be added to the Debt and shall bear interest thereafter
at the Default Rate until paid. If any environmental site assessment report
prepared in connection with such inspection or audit recommends that an
operations and maintenance plan be implemented for any Hazardous Substance,
Borrower shall cause such operations and maintenance plan to be prepared and
implemented at its expense upon request of Lender. In the event that any
investigation, site monitoring, containment, cleanup, removal, restoration or
other work of any kind is reasonably necessary or desirable under an applicable
Environmental Law ("Remedial Work"), Borrower shall commence all such Remedial
Work within 30 days after written demand by Lender for performance thereof (or
such shorter period of time as may be required under applicable law).
Thereafter, Borrower shall diligently prosecute to completion all such Remedial
Work. All Remedial Work shall be performed by contractors approved in advance by
Lender, and under the supervision of a consulting engineer approved by Lender.
All costs of such Remedial Work shall be paid by Borrower, including Lender's
reasonable attorneys' fees and disbursements incurred in connection with the
monitoring or review of such Remedial Work. Borrower will not install or permit
to be installed on any Property any underground storage tank.
V.11 Title to the Properties. Borrower will warrant and defend the title to
each Property, and the validity and priority of the Liens of the Mortgages,
subject only to Permitted Encumbrances, against the claims of all Persons.
V.12 Estoppel Statement. After request by Lender, Borrower shall within
fifteen days furnish Lender with a statement, duly acknowledged and certified,
setting forth (i) the unpaid Principal, (ii) the Interest Rate, (iii) the date
installments of interest and/or Principal
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were last paid, (iv) any offsets or defenses to the payment of the Debt, and (v)
that the Loan Documents are valid, legal and binding obligations and have not
been modified or if modified, giving particulars of such modification. After
request by Lender (but no more frequently than once in any year), Borrower shall
furnish to Lender (x) within ten days, a certificate reaffirming all
representations and warranties of Borrower set forth in the Loan Documents as of
the date requested by Lender or, to the extent of any changes to any such
representations and warranties, so stating such changes, and (y) within 30 days,
tenant estoppel certificates from each tenant at each Property in form and
substance reasonably satisfactory to Lender.
V.13 Principal Place of Business. Borrower shall not change its principal
place of business without first giving Lender 30 days' prior notice.
V.14 Property Management.
V.14.1 Management Agreement. Subject to Section 5.14.2, Borrower shall (i)
cause each Property to be operated pursuant to the Management Agreement; (ii)
promptly perform and observe all of the covenants required to be performed and
observed by it under the Management Agreement and do all things necessary to
preserve and to keep unimpaired its material rights thereunder; (iii) promptly
notify Lender of any default under the Management Agreement of which it is
aware; (iv) promptly deliver to Lender a copy of each financial statement,
business plan, capital expenditure plan, and property improvement plan and any
other notice, report and estimate received by Borrower under the Management
Agreement; and (v) promptly enforce the performance and observance of all of the
covenants required to be performed and observed by Manager under the Management
Agreement.
V.14.2 Termination of Manager. If an Event of Default shall be continuing,
Borrower shall, at the request of Lender, terminate the Management Agreement and
replace the Manager (or insert a manager, if the Properties are then
self-managed) with a manager approved by Lender on terms and conditions
satisfactory to Lender.
V.15 Special Purpose Bankruptcy Remote Entity. Borrower shall continue to
be a Special Purpose Bankruptcy Remote Entity. A "Special Purpose Bankruptcy
Remote Entity" means a corporation, limited partnership or limited liability
company which at all times since its formation and at all times thereafter (i)
was and is organized solely for the purpose of (A) owning the Properties or (B)
acting as a general partner of the limited partnership that owns the Properties
or member of the limited liability company that owns the Properties, (ii) has
not engaged and will not engage in any business unrelated to (A) the ownership
of the Properties, (B) acting as general partner of the limited partnership that
owns the Properties or (C) acting as a member of the limited liability company
that owns the Properties, as applicable, (iii) has not had and will not have any
assets other than those related to the Properties or its partnership or member
interest in the limited partnership or limited liability company that owns the
Properties, as applicable, (iv) has not engaged, sought or consented to and will
not engage in, seek or consent to any dissolution, winding up, liquidation,
consolidation, merger, asset sale, transfer of partnership or membership
interests (if such entity is a general partner in a limited partnership or a
member in a limited liability company), or amendment of its limited partnership
agreement,
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articles of incorporation, articles of organization, certificate of formation or
operating agreement (as applicable), (v) if such entity is a limited
partnership, has, as its only general partners, Special Purpose Bankruptcy
Remote Entities that are corporations, (vi) if such entity is a corporation, has
at least one Independent Director, and has not caused or allowed and will not
cause or allow the board of directors of such entity to take any action
requiring the unanimous affirmative vote of 100% of the members of its board of
directors unless an Independent Director shall have participated in such vote,
(vii) if such entity is a limited liability company, has at least one member
that is a Special Purpose Bankruptcy Remote Entity that is a corporation and
such corporation is the managing member of such limited liability company,
(viii) if such entity is a limited liability company, has articles of
organization, a certificate of formation and/or an operating agreement, as
applicable, providing that (A) such entity may dissolve only upon the bankruptcy
of the managing member, (B) the vote of a majority-in-interest of the remaining
members is sufficient to continue the life of the limited liability company in
the event of such bankruptcy of the managing member and (C) if the vote of a
majority-in-interest of the remaining members to continue the life of the
limited liability company following the bankruptcy of the managing member is not
obtained, the limited liability company may not liquidate any Property without
the consent of the applicable Rating Agencies for as long as the Loan is
outstanding, (ix) without the unanimous consent of all of its partners,
directors or members, as applicable, shall not (A) file a bankruptcy or
insolvency petition or otherwise institute insolvency proceedings with respect
to itself or to any other entity in which it has a direct or indirect legal or
beneficial ownership interest, (B) dissolve, liquidate, consolidate, merge, or
sell all or substantially all of its assets or the assets of any other entity in
which it has a direct or indirect legal or beneficial ownership interest, (C)
engage in any other business activity, or amend its organizational documents,
(x) is and will remain solvent and is maintaining and will maintain adequate
capital for the normal obligations reasonably foreseeable in a business of its
size and character and in light of its contemplated business operations, (xi)
has not failed and will not fail to correct any known misunderstanding regarding
the separate identity of such entity, (xii) has maintained and will maintain its
accounts, books and records separate from any other Person and will file its own
tax returns, (xiii) has maintained and will maintain its books, records,
resolutions and agreements as official records, (xiv) will not commingle its
funds or assets with those of any other Person, (xv) will hold its assets in its
own name, (xvi) will conduct its business in its name, (xvii) will maintain its
financial statements, accounting records and other entity documents separate
from any other Person, (xviii) will pay its own liabilities, including the
salaries of its own employees, out of its own funds and assets, (xix) will
observe all partnership, corporate or limited liability company formalities, as
applicable, (xx) has maintained and will maintain an arm's-length relationship
with its Affiliates, (xxi) has no indebtedness other than the Loan and
liabilities in the ordinary course of business relating to the ownership and
operation of the Properties; (xxii) has not and will not assume or guarantee or
become obligated for the debts of any other Person or hold out its credit as
being available to satisfy the obligations of any other Person except for the
Loan and the liabilities permitted pursuant to this Agreement, (xxiii) has not
and will not acquire obligations or securities of its partners, members or
shareholders, (xxiv) has allocated and will allocate fairly and reasonably any
overhead for shared office space and uses separate stationery, invoices and
checks, (xxv) except in connection with the Loan has not pledged and will not
pledge its assets for the benefit of any other Person, (xxvi) has held itself
out and identified itself and will hold itself out and identify itself as a
separate and distinct entity under its own name and
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not as a division or part of any other Person, (xxvii) has maintained and will
maintain its assets in such a manner that it will not be costly or difficult to
segregate, ascertain or identify its individual assets from those of any other
Person, (xxviii) has not made and will not make loans to any Person, (xxix) has
not identified and will not identify its partners, members or shareholders, or
any Affiliate of any of them, as a division or part of it, (xxx) has not entered
into or been a party to, and will not enter into or be a party to, any
transaction with its partners, members, shareholders or Affiliates except in the
ordinary course of its business and on terms which are intrinsically fair and
are no less favorable to it than would be obtained in a comparable arm's-length
transaction with an unrelated third party, (xxxi) has no obligation to indemnify
its partners, officers, directors or members, as the case may be, or has such an
obligation that is fully subordinated to the Debt and will not constitute a
claim against it in the event that cash flow in excess of the amount required to
pay the Debt is insufficient to pay such obligation, and (xxxii) if such entity
is a corporation, it is required to consider the interests of its creditors in
connection with all corporate actions.
V.16 Assumptions in Non-Consolidation Opinion. Borrower and the Managing
Member shall conduct their business so that the assumptions made as to
themselves in that certain substantive non-consolidation opinion letter dated as
of the date hereof, delivered by Borrower's counsel in connection with the Loan,
shall be true and correct in all respects.
V.17 Expenses. Borrower shall reimburse Lender upon receipt of notice for
all reasonable costs and expenses (including reasonable attorneys' fees and
disbursements) incurred by Lender in connection with (i) the preparation,
negotiation, execution and delivery of the Loan Documents and the consummation
of the transactions contemplated thereby and all the costs of furnishing all
opinions by counsel for Borrower; (ii) Borrower's and Lender's ongoing
performance under and compliance with the Loan Documents, including confirming
compliance with environmental and insurance requirements; (iii) the negotiation,
preparation, execution, delivery and administration of any consents, amendments,
waivers or other modifications of or under any Loan Document and any other
documents or matters requested by Lender; (iv) filing and recording of any Loan
Documents; (v) title insurance, surveys, inspections and appraisals; (vi)
enforcing or preserving any rights, in response to third party claims or the
prosecuting or defending of any action or proceeding or other litigation, in
each case against, under or affecting Borrower, the Loan Documents, the
Properties, or any other security given for the Loan; and (vii) enforcing any
obligations of or collecting any payments due from Borrower under any Loan
Document or with respect to the Properties or in connection with any refinancing
or restructuring of the Loan in the nature of a "work-out", or any insolvency or
bankruptcy proceedings. Any costs and expenses due and payable to Lender
hereunder which are not paid by Borrower within ten days after demand may be
paid from any amounts in the Deposit Account, with notice thereof to Borrower.
The obligations and liabilities of Borrower under this Section 5.17 shall
survive the Term and the exercise by Lender of any of its rights or remedies
under the Loan Documents, including the acquisition of the Properties by
foreclosure or a conveyance in lieu of foreclosure.
V.18 Indemnity. Borrower shall indemnify and hold harmless Lender from and
against any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature whatsoever (including the
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reasonable fees and disbursements of counsel for Lender in connection with any
investigative, administrative or judicial proceeding commenced or threatened,
whether or not Lender shall be designated a party thereto), that may be imposed
on, incurred by, or asserted against Lender (collectively, the "Indemnified
Liabilities") in any manner, relating to or arising out of or by reason of the
Loan, including: (i) any breach by Borrower of its obligations under, or any
material misrepresentation by Borrower contained in, any Loan Document; (ii) the
use or intended use of the proceeds of the Loan; (iii) any information provided
by or on behalf of Borrower, or contained in any documentation approved by
Borrower; (iv) ownership of the Mortgages, the Properties or any interest
therein, or receipt of any Rents; (v) any accident, injury to or death of
persons or loss of or damage to property occurring in, on or about the Property
or on the adjoining sidewalks, curbs, adjacent property or adjacent parking
areas, streets or ways; (vi) any use, nonuse or condition in, on or about any
Property or on adjoining sidewalks, curbs, adjacent property or adjacent parking
areas, streets or ways; (vii) performance of any labor or services or the
furnishing of any materials or other property in respect of any Property; (viii)
the presence, disposal, escape, seepage, leakage, spillage, discharge, emission,
release, or threatened release of any Hazardous Substance on, from or affecting
any Property; (ix) any personal injury (including wrongful death) or property
damage (real or personal) arising out of or related to such Hazardous Substance;
(x) any lawsuit brought or threatened, settlement reached, or government order
relating to such Hazardous Substance; (xi) any violation of the Environmental
Laws, which is based upon or in any way related to such Hazardous Substance,
including, without limitation, the costs and expenses of any Remedial Work,
attorney and consultant fees and disbursements, investigation and laboratory
fees, court costs, and litigation expenses; (xii) any failure of any Property to
comply with any Legal Requirement; (xiii) any claim by brokers, finders or
similar persons claiming to be entitled to a commission in connection with any
Lease or other transaction involving any Property or any part thereof under any
Legal Requirement, or any liability asserted against Lender with respect thereto
(unless such broker, finder or similar person was engaged by Lender pursuant to
its rights under the Loan Documents); and (xiv) the claims of any lessee of any
portion of any Property or any person acting through or under any lessee or
otherwise arising under or as a consequence of any Lease; provided, however,
that Borrower shall not have any obligation to Lender hereunder to the extent
that such Indemnified Liabilities arise from the gross negligence, illegal acts,
fraud or willful misconduct of Lender. To the extent that the undertaking to
indemnify and hold harmless set forth in the preceding sentence may be
unenforceable because it violates any law or public policy, Borrower shall
contribute the maximum portion that it is permitted to pay and satisfy under
applicable law to the payment and satisfaction of all Indemnified Liabilities
incurred by Lender. Any amounts payable to Lender by reason of the application
of this paragraph shall become immediately due and payable and shall bear
interest at the Default Rate from the date loss or damage is sustained by Lender
until paid. The obligations and liabilities of Borrower under this Section 5.18
shall survive the Term and the exercise by Lender of any of its rights or
remedies under the Loan Documents, including the acquisition of the Properties
by foreclosure or a conveyance in lieu of foreclosure.
VI. NEGATIVE COVENANTS
Until the earlier to occur of the end of the Term or the Defeasance of the
entire unpaid Principal, Borrower covenants and agrees with Lender that it will
not, directly or
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indirectly:
VI.1 Management Agreement. Without Lender's prior consent: (i) surrender,
terminate or cancel the Management Agreement or otherwise replace the Manager or
enter into any other management agreement (except pursuant to Section 5.14.2);
(ii) suffer or permit the ownership, management or control of the Manager to be
transferred to a Person other than an Affiliate of Borrower; (iii) reduce or
consent to the reduction of the term of the Management Agreement; (iv) increase
or consent to the increase of the amount of any charges under the Management
Agreement; or (v) otherwise modify, change, supplement, alter or amend in any
material respect, or waive or release any of its rights and remedies under, the
Management Agreement; or (vi) suffer or permit the occurrence and continuance of
a default beyond any applicable cure period under the Management Agreement (or
any successor management agreement) if such default permits the Manager to
terminate the Management Agreement (or such successor management agreement);
VI.2 Liens. Without Lender's prior consent, create, incur, assume, permit
or suffer to exist any mechanic's, materialmen's or other Lien on any portion of
any Property or legal or beneficial ownership interest in Borrower, except
Permitted Encumbrances, unless such Lien is bonded or discharged within 30 days
after Borrower first receives notice of such Lien;
VI.3 Dissolution. Dissolve, terminate, liquidate, merge with or consolidate
into another Person;
VI.4 Change In Business. Enter into any line of business other than the
ownership and operation of the Properties, or make any material change in the
scope or nature of its business objectives, purposes or operations, or undertake
or participate in activities other than the continuance of its present business;
VI.5 Debt Cancellation. Cancel or otherwise forgive or release any claim or
debt owed to Borrower by any Person, except for adequate consideration and in
the ordinary course of Borrower's business in its reasonable judgment;
VI.6 Assets. Purchase or own any property other than the Properties;
VI.7 Transfers. Make, suffer or permit the occurrence of any Transfer other
than a Permitted Transfer. Notwithstanding the foregoing, Borrower shall have
the right, from time to time, to convey, free and clear of the Lien of the Loan
Documents, without payment of a Release Amount, one or more of the Eligible
Out-Parcels, in a bona-fide, arms-length sale or ground lease of such Eligible
Out-Parcel(s) to a purchaser that is not a Related Person of Borrower (a "Third
Party Sale"), and the Lender shall execute, acknowledge and deliver a Release of
any such Eligible Out-Parcel being so sold and conveyed within ten Business Days
after receipt of Borrower's written request for such Release; provided (i) such
request shall refer to this Section, identify such Eligible Out-Parcel and be
accompanied by a counterpart of such Release in form for execution by the
Lender, (ii) no Default shall have occurred and be
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continuing as of the date of such request and Borrower shall have delivered to
the Lender an Officer's Certificate confirming such fact and certifying that
such sale qualifies as a Third-Party Sale, (iii) no Default shall have occurred
and be continuing as of the date of such Release, and (iv) Lender shall have
received such assurance as it shall reasonably require that the portion of the
Property not being conveyed will not be adversely affected by such conveyance
(including, without limitation, assurance that such Property will constitute a
separate legal parcel and tax lot, in compliance with all zoning and other legal
requirements, with undiminished legal access to public roads, and will not be
affected by any Liens that are not Permitted Encumbrances).
VI.8 Debt. Create, incur or assume any indebtedness other than the Debt and
unsecured trade debt incurred in the ordinary course of business and not past
due;
VI.9 Assignment of Rights. Without Lender's prior consent, attempt to
assign Borrower's rights or interest under any Loan Document in contravention of
any Loan Document; or
VI.10 Operation of the Properties. Cease to operate the Properties as
shopping centers, or in the case of the Property located in Cary, North
Carolina, a shopping center with appurtenant office use, or terminate such
business for any reason whatsoever, (other than temporary cessation in
connection with renovations to any Property), unless any such Property has been
released or substituted hereunder.
VII. INSURANCE; CASUALTY; AND CONDEMNATION
VII.1 Insurance.
VII.1.1 Coverage. Borrower, at its sole cost, for the mutual benefit of
Borrower and Lender, shall obtain and maintain during the Term the following
policies of insurance with respect to each Property:
(a) Property insurance insuring against loss or damage by standard,
"all-risk" perils, which shall (i) be in an amount equal to the greatest of
(A) the then full replacement cost of such Property without deduction for
physical depreciation, (B) the Allocated Loan Amount for the applicable
Property, and (C) such amount as is necessary so that the insurer would not
deem Borrower a co-insurer under such policies, (ii) have deductibles no
greater than $25,000 per occurrence, (iii) be paid annually in advance and
(iv) contain a "Replacement Cost Endorsement" with a waiver of
depreciation.
(b) Flood insurance if any part of the Property is located in an area
identified by the Federal Emergency Management Agency as an area having
special flood hazards and in which flood insurance has been made available
under the National Flood Insurance Program, in an amount at least equal to
the full replacement cost of the applicable Property or the maximum limit
of coverage available with respect to the Property under such program,
whichever is less.
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(c) Commercial general public liability insurance, including broad
form property damage, blanket contractual and personal injuries (including
death resulting therefrom) coverages and containing minimum limits per
occurrence of $1,000,000 and $2,000,000 in the aggregate for any policy
year; together with at least $10,000,000 excess and/or umbrella liability
insurance for any and all claims, including all legal liability imposed
upon Borrower and all court costs and attorneys' fees incurred in
connection with the ownership, operation and maintenance of each Property.
(d) Rental loss and/or business interruption insurance in an amount
equal to the estimated Rents for the next succeeding 12-month period. The
amount of such insurance shall be increased from time to time during the
Term as and when the estimated or actual Rents increase.
(e) Insurance against loss or damage from (i) leakage of sprinkler
systems and (ii) explosion of steam boilers, air conditioning equipment,
high pressure piping, machinery and equipment, pressure vessels or similar
apparatus now or hereafter installed in any of the Improvements (without
exclusion for explosions), in an amount at least equal to $2,000,000 for
each Property.
(f) Worker's compensation insurance with respect to any employees of
Borrower, as required by any Legal Requirement.
(g) During any period of repair or restoration, builder's "all-risk"
insurance in an amount equal to not less than the full insurable value of
the Improvements on the applicable Property, against such risks (including
fire and extended coverage and collapse of the Improvements to agreed
limits) as Lender may request, in form and substance acceptable to Lender.
(h) Coverage to compensate for the cost of demolition and the
increased cost of construction in an amount satisfactory to Lender.
(i) Such other insurance (including earthquake insurance and hurricane
insurance) as may from time to time be reasonably required by Lender in
order to protect its interests against other insurable hazards which at the
time are commonly insured against and generally available in the case of
premises similarly situated, due regard being given to the height and the
type of structures and its location, construction, use and occupancy.
VII.1.2 Policies. All policies of insurance (the "Policies") required
pursuant to Section 7.1.1 shall (i) be issued by companies approved by Lender
and licensed to do business in the applicable State, with a claims paying
ability rating of "AA" or better by Standard & Poor's Ratings Group; (ii) name
Lender and its successors and/or assigns as their interest may appear as the
mortgagee (in the case of property insurance) or an additional insured (in the
case of liability insurance); (iii) contain (in the case of property insurance)
a Non-Contributory Standard Lender Clause and a Lender's Loss Payable
Endorsement, or their equivalents, naming
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Lender as the person to which all payments made by such insurance company shall
be paid; (iv) contain a waiver of subrogation against Lender; (v) be assigned
and duplicate originals thereof delivered to Lender; (vi) contain such
provisions as Lender deems reasonably necessary or desirable to protect its
interest, including endorsements providing that neither Borrower, Lender nor any
other party shall be a co-insurer under the Policies and that Lender shall
receive at least 30 days' prior written notice of any modification, reduction or
cancellation of any of the Policies; and (vii) be satisfactory in form and
substance to Lender and approved by Lender as to amounts, form, risk coverage,
deductibles, loss payees and insureds. Borrower shall pay the premiums for such
Policies (the "Insurance Premiums") as the same become due and payable and
furnish to Lender evidence of the renewal of each of the Policies together with
(unless such Insurance Premiums have been paid by Lender pursuant to Section
3.3) receipts for or other evidence of the payment of the Insurance Premiums
reasonably satisfactory to Lender. If Borrower does not furnish such evidence
and receipts at least 30 days prior to the expiration of any expiring Policy,
then Lender, after 10 days notice to Borrower, may, but shall not be obligated
to, procure such insurance and pay the Insurance Premiums therefor, and Borrower
agrees to reimburse Lender for the cost of such Insurance Premiums promptly on
demand. Borrower shall deliver to Lender a certified copy of each Policy within
30 days after its effective date. Within 30 days after request by Lender,
Borrower shall obtain such increases in the amounts of coverage required
hereunder as may be reasonably requested by Lender, taking into consideration
changes in the value of money over time, changes in liability laws, changes in
prudent customs and practices, and the like. The insurance required hereunder
may, at the option of Borrower, be effected by blanket or umbrella policies
issued to Borrower and its affiliates covering the Properties and properties
owned by such affiliates, provided that the policies otherwise comply with the
provisions hereof and specifically allocate to each Property the coverages
required hereby, without possibility of reduction or coinsurance by reason of,
or damage to, another premises named therein, and if the insurance required
hereunder shall be effected by any such blanket or umbrella policies, Borrower
shall furnish to Lender certified copies or duplicate originals of such policies
in place of the originals, with schedules thereto attached showing the amount of
insurance afforded by such policies applicable to each Property, and in
addition, within thirty (30) days after the filing thereof with any insurance
ratemaking body, copies of the schedule of all improvements affected by any such
blanket or umbrella policy of insurance.
VII.2 Casualty.
VII.2.1 Notice; Restoration. If any Property is damaged or destroyed, in
whole or in part, by fire or other casualty (a "Casualty"), Borrower shall give
prompt notice thereof to Lender; provided, however, that no such notice shall be
required where the loss or damage is $50,000 or less and no Event of Default
shall have occurred and be continuing. Following the occurrence of a Casualty,
Borrower, regardless of whether insurance proceeds are available, shall promptly
proceed to restore, repair, replace or rebuild the affected Property in
accordance with Legal Requirements to be of at least equal value and of
substantially the same character as prior to such damage or destruction.
VII.2.2 Settlement of Proceeds. In the event of a Casualty covered by any
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of the Policies (an "Insured Casualty") where the loss does not exceed $50,000,
Borrower may settle and adjust any claim without the consent of Lender; provided
such adjustment is carried out in a competent and timely manner; and Borrower is
hereby authorized to collect and receipt for the insurance proceeds (the
"Proceeds"). In the event of an Insured Casualty where the loss equals or
exceeds $50,000, Lender and Borrower shall jointly, so long as no Event of
Default exists, settle and adjust any claim and agree with the insurer(s) on the
amount to be paid on the loss, and the Proceeds shall be due and payable solely
to Lender and held by Lender in the Casualty/Condemnation Subaccount and
disbursed in accordance herewith. The expenses incurred by Lender in the
adjustment and collection of the Proceeds shall become part of the Debt and
shall be reimbursed by Borrower to Lender upon demand.
VII.3 Condemnation.
VII.3.1 Notice; Restoration. Borrower shall promptly give Lender notice of
the actual or threatened commencement of any condemnation or eminent domain
proceeding affecting any Property (a "Condemnation") and shall deliver to Lender
copies of any and all papers served in connection with such Condemnation.
Following the occurrence of a Condemnation, Borrower, regardless of whether an
Award is available, shall promptly proceed to restore, repair, replace or
rebuild the affected Property in accordance with Legal Requirements to the
extent practicable to be of at least equal value and of substantially the same
character as prior to such Condemnation.
VII.3.2 Collection of Award. Lender may participate in any Condemnation
proceeding to collect, receive and retain any award or payment in respect of a
Condemnation (an "Award") and to make any compromise or settlement in connection
with such Condemnation and Borrower will deliver to Lender all instruments
requested by Lender to permit such participation. Notwithstanding any
Condemnation (or any transfer made in lieu of or in anticipation of such a
Condemnation), Borrower shall continue to pay the Debt at the time and in the
manner provided for in the Loan Documents, and the Debt shall not be reduced
unless and until any Award shall have been actually received and applied by
Lender to expenses of collecting the Award and to discharge of the Debt. Lender
shall not be limited to the interest paid on the Award by the condemning
authority but shall be entitled to receive out of the Award interest at the rate
or rates provided in the Note. If the affected Property is sold, through
foreclosure or otherwise, prior to the receipt by Lender of such Award, Lender
shall have the right, whether or not a deficiency judgment on the Note shall be
recoverable or shall have been sought, recovered or denied, to receive all or a
portion of the Award sufficient to pay the Debt. Borrower shall cause any Award
that is payable to Borrower to be paid directly to Lender. Lender shall hold
such Award in the Casualty/Condemnation Subaccount and disburse such Award in
accordance with the terms hereof.
VII.4 Application of Proceeds or Award.
VII.4.1 Application to Restoration. In the event of an Insured Casualty or
Condemnation where (i) the loss is in an aggregate amount less than the greater
of $500,000 or
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25% of the fair market value of the affected Property as reasonably determined
by Lender, (ii) in the reasonable judgment of Lender, the Property can be
restored within six months, and prior to the Stated Maturity Date and the
expiration of the business interruption insurance with respect thereto, to an
economic unit not less valuable and not less useful than the same was prior to
the Insured Casualty or Condemnation, and after such restoration will adequately
secure the outstanding balance of the Allocated Loan Amount for such Property,
and (iii) no Default or Event of Default shall have occurred and be then
continuing, then the Proceeds or the Award, as the case may be (after
reimbursement of any expenses incurred by Lender), shall be applied to reimburse
Borrower for the cost of restoring, repairing, replacing or rebuilding the
affected Property (the "Restoration"), in the manner set forth herein. Borrower
shall commence and diligently prosecute such Restoration; provided that (i)
Borrower shall pay (and if required by Lender, Borrower shall deposit with
Lender in advance) all costs of such Restoration in excess of the net amount of
the Proceeds or the Award made available pursuant to the terms hereof; and (ii)
Lender shall have received evidence reasonably satisfactory to it that, during
the period of the Restoration, the Rents will be at least equal to the sum of
the Operating Expenses and Debt Service, as reasonably determined by Lender.
VII.4.2 Application to Debt. Except as provided in Section 7.4.1, the
Proceeds and any Award may, at the option of Lender in its sole discretion, be
applied to the payment of the Debt (and at Borrower's option, shall be applied
towards the Release Amount for the applicable Property) or applied to reimburse
Borrower for the cost of any Restoration, in the manner set forth in Section
7.4.3. Any such application to the Debt shall be in an amount up to the Release
Amount for the affected Property together with an additional amount equal to the
Yield Maintenance Premium, if any, that would be required under Section 2.3.3 if
a Defeasance Deposit were to be made by Borrower with respect to a Defeased Note
in the amount of the Proceeds or Award applied to the Debt. Notwithstanding the
foregoing, if the Proceeds or the Award are not in excess of the Release Amount
for the affected Property, then such application of the Proceeds or the Award to
the Debt shall be subject to Section 2.7, but shall otherwise be without any
prepayment consideration, unless an Event of Default has occurred and is
continuing at the time the Proceeds are received from the insurance company or
the Award is received from the condemning authority, as the case may be, in
which event Borrower shall be required to pay to Lender the Yield Maintenance
Premium applicable thereto. After any such application to the Debt, the unpaid
Principal shall be reamortized over the remaining term thereof and the Allocated
Loan Amount for the affected Property shall be reduced by the Principal
reduction resulting from such application.
VII.4.3 Procedure for Application to Restoration. If Borrower is entitled
to reimbursement out of the Proceeds or an Award held by Lender, or if Lender
determines to make Proceeds or an Award available to Borrower, such Proceeds or
Award shall be disbursed from time to time from the Casualty/Condemnation
Subaccount upon Lender being furnished with (i) evidence satisfactory to it of
the estimated cost of completion of the Restoration, (ii) funds or, at Lender's
option, assurances satisfactory to Lender that such funds are available,
sufficient in addition to the Proceeds or Award to complete the proposed
Restoration, (iii) such architect's certificates, waivers of lien, contractor's
sworn statements, title insurance endorsements, bonds, plats of survey and such
other evidences of cost, payment and performance
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as Lender may reasonably require and approve, and (iv) all plans and
specifications for such Restoration, such plans and specifications to be
approved by Lender prior to commencement of any work, such approval not to be
unreasonably withheld or delayed. No payment made prior to the final completion
of the Restoration shall exceed 90% of the value of the work performed from time
to time; funds other than the Proceeds or Award shall be disbursed prior to
disbursement of such Proceeds or Award; and at all times, the undisbursed
balance of such Proceeds or Award remaining in the hands of Lender, together
with funds deposited for that purpose or irrevocably committed to the
satisfaction of Lender by or on behalf of Borrower for that purpose, shall be at
least sufficient in the reasonable judgment of Lender to pay for the cost of
completion of the Restoration, free and clear of all Liens or claims for Lien.
Any surplus that remains out of the Proceeds held by Lender after payment of
such costs of Restoration shall be paid to Borrower. Any surplus that remains
out of the Award received by Lender after payment of such costs of Restoration
shall, in the sole and absolute discretion of Lender, be retained by Lender and
applied to payment of the Debt or returned to Borrower.
VIII. DEFAULTS
VIII.1 Events of Default. Each of the following events shall constitute an
"Event of Default":
(a) any portion of the Debt is not paid when due;
(b) Borrower shall fail to pay when due any deposit into any Fund;
(c) any of the Taxes or Other Charges are not paid when due (unless
sufficient funds are in the Taxes component of the Tax and Insurance Escrow
Fund on the applicable date), subject to Borrower's right to contest Taxes
in accordance with Section 5.2;
(d) the Policies are not kept in full force and effect, or are not
delivered to Lender upon request;
(e) a Transfer other than a Permitted Transfer occurs;
(f) any representation or warranty made by Borrower in any Loan
Document or in any report, certificate, financial statement or other
instrument, agreement or document furnished by Borrower in connection with
any Loan Document, shall be false or misleading in any material respect as
of the date the representation or warranty was made;
(g) Borrower shall make an assignment for the benefit of creditors, or
shall generally not be paying its debts as they become due;
(h) a receiver, liquidator or trustee shall be appointed for Borrower;
or Borrower shall be adjudicated a bankrupt or insolvent; or any petition
for bankruptcy, reorganization or arrangement pursuant to federal
bankruptcy law, or any similar federal
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or state law, shall be filed by or against, consented to, or acquiesced in
by, Borrower; or any proceeding for the dissolution or liquidation of
Borrower shall be instituted; provided, however, if such appointment,
adjudication, petition or proceeding was involuntary and not consented to
by Borrower, only upon the same not being discharged, stayed or dismissed
within 90 days;
(i) Borrower breaches any negative covenant contained in Section 6 or
any covenant contained in Section 5.15;
(j) Borrower shall be in default under any other mortgage or security
agreement covering any part of any Property whether it be superior or
junior in Lien to the Mortgage encumbering such Property, beyond any
applicable notice and grace period contained therein;
(k) except as permitted hereunder, the actual or threatened
alteration, improvement, demolition or removal of any of the Improvements
without the prior consent of Lender;
(l) an Event of Default as defined or described in any other Loan
Document occurs; or any other event shall occur or condition shall exist,
if the effect of such event or condition is to accelerate or to permit
Lender to accelerate the maturity of any portion of the Debt;
(m) Borrower shall be in default under any term, covenant or provision
set forth herein of in any other Loan Document which specifically contains
a notice requirement or grace period and such notice has been given and
such grace period has expired;
(n) any of the assumptions contained in any substantive
non-consolidation opinion, delivered to Lender by Borrower's counsel in
connection with the Loan or otherwise hereunder, were not true and correct
as of the date of such opinion or thereafter became untrue or incorrect;
(o) Borrower shall fail to pay when due (and beyond any applicable
grace period) any rent, additional rent or other charge payable under the
Ground Lease; or Borrower shall default in the observance or performance of
any other term, covenant or condition of the Ground Lease and such default
is not cured prior to the expiration of any applicable grace period
provided therein; or any event shall occur that would cause the Ground
Lease to terminate without notice or action by the landlord thereunder or
would entitle such landlord to terminate the Ground Lease and the term
thereof by giving notice to Borrower; or the leasehold estate created by
the Ground Lease shall be surrendered or the Ground Lease shall be
terminated or cancelled for any reason or under any circumstance whatsoever
(other than as provided in Sections 3.8 and 3.9 of the Ground Lease); or
any term of the Ground Lease shall be modified or supplemented without
Lender's consent; or Borrower shall fail or neglect to pursue diligently
all actions
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necessary to exercise any renewal rights pursuant to the Ground Lease; or
(p) Borrower shall continue to be in Default under any of the other
terms, covenants or conditions of this Agreement or any other Loan Document
not specified in subsections (a) through (o) above, for ten days after
notice to Borrower from Lender, in the case of any Default which can be
cured by the payment of a sum of money, or for 30 days after notice from
Lender in the case of any other Default; provided, however, that if such
non-monetary Default is susceptible of cure but cannot reasonably be cured
within such 30-day period, and Borrower shall have commenced to cure such
Default within such 30-day period and thereafter diligently and
expeditiously proceeds to cure the same, such 30-day period shall be
extended for an additional period of time as is reasonably necessary for
Borrower in the exercise of due diligence to cure such Default, such
additional period not to exceed 90 days.
VIII.2 Remedies.
VIII.2.1 Acceleration. Upon the occurrence of an Event of Default (other
than an Event of Default described in paragraph (g) or (h) of Section 8.1) and
at any time thereafter, in addition to any other rights or remedies available to
it pursuant to the Loan Documents or at law or in equity, Lender may take such
action, without notice or demand, that Lender deems advisable to protect and
enforce its rights against Borrower and in and to the Properties, including
declaring the Debt to be immediately due and payable; and upon any Event of
Default described in paragraph (g) or (h) of Section 8.1, the Debt shall
immediately and automatically become due and payable, without notice or demand,
and Borrower hereby expressly waives any such notice or demand, anything
contained in any Loan Document to the contrary notwithstanding.
VIII.2.2 Remedies Cumulative. Upon the occurrence of an Event of Default,
all or any one or more of the rights, powers, privileges and other remedies
available to Lender against Borrower under the Loan Documents or at law or in
equity may be exercised by Lender at any time and from time to time, whether or
not all or any of the Debt shall be declared due and payable, and whether or not
Lender shall have commenced any foreclosure proceeding or other action for the
enforcement of its rights and remedies under any of the Loan Documents. Any such
actions taken by Lender shall be cumulative and concurrent and may be pursued
independently, singly, successively, together or otherwise, at such time and in
such order as Lender may determine in its sole discretion, to the fullest extent
permitted by law, without impairing or otherwise affecting the other rights and
remedies of Lender permitted by law, equity or contract or as set forth in the
Loan Documents. Without limiting the generality of the foregoing, Borrower
agrees that if an Event of Default is continuing, (i) to the extent permitted by
applicable law, Lender is not subject to any "one action" or "election of
remedies" law or rule, and (ii) all liens and other rights, remedies or
privileges provided to Lender shall remain in full force and effect until Lender
has exhausted all of its remedies against the Properties, each Mortgage has been
foreclosed, each Property has been sold and/or otherwise realized upon in
satisfaction of the Debt or the Debt has been paid in full. To the extent
permitted by applicable law, nothing contained in any Loan Document shall be
construed as requiring Lender to resort to
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any portion of any Property for the satisfaction of any of the Debt in
preference or priority to any other portion, and Lender may seek satisfaction
out of each such Property or any part thereof, in its absolute discretion.
VIII.2.3 Severance. Lender shall have the right from time to time to sever
the Note and the other Loan Documents into one or more separate notes, mortgages
and other security documents in such denominations as Lender shall determine in
its sole discretion for purposes of evidencing and enforcing its rights and
remedies. Borrower shall execute and deliver to Lender from time to time,
promptly after the request of Lender, a severance agreement and such other
documents as Lender shall request in order to effect the severance described in
the preceding sentence, all in form and substance reasonably satisfactory to
Lender. Borrower hereby absolutely and irrevocably appoints Lender as its true
and lawful attorney, coupled with an interest, in its name and stead to make and
execute all documents necessary or desirable to effect such severance, Borrower
ratifying all that such attorney shall do by virtue thereof.
VIII.2.4 Delay. No delay or omission to exercise any remedy, right or power
accruing upon an Event of Default shall impair any such remedy, right or power
or be construed as a waiver thereof, but any such remedy, right or power may be
exercised from time to time and as often as may be deemed expedient. A waiver of
one Default or Event of Default shall not be construed to be a waiver of any
subsequent Default or Event of Default or to impair any remedy, right or power
consequent thereon.
IX. SPECIAL PROVISIONS
IX.1 Sale of Note and Securitization.
IX.1.1 Cooperation. At Lender's request (to the extent not already required
to be provided by Borrower under this Agreement), Borrower shall use reasonable
efforts to satisfy the market standards to which Lender customarily adheres or
which may be reasonably required in the marketplace or by the Rating Agencies in
connection with the sale of the Note or participation therein or the first
successful securitization (such sale and/or securitization, the
"Securitization") of rated single or multi-class securities (the "Securities")
secured by or evidencing ownership interests in the Note and the Mortgages.
Without limiting the generality of the foregoing, Borrower shall:
(a) (i) provide such financial and other information with respect to the
Properties, Borrower and its Affiliates, Manager and any tenants of the
Properties, (ii) provide business plans and budgets relating to the Properties
and (iii) perform or permit or cause to be performed or permitted such site
inspection, appraisals, market studies, environmental reviews and reports (Phase
I's and, if appropriate, Phase II's), engineering reports and other due
diligence investigations of the Properties, as may be reasonably requested by
Lender or the Rating Agencies or as may be necessary or appropriate in
connection with the Securitization (the items provided to Lender pursuant to
this paragraph (a) being called the "Provided Information"), together, if
customary, with appropriate verification of and/or consents to the Provided
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Information through letters of auditors or opinions of counsel of independent
attorneys acceptable to Lender and the Rating Agencies;
(b) at Borrower's expense, cause counsel to render opinions as to
non-consolidation, fraudulent conveyance, true sale and true contribution and
any other opinion customary in securitization transactions with respect to the
Properties, Borrower and its Affiliates, which counsel and opinions shall be
reasonably satisfactory to Lender and the Rating Agencies;
(c) make such representations and warranties as of the closing date of the
Securitization with respect to the Properties, Borrower and the Loan Documents
as are customarily provided in securitization transactions and as may be
reasonably requested by Lender or the Rating Agencies and consistent with the
facts covered by such representations and warranties as they exist on the date
thereof, including the representations and warranties made in the Loan
Documents;
(d) provide current certificates of good standing and qualification with
respect to Borrower from appropriate Governmental Authorities; and
(e) execute such amendments to the Loan Documents and Borrower's
organizational documents, enter into a lock-box or similar arrangement with
respect to the Rents and establish and fund such reserve funds (including
reserve funds for deferred maintenance and capital improvements) as may be
requested by Lender or the Rating Agencies or otherwise to effect the
Securitization, provided that nothing contained in this subsection (e) shall
result in a material economic change in the transaction.
All reasonable third party costs and expenses incurred by Lender in connection
with Borrower's complying with requests made under this Section 9.1 shall be
paid by Borrower up to a maximum amount equal to .10% of the original Principal,
which Borrower shall deposit with Lender on the date hereof.
IX.1.2 Use of Information. Borrower understands that certain of the
Provided Information and the Required Records may be included in disclosure
documents in connection with the Securitization, including a prospectus or
private placement memorandum (each, a "Disclosure Document") and may also be
included in filings with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), or the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), or provided or made
available to investors or prospective investors in the Securities, the Rating
Agencies, and service providers relating to the Securitization. In the event
that the Disclosure Document is required to be revised prior to the sale of all
Securities, Borrower shall cooperate with Lender in updating the Provided
Information or Required Records for inclusion or summary in the Disclosure
Document by providing all current information pertaining to Borrower and the
Properties necessary to keep the Disclosure Document accurate and complete in
all material respects with respect to such matters.
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IX.1.3 Borrower Obligations Regarding Disclosure Documents. In connection
with a preliminary and a final private placement or prospectus, as applicable,
Borrower agrees:
(a) if requested by Lender, to certify in writing that Borrower has
carefully examined those portions of such memorandum or prospectus, as
applicable, pertaining to Borrower, the Property and the Loan, including
applicable portions of the sections entitled "Special Considerations",
"Description of the Mortgages", "Description of the Mortgage Loans and Mortgaged
Properties", "The Manager", "The Borrower" and "Certain Legal Aspects of the
Mortgage Loan", and such sections (and any other sections reasonably requested
and pertaining to Borrower, the Properties or the Loan) do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in the light of the circumstances under
which they were made, not misleading;
(b) to indemnify Lender and the Affiliates of Nomura Securities
International, Inc. ("Nomura"), that have filed the registration statement
relating to the Securitization (the "Registration Statement"), each of its
directors, each of its officers who have signed the Registration Statement and
each person or entity who controls Nomura within the meaning of Section 15 of
the Securities Act or Section 30 of the Exchange Act of 1933, as amended
(collectively, the "Nomura Group"), and Nomura, each of its directors and each
person who controls Nomura, within the meaning of Section 15 of the Securities
Act and Section 20 of the Exchange Act (collectively, the "Underwriter Group")
for any losses, claims, damages or liabilities (the "Liabilities") to which
Lender, the Nomura Group or the Underwriter Group may become subject insofar as
the Liabilities arise out of or are based upon any untrue statement of any
material fact contained in the applicable portions of such sections of such
memorandum, prospectus or Registration Statement applicable to Borrower, the
Properties or the Loan, or arise out of or are based upon the omission to state
therein a material fact required to be stated in the applicable portions of such
sections or necessary in order to make the statements in the applicable portions
of such sections or in light of the circumstances under which they were made,
not misleading; and
(c) to reimburse Lender and Nomura for any legal or other expenses
reasonably incurred by Lender and Nomura in connection with investigating or
defending the Liabilities.
Borrower's Liability under clause (a) or (b) above shall be limited solely to
Liabilities arising out of or based upon any such untrue statement or omission
made therein in reliance upon and in conformity with information furnished to
Lender by or on behalf of Borrower in connection with the preparation of those
portions of the Disclosure Document pertaining to Borrower, the Properties or
the Loan or in connection with the underwriting of the debt, including financial
statements of Borrower, operating statements, rent rolls, environmental site
assessment reports and property condition reports with respect to the
Properties. The foregoing indemnity will be in addition to any liability which
Borrower may otherwise have.
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IX.1.4 Borrower Indemnity Regarding Filings. In connection with filings
under the Exchange Act, Borrower agrees to (i) indemnify Lender, the Nomura
Group and the Underwriter Group for any Liabilities to which Lender, the Nomura
Group or the Underwriter Group may become subject insofar as the Liabilities
arise out of or are based upon the omission or alleged omission to state in the
Provided Information or Required Records a material fact required to be stated
in the Provided Information or Required Records in order to make the statements
in the Provided Information or Required Records, in light of the circumstances
under which they were made not misleading and (ii) reimburse Lender or Nomura
for any legal or other expenses reasonably incurred by Lender and Nomura in
connection with defending or investigating the Liabilities.
IX.1.5 Indemnification Procedure. Promptly after receipt by an indemnified
party under Section 9.1.3 or 9.1.4 of notice of the commencement of any action
for which a claim for indemnification is to be made against Borrower, such
indemnified party shall notify Borrower in writing of such commencement, but the
omission to so notify the Borrower will not relieve Borrower from any liability
that it may have to any indemnified party hereunder except to the extent that
failure to notify causes prejudice to Borrower. In the event that any action is
brought against any indemnified party, and it notifies Borrower of the
commencement thereof, Borrower will be entitled, jointly with any other
indemnifying party, to participate therein and, to the extent that it (or they)
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice of commencement, to assume the defense thereof
with counsel satisfactory to such indemnified party. After notice from Borrower
to such indemnified party under this Section 9.1.5, Borrower shall not be
responsible for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, if the defendants in any such action
include both Borrower and an indemnified party, and any indemnified party shall
have reasonably concluded that there are any legal defenses available to it
and/or other indemnified parties that are different from or additional to those
available to Borrower, then the indemnified party or parties shall have the
right to select separate counsel to assert such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Borrower shall not be liable for the expenses of more than one separate
counsel unless there are legal defenses available to it that are different from
or additional to those available to another indemnified party.
IX.1.6 Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 9.1.3 or 9.1.4 is for any reason held to be unenforceable by an
indemnified party in respect of any Liabilities (or action in respect thereof)
referred to therein which would otherwise be indemnifiable under Section 9.1.3
or 9.1.4, Borrower shall contribute to the amount paid or payable by the
indemnified party as a result of such Liabilities (or action in respect
thereof); provided, however, that no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person not guilty of such fraudulent
misrepresentation. In determining the amount of contribution to which the
respective parties are entitled, the following factors shall be considered: (i)
the Nomura Group's and Borrower's relative knowledge and access to information
concerning the matter with respect to which the claim was asserted; (ii) the
opportunity to correct and prevent any statement or omission; and (iii) any
other equitable
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<PAGE>
considerations appropriate in the circumstances. Lender and Borrower hereby
agree that it may not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation.
IX.1.7 Rating Surveillance. Lender will retain the Rating Agencies to
provide rating surveillance services on Securities. The pro rata share of such
rating surveillance will be at the expense of Borrower, subject to the
limitation on Borrower's costs contained in the last paragraph of Section 9.1.1.
X. MISCELLANEOUS
X.1 Exculpation. Subject to the qualifications below, Lender shall not
enforce the liability and obligation of Borrower to perform and observe the
obligations contained in the Loan Documents against Borrower or any of its
officers, directors, employees, partners, members or shareholders ("Borrower's
Constituents"), by any action or proceeding wherein a money judgment shall be
sought, except that Lender may bring a foreclosure action, an action for
specific performance or any other appropriate action or proceeding to enable
Lender to enforce and realize upon its security interests under the Loan
Documents, or in the Properties, the Rents or any other collateral given by or
on behalf of Borrower to Lender pursuant to the Loan Documents; provided,
however, that, except as specifically provided in this Section 10.1, any
judgment in any such action or proceeding shall be enforceable against Borrower
only to the extent of Borrower's interest in the Properties, in the Rents and in
any other collateral given by or on behalf of Borrower to Lender, and Lender
agrees that it shall not sue for, seek or demand any deficiency judgment against
(i) Borrower, (ii) the property of any of Borrower's Constituents, or (iii) the
property of any of the officers, directors, employees, partners, members or
shareholders of any of Borrower's Constituents, in any such action or proceeding
under or by reason of or under or in connection with any Loan Document. The
provisions of this section shall not, however, (i) constitute a waiver, release
or impairment of any obligation evidenced or secured by any Loan Document; (ii)
impair the right of Lender to name Borrower as a party defendant in any action
or suit for foreclosure and sale under the Mortgages; (iii) affect the validity
or enforceability of any guaranty made in connection with the Loan or any of the
rights and remedies of Lender thereunder; (iv) impair the right of Lender to
obtain the appointment of a receiver; (v) impair the enforcement of the
Assignment of Leases as against Borrower's interest in the Properties or the
Rents; (vi) constitute a prohibition against Lender to commence any other
appropriate action or proceeding in order for Lender to fully realize the
security granted by the Mortgages or to exercise its remedies against the
Properties; or (vii) constitute a waiver of the right of Lender to enforce the
liability and obligation of Borrower, by money judgment or otherwise, to the
extent of any loss, damage, cost, expense, liability, claim or other obligation
incurred by Lender (including attorneys' fees and costs reasonably incurred)
arising out of or in connection with the following:
(a) fraud or intentional misrepresentation by Borrower or any
guarantor in connection with the Loan;
(b) the willful misconduct of Borrower;
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<PAGE>
(c) the breach of any representation, warranty, covenant or
indemnification in any Loan Document concerning Environmental Laws or
Hazardous Substances, including Sections 4.1.32 and 5.10, and clauses
(viii) through (xi) of Section 5.18;
(d) the removal or disposal of any portion of any Property after an
Event of Default, which removal or disposal is prohibited under the Loan
Documents;
(e) the misappropriation or conversion by Borrower of (x) any Proceeds
paid by reason of any Insured Casualty, (y) any Award received in
connection with a Condemnation, or (z) any Rents during the continuance of
an Event of Default, which are not deposited into the Deposit Account;
(f) failure to pay charges for labor or materials or other charges
that can create Liens on any portion of any Property unless such charges
are the subject of a bona fide dispute in which Borrower is contesting the
amount or validity thereof;
(g) any security deposits collected with respect to any Property which
are not delivered to Lender upon a foreclosure of or action in lieu
thereof, except to the extent any such security deposits were applied in
accordance with the terms and conditions of any of the Leases prior to the
occurrence of the Event of Default that gave rise to such foreclosure or
action in lieu thereof;
(h) Borrower's indemnifications of Lender set forth in Sections 9.1.3
and 9.1.4; and
(i) Borrower's indemnification of Lender set forth in Section 24 of
each of the Mortgages.
provided, however, that notwithstanding anything to the contrary contained
in this clause (vii), Lender agrees that it shall not sue for, seek or demand
any judgment against (i) the property of any of Borrower's Constituents, or (ii)
the property of any of the officers, directors, employees, partners, members or
shareholders of any of Borrower's Constituents, in any such action or proceeding
under or by reason of or under or in connection with any Loan Document.
Notwithstanding anything to the contrary in this Agreement or any of the Loan
Documents, Lender shall not be deemed to have waived any right which Lender may
have under Section 506(a), 506(b), 1111(b) or any other provisions of the U.S.
Bankruptcy Code to file a claim for the full amount of the Debt or to require
that all collateral shall continue to secure all of the Debt in accordance with
the Loan Documents.
X.2 Notices. All notices, consents, approvals and requests required or
permitted hereunder or under any other Loan Document (a "notice") shall be given
in writing and shall be effective for all purposes if hand delivered or sent (i)
by certified or registered United
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States mail, postage prepaid, or (ii) by (A) expedited prepaid delivery service,
either commercial or United States Postal Service, with proof of attempted
delivery, and (B) telecopier (with answer back acknowledged), in any case
addressed as follows (or to such other address or Person as a party shall
designate from time to time by notice to the other party): If to Lender: Nomura
Asset Capital Corporation, Two World Financial Center, Building B, New York, New
York 10281, Attention: Sheryl McAfee, Telecopier (212) 667-1206, with copies to
: Nomura Asset Capital Corporation, Two World Financial Center, Building B, New
York, New York 10281, Attention: Barry Funt, Telecopier (212) 667-1567 and Kaye,
Scholer, Fierman, Hays & Handler, LLP, 425 Park Avenue, New York, New York
10022, Attention: Stephen Gliatta, Telecopier: (212) 836-7156; if to Borrower:
c/o FAC Realty Trust, Inc., 11000 Regency Parkway, Cary, North Carolina 27511,
Attention: President, Telecopier (919) 462-8799, with copies to: FAC Realty
Trust, Inc.,11000 Regency Parkway, Cary, North Carolina 27511, Attention: Chief
Financial Officer and another copy sent to Attention: General Counsel at the
same address, Telecopier (703) 506-9137, and with a copy to: Mayer, Brown &
Platt, 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006, Attention: Keith
J. Willner, Telecopier: (202) 861-0473. A notice shall be deemed to have been
given: in the case of hand delivery, at the time of delivery; in the case of
registered or certified mail, when delivered or the first attempted delivery on
a Business Day; or in the case of expedited prepaid delivery and telecopy, upon
the first attempted delivery (but not in the case of telecopy) on a Business
Day.
X.3 Brokers and Financial Advisors. Borrower hereby represents that it has
dealt with no financial advisors, brokers, underwriters, placement agents,
agents or finders in connection with the Loan. Borrower and Lender hereby agree
to indemnify and hold the other harmless from and against any and all claims,
liabilities, costs and expenses of any kind in any way relating to or arising
from a claim by any Person that such Person acted on behalf of the indemnifying
party in connection with the transactions contemplated herein. The provisions of
this Section 10.3 shall survive the expiration and termination of this Agreement
and the repayment of the Debt.
X.4 Retention of Servicer. Lender reserves the right to retain the Servicer
to act as its agent hereunder with such powers as are specifically delegated to
the Servicer by Lender, whether pursuant to the terms of this Agreement, the
Pooling and Servicing Agreement, the Deposit Account Agreement or otherwise,
together with such other powers as are reasonably incidental thereto. Borrower
shall pay any reasonable fees and expenses of the Servicer in connection with a
Defeasance, release of the Property, assumption or modification of the Loan or
enforcement of the Loan Documents.
X.5 Survival. This Agreement and all covenants, agreements, representations
and warranties made herein and in the certificates delivered pursuant hereto
shall survive the making by Lender of the Loan and the execution and delivery to
Lender of the Note, and shall continue in full force and effect so long as all
or any of the Debt is unpaid. All Borrower's covenants and agreements in this
Agreement shall inure to the benefit of the respective legal representatives,
successors and assigns of Lender.
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X.6 Lender's Discretion. Whenever pursuant to this Agreement or any other
Loan Document, Lender exercises any right given to it to approve or disapprove,
or any arrangement or term is to be satisfactory to Lender, the decision of
Lender to approve or disapprove or to decide whether arrangements or terms are
satisfactory or not satisfactory shall (except as is otherwise specifically
herein provided) be in the sole discretion of Lender and shall be final and
conclusive.
X.7 Governing Law. (a) THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW
YORK, AND MADE BY LENDER AND ACCEPTED BY BORROWER IN THE STATE OF NEW YORK, AND
THE PROCEEDS OF THE NOTE DELIVERED PURSUANT HERETO WERE DISBURSED FROM THE STATE
OF NEW YORK, WHICH STATE THE PARTIES AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE
PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY, AND IN ALL RESPECTS,
INCLUDING MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND
THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND PERFORMED IN SUCH STATE AND ANY APPLICABLE LAW OF THE UNITED STATES OF
AMERICA, EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION,
AND ENFORCEMENT OF THE LIENS CREATED PURSUANT TO THE LOAN DOCUMENTS SHALL BE
GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE
APPLICABLE PROPERTY IS LOCATED, IT BEING UNDERSTOOD THAT, TO THE FULLEST EXTENT
PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF NEW YORK SHALL
GOVERN THE VALIDITY AND THE ENFORCEABILITY OF ALL LOAN DOCUMENTS AND THE DEBT.
TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWER HEREBY UNCONDITIONALLY AND
IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION
GOVERNS THIS AGREEMENT AND THE NOTE, AND THIS AGREEMENT AND THE NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
PURSUANT TO ss. 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.
(b) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER ARISING
OUT OF OR RELATING TO THIS AGREEMENT SHALL BE INSTITUTED IN ANY FEDERAL OR STATE
COURT IN NEW YORK, NEW YORK, PURSUANT TO ss. 5-1402 OF THE NEW YORK GENERAL
OBLIGATIONS LAW, AND BORROWER WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND BORROWER
HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT,
ACTION OR PROCEEDING. BORROWER DOES HEREBY DESIGNATE AND APPOINT MAYER, BROWN &
PLATT, AT 1675 BROADWAY, NEW YORK, NEW YORK, ATTENTION: REAL ESTATE GROUP,
MANAGING PARTNER, AS ITS AUTHORIZED AGENT TO ACCEPT AND ACKNOWLEDGE ON ITS
BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT,
ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW
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YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT SAID ADDRESS AND
WRITTEN NOTICE OF SAID SERVICE OF BORROWER MAILED OR DELIVERED TO BORROWER IN
THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF
PROCESS UPON BORROWER, IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE OF
NEW YORK. BORROWER (I) SHALL GIVE PROMPT NOTICE TO LENDER OF ANY CHANGED ADDRESS
OF ITS AUTHORIZED AGENT HEREUNDER, (II) MAY AT ANY TIME AND FROM TIME TO TIME
DESIGNATE A SUBSTITUTE AUTHORIZED AGENT WITH AN OFFICE IN NEW YORK, NEW YORK
(WHICH OFFICE SHALL BE DESIGNATED AS THE ADDRESS FOR SERVICE OF PROCESS), AND
(III) SHALL PROMPTLY DESIGNATE SUCH A SUBSTITUTE IF ITS AUTHORIZED AGENT CEASES
TO HAVE AN OFFICE IN NEW YORK, NEW YORK OR IS DISSOLVED WITHOUT LEAVING A
SUCCESSOR.
X.8 Modification, Waiver in Writing. No modification, amendment, extension,
discharge, termination or waiver of any provision of this Agreement or of any
other Loan Document, nor consent to any departure by Borrower therefrom, shall
in any event be effective unless the same shall be in a writing signed by the
party against whom enforcement is sought, and then such waiver or consent shall
be effective only in the specific instance, and for the purpose, for which
given. Except as otherwise expressly provided herein, no notice to or demand on
Borrower shall entitle Borrower to any other or future notice or demand in the
same, similar or other circumstances.
X.9 Delay Not a Waiver. Neither any failure nor any delay on the part of
Lender in insisting upon strict performance of any term, condition, covenant or
agreement, or exercising any right, power, remedy or privilege hereunder, or
under any other Loan Document, shall operate as or constitute a waiver thereof,
nor shall a single or partial exercise thereof preclude any other future
exercise, or the exercise of any other right, power, remedy or privilege. In
particular, and not by way of limitation, by accepting payment after the due
date of any amount payable under any Loan Document, Lender shall not be deemed
to have waived any right either to require prompt payment when due of all other
amounts due under the Loan Documents, or to declare a Default for failure to
effect prompt payment of any such other amount.
X.10 Trial by Jury. BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF
ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY
TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO
THE LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN
CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY
AND VOLUNTARILY BY BORROWER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH
INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE
ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY
PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER.
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X.11 Headings. The Section headings and Table of Contents in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
X.12 Severability. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
X.13 Preferences. Lender shall have the continuing and exclusive right to
apply or reverse and reapply any and all payments by Borrower to any portion of
the Debt. To the extent Borrower makes a payment to Lender, or Lender receives
proceeds of any collateral, which is in whole or part subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, receiver or any other party under any bankruptcy law, state or
federal law, common law or equitable cause, then, to the extent of such payment
or proceeds received are required to be repaid by Lender, the Debt or part
thereof intended to be satisfied shall be revived and continue in full force and
effect, as if such payment or proceeds had not been received by Lender.
X.14 Waiver of Notice. Borrower shall not be entitled to any notices of any
nature whatsoever from Lender except with respect to matters for which this
Agreement or any other Loan Document specifically and expressly provides for the
giving of notice by Lender to Borrower and except with respect to matters for
which Borrower is not, pursuant to applicable Legal Requirements, permitted to
waive the giving of notice. Except as prohibited by law, Borrower hereby
expressly waives the right to receive any notice from Lender with respect to any
matter for which no Loan Document specifically and expressly provides for the
giving of notice by Lender to Borrower.
X.15 Remedies of Borrower. In the event that a claim or adjudication is
made that Lender or its agent, including Servicer, has acted unreasonably or
unreasonably delayed acting in any case where by law or under any Loan Document,
Lender or such agent, as the case may be, has an obligation to act reasonably or
promptly, Borrower agrees that neither Lender nor its agents, including
Servicer, shall be liable for any monetary damages, and Borrower's sole remedy
shall be to commence an action seeking injunctive relief or declaratory
judgment. Any action or proceeding to determine whether Lender has acted
reasonably shall be determined by an action seeking declaratory judgment.
X.16 Prior Agreements. This Agreement and the other Loan Documents contain
the entire agreement of the parties hereto and thereto in respect of the
transactions contemplated hereby and thereby, and all prior agreements among or
between such parties, whether oral or written, are superseded by the terms of
this Agreement and the other Loan Documents.
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X.17 Offsets, Counterclaims and Defenses. Borrower hereby waives the right
to assert a counterclaim, other than a compulsory counterclaim, in any action or
proceeding brought against it by Lender or its agents, including Servicer. Any
assignee of Lender's interest in and to the Loan Documents shall take the same
free and clear of all offsets, counterclaims or defenses that are unrelated to
the Loan Documents which Borrower may otherwise have against any assignor of
such documents, and no such unrelated offset, counterclaim or defense shall be
interposed or asserted by Borrower in any action or proceeding brought by any
such assignee upon such documents, and any such right to interpose or assert any
such unrelated offset, counterclaim or defense in any such action or proceeding
is hereby expressly waived by Borrower.
X.18 Publicity. All news releases, publicity or advertising by Borrower or
its Affiliates through any media intended to reach the general public, which
refers to the Loan Documents, the Loan, Lender, Nomura, the Loan purchaser, the
Servicer or the trustee in a Securitization, shall be subject to the prior
written approval of Lender.
X.19 No Usury. Borrower and Lender intend at all times to comply with
applicable state law or applicable United States federal law (to the extent that
it permits Lender to contract for, charge, take, reserve or receive a greater
amount of interest than under state law) and that this Section 10.19 shall
control every other agreement in the Loan Documents. If the applicable law
(state or federal) is ever judicially interpreted so as to render usurious any
amount called for under the Note or any other Loan Document, or contracted for,
charged, taken, reserved or received with respect to the Debt, or if Lender's
exercise of the option to accelerate the maturity of the Loan of any prepayment
by Borrower results in Borrower having paid any interest in excess of that
permitted by applicable law, then it is Borrower's and Lender's express intent
that all excess amounts theretofore collected by Lender shall be credited
against the unpaid Principal and all other Debt (or, if the Debt has been or
would thereby be paid in full, refunded to Borrower), and the provisions of the
Loan Documents immediately be deemed reformed and the amounts thereafter
collectible thereunder reduced, without the necessity of the execution of any
new document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for thereunder. All sums paid or
agreed to be paid to Lender for the use, forbearance or detention of the Loan
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated, and spread throughout the full stated term of the Loan until payment
in full so that the rate or amount of interest on account of the Debt does not
exceed the maximum lawful rate from time to time in effect and applicable to the
Debt for so loan as the Debt is outstanding. Notwithstanding anything to the
contrary contained in any Loan Document, it is not the intention of Lender to
accelerate the maturity of any interest that has not accrued at the time of such
acceleration or to collect unearned interest at the time of such acceleration.
X.20 Conflict; Construction of Documents. In the event of any conflict
between the provisions of this Agreement and any of the other Loan Documents,
the provisions of this Agreement shall control. The parties hereto acknowledge
that they were represented by counsel in connection with the negotiation and
drafting of the Loan Documents and that the Loan Documents shall not be subject
to the principle of construing their meaning against the party that
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drafted them.
X.21 No Third Party Beneficiaries. The Loan Documents are solely for the
benefit of Lender and the Borrower and nothing contained in any Loan Document
shall be deemed to confer upon anyone other than the Lender and the Borrower any
right to insist upon or to enforce the performance or observance of any of the
obligations contained therein.
X.22 Cross Default; Cross Collateralization. Borrower acknowledges that
Lender has made the Loan to Borrower upon the security of its collective
interest in the Properties and in reliance upon the aggregate of the Properties
taken together being of greater value as collateral security than the sum of the
Properties taken separately. Borrower agrees that the Mortgages are and will be
cross-collateralized and cross-defaulted with each other so that (i) an Event of
Default under any of the Mortgages shall constitute an Event of Default under
each of the other Mortgages which secure the Note; (ii) an Event of Default
under the Note or this Agreement shall constitute an Event of Default under each
Mortgage; and (iii) each Mortgage shall constitute security for the Note as if a
single blanket lien were placed on all of the Properties as security for the
Note.
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IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to
be duly executed under seal by their duly authorized representatives, all as of
the day and year first above written.
FAC MORTGAGE LLC, a Delaware limited liability
company (SEAL)
By: FAC Mortgage Formation, Inc., a Delaware
corporation, its managing member
By: _________________________
Name: Linda M. Swearingen
Title: Vice President
ATTEST:
By: ______________________
Name: William L. Welch, III
Title: Assistant Secretary
[CORPORATE SEAL]
NOMURA ASSET CAPITAL CORPORATION
By:_______________________________________
Name:
Title:
ATTEST:
By: ______________________
Name:
Title:_________ Secretary
[CORPORATE SEAL]
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SCHEDULE 1
List of Properties
Owned Properties
1. Branson, MO - Factory Shoppes at Branson Meadows, 4562 Gretna Road,
Branson, MO 65616
2. Georgetown, KY- Factory Stores of America, 401 Outlet Center Drive,
Georgetown, KY 40324
3. Graceville, FL - Factory Stores of America, 950 Prim Avenue, Graceville, FL
32440
4. Lebanon, MO - Factory Stores of America, 2020 Industrial Drive, Lebanon, MO
65536
5. Cary, NC - McGreggor Village Shopping Center, 107 Edinburgh South, Cary, NC
27511
6. Nebraska City, NE - Factory Stores of America, 101 Nebraska State Hwy,
Nebraska City, NE 68410
7. Raleigh, NC - North Ridge Shopping Center, 6196 Falls of the Neuse Road,
Raleigh, NC 27609
8. Smithfield, NC - Factory Stores of America, 1025 Industrial Park Drive,
Smithfield, NC 27577
9. Story City, IA - Factory Stores of America, 324 Factory Outlet Drive, Story
City, IA 50248
10. Sulphur Springs, TX - Factory Stores of America, 614 Radio Road, Sulphur
Springs, TX 75482
Ground Leased Property
11. Boaz, AL - Factory Stores of America, 200 Lackey Street, Boaz, AL 35957
1-1
<PAGE>
SCHEDULE 2
Matters Regarding Representations
2-1
<PAGE>
SCHEDULE 3
Rent Rolls
(See Attached)
3-1
<PAGE>
SCHEDULE 4
Required Repairs
(See Attached)
4-1
<PAGE>
SCHEDULE 5
Anchor Leases
(See Attached)
5-1
<PAGE>
SCHEDULE 6
Eligible Out-Parcels
(See Attached)
6-1
<PAGE>
SCHEDULE 7
Form of Rent Roll
(See Attached)
7-1
Agreement to Furnish Certain Instruments Defining the Rights of Long-Term Debt
Holders.
The Company hereby agrees to furnish, upon request, any and all instruments
defining the rights of long-term debt holders not contained as an exhibit to
this Form 10-K.
EMPLOYMENT AGREEMENT
BETWEEN
FAC REALTY, INC.
AND
C. CAMMACK MORTON
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 1st day of March, 1997
between FAC REALTY, INC., a Delaware corporation (the "Company"), and C. CAMMACK
MORTON (the "Executive") for employment commencing on the Effective Date (as
hereinafter defined).
W I T N E S S E T H:
WHEREAS, the Executive has been employed by the Company as President and
Chief Operating Officer under that certain Second Amended and Restated
Employment Agreement between Factory Stores of America, Inc., now known as FAC
Realty, Inc., and dated December 15, 1995 (the "Original Employment Agreement");
and
WHEREAS, the Company desires to employ the Executive as its Chief Executive
Officer and to terminate the Original Employment Agreement, and the Executive
desires to be so employed on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as President and Chief
Executive Officer and the Executive hereby accepts such employment, on the terms
and subject to the conditions hereinafter set forth. The Original Employment
Agreement is hereby terminated.
(b) During the term of his employment under this Employment Agreement and
any extension hereof (all references herein to the term of this Employment
Agreement shall include any extension hereof), the Executive shall be and have
the title of President and Chief Executive Officer and shall devote his entire
business time and all reasonable efforts to his employment and perform
diligently such duties as are customarily performed by presidents and chief
executive officers of companies similar in size to the Company, together with
such other duties as may be reasonably requested from time to time by the Board
of Directors of the Company (the "Board"), which duties shall be consistent with
his title and position as set forth above and as provided in Paragraph 2;
provided, however, that business activities by the Executive with respect to
passive investments, so long as such activities do not, alone or in the
aggregate, materially interfere with the Executive's performance of his duties
as described in this Paragraph l(b), will not be deemed inconsistent with the
requirements of this Paragraph l(b).
2. Term and Positions.
(a) Subject to the provisions for extension or termination hereinafter
stated, the term of this Employment Agreement shall begin as of March 1, 1997
(the "Effective Date")
-2-
<PAGE>
and shall continue through February 29, 2000 (the "Expiration Date"). As of the
March 1, 1998 and each successive anniversary thereof, such term automatically
shall be extended for one (1) additional year, unless: (i) this Employment
Agreement is terminated as provided in Paragraph 5 or (ii) either the Company or
the Executive shall give written notice to the other at least thirty (30) days
before the first anniversary of the Effective Date or any subsequent annual
anniversary thereof, that this Employment Agreement shall not be so extended but
shall terminate upon the expiration of the then-existing term (for example,
unless such written notice of non-extension is given on or prior to January 28,
1998, the term of this Employment Agreement automatically will be extended,
effective March 1, 1998, until February 28, 2001). In the event of a "change of
control" (as hereinafter defined) the term of this Employment Agreement shall
automatically be extended for a term of two (2) years from the then existing
Termination Date.
(b) The Executive shall be entitled to serve as President and Chief
Executive Officer of the Company. For service as a director, officer and
employee of the Company, the Executive shall be entitled to the full protection
of the applicable indemnification provisions of the Restated Certificate of
Incorporation and Bylaws of the Company, as the same may be amended from time to
time, which indemnifications shall remain effective after termination of this
Employment Agreement with respect to Executive's actions and inactions during
the term hereof. Without limiting the generality of any of the foregoing, except
as hereafter expressly agreed in writing by the Executive, during and throughout
the term of his employment under this Employment Agreement: (i) all employees of
the Company shall report directly or indirectly to the Executive; and (ii)
unless the Board of Directors shall otherwise direct, the Executive shall have
the authority to make operating decisions regarding day-to-day operation of the
business.
(c) If:
(i) the Company materially changes the Executive's duties and
responsibilities as set forth in Paragraphs l(b) and 2(b) without his
consent;
(ii) the Executive's place of employment or the principal executive
offices of the Company are located more than fifty (50) miles from the
geographical center of Cary, North Carolina;
(iii) there occurs a material breach by the Company of any of its
obligations under this Employment Agreement, which breach has not been
cured in all material respects within ten (10) days after the Executive
gives notice thereof to the Company;
(iv) there occurs a "change in control" (as hereinafter defined) of
the Company during the term of this Employment Agreement; or
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(v) after the Effective Date, the Executive is not at all times during
his employment hereunder a member of the Board of Directors, or, if the
Board of Directors constitutes an Executive Committee, the Executive is not
at all times during his employment hereunder a member of such Executive
Committee;
then in any such event the Executive shall have the right to terminate his
employment with the Company, but such termination shall not be considered a
voluntary resignation or termination of such employment or of this Employment
Agreement by the Executive but rather a discharge of the Executive by the
Company "without cause" (as defined in Paragraph 5 (a)). The Executive may
exercise such right of termination at any time within three (3) months following
the occurrence of the applicable event described in (i) and (iii) of this
Paragraph 2(c), and within six (6) months following the occurrence of the
applicable event described in (ii), (iv) and (v) of this Paragraph 2(c).
(d) The Executive shall be deemed not to have consented to any written
proposal calling for a material change in his duties and responsibilities unless
he shall give written notice of his consent thereto to the Board of the Company
within fifteen (15) days after receipt of such written proposal. If the
Executive shall not have given such consent, the Company shall have the
opportunity to withdraw such proposed material change by written notice to the
Executive given within ten (10) days after the end of said fifteen (15) day
period.
(e) The term "change in control" means the first to occur of the following
events:
(i) any person or group of commonly controlled persons owns or
controls, directly or indirectly, fifty percent (50%) or more (directly or
indirectly, including convertible shares or convertible partnership units)
of the voting control or value of the capital stock of the Company
following the Effective Date;
(ii) any person or group of commonly controlled persons owning less
than five percent (5%) of the voting control or value of the capital stock
of the Company within 30 days following the Effective Date owns or
controls, directly or indirectly, more than twenty percent (20%) (directly
or indirectly, including convertible shares or convertible partnership
units) of the voting control or value of the capital stock of the Company;
or
(iii) following the Effective Date, the stockholders of the Company
approve an agreement to merge or consolidate with another corporation or
other entity resulting (whether separately or in connection with a series
of transactions) in a change in ownership of twenty percent (20%) or more
(directly or indirectly, including convertible shares or convertible
partnership units) of the voting control or value of the capital stock of
the Company, or an agreement to sell or otherwise dispose of all or
substantially all of the Company's assets (including without limitation, a
plan of liquidation or dissolution), or otherwise approve of a fundamental
alteration in the nature of the Company's business; provided,
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however, a pledge, hypothecation or other similar disposition for the
purpose of providing collateral security made at the time the Company
enters into a bona fide financing transaction with a party which at the
time of such transaction is not an affiliate of the Company would not
constitute a change in control.
Notwithstanding the foregoing provisions of this Paragraph 2, the ownership or
acquisition of capital stock by the Executive, J. Dixon Fleming, Jr., Patrick M.
Miniutti, Christopher G. Gavrelis, Connell L. Radcliff, and/or their respective
affiliates, shall not be deemed to result in a "change in control" of the
Company.
3. Compensation.
During the term of his employment under this Employment Agreement the
Company shall pay or provide, as the case may be, to the Executive the
compensation and other benefits and rights set forth in this Paragraph 3. All
restricted stock given as compensation shall be subject to the Company's 1996
Restricted Stock Plan.
(a) The Company shall pay to the Executive a base salary payable in
accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) of (i) cash payments of Three Hundred Thirty
Thousand and No/100 Dollars ($330,000.00) per annum; (ii) Common Stock of
the Company equivalent to $200,000 based on the market price of the Common
Stock on March 1, 1997 and each subsequent annual anniversary, rounded down
to the nearest 1,000 shares (for example, $200,000 divided by $6.625 per
share would result in 30,000 shares issued), which shares shall
automatically vest on the subsequent annual anniversary (for example, March
1, 1998 for shares issued March 1, 1997) unless the Executive voluntarily
terminates his employment prior to such anniversary date or his employment
is terminated for "cause" (see Paragraph 5 (a) (iii)); (iii) Common Stock
of the Company equivalent to $25,000 based on the market price of the
Common Stock on March 1, 1997 and each subsequent annual anniversary
rounded up to the nearest 1,000 shares plus 50% (for example, $25,000
divided by $6.625 per share would result in 4,000 shares issued plus 50%,
or a total of 6,000 shares), which shares shall automatically vest on the
third anniversary of the date of issuance (for example, March 1, 2000 for
shares issued March 1, 1997) unless the Executive voluntarily terminates
his employment prior to such anniversary date or his employment is
terminated for "cause" (see Paragraph 5 (a) (iii)); and (iv) such increases
(but not decreases) from time to time (based upon the performance of the
Company and the Executive) as determined by the Board or the Company's
Executive Compensation Committee payable in the form of Common Stock of the
Company similar to (iii) above.
(b) The Company may pay to the Executive bonus compensation on a
calendar year basis pursuant to the terms of the incentive compensation
plan established by the Board from time to time, not later than March 1
following each calendar year. Such bonus compensation may be payable in the
form of cash or Common Stock of the Company. In the event such bonus is
paid in the form of Common Stock, the determination of shares issued may be
based on the cash equivalent divided by the market price of the Common
Stock on or about the date of determination of the bonus
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compensation by the Board. Such shares will be increased by 50% and shall
automatically vest on the third anniversary of the date of issuance (for
example, March 1, 2001 for shares issued March 1, 1998) unless the
Executive voluntarily terminates his employment prior to such anniversary
date or his employment is terminated for "cause" (see Paragraph 5 (a)
(iii)).
(c) The Company shall provide to the Executive such medical,
hospitalization and dental insurance for himself, his spouse and eligible
family members, as may be available to other officers of the Company and
term life insurance in the amount of not less than $1,000,000.
(d) The Executive shall participate in all retirement and other
benefit plans of the Company generally available from time to time to
officers of the Company and for which the Executive qualifies under the
terms thereof (and nothing in this Employment Agreement shall or shall be
deemed to in any way affect the Executive's rights and benefits thereunder
except as expressly provided herein).
(e) The Executive shall be entitled to such periods of vacation and
sick leave allowance each year as are determined by the Company's Executive
Compensation Committee for officers generally; provided that Executive
shall be entitled to not less than four weeks (twenty days) of vacation
each year.
(f) The Executive shall be entitled to participate in any equity or
other employee benefit plan that is generally available to senior executive
officers, as distinguished from general management, of the Company. The
Executive's participation in and benefits under any such plan shall be on
the terms and subject to the conditions specified in the governing document
of the particular plan.
(g) The Company shall reimburse the Executive or provide him with an
expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall
furnish such documentation with respect to reimbursement to be paid
hereunder as the Company shall reasonably request.
(h) The Company shall (i) pay to the Executive an annual automobile
allowance of $8,000 payable on a pro rata monthly basis; (ii) pay or
reimburse the Executive for country club initiation fees of up to $20,000
plus periodic dues; and (iii) pay or reimburse the Executive up to $2,500
annually for expenses of financial, estate or tax planning.
4. Payment in the Event of Death or Permanent Disability.
(a) In the event of the Executive's death or "permanent disability" (as
hereinafter defined) during the term of his employment under this Employment
Agreement, the Company shall pay to the Executive (or his personal
representatives,
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heirs, successors and assigns in the event of his death) an amount equal to two
(2) times the Executive's then effective annual base salary, as determined under
Paragraph 3(a), plus a pro rata portion of the bonus applicable to the calendar
year in which such death or permanent disability occurs, as such bonus is
determined under Paragraph 3(b).
(b) The pro rata portion of the bonus described in Paragraph 4(a) shall be
paid when and as provided in Paragraph 3(b). The remainder of the benefit to be
paid pursuant to Paragraph 4(a) shall be paid within ninety (90) days after the
date of death or permanent disability, as the case may be.
(c) Except as otherwise provided in Paragraphs 2(b), 3(d), 4(a) and 4(b),
in the event of the Executive's death or permanent disability, the Executive's
employment hereunder shall terminate and the Executive shall be entitled to no
further compensation or other benefits under this Employment Agreement, except
as to that portion of any unpaid salary and other benefits accrued and earned by
him hereunder up to and including the date of such death or permanent
disability, as the case may be.
(d) For purposes of this Employment Agreement, the Executive's "permanent
disability" shall be deemed to have occurred after one hundred twenty (120) days
in the aggregate during any consecutive twelve (12) month period, or after
ninety (90) consecutive days, during which one hundred twenty (120) or ninety
(90) days, as the case may be, the Executive, by reason of his physical or
mental disability or illness, shall have been unable to discharge his duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the Raleigh, North Carolina, area and, unless such physician shall issue his
written statement to the effect that in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full time and
energy to discharging his duties within thirty (30) days after the date of such
statement, such permanent disability shall be deemed to have occurred.
5. Termination.
(a) The Employment of the Executive under this Employment Agreement, and
the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined above) of the
Executive;
(ii) for "cause" at any time by action of the Board; or
(iii) "without cause" at any time by action of the Board.
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For purposes hereof, the term "cause" shall mean:
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(A) The Executive's fraud, commission of a felony, commission of
an act or series of repeated acts of dishonesty which fraud, felony or
dishonesty is materially inimical to the best interests of the
Company, or which results in material injury to the business
reputation of the Company, or the Executive's willful and repeated
failure to perform his duties under this Employment Agreement, which
failure has not been cured within fifteen (15) days after the Company
gives notice thereof to the Executive; or
(B) The Executive's material breach of any material provision of
this Employment Agreement, which breach has not been cured in all
substantial respects within ten (10) days after the Company gives
notice thereof to the Executive.
For purposes hereof, the term "without cause" shall mean any reason other
than those set forth in subparagraphs (a)(i) and (a)(ii) of this Paragraph
5.
The exercise by the Company of its rights of termination under this Paragraph 5
shall be the Company's sole remedy in the event of the occurrence of the event
as a result of which such right to terminate arises. Upon any termination of
this Employment Agreement, the Executive shall be deemed to have resigned from
all offices and directorships held by the Executive in the Company.
(b) In the event of a termination claimed by the Company to be for "cause"
pursuant to Paragraph 5(a)(ii), the Executive shall have the right to have the
justification for said termination determined by arbitration in Raleigh, North
Carolina. In order to exercise such right, the Executive shall serve on the
Company within thirty (30) days after termination a written request for
arbitration. The Company immediately shall request the appointment of a single
arbitrator by the American Arbitration Association and thereafter the question
of "cause" shall be determined under the rules of the American Arbitration
Association, and the decision of the arbitrator shall be final and binding on
both parties. The parties shall use all reasonable efforts to facilitate and
expedite the arbitration and shall act to cause the arbitration to be completed
as promptly as possible. During the pendency of the arbitration, the Executive
shall continue to receive all compensation and benefits to which he is entitled
hereunder, and if at any time during the pendency of such arbitration the
Company fails to pay and provide all compensation and benefits to the Executive
in a timely manner the Company shall be deemed to have automatically waived
whatever rights it then may have had to terminate the Executive's employment for
cause. Expenses of the arbitration shall be borne equally by the parties.
(c) In the event of termination pursuant to subparagraph (a)(i) or (a)(ii)
of this Paragraph 5, except as otherwise provided in Paragraphs 2(b), 3(d), 4(a)
and 4(b), as applicable, the Executive shall be entitled to no further
compensation or other benefits under this Employment Agreement, except as to
that portion of any unpaid salary and other benefits accrued and earned by him
hereunder up to and including the effective date of such termination.
(d) In the event of termination pursuant to Paragraph 2(c), or subparagraph
(a)(iii) of this paragraph 5, the Executive shall be entitled to
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(i) severance pay payable within five (5) days of such termination in
a lump sum equal to the sum of (A) the greater of (x) the total amount of
unpaid base salary for the then-unexpired portion of the term of this
Employment Agreement, including any extended term as provided by Section
2(a) hereof at the then-effective annual rate of salary, as determined
under Paragraph 3(a) and (y) the amount of one year's base salary at the
then-effective annual rate of salary, and (B) the product of the number of
years (including fractions) representing the unexpired term of this
Employment Agreement (but not less than one) times an amount equal to the
average of the annual bonuses payable to the Executive under Paragraph 3(b)
for the three (3) full calendar years immediately prior to termination of
this Employment Agreement in which a bonus was payable or such lesser
number of full calendar years during which the Executive was employed
hereunder in which a bonus was payable,
(ii) during a period equal to the greater of one (1) year or the
unexpired term of this Employment Agreement, all other benefits to which
the Executive would have been entitled during the term of this Employment
Agreement had the Executive's employment not been terminated,
(iii) during a period equal to the greater of one (1) year or the
unexpired term of this Employment Agreement, the continuing use of a
secretary and office space to be provided by the Company, and
(iv) other benefits accrued and earned by him hereunder up to and
including the effective date of such termination.
(e) In the event of the termination of his employment pursuant to Paragraph
2(c) or Paragraph 5(a)(iii), the Executive shall have the option to be released
from his obligations under Paragraph 6(a)(i) for the one (1) year period
following the termination of his employment, by releasing the Company from its
obligations under Paragraph 5(d) hereof (other than those provided in Paragraph
5(d)(iv)). Such option may be exercised by the Executive giving the Company
notice thereof within five (5) days of such termination.
(f) In no event shall the Executive have or be deemed to have any duty to
seek employment or otherwise mitigate damages with respect to any amounts or
benefits due to him upon termination of this Employment Agreement as provided in
this Paragraph 5, nor shall any such amount or benefits be reduced by reason of
any other compensation or benefits which the Executive may earn following
termination of this Employment Agreement.
6. Covenants and Confidential Information.
(a) The Executive acknowledges the Company's reliance and expectation of
the Executive's continued commitment to performance of his duties and
responsibilities during the time when he is employed under this Employment
Agreement. In light of such reliance and expectation on the part of the Company
(but subject to Paragraph 5(d), 5(e) and 5(f) above),
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during the time when he is employed under this Employment Agreement and for a
period of one (1) year after the
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termination of such employment for any reason other than the expiration of the
term hereof in accordance with Paragraph 2(a)(ii) hereof (and, as to clause (ii)
of this subparagraph (a), at any time during and after the term of this
Employment Agreement), the Executive shall not, directly or indirectly, do
either of the following:
(i) Own, manage, control or participate in the ownership, management,
or control of, or be employed or engaged by or otherwise affiliated or
associated as a consultant, independent contractor or otherwise with, any
other corporation, partnership, proprietorship, firm, association or other
business entity engaged in the business of, or otherwise engage in the
business of, acquiring, owning, developing or managing factory outlet
shopping centers; provided, however, that the ownership of not more than
one percent (1%) of any class of publicly traded securities of any entity;
or
(ii) Disclose, divulge, discuss, copy or otherwise use or suffer to be
used in any manner, in competition with, or contrary to the interests of,
the Company, any confidential information relating to the Company's
operations, properties or otherwise to its particular business or other
trade secrets of the Company, it being acknowledged by the Executive that
all such information regarding the business of the Company compiled or
obtained by, or furnished to, the Executive while the Executive shall have
been employed by or associated with the Company is confidential information
and the Company's exclusive property; provided, however, that the foregoing
restrictions shall not apply to the extent that such information (A) is
obtainable in the public domain or known in the industry generally, (B)
becomes obtainable in the public domain or known in the industry generally,
except by reason of the breach by the Executive of the terms hereof, (C)
was not acquired by the Executive in connection with his employment or
affiliation with the Company, (D) was not acquired by the Executive from
the Company or its representatives, or (E) is required to be disclosed by
rule of law or by order of a court or governmental body or agency.
(b) The Executive agrees and understands that the remedy at law for any
breach by him of this Paragraph 6 may be inadequate and that the damages flowing
such breach are not readily susceptible to being measured in monetary terms.
Accordingly, it is acknowledged that, upon adequate proof of the Executive's
violation of any legally enforceable provision of this Paragraph 6, the Company
may be entitled to immediate injunctive relief and may obtain a temporary order
restraining any threatened or further breach. Nothing in this Paragraph 6 shall
be deemed to limit the Company's remedies at law or in equity for any breach by
the Executive of any of the provisions of this Paragraph 6 which may be pursued
or availed of by the Company.
(c) The Executive has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon the Company
under this Paragraph 6, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition which
otherwise would be unfair to the Company, do not stifle the inherent skill and
experience of the Executive, would not operate as a bar to the Executive's sole
means of support, are fully required to protect the legitimate interests of the
Company and do not confer a benefit upon the Company disproportionate to the
detriment to the Executive.
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7. Stock Options. The Executive shall receive stock options under the
Company's 1993 Employee Stock Incentive Plan as amended as more fully described
in that certain Nonqualified Stock Option Agreement and that certain Incentive
Stock Option Agreement dated February 14, 1996 the terms and conditions of which
are incorporated herein by reference.
8. Restricted Stock. The Executive shall receive a grant of 150,000 shares
(the "Restricted Shares") of restricted common stock of the Company ("Common
Stock") granted under the Company's 1996 Restricted Stock Plan. Prior to
vesting, the Restricted Shares will be registered under the Securities Act on
Form S-8, will be listed on the NYSE and following vesting thereof will be
freely tradable subject to applicable provisions of Rule 144 promulgated under
the Securities Act. With respect to said grant, the Company and the Executive
shall enter into a Restricted Stock Agreement in a form mutually agreed upon by
the Company and the Executive providing that (i) the Restricted Shares shall
vest in ten (10) equal installments of ten percent (10%) per year (provided as
to each installment that the Executive continues to be employed by the Company),
commencing on the Effective Date and thereafter on the first through ninth
anniversaries of the Effective Date provided (ii) all unvested Restricted Shares
shall immediately vest upon the Executive's death or permanent disability (as
defined in Paragraph 4(d)) during his employment by the Company; or termination
of the Executive's employment by the Company pursuant to Paragraph 2(c) or
Paragraph 5(a)(iii) or termination of the Executive's employment due to the
Company's election not to extend this Employment Agreement as permitted in
Paragraph 2(a); or pursuant to Paragraph 5(a)(iii) if such termination occurs
within three (3) months prior to, at the time of, or within one (1) year
following a "change of control" (as defined in Section 2(e) hereof) or provided
that such change is effected, the execution of a definitive agreement therefor
(notwithstanding the requirement of continued employment in subparagraph (i)
above, upon such termination of employment). The Executive shall be entitled to
dividends on only those Restricted Shares which have vested as of the record
date of any dividend payment.
9. Tax Adjustment Payments. If all or any portion of the amounts payable to
the Executive under this Employment Agreement (together with all other payments
of cash or property, whether pursuant to this Employment Agreement or otherwise,
including, without limitation, the issuance of common stock of the Company, or
the granting, exercise or termination of options therefor) constitutes "excess
parachute payments" within the meaning of Section 280G of the Code that are
subject to the excise tax imposed by Section 4999 of the Code (or any similar
tax or assessment), the amounts payable hereunder shall be increased (in the
same manner, to the extent applicable, without duplication, as provided in (i),
(ii) and (iii) below) to the extent necessary to place the Executive in the same
after-tax position as he would have been in had no such tax assessment been
imposed on any such payment paid or payable to the Executive under this
Employment Agreement or any other payment that the Executive may receive in
connection therewith. The determination of the amount of any such tax or
assessment and the incremental payment required hereby in connection therewith
shall be made by the accounting firm employed by the Executive within thirty
(30) calendar days after such payment and said incremental payment shall be made
within five (5) calendar days after such determination has been made. If, after
the date upon which the payment required by this Paragraph 8 has been made, it
is determined (pursuant to final regulations or published rulings of
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the Internal Revenue Service, final judgment of a court of competent
jurisdiction, Internal Revenue Service audit assessment, or otherwise) that the
amount of excise or other similar taxes or assessments payable by the Executive
is greater than the amount initially so determined, then the Company shall pay
the Executive an amount equal to the sum of: (i) such additional excise or other
taxes, plus (ii) any interest, fines and penalties resulting from such
underpayment, plus (iii) an amount necessary to reimburse the Executive for any
income, excise or other tax assessment payable by the Executive with respect to
the amounts specified in (i) and (ii) above, and the reimbursement provided by
this clause (iii), in the manner described above in this Paragraph 8. Payment
thereof shall be made within five (5) calendar days after the date upon which
such subsequent determination is made.
10. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to enter into, execute and deliver this Employment
Agreement, fulfill its obligations hereunder and consummate the transactions
contemplated hereby.
(b) The execution and delivery of, performance of obligations under, and
consummation of the transactions contemplated by, this Employment Agreement have
been duly authorized and approved by all requisite corporate action by or in
respect of the Company, and this Employment Agreement constitutes the legally
valid and binding obligation of the Company, enforceable by the Executive in
accordance with its terms.
(c) No provision of the Company's governing documents or any agreement to
which it is a party or by which it is bound or of any material law or regulation
of the kind usually applicable and binding upon the Company prohibits or limits
its ability to enter into, execute and deliver this Employment Agreement,
fulfill its respective obligations hereunder and consummate the transactions
contemplated hereby.
11. Miscellaneous.
(a) The Executive represents and warrants that he is not a party to any
agreement, contract or understanding, whether employment or otherwise, which
would restrict or prohibit him from undertaking or performing employment in
accordance with the terms and conditions of this Employment Agreement.
(b) The provisions of this Employment Agreement are severable and if any
one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any partially
unenforceable provision to the extent enforceable nevertheless shall be binding
and enforceable.
(c) The rights and obligations of the Company under this Employment
Agreement shall inure to the benefit of, and shall be binding on, the Company
and its successors and assigns, and the rights and obligations of the Executive
under this Employment Agreement shall inure to the benefit of, and shall be
binding upon, the Executive (other than obligations to perform services and to
refrain from competition and disclosure of confidential information) and
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his heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to this Employment
Agreement, or the breach thereof, shall be settled by arbitration in accordance
with the Rules of the American Arbitration Association then pertaining in the
City of Raleigh, North Carolina, and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitrator or arbitrators shall be deemed to possess the powers to
issue mandatory orders and restraining orders in connection with such
arbitration; provided, however, that nothing in this Paragraph 11(d) shall be
construed so as to deny the Company the right and power to seek and obtain
injunctive relief in a court of equity for any breach or threatened breach by
the Executive of any of his covenants contained in Paragraph 6 hereof.
(e) Any notice to be given under this Employment Agreement shall be
personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified return receipt requested, and if mailed to the Company,
shall be addressed to its principal place of business, attention: Chairman, and
if mailed to the Executive, shall be addressed to him at his home address last
known on the records of the Company, or at such other address or addresses as
either the Company or the Executive may hereafter designate in writing to the
other. All notices provided for hereunder to the parties shall be accompanied by
simultaneous copy of such notice sent to the attorneys for such parties, as
follows:
If to the Executive:
Bernard Flateman, Esq.
Sills Cummis Zuckerman Radin Tischman Epstein & Gross, P.A.
One Riverfront Plaza
Newark, New Jersey 07102
If to the Company:
FAC Realty, Inc.
11000 Regency Parkway,
Third Floor East Tower
Cary, North Carolina 27511
Attention: General Counsel
Notices sent by Federal Express or similar overnight delivery service or by
facsimile transmissions shall also constitute due notice under this paragraph
11(e), effective upon receipt thereof.
(f) The failure of either party to enforce any provision or provisions of
this Employment Agreement shall not in any way be construed as a waiver of any
such provision or provisions as to any future violations thereof, nor prevent
that party thereafter from enforcing each and every other provision of this
Employment Agreement. The rights granted the parties herein are cumulative and
the waiver of any single remedy shall not constitute a waiver of such party's
right to assert all other legal remedies available to it under the
circumstances.
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(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties made prior to the date hereof and may not be
modified or terminated orally. No modification, termination or attempted waiver
shall be valid unless in writing and signed by the party against whom the same
is sought to be enforced.
(h) This Employment Agreement shall be governed by and construed according
to the laws of the State of North Carolina.
(i) Captions and paragraph headings used herein are for convenience and are
not a part of this Employment Agreement and shall not be used in construing it.
(j) Where necessary or appropriate to the mean hereof, the singular and
plural shall be deemed to include each other, and the masculine, feminine and
neuter shall be deemed to include each other.
(k) This Employment Agreement may be executed in multiple counterparts,
each of which will be deemed an original, but all of which together will
constitute one and the same instrument. This Employment Agreement may be
executed by facsimile signature.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement on
the day and year first set forth above.
FAC REALTY, INC., a Delaware corporation
By: ____________________________________(SEAL)
Patrick M. Miniutti
Executive Vice President
Chief Financial Officer
By: ____________________________________
Theodore E. Haigler, Jr.
Chairman of Executive Compensation
Committee
________________________________________(SEAL)
C. Cammack Morton
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EMPLOYMENT AGREEMENT
BETWEEN
FAC REALTY, INC.
AND
PATRICK M. MINIUTTI
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 1st day of March, 1997
between FAC REALTY, INC., a Delaware corporation (the "Company"), and PATRICK M.
MINIUTTI (the "Executive") for employment commencing on the Effective Date (as
hereinafter defined).
WITNESSETH:
WHEREAS, the Executive has been employed by the Company as Executive Vice
President and Chief Financial Officer under that certain Employment Agreement
between FAC Realty, Inc. and dated August 26, 1996 (the "Original Employment
Agreement"); and
WHEREAS, the Company desires to employ the Executive as its Executive Vice
President and Chief Financial Officer and to terminate the Original Employment
Agreement, and the Executive desires to be so employed on the terms and subject
to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. Employment
(a) The Company hereby employs the Executive as Executive Vice
President and Chief Financial Officer and the Executive hereby accepts such
employment, on the terms and subject to the conditions hereinafter set
forth. The Original Employment Agreement is hereby terminated
(b) During the term of his employment under this Employment Agreement
and any extension hereof (all references herein to the term of this
Employment Agreement shall include any extension hereof), the Executive
shall be and have the title of Executive Vice President and Chief financial
Officer and shall devote his entire business time and all reasonable
efforts to his employment and perform diligently such duties as are
customarily performed by presidents and chief executive officers of
companies similar in size to the Company, together with such other duties
as may be reasonably requested from time to time by the Board of Directors
of the Company (the "Board"), which duties shall be consistent with his
title and position as set forth above and as provided in Paragraph 2;
provided, however, that business activities by the Executive with respect
to passive investments, so long as such activities do not, alone or in the
aggregate, materially interfere with the Executive's performance of his
duties as described in this Paragraph 1(b). will not be deemed inconsistent
with the requirements of this Paragraph 1(b).
2. Term and Positions.
(a) Subject to the provisions for extension or termination hereinafter
stated, the term of this Employment Agreement shall begin as of March 1,
1997 (the "Effective Date") and shall continue through February 29, 2000
(the "Expiration Date"). As of the March 1, 1998 and each
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successive anniversary thereof, such term automatically shall be extended
for one (1) additional year, unless: (i) this Employment Agreement is
terminated as provided in Paragraph 5 or (ii) either the Company or the
Executive shall give written notice to the other at least thirty (30) days
before the first anniversary of the Effective Date or any subsequent annual
anniversary thereof, that this Employment Agreement shall not be so
extended but shall terminate upon the expiration of the then-existing term
(for example, unless such written notice of non-extension is given on Or
prior to January 28, 1998, the term of this Employment Agreement
automatically will be extended, effective March 1, 1998, until February 28,
2001). In the event of a "change of control" (as hereinafter defined) the
term of this Employment Agreement shall automatically be extended for a
term of two (2) years from the then existing Termination Date.
(b) The Executive shall be entitled to serve as Executive Vice
President and Chief Financial Officer of the Company. For service as a
director, officer and employee of the Company, the Executive shall be
entitled to the full protection of the applicable indemnification
provisions of the Restated Certificate of Incorporation and Bylaws of the
Company, as the same may be amended from time to time, which
indemnifications shall remain effective after termination of this
Employment Agreement with respect to Executive's actions and inactions
during the term hereof. Without limiting the generality of any of the
foregoing, except as hereafter expressly agreed in writing by the
Executive, during and throughout the term of his employment under this
Employment Agreement: (i) all employees of the Company shall report
directly or indirectly to the Executive; and (ii) unless the Board of
Directors shall otherwise direct, the Executive shall have the authority to
make operating decisions regarding day-to-day operation of the business.
(c) If:
(i) the Company materially changes the Executive's duties and
responsibilities as set forth in Paragraphs 1(b) and 2(b) without his
consent;
(ii) the Executive's place of employment or the principal
executive offices of the Company are located more than fifty (50)
miles from the geographical center of Cary, North Carolina;
(iii) there occurs a material breach by the Company of any of its
obligations under this Employment Agreement, which breach has not been
cured in all material respects within ten (10) days after the
Executive gives notice thereof to the Company;
(iv) there occurs a "change in control" (as hereinafter defined)
of the Company during the term of this employment Agreement; or
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<PAGE>
(v) after the Effective Date, the Executive is not at all times
during his employment hereunder a member of the Board of Directors,
or, if the Board of Directors constitutes an Executive Committee, the
Executive is not at all times during his employment hereunder a member
of such Executive Committee;
then in any such event the Executive shall have the right to terminate his
employment with the Company, but such termination shall not be considered a
voluntary resignation or termination of such employment or of this
Employment Agreement by the Executive but rather a discharge of the
Executive by the Company "without cause" (as defined in Paragraph 5 (a)).
The Executive may exercise such right of termination at any time within
three (3) months following the occurrence of the applicable event described
in (i) and (iii) of this Paragraph 2(c), and within six (6) months
following the occurrence of the applicable event described in (ii), (iv)
and (v) of this Paragraph 2(c).
(d) The Executive shall be deemed not to have consented to any written
proposal calling for a material change in his duties and responsibilities
unless he shall give written notice of his consent thereto to the Board of
the Company within fifteen (15) days after receipt of such written
proposal. If the Executive shall not have given such consent, the Company
shall have the opportunity to withdraw such proposed material change by
written notice to the Executive given within ten (10) days after the end of
said fifteen (15) day period.
(e) The term "change in control" means the first to occur of the
following events:
(i) any person or group of commonly controlled persons owns or
controls, directly or indirectly, fifty percent (50%) or more
(directly or indirectly, including convertible shares or convertible
partnership units) of the voting control or value of the capital stock
of the Company following the Effective Date;
(ii) any person or group of commonly controlled persons owning
less than five percent (5%) of the voting control or value of the
capital stock of the Company within 30 days following the Effective
Date owns or controls, directly or indirectly, more than twenty
percent (20%) (directly or indirectly, including convertible shares or
convertible partnership units) of the voting control or value of the
capital stock of the Company; or
(iii) following the Effective Date, the stockholders of the
Company approve an agreement to merge or consolidate with another
corporation or other entity resulting (whether separately or in
connection with a series of transactions) in a change in ownership of
twenty percent (20%) or more (directly or indirectly, including
convertible shares or convertible partnership units) of the voting
control or value of the capital stock of the Company, or an agreement
to sell or otherwise dispose of all or substantially all of the
Company's assets (including without limitation, a plan of liquidation
or dissolution), or otherwise approve of a fundamental alteration in
the nature of the Company's business; provided, however, a pledge,
hypothecation or other similar disposition for the purpose of
providing collateral security made at the time the Company enters into
a bona fide financing
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<PAGE>
transaction with a party which at the time of such transaction is not
an affiliate of the Company would not constitute a change in control.
Notwithstanding the foregoing provisions of this Paragraph 2, the ownership or
acquisition of capital stock by the Executive, J. Dixon Fleming, Jr., Patrick M.
Miniutti, Christopher G. Gavrelis, Connell L. Radcliffe and/or their respective
affiliates, shall not be deemed to result in a "change in control" of the
Company.
3. Compensation.
During the term of his employment under this Employment Agreement the
Company shall pay or provide, as the case may be, to the Executive the
compensation and other benefits and rights set forth in this Paragraph 3. All
restricted stock given as compensation shall be subject to the Company's 1996
Restricted Stock Plan.
(a) The Company shall pay to the Executive a base salary payable in
accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) of (i) cash payments of Two Hundred Twenty-Five
Thousand and No/100 Dollars ($225,000.00) per annum; (ii) Common Stock of
the Company equivalent to $100,000 based on the market price of the Common
Stock on March 1, 1997 and each subsequent annual anniversary, rounded down
to the nearest 1,000 shares (for example, $100,000 divided by $6.625 per
share would result in 15,000 shares issued), which shares shall
automatically vest on the subsequent annual anniversary (for example, March
1, 1998 for shares issued March 1. 1997) unless the Executive voluntarily
terminates his employment prior to such anniversary date or his employment
is terminated for "cause" (see Paragraph 5 (a) (iii)); (iii) Common Stock
of the Company equivalent to $18,750 based on the market price of the
Common Stock on March 1, 1997 and each subsequent annual anniversary
rounded up to the nearest 1,000 shares plus 50% (for example, $18,750
divided by $6.625 per share would result in 3,000 shares issued plus 50%,
or a total of 4,500 shares), which shares shall automatically vest on the
third anniversary of the date of issuance (for example, March 1, 2000 for
shares issued March 1, 1997) unless the Executive voluntarily terminates
his employment prior to such anniversary date or his employment is
terminated for "cause" (see Paragraph 5 (a) (iii)); and (iv) such increases
(but not decreases) from time to time (based upon the performance of the
Company and the Executive) as determined by the Board or the Company's
Executive Compensation Committee payable in the form of Common Stock of the
Company similar to (iii) above,
(b) The Company may pay to the Executive bonus compensation on a
calendar year basis pursuant to the terms of the incentive compensation
plan established by the board from time to time, not later than March 1
following each calendar year. Such bonus compensation may be payable in the
form of cash or Common Stock of the Company. In the event such bonus is
paid in the form of Common Stock, the determination of shares issued may be
based on the cash equivalent divided by the market price of the Common
Stock on or about the date of determination of the bonus compensation by
the Board. Such Shares will be increased by 50% and shall automatically
vest on the third anniversary of the date of
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<PAGE>
issuance (for example, March 1, 2001 for shares issued March 1, 1998)
unless the Executive voluntarily terminates his employment prior to such
anniversary date or his employment is terminated for "cause" (see Paragraph
5 (a) (iii)).
(c) The Company shall provide to the Executive such medical,
hospitalization and dental insurance for himself, his spouse and eligible
family members, as may be available to other officers of the Company and
term life insurance in the amount of not less than $1,000,000.
(d) The Executive shall participate in all retirement and other
benefit plans of the Company generally available from time to time to
officers of the Company and for which the Executive qualifies under the
terms thereof (and nothing in this Employment Agreement shall or shall be
deemed to in any way affect the Executive's rights and benefits thereunder
except as expressly provided herein).
(e) The Executive shall be entitled to such periods of vacation and
sick leave allowance each year as are determined by the Company's Executive
Compensation Committee for officers generally; provided that Executive
shall be entitled to not less than four weeks (twenty days) of vacation
each year.
(f) The Executive shall be entitled to participate in any equity or
other employee benefit plan that is generally available to senior executive
officers, as distinguished from general management, of the Company. The
Executive's participation in and benefits under any such plan shall be on
the terms and subject to the conditions specified in the governing document
of the particular plan.
(g) The Company shall reimburse the Executive or provide him with an
expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall
furnish such documentation with respect to reimbursement to be paid
hereunder as the Company shall reasonably request.
(h) The Company shall (i) pay to the Executive an annual automobile
allowance of $8,000 payable on a pro rata monthly basis; (ii) pay or
reimburse the Executive for country club initiation fees of up to $10,000
plus periodic dues; and (iii) pay or reimburse the Executive up to $2,500
annually for expenses of financial, estate or tax planning.
4 Payment in the Event of Death or Permanent Disability.
(a) In the event of the Executive's death or "permanent disability"
(as hereinafter defined) during the term of his employment under this
Employment Agreement, the Company shall pay to the Executive (or his
personal representatives, heirs, successors and assigns in the event of his
death) an amount equal to two (2) times the Executive's then effective
annual base salary, as determined under Paragraph 3(a), plus a pro rata
portion of the bonus applicable to the calendar year in which such death or
permanent disability occurs,
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<PAGE>
as such bonus is determined under Paragraph 3(b).
(b) The pro rata portion of the bonus described in Paragraph 4(a)
shall be paid when and as provided in Paragraph 3(b). The remainder of the
benefit to be paid pursuant to Paragraph 4(a) shall be paid within ninety
(90) days after the date of death or permanent disability, as the case may
be.
(c) Except as otherwise provided in Paragraphs 2(b), 3(d), 4(a) and
4(b), in the event of the Executive's death or permanent disability, the
Executive's employment hereunder shall terminate and the Executive shall be
entitled to no further compensation or other benefits under this Employment
Agreement, except as to that portion of any unpaid salary and other
benefits accrued and earned by him hereunder up to and including the date
of such death or permanent disability, as the case may be.
(d) For purposes of this Employment Agreement, the Executive's
"permanent disability" shall be deemed to have occurred after one hundred
twenty (120) days in the aggregate during any consecutive twelve (12) month
period, or after ninety (90) consecutive days, during which one hundred
twenty (120) or ninety (90) days, as the case may be, the Executive, by
reason of his physical or mental disability or illness, shall have been
unable to discharge his duties under this Employment Agreement. The date of
permanent disability shall be such one hundred twentieth (120th) or
ninetieth (90th) day, as the case may be. In the event either the Company
or the Executive, after receipt of notice of the Executive's permanent
disability from the other, dispute that the Executive's permanent
disability shall have occurred, the Executive shall promptly submit to a
physical examination by the chief of medicine of any major accredited
hospital in the Raleigh, North Carolina, area and, unless such physician
shall issue his written statement to the effect that in his opinion, based
on his diagnosis, the Executive is capable of resuming his employment and
devoting his full time and energy to discharging his duties within thirty
(30) days after the date of such statement, such permanent disability shall
be deemed to have occurred.
5. Termination
(a) The Employment of the Executive under this Employment Agreement,
and the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined above) of
the Executive;
(ii) for "cause" at any time by action of the Board; or
(iii) "without cause" at any time by action of the Board.
For purposes hereof, the term "cause" shall mean:
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<PAGE>
(A) The Executive's fraud, commission of a felony,
commission of an act or series of repeated acts of dishonesty
which fraud, felony or dishonesty is materially inimical to the
best interests of the Company, or which results in material
injury to the business reputation of the Company, or the
Executive's willful and repeated failure to perform his duties
under this Employment Agreement, which failure has not been cured
within fifteen (15) days after the Company gives notice thereof
to the Executive; or
(B) The Executive's material breach of any material
provision of this Employment Agreement, which breach has not been
cured in all substantial respects within ten (10) days after the
Company gives notice thereof to the Executive.
For purposes hereof, the term "without cause" shall mean any reason
other than those set forth in subparagraphs (a)(i) and (a)(ii) of this
Paragraph 5.
The exercise by the Company of its rights of termination under this
Paragraph 5 shall be the Company's sole remedy in the event of the
occurrence of the event as a result of which such right to terminate
arises. Upon any termination of this Employment Agreement, the Executive
shall be deemed to have resigned from all offices and directorships held by
the Executive in the Company.
(b) In the event of a termination claimed by the Company to be for
"cause" pursuant to Paragraph 5(a)(ii), the Executive shall have the right
to have the justification for said termination determined by arbitration in
Raleigh, North Carolina. In order to exercise such right, the Executive
shall serve on the Company within thirty (30) days after termination a
written request for arbitration. The Company immediately shall request the
appointment of a single arbitraitor by the American Arbitration Association
and thereafter the question of "cause" shall be determined under the rules
of the American Arbitration Association, and the decision of the arbitrator
shall be final and binding on both parties. The parties shall use all
reasonable efforts to facilitate and expedite the arbitration and shall act
to cause the arbitration to be completed as promptly as possible. During
the pendency of the arbitration, the Executive shall continue to receive
all compensation and benefits to which he is entitled hereunder, and if at
any time during the pendency of such arbitration the Company fails to pay
and provide all compensation and benefits to the Executive in a timely
manner the Company shall be deemed to have automatically waived whatever
rights it then may have had to terminate the Executive's employment for
cause. Expenses of the arbitration shall be borne equally by the parties.
(c) In the event of termination pursuant to subparagraph (a)(i) or
(a)(ii) of this Paragraph 5, except as otherwise provided in Paragraphs
2(b), 3(d), 4(a) and 4(b), as applicable, the Executive shall be entitled
to no further compensation or other benefits under this Employment
Agreement, except as to that portion of any unpaid salary and other
benefits accrued and earned by him hereunder up to and including the
effective date of such termination.
(d) In the event of termination pursuant to Paragraph 2(c), or
subparagraph (a)(iii) of this paragraph 5, the Executive shall be entitled
to
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<PAGE>
(i) severance pay payable within five (5) days of such
termination in a lump sum equal to the sum of (A) the greater of (x)
the total amount of unpaid base salary for the then-unexpired portion
of the term of this Employment Agreement, including any extended term
as provided by Section 2(a) hereof at the then-effective annual rate
of salary, as determined under Paragraph 3(a) and (y) the amount of
one year's base salary at the then-effective annual rate of salary,
and (B) the product of the number of years (including fractions)
representing the unexpired term of this Employment Agreement (but not
less than one) times an amount equal to the average of the annual
bonuses payable to the Executive under Paragraph 3(b) for the three
(3) full calendar years immediately prior to termination of this
Employment Agreement in which a bonus was payable or such lesser
number of full calendar years during which the Executive was employed
hereunder in which a bonus was payable,
(ii) during a period equal to the greater of one (1) year or the
unexpired term of this Employment Agreement, all other benefits to
which the Executive would have been entitled during the term of this
Employment Agreement had the Executive's employment not been
terminated.
(iii) during a period equal to the greater of one (1) year or the
unexpired term of this Employment Agreement, the continuing use of a
secretary and office space to be provided by the Company, and
(iv) other benefits accrued and earned by him hereunder up to and
including the effective date of such termination.
(e) In the event of the termination of his employment pursuant to
Paragraph 2(c) or Paragraph 5(a)(iii), the Executive shall have the option
to be released from his obligations under Paragraph 6(a)(i) for the one (1)
year period following the termination of his employment, by releasing the
Company from its obligations under Paragraph 5(d) hereof (other than those
provided in Paragraph 5(d)(iv)) Such option may be exercised by the
Executive giving the Company notice thereof within five (5) days of such
termination.
(f) In no event shall the Executive have or be deemed to have any duty
to seek employment or otherwise mitigate damages with respect to any
amounts or benefits due to him upon termination of this Employment
Agreement as provided in this Paragraph 5, nor shall any such amount or
benefits be reduced by reason of any other compensation or benefits which
the Executive may earn following termination of this Employment Agreement.
6. Covenants and Confidential Information.
(a) The Executive acknowledges the Company's reliance and expectation
of the Executive's continued commitment to performance of his duties and
responsibilities during the time when he is employed under this Employment
Agreement. In light of such reliance and expectation on the part of the
Company (but subject to Paragraph 5(d), 5(e) and 5(f) above), during the
time when he is employed under this Employment Agreement and for a period
of one (1) year after the
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termination of such employment for any reason other than the expiration of
the term hereof in accordance with Paragraph 2(a)(ii) hereof (and, as to
clause (ii) of this subparagraph (a), at any time during and after the term
of this Employment Agreement), the Executive shall not, directly or
indirectly, do either of the following:
(i) Own, manage, control or participate in the ownership,
management, or control of, or be employed or engaged by or otherwise
affiliated or associated as a consultant, independent contractor or
otherwise with, any other corporation, partnership, proprietorship,
firm, association or other business entity engaged in the business of,
or otherwise engage in the business of, acquiring, owning, developing
or managing factory outlet shopping centers; provided, however, that
the ownership of not more than one percent (1%) of any class of
publicly traded securities of any entity; or
(ii) Disclose, divulge, discuss, copy or otherwise use or suffer
to be used in any manner, in competition with, or contrary to the
interests of, the Company, any confidential information relating to
the Company's operations, properties or otherwise to its particular
business or other trade secrets of the Company, it being acknowledged
by the Executive that all such information regarding the business of
the Company compiled or obtained by, or furnished to, the Executive
while the Executive shall have been employed by or associated with the
Company is confidential information and the Company's exclusive
property; provided, however, that the foregoing restrictions shall not
apply to the extent that such information (A) is obtainable in the
public domain or known in the industry generally, (B) becomes
obtainable in the public domain or known in the industry generally,
except by reason of the breach by the Executive of the terms hereof,
(C) was not acquired by the Executive in connection with his
employment or affiliation with the Company, (D) was not acquired by
the Executive from the Company or its representatives, or (E) is
required, to be disclosed by rule of law or by order of a court or
governmental body or agency.
(b) The Executive agrees and understands that the remedy at law for
any breach by him of this Paragraph 6 may be inadequate and that the
damages flowing such breach are not readily susceptible to being measured
in monetary terms. Accordingly, it is acknowledged that, upon adequate
proof of the Executives violation of any legally enforceable provision of
this Paragraph 6, the Company may be entitled to immediate injunctive
relief and may obtain a temporary order restraining any threatened or
further breach. Nothing in this Paragraph 6 shall be deemed to limit the
Company's remedies at law or in equity for any breach by the Executive of
any of the provisions of this Paragraph 6 which may be pursued or availed
of by the Company.
(c) The Executive has carefully considered the nature and extent of
the restrictions upon him and the rights and remedies conferred upon the
Company under this Paragraph 6, and hereby acknowledges and agrees that the
same are reasonable in time and territory, are designed to eliminate
competition which otherwise would be unfair to the Company, do not stifle
the inherent skill and experience of the Executive, would not operate as a
bar to the Executive's sole means of support, are fully required to protect
the legitimate interests of the Company and do not confer a benefit upon
the Company disproportionate to the detriment to the Executive.
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7. Stock Options. The Executive shall receive stock options under the
Company's 1993 Employee Stock Incentive Plan as amended as more fully described
in that certain Nonqualified Stock Option Agreement and that certain Incentive
Stock Option Agreement dated February 14, 1996 the terms and conditions of which
are incorporated herein by reference.
8. Restricted Stock. The Executive shall receive a grant of 120,000 shares
(the "Restricted Shares") of restricted common stock of the Company ("Common
Stock") granted under the Company's 1996 Restricted Stock Plan. Prior to
vesting, the Restricted Shares will be registered under the Securities Act on
Form S-8, will be listed on the NYSE and following vesting thereof will be
freely tradable subject to applicable provisions of Rule 144 promulgated under
the Securities Act. With respect to said grant, the Company and the Executive
shall enter into a Restricted Stock Agreement in a form mutually agreed upon by
the Company and the Executive providing that (i) the Restricted Shares shall
vest in ten (10) equal installments of ten percent (10%) per year (provided as
to each installment that the Executive continues to be employed by the Company),
commencing on the Effective Date and thereafter on the first through ninth
anniversaries of the Effective Date provided (ii) all unvested Restricted Shares
shall immediately vest upon the Executive's death or permanent disability (as
defined in Paragraph 4(d)) during his employment by the Company; or termination
of the Executive's employment by the Company due to the Company's election not
to extend this Employment Agreement as permitted in Paragraph 2(a); or pursuant
to Paragraph 5(a)(iii) if such termination occurs within three (3) months prior
to, at the time of, or within one (1) year following a "change of control's (as
defined in Section 2(e) hereof) or provided that such change is effected, the
execution of a definitive agreement therefor (notwithstanding the requirement of
continued employment in subparagraph (i) above, upon such termination of
employment). The Executive shall be entitled to dividends on any those
Restricted Shares which have vested as of the record date of any dividend
payment.
9. Tax Adjustment Payments. If all or any portion of the amounts payable to
the Executive under this Employment Agreement (together with all other payments
of cash or property, whether pursuant to this Employment Agreement or otherwise,
including, without limitation, the issuance of common stock of the Company, or
the granting, exercise or termination of options therefor) constitutes "excess
parachute payments" within the meaning of Section 280G of the Code that are
subject to the excise tax imposed by Section 4999 of the Code (or any similar
tax or assessment), the amounts payable hereunder shall be increased (in the
same manner, to the extent applicable, without duplication, as provided in (i),
(ii) and (iii) below) to the extent necessary to place the Executive in the same
after-tax position as he would have been in had no such tax assessment been
imposed on any such payment paid or payable to the Executive under this
Employment Agreement or any other payment that the Executive may receive in
connection therewith. The determination of the amount of any such tax or
assessment and the incremental payment required hereby in connection therewith
shall be made by the accounting firm employed by the Executive within thirty
(30) calendar days after such payment and said incremental payment shall be made
within five (5) calendar days after such determination has been made. If, after
the date upon which the payment required by this Paragraph 8 has been made, it
is determined (pursuant to final regulations or published rulings of the
Internal Revenue Service, final judgment of a court of competent jurisdiction,
Internal Revenue Service audit assessment, or otherwise) that the amount of
excise or other similar taxes or assessments payable by the Executive is greater
than the amount
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initially so determined, then the Company shall pay the Executive an amount
equal to the sum of: (i) such additional excise or other taxes, plus (ii) any
interest, fines and penalties resulting from such underpayment, plus (iii) an
amount necessary to reimburse the Executive for any income, excise or other tax
assessment payable by the Executive with respect to the amounts specified in (i)
and (ii) above, and the reimbursement provided by this clause (iii), in the
manner described above in this Paragraph 8. Payment thereof shall be made within
five (5) calendar days after the date upon which such subsequent determination
is made.
10. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to enter into, execute and deliver
this Employment Agreement, fulfill its obligations hereunder and consummate
the transactions contemplated hereby.
(b) The execution and delivery of, performance of obligations under,
and consummation of the transactions contemplated by, this Employment
Agreement have been duly authorized and approved by all requisite corporate
action by or in respect of the Company, and this Employment Agreement
constitutes the legally valid and binding obligation of the Company,
enforceable by the Executive in accordance with its terms.
(c) No provision of the Company's governing documents or any agreement
to which it is a party or by which it is bound or of any material law or
regulation of the kind usually applicable and binding upon the Company
prohibits or limits its ability to enter into, execute and deliver this
Employment Agreement, fulfill its respective obligations hereunder and
consummate the transactions contemplated hereby.
11. Miscellaneous.
(a) The Executive represents and warrants that he is not a party to
any agreement, contract or understanding, whether employment or otherwise,
which would restrict or prohibit him from undertaking or performing
employment in accordance with the terms and conditions of this Employment
Agreement.
(b) The provisions of this Employment Agreement are severable and if
any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any
partially unenforceable provision to the extent enforceable nevertheless
shall be binding and enforceable.
(c) The rights and obligations of the Company under this Employment
Agreement shall inure to the benefit of, and shall be binding on, the
Company and its successors and assigns, and the rights and obligations of
the Executive under this Employment Agreement shall inure to the benefit
of, and shall be binding upon, the Executive (other than obligations to
perform services and to refrain from competition and disclosure of
confidential information) and his heirs, personal representatives and
assigns.
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<PAGE>
(d) Any controversy or claim arising out of or relating to this
Employment Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the American Arbitration
Association then pertaining in the City of Raleigh, North Carolina, and
judgment upon the award rendered by the arbitrator or arbitrators may be
entered in any court having jurisdiction thereof. The arbitrator or
arbitrators shall be deemed to possess the powers to issue mandatory orders
and restraining orders in connection with such arbitration; provided,
however, that nothing in this Paragraph 11(d) shall be construed so as to
deny the Company the right and power to seek and obtain injunctive relief
in a court of equity for any breach or threatened breach by the Executive
of any of his covenants contained in Paragraph 6 hereof.
(e) Any notice to be given under this Employment Agreement shall be
personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified return receipt requested, and if mailed to the
Company, shall be addressed to its principal place of business, attention:
Chairman, and if mailed to the Executive, shall be addressed to him at his
home address last known on the records of the Company, or at such other
address or addresses as either the Company or the Executive may hereafter
designate in writing to the other. All notices provided for hereunder to
the parties shall be accompanied by simultaneous copy of such notice sent
to the attorneys for such parties, as follows:
If to the Executive;
If to the Company;
FAG Realty, Inc.
11000 Regency Parkway.
Third Floor East Tower
Cary, North Carolina 27511
Attention: General Counsel
Notices sent by Federal Express or similar overnight delivery service or by
facsimile transmissions shall also constitute due notice under this
paragraph 11(e), effective upon receipt thereof.
(f) The failure of either party to enforce any provision or provisions
of this Employment Agreement shall not in any way be construed as a waiver
of any such provision or provisions as to any future violations thereof,
for prevent that party thereafter front enforcing each and every other
provision of this Employment Agreement. The rights granted the parties
herein are cumulative and the waiver of any single remedy shall not
constitute a waiver of such party's right to assert all other legal
remedies available to it under the circumstances.
(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties made prior to the date hereof and may
not be modified or terminated orally. No modification, termination or
attempted waiver shall be valid unless in writing and signed by the party
against whom the same is sought to be enforced.
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<PAGE>
(h) This Employment Agreement shall be governed by and construed
according to the laws of the State of North Carolina.
(i) Captions and paragraph headings used herein are for convenience
and are not a part of this Employment Agreement and shall not be used in
construing it.
(j) Where necessary or appropriate to the mean hereof, the singular
and plural shall be deemed to include each other, and the masculine,
feminine and neuter shall be deemed to Include each other.
(k) This Employment Agreement may be executed in multiple
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. This Employment
Agreement may be executed by facsimile signature.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement on
the day and year first set forth above.
FAC REALTY, INC., a Delaware corporation
By: /s/ C. CARNMACK MORTON
-----------------------------------
C. Carnmack Morton
President
Chief Executive Officer
By: /s/ THEODIRE E. HAIGLER, JR.
-----------------------------------
Theodire E. Haigler, Jr.
Chairman of Executive Compensation
Committee
/s/ PATRICK M. MINIUTTI (SEAL)
----------------------------------------
Patrick M. Miniutti
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EMPLOYMENT AGREEMENT
BETWEEN
FAC REALTY TRUST, INC.
AND
WILLIAM H. NEVILLE
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 8th day of September,
1997 between FAC REALTY, INC., a Delaware corporation (the "Company"), and
WILLIAM H. NEVILLE (the "Executive") for employment commencing on the Effective
Date (as hereinafter defined).
W I T N E S S E T H:
WHEREAS, the Executive has been employed by the Company as Executive Vice
President and Chief Operating Officer.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as Executive Vice President
and Chief Operating Officer and the Executive hereby accepts such employment, on
the terms and subject to the conditions hereinafter set forth.
(b) During the term of his employment under this Employment Agreement and
any extension hereof (all references herein to the term of this Employment
Agreement shall include any extension hereof), the Executive shall be and have
the title of Executive Vice President and Chief Operating Officer and shall
devote his entire business time and all reasonable efforts to his employment and
perform diligently such duties as are customarily performed by chief operating
officers of companies similar in size to the Company, together with such other
duties as may be reasonably requested from time to time by the Board of
Directors of the Company (the "Board"), which duties shall be consistent with
his title and position as set forth above and as provided in Paragraph 2;
provided, however, that business activities by the Executive with respect to
passive investments, so long as such activities do not, alone or in the
aggregate, materially interfere with the Executive's performance of his duties
as described in this Paragraph l(b), will not be deemed inconsistent with the
requirements of this Paragraph l(b).
2. Term and Positions.
(a) Subject to the provisions for extension or termination hereinafter
stated, the term of this Employment Agreement shall begin as of September 8,
1997 (the "Effective Date") and shall continue through February 28, 2001 (the
"Expiration Date"). As of March 1, 1999 and each successive anniversary thereof,
such term automatically shall be extended for one (1) additional year, unless:
(i) this Employment Agreement is terminated as provided in Paragraph 5 or (ii)
either the Company or the Executive shall give written notice to the other at
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<PAGE>
least thirty (30) days before the first anniversary of the Effective Date or any
subsequent annual anniversary thereof, that this Employment Agreement shall not
be so extended but shall terminate upon the expiration of the then existing term
(for example, unless such written notice of non-extension is given on or prior
to January 28, 1999, the term of this Employment Agreement automatically will be
extended, effective March 1, 1999, until February 28, 2002). In the event of a
"change of control" (as hereinafter defined) the term of this Employment
Agreement shall automatically be extended for a term of two (2) years from the
then existing Termination Date.
(b) The Executive shall be entitled to serve as Executive Vice President
and Chief Operating Officer of the Company. For service as an officer and
employee of the Company, the Executive shall be entitled to the full protection
of the applicable indemnification provisions of the Restated Certificate of
Incorporation and Bylaws of the Company, as the same may be amended from time to
time, which indemnifications shall remain effective after termination of this
Employment Agreement with respect to Executive's actions and inactions during
the term hereof.
(c) If:
(i) the Company materially changes the Executive's duties and
responsibilities as set forth in Paragraphs l(b) and 2(b) without his
consent;
(ii) the Executive's place of employment or the principal executive
offices of the Company are located more than fifty (50) miles from the
geographical center of Cary, North Carolina;
(iii) there occurs a material breach by the Company of any of its
obligations under this Employment Agreement, which breach has not been
cured in all material respects within ten (10) days after the Executive
gives notice thereof to the Company;
(iv) there occurs a "change in control" (as hereinafter defined) of
the Company during the term of this Employment Agreement;
then in any such event the Executive shall have the right to terminate his
employment with the Company, but such termination shall not be considered a
voluntary resignation or termination of such employment or of this Employment
Agreement by the Executive but rather a discharge of the Executive by the
Company "without cause" (as defined in Paragraph 5 (a)). The Executive may
exercise such right of termination at any time within three (3) months following
the occurrence of the applicable event described in (i) and (iii) of this
Paragraph 2(c), and within six (6) months following the occurrence of the
applicable event described in (ii) and (iv) of this Paragraph 2(c).
(d) The Executive shall be deemed not to have consented to any written
proposal calling for a material change in his duties and responsibilities unless
he shall give written notice of his consent thereto to the Board of the Company
within fifteen (15) days after receipt of such written proposal. If the
Executive shall not have given such consent, the Company shall have the
opportunity to withdraw such proposed material change by written notice to the
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<PAGE>
Executive given within ten (10) days after the end of said fifteen (15) day
period.
(e) The term "change in control" means the first to occur of the following
events:
(i) any person or group of commonly controlled persons owns or
controls, directly or indirectly, fifty percent (50%) or more (directly or
indirectly, including convertible shares or convertible partnership units)
of the voting control or value of the capital stock of the Company
following the Effective Date;
(ii) any person or group of commonly controlled persons owning less
than five percent (5%) of the voting control or value of the capital stock
of the Company within 30 days following the Effective Date owns or
controls, directly or indirectly, more than twenty percent (20%) (directly
or indirectly, including convertible shares or convertible partnership
units) of the voting control or value of the capital stock of the Company;
or
(iii) following the Effective Date, the stockholders of the Company
approve an agreement to merge or consolidate with another corporation or
other entity resulting (whether separately or in connection with a series
of transactions) in a change in ownership of twenty percent (20%) or more
(directly or indirectly, including convertible shares or convertible
partnership units) of the voting control or value of the capital stock of
the Company, or an agreement to sell or otherwise dispose of all or
substantially all of the Company's assets (including without limitation, a
plan of liquidation or dissolution), or otherwise approve of a fundamental
alteration in the nature of the Company's business; provided, however, a
pledge, hypothecation or other similar disposition for the purpose of
providing collateral security made at the time the Company enters into a
bona fide financing transaction with a party which at the time of such
transaction is not an affiliate of the Company would not constitute a
change in control.
Notwithstanding the foregoing provisions of this Paragraph 2, the ownership or
acquisition of capital stock by the Executive, J. Dixon Fleming, Jr., C. Cammack
Morton, Patrick M. Miniutti, Christopher G. Gavrelis, Connell L. Radcliff,
and/or their respective affiliates, shall not be deemed to result in a "change
in control" of the Company.
(f) In the event C. Cammack Morton's employment with the Company is
terminated without cause, and the Executive resigns from the Company within
thirty (30) days thereafter, the Executive shall be entitled to a severance
payment of equal to six (6) months of the cash portion of his salary and shall
be entitled to no further compensation, other than as to restricted shares or
stock options which had fully vested as of the date of such termination.
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<PAGE>
3. Compensation.
During the term of his employment under this Employment Agreement the
Company shall pay or provide, as the case may be, to the Executive the
compensation and other benefits and rights set forth in this Paragraph 3. All
restricted stock given as compensation shall be subject to the Company's 1996
Restricted Stock Plan.
(a) The Company shall pay to the Executive a base salary payable in
accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) of (i) cash payments of Two Hundred and Twenty-Five
Thousand and No/100 Dollars ($225,000.00) per annum; and (ii) such increases
(but not decreases) from time to time (based upon the performance of the Company
and the Executive) as determined by the Board or the Company's Executive
Compensation Committee commencing March 1, 1999.
(b) The Company may pay to the Executive bonus compensation on a calendar
year basis pursuant to the terms of the incentive compensation plan established
by the Board from time to time, not later than March 1 following each calendar
year. Such bonus compensation may be payable in the form of cash or Common Stock
of the Company. In the event such bonus is paid in the form of Common Stock, the
determination of shares issued may be based on the cash equivalent divided by
the market price of the Common Stock on or about the date of determination of
the bonus compensation by the Board. Such shares will be increased by 50% and
shall automatically vest on the third anniversary of the date of issuance (for
example, March 1, 2001 for shares issued March 1, 1998) unless the Executive
voluntarily terminates his employment prior to such anniversary date or his
employment is terminated for "cause" (see Paragraph 5 (a) (iii)).
(c) The Company shall provide to the Executive such medical,
hospitalization and dental insurance for himself, his spouse and eligible family
members, as may be available to other officers of the Company and term life
insurance in the amount of not less than $325,000.
(d) The Executive shall participate in all retirement and other benefit
plans of the Company generally available from time to time to officers of the
Company and for which the Executive qualifies under the terms thereof (and
nothing in this Employment Agreement shall or shall be deemed to in any way
affect the Executive's rights and benefits thereunder except as expressly
provided herein).
[Balance of the page intentionally left blank.]
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<PAGE>
(e) The Executive shall be entitled to such periods of vacation and sick
leave allowance each year as are determined by the Company's Executive
Compensation Committee for officers generally; provided that Executive shall be
entitled to not less than four weeks (twenty days) of vacation each year.
(f) The Executive shall be entitled to participate in any equity or other
employee benefit plan that is generally available to senior executive officers,
as distinguished from general management, of the Company. The Executive's
participation in and benefits under any such plan shall be on the terms and
subject to the conditions specified in the governing document of the particular
plan.
(g) The Company shall reimburse the Executive or provide him with an
expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall furnish
such documentation with respect to reimbursement to be paid hereunder as the
Company shall reasonably request.
(h) The Company shall pay to the Executive an annual automobile allowance
of $8,000 payable on a pro rata monthly basis.
4. Payment in the Event of Death or Permanent Disability.
(a) In the event of the Executive's death or "permanent disability" (as
hereinafter defined) during the term of his employment under this Employment
Agreement, the Company shall pay to the Executive (or his personal
representatives, heirs, successors and assigns in the event of his death) an
amount equal to two (2) times the Executive's then effective annual base salary,
as determined under Paragraph 3(a), plus a pro rata portion of the bonus
applicable to the calendar year in which such death or permanent disability
occurs, as such bonus is determined under Paragraph 3(b).
(b) The pro rata portion of the bonus described in Paragraph 4(a) shall be
paid when and as provided in Paragraph 3(b). The remainder of the benefit to be
paid pursuant to Paragraph 4(a) shall be paid within ninety (90) days after the
date of death or permanent disability, as the case may be.
(c) Except as otherwise provided in Paragraphs 2(b), 3(d), 4(a) and 4(b),
in the event of the Executive's death or permanent disability, the Executive's
employment hereunder shall terminate and the Executive shall be entitled to no
further compensation or other benefits under this Employment Agreement, except
as to that portion of any unpaid salary and other benefits accrued and earned by
him hereunder up to and including the date of such death or permanent
disability, as the case may be, or pursuant to any agreement with the Executive
relating to any restricted shares or stock options held by the Executive.
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<PAGE>
(d) For purposes of this Employment Agreement, the Executive's "permanent
disability" shall be deemed to have occurred after one hundred twenty (120) days
in the aggregate during any consecutive twelve (12) month period, or after
ninety (90) consecutive days, during which one hundred twenty (120) or ninety
(90) days, as the case may be, the Executive, by reason of his physical or
mental disability or illness, shall have been unable to discharge his duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the Raleigh, North Carolina, area and, unless such physician shall issue his
written statement to the effect that in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full time and
energy to discharging his duties within thirty (30) days after the date of such
statement, such permanent disability shall be deemed to have occurred.
5. Termination.
(a) The Employment of the Executive under this Employment Agreement, and
the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined above) of the
Executive;
(ii) for "cause" at any time by action of the Board; or
(iii) "without cause" at any time by action of the Board.
For purposes hereof, the term "cause" shall mean:
(A) The Executive's fraud, commission of a felony, commission of
an act or series of repeated acts of dishonesty which fraud, felony or
dishonesty is materially inimical to the best interests of the
Company, or which results in material injury to the business
reputation of the Company, or the Executive's willful and repeated
failure to perform his duties under this Employment Agreement, which
failure has not been cured within fifteen (15) days after the Company
gives notice thereof to the Executive; or
(B) The Executive's material breach of any material provision of
this Employment Agreement, which breach has not been cured in all
substantial respects within ten (10) days after the Company gives
notice thereof to the Executive.
For purposes hereof, the term "without cause" shall mean any reason other
than those set
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<PAGE>
forth in subparagraphs (a)(i) and (a)(ii) of this Paragraph 5.
The exercise by the Company of its rights of termination under this
Paragraph 5 shall be the Company's sole remedy in the event of the
occurrence of the event as a result of which such right to terminate
arises. Upon any termination of this Employment Agreement, the Executive
shall be deemed to have resigned from all offices and directorships held by
the Executive in the Company.
(b) In the event of a termination claimed by the Company to be for "cause"
pursuant to Paragraph 5(a)(ii), the Executive shall have the right to have the
justification for said termination determined by arbitration in Raleigh, North
Carolina. In order to exercise such right, the Executive shall serve on the
Company within thirty (30) days after termination a written request for
arbitration. The Company immediately shall request the appointment of a single
arbitrator by the American Arbitration Association and thereafter the question
of "cause" shall be determined under the rules of the American Arbitration
Association, and the decision of the arbitrator shall be final and binding on
both parties. The parties shall use all reasonable efforts to facilitate and
expedite the arbitration and shall act to cause the arbitration to be completed
as promptly as possible. During the pendency of the arbitration, the Executive
shall continue to receive all compensation and benefits to which he is entitled
hereunder, and if at any time during the pendency of such arbitration the
Company fails to pay and provide all compensation and benefits to the Executive
in a timely manner the Company shall be deemed to have automatically waived
whatever rights it then may have had to terminate the Executive's employment for
cause. Expenses of the arbitration shall be borne equally by the parties.
(c) In the event of termination pursuant to subparagraph (a)(i) or (a)(ii)
of this Paragraph 5, except as otherwise provided in Paragraphs 2(b), 3(d), 4(a)
and 4(b), as applicable, the Executive shall be entitled to no further
compensation or other benefits under this Employment Agreement, except as to
that portion of any unpaid salary and other benefits accrued and earned by him
hereunder up to and including the effective date of such termination.
(d) In the event of termination pursuant to Paragraph 2(c), or subparagraph
(a)(iii) of this paragraph 5, the Executive, in addition to any rights of the
Executive to any restricted shares or stock options, shall be entitled to
(i) severance pay payable within five (5) days of such termination in
a lump sum equal to the sum of (A) the greater of (x) the total amount of
unpaid base salary for the then-unexpired portion of the term of this
Employment Agreement, including any extended term as provided by Section
2(a) hereof at the then-effective annual rate of salary, as determined
under Paragraph 3(a) and (y) the amount of one year's base salary at the
then-effective annual rate of salary, and (B) the product of the number of
years (including fractions) representing the unexpired term of this
Employment Agreement (but not less than one) times an amount equal to the
average of the annual bonuses payable to the Executive under Paragraph 3(b)
for the three (3) full calendar years immediately prior to termination of
this Employment Agreement in which a bonus was payable or such lesser
number of full calendar years during which the Executive was employed
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<PAGE>
hereunder in which a bonus was payable,
(ii) during a period equal to the greater of one (1) year or the
unexpired term of this Employment Agreement, all other benefits to which
the Executive would have been entitled during the term of this Employment
Agreement had the Executive's employment not been terminated,
(iii) during a period equal to the greater of one (1) year or the
unexpired term of this Employment Agreement, the continuing use of a
secretary and office space to be provided by the Company, and
(iv) other benefits accrued and earned by him hereunder up to and
including the effective date of such termination.
(e) In the event of the termination of his employment pursuant to Paragraph
2(c) or Paragraph 5(a)(iii), the Executive shall have the option to be released
from his obligations under Paragraph 6(a)(i) for the one (1) year period
following the termination of his employment, by releasing the Company from its
obligations under Paragraph 5(d) hereof (other than those provided in Paragraph
5(d)(iv)). Such option may be exercised by the Executive giving the Company
notice thereof within five (5) days of such termination.
(f) In no event shall the Executive have or be deemed to have any duty to
seek employment or otherwise mitigate damages with respect to any amounts or
benefits due to him upon termination of this Employment Agreement as provided in
this Paragraph 5, nor shall any such amount or benefits be reduced by reason of
any other compensation or benefits which the Executive may earn following
termination of this Employment Agreement.
(g) Notwithstanding any other provision of this Agreement to the contrary,
the Executive and the Company shall each have the right to terminate this
Agreement on or before March 1, 1998 in the event the Executive's presence (or
lack thereof) at the Company's corporate offices becomes unsatisfactory to
either party. In such event, (i) this Agreement shall terminate thirty (30) days
after delivery of the termination notice, (ii) the Executive shall be entitled
to receive any vested shares of restricted stock and would forfeit his right to
any other compensation, and (iii) the covenant not to compete contained in
Section 6(a)(i) hereof shall be of no further force and effect after such
termination.
6. Covenants and Confidential Information.
(a) The Executive acknowledges the Company's reliance and expectation of
the Executive's continued commitment to performance of his duties and
responsibilities during the time when he is employed under this Employment
Agreement, including his continued commitment to being present in the Company's
offices. In light of such reliance and expectation on the part of the Company
(but subject to Paragraph 5(d), 5(e) and 5(f) above), during the time when he is
employed under this Employment Agreement and for a period of one (1) year after
the termination of such employment for any reason other than the expiration of
the term hereof in accordance with Paragraph 2(a)(ii) hereof (and, as to clause
(ii) of this subparagraph (a), at any
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time during and after the term of this Employment Agreement), the Executive
shall not, directly or indirectly, do either of the following:
(i) Own, manage, control or participate in the ownership, management,
or control of, or be employed or engaged by or otherwise affiliated or
associated as a consultant, independent contractor or otherwise with, any
other corporation, partnership, proprietorship, firm, association or other
business entity engaged in the business of, or otherwise engage in the
business of, acquiring, owning, developing or managing outlet centers;
provided, however, that the ownership of not more than one percent (1%) of
any class of publicly traded securities of any entity shall not be deemed a
violation of this covenant; or
(ii) Disclose, divulge, discuss, copy or otherwise use or suffer to be
used in any manner, in competition with, or contrary to the interests of,
the Company, any confidential information relating to the Company's
operations, properties or otherwise to its particular business or other
trade secrets of the Company, it being acknowledged by the Executive that
all such information regarding the business of the Company compiled or
obtained by, or furnished to, the Executive while the Executive shall have
been employed by or associated with the Company is confidential information
and the Company's exclusive property; provided, however, that the foregoing
restrictions shall not apply to the extent that such information (A) is
obtainable in the public domain or known in the industry generally, (B)
becomes obtainable in the public domain or known in the industry generally,
except by reason of the breach by the Executive of the terms hereof, (C)
was not acquired by the Executive in connection with his employment or
affiliation with the Company, (D) was not acquired by the Executive from
the Company or its representatives, or (E) is required to be disclosed by
rule of law or by order of a court or governmental body or agency.
(b) The Executive agrees and understands that the remedy at law for any
breach by him of this Paragraph 6 may be inadequate and that the damages flowing
such breach are not readily susceptible to being measured in monetary terms.
Accordingly, it is acknowledged that, upon adequate proof of the Executive's
violation of any legally enforceable provision of this Paragraph 6, the Company
may be entitled to immediate injunctive relief and may obtain a temporary order
restraining any threatened or further breach. Nothing in this Paragraph 6 shall
be deemed to limit the Company's remedies at law or in equity for any breach by
the Executive of any of the provisions of this Paragraph 6 which may be pursued
or availed of by the Company.
(c) The Executive has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon the Company
under this Paragraph 6, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition which
otherwise would be unfair to the Company, do not stifle the inherent skill and
experience of the Executive, would not operate as a bar to the Executive's sole
means of support, are fully required to protect the legitimate interests of the
Company and do not confer a benefit upon the Company disproportionate to the
detriment to the Executive.
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7. Stock Options. The Executive shall receive stock options under the
Company's Amended and Restated 1993 Employee Stock Incentive Plan as more fully
described in that certain Incentive Stock Option Agreement dated September 8,
1997 the terms and conditions of which are incorporated herein by reference.
8. Restricted Stock. Simultaneously with the execution hereof, the
Executive shall receive a grant of 20,000 shares (the "Restricted Shares") of
restricted common stock of the Company ("Common Stock") granted under the
Company's 1996 Restricted Stock Plan. Prior to vesting, the Restricted Shares
will be registered under the Securities Act on Form S-8, will be listed on the
NYSE and following vesting thereof will be freely tradable subject to applicable
provisions of Rule 144 promulgated under the Securities Act. With respect to
said grant, the Company and the Executive shall enter into a Restricted Stock
Agreement in a form mutually agreed upon by the Company and the Executive
providing that (i) the Restricted Shares shall vest in three (3) equal
installments of thirty three and one-third percent (33.33%) on March 1, 1998 and
each successive anniversary thereof (provided as to each installment that the
Executive continues to be employed by the Company) and (ii) all unvested
Restricted Shares shall immediately vest upon the Executive's death or permanent
disability (as defined in Paragraph 4(d)) during his employment by the Company;
or termination of the Executive's employment by the Company pursuant to
Paragraph 2(c) or Paragraph 5(a)(iii); or pursuant to Paragraph 5(a)(iii) if
such termination occurs within three (3) months prior to, at the time of, or
within one (1) year following a "change of control" (as defined in Section 2(e)
hereof) or provided that such change is effected, the execution of a definitive
agreement therefor (notwithstanding the requirement of continued employment in
subparagraph (i) above, upon such termination of employment). In the event this
Agreement is extended as provided in Section 2(a), the Executive shall receive
restricted shares equal to $50,000, which shares shall vest on March 1 of the
following year and shall be subject to the same terms and conditions as the
Restricted Shares.
9. Tax Adjustment Payments. If all or any portion of the amounts payable to
the Executive under this Employment Agreement (together with all other payments
of cash or property, whether pursuant to this Employment Agreement or otherwise,
including, without limitation, the issuance of common stock of the Company, or
the granting, exercise or termination of options therefor) constitutes "excess
parachute payments" within the meaning of Section 280G of the Code that are
subject to the excise tax imposed by Section 4999 of the Code (or any similar
tax or assessment), the amounts payable hereunder shall be increased (in the
same manner, to the extent applicable, without duplication, as provided in (i),
(ii) and (iii) below) to the extent necessary to place the Executive in the same
after-tax position as he would have been in had no such tax assessment been
imposed on any such payment paid or payable to the Executive under this
Employment Agreement or any other payment that the Executive may receive in
connection therewith. The determination of the amount of any such tax or
assessment and the incremental payment required hereby in connection therewith
shall be made by the accounting firm employed by the Executive within thirty
(30) calendar days after such payment and said incremental payment shall be made
within five (5) calendar days after such determination has been made. If, after
the date upon which the payment required by this Paragraph 8 has been made, it
is determined (pursuant to final regulations or published rulings of the
Internal Revenue Service, final judgment of a court of competent jurisdiction,
Internal Revenue Service audit assessment, or otherwise) that the amount of
excise or other similar taxes or assessments payable by the Executive is greater
than the amount initially so determined, then
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<PAGE>
the Company shall pay the Executive an amount equal to the sum of: (i) such
additional excise or other taxes, plus (ii) any interest, fines and penalties
resulting from such underpayment, plus (iii) an amount necessary to reimburse
the Executive for any income, excise or other tax assessment payable by the
Executive with respect to the amounts specified in (i) and (ii) above, and the
reimbursement provided by this clause (iii), in the manner described above in
this Paragraph 8. Payment thereof shall be made within five (5) calendar days
after the date upon which such subsequent determination is made.
10. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to enter into, execute and deliver this Employment
Agreement, fulfill its obligations hereunder and consummate the transactions
contemplated hereby.
(b) The execution and delivery of, performance of obligations under, and
consummation of the transactions contemplated by, this Employment Agreement have
been duly authorized and approved by all requisite corporate action by or in
respect of the Company, and this Employment Agreement constitutes the legally
valid and binding obligation of the Company, enforceable by the Executive in
accordance with its terms.
(c) No provision of the Company's governing documents or any agreement to
which it is a party or by which it is bound or of any material law or regulation
of the kind usually applicable and binding upon the Company prohibits or limits
its ability to enter into, execute and deliver this Employment Agreement,
fulfill its respective obligations hereunder and consummate the transactions
contemplated hereby.
11. Miscellaneous.
(a) The Executive represents and warrants that he is not a party to any
agreement, contract or understanding, whether employment or otherwise, which
would restrict or prohibit him from undertaking or performing employment in
accordance with the terms and conditions of this Employment Agreement.
(b) The provisions of this Employment Agreement are severable and if any
one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any partially
unenforceable provision to the extent enforceable nevertheless shall be binding
and enforceable.
(c) The rights and obligations of the Company under this Employment
Agreement shall inure to the benefit of, and shall be binding on, the Company
and its successors and assigns, and the rights and obligations of the Executive
under this Employment Agreement shall inure to the benefit of, and shall be
binding upon, the Executive (other than obligations to perform services and to
refrain from competition and disclosure of confidential information) and his
heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to this Employment
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<PAGE>
Agreement, or the breach thereof, shall be settled by arbitration in accordance
with the Rules of the American Arbitration Association then pertaining in the
City of Raleigh, North Carolina, and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitrator or arbitrators shall be deemed to possess the powers to
issue mandatory orders and restraining orders in connection with such
arbitration; provided, however, that nothing in this Paragraph 11(d) shall be
construed so as to deny the Company the right and power to seek and obtain
injunctive relief in a court of equity for any breach or threatened breach by
the Executive of any of his covenants contained in Paragraph 6 hereof.
(e) Any notice to be given under this Employment Agreement shall be
personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified return receipt requested, and if mailed to the Company,
shall be addressed to its principal place of business, attention: Chairman, and
if mailed to the Executive, shall be addressed to him at his home address last
known on the records of the Company, or at such other address or addresses as
either the Company or the Executive may hereafter designate in writing to the
other. All notices provided for hereunder to the parties shall be accompanied by
simultaneous copy of such notice sent to its attorney, as follows:
FAC Realty, Inc.
11000 Regency Parkway,
Third Floor East Tower
Cary, North Carolina 27511
Attention: General Counsel
Notices sent by Federal Express or similar overnight delivery service or by
facsimile transmissions shall also constitute due notice under this paragraph
11(e), effective upon receipt thereof.
(f) The failure of either party to enforce any provision or provisions of
this Employment Agreement shall not in any way be construed as a waiver of any
such provision or provisions as to any future violations thereof, nor prevent
that party thereafter from enforcing each and every other provision of this
Employment Agreement. The rights granted the parties herein are cumulative and
the waiver of any single remedy shall not constitute a waiver of such party's
right to assert all other legal remedies available to it under the
circumstances.
(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties made prior to the date hereof and may not be
modified or terminated orally. No modification, termination or attempted waiver
shall be valid unless in writing and signed by the party against whom the same
is sought to be enforced.
(h) This Employment Agreement shall be governed by and construed according
to the laws of the State of North Carolina.
(i) Captions and paragraph headings used herein are for convenience and are
not a part of this Employment Agreement and shall not be used in construing it.
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<PAGE>
(j) Where necessary or appropriate to the meaning hereof, the singular and
plural shall be deemed to include each other, and the masculine, feminine and
neuter shall be deemed to include each other.
(k) This Employment Agreement may be executed in multiple counterparts,
each of which will be deemed an original, but all of which together will
constitute one and the same instrument. This Employment Agreement may be
executed by facsimile signature.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement on
the day and year first set forth above.
FAC REALTY, INC., a Delaware corporation
By: _______________________________(SEAL)
C. Cammack Morton
President and
Chief Executive Officer
___________________________________(SEAL)
William H. Neville
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EMPLOYMENT AGREEMENT
BETWEEN
FAC REALTY, IN
AND
SONA A. THORBURN
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 13th day of October,
1997 between FAC REALTY, INC., a Delaware corporation (the "Company"), and Sona
A. THORBURN (the "Executive") for employment commencing on the Effective Date
(as hereinafter defined).
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, on the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as Vice President and Chief
Accounting Officer and the Executive hereby accepts such employment, on the
terms and subject to the conditions hereinafter set forth.
(b) During the term of her employment under this Employment Agreement, the
Executive shall be and have the title of Vice President and shall devote her
entire business time and all reasonable efforts to her employment and perform
diligently such duties as are customarily performed by vice presidents of
companies similar in size to the Company, together with such other duties as may
be reasonably requested from time to time by the Board of Directors of the
Company (the "Board"), which duties shall be consistent with her title and
position as set forth above and as provided in Paragraph 2; provided, however,
that business activities by the Executive with respect to passive investments,
so long as such activities do not, alone or in the aggregate, materially
interfere with the Executive's performance of her duties as described in this
Paragraph l(b), will not be deemed inconsistent with the requirements of this
Paragraph l(b).
2. Term and Positions.
(a) Subject to the provisions for termination hereinafter stated, the term
of this Employment Agreement shall begin on October 13, 1997 (the "Effective
Date") and shall continue through October 1, 1998. In the event of a "change in
control" (as thereinafter defined) the term of this Employment Agreement shall
be extended through October 1, 1999.
(b) The Executive shall be entitled to serve as Vice President of the
Company. For service as an officer and employee of the Company, the Executive
shall be entitled to the full protection of the applicable indemnification
provisions of the Certificate of Incorporation and Bylaws of the Company, as the
same may be amended from time to time, which indemnifications shall remain
effective after termination of this Employment Agreement with respect to
Executive's actions and inactions during the term hereof.
(c) If:
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<PAGE>
(i) the Company materially changes the Executive's duties and
responsibilities as set forth in Paragraphs l(b) and 2(b) without her
consent;
(ii) the Executive's place of employment or the principal executive
offices of the Company are located more than fifty (50) miles from the
geographical center of Smithfield, North Carolina; or
(iii) there occurs a material breach by the Company of any of its
obligations under this Employment Agreement, which breach has not been
cured in all material respects within ten (10) days after the Executive
gives notice thereof to the Company;
then in any such event the Executive shall have the right to terminate her
employment with the Company, but such termination shall not be considered a
voluntary resignation or termination of such employment or of this Employment
Agreement by the Executive but rather a discharge of the Executive by the
Company "without cause" (as defined in Paragraph 5 (a) (iii)). The Executive may
exercise such right of termination at any time within three (3) months following
the occurrence of the applicable event described in (i) and (iii) of this
Paragraph 2(c), and within six (6) months following the occurrence of the
applicable event described in (ii) of this Paragraph 2(c).
(d) The Executive shall be deemed not to have consented to any written
proposal calling for a material change in her duties and responsibilities unless
he shall give written notice of her consent thereto to the Executive Management
Committee of the Company within fifteen (15) days after receipt of such written
proposal. If the Executive shall not have given such consent, the Company shall
have the opportunity to withdraw such proposed material change by written notice
to the Executive given within ten (10) days after the end of said fifteen (15)
day period.
(e) The term "change in control" means the first to occur of the following
events:
i) any person or group of commonly controlled persons owns or
controls, directly or indirectly, fifty percent (50%) or more of the voting
control or value of the capital stock of the Company following the
Effective Date;
ii) any person or group of commonly controlled persons owning less
than five percent (5%) of the voting control or value of the capital stock
of the Company within 30 days following the Effective Date owns or
controls, directly or indirectly, more than twenty percent (20%) of the
voting control or value of the capital stock of the Company; or
iii) following the Effective Date, the stockholders of the Company
approve an agreement to merge or consolidate with another corporation or
other entity resulting (whether separately or in connection with a series
of transactions) in a change in ownership of twenty percent (20%) or more
of the voting control or value of the capital stock of the Company, or an
agreement to sell or otherwise dispose of all or substantially all of the
Company's assets (including without limitation, a plan of liquidation or
dissolution), or otherwise approve of a fundamental alteration in the
nature of the Company's business; provided,
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<PAGE>
however, a pledge, hypothecation or other similar disposition for the
purpose of providing collateral security made at the time the Company
enters into a bona fide financing transaction with a party which at the
time of such transaction is not an affiliate of the Company would not
constitute a change in control.
Notwithstanding the foregoing provisions of this Paragraph 2, the ownership or
acquisition of capital stock by the Executive, and/or any other person who is or
was an officer of the Company as of the Effective Date and/or their respective
affiliates, shall not be deemed to result in a "change in control" of the
Company.
3. Compensation.
During the term of her employment under this Employment Agreement the
Company shall pay or provide, as the case may be, to the Executive the
compensation and other benefits and rights set forth in this Paragraph 3.
(a) The Company shall pay to the Executive a base salary payable in
accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) of One Hundred Ten Thousand Dollars ($110,000.00)
per annum, to be increased (but not decreased) from time to time (based
upon the performance of the Company and the Executive) as determined by the
Board or the Company's Executive Compensation Committee.
(b) The Company may pay to the Executive bonus compensation on a
calendar year basis pursuant to the terms of the incentive compensation
plan established by the Board from time to time, not later than March 1
following each calendar year. Such bonus compensation may be payable in the
form of cash or Common Stock of the Company. In the event such bonus is
paid in the form of Common Stock, the determination of shares issued may be
based on the cash equivalent divided by the market price of the Common
Stock on or about the date of determination of the bonus compensation by
the Board. Such shares may be increased by fifty percent (50%) and
automatically vest on the third anniversary of the date of issuance (for
example October 1, 2001 for shares issued March 1, 1998) unless the
Executive voluntarily terminates his employment prior to such anniversary
date or his employment is terminated for "cause" (see Paragraph 5(a)(iii)).
(c) The Company shall provide to the Executive such life, medical,
hospitalization and dental insurance for himself, her spouse and eligible
family members, as may be available to other officers of the Company.
(d) The Executive shall participate in all retirement and other
benefit plans of the Company generally available from time to time to
officers of the Company and for which the Executive qualifies under the
terms thereof (and nothing in this Employment Agreement shall or shall be
deemed to in any way affect the Executive's rights and benefits thereunder
except as expressly provided herein).
(e) The Executive shall be entitled to such periods of vacation and
sick leave allowance each year as are determined by the Company's Executive
Compensation Committee for officers generally; provided, however, the
Executive shall be entitled to
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<PAGE>
not less than three weeks of vacation per year.
(f) The Executive shall be entitled to participate in any equity or
other employee benefit plan that is generally available to officers, as
distinguished from general management, of the Company. The Executive's
participation in and benefits under any such plan shall be on the terms and
subject to the conditions specified in the governing document of the
particular plan.
(g) The Company shall reimburse the Executive or provide him with an
expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall
furnish such documentation with respect to reimbursement to be paid
hereunder as the Company shall reasonably request.
4. Payment in the Event of Death or Permanent Disability.
(a) In the event of the Executive's death or "permanent disability" (as
hereinafter defined) during the term of her employment under this Employment
Agreement, the Company shall pay or cause its insurance company to pay to the
Executive (or her personal representatives, heirs, successors and assigns in the
event of her death) an amount equal to not less than two (2) times the
Executive's then effective annual base salary, as determined under Paragraph
3(a), plus a pro rata portion of the bonus applicable to the calendar year in
which such death or permanent disability occurs, as such bonus is determined
under Paragraph 3(b).
(b) The pro rata portion of the bonus described in Paragraph 4(a) shall be
paid when and as provided in Paragraph 3(b). The remainder of the benefit to be
paid pursuant to Paragraph 4(a) shall be paid within ninety (90) days after the
date of death or permanent disability, as the case may be.
(c) Except as otherwise provided in Paragraphs 2(b), 3(d), 4(a) and 4(b),
in the event of the Executive's death or permanent disability, the Executive's
employment hereunder shall terminate and the Executive shall be entitled to no
further compensation or other benefits under this Employment Agreement, except
as to that portion of any unpaid salary and other benefits accrued and earned by
him hereunder up to and including the date of such death or permanent
disability, as the case may be.
(d) For purposes of this Employment Agreement, the Executive's "permanent
disability" shall be deemed to have occurred after one hundred twenty (120) days
in the aggregate during any consecutive twelve (12) month period, or after
ninety (90) consecutive days, during which one hundred twenty (120) or ninety
(90) days, as the case may be, the Executive, by reason of her physical or
mental disability or illness, shall have been unable to discharge her duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the
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<PAGE>
Raleigh, North Carolina, area and, unless such physician shall issue his/her
written statement to the effect that in his/her opinion, based on his/her
diagnosis, the Executive is capable of resuming her employment and devoting her
full time and energy to discharging her duties within thirty (30) days after the
date of such statement, such permanent disability shall be deemed to have
occurred.
5. Termination.
(a) The Employment of the Executive under this Employment Agreement, and
the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined above) of the
Executive;
(ii) for "cause" at any time by action of the Board; or
(iii) "without cause" at any time by action of the Board.
For purposes hereof, the term "cause" shall mean:
(A) The Executive's fraud, commission of a felony, commission of
an act or series of repeated acts of dishonesty which fraud, felony or
dishonesty is materially inimical to the best interests of the
Company, or which results in material injury to the business
reputation of the Company, or the Executive's willful and repeated
failure to perform her duties under this Employment Agreement, which
failure has not been cured within fifteen (15) days after the Company
gives notice thereof to the Executive; or
(B) The Executive's material breach of any material provision of
this Employment Agreement, which breach has not been cured in all
substantial respects within ten (10) days after the Company gives
notice thereof to the Executive.
For purposes hereof, the term "without cause" shall mean any reason other
than those set forth in subparagraphs (a)(i) and (a)(ii) of this Paragraph
5.
The exercise by the Company of its rights of termination under this
Paragraph 5 shall be the Company's sole remedy in the event of the
occurrence of the event as a result of which such right to terminate
arises. Upon any termination of this Employment Agreement, the
Executive shall be deemed to have resigned from all offices and
directorships held by the Executive in the Company.
(b) In the event of a termination claimed by the Company to be for "cause"
pursuant to Paragraph 5(a)(ii), the Executive shall have the right to have the
justification for said termination determined by arbitration in Raleigh, North
Carolina. In order to exercise such right, the Executive shall serve on the
Company within thirty (30) days after termination a written request for
arbitration. The Company immediately shall request the appointment of a single
arbitrator by the American Arbitration Association and thereafter the question
of "cause" shall be determined under the rules of the American Arbitration
Association, and the decision of the arbitrator shall be final and binding on
both parties. The parties shall use all reasonable efforts to
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<PAGE>
facilitate and expedite the arbitration and shall act to cause the arbitration
to be completed as promptly as possible. During the pendency of the arbitration,
the Executive shall continue to receive all compensation and benefits to which
he is entitled hereunder, and if at any time during the pendency of such
arbitration the Company fails to pay and provide all compensation and benefits
to the Executive in a timely manner the Company shall be deemed to have
automatically waived whatever rights it then may have had to terminate the
Executive's employment for cause. Expenses of the arbitration shall be borne
equally by the parties.
(c) In the event of termination pursuant to subparagraph (a)(i) or (a)(ii)
of this Paragraph 5, except as otherwise provided in Paragraphs 2(b), 3(d), 4(a)
and 4(b), as applicable, the Executive shall be entitled to no further
compensation or other benefits under this Employment Agreement, except as to
that portion of any unpaid salary and other benefits accrued and earned by him
hereunder up to and including the effective date of such termination.
(d) In the event of termination pursuant to subparagraph (i), (ii) or (iii)
of Paragraph 2 (c) or subparagraph (a)(iii) of this Paragraph 5, the Executive
shall be entitled to (i) severance pay payable within five (5) days of such
termination in a lump sum equal to the greater of (A) the total amount of unpaid
base salary for the then-unexpired portion of the term of this Employment
Agreement, at the theneffective annual rate of salary, as determined under
Paragraph 3(a), and (B) the amount of six months base salary at the then
effective annual rate of salary, (ii) a pro rata portion of the bonus described
in Paragraph 4(a) applicable to the calendar year in which such termination
occurs, as such bonus is determined under Paragraph 3(b), and (iii) other
benefits accrued and earned by him hereunder up to and including the effective
date of such termination.
(e) In no event shall the Executive have or be deemed to have any duty to
seek employment or otherwise mitigate damages with respect to any amounts or
benefits due to him upon termination of this Employment Agreement provided in
this Paragraph 5, nor shall any such amount or benefit be reduced by reason of
any other compensation or benefits which the Executive may earn following
termination of this Employment Agreement.
6. Covenants and Confidential Information.
(a) The Executive acknowledges the Company's reliance and expectation of
the Executive's continued commitment to performance of her duties and
responsibilities during the time when he is employed under this Employment
Agreement. In light of such reliance and expectation on the part of the Company,
during the time when he is employed under this Employment Agreement and if the
Executive's employment is terminated voluntarily by the Executive or by the
Company pursuant to Paragraph 5(a)(ii), for the period after such termination
through the date this Employment Agreement would have otherwise terminated but
for such termination (and, as to clause (ii) of this subparagraph (a), at any
time during and after the term of this Employment Agreement), the Executive
shall not, directly or indirectly, do either of the following:
(i) Own, manage, control or participate in the ownership, management,
or control of, or be employed or engaged by or otherwise affiliated or
associated as a consultant, independent contractor or otherwise with, any
other corporation, partnership, proprietorship, firm, association or other
business entity engaged in the business of, or otherwise engage in the
business of, acquiring, owning, developing
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<PAGE>
or managing factory outlet shopping centers; provided, however, that the
ownership of not more than one percent (1%) of any class of publicly traded
securities of any entity shall not be deemed a violation of this covenant;
or (ii) Disclose, divulge, discuss, copy or otherwise use or suffer to be
used in any manner, in competition with, or contrary to the interests of,
the Company, any confidential information relating to the Company's
operations, properties or otherwise to its particular business or other
trade secrets of the Company, it being acknowledged by the Executive that
all such information regarding the business of the Company compiled or
obtained by, or furnished to, the Executive while the Executive shall have
been employed by or associated with the Company is confidential information
and the Company's exclusive property; provided, however, that the foregoing
restrictions shall not apply to the extent that such information (A) is
obtainable in the public domain or known in the industry generally, (B)
becomes obtainable in the public domain or known in the industry generally,
except by reason of the breach by the Executive of the terms hereof, (C)
was not acquired by the Executive in connection with her employment or
affiliation with the Company, (D) was not acquired by the Executive from
the Company or its representatives, or (E) is required to be disclosed by
rule of law or by order of a court or governmental body or agency.
(b) The Executive agrees and understands that the remedy at law for any
breach by him of this Paragraph 6 may be inadequate and that the damages
following such breach are not readily susceptible to being measured in monetary
terms. Accordingly, it is acknowledged that, upon adequate proof of the
Executive's violation of any legally enforceable provision of this Paragraph 6,
the Company may be entitled to immediate injunctive relief and may obtain a
temporary order restraining any threatened or further breach. Nothing in this
Paragraph 6 shall be deemed to limit the Company's remedies at law or in equity
for any breach by the Executive of any of the provisions of this Paragraph 6
which may be pursued or availed of by the Company.
(c) The Executive has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon the Company
under this Paragraph 6, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition which
otherwise would be unfair to the Company, do not stifle the inherent skill and
experience of the Executive, would not operate as a bar to the Executive's sole
means of support, are fully required to protect the legitimate interests of the
Company and do not confer a benefit upon the Company disproportionate to the
detriment to the Executive.
7. Purposely Omitted..
8. Restricted Stock. The Executive shall receive a grant of 3,871 shares
(the "Restricted Shares") of restricted common stock of the Company ("Common
Stock") granted under the Company's 1996 Restricted Stock Plan. Prior to
vesting, the Restricted Shares will be registered under the Securities Act on
Form S-8, will be listed on the NYSE and following vesting thereof will be
freely tradable subject to applicable provisions of Rule 144 promulgated under
the Securities Act. With respect to said grant, the Company and the Executive
shall enter into a Restricted Stock Agreement in a form mutually agreed upon by
the Company and the Executive providing that (i) the Restricted Shares shall
vest in three equal installments of thirty-three and one-third percent (331/3)
per year provided the Executive continues to be employed by the Company,
commencing on the one-year anniversary date of the Effective Date and (ii) upon
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the Executive's death or permanent disability (as defined in Paragraph 4(d))
during her employment by the Company or termination of the Executive's
employment pursuant to (or, in the case of termination at any time following the
expiration of this Employment Agreement, for the reasons set forth in) Paragraph
2(c) or Paragraph 5(a)(iii), all unvested Restricted Shares shall
(notwithstanding the requirement of continued employment in subparagraph (i)
above), upon such termination of employment, immediately vest.
9. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to enter into, execute and deliver this Employment
Agreement, fulfill its obligations hereunder and consummate the transactions
contemplated hereby.
(b) The execution and delivery of, performance of obligations under, and
consummation of the transactions contemplated by, this Employment Agreement have
been duly authorized and approved by all requisite corporate action by or in
respect of the Company, and this Employment Agreement constitutes the legally
valid and binding obligation of the Company, enforceable by the Executive in
accordance with its terms.
(c) No provision of the Company's governing documents or any agreement to
which it is a party or by which it is bound or of any material law or regulation
of the kind usually applicable and binding upon the Company prohibits or limits
its ability to enter into, execute and deliver this Employment Agreement,
fulfill its respective obligations hereunder and consummate the transactions
contemplated hereby.
10. Miscellaneous.
(a) The Executive represents and warrants that he is not a party to any
agreement, contract or understanding, whether employment or otherwise, which
would restrict or prohibit him from undertaking or performing employment in
accordance with the terms and conditions of this Employment Agreement.
(b) The provisions of this Employment Agreement are severable and if any
one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any partially
unenforceable provision to the extent enforceable nevertheless shall be binding
and enforceable.
(c) The rights and obligations of the Company under this Employment
Agreement shall inure to the benefit of, and shall be binding on, the Company
and its successors and assigns, and the rights and obligations of the Executive
under this Employment Agreement shall inure to the benefit of, and shall be
binding upon, the Executive (other than obligations to perform services and to
refrain from competition and disclosure of confidential information) and her
heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to this Employment
Agreement, or the breach thereof, shall be settled by arbitration in accordance
with the Rules of the American Arbitration Association then pertaining in the
City of Raleigh, North Carolina, and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitrator or arbitrators shall be deemed to possess the powers to
issue mandatory orders and restraining orders in connection with such
arbitration; provided,
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however, that nothing in this Paragraph 9(d) shall be construed so as to deny
the Company the right and power to seek and obtain injunctive relief in a court
of equity for any breach or threatened breach by the Executive of any of her
covenants contained in Paragraph 6 hereof.
(e) Any notice to be given under this Employment Agreement shall be
personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified return receipt requested, and if mailed to the Company,
shall be addressed to its principal place of business, attention: Chairman, and
if mailed to the Executive, shall be addressed to him at her home address last
known on the records of the Company, or at such other address or addresses as
either the Company or the Executive may hereafter designate in writing to the
other. All notices provided for hereunder to the parties shall be accompanied by
simultaneous copy of such notice sent to the attorneys for such parties, as
follows:
If to the Executive:
If to the Company:
General Counsel
FAC Realty, Inc.
11000 Regency Parkway
Third Floor, East Tower
Cary, North Carolina 27511
Notices sent by Federal Express or similar overnight delivery service or by
facsimile transmissions shall also constitute due notice under this paragraph
9(e), effective upon receipt thereof.
(f) The failure of either party to enforce any provision or provisions of
this Employment Agreement shall not in any way be construed as a waiver of any
such provision or provisions as to any future violations thereof, nor prevent
that party thereafter from enforcing each and every other provision of this
Employment Agreement. The rights granted the parties herein are cumulative and
the waiver of any single remedy shall not constitute a waiver of such party's
right to assert all other legal remedies available to it under the
circumstances.
(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties made prior to the date hereof and may not be
modified or terminated orally. No modification, termination or attempted waiver
shall be valid unless in writing and signed by the party against whom the same
is sought to be enforced.
(h) This Employment Agreement shall be governed by and construed according
to the laws of the State of North Carolina.
(i) Captions and paragraph headings used herein are for convenience and are
not a part of this Employment Agreement and shall not be used in construing it.
(j) Where necessary or appropriate to the mean hereof, the singular and
plural
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<PAGE>
shall be deemed to include each other, and the masculine, feminine and neuter
shall be deemed to include each other.
(k) This Employment Agreement may be executed in multiple counterparts,
each of which will be deemed an original, but all of which together will
constitute one and the same instrument. This Employment Agreement may be
executed by facsimile signature.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement on
the day and year first set forth above.
FAC REALTY INC., a Delaware corporation
(SEAL) By: _____________________________________
Sona A. Thorburn C. Cammack Morton
President and Chief Executive Officer
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EMPLOYMENT AGREEMENT
BETWEEN
FACTORY STORES OF AMERICA, INC.
AND
CHRISTOPHER G. GAVRELIS
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 15th day of December,
1995 between FACTORY STORES OF AMERICA, INC., a Delaware corporation (the
"Company"), and CHRISTOPHER G. GAVRELIS (the "Executive") for employment
commencing on the Effective Date (as hereinafter defined).
WITNESSETH:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, on the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as Senior Vice President
and the Executive hereby accepts such employment, on the terms and subject
to the conditions hereinafter set forth.
(b) During the term of his employment under this Employment Agreement,
the Executive shall be and have the title of Senior Vice President and
shall devote his entire business time and all reasonable efforts to his
employment and perform diligently such duties as are customarily performed
by senior vice presidents of companies similar in size to the company,
together with such other duties as may be reasonably requested from time to
time by the Board of Directors of the Company (the "Board"), which duties
shall be consistent with his title and position as set forth above and as
provided in Paragraph 2; provided, however, that business activities by the
Executive with respect to passive investments, so long as such activities
do not, alone or in the aggregate, materially interfere with the
Executive's performance of his duties as described in this Paragraph 1(b),
will not be deemed inconsistent with the requirements of this Paragraph
1.(b)
2. Term and Positions.
(a) Subject to the provisions for termination hereinafter stated, the
term of this Employment Agreement shall begin on December 15, 1995 (the
"Effective Date") and shall continue through the second anniversary of the
Effective Date.
(b) The Executive shall be entitled to serve as Senior Vice President
of the Company. For service as an officer and employee of the Company, the
Executive shall be entitled to the full protection of the applicable
indemnification provisions of the Certificate of Incorporation and Bylaws
of the Company, as
<PAGE>
the same may be amended from time to time, which indemnifications shall
remain effective after termination of this Employment Agreement with
respect to Executive's actions and inactions during the term hereof.
(c) If:
(i) the Company materially changes the Executive's duties and
responsibilities as set forth in Paragraphs 1(b) and 2(b) without his
consent;
(ii) the Executive's place of employment or the principal
executive offices of the Company are located more than fifty (50)
miles from the geographical center of Smithfield, North Carolina;
(iii) there occurs a material breach by the Company of any of its
obligations under this Employment Agreement, which breach has not been
cured in all material respects, within ten (10) days after the
Executive gives notice thereof to the Company; or
(iv) there occurs a "change in control" (as hereinafter defined)
of the Company during the term of this Employment Agreement;
then in any such event the Executive shall have the right to terminate his
employment with the Company, but such termination shall not be considered a
voluntary resignation or termination of such employment or of this
Employment Agreement by the Executive but rather a discharge of the
Executive by the Company "without cause" (as defined in Paragraph 5 (a)
(iii)). The Executive may exercise such right of termination at any time
within three (3) months following the occurrence of the applicable event
described in (i), (iii) and (iv) of this Paragraph 2(c), and within six (6)
months following the occurrence of the applicable event described in (ii)
of this Paragraph 2(c).
(d) The Executive shall be deemed not to have consented to any
written proposal calling for a material change in his duties and
responsibilities unless he shall give written notice of his consent
thereto to the Executive Management Committee of the Company within
fifteen (15) days after receipt of such written proposal. If the
Executive shall not have given such consent, the Company shall have
the opportunity to withdraw such proposed material change by written
notice to the Executive given within ten (10) days after the end of
said fifteen (15) day period.
(e) The term "change in control" means the first to occur of the
following events:
i) any person or group of commonly controlled persons owns
or controls, directly or indirectly, fifty percent (50%) or more
of the voting
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<PAGE>
control or value of the capital stock of the Company following
the Effective Date;
ii) any person or group of commonly controlled persons
owning less than five percent (5%) of the voting control or value
of the capital stock of the Company within 30 days following the
Effective Date owns or controls, directly or indirectly, more
than twenty percent (20%) of the voting control or value of the
capital stock of the Company; or
iii) following the Effective Date, the stockholders of the
Company approve an agreement to merge or consolidate with another
corporation or other entity resulting (whether separately or in
connection with a series of transactions) in a change in
ownership of twenty percent (20%) or more of the voting control
or value of the capital stock of the Company, or an agreement to
sell or otherwise dispose of all or substantially all of the
Company's assets (including without limitation, a plan of
liquidation or dissolution), or otherwise approve of a
fundamental alteration in the nature of the Company's business;
provided, however, a pledge, hypothecation or other similar
disposition for the purpose of providing collateral security made
at the time the Company enters into a bona fide financing
transaction with a party which at the time of such transaction is
not an affiliate of the Company would not constitute a change in
control.
Notwithstanding the foregoing provisions of this Paragraph 2, the
ownership or acquisition of capital stock by the Executive, J. Dixon
Fleming, Jr., C. Cammack Norton, Connell L. Radcliff, and/or their
respective affiliates, shall not be deemed to result in a "change in
control" of the Company.
3. Compensation.
During the term of his employment under this Employment Agreement the
Company shall, pay or provide, as the case may be, to the Executive the
compensation and other benefits and rights set forth in this Paragraph 3.
(a) The Company shall pay to the Executive a base salary payable in
accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) of One Hundred Twenty-Five Thousand Dollars
($125,000) per annum, to be increased (but not decreased) from time to time
(based upon the performance of the Company and the Executive) as determined
by the Board or the Company's Executive Compensation Committee.
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<PAGE>
(b) The Company shall pay to the Executive bonus compensation on a
calendar year basis pursuant to the terms of the incentive compensation
plan established by the Board from time to time, not later than 30 days
following the completion of the audit of the Company's financial statements
for each calendar year, prorated on a per diem basis for partial calendar
years in which the Executive was employed hereunder.
(c) The Company shall provide to the Executive such life, medical,
hospitalization and dental insurance for himself, his spouse and eligible
family members, as may be available to other officers of the Company.
(d) The Executive shall participate in all retirement and other
benefit plans of the Company generally available from time to time to
officers of the Company and for which the Executive qualifies under the
terms thereof (and nothing in this Employment Agreement shall or shall be
deemed to in any way affect the Executive's rights and benefits thereunder
except as expressly provided herein).
(e) The Executive shall be entitled to such periods of vacation and
sick leave allowance each year as are determined by the Company's Executive
Compensation Committee for officers generally.
(f) The Executive shall be entitled to participate in any equity or
other employee benefit plan that is generally available to officers, as
distinguished from general management, of the Company. The Executive's
participation in and benefits under any such plan shall be on the terms and
subject to the conditions specified in the governing document of the
particular plan.
(g) The Company shall reimburse the Executive or provide him with an
expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall
furnish such documentation with respect to reimbursement to be paid
hereunder as the Company shall reasonably request.
4. Payment in the Event of Death or Permanent Disability.
(a) In the event of the Executive's death or "permanent disability"
(as hereinafter defined) during the term of his employment under this
Employment Agreement, the Company shall pay to the Executive (or his
personal representatives, heirs, successors and assigns in the event of his
death) an amount equal to two (2) times the Executive's then effective
annual base salary, as determined under Paragraph 3(a), plus a pro rata
portion of the bonus applicable to the calendar year in which such death or
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<PAGE>
permanent disability occurs, as such bonus is determined under Paragraph
3(b).
(b) The pro rata portion of the bonus described in Paragraph 4(a)
shall be paid when and as provided in Paragraph 3(b). The remainder of the
benefit to be paid pursuant to Paragraph 4(e) shall be paid within ninety
(90) days after the date of death or permanent disability, as the case may
be.
(c) Except as otherwise provided in Paragraphs 2(b), 3(d), 4(a) and
4(b), in the event of the Executive's death or permanent disability, the
Executive's employment hereunder shall terminate and the Executive shall be
entitled to no further compensation or other benefits under this Employment
Agreement, except as to that portion of any unpaid salary and other
benefits accrued and earned by him hereunder up to and including the date
of such death or permanent disability, as the case may be.
(d) For purposes of this Employment Agreement, the Executive's
"permanent disability" shall be deemed to have occurred after one hundred
twenty (120) days in the aggregate during any consecutive twelve (12) month
period, or after ninety (90) consecutive days, during which one hundred
twenty (120) or ninety (90) days, as the case may be, the Executive, by
reason of his physical or mental disability or illness, shall have been
unable to discharge his duties under this Employment Agreement. The date of
permanent disability shall be such one hundred twentieth (120th) or
ninetieth (90th) day, as the case may be. In the event either the Company
or the Executive, after receipt of notice of the Executive's permanent
disability from the other, dispute that the Executive's permanent
disability shall have occurred, the Executive shall promptly submit to a
physical examination by the chief of medicine of any major accredited
hospital in the Raleigh, North Carolina, area and, unless such physician
shall issue his written statement to the effect that in his opinion, based
on his diagnosis, the Executive is capable of resuming his employment and
devoting his full time and energy to discharging his duties within thirty
(30) days after the date of such statement, such permanent disability shall
be deemed to have occurred.
5. Termination.
(a) The Employment of the Executive under this Employment Agreement,
and the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined above) of
the Executive;
(ii) for "cause" at any time by action of the Board; or
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<PAGE>
(iii) "without cause" at any time by action of the Board.
For purposes hereof, the term "cause" shall mean:
(A): The Executive's fraud, commission of a felony, commission of
an act or series of repeated acts of dishonesty which fraud, felony or
dishonesty is materially inimical to the best interests of the
Company, or which results in material injury to the business
reputation of the Company, or the Executive's willful and repeated
failure to perform his duties under this Employment Agreement, which
failure has not been cured within fifteen (15) days after the Company
gives notice thereof to the Executive; or
(B) The Executive's material breach of any material provision of
this Employment Agreement, which breach has not been cured in all
substantial respects within ten (10) days after the Company gives
notice thereof to the Executive.
For purposes hereof, the term "without cause" shall mean any reason other
than those set forth in subparagraphs (a) (i) and (a) (ii) of this
Paragraph 5.
The exercise by the Company of its rights of termination under this
Paragraph 5 shall be the Company's sole remedy in the event of the
occurrence of the event as a result of which such right to terminate
arises. Upon any termination of this Employment Agreement, the
Executive shall be deemed to have resigned from all offices and
directorships held by the Executive in the Company.
(b) In the event of a termination claimed by the Company to be for
"cause" pursuant to Paragraph 5(a) (ii), the Executive shall have the right
to have the justification for said termination determined by arbitration in
Raleigh, North Carolina. In order to exercise such right, the Executive
shall serve on the Company within thirty (30) days after termination a
written request for arbitration. The Company immediately shall request the
appointment of a single arbitrator by the American Arbitration Association
and thereafter the question of "cause" shall be determined under the rules
of the American Arbitration Association, and the decision of the arbitrator
shall be final and binding on both parties. The parties shall use all
reasonable efforts to facilitate and expedite the arbitration and shall act
to cause the arbitration to be completed as promptly as possible. During
the pendency of the arbitration, the Executive shall continue to receive
all compensation and benefits to which he is entitled hereunder, and if at
any time during the pendency of such arbitration the Company fails to pay
and provide all compensation and benefits to the Executive in a timely
manner the Company shall be deemed to have automatically waived whatever
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<PAGE>
rights it then may have had to terminate the Executive's employment for
cause. Expenses of the arbitration shall be borne equally by the parties.
(c) In the event of termination pursuant to subparagraph (a) (i) or
(a) (ii) of this Paragraph 5, except as otherwise provided in Paragraphs
2(b), 3(d), 4(a) and 4(b), as applicable, the Executive shall be entitled
to no further compensation or other benefits under this Employment
Agreement, except as to that portion of any unpaid salary and other
benefits accrued and earned by him hereunder up to and including the
effective date of such termination.
(d) In the event of termination pursuant to Paragraph 2(c) or
subparagraph (a) (iii) of this Paragraph 5, the Executive shall be entitled
to (i) severance pay payable within five (5) days of such termination in a
lump sum equal to the greater of (A) the total amount of unpaid base salary
for the then-unexpired portion of the term of this Employment Agreement, at
the then-effective annual rate of salary, as determined under Paragraph
3(a), and (B) the amount of one year's base salary at the then-effective
annual rate of salary, (ii) a pro rata portion of the bonus described in
Paragraph 4(a) applicable to the calendar year in which such termination
occurs, as such bonus is determined under Paragraph 3(b), and (iii) other
benefits accrued and earned by him hereunder up to and including the
effective date of such termination.
(e) In no event shall the Executive have or be deemed to have any duty
to seek employment or otherwise mitigate damages with respect to any
amounts or benefits due to him upon termination of this Employment
Agreement provided in this Paragraph 5, nor shall any such amount or
benefit be reduced by reason of any other compensation or benefits which
the Executive may earn following termination of this Employment Agreement.
6. Covenants and Confidential Information.
(a) The Executive acknowledges the Company's reliance and expectation
of the Executive's continued commitment to performance of his duties and
responsibilities during the time when he is employed under this Employment
Agreement. In light of such reliance and expectation on the part of the
Company, during the time when he is employed under this Employment
Agreement and if the Executive's employment is terminated voluntarily by
the Executive or by the Company pursuant to Paragraph 5(a) (ii), for the
period after such termination through the date this Employment Agreement
would have otherwise terminated but for such termination (and, as to clause
(ii) of this subparagraph (a), at any time during and after the term of
this Employment Agreement), the Executive shall not, directly or
indirectly, do either of the following;
(i) Own, manage, control or participate in the ownership,
management, or control of, or be employed or
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<PAGE>
engaged by or otherwise affiliated or associated as a consultant,
independent contractor or otherwise with, any other corporation,
partnership, proprietorship, firm, association or other business
entity engaged in the business of, or otherwise engage in the business
of, acquiring, owning, developing or managing factory outlet shopping
centers; provided, however, that the ownership of not more than one
percent (1%) of any class of publicly traded securities of any entity
shall not be deemed a violation of this covenant; or
(ii) Disclose, divulge, discuss, copy or otherwise use or suffer
to be used in any manner, in competition with, or contrary to the
interests of, the Company, any confidential information relating to
the Company's operations, properties or otherwise to its particular
business or other trade secrets of the Company, it being acknowledged
by the Executive that all such information regarding the business of
the Company compiled or obtained by, or furnished to, the Executive
while the Executive shall have been employed by or associated with the
Company is confidential information and the Company's exclusive
property; provided, however, that the foregoing restrictions shall not
apply to the extent that such information (A) is obtainable in the
public domain or known in the industry generally, (B) becomes
obtainable in the public domain or known in the industry generally,
except by reason of the breach by the Executive of the terms hereof,
(C) was not acquired by the Executive in connection with his
employment or affiliation with the Company, (D) was not acquired by
the Executive from the Company or its representatives, or (E) is
required to be disclosed by rule of law or by order of a court or
governmental body or agency.
(b) The Executive agrees and understands that the remedy at law for
any breach by him of this Paragraph 6 may be inadequate and that the
damages flowing such breach are not readily susceptible to being measured
in monetary terms. Accordingly, it is acknowledged that, upon adequate
proof of the Executive's violation of any legally enforceable provision of
this Paragraph 6, the Company may be entitled to immediate injunctive
relief and may obtain a temporary order restraining any threatened or
further breach. Nothing in this Paragraph 6 shall be deemed to limit the
Company's remedies at law or in equity for any breach by the Executive of
any of the provisions of this Paragraph 6 which may be pursued or availed
of by the Company.
(c) The Executive has carefully considered the nature and extent of
the restrictions upon him and the rights and remedies conferred upon the
Company under this Paragraph 6, and hereby acknowledges and agrees that the
same are reasonable in time and territory, are designed to eliminate
competition which otherwise would be unfair to the Company, do not stifle
the
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<PAGE>
inherent skill and experience of the Executive, would not operate as a bar
to the Executive's sole means of support, are fully required to protect the
legitimate interests of the Company and do not confer a benefit upon the
Company disproportionate to the detriment to the Executive.
7. Stock Options. The Executive shall receive stock options under the
company's 1993 Employee Stock Incentive Plan (the "Option Plan") to purchase up
to 35,000 shares of the Company's common stock. Such options shall be eligible
to qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code of 1956, as amended. The Company shall cause the shares underlying
such options to be registered on Form S-8 as soon as practicable after the date
of grant. The shares will be listed on the New York Stock Exchange (the "NYSE")
and will be freely tradable subject to the applicable provisions of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
As soon as practicable following approval of the option grant by the Company's
Executive Compensation Committee, the Company and the Executive shall enter into
a Stock Option Agreement in a form mutually agreed upon by the Company and the
Executive providing that such options shall vest at the rate of twenty Percent
(20%) on the date of grant and an additional twenty percent (20%) on each of the
next four anniversaries of the date of grant, provided that at each date of
vesting he is employed by the Company, and upon vesting shall be exercisable at
any time or times during the ten year period following the date of grant at an
option price equal to the closing price of the Company's common stock on the
NYSE on the business day immediately preceding the effective date of the Stock
Option Agreement.
8. Restricted Stock. The Executive shall receive a grant of 16,667 shares
(the "Restricted Shares") of restricted common stock of the Company ("Common
Stock") granted under the Company's 1996 Restricted Stock Plan. Prior to
vesting, the Restricted Shares will be registered under the Securities Act on
Form S-8, will be listed on the NYSE and following vesting thereof will be
freely tradable subject to applicable provisions of Rule 144 promulgated under
the Securities Act. With respect to said grant, the Company and the Executive
shall enter into a Restricted Stock Agreement in a form mutually agreed upon by
the Company and the Executive providing that (i) the Restricted Shares shall
vest in three equal installments of thirty-three and one-third percent (33 1/3%)
per year provided the Executive continues to be employed by the Company,
commencing on the one-year anniversary date of the Effective Date and (ii) upon
the Executive's death or permanent disability (as defined in Paragraph 4(d))
during his employment by the Company or termxnation of the Executive's
employment pursuant to (or, in the case of termination at any time following the
expiration of this Employment Agreement, for the reasons set forth in) Paragraph
2(c) or Paragraph 5(a) (iii), all unvested Restricted Shares shall
(notwithstanding the requirement of continued employment in
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subparagraph (i) above), upon such termination of employment, immediately vest.
9. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to enter into, execute and deliver
this Employment Agreement, fulfill its obligations hereunder and consummate
the transactions contemplated hereby.
(b) The execution and delivery of, performance of obligations under,
and consummation of the transactions contemplated by, this Employment
Agreement have been duly authorized and approved by all requisite corporate
action by or in respect of the Company, and this Employment Agreement
constitutes the legally valid and binding obligation of the Company,
enforceable by the Executive in accordance with its terms.
(c) No provision of the Company's governing documents or any agreement
to which it is a party or by which it is bound or of any material law or
regulation of the kind usually applicable and binding upon the Company
prohibits or limits its ability to enter into, execute and deliver this
Employment Agreement, fulfill its respective obligations hereunder and
consummate the transactions contemplated hereby.
10. Miscellaneous.
(a) The Executive represents and warrants that he is not a party to
any agreement, contract or understanding whether employment or otherwise,
which would restrict or prohibit him from undertaking or performing
employment in accordance with the terms and conditions of this Employment
Agreement.
(b) The provisions of this Employment Agreement are severable and if
any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any
partially unenforceable provision to the extent enforceable nevertheless
shall be binding and enforceable.
(c) The rights and obligations of the Company under this Employment
Agreement shall inure to the benefit of, and shall be binding on, the
Company and its successors and assigns, and the rights and obligations of
the Executive under this Employment Agreement shall inure to the benefit
of, and shall be binding upon, the Executive (other than obligations to
perform services and to refrain from competition and disclosure of
confidential information) and his heirs, personal representatives and
assigns.
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<PAGE>
(d) Any controversy or claim arising out of or relating to this
Employment Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the American Arbitration
Association then pertaining in the City of Raleigh, North Carolina, and
judgment upon the award rendered by the arbitrator or arbitrators may be
entered in any court having jurisdiction thereof. The arbitrator or
arbitrators shall be deemed to possess the powers to issue mandatory orders
and restraining orders in connection with such arbitration; provided,
however, that nothing in this Paragraph 9(d) shall be construed so as to
deny the Company the right and power to seek and obtain injunctive relief
in a court of equity for any breach or threatened breach by the Executive
of any of his covenants contained in Paragraph 6 hereof.
(e) Any notice to be given under this Employment Agreement shall be
personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified return receipt requested, and if mailed to the
Company, shall be addressed to its principal place of business, attention:
Chairman, and if mailed to the Executive, shall be addressed to him at his
home address last known on the records of the Company, or at such other
address or addresses as either the Company or the Executive may hereafter
designate in writing to the other. All notices provided for hereunder to
the parties shall be accompanied by simultaneous copy of such notice sent
to the attorneys for such parties, as follows:
If to the Executive:
Bernard Flateman, Esq.
Sills Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A.
One Riverfront Plaza
Newark, New Jersey 07102
If to the Company;
Stephen D. Hope, Esq.
Moore & van Allen, PLLC
NationsBank Corporate Center
100 North Tryon Street, Floor 47
Charlotte, North Carolina 25202-4003
Notices sent by Federal Express or similar overnight delivery service or by
facsimile transmissions shall also constitute due notice under this
paragraph 9(e), effective upon receipt thereof.
(f) The failure of either party to enforce any provision or provisions
of this Employment Agreement shall not in any way be construed as a waiver
of any such provision or provisions as to any future violations thereof,
nor prevent that party thereafter from enforcing each and every other
provision of this Employment Agreement. The rights granted the parties
herein
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are cumulative and the waiver of any single remedy shall not constitute a
waiver of such party's right to assert all other legal remedies available
to it under the circumstances.
(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties made prior to the date hereof and may
not be modified or terminated orally. No modification, termination or
attempted waiver shall be valid unless in writing and signed by the party
against whom the same is sought to be enforced.
(h) This Employment Agreement shall be governed by and construed
according to the laws of the State of North Carolina.
(i) Captions and paragraph headings used herein are for convenience
and are not a part of this Employment Agreement and shall not be used in
construing it.
(j) Where necessary or appropriate to the mean hereof, the singular
and plural shall be deemed to include each other, and the masculine,
feminine and neuter shall be deemed to include each other.
(k) This Employment Agreement may be executed in multiple
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. This Employment
Agreement may be executed by facsimile signature.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement on
the day and year first set forth above.
FACTORY STORES OF AMERICA, INC., a
Delaware corporation
By: /s/ J. DIXON FLEMING, JR.
-----------------------------------
J. Dixon Fleming, Jr., Chairman
and Chief Executive Officer
/s/ CHRISTOPHER G. GAVRELIS
----------------------------------------
Christopher G. Gavrelis
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FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this 30th day of May,
1997, effective as of March 1, 1997, by and between FAC REALTY, INC. (formerly
Factory Stores of America, Inc.) (the "Company") and CHRISTOPHER G. GAVRELIS
(the "Executive").
RECITALS
A. The Company and the Executive entered into that certain Employment
Agreement with an Effective Date of December 15, 1995 (the "Agreement").
B. The Company and the Executive desire to amend the Agreement, to, among
other things, extend the term thereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
AGREEMENT
1. All capitalized terms shall be deemed to have the meaning ascribed to
them in the Agreement.
2. Section 2(a) of the Agreement shall be amended by deleting "the second
anniversary of the Effective Date" and substituting "February 28, 1999 in its
place and stead. The following shall also be added to the end of Section 2(a):
"In the event of a "change in control" (as hereinafter defined) the term of this
Employment Agreement shall be extended until February 25, 2001.
3. Section 2(c) of the Agreement shall be amended by deleting "Smithfield,
North Carolina" and substituting "Cary, North Carolina" in its place and stead.
4. Section 3(a) of the Agreement shall be amended by deleting "One Hundred
Twenty-Five Thousand Dollars ($125,000)" and substituting "One Hundred Sixty
Thousand Dollars ($160,000)" in its place and stead.
5. Section 10(a) of the Agreement shall be amended by deleting "Stephen D.
Hope, Esq., Moore & Van Allen, PLLC, NationsBank Corporate Center, 100 North
Tryon Street, Floor 47, Charlotte, North Carolina 28202-4003" and substituting
"General Counsel, FAC Realty Trust, 11000 Regency Parkway, Cary, North Carolina
27511" in its place and stead.
6. Except as otherwise modified herein, all other provisions of the
Agreement are hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the
effective date hereof.
FAC REALTY, INC.
By: /s/ C. CAMMACK MORTON
-------------------------------------
C. Cammack Morton
President and Chief Executive Officer
/s/ CHRISTOPHER G. GAVRELIS
-----------------------------------------
CHRISTOPHER G. GAVRELIS
<PAGE>
FAC REALTY TRUST, INC.
AMENDED AND RESTATED
1995 OUTSIDE DIRECTORS' STOCK PLAN
FAC Realty Trust, Inc. hereby amends and restates as of March 31, 1998
its 1995 Outside Directors' Stock Award Plan for the benefit of certain members
of the Board of Directors of the Company, subject to the following provisions:
SECTION 1. PURPOSES. The purposes of the Plan are to secure for the
Company and its stockholders the benefits of the incentive inherent in increased
Common Stock ownership by the Outside Directors and to provide the Outside
Directors with the opportunity to increase their proprietary interest in the
Company.
SECTION 2. DEFINITIONS. For the purposes of this Plan and any Award,
the following words shall have the meanings indicated, unless the context
clearly requires otherwise:
"AWARD" means an Option or an award of shares of Common Stock,
in either case pursuant to the terms and conditions of the Plan.
"AWARDEE" means an Outside Director granted an Award under the
Plan.
"BOARD" means the Board of Directors of the Company.
"COMMITTEE" means a committee appointed by the Board. Unless
and until otherwise appointed, the Committee shall be the Board.
"COMMON STOCK" means the common stock of the Company, par
value $0.01 per share, subject to the right of the Company to change
the authorized number of shares of such class and to provide no par or
a change in par value for such stock.
"COMPANY" means FAC Realty Trust, Inc., a Maryland
corporation.
"DIRECTOR" means a member of the Board.
"EFFECTIVE DATE" means the date on which the Plan is adopted
by the Company, subject to approval by the stockholders of the Company.
"FAIR MARKET VALUE" means, with respect to shares of Common
Stock, the closing price of the Common Stock on the New York Stock
Exchange or such other securities exchange which the Common Stock is
listed on the relevant date.
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<PAGE>
"OPTION" means a stock option that is not qualified under
Section 422 of the Internal Revenue Code of 1986, as amended.
"OUTSIDE DIRECTOR" means any Director who is not an officer or
employee of the Company or any Subsidiary.
"PLAN" means the FAC Realty Trust, Inc. Amended and Restated
1995 Outside Directors' Stock Plan, as amended from time to time in
accordance herewith.
"RETAINER FEE" means the annual retainer fee earned by each
Outside Director.
"SUBSIDIARY" means any corporation (other than the Company),
partnership, joint venture, organization or other entity of which 50
percent or more of the total combined voting power of all classes of
equity of such entity or 50 percent or more of the capital account or
profit interest of such entity is owned, directly or indirectly, by the
Company or a Subsidiary, whether or not such entity now exists or is
hereafter organized or acquired by the Company or a Subsidiary.
SECTION 3. ADMINISTRATION. The Plan shall be administered by the
Committee. The Committee shall have the powers vested in it by the terms of the
Plan, such powers to include authority (within the limitations described herein)
to establish the form, terms and conditions of Awards and of Award agreements,
if any, embodying Awards made under the Plan. Subject to the provisions of the
Plan, the Committee shall have the power to construe the Plan, to determine all
questions arising thereunder and to adopt and amend such rules and regulations
for the administration of the plan as it may deem desirable. Any decision of the
Committee in the administration of the Plan, as described herein, shall be final
and conclusive. The Committee may act only by a majority of its members in
office, except that the members thereof may authorize any one or more of their
number or the Secretary or any other officer of the Company to execute and
deliver documents on behalf of the Committee. No member of the Committee shall
be liable for anything done or omitted to be done by such member or by any other
member of the Board in connection with the Plan except for such member's own
willful misconduct or as expressly provided by statute.
SECTION 4. AMOUNT OF STOCK. The stock which may be issued and sold
under the Plan will be the Common Stock, of a total number not exceeding one
hundred fifty thousand (150,000) shares, subject to adjustment as provided in
Section 8. The stock to be issued may be either authorized and unissued shares
or issued shares acquired by the Company or one of its Subsidiaries. All or any
shares of Common Stock subject to an Option or stock grant which for any reason
are not issued or are reacquired under the Option or stock grant may again be
made subject to an Option or stock grant under the Plan.
SECTION 5. ELIGIBILITY. Each Outside Director shall receive
Awards in accordance with Section 6.
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<PAGE>
SECTION 6. AWARDS. The Committee may provide for Options and/or stock
grants to be awarded to Outside Directors in consideration for their service to
the Company. The Committee shall determine to which Outside Directors any such
Options and/or stock grants shall be awarded hereunder (any such person, an
"Awardee"). The Committee shall specify the number of shares of Common Stock
subject to each Option or stock grant provided for under this Section 6, or the
formula pursuant to which such number shall be determined, the Outside
Director(s) to receive any such Award, the date or triggering event of any such
Award and the vesting and expiration terms applicable to such Award. Subject to
adjustment pursuant to Section 8, the maximum number of shares of Common Stock
subject to Options and stock grants awarded under this Plan during any calendar
year to any person on account of his or her service as an Outside Director shall
not exceed 5,000 shares.
SECTION 7. TERMS AND CONDITIONS OF AWARDS. Options and stock grants
awarded pursuant to the Plan need not be identical but each Option and each
stock grant shall be subject to the following general terms and conditions.
(a) Terms and Restrictions Upon Shares: The Committee may
provide that the shares of Common Stock issued upon exercise of an
Option or receipt of a stock grant shall be subject to such further
conditions, restrictions or agreements as the Committee in its
discretion may specify prior to the exercise of such Option or receipt
of such stock grant, including without limitation, deferrals on
issuance, conditions on vesting or transferability, and forfeiture or
repurchase provisions. The Committee may waive conditions to and/or
accelerate exercisability of an Option or stock grant, either
automatically upon the occurrence of specified events (including in
connection with a change of control of the Company) or otherwise in its
discretion.
(b) Transferability of Option: Unless otherwise provided by
the Committee, each Option shall be transferable only by will or the
laws of descent and distribution.
(c) Option Price: The exercise price for each Option shall be
established by the Committee or under a formula established by the
Committee. The exercise price shall not be less than the Fair Market
Value of the stock on the date of grant, except that in the event that
receipt of Options is conditioned on the Non-Employee Director electing
to forego his or her right to all or any part of his or her cash
retainer or other fees, the aggregate exercise price of such Options
shall not be less than 100% of the fair market value of the number of
shares of Common Stock subject to such options at the time such options
are granted less the amount of retainer or other fees such Non-Employee
Director has elected to forego.
(d) Stock Grant Terms: Stock grants under the Plan may, in the
sole discretion of the Committee, but need not, be conditioned upon the
Participant paying cash or cash-equivalent consideration or agreeing to
forego other compensation for the Shares covered by the stock grant.
Stock grants under the Plan may be subject to such
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<PAGE>
conditions, restrictions or other vesting terms as are established in
the sole discretion of the Committee. The conditions, restrictions or
vesting terms may be contingent upon the passage of time, continued
service or achievement of Company or individual performance goals, as
specified by the Committee.
(e) Award Agreements: The Committee may require any Awardee to
enter into an Award agreement with the Company in a form specified by
the Committee agreeing to the terms and conditions of the Award and
such other matters consistent with the Plan as the Committee in its
sole discretion shall determine. Certificates representing Award shares
granted subject to restriction shall bear a legend in such form as may
be prescribed by the Committee.
SECTION 8. EFFECT OF CERTAIN TRANSACTIONS. The number of shares of
Common Stock reserved for issuance under the Plan shall be appropriately
adjusted by the Committee, whose determination shall be conclusive, to reflect
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, a consolidation of shares, the payment of a stock
dividend, or any other capital adjustment affecting the number of issued shares
of Common Stock. In the event that the outstanding shares of Common Stock shall
be changed into or exchanged for a different number or kind of shares of stock
or other securities of the Company or another corporation, whether through
reorganization, recapitalization, merger, consolidation, or otherwise, then
there shall be substituted for each share of Common Stock reserved for issuance
under the Plan, but not yet awarded under the Plan, the number and kind of
shares of stock or other securities into which each outstanding share of Common
Stock shall be so changed or for which each such share shall be exchanged.
SECTION 9. AMENDMENT OR DISCONTINUANCE. The Plan may be amended at any
time and from time to time by the Board as the Board shall deem advisable
including, but not limited to, amendments necessary to qualify for any exemption
or to comply with applicable law or regulations; provided, however, that any
such amendment shall be subject to further approval by the stockholders of the
company to the extent required by law, the New York Stock Exchange or as deemed
advisable by the Board. No amendment of the Plan shall materially and adversely
affect any right of any Awardee with respect to any Award theretofore granted
without such Awardee's written consent. Any such action to amend or discontinue
the Plan shall be adopted by formal action of the Board and executed by an
officer or persons authorized to act on behalf of the Company.
SECTION 10. TERMINATION. This Plan shall terminate upon the earlier of
the following dates or events to occur:
(a) upon the adoption of a resolution of the Board terminating
the Plan; or
(b) May 14, 2005 (which date is ten years from the date the
Plan was initially approved and adopted by the stockholders of the
Company).
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<PAGE>
Any action under Section 10(a) to terminate the Plan shall be adopted
by formal action of the Board and executed by an officer or person authorized to
act on behalf of the Company.
SECTION 11. MISCELLANEOUS PROVISIONS.
(a) Except as expressly provided for in the Plan, no Outside
Director or other person shall have any claim or right to be granted an
Award under the Plan. Neither the Plan nor any action taken thereunder
shall be construed as giving any Outside Director any right to be
retained in the service of the Company.
(b) An Awardee's right and interest under the Plan may not be
assigned or transferred in whole or in part either directly or by
operation of law or otherwise (except in the event of an Awardee's
death, by will or the laws of descent and distribution), including, but
not by way of limitation, execution, levy, garnishment, attachment,
pledge, bankruptcy, or in any other manner, and no such right or
interest of any participant in the Plan shall be subject to any
obligation or liability of such participant.
(c) No shares of Common Stock shall be issued hereunder unless
counsel for the Company shall be satisfied that (i) such issuance will
be in compliance with applicable federal and state securities laws,
including, but not limited to, listing requirements and New York Stock
Exchange requirements, and any other laws or regulations applicable to
the delivery of such shares, and (ii) the certificates representing
shares of Common Stock awarded bear any and all legends necessary in
order to comply with such laws and regulations.
(d) It shall be a condition to the obligation of the Company
to issue an Award, that the Awardee pay to the Company, upon its
demand, such amount as may be requested by the Company for the purpose
of satisfying any liability to withhold federal, state, local income or
other taxes. If the amount requested is not paid, the Company may
refuse to issue an Award.
(e) The expenses of the Plan shall be borne by the Company.
(f) The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any other
segregation of assets to assure the issuance of Awards under the Plan
and the issuance of Awards shall be subordinate to the claims of the
Company's general creditors.
(g) By accepting any Award or other benefit under the Plan,
each Awardee and each person claiming under or through such person
shall be conclusively deemed to have indicated his or her acceptance
and ratification of, and consent to, any action taken under the Plan by
the Company or the Board.
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<PAGE>
(h) All section references herein refer to sections of this
Plan unless specifically noted otherwise.
(i) Any notice or other communication provided for herein
shall be given in writing by registered or certified mail, return
receipt requested, or by facsimile, telecopy, or other means of
electronic communication, reasonably calculated in any instance to be
received by the receiving party or his, her or its authorized agent at
the receiving party's last-known address. The notice or communication
shall be deemed as delivered when it arrives at such address.
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RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (this "Agreement") is made and entered into
as of this 4th day of April, 1996 (hereinafter referred to as the "Effective
Date"), by and between FACTORY STORES OF AMERICA, INC., a Delaware corporation
(the "Corporation"), and C. CAMMACK MORTON (the "Participant").
WHEREAS, The Factory Stores of America, Inc. 1996 Restricted Stock Plan
(the "Plan") has been adopted by the Executive Compensation Committee (the
"Committee") of the Board of Directors of the Corporation (the "Board") and the
Board; and
WHEREAS, the Committee has determined that it is desirable and in the best
interest of the Corporation to make an award (the "Award") of certain shares of
common stock, par value $.01 per share of the Corporation ("Common Stock"),
under the Plan, to the Participant, subject to certain restrictions as specified
below; and
WHEREAS, in order to enforce the aforesaid restrictions, Participant is
required under the terms of the Award to immediately deposit the certificate(s)
for the shares of Common Stock subject to the Award, together with stock powers
appropriately endorsed in blank, with the Corporation in accordance with the
requirements of this Agreement.
NOW, THEREFORE, the Corporation and the Participant agree as follows:
1. Date of Award. The date of making the Award under this Agreement is the
4th day of April, 1996 (the "Effective Date").
2. Receipt by Participant. The Participant acknowledges receipt from the
Corporation of 90,000 shares of Common Stock (the "Restricted Stock") and agrees
to the execution of stock powers or such other transfer authorizations as the
Corporation shall request, in blank, covering the Restricted Stock to be held by
the Corporation, prior to the distribution of certificates representing the
Restricted Stock to the Participant as hereinafter provided.
3. Investment Representation and Transfer Restrictions; and Registration
(a) Investment Representation. Participant represents to the Corporation
that the Participant is taking the Restricted Stock for investment and without
any present intention to sell, transfer or otherwise dispose of the Restricted
Stock.
(b) Securities Law Restrictions. The Participant agrees with the
Corporation that the Restricted Stock shall be subject to such stop-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the
<PAGE>
Securities and Exchange Commission, any stock exchange upon which Common Stock
is then listed and any other applicable federal or state securities laws, rules
or regulations, and the Committee may cause a legend or legends to be placed on
any certificate representing any of the shares of Restricted Stock to make
appropriate reference to such restrictions.
(c) Other Transfer Restrictions. The Participant agrees with the
Corporation that each certificate representing any of the shares of Restricted
Stock may bear a legend, substantially in the form attached as Exhibit A hereto,
to the effect that the shares of Restricted Stock represented thereby are
subject to potential forfeiture and may not be sold, exchanged, transferred,
pledged, hypothecated or otherwise disposed of except in accordance with the
terms of this Agreement, and shall be subject to such stop-transfer orders and
other restrictions as the Committee shall deem advisable to ensure compliance
with the terms of this Agreement.
(d) Registration. Prior to vesting pursuant to Paragraph 5 below, the
Corporation shall cause the Restricted Stock to be registered under the
Securities Act of 1933 and to be listed on the New York Stock Exchange (the
"NYSE").
4. Receipt by the Corporation. The Corporation acknowledges receipt from
the Participant of certificates representing the Restricted Stock, registered in
the name of the Participant, and acknowledges receipt of stock powers executed
in blank by the Participant covering all of the Restricted Stock. Certificates
representing the Restricted Stock shall be held by the Corporation and
distributed or transferred as directed by the Committee in accordance with this
Agreement.
5. Vesting and Delivery of Restricted Stock by the Corporation
(a) Periodic Vesting. Subject to subparagraph 5(b) below, the Restricted
Stock shall vest and become nonforfeitable in five (5) equal installments of
twenty percent (20%) per year provided the Participant continues to be employed
by the Company at the relevant vesting date, commencing (i.e., the first 20%
shall vest) on the later to occur of (i) the average closing price of Common
Stock on the NYSE being $16.00 per share (subject to appropriate adjustment for
stock dividends, stock splits, or similar transactions) or more for any five (5)
consecutive trading days or (ii) December 14, 2000.
(b) Accelerated Vesting.
(i) If the condition set forth in clause (i) of subparagraph 5(a) has
previously during the term of this Agreement been satisfied, then
notwithstanding the requirement of continued employment in subparagraph
5(a) above, all Restricted stock not previously vested and subject to
forfeiture shall vest and the right of the Participant to such shares of
Restricted Stock shall become nonforfeitable upon the occurrence of any of
the following:
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<PAGE>
(A) the Participant's death during his employment by the
Corporation;
(B) the Participant's disability (as defined in the Plan) during
his employment by the Corporation;
(C) termination of the Participant's employment by the
Corporation due to the Corporation's election not to extend the Second
Amended and Restated Employment Agreement, dated December 15, 1995, by
and between the Corporation and the Participant (the "Employment
Agreement"), as permitted in Paragraph 2(a) thereof; or
(D) termination of the Participant's employment "without cause"
pursuant to Paragraph 2(c) or Paragraph 5(a)(iii) of the Employment
Agreement.
(ii) If the condition set forth in clause (i) of subparagraph 5(a) has
not previously during the term of this Agreement been satisfied, then
notwithstanding the requirement of continued employment in subparagraph
5(a) above, 74,000 shares of Restricted Stock shall be forfeited and 16,000
shares of Restricted Stock shall vest and the right of the Participant to
such shares of the Restricted Stock shall become nonforfeitable upon the
occurrence of any of the following:
(A) the Participant's death during his employment by the
Corporation;
(B) the Participant's disability (as defined in the Plan) during
his employment by the Corporation;
(C) termination of the Participant's employment by the
Corporation due to the Corporation's election not to extend the
Employment Agreement as permitted in Paragraph 2(a) thereof; or
(D) termination of the Participant's employment "without cause"
pursuant to Paragraph 2(c) (other than pursuant to Paragraph 2(c)(iv))
or Paragraph 5(a)(iii) (other than within three (3) months prior to,
at the time of or within one (1) year following a "change of control"
pursuant to Paragraph 2(e) or, provided that such change is effected,
the execution of a definitive agreement therefor) of the Employment
Agreement.
(iii) If the condition set forth in clause (i) of subparagraph 5(a)
has not previously during the term of this Agreement been satisfied, then
notwithstanding the requirement of continued employment in subparagraph
5(a) above, all Restricted Stock not previously vested and subject to
forfeiture shall vest and the right of the Participant to such shares of
Restricted Stock shall become nonforfeitable as follows upon the
termination by the Participant of his
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<PAGE>
employment pursuant to Paragraph 2(c)(iv) of the Employment Agreement:
(A) 16,000 shares on the date of the termination of the
Participant's employment by the Corporation;
(B) 37,000 shares on the first anniversary of the termination of
the Participant's employment; and
(C) 37,000 shares on the second anniversary of the termination of
the Participant's employment.
(iv) If the condition set forth in clause (i) of subparagraph 5(a) has
not previously during the term of this Agreement been satisfied, then
notwithstanding the requirement of continued employment in subparagraph
5(a) above, all Restricted Stock not previously vested and subject to
forfeiture shall vest and the right of the Participant to such shares of
Restricted Stock shall become nonforfeitable upon the termination of the
Participant's employment by the Corporation "without cause" pursuant to
Paragraph 5(a) (iii) of the Employment Agreement if such termination occurs
within three (3) months prior to, at the time of or within one (1) year
following a "change of control" as defined in Section 2(e) of the
Employment Agreement or, provided that such change is effected, the
execution of a definitive agreement therefor.
(c) Delivery of Restricted Stock Certificates to the Participant. Within
thirty (30) days after a date on which shares of Restricted Stock have become
vested as provided in subparagraphs 5(a) or 5(b) above, the Committee shall
instruct the appropriate officer of the Corporation to deliver to the
Participant, the Participant's designee, or such other person as shall have been
designated as Participant's beneficiary in accordance with this Agreement, as
applicable, certificates representing the shares of Restricted Stock which have
become vested and nonforfeitable, free from any restrictions imposed by this
Agreement other than such restrictions and conditions as may be deemed necessary
by the Committee to assure compliance with all applicable securities laws,
rules, regulations and listing requirements as set forth in subparagraph 3(b)
above.
(d) Delivery of Forfeited Restricted Stock. If the Participant's employment
with the Corporation terminates for any reason other than one of those provided
in subparagraph 5(b) above, before all of the shares of Restricted Stock are
vested in accordance with subparagraphs 5(a) and 5(b) above, all such shares
then subject to forfeiture shall be deemed forfeited by the Participant and the
Committee shall instruct the appropriate officer of the Corporation concerning
the disposition of such forfeited shares. Thereafter such forfeited shares shall
cease to be subject to this Agreement.
(e) Limitation on Shares of Restricted Stock. Except as otherwise provided
in Paragraph 6(a) or 9 of this Agreement, the aggregate number of shares of
Restricted Stock which the Participant may be entitled to receive under this
Agreement shall not exceed 90,000.
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<PAGE>
6. Voting Rights: Dividends: Other Distributions.
(a) The Participant shall have the full power to vote all of the Restricted
Stock held by the Corporation in the Participant's name from time to time and
shall be entitled to receive all cash dividends declared upon any of the
Restricted Stock held by the Corporation in the Participant's name from time to
time. All shares of Common Stock or other securities, including but not limited
to stock dividends, issued in respect of the Restricted Stock or in substitution
thereof, whether by the Corporation or by another issuer, shall be held by the
Corporation and shall be subject to all terms and conditions of this Agreement
and shall be redelivered to the Participant or delivered as instructed by the
Committee under the same circumstances as the Restricted Stock with respect to,
or in substitution for, which they were issued; provided, however, that if the
Participant should receive rights, warrants or fractional interests in respect
of any of the Restricted Stock held by the Corporation in the Participant's
name, such rights or warrants may be held, exercised, sold or otherwise disposed
of, and such fractional interests may be settled, by the Participant free and
clear of the restrictions herein set forth.
(b) The Participant shall use sixty percent (60%) of the cash dividends
paid on any unvested shares of Restricted Stock to purchase additional shares of
Common Stock within thirty (30) days of payment or as soon thereafter as the
Participant may purchase shares of Common Stock without penalty under the
Federal securities law.
7. Designation of Beneficiary. The Participant may file with the Committee
a written designation of one or more persons as the beneficiary who shall be
entitled to receive the Restricted Stock, if any, distributable to the
Participant upon the Participant's death. The Participant may, from time to
time, revoke or change the Participant's beneficiary designation without the
consent of any prior beneficiary, if any, by filing a new designation with the
Committee. The last such designation received by the Committee shall be
controlling; provided, however, that no designation, or change or revocation
thereof, shall be effective unless received by the Committee prior to the
Participant's death, and in no event shall it be effective as of a date prior to
such receipt.
If no such beneficiary designation is in effect at the time of the
Participant's death, or if no designated beneficiary survives the Participant,
or if such designation conflicts with law, the Participant's estate shall be
deemed to have been designated the Participant's beneficiary and shall receive
the Restricted Stock, if any, distributable to the Participant upon the
Participant's death. If the Committee is in doubt as to the right of any person
to receive such distribution, the Committee may direct an appropriate officer of
the Corporation to retain the Restricted Stock, without liability for any
interest in respect thereof, until the rights thereto are determined, or the
Committee may direct the transfer of such Restricted Stock into any court of
appropriate jurisdiction and such transfer shall be deemed a complete discharge
of the obligations of the Corporation hereunder.
8. Effect of Award on Status of Participant. The fact that an Award has
been made to the Participant under this Plan shall not confer on the Participant
any right to continued
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<PAGE>
employment with the Corporation; nor shall it limit the right of the Corporation
to terminate the Participant's employment at any time.
9. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation
(a) In the event of a change in the number or type of shares of Common
Stock outstanding (or in the event of an exchange of such shares) by reason of a
reclassification, recapitalization, reorganization, merger, or consolidation, or
other similar capital adjustment, merger or consolidation of the Corporation, or
the sale by the Corporation of all or a substantial portion of its assets, or
the occurrence of any other event which could affect the implementation of the
Plan and the realization of its objectives, the Committee shall make such
adjustments in the terms, conditions, or restrictions of this Agreement as are
equitable and just.
(b) The making of the Award under this Agreement does not affect in any way
the right or power of the Corporation or its stockholders to make or authorize
any adjustment, recapitalization, reorganization, or other change in the
Corporation's capital structure or its business, or any merger or consolidation
of the Corporation, or to issue bonds, debentures, preferred or other preference
stock ahead of or affecting Common Stock or the rights thereof, or the
dissolution or liquidation of the Corporation, or any sale or transfer of all or
any part of the Corporation's assets or business.
10. Nontransferability. The Restricted Stock may not be sold, exchanged,
transferred, pledged, hypothecated, or otherwise disposed of by the Participant
until transferred to the Participant by the Corporation in accordance with the
terms of this Agreement. Nothing herein shall preclude the Participant from
making a gift of any Restricted Stock to a spouse, child, stepchild, grandchild,
parent, sibling, or legal dependent of the Participant, or to a trust of which
the beneficiary or beneficiaries of the trust shall be either a person
designated herein or the Participant, provided, however, that any Restricted
Stock so given shall remain subject to the restrictions, obligations and
conditions set forth in this Agreement. In addition, the Restricted Stock may be
tendered in response to a tender offer for or a request or invitation to tender
of greater than fifty percent (50%) of the common stock of the Corporation and
may be surrendered in a merger, consolidation or share exchange involving the
Corporation; provided, however, in each case, that except as otherwise provided
in Paragraph 6 above, the security or other consideration received in exchange
therefor shall thereafter be subject to the restrictions and conditions set
forth in this Agreement.
11. Taxes. All Restricted Stock distributed pursuant to this Agreement, and
any amounts distributed with respect thereto prior to distribution of such
Restricted Stock by the Corporation, shall be subject to applicable federal,
state and local withholding for taxes. The Participant expressly acknowledges
and agrees to such withholding without regard to whether the Restricted Stock
may then be sold or otherwise transferred by the Participant.
12. Notices. Any notices or other communications required or permitted to
be given under this Agreement shall be in writing and shall be deemed to have
been sufficiently given if delivered personally or when delivered to a
nationally recognized overnight courier service or deposited in the United
States mail as Certified Mail, return receipt requested, properly addressed
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<PAGE>
and postage prepaid, if to the Corporation at its principal office at 230 North
Equity Drive, Smithfield, North Carolina 27577; and, if to the Participant, at
the Participant's last address appearing on the books of the Corporation. The
Corporation and the Participant may change their address or addresses by giving
written notice of such change as provided herein. Any notice or other
communication hereunder shall be deemed to have been given on the date actually
delivered, as of the first (1st) business day following delivery to a nationally
recognized overnight courier service, or as of the third (3rd) business day
following the date mailed, as the case may be.
13. Construction Controlled by Plan. This Agreement shall be construed so
as to be consistent with the Plan; and except as specifically provided herein
the provisions of the Plan shall be deemed to be controlling in the event that
any provision hereof should appear to be inconsistent therewith. The Participant
hereby acknowledges receipt of a copy of the Plan from the Corporation.
14. Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such a manner as to be valid and enforceable under applicable
law, but if any provision of this Agreement is determined to be unenforceable,
invalid or illegal, the validity of any other provision or part thereof, shall
not be affected thereby and this Agreement shall continue to be binding on the
parties hereto as if such unenforceable, invalid or illegal provision or part
thereof had not been included herein.
15. Modification of Agreement; Waiver. This Agreement may be modified,
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto. No waiver hereunder shall constitute a waiver with respect to any
subsequent occurrence or other transaction hereunder or of any other provision
hereof.
16. Captions and Headings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Agreement. As used herein,
the masculine gender shall include the feminine and neuter, the singular number
the plural, and vice versa, whenever such meanings are appropriate.
17. Governing Law: Venue and Jurisdiction. Without regard to the principles
of conflicts of laws, the laws of the State of North Carolina shall govern and
control the validity, interpretation, performance, and enforcement of this
Agreement. The parties hereto agree that any suit or action relating to this
Agreement shall be instituted and prosecuted in the courts of the County of
Johnston, State of North Carolina, and each party hereby does waive any right or
defense relating to such jurisdiction and venue.
18. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the Corporation, and its successors and assigns, and shall be
binding upon and inure to the benefit of the Participant, and his heirs,
legatees, personal representatives, executors and administrators.
-7-
<PAGE>
19. Entire Agreement. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto and, except as otherwise
provided hereunder, there are no other agreements or understandings, written or
oral, in effect between the parties hereto relating to the matters addressed
herein.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed in its corporate name by a duly authorized officer, and attested by its
Secretary or any of its Assistant Secretaries, and its corporate seal to be
hereto affixed, all by authority of its Board of Directors first duly given; and
the individual party hereto has hereunto set such party's hand and adopted as
such party's seal the typewritten word "SEAL" appearing beside such party's
name, all done this the day and year first above written.
FACTORY STORES OF AMERICA, INC.
By: _______________________________________
J. Dixon Fleming, Jr.
Chairman and Chief Executive Officer
ATTEST:
___________________
___________________ Secretary
[Corporate Seal]
____________________________________(SEAL)
C. CAMMACK MORTON
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<PAGE>
EXHIBIT A
Form of Legend
The shares represented by this certificate are subject to restrictions on
transfer and potential forfeiture under the terms of a Restricted Stock
Agreement dated April 4, 1996, a copy of which agreement may be obtained from
the issuer by writing to:
Factory Stores of America, Inc.
230 North Equity Drive
Smithfield, North Carolina 27358
Attention: Corporate Secretary
-9-
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (this "Agreement") is made and entered into
as of the 26th day of August, 1996 (hereinafter referred to as the "Effective
Date"), by and between FAC REALTY, INC., a Delaware corporation (the
"Corporation"), and PATRICK M. MINIUTTI (the "Participant").
WHEREAS, the Corporation's 1996 Restricted Stock Plan (the "Plan") has been
adopted by the Executive Compensation Committee (the "Committee") of the Board
of Directors of the Corporation (the "Board") and the Board; and
WHEREAS, the Committee has determined that it is desirable and in the best
interest of the Corporation to make an award (the "Award" ) of certain shares of
common stock, par value $.01 per share of the Corporation ("Common Stock"),
under the Plan, to the Participant, subject to certain restrictions as specified
below; and
WHEREAS, in order to enforce the aforesaid restrictions Participant is
required under the terms of the Award to immediately deposit the certificate(s)
for the shares of Common Stock subject to the Award, together with stock powers
appropriately endorsed in blank, with the Corporation in accordance with the
requirements of this Agreement.
NOW, THEREFORE, the Corporation and the Participant agree as follows:
1. Date of Award. The date of making the Award under this Agreement is the
26th day of August, 1996 (the "Effective Date") .
2. Receipt by Participant. The Participant acknowledges receipt from the
Corporation of 90,000 shares of Common Stock (the "Restricted Stock" ) and
agrees to the execution of stock powers or such other transfer authorizations as
the Corporation shall request, in blank, covering the Restricted Stock to be
held by the Corporation, prior to the distribution of certificates representing
the Restricted Stock to the Participant as hereinafter provided.
3. Investment Representation; Transfer Restrictions, and Registration
(a) Investment Representation. Participant represents to the Corporation
that the Participant is taking the Restricted Stock for investment and without
any present intention to sell, transfer or otherwise dispose of the Restricted
Stock.
(b) Securities Law Restrictions. The Participant agrees with the
Corporation that the Restricted Stock shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and Exchange
Commission, any stock exchange upon which Common Stock is then listed and any
other applicable federal or state securities laws, rules or regulations, and the
Committee may cause a legend or legends to be placed on any certificate
representing any of the shares of Restricted Stock to make appropriate
<PAGE>
reference to such restrictions.
(c) Other Transfer Restrictions. The Participant agrees with the
Corporation that each certificate representing any of the shares of Restricted
Stock may bear a legend, substantially in the form attached as Exhibit A hereto,
to the effect that the shares of Restricted Stock represented thereby are
subject to potential forfeiture and may not be sold, exchanged, transferred,
pledged, hypothecated or otherwise disposed of except in accordance with the
terms of this Agreement, and shall be subject to such stop transfer orders and
other restrictions as the Committee shall deem advisable to ensure compliance
with the terms of this Agreement.
(d) Registration. Prior to vesting pursuant to Paragraph 5 below, the
Corporation shall cause the Restricted Stock to be registered under the
Securities Act of 1933 and to be listed on the New York Stock Exchange (the
"NYSE" ).
4. Receipt by the Corporation. The Corporation acknowledges receipt from
the Participant of certificates representing the Restricted Stock, registered in
the name of the Participant, and acknowledges receipt of stock powers executed
in blank by the Participant covering all of the Restricted Stock. Certificates
representing the Restricted Stock shall be held by the Corporation and
distributed or transferred as directed by the Committee in accordance with this
Agreement.
5. Vesting and Delivery of Restricted Stock by the Corporation
(a) Periodic Vesting. Subject to subparagraph 5(b) below, the Restricted
Stock shall vest and become nonforfeitable in accordance with the following
schedule:
On the third anniversary of the Effective Date: 30% Vested
On the fourth anniversary of the Effective Date an additional: 10% Vested
On the fifth anniversary of the Effective Date an additional: 10% Vested
On the sixth anniversary of the Effective Date an additional: 10% Vested
On the seventh anniversary of the Effective Date an additional: 10% Vested
On the eighth anniversary of the Effective Date an additional: 10% Vested
On the ninth anniversary of the Effective Date an additional: 10% Vested
On the tenth anniversary of the Effective Date an additional: 10% Vested
(b) Accelerated Vesting
(i) Notwithstanding the requirement of continued employment in
subparagraph 5 (a) above, all Restricted Stock not previously vested and
subject to forfeiture shall vest and the right of the Participant to such
shares of Restricted Stock shall become nonforfeitable upon the occurrence
of any of the following:
-2-
<PAGE>
(i) the Participant's death during his employment by the Corporation;
or
(ii) the Participant's disability (as defined in the Plan) during his
employment by the Corporation; or
(iii) termination of the Participant's employment by the Corporation
due to the Corporation's election not to extend the Participant's
employment agreement (with the Corporation with an Effective Date of August
26, 1996, as the same may be amended "the Employment Agreement") as
permitted in Paragraph 2(a) thereof; or
(iv) the termination of Participant's employment by the Corporation
"without cause" pursuant to 5(a)(iii) of the Employment Agreement if such
termination occurs within three (3) months prior to, at the time of, or
within one (1) year following a "change of control" as defined in Section
2(e) of the Employment Agreement or, provided that such change is effected,
the execution of a definitive agreement therefor.
(c) Delivery of Restricted Stock Certificates to the Participant. Within
thirty (30) days after a date on which shares of Restricted Stock have become
vested as provided in subparagraphs 5 (a) or 5 (b) above, the Committee shall
instruct the appropriate officer of the Corporation to deliver to the
Participant, the Participant's designee, or such other person as shall have been
designated as Participant's beneficiary in accordance with this Agreement, as
applicable, certificates representing the shares of Restricted Stock which have
become vested and nonforfeitable, free from any restrictions imposed by this
Agreement other than such restrictions and conditions as may be deemed necessary
by the Committee to assure compliance with all applicable securities laws rules
regulations and listing requirements as set forth in subparagraph 3 (b) above.
(d) Delivery of Forfeited Restricted Stock. If the Participant's employment
with the Corporation terminates for any reason other than one of those provided
in subparagraph 5 (b) above, before all of the shares of Restricted Stock are
vested in accordance with subparagraphs 5 (a) and 5 (b) above, all such shares
then subject to forfeiture shall be deemed forfeited by the Participant and the
Committee shall instruct the appropriate officer of the Corporation concerning
the disposition of such forfeited shares. Thereafter such forfeited shares shall
cease to be subject to this Agreement.
(e) Limitation on Shares of Restricted Stock. Except as otherwise provided
in Paragraph 6 (a) or 9 of this Agreement, the aggregate number of shares of
Restricted Stock which the Participant may be entitled to receive under this
Agreement shall not exceed 90,000.
6. Voting Rights; Dividends; Other Distributions
(a) The Participant shall have the full power to vote all of the Restricted
Stock
-3-
<PAGE>
held by the Corporation in his name from time to time and shall be entitled to
receive all cash dividends declared upon any of the Restricted Stock held by the
Corporation in his name from time to time. All shares of Common Stock or other
securities, including but not limited to stock dividends, issued in respect of
the Restricted Stock or in substitution thereof, whether by the Corporation or
by another issuer, shall be held by the Corporation and shall be subject to all
terms and conditions of this Agreement and shall be redelivered to the
Participant or delivered as instructed by the Committee under the same
circumstances as the Restricted Stock with respect to, or in substitution for
which they were issued; provided, however, that if the Participant should
receive rights, warrants or fractional interests in respect of any of the
Restricted Stock held by the Corporation in his name, such rights or warrants
may be held, exercised, sold or otherwise disposed of, and such fractional
interests may be settled, by the Participant free and clear of the restrictions
herein set forth.
(b) The Participant shall use the cash dividends paid on any unvested
shares of Restricted Stock, less an amount necessary to pay all applicable taxes
associated with the vesting of the Restricted Stock and such dividends, to
purchase additional shares of Common Stock within thirty (30) days of payment or
as soon thereafter as the Participant may purchase shares of Common Stock
without penalty under the Federal securities laws.
7. Designation of Beneficiary. The Participant may file with the Committee
a written designation of one or more persons as the beneficiary who shall be
entitled to receive the Restricted Stock, if any, distributable to the
Participant upon his death.
The Participant may, from time to time, revoke or change his beneficiary
designation without the consent of any prior beneficiary, if any, by filing a
new designation with the Committee. The last such designation received by the
Committee shall be controlling; provided, however, that no designation, or
change or revocation thereof, shall be effective unless received by the
Committee prior to the Participant's death, and in no event shall it be
effective as of a date prior to such receipt.
If no such beneficiary designation is in effect at the time of the
Participant's death, or if no designated beneficiary survives the Participant,
or if such designation conflicts with law, the Participant's estate shall be
deemed to have been designated his beneficiary and shall receive the Restricted
Stock, if any, distributable to the Participant upon the Participant's death. If
the Committee is in doubt as to the right of any person to receive such
distribution, the Committee may direct an appropriate officer of the Corporation
to retain the Restricted Stock, without liability for any interest in respect
thereof, until the rights thereto are determined, or the Committee may direct
the transfer of such Restricted Stock into any court of appropriate jurisdiction
and such transfer shall be deemed a complete discharge of the obligations of the
Corporation hereunder.
8. Effect of Award on Status of Participant. The fact that an Award has
been made to the Participant under this Plan shall not confer on the Participant
any right to continued employment with the Corporation; nor shall it limit the
right of the Corporation to terminate the Participant's employment at any time.
-4-
<PAGE>
9. Adjustment Upon Chances in Capitalization: Dissolution or Liquidation
(a) In the event of a change in the number or type of shares of Common
Stock outstanding (or in the event of an exchange of such shares) by reason of a
reclassification recapitalization, reorganization, merger, or consolidation, or
other similar capital adjustment, merger or consolidation of the Corporation, or
the sale by the Corporation of all or a substantial portion of its assets, or
the occurrence of any other event which could affect the implementation of the
Plan and the realization of its objectives, the Committee shall make such
adjustments in the terms, conditions, or restrictions of this Agreement as are
equitable and just.
(b) The making of the Award under this Agreement does not affect in any way
the right or power of the Corporation or its stockholders to make or authorize
any adjustment, recapitalization, reorganization, or other change in the
Corporation's capital structure or its business, or any merger or consolidation
of the Corporation, or to issue bonds, debentures, preferred or other preference
stock ahead of or affecting Common Stock or the rights thereof or the
dissolution or liquidation of the Corporation, or any sale or transfer of all or
any part of the Corporation's assets or business.
10. Nontransferability. The Restricted Stock may not be sold, exchanged,
transferred, pledged, hypothecated, or otherwise disposed of by the Participant
until transferred to the Participant by the Corporation in accordance with the
terms of this Agreement. Nothing herein shall preclude the Participant from
making a gift of any Restricted Stock to a spouse, child, stepchild, grandchild,
parent, sibling, or legal dependent of the Participant or to a trust of which
the beneficiary or beneficiaries of the trust shall be either a person
designated herein or the Participant, provided, however, that any Restricted
Stock so given shall remain subject to the restrictions, obligations and
conditions set forth in this Agreement. In addition, the Restricted Stock may be
tendered in response to a tender offer for or a request or invitation to tender
of greater than fifty percent (50%) of the common stock of the Corporation and
may be surrendered in a merger, consolidation or share exchange involving the
Corporation; provided, however, in each case, that except as otherwise provided
in Paragraph 6 above, the security or other consideration received in exchange
therefor shall thereafter be subject to the restrictions and conditions set
forth in this Agreement.
11. Taxes. All Restricted Stock distributed pursuant to this Agreement, and
any amounts distributed with respect thereto prior to distribution of such
Restricted Stock by the Corporation, shall be subject to applicable federal,
state and local withholding for taxes. The Participant expressly acknowledges
and agrees to such withholding without regard to whether the Restricted Stock
may then be sold or otherwise transferred by the Participant.
12. Notices. Any notices or other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been sufficiently given if delivered personally or when delivered to a
nationally recognized overnight courier service or deposited in the United
States mail as Certified Mail, return receipt requested, properly addressed and
postage prepaid, if to the Corporation at its principal office prior to December
1, 1996 at 230 North Equity Drive, Smithfield, North Carolina 27577 (from and
after December 1, 1996 at 11000 Regency Parkway, Third Floor East Tower, Cary,
North Carolina 27511; and, if to the Participant,
-5-
<PAGE>
at his last address appearing on the books of the Corporation. The Corporation
and the Participant may change their address or addresses by giving written
notice of such change as provided herein. Any notice or other communication
hereunder shall be deemed to have been given on the date actually delivered, as
of the first (1st) business day following delivery to a nationally recognized
overnight courier service or as of the third (3rd) business day following the
date mailed, as the case may be.
13. Construction Controlled by Plan. This Agreement shall be construed so
as to be consistent with the Plan; and except as specifically provided herein
the provisions of the Plan shall be deemed to be controlling in the event that
any provision hereof should appear to be inconsistent therewith. The Participant
hereby acknowledges receipt of a copy of the Plan from the Corporation.
14. Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such a manner as to be valid and enforceable under applicable
law, but if any provision of this Agreement is determined to be unenforceable,
invalid or illegal, the validity of any other provision or part thereof, shall
not be affected thereby and this Agreement shall continue to be binding on the
parties hereto as if such unenforceable, invalid or illegal provision or part
thereof had not been included herein.
15. Modification of Agreement; Waiver. This Agreement may be modified,
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto. No waiver hereunder shall constitute a waiver with respect to any
subsequent occurrence or other transaction hereunder or of any other provision
hereof .
16. Cautions and Headings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Agreement. As used herein,
the masculine gender shall include the feminine and neuter, the singular number
the plural, and vice versa, whenever such meanings are appropriate.
17. Governing Law: Venue and Jurisdiction. Without regard to the principles
of conflicts of laws, the laws of the state of North Carolina shall govern and
control the validity interpretation, performance, and enforcement of this
Agreement. The parties hereto agree that any suit or action relating to this
Agreement shall be Instituted and prosecuted in the courts of the County of
Johnston, State of North Carolina, and each party hereby does waive any right or
defense relating to such jurisdiction and venue.
18. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the Corporation, and its successors and assigns, and shall be
binding upon and inure to the benefit of the Participant, and his heirs,
legatees, personal representatives, executors and administrators.
-6-
<PAGE>
19. Entire Agreement. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto and, except as otherwise
provided hereunder, there are no other agreements or understandings, written or
oral in effect between the parties hereto relating to the matters addressed
herein.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed in its corporate name by a duly authorized officer, and attested by its
Secretary or any of its Assistant Secretaries, and its corporate seal to be
hereto affixed, all by authority of its Board of Directors first duly given; and
the individual parties hereto have hereunto set his hand and adopted as his seal
the typewritten word "SEAL" appearing beside his name, all done this the day and
year first above written.
FAC REALTY, INC.
By: ____________________________(SEAL)
C. Cammack Morton
President and COO
ATTEST:
___________________
___________________ Secretary
[Corporate Seal]
____________________________(SEAL)
Patrick M. Miniutti
-7-
<PAGE>
EXHIBIT A
Form of Legend
The shares represented by this certificate are subject to restrictions on
transfer and potential forfeiture under the terms of a Restricted Stock
Agreement dated April 4, 1996, a copy of which agreement may be obtained from
the issuer by writing to:
prior to December 1, 1996
FAC Realty, Inc.
230 North Equity Drive
Smithfield, NC 27577
Attention: Corporate Secretary
from and after December 1, 1996
FAC Realty, Inc.
11000 Regency Parkway
Third Floor East Tower
Cary, North Carolina 27511
Attention: Corporate Secretary
-8-
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, Patrick M. Miniutti hereby sells, assigns and transfers
in accordance with the terms of that Restricted Stock Agreement dated August 26,
1996 between himself and the Company (hereinafter defined)
unto___________________ (_____________) unvested Shares of the Common Stock of
FAC REALTY, INC. (the "Company") standing in his name on the books of the
Company represented by Certificate(s) No.____________ herewith, and does hereby
irrevocably constitute and appoint the Company as his attorney-in-fact to
transfer the said stock on the books of the Company with full power of
substitution in the same.
Dated ___________________________
IN THE PRESENCE OF:
____________________________________________
____________________________________________ (SEAL)
Patrick M. Miniutti
-9-
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (this "Agreement") is made and entered into
on this 9th day of June, 1997 (hereinafter referred to as the "Effective Date"),
by and between FAC REALTY, INC., a Delaware corporation (the "Corporation"), and
CHRISTOPHER G. GAVRELIS (the "Participant").
WHEREAS, prior to the Corporation's change of name to FAC Realty, Inc. the
Factory Stores of America, Inc. 1996 Restricted Stock Plan (the "Plan") was
adopted by the Executive Compensation Committee (the "Committee") of the Board
of Directors of the Corporation (the "Board") and the Board; and
WHEREAS, the Committee has determined that it is desirable and in the best
interest of the Corporation to make an award (the "Award") of certain shares of
common stock, par value $.01 per share of the Corporation ("Common Stock"),
under the Plan, to the Participant, subject to certain restrictions as specified
below; and
WHEREAS, in order to enforce the aforesaid restrictions, Participant is
required under the terms of the Award to immediately deposit the certificate(s)
for the shares of Common Stock subject to the Award, together with stock powers
appropriately endorsed in blank, with the Corporation in accordance with the
requirements of this Agreement.
NOW, THEREFORE, the Corporation and the Participant agree as follows:
1. Date of Award. The date of making the Award under this Agreement is the
1st day of March 1997 (the "Effective Date").
2. Receipt by Participant. The Participant acknowledges receipt from the
Corporation of 6,000 shares of Common Stock (the "Restricted Stock") and agrees
to the execution of stock powers or such other transfer authorizations as the
Corporation shall request, in blank, covering the Restricted Stock to be held by
the Corporation, prior to the distribution of certificates representing the
Restricted Stock to the Participant as hereinafter provided.
3. Investment Representation and Transfer Restrictions
(a) Investment Representation. Participant represents to the Corporation
that the Participant is taking the Restricted Stock for investment and without
any present intention to sell, transfer or otherwise dispose of the Restricted
Stock.
(b) Securities Law Restrictions. The Participant agrees with the
Corporation that the Restricted Stock shall
<PAGE>
be subject to such stop-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which Common Stock
is then listed and any other applicable federal or state securities laws, rules
or regulations, and the Committee may cause a legend or legends to be placed on
any certificate representing any of the shares of Restricted Stock to make
appropriate reference to such restrictions.
(c) Other Transfer Restrictions. The Participant agrees with the
Corporation that each certificate representing any of the shares of Restricted
Stock may bear a legend, substantially in the form attached as Exhibit A hereto,
to the effect that the shares of Restricted Stock represented thereby are
subject to potential forfeiture and may not be sold, exchanged, transferred,
pledged, hypothecated or otherwise disposed of except in accordance with the
terms of this Agreement, and shall be subject to such stop-transfer orders and
other restrictions as the Committee shall deem advisable to ensure compliance
with the terms of this Agreement.
(d) Registration. Prior to vesting pursuant to Paragraph 5 below, the
Corporation shall cause the Restricted Stock to be registered under the
Securities Act of 1933 and to be listed on the New York Stock Exchange.
4. Receipt by the Corporation. The Corporation acknowledges receipt from
the Participant of certificates representing the Restricted Stock, registered in
the name of the Participant, and acknowledges receipt of stock powers executed
in blank by the Participant covering all of the Restricted Stock. Certificates
representing the Restricted Stock shall be held by the Corporation and
distributed or transferred as directed by the Committee in accordance with this
Agreement.
5. Vesting and Delivery of Restricted Stock by the Corporation
(a) Vesting. Subject to subparagraph 5(b) below, the Restricted Stock shall
vest and become nonforfeitable on March 1, 2000.
(b) Accelerated Vesting. Notwithstanding subparagraph 5(a) above, all
Restricted Stock previously not vested and subject to forfeiture shall vest and
the right of the Participant to such shares of the Restricted Stock shall become
nonforfeitable upon the occurrence of any of the following:
(i) Retirement of Participant. The termination of the Participant's
membership on the Board or employment by the Corporation, as applicable, by
reason
2
<PAGE>
of retirement (as defined in the Plan).
(ii) Disability of Participant. The termination of the Participant's
membership on the Board or employment by the Corporation, as applicable, by
reason of disability (as defined in the Plan).
(iii) Death of Participant. The Participant's death during the
employment of the Participant by the Corporation.
(iv) Termination Without Cause. The termination of Participant's
employment by the Corporation "without cause" pursuant to Paragraph 2(c) or
Paragraph 5(a)(iii) of the Employment Agreement dated December 15, 1995 by
and between the Corporation and the Participant (the "Employment
Agreement") or, in the case of termination at any time following the
expiration of the Employment Agreement, termination for the reasons set
forth in Paragraph 2(c) or Paragraph 5(a)(iii) thereof.
(c) Delivery of Restricted Stock Certificates to the Participant. Within
thirty (30) days after a date on which shares of Restricted Stock have become
vested as provided in subparagraphs 5(a) or 5(b) above, the Committee shall
instruct the appropriate officer of the Corporation to deliver to the
Participant, the Participant's designee, or such other person as shall have been
designated as Participant's beneficiary in accordance with this Agreement, as
applicable, certificates representing the shares of Restricted Stock which have
become vested and nonforfeitable, free from any restrictions imposed by this
Agreement other than such restrictions and conditions as may be deemed necessary
by the Committee to assure compliance with all applicable securities laws,
rules, regulations and listing requirements as set forth in subparagraph 3(b)
above.
(d) Delivery of Forfeited Restricted Stock. If the Participant's employment
with the Corporation terminates for any reason other than one of those provided
in subparagraph 5(b) above, before all of the shares of Restricted Stock are
vested in accordance with subparagraphs 5(a) and 5(b) above, all such shares
then subject to forfeiture shall be deemed forfeited by the Participant and the
Committee shall instruct the appropriate officer of the Corporation concerning
the disposition of such forfeited shares. Thereafter such forfeited shares shall
cease to be subject to this Agreement.
6. Voting Rights: Dividends: Other Distributions. The Participant shall
have the full power to vote all of the Restricted Stock held by the Corporation
in the Participant's
3
<PAGE>
name from time to time and shall be entitled to receive all cash dividends
declared upon any of the Restricted Stock held by the Corporation in the
Participant's name from time to time. All shares of Common Stock or other
securities, including but not limited to stock dividends, issued in respect of
the Restricted Stock or in substitution thereof, whether by the Corporation or
by another issuer, shall be held by the Corporation and shall be subject to all
terms and conditions of this Agreement and shall be redelivered to the
Participant or delivered as instructed by the Committee under the same
circumstances as the Restricted Stock with respect to, or in substitution for,
which they were issued; provided, however, that if the Participant should
receive rights, warrants or fractional interests in respect of any of the
Restricted Stock held by the Corporation in the Participant's name, such rights
or warrants may be held, exercised, sold or otherwise disposed of, and such
fractional interests may be settled, by the Participant free and clear of the
restrictions herein set forth.
7. Designation of Beneficiary. The Participant may file with the Committee
a written designation of one or more persons as the beneficiary who shall be
entitled to receive the Restricted Stock, if any, distributable to the
Participant upon the Participant's death. The Participant may, from time to
time, revoke or change the Participant's beneficiary designation without the
consent of any prior beneficiary, if any, by filing a new designation with the
Committee. The last such designation received by the Committee shall be
controlling; provided, however, that no designation, or change or revocation
thereof, shall be effective unless received by the Committee prior to the
Participant's death, and in no event shall it be effective as of a date prior to
such receipt.
If no such beneficiary designation is in effect at the time of the
Participant's death, or if no designated beneficiary survives the Participant,
or if such designation conflicts with law, the Participant's estate shall be
deemed to have been designated the Participant's beneficiary and shall receive
the Restricted Stock, if any, distributable to the Participant upon the
Participant's death. If the Committee is in doubt as to the right of any person
to receive such distribution, the Committee may direct an appropriate officer of
the Corporation to retain the Restricted Stock, without liability for any
interest in respect thereof, until the rights thereto are determined, or the
Committee may direct the transfer of such Restricted Stock into any court of
appropriate jurisdiction and such transfer shall be deemed a complete discharge
of the obligations of the Corporation hereunder.
8. Effect of Award on Status of Participant. The fact that an Award has
been made to the Participant under this Plan shall not confer on the Participant
any right to continued employment with the Corporation; nor shall it limit the
right of
4
<PAGE>
the Corporation to terminate the Participant's employment at any time.
9. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation
(a) In the event of a change in the number or type of shares of Common
Stock outstanding (or in the event of an exchange of such shares) by reason of a
reclassification, recapitalization, reorganization, merger, or consolidation, or
other similar capital adjustment, merger or consolidation of the Corporation, or
the sale by the Corporation of all or a substantial portion of its assets, or
the occurrence of any other event which could affect the implementation of the
Plan and the realization of its objectives, the Committee shall make such
adjustments in the terms, conditions, or restrictions of this Agreement as are
equitable and just.
(b) The making of the Award under this Agreement does not affect in any way
the right or power of the Corporation or its stockholders to make or authorize
any adjustment, recapitalization, reorganization, or other change in the
Corporation's capital structure or its business, or any merger or consolidation
of the Corporation, or to issue bonds, debentures, preferred or other preference
stock ahead of or affecting Common Stock or the rights thereof, or the
dissolution or liquidation of the Corporation, or any sale or transfer of all or
any part of the Corporation's assets or business.
10. Nontransferability. The Restricted Stock may not be sold, exchanged,
transferred, pledged, hypothecated, or otherwise disposed of by the Participant
until transferred to the Participant by the Corporation in accordance with the
terms of this Agreement. Nothing herein shall preclude the Participant from
making a gift of any Restricted Stock to a spouse, child, stepchild, grandchild,
parent, sibling, or legal dependent of the Participant, or to a trust of which
the beneficiary or beneficiaries of the trust shall be either a person
designated herein or the Participant, provided, however, that any Restricted
Stock so given shall remain subject to the restrictions, obligations and
conditions set forth in this Agreement. In addition, the Restricted Stock may be
tendered in response to a tender offer for or a request or invitation to tender
of greater than fifty percent (50%) of the common stock of the Corporation and
may be surrendered in a merger, consolidation or share exchange involving the
Corporation; provided, however, in each case, that except as otherwise provided
in Paragraph 6 above, the security or other consideration received in exchange
therefor shall thereafter be subject to the restrictions and conditions set
forth in this Agreement.
11. Taxes. All Restricted Stock distributed pursuant to
5
<PAGE>
this Agreement, and any amounts distributed with respect thereto prior to
distribution of such Restricted Stock by the Corporation, shall be subject to
applicable federal, state and local withholding for taxes. The Participant
expressly acknowledges and agrees to such withholding without regard to whether
the Restricted Stock may then be sold or otherwise transferred by the
Participant.
12. Notices. Any notices or other communications required or permitted to
be given under this Agreement shall be in writing and shall be deemed to have
been sufficiently given if delivered personally or when delivered to a
nationally recognized overnight courier service or deposited in the United
States mail as Certified Mail, return receipt requested, properly addressed and
postage prepaid, if to the Corporation at its principal office at 11000 Regency
Parkway, Third Floor East Tower, Cary, North Carolina 27511; and, if to the
Participant, at the Participant's last address appearing on the books of the
Corporation. The Corporation and the Participant may change their address or
addresses by giving written notice of such change as provided herein. Any notice
or other communication hereunder shall be deemed to have been given on the date
actually delivered, as of the first (1st) business day following delivery to a
nationally recognized overnight courier service, or as of the third (3rd)
business day following the date mailed, as the case may be.
13. Construction Controlled by Plan. This Agreement shall be construed so
as to be consistent with the Plan; and except as specifically provided herein
the provisions of the Plan shall be deemed to be controlling in the event that
any provision hereof should appear to be inconsistent therewith. The Participant
hereby acknowledges receipt of a copy of the Plan from the Corporation.
14. Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such a manner as to be valid and enforceable under applicable
law, but if any provision of this Agreement is determined to be unenforceable,
invalid or illegal, the validity of any other provision or part thereof, shall
not be affected thereby and this Agreement shall continue to be binding on the
parties hereto as if such unenforceable, invalid or illegal provision or part
thereof had not been included herein.
15. Modification of Agreement; Waiver. This Agreement may be modified,
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto. No waiver hereunder shall constitute a waiver with respect to any
subsequent occurrence or other transaction hereunder or of any other provision
hereof.
6
<PAGE>
16. Captions and Headings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Agreement. As used herein,
the masculine gender shall include the feminine and neuter, the singular number
the plural, and vice versa, whenever such meanings are appropriate.
17. Governing Law: Venue and Jurisdiction. Without regard to the principles
of conflicts of laws, the laws of the State of North Carolina shall govern and
control the validity, interpretation, performance, and enforcement of this
Agreement. The parties hereto agree that any suit or action relating to this
Agreement shall be instituted and prosecuted in the courts of the County of
Wake, State of North Carolina, and each party hereby does waive any right or
defense relating to such jurisdiction and venue.
18. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the Corporation, and its successors and assigns, and shall be
binding upon and inure to the benefit of the Participant, and his heirs,
legatees, personal representatives, executors and administrators.
7
<PAGE>
19. Entire Agreement. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto and, except as otherwise
provided hereunder, there are no other agreements or understandings, written or
oral, in effect between the parties hereto relating to the matters addressed
herein.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed in its corporate name by a duly authorized officer, and attested by its
Secretary or any of its Assistant Secretaries, and its corporate seal to be
hereto affixed, all by authority of its Board of Directors first duly given; and
the individual party hereto has hereunto set such party's hand and adopted as
such party's seal the typewritten word "SEAL" appearing beside such party's
name, all done this the day and year first above written.
FAC REALTY, INC.
By: ______________________________
C. Cammack Morton
President and Chief Executive
Officer
ATTEST:
__________________________
__________________________ Secretary
[Corporate Seal]
__________________________
________________________________
(SEAL)
__________________________
Christopher G. Gavrelis
8
<PAGE>
EXHIBIT A
Form of Legend
The shares represented by this certificate are subject to restrictions on
transfer and potential forfeiture under the terms of a Restricted Stock
Agreement dated on June 9, 1997, a copy of which agreement may be obtained from
the issuer by writing to:
FAC REALTY, INC.
11000 Regency Parkway
Third Floor, East Tower
Cary, North Carolina 27511
Attention: Corporate Secretary
9
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, CHRISTOPHER G. GAVRELIS hereby sells, assigns and
transfers unto ______________________________________ Six Thousand (6,000)
Shares of the Common Stock of FAC REALTY, INC. (the "Company") standing in its
name on the books of the Company represented by Certificate(s) No.
____________________ herewith, and does hereby irrevocably constitute and
appoint attorney to transfer the said stock on the books of the Company with
full power of substitution in the premises.
Dated __________________
IN THE PRESENCE OF:
____________________________________
____________________________________ (SEAL)
CHRISTOPHER G. GAVRELIS
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is executed this ________ day of July 1997, by and between
FAC REALTY, INC. (formerly known as Factory Stores of America, Inc.), a Delaware
corporation (the "Company"), and C. CAMMACK MORTON, an individual (the
"Holder"), pursuant to and under authority of the Factory Stores of America,
Inc., 1993 Amended and Restated Employee Stock Incentive Plan (the "Plan").
W I T N E S S E T H:
WHEREAS, Factory Stores of America, Inc., and the Holder entered into that
certain Incentive Stock Option Agreement dated as of February 14, 1996 (the
"Prior Agreement"); and
WHEREAS, pursuant to the Plan, the Administrator may grant new stock
options to an optionee, on terms and conditions determined by the Administrator,
upon the voluntary surrender of Stock Options previously granted to such
optionee; and
WHEREAS, as part of the Holder's future compensation arrangements, the
Administrator has determined it is in the best interests of the Company to
accept the voluntary surrender of existing Stock Options granted to the Holder
under the Prior Agreement, and to replace such options as provided more fully
herein; and
WHEREAS the Company and the Holder desire to terminate the Prior Agreement,
and the Holder desires to surrender, and the Company desires to accept such
surrender, all shares and options and all rights granted under the Prior
Agreement; and
WHEREAS, the Company desires to provide the Holder with an option to
purchase Eighty-Eight Thousand Eight Hundred Eighty-Five (88,885) shares of
Common Stock, $0.01 par value, of the Company ("Shares"); and
WHEREAS, the Holder desires to accept such option;
NOW, THEREFORE, in consideration of the mutual covenants herein set forth,
the parties hereto hereby agree as follows:
1. Grant of Option. The Company does hereby grant to the Holder, and the
Holder does hereby accept, the right and option (the "Option") to purchase, at
the option of the Holder, 88,885 Shares at the option price of $5.625 per Share
and upon and subject to the other terms and conditions hereof. Notwithstanding
the foregoing, if at any time or from time to time the number of 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 (whether as a result of a stock split, stock dividend, combination
or exchange of shares, exchange for other securities, reclassification,
reorganization, redesignation, merger, consolidation, recapitalization or
otherwise), then (i) there shall automatically be substituted, for each Share
for which the Option has not been exercised, the number and kind of shares of
stock or other securities into
<PAGE>
which each outstanding share shall be changed or for which each such share shall
be exchanged, and (ii) the option price per Share shall be increased or
decreased proportionately so that the aggregate exercise price for the Shares
subject to the Option shall remain the same as immediately prior to such event.
In addition to the foregoing, the Company shall be entitled in the event of any
such increase, decrease or exchange of Shares to make adjustments to this
Agreement (including adjustments which may provide for the elimination of
fractional shares) which do not have a material adverse effect upon the Holder,
where necessary to preserve the terms and conditions hereof.
2. Term of the Option. Subject to the other terms and conditions hereof,
the Option shall vest with respect to Seventeen Thousand Seven Hundred
Seventy-Seven (17,777) Shares on April 1, 1997 (the "Effective Date") and shall
vest with respect to Seventeen Thousand Seven Hundred Seventy-Seven (17,777)
Shares per year on the first through fourth anniversaries of the Effective Date,
and is exercisable, in whole or in part, only with respect to those Shares for
which the Option has become vested. Shares for which the Option has become
exercisable shall be referred to herein as "Vested Shares," and Shares for which
the Option has not become exercisable shall be referred to herein as "Unvested
Shares." The Option shall terminate on April 1, 2007, and must be exercised, if
at all, before such date and shall not thereafter be exercisable,
notwithstanding anything herein to the contrary. The "Effective Date" for the
purpose of this Paragraph 2 shall be the date first above written.
3. 1993 Amended and Restated Employee Stock Incentive Plan. This Option is
in all respects subject to the terms and conditions of the Plan, which is
incorporated by reference herein.
4. Exercise. (i) Subject to the other terms and conditions hereof, and
provided payment is made as provided below, the Option shall be exercisable from
time to time by written notice to the Company (in the form required by the
Company) which shall:
(a) state that the Option is thereby being exercised, the number of
Shares with respect to which the Option is being exercised, each person in
whose name any certificates for the Shares should be registered and such
person's address and social security number;
(b) be signed by the person or persons entitled to exercise the Option
and, if the Option is being exercised by anyone other than the Holder, be
accompanied by proof satisfactory to counsel for the Company of the right
of such person or persons to exercise the Option under all applicable laws
and regulations; and
(c) be accompanied by such representations, warranties or agreements
with respect to the investment intent of such person or persons exercising
the Option and the compliance with any applicable law or regulation or to
confirm any factual matters as the Company or its counsel may reasonably
request, in form and substance satisfactory to counsel for the Company.
(ii) Payment of the Option price may be made, in the discretion
of the
-2-
<PAGE>
person exercising the Option, in one of the following manners, or in
any other manner approved by the Administrator (as "Administrator" is
defined in the Plan), in its sole discretion:
(a) the written notice to the Company described above may be
accompanied by full payment of the option price in cash or by check, or,
with the consent of the Company, in whole or in part with a surrender of
previously acquired Shares of the Company having a Fair Market Value (as
defined below) on the date of exercise equal to that portion of the
purchase price for which payment in cash or check is not made. The later of
the dates on which such notice and payment are received by the Company
shall be the date of exercise of the Option; and
(b) within five days of the giving of the written notice to the
Company described above, the funds to pay for exercise of the Option may be
delivered to the Company a broker acting on behalf of the person exercising
the Option either in connection with the sale of the Shares underlying the
Option or in connection with the making of a margin loan to such person to
enable payment of the exercise price of the Option. The later of the dates
on which such notice and payment are received by the Company shall be the
date of exercise of the Option. In connection with any such exercise, the
Company will provide a copy of the notice of exercise of the Option to the
aforesaid broker upon receipt by the Company of such notice and will
deliver to such broker, within five business days of the delivery of such
notice to the Company, a certificate or certificates (as requested by the
broker) representing the number of Shares underlying the Option that have
been sold by such broker for the person exercising the Option.
(iii) For purposes hereof, the "Fair Market Value" of a Share as
of a given date shall be (in order of applicability): (a) the closing
price of a Share on the principal exchange on which the Shares are
then trading, if any, on the day immediately prior to such date, or if
Shares were not traded on the day previous to such date, then on the
next preceding trading day during which a sale occurred; or (b) if
Shares are not traded on an exchange but are quoted on NASDAQ or a
successor quotation system, (1) the last sale price (if Shares are
then listed as a National Market Issue under the NASD national Market
System), or (2) if Shares are not then so listed, the mean between the
closing representative bid and asked prices for Shares on the day
previous to such date as reported by NASDAQ or such successor
quotation system; or (c) if Shares are not publicly traded on an
exchange and not quoted on NASDAQ or a successor quotation system, the
mean between the closing bid and asked prices for Shares, on the day
previous to such date, as determined in good faith by the
Administrator; and (d) if Shares are not publicly traded, the fair
market value established by the Administrator acting in good faith.
(iv) Upon exercise of the Option and the satisfaction of all
conditions thereto, the Company shall deliver a certificate or
certificates for Shares to the specified person or persons at the
specified time upon receipt of payment for such Shares as set forth
above.
5. Termination of Employment. If the Holder's employment with the Company
ends on account of his death or permanent and total disability, the Option shall
automatically become vested with respect to all Shares, and the Option must be
exercised, if at all, within the one-year period ending on the anniversary of
such death or permanent and total disability. In the
-3-
<PAGE>
case of death, the Option shall be exercised by the Holder's estate or the
person designated by the Holder by will, or as otherwise designated by the laws
of descent and distribution. If the Holder's employment with the Company ends
due to termination of his employment by the Company "without cause" (as defined
in Section 8 of the Plan), the Option may and must be exercised, if at all, with
respect to any or all of the Vested Shares, within one year of the date of such
termination. In all other instances that the Holder ceases to be an employee of
the Company, the Holder shall have no right after his employment ends to
exercise all or any part of this Option with respect to either Vested or
Unvested Shares. For purposes hereof, "permanent and total disability" is
defined in Section 8 of the Plan.
6. Transferability. The Option and the Holder's rights therein are not
transferable by the Holder, except upon the death of the Holder as provided in
Paragraph 5. The Option is exercisable (subject to any other applicable
restrictions on exercise) only by the Holder, except when a guardian or other
legal representative has been duly appointed for the Holder and except in the
event of the Holder's death as provided in Paragraph 5.
7. Taxes. The Holder hereby agrees to pay to the Company any federal, state
or local taxes of any kind that may be required by law to be withheld and
remitted by the Company with respect to the Option and the exercise thereof. If
the Holder does not make such payment to the company, the Company, to the extent
required or permitted by law, shall have the right to withhold from any payment
of any kind otherwise due to the Holder from the Company, any federal, state or
local taxes of any kind required by law to be withheld with respect to the
Option or the Shares which are the subject of the Option. The Administrator, in
its sole discretion, may permit the Holder to pay such taxes through the
withholding of Shares otherwise deliverable to the Holder upon exercise of the
Option or the delivery to the Company of Common Shares otherwise acquired by the
Holder. The fair market value of Common Shares withheld by the Company or
tendered to the Company for the satisfaction of any tax withholding obligations
determined to exist under this Paragraph 8 shall be determined on the date such
Common Shares are withheld or tendered.
8. Intent. This Option is an incentive stock option as defined in Section
422 of the Code.
9. Securities Law Compliance. Notwithstanding any provision of this
Agreement to the contrary, the Option shall not be exercisable unless, at the
time the Holder attempts to exercise the Option, in the opinion of counsel for
the Company, all applicable securities laws, rules and regulations have been
complied with. The Holder agrees that the Administrator may impose such
restrictions on the Shares as are deemed advisable by the Administrator,
including, without limitation, restrictions relating to listing or trading
requirements. The Holder further agrees that certificates representing the
Shares may bear such legends and statements as the Administrator shall deem
appropriate or advisable to assure, among other things, compliance with
applicable securities laws, rules and regulations.
10. Rights of the Holder. The Holder shall have no dividend, voting or
other rights of a stockholder with respect to the Shares which are subject to
the Option prior to the purchase of such Shares upon exercise of the Option and
the execution and delivery of all other documents
-4-
<PAGE>
and instruments deemed necessary or desirable by the Company.
11. Surrender of Outstanding Stock Options; Termination of Prior Agreement.
The Holder hereby voluntarily surrenders all outstanding stock options, whether
vested or unvested, granted under the Prior Agreement, and the Company accepts
such surrender. The Prior Agreement is hereby terminated and of no further force
and effect. All shares and options and all rights granted under the Prior
Agreement are hereby terminated and canceled.
12. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, except to the extent
otherwise governed by Federal law. All capitalized terms not defined herein
shall have the meaning ascribed to them in the Plan.
IN WITNESS WHEREOF, the parties have subscribed their names hereto as of
the date first above written.
FAC REALTY, INC., a Delaware corporation
By: ___________________________________
C. Cammack Morton
-5-
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is executed this __________ day of July 1997, by and between
FAC REALTY, INC. (formerly known as Factory Stores of America, Inc.), a Delaware
corporation (the "Company"), and PATRICK M. MINIUTTI, an individual (the
"Holder"), pursuant to and under authority of the Factory Stores of America,
Inc., 1993 Amended and Restated Employee Stock Incentive Plan (the "Plan").
W I T N E S S E T H:
WHEREAS, Factory Stores of America, Inc., and the Holder entered into that
certain Incentive Stock Option Agreement dated as of August 26, 1996 (the "Prior
Agreement"); and
WHEREAS, pursuant to the Plan, the Administrator may grant new stock
options to an optionee, on terms and conditions determined by the Administrator,
upon the voluntary surrender of Stock Options previously granted to such
optionee; and
WHEREAS, as part of the Holder's future compensation arrangements, the
Administrator has determined it is in the best interests of the Company to
accept the voluntary surrender of existing Stock Options granted to the Holder
under the Prior Agreement, and to replace such options as provided more fully
herein; and
WHEREAS the Company and the Holder desire to terminate the Prior Agreement,
and the Holder desires to surrender, and the Company desires to accept such
surrender, all shares and options and all rights granted under the Prior
Agreement; and
WHEREAS, the Company desires to provide the Holder with an option to
purchase Eighty-Eight Thousand Eight Hundred Eighty-Five (88,885) shares of
Common Stock, $0.01 par value, of the Company ("Shares"); and
WHEREAS, the Holder desires to accept such option;
NOW, THEREFORE, in consideration of the mutual covenants herein set forth,
the parties hereto hereby agree as follows:
1. Grant of Option. The Company does hereby grant to the Holder, and the
Holder does hereby accept, the right and option (the "Option") to purchase, at
the option of the Holder, 88,885 Shares at the option price of $5.625 per Share
and upon and subject to the other terms and conditions hereof. Notwithstanding
the foregoing, if at any time or from time to time the number of 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 (whether as a result of a stock split, stock dividend, combination
or exchange of shares, exchange for other securities, reclassification,
reorganization, redesignation, merger, consolidation, recapitalization or
otherwise), then (i) there shall automatically be substituted, for each Share
for which the Option has not been exercised, the number and kind of shares of
stock or other securities into
<PAGE>
which each outstanding share shall be changed or for which each such share shall
be exchanged, and (ii) the option price per Share shall be increased or
decreased proportionately so that the aggregate exercise price for the Shares
subject to the Option shall remain the same as immediately prior to such event.
In addition to the foregoing, the Company shall be entitled in the event of any
such increase, decrease or exchange of Shares to make adjustments to this
Agreement (including adjustments which may provide for the elimination of
fractional shares) which do not have a material adverse effect upon the Holder,
where necessary to preserve the terms and conditions hereof.
2. Term of the Option. Subject to the other terms and conditions hereof,
the Option shall vest with respect to Seventeen Thousand Seven Hundred
Seventy-Seven (17,777) Shares on April 1, 1997 (the "Effective Date") and shall
vest with respect to Seventeen Thousand Seven Hundred Seventy-Seven (17,777)
Shares per year on the first through fourth anniversaries of the Effective Date,
and is exercisable, in whole or in part, only with respect to those Shares for
which the Option has become vested. Shares for which the Option has become
exercisable shall be referred to herein as "Vested Shares," and Shares for which
the Option has not become exercisable shall be referred to herein as "Unvested
Shares." The Option shall terminate on April 1, 2007, and must be exercised, if
at all, before such date and shall not thereafter be exercisable,
notwithstanding anything herein to the contrary. The "Effective Date" for the
purpose of this Paragraph 2 shall be the date first above written.
3. 1993 Amended and Restated Employee Stock Incentive Plan. This Option is
in all respects subject to the terms and conditions of the Plan, which is
incorporated by reference herein.
4. Exercise. (i) Subject to the other terms and conditions hereof, and
provided payment is made as provided below, the Option shall be exercisable from
time to time by written notice to the Company (in the form required by the
Company) which shall:
(a) state that the Option is thereby being exercised, the number of
Shares with respect to which the Option is being exercised, each person in
whose name any certificates for the Shares should be registered and such
person's address and social security number;
(b) be signed by the person or persons entitled to exercise the Option
and, if the Option is being exercised by anyone other than the Holder, be
accompanied by proof satisfactory to counsel for the Company of the right
of such person or persons to exercise the Option under all applicable laws
and regulations; and
(c) be accompanied by such representations, warranties or agreements
with respect to the investment intent of such person or persons exercising
the Option and the compliance with any applicable law or regulation or to
confirm any factual matters as the Company or its counsel may reasonably
request, in form and substance satisfactory to counsel for the Company.
(ii) Payment of the Option price may be made, in the discretion
of the
-2-
<PAGE>
person exercising the Option, in one of the following manners, or in
any other manner approved by the Administrator (as "Administrator" is
defined in the Plan), in its sole discretion:
(a) the written notice to the Company described above may be
accompanied by full payment of the option price in cash or by check, or,
with the consent of the Company, in whole or in part with a surrender of
previously acquired Shares of the Company having a Fair Market Value (as
defined below) on the date of exercise equal to that portion of the
purchase price for which payment in cash or check is not made. The later of
the dates on which such notice and payment are received by the Company
shall be the date of exercise of the Option; and
(b) within five days of the giving of the written notice to the
Company described above, the funds to pay for exercise of the Option may be
delivered to the Company a broker acting on behalf of the person exercising
the Option either in connection with the sale of the Shares underlying the
Option or in connection with the making of a margin loan to such person to
enable payment of the exercise price of the Option. The later of the dates
on which such notice and payment are received by the Company shall be the
date of exercise of the Option. In connection with any such exercise, the
Company will provide a copy of the notice of exercise of the Option to the
aforesaid broker upon receipt by the Company of such notice and will
deliver to such broker, within five business days of the delivery of such
notice to the Company, a certificate or certificates (as requested by the
broker) representing the number of Shares underlying the Option that have
been sold by such broker for the person exercising the Option.
(iii) For purposes hereof, the "Fair Market Value" of a Share as
of a given date shall be (in order of applicability): (a) the closing
price of a Share on the principal exchange on which the Shares are
then trading, if any, on the day immediately prior to such date, or if
Shares were not traded on the day previous to such date, then on the
next preceding trading day during which a sale occurred; or (b) if
Shares are not traded on an exchange but are quoted on NASDAQ or a
successor quotation system, (1) the last sale price (if Shares are
then listed as a National Market Issue under the NASD national Market
System), or (2) if Shares are not then so listed, the mean between the
closing representative bid and asked prices for Shares on the day
previous to such date as reported by NASDAQ or such successor
quotation system; or (c) if Shares are not publicly traded on an
exchange and not quoted on NASDAQ or a successor quotation system, the
mean between the closing bid and asked prices for Shares, on the day
previous to such date, as determined in good faith by the
Administrator; and (d) if Shares are not publicly traded, the fair
market value established by the Administrator acting in good faith.
(iv) Upon exercise of the Option and the satisfaction of all
conditions thereto, the Company shall deliver a certificate or
certificates for Shares to the specified person or persons at the
specified time upon receipt of payment for such Shares as set forth
above.
5. Termination of Employment. If the Holder's employment with the Company
ends on account of his death or permanent and total disability, the Option shall
automatically become vested with respect to all Shares, and the Option must be
exercised, if at all, within the one-year period ending on the anniversary of
such death or permanent and total disability. In the
-3-
<PAGE>
case of death, the Option shall be exercised by the Holder's estate or the
person designated by the Holder by will, or as otherwise designated by the laws
of descent and distribution. If the Holder's employment with the Company ends
due to termination of his employment by the Company "without cause" (as defined
in Section 8 of the Plan), the Option may and must be exercised, if at all, with
respect to any or all of the Vested Shares, within one year of the date of such
termination. In all other instances that the Holder ceases to be an employee of
the Company, the Holder shall have no right after his employment ends to
exercise all or any part of this Option with respect to either Vested or
Unvested Shares. For purposes hereof, "permanent and total disability" is
defined in Section 8 of the Plan.
6. Transferability. The Option and the Holder's rights therein are not
transferable by the Holder, except upon the death of the Holder as provided in
Paragraph 5. The Option is exercisable (subject to any other applicable
restrictions on exercise) only by the Holder, except when a guardian or other
legal representative has been duly appointed for the Holder and except in the
event of the Holder's death as provided in Paragraph 5.
7. Taxes. The Holder hereby agrees to pay to the Company any federal, state
or local taxes of any kind that may be required by law to be withheld and
remitted by the Company with respect to the Option and the exercise thereof. If
the Holder does not make such payment to the company, the Company, to the extent
required or permitted by law, shall have the right to withhold from any payment
of any kind otherwise due to the Holder from the Company, any federal, state or
local taxes of any kind required by law to be withheld with respect to the
Option or the Shares which are the subject of the Option. The Administrator, in
its sole discretion, may permit the Holder to pay such taxes through the
withholding of Shares otherwise deliverable to the Holder upon exercise of the
Option or the delivery to the Company of Common Shares otherwise acquired by the
Holder. The fair market value of Common Shares withheld by the Company or
tendered to the Company for the satisfaction of any tax withholding obligations
determined to exist under this Paragraph 8 shall be determined on the date such
Common Shares are withheld or tendered.
8. Intent. This Option is an incentive stock option as defined in Section
422 of the Code.
9. Securities Law Compliance. Notwithstanding any provision of this
Agreement to the contrary, the Option shall not be exercisable unless, at the
time the Holder attempts to exercise the Option, in the opinion of counsel for
the Company, all applicable securities laws, rules and regulations have been
complied with. The Holder agrees that the Administrator may impose such
restrictions on the Shares as are deemed advisable by the Administrator,
including, without limitation, restrictions relating to listing or trading
requirements. The Holder further agrees that certificates representing the
Shares may bear such legends and statements as the Administrator shall deem
appropriate or advisable to assure, among other things, compliance with
applicable securities laws, rules and regulations.
10. Rights of the Holder. The Holder shall have no dividend, voting or
other rights of a stockholder with respect to the Shares which are subject to
the Option prior to the purchase of such Shares upon exercise of the Option and
the execution and delivery of all other documents
-4-
<PAGE>
and instruments deemed necessary or desirable by the Company.
11. Surrender of Outstanding Stock Options; Termination of Prior Agreement.
The Holder hereby voluntarily surrenders all outstanding stock options, whether
vested or unvested, granted under the Prior Agreement, and the Company accepts
such surrender. The Prior Agreement is hereby terminated and of no further force
and effect. All shares and options and all rights granted under the Prior
Agreement are hereby terminated and canceled.
12. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, except to the extent
otherwise governed by Federal law. All capitalized terms not defined herein
shall have the meaning ascribed to them in the Plan.
IN WITNESS WHEREOF, the parties have subscribed their names hereto as of
the date first above written.
FAC REALTY, INC., a Delaware corporation
By: ____________________________________
________________________________________
Patrick M. Miniutti
-5-
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is executed this ___________ day of July 1997, by and
between FAC REALTY, INC. (formerly known as Factory Stores of America, Inc.), a
Delaware corporation (the "Company"), and PATRICK M. MINIUTTI an individual (the
"Holder"), pursuant to and under authority of the Factory Stores of America,
Inc., 1993 Amended and Restated Employee Stock Incentive Plan (the "Plan").
W I T N E S S E T H:
WHEREAS, Factory Stores of America, Inc., and the Holder entered into that
certain Incentive Stock Option Agreement dated as of August 26, 1996 (the "Prior
Agreement"); and
WHEREAS, pursuant to the Plan, the Administrator may grant new stock
options to an optionee, on terms and conditions determined by the Administrator,
upon the voluntary surrender of Stock Options previously granted to such
optionee; and
WHEREAS, as part of the Holder's future compensation arrangements, the
Administrator has determined it is in the best interests of the Company to
accept the voluntary surrender of existing Stock Options granted to the Holder
under the Prior Agreement, and to replace such options as provided more fully
herein; and
WHEREAS the Company and the Holder desire to terminate the Prior Agreement,
and the Holder desires to surrender, and the Company desires to accept such
surrender, all shares and options and all rights granted under the Prior
Agreement; and
WHEREAS, the Company desires to provide the Holder with an option to
purchase One Hundred Eleven Thousand One Hundred Fifteen (111,115) shares of
Common Stock, $0.01 par value, of the Company ("Shares"); and
WHEREAS, the Holder desires to accept such option;
NOW, THEREFORE, in consideration of the mutual covenants herein set forth,
the parties hereto hereby agree as follows:
1. Grant of Option. The Company does hereby grant to the Holder, and the
Holder does hereby accept, the right and option (the "Option") to purchase, at
the option of the Holder, 111,115 Shares at the option price of $5.625 per Share
and upon and subject to the other terms and conditions hereof. Notwithstanding
the foregoing, if at any time or from time to time the number of 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 (whether as a result of a stock split, stock dividend, combination
or exchange of shares, exchange for other securities, reclassification,
reorganization, redesignation, merger, consolidation, recapitalization or
otherwise), then (i) there shall automatically be substituted, for each Share
for which the Option has not been exercised, the number and kind of shares of
stock or other
<PAGE>
securities into which each outstanding share shall be changed or for which each
such share shall be exchanged, and (ii) the option price per Share shall be
increased or decreased proportionately so that the aggregate exercise price for
the Shares subject to the Option shall remain the same as immediately prior to
such event. In addition to the foregoing, the Company shall be entitled in the
event of any such increase, decrease or exchange of Shares to make adjustments
to this Agreement (including adjustments which may provide for the elimination
of fractional shares) which do not have a material adverse effect upon the
Holder, where necessary to preserve the terms and conditions hereof.
2. Term of the Option. Subject to the other terms and conditions hereof,
the Option shall vest with respect to Twenty-Two Thousand Two Hundred
Twenty-Three (22,223) Shares on April 1, 1997 (the "Effective Date") and shall
vest with respect to Twenty-Two Thousand Two Hundred Twenty-Three (22,223)
Shares per year on the first through fourth anniversaries of the Effective Date,
and is exercisable, in whole or in part, only with respect to those Shares for
which the Option has become vested. Shares for which the Option has become
exercisable shall be referred to herein as "Vested Shares," and Shares for which
the Option has not become exercisable shall be referred to herein as "Unvested
Shares." The Option shall terminate on April 1, 2007, and must be exercised, if
at all, before such date and shall not thereafter be exercisable,
notwithstanding anything herein to the contrary. The "Effective Date" for the
purpose of this Paragraph 2 shall be the date first above written.
3. 1993 Amended and Restated Employee Stock Incentive Plan. This Option is
in all respects subject to the terms and conditions of the Plan, which is
incorporated by reference herein.
4. Exercise. (i) Subject to the other terms and conditions hereof, and
provided payment is made as provided below, the Option shall be exercisable from
time to time by written notice to the Company (in the form required by the
Company) which shall:
(a) state that the Option is thereby being exercised, the number of
Shares with respect to which the Option is being exercised, each person in
whose name any certificates for the Shares should be registered and such
person's address and social security number;
(b) be signed by the person or persons entitled to exercise the Option
and, if the Option is being exercised by anyone other than the Holder, be
accompanied by proof satisfactory to counsel for the Company of the right
of such person or persons to exercise the Option under all applicable laws
and regulations; and
(c) be accompanied by such representations, warranties or agreements
with respect to the investment intent of such person or persons exercising
the Option and the compliance with any applicable law or regulation or to
confirm any factual matters as the Company or its counsel may reasonably
request, in form and substance satisfactory to counsel for the Company.
(ii) Payment of the Option price may be made, in the discretion
of the
-2-
<PAGE>
person exercising the Option, in one of the following manners, or in
any other manner approved by the Administrator (as "Administrator" is
defined in the Plan), in its sole discretion:
(a) the written notice to the Company described above may be
accompanied by full payment of the option price in cash or by check, or,
with the consent of the Company, in whole or in part with a surrender of
previously acquired Shares of the Company having a Fair Market Value (as
defined below) on the date of exercise equal to that portion of the
purchase price for which payment in cash or check is not made. The later of
the dates on which such notice and payment are received by the Company
shall be the date of exercise of the Option; and
(b) within five days of the giving of the written notice to the
Company described above, the funds to pay for exercise of the Option may be
delivered to the Company a broker acting on behalf of the person exercising
the Option either in connection with the sale of the Shares underlying the
Option or in connection with the making of a margin loan to such person to
enable payment of the exercise price of the Option. The later of the dates
on which such notice and payment are received by the Company shall be the
date of exercise of the Option. In connection with any such exercise, the
Company will provide a copy of the notice of exercise of the Option to the
aforesaid broker upon receipt by the Company of such notice and will
deliver to such broker, within five business days of the delivery of such
notice to the Company, a certificate or certificates (as requested by the
broker) representing the number of Shares underlying the Option that have
been sold by such broker for the person exercising the Option.
(iii) For purposes hereof, the "Fair Market Value" of a Share as
of a given date shall be (in order of applicability): (a) the closing
price of a Share on the principal exchange on which the Shares are
then trading, if any, on the day immediately prior to such date, or if
Shares were not traded on the day previous to such date, then on the
next preceding trading day during which a sale occurred; or (b) if
Shares are not traded on an exchange but are quoted on NASDAQ or a
successor quotation system, (1) the last sale price (if Shares are
then listed as a National Market Issue under the NASD national Market
System), or (2) if Shares are not then so listed, the mean between the
closing representative bid and asked prices for Shares on the day
previous to such date as reported by NASDAQ or such successor
quotation system; or (c) if Shares are not publicly traded on an
exchange and not quoted on NASDAQ or a successor quotation system, the
mean between the closing bid and asked prices for Shares, on the day
previous to such date, as determined in good faith by the
Administrator; and (d) if Shares are not publicly traded, the fair
market value established by the Administrator acting in good faith.
(iv) Upon exercise of the Option and the satisfaction of all
conditions thereto, the Company shall deliver a certificate or
certificates for Shares to the specified person or persons at the
specified time upon receipt of payment for such Shares as set forth
above.
5. Termination of Employment. If the Holder's employment with the Company
ends on account of his death or permanent and total disability, the Option shall
automatically become vested with respect to all Shares, and the Option must be
exercised, if at all, within the one-year period ending on the anniversary of
such death or permanent and total disability. In the
-3-
<PAGE>
case of death, the Option shall be exercised by the Holder's estate or the
person designated by the Holder by will, or as otherwise designated by the laws
of descent and distribution. If the Holder's employment with the Company ends
due to termination of his employment by the Company "without cause" (as defined
in Section 8 of the Plan), the Option may and must be exercised, if at all, with
respect to any or all of the Vested Shares, within one year of the date of such
termination. In all other instances that the Holder ceases to be an employee of
the Company, the Holder shall have no right after his employment ends to
exercise all or any part of this Option with respect to either Vested or
Unvested Shares. For purposes hereof, "permanent and total disability" is
defined in Section 8 of the Plan.
6. Transferability. The Option and the Holder's rights therein are not
transferable by the Holder, except upon the death of the Holder as provided in
Paragraph 5. The Option is exercisable (subject to any other applicable
restrictions on exercise) only by the Holder, except when a guardian or other
legal representative has been duly appointed for the Holder and except in the
event of the Holder's death as provided in Paragraph 5.
7. Taxes. The Holder hereby agrees to pay to the Company any federal, state
or local taxes of any kind that may be required by law to be withheld and
remitted by the Company with respect to the Option and the exercise thereof. If
the Holder does not make such payment to the company, the Company, to the extent
required or permitted by law, shall have the right to withhold from any payment
of any kind otherwise due to the Holder from the Company, any federal, state or
local taxes of any kind required by law to be withheld with respect to the
Option or the Shares which are the subject of the Option. The Administrator, in
its sole discretion, may permit the Holder to pay such taxes through the
withholding of Shares otherwise deliverable to the Holder upon exercise of the
Option or the delivery to the Company of Common Shares otherwise acquired by the
Holder. The fair market value of Common Shares withheld by the Company or
tendered to the Company for the satisfaction of any tax withholding obligations
determined to exist under this Paragraph 8 shall be determined on the date such
Common Shares are withheld or tendered.
8. Intent. This Option does not, and is not intended to, qualify as an
Incentive Stock Option as defined in Section 422 of the Code. The Option shall
be construed and exercised consistent with such intention.
9. Securities Law Compliance. Notwithstanding any provision of this
Agreement to the contrary, the Option shall not be exercisable unless, at the
time the Holder attempts to exercise the Option, in the opinion of counsel for
the Company, all applicable securities laws, rules and regulations have been
complied with. The Holder agrees that the Administrator may impose such
restrictions on the Shares as are deemed advisable by the Administrator,
including, without limitation, restrictions relating to listing or trading
requirements. The Holder further agrees that certificates representing the
Shares may bear such legends and statements as the Administrator shall deem
appropriate or advisable to assure, among other things, compliance with
applicable securities laws, rules and regulations.
10. Rights of the Holder. The Holder shall have no dividend, voting or
other rights of a stockholder with respect to the Shares which are subject to
the Option prior to the purchase
-4-
<PAGE>
of such Shares upon exercise of the Option and the execution and delivery of all
other documents and instruments deemed necessary or desirable by the Company.
11. Surrender of Outstanding Stock Options; Termination of Prior Agreement.
The Holder hereby voluntarily surrenders all outstanding stock options, whether
vested or unvested, granted under the Prior Agreement, and the Company accepts
such surrender. The Prior Agreement is hereby terminated and of no further force
and effect. All shares and options and all rights granted under the Prior
Agreement are hereby terminated and canceled.
12. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, except to the extent
otherwise governed by Federal law. All capitalized terms not defined herein
shall have the meaning ascribed to them in the Plan.
IN WITNESS WHEREOF, the parties have subscribed their names hereto as of
the date first above written.
FAC REALTY, INC., a Delaware corporation
By: ___________________________________
Patrick M. Miniutti
-5-
Exhibit 21
FAC Realty Trust, Inc.
Subsidiaries
Name State of
Incorporation
FAC Properties Holding Corp. Maryland
FAC Properties, LP Delaware
FSA Properties, Inc. Delaware
FAC Mortgage, LLC Delaware
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-03240 and Form S-8 No. 33-29491 both amended on March 11, 1998)
pertaining to the FAC Realty Trust, Inc. Amended and Restated 1993 Employee
Stock incentive Plan, the FAC Realty Trust, Inc. 1995 Outside Director's Stock
Award Plan, the FAC Realty Trust, Inc. 1996 Restricted Stock Plan and the FAC
Realty Trust, Inc. 1997 Qualified Employee Stock Purchase Plan of our report
dated January 31, 1997, except for the first paragraph of Note 11 and the last
two sentences of the first paragraph of Note 13 as to which the date is March
27, 1997, with respect to the consolidated financial statements of FAC Realty
Trust, Inc. at December 31, 1996 and for each of the two years in the period
then ended, included in this Annual Report (Form 10-K) for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
Raleigh, North Carolina
April 13, 1998
<PAGE>
Exhibit 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 11, 1998 (except for
the matters discussed in Note 15, as to which date is March 31, 1998) included
in the Registration Statement (Form S-8 No. 333-3240) pertaining to the 1996
Restricted Stock Plan, 1995 Outside Director's Stock Award Plan, and 1993
Employee Stock Incentive Plan for FAC Realty Trust, Inc. and Registration
Statement (333-29491) pertaining to the 1996 Restricted Stock Plan, 1995
Outside Director's Stock Award Plan, 1993 Employee Stock Incentive Plan and
Qualified Employee Stock Purchase Plan for FAC Realty Trust, Inc.
In addition, as independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated April 9, 1998,
included in the Registration Statement (333-29491) pertaining to the 1996
Restricted Stock Plan, 1995 Outside Director's Stock Award Plan, 1993 Employee
Stock Incentive Plan and Qualified Employee Stock Purchase Plan for FAC Realty
Trust, Inc.
/s/ ARTHUR ANDERSEN LLP
Raleigh, North Carolina,
April 15, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,730,000
<SECURITIES> 0
<RECEIVABLES> 7,167,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,206,000
<PP&E> 414,271,000
<DEPRECIATION> (50,134,000)
<TOTAL-ASSETS> 403,626,000
<CURRENT-LIABILITIES> 6,796,000
<BONDS> 233,903,000
0
19,162,000
<COMMON> 119,000
<OTHER-SE> 143,643,000
<TOTAL-LIABILITY-AND-EQUITY> 403,626,000
<SALES> 0
<TOTAL-REVENUES> 53,726,000
<CGS> 0
<TOTAL-COSTS> 31,323,000
<OTHER-EXPENSES> 6,397,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,436,000
<INCOME-PRETAX> (430,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (430,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (986,000)
<CHANGES> 0
<NET-INCOME> (1,416,000)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> OCT-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 10,894 10,894
<SECURITIES> 0 0
<RECEIVABLES> 5,864 5,864
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 26,634 26,634
<PP&E> 368,005 368,005
<DEPRECIATION> (36,027) (36,027)
<TOTAL-ASSETS> 358,612 358,612
<CURRENT-LIABILITIES> 9,537 9,537
<BONDS> 183,657 183,657
0 0
19,162 19,162
<COMMON> 121 121
<OTHER-SE> 145,309 145,309
<TOTAL-LIABILITY-AND-EQUITY> 358,612 358,612
<SALES> 0 0
<TOTAL-REVENUES> 12,109,000 47,170,000
<CGS> 0 0
<TOTAL-COSTS> 6,317,000 27,777,000
<OTHER-EXPENSES> 8,411,000 11,199,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,641,000 14,175,000
<INCOME-PRETAX> (1,260,000) (5,981,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,260,000) (5,981,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (103,000)
<CHANGES> 0 0
<NET-INCOME> (1,260,000) (6,084,000)
<EPS-PRIMARY> (0.56) (0.55)
<EPS-DILUTED> (0.56) (0.55)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,730,000
<SECURITIES> 0
<RECEIVABLES> 7,167,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,206,000
<PP&E> 414,271,000
<DEPRECIATION> (50,134,000)
<TOTAL-ASSETS> 403,626,000
<CURRENT-LIABILITIES> 6,796,000
<BONDS> 233,903,000
0
19,162,000
<COMMON> 119,000
<OTHER-SE> 143,643,000
<TOTAL-LIABILITY-AND-EQUITY> 403,626,000
<SALES> 0
<TOTAL-REVENUES> 14,715,000
<CGS> 0
<TOTAL-COSTS> 8,457,000
<OTHER-EXPENSES> 1,277,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,423,000
<INCOME-PRETAX> 558,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 558,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558,000
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
