-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E5plnGEIuf7TlPxNypuZ7+x4RPq/xHZQjBzpgoGXai3LqAjf/Nagg0eOjKDebmjX z47CrzJURiOeZe9AG9eYag== 0000089107-96-000019.txt : 19961115 0000089107-96-000019.hdr.sgml : 19961115 ACCESSION NUMBER: 0000089107-96-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960929 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE MERCHANDISE CO INC CENTRAL INDEX KEY: 0000089107 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISC GENERAL MERCHANDISE STORES [5399] IRS NUMBER: 620816060 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09223 FILM NUMBER: 96661090 BUSINESS ADDRESS: STREET 1: 7100 SERVICE MERCHANDISE DR CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6156606000 MAIL ADDRESS: STREET 1: PO BOX 24600 CITY: NASHVILLE STATE: TN ZIP: 37202 10-Q 1 SERVICE MERCHANDISE COMPANY, INC. FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------ Commission File No. 1-9223 SERVICE MERCHANDISE COMPANY, INC. (Exact name of registrant as specified in its charter) TENNESSEE 62-0816060 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P. O. Box 24600, Nashville, TN 37202-4600 (Mailing Address) 7100 Service Merchandise Drive, Brentwood, TN (Address of principal executive offices) 37027 (Zip code) (615) 660-6000 (Registrant's telephone number including Area Code) 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 the number of shares outstanding of each of the Registrant's classes of common stock as of the latest practicable date. As of October 27, 1996, there were 99,749,912 shares of Service Merchandise Company, Inc. common stock outstanding. SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES TABLE OF CONTENTS
Page No. PART I - FINANCIAL INFORMATION Consolidated Statements of Operations (Unaudited) - Three and Nine Periods Ended September 29, 1996 and October 1, 1995 . . . . . . . . . . 3 Consolidated Balance Sheets - September 29, 1996 (Unaudited), October 1, 1995 (Unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows (Unaudited) - Nine Periods Ended September 29, 1996 and October 1, 1995 .. . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited). . . . . . . . . . . . . . . . . . . . 8-11 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-2- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)
Three Periods Ended Nine Periods Ended ------------------------------ ------------------------------- September 29, October 1, September 29, October 1, ------------- ------------- ------------- ------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- Net sales $738,328 $730,031 $2,313,940 $2,332,035 Costs and expenses: Cost of merchandise sold and buying and occupancy expenses 563,210 553,868 1,770,213 1,772,284 ------------- ------------- ------------- ------------- Gross margin after cost of merchandise sold and buying and occupancy expenses 175,118 176,163 543,727 559,751 Selling, general and administrative expenses 161,792 154,062 508,621 505,519 Depreciation and amortization 14,241 14,763 44,882 46,646 ------------- ------------- ------------- ------------- Earnings (loss) before interest and income taxes (915) 7,338 (9,776) 7,586 Interest expense-debt 16,834 19,011 46,349 50,793 Interest expense-capitalized leases 2,128 2,327 6,554 7,121 ------------- ------------- ------------- ------------- Loss before income tax benefit (19,877) (14,000) (62,679) (50,328) Income tax benefit (7,553) (5,460) (23,818) (19,628) ------------- ------------- ------------- ------------- Net loss ($12,324) ($8,540) ($38,861) ($30,700) ============= ============= ============= ============= Weighted average common shares and common share equivalents outstanding 101,337 101,857 101,364 101,395 ============= ============= ============= ============= Per common share: Net loss per common share ($0.12) ($0.08) ($0.38) ($0.30) ============= ============= ============= ============= See Notes to Consolidated Financial Statements.
3 SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share data)
(Unaudited) -------------------------- September 29, October 1, December 31, 1996 1995 1995 (1) ------------ ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $21,390 $18,901 $177,314 Accounts receivable, net of allowance of $2,966, $3,022 and $2,763, respectively 39,512 36,456 53,621 Refundable income taxes 13,513 12,193 - Inventories 1,328,761 1,328,436 1,034,467 Prepaid expenses 60,963 65,050 25,277 ------------ ------------ ------------ TOTAL CURRENT ASSETS 1,464,139 1,461,036 1,290,679 Property and Equipment: Owned assets, net of accumulated depreciation of $515,340, $492,527 and $505,429, respectively 556,546 574,319 583,290 Capitalized leases, net of accumulated amortization of $87,197, $79,624 and $81,579, respectively 39,395 46,391 44,823 Other assets and deferred charges 22,384 22,894 21,778 ------------ ------------ ------------ TOTAL ASSETS $2,082,464 $2,104,640 $1,940,570 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to banks $348,400 $445,700 - Accounts payable 544,364 517,448 $620,669 Accrued expenses 166,021 169,076 193,016 State and local sales taxes 31,918 28,734 61,224 Income taxes - - 29,209 Current maturities of long-term debt 4,698 1,830 1,936 Current maturities of capitalized lease obligations 7,479 7,413 7,885 Deferred income taxes 10,841 3,578 11,715 ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 1,113,721 1,173,779 925,654 Long-term debt 555,625 554,577 557,392 Capitalized lease obligations 60,604 68,400 65,894 Deferred income taxes 3,886 2,415 4,888 ------------ ------------ ------------ TOTAL LIABILITIES 1,733,836 1,799,171 1,553,828 ------------ ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $1 par value, authorized 4,600,000 shares, undesignated as to rate and other rights, none issued Series A Junior Preferred Stock, $1 par value, authorized 400,000 shares, none issued Common stock, $.50 par value, authorized 500,000,000 shares, issued and outstanding 99,748,000, 99,670,000 and 99,686,000 shares, respectively 49,874 49,835 49,843 Additional paid-in capital 5,633 5,466 5,483 Deferred compensation (1,484) (2,273) (2,050) Retained earnings 294,605 252,441 333,466 ------------ ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 348,628 305,469 386,742 ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,082,464 $2,104,640 $1,940,570 ============ ============ ============ (1) Derived from fiscal year ended December 31, 1995 audited financial statements.
See Notes to Consolidated Financial Statements. -4- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Nine Periods Ended ----------------------------------- September 29, October 1, -------------- -------------- 1996 1995 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($38,861) ($30,700) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 47,099 48,748 Deferred income taxes (1,876) 1,366 (Gain) loss on disposal of property and equipment (4,650) 198 Changes in assets and liabilities (net of disposition): Accounts receivable, net 14,109 18,678 Inventories (294,294) (324,154) Prepaid expenses (35,686) (37,272) Accounts payable (76,305) (122,318) Accrued expenses and state and local sales taxes (56,301) (68,114) Income taxes (42,722) (51,557) -------------- -------------- NET CASH USED BY OPERATING ACTIVITIES (489,487) (565,125) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment - owned (17,232) (23,597) Proceeds from the disposal of property and equipment 9,831 1,492 Other assets, net (1,008) (4,315) -------------- ------------- NET CASH USED BY INVESTING ACTIVITIES (8,409) (26,420) -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings 348,400 445,700 Proceeds from long-term debt 2,600 3,600 Repayment of long-term debt (1,643) (5,137) Repayment of capitalized lease obligations (6,353) (5,873) Debt issuance costs (1,084) (199) Exercise of stock options and forfeiture of restricted stock, net 52 (909) -------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 341,972 437,182 -------------- ------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (155,924) (154,363) CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 177,314 173,264 -------------- ------------- CASH AND CASH EQUIVALENTS-END OF PERIOD $21,390 $18,901 ============== ============= See Notes to Consolidated Financial Statements.
-5- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. The consolidated financial statements, except for the consolidated balance sheet as of December 31, 1995, have been prepared by the Company without audit. In management's opinion, the information and amounts furnished in this report reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of the financial position and results of operations for the interim periods presented. Certain prior period amounts have been reclassified to conform to the current year's presentation. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. The Company has historically incurred a net loss for the first three quarters of the year due to the seasonality of its business. The results of operations for the third quarter ended September 29, 1996 and October 1, 1995 are not necessarily indicative of the operating results for the entire fiscal year. B. The third quarter ended September 29, 1996 and October 1, 1995 each contained 91 selling days. Year to date ended September 29, 1996 and October 1, 1995 each contained 272 selling days. C. The net loss per common share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding. D. Cash payments for interest for the nine periods ended September 29, 1996 and October 1, 1995 were $43.9 million and $50.0 million, respectively. Cash payments for income taxes for the nine periods ended September 29, 1996 and October 1, 1995 were $17.2 million and $30.3 million, respectively. The Company considers all highly liquid investments purchased as part of its daily cash management activities to be cash equivalents. Such investments are generally made for periods covering 1 to 30 days. E. The Company has available a Reducing Revolving Credit Facility ("Credit Facility"). The maximum commitment level for the Credit Facility reduces $25 million annually until reaching $475 million at December 31, 1998. Currently, the maximum commitment level is $550 million. The Credit Facility matures on June 8, 1999 and currently has an interest rate of LIBOR + 5/8% on the borrowed amount and a 3/8% facility fee on the entire committed amount. Short-term borrowings related to the Credit Facility were $348.4 million and $445.7 million as of September 29, 1996 and October 1, 1995, respectively. On September 16, 1996, the Company amended the existing Credit Facility to permit the incurrence of debt and the lien on assets at the subsidiary level for a real estate mortgage financing approved in an earlier amendment. Subsequent to quarter end, the Company completed the first of two pools in a real estate mortgage financing. On October 4, 1996, the Company closed $58 million of a $75 million commitment from its lender, with the remainder expected to be funded in the fourth quarter of 1996. The proceeds are ultimately expected to be used for capital investments in the Company's business. The first mortgage pool is being financed over a fifteen year term with an interest rate of 9.27%. -6- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) F. Effective January 1, 1996, the Company adopted the provisions of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and determined that no material impairment exists which would require recognition under the provisions of this standard. G. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions entered into after December 15, 1995. Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. The Company will adopt only the disclosure provisions relative to SFAS No. 123 and continue to account for stock transactions under Accounting Principles Board Opinion No. 25. -7- SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) For comparative purposes, interim balance sheets are more meaningful when compared to the balance sheets at the same point in time of the prior year. Comparisons to balance sheets of the most recent fiscal year end may not be meaningful due to the seasonal nature of the Company's business. RESULTS OF OPERATIONS The nature of the Company's business is highly seasonal. Historically, sales in the fourth quarter have been substantially higher than sales achieved in each of the first three quarters of the fiscal year. Thus expenses and, to a greater extent, operating income vary greatly by quarter. Caution, therefore, is advised when appraising results for a period shorter than a full year, or when comparing any period other than to the same period of the previous year. THIRD QUARTER ENDED SEPTEMBER 29, 1996 VS. THIRD QUARTER ENDED OCTOBER 1, 1995 NET SALES Net sales for the third quarter of 1996 were $738.3 million compared to $730.0 million for the comparable quarter of 1995, representing an increase of $8.3 million or 1.1%. Comparable store sales increased 0.8% in the quarter as compared to the same quarter a year ago. Hardlines experienced higher sales for the quarter while jewelry sales were down, partially reflecting the movement of a gold and diamond promotion to early fourth quarter this year and softer sales earlier in the quarter. At the end of the third quarter, Service Merchandise was operating 408 stores, a net increase of 2 stores from a year ago. GROSS MARGIN Gross margin, after buying and occupancy expenses, for the third quarter of 1996 was $175.1 million, or 23.7% of net sales, compared to $176.2 million, or 24.1% of net sales, a year ago. The slightly lower gross margin rates reflect a decline in jewelry sales, which carry a higher margin, and the increased hardlines sales levels. In addition, freight costs were higher for the quarter due to higher hardlines sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the third quarter were $161.8 million, or 21.9% of net sales, versus $154.1 million, or 21.1% of net sales, in the third quarter of 1995. The increase is primarily attributable to additional employment expenses associated with changes in merchandising and display fixtures in many of the stores. -8- Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) (continued) INTEREST EXPENSE Interest expense decreased to $19.0 million in the quarter as compared to $21.3 million a year ago. The decrease primarily reflects $118.9 million in lower average short-term borrowings outstanding for the quarter as compared to the same period a year ago. TAXES ON INCOME The Company recognized an income tax benefit of $7.6 million and $5.5 million for the third quarter ended September 29, 1996 and October 1, 1995, respectively. The effective tax rates for the quarter ended September 29, 1996 and October 1, 1995 were 38% and 39%, respectively. For the fiscal year ended December 31, 1995 the effective income tax rate was 38%. NINE PERIODS ENDED SEPTEMBER 29, 1996 VS. NINE PERIODS ENDED OCTOBER 1, 1995 NET SALES Net sales for the first nine periods of 1996 were $2,313.9 million as compared to $2,332.0 million for the first nine periods of 1995, a decrease of 0.8% due primarily to weak sales in the first quarter of 1996. Comparable store sales have decreased 0.9% for the first nine periods compared to a year ago. GROSS MARGIN Gross margin, after taking into account buying and occupancy expenses, for the nine periods ended September 29, 1996 was $543.7 million, or 23.5% of net sales, as compared to $559.8 million, or 24.0% of net sales, for the same period a year ago. The decline in gross margin rate resulted primarily from increased transportation costs and to a lesser extent occupancy costs. Merchandise margin rates remained relatively flat for the first nine periods of 1996. -9- Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) (continued) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $508.6 million, or 22.0% of net sales, for the nine periods ended September 29, 1996 as compared to $505.5 million, or 21.7% of net sales, for the same sales period a year ago. The increase in selling, general and administrative expenses is primarily attributable to additional employment expenses associated with the changes in merchandising and display fixtures in many of the stores partially offset by a reduction in advertising costs. INTEREST EXPENSE Interest expense for the first nine periods of 1996 was $52.9 million as compared to $57.9 million for the same period a year ago. The decrease primarily reflects $75.2 million in lower average short-term borrowings outstanding for the first nine periods of 1996 as compared to the same period in 1995. TAXES ON INCOME The Company recognized an income tax benefit of $23.8 million for the nine periods ended September 29, 1996 compared to an income tax benefit of $19.6 million for the same period a year ago. The estimated annual effective tax rates for the nine periods ended September 29, 1996 and October 1, 1995 were 38% and 39%, respectively. For the fiscal year ended December 31, 1995 the effective income tax rate was 38%. LIQUIDITY AND CAPITAL RESOURCES Net working capital (current assets less current liabilities) totaled $350.4 million at the end of the third quarter of 1996, representing an increase of 22.0% from the October 1, 1995 level of $287.3 million. The net working capital increase was primarily due to a reduction of $97.3 million of short-term borrowings which totaled $348.4 million ($179.1 million available for borrowing) at September 29, 1996 compared to $445.7 million ($116.2 million available for borrowing) at October 1, 1995. This was offset by a $26.9 million increase in accounts payable. The current ratio at September 29, 1996 was 1.3:1 compared to the current ratio at October 1, 1995 of 1.2:1. The reduction in short-term borrowings is primarily the result of additional operating cash flow and reduced capital expenditures over the past year. Working capital requirements fluctuate significantly during the year due to the seasonal nature of the jewelry, gift and home business. These requirements are financed through a combination of internally generated cash flow from operating activities and short-term borrowings. -10- Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) (continued) The Company has available a Reducing Revolving Credit Facility ("Credit Facility"). The maximum commitment level for the facility reduces $25 million annually until reaching $475 million at December 31, 1998. Currently, the maximum commitment level is $550 million. The Credit Facility matures on June 8, 1999 and currently has an interest rate of LIBOR + 5/8% on the borrowed amount and a 3/8% facility fee on the entire committed amount. On September 16, 1996, the Company amended the existing Credit Facility to permit the incurrence of debt and the lien on assets at the subsidiary level for a real estate mortgage financing approved in an earlier amendment. Total long-term debt, including current maturities and capitalized leases, decreased to $628.4 million at September 29, 1996 from $632.2 million at October 1, 1995. The decrease in total long-term debt was primarily the result of scheduled payments for capitalized lease obligations partially offset by two new mortgages obtained by the Company. Subsequent to quarter end, the Company completed the first of two pools in a real estate mortgage financing. On October 4, 1996, the Company closed $58 million of a $75 million commitment from its lender, with the remainder expected to be funded in the fourth quarter of 1996. The proceeds are ultimately expected to be used for capital investments in the Company's business. The first mortgage pool is being financed over a fifteen year term with an interest rate of 9.27%. Effective January 1, 1996, the Company adopted the provisions of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and determined that no material impairment exists which would require recognition under the provisions of this standard. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions entered into after December 15, 1995. Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. The Company will adopt only the disclosure provisions relative to SFAS No. 123 and continue to account for stock transactions under Accounting Principles Board Opinion No. 25. Additions to owned property and equipment were $17.2 million for the nine periods ended September 29, 1996 compared to $23.6 million for the same period last year. The Company operated 408 jewelry, gift and home stores as of September 29, 1996, a net increase of 2 stores from a year ago. Net store growth is anticipated to remain relatively flat for fiscal 1996. The Company expects to incur capital expenditures of approximately $50 million during fiscal 1996 related primarily to store growth and improvements to existing stores. The Company plans to fund these expenditures through a combination of cash flow from operations, borrowings under the Reducing Revolving Credit Facility and proceeds from the real estate mortgage financing. -11- PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in the Rights of the Company's Security Holders On September 16, 1996, the Company amended the existing Credit Facility to permit the incurrence of debt and the lien on assets at the subsidiary level for a real estate mortgage financing approved in an earlier amendment. Item 3. Defaults by the Company on Its Senior Securities Not applicable. Item 4. Results of Votes of Security Holders Not applicable. Item 5. Other Information Not applicable. -12- Item 6. Exhibits and Reports on Form 8-K 6(a) Exhibits filed with this Form 10-Q Exhibit No. Under Items 601 of Regulation S-K Brief Description --------------------- ----------------- 4.1 Amendment No. 3 to Credit Agreement effective September 16, 1996 among Service Merchandise Company, Inc., Various Banks and The Chase Manhattan Bank (as successor to Chemical Bank) as Administrative Agent. 4.2 Conditional Loan Commitment dated as of September 9, 1996 concerning the $75 million Real Estate Mortgage Financing among Service Merchandise Company, Inc. and First Union National Bank of North Carolina. 4.2a Loan Agreement dated as of October 4, 1996 concerning the $75 million Real Estate Mortgage Financing among SMC-SPE-1, Inc., and First Union National Bank of North Carolina. 4.2b Loan Agreement dated as of October 4, 1996 concerning the $75 million Real Estate Mortgage Financing among SMC-SPE-2, Inc., and First Union National Bank of North Carolina. 11 Statement re: Computation of Net Loss Per Common Share for the Three Periods Ended and Nine Periods Ended September 29, 1996 and October 1, 1995. 27 Financial Data Schedule for the Nine Periods Ended September 29, 1996. 6(b) Reports on Form 8-K There were no reports on Form 8-K during the three periods ended September 29, 1996. -13- SIGNATURES Pursuant to the requirements 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. SERVICE MERCHANDISE COMPANY, INC. Date: November 8, 1996 /s/ Raymond Zimmerman ----------------------------- Raymond Zimmerman Chairman of the Board (Chief Executive Officer) Date: November 8, 1996 /s/ Gary Witkin ----------------------------- Gary Witkin President (Chief Operating Officer) Date: November 8, 1996 /s/ S. Cusano ----------------------------- S. Cusano Vice President and Chief Financial Officer (Chief Financial Officer) (Chief Accounting Officer) -14- EX-4.1 2 AMENDMENT NO. 3 TO CREDIT AGREEMENT THIRD AMENDMENT --------------- THIRD AMENDMENT (this "Amendment"), dated as of September 16, 1996, among SERVICE MERCHANDISE COMPANY, INC. (the "Borrower"), the various lending institutions party to the Credit Agreement referred to below (the "Banks"), and THE CHASE MANHATTAN BANK (as successor to CHEMICAL BANK), as Administrative Agent (in such capacity, the "Administrative Agent"). All capitalized terms used herein and not otherwise defined shall have the respective meanings provided such terms in the Credit Agreement referred to below. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Borrower, the Banks and the Administrative Agent are parties to a Credit Agreement, dated as of June 8, 1994 and amended by the First Amendment thereto dated as of April 13, 1995 and the Second Amendment thereto dated May 23, 1996 (as so amended, the "Credit Agreement"); and WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed that as of the Third Amendment Effective Date (as defined below): 1. Section 9.11(vi) of the Credit Agreement is hereby amended by adding the following language to the end thereof (prior to the word "and"): "and restrictions imposed by the terms of the First Union Permitted Mortgage Financing on the First Union Permitted Mortgage Financing Subsidiaries." 2. Section 9.15 of the Credit Agreement is hereby amended by inserting the following proviso to the end of clause (b) thereof: "; provided that the First Union Permitted Mortgage Financing Subsidiaries shall not enter into the Guaranty." 3. Section 11.01 of the Credit Agreement is hereby amended by inserting in the appropriate alphabetical order the following new definitions: "First Union Permitted Mortgage Financing" shall mean the Permitted Mortgage Financing provided by First Union National Bank of North Carolina substantially in accordance with its commitment letter to the Borrower dated September 9, 1996. "First Union Permitted Mortgage Financing Subsidiaries" shall mean any direct or indirect wholly-owned Subsidiary of the Borrower which is wholly-owned, directly or indirectly by a Guarantor and which is created to be a borrower under the First Union Permitted Mortgage Financing. "Third Amendment Effective Date" shall mean the effective date of the Third Amendment to this Agreement. 4. The definition of "Permitted Investments" in Section 11.01 of the Credit Agreement is hereby amended by (x) inserting the words "and may transfer assets" after the words "unsecured loans and advances" in clause (iv) thereof and (y) by (a) deleting the word "and" at the end of clause (iv), (b) deleting the period at the end of clause (v) and inserting in lieu thereof "; and" and (c) inserting immediately thereafter the following new clause: "(vi) the Borrower and/or its Subsidiaries may, all in connection with the First Union Permitted Mortgage Financing and in a manner satisfactory to the Administrative Agent, (x) transfer Real Property and related assets to the First Union Permitted Mortgage Financing Subsidiaries and (y) provide security or escrow deposits or Letters of Credit in lieu of security or escrow deposits, guaranties, indemnities and similar items required by the terms of the First Union Permitted Mortgage Financing, provided, that on the date of each closing thereof, the aggregate proceeds of such financing net of the aforementioned items are not less than 60% of the aggregate fair market value of the Real Property and related assets being encumbered in connection therewith." 5. The definition of "Permitted Mortgage Financing" in Section 11.01 of the Credit Agreement is hereby amended by (x) adding the words "and/or its Subsidiaries" both after the words "incurred by the Borrower" and after the words "owned or leased by the Borrower" appearing therein, and (y) deleting the words "fair market value of the respective asset being sold", and substituting in lieu thereof the words "aggregate fair market value of the assets being encumbered." 6. Section 13.07(a) of the Credit Agreement is hereby amended by adding the following language at the end thereof: " To the extent that the Borrower or a Subsidiary thereof provides a guaranty of the obligations of the Borrower or its Subsidiaries as tenants under the Real Property operating leases contemplated by the First Union Permitted Mortgage Financing, any Contingent Obligations represented by such guaranty shall not be taken into account for purposes of calculations under this Agreement involving the Indebtedness of the Borrower and its Subsidiaries." 7. In order to induce the undersigned Banks to enter into this Amendment, the Borrower hereby represents and warrants that (x) no Default or Event of Default exists on the Third Amendment Effective Date both before and after giving effect to this Amendment and (y) all of the representations and warranties contained in the Credit Agreement shall be true and correct in all material respects as of the Third Amendment Effective Date both before and after giving effect to this Amendment, with the same effect as though such representations and warranties had been made on and as of the Third Amendment Effective Date (it being understood that any representation or warranty made as of a specified date shall be required to be true and correct in all material respects only as of such specific date). 8. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 9. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Administrative Agent. 10. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 11. This Amendment shall become effective on the date (the "Third Amendment Effective Date") when the Borrower and the Required Banks (i) shall have signed a counterpart hereof (whether the same or different counterparts) and (ii) shall have delivered (including by way of telecopier) the same to the Administrative Agent at the Notice Office. 12. From and after the Third Amendment Effective Date all references in the Credit Agreement and the other Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as modified hereby. IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. Address: 7100 Service Merchandise Drive SERVICE MERCHANDISE COMPANY, INC. Brentwood, Tennessee 37027 Attention: Thomas L. Garrett, Jr. Telephone: 615-660-6000 Telecopy: 615-660-3667 By: /s/ Thomas L. Garrett, Jr. ----------------------------------- 270 Park Avenue, 9th Floor THE CHASE MANHATTAN BANK New York, New York 10017 Individually, and as Administrative Agent Attention: Christopher C. Wardell Telephone: 212-270-2053 By: /s/ Christopher C. Wardell Telecopy: 212-270-6125 ----------------------------------- Title: Managing Director ----------------------------------- WITH A COPY TO: Chase Securities, Inc. 10 South LaSalle Street Suite 2300 Chicago, Illinois 60603 Attention: Paul Doran Telephone: 313-807-4089 Telecopy: 312-346-9310 One Ravinia Drive ABN AMRO BANK N.V., ATLANTA Suite 1200 AGENCY Atlanta, Georgia 30346-2103 Attention: Linda Davis Telephone: 404-399-7378 By: /s/ Larry Kelley Telecopy: 404-395-9188 ----------------------------------- Title: Group Vice President ----------------------------------- By: /s/ Steven L. Hipsman ----------------------------------- Title: Vice President ----------------------------------- 245 Park Avenue ARAB BANKING CORPORATION New York, New York 10167 Attention: Louise Bilbro Telephone: 212-850-0665 By: /s/ Louise Bilbro Telecopy: 212-599-8385 ----------------------------------- Title: Vice President ----------------------------------- 100 Federal Street THE FIRST NATIONAL BANK OF BOSTON Boston, Massachusetts 02110 Attention: Peter Griswold Telephone: 617-434-8312 By: /s/ Telecopy: 617-434-6685 ----------------------------------- Title: Managing Director ----------------------------------- 430 Park Avenue THE BANK OF MONTREAL New York, New York 10022 Attention: Tom Calder Telephone: 212-605-1460 By: /s/ W. Tom Calder Telecopy: 212-605-1455 ----------------------------------- Title: Director ----------------------------------- One Wall Street, 22nd Floor THE BANK OF NEW YORK New York, New York 10286 Attention: Paula Diponzio Telephone: 212-635-7867 By: /s/ Paula Diponzio Telecopy: 212-635-1483 ----------------------------------- Title: Vice President ----------------------------------- Structured Finance Department THE BANK OF TOKYO-MITSUBISHI, LTD. 1251 Avenue of the Americas New York, New York 10022 Attention: Paul P. Malecki By: /s/ Paul P. Malecki ----------------------------------- Title: Vice President ----------------------------------- Structured Finance Department THE BANK OF TOKYO-MITSUBISHI, TRUST 1251 Avenue of the Americas COMPANY New York, New York 10022 Attention: Paul P. Malecki By: /s/ Paul P. Malecki ----------------------------------- Title: Vice President ----------------------------------- 787 Seventh Avenue BANQUE PARIBAS New York, New York 10019 Attention: Ann Pifer Telephone: 212-841-2383 By: /s/ Ann C. Pifer Telecopy: 212-841-2333 ----------------------------------- Title: Vice President ----------------------------------- By: /s/ Mary T. Finnegan ----------------------------------- Title: Vice President ----------------------------------- Two Paces West CANADIAN IMPERIAL BANK OF 2727 Paces Ferry Road COMMERCE Atlanta, Georgia 30339 Attention: Kathryn W. Sax Telephone: 770-319-4903 By: /s/ Kathryn W. Sax Telecopy: 770-319-4954 ----------------------------------- Title: Authorized Signatory ----------------------------------- 75 Wall Street DRESDNER BANK AG, NEW YORK New York, New York 10005 BRANCH Attention: Richard Conroy Telephone: 212-429-2206 By: /s/ Richard Conroy Telecopy: 212-574-0129 ----------------------------------- Title: Vice President ----------------------------------- By: /s/ ----------------------------------- Title: Vice President ----------------------------------- Marquis One Tower, Suite 2100 THE FUJI BANK, LTD. 245 Peachtree Center Avenue NE Atlanta, Georgia 30303-1208 Attention: Brett Johnson Telephone: 404-653-2100 By: /s/ Toshibiro Mitsui Telecopy: 404-653-2119 ----------------------------------- Title: Vice President and Manager ----------------------------------- Two World Trade Center, 99th Floor THE HOKKAIDO TAKUSHOKU BANK, LTD. New York, New York 10048 Attention: Scott D. Winston Telephone: 212-912-6914 By: /s/ Telecopy: 212-466-6079 ----------------------------------- Title: Senior Vice President and Manager ----------------------------------- 245 Park Avenue THE INDUSTRIAL BANK OF JAPAN, New York, New York 10167 LIMITED -NEW YORK BRANCH Attention: Jim Welch Telephone: 212-309-6577 By: /s/ Telecopy: 212-682-2870 ----------------------------------- Title: Senior Vice President and ----------------------------------- Senior Manager ----------------------------------- 245 Peachtree Center Avenue NE LTCB TRUST COMPANY Suite 2801 Atlanta, Georgia 30303 Attention: Becky Sedler Telephone: 404-659-7210 By: /s/ Satoru Otsubo Telecopy: 404-658-9751 ----------------------------------- Title: Executive Vice President ----------------------------------- 140 Broadway MIDLAND BANK PLC New York, New York 10005 Attention: Karen Wold Telephone: 212-658-2750 By: /s/ Karen Wold Telecopy: 212-658-2586 ----------------------------------- Title: Director ----------------------------------- 500 West Jefferson Street PNC BANK, KENTUCKY, INC. Louisville, Kentucky 40202 Attention: Ralph Phillips Telephone: 502-581-4543 By: /s/ Ralph A. Phillips Telecopy: 502-581-2302 ----------------------------------- Title: Vice President ----------------------------------- 520 Madison Avenue, 25th Floor THE MITSUBISHI TRUST AND New York, New York 10022 BANKING CORPORATION Attention: Susan LeFevre Telephone: 212-891-8454 Telecopy: 212-755-2349 By: /s/ 212-486-0970 ----------------------------------- Title: Senior Vice President ----------------------------------- One NationsBank Plaza M-5 NATIONSBANK, N.A. f/k/a 311 Union Street NATIONSBANK OF NORTH CAROLINA, Nashville, Tennessee 37239-1697 N.A. Attention: Kimberly Dupuy Telephone: 615-749-3174 Telecopy: 615-749-4640 By: /s/ ----------------------------------- Title: Vice President ----------------------------------- 245 Park Avenue, 30th Floor THE NIPPON CREDIT BANK, LTD. New York, New York 10167 Attention: Barry Fein Telephone: 212-984-1261 By: /s/ Barry Fein Telecopy: 212-490-3895 ----------------------------------- Title: Assistant Vice President ----------------------------------- Marquis One Tower, Suite 2703 THE SAKURA BANK, LIMITED 245 Peachtree Center Avenue NE Atlanta, Georgia 30303 Attention: Chad Zimmerman Telephone: 404-521-3111 By: /s/ Hiroyasu Imanishi Telecopy: 404-521-1133 ----------------------------------- Title: Vice President and Senior Manager ----------------------------------- Georgia Pacific Center, Suite 3210 THE SUMITOMO BANK, LIMITED, 133 Peachtree Street NE ATLANTA AGENCY Atlanta, Georgia 30303 Attention: Tom Lawson Telephone: 404-526-8513 By: /s/ Masayuki Fukushima Telecopy: 404-521-1187 ----------------------------------- Title: Joint General Manager ----------------------------------- 55 East 52nd Street THE TOKAI BANK, LTD. NEW YORK New York, New York 10055 BRANCH Attention: Bill Struckell Telephone: 212-339-1123 By: /s/ Telecopy: 212-754-2170 ----------------------------------- Title: Senior Vice President ----------------------------------- One Detroit Center, 9th Floor COMERCIA BANK 500 Woodward Avenue, MC 3281 Detroit, Michigan 48226 Attention: Kristine L. Andersen Telephone: 313-222-3648 By: /s/ John M. Costa Telecopy: 313-222-3330 ----------------------------------- Title: Vice President ----------------------------------- 650 Fifth Avenue BANK OF IRELAND, CAYMAN ISLAND New York, New York 10019 BRANCH Attention: John Cusack Telephone: 212-397-1712 By: /s/ John Cusack Telecopy: 212-586-7752 ----------------------------------- Title: Assistant Vice President ----------------------------------- 1211 Avenue of the Americas WESTDEUTSCHE LANDESBANK New York, New York 10036 GIROZENTRALE, NEW YORK AND Attention: Karen E. Hoplock CAYMAN ISLAND BRANCHES Telephone: 212-852-6000 Telecopy: 212-852-6300 By: /s/ ----------------------------------- Title: Vice President ----------------------------------- By: /s/ ----------------------------------- Title: Associate ----------------------------------- One Parkview Plaza VAN KAMPEN AMERICAN CAPITAL Oakbrook Terrace, Illinois 60181 PRIME RATE INCOME TRUST Attention: Jeffrey W. Maillet Telephone: 630-684-6438 By: /s/ Jeffrey W. Maillet Telecopy: 630-684-6740 ----------------------------------- Title: Senior Vice President and Director ----------------------------------- 666 Fifth Avenue, Suite 800 THE YASUDA TRUST AND BANKING New York, New York 10103 COMPANY, LTD. Attention: Makoto Tagawa Telephone: 212-373-5709 By: /s/ Makoto Tagawa Telecopy: 212-373-5796 ----------------------------------- Title: Deputy General Manager ----------------------------------- EX-4.2 3 CONDITIONAL LOAN COMMITMENT CONDITIONAL LOAN COMMITMENT Check One: [X] Commercial [ ] Multi-Family Date: September 9, 1996 Service Merchandise Company, Inc. 7100 Service Merchandise Drive Brentwood, Tennessee 37027 Attention: Thomas L. Garrett, Jr. Ladies and Gentlemen: We are pleased to advise you that, based upon your application and other materials you have furnished in connection therewith, First Union National Bank of North Carolina ("Lender") has committed to make a loan or loans (individually, a "Loan" and collectively, the "Loans") on the following terms and conditions: ARTICLE 1- GENERAL TERMS OF LOAN --------------------------------- 1.1 Borrower. There shall be one Borrower per each Loan Pool (as defined in the Special Stipulations Rider attached hereto), which shall be a special purpose entity satisfactory to Lender in all respects and the owner of a fee or leasehold interest in the Properties included in such Loan Pool (each, a "Borrower"). 1.2 Loan Purpose; Properties. The financing of Service Merchandise properties, together with parking and other appurtenant facilities (the "Improvements") upon the lands (collectively, the "Land") and at the locations set forth on Schedule "A" attached hereto and by this reference incorporated herein (it being understood by the parties that Service Merchandise Company, Inc. ("SMC") intends, but is not required, to continue to propose to Lender for Lender's review and approval, additional properties to add to the twenty-two (22) Properties set forth on Schedule "A", with the goal of adding enough additional collateral to support up to $75,000,000 in Loan proceeds), and of the personal property of the Borrower(s) used in connection with the operation, ownership, management and maintenance of the Properties ("Personal Property") (as opposed to trade fixtures, inventory and other personalty utilized for the operation of the businesses conducted at the Properties) (the Land, the Improvements, the Personal Property and all related appurtenances being herein referred to individually as a "Property" and collectively as the "Properties"). In no event shall any proceeds of the Loans be used for personal, family or household purposes. 1.3 Loan Amount. In the aggregate, approximately $75,000,000 of Loans. The exact aggregate amount of each Loan in each Loan Pool (each, a "Loan Amount") will be determined by Lender in its discretion based upon, among other things, the conditions contained in Section 3.4 hereof. 1.4 Interest Rate. (a) A fixed interest rate (the "Interest Rate") per annum equal to two hundred thirty- five (235) basis points in excess of the US Treasury Note Yield (as defined below) or such other security mutually agreed upon by Lender and Borrower, rounded up to the nearest 1/16%, which Interest Rate shall be determined by Lender on the date of pre-Closing of a Loan Pool or the date of Closing, as the case may be, each in accordance with Section 4.5 hereof. The Interest Rate shall be calculated on the daily outstanding aggregate principal balance of the Loans in a Loan Pool on the basis of a year consisting of 360 days and based on twelve (12) 30-day months for each full calendar month and on the actual number of days elapsed for any partial month in which interest is being calculated. The "US Treasury Note Yield" means a fixed rate of interest equal to the yield of a United States Treasury obligation with a maturity date as close as commercially reasonable to the maturity date of the Loans in a Loan Pool, as published electronically at the time of determination by Lender on either Dow Jones Telerate, Inc. or Bloomberg Financial Markets (collectively "Financial News Wires"), or if such Financial News Wires no longer publish such information, in another authoritative source selected by Lender. (b) The Interest Rate shall be "locked" (i.e. taken from the Financial News Wires) by Lender in accordance with the procedures set forth in Section 4.5 of this Commitment; provided, however, Lender shall not be obligated to lock the Interest Rate until Lender has received both the Commitment Fee and the Rate Lock Fee (except as otherwise provided in Section 4.5) as required herein. 1.5 Repayment Terms. If the funding of a Loan Pool does not occur on the first (1st) day of a calendar month, then interest accruing on each Loan in the Loan Pool from the date of closing through the last day of that calendar month shall be prepaid at the Closing (as hereinafter defined). Thereafter, principal and interest shall be payable monthly, in arrears, in equal monthly installments during the term of the applicable Loans, based upon a twenty-two (22) year amortization schedule commencing on the first (1st) day of the second calendar month following the Loan Closing. All outstanding principal and unpaid interest for each Loan in the Loan Pool shall be due and payable in full on the tenth (10th) anniversary of the Closing of the applicable Loan Pool (the "Maturity Date"). Notwithstanding the foregoing, SMC shall have the option with respect to all of the Loans to elect a fifteen (15) year amortization schedule with a Maturity Date on the fifteenth (15th) anniversary of the Closing of each Loan Pool. Such election must be made by SMC for all Loans in writing not later than five (5) business days prior to the first Closing. 1.6 Prepayment. Prepayment of the Loans in a Loan Pool shall be prohibited prior to the first (1st) anniversary of the Closing, subject to the last sentence of this Section 1.6. Thereafter, Borrower will have the right to prepay the entire aggregate principal balance of the Loans in a Loan Pool in full, but not in part (except as otherwise provided herein), provided: 2 (a) During the period from the first (1st) anniversary of the Closing until the date that is nine (9) years and six (6) months following the Closing, Lender is paid a prepayment fee in an amount equal to the greater of (i) one percent (1.0%) of the amount being prepaid or (ii) Yield Maintenance (as hereinafter defined); and (b) From and after the date that is nine (9) years and six (6) months following the Closing, there shall be no prepayment fee. **OR** If Borrower exercises its election pursuant to Section 1.5 hereof to structure the Loans with a fifteen (15) year term based upon a fifteen (15) year amortization schedule, then prepayment of the Loans in a Loan Pool shall be prohibited prior to the fifth (5th) anniversary of the Closing. Thereafter, Borrower will have the right to prepay the entire aggregate principal balance of the Loans in a Loan Pool in full, but not in part, provided: (a) During the period from the fifth (5th) anniversary of the Closing until the date that is ten (10) years following the Closing, Lender is paid a prepayment fee in an amount equal to the greater of (i) one percent (1.0%) of the amount being prepaid or (ii) Yield Maintenance; and (b) During the period from the tenth (10th) anniversary of the Closing until the date that is eleven (11) years following the Closing, Lender is paid a prepayment fee in an amount equal to five percent (5%) of the amount being prepaid; and (c) During the period from the eleventh (11th) anniversary of the Closing until the date that is twelve (12) years following the Closing, Lender is paid a prepayment fee in an amount equal to four percent (4%) of the amount being prepaid; and (d) During the period from the twelfth (12th) anniversary of the Closing until the date that is thirteen (13) years following the Closing, Lender is paid a prepayment fee in an amount equal to three percent (3%) of the amount being prepaid; and (e) During the period from the thirteenth (13th) anniversary of the Closing until the date that is fourteen (14) years following the Closing, Lender is paid a prepayment fee in an amount equal to two percent (2%) of the amount being prepaid; and (f) During the period from the fourteenth (14th) anniversary of the Closing until the date that is fourteen (14) years and six (6) months following the Closing, Lender is paid a prepayment fee in an amount equal to one percent (1%) of the amount being prepaid; and (g) From and after the date that is fourteen (14) years and six (6) months following the Closing, there shall be no prepayment fee. 3 "Yield Maintenance" shall mean: (i) the present value of all future installments due under the Note (or Notes if more than one Note evidences the Loans in a Loan Pool) including the principal amount due at maturity, discounted at an interest rate per annum equal to the Treasury Constant Maturity Yield Index (as defined in the Note) for instruments having a maturity coterminous with the remaining term of the Note(s), less (ii) the principal amount immediately before such prepayment. Payment following a default shall be deemed a "voluntary" prepayment for the purposes of the imposition of a prepayment fee. No prepayment fee shall be due in connection with prepayments resulting from Lender applying insurance or condemnation proceeds to reduce the principal balance of the Loan, as described in Section 6 of the Special Stipulations Rider attached hereto. 1.7 Secuity for Loan. Each Loan in a Loan Pool shall be secured by a first lien and perfected first security interest in all Properties in the Loan Pool, all leases, rents, income and profits therefrom and all construction, design or other contracts, documents or drawings concerning or affecting the Properties. 1.8 Liability. A Borrower shall have no personal liability for the repayment of the Loans or performance under the Loan Documents (as hereinafter defined), except for (i) misapplication or misappropriation of insurance proceeds, condemnation proceeds, tenant security deposits, rents and any other funds due Lender under the Loan Documents, (ii) intentional damage to and waste of a Property or Properties and damage to a Property or Properties resulting from gross negligence; (iii) failure to pay taxes or other liens with priority over Lender's Loan Documents; (iv) damages arising from any fraud or misrepresentation of Borrower; and (v) damages arising from the existence of hazardous or toxic substances or the failure of Borrower to comply with environmental laws. Each Borrower and Guarantor (as defined below) shall indemnify Lender with respect to any environmental matters, pursuant to a Hazardous Substances Indemnity Agreement executed by Borrower and Guarantor at Closing. Either SMC or an entity to be formed by SMC, which must have a minimum capitalization acceptable to Lender of $500,000 per Loan to which it is Guarantor and otherwise be acceptable to Lender ("Guarantor"), will be required to execute a guaranty of Borrower's obligations for the repayment of the items listed in clauses (i) through (v) above in the form of an Indemnity and Guaranty Agreement to be executed by Guarantor at pre-Closing. The organizational documents, financial statements and principals of the Guarantor, as applicable, are subject to the approval of Lender. 1.9 Deposits. (a) Borrower shall pay at each Closing and concurrently with each monthly installment of principal and interest such amount as in Lender's discretion will be sufficient to pay out of the monies so paid to Lender at least thirty (30) days before due, all taxes, assessments and similar charges and insurance 4 premiums affecting the applicable Properties. Notwithstanding the foregoing, if Lender determines (based on a review of the applicable Property lease) that a tenant under a Property lease is obligated to pay taxes directly to the taxing authority and insurance premiums directly to the insurer prior to the due date thereof, then for so long as such Property lease is in effect, Borrower shall not be obligated to escrow for the taxes and insurance so paid by such tenant; provided, however, that Lender must be provided with prompt evidence of each tax and insurance payment at least fourteen (14) days prior to the due date thereof. Upon the failure of such tenant and/or Borrower to timely comply with the foregoing, such exception to the escrow requirement shall terminate and escrows for taxes and insurance shall thereafter be immediately required as otherwise provided in this clause (a). (b) An escrow for tenant improvements and leasing commissions will be created at each applicable Closing, which in the aggregate shall be equal to $1,300,000 (as such amount may be allocated by Lender on a Loan Pool by Loan Pool and Property by Property basis). Such funds will be placed in an interest bearing account (on a Loan Pool by Loan Pool basis) and interest will be accumulated in such account for the benefit of Borrower (each, a "TI Reserve"). In lieu of a cash TI Reserve, a Borrower may post a letter of credit with Lender from an issuer, with an expiry date and upon terms acceptable to Lender including, without limitation, being a clean, irrevocable, evergreen letter of credit payable upon presentation of Lender's sight draft. Funds from each TI Reserve may be disbursed by Lender for tenant improvement work and leasing commissions associated with tenant rollovers as more particularly provided in the Loan Documents, provided that any amounts that are disbursed (or drawn) are replenished by the applicable Borrower within ten (10) days and provided there is then no default under the applicable Loan Documents. (c) At the Closing, Lender may require reasonable additional escrows based upon its underwriting review (whether funded at Closing or on a monthly basis thereafter). (d) All funds paid to Lender pursuant to this Section 1.9 shall constitute additional security for the Loans in the applicable Loan Pool and may be commingled with Lender's other funds. 1.10 Debt Service Reserve. At the Closing of a Loan Pool, Borrower shall deposit with Lender an amount equal to one (1) regular monthly installment of principal and interest on the Loans in such Loan Pool, together with one (1) installment of any monthly deposits due under the Loan Documents (the "Debt Service Reserve"). Such amount shall constitute additional security for the Loans in the Loan Pool and may be commingled with Lender's other funds and shall not bear interest. Such amount shall be applied by Lender to make the first monthly installment of principal and interest due on the Loans and the first monthly installment due in the applicable reserve accounts. Borrower shall have no obligation to replenish the Debt Service Reserve. 1.11 Repair and Remediation Reserve. At the Closing of each Loan Pool, Borrower shall deposit with Lender an amount equal to 125% of the estimated costs of the repairs to be undertaken on the Properties in such Loan Pool in accordance with the engineering report prepared for Lender in connection 5 herewith, as estimated by Lender. Such amount shall constitute additional security for the Loans in the Loan Pool and may be commingled with Lender's or Lender's Loan servicer's other funds and any interest earned thereon shall be retained by Lender. Lender or, at Lender's election, Lender's Loan servicer, shall disburse amounts from such reserve to pay the costs of such repairs, subject to such terms and conditions as may be provided in the Loan Documents. Borrower shall pay all costs associated with such disbursements, including the reasonable out-of-pocket cost of inspections deemed necessary or appropriate by Lender or Lender's Loan servicer. 1.12 One Time Assumption Right. The Loan Documents shall provide that all amounts due under the Loans in a Loan Pool shall be due and payable upon the sale or other transfer of a Property (or Properties) in such Loan Pool or ownership interests in the applicable Borrower or upon all or any portion of the Properties in the Loan Pool being further encumbered; provided, however that Lender shall consent to a one time transfer of ownership of a Property upon the satisfaction of certain conditions which shall include, without limitation: (a) No default is then continuing under any of the Loan Documents for such Loan Pool. (b) Lender receives no less than sixty (60) days' prior written notice of the terms of the transfer and such information concerning the proposed transferee as Lender would require in evaluating an initial extension of credit to a borrower, including, without limitation, that such proposed transferee is an entity organized under the laws of the United States of America, any State thereof or the District of Columbia, which terms and information shall be acceptable to Lender, and Lender receives a non-refundable application fee equal to $5,000.00. (c) Lender receives an assumption fee equal to one percent (1%) of the then allocated outstanding principal amount of the Loan secured by the transferred Property and Lender is reimbursed for all out-of-pocket fees and expenses incurred by Lender in connection with such transfer and assumption. (d) The proposed transferee executes such documents and agreements as Lender may reasonably require, in form and substance satisfactory to Lender, whereby it assumes and agrees to pay the allocated amount of indebtedness of Borrower under the Loan Documents. (e) Borrower delivers to Lender, at Borrower's sole cost and expense, such endorsements to Lender's title insurance policy, hazard insurance policy and other similar materials as Lender may deem necessary, each in form and substance satisfactory to Lender. (f) Borrower executes and delivers to Lender, each in form and substance satisfactory to Lender, (i) a release of Lender, its officers, directors, employees and agents, from all claims and liabilities relating to the Loan secured by such Property and (ii) such agreements and documents as Lender may require to evidence and ratify Borrower's continuing liability under the Loan Documents with respect to such Property for any acts or events occurring or obligations arising prior to or simultaneously with the transfer. 6 (g) Guarantor executes and delivers to Lender, each in form and substance satisfactory to Lender, such agreements and documents as Lender may require to evidence and ratify such party's continuing liability under the Loan Documents with respect to such Property; provided, however, that if the proposed transferee or a party associated with the proposed transferee approved by Lender, in its sole discretion, assumes the obligations of Guarantor under its guaranty or indemnity agreement with respect to such Property by one or more agreements, in form and substance satisfactory to Lender, Lender shall release Guarantor from all obligations arising under its guaranty or indemnity agreement with respect to such Property after the closing of the transfer. ARTICLE 2 - LOAN DOCUMENTS -------------------------- 2.1 Loan Documents. All such loan documents as Lender may, in its judgment, deem necessary or expedient for its protection, including a loan agreement, promissory note(s), mortgages, deeds of trust or security deeds, assignments of leases and rents, security agreements, UCC-1 financing statements, environmental indemnity(ies), guaranty(ies), and appropriate collateral assignments (collectively, the "Loan Documents"), shall be prepared by counsel for Lender based on Lender's standard form Loan documents (containing those changes that are transaction specific or that may be required by the laws of the state in which a Property is located) and shall contain representations, covenants and agreements satisfactory to Lender and shall be in all respects in form and substance satisfactory to Lender in its sole discretion. The UCC-1 financing statements shall only cover Personal Property (as opposed to trade fixtures, inventory and other personalty utilized for the operation of the businesses conducted at the Properties). In the event of any inconsistencies between the terms hereof and the terms of such Loan Documents, the terms of the Loan Documents shall control. ARTICLE 3 - REQUIREMENTS FOR CLOSING ------------------------------------ 3.1 Back-up Documents. Each Borrower shall execute the Loan Documents and shall furnish back-up documentation as may be required by Lender or Lender's counsel, all of which must be approved by Lender and Lender's counsel in their sole determination as a condition to Closing. Attached hereto as Exhibit "A" is a summary of certain requirements for Closing and attached hereto as Exhibit "B" is a description of Lender's property and liability insurance requirements. The terms and conditions of this Commitment (together with the Special Stipulations Rider) shall control over any terms and conditions of Exhibit "A" that are inconsistent herewith. 3.2 Appraisal, Engineering Report and Environmental Report. This Commitment is subject to receipt and review of an appraisal, an engineering report and an environmental report with respect to each Property, all of which shall be obtained by Lender at Borrower's expense, and all of which must be acceptable in all respects to Lender. SMC and each Borrower shall cooperate with the parties producing such reports and shall provide such information as may be necessary in order to enable such reports to be completed in a timely manner. Lender shall select the entities to provide the engineering, environmental and appraisal 7 reports. SMC authorizes Lender to use the Report Deposit (as defined in Section 4.2) on account of the payment of such costs. 3.3 Counsel for Lender. Graham & James LLP (together with local counsel if Lender so elects) shall act as counsel for Lender, and such counsel shall prepare such documents as it considers appropriate to be executed in connection with the Loans. The address of such counsel is as follows: Graham & James LLP 885 Third Avenue 24th Floor New York, New York 10022 Attention: Mitchell Fenton, Esq. 3.4 Loan-to-Value; Debt Service Coverage. This Commitment is expressly subject to the confirmation by Lender that, as of the Closing date: (i) the ratio of the Loan Amount with respect to each Property to the fair market value of such Property, as determined by the appraisal obtained by Lender hereunder (i.e., the loan-to-value ratio) is equal to or less than 75%; (ii) the Debt Service Coverage Ratio of each Property is equal to or greater than 1.25:1. "Debt Service" shall mean principal, interest and reserve payments due under the Loan Documents for the applicable Loan Pool during the first year of the Loans in such Loan Pool. "Debt Service Coverage Ratio" shall mean the ratio of the aggregate Store Sales (as hereinafter defined) at each Property for the twelve (12) month period prior to such determination, multiplied by an occupancy cost factor of four percent (4%) (which cost factor is subject to adjustment by Lender in its sole and absolute discretion based upon the appraisals and other relevant due diligence), to Debt Service; and (iii) if any of the Properties in a Loan Pool was acquired by Borrower within the twelve (12) months preceding the date hereof or is being acquired by Borrower contemporaneously with the funding of the Loans in such Loan Pool, the ratio of the allocated Loan Amount secured by such Property to the acquisition price of such Property, as determined by the contract pursuant to which the Property is being acquired and a sworn statement thereof to be delivered by Borrower at the time of the pre-Closing, is equal to or less than 85%. As used herein, "Store Sales" shall mean with respect to each Property, the aggregate selling prices of all merchandise sold or delivered in, at, on or from any part of such property and the charges for all services of any sort (including receipts from vending machines and revenues from the rental of merchandise), sold or performed in, at, on or from any part of the Property. Store Sales includes sales and charges for cash or credit, regardless of collection in the case of the latter. Store Sales excludes (i) refunds made by Borrower to its customers for merchandise returned to Borrower, (ii) exchanges of merchandise between stores of Borrower (or Borrower's affiliates) where such 8 exchanges are made solely for the convenient operation of Borrower's business and not for the purpose of consummating a sale at another location that has been made, in fact, at, in, on or from the Property, and (iii) the amount of any city, county or state sales tax on such sales paid to a taxing authority by Borrower (but not by any vendor of Borrower). A Store Sale shall be deemed to be made in the Property if (x) an order therefor is secured or received in the Property, or (y) pursuant to mail, telegraph, telephone or other similar means, orders are received or filled at or from the Property. ARTICLE 4 - FEES, COSTS AND EXPENSES; CLOSING AND FUNDING --------------------------------------------------------- 4.1 Costs and Expenses/Application Fee. (a) SMC or the applicable Borrower shall pay all costs and expenses incurred in connection with the preparation for and the closing of the Loans, whether the Loans close or not (except as set forth in Section 4.6 hereof), including appraisal fees, engineering examination fees, environmental audit fees, inspection fees, credit report fees, accountant review fees, insurance policy review fees, surveyors' fees, zoning/survey consultant's fees, legal fees (including fees of counsel and local counsel for Lender), intangibles taxes, note taxes, mortgage taxes, stamp taxes, transfer taxes, all recording costs and filing fees, all license and permit fees, all title/UCC/litigation/tax lien search fees, and all title and other insurance premiums. Lender shall not bear any out-of-pocket costs or expenses whatsoever in connection with this Commitment or the Loans. This Section 4.1 shall survive the closing of the Loans and the expiration or termination of this Commitment. (b) As part of its loan application, SMC has delivered to Lender an application fee in the amount of $70,000 (the "Application Fee"), which is equal to $2,500 per Property based on an assumption of a total of twenty-eight (28) Properties. Such amount is subject to a proportionate increase based on the actual number of additional Properties reviewed, and SMC (and the applicable Borrower) shall remain liable for any shortfall. 4.2 Report Deposit. SMC shall be required to make a deposit with Lender in the amount of $100,000.00 (which amount is based on an assumption of twenty-eight (28) Properties and shall be subject to a proportionate increase based on the number of additional Properties for which reports were obtained or work was performed) on account of the estimated costs and expenses of obtaining the appraisal, engineering report, environmental report, insurance consultant report, and credit reports (the "Report Deposit"). [CHECK OPTION (A) OR (B) AS APPLICABLE] ( ) OPTION A: SMC shall deliver the Report Deposit upon execution of this Commitment. (XX) OPTION B: Lender acknowledges that SMC has already made the $100,000 Report Deposit as part of its loan application. In the event that Lender's out-of-pocket costs and expenses described above exceed the amount of the Report Deposit, the amount of such excess shall be 9 reimbursed by SMC or the applicable Borrower to Lender out of the Loan proceeds at the applicable Closing. In the event that the amount of the Report Deposit exceeds Lender's out-of-pocket costs and expenses, the amount of such excess shall be credited to SMC or the applicable Borrower by Lender at the last Closing. 4.3 Lender's Fee. At each Closing, the applicable Borrower shall be required to pay to Lender a Lender's Fee in an amount equal to one percent (1%) of the Loan Amount funded at such Closing, which Lender's Fee shall be fully earned and non-refundable at such Closing. Lender shall retain one-half of one percent (1/2%) of such Loan Amount from the Commitment Fee and one-half of one percent (1/2%) of such Loan Amount from the proceeds of the Loan Pool being funded. If any of the Loans are not closed and funded, the unused portion of the Commitment Fee shall be credited against Lender's costs, fees and expenses as otherwise provided herein (and SMC shall remain liable for any shortfall) and any unused amounts, if any, shall be returned to SMC. 4.4 Commitment Fee. SMC shall be required to pay Lender a Commitment Fee in the amount of $375,000. The Application Fee shall be credited against, and treated as part of, the Commitment Fee. SMC shall deliver the Commitment Fee to Lender upon execution of this Commitment. (i) If Lender has used any portion of the Commitment Fee to pay the costs of any appraisal, engineering report or environmental report or other out-of-pocket costs performed by Lender or its representative under Lender's internal underwriting procedures, then such amounts shall be reimbursed by the applicable Borrower to Lender out of the Loan proceeds at the Closing(s). (ii) If a Loan (or Loans) does not close for any reason other than due to (x) the failure of SMC, its affiliate(s) and/or the applicable Borrower to proceed expeditiously and in good faith and to use commercially reasonable efforts to close such Loan(s) or to (y) the willful default of SMC, its affiliate(s) and/or the applicable Borrower under the terms of this Commitment or the loan application submitted by SMC to Lender, then (1) the Report Deposit (and upon depletion of the Report Deposit, the Commitment Fee) shall be used to pay the costs of such appraisal, engineering report and environmental report and (2) the Commitment Fee shall be used to pay the balance due on such costs and (together with any unused portion of the Report Deposit) any other out-of-pocket costs or expenses incurred by Lender in connection with this Commitment or the proposed Loan, and, thereafter, the balance, if any, shall be returned to SMC. If the Report Deposit and the Commitment Fee are not sufficient to pay all of the costs of such reports and such other out-of-pocket costs or expenses, then SMC and/or the applicable Borrower shall immediately pay to Lender such additional amount as is necessary to pay such costs or expenses in full. (iii) If a Loan (or Loans) does not close due (x) to the failure of SMC, its affiliate(s) and/or the applicable Borrower to proceed expeditiously and in good faith and to use commercially reasonable efforts to close such Loan(s) or (y) to the willful default of SMC, its affiliate(s) and/or the applicable Borrower under the terms of this Commitment or the loan application submitted by SMC to Lender SMC, then Lender shall retain the Commitment Fee as full 10 liquidated damages, but such liquidated damages shall not waive Lender's right to obtain reimbursement of its costs and expenses as provided in this subsection (iii). The Report Deposit shall be used to pay the costs of any appraisal, engineering report and environmental report with respect to such unclosed Loan(s) required by Section 3.2 hereof and any excess shall be applied to any other out-of-pocket costs or expenses incurred by Lender in connection with this Commitment or the proposed Loans, and the remaining portion of the Report Deposit, if any, shall be returned to SMC. If the Report Deposit shall not be sufficient to pay the costs of such reports and such other out-of-pocket expenses, then SMC shall promptly after request from Lender pay to Lender the additional amount needed to pay such costs or expenses in full. (iv) SMC's obligations under subparagraphs (i) through (iii) above shall survive the expiration or termination of this Commitment. 4.5 Rate Lock Fee. Each Borrower shall be required to pay Lender prior to pre-Closing a Rate Lock Fee in the amount of one percent (1%) of the applicable Loan Amount in accordance with the following procedure, unless such Borrower elects to attend the Closing in the office of Lender's counsel, in which event the Loans may be locked and funded on the same day and no Rate Lock Fee with respect to such Loans shall be required. Following confirmation by Lender that all preconditions to pre-Closing have been satisfied and upon Lender's request for such Rate Lock Fee, the applicable Borrower shall deliver the Rate Lock Fee by bank wire or other immediately available funds received by Lender no later than 5:00 P.M. on the date prior to pre-Closing. The Rate Lock Fee shall be fully earned and, except as hereinafter provided, non-refundable upon receipt by Lender. In the event that the applicable Loans are funded in accordance with the terms of this Commitment, the Rate Lock Fee shall be credited against any other expenses of such Borrower due at Closing and any excess shall be refunded to such Borrower. 4.6 Legal Fees. Legal fees for the Loans shall not exceed $9,000 per Loan assuming no unusual circumstances and reasonable document negotiation, plus disbursements and local counsel fees. In the event that a Loan (or Loans) does not close (due to no willful default of SMC or its affiliates or the applicable Borrower and provided that SMC and its affiliates and such Borrower have proceeded expeditiously and in good faith and used commercially reasonable efforts to close such Loan), such Borrower shall only be obligated to pay fifty percent (50%) of Lender's legal fees (plus disbursements) in connection with such transaction(s) and such Borrower shall pay same to Lender upon demand. In the event that Lender's counsel performs initial legal due diligence on a property or properties proposed by SMC or the applicable Borrower to serve as collateral, but such property or properties do not become part of the collateral pool supporting a Loan or Loans, then in addition to the fee set forth in the first sentence hereof, Lender's counsel shall receive a fee equal to its actual time in reviewing such property(ies), not to exceed Seven Hundred Fifty and 00/100 Dollars ($750) per property. 4.7 Financial Consultant and Other Fees. Lender shall not be obligated to pay any loan commission and/or brokerage fee and/or consulting fee in connection with this Commitment, Lender's acceptance thereof or the consummation of the Loans. [SMC CHECK OPTION (A) OR (B) AS APPLICABLE] 11 (XX) Option A. SMC represents and warrants that it has not dealt with any finder or broker or consultant in connection with this Commitment other than Financial Consultant (as hereinafter defined). ( ) Option B. SMC acknowledges, represents and warrants that in addition to Financial Consultant, it has only dealt with _____________________ ("Broker") in connection with this Commitment, and that SMC has agreed to pay Broker a fee in the amount of $____________ in connection with the Loans. SMC shall pay any and all commissions and fees due to the Financial Consultant, and SMC hereby agrees to indemnify, defend and hold Lender harmless from any claims for commissions or fees, including any legal fees and expenses, from any person or party including, without limitation, the Financial Consultant and Broker. The foregoing representation and such indemnity shall survive the expiration or termination of this Commitment, or the Closing(s), as applicable. SMC hereby acknowledges and agrees that Lender shall have no obligation to pay any commissions and/or fees due to any person or party claiming through SMC or its affiliates including, without limitation, the Financial Consultant and Broker. 4.8 Closing and Funding of Loans. Pre-Closing or, if there is no pre-Closing as provided in Section 4.5 hereof, Closing (i.e., execution and delivery of all documents and satisfaction of all requirements for Closing as determined by Lender) shall occur at the offices of Lender's counsel, or at such other location as agreed to by Lender and SMC. The intended Closing Date for the Loans is October 4, 1996, and SMC and its affiliates and each Borrower shall proceed expeditiously and in good faith, and use commercially reasonable efforts, to close the Loans by such date (it being understood and agreed that if no additional Properties make up the collateral supporting the proceeds of the Loans other than the Properties set forth on Schedule A, such event shall not, in and of itself, constitute a failure by Borrower to proceed in good faith). Provided that SMC, its affiliates and each Borrower proceed expeditiously and in good faith, and use commercially reasonable efforts, to close the Loans in a Loan Pool, if any Loan in such Loan Pool is unable to close because a Property fails to satisfy the conditions of this Commitment, Lender will have no obligation to fund such Loan but will fund the remaining Loans in such Loan Pool. If less than $75,000,000 of the Loans close prior to October 4, 1996, Lender shall not be obligated to close more than an additional (a) $25,000,000 of Loans (provided that the aggregate amount of all Loans shall not exceed $75,000,000) between October 5, 1996 and February 14, 1997 upon the same terms and conditions set forth herein and (b) $25,000,000 of Loans (provided that the aggregate amount of all Loans shall not exceed $75,000,000) between February 15, 1997 and June 30, 1997 upon the same terms and conditions as set forth herein. Lender shall have no obligation to close any Loans after June 30, 1997, but may, in its sole discretion, elect to do so upon such terms and in such amounts as Lender shall determine. In addition to satisfaction of all of the terms and conditions of this Commitment, funding of Loan proceeds by Lender ("Closing") shall be contingent on delivery of the executed Loan Documents, title policy, survey and other original documents to Lender's counsel or, at Lender's option, 12 to a custodian designated by Lender, and confirmation by Lender's counsel or the custodian that it has possession of all Loan Documents required under Lender's conduit program. Such confirmation shall occur and the Loan(s) shall be funded not later than three (3) business days after the pre-Closing date; provided, in the event Lender's counsel or the custodian determines that any required document is missing or incomplete, Borrower shall immediately execute and deliver to Lender's counsel or the custodian such additional documentation as may be required by Lender's counsel or the custodian to issue such confirmation, and the Loan(s) shall be funded within two (2) business days after such confirmation. ARTICLE 5 - OTHER CONDITIONS ---------------------------- 5.1 Acceptance. Upon the return by Borrower to Lender of a fully executed copy of this Commitment within seven (7) days after the date hereof, together with the Commitment Fee provided for in Section 4.4 hereof and the Report Deposit described in Section 4.2 hereof (if not previously deposited), this Commitment will constitute an agreement obligating Lender to make and Borrower to accept the Loans in accordance with the terms and conditions set forth in this Commitment. If said executed copy of this Commitment and Commitment Fee and Report Deposit are not received by Lender within seven (7) days from the date hereof, this Commitment shall be null and void. 5.2 Expiration and Termination. Unless all applicable conditions contained herein have been met to the satisfaction of Lender and the Loans have been pre-Closed or Closed within the time schedules set forth in Section 4.8 above, this Commitment shall automatically expire unless Lender elects otherwise. Lender may, at its option, terminate its agreement to make the Loans (a) in the event that there is any material inaccuracy or any material, adverse change in any information, representations or materials submitted with or in support of the application for the Loans, (b) in the event of any material adverse change in the financial condition of any of the Properties (provided that Lender shall not terminate this Commitment in the event of any material adverse change in the financial condition of a particular Property, and in such event Lender will have no obligation to close the Loan(s) related to such Property(ies) but will close the Loans related to the remaining Properties), SMC or SMC and its affiliates taken as a whole, any Borrower or any guarantor, indemnitor or any other person or entity to be liable for repayment of the Loans (SMC, SMC and its affiliates taken as a whole, any such Borrower and any such guarantor, indemnitor, person or entity being herein referred to as a "Credit Party") or the material default or defaults beyond any applicable notice and/or grace periods by any Credit Party under any material obligation which, in Lender's reasonable determination, may have an adverse affect on any Credit Party, or any of the Properties (provided that Lender shall not terminate this Commitment in the event of any such material, adverse affect on a particular Property, and in such event Lender will have no obligation to close the Loan(s) related to such Property(ies) but will close the Loans related to the remaining Properties), or (c) in the event of any material, adverse change in the condition of any of the Properties, physical or otherwise, including any changes, whether existing or potential, caused by pending or threatened condemnation or by casualty (provided that Lender shall not terminate this Commitment in the event of any such material, adverse change in the condition of a particular Property, and in such event 13 Lender will have no obligation to close the Loan(s) related to such Property(ies) but will close the Loans related to the remaining Properties). In the event that any Credit Party shall become insolvent or make a general assignment for the benefit of creditors, or if there shall be filed by or against any Credit Party a petition in bankruptcy, or for the appointment of a receiver, or if proceedings shall be commenced under any bankruptcy or insolvency law for any Credit Party's relief or for the composition, extension, arrangement or adjustment of any Credit Party's obligations, or if any Credit Party's business shall be discontinued as a going concern, or if there shall be a suspension of any Credit Party's business, or a default in the performance of any other obligation any Credit Party may have to Lender, or in case of the issuance of any warrant or attachment of a material nature against any property of any Credit Party or the taking of possession of or assumption of control of all or any substantial part of the property of any Credit Party's business by any governmental agency, then Lender's commitment to make the Loans shall automatically and immediately terminate without further notice and without further action on the part of Lender unless Lender elects otherwise. In the event of any such expiration or termination, Lender shall have no further obligations hereunder (except with respect to the return of any fees to Borrower to the extent provided in this Commitment), and SMC and the Borrower(s) shall be liable only for damages, costs and expenses to the extent provided in this Commitment. 5.3 SMC's Representations and Warranties. SMC represents and warrants that the statements contained herein and in all documentation provided to Lender and all other representations or statements made by or on behalf of SMC and the Borrower(s) to Lender in connection with the application for and closing of the Loans are true and complete in all material respects and do not omit any fact or information material to Lender's evaluation of said application and of SMC's and each such Borrower's compliance with the conditions for the Closing(s). SMC acknowledges that Lender will rely on this warranty and representation in making the Loans. If SMC or the Borrower(s) has made any material misrepresentation in connection with this Commitment for and closing of the Loans, such shall be a default under the Loan Documents entitling Lender to exercise any and all of its rights upon a default under the Loan Documents. In addition, if all or any of the Loans have not closed and Lender elects to terminate its commitment to make the Loans due to any material misrepresentation as provided in Section 5.2 above, then notwithstanding any other provision herein, the Commitment Fee, the Rate Lock Fee (if paid) and the Report Deposit shall be retained as liquidated damages by Lender as its sole remedy, other than the right to collect from SMC and the Borrower(s) the out-of-pocket costs and expenses referred to in Section 4.1 above. SMC and the applicable Borrower shall reaffirm the continuing accuracy and completeness of such warranties and representations at each Closing. 5.4 Confidentiality. Subject to the next sentence, Lender agrees to keep confidential any and all financial, technical, commercial or other information concerning the business affairs of SMC that SMC has provided to Lender and that was not otherwise generally available to the public. Notwithstanding the foregoing, to the extent that Lender deems necessary, SMC understands that such information may be included in related marketing efforts and disclosure documents to be utilized in connection with the sale or placement by Lender or its affiliate, First Union Capital Markets, Inc., of one or more classes of Commercial Mortgage Pass-Through Certificates representing interests in a trust 14 consisting primarily of all or a portion of the Loans and other mortgage loans. Prior to the Closing of a Loan Pool, and except as otherwise required pursuant to applicable law, SMC and its affiliates agree to keep confidential the Loans in such Loan Pool and any person, entity or information introduced or revealed by Lender to SMC in connection therewith, unless SMC receives the prior written consent of Lender. In addition, SMC agrees not to enter into any real estate mortgage financing transaction that involves any of the Properties or any information involved in the Loans for a period of two (2) months after the execution and delivery of this Commitment. 5.5 Intentionally Omitted. 5.6 Role of Financial Consultant. [CHECK OPTION A OR B AS APPLICABLE] (XX) Option A. Chase Securities, Inc. (the "Financial Consultant") has acted as Borrower's consultant in connection with this Commitment. Financial Consultant is acting as an independent contractor and not as an agent, employee, partner, joint venturer or affiliate of Borrower. SMC understands that Financial Consultant does not have the authority to, and cannot, bind Lender in any respect, including, without limitation, the waiver of any condition contained herein, or the funding of such Loans. ( ) Option B. There is no Financial Consultant involved in this transaction. 5.7 Miscellaneous. Lender shall be under no obligation to make a Loan unless and until all of the requirements hereunder have been fully satisfied. Except as otherwise specifically provided herein, all documents, certificates, permits and other items contemplated hereby, all inspections, appraisals, evaluations and approvals contemplated hereby, all payments required hereby, and all other conditions, matters or things of any nature contemplated hereby to exist, be performed or be provided, shall all be satisfactory to Lender in its reasonable discretion and shall exist, be performed and be provided to Lender prior to the applicable Closing. Neither this Commitment, nor any right to receive any of the proceeds of the Loans shall be assignable by SMC or a Borrower without the prior written consent of Lender, and any attempt to make such assignment without such consent shall be void. Execution of this Commitment by Lender shall not imply the approval by Lender of any document or information previously furnished to Lender, it being acknowledged by all parties hereto that no approvals have been given by Lender with respect to the conditions and requirements set forth in this Commitment. This Commitment contains the entire agreement of SMC and Lender with respect to the matters referred to herein and supersedes entirely any and all prior written or oral agreements relating to the Loans (except for the loan application submitted by SMC to Lender; it being understood and agreed that the terms and conditions of this Commitment shall control over any terms and conditions of the loan application that are inconsistent herewith). There are no contemporaneous oral agreements relating to the subject matter hereof. No change in the provisions of this Commitment and no approval or consent of Lender shall be binding unless in writing and executed in the name of, and by an officer of, Lender. Time is of the essence with respect 15 to all dates and periods of time set forth in this Commitment. Subject to Section 2.1 hereof, this Commitment and all terms and provisions hereof shall survive the Closing and shall not be merged into any of the Loan Documents. Whenever anything is described herein in general terms and one or more examples or components thereof is set forth after the word "including" or is otherwise associated with such general description, the examples or components shall be deemed illustrative only and shall not be construed as limiting the generality of the description in any way. This Commitment shall be interpreted, construed and enforced according to the laws of the State of New York. When any sums are stated herein as being retained by Lender as full liquidated damages, such sums are being retained under circumstances where it will be difficult to ascertain the sum required to compensate Lender for the loss of opportunity to make the Loan(s), the loss of opportunity to make other loans on account of time and attention relating to the Loan(s) and for the internal expenses incurred by Lender in connection with the review, evaluation and processing of material and information relating to the Loan(s) and such liquidated damages represents the reasonable, good faith attempt of the parties hereto to liquidate such damage in advance. 5.8 Special Stipulations. [CHECK OPTION A OR OPTION B AS APPLICABLE] (XX) Option A. The Special Stipulations Rider attached hereto contains seven (7) provisions which are by this reference made a part hereof and shall control over any provisions hereof which are inconsistent therewith. ( ) Option B. There is no Special Stipulations Rider attached to this Commitment. 16 IN WITNESS WHEREOF, Lender hereby executes this Commitment as of the date first above written. FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ Barry P. Reiner ---------------------------- Name: Barry P. Reiner ---------------------------- Title: Vice President ---------------------------- The foregoing Commitment is hereby agreed to and accepted by the undersigned this ____ day of September, 1996. SERVICE MERCHANDISE COMPANY, INC. By: /s/ Thomas L. Garrett, Jr. ---------------------------- Name: Thomas L. Garrett, Jr. ---------------------------- Title: Treasurer ---------------------------- 17 SPECIAL STIPULATIONS RIDER TO COMMITMENT LETTER DATED SEPTEMBER 9, 1996 FROM FIRST UNION NATIONAL BANK OF NORTH CAROLINA TO SERVICE MERCHANDISE COMPANY, INC. The Commitment to which this rider is attached is subject to the following: 1. Lender may elect to create one or more pools with respect to the Loans and the respective Properties securing the Loans (each, a "Loan Pool") to such extent and in such manner as Lender determines in its sole discretion. In addition, the Loans in each Loan Pool shall be cross collateralized and cross defaulted to such extent and in such manner as lender determines in its sole discretion; provided, however, that the Loans in one Loan Pool shall not be cross collateralized or cross defaulted with the Loans in any other Loan Pool. 2. A Property may be released from the lien of the Lender's mortgage subject to the following conditions: (a) The Lender shall be provided with at least forty-five (45) days' prior written notice and there shall be no default under the Loan Documents either on the date of such written notice or on the actual release date. (b) The applicable Borrower shall pay to the Lender a release price in an amount equal to one hundred ten percent (110%) of the then allocated loan amount for the Property to be released (as determined by Lender), which amount shall be applied against the outstanding balance of the Loans. (c) In order for the applicable Borrower to have the right to request a release either (x) the "DSCR" (as defined below) for the Property to be released is less than the average coverage for the entire Loan Pool, provided that the coverage for the Loan Pool is at least 1.25 or (y) the aggregate DSCR for all Properties in the Loan Pool (excluding the Property requested to be released) that would remain after the release calculated for the twelve (12) month period immediately prior to the release shall not be less than 1.30. (d) The Borrower shall, at its expense, provide (i) all financial and other information to substantiate the foregoing to the Lender's satisfaction, including updated sales information and appraisals if required by the Lender in order to determine such current DSCR's and (ii) title endorsements acceptable to the Lender insuring that the lien of the mortgage on the remaining Properties shall continue in effect with first lien priority and shall be unaffected by the release of such Property. All expenses incurred by the Lender in connection with a request for a release shall be paid by the applicable Borrower, including, without limitation, attorneys' fees. (e) The payment of a release price for the release of a Property shall be deemed to be a prepayment of the applicable Loan and shall be subject to the prepayment lock-out and yield maintenance provisions. (f) The released Property shall be transferred to an entity that is not the immediate parent of the applicable corporate Borrower; provided, however, that title may pass through such immediate parent to another entity in a series of transfers that occur on the same day, and such Borrower shall provide Lender with evidence reasonably satisfactory to Lender confirming the foregoing, including, without limitation, a copy of the deed (or deeds) conveying title to the released Property, certified to be true and complete by such Borrower, and a certificate of such Borrower confirming the name, address and non-immediate parent status of such ultimate transferee. (g) In no event shall more than twenty percent (20%), rounded up or down to the nearest whole number, of the Properties in a Loan Pool be released within any calendar year. (h) The term "DSCR" shall mean the Debt Service Coverage Ratio as determined by Lender based on the rolling twelve (12) month Store Sales multiplied by a market occupancy cost factor (which shall be the same occupancy cost factor applied pursuant to Section 3.4(ii) of the Commitment), divided by the principal, interest and reserve payments due under the Loan Documents for such twelve (12) month period. 3. Each Borrower shall be required to enter into a bondable lease for each Property upon terms, and in form, acceptable to Lender with SMC as tenant (or with an operating subsidiary of SMC as tenant, in which event SMC shall guaranty the obligations of the tenant under the lease pursuant to a guaranty acceptable to Lender). Each lease shall provide for a minimum term of fifteen (15) years from the date of the applicable Closing with a seven (7) year renewal option exercisable at the option of the tenant thereunder. A default under any lease shall constitute a Loan default. Each lease must be at market rents as determined by an independent third party appraiser approved by Lender. The tenant thereunder shall be required to pay for all operating expenses, maintenance, taxes, insurance and other amounts. 4. A Borrower shall have the right to substitute a Property with a property outside of the applicable Loan Pool at anytime up to the ninetieth (90th) day after the closing of Lender's (or its affiliate's) securitization which includes the Loans in the Loan Pool. Such time restriction is based on a REMIC requirement currently in effect, and is subject to adjustment by Lender based on any changes to the REMIC requirements. The substitute property must be acceptable to (a) Lender, if prior to such securitization or (b) the REMIC trustee, applicable rating agencies and servicer, if post- securitization, which approval shall include, without limitation, value, property type, location and operating income. 5. In no event shall more than twenty percent (20%), rounded up or down to the nearest whole number, of the Properties in a Loan Pool be permitted to "go dark" at the same time, and a violation of this restriction shall be a default under the applicable Loan Documents. For the purposes hereof, a Property shall be deemed "go dark" if it is more than two-thirds (2/3) vacant for any consecutive six (6) month period. In addition, it shall be a default under the applicable Loan Documents if a Property becomes vacant and such vacancy triggers a default and/or a purchase option (or termination option in the case of a ground lease) under another agreement affecting the Property. 6. During the first eight (8) years of the term of a Loan, if (a) less than sixty percent (60%) of a Property is damaged or destroyed or taken by eminent domain, the applicable Borrower shall be required to restore the Property and Lender shall make the insurance or condemnation proceeds available for restoration pursuant to the disbursement requirements contained in the applicable Loan Documents or (b) sixty percent (60%) or more of a Property is damaged or destroyed or taken by eminent domain, the applicable Borrower shall have the right, subject to the other terms of the Loan Documents and provided that no default then exists, to elect (i) to restore the Property, in which case Lender shall make the insurance or condemnation proceeds available for restoration pursuant to the disbursement requirements contained in the applicable Loan Documents or (ii) not to restore the Property, in which case Lender shall apply the insurance or condemnation proceeds to repayment of the Loan and Borrower shall pay Lender, for application to the Loans as provided in Subsection 2(b), an amount equal to the difference between the applicable Release Price and the amount of such insurance or condemnation proceeds (without prepayment penalty). Upon such payment by Borrower, the Property shall be released from the lien of the applicable mortgage pursuant to Section 2 hereof without regard to the limitation set forth in clause (g) of Section 2. From and after the first eight (8) years of the term of a Loan, it shall be at Lender's election (regardless of the amount damaged, destroyed or taken) whether to require such Borrower to restore the Property or to apply the insurance or condemnation proceeds to the repayment of the Loan. Notwithstanding the foregoing, if Borrower exercises its election pursuant to Section 1.5 of this Commitment to structure the Loans with a fifteen (15) year term based upon a fifteen (15) year amortization schedule, then at any time during the term of a Loan, if (1) less than sixty percent (60%) of a Property is damaged or destroyed or taken by eminent domain, the applicable Borrower shall be required to restore the Property and Lender shall make the insurance or condemnation proceeds available for restoration pursuant to the disbursement requirements contained in the applicable Loan Documents or (2) sixty percent (60%) or more of a Property is damaged or destroyed or taken by eminent domain, the applicable Borrower shall have the right, subject to the other terms of the Loan Documents and provided that no default then exists, to elect (x) to restore the Property, in which case Lender shall make the insurance or condemnation proceeds available for restoration pursuant to the disbursement requirements contained in the applicable Loan Documents or (y) not to restore the Property, in which case Lender shall apply the insurance or condemnation proceeds to repayment of the Loan. 7. In addition to the items set forth in Exhibit "A", the following items are conditions to the closing of the Loans: (a) SMC shall provide Lender with copies of its most recent 10-K and 10-Q reports; (b) Lender may inspect and approve each Property; (c) In connection with any Property that is subject to a ground lease, SMC or the applicable Borrower shall provide Lender with an estoppel, recognition agreement or lease amendment (as determined by Lender) satisfactory to Lender with respect to any defaults under the ground lease and the rights of Lender as leasehold mortgagee. In addition, if the ground lessor is SMC or another affiliate of the Borrower, then Lender shall have the right to have the applicable Loan secured by a first lien on and perfected security interest in the fee estate of the Property (in addition to a leasehold mortgage); (d) Lender shall be in receipt of a certificate of completion from an architect or engineer of record with respect to any Property or improvements thereon if the same shall have been completed or substantially renovated within three (3) years of the date of this Commitment (only to the extent that any such certificate of completion is required by local law); (e) A schedule of Personal Property prepared by the same company that prepared the engineering report for the Properties shall be delivered to Lender showing all Personal Property used in the operation of a Property (as opposed to trade fixtures, inventory and other personalty utilized for the operation of the business conducted at the Property), which shall be subject to a first priority security interest in favor of Lender and perfected by a UCC-1 financing statement and shall be certified by Borrower as complete and correct; (f) A revenue statement with respect to each lease of a Property showing a minimum Debt Service Coverage Ratio in accordance with Section 3.4 of the Commitment; (g) The Property shall be managed by an entity acceptable to Lender in accordance with a short form management agreement approved by Lender. An affiliate of SMC (owned and controlled by SMC) is presently an acceptable manager. All management contracts or agreements with shall be subordinate to the Mortgages in a Loan Pool, shall be assigned to Lender as additional security and may be terminated by Lender, at its election, upon the occurrence of an Event of Default under the applicable Loan Documents; and (h) Each Borrower shall be required to furnish Lender within thirty (30) days after the close of each fiscal year with financial statements certified by the chief financial officer of SMC (or its successor) and an authorized officer of such Borrower, which shall consist of the annual sales information for the store located at each Property together with a schedule of capital expenditures made by the tenant at such Property (the "Statements"). In addition, each Borrower shall furnish Lender with audited financials of SMC (or its successor) within thirty (30) days of same becoming available. In addition, each Borrower and Guarantor shall furnish Lender within thirty (30) days after the close of each fiscal year with a balance sheet and a profit and loss statement certified by the chief financial officer of the Guarantor (or its successor) and an authorized officer of such Borrower. In addition, monthly reports of sales information for the store located at each Property, certified by the chief financial officer of SMC (or its successor) and an authorized officer of each Borrower shall be required for the first twelve (12) months following the Closing of each Loan Pool. Lender agrees to instruct Lender's Loan servicer to require any recipient of the financial information delivered by Borrower pursuant to this clause (h) to sign a confidentiality agreement with respect to such financial information. The Foregoing Special Stipulations shall control over any provisions of the Commitment which are inconsistent herewith. EX-4.2A 4 LOAN AGREEMENT LOAN AGREEMENT Dated as of October 4, 1996 by and between SMC-SPE-1, INC., a Delaware corporation, as Borrower and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association, as Lender TABLE OF CONTENTS ARTICLE 1 DEFINITIONS.....................................................................................4 1.1 Definitions.....................................................................................4 1.2 Principles of Construction.....................................................................11 ARTICLE 2 GENERAL TERMS..................................................................................11 2.1 Loan Commitment; Disbursement to Borrower......................................................11 2.1.1 The Loans.............................................................................11 2.1.2 The Notes.............................................................................11 2.2 Loan Repayment/Prepayment......................................................................12 2.2.1 Loan Repayment........................................................................12 2.2.2 Prepayment............................................................................12 2.3 Total Sale.....................................................................................16 2.4 Transfer of Individual Property................................................................18 2.5 Substitution of a Property.....................................................................18 2.6 TI Reserve.....................................................................................21 ARTICLE 3 REPRESENTATIONS AND WARRANTIES.................................................................22 3.1 Borrower's Representations.....................................................................22 3.2 Survival of Representations....................................................................23 ARTICLE 4 DEFAULTS.......................................................................................23 4.1 Event of Default...............................................................................23 4.2 Remedies.......................................................................................24 ARTICLE 5 MISCELLANEOUS..................................................................................25 5.1 Survival.......................................................................................25 5.2 Lender's Discretion............................................................................25 5.3 Governing Law..................................................................................25 5.4 Modification; Waiver in Writing................................................................25 5.5 Notices........................................................................................25 ARTICLE 6 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL...............................................26 6.1 Headings.......................................................................................26 6.2 Successors and Assigns; Assignment.............................................................27 6.3 Severability...................................................................................27 6.4 Expenses; Indemnity............................................................................27 6.5 Exhibits Incorporated..........................................................................27 6.6 No Joint Venture or Partnership................................................................27 6.7 Borrower's Waivers.............................................................................27 6.8 Construction of Documents......................................................................28 6.9 Prior Agreements...............................................................................28 6.10 Exculpation....................................................................................28 6.11 Maximum Interest...............................................................................28 EXHIBIT A Initial Allocated Loan Amounts.................................................................31
LOAN AGREEMENT -------------- THIS LOAN AGREEMENT (this "Agreement"), dated as of October 4, 1996, by and between FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association, having an address at One First Union Center, DC6, Charlotte, North Carolina 28288- 0166 (together with its successors and assigns, "Lender"), and SMC-SPE-1, a Delaware corporation, having an address at c/o Service Merchandise Company, Inc., 7100 Service Merchandise Drive, Brentwood, Tennessee 37027 ("Borrower"). All capitalized terms used herein shall have the respective meanings set forth in Section 1.1 hereof. W I T N E S S E T H : - - - - - - - - - - WHEREAS, Borrower desires to obtain mortgage loan financing in the aggregate principal amount of FIFTY-TWO MILLION EIGHT HUNDRED THIRTY THOUSAND AND 00/100 DOLLARS ($52,830,000.00) (collectively, the "Loans") in connection with the acquisition or financing of nineteen (19) Service Merchandise locations (individually, a "Property" and collectively, the "Properties"), as more specifically described in the "Mortgages" (as hereinafter defined); and WHEREAS, the Loans are evidenced by nineteen (19) Promissory Notes and secured by nineteen (19) Mortgages on the Properties; WHEREAS, Lender is willing to make the Loans to Borrower, subject to and in accordance with the terms of this Agreement and the other Loan Documents. NOW, THEREFORE, in consideration of the covenants, agreements, representations and warranties set forth in this Agreement, and other good and valuable consideration, the parties hereto hereby covenant, agree, represent and warrant as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly required or unless the context clearly indicates a contrary intent: "Affiliate" of any specified Person shall mean any Person or entity (i) which owns beneficially, directly or indirectly, more than fifty percent (50%) of the outstanding shares of common stock or which is otherwise in control of Borrower, (ii) of which more than fifty percent (50%) of the outstanding voting securities are owned beneficially, directly or indirectly, by any entity described in clause (i) above, or (iii) which is controlled by an entity described in clause (i) above; provided that for the purposes of this definition the term "control" and "controlled by" shall have the meanings assigned to them in Rule 405 under the Securities Act of 1933, as amended. "Allocated Loan Amount" shall mean the Initial Allocated Loan Amount of each Property, as such amount may be adjusted from time to time as hereinafter set forth. Upon each adjustment in the principal portion of the Indebtedness (each, a "Total Adjustment"), whether as a result of amortization, prepayment or as otherwise expressly provided herein or in any other Loan Document, each Allocated Loan Amount shall be increased or decreased, as the case may be, by an amount equal to the product of (i) the Total Adjustment, and (ii) a fraction, the numerator of which is the applicable Allocated Loan Amount (prior to the adjustment in question) and the denominator of which is the aggregate of the Allocated Loan Amounts (prior to the adjustment in question). However, when the principal portion of the Indebtedness is reduced as a result of Lender's receipt of (i) a Release Price, the Allocated Loan Amount for the Property being released and discharged from the encumbrance of the applicable Mortgage shall be reduced to zero (the amount by which such Allocated Loan Amount is reduced being referred to as the "Released Allocated Amount"), the applicable Mortgage, Assignment of Leases and other Collateral Documents with respect to such Loan shall be satisfied and discharged (of record, if applicable), and each other Allocated Loan Amount shall be decreased by an amount equal to the product of (1) the excess of (a) the Release Price over (b) the Released Allocated Amount, and (2) a fraction, the numerator of which is the applicable Allocated Loan Amount for each Property (prior to the adjustment in question) and the denominator of which is the aggregate of all of the Allocated Loan Amounts (prior to the adjustment in question) other than the Allocated Loan Amount applicable to the Property for which the Release Price was received or (ii) the sum of Net Proceeds (which term for the purposes of computing the Allocated Loan Amount only shall be deemed to include casualty and condemnation proceeds that are applied towards the reduction of the Indebtedness as set forth in Section 1.9 of the Mortgages) and Borrower's Contribution (if any), the Allocated Loan Amount for the Property with respect to which such sum was received shall be reduced to zero (the amount by which such Allocated Loan Amount is reduced being referred to as the "Foreclosed Allocated Amount"), the applicable Mortgage, Assignment of Leases and other Collateral Documents with respect to such Loan shall be satisfied and discharged (of record, if applicable), and each other Allocated Loan Amount shall (x) if the Net Proceeds exceed the Foreclosed Allocated Loan Amount (such excess being referred to as the "Surplus Net Proceeds"), be decreased by an amount equal to the product of (1) the Surplus Net Proceeds and (2) a fraction, the numerator of which is the applicable Allocated Loan Amount for each Property (prior to the adjustment in question) and the denominator of which is the aggregate of all of the Allocated Loan Amounts, (prior to the adjustment in question) other than the Allocated Loan Amount applicable to the Property with respect to which the Net Proceeds were received (such fraction being referred to as the "Net Proceeds Adjustment Fraction"), (y) if the Foreclosed Allocated Amount exceeds the sum of Net Proceeds and any Borrower's Contribution (such excess being referred to as the "Net Proceeds Deficiency"), be increased by an amount equal to the product of (1) the Net Proceeds Deficiency and (2) the Net Proceeds Adjustment Fraction, or (z) if the sum of Net Proceeds and any Borrower's Contribution equals the Foreclosed Allocated Amount, remain unadjusted. "ALTA" shall mean American Land Title Association, or any successor thereto. "Annual Release Limit" shall have the meaning specified in Section 2.2.2(c)(4). "Assignment of Leases" shall mean, with respect to each Loan, that certain first priority Assignment of Leases and Rents, dated as of the date hereof, from Borrower, as assignor, to Lender, as assignee, with respect to the Property that is encumbered by the applicable Mortgage, assigning to Lender all of Borrower's interest in and to the Leases and Rents of such Property as security for the Loan, as such Assignment of Leases may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Borrower" shall have the meaning specified in the first Paragraph hereof. "Borrower's Contribution" shall have the meaning specified in Section 1.9 of the Mortgages. "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which national banks in North Carolina are not open for business. "Closing Date" shall mean the date hereof. "Code" shall mean the Internal Revenue Code of 1986. "Collateral Security Documents" shall mean, with respect to each Loan, any document or instrument given as security for the Note evidencing such Loan, including, without limitation, the Mortgage and the Assignment of Leases, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Conditional Commitment" shall mean the Conditional Commitment Letter from Lender and accepted by SMC dated September 9, 1996, together with the Special Stipulations Rider and Exhibit A and Exhibit B attached thereto. "Debt Service" shall mean, with respect to each Loan, the amount of interest, principal and reserve payments due and payable in respect of such Loan in accordance with the applicable Note and the other Loan Documents during an applicable period. "DSCR" shall mean the quotient obtained by dividing (i) the product of Store Sales at a Property (or Properties) for the twelve (12) month period immediately prior to the date for which the computation is made, multiplied by four (4%) per cent, by (ii) Debt Service for the corresponding period. "Environmental Indemnity" shall mean that certain Hazardous Substances Indemnity Agreement of even date herewith, by Borrower and Indemnitor in favor of Lender with respect to environmental conditions on the Properties, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Event of Default" shall have the meaning specified in Section 4.1. "Fiscal Year" shall mean each annual period commencing on the first (1st) day after the end of the immediately preceding such annual period and ending the Sunday nearest the end of each calendar year of the term of this Agreement, or such other fiscal year of Borrower as Borrower may select from time to time with the prior written consent of Lender. "GAAP" shall mean generally accepted accounting principles in the United States of America as of the date of the applicable financial report. "Governmental Authority" shall mean any court, board, agency, commission, office or authority of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence. "Improvements" shall have the meaning specified in the applicable Mortgage with respect to each Property. "Indebtedness" shall mean the aggregate indebtedness in the original principal amounts set forth in, and evidenced by, the Notes, together with all other obligations and liabilities of Borrower due or to become due to Lender pursuant to the Notes, this Agreement or any other Loan Document, including, without limitation, all interest thereon. "Indemnitor" shall mean SMC-HC, Inc., a Delaware corporation. "Indemnity" shall mean that certain Indemnity and Guaranty Agreement of even date herewith, by Indemnitor in favor of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Initial Allocated Loan Amount" shall mean, with respect to each Loan, the principal amount of the applicable Note evidencing such Loan, as set forth on Exhibit A attached hereto and by this reference a part hereof. "Lease" shall mean, with respect to each Loan and the applicable Property, all leases, licenses, tenancies, concessions and occupancy agreements of such Property or the Improvements or the fixtures or equipment or any portion thereof or any interest therein, now or hereafter entered into. "Lender" shall have the meaning specified in the first Paragraph hereof. "Lien" shall mean, with respect to each Loan and the applicable Property, any mortgage, deed of trust, deed to secure debt, lien, pledge, hypothecation, assignment, security interest, or any other encumbrance, charge or transfer of, on or affecting such Property or any portion thereof or any interest therein, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, any financing statement, and mechanic's, materialmen's and other similar liens. "Loan" shall mean one of the Loans, which shall be evidenced by a Note and secured by the Mortgages and the other Collateral Security Documents with respect to such Loan, to be made by Lender to Borrower pursuant hereto. "Loans" shall have the meaning specified in the recitals hereof, and shall refer, collectively, to each Loan. "Loan Documents" shall mean, collectively, shall mean this Agreement, the Mortgages, the Notes, the Assignments of Leases, the Environmental Indemnity, the Indemnity, the Loan Application submitted by SMC to Lender dated August 16, 1996, the Conditional Commitment and all other agreements, instruments, certificates or documents executed and delivered by Borrower or any Affiliate of Borrower in connection with the Loans. "Maturity Date" shall mean November 30, 2011. "Mortgage" shall mean, with respect to each Loan and the applicable Property, that certain first priority (i) Mortgage and Security Agreement, (ii) Leasehold Mortgage and Security Agreement, (iii) Deed of Trust and Security Agreement or (iv) Deed to Secure Debt and Security Agreement, as applicable, executed and delivered by Borrower as security for such Loan and the other Loans and encumbering such Property, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Net Proceeds" shall mean, with respect to each Loan and the applicable Property, the excess of (i)(x) the purchase price (at foreclosure or otherwise) actually received by Lender with respect to such Property as a result of the exercise by Lender of its rights, powers, privileges and other remedies after the occurrence of an Event of Default, or (y) if Lender (or Lender's nominee) is the purchaser at foreclosure by credit bid, then the amount of such credit bid, in either case, over (ii) all costs and expenses, including, without limitation, all reasonable attorneys' fees and disbursements and any brokerage fees, if applicable, incurred by Lender in connection with the exercise of such remedies, including the sale of such Property after a foreclosure against the Property. "Note" shall mean, with respect to each Loan, the Promissory Note of even date herewith made by Borrower in favor of Lender in the Initial Allocated Loan Amount of such Loan, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Person" shall mean 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. "Prepayment Date" shall have the meaning specified in Section 2.2.2. "Property" shall mean, with respect to each Loan, the parcel of real property and the Improvements thereon encumbered by the Mortgage specifically corresponding to such Loan, together with all rights and property pertaining to such real property and Improvements, as more particularly described in the granting clauses of such Mortgage and referred to therein as the "Property". "Rating Agency" shall mean any nationally recognized statistical agency selected by Lender including, without limitation, Duff & Phelps Rating Co., Fitch Investors Services, Inc., Moody's Investors Services, Inc., and/or Standard and Poors Corporation, collectively, and any successor to any of them; provided, however, that at any time during which a Loan is an asset of a securitization or is otherwise an asset of any rated transaction, "Rating Agency" shall mean the rating agency or rating agencies that from time to time rate the securities, certificates or other instruments issued in connection with such securitization or other transaction. "Release" shall have the meaning specified in Section 2.2.2. "Release Price" shall have the meaning specified in Section 2.2.2. "Released Property" shall have the meaning specified in Section 2.2.2. "REMIC" shall mean a "real estate mortgage investment conduit" within the meaning of the Code. "REMIC Provisions" shall mean the provisions of the federal income tax law relating to REMICs, which appear at Sections 860A through 860G of the Code, and any related provisions and proposed, temporary and final Treasury regulations and published rulings, notices and announcements promulgated thereunder, as the foregoing may be in effect from time to time. "REMIC Trust" shall have the meaning specified in Section 2.5.2. "Rents" shall mean, with respect to the Property, all rents, royalties, issues, profits, revenue, income and other benefits arising from the Leases and renewals thereof. "Satisfaction" shall have the meaning specified in Section 2.2.2. "Secondary Market Transaction" shall have the meaning specified in Section 2.3(14). "SMC" shall mean Service Merchandise Company, Inc., a Tennessee corporation. "Startup Date" shall have the meaning specified in Section 2.5.2. "State" shall mean, with respect to each Property, the State or Commonwealth in which such Property or any part thereof is located. "Store Sales" shall mean, with respect to each Property, the aggregate selling prices of all merchandise sold or delivered in, at, on or from any part of such Property and the charges for all services of any sort (including receipts from vending machines and revenues from the rental of merchandise), sold or performed in, at, on or from any part of the Property. Store Sales includes sales and charges for cash or credit, regardless of collection in the case of the latter. Store Sales excludes (i) refunds made by the retail operator at such Property to its customers for merchandise returned to such retail operator, (ii) exchanges of merchandise between stores of Borrower or such retail operator (or Borrower's or such retail operator's affiliates) where such exchanges are made solely for the convenient operation of such retail operator's business and not for the purpose of consummating a sale at another location that has been made, in fact, at, in, on or from the Property, and (iii) the amount of any city, county or state sales tax on such sales paid to a taxing authority by Borrower or such retail operator (but not by any vendor of such retail operator). A Store Sale shall be deemed to be made in the Property if (x) an order therefor is secured or received in the Property, or (y) pursuant to mail, telegraph, telephone or other similar means, orders are received or filled at or from the Property. "TI Costs" shall mean costs and expenses incurred by Borrower for the payment of leasing commissions and expenditures related to repairs, replacements and improvements (including any tenant work allowance) in connection with the leasing of a Property or any portion thereof to a new tenant or the renewal or extension of a Lease to an existing tenant. "TI Reserve" shall have the meaning specified in Section 2.4 hereof. "Title Insurance Policy" shall mean, with respect to each Property, the ALTA extended coverage mortgagee title insurance policy (1992 Loan Policy or other loan policy acceptable to Lender) issued with respect to such Property and insuring the lien of the Mortgage encumbering such Property and containing such endorsements and affirmative assurances as Lender shall reasonably require (to the extent authorized in the State). "Total Sale" shall have the meaning specified in Section 2.3 hereof. "Yield Maintenance" shall mean, with respect to each Loan and the corresponding Note, the positive excess of (1) the present value ("PV") of all future installments of principal and interest due under the Note including the principal amount due at maturity (collectively, "All Future Payments"), discounted at an interest rate per annum equal to the Treasury Constant Maturity Yield Index published during the second full week preceding the date for which the calculation is made for the U.S. Treasury security having a maturity coterminous with the remaining term of such Note, over (2) the principal amount of such Loan outstanding immediately before such prepayment [(PV of All Future Payments) - (principal balance at time of prepayment) = Yield Maintenance]. "Treasury Constant Maturity Yield Index" shall mean the average yield for "This Week" as reported by the Federal Reserve Board in Federal Reserve Statistical Release H.15(519). If there is no Treasury Constant Maturity Yield Index for a U.S. Treasury security having a maturity coterminous with the remaining term of such Note, then the index shall be equal to the weighted average yield to maturity of the Treasury Constant Maturity Yield Indices with maturities next longer and shorter than such remaining average life to maturity, calculated by averaging (and rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the average is not such a multiple) the yields of the relevant Treasury Constant Maturity Yield Indices (rounded, if necessary, to the nearest 1/100 of 1% with any figure of 1/200 of 1% or above rounded upward). 1.2 Principles of Construction. All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Agreement unless otherwise specified. Unless otherwise specified, the words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, as modified herein. ARTICLE 2 GENERAL TERMS 2.1 Loan Commitment; Disbursement to Borrower. 2.1.1 The Loans. Subject to and upon the terms and conditions set forth herein, Lender hereby agrees to make the Loans to Borrower on the Closing Date, in the Initial Allocated Loan Amounts set forth in the Notes, which Loans shall mature on the Maturity Date. Borrower hereby agrees to accept the Loans on the Closing Date, subject to and upon the terms and conditions set forth herein. 2.1.2 The Notes. Each Loan shall be evidenced by a Note in the Initial Allocated Loan Amount of such Loan. The Loan evidenced by each Note shall bear interest as provided in such Note, and shall be subject to repayment and prepayment as provided in such Note and in Section 2.2 hereof. The Loan evidenced by each Note shall be entitled to the benefits of this Agreement and shall be secured by the Mortgages, Assignments of Leases and the other Collateral Security Documents. 2.2 Loan Repayment/Prepayment. 2.2.1 Loan Repayment. Borrower shall repay each Loan in accordance with the provisions of the Note evidencing such Loan. 2.2.2 Prepayment. (a) Except as set forth in Sections 2.2.2(b) and (c) hereof, no prepayment of the Indebtedness may be made in whole or in part. (b) With respect to each Loan and each Note evidencing such Loan, the following prepayment terms and conditions shall apply: (1) The Loan may be prepaid in whole or in part at any time after the first (1st) anniversary of the Note provided (i) written notice of such prepayment is received by Lender not more than sixty (60) days and not less than thirty (30) days prior to the date of such prepayment, (ii) such prepayment is accompanied by all unpaid interest accrued thereunder and all other sums then due thereunder and under the other Loan Documents (including this Agreement), and (iii) if such prepayment occurs prior to the date that is six (6) months prior to the Maturity Date, Lender is paid a prepayment fee in an amount equal to the following: (i) during the period from and including the first (1st) anniversary of the Note until the date that is nine (9) years and six (6) months after the date of the Note, the greater of (i) one percent (1.0%) of the principal amount being prepaid, or, in the event of a Release, one percent (1%) of the then Allocated Loan Amount for the Property to be Released, or (ii) Yield Maintenance; (ii) during the period from and including the date that is nine (9) years and six (6) months after the date of the Note until the date that is ten (10) years and six (6) months after the date of the Note, five percent (5%) of the principal amount being prepaid, or, in the event of a Release, five percent (5%) of the then Allocated Loan Amount for the Property to be Released; (iii) during the period from and including the date that is ten (10) years and six (6) months after the date of the Note until the date that is eleven (11) years and six (6) months after the date of the Note, four percent (4%) of the principal amount being prepaid, or, in the event of a Release, four percent (4%) of the then Allocated Loan Amount for the Property to be Released; (iv) during the period from and including the date that is eleven (11) years and six (6) months after the date of the Note until the date that is twelve (12) years and six (6) months after the date of the Note, three percent (3%) of the principal amount being prepaid, or, in the event of a Release, three percent (3%) of the then Allocated Loan Amount for the Property to be Released; (v) during the period from and including the date that is twelve (12) years and six (6) months after the date of the Note until the date that is thirteen (13) years and six (6) months after the date of the Note, two percent (2%) of the principal amount being prepaid, or, in the event of a Release, two percent (2%) of the then Allocated Loan Amount for the Property to be Released; and (vi) during the period from and including the date that is thirteen (13) years and six (6) months after the date of the Note until the date that is fourteen (14) years and six (6) months after the date of the Note, one percent (1%) of the principal amount being prepaid, or, in the event of a Release, one percent (1%) of the then Allocated Loan Amount for the Property to be Released. In the event that any prepayment fee is due hereunder, Lender shall deliver to Borrower a statement setting forth the amount and determination of the prepayment fee, and, provided that Lender shall have in good faith applied the formula described above, Borrower shall not have the right to challenge the calculation or the method of calculation set forth in any such statement in the absence of manifest error. Lender shall not be obligated or required to have actually reinvested the prepaid principal balance at the Treasury Constant Maturity Yield or otherwise as a condition to receiving the prepayment fee. No prepayment fee or shall be due or payable in connection with any prepayment of the indebtedness evidenced by the Note, in whole, made on or after the date that is six (6) months prior to the Maturity Date, or upon prepayment resulting from application of insurance or condemnation proceeds and any related Borrower's Contribution as provided in the Mortgage at any time during the Loan term. In addition to the aforesaid prepayment fee, if, upon any such prepayment (whether prior to or after the date that is six (6) months prior to the Maturity Date), the aforesaid prior written notice has not been received by Lender, the prepayment fee shall be increased by an amount equal to the lesser of (i) thirty (30) days' unearned interest computed on the outstanding principal balance of the Note so prepaid and (ii) unearned interest computed on the outstanding principal balance of the Note so prepaid for the period from, and including, the date of prepayment through the Maturity Date. (2) Partial prepayments of the indebtedness evidenced by a Note shall not be permitted, except partial prepayments resulting from Lender applying insurance or condemnation proceeds and any related Borrower's Contribution to reduce the outstanding principal balance of the Loan evidenced by such Note as provided in the corresponding Mortgage, in which event no prepayment fee shall be due. No notice of prepayment shall be required under the circumstance specified in the preceding sentence. No principal amount repaid may be reborrowed. Partial payments of principal of any Loan shall be applied to the unpaid principal balance thereof, but such application shall not reduce the amount of the fixed monthly installments required to be paid pursuant to Section 1.01 of the corresponding Note. (3) Except as otherwise expressly provided in Section 2.2.2(b)(2) above, the prepayment fees provided above shall be due, to the extent permitted by applicable law, under any and all circumstances where all or any portion of the Note is paid prior to the Maturity Date, whether such prepayment is voluntary or involuntary, even if such prepayment results from Lender's exercise of its rights upon Borrower's default and acceleration of the maturity date of the Note (irrespective of whether foreclosure proceedings have been commenced), and shall be in addition to any other sums due hereunder or under any of the other Loan Documents. No tender of a prepayment of the Note with respect to which a prepayment fee is due shall be effective unless such prepayment is accompanied by the prepayment fee. Any tender of prepayment of any Loan made prior to the first (1st) anniversary of the corresponding Note, whether voluntary or involuntary (except partial prepayments resulting from Lender applying insurance or condemnation proceeds to reduce the outstanding principal balance of the Loan evidenced by such Note as provided in the corresponding Mortgage), must include a prepayment fee computed as provided in Section 2.2.2(b) above plus an additional prepayment fee of one percent (1%) of the principal balance of the Note. (4) Except in the case of a prepayment resulting from Lender applying insurance or condemnation proceeds and any related Borrower's Contribution to the repayment of a Loan in whole, Borrower may not prepay any one Loan in whole pursuant to this Section 2.2.2(b) without prepaying all Loans in whole. (c) Notwithstanding anything to the contrary contained in Section 2.2.2(b) above, Borrower may prepay any Loan(s) in whole in accordance with this Section 2.2.2(c) without prepaying all Loans in whole. If Borrower desires to make a prepayment pursuant to this Section 2.2.2(c), and sends a notice to Lender indicating that such prepayment is being made in connection with a release of a Property from the lien of a Mortgage pursuant to this clause (c) (the "Released Property"), then, upon the request of Borrower, Lender shall, upon satisfaction of all the following terms and conditions, execute, acknowledge and deliver to Borrower a satisfaction of such Mortgage or other reconveyance of the Released Property in form and substance reasonably satisfactory to Borrower and Lender (a "Satisfaction"), whereby Lender acknowledges and agrees to release such Released Property from the lien of such Mortgage (a "Release"): (1) Lender shall have received in immediately available federal funds on the date proposed for such prepayment (the "Prepayment Date") any prepayment fee payable pursuant to clause (b) above, plus an amount equal to one hundred ten (110%) percent of the then Allocated Loan Amount for the Property to be released (the "Release Price") accompanied by all unpaid interest accrued under the Loan(s) being prepaid, which Release Price shall be applied to the repayment of the Loans as provided in the definition of "Allocated Loan Amount"; (2) Either (a) the DSCR for the Property to be released shall be less than the aggregate DSCR for all of the Properties (excluding the Released Property), provided that the aggregate DSCR for all of the Properties (excluding the Released Property) is at least 1.25 or (b) the aggregate DSCR for all of the Properties (excluding the Released Property) for the twelve (12) month period immediately prior to such Release is not less than 1.30; provided, however, that neither this clause (2) nor clauses (3) or (4) below shall be applicable to a Release obtained by Borrower pursuant to Section 1.9 of a Mortgage, or a Release in connection with the exercise by Borrower of its cure rights under Section 4.1(g) hereof. Notwithstanding the foregoing, this clause (2) shall be applicable to a Release in connection with the exercise by Borrower of its cure rights under Section 4.1(g) hereof if, in Lender's reasonable judgment, Borrower allowed the Property that is subject to such cure rights to become vacant for the purpose of obtaining a Release that does not meet the conditions of this clause (2). (3) Borrower shall, at its expense, provide all financial and other information to substantiate Store Sales to Lender's reasonable satisfaction, including updated sales information as provided herein. (4) Borrower shall not be permitted to obtain Releases for more than twenty percent (20%) (rounded up or down to the nearest whole number) of the Properties in any Fiscal Year (the "Annual Release Limit"); provided, however, that (i) in any Fiscal Year Borrower shall be permitted a Release of one (1) additional Property over the Annual Release Limit in connection with the exercise by Borrower of its cure rights under Section 4.1(g) hereof; provided, that, in Lender's reasonable judgment, Borrower did not allow the Property that is subject to such cure rights to become vacant for the purpose of obtaining an additional Release within such Fiscal Year, and (ii) any Release obtained by Borrower pursuant to Section 1.9 of a Mortgage shall not be included in the calculation of the Annual Release Limit. (5) The Released Property shall be transferred to a Person that is not the immediate parent of Borrower; provided, however, that title may pass through such immediate parent to another entity in a series of transfers that occur on the same day, and Borrower shall provide Lender with evidence reasonably satisfactory to Lender confirming the foregoing, including, without limitation, a copy of the deed conveying title to the Released Property, certified to be true and complete by Borrower, and a certificate of Borrower confirming the name, address and non-parent status of such ultimate transferee. (6) Borrower shall, at its sole expense, prepare any and all documents and instruments necessary to effect the Release, or otherwise reasonably required by Lender in connection therewith, all of which shall be subject to the approval of Lender, and Borrower shall pay all reasonable costs incurred by Lender (including, but not limited to, attorneys' fees and disbursements, title endorsements acceptable to Lender insuring that the lien of the mortgages on the remaining Properties shall continue in effect with first lien priority and shall be unaffected by the release of such Property, and all other reasonable costs incurred by Lender in connection with the review, execution and delivery of such documents and the Release transaction. Without limitation to the foregoing, Borrower shall deliver or cause to be delivered, at Borrower's sole expense, a re-affirmation of any guaranty or indemnification delivered to Lender relative to any Loan, in form and substance satisfactory to Lender. (7) No Event of Default shall have occurred and be continuing at the time of the request for the Release or on the Prepayment Date. (8) Lender shall have received not less than forty-five (45) days' prior written notice. 2.3 Total Sale. Subject to the terms of this Section 2.3, Lender shall consent to a one time sale, conveyance or transfer of all of the Properties (hereinafter, a "Total Sale") to any person or entity provided that each of the following terms and conditions are satisfied: (a) Event of Default shall have occurred and be continuing at the time of the request for the prospective Total Sale or on the date of the Total Sale; (b) Borrower gives Lender written notice of the terms of such prospective Total Sale not less than sixty (60) days before the date on which such Total Sale is scheduled to close and, concurrently therewith, gives Lender all such information concerning the proposed transferee of the Properties (hereinafter, "Buyer") as Lender would require in evaluating an initial extension of credit to a borrower and pays to Lender a non-refundable application fee in the amount of $5,000.00. Lender, acting in good faith, shall have the right to approve or disapprove the proposed Buyer. In determining whether to give or withhold its approval of the proposed Buyer, Lender shall consider Buyer's experience and track record in owning and operating facilities similar to the Properties, Buyer's entity structure, Buyer's financial strength, Buyer's general business standing and Buyer's relationships and experience with contractors, vendors, tenants, lenders and other business entities; provided, however, that, notwithstanding Lender's agreement to consider the foregoing factors in determining whether to give or withhold such approval, such approval shall be given or withheld based on what Lender in good faith determines to be commercially reasonable in Lender's sole discretion and, if given, may be given subject to such conditions as Lender may in good faith deem appropriate; (c) Borrower pays Lender, concurrently with the closing of such Total Sale, all out-of- pocket costs and expenses, including, without limitation, attorneys' fees, reasonably incurred by Lender in connection with the Total Sale plus a non-refundable assumption fee equal to one percent (1.0%) of the then outstanding aggregate principal balance of the then Allocated Loan Amount for the Properties; (d) Buyer assumes and agrees to pay the Indebtedness subject to the provisions of Section 5.16 hereof and, prior to or concurrently with the closing of such Total Sale, Buyer executes, without any cost or expense to Lender, including, without limitation, attorneys' fees, such documents and agreements as Lender shall reasonably require to evidence and effectuate said assumption and delivers such legal opinions as Lender may reasonably require; (e) Borrower and Buyer execute, without any cost or expense to Lender, including, without limitation attorneys' fees, new financing statements or financing statement amendments and any additional documents as may be reasonably requested by Lender; (f) Buyer and Lender execute, without any cost or expense to Lender, including without limitation attorneys' fees, such amendments to the Loan Documents and any additional documents as may be reasonably requested by Lender. (g) Borrower shall cause to be delivered to Lender, without any cost or expense to Lender, including without limitation attorneys' fees, such endorsements to Lender's title insurance policy, hazard insurance endorsements or certificates and other similar materials as Lender may reasonably deem necessary at the time of the Total Sale, all in form and substance reasonably satisfactory to Lender, including, without limitation, an endorsement or endorsements to Lender's title insurance policy insuring the liens of the Mortgages, extending the effective date of such policy to the date of execution and delivery (or, if later, of recording) of the assumption agreement referenced above in subparagraph (4) of this Section with no additional exceptions added to such policy and insuring that fee simple title to the Properties is vested in Buyer; (h) Borrower executes and delivers to Lender, without any cost or expense to Lender, including, without limitation, attorneys' fees, a release of Lender, its officers, directors, employees and agents, from all claims and liability relating to the transactions evidenced by the Loan Documents through and including the date of the closing of the Total Sale, which agreement shall be in form and substance reasonably satisfactory to Lender and shall be binding upon Borrower and Buyer; (i) Such Total Sale is not construed so as to relieve any current guarantor or indemnitor of its obligations under any guaranty or indemnity agreement executed in connection with the Loans and each such current guarantor and indemnitor executes, without any cost or expense to Lender, including, without limitation, attorneys' fees, such documents and agreements as Lender shall reasonably require to evidence and effectuate the ratification of each such guaranty and indemnity agreement, provided that if Buyer or a party associated with Buyer in good faith approved by Lender in its sole discretion assumes the obligations of the current guarantor or indemnitor under its guaranty or indemnity agreement and Buyer or such party associated with Buyer, as applicable, executes, without any cost or expense to Lender, including, without limitation, attorneys' fees, a new guaranty or indemnity agreement in form and substance satisfactory to Lender, then Lender shall release the current guarantor or indemnitor from all obligations arising under its guaranty or indemnity agreement after the closing of such Total Sale; (j) Subject to the provisions of Section 5.16 hereof, such Total Sale is not construed so as to relieve Borrower of any personal liability under this Agreement or any of the other Loan Documents for any acts or events occurring or obligations arising prior to or simultaneously with the closing of such Total Sale and Borrower executes, at Borrower's sole cost and expense, such documents and agreements as Lender shall reasonably require to evidence and effectuate the ratification of said personal liability; (k) Buyer shall furnish, if Buyer is a corporation, partnership or other entity, all appropriate papers evidencing Buyer's capacity and good standing, and the qualification of the signers to execute the assumption of the Indebtedness, which papers shall include certified copies of all documents relating to the organization and formation of Buyer and of the entities, if any, which are partners of Buyer. Buyer and such constituent partners, members or shareholders of Buyer (as the case may be), as Lender shall require, shall be a single purpose entity, whose formation documents shall be approved by counsel to Lender; (l) Buyer shall assume the obligations of Borrower under any management agreements pertaining to the Properties; (m) Buyer shall furnish an opinion of counsel reasonably satisfactory to Lender and its counsel (i) that Buyer's formation documents provide for the matters described in subparagraph (11) of this Section, (ii) that the assumption of the Indebtedness has been duly authorized, executed and delivered, and that the Loan Documents are valid, binding and enforceable against Buyer in accordance with their terms, (iii) that Buyer and any entity that is a controlling stockholder or general partner of Buyer, have been duly organized, and are in existence and good standing, and (v) with respect to such other matters, as Lender may request; and (n) Lender shall have received evidence in writing from the Rating Agencies to the effect that the proposed transfer will not result in a re-qualification, reduction or withdrawal of any rating initially assigned or to be assigned in a Secondary Market Transaction. For purposes hereof, a "Secondary Market Transaction" shall be (a) any sale of a Mortgage or Mortgages, a Note or Notes and other applicable Loan Documents to one or more investors as a whole loan; (b) a participation of a Loan or Loans to one or more investors, (c) any deposit of a Mortgage or Mortgages, a Note or Notes and other applicable Loan Documents with a trust or other entity that may sell certificates or other instruments to investors evidencing an ownership interest in the assets of such trust or other entity, or (d) any other sale or transfer of a Loan or any interest therein to one or more investors. 2.4 Transfer of Individual Property. Lender shall consent to a one time sale, conveyance or transfer of an individual Property encumbered by a Mortgage subject to, and in accordance with, the terms, provisions and conditions of Section 1.13(c) of the applicable Mortgage. 2.5 Substitution of a Property. Subject to the terms of this Section 2.5, Borrower may substitute for a Property (the "Substituted Property") a property that is not encumbered by a Mortgage (the "Substitution Property") to serve as the collateral for the applicable Loan (a "Substitution") provided that each of the following terms and conditions are satisfied: (a) No Event of Default shall have occurred and be continuing at the time of the request for the proposed Substitution or on the date of the Substitution; (b) Such Substitution shall only be permitted prior to the date that is ninety (90) days after the date on which an election to treat the Loan that is secured by such Property, along with other assets, if any, as a REMIC (such assets pool, the "REMIC Trust") is made (the "Startup Date"); provided, however, that such ninety (90) day period is based on the REMIC Provisions in effect as of the date hereof, and is subject to adjustment by Lender based upon any changes to such REMIC Provisions. The Substitution must be acceptable to (i) Lender, if prior to the Startup Date, or (ii) any assignee of Lender and the then current servicer of such Loan, if subsequent to the Startup Date (either, the "Approving Party"), as well as the Rating Agencies, which approval shall include consideration of, but not be limited to, the appraised value of the proposed Substitution Property (which shall be at least equal to the appraised value of the Substituted Property as of the date hereof), the type and location of the proposed Substitution Property, and the operating income and Store Sales of the proposed Substitution Property (which shall be at least equal to the operating income and the Store Sales of the Substituted Property as of the date hereof). Without limiting the generality of the foregoing, Borrower must satisfy the following conditions: (1) Borrower shall provide to the Approving Party written notice of the terms of such prospective Substitution not less than sixty (60) days before the date on which such Substitution is scheduled to be effected, together with (x) all such information concerning the proposed Substitution Property as Lender would require in evaluating an initial extension of credit to a borrower to be secured by such Substitution Property and as may be required by the Approving Party and (y) payment of a non-refundable application fee in the amount of $5,000.00. The Approving Party shall have the right to approve or disapprove the proposed Substitution Property; provided, however, that, such approval shall be given or withheld based on what the Approving Party in good faith determines to be commercially reasonable in the Approving Party's sole discretion and, if given, may be given subject to such conditions as the Approving Party in good faith may deem appropriate; (2) Borrower pays to the Approving Party, concurrently with the effecting of such Substitution, a non-refundable assumption fee in an amount equal to all out- of-pocket costs and expenses, including, without limitation, attorneys' fees, reasonably incurred by such Approving Party in connection with the Substitution; (3) Borrower executes and delivers, without any cost or expense to the Approving Party, including, without limitation, attorneys' fees, a Mortgage, Assignment of Leases and Rents, financing statements and any additional loan documents as the Approving Party in good faith may, in its sole discretion, deem necessary or expedient, including amendments and ratifications to the Environmental Indemnity and the Indemnity and such amendments to the other Loan Documents as the Approving Party may reasonably require, all in form and substance reasonably satisfactory to the Approving Party; (4) Borrower shall cause to be delivered to the Approving Party, without any cost or expense to the Approving Party, including without limitation, attorneys' fees, an ALTA title insurance policy, with any endorsements the Approving Party in good faith may require in its sole discretion, insuring the Approving Party, in an amount at least equal to the Allocated Loan Amount to be secured by the Substitution Property, which policy shall provide that the Mortgage constitutes a first lien or charge upon the Substitution Property subject only to such items as shall have been approved in writing by the Approving Party and its attorneys; (5) Borrower shall cause to be delivered to the Approving Party hazard insurance endorsements or certificates and other similar materials as the Approving Party may reasonably deem necessary at the time of the Substitution, all in form and substance reasonably satisfactory to the Approving Party; (6) Borrower shall cause to be delivered to the Approving Party all documents and information required by the Conditional Commitment with respect to the Approving Party's review and approval of a Substitution Property and Borrower shall comply with all conditions with respect to a Property set forth in the Conditional Commitment; (7) Borrower executes and delivers to the Approving Party, without any cost or expense to the Approving Party, including, without limitation, attorneys' fees, a release of the Approving Party, its officers, directors, employees and agents, from all claims and liability relating to the transactions evidenced by the Substituted Property through and including the date of the effecting of the Substitution, which agreement shall be in form and substance reasonably satisfactory to the Approving Party and shall be binding upon Borrower; (8) Borrower shall furnish an opinion of counsel reasonably satisfactory to the Approving Party and its counsel to the effect that (i) the Substitution does not violate any, and is in compliance with all, REMIC Provisions, will not endanger the status of the REMIC Trust as a REMIC, or result in the imposition of a tax upon the REMIC Trust (including, but not limited to, the tax on prohibited transactions as defined in Section 860F(a)(2) of the Code and the tax on contributions to a REMIC set forth in Section 860G(d) of the Code), (ii) that Borrower's formation documents provide for the Substitution, (iii) that the Substitution has been duly authorized, executed and delivered, and that the Loan Documents (including, without limitation, any amendments thereto or any new Loan Documents executed in connection with the Substitution) are valid, binding and enforceable against Borrower in accordance with their terms, (iv) that Borrower and any entity that is a controlling stockholder of Borrower, have been duly organized, and are in existence and good standing, and (v) with respect to such other matters as the Approving Party may request; (9) The Approving Party shall have received evidence in writing from the Rating Agencies to the effect that the proposed Substitution will not result in a re-qualification, reduction or withdrawal of any rating initially assigned or to be assigned in a Secondary Market Transaction; (10) Such Substitution is not construed so as to relieve any current guarantor or indemnitor of its obligations under any guaranty or indemnity agreement executed in connection with the Loans; and (11) Subject to the provisions of Section 5.16 hereof, such Substitution is not construed so as to relieve Borrower of any personal liability under this Agreement or any of the other Loan Documents for any acts or events occurring or obligations arising prior to or simultaneously with the effecting of such Substitution and Borrower executes, at Borrower's sole cost and expense, such documents and agreements as the Approving Party shall reasonably require to evidence and effectuate the ratification of said personal liability. 2.6 TI Reserve. (a) As additional security for the Loan, on the date hereof Borrower has established, and Borrower shall maintain at all times while any portion of the Loan remains outstanding, a TI Costs reserve (the "TI Reserve") with Lender for payment of TI Costs in the amount of One Million One Hundred Seventy-Five Thousand and 00/100 Dollars ($1,175,000.00), which amount shall be reduced proportionately with reductions in the Indebtedness upon the transfer or Release of a Property in accordance with the terms of the this Agreement and the other Loan Documents. Borrower hereby agrees to pay all TI Costs with respect to each Property (without regard to the amount of money then available in the TI Reserve). So long as no Event of Default hereunder or under the other Loan Documents has occurred and is continuing, all sums in the TI Reserve shall be held by Lender to pay TI Costs. Provided that (i) Lender has received written notice from Borrower requesting funds from the TI Reserve at least ten (10) Business Days prior to the due date of any requested disbursement relating to TI Costs, or if Borrower makes timely payment therefor, not more than forty-five (45) days after Borrower has made such payment, (ii) no Event of Default has occurred and is continuing, (iii) Borrower furnishes Lender with a written disbursement request for the payment or reimbursement of such TI Costs, not more frequently than once every ninety (90) day period, (iv) there are sufficient funds available in the TI Reserve with respect to Borrower's disbursement request, (v) Borrower shall have theretofore complied with the requirements of the Mortgages relative to (1) new leases, licenses and/or occupancy agreements with respect to the Properties and (2) the performance of improvements and alterations to the Properties, (vi) Borrower shall have theretofore furnished Lender with reasonably satisfactory evidence of the progress and/or completion of tenant improvement work, the cost of tenant improvement work, reasonably satisfactory evidence that any and all completed tenant improvement work complies with law, lien waivers for lienable work, copies of bills, invoices and other reasonable documentation as may be required by Lender to substantiate the use of such funds and establish that the TI Costs that are the subject of such disbursement request represent completed or partially completed tenant improvement work performed at all or any portion of the Property, and (vii) Borrower has replenished the TI Reserve in the amount of any previous withdrawals therefrom in accordance with this Section, then Lender shall make such payments out of the TI Reserve. In making any payment from the TI Reserve, Lender shall be entitled to rely on such request from Borrower without any inquiry into the accuracy, validity or contestability of any such amount. Borrower shall deposit the amount of any funds withdrawn from the TI Reserve within ten (10) days after the date of such withdrawal. The TI Reserve shall not, unless otherwise explicitly required by applicable law, be or be deemed to be escrow or trust funds, but, at Lender's option and in Lender's discretion, may either be held in a separate account or be commingled by Lender with the general funds of Lender. Interest on the funds contained in the TI Reserve shall be credited to Borrower. The TI Reserve is solely for the protection of Lender and entails no responsibility on Lender's part beyond the payment of the costs and expenses described in this Section in accordance with the terms hereof and beyond the allowing of due credit for the sums actually received. In the event that the amounts on deposit or available in the TI Reserve are inadequate to pay the TI Costs, Borrower shall pay the amount of such deficiency. Upon assignment of this Agreement by Lender, any funds in the TI Reserve shall be turned over to the assignee and any responsibility of Lender, as assignor, with respect thereto shall terminate. If there is an Event of Default under this Agreement, Lender may, but shall not be obligated to, apply at any time the balance then remaining in the TI Reserve against the indebtedness secured by the Mortgages in whatever order Lender shall subjectively determine. No such application of the TI Reserve shall be deemed to cure any default hereunder. (b) At Borrower's option, the TI Reserve can be deposited with Lender in the form of a letter of credit (a "Letter of Credit"). The Letter of Credit shall be unconditional and irrevocable, issued by a commercial bank having a rating of "AA" or higher by Moody's Investors Services, Inc. and Standard and Poors Corporation at the time of issuance, the letter of credit payment window of which bank is located in New York County, New York and otherwise satisfactory to Lender in its sole discretion. The Letter of Credit shall be payable (x) to Lender upon presentation solely of a sight draft stating that an event under this Agreement has occurred that entitles Lender to such draw and (y) in multiple drafts. The Letter of Credit shall be for a period expiring not earlier than one (1) year after the date of delivery of the Letter of Credit to Lender. The Letter of Credit shall be replaced not less than thirty (30) days prior to the expiration date of the Letter of Credit. If Borrower fails to replace timely the Letter of Credit with either (i) a cash deposit meeting the requirements of Section 2.6(a), or (ii) a new Letter of Credit meeting the requirements of this clause (b), Lender may draw on the then expiring Letter of Credit and apply all or any portion of the proceeds therefrom to (x) the indebtedness secured by the Mortgages or (y) the funding of the TI Reserve, in Lender's sole discretion. Otherwise, Lender may draw upon the Letter of Credit only in respect of any amount that Lender would be entitled to use, apply or retain the proceeds of the TI Reserve under this Section. (c) In the event that the Letter of Credit bank shall at any time cease to have a long-term rating of at least "A" or higher by any one of the Rating agencies, Borrower shall, within five (5) Business Days after notice of the occurrence of such event, replace the Letter of Credit with either (i) a cash deposit meeting the requirements of Section 2.6(a), or (ii) a letter of credit (the "Replacement Letter of Credit") issued by a commercial bank having a long-term rating of "AA" or higher by Moody's Investors Services, Inc. and Standard and Poors Corporation, the letter of credit window of which bank is located in New York County, New York and otherwise satisfactory to Lender in its sole discretion. Simultaneously with the furnishing of such Replacement Letter of Credit, Lender shall surrender to Borrower the Letter of Credit which is being replaced and thereupon the Replacement Letter of Credit shall be deemed to be the Letter of Credit for all purposes of this Agreement. If Borrower shall fail to furnish such Replacement Letter of Credit within such five (5) Business Day period, Lender may draw upon the then Letter of Credit and apply all or any portion of the proceeds therefrom to (x) the indebtedness secured by the Mortgages or (y) the funding of the TI Reserve, in Lender's sole discretion. (d) Upon the full repayment of the Loans, the unexpended portion of the TI Reserve (including any corresponding Letter(s) of Credit) shall be returned to Borrower. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 Borrower's Representations. The representations and warranties of Borrower set forth in the Mortgages are hereby incorporated herein in full. 3.2 Survival of Representations. Borrower agrees that all of the representations and warranties of Borrower incorporated in Section 3.1 and elsewhere in this Agreement and in the other Loan Documents shall survive for so long as any amount remains owing to Lender under the Notes, the Mortgages, this Agreement or any of the other Loan Documents. All representations, warranties, covenants and agreements made in this Agreement or in the other Loan Documents by Borrower shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf. ARTICLE 4 DEFAULTS 4.1 Event of Default. Each of the following events occurring with respect to Borrower, or any Property shall constitute an "Event of Default" hereunder: (a) if Borrower fails to punctually perform any covenant, agreement, obligation, term or condition hereof that requires payment of any money to Lender (except those regarding payments to be made under the Notes, which failure is subject to any grace periods set forth in the Notes) for ten (10) days after written notice thereof from Lender to Borrower. (b) if Borrower fails to perform any other covenant, agreement, obligation, term or condition set forth herein other than those otherwise described elsewhere in this Section 4.1 and, to the extent such failure or default is susceptible of being cured, the continuance of such failure or default for thirty (30) days after written notice thereof from Lender to Borrower; provided, however, that, if such default is susceptible of cure but such cure cannot be accomplished with reasonable diligence within said period of time, and if Borrower commences to cure such default promptly after receipt of notice thereof from Lender, and thereafter prosecutes the curing of such default with reasonable diligence, such period of time shall be extended for such period of time as may be necessary to cure such default with reasonable diligence, but not to exceed an additional ninety (90) days (the "Additional Cure Period"); provided, further, that if such default is susceptible of cure but such cure cannot be accomplished with reasonable diligence within said Additional Cure Period and Borrower notifies Lender not later than ten (10) days prior to the end of such Additional Cure Period of its intention to continue to cure such default with all due diligence and thereafter continuously prosecutes the curing of such default with all due diligence, such Additional Cure Period shall be extended for such period of time as may be necessary to cure such default with all due diligence, but not to exceed an additional sixty (60) days. (c) if any representation or warranty made herein, in or in connection with any application or commitment relating to the Loans, or in any of the other Loan Documents to Lender by Borrower or by any indemnitor or guarantor under any indemnity or guaranty executed in connection with the Loans is determined by Lender to have been false or misleading in any material respect at the time made. (d) if a default occurs under any of the other Loan Documents that is not cured within any applicable grace or cure period therein provided. (e) if Borrower attempts to (i) assign its respective rights under this Agreement or any of the other Loan Documents or any interest herein or therein or (ii) transfer the Properties or any interest therein, in either case in contravention of the Loan Documents. (f) if greater than twenty percent (20%) (rounded up or down to the nearest whole number) of the Properties at any one time are each two-thirds (2/3) or more vacant for a period of six (6) consecutive months excluding any periods of time during which restorations, alterations or improvements are being diligently performed on any such Properties either following any casualty or condemnation or as otherwise permitted under the Loan Documents. (g) if (i) a Property becomes vacant, (ii) as a result thereof, a termination option and/or purchase option is exercised by the counterparty to a ground lease, reciprocal easement agreement or other agreement affecting Borrower's right to occupy and operate such Property, and (iii) prior to the earlier to occur of (i) thirty (30) days thereafter or (2) the date that such termination or purchase, as applicable, becomes effective, Borrower fails to effect the Release of such Property pursuant to Section 2.2.2(c) hereof; provided, however, that Borrower shall not have the right to effect such a Release prior to the first (1st) anniversary of the applicable Note. 4.2 Remedies. (a) 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 this Agreement or any of the other 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 Indebtedness 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 with respect to the Properties. 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 herein or in the other Loan Documents. (b) The rights, powers and remedies of Lender under this Agreement shall be cumulative and not exclusive of any other right, power or remedy which Lender may have against Borrower pursuant to this Agreement or the other Loan Documents, or existing at law or in equity or otherwise. Lender's rights, powers and remedies may be pursued singly, concurrently or otherwise, at such time and in such order as Lender may determine in Lender's sole discretion. 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 shall 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 with respect to Borrower shall not be construed to be a waiver with respect to any subsequent default or Event of Default by Borrower, or to impair any remedy, right or power consequent thereon. ARTICLE 5 MISCELLANEOUS 5.1 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 Loans and the execution and delivery to Lender of the Notes, and shall continue in full force and effect so long as all or any of the Indebtedness is outstanding and unpaid. 5.2 Lender's Discretion. Whenever pursuant to this Agreement 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. 5.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, provided that to the extent that any of such laws may now or hereafter be preempted by Federal law, such Federal law shall so govern and be controlling. 5.4 Modification; Waiver in Writing. Lender may waive any single default by Borrower hereunder without waiving any other prior or subsequent default. Lender may remedy any default by Borrower hereunder without waiving the default remedied. Neither the failure by Lender to exercise, nor the delay by Lender in exercising, any right, power or remedy upon any default by Borrower hereunder shall be construed as a waiver of such default or as a waiver of the right to exercise any such right, power or remedy at a later date. No single or partial exercise by Lender of any right, power or remedy hereunder shall exhaust the same or shall preclude any other or further exercise thereof, and every such right, power or remedy hereunder may be exercised at any time and from time to time. No modification or waiver of any provision hereof nor consent to any departure by Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose given. No notice to nor demand on Borrower in any case shall of itself entitle Borrower to any other or further notice or demand in similar or other circumstances unless otherwise expressly provided herein. Acceptance by Lender of any payment in an amount less than the amount then due on any of the Indebtedness shall be deemed an acceptance on account only and shall not in any way affect the existence of a default hereunder. In case Lender shall have proceeded to invoke any right, remedy or recourse permitted hereunder or under the other Loan Documents and shall thereafter elect to discontinue or abandon the same for any reason, Lender shall have the unqualified right to do so and, in such an event, Borrower and Lender shall be restored to their former positions with respect to the Indebtedness, the Loan Documents, the Properties and otherwise, and the rights, remedies, recourses and powers of Lender shall continue as if the same had never been invoked. 5.5 Notices. All notices, demands, requests or other communications to be sent by one party to the other hereunder or required by law shall be in writing and shall be deemed to have been validly given or served by delivery of the same in person to the intended addressee, or by depositing the same with Federal Express or another reputable private courier service for next Business Day delivery, or by depositing the same in the United States mail, postage prepaid, registered or certified mail, return receipt requested, in any event addressed to the intended addressee at its address set forth on the first page of this Agreement or at such other address as may be designated by such party as herein provided. All notices, demands and requests to be sent to Lender shall be addressed to the attention of the Capital Markets Group. All notices, demands and requests shall be effective upon such personal delivery, or one (1) Business Day after being deposited with the private courier service, or two (2) Business Days after being deposited in the United States mail as required above. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given as herein required shall be deemed to be receipt of the notice, demand or request sent. By giving to the other party hereto at least fifteen (15) days' prior written notice thereof in accordance with the provisions hereof, the parties hereto shall have the right from time to time to change their respective addresses and each shall have the right to specify as its address any other address within the United States of America. ARTICLE 6 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL (a) BORROWER AND LENDER EACH, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, (i) SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF NORTH CAROLINA OVER ANY SUIT, ACTION OR PROCEEDING BY ANY PERSON ARISING FROM OR RELATING TO THE NOTE, THIS AGREEMENT OR ANY OTHER OF THE LOAN DOCUMENTS, (ii) AGREES THAT ANY SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION SITTING IN MECKLENBURG COUNTY, NORTH CAROLINA, AND (iii) SUBMITS TO THE JURISDICTION OF SUCH COURTS. BORROWER AND LENDER EACH FURTHER CONSENTS AND AGREES TO SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER LEGAL PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY REGISTERED OR CERTIFIED U.S. MAIL, POSTAGE PREPAID, TO BORROWER OR LENDER, AS THE CASE MAY BE, AT THE ADDRESS FOR NOTICES DESCRIBED IN SECTION 5.5 HEREOF, AND CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY RESPECT VALID AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW). (b) BORROWER AND LENDER EACH, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WAIVES, RELINQUISHES AND FOREVER FORGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THE INDEBTEDNESS OR ANY CONDUCT, ACT OR OMISSION OF LENDER OR BORROWER, OR ANY OF THEIR DIRECTORS, OFFICERS, PARTNERS, MEMBERS, EMPLOYEES, AGENTS OR ATTORNEYS, OR ANY OTHER PERSONS AFFILIATED WITH LENDER OR BORROWER, IN EACH OR THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. 6.1 Headings. The Article and/or Section headings and the 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. 6.2 Successors and Assigns; Assignment. The terms, provisions, indemnities, covenants and conditions hereof shall be binding upon and inure to the benefit of Borrower and the successors and assigns of Borrower, including all successors in interest of Borrower in and to all or any part of the Properties, and shall be binding upon and inure to the benefit of Lender, its directors, officers, shareholders, employees and agents and their respective successors and assigns. All references in this Agreement to Borrower or Lender shall be deemed to include all such parties' successors and assigns, and the term "Lender" as used herein shall also mean and refer to any lawful holder or owner, including pledgees and participants, of any of the Indebtedness. If Borrower consists of more than one person or entity, each will be jointly and severally liable to perform the obligations of Borrower. 6.3 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. 6.4 Expenses; Indemnity. Borrower covenants and agrees to reimburse Lender upon receipt of written notice from Lender for all reasonable out-of-pocket costs and expenses (including reasonable attorneys' fees and disbursements) incurred by Lender in connection with (i) the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications to this Agreement and/or the other Loan Documents and any other documents or matters requested by Borrower; (ii) 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, this Agreement, the other Loan Documents, the Properties, or any other security given for the Loans; and (iii) enforcing any obligations of or collecting any payments due from Borrower under this Agreement, the other Loan Documents or with respect to the Properties or in connection with any refinancing or restructuring of the credit arrangement provided under this Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceedings; provided, however, that Borrower shall not be liable for the payment of any such costs and expenses to the extent the same arise by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender. 6.5 Exhibits Incorporated. The Exhibits and Schedules annexed hereto are hereby incorporated herein as a part of this Agreement with the same effect as if set forth in the body hereof. 6.6 No Joint Venture or Partnership. The relationship between Borrower and Lender is that of a borrower and a lender only and neither of those parties is, nor shall it hold itself out to be, the agent, employee, joint venturer or partner of the other party. 6.7 Borrower's Waivers. 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. 6.8 Construction of Documents. The parties hereto acknowledge that they were represented by counsel in connection with the negotiation and drafting of this Agreement and the other Loan Documents and that this Agreement and such Loan Documents shall not be subject to the principle of construing their meaning against the party which drafted same. 6.9 Prior Agreements. This Agreement and the other Loan Documents contain the entire agreements between the parties relating to the subject matter hereof and thereof and all prior agreements relative hereto and thereto that are not contained herein or therein are terminated. This Agreement and the other Loan Documents may not be amended, revised, waived, discharged, released or terminated orally but only by a written instrument or instruments executed by the party against which enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination which is not so documented shall not be effective as to any party. 6.10 Exculpation. Notwithstanding anything to the contrary contained in this Agreement, the liability of Borrower for the Indebtedness and for the performance of the other agreements, covenants and obligations contained herein and in the other Loan Documents shall be limited as set forth in Section 1.05 of the Notes, which Section is incorporated herein by reference as fully as if set forth herein at length; provided, however, that nothing herein shall be deemed to be a waiver of any right that Lender may have under Sections 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 Indebtedness in any bankruptcy proceeding in which Borrower is a debtor or to require that all collateral shall continue to secure all Indebtedness owing to Lender in accordance with this Agreement, the Notes, the Mortgages and the other Loan Documents. 6.11 Maximum Interest. The provisions of this Agreement and of all agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity of the Notes or otherwise, shall the amount paid, or agreed to be paid, regardless of how denominated (herein "Interest"), to Lender for or in respect of the use, forbearance or retention of the money loaned under the Notes exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between Borrower and Lender shall, at the time performance or fulfillment of such provision shall be due, exceed the limit for Interest prescribed by law or otherwise transcend the limit of validity prescribed by applicable law, then ipso facto the obligation to be performed or fulfilled shall be reduced to such limit, and if, from any circumstance whatsoever, Lender shall ever receive anything of value deemed Interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive Interest shall be applied to the reduction of the principal balance owing under the applicable Note in the inverse order of its maturity (whether or not then due) or at the option of Lender be paid over to Borrower, and not to the payment of Interest. To the fullest extent permitted by applicable law, all Interest (including any amounts or payments deemed to be Interest) paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full period until payment in full of the principal balance of the applicable Note so that the Interest thereon for such full period will not exceed the maximum amount permitted by applicable law. This Section will control all agreements between Borrower and Lender. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written. LENDER: FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ ---------------------------- Name: ---------------------------- Title: ---------------------------- BORROWER: SMC-SPE-1, a Delaware corporation, By: /s/ Wade Smith ---------------------------- Name: Wade Smith ---------------------------- Title: Vice President ---------------------------- EXHIBIT A --------- INITIAL ALLOCATED LOAN AMOUNTS Store #316 = $2,810,000.00 Store #202 = $2,848,000.00 Store #452 = $2,810,000.00 Store #343 = $2,773,000.00 Store #309 = $2,698,000.00 Store #441 = $2,735,000.00 Store #214 = $2,286,000.00 Store #532 = $2,660,000.00 Store #389 = $2,848,000.00 Store #190 = $2,398,000.00 Store #259 = $2,735,000.00 Store #359 = $2,885,000.00 Store #353 = $3,110,000.00 Store #042 = $2,585,000.00 Store #276 = $3,073,000.00 Store #277 = $2,623,000.00 Store #360 = $3,447,000.00 Store #348 = $3,220,000.00 Store #440 = $2,286,000.00 EX-4.2B 5 LOAN AGREEMENT LOAN AGREEMENT Dated as of October 4, 1996 by and between SMC-SPE-2, INC., a Delaware corporation, as Borrower and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association, as Lender 1 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS..............................................................................................1 1.1 Definitions.....................................................................................1 1.2 Principles of Construction......................................................................8 ARTICLE 2 GENERAL TERMS............................................................................................8 2.1 Loan Commitment; Disbursement to Borrower.......................................................8 2.1.1 The Loans..............................................................................8 2.1.2 The Notes..............................................................................8 2.2 Loan Repayment/Prepayment.......................................................................9 2.2.1 Loan Repayment.........................................................................9 2.2.2 Prepayment.............................................................................9 2.3 Total Sale.....................................................................................13 2.4 Transfer of Individual Property................................................................16 2.5 Substitution of a Property.....................................................................16 2.6 TI Reserve.....................................................................................19 ARTICLE 3 REPRESENTATIONS AND WARRANTIES..........................................................................20 3.1 Borrower's Representations.....................................................................20 3.2 Survival of Representations....................................................................20 ARTICLE 4 DEFAULTS...............................................................................................21 4.1 Event of Default...............................................................................21 4.2 Remedies.......................................................................................22 ARTICLE 5 MISCELLANEOUS...........................................................................................22 5.1 Survival.......................................................................................22 5.2 Lender's Discretion............................................................................23 5.3 Governing Law..................................................................................23 5.4 Modification; Waiver in Writing................................................................23 5.5 Notices........................................................................................23 5.6 Submission to Jurisdiction; Waiver of Jury Trial...............................................24 5.7 Headings.......................................................................................24 5.8 Successors and Assigns; Assignment.............................................................25 5.9 Severability...................................................................................25 5.10 Expenses; Indemnity............................................................................25 5.11 Exhibits Incorporated..........................................................................25 5.12 No Joint Venture or Partnership................................................................25 i 5.13 Borrower's Waivers.............................................................................25 5.14 Construction of Documents......................................................................26 5.15 Prior Agreements...............................................................................26 5.16 Exculpation....................................................................................26 5.17 Maximum Interest...............................................................................26 5.18 Counterparts...................................................................................27 EXHIBIT A INITIAL ALLOCATED LOAN AMOUNTS..........................................................................29 ii
LOAN AGREEMENT -------------- THIS LOAN AGREEMENT (this "Agreement"), dated as of October 4, 1996, by and between FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association, having an address at One First Union Center, DC6, Charlotte, North Carolina 28288-0166 (together with its successors and assigns, "Lender"), and SMC-SPE-2, a Delaware corporation, having an address at c/o Service Merchandise Company, Inc., 7100 Service Merchandise Drive, Brentwood, Tennessee 37027 ("Borrower"). All capitalized terms used herein shall have the respective meanings set forth in Section 1.1 hereof. W I T N E S S E T H : - - - - - - - - - - WHEREAS, Borrower desires to obtain mortgage loan financing in the aggregate principal amount of FIVE MILLION ONE HUNDRED SEVENTY THOUSAND AND 00/100 DOLLARS ($5,170,000.00) (collectively, the "Loans") in connection with the acquisition or financing of two (2) Service Merchandise locations (individually, a "Property" and collectively, the "Properties"), as more specifically described in the "Mortgages" (as hereinafter defined); and WHEREAS, the Loans are evidenced by two (2) Promissory Notes and secured by two (2) Mortgages on the Properties; WHEREAS, Lender is willing to make the Loans to Borrower, subject to and in accordance with the terms of this Agreement and the other Loan Documents. NOW, THEREFORE, in consideration of the covenants, agreements, representations and warranties set forth in this Agreement, and other good and valuable consideration, the parties hereto hereby covenant, agree, represent and warrant as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly required or unless the context clearly indicates a contrary intent: "Affiliate" of any specified Person shall mean any Person or entity (i) which owns beneficially, directly or indirectly, more than fifty percent (50%) of the outstanding shares of common stock or which is otherwise in control of Borrower, (ii) of which more than fifty percent (50%) of the outstanding voting securities are owned beneficially, directly or indirectly, by any entity described in clause (i) above, or (iii) which is controlled by an entity described in clause (i) above; provided that for the purposes of this definition the term "control" and "controlled by" shall have the meanings assigned to them in Rule 405 under the Securities Act of 1933, as amended. "Allocated Loan Amount" shall mean the Initial Allocated Loan Amount of each Property, as such amount may be adjusted from time to time as hereinafter 1 set forth. Upon each adjustment in the principal portion of the Indebtedness (each, a "Total Adjustment"), whether as a result of amortization, prepayment or as otherwise expressly provided herein or in any other Loan Document, each Allocated Loan Amount shall be increased or decreased, as the case may be, by an amount equal to the product of (i) the Total Adjustment, and (ii) a fraction, the numerator of which is the applicable Allocated Loan Amount (prior to the adjustment in question) and the denominator of which is the aggregate of the Allocated Loan Amounts (prior to the adjustment in question). However, when the principal portion of the Indebtedness is reduced as a result of Lender's receipt of (i) a Release Price, the Allocated Loan Amount for the Property being released and discharged from the encumbrance of the applicable Mortgage shall be reduced to zero (the amount by which such Allocated Loan Amount is reduced being referred to as the "Released Allocated Amount"), the applicable Mortgage, Assignment of Leases and other Collateral Documents with respect to such Loan shall be satisfied and discharged (of record, if applicable), and each other Allocated Loan Amount shall be decreased by an amount equal to the product of (1) the excess of (a) the Release Price over (b) the Released Allocated Amount, and (2) a fraction, the numerator of which is the applicable Allocated Loan Amount for each Property (prior to the adjustment in question) and the denominator of which is the aggregate of all of the Allocated Loan Amounts (prior to the adjustment in question) other than the Allocated Loan Amount applicable to the Property for which the Release Price was received or (ii) the sum of Net Proceeds (which term for the purposes of computing the Allocated Loan Amount only shall be deemed to include casualty and condemnation proceeds that are applied towards the reduction of the Indebtedness as set forth in Section 1.9 of the Mortgages) and Borrower's Contribution (if any), the Allocated Loan Amount for the Property with respect to which such sum was received shall be reduced to zero (the amount by which such Allocated Loan Amount is reduced being referred to as the "Foreclosed Allocated Amount"), the applicable Mortgage, Assignment of Leases and other Collateral Documents with respect to such Loan shall be satisfied and discharged (of record, if applicable), and each other Allocated Loan Amount shall (x) if the Net Proceeds exceed the Foreclosed Allocated Loan Amount (such excess being referred to as the "Surplus Net Proceeds"), be decreased by an amount equal to the product of (1) the Surplus Net Proceeds and (2) a fraction, the numerator of which is the applicable Allocated Loan Amount for each Property (prior to the adjustment in question) and the denominator of which is the aggregate of all of the Allocated Loan Amounts, (prior to the adjustment in question) other than the Allocated Loan Amount applicable to the Property with respect to which the Net Proceeds were received (such fraction being referred to as the "Net Proceeds Adjustment Fraction"), (y) if the Foreclosed Allocated Amount exceeds the sum of Net Proceeds and any Borrower's Contribution (such excess being referred to as the "Net Proceeds Deficiency"), be increased by an amount equal to the product of (1) the Net Proceeds Deficiency and (2) the Net Proceeds Adjustment Fraction, or (z) if the sum of Net Proceeds and any Borrower's Contribution equals the Foreclosed Allocated Amount, remain unadjusted. "ALTA" shall mean American Land Title Association, or any successor thereto. "Annual Release Limit" shall have the meaning specified in Section 2.2.2(c)(4). 2 "Assignment of Leases" shall mean, with respect to each Loan, that certain first priority Assignment of Leases and Rents, dated as of the date hereof, from Borrower, as assignor, to Lender, as assignee, with respect to the Property that is encumbered by the applicable Mortgage, assigning to Lender all of Borrower's interest in and to the Leases and Rents of such Property as security for the Loan, as such Assignment of Leases may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Borrower" shall have the meaning specified in the first Paragraph hereof. "Borrower's Contribution" shall have the meaning specified in Section 1.9 of the Mortgages. "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which national banks in North Carolina are not open for business. "Closing Date" shall mean the date hereof. "Code" shall mean the Internal Revenue Code of 1986. "Collateral Security Documents" shall mean, with respect to each Loan, any document or instrument given as security for the Note evidencing such Loan, including, without limitation, the Mortgage and the Assignment of Leases, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Conditional Commitment" shall mean the Conditional Commitment Letter from Lender and accepted by SMC dated September 9, 1996, together with the Special Stipulations Rider and Exhibit A and Exhibit B attached thereto. "Debt Service" shall mean, with respect to each Loan, the amount of interest, principal and reserve payments due and payable in respect of such Loan in accordance with the applicable Note and the other Loan Documents during an applicable period. "DSCR" shall mean the quotient obtained by dividing (i) the product of Store Sales at a Property (or Properties) for the twelve (12) month period immediately prior to the date for which the computation is made, multiplied by four (4%) per cent, by (ii) Debt Service for the corresponding period. "Environmental Indemnity" shall mean that certain Hazardous Substances Indemnity Agreement of even date herewith, by Borrower and Indemnitor in favor of Lender with respect to environmental conditions on the Properties, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Event of Default" shall have the meaning specified in Section 4.1. 3 "Fiscal Year" shall mean each annual period commencing on the first (1st) day after the end of the immediately preceding such annual period and ending the Sunday nearest the end of each calendar year of the term of this Agreement, or such other fiscal year of Borrower as Borrower may select from time to time with the prior written consent of Lender. "GAAP" shall mean generally accepted accounting principles in the United States of America as of the date of the applicable financial report. "Governmental Authority" shall mean any court, board, agency, commission, office or authority of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence. "Improvements" shall have the meaning specified in the applicable Mortgage with respect to each Property. "Indebtedness" shall mean the aggregate indebtedness in the original principal amounts set forth in, and evidenced by, the Notes, together with all other obligations and liabilities of Borrower due or to become due to Lender pursuant to the Notes, this Agreement or any other Loan Document, including, without limitation, all interest thereon. "Indemnitor" shall mean SMC-HC, Inc., a Delaware corporation. "Indemnity" shall mean that certain Indemnity and Guaranty Agreement of even date herewith, by Indemnitor in favor of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Initial Allocated Loan Amount" shall mean, with respect to each Loan, the principal amount of the applicable Note evidencing such Loan, as set forth on Exhibit A attached hereto and by this reference a part hereof. "Lease" shall mean, with respect to each Loan and the applicable Property, all leases, licenses, tenancies, concessions and occupancy agreements of such Property or the Improvements or the fixtures or equipment or any portion thereof or any interest therein, now or hereafter entered into. "Lender" shall have the meaning specified in the first Paragraph hereof. "Lien" shall mean, with respect to each Loan and the applicable Property, any mortgage, deed of trust, deed to secure debt, lien, pledge, hypothecation, assignment, security interest, or any other encumbrance, charge or transfer of, on or affecting such Property or any portion thereof or any interest therein, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, any financing statement, and mechanic's, materialmen's and other similar liens. 4 "Loan" shall mean one of the Loans, which shall be evidenced by a Note and secured by the Mortgages and the other Collateral Security Documents with respect to such Loan, to be made by Lender to Borrower pursuant hereto. "Loans" shall have the meaning specified in the recitals hereof, and shall refer, collectively, to each Loan. "Loan Documents" shall mean, collectively, shall mean this Agreement, the Mortgages, the Notes, the Assignments of Leases, the Environmental Indemnity, the Indemnity, the Loan Application submitted by SMC to Lender dated August 16, 1996, the Conditional Commitment and all other agreements, instruments, certificates or documents executed and delivered by Borrower or any Affiliate of Borrower in connection with the Loans. "Maturity Date" shall mean November 30, 2011. "Mortgage" shall mean, with respect to each Loan and the applicable Property, that certain first priority (i) Mortgage and Security Agreement, (ii) Leasehold Mortgage and Security Agreement, (iii) Deed of Trust and Security Agreement or (iv) Deed to Secure Debt and Security Agreement, as applicable, executed and delivered by Borrower as security for such Loan and the other Loans and encumbering such Property, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Net Proceeds" shall mean, with respect to each Loan and the applicable Property, the excess of (i)(x) the purchase price (at foreclosure or otherwise) actually received by Lender with respect to such Property as a result of the exercise by Lender of its rights, powers, privileges and other remedies after the occurrence of an Event of Default, or (y) if Lender (or Lender's nominee) is the purchaser at foreclosure by credit bid, then the amount of such credit bid, in either case, over (ii) all costs and expenses, including, without limitation, all reasonable attorneys' fees and disbursements and any brokerage fees, if applicable, incurred by Lender in connection with the exercise of such remedies, including the sale of such Property after a foreclosure against the Property. "Note" shall mean, with respect to each Loan, the Promissory Note of even date herewith made by Borrower in favor of Lender in the Initial Allocated Loan Amount of such Loan, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time. "Person" shall mean 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. "Prepayment Date" shall have the meaning specified in Section 2.2.2. "Property" shall mean, with respect to each Loan, the parcel of real property and the Improvements thereon encumbered by the Mortgage specifically 5 corresponding to such Loan, together with all rights and property pertaining to such real property and Improvements, as more particularly described in the granting clauses of such Mortgage and referred to therein as the "Property". "Rating Agency" shall mean any nationally recognized statistical agency selected by Lender including, without limitation, Duff & Phelps Rating Co., Fitch Investors Services, Inc., Moody's Investors Services, Inc., and/or Standard and Poors Corporation, collectively, and any successor to any of them; provided, however, that at any time during which a Loan is an asset of a securitization or is otherwise an asset of any rated transaction, "Rating Agency" shall mean the rating agency or rating agencies that from time to time rate the securities, certificates or other instruments issued in connection with such securitization or other transaction. "Release" shall have the meaning specified in Section 2.2.2. "Release Price" shall have the meaning specified in Section 2.2.2. "Released Property" shall have the meaning specified in Section 2.2.2. "REMIC" shall mean a "real estate mortgage investment conduit" within the meaning of the Code. "REMIC Provisions" shall mean the provisions of the federal income tax law relating to REMICs, which appear at Sections 860A through 860G of the Code, and any related provisions and proposed, temporary and final Treasury regulations and published rulings, notices and announcements promulgated thereunder, as the foregoing may be in effect from time to time. "REMIC Trust" shall have the meaning specified in Section 2.5.2. "Rents" shall mean, with respect to the Property, all rents, royalties, issues, profits, revenue, income and other benefits arising from the Leases and renewals thereof. "Satisfaction" shall have the meaning specified in Section 2.2.2. "Secondary Market Transaction" shall have the meaning specified in Section 2.3(14). "SMC" shall mean Service Merchandise Company, Inc., a Tennessee corporation. "Startup Date" shall have the meaning specified in Section 2.5.2. "State" shall mean, with respect to each Property, the State or Commonwealth in which such Property or any part thereof is located. 6 "Store Sales" shall mean, with respect to each Property, the aggregate selling prices of all merchandise sold or delivered in, at, on or from any part of such Property and the charges for all services of any sort (including receipts from vending machines and revenues from the rental of merchandise), sold or performed in, at, on or from any part of the Property. Store Sales includes sales and charges for cash or credit, regardless of collection in the case of the latter. Store Sales excludes (i) refunds made by the retail operator at such Property to its customers for merchandise returned to such retail operator, (ii) exchanges of merchandise between stores of Borrower or such retail operator (or Borrower's or such retail operator's affiliates) where such exchanges are made solely for the convenient operation of such retail operator's business and not for the purpose of consummating a sale at another location that has been made, in fact, at, in, on or from the Property, and (iii) the amount of any city, county or state sales tax on such sales paid to a taxing authority by Borrower or such retail operator (but not by any vendor of such retail operator). A Store Sale shall be deemed to be made in the Property if (x) an order therefor is secured or received in the Property, or (y) pursuant to mail, telegraph, telephone or other similar means, orders are received or filled at or from the Property. "TI Costs" shall mean costs and expenses incurred by Borrower for the payment of leasing commissions and expenditures related to repairs, replacements and improvements (including any tenant work allowance) in connection with the leasing of a Property or any portion thereof to a new tenant or the renewal or extension of a Lease to an existing tenant. "TI Reserve" shall have the meaning specified in Section 2.4 hereof. "Title Insurance Policy" shall mean, with respect to each Property, the ALTA extended coverage mortgagee title insurance policy (1992 Loan Policy or other loan policy acceptable to Lender) issued with respect to such Property and insuring the lien of the Mortgage encumbering such Property and containing such endorsements and affirmative assurances as Lender shall reasonably require (to the extent authorized in the State). 7 "Total Sale" shall have the meaning specified in Section 2.3 hereof. "Yield Maintenance" shall mean, with respect to each Loan and the corresponding Note, the positive excess of (1) the present value ("PV") of all future installments of principal and interest due under the Note including the principal amount due at maturity (collectively, "All Future Payments"), discounted at an interest rate per annum equal to the Treasury Constant Maturity Yield Index published during the second full week preceding the date for which the calculation is made for the U.S. Treasury security having a maturity coterminous with the remaining term of such Note, over (2) the principal amount of such Loan outstanding immediately before such prepayment [(PV of All Future Payments) - (principal balance at time of prepayment) = Yield Maintenance]. "Treasury Constant Maturity Yield Index" shall mean the average yield for "This Week" as reported by the Federal Reserve Board in Federal Reserve Statistical Release H.15(519). If there is no Treasury Constant Maturity Yield Index for a U.S. Treasury security having a maturity coterminous with the remaining term of such Note, then the index shall be equal to the weighted average yield to maturity of the Treasury Constant Maturity Yield Indices with maturities next longer and shorter than such remaining average life to maturity, calculated by averaging (and rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the average is not such a multiple) the yields of the relevant Treasury Constant Maturity Yield Indices (rounded, if necessary, to the nearest 1/100 of 1% with any figure of 1/200 of 1% or above rounded upward). 1.2 Principles of Construction. All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Agreement unless otherwise specified. Unless otherwise specified, the words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, as modified herein. ARTICLE 2 GENERAL TERMS 2.1 Loan Commitment; Disbursement to Borrower. 2.1.1 The Loans. Subject to and upon the terms and conditions set forth herein, Lender hereby agrees to make the Loans to Borrower on the Closing Date, in the Initial Allocated Loan Amounts set forth in the Notes, which Loans shall mature on the Maturity Date. Borrower hereby agrees to accept the Loans on the Closing Date, subject to and upon the terms and conditions set forth herein. 2.1.2 The Notes. Each Loan shall be evidenced by a Note in the Initial Allocated Loan Amount of such Loan. The Loan evidenced by each Note shall bear interest as provided in such Note, and shall be subject to repayment and prepayment as provided in such Note and in Section 2.2 hereof. The Loan 8 evidenced by each Note shall be entitled to the benefits of this Agreement and shall be secured by the Mortgages, Assignments of Leases and the other Collateral Security Documents. 2.2 Loan Repayment/Prepayment. 2.2.1 Loan Repayment. Borrower shall repay each Loan in accordance with the provisions of the Note evidencing such Loan. 2.2.2 Prepayment. (a) Except as set forth in Sections 2.2.2(b) and (c) hereof, no prepayment of the Indebtedness may be made in whole or in part. (b) With respect to each Loan and each Note evidencing such Loan, the following prepayment terms and conditions shall apply: (1) The Loan may be prepaid in whole or in part at any time after the first (1st) anniversary of the Note provided (i) written notice of such prepayment is received by Lender not more than sixty (60) days and not less than thirty (30) days prior to the date of such prepayment, (ii) such prepayment is accompanied by all unpaid interest accrued thereunder and all other sums then due thereunder and under the other Loan Documents (including this Agreement), and (iii) if such prepayment occurs prior to the date that is six (6) months prior to the Maturity Date, Lender is paid a prepayment fee in an amount equal to the following: (i) during the period from and including the first (1st) anniversary of the Note until the date that is nine (9) years and six (6) months after the date of the Note, the greater of (i) one percent (1.0%) of the principal amount being prepaid, or, in the event of a Release, one percent (1%) of the then Allocated Loan Amount for the Property to be Released, or (ii) Yield Maintenance; (ii) during the period from and including the date that is nine (9) years and six (6) months after the date of the Note until the date that is ten (10) years and six (6) months after the date of the Note, five percent (5%) of the principal amount being prepaid, or, in the event of a Release, five percent (5%) of the then Allocated Loan Amount for the Property to be Released; (iii) during the period from and including the date that is ten (10) years and six (6) months after the date of the Note until the date that is eleven (11) 9 years and six (6) months after the date of the Note, four percent (4%) of the principal amount being prepaid, or, in the event of a Release, four percent (4%) of the then Allocated Loan Amount for the Property to be Released; (iv) during the period from and including the date that is eleven (11) years and six (6) months after the date of the Note until the date that is twelve (12) years and six (6) months after the date of the Note, three percent (3%) of the principal amount being prepaid, or, in the event of a Release, three percent (3%) of the then Allocated Loan Amount for the Property to be Released; (v) during the period from and including the date that is twelve (12) years and six (6) months after the date of the Note until the date that is thirteen (13) years and six (6) months after the date of the Note, two percent (2%) of the principal amount being prepaid, or, in the event of a Release, two percent (2%) of the then Allocated Loan Amount for the Property to be Released; and (vi) during the period from and including the date that is thirteen (13) years and six (6) months after the date of the Note until the date that is fourteen (14) years and six (6) months after the date of the Note, one percent (1%) of the principal amount being prepaid, or, in the event of a Release, one percent (1%) of the then Allocated Loan Amount for the Property to be Released. In the event that any prepayment fee is due hereunder, Lender shall deliver to Borrower a statement setting forth the amount and determination of the prepayment fee, and, provided that Lender shall have in good faith applied the formula described above, Borrower shall not have the right to challenge the calculation or the method of calculation set forth in any such statement in the absence of manifest error. Lender shall not be obligated or required to have actually reinvested the prepaid principal balance at the Treasury Constant Maturity Yield or otherwise as a condition to receiving the prepayment fee. No prepayment fee or shall be due or payable in connection with any prepayment of the indebtedness evidenced by the Note, in whole, made on or after the date that is six (6) months prior to the Maturity Date, or upon prepayment resulting from application of insurance or condemnation proceeds and any related Borrower's Contribution as provided in the Mortgage at any time during the Loan term. In addition to the aforesaid prepayment fee, if, upon any such prepayment (whether prior to or after the date that is six (6) months prior to the Maturity Date), the aforesaid prior written notice has not been received by Lender, the prepayment fee shall be increased by an amount equal to the lesser of (i) thirty (30) days' unearned interest computed on the outstanding principal balance of 10 the Note so prepaid and (ii) unearned interest computed on the outstanding principal balance of the Note so prepaid for the period from, and including, the date of prepayment through the Maturity Date. (2) Partial prepayments of the indebtedness evidenced by a Note shall not be permitted, except partial prepayments resulting from Lender applying insurance or condemnation proceeds and any related Borrower's Contribution to reduce the outstanding principal balance of the Loan evidenced by such Note as provided in the corresponding Mortgage, in which event no prepayment fee shall be due. No notice of prepayment shall be required under the circumstance specified in the preceding sentence. No principal amount repaid may be reborrowed. Partial payments of principal of any Loan shall be applied to the unpaid principal balance thereof, but such application shall not reduce the amount of the fixed monthly installments required to be paid pursuant to Section 1.01 of the corresponding Note. (3) Except as otherwise expressly provided in Section 2.2.2(b)(2) above, the prepayment fees provided above shall be due, to the extent permitted by applicable law, under any and all circumstances where all or any portion of the Note is paid prior to the Maturity Date, whether such prepayment is voluntary or involuntary, even if such prepayment results from Lender's exercise of its rights upon Borrower's default and acceleration of the maturity date of the Note (irrespective of whether foreclosure proceedings have been commenced), and shall be in addition to any other sums due hereunder or under any of the other Loan Documents. No tender of a prepayment of the Note with respect to which a prepayment fee is due shall be effective unless such prepayment is accompanied by the prepayment fee. Any tender of prepayment of any Loan made prior to the first (1st) anniversary of the corresponding Note, whether voluntary or involuntary (except partial prepayments resulting from Lender applying insurance or condemnation proceeds to reduce the outstanding principal balance of the Loan evidenced by such Note as provided in the corresponding Mortgage), must include a prepayment fee computed as provided in Section 2.2.2(b) above plus an additional prepayment fee of one percent (1%) of the principal balance of the Note. (4) Except in the case of a prepayment resulting from Lender applying insurance or condemnation proceeds and any related Borrower's Contribution to the repayment of a Loan in whole, Borrower may not prepay any one Loan in whole pursuant to this Section 2.2.2(b) without prepaying all Loans in whole. (c) Notwithstanding anything to the contrary contained in Section 2.2.2(b) above, Borrower may prepay any Loan(s) in whole in accordance with this Section 2.2.2(c) without prepaying all Loans in whole. If Borrower desires to make a prepayment pursuant to this Section 2.2.2(c), and sends a notice to Lender indicating that such prepayment is being made in connection with a release of a 11 Property from the lien of a Mortgage pursuant to this clause (c) (the "Released Property"), then, upon the request of Borrower, Lender shall, upon satisfaction of all the following terms and conditions, execute, acknowledge and deliver to Borrower a satisfaction of such Mortgage or other reconveyance of the Released Property in form and substance reasonably satisfactory to Borrower and Lender (a "Satisfaction"), whereby Lender acknowledges and agrees to release such Released Property from the lien of such Mortgage (a "Release"): (1) Lender shall have received in immediately available federal funds on the date proposed for such prepayment (the "Prepayment Date") any prepayment fee payable pursuant to clause (b) above, plus an amount equal to one hundred ten (110%) percent of the then Allocated Loan Amount for the Property to be released (the "Release Price") accompanied by all unpaid interest accrued under the Loan(s) being prepaid, which Release Price shall be applied to the repayment of the Loans as provided in the definition of "Allocated Loan Amount"; (2) Either (a) the DSCR for the Property to be released shall be less than the aggregate DSCR for all of the Properties (excluding the Released Property), provided that the aggregate DSCR for all of the Properties (excluding the Released Property) is at least 1.25 or (b) the aggregate DSCR for all of the Properties (excluding the Released Property) for the twelve (12) month period immediately prior to such Release is not less than 1.30; provided, however, that neither this clause (2) nor clauses (3) or (4) below shall be applicable to a Release obtained by Borrower pursuant to Section 1.9 of a Mortgage, or a Release in connection with the exercise by Borrower of its cure rights under Section 4.1(g) hereof. Notwithstanding the foregoing, this clause (2) shall be applicable to a Release in connection with the exercise by Borrower of its cure rights under Section 4.1(g) hereof if, in Lender's reasonable judgment, Borrower allowed the Property that is subject to such cure rights to become vacant for the purpose of obtaining a Release that does not meet the conditions of this clause (2). (3) Borrower shall, at its expense, provide all financial and other information to substantiate Store Sales to Lender's reasonable satisfaction, including updated sales information as provided herein. (4) Borrower shall not be permitted to obtain Releases for more than twenty percent (20%) (rounded up or down to the nearest whole number) of the Properties in any Fiscal Year (the "Annual Release Limit"); provided, however, that (i) in any Fiscal Year Borrower shall be permitted a Release of one (1) additional Property over the Annual Release Limit in connection with the exercise by Borrower of its cure rights under Section 4.1(g) hereof; provided, that, in 12 Lender's reasonable judgment, Borrower did not allow the Property that is subject to such cure rights to become vacant for the purpose of obtaining an additional Release within such Fiscal Year, and (ii) any Release obtained by Borrower pursuant to Section 1.9 of a Mortgage shall not be included in the calculation of the Annual Release Limit. (5) The Released Property shall be transferred to a Person that is not the immediate parent of Borrower; provided, however, that title may pass through such immediate parent to another entity in a series of transfers that occur on the same day, and Borrower shall provide Lender with evidence reasonably satisfactory to Lender confirming the foregoing, including, without limitation, a copy of the deed conveying title to the Released Property, certified to be true and complete by Borrower, and a certificate of Borrower confirming the name, address and non-parent status of such ultimate transferee. (6) Borrower shall, at its sole expense, prepare any and all documents and instruments necessary to effect the Release, or otherwise reasonably required by Lender in connection therewith, all of which shall be subject to the approval of Lender, and Borrower shall pay all reasonable costs incurred by Lender (including, but not limited to, attorneys' fees and disbursements, title endorsements acceptable to Lender insuring that the lien of the mortgages on the remaining Properties shall continue in effect with first lien priority and shall be unaffected by the release of such Property, and all other reasonable costs incurred by Lender in connection with the review, execution and delivery of such documents and the Release transaction. Without limitation to the foregoing, Borrower shall deliver or cause to be delivered, at Borrower's sole expense, a re-affirmation of any guaranty or indemnification delivered to Lender relative to any Loan, in form and substance satisfactory to Lender. (7) No Event of Default shall have occurred and be continuing at the time of the request for the Release or on the Prepayment Date. (8) Lender shall have received not less than forty-five (45) days' prior written notice. 2.3 Total Sale. Subject to the terms of this Section 2.3, Lender shall consent to a one time sale, conveyance or transfer of all of the Properties (hereinafter, a "Total Sale") to any person or entity provided that each of the following terms and conditions are satisfied: (a) No Event of Default shall have occurred and be continuing at the time of the request for the prospective Total Sale or on the date of the Total Sale; 13 (b) Borrower gives Lender written notice of the terms of such prospective Total Sale not less than sixty (60) days before the date on which such Total Sale is scheduled to close and, concurrently therewith, gives Lender all such information concerning the proposed transferee of the Properties (hereinafter, "Buyer") as Lender would require in evaluating an initial extension of credit to a borrower and pays to Lender a non-refundable application fee in the amount of $5,000.00. Lender, acting in good faith, shall have the right to approve or disapprove the proposed Buyer. In determining whether to give or withhold its approval of the proposed Buyer, Lender shall consider Buyer's experience and track record in owning and operating facilities similar to the Properties, Buyer's entity structure, Buyer's financial strength, Buyer's general business standing and Buyer's relationships and experience with contractors, vendors, tenants, lenders and other business entities; provided, however, that, notwithstanding Lender's agreement to consider the foregoing factors in determining whether to give or withhold such approval, such approval shall be given or withheld based on what Lender in good faith determines to be commercially reasonable in Lender's sole discretion and, if given, may be given subject to such conditions as Lender may in good faith deem appropriate; (c) Borrower pays Lender, concurrently with the closing of such Total Sale, all out-of- pocket costs and expenses, including, without limitation, attorneys' fees, reasonably incurred by Lender in connection with the Total Sale plus a non-refundable assumption fee equal to one percent (1.0%) of the then outstanding aggregate principal balance of the then Allocated Loan Amount for the Properties; (d) Buyer assumes and agrees to pay the Indebtedness subject to the provisions of Section 5.16 hereof and, prior to or concurrently with the closing of such Total Sale, Buyer executes, without any cost or expense to Lender, including, without limitation, attorneys' fees, such documents and agreements as Lender shall reasonably require to evidence and effectuate said assumption and delivers such legal opinions as Lender may reasonably require; (e) Borrower and Buyer execute, without any cost or expense to Lender, including, without limitation attorneys' fees, new financing statements or financing statement amendments and any additional documents as may be reasonably requested by Lender; (f) Buyer and Lender execute, without any cost or expense to Lender, including without limitation attorneys' fees, such amendments to the Loan Documents and any additional documents as may be reasonably requested by Lender. (g) Borrower shall cause to be delivered to Lender, without any cost or expense to Lender, including without limitation attorneys' fees, such endorsements to Lender's title insurance policy, hazard insurance endorsements or certificates and other similar materials as Lender may reasonably deem necessary at the time of the Total Sale, all in form and substance reasonably satisfactory to Lender, including, without limitation, an endorsement or endorsements to Lender's title insurance policy insuring the liens of the Mortgages, extending the effective date of such policy to the date of execution and delivery (or, if later, of recording) of the assumption agreement referenced 14 above in subparagraph (4) of this Section with no additional exceptions added to such policy and insuring that fee simple title to the Properties is vested in Buyer; (h) Borrower executes and delivers to Lender, without any cost or expense to Lender, including, without limitation, attorneys' fees, a release of Lender, its officers, directors, employees and agents, from all claims and liability relating to the transactions evidenced by the Loan Documents through and including the date of the closing of the Total Sale, which agreement shall be in form and substance reasonably satisfactory to Lender and shall be binding upon Borrower and Buyer; (i) Such Total Sale is not construed so as to relieve any current guarantor or indemnitor of its obligations under any guaranty or indemnity agreement executed in connection with the Loans and each such current guarantor and indemnitor executes, without any cost or expense to Lender, including, without limitation, attorneys' fees, such documents and agreements as Lender shall reasonably require to evidence and effectuate the ratification of each such guaranty and indemnity agreement, provided that if Buyer or a party associated with Buyer in good faith approved by Lender in its sole discretion assumes the obligations of the current guarantor or indemnitor under its guaranty or indemnity agreement and Buyer or such party associated with Buyer, as applicable, executes, without any cost or expense to Lender, including, without limitation, attorneys' fees, a new guaranty or indemnity agreement in form and substance satisfactory to Lender, then Lender shall release the current guarantor or indemnitor from all obligations arising under its guaranty or indemnity agreement after the closing of such Total Sale; (j) Subject to the provisions of Section 5.16 hereof, such Total Sale is not construed so as to relieve Borrower of any personal liability under this Agreement or any of the other Loan Documents for any acts or events occurring or obligations arising prior to or simultaneously with the closing of such Total Sale and Borrower executes, at Borrower's sole cost and expense, such documents and agreements as Lender shall reasonably require to evidence and effectuate the ratification of said personal liability; (k) Buyer shall furnish, if Buyer is a corporation, partnership or other entity, all appropriate papers evidencing Buyer's capacity and good standing, and the qualification of the signers to execute the assumption of the Indebtedness, which papers shall include certified copies of all documents relating to the organization and formation of Buyer and of the entities, if any, which are partners of Buyer. Buyer and such constituent partners, members or shareholders of Buyer (as the case may be), as Lender shall require, shall be a single purpose entity, whose formation documents shall be approved by counsel to Lender; (l) Buyer shall assume the obligations of Borrower under any management agreements pertaining to the Properties; (m) Buyer shall furnish an opinion of counsel reasonably satisfactory to Lender and its counsel (i) that Buyer's formation documents provide for the matters described in subparagraph (11) of this Section, (ii) that the assumption of the Indebtedness has been duly authorized, executed and delivered, and that 15 the Loan Documents are valid, binding and enforceable against Buyer in accordance with their terms, (iii) that Buyer and any entity that is a controlling stockholder or general partner of Buyer, have been duly organized, and are in existence and good standing, and (v) with respect to such other matters, as Lender may request; and (n) Lender shall have received evidence in writing from the Rating Agencies to the effect that the proposed transfer will not result in a re-qualification, reduction or withdrawal of any rating initially assigned or to be assigned in a Secondary Market Transaction. For purposes hereof, a "Secondary Market Transaction" shall be (a) any sale of a Mortgage or Mortgages, a Note or Notes and other applicable Loan Documents to one or more investors as a whole loan; (b) a participation of a Loan or Loans to one or more investors, (c) any deposit of a Mortgage or Mortgages, a Note or Notes and other applicable Loan Documents with a trust or other entity that may sell certificates or other instruments to investors evidencing an ownership interest in the assets of such trust or other entity, or (d) any other sale or transfer of a Loan or any interest therein to one or more investors. 2.4 Transfer of Individual Property. Lender shall consent to a one time sale, conveyance or transfer of an individual Property encumbered by a Mortgage subject to, and in accordance with, the terms, provisions and conditions of Section 1.13(c) of the applicable Mortgage. 2.5 Substitution of a Property. Subject to the terms of this Section 2.5, Borrower may substitute for a Property (the "Substituted Property") a property that is not encumbered by a Mortgage (the "Substitution Property") to serve as the collateral for the applicable Loan (a "Substitution") provided that each of the following terms and conditions are satisfied: (a) No Event of Default shall have occurred and be continuing at the time of the request for the proposed Substitution or on the date of the Substitution; (b) Such Substitution shall only be permitted prior to the date that is ninety (90) days after the date on which an election to treat the Loan that is secured by such Property, along with other assets, if any, as a REMIC (such assets pool, the "REMIC Trust") is made (the "Startup Date"); provided, however, that such ninety (90) day period is based on the REMIC Provisions in effect as of the date hereof, and is subject to adjustment by Lender based upon any changes to such REMIC Provisions. The Substitution must be acceptable to (a) Lender, if prior to the Startup Date, or (b) any assignee of Lender and the then current servicer of such Loan, if subsequent to the Startup Date (either, the "Approving Party"), as well as the Rating Agencies, which approval shall include consideration of, but not be limited to, the appraised value of the proposed Substitution Property (which shall be at least equal to the appraised value of the Substituted Property as of the date hereof), the type and location of the proposed Substitution Property, and the operating income and Store Sales of the proposed Substitution Property (which shall be at least equal to the operating income and the Store Sales of the Substituted Property as of the date hereof). Without limiting the generality of the foregoing, Borrower must satisfy the following conditions: (1) Borrower shall provide to the Approving Party written notice of the terms of such prospective Substitution not less than sixty (60) days before the 16 date on which such Substitution is scheduled to be effected, together with (x) all such information concerning the proposed Substitution Property as Lender would require in evaluating an initial extension of credit to a borrower to be secured by such Substitution Property and as may be required by the Approving Party and (y) payment of a non-refundable application fee in the amount of $5,000.00. The Approving Party shall have the right to approve or disapprove the proposed Substitution Property; provided, however, that, such approval shall be given or withheld based on what the Approving Party in good faith determines to be commercially reasonable in the Approving Party's sole discretion and, if given, may be given subject to such conditions as the Approving Party in good faith may deem appropriate; (2) Borrower pays to the Approving Party, concurrently with the effecting of such Substitution, a non-refundable assumption fee in an amount equal to all out- of-pocket costs and expenses, including, without limitation, attorneys' fees, reasonably incurred by such Approving Party in connection with the Substitution; (3) Borrower executes and delivers, without any cost or expense to the Approving Party, including, without limitation, attorneys' fees, a Mortgage, Assignment of Leases and Rents, financing statements and any additional loan documents as the Approving Party in good faith may, in its sole discretion, deem necessary or expedient, including amendments and ratifications to the Environmental Indemnity and the Indemnity and such amendments to the other Loan Documents as the Approving Party may reasonably require, all in form and substance reasonably satisfactory to the Approving Party; (4) Borrower shall cause to be delivered to the Approving Party, without any cost or expense to the Approving Party, including without limitation, attorneys' fees, an ALTA title insurance policy, with any endorsements the Approving Party in good faith may require in its sole discretion, insuring the Approving Party, in an amount at least equal to the Allocated Loan Amount to be secured by the Substitution Property, which policy shall provide that the Mortgage constitutes a first lien or charge upon the Substitution Property subject only to such items as shall have been approved in writing by the Approving Party and its attorneys; (5) Borrower shall cause to be delivered to the Approving Party hazard insurance endorsements or certificates and other similar materials as the Approving Party may reasonably deem necessary at the time of the Substitution, all in form and substance reasonably satisfactory to the Approving Party; (6) Borrower shall cause to be delivered to the Approving Party all documents and information required by the Conditional Commitment with respect to 17 the Approving Party's review and approval of a Substitution Property and Borrower shall comply with all conditions with respect to a Property set forth in the Conditional Commitment; (7) Borrower executes and delivers to the Approving Party, without any cost or expense to the Approving Party, including, without limitation, attorneys' fees, a release of the Approving Party, its officers, directors, employees and agents, from all claims and liability relating to the transactions evidenced by the Substituted Property through and including the date of the effecting of the Substitution, which agreement shall be in form and substance reasonably satisfactory to the Approving Party and shall be binding upon Borrower; (8) Borrower shall furnish an opinion of counsel reasonably satisfactory to the Approving Party and its counsel to the effect that (i) the Substitution does not violate any, and is in compliance with all, REMIC Provisions, will not endanger the status of the REMIC Trust as a REMIC, or result in the imposition of a tax upon the REMIC Trust (including, but not limited to, the tax on prohibited transactions as defined in Section 860F(a)(2) of the Code and the tax on contributions to a REMIC set forth in Section 860G(d) of the Code), (ii) that Borrower's formation documents provide for the Substitution, (iii) that the Substitution has been duly authorized, executed and delivered, and that the Loan Documents (including, without limitation, any amendments thereto or any new Loan Documents executed in connection with the Substitution) are valid, binding and enforceable against Borrower in accordance with their terms, (iv) that Borrower and any entity that is a controlling stockholder of Borrower, have been duly organized, and are in existence and good standing, and (v) with respect to such other matters as the Approving Party may request; (9) The Approving Party shall have received evidence in writing from the Rating Agencies to the effect that the proposed Substitution will not result in a re- qualification, reduction or withdrawal of any rating initially assigned or to be assigned in a Secondary Market Transaction; (10) Such Substitution is not construed so as to relieve any current guarantor or indemnitor of its obligations under any guaranty or indemnity agreement executed in connection with the Loans; and (11) Subject to the provisions of Section 5.16 hereof, such Substitution is not construed so as to relieve Borrower of any personal liability under this Agreement or any of the other Loan Documents for any acts or events occurring or obligations arising prior to or simultaneously with the effecting of such Substitution and Borrower executes, at Borrower's sole cost and expense, such documents and agreements as the Approving Party shall reasonably require to evidence and effectuate the ratification of said personal liability. 18 2.6 TI Reserve. (a) As additional security for the Loan, on the date hereof Borrower has established, and Borrower shall maintain at all times while any portion of the Loan remains outstanding, a TI Costs reserve (the "TI Reserve") with Lender for payment of TI Costs in the amount of One Hundred Twenty-Five Thousand and 00/100 Dollars ($125,000.00), which amount shall be reduced proportionately with reductions in the Indebtedness upon the transfer or Release of a Property in accordance with the terms of the this Agreement and the other Loan Documents. Borrower hereby agrees to pay all TI Costs with respect to each Property (without regard to the amount of money then available in the TI Reserve). So long as no Event of Default hereunder or under the other Loan Documents has occurred and is continuing, all sums in the TI Reserve shall be held by Lender to pay TI Costs. Provided that (i) Lender has received written notice from Borrower requesting funds from the TI Reserve at least ten (10) Business Days prior to the due date of any requested disbursement relating to TI Costs, or if Borrower makes timely payment therefor, not more than forty-five (45) days after Borrower has made such payment, (ii) no Event of Default has occurred and is continuing, (iii) Borrower furnishes Lender with a written disbursement request for the payment or reimbursement of such TI Costs, not more frequently than once every ninety (90) day period, (iv) there are sufficient funds available in the TI Reserve with respect to Borrower's disbursement request, (v) Borrower shall have theretofore complied with the requirements of the Mortgages relative to (1) new leases, licenses and/or occupancy agreements with respect to the Properties and (2) the performance of improvements and alterations to the Properties, (vi) Borrower shall have theretofore furnished Lender with reasonably satisfactory evidence of the progress and/or completion of tenant improvement work, the cost of tenant improvement work, reasonably satisfactory evidence that any and all completed tenant improvement work complies with law, lien waivers for lienable work, copies of bills, invoices and other reasonable documentation as may be required by Lender to substantiate the use of such funds and establish that the TI Costs that are the subject of such disbursement request represent completed or partially completed tenant improvement work performed at all or any portion of the Property, and (vii) Borrower has replenished the TI Reserve in the amount of any previous withdrawals therefrom in accordance with this Section, then Lender shall make such payments out of the TI Reserve. In making any payment from the TI Reserve, Lender shall be entitled to rely on such request from Borrower without any inquiry into the accuracy, validity or contestability of any such amount. Borrower shall deposit the amount of any funds withdrawn from the TI Reserve within ten (10) days after the date of such withdrawal. The TI Reserve shall not, unless otherwise explicitly required by applicable law, be or be deemed to be escrow or trust funds, but, at Lender's option and in Lender's discretion, may either be held in a separate account or be commingled by Lender with the general funds of Lender. Interest on the funds contained in the TI Reserve shall be credited to Borrower. The TI Reserve is solely for the protection of Lender and entails no responsibility on Lender's part beyond the payment of the costs and expenses described in this Section in accordance with the terms hereof and beyond the allowing of due credit for the sums actually received. In the event that the amounts on deposit or available in the TI Reserve are inadequate to pay the TI Costs, Borrower shall pay the amount of such deficiency. Upon assignment of this Agreement by Lender, any funds in the TI Reserve shall be turned over to the assignee and any responsibility of Lender, as assignor, with respect thereto shall terminate. If there is an Event 19 of Default under this Agreement, Lender may, but shall not be obligated to, apply at any time the balance then remaining in the TI Reserve against the indebtedness secured by the Mortgages in whatever order Lender shall subjectively determine. No such application of the TI Reserve shall be deemed to cure any default hereunder. (b) At Borrower's option, the TI Reserve can be deposited with Lender in the form of a letter of credit (a "Letter of Credit"). The Letter of Credit shall be unconditional and irrevocable, issued by a commercial bank having a rating of "AA" or higher by Moody's Investors Services, Inc. and Standard and Poors Corporation at the time of issuance, the letter of credit payment window of which bank is located in New York County, New York and otherwise satisfactory to Lender in its sole discretion. The Letter of Credit shall be payable (x) to Lender upon presentation solely of a sight draft stating that an event under this Agreement has occurred that entitles Lender to such draw and (y) in multiple drafts. The Letter of Credit shall be for a period expiring not earlier than one (1) year after the date of delivery of the Letter of Credit to Lender. The Letter of Credit shall be replaced not less than thirty (30) days prior to the expiration date of the Letter of Credit. If Borrower fails to replace timely the Letter of Credit with either (i) a cash deposit meeting the requirements of Section 2.6(a), or (ii) a new Letter of Credit meeting the requirements of this clause (b), Lender may draw on the then expiring Letter of Credit and apply all or any portion of the proceeds therefrom to (x) the indebtedness secured by the Mortgages or (y) the funding of the TI Reserve, in Lender's sole discretion. Otherwise, Lender may draw upon the Letter of Credit only in respect of any amount that Lender would be entitled to use, apply or retain the proceeds of the TI Reserve under this Section. (c) In the event that the Letter of Credit bank shall at any time cease to have a long-term rating of at least "A" or higher by any one of the Rating agencies, Borrower shall, within five (5) Business Days after notice of the occurrence of such event, replace the Letter of Credit with either (i) a cash deposit meeting the requirements of Section 2.6(a), or (ii) a letter of credit (the "Replacement Letter of Credit") issued by a commercial bank having a long-term rating of "AA" or higher by Moody's Investors Services, Inc. and Standard and Poors Corporation, the letter of credit window of which bank is located in New York County, New York and otherwise satisfactory to Lender in its sole discretion. Simultaneously with the furnishing of such Replacement Letter of Credit, Lender shall surrender to Borrower the Letter of Credit which is being replaced and thereupon the Replacement Letter of Credit shall be deemed to be the Letter of Credit for all purposes of this Agreement. If Borrower shall fail to furnish such Replacement Letter of Credit within such five (5) Business Day period, Lender may draw upon the then Letter of Credit and apply all or any portion of the proceeds therefrom to (x) the indebtedness secured by the Mortgages or (y) the funding of the TI Reserve, in Lender's sole discretion. (d) Upon the full repayment of the Loans, the unexpended portion of the TI Reserve (including any corresponding Letter(s) of Credit) shall be returned to Borrower. 20 ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 Borrower's Representations. The representations and warranties of Borrower set forth in the Mortgages are hereby incorporated herein in full. 3.2 Survival of Representations. Borrower agrees that all of the representations and warranties of Borrower incorporated in Section 3.1 and elsewhere in this Agreement and in the other Loan Documents shall survive for so long as any amount remains owing to Lender under the Notes, the Mortgages, this Agreement or any of the other Loan Documents. All representations, warranties, covenants and agreements made in this Agreement or in the other Loan Documents by Borrower shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf. ARTICLE 4 DEFAULTS 4.1 Event of Default. Each of the following events occurring with respect to Borrower, or any Property shall constitute an "Event of Default" hereunder: (a) if Borrower fails to punctually perform any covenant, agreement, obligation, term or condition hereof that requires payment of any money to Lender (except those regarding payments to be made under the Notes, which failure is subject to any grace periods set forth in the Notes) for ten (10) days after written notice thereof from Lender to Borrower. (b) if Borrower fails to perform any other covenant, agreement, obligation, term or condition set forth herein other than those otherwise described elsewhere in this Section 4.1 and, to the extent such failure or default is susceptible of being cured, the continuance of such failure or default for thirty (30) days after written notice thereof from Lender to Borrower; provided, however, that, if such default is susceptible of cure but such cure cannot be accomplished with reasonable diligence within said period of time, and if Borrower commences to cure such default promptly after receipt of notice thereof from Lender, and thereafter prosecutes the curing of such default with reasonable diligence, such period of time shall be extended for such period of time as may be necessary to cure such default with reasonable diligence, but not to exceed an additional ninety (90) days (the "Additional Cure Period"); provided, further, that if such default is susceptible of cure but such cure cannot be accomplished with reasonable diligence within said Additional Cure Period and Borrower notifies Lender not later than ten (10) days prior to the end of such Additional Cure Period of its intention to continue to cure such default with all due diligence and thereafter continuously prosecutes the curing of such default with all due diligence, such Additional Cure Period shall be extended for such period of time as may be necessary to cure such default with all due diligence, but not to exceed an additional sixty (60) days. (c) if any representation or warranty made herein, in or in connection with any application or commitment relating to the Loans, or in any of the other Loan 21 Documents to Lender by Borrower or by any indemnitor or guarantor under any indemnity or guaranty executed in connection with the Loans is determined by Lender to have been false or misleading in any material respect at the time made. (d) if a default occurs under any of the other Loan Documents that is not cured within any applicable grace or cure period therein provided. (e) if Borrower attempts to (i) assign its respective rights under this Agreement or any of the other Loan Documents or any interest herein or therein or (ii) transfer the Properties or any interest therein, in either case in contravention of the Loan Documents. (f) if greater than twenty percent (20%) (rounded up or down to the nearest whole number) of the Properties at any one time are each two-thirds (2/3) or more vacant for a period of six (6) consecutive months excluding any periods of time during which restorations, alterations or improvements are being diligently performed on any such Properties either following any casualty or condemnation or as otherwise permitted under the Loan Documents. (g) if (i) a Property becomes vacant, (ii) as a result thereof, a termination option and/or purchase option is exercised by the counterparty to a ground lease, reciprocal easement agreement or other agreement affecting Borrower's right to occupy and operate such Property, and (iii) prior to the earlier to occur of (i) thirty (30) days thereafter or (2) the date that such termination or purchase, as applicable, becomes effective, Borrower fails to effect the Release of such Property pursuant to Section 2.2.2(c) hereof; provided, however, that Borrower shall not have the right to effect such a Release prior to the first (1st) anniversary of the applicable Note. 4.2 Remedies. (a) 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 this Agreement or any of the other 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 Indebtedness 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 with respect to the Properties. 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 herein or in the other Loan Documents. (b) The rights, powers and remedies of Lender under this Agreement shall be cumulative and not exclusive of any other right, power or remedy which Lender may have against Borrower pursuant to this Agreement or the other Loan Documents, or existing at law or in equity or otherwise. Lender's rights, powers 22 and remedies may be pursued singly, concurrently or otherwise, at such time and in such order as Lender may determine in Lender's sole discretion. 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 shall 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 with respect to Borrower shall not be construed to be a waiver with respect to any subsequent default or Event of Default by Borrower, or to impair any remedy, right or power consequent thereon. ARTICLE 5 MISCELLANEOUS 5.1 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 Loans and the execution and delivery to Lender of the Notes, and shall continue in full force and effect so long as all or any of the Indebtedness is outstanding and unpaid. 5.2 Lender's Discretion. Whenever pursuant to this Agreement 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. 5.3 Governing Law. The Parties hereby irrevocably agree (and waive all rights to the contrary) that this Agreement shall be governed by the internal laws (and not the laws relating to conflicts of law) of the State of North Carolina, except to the extent that the same may be superseded or preempted by the federal law, provided however, that with respect to the provisions herein, if any, that relate to the perfection, priority or enforcement of liens on personal property or real property or the determination of the existence of contamination affecting any real property, the agreement shall be governed by the laws of the jurisdiction in which the personal property or real property is located. 5.4 Modification; Waiver in Writing. Lender may waive any single default by Borrower hereunder without waiving any other prior or subsequent default. Lender may remedy any default by Borrower hereunder without waiving the default remedied. Neither the failure by Lender to exercise, nor the delay by Lender in exercising, any right, power or remedy upon any default by Borrower hereunder shall be construed as a waiver of such default or as a waiver of the right to exercise any such right, power or remedy at a later date. No single or partial exercise by Lender of any right, power or remedy hereunder shall exhaust the same or shall preclude any other or further exercise thereof, and every such right, power or remedy hereunder may be exercised at any time and from time to time. No modification or waiver of any provision hereof nor consent to any departure by Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose given. No notice to nor demand on Borrower in any case shall of itself entitle Borrower 23 to any other or further notice or demand in similar or other circumstances unless otherwise expressly provided herein. Acceptance by Lender of any payment in an amount less than the amount then due on any of the Indebtedness shall be deemed an acceptance on account only and shall not in any way affect the existence of a default hereunder. In case Lender shall have proceeded to invoke any right, remedy or recourse permitted hereunder or under the other Loan Documents and shall thereafter elect to discontinue or abandon the same for any reason, Lender shall have the unqualified right to do so and, in such an event, Borrower and Lender shall be restored to their former positions with respect to the Indebtedness, the Loan Documents, the Properties and otherwise, and the rights, remedies, recourses and powers of Lender shall continue as if the same had never been invoked. 5.5 Notices. All notices, demands, requests or other communications to be sent by one party to the other hereunder or required by law shall be in writing and shall be deemed to have been validly given or served by delivery of the same in person to the intended addressee, or by depositing the same with Federal Express or another reputable private courier service for next Business Day delivery, or by depositing the same in the United States mail, postage prepaid, registered or certified mail, return receipt requested, in any event addressed to the intended addressee at its address set forth on the first page of this Agreement or at such other address as may be designated by such party as herein provided. All notices, demands and requests to be sent to Lender shall be addressed to the attention of the Capital Markets Group. All notices, demands and requests shall be effective upon such personal delivery, or one (1) Business Day after being deposited with the private courier service, or two (2) Business Days after being deposited in the United States mail as required above. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given as herein required shall be deemed to be receipt of the notice, demand or request sent. By giving to the other party hereto at least fifteen (15) days' prior written notice thereof in accordance with the provisions hereof, the parties hereto shall have the right from time to time to change their respective addresses and each shall have the right to specify as its address any other address within the United States of America. 5.6 Submission to Jurisdiction; Waiver of Jury Trial. (a) BORROWER AND LENDER EACH, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY, IRREVOCABLY, AND VOLUNTARILY, (i) SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF NORTH CAROLINA OVER ANY SUIT, ACTION OR PROCEEDING BY ANY PERSON ARISING FROM OR RELATING TO THE NOTE, THIS AGREEMENT OR ANY OTHER OF THE LOAN DOCUMENTS, (ii) AGREES THAT ANY SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION SITTING IN MECKLENBURG COUNTY, NORTH CAROLINA, AND (iii) SUBMITS TO THE JURISDICTION OF SUCH COURTS. BORROWER AND LENDER EACH FURTHER CONSENTS AND AGREES TO SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER LEGAL PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY REGISTERED OR CERTIFIED U.S. MAIL, POSTAGE PREPAID, TO BORROWER OR LENDER, AS THE CASE MAY BE, AT THE ADDRESS FOR NOTICES DESCRIBED IN SECTION 5.5 HEREOF, AND CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY 24 RESPECT VALID AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW). (b) BORROWER AND LENDER EACH, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WAIVES, RELINQUISHES AND FOREVER FORGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THE INDEBTEDNESS OR ANY CONDUCT, ACT OR OMISSION OF LENDER OR BORROWER, OR ANY OF THEIR DIRECTORS, OFFICERS, PARTNERS, MEMBERS, EMPLOYEES, AGENTS OR ATTORNEYS, OR ANY OTHER PERSONS AFFILIATED WITH LENDER OR BORROWER, IN EACH OR THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. 5.7 Headings. The Article and/or Section headings and the 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. 5.8 Successors and Assigns; Assignment. The terms, provisions, indemnities, covenants and conditions hereof shall be binding upon and inure to the benefit of Borrower and the successors and assigns of Borrower, including all successors in interest of Borrower in and to all or any part of the Properties, and shall be binding upon and inure to the benefit of Lender, its directors, officers, shareholders, employees and agents and their respective successors and assigns. All references in this Agreement to Borrower or Lender shall be deemed to include all such parties' successors and assigns, and the term "Lender" as used herein shall also mean and refer to any lawful holder or owner, including pledgees and participants, of any of the Indebtedness. If Borrower consists of more than one person or entity, each will be jointly and severally liable to perform the obligations of Borrower. 5.9 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. 5.10 Expenses; Indemnity. Borrower covenants and agrees to reimburse Lender upon receipt of written notice from Lender for all reasonable out-of-pocket costs and expenses (including reasonable attorneys' fees and disbursements) incurred by Lender in connection with (i) the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications to this Agreement and/or the other Loan Documents and any other documents or matters requested by Borrower; (ii) 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, this Agreement, the other Loan Documents, the Properties, or any other security given for the Loans; and (iii) enforcing any obligations of or collecting any payments due from Borrower under this Agreement, the other 25 Loan Documents or with respect to the Properties or in connection with any refinancing or restructuring of the credit arrangement provided under this Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceedings; provided, however, that Borrower shall not be liable for the payment of any such costs and expenses to the extent the same arise by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender. 5.11 Exhibits Incorporated. The Exhibits and Schedules annexed hereto are hereby incorporated herein as a part of this Agreement with the same effect as if set forth in the body hereof. 5.12 No Joint Venture or Partnership. The relationship between Borrower and Lender is that of a borrower and a lender only and neither of those parties is, nor shall it hold itself out to be, the agent, employee, joint venturer or partner of the other party. 5.13 Borrower's Waivers. 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. 5.14 Construction of Documents. The parties hereto acknowledge that they were represented by counsel in connection with the negotiation and drafting of this Agreement and the other Loan Documents and that this Agreement and such Loan Documents shall not be subject to the principle of construing their meaning against the party which drafted same. 5.15 Prior Agreements. This Agreement and the other Loan Documents contain the entire agreements between the parties relating to the subject matter hereof and thereof and all prior agreements relative hereto and thereto that are not contained herein or therein are terminated. This Agreement and the other Loan Documents may not be amended, revised, waived, discharged, released or terminated orally but only by a written instrument or instruments executed by the party against which enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination which is not so documented shall not be effective as to any party. 5.16 Exculpation. Notwithstanding anything to the contrary contained in this Agreement, the liability of Borrower for the Indebtedness and for the performance of the other agreements, covenants and obligations contained herein and in the other Loan Documents shall be limited as set forth in Section 1.05 of the Notes, which Section is incorporated herein by reference as fully as if set forth herein at length; provided, however, that nothing herein shall be deemed to be a waiver of any right that Lender may have under Sections 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 Indebtedness in any bankruptcy proceeding in which Borrower is a debtor or to require that all collateral shall continue to secure all Indebtedness owing to Lender in accordance with this Agreement, the Notes, the Mortgages and the other Loan Documents. 26 5.17 Maximum Interest. The provisions of this Agreement and of all agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity of the Notes or otherwise, shall the amount paid, or agreed to be paid, regardless of how denominated (herein "Interest"), to Lender for or in respect of the use, forbearance or retention of the money loaned under the Notes exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between Borrower and Lender shall, at the time performance or fulfillment of such provision shall be due, exceed the limit for Interest prescribed by law or otherwise transcend the limit of validity prescribed by applicable law, then ipso facto the obligation to be performed or fulfilled shall be reduced to such limit, and if, from any circumstance whatsoever, Lender shall ever receive anything of value deemed Interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive Interest shall be applied to the reduction of the principal balance owing under the applicable Note in the inverse order of its maturity (whether or not then due) or at the option of Lender be paid over to Borrower, and not to the payment of Interest. To the fullest extent permitted by applicable law, all Interest (including any amounts or payments deemed to be Interest) paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full period until payment in full of the principal balance of the applicable Note so that the Interest thereon for such full period will not exceed the maximum amount permitted by applicable law. This Section will control all agreements between Borrower and Lender. 5.18 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be effective upon delivery and thereafter shall be deemed an original, and all of which shall be taken to be one and the same instrument, for the same effect as if all parties hereto had signed the same signature page. Any signature page of this Agreement may be detached from any counterpart of this Agreement without impairing the legal effect of any signatures thereon and may be attached to another counterpart of this Agreement identical in form hereto but having attached to it one or more additional signature pages. 27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written. LENDER: FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ ---------------------------- Name: ---------------------------- Title: ---------------------------- BORROWER: SMC-SPE-2, a Delaware corporation, By: /s/ Wade Smith ---------------------------- Name: Wade Smith ---------------------------- Title: Vice President ---------------------------- EXHIBIT A --------- INITIAL ALLOCATED LOAN AMOUNTS Store #349 = $2,885,000.00 Store #344 = $2,285,000.00 EX-11 6 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES Computation of Net Loss Per Common Share (Unaudited) (In thousands, except per share data)
Three Periods Ended Nine Periods Ended ------------------------------- -------------------------------- September 29 October 1 September 29 October 1 1996 1995 1996 1995 ------------- ------------- -------------- ------------- Primary - ------- Net loss ($12,324) ($8,540) ($38,861) ($30,700) ============= ============= ============== ============= Shares: Weighted average common shares outstanding 99,216 99,136 99,200 99,029 Weighted average shares of restricted stock outstanding 524 528 522 659 Additional shares assuming exercise of stock options 1,597 2,193 1,642 1,707 ------------- ------------- -------------- ------------- Weighted average common shares and common share equivalents outstanding - primary 101,337 101,857 101,364 101,395 ============= ============= ============== ============= Primary net loss per common share ($0.12) ($0.08) ($0.38) ($0.30) ============= ============= ============== ============= Assuming Full Dilution - ---------------------- Net loss ($12,324) ($8,540) ($38,861) ($30,700) ============= ============= ============== ============= Shares: Weighted average common shares outstanding 99,216 99,136 99,200 99,029 Weighted average shares of restricted stock outstanding 524 528 522 659 Additional shares assuming exercise of stock options 1,597 2,236 1,666 1,737 ------------- ------------- -------------- ------------- Weighted average common shares and common share equivalents outstanding - fully diluted 101,337 101,900 101,388 101,425 ============= ============= ============== ============= Fully diluted net loss per common share ($0.12) ($0.08) ($0.38) ($0.30) ============= ============= ============== =============
EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Service Merchandise Company, Inc. Form 10-Q for the nine periods ended September 29, 1996 and is qualified in its entirety by reference to such financial statements detailed in Part I of the Form 10-Q. 1,000 9-MOS 9-MOS DEC-29-1996 DEC-31-1995 JAN-01-1996 JAN-02-1995 SEP-29-1996 OCT-01-1995 21,390 18,901 0 0 42,478 39,478 2,966 3,022 1,328,761 1,328,436 1,464,139 1,461,036 1,198,478 1,192,861 602,537 572,151 2,082,464 2,104,640 1,113,721 1,173,779 616,229 622,977 0 0 0 0 99,748 99,670 298,754 255,634 2,082,464 2,104,640 2,313,940 2,332,035 2,313,940 2,332,035 1,770,213 1,772,284 1,770,213 1,772,284 553,503 552,165 0 0 52,903 57,914 (62,679) (50,328) (23,818) (19,628) (38,861) (30,700) 0 0 0 0 0 0 (38,861) (30,700) (0.38) (0.30) (0.38) (0.30) Certain prior period amounts have been reclassified for comparative purposes. Amount represents the number of shares of $0.50 par value common stock issued and outstanding. Amount includes I) depreciation and amortization and II) selling, general and administrative expenses.
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