-----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, Skf6oKQtqrCu0GoJAWNIhrJ1jCOhHXQUFS/jnA3oj8vNc+KzyDCwZJ8PU20n+C+S cCFK+pbRt8Pd6j6BtkGtZw== 0000092344-97-000003.txt : 19970327 0000092344-97-000003.hdr.sgml : 19970327 ACCESSION NUMBER: 0000092344-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHLAND CORP CENTRAL INDEX KEY: 0000092344 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CONVENIENCE STORES [5412] IRS NUMBER: 751085131 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16626 FILM NUMBER: 97563935 BUSINESS ADDRESS: STREET 1: 2711 N HASKELL AVE CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2148287011 MAIL ADDRESS: STREET 1: 2711 NORTH HASKELL AVE CITY: DALLAS STATE: TX ZIP: 75204 10-K 1 10-K ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 Numbers 0-676 and 0-16626 ___________________ THE SOUTHLAND CORPORATION (Exact name of registrant as specified in its charter) TEXAS 75-1085131 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2711 North Haskell Ave., Dallas, Texas 75204-2906 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code, 214-828-7011 ___________________ Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- None N/A Securities Registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $475,110,200 at March 7, 1997, based upon 139,328,504 shares held by persons other than officers, directors and 5% owners. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] 409,922,935 shares of Common Stock, $.0001 par value (the registrant's only class of Common Stock), were outstanding as of March 7, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the listed Parts and Items of Form 10-K: Definitive Proxy Statement for April 23, 1997 Annual Meeting of Shareholders: Part III, a portion of Item 10 and Items 11, 12 and 13. ============================================================================
ANNUAL REPORT ON FORM 10-K For the year ended December 31, 1996 TABLE OF CONTENTS Page Reference Form 10-K PART I Item 1. Business 1 Executive Officers of the Registrant 19 Item 2. Properties 22 Item 3. Legal Proceedings 25 Item 4. Submission of Matters to a Vote of Security Holders 28 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 29 Item 6. Selected Financial Data 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 31 Item 8. Financial Statements and Supplementary Data 41 Independent Auditors' Report of Coopers & Lybrand L.L.P. on The Southland 70 Corporation and Subsidiaries' Financial Statements for each of the three years in the period ended December 31, 1996 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 71 Disclosures PART III Item 10. Directors and Executive Officers of the Registrant and see Part I, Item 1, above * Item 11. Executive Compensation * Item 12. Security Ownership of Certain Beneficial Owners and Management * Item 13. Certain Relationships and Related Transactions * PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 72 Signatures 78 ___________________________ *Included in Form 10-K by incorporation by reference to the Registrant's Proxy Statement, dated March 19, 1997, for the April 23, 1997 Annual Meeting of Shareholders. SOME OF THE MATTERS DISCUSSED IN THIS FORM 10-K CONTAIN FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY'S FUTURE BUSINESS PROSPECTS WHICH ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING COMPETITIVE PRESSURES, ADVERSE ECONOMIC CONDITIONS AND GOVERNMENT REGULATIONS. THESE ISSUES, AND OTHER FACTORS WHICH MAY BE IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS.
PART I ITEM 1. BUSINESS. GENERAL The Southland Corporation ("Southland," the "Company" or "Registrant"), conducting business principally under the name 7-ELEVEN-R-, is the largest convenience store chain in the world, with over 16,300 Company-operated, franchised and licensed locations worldwide, and is among the nation's largest retailers. The 7-ELEVEN-R- trademark has been registered since 1961 and is well known throughout the United States and in many other parts of the world. The Company believes that 7-ELEVEN-R- is the leading name in the convenience store industry. Notwithstanding its divestitures of stores and other businesses since 1987, the Company remains geographically diversified. The Company has, over the past several years, implemented its strategic plan to divest all its non-convenience store operations, and has trimmed its store operations by consolidating its efforts in certain market areas and by closing less profitable stores. During 1996, the Company achieved two important goals: (i) completion of the four-year project to upgrade and remodel the more-than-5,000 7-ELEVEN-R- stores in the U.S. and Canada and (ii) after a decade of dramatic reductions in the number of 7-ELEVEN-R- stores, a total of 36 new stores were opened by the Company in 1996. The Company, with executive offices at 2711 North Haskell Avenue, Dallas, Texas 75204 (telephone 214/828-7011), was incorporated in Texas in 1961 as the successor to an ice business organized in 1927. Unless the context otherwise requires, the terms "Company," "Southland" and "Registrant" as used herein include The Southland Corporation and its subsidiaries and predecessors. In 1996, Southland's operations (for financial reporting purposes) were conducted in one business segment -- the Operating and Franchising of Convenience Food Stores. At December 31, 1996, the Company's operations included 5,394 7-ELEVEN- R- convenience stores in the United States and Canada, and 28 other retail locations, including HIGH'S-TM- Dairy Stores, Quik Marts and SUPER-7-R- high-volume gasoline outlets with mini-convenience stores. The Company also has an equity interest in 220 convenience stores in Mexico (almost all of which are now using the 7-ELEVEN-R- name). Area licensees, or their franchisees, operate additional 7-ELEVEN-R- stores in certain areas of the United States, in 18 foreign countries and the U.S. territories of Guam and Puerto Rico. As of the end of 1996, the Company has an equity interest in three of the licensees whose area licenses cover six foreign countries and Puerto Rico. During 1996, the Company continued to focus on the implementation of its business plan of providing superior service to its customers through better merchandising, with item-by-item control of inventory at each store, emphasizing the importance of ordering the right products, introduction of new products and remaining in stock, at all times, on each particular store's best-selling items. During 1996, the Company devoted significant time and resources to the planning and development, as well as initial phases of implementation, of a proprietary retail information system that will assist 1 the stores in proper forecasting so as to better serve convenience-oriented customers with the SPEED, QUALITY, SELECTION, PRICE and shopping ENVIRONMENT that will give the Company a sustainable competitive advantage. THE RESTRUCTURINGS. In 1987 the Company was financially restructured through a leveraged buyout (the "LBO") and in October 1990 filed a voluntary bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. In March 1991, the Company emerged from bankruptcy with a $430 million infusion of capital from its new majority owner, IYG Holding Company, which is jointly owned by Ito-Yokado Co., Ltd. ("Ito-Yokado") and Seven-Eleven Japan Co., Ltd. ("Seven-Eleven Japan"), both Japanese corporations. Seven-Eleven Japan is the Company's largest area licensee, operating over 6,700 7-ELEVEN-R- stores in Japan and, through its wholly-owned subsidiary Seven-Eleven (Hawaii), Inc., 47 7-ELEVEN-R- stores in Hawaii. On February 21, 1991, the U.S. Bankruptcy Court for the Northern District of Texas issued an order (the "Confirmation Order") confirming the Company's Plan of Reorganization (the "Plan") and on March 4, 1991, the Confirmation Order became final and non-appealable. (See "Legal Proceedings," below.) The Plan provided for holders of the Company's then outstanding debt and equity securities (the "Old Securities") to receive new debt securities, common stock and, in certain cases, cash, in exchange for their Old Securities and, pursuant to a Stock Purchase Agreement, for Ito- Yokado and Seven-Eleven Japan to acquire approximately 70% of the Company for $430 million in cash. In addition, among other things, the Plan provided for the amendment and restatement of the Company's Credit Agreement with its Senior Lenders (the "Prior Credit Agreement") and for the Company to effect a one-for-ten reverse stock split of its common stock (the "Stock Split"). The closing (the "Closing") under the Stock Purchase Agreement (the "Stock Purchase Agreement"), occurred on March 5, 1991. THE PURCHASER. IYG Holding Company, a Delaware corporation (the "Purchaser" or "IYG"), is a jointly owned subsidiary of Ito-Yokado and Seven- Eleven Japan, formed for the specific purpose of purchasing the Common Stock of the Company pursuant to the Stock Purchase Agreement. Ito-Yokado owns 51% and Seven-Eleven Japan owns 49%, respectively, of IYG. ITO-YOKADO. Ito-Yokado is among the largest retailing companies in Japan. Its principal business consists of the operation of 158 superstores that sell a broad range of food, clothing and household goods. In addition, its activities include operating two restaurant chains doing business under the names "Denny's" and "Famil" and a chain of supermarkets. All of Ito-Yokado's operations are located in Japan except for some limited purchasing activities. Prior to 1990, Ito-Yokado had no affiliation with the Company, other than through its majority-owned subsidiary, Seven-Eleven Japan (see below) which is the Company's area licensee in Japan. In 1990, in addition to entering into the Stock Purchase Agreement, Ito-Yokado provided the Company with much-needed interim liquidity through a $25 million term loan agreement. This term loan, plus interest, was repaid on March 5, 1991. In addition, in 1992 Ito-Yokado guaranteed the Company's $400 million commercial paper facility and in November 1995, Ito-Yokado purchased $153 million of 4.5% Convertible Quarterly Income Debt Securities due 2010 issued by the Company. SEVEN-ELEVEN JAPAN. Seven-Eleven Japan is the largest convenience store chain in Japan. Seven-Eleven Japan is a 50.3%-owned subsidiary of Ito-Yokado. 2 Seven-Eleven Japan is the largest area licensee of the Company with approximately 6,765 stores in Japan and owns Seven-Eleven (Hawaii), Inc., which, as of year-end 1996, operated an additional 47 7-ELEVEN-R- stores in Hawaii under a separate area license agreement covering that state. In November 1995, Seven-Eleven Japan purchased $147 million of 4.5% Convertible Quarterly Income Debt Securities due 2010 issued by the Company. REFINANCING OF BANK DEBT. On February 27, 1997, the Company refinanced all of its remaining debt under the Prior Credit Agreement (originally entered into in 1987, which had been restated and amended several times), with a new Credit Agreement (the "Credit Agreement"). The bank group, led by Citibank, N.A., as Administrative Agent, and The Sakura Bank, Limited, New York Branch, as Co-Agent, is comprised of six Japanese banks, three American banks and one Canadian bank. The Credit Agreement, which will mature at the beginning of 2002, provides for a $225 million amortizing term loan and a $400 million revolving credit facility with a $150 million letter of credit sublimit within the revolving credit facility. The term loan has scheduled quarterly repayments of $14.1 million, commencing March 31, 1998. The term loans and any revolver borrowings carry a floating interest rate of either the Citibank, N.A. base rate or a reserve-adjusted Eurodollar rate plus .225% for drawn amounts. Letter of credit fees are to be paid quarterly at .325% per year on the outstanding amount. In addition, a facility fee of .15% per year is payable on the total amount of funds available under the Credit Agreement from time to time. As in the Prior Credit Agreement, the Credit Agreement requires Ito-Yokado and Seven-Eleven Japan to maintain fifty percent or more direct or indirect ownership of the Company. In conjunction with the execution of the Credit Agreement on February 27, 1997, the Company expects to enter into a $115 million Master Lease Facility (the "MLF") in early April, 1997 with Citicorp Bankers Leasing Corporation ("CBLC"). Funding for the six and one-half year MLF is being provided by CBLC and the same bank group providing financing under the Credit Agreement. The purpose of the MLF is to finance the rollout of the second phase of the Company's retail information system, consisting of the installation of point-of-sale cash registers with scanning capabilities, as well as cabinets, batteries, processors, printers, display screens, cash drawers, scanners, PAM controllers, hand-held terminals and other equipment, as well as customized associated software developed specifically for the Company. (See "Retail Information System," below.) OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES 7-ELEVEN-R- STORES. On December 31, 1996, the Company's operations included 5,422 stores in the United States and Canada, operated principally under the name 7-ELEVEN-R-. An additional 620 stores (in the United States) are operated by area licensees. These stores are located in 41 states, the District of Columbia, and five provinces of Canada. During 1996, the Company added 44 convenience stores, five of which were rebuilds or relocations of existing stores, three of which were seasonal openings and 36 of which were new stores. In addition, 46 convenience stores were closed during the year (including relocations, rebuilds, and seasonal activity), mostly due to changing market patterns, lease expirations and the closing of selected stores that were not profitable. During 1996, the Company also completed its four-year store remodeling program, the most extensive updating of the Company's stores ever undertaken in the Company's history (see "Remodeling of Stores," below). 3 The Company's convenience stores are extended-hour retail stores, emphasizing convenience to the customer and providing fresh take-out foods, groceries and beverages, self-serve gasoline (at about 2,000 stores), dairy products, non-food merchandise, specialty items, certain financial services, lottery tickets, and incidental services. Generally, the Company's stores are open every day of the year and are located in neighborhood areas, on main thoroughfares, in shopping centers, or on other sites where they are easily accessible and have ample parking facilities for quick in-and-out shopping. Stores are generally from 2,400 to 3,100 square feet in size and carry 2,300 to 2,600 items. The vast majority of the stores operate 24 hours a day. The stores attract early and late shoppers, lunch-time customers, weekend and holiday shoppers and customers who may need only a few items at any one time and desire rapid service. The Company's sales are also affected by seasonality and weather. Many of the Company's traditional products attract more shoppers during warm and dry weather and during the longer daylight hours of the summer months, when leisure-time activities are more prevalent. Substantially all convenience store sales are for cash (including sales for which checks are accepted), although major credit cards, along with the "Citgo Plus" credit card, are accepted in most markets for purchases of both merchandise and gasoline. Credit card sales currently account for approximately 8.5% of sales, including gasoline. REMODELING OF STORES. By the end of 1996, the Company had virtually completed its four-year project to remodel the more-than-5,000 7-ELEVEN-R- stores in the U.S. and Canada, with approximately 1,000 remodels being completed during the year. Approximately 50 stores, at which permitting or other delays slowed the remodel process, are scheduled to be completed in 1997. The remodeled stores have increased interior and exterior lighting, wider aisles, shopper-friendly aisle markers, lower shelf heights to help shoppers locate items faster, less cluttered aisles and counters, upgraded gasoline island equipment, and a new tri-striped exterior store facade that replaced the mansard roof that had been a standard of the prior design. In addition, closed circuit TV cameras and alarm devices have been added at the remodeled stores as a further security upgrade. The remodeling process focused on the changes that customers notice and appreciate most, such as the brighter lighting and more user-friendly store layouts. In addition, during 1997, the Company anticipates that approximately 3,000 stores will be further updated as part of the Company's commitment to continually upgrade stores and equipment. These stores are scheduled to get counter modifications to accommodate the new point-of-sale ("POS") equipment that will be installed as part of the Company's proprietary new retail information system. Stores will also be reviewed for possible layout changes that are currently being tested. MERCHANDISING. Each store's merchandise includes a selection of core items as well as optional items selected by the individual store operators to meet their customers' local needs and preferences. During 1996, the Company continued to focus on proper ordering techniques, and on remaining in-stock on high-demand items, as well as on the introduction of new items, on a weekly basis. The emphasis has been on maintaining a product mix with an expanded selection of higher quality fresh foods that, through the use of commissaries, bakeries and combined distribution centers ("CDC's"), with daily deliveries of freshly made sandwiches and bakery products from the commissaries and bakeries, are now available in many parts of the country. 4 The Company is continuing to experiment with other merchandising innovations to encourage existing customers to increase their shopping frequency and to enhance the stores' appeal to new customers. There has also been an increased focus on novelty and seasonal items to spur impulse buying. Stores are being further encouraged to introduce items that are new to the market, or new to convenience stores, in order to encourage customers to shop in 7-ELEVEN-R- stores more frequently. During 1996, the Company continued to focus on maintaining the proper store image to attractively display new merchandise. In addition, the store operator is expected to be aware of every facet of the store's merchandising, including the user-friendly appearance of both the exterior and interior facility. In an effort to focus consumer attention on selected merchandise, the Company increased its tie-ins with major league sports, utilizing trading cards, phone cards, fresh food and beverage promotions to support the theme (see "Advertising," below). During 1996, as part of the Company's new merchandising focus, between 20 and 25 new items were made available to the stores each week. Store operators were encouraged to try new items in their first week of availability and new-item acceptance has been closely monitored. New item introduction will remain a key marketing strategy for the Company in 1997, with plans to identify and introduce more items each week, with focus on both food items and non-food items, in categories that offer meaningful potential for sales growth. The Company continued to utilize an everyday-fair-price strategy, which minimizes discounting, and is designed to provide consistent, competitive prices throughout the store. The Company is working with suppliers to find ways to lower costs to the Company, so that savings can be reflected in the price to the customer. During 1996, the Company further intensified its focus on better order forecasting to avoid lost sales opportunities caused by out-of-stock conditions. Through case studies and other examples, the entire field organization has been kept informed on ways to identify and track each store's best-selling items in each product category. Store employees are responsible for placing orders with a view toward forecasting the demand for the highest selling items in the store, based on specific local conditions. NEW PRODUCTS. FRESH FOODS AND FOOD PRODUCTS. During 1996, the Company continued its initiative to introduce more fresh food products of a higher quality into the stores, utilizing daily deliveries from local commissaries and bakeries, operated by companies with expertise in foodservice. These companies prepare food to 7-ELEVEN-R- specifications exclusively for the stores and have the product delivered in the exact quantities ordered by the stores through the CDC program (see "Distribution, Fresh Products," below). By the end of 1996, there were seven commissary facilities and five bakeries providing fresh-made foods to over 2,000 stores. By year-end, commissaries were serving stores in California, Colorado, Delaware, Florida, Maryland, New Jersey, New York, Pennsylvania, Texas, Virginia, West Virginia and Washington, D.C., with additional commissaries planned to serve stores in Illinois and Wisconsin in early 1997. Bakeries preparing "WORLD OVENS-R-" products now operate in Dallas, San Jose, Baltimore, Orlando and Denver. 5 In addition, during 1996 the Company worked to further enhance its image as an alternative to other fast-food restaurants by diversifying its product mix of ready-to-eat items by adding fresh and healthy food items, including salads, healthy and low-fat sandwiches and entrees (which in Dallas were introduced utilizing the endorsement of a local fitness expert, to highlight the "health-conscious" focus), and healthy snacks, in addition to expanding the "DELI CENTRAL-R-" array of other prepared meals that are available. Many new entree items, as well as "personal" pizzas, were introduced in selected markets. The Company plans to have the DELI CENTRAL-R- and WORLD OVENS-R- products in almost all of its stores within a few years. Through the use of the commissaries and other suppliers, several new categories of fresh food products were added to the stores' food offerings in 1996 on a test basis in selected areas of the country, including home-meal replacement products such as Teriyaki Rice Bowls, BBQ Pork Fried Rice, Italian Ziti, Sweet and Sour Pork, unique grilled sandwiches and pizza. The Company also introduced a new breakfast product -- the Cinnamon Swirl French Toast with Sausage -- and offered tastings of this new product to promote customer awareness. The Company has also developed a new burger product (the 1/4 LB. BURGER BIG BITE-TM-) that can be freshly cooked on the in-store roller grill, and served on a hot dog bun. During 1996, the Company continued to expand its corporate brand QUALITY CLASSIC SELECTION-R- spring water and sparkling water, offering four flavors during the year. The 1- and 2-liter size of sparkling water enjoyed much popularity and, to continue growth in this area, two new flavors of sparkling water are planned for introduction in 1997. In addition a new tea product is being tested in certain markets, to replace the brewed teas that were introduced during the year, but were not as popular as had been hoped. QUALITY CLASSIC SELECTION-R- was launched in Canada in 1996. In addition, the Company continues to adjust the product selection of its juices, drinks, waters and isotonics, to meet seasonal and demographic demands. The Company has also focused on adding to its offering of higher quality wine, as well as expanding the variety of wine coolers that are sold in the stores. In the hot beverage area, as a complement to promoting its ever-popular 7-ELEVEN-R- coffee, the Company continued to emphasize its own proprietary regular and decaffeinated CAFE SELECT-R- line of gourmet-flavored coffees, hot chocolates and cappuccinos, introducing the "Summer Blend" and Vanilla Nut flavors during 1996, as well as a new seasonal flavor, "Spiced Rum." Approximately 95% of 7-ELEVEN-R- stores offer the new hot chocolate and cappuccino products. The Company plans to install a cappuccino maker in virtually all stores that do not currently have such a machine and is also in the process of upgrading the coffee bar area of the store, not only by adding cappuccino machines, but also by standardizing the coffee island to be larger (10-11 feet long), cleaner and more uniformly equipped (with 2-product grinders and two 5-burner machines). The snack category saw growth in 1996 by emphasizing low-fat products and the "better for you" items -- including "Baked Lays" from Frito Lay, low- fat pretzels, and new individually wrapped "SnackWells" products from Nabisco. The CDC distribution method benefited this category by allowing stores access to locally popular snack items which could not be made available through direct distribution, and by providing daily delivery to areas where the number of stores or sales volume did not justify the manufacturer's direct distribution. Some of the locally popular brands that 6 can now be included, which complement our traditional mix, are "Snyder's of Hanover" pretzels and "On the Border" chips and hot sauce. During 1996, the Company introduced several new flavors of SLURPEE-R- drinks which were developed and produced by Coca-Cola. These new flavors represented 22% of the total gallons of SLURPEE-R- drinks sold. In 1997, the Company plans to introduce four or five more new flavors of SLURPEE-R- drinks. In 1996 SLURPEE-R- drinkers were offered a chance to win a trip to the World Series (see "Advertising," below), tying in with the Company's popular Major League Baseball promotions. NON-FOOD ITEMS. 7-ELEVEN-R- also continued its emphasis on growing its selection of non-food services, such as the continued aggressive marketing of branded prepaid telephone cards for long distance service. The prepaid telephone cards, which were originally introduced in November 1994, now include annual collectors' series for several major league sports and, in April, 1996, a 180-minute card was introduced. After the successful introduction of the National Football League ("NFL") Collectors' Series 7- ELEVEN PHONE CARD-TM-, the Company added the Major League Baseball Collectors' Cards and the National Basketball Association Collectors' Series 7-ELEVEN PHONE CARDS-TM-. National Hockey League cards were added in Canada in 1996. The Company sold approximately 4.5 million 7-ELEVEN PHONE CARDS-TM- , in 15-, 30-, 60-, 90- and 180-minute increments in 1996 and will continue to seek expanded sales in the phone card market. By year-end there were approximately 4,600 ATMs in 7-ELEVEN-R- stores around the U.S. constituting the largest ATM network of any retailer. Southland Canada, Inc., the Company's Canadian subsidiary, now has ATMs in approximately 350 Canadian stores, with plans to have ATMs installed in virtually all Canadian stores under the terms of a new agreement entered into in 1996. In addition, the Company is testing the delivery of other services through the ATM, such as offering postage stamps for sale. The Company is one of the nation's leading retailers of money orders and, in 1996, the Company completed the installation of new money order processing equipment in substantially all stores. The new equipment is designed to provide a more efficient and faster transaction. The Company has now increased the per-money-order maximum limit available for purchase from $300 to $500, satisfying the needs of the convenience shopper, and potentially increasing the Company's market share of money order business. The Company continued to focus on adding new and popular seasonal merchandise, including its line of sunglasses with the sophisticated look of certain very expensive brands - but at extremely reasonable prices. Sunglass sales have increased dramatically during the two years this program has been in effect. Another very successful program that began in 1995, but increased dramatically in 1996, was the 7-ELEVEN-R- collectible truck model, made available during the holiday season. Over 28,000 of the trucks were sold in 1996. Enjoying the resurgence in the popularity of cigars, 7-ELEVEN-R- stores in the United States and Canada have installed humidors offering high-quality cigar products on the sales counters. In some stores "Fine Cut" or pouch tobacco is also sold. In addition, the Canadian stores have also increased their customers' demand for magazines and newspapers by offering a wide variety of titles, and special-order capabilities, so as to fit demands according to consumer 7 demographics. This new approach along with improvements to the display area, has resulted in a marked increase in this category over the past three years. GASOLINE. In 1996, the Company sold over 1.4 billion gallons of gasoline at retail at approximately 2,000 7-ELEVEN-R- stores and other Southland self-serve outlets. The Company monitors gasoline sales to maintain a steady supply of petroleum products to the Company's stores, to determine competitive retail pricing, to provide the appropriate product mix at each location and to manage inventory levels, based on market conditions. During 1996, the Company continued its program to upgrade the gasoline pump area of the stores, by adding canopies and new equipment. Approximately 1,000 stores are now equipped to accept credit cards for the purchase of gasoline at the pump, which makes gasoline shopping at 7-ELEVEN-R- stores even more convenient for the credit customer. During 1996, the Company discontinued the sale of gasoline at only 6 locations, while adding gasoline at 4 new locations. Almost all of the Company's stores that sell gasoline offer CITGO-branded gasoline. The Company has a long-term product purchase agreement with CITGO Petroleum Corporation ("Citgo") under which Southland purchases substantially all its U.S. gasoline requirements from Citgo at market-related prices through the year 2006. Holders of the "Citgo Plus" credit card can use the card to finance purchases of gasoline, as well as other merchandise, at 7-ELEVEN-R- stores. At year-end, there were approximately 1.25 million active "Citgo Plus" credit card accounts. DISTRIBUTION. FRESH PRODUCTS. To further facilitate the sale of fresh products in the stores, the Company continued to roll-out its CDC program through the strategic alliance with companies that specialize in distribution. By the end of 1996, over 2,200 stores in Texas, Long Island, New Jersey, Philadelphia, Denver, Tampa, Orlando, Maryland, Virginia, the District of Columbia and northern California were receiving daily deliveries from eleven CDCs, bringing 7-ELEVEN-R- the freshest dairy products, produce, packaged baked goods, bread products, sandwiches and even products like fresh-cut flowers and magazines. The distribution companies provide cross- dock facilities where the products of multiple vendors, many of whom formerly delivered directly to 7-ELEVEN-R- stores themselves, are combined to make one delivery to the store. The distribution is then accomplished by the third- party CDC operator. This enables the stores to receive daily shipments of products where freshness is paramount and avoids the inconvenience of multiple daily deliveries to the stores by several vendors. The products available through the CDCs vary from market to market. Included in the products distributed through the CDCs are those produced by the commissaries and bakeries that service the Company's stores. The Company plans to continue to expand the use of the CDC concept and is in various stages of finalizing agreements with several operators who will provide the distribution services covering new areas. WAREHOUSE PRODUCTS. The Company continued to utilize the distribution services of McLane Company, Inc. ("McLane"), pursuant to a ten-year contract entered into in 1992, for delivery of warehouse products to all of the Company's corporate stores and those franchise stores that utilize McLane for distribution services. McLane serves Southland using two former Southland distribution centers and eight additional distribution centers throughout the country. The Company has worked with McLane to minimize out-of-stock conditions and to assist McLane to be increasingly responsive to individual store's needs. In 1996, there was a marked increase in the number of stores receiving deliveries twice a week from McLane. 8 Franchisees are required to carry merchandise of a type, quality, quantity and variety consistent with the 7-ELEVEN-R- image, as well as certain proprietary products. Except for the proprietary items, franchisees are not required to purchase merchandise from vendors the Company recommends. Except for consigned gasoline, franchisees are not required to sell merchandise at prices suggested by the Company. SUPPLY AGREEMENTS. In connection with the sale of the Company's Reddy Ice and Dairies Group divisions, both in 1988, the Company entered into long- term contracts to purchase the products historically supplied to the Company's stores by such divested operations. Although the Reddy Ice contract expired by its terms in May 1995, the Company has continued to buy ice from Reddy Ice. PRODUCT CATEGORIES. The Company does not record sales on the basis of product categories. However, based upon the total dollar volume of store purchases, management estimates that the percentages of its 7-ELEVEN-R- convenience store sales in the United States by principal product categories for the last three years were as follows: YEARS ENDED DECEMBER 31 Product Categories 1996 1995 1994 ---- ---- ---- Gasoline 26.0% 24.9% 24.2% Tobacco Products 16.5 16.6 17.2 Groceries 9.7 9.8 9.6 Beer/Wine 9.1 9.0 9.4 Food Service 8.5 8.7 8.5 Soft Drinks 8.4 8.7 8.8 Non-Foods 5.9 6.1 6.2 Dairy Products 4.3 4.4 4.6 Candy 3.5 3.6 3.8 Baked Goods 3.3 3.4 3.6 Customer Services 3.2 3.1 2.4 Health/Beauty Aids 1.6 1.7 1.7 ----- ----- ----- Total 100.0% 100.0% 100.0% ====== ====== ====== LOCAL REGULATIONS. In certain areas where stores are located, state or local laws limit the hours of operation or sale of certain products, most significantly alcoholic beverages, tobacco products, possible inhalants and lottery tickets. State and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for and renewals of permits and licenses relating to the sale of these products or to seek other remedies. In most states, such agencies have discretion to determine if a licensee is qualified to be licensed, and denials may be based on past noncompliance with applicable statutes and regulations as well as on the involvement of the licensee in criminal proceedings or activities which in such agencies' discretion are determined to adversely reflect on the licensee's qualifications. Such regulation is subject to legislative and administrative change from time to time. A new federal law went into effect, as of February 28, 1997, requiring retailers to have new procedures in place to determine the age of persons wanting to purchase tobacco products. The Company has diligently worked to prepare sales associates to be certain that each store will be in compliance with the new requirements. This type of age-sensitive statutory compliance program is similar to the Company's very successful COME OF AGE program, which the Company has used since 1984 to train store personnel about the laws 9 relating to the proper handling and sale of age-restricted products, particularly alcoholic beverages. This training program is provided to corporate and franchise stores and is made available to franchisees' and licensees' sales associates. The Company has also instituted other neighborhood and community cooperative programs, such as working with local police offices through programs like "Operation Chill," designed for law enforcement officers to reward young people's positive behavior with free SLURPEE-R- coupons, the "We Card" program, the installation of Police Community Network Centers in some stores and other similar efforts. FRANCHISES. At December 31, 1996, 2,927 7-ELEVEN-R- stores were operated by independent franchisees under the Company's franchise program for individual 7-ELEVEN-R- stores. Sales by stores operated by franchisees (which are included in the Company's net sales) were approximately $2,860,768,000 for the year ended December 31, 1996. In its franchise program for individual 7-ELEVEN-R- stores, the Company selects qualified applicants and trains the individuals who will participate personally in operating the store. The franchisee pays the Company an initial fee, which varies by store, and is generally calculated based upon gross profit experience for the store or market area, to cover certain costs including: training; an allowance for travel; meals and lodging for the trainees; and other costs relating to the franchising of the store and may provide a profit. Under the standard form of franchise agreement, the Company leases or subleases, to the franchisee, a ready-to-operate 7-ELEVEN- R- store that has been fully equipped and stocked. The Company bears the costs of acquiring the land, building and equipment, as well as most utility costs and property taxes. Under the standard franchise arrangement, which typically has an initial term of 10 years, the franchisee pays for all business licenses and permits, as well as all in-store selling expenses, including: payroll; inventory and cash variations; supplies; inventory, payroll and other business taxes; certain repairs and maintenance; and other controllable in-store expenses, and is required to invest an amount equal to the cost of the store's inventory and cash register fund. The Company finances a portion of the cost of business licenses and permits and of the investment in inventory, as well as the ongoing operating expenses and purchases of inventory. In certain circumstances, up to 100% of the full franchise fee will be financed for qualified applicants. Under the standard franchise agreements currently in effect, the Company receives a share in the gross profit of the store (ranging from 50% to 58%, depending on the hours of store operation, adjusted if necessary to assure the franchisee a specified gross income before selling expenses), based on all sales of merchandise and services, except those on which the Company pays the franchisee a commission (such as consigned gasoline). The Company's share of gross profit, called the "7-ELEVEN-R- Charge," is its continuing royalty charge to the franchisee for the license to use the 7-ELEVEN-R- operating system and trademarks, for the lease and use of the store premises and equipment and for continuing services provided by the Company. These services can include merchandising, advertising, recordkeeping, store audits, contractual indemnification, business counseling services and preparation of financial statements. Other optional services may be available from or through the Company for additional fees. 10 During 1996, the Company continued testing a franchise agreement that provided a three-tiered structure for calculating the 7-ELEVEN-R- Charge. This test, which is limited to Washington, Idaho and Oregon, will continue, in those states only. The Company's current training program for new franchisees now consists of seven weeks of intensified instruction in the new strategies that are being implemented by the Company. The Company is also encouraging existing successful franchisees to franchise multiple locations. This will provide growth opportunities for current franchisees within the 7-ELEVEN-R- system by encouraging them to pursue additional stores and may result in increased income for the franchisee, partly by creating opportunities for lower per unit operating expenses for the franchisee and the Company. Under Southland's standard franchise agreement, the franchise may be terminated by the franchisee at any time or by the Company only for the causes, and upon the notices, as specified in the franchise agreement and as provided by applicable law. In the event of expiration or termination of the franchise, the Company has the right to (i) acquire the franchisee's interest in inventory of a type, quantity, quality and variety consistent with the 7-ELEVEN-R- image and the other tangible assets in the franchise business; and, (ii) take possession of the real property on which the store is located and, in such event, the franchisee has no continuing lease obligations. Certain franchisees have contractual rights to sign new franchise agreements upon expiration of their existing agreements, so long as they meet certain specified conditions. Many states in which the Company franchises individual 7-ELEVEN-R- stores have enacted legislation governing the offer, sale, termination and/or renewal of franchises, and the Federal Trade Commission has a trade regulation rule regarding required disclosures to prospective franchisees. AREA LICENSES. As of December 31, 1996, the Company had granted domestic area licenses to eight companies which were operating 620 convenience stores using the 7-ELEVEN-R- system and name in certain areas of Alaska, Arkansas, Hawaii, Indiana (using the name SUPER-7-R- in Indianapolis), Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, West Virginia and Wyoming. Although parts of both Nevada and Virginia are also covered by area licenses, there are no stores currently operated under the area licenses in those states. The 47 stores in Hawaii are operated under an area license agreement with Seven-Eleven (Hawaii), Inc. (a subsidiary of Seven-Eleven Japan). As of the end of 1996, foreign area license agreements covered the operation of 6,765 7-ELEVEN-R- stores in Japan, 1,346 in Taiwan, 714 in Thailand, 331 in Hong Kong, 162 in Australia, 125 in South Korea, 105 in the Philippines, 101 in Malaysia, 83 in Spain, 81 in Singapore, 55 in the United Kingdom, 41 in Norway, 37 in Sweden, 30 in China, 22 in Denmark, 14 in Brazil, 12 in Puerto Rico, 10 in Guam and nine in Turkey. In connection with the granting of area licenses in Brazil, Norway (which license now also includes Denmark, Finland and Sweden), the Philippines and Puerto Rico, the Company acquired an equity interest in those area licensees. The Company is in the process of selling its equity interest in the Norwegian licensee. Nine "12+12" stores in Spain, not included in the 83 stores mentioned above, are also under license agreement. 11 Stores operating under area licenses are not included in the number of Company operating units, and their sales are not included in the Company's revenue. Revenues from initial fees paid for area licenses and continuing royalties based on the sales volume of the stores are included in Other Income. INTERNATIONAL AFFILIATES. The Company also has an equity interest in 218 convenience stores in Mexico operated by 7-ELEVEN Mexico, and two stores in Mexico are operating under a license agreement with 7-ELEVEN Mexico. These stores feature merchandise and services essentially the same as 7-ELEVEN-R- stores in the U.S. Sales from the stores in Mexico are not included in Southland's revenues, but Southland's equity in their operating results is included in Other Income and has not been material. HIGH'S-TM- DAIRY STORES. As of December 31, 1996, the Company operated 5 HIGH'S-TM- Dairy Stores located in Maryland and Virginia, which are similar in size and location to 7-ELEVEN-R- stores and feature a product mix that emphasizes a variety of dairy products. QUIK MART AND SUPER-7-R- GASOLINE UNITS. At December 31, 1996, 22 Quik Mart and SUPER-7-R- gasoline units were in operation in eight states. A typical Quik Mart is a high-volume gasoline outlet combined with a mini- convenience store ranging in size from 300 to 1,600 square feet of sales space stocked primarily with snack food, candy, cold drinks and other immediately consumable items, while a SUPER-7-R- gasoline unit is a high- volume, multi-pump, self-service gasoline-dispensing operation. The Company plans to either close or convert these units to 7-ELEVEN-R- stores over the next few years. CORPORATE CITYPLACE. The Company's headquarters are located in "Cityplace Center East," its 42-story office tower located on the east side of Dallas' Central Expressway north of Dallas' central business district. The Company currently occupies approximately 520,000 square feet, about 39% of Cityplace Center East. During 1996, leases covering approximately 125,000 additional square feet were signed, both with new tenants and with current tenants who increased their leased space. The building is now virtually completely leased or reserved for expansion under current leases. OTHER INFORMATION ABOUT THE COMPANY CREDIT AGREEMENT AND DEBT COVENANTS. The Company's new Credit Agreement (see "Refinancing of Bank Debt," above) contains a number of financial and operating covenants requiring, among other things, the maintenance of certain financial ratios, including interest and rent coverage, fixed-charge coverage, and senior indebtedness to EBITDA (defined in the Credit Agreement as earnings before interest, income taxes, depreciation and amortization, with adjustments for certain extraordinary and unusual gains and losses). The covenant levels established by the Credit Agreement generally require a continuing improvement in the Company's financial condition. The Credit Agreement also contains various covenants which, among other things, (a) 12 limit the Company's ability to incur or guarantee indebtedness or other liabilities other than under the Credit Agreement, (b) restrict the Company's ability to engage in asset sales and sale/leaseback transactions, (c) restrict the types of investments the Company can make and (d) restrict the Company's ability to pay cash dividends, redeem or prepay principal and interest on any subordinated debt and certain senior debt. These covenants contain exceptions that are customary in credit agreements associated with financings of companies having creditworthiness similar to Southland's, as well as exceptions consistent with the specific nature of the business and financial operations of the Company. As in the Prior Credit Agreement, the new Credit Agreement requires that Ito-Yokado and Seven-Eleven Japan maintain fifty percent or more direct or indirect ownership of the Company. The Company's outstanding Debt Securities contain certain covenants which, among other things, (i) limit the payment of dividends and certain other restricted payments by both the Company and its subsidiaries, (ii) require the purchase by the Company of the Debt Securities at the option of the holder upon a change of control (as defined in the indentures governing the Debt Securities), (iii) limit additional indebtedness, (iv) limit future exchange offers, (v) limit the repayment of subordinated indebtedness, (vi) require board approval of certain asset sales, (vii) limit transactions with certain stockholders and affiliates and (viii) limit consolidations, mergers and the conveyance of all or substantially all of the Company's assets. The Company's outstanding Convertible Debt Securities, which were issued in November, 1995, to Ito-Yokado and Seven-Eleven Japan, are subordinated to all existing debt, convertible into the Company's Common Stock at a premium (as described below) and carry certain registration rights that require the Company to register the Convertible Debt Securities (or Common Stock issued upon conversion) under the Securities Act of 1933. The holders may elect to convert the Convertible Debt Securities in denominations of $1,000 principal amount or integral multiples thereof, into shares of the Company's Common Stock. The number of shares obtained is determined by dividing the principal amount of the Convertible Debt Securities being converted by $4.16 which represents an average of Southland's share price at the time the Convertible Debt Securities were issued, plus a premium. The $300 million Convertible Debt Securities are convertible into approximately 72 million shares of the Company's Common Stock. SHAREHOLDERS AGREEMENT. Upon the Closing, the Company, the Purchaser, Ito-Yokado and various holders of the Company's Common Stock who held the common stock prior to the Closing (the "Existing Shareholders") entered into a shareholders agreement (the "Shareholders Agreement") pursuant to which the parties were not permitted to offer, sell, assign, transfer, grant a participation in, pledge or otherwise dispose of any shares of Common Stock except in compliance with the Shareholders Agreement. The Shareholders Agreement terminated on March 5, 1996, except for certain demand registration rights. Under the Shareholders Agreement, IYG had the obligation to purchase, if requested to do so, certain shares (including those pledged as collateral) from certain signatories to the Shareholders Agreement. As a result of that obligation, IYG acquired 1,903,966 shares of Common Stock in March 1996 and 1,391,474 shares of Common Stock in April 1996, bringing the total shares owned by IYG to 266,937,933. 13 THE WARRANT AGREEMENT. As part of the Plan and the Closing on March 5, 1991, Thompson Brothers, L.P., The Hayden Company, The Philp Co., The Williamsburg Corporation and Thompson Capital Partners, L.P. entered into a Warrant Agreement with Wilmington Trust Company as Warrant Agent, the Company and Ito-Yokado. Under the Warrant Agreement, each Warrant entitled the holder to purchase, at the exercise price (the "Exercise Price") of $1.75 per Warrant, one of the underlying shares of Common Stock. As of February 23, 1996, the expiration date of the Warrants, a total of 10,098,089 Warrants had been exercised. THE EMPLOYMENT AGREEMENTS. As a condition to the Closing, the Company entered into five-year Employment Agreements with Messrs. John P. Thompson, Jere W. Thompson and Joe C. (Jodie) Thompson, Jr. As of December 30, 1992, the Employment Agreement with Joe C. (Jodie) Thompson, Jr. was terminated and the Employment Agreements with John P. Thompson and Jere W. Thompson terminated on March 5, 1996, according to their terms. RESEARCH AND DEVELOPMENT The Company did not incur any significant expenses for product testing or traditional research and development activities in 1996. During 1996, the Company"s Strategic Planning Department conducted certain market research studies, which include concept tests, consumer preference tests, and tracking of changes in image and store usage patterns. In addition, the Company"s test kitchen spent approximately $69,000 for new product development and taste testings and to test equipment used for cooking and displaying food products, which includes quality assurance testing. RETAIL INFORMATION SYSTEM In 1993, the Company began development of its own proprietary retail information system, which is being implemented in phases, over a multi-year period. The system is designed to build efficiencies into ordering, distribution and merchandising processes and to provide timely and accurate store information on an item-by-item basis. The system is designed to provide information about every important aspect of the store's operation and to facilitate inventory tracking. Implementation of the first phase began in 1994 and was completed in early 1996. It automated basic in-store accounting processes. The Pre-POS system, which provided new cash registers in 336 stores was implemented in the fourth quarter of 1996. The second phase, now underway, consists of an ordering and distribution system and retail scanning. This system will provide a sophisticated ordering system linking stores to vendors with full POS scanning capability including new registers for all stores. Rollout of the system will begin in the third quarter of 1997 and is expected to provide the foundation for future phases. TRADEMARKS The Company's 7-ELEVEN-R- trademark has been registered since 1961 and is well known throughout the United States and in many other parts of the world. Other trademarks and service marks owned by the Company include SUPER-7-R-, SLURPEE-R-, BIG GULP-R- and BIG BITE-R-, as well as many additional trade names, marks and slogans relating to other individual types of food and beverage items. In connection with the Company's emphasis on the introduction of more fresh food items, the DELI CENTRAL-R- and WORLD OVENS-R- trademarks are being introduced in stores nationwide, along with the QUALITY CLASSIC SELECTION-R- trademark, covering the Company's proprietary brand of 14 spring and sparkling waters, as well as other beverage products. New marks introduced during the year include BETTER CHOICES-SM- which consist of healthy snack and meal items that have been recognized by Larry North, fitness celebrity, as low-fat, healthy products, and 7-ELEVEN SERVICE CENTER- SM-, which refers to the work station that has been added in some stores to offer faxing and mailing services for customers, among other things. CAFE SELECT-R-, continues to be used, covering the Company's gourmet coffees, cappuccino and hot chocolate products. ADVERTISING During 1996, the Company continued its very successful "Comedians" campaign, which first aired in December, 1993. The Company also introduced several new promotional and seasonal advertising campaigns such as new versions of the BRAINFREEZE-R- television commercials, featuring the famous soccer player Alexi Lalas, to promote the "SLURPEE-R- World Series" game. Also featured in various advertisements in 1996 were the 7-ELEVEN- PHONE CARD-TM- Major League Baseball Classic Collector Series, featuring 12 different Major League baseball players. In addition, the 7-ELEVEN PHONE CARD-TM- NFL Collector Series, which featured 12 different NFL players, was used to enhance the promotion of the NFL-licensed coffee mugs being sold at the stores, each featuring one of the 30 NFL teams. The popularity of the National Hockey League ("NHL") has been growing at a tremendous rate. 7-ELEVEN-R- focused on this increased consumer interest by offering a limited edition NHL coffee mug in 1996. In addition, the Company sponsored NHL programming and was a major sponsor of the NHL All-Star game, as well as sponsoring FOX TV's Major League Baseball and NFL football games. During the year, the Company used several television promotions to target special products. To highlight hot dogs, a TV spot featuring the famous baseball broadcaster Harry Caray was used; a TV spot for fountain soft drinks tied-in with the movie "Cable Guy" starring Jim Carrey; the 7-ELEVEN PHONE CARD-TM- Major League Baseball Classic Collector Series TV spot featured Cal Ripken (from the Baltimore Orioles); and the 7-ELEVEN- PHONE CARD-TM- NFL Collector Series spot featured Detroit Lions player Barry Sanders. During the year radio advertising was used to highlight specific products such as ATMs, fountain soft drinks, 7-ELEVEN-R- PHONE CARDS and SLURPEE-R- drinks. In addition, during the year, the Company offered free or discounted pastries or DELI CENTRAL-R- items, with the frequent purchase of coffee or soft drinks, and distributed coupons for price discounts or free items, to encourage customers to sample some of the new fresh food items that were introduced during 1996. The Company also produced seasonal advertising and point of purchase materials to tie-in with the Arnold Schwarzenegger holiday movie "Jingle All the Way." COMPETITION During the past few years the Company, like other traditional convenience retailers, has experienced increased competitive pressures from 15 supermarkets and drug stores offering extended hours and services, as well as from an increasing number of convenience-type stores built by the oil companies. The convenience retailing industry is also being negatively impacted by demographic factors (such as an aging population) and an erosion of demand for certain of its traditional core products, including cigarettes, soft drinks and beer. Although 7-ELEVEN-R- is the most widely recognized name in the convenience retailing industry, the Company's convenience retailing operations represent only a very small percentage of the highly competitive food retailing industry. Independent industry sources estimate that in the United States annual sales in 1995 (the most recent data available) for the convenience store industry were approximately $144.1 billion (including $74.4 billion of gasoline) and that over 93,200 store units were in operation. The industry traditionally has narrow net profit margins. In addition, the Company's stores compete with a number of national, regional, local and independent retailers, including grocery and supermarket chains, grocery wholesalers and buying clubs, other convenience store chains, oil company gasoline/mini-convenience "g-stores," independent food stores, and fast food chains as well as variety, drug and candy stores. In sales of gasoline, the Company's stores compete with other food stores and service stations and generate only a very small percentage of the gasoline sales in the United States. Each store's ability to compete is dependent on its location, accessibility and individual service. Growing competitive pressures from new participants in the convenience retailing industry and the rapid growth in numbers of convenience-type stores opened by oil companies over the past few years have intensified competitive pressures for the Company. Cityplace Center East, the Company's headquarters office building in Dallas, Texas, is occupied by the Company and other third party tenants, with the Company having the right to sublease the remaining space (see "Cityplace," above). During 1996, the Company entered into subleases with new tenants and expansions with existing tenants covering about 125,000 additional square feet. The building is now virtually completely leased or reserved for expansion under current leases. In seeking tenants, this project competes with other downtown, Oak Lawn, North Dallas and North Central Expressway luxury office space developments. It is anticipated that competition for tenants will remain strong in the Dallas commercial real estate market. ENVIRONMENTAL MATTERS The operations of the Company are subject to various federal, state and local laws and regulations relating to the environment. Certain of the more significant federal laws are described below. The implementation of these laws by the United States Environmental Protection Agency ("EPA") and the states will continue to affect the Company's operations by imposing increased operating and maintenance costs and capital expenditures required for compliance. Additionally, the procedural provisions of these laws can result in increased lead times and costs for new facilities. The Resource Conservation and Recovery Act of 1976, as amended, affects the Company through its substantial reporting, recordkeeping and waste management requirements. In addition, standards for underground fuel storage tanks and associated equipment may increase operating expenses and the costs of marketing petroleum products. In response to this legislation, and various 16 state and local regulations, the Company established a comprehensive program to manage underground storage tanks and associated equipment that established procedures for tank testing, repair and corrective action. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA"), as amended, creates the potential for substantial liability for the costs of study and clean-up of waste disposal sites and includes various reporting requirements. This Act may result in joint and several liability even for parties not primarily responsible for hazardous waste disposal sites. As a consequence of past waste disposal, the Company may be potentially liable for cleanup costs at several sites which are being considered or which may be considered for federal clean-up action under CERCLA. Additional requirements imposed by the Superfund Amendments and Reauthorization Act of 1986 also have resulted in additional reporting duties. The Clean Air Act, as amended, and similar regulations at the state and local levels, impose significant responsibilities on the Company through certain requirements pertaining to vapor recovery, sales of reformulated gasoline and related recordkeeping. Violation of any federal environmental statutes or regulations or orders issued thereunder, as well as relevant state and local laws and regulations, could result in civil or criminal enforcement actions. CURRENT ENVIRONMENTAL PROJECTS AND PROCEEDINGS. As previously reported, in December 1988, the Company closed its chemical manufacturing facility in Great Meadows, New Jersey ("Great Meadows"). As a result, the Company is required to conduct environmental remediation at the facility and has submitted a clean-up plan to the New Jersey Department of Environmental Protection ("NJDEP") which provides for remediation at the site for an approximate three-to-five-year period as well as continued groundwater treatment for a projected 20-year period. While the Company has recently received conditional approval of its clean-up plan, the Company must supply additional information to the NJDEP before the plan can be finalized. At December 31, 1996, the Company has recorded an undiscounted liability of $30.9 million, which represents its best estimate of the clean-up and treatment costs to be incurred. Some remedial actions have commenced. As previously reported, the Company filed suit in the United States District Court for the District of New Jersey against a large chemical company that formerly owned the Great Meadows property. In 1991, the Company and the former owner of the facility executed a final settlement agreement pursuant to which the former owner agreed to pay a substantial portion of the cleanup costs described above. Based on the terms of the settlement agreement and the financial resources of the former owner, the Company has recorded a receivable of $18.2 million, at year-end 1996, representing the former owner's portion of the accrued clean-up costs. As of December 31, 1996, the Company had approximately 2,000 operating retail outlets involved in the sale of gasoline and other motor fuels. In the ordinary course of business, the Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations primarily relating to underground storage tank ("UST") systems. The Company has established a comprehensive program to manage USTs and associated equipment and to ensure compliance with applicable laws. 17 The Company anticipates that it will spend approximately $15 million in 1997 on capital improvements required to comply with environmental regulations relating to USTs as well as above-ground vapor recovery equipment at store locations and approximately an additional $20 million on such capital improvements from 1998 through 2000. Additionally, the Company accrues for the anticipated future costs of environmental clean-up activities (consisting of environmental assessment and remediation) relating to detected releases of regulated substances at its existing and previously owned or operated sites at which gasoline has been sold (including store sites and other facilities that have been sold by the Company). At December 31, 1996, the Company has an accrued liability of $46.5 million for such activities and anticipates that substantially all such expenditures will be incurred within the next five years. This estimate is based on the Company's prior experience with gasoline sites and its consideration of such factors as the age of the tanks, location of tank sites and experience with contractors who perform environmental assessment and remedial work. Under state reimbursement programs the Company is eligible to receive reimbursement for a portion of future remediation costs, as well as remediation costs previously paid. At December 31, 1996, the Company has recorded a net receivable of $50.0 million for the estimated probable state reimbursements. The Company increased the estimated net environmental cost reimbursements at the end of 1996 by approximately $7.5 million as a result of completing a review of state reimbursement programs. In assessing the probability of state reimbursements, the Company takes into consideration each state's fund balance, revenue sources, existing claim backlog, status of clean-up activity and claim ranking systems. As a result of these assessments, the recorded receivable amount is net of an allowance of $9.5 million. There is no assurance of the timing of the receipt of state reimbursement funds; however, based on its experience, the Company expects to receive the majority of state reimbursement funds, except from California, within one to three years after payment of eligible assessment and remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. The Company estimates that it may take from one to eight years to receive reimbursement funds from California. Therefore, the portion of the recorded receivable amounts that relate to sites where remediation activities have been completed have been discounted at 7 percent to reflect their present value. The 1996 recorded receivable amount is also net of a discount of $6.4 million. The estimated future assessment and remediation expenditures and related state reimbursement amounts could change within the near future as governmental requirements and state reimbursement programs continue to be implemented or revised. In general, the Company's capital expenditures for environmental matters will continue to be affected by federal, state and local environmental laws and regulations. It is possible that future environmental requirements may be more stringent than current requirements, thereby requiring additional expenditures. As described above, the Company also anticipates future maintenance expenditures in connection with environmental requirements relating to continuing upkeep of USTs at store locations. See also "Legal Proceedings," below, at pages 25 through 28, for a discussion of other pending legal proceedings relating to environmental matters. 18 EMPLOYEES At December 31, 1996, the Company had 29,532 employees, of whom approximately 31 percent were considered to be either temporary or part-time employees. None of the Company's employees were subject to collective bargaining agreements at year-end. The Company has in the past been able to satisfy substantially all of its requirements for managerial personnel above the field consultant level from within its organization. The Company's store managers and supervisory staff personnel are compensated on some form of incentive basis. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, positions and offices with the registrant of all current executive officers, as well as the Chairman of the Board and the Vice Chairman of the Board, of the Company are shown in the following chart. The term of office of each executive officer is at the pleasure of the board of directors. The business experience of each such executive officer for at least the last five years, and the period during which he or she served in office, as well as the date each was employed by the Company, are reflected in the applicable footnotes to the chart. All executive officers of Southland named herein, were officers or employees of the Company at the time Southland filed its voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as described above. Mr. Ito and Mr. Suzuki became Chairman of the Board and Vice Chairman of the Board, respectively, on March 5, 1991, after Southland emerged from bankruptcy, and are officers of the Board and are not administrative executive officers.
AGE AT NAME 3-01-97 POSITIONS AND OFFICES WITH REGISTRANT AT 12/31/96 - ---- ------- ------------------------------------------------- Masatoshi Ito 72 Chairman of the Board and Director (1) Toshifumi Suzuki 64 Vice Chairman of the Board and Director (2) Clark J. Matthews, II 60 President, Chief Executive Officer; Secretary and Director (3) Stephen B. Krumholz 47 Executive Vice President and Chief Operating Officer (4) James W. Keyes 41 Executive Vice President and Chief Financial Officer (5) Rodney A. Brehm 49 Senior Vice President, Distribution (6) Michael R. Cutter 45 Senior Vice President, Merchandising (7) Adrian O. Evans 60 Senior Vice President, Construction and Maintenance (8) Stephen B. LeRoy 44 Senior Vice President, International and Real Estate (9) Bryan F. Smith, Jr. 44 Senior Vice President and General Counsel (10) Robert E. Bailey 54 Vice President, Northwest Division (11) Terry L. Blocher 52 Vice President, Southwest Division (12) Paul L. Bureau, Jr. 55 Vice President, Corporate Tax (13) Kathleen Callahan-Guion 45 Vice President, Chesapeake Division (14) Frank Crivello 43 Vice President, Northeast Division (15) Joseph Gomes 57 Vice President, Central Division (16) John Harris 50 Vice President, Florida Division (17) James Notarnicola 45 Vice President, Communications (18) Gary R. Rose 51 Vice President, Gasoline and Environmental Services (19) Jeffrey Schenck 46 Vice President, Greater Midwest Division (20) David A. Urbel 55 Vice President, Planning and Treasurer (21) Donald E. Thomas 38 Controller (22) - -------------------
19 (1) Chairman of the Board and Director of the Company since March 5, 1991. Director and Honorary Chairman of Ito-Yokado Group, which includes Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and Denny's Japan Co., Ltd., as well as other companies. Ito-Yokado Co., Ltd. is one of Japan's leading diversified retailing companies which, together with its subsidiaries and affiliates, operates superstores, convenience stores, department stores, supermarkets, specialty shops and discount stores. President of Ito-Yokado Co., Ltd. from 1958 to 1992. Chairman of Seven-Eleven Japan Co., Ltd. from 1978 to 1992, and President from 1973 to 1978. Chairman of Denny's Japan Co., Ltd. from 1981 to 1992, and President from 1973 to 1981. Chairman of Famil Co., Ltd. since 1986. Chairman of York Mart Co., Ltd. since 1979. Chairman of Robinson's Japan Co., Ltd. since 1995. Chairman of Maryann Co., Ltd. since 1977. President of Oshman's Japan Co., Ltd. since 1984. Statutory Auditor of Steps Co., Ltd. since 1992. Chairman of York-Keibi Co., Ltd. since 1989. President of Union Lease Co., Ltd. since 1985. Statutory Auditor of Daikuma Co., Ltd. since 1982. Chairman of Marudai Co., Ltd. since 1989. Director of Seven-Eleven (Hawaii), Inc. since 1989. Chairman of Umeya Co., Ltd. since 1981. Director of Shop America Limited since 1990. Director and Chairman of the Board of IYG Holding Company since 1990. (2) Vice Chairman of the Board and Director of the Company since March 5, 1991. President and Chief Executive Officer of Ito-Yokado Co., Ltd., one of Japan's leading diversified retailing companies which, together with its subsidiaries and affiliates, operates superstores, convenience stores, department stores, supermarkets, specialty shops and discount stores, since October 1992 and Director since 1971; Executive Vice President from 1985 to 1992; Senior Managing Director from 1983 to 1985; Managing Director from 1977 to 1983; employee since 1963. Chairman of the Board and Chief Executive Officer of Seven-Eleven Japan Co., Ltd. since October 1992 and Director since 1973; President from 1975 to 1992; Senior Managing Director from 1973 to 1975. Statutory Auditor of Robinson's Japan Co., Ltd. since 1984. Chairman of Daikuma Co., Ltd. since 1985. President of Seven-Eleven (Hawaii), Inc. since 1989. President of Shop America Limited since 1990. President and Director of IYG Holding Company since 1990. (3) Director since March 5, 1991, and from 1981 until December 15, 1987; President and Chief Executive Officer since March 5, 1991 and Secretary since April 26, 1995; Executive Vice President (or Senior Executive Vice President) and Chief Financial Officer from 1979 to 1991; Vice President and General Counsel from 1973 to 1979; employee of the Company since 1965. (4) Executive Vice President and Chief Operating Officer since June 1993; Senior Vice President, Operations, from August 1992 to June 1993; Senior Vice President, 7-ELEVEN-R- Stores Operations, from 1990 to August 1992; Vice President, Marketing, from 1989 to 1990; Vice President, Northern Region, 7-ELEVEN-R- Stores, from January 1989 to October 1989; Vice President, Northwest Region, 7-ELEVEN-R- Stores, from 1987 to 1988; Division Manager, Mountain Division, 7-ELEVEN-R- Stores, from 1986 to 1987; Regional Marketing Manager from 1981 to 1986; employee of the Company since 1972. (5) Executive Vice President and Chief Financial Officer since May 1, 1996; Senior Vice President, Finance, from June 1993 to April 1996; Vice President, Planning and Finance, from August 1992 to June 1, 1993; Vice President, National Gasoline, from August 1991 to August 1992; General Manager, National Gasoline, from 1986 to 1991; employee of the Company since 1985. 20 (6) Senior Vice President, Distribution since May 1, 1996; Senior Vice President, Distribution and Foodservice, from June 1993 to April 1996; Vice President, Merchandising, from February 1992 to June 1993; Vice President, Marketing, from 1990 to 1992; Vice President, Northwest Region, 7- ELEVEN-R- Stores, from 1989 to 1990; National Marketing Manager from 1986 to 1989; Division Manager, Central Pacific Division, 7-ELEVEN-R- Stores, from 1979 to 1986; employee of the Company since 1972. (7) Senior Vice President, Merchandising from May 1, 1996 to March 31, 1997; Vice President, Merchandising from May 1995 to April 1996; National Field Merchandising Manager from July 1994 to April 1995; Regional Merchandising Manager from January 1990 to July 1994; Division Merchandising Manager from July 1986 to December 1989; employee of the Company since 1975. (8) Senior Vice President, Construction and Maintenance from May 1, 1996 to June 30, 1997; Vice President, Construction and Maintenance, from August 1992 to April 1996; Vice President, Stores Development, from January 1989 to August 1992; Vice President, Mid-America Region, 7-ELEVEN-R- Stores, from 1987 to 1988; Vice President, Central Stores Region, from 1980 to 1987; Central Stores Regional Manager from 1978 to 1980; Division Manager, Canada, from 1976 to 1978; employee of the Company from 1962 to 1972 and since 1975. (9) Senior Vice President, International and Real Estate since May 1, 1995; Vice President, International and Real Estate, May, 1994 to April, 1995; Vice President Real Estate and Licensed Operations, from August 1992 until May 1994; Vice President, Atlantic Region, 7-ELEVEN-R- Stores, from 1990 to 1992; Vice President, Chesapeake Region, 7-ELEVEN-R- Stores, from 1987 to 1990; Regional Manager, Chesapeake Stores Region, in 1987; Division Manager, Capitol Stores Division, from 1986 to 1987; Division Manager, Great Lakes Stores Division, from 1984 to 1986; Operations Manager, Great Lakes Stores Division, from 1981 to 1984; employee of the Company since 1975. (10) Senior Vice President and General Counsel since May 1, 1995; Vice President and General Counsel from August 1992 to April 30, 1995; Assistant General Counsel from January 1990 to July 1992; Associate General Counsel from January 1987 to December 1989; employee of the Company since 1980. (11) Vice President, Northwest Division since May 1, 1995; Division Manager from November 1990 to April 1995; Regional Vice President from May 1986 to October 1990; employee of the Company since 1970. (12) Vice President, Southwest Division since May 1, 1995; Division Manager from February 1, 1985 to April 30, 1995; employee of the Company since 1971. (13) Vice President, Corporate Tax, since May 1993; Corporate Tax Manager from March 1983 to May 1993; Partner, Touche Ross & Co., from 1978 to 1983; employee of the Company since 1983. 21 (14) Vice President, Chesapeake Division from May 1, 1995 to March 14, 1997; Division Manager from November 1, 1986 to April 30, 1995; employee of the Company since 1979. (15) Vice President, Northeast Division since May 1, 1996; Division Manager from October 1987 to April 1996; employee of the Company since 1981. (16) Vice President, Central Division since May 1, 1996; Division Manager from June 1989 to April 1996; employee of the Company since 1978. (17) Vice President, Florida Division since May 1, 1996; Division Manager from October 1987 to April 1996; employee of the Company since 1979. (18) Vice President, Communications from May 1, 1995 to March 31, 1997; Manager, Advertising and Promotions from July 1992 to April 1995; National Sales Manager from November 1990 to July 1992; Regional Marketing Manager from August 1989 to October 1990; employee of the Company since 1978. (19) Vice President, Gasoline and Environmental Services since May 1, 1995; National Gasoline Manager from January 1991 to April 1995; Manager, East/West Gasoline from November 1987 to January 1991; employee of the Company since 1968. (20) Vice President, Greater Midwest Division since May 1, 1996; Division Manager from October 1987 to April 1996; employee of the Company since 1976. (21) Vice President, Planning and Treasurer since August, 1992; Vice President since April, 1992 and Treasurer since December 16, 1987; Deputy Treasurer from 1984 to 1987; Assistant Treasurer from 1983 to 1984; employee of the Company since 1970. (22) Controller since August 1, 1995; Assistant Controller from January 1993 to July 1995; employee of the Company since 1993. Financial Manager, The Trane Company, from April 1992 to December 1992; Senior Manager, Audit Department, Deloitte & Touche, from January 1990 to March 1992; Audit Department, Deloitte & Touche, from June 1981 to March 1992. Deloitte & Touche was formed in 1989 from the merger of Touche Ross & Co. and Deloitte, Haskins, and Sells. ITEM 2. PROPERTIES Under the Prior Credit Agreement, virtually all the Company's assets, not previously subject to liens, were encumbered with mortgages and other liens, including both tangible and intangible property rights, as well as stock in the Company's non-foreign subsidiaries, where such encumbrance was not otherwise prohibited. Upon refinancing of the Prior Credit Agreement and the payment of all amounts due thereunder, such encumbrances were released. 22 OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES 7-ELEVEN-R- At the end of 1996, the 7-ELEVEN-R- stores group was using 62 offices in 19 states and Canada. The following table shows the location and number of the Company's 7-ELEVEN-R- convenience stores (excluding stores under area licenses and of certain affiliates) in operation on December 31, 1996.
STATE/PROVINCE OPERATING 7-ELEVEN-R- CONVENIENCE STORES OWNED LEASED(A) TOTAL U.S. --- Arizona 39 57 96 California 227 941 1,168 Colorado 61 179 240 Connecticut 7 31 38 Delaware 10 17 27 District of Columbia 4 14 18 Florida 227 190 417 Idaho 6 8 14 Illinois 53 85 138 Indiana 6 10 16 Kansas 7 10 17 Maryland 87 228 315 Massachusetts 11 24 35 Michigan 51 48 99 Missouri 32 49 81 Nevada 88 100 188 New Hampshire 2 7 9 New Jersey 74 129 203 New York 43 186 229 North Carolina 2 5 7 Ohio 10 5 15 Oregon 37 96 133 Pennsylvania 60 106 166 Rhode Island 0 8 8 Texas 105 181 286 Utah 37 75 112 Virginia 191 407 598 Washington 59 169 228 West Virginia 10 13 23 Wisconsin 15 0 15 CANADA (B) ------ Alberta 19 97 116 Manitoba 13 37 50 Ontario 30 80 110 British Columbia 21 120 141 Saskatchewan 14 24 38 ----- ----- ----- Total 1,658 3,736 5,394 ===== ===== ===== - ----------------- (A) Of the 7-ELEVEN-R- convenience stores set forth in the foregoing table, 743 are leased by the Company from The Southland Corporation Employees' Savings and Profit Sharing Plan (the "Savings and Profit Sharing Plan"). As of year-end 1996, the Company also leased 50 closed convenience stores or office locations from the Savings and Profit Sharing Plan. (B) The above numbers include 17 stores in Canada that have been operated under a management contract. The Company is in the process of acquiring the assets of these stores, which are all on leased property.
23 OTHER RETAIL. As shown in the following table, at year-end 1996, the Company operated 22 Quik Mart and SUPER-7-R- stores in California, Illinois, Indiana, Massachusetts, Missouri, New Hampshire, Texas and Virginia, 5 HIGH'S-TM- Dairy Stores located in Maryland and Virginia, and one other retail location in Illinois. The following table shows the location and number of the Company's Quik Mart, HIGH'S-TM- and SUPER-7-R- locations in operation on December 31, 1996.
OTHER OPERATING RETAIL LOCATIONS STATE OWNED LEASED TOTAL California 3 0 3 Illinois 6 0 6 Indiana 3 1 4 Maryland 0 2 2 Massachusetts 1 0 1 Missouri 2 0 2 New Hampshire 1 1 2 Texas 2 0 2 Virginia 3 3 6 --- -- -- Total 21 7 28
The Company plans to either close or convert these units to 7-ELEVEN-R- stores over the next few years. OTHER INFORMATION ABOUT PROPERTIES AND LEASES. At December 31, 1996, there were six 7-ELEVEN-R- stores in various stages of construction, all but one on property leased by the Company. The Company owned 16, and had leases on 57, undeveloped convenience store sites. In addition, the Company held 110 7-ELEVEN-R-, HIGH'S-T.M.- and Quik Mart properties available for sale consisting of 66 unimproved parcels of land, 31 closed store locations and 13 parcels of excess property adjoining store locations. At December 31, 1996, 22 of these properties were under contract for sale. On December 31, 1996, the Company held leases on 373 closed store or other non-operating facilities, 50 of which were leased from the Savings and Profit Sharing Plan. Of these, 293 were subleased to outside parties. Generally, the Company's store leases are for primary terms of from 14 to 20 years, with options to renew for additional periods. Many leases contain provisions granting the Company a right of first refusal in the event the lessor decides to sell the property. Many of the Company's store leases, in addition to minimum annual rentals, provide for percentage rentals based upon gross sales in excess of a specified amount and for payment of taxes, insurance and maintenance. ACQUISITIONS. During 1996, the Company acquired from The Store 24 Companies, Inc. of Boston, Massachusetts, 13 stores located in Queens, the Bronx and Brooklyn, New York, all of which are leased. The Company also acquired two stores in the Oakland, California area, from The Customer Company, both of which are owned. 24 OTHER PROPERTIES. The Company also leases 53,580-square-feet of office/warehouse space in Denver, Colorado, for an equipment warehouse and service center. The Company has contracted to sell a five-acre tract of land in Delanco, New Jersey, on which a 19,000-square-foot branch distribution facility is located. This is residual property from the Company's distribution and food processing operations that were divested in late 1992. The Company also owns a 287-acre tract in Great Meadows, New Jersey. The chemical plant that was located on this property has now been demolished and a part of the property is currently involved in environmental clean-up. (See "Current Environmental Projects and Proceedings," pages 17 through 19, above.) CORPORATE The Company's corporate office headquarters is in Dallas, Texas in a 42- story office building, known as Cityplace Center East. The Company's lease covers the entire Cityplace Tower, but gives the Company the right to sublease to other parties. As of early 1996, subleases had been signed with third parties so that (including the space leased by Southland) the building is virtually completely leased or reserved for expansion under current leases. The Company currently utilizes other office space in and around Dallas (although most corporate office space is consolidated in Cityplace Center East). The Company holds tracts in Dallas, Texas, not included in Cityplace, totaling about 5.0 acres which are available for sale. Item 3. LEGAL PROCEEDINGS THE FOLLOWING INFORMATION UPDATES THE STATUS OF CERTAIN PREVIOUSLY REPORTED PENDING LITIGATION INVOLVING THE COMPANY. 7-ELEVEN-R- OWNERS FOR FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION, ET AL. As previously reported, on September 23, 1993, the Company was served with a Summons and Complaint in a purported class action lawsuit entitled 7- ELEVEN-R- Owners for FAIR FRANCHISING, ET AL. V. THE SOUTHLAND CORPORATION, ET AL., Case No. 722272-6, in the Superior Court for Alameda County, California ("7-ELEVEN-R- OFFF"). Also named as defendants in the Complaint are Southland's majority owners and various vendors who supply goods to 7- ELEVEN-R-franchisees in the State of California. The named plaintiffs purportedly represent all persons who have owned 7-ELEVEN-R-franchises in California at any time since August 1987. The Complaint alleges a variety of violations of California state antitrust laws, breaches of contract and other claims relating to discounts and allowances, vendor-supplied equipment, Southland's accelerated inventory management program and the 24-hour operation of 7-ELEVEN-R- stores. Although the case was filed as a class action on behalf of California franchisees, the judge has not yet ruled on whether or not to certify a class. The Company's majority owners filed a motion challenging the court's jurisdiction over them and asking to be dismissed from the case, which the Court granted on March 12, 1997. In addition, Southland and several of the 25 vendor defendants filed motions requesting summary judgment as to most of the antitrust claims in the case. Those motions were heard on January 24, 1997, and on March 12, 1997, the judge granted summary judgment and dismissed all of the claims that alleged a price-fixing conspiracy between Southland and the vendor defendants, as well as dismissing the breach of fiduciary duty and accounting claims against McLane. As a result of this decision, Coca Cola, Pepsi Cola, Hansen's Juices and Oscar Mayer have been dismissed from the case, leaving only Southland, Citgo and McLane as defendants. There are no other hearings set in this case; however, the judge has scheduled the trial to begin on January 12, 1998, and discovery in this matter is proceeding. VALENTE, ET AL. V. THE SOUTHLAND CORPORATION, ET AL. VALENTE I: As previously reported, the same lawyers representing the plaintiffs in the 7-ELEVEN-R-OFFF case, which, as previously reported, is pending in state court in California, filed another lawsuit against the Company and other defendants on March 15, 1996, in the U.S. District Court for the Northern District of California, entitled VALENTE, ET AL. V. THE SOUTHLAND CORPORATION, ET AL., Case No. 3:96-CV-1786-P ("Valente I"). Valente I, which alleges essentially the same issues as the 7-ELEVEN-R- OFFF case, was filed on behalf of a purported class consisting of all persons who owned 7-ELEVEN-R- franchises during the last six years, except those located in California. The Company's motion to transfer the case to federal court in Dallas was granted on June 24, 1996, and the case is now pending in the U.S. District Court for the Northern District of Texas. The plaintiffs, however, have filed a motion to dismiss VALENTE I; the court has not yet ruled on that motion. VALENTE II: On November 14, 1996, the same group of lawyers representing the franchisees filed a third purported class action lawsuit (VALENTE, ET AL. V. THE SOUTHLAND CORPORATION, District Court of Dallas County Texas, 14th Judicial District, Case No. 96-11972-A, "Valente II") in state court in Dallas. Southland is the only defendant named in this case, which alleges breach of contract relating to the manner in which the Company accounted for discounts and allowances from merchandise vendors. The plaintiffs have amended their complaint to assert that the class consists of all persons who signed a franchise agreement with Southland, on or after January 1, 1967, with respect to a 7-ELEVEN-R- store in any state, except California. The Company intends to contest the certification of classes in these cases and to defend vigorously against all of the plaintiffs' allegations. The Company believes it has meritorious defenses to all of the claims asserted by the plaintiffs in both the California action and the Texas cases. The ultimate outcome, however, cannot be predicted. EMIL V. SPARANO, ET AL. V. THE SOUTHLAND CORPORATION, ET AL. As previously reported, a lawsuit entitled EMIL V. SPARANO, ET AL. V. THE SOUTHLAND CORPORATION, ET AL. was filed against the Company in the United States District Court for the Northern District of Illinois, in April 1994. Plaintiffs are several franchisees of 7-ELEVEN-R- stores in Illinois, 26 Pennsylvania, New Jersey and Nevada; and they purport to represent a nationwide class of all persons who have owned 7-ELEVEN-R- franchises anywhere in the United States at any time since 1987. In addition to the Company, several of the Company's current or former officers and directors (John P. Thompson, Jere W. Thompson, Joe C. Thompson, Jr., Clark J. Matthews, II, Walton Grayson, III, John H. Rodgers and Frank Gangi, collectively, the "Individual Defendants") and Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG Holding Company (collectively, the "Foreign Companies") were named as defendants in this case. The lawsuit originally included 11 causes of action. During 1996, as previously reported, Southland and the Foreign Companies received favorable rulings on several motions. As a result, all claims against the Foreign Companies were dismissed, and the only Individual Defendants remaining in the case are John Thompson, Jere Thompson and Clark Matthews. In addition, of the 11 original causes of action, only the claim alleging that fraudulent statements about the Company's financial condition were made, during and after the Company's LBO and Chapter 11 bankruptcy proceedings, has been certified to proceed as a class action against the three remaining Individual Defendants and Southland. The plaintiffs are not pursuing any of the other claims that were originally alleged. The class has now been defined to include those persons who owned 7- ELEVEN-R- franchises at any time from December 1, 1987 to March 4, 1991. The parties are currently attempting to agree on the form of notice that will be sent to class members. The Company has aggressively attacked the merits of this suit from its inception and believes that it has meritorious defenses to the remaining claim. At this time, however, the litigation is still at an early stage of development and the ultimate outcome cannot be predicted. DEFAULT INTEREST CLAIM As previously reported, on October 24, 1990, the Company filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, Case No. 390-37119-HCA-11. The Company's Plan of Reorganization was confirmed by the Court on February 21, 1991. Subsequent to the Company's bankruptcy filing, the Company's senior lenders under the Credit Agreement filed a proof of claim demanding, among other things, default interest, as a result of the Company's failure to make an interest payment due June 15, 1990 and received a favorable ruling from the Bankruptcy Court. The Company has appealed this decision but recognized the approximately $12.2 million of additional interest expense in its financial statements for 1991. There were no material developments in this matter in 1996. T&L PROPERTY SERVICE (TAL-TEX) As previously reported, on June 21, 1995, a lawsuit was filed in Dallas County, Texas against the Company by T&L Property Service, an affiliate of Tax-Tex, Inc. ("Tal-Tex"). Tal-Tex is a water supply company located near Round Rock, Texas. The Complaint was subsequently amended to include claims by Tal-Tex and its principals and claims by certain individuals who reside in or near Round Rock on behalf of themselves and a purported class of similarly situated residents, alleging personal injuries 27 and property damages as a result of a release of petroleum from underground storage tanks at a 7-ELEVEN-R- store in Round Rock, Texas. In March, 1996, the claims of the Tal-Tex entities were severed from the purported class action. In December, 1996, the Court denied the motion to certify the class, and in January, 1997, the individual plaintiffs voluntarily dismissed both the individual claims and the class claims leaving only the lawsuit pending in Dallas County, Texas, involving the Tal-Tex entities. The individual plaintiffs subsequently filed a new lawsuit in Georgetown, Texas, (TONKAWA SPRINGS HOMEOWNERS ASSOCIATION ET AL. V. THE SOUTHLAND CORPORATION, Cause No. 97-021-C277, in the 277th Judicial District Court for Williamson County, Texas) on behalf of themselves individually, and as representatives of a purported class of property owners in the subdivision near Round Rock, Texas, whose properties have been allegedly damaged as a result of the original release of petroleum from the 7-ELEVEN-R- store in Round Rock, Texas. The Company strongly contests, and is vigorously defending against, both lawsuits. ARTURO M. VASQUEZ, ET AL. V. THE SOUTHLAND CORPORATION, ET AL. As previously reported, a suit was filed in 1995 against the Company entitled ARTURO M. VASQUEZ, ET AL. V. THE SOUTHLAND CORPORATION, ET AL., which asserts certain claims on behalf of a purported class of property owners whose properties have allegedly been damaged by petroleum releases from underground storage tanks at approximately 150 former or current Southland locations in Texas. The Company's motion to transfer venue in this matter to Dallas County, Texas was granted, and upon reconsideration the judge upheld the transfer. Immediately prior to the class certification hearing, the plaintiffs withdrew all allegations involving the purported class, thereby resulting in a lawsuit involving only a few individual plaintiffs. Southland strongly contests, and is vigorously defending against, the claims in this lawsuit. In addition, the Company is also occasionally sued by persons who allege that they have incurred property damage and personal injuries as a result of releases of motor fuels from underground storage tanks operated by the Company at its retail outlets. It is the Company's policy to vigorously defend against such claims. Except as specifically disclosed in this section on "Legal Proceedings" or in the section on "Environmental Matters", above, the Company does not believe that its exposure from such claims, either individually or in the aggregate, is material to its business or financial condition. Information concerning other legal proceedings is incorporated herein from "Environmental Matters," pages 16 through 18, above. In the ordinary course of business, the Company is also involved in various other legal proceedings which, in the Company's opinion, are not material, either individually or in the aggregate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. 28 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $.0001 par value per share, is the only class of common equity of the Company and represents the only voting securities of the Company. There are 409,922,935 shares of Common Stock issued and outstanding and, as of March 7, 1997, there were 2,834 record holders of the Common Stock. The Company's Common Stock is traded on The NASDAQ Stock Market under the symbol "SLCM". The following information has been provided to the Company by the NASDAQ Stock Market.
PRICE RANGE ----------------------------------------------------------- QUARTERS HIGH LOW CLOSE - ------------- ---------------------------------------------------------- 1996 FIRST $ 4 1/16 $ 2 15/16 $ 3 5/16 SECOND 4 15/16 3 3 1/32 THIRD 3 5/8 3 3 1/32 FOURTH 3 5/32 2 7/16 2 31/32 1995 FIRST $ 4 23/32 $ 3 7/16 $ 3 3/4 SECOND 4 3/8 3 7/16 3 7/16 THIRD 4 1/8 2 7/8 3 FOURTH 4 1/4 2 15/16 3 5/16 (a) These quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The indentures governing the Company's outstanding debt securities do not permit the payment of cash dividends except in limited circumstances. The Credit Agreement also restricts the Company's ability to pay cash dividends on the Common Stock. Under Texas law, cash dividends may only be paid (a) out of the surplus of a corporation, which is defined as the excess of the total value of the corporation's assets over the sum of its debt, the par value of its stock and the consideration fixed by the corporation's board of directors for stock without par value, and (b) only if, after giving effect thereto, the corporation would not be insolvent, which is defined to mean the inability of a corporation to pay its debts as they become due in the usual course. Surplus may be determined by a corporation's board of directors by, among other things, the corporation's financial statements or by a fair valuation or information from any other method that is reasonable in the circumstances. No assurances can be given that the Company will have sufficient surplus to pay any cash dividends even if the payment thereof is not otherwise restricted. 29 ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA THE SOUTHLAND CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31 ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) Net sales . . . . . . . . . . . . . . . . . $ 6,868.9 $ 6,745.8 $ 6,684.5 $ 6,744.3 $ 7,425.8 Other income (a). . . . . . . . . . . . . . 86.4 78.5 74.6 71.3 67.4 Total revenues (a). . . . . . . . . . . . . 6,955.3 6,824.3 6,759.1 6,815.6 7,493.2 LIFO charge (credit). . . . . . . . . . . . 4.7 2.6 3.0 (8.7) 1.5 Depreciation and amortization . . . . . . . 185.4 166.4 162.7 154.4 180.3 Interest expense, net . . . . . . . . . . . 90.2 85.6 95.0 81.8 97.4 Earnings (loss) before income taxes, extraordinary items and cumulative effect of accounting changes . . . . . . . . . . 130.8 101.5 73.5 (2.6) (119.9)(b) Income taxes (benefit). . . . . . . . . . . 41.3 (66.1)(c) (18.5)(d) 8.7 11.5 Earnings (loss) before extraordinary items and cumulative effect of accounting changes 89.5 167.6 92.0 (11.3) (131.4) Net earnings (loss) . . . . . . . . . . . . 89.5 270.8 (e) 92.0 71.2 (f) (131.4) Earnings (loss) per common share (primary and fully diluted): Before extraordinary items and cumulative effect of accounting changes . . . . . . . . . . . . . . 0.20 0.40 0.22 (0.03) (0.32) Net earnings (loss). . . . . . . . . . 0.20 0.65 0.22 0.17 (0.32) Total assets. . . . . . . . . . . . . . . . 2,039.1 2,081.1 2,000.6 1,990.0 2,039.7 Long-term debt, including current portion . 1,707.4 1,850.6 2,351.2 2,419.9 2,560.4
- ------------------------- (a) Prior-year amounts have been reclassified to conform to current-year presentation. (b) Loss before income taxes, extraordinary items and cumulative effect of accounting changes include a $45 million loss on the sale and closing of the Company's distribution and food processing facilities. (c) Income taxes (benefit) includes an $84.3 million tax benefit from recognition of the remaining portion of the Company's net deferred tax assets as explained in Note 15 to the Consolidated Financial Statements. (d) Income taxes (benefit) includes a $30 million tax benefit from recog- nition of a portion of the Company's net deferred tax assets as explained in Note 15 to the Consolidated Financial Statements. (e) Net earnings include an extraordinary gain of $103.2 million on debt redemption as explained in Note 8 to the Consolidated FInancial Statements. (f) Net earnings include an extraordinary gain of $99 million on debt redemption and a charge for the cumulative effect of an accounting change for postemployment benefits of $16.5 million. 30 Some of the matters discussed in this annual report contain forward-looking statements regarding the Company's future business which are subject to certain risks and uncertainties, including competitive pressures, adverse economic conditions and government regulations. These issues, and other factors which may be identified from time to time in the Company's reports filed with the SEC, could cause actual results to differ materially from those indicated in the forward-looking statements. RESULTS OF OPERATIONS SUMMARY OF RESULTS OF OPERATIONS The Company's net earnings for 1996 were $89.5 million, compared to net earnings of $270.8 million in 1995 and $92.0 million in 1994. The Company's operating performance continued to improve, resulting in a 29% increase in 1996 earnings before income taxes and extraordinary gain (see chart below).
YEARS ENDED DECEMBER 31 ------------------------ (DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) 1996 1995 1994 ---- ---- ---- Earnings before income taxes and extraordinary gain $130.8 $101.5 $ 73.5 Income tax (expense) benefit (41.3) 66.1 18.5 Extraordinary gain from partial redemption of the Company's 41/2 and 5% debentures in November 1995 - 103.2 - ------- ------- ------- Net earnings $ 89.5 $270.8 $ 92.0 ======= ======= ======= Net earnings per common share (primary and fully diluted) $ .20 $ .65 $ .22 ======= ======= ======
The Company's operating improvement in 1996 was primarily due to savings in operating, selling, general and administrative expenses. Although store closings (121 average) resulted in a decline in total merchandise gross profit compared to 1995, average per store merchandise sales and gross profits improved in each quarter in 1996 over 1995. MANAGEMENT STRATEGIES Since 1992, the Company hasbeen committed to several key strategies that it believes, over the long term, will provide further differentiation from competitors and allow 7-Eleven to maintain its position as the premier convenience retailer. These strategies include: an upgraded store base; a customer-driven approach to product selection; an everyday-fair-pricing policy on all items; daily delivery of fresh perishable items; introduction of high-quality, ready-to-eat fresh foods; and the implementation For the past four years, the Company has focused on upgrading its store base, both through remodeling existing stores and closing underachieving stores. More recently, this strategy has been expanded through the opening or 31 acquiring of new stores. During 1996, the Company completed the most extensive remodeling program in its history. With its store base now completely remodeled, future upgrade programs will focus on retail information systems, food service and other merchandising programs. Also in 1996, the Company slowed its ten-year decline in operating properties by ending the year with only two fewer stores. Beginning in 1997, new store openings are expected to outpace closings each year, with future expansion initially occurring in existing markets to support the Company's fresh food and combined-distribution initiatives. In recent years, the Company has pruned its store base, closing or disposing of those stores that either could not support its strategies or were not expected to achieve an acceptable level of profitability in the future. As a result, store closings during the past three years totaled 39, 214 and 182 in 1996, 1995 and 1994, respectively. The customer-driven approach to merchandising focuses on providing the customer an expanded selection of quality products at a good value. This is being accomplished by emphasizing the importance of ordering at the store level, removing slow-moving items and aggressively introducing new products in the early stages of their life cycle. This process will be an ongoing part of managing our business in a continual effort to satisfy the ever-changing preferences of our customers. The Company's everyday-fair-pricing strategy is designed to provide consistent prices on all items by reducing its reliance on discounting. Following a complete evaluation of product pricing in 1992, the everyday- fair-pricing strategy was introduced, which in turn, allowed some product prices to be lowered, while others were increased to achieve more consistency. Going forward, the Company plans to migrate toward lower retail prices as lower product costs are achieved through contract negotiations or strategic alliances with suppliers and distributors. Daily delivery of fresh perishable items and high-quality, ready-to-eat foods is another key management strategy. Implementation of this strategy includes third-party development and operation of combined distribution centers ("CDC"), fresh-food commissaries and bakery facilities in many of the Company's markets around the country. The commissary and bakery ready-to-eat items, like fresh sandwiches and pastries, along with goods from multiple vendors such as dairy products, produce and other perishable goods, are "combined" at a distribution center and delivered daily to each store. In addition to providing fresher products, improved in-stock conditions from daily deliveries and quicker response time on new items, the combined distribution is also intended to provide lower product costs, in part from vendors' savings, through this approach. At the end of 1996, over 2,000 stores were serviced by the CDCs and carried fresh-food products manufactured by the commissaries. Further expansion of these programs is anticipated in 1997 in the following markets: Miami/Fort Lauderdale, Chicago and Long Island. When CDCs in these markets are operational, daily-delivered fresh food will be available to nearly one-half of the Company's stores. The development of a retail information system ("RIS") began in 1994. The initial phase, completed in early 1996, involved installing in-store processors ("ISP") in each store to automate accounting and other store-level tasks. The current phase involves the installation of point-of-sale registers with scanning capabilities, as well as tools on the ISP to assist with ordering and product assortment, and a hand-held unit for ordering product from the sales floor. After completion of this phase in 1998, the system will provide each store and its suppliers and distributors with on-line information to make better decisions in anticipating customer needs. Management feels that the effective utilization of daily sales data gathered by the system will improve sales through reducing out-of-stock incidents and enhancing each individual store's product mix to better match customers' needs. In addition, the system will assist with monitoring inventories to 32 better control shortage and product write-offs. While implementation costs during the roll-out phase are expected to exceed the short-term benefits, the anticipated long-term benefits of this system, coupled with further reductions in costs resulting from automation, are expected to help the Company reach its goal of sustained profitable growth over the long term. (EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS REFER TO AN AVERAGE OF ALL STORES RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR.) SALES The Company recorded net sales of $6.87 billion for the year ended December 31, 1996, compared to sales of $6.75 billion in 1995 and $6.68 billion in 1994. Over the past three years, sales increases have primarily come from same-store merchandise sales growth, combined with higher gasoline prices. During this time period, growth in total sales was suppressed by the closing of more than 430 underachieving stores (see Management Strategies).
MERCHANDISE SALES GROWTH DATA (PER-STORE) YEARS ENDED DECEMBER 31 ----------------------- Increase (Decrease) from prior year 1996 1995 1994 - ----------------------------------- ---- ---- ---- U.S. same-store sales 1.4% 2.0% 2.1% U.S. same-store real growth; excluding inflation (1.0)% - 2.8% 7-Eleven inflation (deflation) 2.4% 2.1% (.7)%
While average per-store merchandise sales results in 1996 were fairly consistent among the various geographical areas, category results were mixed. Categories with significant sales improvement included pre-paid phone cards and services, while traditional convenience store products such as cigarettes, non-alcoholic beverages and candy, which account for almost 40% of merchandise sales, had below average growth. Competition continues to intensify as other retailers rely on price promotions to drive their sales of these products. Additionally, management feels that the Company's ongoing challenge of balancing short-term performance with its long-term objectives contributed to the less-than-desired sales results for the year. During 1995 average per-store merchandise sales results varied by geographic region. The largest increases occurred in those areas with the highest percentage of completed remodels (Florida 4.8%, Texas/Colorado 4.1%). Conversely, the Southern California area, which included 18% of the Company's domestic stores, experienced a decline of almost 1.5% due to a sluggish economy. Merchandise sales results experienced deflation during 1994 as a result of cigarette price reductions (on certain premium brands) associated with manufacturers' cost reductions. Gasoline sales dollars per store increased 7.3%, 4.0% and 8.7% in 1996, 1995 and 1994, respectively. In 1996 and 1995 this increase was mostly due to the average sales price per gallon increasing 12 cents over the two-year period. The increase in gasoline sales dollars per store in 1994 was primarily due to per-store gallonage improvement of 7.8%. Gallon volumes in both 1996 and 1995 did not sustain the high growth levels experienced in 1994 as a result of market factors which affected the way the Company managed its gasoline business. 33 OTHER INCOME Other income of $86.4 million for 1996 was $7.9 million higher than 1995 and $11.7 million higher than 1994. The improvement is primarily the result of increased royalty income from licensed operations, combined with increased franchising activities which generated more fees. GROSS PROFITS
MERCHANDISE GROSS PROFIT DATA YEARS ENDED DECEMBER 31 ------------------------------- 1996 1995 1994 ---- ---- ---- Merchandise Gross Profit - (DOLLARS IN MILLIONS) $ 1,787.7 $ 1,790.2 $ 1,791.1 Increase/(decrease) from prior year - all stores - ------------------------------------------------- Average per-store gross profit dollar change 2.1% 3.1% 1.7% Margin percentage point change (.19) (.01) (.50) Average per-store merchandise sales 2.7% 3.1% 3.2%
Total merchandise gross profit dollars have declined slightly in each of the last three years primarily from store closings and a slightly lower margin. However, as a result of per-store sales growth, gross profit dollars per store have consistently improved compared to prior-year results in each quarter over the same period. During 1996, merchandise margin declined slightly due to three main factors: rising product costs, lower-than-average sales growth of high-margin items and higher product write-offs. Rising product costs and more aggressive retail pricing continue to present a challenge in today's increasingly more competitive environment. Initial costs associated with new, fresh-food products from the further roll-out of the Company's fresh-food program have affected margin. Management is actively working to improve merchandise margin while providing fair and consistent prices. In 1995, sales of higher-margin categories like pre-paid phone cards and services performed well enough to offset cost increases that could not be passed on to the consumer for competitive reasons. The decline in margin during 1994 was primarily due to increased costs for disposal of slow-moving merchandise, combined with a pricing test in which the Company tested lower prices in certain parts of the country as part of a more aggressive everyday- fair-pricing strategy.
GASOLINE GROSS PROFIT DATA YEARS ENDED DECEMBER 31 --------------------------- 1996 1995 1994 ---- ---- ---- Gasoline Gross Profit - (DOLLARS IN MILLIONS) $ 188.1 $ 192.9 $ 199.6 Increase/(decrease) from prior year - ----------------------------------- Average per-store gross profit dollar change (1.4)% (3.3)% 8.2% Margin point change (in cents per gallon) (.17) (.60) .06 Average per-store gas gallonage (.1)% 1.0% 7.8%
34 In 1996, gasoline gross profits declined $4.8 million from the levels achieved in 1995. Lower margins (in cents per gallon) and gasoline gallonage, during 1996, were the result of market conditions that kept wholesale costs high for much of the year while competitive pressures kept retail prices in check. The strong 1994 results were aided by favorable market conditions created by the federally mandated fuel reformulation program which kept the margins unusually high in the fourth quarter of 1994.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("OSG&A") YEARS ENDED DECEMBER 31 ------------------------------ (DOLLARS IN MILLIONS) 1996 1995 1994 ---- ---- ---- Total operating, selling, general and administrative expenses $ 1,841.2 $ 1,874.5 $ 1,896.8 Ratio of OSG&A to sales 26.8% 27.8% 28.4% Decrease in OSG&A compared to prior year* $ (33.3) $ (22.3) $ (143.3) *1993 INCLUDED $48.2 MILLION LOSS FOR STORE CLOSINGS AND DISPOSITIONS OF PROPERTIES AND A $10.8 MILLION LOSS FOR DISPOSITION OF CITIJET, A FIXED-BASE OPERATION AT DALLAS LOVE FIELD AIRPORT. EXCLUDING THESE UNUSUAL ITEMS, THE DECREASE IN 1994 WOULD HAVE BEEN $84.3 MILLION.
OSG&A expenses, and the ratio to sales, have declined in each of the last three years. In 1996, despite the incremental costs of the retail information system initiatives which exceeded $7 million, OSG&A expenses declined over $33 million. The largest item contributing to the improvement was lower insurance costs. Based upon favorable claims experience, the Company lowered its store insurance and employee benefit reserves. Other factors aiding the comparison included the absence of a significant restructuring charge compared to a charge of $13.4 million in 1995, declines in environmental remediation expenses, savings from reductions in force and lower expenses from having fewer stores. Management expects future periods' expenses and the ratio to sales to increase with the continued roll-out of the retail information system. The Company continues to review the functions necessary to enable its stores to respond faster and more cost efficiently to rapidly changing customer needs and preferences. In conjunction with this review, management continues to realign and reduce personnel and office facilities, in order to eliminate non-essential costs, while devoting resources to the implementation of its retail information system and other strategic initiatives (see Management Strategies). The majority of the decrease in OSG&A expenses in 1995 and 1994 resulted from cost savings realized from reductions in force, combined with the effect of having fewer stores (see Management Strategies). In December 1995, the Company accrued $13.4 million for severance costs and realignment of office space. These reductions were substantially complete in 1996, and changes in estimates from the original accrual did not have a material impact on 1996 earnings. In December 1994, the Company accrued $7.4 million for severance costs and office reductions. The employee terminations were completed in 1995, while the office realignments were completed in 1996. Changes from 1994's original accrual did not have a material impact on 1995 earnings. 35 INTEREST EXPENSE, NET Net interest expense increased $4.6 million in 1996 compared to 1995 due to lower interest income, combined with higher interest expense from the Convertible Quarterly Income Debt Securities ("Convertible Debt") due 2010 which were issued in November 1995. The lower interest income was primarily the result of a new money order agreement that eliminated interest income from the funding arrangement; however, it provided lower cost of goods and operating costs, which more than offset the impact of the lost interest. Interest on the Convertible Debt was almost entirely offset by reduced principal balances and lower rates on floating rate debt. As discussed further in Note 8 to the Consolidated Financial Statements, in accordance with SFAS No. 15, no interest expense is recognized on the Company's public debt securities, as the cash interest payments are charged against the recorded principal balance of such securities. Approximately 35% of the Company's debt contains floating rates that will be unfavorably impacted by rising interest rates. The weighted average interest rate for such debt was 5.83% for 1996 versus 6.62% and 5.51% for 1995 and 1994, respectively. The Company expects net interest expense in 1997 to remain relatively flat due to higher borrowings to finance new store development, offset by increased capitalized interest and a .6% reduction in the cost of borrowing that the Company negotiated with the lenders in its new, unsecured bank debt credit agreement ("New Credit Agreement") (see Liquidity and Capital Resources). The Company's net interest expense in 1995 decreased $9.4 million compared to 1994. Most of the savings related to non-cash interest, which declined due to the refinancing of the term loans under the secured senior bank debt credit agreement ("Old Credit Agreement") in December 1994 and the extension of the repayment of the debt relating to the Company's headquarters facilities (Cityplace) at a lower interest rate in February 1995. The adverse impact of the 1.1% rise in the weighted average interest rate on the Company's floating rate debt during 1995 increased interest expense approximately $8 million. However, the 1.5% reduction in the margin that the Company negotiated with its bank lenders in the refinancing in late 1994 offset a portion ($5 million) of this increase. INCOME TAXES The Company recorded tax expense in 1996 of $41.3 million, compared to tax benefits in 1995 and 1994 of $66.1 million and $18.5 million, respectively. Higher income taxes were the result of the rise in earnings before income taxes and extraordinary items, which have increased by 29% and 38% for the year-to-year comparisons of 1996 vs. 1995 and 1995 vs. 1994. Tax benefits in 1995 and 1994 were the result of recognition of deferred tax assets. During the fourth quarter of 1995, due to the Company's demonstrated ability to produce higher levels of taxable income, the remaining portion of the valuation allowance for deferred taxes was reversed, producing an $84.3 million benefit. During the fourth quarter of 1994, as a result of the Company's anticipated 1995 taxable earnings, the valuation allowance was reduced $30 million. EXTRAORDINARY GAIN On November 22, 1995, the Company completed a tender offer for 40% of the face value of both its 5% First Priority Senior Subordinated Debentures 36 due December 15, 2003 ($180.6 million) and 4 1/2% Second Priority Senior Subordinated Debentures-Series A ($82.7 million) due June 15, 2004 (collectively, the "Debentures"). Under the terms of the offer the final clearing prices were $840.00 and $786.00 for the 5% and 4 1/2% Debentures, respectively, per $1,000 face amount, resulting in a cash outlay by the Company of $216.7 million. To finance the purchase of the Debentures, the Company issued $300 million in Convertible Debt to Ito-Yokado Co., Ltd., and Seven-Eleven Japan Co., Ltd., the joint owners of IYG Holding Company, which is the Company's majority shareholder. The Company recognized a $103.2 million after-tax extraordinary gain on the purchase of the Debentures in the fourth quarter of 1995. The gain resulted from purchasing the Debentures below their face value and from retiring the future undiscounted interest payments on that portion of the Debentures that were purchased. As a result of the Company's financial restructuring in 1991, SFAS No. 15 required the Company to include its future undiscounted interest payments on the Debentures in the carrying value of the debt on the balance sheet. LIQUIDITY AND CAPITAL RESOURCES The majority of the Company's working capital is provided from three sources: i) cash flows generated from its operating activities; ii) a $400 million commercial paper facility (guaranteed by Ito-Yokado Co., Ltd.); and iii) short-term seasonal borrowings of up to $400 million (reduced by outstanding letters of credit) under its revolving credit facility. The Company believes that operating activities, coupled with available short-term working capital facilities, will provide sufficient liquidity to fund current operating and capital expenditure programs, as well as to service debt requirements. In February 1997, the Company entered into a New Credit Agreement, refinancing its old term loan ($225 million), revolving credit facility and letters of credit ($150 million each), all of which were scheduled to mature on December 31, 1999, with a new term loan facility ("Term Loan") and revolving credit facility. The Term Loan ($225 million) has scheduled quarterly repayments of $14.1 million commencing March 31, 1998 through December 31, 2001. The new revolving credit facility ($400 million) expires February 2002 and allows for revolving borrowings ("Revolver"), and for issuance of letters of credit not to exceed $150 million. Interest on the Term Loan and Revolver is based on a variable rate equal to the administrative agent bank's base rate or, at the Company's option, a rate equal to a reserve-adjusted Eurodollar rate plus .225% per year for drawn amounts. The new agreement requires letter of credit fees to be paid quarterly at .325% per year on the outstanding amount. In addition, a facility fee of .15% per year is payable quarterly on the total amount available under the New Credit Agreement, as such amount is reduced from time to time. The cost of borrowings and letters of credit under the New Credit Agreement represents a decrease of .6% and .45% per year, respectively, from the Old Credit Agreement. The Company has received commitments subject to final documentation, for a Master Lease Facility ("MLF") in an amount not to exceed $115 million. The MLF is expected to close in April of 1997 and is intended to finance a complete integrated point-of-sale system which is scheduled to be rolled out over the subsequent six quarters (see Management Strategies). The lease payment on the MLF will be based on a variable rate equal to the Eurodollar rate plus a blended all-inclusive spread of .46% per year. The MLF is expected to have a two-year noncancellable term with semiannual options to renew for up to an additional three years. Based upon current roll-out 37 schedules, it is anticipated that the commitment under the MLF will be fully utilized by the end of 1998. The New Credit Agreement contains certain financial and operating covenants requiring, among other things, the maintenance of certain financial ratios, including interest and rent coverage, fixed-charge coverage and senior indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The covenant levels established by the New Credit Agreement generally require continuing improvement in the Company's financial condition. The covenants in the New Credit Agreement, when compared to the Old Credit Agreement, allow the Company more flexibility in its borrowing levels and capital expenditures. For the period ended December 31, 1996, the Company was in compliance with all of the covenants required under the Old Credit Agreement, including compliance with the principal financial and operating covenants (calculated over the latest 12-month period) as follows:
REQUIREMENTS ------------------------ Covenants Actuals Minimum Maximum - --------- ------- ------- ------- Interest coverage* 3.44 to 1.0 3.00 to 1.0 - Fixed charge coverage 1.11 to 1.0 0.90 to 1.0 - Senior indebtedness to EBITDA 3.07 to 1.0 - 3.50 to 1.0 *INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS.
In 1996, the Company repaid $140.4 million of debt, which included $75.0 million representing the quarterly installments due in 1996 under the Old Credit Agreement, $27.8 million for principal payments on the Company's yen- denominated loan (secured by the royalty income stream from its area licensee in Japan) and $22.4 million for SFAS No. 15 interest. Outstanding balances at December 31, 1996, for the commercial paper, the Term Loan and the Revolver, were $398.1 million, $225.0 million and zero, respectively. As of December 31, 1996, outstanding letters of credit issued pursuant to the Old Credit Agreement totaled $79.2 million. CASH FROM OPERATING ACTIVITIES Net cash provided by operating activities was $261.0 million for 1996, compared to $236.2 million in 1995 and $271.6 million in 1994 (see Results of Operations section). CAPITAL EXPENDITURES During 1996, net cash used in investing activities consisted primarily of payments of $194.4 million for property and equipment, the majority of which was used for remodeling stores, the continued implementation of a retail information system, upgrading retail gasoline facilities, replacing equipment and complying with environmental regulations. The Company expects 1997 capital expenditures, excluding lease commitments, to be approximately $325 million. Capital expenditures are being used to develop or acquire new stores, upgrade store facilities, further 38 implement a retail information system, replace equipment, upgrade gasoline facilities and comply with environmental regulations. The amount of expenditures during the year will be materially impacted by the proportion of new store development funded through working capital versus leases. Most leases related to new store construction would contain initial terms of 15-20 years with typical option renewal periods. CAPITAL EXPENDITURES - GASOLINE EQUIPMENT The Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations primarily relating to underground storage tank ("UST") systems. The Company anticipates it will spend approximately $15 million in 1997 on capital improvements required to comply with environmental regulations relating to USTs, as well as above-ground vapor recovery equipment at store locations, and approximately an additional $20 million on such capital improvements from 1998 through 2000. ENVIRONMENTAL In December 1996, the Company adopted the American Institute of Certified Public Accountants' recently issued Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities." SOP No. 96-1 provides guidance on specific accounting issues that are present in the recognition, measurement and disclosure of environmental remediation liabilities and is required for fiscal years beginning after December 15, 1996. In December 1988, the Company closed its chemical manufacturing facility in New Jersey. As a result, the Company is required to conduct environmental remediation at the facility and has submitted a clean-up plan to the New Jersey Department of Environmental Protection (the "State"), which provides for remediation of the site for approximately a three- to- five-year period, as well as continued groundwater treatment for a projected 20-year period. While the Company has recently received conditional approval of its clean-up plan, the Company must supply additional information to the State before the plan can be finalized. The Company has recorded undiscounted liabilities representing its best estimates of the clean-up costs of $30.9 million at December 31, 1996. In 1991, the Company and the former owner of the facility executed a final settlement pursuant to which the former owner agreed to pay a substantial portion of the clean-up costs. Based on the terms of the settlement agreement and the financial resources of the former owner, the Company has recorded a receivable of $18.2 million at December 31, 1996. Additionally, the Company accrues for the anticipated future costs and the related probable state reimbursement amounts for remediation activities at its existing and previously operated gasoline sites where releases of regulated substances have been detected. At December 31, 1996, the Company's estimated undiscounted liability for these sites was $46.5 million. This estimate is based on the Company's prior experience with gasoline sites and its consideration of such factors as the age of the tanks, location of tank sites and experience with contractors who perform environmental assessment and remediation work. The Company anticipates that substantially all of the future remediation costs for detected releases at these sites as of December 31, 1996, will be incurred within the next five years. Under state reimbursement programs, the Company is eligible to receive reimbursement for a portion of future remediation costs, as well as remediation costs previously paid. Accordingly, at December 31, 1996, the 39 Company has recorded a net receivable of $50.0 million for the estimated probable state reimbursements. The Company increased the estimated net environmental cost reimbursements at the end of 1996 by approximately $7.5 million as a result of completing a review of state reimbursement programs. In assessing the probability of state reimbursements, the Company takes into consideration each state's fund balance, revenue sources, existing claim backlog, status of clean-up activity and claim ranking systems. As a result of these assessments, the recorded receivable amount is net of an allowance of $9.5 million. While there is no assurance of the timing of the receipt of state reimbursement funds, based on its experience, the Company expects to receive the majority of state reimbursement funds, except from California, within one to three years after payment of eligible remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. The Company estimates that it may take one to eight years to receive reimbursement funds from California. Therefore, the portion of the recorded receivable amounts that relate to sites where remediation activities have been completed have been discounted at 7% to reflect their present value. As a result of the adoption of SOP No. 96-1, the 1996 recorded receivable amount is also net of a discount of $6.4 million. The estimated future assessment and remediation expenditures and related state reimbursement amounts could change within the near future as governmental requirements and state reimbursement programs continue to be implemented or revised. 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. THE SOUTHLAND CORPORATION AND SUBSIDIARIES Consolidated Financial Statements for the Years Ended December 31, 1996, 1995 and 1994 41 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
ASSETS 1996 1995 ------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 36,494 $ 43,047 Accounts receivable 109,413 107,224 Inventories 109,050 102,020 Other current assets 95,943 103,816 ------------- ------------- TOTAL CURRENT ASSETS 350,900 356,107 PROPERTY AND EQUIPMENT 1,349,839 1,335,783 OTHER ASSETS 338,409 389,227 ------------- ------------- $ 2,039,148 $ 2,081,117 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Trade accounts payable $ 211,060 $ 195,154 Accrued expenses and other liabilities 297,246 329,429 Commercial paper 98,055 50,198 Long-term debt due within one year 68,571 145,346 ------------- ------------- TOTAL CURRENT LIABILITIES 674,932 720,127 DEFERRED CREDITS AND OTHER LIABILITIES 214,343 236,545 LONG-TERM DEBT 1,638,828 1,705,237 CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES 300,000 300,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT): Common stock, $.0001 par value; 1,000,000,000 shares authorized; 409,922,935 shares issued 41 41 Additional capital 625,574 625,574 Accumulated deficit (1,414,570) (1,506,407) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (788,955) (880,792) ------------- ------------- $ 2,039,148 $ 2,081,117 ============= ============= See notes to consolidated financial statements. 42
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA) 1996 1995 1994 ------------- ------------- ------------- REVENUES: Net sales (including $961,987, $977,828 and $972,030 in excise taxes) $ 6,868,912 $ 6,745,820 $ 6,684,495 Other income 86,351 78,458 74,624 ------------- ------------- ------------- 6,955,263 6,824,278 6,759,119 COSTS AND EXPENSES: Cost of goods sold 4,893,061 4,762,707 4,693,826 Operating, selling, general and administrative expenses 1,841,174 1,874,460 1,896,827 Interest expense, net 90,204 85,582 94,970 ------------- ------------- ------------- 6,824,439 6,722,749 6,685,623 ------------- ------------- ------------- EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY GAIN 130,824 101,529 73,496 INCOME TAXES (BENEFIT) 41,348 (66,065) (18,500) ------------- ------------- ------------- EARNINGS BEFORE EXTRAORDINARY GAIN 89,476 167,594 91,996 EXTRAORDINARY GAIN ON DEBT REDEMPTION (NET OF TAX EFFECT OF $8,603 in 1995) - 103,169 - ------------- ------------- ------------- NET EARNINGS $ 89,476 $ 270,763 $ 91,996 ============= ============= ============= EARNINGS PER COMMON SHARE (PRIMARY AND FULLY DILUTED): Before extraordinary gain $ .20 $ .40 $ .22 Extraordinary gain - .25 - ------ ------ ------ Net earnings $ .20 $ .65 $ .22 ====== ====== ====== See notes to consolidated financial statements. 43
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) COMMON STOCK TOTAL ------------------------ ADDITIONAL ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT) - ------------------------------ ----------- ------ ----------- ------------- --------------- BALANCE, JANUARY 1, 1994 409,922,935 $ 41 $ 625,574 $ (1,873,965) $ (1,248,350) Net earnings - - - 91,996 91,996 Foreign currency translation adjustments - - - (877) (877) - ------------------------------ ----------- ------ ----------- ------------- --------------- BALANCE, DECEMBER 31, 1994 409,922,935 41 625,574 (1,782,846) (1,157,231) Net earnings - - - 270,763 270,763 Foreign currency translation adjustments - - - (2,470) (2,470) Other - - - 8,146 8,146 - ------------------------------ ----------- ------ ----------- ------------- --------------- BALANCE, DECEMBER 31, 1995 409,922,935 41 625,574 (1,506,407) (880,792) Net earnings - - - 89,476 89,476 Foreign currency translation adjustments - - - (258) (258) Other - - - 2,619 2,619 - ------------------------------ ----------- ------ ----------- ------------- --------------- BALANCE, DECEMBER 31, 1996 409,922,935 $ 41 $ 625,574 $ (1,414,570) $ (788,955) =========== ====== =========== ============= =============== See notes to consolidated financial statements. 44
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 89,476 $ 270,763 $ 91,996 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary gain on debt redemption - (103,169) - Depreciation and amortization of property and equipment 166,347 147,423 143,670 Other amortization 19,026 19,026 19,026 Deferred income taxes 23,790 (84,269) (30,000) Noncash interest expense 1,746 1,974 11,384 Other noncash expense (income) 182 (409) 614 Net loss on property and equipment 1,714 7,274 7,504 Decrease (increase) in accounts receivable 4,824 (2,708) (3,066) (Increase) decrease in inventories (7,030) (552) 7,895 Decrease (increase) in other assets 386 (1,053) 24,273 Decrease in trade accounts payable and other liabilities (39,421) (18,083) (1,729) ------------- ------------- ------------- Net cash provided by operating activities 261,040 236,217 271,567 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchase of property and equipment (194,373) (192,221) (171,636) Proceeds from sale of property and equipment 14,499 15,720 15,867 Other 9,588 2,770 (5,552) Proceeds from sale of distribution and food center assets - - 6,305 ------------- ------------- ------------- Net cash used in investing activities (170,286) (173,731) (155,016) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from commercial paper and revolving credit facilities 4,292,215 4,171,927 4,451,774 Payments under commercial paper and revolving credit facilities (4,249,134) (4,256,918) (4,418,693) Proceeds from issuance of long-term debt - - 300,000 Principal payments under long-term debt agreements (140,388) (289,372) (400,580) Proceeds from issuance of convertible quarterly income debt securities - 300,000 - Debt issuance costs - (4,364) (3,250) ------------- ------------- ------------- Net cash used in financing activities (97,307) (78,727) (70,749) ------------- ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,553) (16,241) 45,802 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,047 59,288 13,486 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36,494 $ 43,047 $ 59,288 ============= ============= ============= RELATED DISCLOSURES FOR CASH FLOW REPORTING: Interest paid, excluding SFAS No.15 Interest $ (100,777) $ (97,945) $ (98,157) ============= ============= ============= Net income taxes paid $ (18,918) $ (34,674) $ (7,810) ============= ============= ============= See notes to consolidated financial statements. 45
THE SOUTHLAND CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The Southland Corporation and subsidiaries ("the Company") is owned approximately 65% by IYG Holding Company, which is jointly owned by Ito-Yokado Co., Ltd. ("IY") and Seven-Eleven Japan Co., Ltd. ("SEJ"). The consolidated financial statements include the accounts of The Southland Corporation and its subsidiaries. Intercompany transactions and account balances are eliminated. Prior-year and quarterly amounts are reclassified to conform to the current-year presentation. The Company operates more than 5,400 7-Eleven and other convenience stores in the United States and Canada. Area licensees, or their franchisees, and affiliates operate approximately 10,800 additional 7-Eleven convenience stores in certain areas of the United States, in 18 foreign countries and in the U. S. territories of Guam and Puerto Rico. The Company's net sales are comprised of sales of groceries, take-out foods and beverages, gasoline (at certain locations), dairy products, non-food merchandise, specialty items and services. Net sales and cost of goods sold of stores operated by franchisees are consolidated with the results of Company-operated stores. Net sales of stores operated by franchisees are $2,860,768,000, $2,832,131,000 and $2,820,685,000 from 2,927, 2,896 and 2,962 stores for the years ended December 31, 1996, 1995 and 1994, respectively. Under the present franchise agreements, initial franchise fees are recognized in income currently and are generally calculated based upon gross profit experience for the store or market area. These fees cover certain costs including training, an allowance for travel, meals and lodging for the trainees and other costs relating to the franchising of the store. The gross profit of the franchise stores is split between the Company and its franchisees. The Company's share of the gross profit of franchise stores is its continuing franchise fee, generally ranging from 50% to 58% of the gross profit of the store, which is charged to the franchisee for the license to use the 7- Eleven operating system and trademarks, for the lease and use of the store premises and equipment, and for continuing services provided by the Company. These services include merchandising, advertising, recordkeeping, store audits, contractual indemnification, business counseling services and preparation of financial statements. The gross profit earned by the Company's franchisees of $516,884,000, $515,610,000 and $517,955,000 for the years ended December 31, 1996, 1995 and 1994, respectively, is included in the Consolidated Statements of Earnings as operating, selling, general and administrative expenses ("OSG&A"). 46 Sales by stores operated under domestic and foreign area license agreements are not included in consolidated revenues. All fees or royalties arising from such agreements are included in other income. Initial fees, which have been immaterial, are recognized when the services required under the agreements are performed. OTHER INCOME - Other income is primarily area license royalties and franchise fee income. The area license royalties include amounts from area license agreements with SEJ of approximately $47,000,000, $44,000,000 and $42,000,000 for the years ended December 31, 1996, 1995 and 1994, respectively. OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Buying and occupancy expenses are included in OSG&A. INTEREST EXPENSE - Interest expense is net of interest income of $10,649,000, $16,975,000 and $13,618,000 for the years ended December 31, 1996, 1995 and 1994, respectively. INCOME TAXES - Income taxes are determined using the liability method, where deferred tax assets and liabilities are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets include tax carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investment instruments purchased with maturities of three months or less to be cash equivalents. Cash and cash equivalents include temporary cash investments of $12,252,000 and $8,787,000 at December 31, 1996 and 1995, respectively, stated at cost, which approximates market. In addition, at December 31, 1996, cash and cash equivalents include $8,045,000 of restricted cash related to unremitted money order collections. INVENTORIES - Inventories are stated at the lower of cost or market. Cost is generally determined by the LIFO method for stores in the United States and by the FIFO method for stores in Canada. DEPRECIATION AND AMORTIZATION - Depreciation of buildings and equipment is based upon the estimated useful lives of these assets using the straight-line method. Amortization of capital leases, improvements to leased properties and favorable leaseholds is based upon the remaining terms of the leases or the estimated useful lives, whichever is shorter. Foreign and domestic area license royalty intangibles were recorded in 1987 at the fair value of future royalty payments and are being amortized over 20 years using the straight-line method. The 20-year life is less than the estimated lives of the various royalty agreements, the majority of which are perpetual. STORE CLOSINGS - Provision is made on a current basis for the write- down of identified owned-store closings to their net realizable value. For identified leased-store closings, leasehold improvements are written down to their net realizable value and a provision is made on a current basis if anticipated expenses are in excess of expected sublease rental income. 47 STOCK-BASED COMPENSATION - As of January 1996, the Company adopted the disclosure-only requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and will therefore continue to apply the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." BUSINESS SEGMENT - The Company operates in a single business segment - - the operating, franchising and licensing of convenience food stores, primarily under the 7-Eleven name. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACCOUNTS RECEIVABLE
December 31 -------------------------- 1996 1995 ---- ---- (Dollars in Thousands) Trade accounts receivable $ 37,690 $ 40,647 Franchisee accounts receivable 46,345 43,556 Environmental cost reimbursements (net of long-term portion of $53,886 and $64,034) - see Note 14 14,366 17,654 Other accounts receivable 16,021 10,225 ----------- ----------- 114,422 112,082 Allowance for doubtful accounts (5,009) (4,858) ----------- ----------- $ 109,413 $ 107,224 =========== ===========
3. INVENTORIES Inventories stated on the LIFO basis that are included in inventories in the accompanying Consolidated Balance Sheets were $66,272,000 and $62,705,000 at December 31, 1996 and 1995, respectively, which is less than replacement cost by $31,418,000 and $30,907,000, respectively. 48 4. OTHER CURRENT ASSETS
December 31 ------------------------- 1996 1995 --------- ----------- (Dollars in Thousands) Prepaid expenses $ 20,298 $ 17,775 Deferred tax assets 70,438 78,665 Other 5,207 7,376 ---------- ---------- $ 95,943 $ 103,816 ========== ==========
5. PROPERTY AND EQUIPMENT
December 31 ---------------------------- 1996 1995 ------------ ------------ (Dollars in Thousands) Cost: Land $ 453,233 $ 461,585 Buildings and leaseholds 1,310,927 1,274,651 Equipment 790,718 697,673 Construction in process 32,614 32,725 ------------- ------------- 2,587,492 2,466,634 Accumulated depreciation and amortization (1,237,653) (1,130,851) ------------- ------------- $ 1,349,839 $ 1,335,783 ============= =============
In January 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets." The statement establishes accounting standards for the impairment of long-lived assets to be held and used and for long-lived assets to be disposed of. The adoption of SFAS No. 121 did not have a material effect on the Company's earnings. 49 6. OTHER ASSETS
December 31 -------------------------- 1996 1995 ---- ---- (Dollars in Thousands) Japanese license royalty intangible (net of accumulated amortization of $149,004 and $132,988) $ 169,497 $ 185,513 Other license royalty intangibles (net of accumulated amortization of $26,586 and $23,750) 30,018 32,854 Environmental cost reimbursements - see Note 14 53,886 64,034 Deferred tax assets 13,158 30,396 Other (net of accumulated amortization of $6,694 and $5,023) 71,850 76,430 ---------- ---------- $ 338,409 $ 389,227 ========== ==========
7. ACCRUED EXPENSES AND OTHER LIABILITIES
December 31 ------------------------- 1996 1995 ---- ---- (Dollars in Thousands) Accrued insurance $ 79,253 $ 83,068 Accrued payroll 45,256 43,025 Accrued taxes, other than income 37,967 40,710 Accrued environmental costs - see Note 14 23,654 40,659 Other 111,116 121,967 --------- --------- $ 297,246 $ 329,429 ========= =========
Other includes accounts payable to The Southland Corporation Employees' Savings and Profit Sharing Plan (see Note 12) for contributions and contingent rent payables of $15,641,000 and $13,635,000 as of December 31, 1996 and 1995, respectively. The Company continues to review the functions necessary to enable its stores to respond faster, more creatively and more cost efficiently to rapidly changing customer needs and preferences. To accomplish this goal, the Company continues to realign and reduce personnel and office facilities. 50 In December 1995 and 1994, the Company accrued $13,415,000 and $7,405,000, respectively, for severance benefits for employees terminated and for changes in office facilities. The 1995 employee terminations and office realignments were substantially completed in 1996, and changes in estimates from the original accruals did not have a material impact on 1996 or 1995 earnings. 8. DEBT
December 31 ---------------------------- 1996 1995 ---- ---- (Dollars in Thousands) Bank Debt Term Loans $ 225,000 $ 300,000 Commercial paper 300,000 300,000 5% First Priority Senior Subordinated Debentures due 2003 364,056 377,558 4-1/2% Second Priority Senior Subordinated Debentures (Series A) due 2004 165,387 170,952 4% Second Priority Senior Subordinated Debentures (Series B) due 2004 24,396 25,146 12% Second Priority Senior Subordinated Debentures (Series C) due 2009 54,468 57,082 6-1/4% Yen Loan 201,447 229,243 7-1/2% Cityplace Term Loan due 2005 282,606 286,949 Capital lease obligations 82,833 90,852 Other 7,206 12,801 ----------- ----------- 1,707,399 1,850,583 Less long-term debt due within one year 68,571 145,346 ----------- ----------- $ 1,638,828 $ 1,705,237 =========== ============
BANK DEBT - At December 31, 1996, the Company was obligated to a group of lenders under a credit agreement that included term loans and a revolving credit facility. In February 1997, the Company repaid all amounts due under that credit agreement with proceeds from a group of lenders under a new, unsecured credit agreement ("Credit Agreement"). The new Credit Agreement includes a $225 million term loan, which replaced the previous term loan of equal amount, and a $400 million revolving credit facility. A sublimit of $150 million for letters of credit is included in the revolving credit facility. The amount of borrowing availability represents an increase of $100 million over the previous facility. In addition, to the extent outstanding letters of credit are less than the $150 million maximum, the excess availability can be used for additional borrowings under the revolving credit facility. 51 The Company has also obtained commitments from the same group of lenders for up to $115 million of lease financing that will be used primarily for electronic point-of-sale equipment associated with the Company's retail information system. The master lease arrangement is expected to close in April 1997. The term loan matures on December 31, 2001, and has no payments due in 1997. Thereafter, the loans will be repaid in 16 quarterly installments of $14,062,500 commencing March 31, 1998. Upon expiration of the new revolving credit facility in February 2002, all the then-outstanding letters of credit must expire and may need to be replaced, and all other amounts then outstanding will be due and payable in full. At December 31, 1996, outstanding letters of credit under the previous facility totaled $79,207,000, and no revolving loans were outstanding. Interest on the new term loan and borrowings under the revolving credit facility is generally payable quarterly and is based on a variable rate equal to the administrative agent bank's base rate or, at the Company's option, at a rate equal to a reserve-adjusted Eurodollar rate plus .225% per year. A fee of .325% per year on the outstanding amount of letters of credit is required to be paid quarterly. In addition, a facility fee of .15% per year is charged on the aggregate amount of the credit agreement facility, as such amount is reduced from time to time, and is payable quarterly. The cost of borrowings and letters of credit under the new Credit Agreement represents a decrease of .6% and .45% per year, respectively, from the previous credit agreement. The weighted- average interest rate on the term loan outstanding under the previous credit agreement at December 31, 1996 and 1995 was 6.3% and 6.9%, respectively. The Credit Agreement contains various financial and operating covenants which require, among other things, the maintenance of certain financial ratios including interest and rent coverage, fixed-charge coverage and senior indebtedness to earnings before interest, income taxes, depreciation and amortization. The Credit Agreement also contains various covenants which, among other things, (a) limit the Company's ability to incur or guarantee indebtedness or other liabilities other than under the Credit Agreement, (b) restrict the Company's ability to engage in asset sales and sale/leaseback transactions, (c) restrict the types of investments the Company can make and (d) restrict the Company's ability to pay cash dividends, redeem or prepay principal and interest on any subordinated debt and certain senior debt. COMMERCIAL PAPER - The Company has a facility that provides for the issuance of up to $400 million in commercial paper. At both December 31, 1996 and 1995, $300 million of the respective $398,055,000 and $350,198,000 outstanding principal amounts, net of discount, was classified as long-term debt since the Company intends to maintain at least this amount outstanding during the next year. Such debt is unsecured and is fully and unconditionally guaranteed by IY. IY has agreed to continue its guarantee of all commercial paper issued through 1998. While it is not anticipated that IY would be required to perform under its commercial paper guarantee, in the event IY makes any payments under the guarantee, the Company and IY have entered into an agreement by which the Company is required to reimburse IY subject to restrictions in the Credit Agreement. The weighted-average interest rate on commercial paper borrowings outstanding at December 31, 1996 and 1995, respectively, was 5.4% and 5.8%. 52 DEBENTURES - The Debentures are accounted for in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring," and were initially recorded at an amount equal to the future undiscounted cash payments, both principal and interest ("SFAS No. 15 Interest"). Accordingly, no interest expense will be recognized over the life of these securities, and cash interest payments will be charged against the recorded amount of such securities. Interest on all of the Debentures is payable in cash semiannually on June 15 and December 15 of each year. The 5% First Priority Senior Subordinated Debentures, due December 15, 2003, had an outstanding principal amount of $269,993,000 at December 31, 1996, and are redeemable at any time at the Company's option at 100% of the principal amount. The Second Priority Senior Subordinated Debentures were issued in three series, and each series is redeemable at any time at the Company's option at 100% of the principal amount and are described as follows: 4-1/2% Series A Debentures, due June 15, 2004, with an outstanding principal amount of $123,654,000 at December 31, 1996. 4% Series B Debentures, due June 15, 2004, with an outstanding principal amount of $18,766,000 at December 31, 1996. 12% Series C Debentures, due June 15, 2009, with an outstanding principal amount of $21,787,000 at December 31, 1996. In November 1995, the Company purchased $180,621,000 of the principal amount of its First Priority Senior Subordinated Debentures due 2003 ("5% Debentures") and $82,719,000 of the principal amount of its 4-1/2% Second Priority Senior Subordinated Debentures (Series A) due 2004 ("4-1/2% Debentures") (collectively, "Refinanced Debentures") with a portion of the proceeds from the issuance of $300 million principal amount of Convertible Quarterly Income Debt Securities (see Note 9). The purchase of the Refinanced Debentures resulted in an extraordinary gain of $103,169,000 (net of current tax effect of $8,603,000) as a result of the discounted purchase price and the inclusion of SFAS No. 15 Interest in the carrying amount of the debt. Prior to the refinancing, the 5% Debentures were subject to annual sinking fund requirements of $27,045,000 due each December 15, commencing 1996 through 2002. The Company used its purchase of the 5% Debentures to satisfy such sinking fund requirements in direct order of maturity until December 15, 2002, at which time a sinking fund payment of $8,696,000 will be due. The Debentures contain certain covenants that, among other things, (a) limit the payment of dividends and certain other restricted payments by both the Company and its subsidiaries, (b) require the purchase by the Company of the Debentures at the option of the holder upon a change of control, (c) limit additional indebtedness, (d) limit future exchange offers, (e) limit the repayment of subordinated indebtedness, (f) require board approval of certain asset sales, (g) limit transactions with certain stockholders and affiliates and (h) limit consolidations, mergers and the conveyance of all or substantially all of the Company's assets. 53 The First and Second Priority Senior Subordinated Debentures are subordinate to the borrowings outstanding under the Credit Agreement and to previously outstanding mortgages and notes that are either backed by specific collateral or are general unsecured, unsubordinated obligations. The Second Priority Debentures are subordinate to the First Priority Debentures. YEN LOAN - In March 1988, the Company monetized its future royalty payments from SEJ, its area licensee in Japan, through a loan that is nonrecourse to the Company as to principal and interest. The original amount of the yen-denominated debt was 41 billion yen (approximately $327,000,000 at the exchange rate in March 1988) and is collateralized by the Japanese trademarks and a pledge of the future royalty payments. By designating its future royalty receipts during the term of the loan to service the monthly interest and principal payments, the Company has hedged the impact of future exchange rate fluctuations. Payment of the debt is required no later than March 2006 through future royalties from the Japanese licensee, and the Company believes it is a remote possibility that there will be any principal balance remaining at that date. Upon the later of February 28, 2000, or the date which is one year following the final repayment of the loan, royalty payments from the area licensee in Japan will be substantially reduced in accordance with the terms of the license agreement. The current interest rate of 6-1/4% will be reset after March 1998. CITYPLACE DEBT - Cityplace Center East Corporation ("CCEC"), a subsidiary of the Company, issued $290 million of notes in 1987 to finance the construction of the headquarters tower, a parking garage and related facilities of the Cityplace Center development. The interest rate on these notes was 7-7/8%, payable semiannually on February 15 and August 15, and the principal amount was due on February 15, 1995. Because of the application of purchase accounting in 1987, the effective interest rate was 9.0%. The principal amount was paid to noteholders on February 15, 1995, by drawings under letters of credit issued by The Sanwa Bank, Limited, Dallas Agency ("Sanwa"), which has a lien on the property financed. At that time, the Company deferred the maturity of the debt by exercising its option of extending the term of maturity ten years to March 1, 2005, with monthly payments of principal and interest to Sanwa based on a 25-year amortization at 7-1/2%, with the remaining principal due upon maturity (the "Cityplace Term Loan"). The Company is occupying part of the building as its corporate headquarters and the balance is subleased. As additional consideration through the extended term of the debt, CCEC will pay to Sanwa an amount that it receives from the Company which is equal to the net sublease income that the Company receives on the property and 60% of the proceeds, less $275 million and permitted costs, upon a sale or refinancing of the building. 54 MATURITIES - Long-term debt maturities assume the continuance of the commercial paper program. The maturities, which include capital lease obligations and sinking fund requirements, as well as SFAS No. 15 Interest accounted for in the recorded amount of the Debentures, are as follows (dollars in thousands):
1997 $ 68,571 1998 131,594 1999 141,594 2000 139,102 2001 139,971 Thereafter 1,086,567 ------------ $ 1,707,399 ============
9. CONVERTIBLE QUARTERLY INCOME DEBT SECURITIES DUE 2010 In November 1995, the Company issued $300 million principal amount of Convertible Quarterly Income Debt Securities due 2010 ("Convertible Debt") to IY and SEJ. The Company used $216,739,000 of the proceeds to purchase the Refinanced Debentures (see Note 8), and the remaining proceeds were designated for general corporate purposes. The Convertible Debt has an interest rate of 4-1/2% and gives the Company the right to defer interest payments thereon for up to 20 consecutive quarters. The holder of the Convertible Debt can convert it into a maximum of 72,112,000 shares of the Company's common shares. The conversion rate represents a premium to the market value of Southland's common stock at the time of issuance of the Convertible Debt. As of December 31, 1996, no shares had been issued as a result of debt conversion. The Convertible Debt is subordinate to all existing debt. In addition to the principal amount of the Convertible Debt, the 1996 and 1995 financial statements include interest payable of $563,000 and $638,000 and interest expense of $13,658,000 and $1,332,000, respectively, related to the Convertible Debt. 10. PREFERRED STOCK The Company has 5,000,000 shares of preferred stock authorized for issuance. Any preferred stock issued will have such rights, powers and preferences as determined by the Company's Board of Directors. 11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The disclosure of the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies as indicated below. 55 The carrying amounts of cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses and other liabilities are reasonable estimates of their fair values. Letters of credit are included in the estimated fair value of accrued expenses and other liabilities. The carrying amounts and estimated fair values of other financial instruments at December 31, 1996, are listed in the following table:
Carrying Estimated Amount Fair Value ---------- ---------- (Dollars in Thousands) Bank Debt $ 225,000 $ 225,000 Commercial Paper 398,055 398,055 Debentures 608,307 355,911 Yen Loan 201,447 226,071 Cityplace Term Loan 282,606 289,015 Convertible Debt - not practicable to estimate fair value 300,000 -
- The methods and assumptions used in estimating the fair value for each of the classes of financial instruments presented in the table above are as follows: The carrying amount of the Bank Debt approximates fair value because the interest rates are variable. - Commercial paper borrowings are sold at market interest rates and have an average remaining maturity of less than 26 days. Therefore, the carrying amount of commercial paper is a reasonable estimate of its fair value. The guarantee of the commercial paper by IY is an integral part of the estimated fair value of the commercial paper borrowings. - The fair value of the Debentures is estimated based on December 31, 1996, bid prices obtained from investment banking firms where traders regularly make a market for these financial instruments. The carrying amount of the Debentures includes $174,106,000 of SFAS No. 15 Interest. - The fair value of the Yen Loan is estimated by calculating the present value of the future yen cash flows at current interest and exchange rates. - The fair value of the Cityplace Term Loan is estimated by calculating the present value of the future cash flows at current interest rates. - It is not practicable, without incurring excessive costs, to estimate the fair value of the Convertible Debt at December 31, 1996. The fair value would be the sum of the fair values assigned to both an interest rate and an equity component of the debt by a valuation firm. 56 12. EMPLOYEE BENEFIT PLANS PROFIT SHARING PLANS - The Company maintains profit sharing plans for its U.S. and Canadian employees. In 1949, the Company excluding its Canadian subsidiary ("Southland") adopted The Southland Corporation Employees' Savings and Profit Sharing Plan (the "Savings and Profit Sharing Plan") and, in 1970, the Company's Canadian subsidiary adopted the Southland Canada, Inc., Profit Sharing Pension Plan. These plans provide retirement benefits to eligible employees. Contributions to the Savings and Profit Sharing Plan, a 401(k) defined contribution plan, are made by both the participants and Southland. Southland contributes the greater of approximately 10% of its net earnings or an amount determined by Southland's president. Net earnings as amended during 1995 are calculated without regard to the contribution to the Savings and Profit Sharing Plan, federal income taxes, gains from debt repurchases and refinancings and, at the discretion of Southland's president, income from accounting changes. The contribution by Southland is generally allocated to the participants on the basis of their individual contribution and years of participation in the Savings and Profit Sharing Plan. The provisions of the Southland Canada, Inc., Profit Sharing Pension Plan are similar to those of the Savings and Profit Sharing Plan. Total contributions to these plans for the years ended December 31, 1996, 1995 and 1994 were $14,069,000, $11,318,000 and $10,513,000, respectively, and are included in OSG&A. POSTRETIREMENT BENEFITS - The Company's group insurance plan (the "Insurance Plan") provides postretirement medical and dental benefits for all retirees that meet certain criteria. Such criteria include continuous participation in the Insurance Plan ranging from 10 to 15 years depending on hire date, and the sum of age plus years of continuous service equal to at least 70. The Company contributes toward the cost of the Insurance Plan a fixed dollar amount per retiree based on age and number of dependents covered, as adjusted for actual claims experience. All other future costs and cost increases will be paid by the retirees. The Company continues to fund its cost on a cash basis; therefore, no plan assets have been accumulated. Net periodic postretirement benefit costs for 1996, 1995 and 1994 include the following components:
1996 1995 1994 --------- --------- --------- (Dollars in Thousands) Service cost $ 595 $ 585 $ 752 Interest cost 1,496 1,678 1,732 Amortization of unrecognized gain (498) (583) (61) --------- --------- --------- $ 1,593 $ 1,680 $ 2,423 ========= ========= ========= 57
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 7% at December 31, 1996 and 1995, respectively. Components of the accrual recorded in the Company's consolidated balance sheets are as follows:
December 31 -------------------------- 1996 1995 ---- ---- (Dollars in Thousands) Accumulated Postretirement Benefit Obligation: Retirees $ 11,174 $ 11,960 Active employees eligible to retire 4,772 5,234 Other active employees 5,251 6,328 ----------- ----------- 21,197 23,522 Unrecognized gains 7,627 5,198 ----------- ----------- $ 28,824 $ 28,720 =========== ===========
STOCK INCENTIVE PLAN - The Southland Corporation 1995 Stock Incentive Plan (the "Stock Incentive Plan") was adopted by the Company in October 1995 and approved by the shareholders in April 1996. The Stock Incentive Plan provides for the granting of stock options, stock appreciation rights, performance shares, restricted stock, restricted stock units, bonus stock and other forms of stock- based awards and authorizes the issuance of up to 41 million shares over a ten-year period. In October 1996 and 1995, respectively, 3,977,640 and 3,863,600 options were granted with an exercise price of $3.00 and $3.1875 per share, which was equal to the fair market value on the date of grant, to certain key employees and officers of the Company. The options granted in both 1996 and 1995 are exercisable in five equal installments beginning one year after grant date with possible acceleration thereafter based upon certain improvements in the price of a share of Southland's common stock. 58 The Company is accounting for the Stock Incentive Plan under the provisions of APB No. 25 (see Note 1) and, accordingly, no compensation cost has been recognized. If compensation cost had been determined based on the fair value at the grant date for awards under this plan consistent with the method prescribed by SFAS No. 123, the Company's net earnings and earnings per share for the years ended December 31, 1996 and 1995, would have been reduced to the pro forma amounts indicated in the table below:
1996 1995 -------- ---------- (Dollars in Thousands, Except Per-Share Data) Net earnings As reported $89,476 $270,763 Pro forma 88,520 270,610 Primary and fully diluted earnings per common share As reported $.20 $.65 Pro forma .20 .65
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the options granted: for both 1996 and 1995, expected volatility of 55.49%, expected life of five years and no dividend yields, combined with risk-free interest rates of 6.39% in 1996 and 5.89% in 1995. A summary of the status of the Stock Incentive Plan as of December 31, 1996 and 1995, and changes during the years ending on those dates, is presented below:
1996 1995 ------------------------- ------------------------- Shares Weighted-Average Shares Weighted-Average Fixed Options (000's) Exercise Price (000's) Exercise Price --------------------------------- ------- ---------------- ------- ---------------- Outstanding at beginning of year 3,864 $3.1875 - - Granted 3,978 3.0000 3,864 $3.1875 Exercised - - - - Forfeited (224) 3.1875 - - -------- ------- Outstanding at end of year 7,618 $3.0895 3,864 $3.1875 ======== ======= Options exercisable at year-end 728 $3.1875 - - Weighted-average fair value of options granted during the year $1.6413 $1.7243 59
Options Outstanding Options Exercisable ------------------------------------------------------------ ----------------------------- Weighted Options Average Weighted Options Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price --------------- ----------- ---------------- -------------- ------------ --------------- $3.0000 3,977,640 9.75 $3.0000 - - 3.1875 3,640,000 8.81 3.1875 728,000 $3.1875 ----------- ----------- 3.0000 - 3.1875 7,617,640 9.30 3.0895 728,000 3.1875 =========== ===========
EQUITY PARTICIPATION PLAN - In 1988, the Company adopted The Southland Corporation Equity Participation Plan (the "Participation Plan"), which provides for the granting of both incentive options and nonstatutory options and the sale of convertible debentures to certain key employees and officers of the Company. In the aggregate, not more than 3,529,412 shares of common stock of the Company can be issued pursuant to the Participation Plan; however, the Company has no present intent to grant additional options or debentures under this plan. The shares available for issuance under the Participation Plan are reduced by the number of shares issued under the Grant Stock Plan, which is described in a following paragraph. Options were granted in 1988 at the fair market value on the date of grant, which is the same as the conversion price provided in the debentures. All options and convertible debentures that were vested became exercisable as of December 31, 1994, pursuant to the terms of the Participation Plan. At December 31, 1996, there were vested options outstanding to acquire 923,500 shares, of which 885,000 were at $7.50 per share and 38,500 were at $7.70 per share, and vested debentures outstanding that were convertible at $7.50 per share into 5,000 shares. During 1996, options to acquire 25,000 shares expired for those participants who are no longer with the Company. All options expire, and the debentures mature, no later than December 31, 1997. GRANT STOCK PLAN - In 1988, the Company adopted The Southland Corporation Grant Stock Plan (the "Stock Plan"). Under the provisions of the Stock Plan, up to 750,000 shares of common stock are authorized to be issued to certain key employees and officers of the Company. Shares issued under the Stock Plan decrease the number of shares that can be issued pursuant to the Participation Plan. The stock is fully vested upon the date of issuance. As of December 31, 1996, 480,844 shares had been issued pursuant to the Stock Plan. No shares have been issued since 1988, and the Company has no present intent to grant additional shares. 13.LEASES LEASES - Certain property and equipment used in the Company's business is leased. Generally, real estate leases are for primary terms from 14 to 20 years with options to renew for additional periods, and equipment leases are for terms from one to ten years. The leases do not contain restrictions that have a material effect on the Company's operations. 60 The composition of capital leases reflected as property and equipment in the consolidated balance sheets is as follows:
December 31 -------------------------- 1996 1995 ---- ---- (Dollars in Thousands) Buildings $ 106,358 $ 116,412 Equipment 142 225 ----------- ----------- 106,500 116,637 Accumulated amortization (71,019) (77,428) ----------- ----------- $ 35,481 $ 39,209 =========== ===========
The present value of future minimum lease payments for capital lease obligations is reflected in the consolidated balance sheets as long- term debt. The amount representing imputed interest necessary to reduce net minimum lease payments to present value has been calculated generally at the Company's incremental borrowing rate at the inception of each lease. Future minimum lease payments for years ending December 31 are as follows:
Capital Operating Leases Leases ---------- ----------- (Dollars in Thousands) 1997 $ 20,593 $ 124,246 1998 19,042 105,101 1999 17,717 83,095 2000 15,816 64,790 2001 13,677 49,413 Thereafter 52,548 164,390 ---------- ---------- Future minimum lease payments 139,393 $ 591,035 =========== Estimated executory costs (288) Amount representing imputed interest (56,272) ---------- Present value of future minimum lease payment $ 82,833 ==========
61 Minimum noncancelable sublease rental income to be received in the future, which is not included above as an offset to future payments, totals $19,676,000 for capital leases and $17,381,000 for operating leases. Rent expense on operating leases for the years ended December 31, 1996, 1995 and 1994, totaled $132,760,000, $125,456,000 and $120,850,000, respectively, including contingent rent expense of $9,438,000, $8,508,000 and $8,576,000, but reduced by sublease rent income of $7,175,000, $7,296,000 and $7,858,000. Contingent rent expense on capital leases for the years ended December 31, 1996, 1995 and 1994, was $2,088,000, $2,399,000 and $2,822,000, respectively. Contingent rent expense is generally based on sales levels or changes in the Consumer Price Index. LEASES WITH THE SAVINGS AND PROFIT SHARING PLAN - At December 31, 1996, the Savings and Profit Sharing Plan owned 152 stores leased to the Company under capital leases and 641 stores leased to the Company under operating leases at rentals which, in the opinion of management, approximated market rates at the date of lease. In addition, 38, 67 and 43 properties were sold by the Savings and Profit Sharing Plan to third parties in 1996, 1995 and 1994, respectively, and at the same time, any related leases with the Company were either cancelled or assigned to the new owner. Included in the consolidated financial statements are the following amounts related to leases with the Savings and Profit Sharing Plan:
December 31 ------------------------ 1996 1995 ---- ---- (Dollars in Thousands) Buildings (net of accumulated amortization of $6,718 and $8,853) $ 1,144 $ 2,041 ========= ========== Capital lease obligations (net of current portion of $1,200 and $1,664) $ 1,055 $ 2,310 ========= =========
Years Ended December 31 --------------------------- 1996 1995 1994 ---- ---- ---- (Dollars in Thousands) Rent expense under operating leases and amortization of capital lease assets $25,670 $26,850 $28,195 ======= ======= ======= Imputed interest expense on capital lease obligations $ 299 $ 483 $ 696 ======= ======= ======= Capital lease principal payments included in principal payments under long-term debt agreements $ 1,580 $ 1,818 $ 2,075 ======= ======= =======
62 14. COMMITMENTS AND CONTINGENCIES MCLANE COMPANY, INC. - In connection with the 1992 sale of distribution and food center assets to McLane, the Company and McLane entered into a ten-year service agreement under which McLane is making its distribution services available to 7-Eleven stores in the United States. If the Company does not fulfill its obligation to McLane during this time period, the Company must reimburse McLane on a pro-rata basis for the transitional payment received at the time of the transaction. The original payment received of $9,450,000 in 1992 is being amortized to cost of goods sold over the life of the agreement. The Company has exceeded the minimum annual purchases each year and expects to exceed the minimum required purchase levels in future years. CITGO PETROLEUM CORPORATION - In 1986, the Company entered into a 20-year product purchase agreement with Citgo to buy specified quantities of gasoline at market prices. These prices are determined pursuant to a formula based on the prices posted by gasoline wholesalers in the various market areas where the Company purchases gasoline from Citgo. Minimum required annual purchases under this agreement are generally the lesser of 750 million gallons or 35% of gasoline purchased by the Company for retail sale. The Company has exceeded the minimum required annual purchases each year and expects to exceed the minimum required annual purchase levels in future years. ENVIRONMENTAL - In December 1996, the Company adopted the American Institute of Certified Public Accountants' recently issued Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities," which is required for fiscal years beginning after December 15, 1996. SOP No. 96-1 provides guidance on specific accounting issues that are present in the recognition, measurement and disclosure of environmental remediation liabilities. In December 1988, the Company closed its chemical manufacturing facility in New Jersey. As a result, the Company is required to conduct environmental remediation at the facility and has submitted a clean-up plan to the New Jersey Department of Environmental Protection (the "State"), which provides for remediation of the site for approximately a three-to-five-year period, as well as continued groundwater treatment for a projected 20-year period. While the Company has recently received conditional approval of its clean-up plan, the Company must supply additional information to the State before the plan can be finalized. The Company has recorded undiscounted liabilities representing its best estimates of the clean-up costs of $30,900,000 and $37,824,000 at December 31, 1996 and 1995, respectively. Of this amount, $25,246,000 and $31,660,000 are included in deferred credits and other liabilities and the remainder in accrued expenses and other liabilities for the respective years. In 1991, the Company and the former owner of the facility executed a final settlement pursuant to which the former owner agreed to pay a substantial portion of the clean-up costs. Based on the terms of the settlement agreement and the financial resources of the former owner, the Company has recorded receivable amounts of $18,227,000 and $22,035,000 at December 31, 1996 and 1995, respectively. Of this amount, $14,861,000 and $18,381,000 are included in other assets and the remainder in accounts receivable for 1996 and 1995, respectively. 63 Additionally, the Company accrues for the anticipated future costs and the related probable state reimbursement amounts for remediation activities at its existing and previously operated gasoline store sites where releases of regulated substances have been detected. At December 31, 1996 and 1995, respectively, the Company's estimated undiscounted liability for these sites was $46,508,000 and $63,669,000, of which $28,508,000 and $29,174,000 are included in deferred credits and other liabilities and the remainder is included in accrued expenses and other liabilities. These estimates were based on the Company's prior experience with gasoline sites and its consideration of such factors as the age of the tanks, location of tank sites and experience with contractors who perform environmental assessment and remediation work. The Company anticipates that substantially all of the future remediation costs for detected releases at these sites as of December 31, 1996, will be incurred within the next five years. Under state reimbursement programs, the Company is eligible to receive reimbursement for a portion of future remediation costs, as well as remediation costs previously paid. Accordingly, the Company has recorded net receivable amounts of $50,025,000 and $59,652,000 for the estimated probable state reimbursements, of which $39,025,000 and $45,653,000 are included in other assets and the remainder in accounts receivable for 1996 and 1995, respectively. The Company increased the estimated net environmental cost reimbursements at the end of 1996 by approximately $7,500,000 as a result of completing a review of state reimbursement programs. In assessing the probability of state reimbursements, the Company takes into consideration each state's fund balance, revenue sources, existing claim backlog, status of clean-up activity and claim ranking systems. As a result of these assessments, the recorded receivable amounts are net of allowances of $9,459,000 and $13,705,000 for 1996 and 1995, respectively. While there is no assurance of the timing of the receipt of state reimbursement funds, based on the Company's experience, the Company expects to receive the majority of state reimbursement funds, except from California, within one to three years after payment of eligible remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. The Company estimates that it may take one to eight years to receive reimbursement funds from California. Therefore, the portion of the recorded receivable amounts that relate to sites where remediation activities have been completed have been discounted at 7% to reflect their present value. As a result of the adoption of SOP No. 96-1, the 1996 recorded receivable amount is also net of a discount of $6,398,000. The estimated future remediation expenditures and related state reimbursement amounts could change within the near future as governmental requirements and state reimbursement programs continue to be implemented or revised. 64 15. INCOME TAXES The components of earnings before income taxes and extraordinary gain are as follows:
Years Ended December 31 ------------------------------------ 1996 1995 1994 --------- --------- -------- (Dollars in Thousands) Domestic (including royalties of $63,536, $59,044 and $54,917 from area license agreements in foreign countries) $ 124,316 $ 98,775 $ 70,615 Foreign 6,508 2,754 2,881 --------- --------- --------- $ 130,824 $ 101,529 $ 73,496 ========== ========== ==========
The provision for income taxes in the accompanying Consolidated Statements of Earnings consists of the following:
Years Ended December 31 ------------------------------- 1996 1995 1994 -------- -------- --------- (Dollars in Thousands) Current: Federal $ 5,054 $ 8,251 $ 6,799 Foreign 10,704 8,968 8,515 State 1,800 985 350 Tax benefit of operating loss carryforward - - (4,164) -------- -------- --------- Subtotal 17,558 18,204 11,500 Deferred: Provision 23,790 60,709 - Beginning of year valuation allowance adjustment - (144,978) (30,000) -------- --------- --------- Subtotal 23,790 (84,269) (30,000) -------- --------- --------- Income taxes before extraordinary gain $ 41,348 $(66,065) $(18,500) ======== ========= =========
Included in Shareholders' Equity at December 31, 1996 and 1995, respectively, are $6,882,000 and $5,208,000 of income taxes provided on unrealized gains on marketable securities. 65 Reconciliations of income taxes before extraordinary gain at the federal statutory rate to the Company's actual income taxes provided are as follows:
Years Ended December 31 -------------------------------- 1996 1995 1994 -------- -------- --------- (Dollars in Thousands) Taxes at federal statutory rate $ 45,788 $ 35,535 $ 25,724 State income taxes, net of federal income tax benefit 1,170 640 228 Foreign tax rate difference 1,077 886 1,212 Net change in valuation allowance excluding the tax effect of the 1995 extraordinary item - (108,632) (47,943) Settlement of IRS examination (7,261) - - Other 574 5,506 2,279 --------- --------- --------- $ 41,348 $(66,065) $(18,500) ========= ========= =========
The valuation allowance for deferred tax assets decreased in 1995 by $174,589,000. The decrease consisted of a $90,320,000 decrease resulting from changes in the Company's gross deferred tax assets and liabilities and an $84,269,000 decrease resulting from a change in estimate regarding the realizability of the Company's deferred tax assets. Based on the Company's trend of positive earnings during the past three years and future expectations, the Company determined that it is more likely than not that its deferred tax assets will be fully realized. In 1994, the valuation allowance decreased by $42,078,000 due to changes in the Company's gross deferred tax assets and liabilities and the realization of $30,000,000 of the Company's net deferred tax asset. 66 Significant components of the Company's deferred tax assets and liabilities are as follows:
December 31 ------------------------ 1996 1995 ---------- ---------- (Dollars in Thousands) Deferred tax assets: SFAS No. 15 interest $ 75,037 $ 81,038 Compensation and benefits 42,573 44,592 Accrued insurance 39,494 43,270 Accrued liabilities 35,677 39,665 Tax credit carryforwards 8,924 14,834 Debt issuance costs 8,059 6,820 Other 5,056 5,560 ---------- --------- Subtotal 214,820 235,779 Deferred tax liabilities: Area license agreements (77,811) (85,164) Property and equipment (41,636) (32,853) Other (11,777) (8,701) ---------- - -------- Subtotal (131,224) (126,718) ---------- ---------- Net deferred taxes $ 83,596 $ 109,061 ========== ==========
The Company's net deferred tax asset is recorded in other current assets and other assets (see Notes 4 and 6). At December 31, 1996, the Company had approximately $8,924,000 of alternative minimum tax ("AMT") credit carryforwards. The AMT credits have no expiration date. 67 16. EARNINGS PER COMMON SHARE Primary earnings per common share is computed by dividing net earnings, plus Convertible Debt interest (see Note 9) net of tax benefits, by the weighted average number of common shares and common share equivalents outstanding during each year. The exercise of outstanding stock options would not result in a dilution of earnings per share. 17. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1996 and 1995 is as follows:
YEAR ENDED DECEMBER 31, 1996: First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ------ (Dollars in Millions, Except Per-Share Data) Net sales $1,563 $1,792 $1,840 $1,674 $6,869 Gross profit 442 525 541 468 1,976 Income taxes (benefit) 4 20 25 (8) 41 Net earnings 5 30 38 16 89 Primary and fully diluted earnings per common share .02 .07 .08 .04 .20
68
YEAR ENDED DECEMBER 31, 1995: First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ------- (Dollars in Millions, Except Per-Share Data) Net sales $1,545 $1,750 $1,826 $1,625 $6,746 Gross profit 449 512 554 468 1,983 Income taxes (benefit) 2 9 12 (89) (66) Earnings (loss) before extraordinary gain (1) 37 50 82 168 Net earnings (loss) (1) 37 50 185 271 Primary and fully diluted earnings per common share before extraordinary gain - .09 .12 .19 .40
The second quarter of 1995 includes a $4,679,000 environmental reimbursement related to outstanding litigation. The fourth quarter of 1995 includes a $103,169,000 extraordinary gain on redemption of debt related to the refinancing of certain debt securities (see Note 8), $84,269,000 from realization of a deferred tax asset (see Note 15) and $13,415,000 of expenses accrued for severance and related costs (see Note 7). 69 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of The Southland Corporation We have audited the accompanying consolidated balance sheets of The Southland Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Southland Corporation and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Dallas, Texas February 18, 1997 70 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information required in response to this Item is incorporated by reference from the Registrant's Definitive Proxy Statement for the April 23, 1997 Annual Meeting of Shareholders. See also "Executive Officers of the Registrant" beginning on page 19, herein. ITEM 11. EXECUTIVE COMPENSATION. The information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the April 23, 1997 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the April 23, 1997 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this Item is incorporated herein by reference to the Registrant's Definitive Proxy Statement for the April 23, 1997 Annual Meeting of Shareholders. 71 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1. The Southland Corporation and Subsidiaries' Financial Statements for the three years in the period ended December 31, 1996 are included herein:
Page Consolidated Balance Sheets - December 31,1996 and 1995 42 Consolidated Statements of Earnings - Years Ended December 31, 1996, 1995 and 1994 43 Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31, 1996, 1995 and 1994 44 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 45 Notes to Consolidated Financial Statements 46 Independent Auditors' Report of Coopers & Lybrand L.L.P. 70
2. The Southland Corporation and Subsidiaries' Financial Statement Schedule, included herein.
Page Independent Auditors' Report of Coopers & Lybrand L.L.P. on Financial Statement Schedule 76 II - Valuation and Qualifying Accounts 77
All other schedules have been omitted because they are not applicable, are not required, or the required information is shown in the financial statements or notes thereto. 3. The following is a list of the Exhibits required to be filed by Item 601 of Regulation S-K.
EXHIBIT NO. 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.(1) Debtor's Plan of Reorganization, dated October 24, 1990, as filed in the United States Bankruptcy Court, Northern District of Texas, Dallas Division, and Addendum to Debtor's Plan of Reorganization dated January 23, 1991, incorporated by reference to The Southland Corporation's Current Report on Form 8-K dated January 23, 1991, File Numbers 0-676 and 0-16626, Exhibits 2.1 and 2.2. 2.(2) Stock Purchase Agreement, dated as of January 25, 1991, by and among The Southland Corporation, Ito-Yokado Co., Ltd. and Seven-Eleven Japan Co., Ltd., incorporated by reference to The Southland Corporation's Current Report on Form 8 K dated January 23, 1991, File Numbers 0-676 and 0-16626, Exhibit 2.3. 2.(3) Confirmation Order issued on February 21, 1991 by the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, incorporated by reference to The Southland Corporation's Current Report on Form 8-K dated March 4, 1991, File Numbers 0-676 and 0-16626, Exhibit 2.1.
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3. ARTICLES OF INCORPORATION AND BYLAWS. 3.(1) Second Restated Articles of Incorporation of The Southland Corporation, as amended through March 5, 1991, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 3.(1). 3.(2) Bylaws of The Southland Corporation, restated as amended through April 24, 1996, incorporated by reference to File Nos. 0-676 and 0-16626, The Southland Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, Exhibit 3. 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES (SEE EXHIBITS (3).(1) AND (3).(2), ABOVE). 4.(i)(1) Specimen Certificate for Common Stock, $.0001 par value.* Tab 1 4.(i)(2) Form of Voting Agreement and Stock Transfer Restriction and Buy-Back Agreement relating to shares of common stock, $.01 par value, issued pursuant to Grant Stock Plan, incorporated by reference to Registration Statement on Form S-8, Reg. No. 33 25327, Exhibits 4.5 and 4.4. 4.(i)(3) Shareholders Agreement dated as of March 5, 1991, among The Southland Corporation, Ito Yokado Co., Ltd., IYG Holding Company, Thompson Brothers, L.P., Thompson Capital Partners, L.P., The Hayden Company, The Williamsburg Corporation, Four J Investment, L.P., The Philp Co., participants in the Company's Grant Stock Plan who are signatories thereto and certain limited partners of Thompson Capital Partners, L.P. who are signatories thereto, incorporated by reference to Schedule 13D filed by Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG Holding Company, Exhibit A. 4.(i)(4) First Amendment, dated December 30, 1992, to Shareholders Agreement, dated as of March 5, 1991, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for year ended December 31, 1992, Exhibit 4.(i)(5), Tab 1. 4.(i)(5) Second Amendment, dated February 28, 1996, to Shareholders Agreement, dated as of March 5, 1991, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31, 1995, Exhibit 4.(I)(6), Tab 1. 4.(ii)(1) Indenture, including Debenture, with Ameritrust Company National Association, as trustee, providing for 5% First Priority Senior Subordinated Debentures due December 15, 2003, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 4.(ii)(2). 4.(ii)(2) Indenture, including Debentures, with The Riggs National Bank of Washington, D.C., as trustee providing for 4 1/2% Second Priority Senior Subordinated Debentures (Series A) due June 15, 2004, 4% Second Priority Senior Subordinated Debentures (Series B) due June 15, 2004, and 12% Second Priority Senior Subordinated Debentures (Series C) due June 15, 2009, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 4.(ii)(3). 4.(ii)(3) Form of 4 1/2% Convertible Quarterly Income Debt Securities due 2010, incorporated by reference to File Nos. 0-676 and 0-16626, Form 8-K, dated November 21, 1995, Exhibit 4(v)-1. 9. VOTING TRUST AGREEMENT. NONE. (EXCEPT SEE EXHIBITS 4.(i)(2) AND 4.(i)(3), ABOVE.)
73
10. MATERIAL CONTRACTS. 10.(i)(1) Stock Purchase Agreement among The Southland Corporation, Ito-Yokado Co., Ltd. and Seven-Eleven Japan Co., Ltd., dated as of January 25, 1991. See Exhibit 2.(2), above. 10.(i)(2) Credit Agreement, dated as of February 27, 1997, among The Southland Corporation, the financial institutions party thereto as Senior Lenders, the financial institutions party thereto as Issuing Banks, Citibank, N.A., as Administrative Agent, and The Sakura Bank, Limited, New York Branch, as Co-Agent.* Tab 2 10.(i)(3) Credit and Reimbursement Agreement by and between Cityplace Center East Corporation, an indirect wholly owned subsidiary of Southland, and The Sanwa Bank Limited, Dallas Agency, dated February 15, 1987, relating to $290 million of 7 7/8% Notes due February 15, 1995, issued by Cityplace Center East Corporation (to which Southland is not a party and which is non-recourse to Southland), incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1986, Exhibit 10(i)(6). 10.(i)(4) Third Amendment to Credit and Reimbursement Agreement, dated as of February 10, 1995, by and between The Sanwa Bank, Limited, Dallas Agency and Cityplace Center East Corporation, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10(i)(4). 10.(i)(5) Amended and Restated Lease Agreement between Cityplace Center East Corporation and The Southland Corporation relating to The Southland Tower, Cityplace Center, Dallas, Texas, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 10.(I)(7). 10.(i)(6) Limited Recourse Financing for The Southland Corporation relating to royalties from Seven Eleven (Japan) Company, Ltd. in the amount of Japanese Yen 41,000,000,000, dated March 21, 1988, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for year ended December 31, 1988, Exhibit 10.(i)(6). 10.(i)(7) Issuing and Paying Agency Agreement, dated as of August 17, 1992, relating to commercial paper facility, Form of Note, Indemnity and Reimbursement Agreement and amendment thereto and Guarantee.* 10.(ii)(B)(1) Standard Form of 7-Eleven Store Franchise Agreement, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31, 1996, Exhibit 10(ii)(B)(1), Tab 3. 10.(iii)(A)(1) The Southland Corporation Executive Protection Plan Summary, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10.(iii)(A)(3). 10.(iii)(A)(2) The Southland Corporation Officers' Deferred Compensation Plan, sample agreement, incorporated by reference to The Southland Corporation's Annual Report on Form 10 K for the year ended December 31, 1993, Exhibit 10.(iii)(A)(4). 10.(iii)(A)(3) Bonus Deferral Agreement relating to deferral of Bonus Payment, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1988, Exhibit 10(iii)(A)(9), Tab 7. 10.(iii)(A)(4) 1997 Performance Plan.* Tab 3
74
10.(iii)(A)(5) 1995 Stock Incentive Plan, incorporated by reference to Registration No. 33-63617, Exhibit 4.10. 10.(iii)(A)(6) Form of Award Agreement granting options to purchase Common Stock, dated October 23, 1995, under the 1995 Stock Incentive Plan incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31, 1996, Exhibit 10(iii)(A)(10), Tab 4. 10.(iii)(A)(7) Form of Award Agreement granting options to purchase Common Stock, dated October 1, 1996, under the 1995 Stock Incentive Plan.* Tab 4 10.(iii)(A)(8) Consultant's Agreement between The Southland Corporation and Timothy N. Ashida, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1991, Exhibit 10(iii)(A)(10), Tab 4. 10.(iii)(A)(9) First Amendment to Consultant's Agreement between The Southland Corporation and Timothy N. Ashida, effective as of May 1, 1995.* Tab 5 11. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS.CALCULATION OF EARNINGS PER SHARE.* Tab 6 21. SUBSIDIARIES OF THE REGISTRANT AS OF MARCH 1997.* Tab 7 23. CONSENTS OF EXPERTS AND COUNSEL.Consent of Coopers & Lybrand L.L.P., Independent Auditors.* Tab 8 27. FINANCIAL DATA SCHEDULE.FILED ELECTRONICALLY ONLY, NOT ATTACHED TO PRINTED REPORTS. ________________________ *Filed or furnished herewith
(b) Reports on Form 8-K. During the fourth quarter of 1996, the Company filed no reports on Form 8-K. (c) The exhibits required by Item 601 of Regulation S-K are attached hereto or incorporated by reference herein. (d)(3) The financial statement schedule for The Southland Corporation and Subsidiaries is included herein, as follows: Schedule II - The Southland Corporation and Subsidiaries Page Valuation and Qualifying Accounts(for the Years Ended December 31, 1996; 1995 and 1994). 77 75 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of The Southland Corporation Our report on the consolidated financial statements of The Southland Corporation and Subsidiaries is included on page 70 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 72 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Dallas, Texas February 18, 1997 76
SCHEDULE II THE SOUTHLAND CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS) Additions ----------------------- Balance at Charged to Charged to Balance at beginning costs and other end of period expenses accounts Deductions of period --------- ----------- ----------- ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1996.................... $ 4,858 $ 2,153 $ - $ (2,002)(1) $ 5,009 Year ended December 31, 1995.................... 6,790 931 - (2,863)(1) 4,858 Year ended December 31, 1994.................... 7,822 307 153 (2) (1,492)(1) 6,790 Allowance for environmental cost reimbursements: Year ended December 31, 1996.................... 13,705 - - (4,246) 9,459 Year ended December 31, 1995.................... 18,890 - - (5,185)(3) 13,705 Year ended December 31, 1994.................... 12,529 6,361 - - 18,890 (1) Uncollectible accounts written off, net of recoveries. (2) Represents amounts charged to the reserve for the sale and closing of the distribution and food centers. (3) Includes an adjustment due to the reassessment of the estimated reimbursement collectibility.
77 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SOUTHLAND CORPORATION (Registrant) March 25, 1997 /s/ Clark J. Matthews, II ------------------------- Clark J. Matthews, II President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
TITLE DATE /s/ Masatoshi Ito Chairman of the Board and Director March 25, 1997 - -------------------------- Masatoshi Ito /s/ Toshifumi Suzuki Vice Chairman of the Board and Director March 25, 1997 - -------------------------- Toshifumi Suzuki /s/ Clark J. Matthews, II President and Chief Executive Officer and Director) March 25, 1997 - -------------------------- (Principal Executive Officer) Clark J. Matthews, II /s/ James W. Keyes Executive Vice President and Chief Financial Officer March 25, 1997 - -------------------------- (Principal Financial Officer) James W. Keyes /s/ Donald E. Thomas Controller March 25, 1997 - -------------------------- (Principal Accounting Officer) Donald E. Thomas /s/ Yoshitami Arai Director March 25, 1997 - -------------------------- Yoshitami Arai /s/ Timothy N. Ashida Director March 25, 1997 - -------------------------- Timothy N. Ashida /s/ Jay W. Chai Director March 25, 1997 - -------------------------- Jay W. Chai /s/ Gary J. Fernandes Director March 25, 1997 - -------------------------- Gary J. Fernandes /s/ Masaaki Kamata Director March 25, 1997 - -------------------------- Masaaki Kamata /s/ Kazuo Otsuka Director March 25, 1997 - -------------------------- Kazuo Otsuka /s/ Asher O. Pacholder Director March 25, 1997 - -------------------------- Asher O. Pacholder /S/Nobutake Sato Director March 25, 1997 - -------------------------- Nobutake Sato 78
EX-4.(I)(1) 2 SPECIMEN CERTIFICATE FOR COMMON STOCK Exhibit 4(i)(1) SPECIMEN CERTIFICATE FOR THE SOUTHLAND CORPORATION COMMON STOCK, $.0001 PAR VALUE The front of the certificate: The left one-third of the certificate is engraved with a geometric pattern and is colored various densities of orange. In this area there are four square boxes, one in each corner, that contain the 7-ELEVEN logo. A rectangular box in the center of this area contains The Southland Corporation logo. The center portion of the front of the certificate has a gray oval at the left top, with the letter H in it. This is for the certificate number. Underneath that oval are the words "INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS." Next to the oval is a picture of a young woman with various processed food products on her right and fresh food products on her left. To the right of the picture is another gray oval which contains a place for the number of shares. Under that oval are the words "COMMON STOCK $.0001 PAR VALUE." Centered under this are the following: THE SOUTHLAND CORPORATION THIS CERTIFICATE IS TRANSFERABLE IN CHICAGO, ILLINOIS, NEW YORK, NEW YORK, OR DALLAS, TEXAS CUSIP 844436 40 2 SEE REVERSE FOR CERTAIN DEFINITIONS This Certifies that [blank space] is the owner of [blank space]." FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF The Southland Corporation transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. Witness the signatures of its duly authorized officers. Dated: blank space Carol S. Hilburn Clark J. Matthews, II Assistant Secretary President and Chief Executive Officer. Countersigned and Registered: Harris Trust and Savings Bank Transfer Agent and Registrar Tab 1 On the reverse side of the certificate: THE SOUTHLAND CORPORATION No holder of any stock of the Corporation shall be entitled, as a matter of right, to subscribe for or purchase any part of any stock, or securities convertible into stock, which the Corporation is authorized to issue. The Corporation is authorized to issue shares of two classes, Common Stock and Preferred Stock. The Stock represented by this certificate is Common Stock. The designations, preferences, limitations and relative rights of each class of authorized stock are set forth in the Restated Articles of Incorporation, as amended and the Statements of Resolution Establishing Series of Shares, if any, copies of which are on file in the office of the Secretary of State of Texas, and will be furnished to any shareholder without charge upon written request to the Corporation at its principal place of business or registered office. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM as tenants in common TEN ENT as tenants by the entireties JT TEN as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT: _______________Custodian _______________minor under Uniform Gifts to Minors Act ________________ State Additional abbreviations may also be used though not in the above list. For value received, ______________hereby sell, assign and transfer unto _____________Please insert Social Security or other identifying number of assignee, four blank lines-- Please print or typewrite name and address of assignee;___________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint __________________ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises Dated, _________________ ________________________________________ NOTICE, The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatever. SIGNATURE GUARANTEED: 2 EX-10.(I)(2) 3 CREDIT AGREEEMENT - ----------------------------------------------------------------------------- CREDIT AGREEMENT Dated as of February 27, 1997 among THE SOUTHLAND CORPORATION, THE FINANCIAL INSTITUTIONS PARTY HERETO as Senior Lenders, CITIBANK, N.A., as Administrative Agent and THE SAKURA BANK, LIMITED, NEW YORK BRANCH, as Co-Agent - ----------------------------------------------------------------------------- Tab 2 ARTICLE I DEFINITIONS Section Page - ------- ---- 1.01. Certain Defined Terms 1 1.02. References to this Agreement 22 1.03. Computation Of Time Periods 22 1.04. Accounting Terms 23 1.05. Miscellaneous Terms 23 1.06. Other Defined Terms 23 1.07. Schedules and Exhibits 23 ARTICLE II AMOUNTS AND TERMS OF LOANS 2.01. Term Loans 23 2.02. Revolving Loans 25 2.03. Competitive Bid Loans 28 2.04. Use of Proceeds of Loans 31 2.05. Interest on the Loans 31 2.06. Fees 35 2.07. Prepayments of Loans; Reductions and Termination of Commitments 36 2.08. Payments 37 2.09. Special Provisions Governing Eurodollar Rate Loans 40 2.10. Increased Capital 45 2.11. Replacement of Senior Lender in Event of Adverse Condition 45 2.12. Authorized Officers and Agents 46 ARTICLE III THE LETTER OF CREDIT SUBFACILITY 3.01. Obligation to Issue 46 3.02. Types and Amounts 46 3.03. Conditions 47 3.04. Issuance of Facility Letters of Credit 48 3.05. Reimbursement Obligations; Duties of Issuing Banks 48 3.06. Participations 49 3.07. Payment of Reimbursement Obligations 51 3.08. Compensation for Facility Letters of Credit 52 -i-
Section Page - ------- ---- 3.09. Issuing Bank Reporting Requirements 52 3.10. Indemnification; Exoneration 53 3.11. Transitional Provisions 54 3.12. Amount of Letter of Credit Subfacility 54 3.13. Obligations Several 55 ARTICLE IV CONDITIONS TO LOANS AND FACILITY LETTERS OF CREDIT 4.01. Conditions Precedent to Initial Loans and Facility Letters of Credit 55 4.02. Conditions Precedent to All Subsequent Revolving Loans and Facility Letters of Credit 58 4.03. Conditions Precedent to All Subsequent Competitive Bid Loans 59 ARTICLE V REPRESENTATIONS AND WARRANTIES 5.01. Representations and Warranties 60 ARTICLE VI REPORTING COVENANTS 6.01. Financial Statements 68 6.02. Environmental Notices 72 6.03. Other Reports 72 ARTICLE VII AFFIRMATIVE COVENANTS 7.01. Corporate Existence, etc. 73 7.02. Compliance with Laws, etc. 73 7.03. Payment of Taxes and Claims 73 7.04. Maintenance of Properties; Insurance 74 7.05. Inspection of Property; Books and Records; Discussions 74 7.06. Release of Liens 74 ARTICLE VIII NEGATIVE COVENANTS 8.01. Indebtedness 75 -ii-
Section Page - ------- ---- 8.02. Dispositions of Assets; Liens 77 8.03. Investments 79 8.04. Accommodation Obligations 80 8.05. Restricted Junior Payments 81 8.06. Conduct of Business 82 8.07. Transactions with Shareholders and Affiliates 82 8.08. Restriction on Fundamental Changes 83 8.09. ERISA 83 8.10. Commercial Paper Facility 84 8.11. Sales and Leasebacks 84 8.12. Subordinated Indebtedness 84 8.13. Amendment of Charter or By-Laws 85 8.14. Disposal of Subsidiary Stock 85 8.15. Margin Regulations 85 8.16. Interest Rate Contracts 85 ARTICLE IX FINANCIAL COVENANTS 9.01. Senior Indebtedness to EBITDA 86 9.02. Minimum Interest and Rent Coverage Ratio 86 9.03. Minimum Fixed Charge Coverage Ratio 87 ARTICLE X EVENTS OF DEFAULT; RIGHTS AND REMEDIES 10.01. Events of Default 88 10.02. Rights and Remedies 92 ARTICLE XI THE ADMINISTRATIVE AGENT; THE CO-AGENT 11.01. Appointment 93 11.02. Nature of Duties 94 11.03. Rights, Exculpation, etc. 94 11.04. Reliance 95 11.05. Indemnification 95 11.06. The Administrative Agent Individually 95 11.07. Successor Administrative Agent; Resignation of Agent 96 -iii-
Section Page - ------- ---- 11.08. The Co-Agent 96 ARTICLE XII MISCELLANEOUS 12.01. Assignments and Participations 96 12.02. Expenses 98 12.03. Indemnity 99 12.04. Change in Accounting Principles 100 12.05. Set-Off 100 12.06. Ratable Sharing 101 12.07. Amendments and Waivers 102 12.08. Independence of Covenants 102 12.09. Notices 102 12.10. Survival of Warranties and Agreements 103 12.11. Failure of Indulgence Not Waiver; Remedies Cumulative 103 12.12. Advice of Counsel 103 12.13. Marshaling; Payments Set Aside 103 12.14. Severability 104 12.15. Headings 104 12.16. Governing Law 104 12.17. Limitation of Liability 104 12.18. Successors and Assigns; Subsequent Holders of Notes 104 12.19. Consent to Jurisdiction and Service of Process; Waiver of Jury Trail 104 12.20. Counterparts; Effectiveness; Inconsistencies 105 12.21. Foreign Bank Certifications 106 12.22. Performance of Obligations 107 12.23. Limitation on Agreements 107 12.24. Construction 108 12.25. Confidentiality 108 -iv-
EXHIBITS Exhibit 1 - Form of Assignment and Acceptance Exhibit 2 - Terms of Commercial Paper Exhibit 3 - Form of Compliance Certificate Exhibit 4-A - Notice of Borrowing (Term Loans) Exhibit 4-B - Notice of Borrowing (Revolving Loans) Exhibit 4-C - Notice of Borrowing (Competitive Bid Loans) Exhibit 5 - Notice of Conversion/Continuation Exhibit 6 - Form of Term Note Exhibit 7 - Form of Revolving Note Exhibit 8 - Form of Competitive Bid Note Exhibit 9 - [Intentionally omitted] Exhibit 10-A - Form of Opinion of Bryan F. Smith Exhibit 10-B - Form of Opinion of Shearman & Sterling Exhibit 11 - Form of Letter from Coopers & Lybrand Exhibit 12 - Form of Officers' No Default Certificate Exhibit 13 - Form of Southland Canada Subordination Agreement Exhibit 14 - Form of Consent to Assignments and Participations Exhibit 15-A - Form of Certificate Relating to Section 1001 Exemption From United States Withholding Tax Exhibit 15-B - Form of Certificate Relating to Section 1442 Exemption From United States Withholding Tax SCHEDULES Schedule 1.01-A - Existing Indebtedness Schedule 1.01-B - Existing Liens Schedule 3.11 - Existing Letters of Credit Schedule 5.01(iii) - Subsidiaries; Ownership of Capital Stock Schedule 5.01(xi) - Pending Litigation Schedule 5.01(xxii) - Environmental Matters Schedule 5.01(xxiii) - ERISA Matters Schedule 5.01(xxv) - Conflicts v CREDIT AGREEMENT THIS CREDIT AGREEMENT dated as of February 27, 1997 (as amended, restated, supplemented or otherwise modified from time to time, the "Agreement") is entered into by and among THE SOUTHLAND CORPORATION, a Texas corporation ("Southland"), the FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTY HERETO AS "SENIOR LENDERS" OR "ISSUING BANKS" (each as defined below), CITIBANK, N.A. ("Citibank"), in its separate capacity as Administrative Agent for the Senior Lenders and the Issuing Banks hereunder (in such capacity, together with any successor administrative agent appointed pursuant to SECTION 11.07, the "Administrative Agent") and THE SAKURA BANK, LIMITED, NEW YORK BRANCH, as Co-Agent (in such capacity, the "Co-Agent"). ARTICLE I DEFINITIONS 1.01. Certain Defined Terms The following terms used in this Agreement shall have the following meanings (such meanings to be applicable both to the singular and the plural forms of the terms defined): "ACCOMMODATION OBLIGATION", as applied to any Person, shall mean any contractual obligation, contingent or otherwise, of that Person with respect to any Indebtedness or other obligation or liability of another, including, without limitation, any such Indebtedness, obligation or liability directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable, including Contractual Obligations (contingent or otherwise) arising through any agreement to purchase, repurchase, or otherwise acquire such Indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, or other financial condition, or to make payment other than for value received. "ADMINISTRATIVE AGENT" shall have the meaning ascribed to it in the preamble hereto. "AFFILIATE", as applied to any Person, shall mean any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, shall mean the possession, directly or indirectly, of the power to vote five percent (5%) or more of the Securities having voting power for the election of directors of such Person or otherwise to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting Securities or by contract or otherwise. "AGREEMENT" shall have the meaning ascribed to it in the preamble hereto. "ASSIGNMENT AND ACCEPTANCE" shall mean, with respect to any Senior Lender, an Assignment and Acceptance in substantially the form of EXHIBIT 1, executed by each party thereto with blanks appropriately completed. "BASE RATE" shall mean, for any period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the highest of: (i) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; (ii) the sum (adjusted to the nearest one-quarter of one percent (1/4 of 1%) or, if there is no nearest one-quarter of one percent (1/4 of 1%), to the next higher one-quarter of one percent (1/4 of 1%)) of (a) one-half of one percent (1/2 of 1%) per annum PLUS (b) the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average (adjusted to the basis of a year of 365 days) being determined weekly by Citibank on the basis of such rates reported by certificate of deposit dealers to, and published by, the Federal Reserve Bank of New York, or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank; and (iii) the sum of (A) one-half of one percent (0.50%) per annum PLUS (B) the Federal Funds Rate in effect from time to time during such period. "BASE RATE LOANS" shall mean all Loans outstanding which bear interest at a rate determined by reference to the Base Rate as provided in SECTION 2.05(a)(i). "BENEFIT PLAN" shall mean any employee benefit plan defined in Section 3(3) of ERISA, other than a Multiemployer Plan, in respect of which Southland, any Subsidiary of Southland or any ERISA Affiliate is an "employer" as defined in Section 3(5) of ERISA. "BORROWING" shall mean, except as otherwise provided in SECTION 2.09(e)(ii), (i) a borrowing consisting of Term Loans or Revolving Loans of the same Type made on the same day by the Senior Lenders and (ii) a borrowing -2- consisting of simulataneous Competitive Bid Loans from each of the Senior Lenders whose offer to make one or more Competitive Bid Loans as part of such borrowing has been accepted by Southland under the auction bidding procedure described in SECTION 2.03. "BUSINESS DAY" shall mean (i) for all purposes other than as covered by CLAUSE (ii) below, any day excluding Saturday, Sunday, and any day which is a legal holiday under the law of the State of New York or the State of Texas, or is a day on which banking institutions located in either such state are required or authorized by law or other governmental action to close and (ii) with respect to all notices, determinations, fundings and payments in connection with the Eurodollar Rate, any day which is a Business Day described in CLAUSE (i) and which is also a day for trading by and between banks in the London interbank Eurodollar market. "CAPITAL EXPENDITURES" shall mean, for any period, (i) the aggregate of all expenditures (whether paid in cash or accrued as liabilities during that period but excluding that portion deemed as Capital Leases) by Southland and its Subsidiaries during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant or equipment or similar fixed asset accounts reflected in the consolidated balance sheet of Southland and its Subsidiaries, MINUS (ii) the amount of expenditures included in CLAUSE (i) which are accrued during the then current fiscal quarter and the three (3) immediately preceding fiscal quarters of Southland and its Subsidiaries with respect to which the properties relating to such expenditures are subject to sale and leaseback transactions permitted by SECTION 8.01(v)(B) and consummated during such current fiscal quarter. "CAPITAL LEASE", as applied to any Person, shall mean any lease of any property (whether real, personal, or mixed) by that Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "CASH EQUIVALENTS" shall mean (i) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by an agency thereof and backed by the full faith and credit of the United States, in each case maturing within one hundred eighty (180) days after the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one hundred eighty (180) days after the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's (or, if at any time neither S&P nor Moody's shall be rating such obligations, then from such other nationally recognized rating services acceptable to the Administrative Agent) and not listed in Credit Watch published by S&P; (iii) commercial paper, other than commercial paper issued by Southland or any of its Affiliates, maturing no more than one hundred eighty (180) days after the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 or Prime-1 from either S&P or Moody's (or, if at any time neither S&P nor Moody's shall be rating such obligations, then the highest rating from such other -3- nationally recognized rating services as are acceptable to the Administrative Agent); (iv) domestic and Eurodollar certificates of deposit or time deposits or bankers' acceptances maturing within one hundred eighty (180) days after the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia or by any foreign bank which acts through a branch or funding office located in the United States of America and, in any case, having (A) combined capital and surplus of not less than $250,000,000 and (B) a long term debt rating of A or better by S&P or A2 or better by Moody's (or, if at any time neither S&P nor Moody's shall be rating such obligations, then from such other nationally recognized rating services acceptable to the Administrative Agent); (v) overnight investments in an aggregate amount not to exceed $50,000,000 at any one time in money-market funds in which such investments are made by any commercial bank which is an Affiliate of one of the fifty (50) largest bank holding companies in the United States in connection with deposit accounts maintained at such commercial bank; and (vi) investments by Southland Canada, Inc., not exceeding $30,000,000 in the aggregate at any one time, in Canadian Securities of the same type as the Securities described in CLAUSES (i) through (iv). "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C., 9601 ET SEQ., any amendments thereto, any successor statutes and any regulations or guidance promulgated thereunder. "CHANGE OF CONTROL" shall mean the occurrence of either of the following: (i) the Majority Owners shall cease to be the direct or indirect owners, or shall cease to direct the voting and disposition, of (A) at least 50%, in the aggregate, of the outstanding shares of Common Stock and (B) Securities of Southland (or other Securities convertible into such Securities) representing at least 50%, in the aggregate, of the combined voting power of all Securities of Southland entitled to vote in the election of directors (other than Securities having such power only by reason of the happening of a contingency); or (ii) the Majority Owners shall cease to have the power, in the aggregate, to elect at least a majority of the directors on the Board of Directors of Southland, or at any time, the Majority Owners shall not have voted in favor of the election of directors constituting at least a majority of the Board of Directors of Southland. "CITIBANK" shall have the meaning ascribed to it in the preamble hereto. "CITICORP SECURITIES" shall mean Citicorp Securities, Inc., a Delaware corporation. "CO-AGENT" shall have the meaning ascribed to it in the preamble hereto. -4- "COMMERCIAL LETTER OF CREDIT" shall mean any documentary Letter of Credit which is drawable upon presentation of documents evidencing the sale yor shipment of goods purchased by Southland in the ordinary course of its business. "COMMERCIAL PAPER" shall mean (i) commercial paper issued by Southland (A) which is unsecured, (B) which qualifies for the exemption from registration under Section 3(a)(3) of the Securities Act, (C) direct payment of which is fully and unconditionally guaranteed by Ito-Yokado and (D) which is otherwise issued and outstanding on substantially the terms set forth in EXHIBIT 2, together with such other or different terms, and governed by such documents, as are permitted by SECTION 8.10 or otherwise acceptable to the Requisite Senior Lenders and (ii) unsecured Indebtedness for money borrowed (to be used as a backup line for the commercial paper described in CLAUSE (i) above) (A) which is subject to terms, conditions and documentation satisfactory in form and substance to the Requisite Senior Lenders, (B) resulting from advances (if any) which are applied to repay the commercial paper described in CLAUSE (i) above at the maturity thereof and (C) direct payment of which is fully and unconditionally guaranteed by Ito-Yokado. "COMMISSION" shall mean the Securities and Exchange Commission or any Person succeeding to the functions thereof. "COMMITMENT" shall mean, with respect to any Senior Lender, such Senior Lender's Term Loan Commitment and Revolving Credit Commitment as adjusted in accordance with the terms of this Agreement, and "COMMITMENTS" shall mean, collectively, the Term Loan Commitments and Revolving Credit Commitments of all of the Senior Lenders. "COMMON STOCK" shall mean the common stock of Southland, $.0001 par value per share. "COMPETITIVE BID AVAILABILITY" shall have the meaning ascribed to it in SECTION 2.03(a)(i). "COMPETITIVE BID LOAN" shall have the meaning ascribed to it in SECTION 2.03(a)(i). "COMPETITIVE BID NOTE" shall have the meaning ascribed to it in SECTION 2.03(d). "COMPLIANCE CERTIFICATE" shall mean a certificate substantially in the form of EXHIBIT 3 delivered to the Senior Lenders by Southland pursuant to SECTION 6.01(iv)(B). "CONSOLIDATED CASH INTEREST EXPENSE" shall mean, for any period, total interest expense, whether paid or accrued (including the interest component of Capital Leases and cash payments made as interest under the -5- Senior Subordinated Debenture Indentures and accounted for as a reduction of principal pursuant to Statement of Financial Accounting Standards No. 15 of the Financial Accounting Standards Board), of Southland and its Subsidiaries on a consolidated basis, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and net costs under Interest Rate Contracts, but excluding, however, (a) interest expenses not payable in cash (including amortization of discount), all as determined in conformity with GAAP and (b) Past Default Interest. "CONSOLIDATED FIXED CHARGES" shall mean, for any period, the amounts for such period of (i) Consolidated Cash Interest Expense, PLUS (ii) scheduled principal payments on the Term Loans (net of the application of all prepayments not paid during such period with respect to such scheduled principal payments) and scheduled principal payments on all Other Indebtedness (including the principal component of Capital Lease obligations), MINUS (iii) cash payments made as interest under the Senior Subordinated Debenture Indentures and accounted for as a reduction of principal pursuant to Statement of Financial Accounting Standards No. 15 of the Financial Accounting Standards Board. "CONSOLIDATED NET INCOME" shall mean, for any period, the net earnings (or loss) after taxes of Southland and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP. "CONTRACTUAL OBLIGATION", as applied to any Person, shall mean any provision of any Securities issued by that Person or any indenture, mortgage, deed of trust, contract, undertaking, document, instrument or other agreement or instrument to which that Person is a party or by which it or any of its properties is bound, or to which it or any of its properties is subject (including, without limitation, any restrictive covenant affecting such Person or any of its properties). "CURE LOANS" shall have the meaning ascribed to it in SECTION 2.08(b)(iii)(C). "CUSTOMARY PERMITTED LIENS" shall mean (i) Liens (other than Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or charges of any Governmental Authority or claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with the provisions of GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens, other than any Lien imposed under ERISA, imposed by law created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with the provisions of GAAP; -6- (iii) Liens (other than any Lien imposed under ERISA) incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (iv) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded), which do not interfere materially with the ordinary conduct of the business of Southland or its Subsidiaries and which do not materially detract from the value of the property to which they attach or impair the use thereof to Southland or its Subsidiaries; (v) rights of tenants, subtenants, franchisees or parties in possession (other than a debtor in possession, trustee in bankruptcy or receiver in respect of Southland), or options or rights of first refusal, whether pursuant to leases, subleases, franchise agreements, other occupancy agreements or otherwise, if such rights were vested on the Effective Date or created thereafter in the ordinary course of business in transactions permitted under this Agreement; (vi) extensions, renewals or replacements of any Lien referred to in CLAUSES (i) through (v) above, provided that the principal amount of the obligation secured thereby is not increased and that any such extension, renewal or replacement is limited to the property originally encumbered thereby; and (vii) building restrictions, zoning laws and other statutes, laws, rules, regulations, ordinances and restrictions, and any amendments thereto, now or at any time hereafter adopted by any governmental or quasi-Governmental Authority having jurisdiction. "DEFAULTING L/C PARTICIPANT" shall have the meaning ascribed to it in SECTION 3.06(b)(ii). "DEFINED BENEFIT PLAN" shall mean any employee benefit plan defined in Section 3(3) of ERISA, other than a Multiemployer Plan, which is subject to the provisions of Title IV of ERISA and which is, or was at any time during the then five (5) preceding years, maintained for employees of Southland, any Subsidiary of Southland or any ERISA Affiliate. "DOLLARS" and "$" shall mean the lawful money of the United States of America. -7- "EBITDA" shall mean, for any period, the sum of the amounts for such period of (i) Consolidated Net Income, PLUS (ii) depreciation and amortization expense, PLUS (iii) interest expense, PLUS (iv) federal, state and foreign income taxes, PLUS (v) extraordinary losses (and any unusual losses in excess of $5,000,000 arising in or outside of the ordinary course of business not included in the extraordinary losses determined in accordance with GAAP which have been included in the determination of Consolidated Net Income), MINUS (vi) extraordinary gains (and any unusual gains in excess of $5,000,000 arising in or outside of the ordinary course of business not included in extraordinary gains determined in accordance with GAAP which have been included in the determination of Consolidated Net Income). "EFFECTIVE DATE" shall mean the date on which this Agreement shall become effective in accordance with SECTION 12.20. "EMPLOYEE CONVERTIBLE SUBORDINATED DEBENTURES" shall mean Southland's Employee Convertible Subordinated Debentures due December 31, 1997 issued pursuant to that certain Indenture dated as of January 1, 1989 between Southland and The Bank of New York, as trustee. "ENVIRONMENTAL LIEN" shall mean a Lien in favor of any Governmental Authority for (i) any liability under federal or state environmental laws or regulations, or (ii) damages arising from or costs incurred by such Governmental Authority in response to a release or threatened release of a hazardous or toxic waste, substance or constituent, or other substance into the environment. "EQUITY PARTICIPATION PLAN" shall mean the Equity Participation Plan adopted by Southland's board of directors on July 22, 1988, relating to the issuance of options for Southland's common stock and Employee Convertible Subordinated Debentures to certain Southland employees. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, any amendments thereto, any successor statutes and any regulations or guidance promulgated thereunder. "ERISA AFFILIATE" shall mean (i) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as Southland; (ii) a trade or business (whether or not incorporated) which is under common control (within the meaning of Section 414(c) of the Internal Revenue Code) with Southland; and (iii) a member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as Southland, any corporation described in CLAUSE (i) above or any trade or business described in CLAUSE (ii) above. "EURODOLLAR AFFILIATE" shall mean, with respect to each Senior Lender, the Affiliate of such Senior Lender set forth below such Senior -8- Lender's name under the heading "Eurodollar Affiliate" on the signature pages of this Agreement or of the Assignment and Acceptance pursuant to which such Person became a Senior Lender under this Agreement or as otherwise set forth in a written notice to Southland and the Administrative Agent in accordance with SECTION 12.09. "EURODOLLAR INTEREST PAYMENT DATE" shall mean, with respect to any Eurodollar Rate Loan, the last day of each Eurodollar Interest Period applicable to such Loan and, in the case of a Eurodollar Interest Period in excess of three months applicable to a Borrowing of Eurodollar Rate Loans, the corresponding date at the end of each three month period after the commencement date of such Eurodollar Interest Period and the last day of such Eurodollar Interest Period. "EURODOLLAR INTEREST PERIOD" shall have the meaning ascribed to it in SECTION 2.09(b). "EURODOLLAR INTEREST RATE DETERMINATION DATE" shall mean the date on which the Administrative Agent determines the Eurodollar Rate applicable to a Borrowing, continuation or conversion of Eurodollar Rate Loans. The Eurodollar Interest Rate Determination Date shall be the second Business Day prior to the first day of the Eurodollar Interest Period applicable to such Borrowing, continuation or conversion. "EURODOLLAR RATE" shall mean, with respect to any Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans, an interest rate per annum obtained by dividing (i) the rate of interest determined by the Administrative Agent to be the average (rounded upward to the nearest whole multiple of one one-hundredth of one percent (1/100 of 1%) per annum if such average is not such a multiple) of the rate per annum determined by each of the Reference Banks to be the rate per annum at which deposits in Dollars are offered by such Reference Bank to major banks in the London interbank Eurodollar market at approximately 11:00 a.m. (London time) on the Eurodollar Interest Rate Determination Date for such Eurodollar Interest Period for a period equal to such Eurodollar Interest Period and in an amount substantially equal to the amount of the Eurodollar Rate Loan to be made by such Reference Bank to be outstanding during such Eurodollar Interest Period, by (ii) a percentage equal to 100% minus the Eurodollar Reserve Percentage. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "EURODOLLAR RATE LOANS" shall mean those Loans outstanding which bear interest at a rate determined by reference to the Eurodollar Rate as provided in SECTION 2.05(a)(ii). "EURODOLLAR RESERVE PERCENTAGE" shall mean for any date that percentage (expressed as a decimal) which is in effect on such date, as prescribed by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve -9- System in New York City with deposits exceeding five billion Dollars in respect of "Eurocurrency liabilities" having a term equal to the applicable Eurodollar Interest Period (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Rate Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any bank to United States residents). "EVENT OF DEFAULT" shall mean any of the occurrences set forth in SECTION 10.01 after the expiration of any applicable grace period expressly provided therein. "EXISTING CREDIT AGREEMENT" shall mean that certain Credit Agreement dated as of July 31, 1987, amended and restated as of November 5, 1987, further amended and restated as of February 17, 1993, further amended and restated as of December 16, 1994, and as further amended through the Effective Date, among Southland (as successor in interest to JT Acquisition Corporation), the financial institutions from time to time party thereto as "Senior Lenders" or "Issuing Banks" (each as defined therein) and Citicorp North America, Inc. (formerly known as Citicorp Industrial Credit, Inc.), in its separate capacity as "Administrative Agent" (as defined therein) and The Sakura Bank, Limited, New York Branch, as "Co-Agent" (as defined therein). "FACILITY LETTER OF CREDIT" shall mean any Commercial Letter of Credit or any Standby Letter of Credit issued by an Issuing Bank for the account of Southland pursuant to ARTICLE III. "FACILITY LETTER OF CREDIT OBLIGATIONS" shall mean, at any particular time, the sum of (i) the aggregate Reimbursement Obligations at such time, PLUS (ii) the aggregate maximum amount available for drawing under the Facility Letters of Credit at such time. "FDIC" shall mean the Federal Deposit Insurance Corporation or any Person succeeding to the functions thereof. "FEDERAL FUNDS RATE" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. "FEDERAL RESERVE BOARD" shall mean the Board of Governors of the Federal Reserve System or any Person succeeding to the functions thereof. -10- "FEE LETTER" shall mean the letter agreement dated December 19, 1996 among the Administrative Agent, Citicorp Securities and Southland. "FISCAL YEAR" shall mean the fiscal year of Southland, which shall be the twelve (12) month period ending on December 31 in each year or such other period as Southland may designate and the Requisite Senior Lenders may approve in writing. "FOREIGN AFFILIATE" shall mean any Affiliate of Southland (i) which is not organized under the laws of the United States of America, any state thereof or the District of Columbia or (ii) with respect to which a majority of such Affiliate's property is not located within any State of the United States of America or the District of Columbia. "FUNDING DATE" shall mean, with respect to any Revolving Credit Advance, the date of the funding of that Revolving Credit Advance. "GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination. "GOVERNMENT ACTS" shall have the meaning ascribed to it in SECTION 3.10(a). "GOVERNMENTAL AUTHORITY" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "HOLDERS" shall mean the holders of the Obligations and shall refer to (i) each Senior Lender in respect of its Loans and as holder of its Notes, (ii) each Issuing Bank in respect of Reimbursement Obligations owed to it, (iii) the Administrative Agent, Senior Lenders and Issuing Banks in respect of all other present and future obligations and liabilities of Southland of every type and description arising under or in connection with this Agreement or any other Loan Document, (iv) each other Person entitled to indemnification pursuant to SECTION 12.03, in respect of the obligations and liabilities of Southland to such Person thereunder and (v) their respective successors, transferees and assigns (to the extent permitted by the terms of the Loan Documents). "INDEBTEDNESS", as applied to any Person, shall mean, at any time, without duplication, (i) the principal of (a) all indebtedness, obligations or other liabilities of such Person for borrowed money, (b) all indebtedness, obligations or other liabilities of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all reimbursement -11- obligations and other liabilities of such Person with respect to letters of credit issued for such Person's account, (d) all obligations of such Person to pay the deferred purchase price of property or services (including employee compensation), except trade accounts payable and accrued expenses arising in the ordinary course of business but only if and so long as the same are payable on available trade terms, (e) all obligations in respect of Capitalized Leases of such Person, (f) all Accommodation Obligations of such Person, and (g) all indebtedness, obligations or other liabilities of such Persons or others secured by a Lien on any asset of such Person, whether or not such indebtedness, obligations or liabilities are assumed by such Person, all as of such time, and (ii) all indebtedness, obligations or other liabilities in respect of Interest Rate Contracts and foreign currency exchange agreements, net of indebtedness, obligations or other liabilities owed to such Person by its counterparties in respect of Interest Rate Contracts and foreign currency exchange agreements. "INTEREST RATE CONTRACTS" shall mean interest rate exchange, collar or cap agreements or non-leveraged options providing interest rate protection. "INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of 1986, any amendments thereto, any successor statutes and any regulations or guidance promulgated thereunder. "INVESTMENT" shall mean, as applied to any Person, any direct or indirect purchase or other acquisition by that Person of Securities, or of a beneficial interest in Securities, of any other Person, and any direct or indirect loan, advance (other than deposits with financial institutions available for withdrawal on demand, prepaid expenses, advances to employees, deposits made to secure the performance of contracts and similar items made or incurred in the ordinary course of business), or capital contribution by that Person to any other Person, including all Indebtedness and accounts owed by that other Person which are not current assets or did not arise from sales of goods or services to that Person in the ordinary course of business. The amount of any Investment shall be determined in conformity with GAAP. "ISSUING BANKS" shall mean Citibank, any other Senior Lender which has issued a Letter of Credit listed in SCHEDULE 3.11 (with respect to that Letter of Credit) and any other Senior Lender (or its Affiliate) which agrees (with the consent of Southland and the Administrative Agent) to become an Issuing Bank for the purpose of issuing Facility Letters of Credit pursuant to ARTICLE III. When a Senior Lender is referred to in its capacity as an Issuing Bank hereunder, such reference to an Issuing Bank shall be interpreted to refer to such Senior Lender solely in its capacity as an Issuing Bank. "ITO-YOKADO" means Ito-Yokado Co., Ltd., a Japanese corporation. "JOINT VENTURE" shall mean a Person which is an Affiliate of Southland solely by reason of ownership of an interest in such Person by Southland or a Subsidiary of Southland. -12- "KNOWLEDGE", when used in respect of a natural person, shall mean actual knowledge of that person and shall mean, when used in respect of a corporate Person, the actual knowledge of any executive officer of such Person. "LETTER OF CREDIT" shall mean each letter of credit issued by any Person for the account of Southland or any of its Subsidiaries. "LETTER OF CREDIT COMMITMENT" shall mean, with respect to any Issuing Bank, such Issuing Bank's commitment to issue Facility Letters of Credit, in an amount (which, together with the Letter of Credit Commitments of all other Issuing Banks, shall not exceed the then amount of the Letter of Credit Subfacility) agreed upon among Southland, such Issuing Bank and the Administrative Agent, as such amount may be modified from time to time pursuant to SECTION 2.07(c), 2.07(d), 3.12 or 10.02(a). "LETTER OF CREDIT REIMBURSEMENT AGREEMENT" shall mean, with respect to a Facility Letter of Credit, such form of application therefor and form of reimbursement agreement therefor (whether in a single or several documents, taken together) as the Issuing Bank from which the Facility Letter of Credit is requested may employ in the ordinary course of business for its own account, whether or not providing for collateral security, with such modifications thereto as may be agreed upon by the Issuing Bank and Southland and as are not materially adverse to the interest of the Senior Lenders; PROVIDED, HOWEVER, in the event of any conflict between the terms of any Letter of Credit Reimbursement Agreement and this Agreement, the terms of this Agreement shall control and no event (other than failure to pay Reimbursement Obligations) which constitutes a default under a Letter of Credit Reimbursement Agreement shall constitute an Event of Default solely by reason of any default provisions contained in such Letter of Credit Reimbursement Agreement. "LETTER OF CREDIT SUBFACILITY" shall mean, at any time, the maximum aggregate amount of Facility Letter of Credit Obligations which may be outstanding at any time, which shall be equal to $150,000,000, as such amount may be reduced from time to time pursuant to SECTION 2.07(c), 2.07(d), or 10.02(a). "LIEN" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance (including, but not limited to, easements, rights of way, zoning restrictions and the like), lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a Capital Lease, any financing lease having substantially the same economic effect as any of the foregoing and the filing of any financing statement (other than a financing statement filed by a "true" lessor pursuant to 9-408 of the Uniform Commercial Code) naming the owner of the asset to which such Lien relates as debtor, under the Uniform Commercial Code or other comparable law of any jurisdiction. -13- "LOAN" shall mean a Term Loan, a Revolving Loan or a Competitive Bid Loan. "LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Letter of Credit Reimbursement Agreements and all other agreements, instruments and written indicia of Contractual Obligations between Southland and the Administrative Agent, the Co-Agent, any Senior Lender, any Issuing Bank or any successor in interest to any of them, delivered to the Administrative Agent, the Co-Agent, Senior Lender, Issuing Bank or such successor in interest by or on behalf of Southland pursuant to or in connection with the transactions contemplated hereby. "MAJORITY OWNERS" shall mean, collectively, Ito- Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. or any Subsidiary of either of them, all of whose capital stock is owned by either Ito-Yokado Co., Ltd. or Seven-Eleven Japan Co., Ltd. "MARGIN STOCK" shall have the meaning ascribed to it in Regulation U and Regulation G. "MASTER ASSIGNMENT AGREEMENT" shall mean the Master Assignment Agreement dated as of December 16, 1994 among Southland and certain financial institutions from time to time party to the Existing Credit Agreement. "MASTER LEASE DOCUMENTS" shall mean a Master Lease evidencing the terms of the Master Lease Facility and any agreements, documents and instruments executed in connection therewith, as the same may be amended, restated, supplemented or otherwise modified from time to time. "MASTER LEASE FACILITY" shall mean a lease facility provided to Southland, as lessee, by Citicorp Bankers Leasing Corporation or an Affiliate or wholly-owned Subsidiary thereof and the other financial institutions parties thereto on substantially the terms set forth in the Revised Proposal dated January 27, 1997, executed by Citicorp Bankers Leasing Corporation and Citicorp Securities and accepted by Southland, PROVIDED that the aggregate Dollar amount advanced for assets leased under the lease facility shall not exceed $115,000,000. "MATERIAL ADVERSE EFFECT" shall mean, with respect to Southland, individually, or Southland and its Subsidiaries, taken as a whole, a material adverse effect upon the business, assets or other properties, liabilities or condition (financial or otherwise) or results of operations of Southland, individually, or Southland and its Subsidiaries, taken as a whole, or the ability of Southland to perform under the Loan Documents. "MOODY'S" shall mean Moody's Investors Service, Inc. -14- "MULTIEMPLOYER PLAN" shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is, or was at any time during the then five preceding years, contributed to on behalf of employees of Southland, any Subsidiary of Southland or any ERISA Affiliate. "NON PRO RATA LOAN" shall have the meaning ascribed to it in SECTION 2.08(b)(iii). "NOTES" shall mean the Term Notes, the Revolving Notes and the Competitive Bid Notes. "NOTICE OF BORROWING" shall mean, with respect to a proposed Borrowing pursuant to SECTION 2.01(b), 2.02(b) or 2.03(b), as applicable, a notice in substantially the form of EXHIBIT 4-A, 4-B or 4-C, respectively. "NOTICE OF CONVERSION/CONTINUATION" shall mean, with respect to a proposed conversion or continuation of a Loan pursuant to SECTION 2.05(c), notice substantially in the form of EXHIBIT 5. "OBLIGATIONS" shall mean all present and future obligations and liabilities of Southland of every type and description arising under or in connection with this Agreement or any other Loan Document, due or to become due to the Administrative Agent, the Co-Agent, any Senior Lender, any Issuing Bank or any Person entitled to indemnification pursuant to SECTION 12.03, or any of their respective successors, transferees or assigns, and shall include, without limitation, (i) all liability of Southland for principal of and interest on the Loans or under the Notes, (ii) all Reimbursement Obligations of Southland to any Issuing Bank and (iii) all liability of Southland under the Loan Documents for any fees, expense reimbursements and indemnifications. "OFFICERS' CERTIFICATE" shall mean, as to a corporation, a certificate executed on behalf of such corporation by (i) its chairman or vice-chairman of the board (if an officer) or its president or any vice-president and (ii) by its principal financial officer, its controller or its treasurer. "OTHER INDEBTEDNESS" shall mean all of the Indebtedness other than the Obligations. "PAST DEFAULT INTEREST" shall have the meaning ascribed to it in the Master Assignment Agreement. "PAYOFF LETTER" shall mean a letter dated the Effective Date or as of a recent date prior to the Effective Date, in form and substance satisfactory to the Administrative Agent and the Senior Lenders, addressed to -15- the Administrative Agent, the Co-Agent and the Senior Lenders and executed by the "Administrative Agent" and each of the "Senior Lenders" and "Issuing Banks" under (and in each case defined in) the Existing Credit Agreement (i) stating that the Existing Credit Agreement has been terminated (other than provisions which, by their terms, survive the termination of the Existing Credit Agreement) and that all outstanding indebtedness and obligations thereunder or with respect thereto have been repaid in full in cash and discharged, (ii) agreeing that all Liens held by or for the benefit of any such Person under the "Loan Documents" under (and as defined in) the Existing Credit Agreement shall, upon receipt of payment in full in cash of all outstanding indebtedness and obligations thereunder, be released, terminated and discharged, (iii) directing such Administrative Agent to execute and deliver any and all agreements, documents and instruments evidencing the release, termination and discharge of such Liens and (iv) directing such Administrative Agent to execute and deliver the acknowledgment described in SECTION 4.01(a)(iv)(B). "PBGC" shall mean the Pension Benefit Guaranty Corporation or any Person succeeding to the functions thereof. "PERMITTED EXISTING INDEBTEDNESS" shall mean the Indebtedness of Southland and its Subsidiaries reflected on SCHEDULE 1.01-A. "PERMITTED EXISTING INVESTMENTS" shall mean the Investments of Southland and its Subsidiaries reflected on Part B of SCHEDULE 5.01(iii). "PERMITTED EXISTING LIENS" shall mean the Liens on assets of Southland and its Subsidiaries reflected on SCHEDULE 1.01-B. "PERSON" shall mean any natural person, corporation, limited partnership, limited liability company, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, and any Governmental Authority. "POTENTIAL EVENT OF DEFAULT" shall mean an event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default. "PRO RATA SHARE" shall mean, with respect to any Senior Lender, a fraction (expressed as a percentage), the numerator of which shall be the amount of such Senior Lender's Commitments and the denominator of which shall be the aggregate amount of all of the Senior Lenders' Commitments, as adjusted from time to time in accordance with the provisions of SECTION 12.01(a) (notwithstanding the termination of any such Commitments pursuant to SECTION 10.02(a)). "QUARTERLY DETERMINATION DATE" shall mean each March 31, June 30, September 30 and December 31 during the term of this Agreement. -16- "QUIDS SUBORDINATED NOTES" shall mean (i) the Quarterly Income Debt Security Due 2010 dated November 22, 1995 issued by Southland to Ito-Yokado in the principal amount of $153,000,000, (ii) the Quarterly Income Debt Security Due 2010 dated November 22, 1995 issued by Southland to Seven-Eleven Japan Co., Ltd. in the principal amount of $147,000,000 (and together with the promissory note described in CLAUSE (i) above, the "Original QUIDS Subordinated Notes") and (iii) any promissory notes issued pursuant to an indenture, in substantially the form of the indenture attached as Exhibit A to each of the Original QUIDS Subordinated Notes, upon the exercise by any holder thereof of its rights under that certain Registration Rights Agreement dated as of November 22, 1995 among Southland, Ito-Yokado and Seven-Eleven Japan Co., Ltd. "REFERENCE BANKS" shall mean Citibank and, at the discretion of the Administrative Agent, one or more Senior Lenders (or Affiliates thereof) approved by the Administrative Agent. "REGULATION A" shall mean Regulation A of the Federal Reserve board as in effect from time to time. "REGULATION D" shall mean Regulation D of the Federal Reserve Board as in effect from time to time. "REGULATION G" shall mean Regulation G of the Federal Reserve Board as in effect from time to time. "REGULATION U" shall mean Regulation U of the Federal Reserve Board as in effect from time to time. "REGULATION X" shall mean Regulation X of the Federal Reserve Board as in effect from time to time. "REIMBURSEMENT OBLIGATIONS" shall mean the reimbursement or repayment obligations of Southland to the Issuing Banks pursuant to Letter of Credit Reimbursement Agreements with respect to Facility Letters of Credit, for amounts paid out thereunder. "RENT EXPENSE ON OPERATING LEASES," as applied to Southland and its Subsidiaries, shall mean, for any period, the amount for such period of (i) total rent expense on operating leases, including contingent rent expense, MINUS (ii) sublease rent income from property subject to operating leases, all such income and expense accounted for on a consolidated basis pursuant to GAAP. "REPORTABLE EVENT" shall mean with respect to any Benefit Plan any event described in Section 4043(b) of ERISA other than any such event as to -17- which the requirement of thirty (30) days' notice to PBGC contained in Section 4043(a) of ERISA is waived under applicable regulations. "REQUIREMENTS OF LAW" shall mean, as to any Person, the charter and by-laws or other organizational or governing documents of such Person, and any law, rule or regulation, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject, including, without limitation, the Securities Act, the Securities Exchange Act, Regulations G, U and X, and any certificate of occupancy, zoning ordinance, building, environmental or land use requirement or permit or occupational safety or health law, rule or regulation. "REQUISITE SENIOR LENDERS" shall mean Senior Lenders whose Pro Rata Shares, in the aggregate, are more than fifty percent (50%). "RESTRICTED JUNIOR PAYMENT" shall mean (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of capital stock of Southland or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock or in any junior class of stock to the holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of Southland or any of its Subsidiaries now or hereafter outstanding, (iii) any payment or prepayment of principal of, premium, if any, or interest on, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Subordinated Indebtedness or any Indebtedness permitted by SECTION 8.01(xiv)(B), and (iv) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of capital stock of Southland or any of its Subsidiaries now or hereafter outstanding (other than the issuance of Common Stock upon the exercise of any warrants, options or rights to acquire such stock). "REVOLVING CREDIT ADVANCE" shall mean a Revolving Loan or a Competitive Bid Loan. "REVOLVING CREDIT COMMITMENT" shall mean, with respect to any Senior Lender, the obligation of such Senior Lender to make Revolving Loans and to participate in Facility Letters of Credit pursuant to the terms and condi- tions of this Agreement, in an aggregate amount at any time outstanding which shall not exceed the principal amount set forth opposite such Senior Lender's name under the heading "Revolving Credit Commitment" on the signature pages hereof or the signature page of the Assignment and Acceptance by which it became a Senior Lender, as modified from time to time pursuant to the terms of this Agreement or to give effect to any applicable Assignment and Acceptance, and "REVOLVING CREDIT COMMITMENTS" shall mean the aggregate principal amount of the Revolving Credit Commitments of all the Senior -18- Lenders, the maximum amount of which shall be $400,000,000, as such amount may be reduced from time to time pursuant to SECTION 2.07(c), 2.07(d) or 10.02(a). "REVOLVING CREDIT OBLIGATIONS" shall mean, at any particular time, the sum of (i) the outstanding principal amount of the Revolving Credit Advances at such time, plus (ii) the Facility Letter of Credit Obligations at such time. "REVOLVING CREDIT TERMINATION DATE" shall mean the earlier of (i) the fifth anniversary of the Effective Date and (ii) the date of termination of the Revolving Credit Commitments pursuant to SECTION 10.02(a). "REVOLVING LOAN" shall have the meaning ascribed to it in SECTION 2.02(a)(i). "REVOLVING LOAN AVAILABILITY" shall have the meaning ascribed to it in SECTION 2.02(a)(i). "REVOLVING NOTE" shall have the meaning ascribed to it in SECTION 2.02(d). "S&P" shall mean Standard & Poor's Rating Group, a division of McGraw Hill, Inc. "SECURITIES" shall mean any stock, shares, voting trust certificates, limited partnership certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities", including, without limitation, any "security" as such term is defined in Section 8-102 of the Uniform Commercial Code, or any certificates of interest, shares, or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire any of the foregoing, but shall not include the Notes or any other evidence of the Obligations. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended to the date hereof and from time to time hereafter, and any successor statute. "SECURITIES EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended to the date hereof and from time to time hereafter, and any successor statute. "SENIOR INDEBTEDNESS" shall mean, at any time, (i) consolidated total Indebtedness of Southland and its Subsidiaries, to the extent required, in conformity with GAAP, to be reflected on a balance sheet of Southland and its Subsidiaries at that time, PLUS (ii) the maximum amount available to be drawn under outstanding Letters of Credit at that time, MINUS (iii) the aggregate principal amount of Subordinated Indebtedness outstanding at that time (to the extent included in CLAUSE (i) above). -19- "SENIOR LENDER" shall mean, at any particular time, any Person who holds a Term Loan Commitment and Revolving Credit Commitment at such time, whether as a signatory to this Agreement or pursuant to an Assignment and Acceptance. "SENIOR SUBORDINATED DEBENTURE INDENTURES" shall mean the indentures pursuant to which the Senior Subordinated Debentures have been issued. "SENIOR SUBORDINATED DEBENTURE REPURCHASE" shall mean (i) the issuance by Southland to Ito-Yokado and Seven- Eleven Japan Co., Ltd., of QUIDS Subordinated Notes in an aggregate principal amount of $300,000,000 and (ii) the repurchase for cancellation with the proceeds of such QUIDS Subordinated Notes of (A) $180,621,000 in aggregate principal amount of Southland's outstanding 5% First Priority Senior Subordinated Debentures due December 15, 2003 and (B) $82,719,000 in aggregate principal amount of Southland's 4.5% Second Priority Senior Subordinated Debentures (Series A) due June 15, 2004. "SENIOR SUBORDINATED DEBENTURES" shall mean Southland's 5% First Priority Senior Subordinated Debentures due December 15, 2003, Southland's 4.5% Second Priority Senior Subordinated Debentures (Series A) due June 15, 2004, and Southland's 4% Second Priority Senior Subordinated Debentures (Series B) due June 15, 2004, and Southland's 12% Second Priority Senior Subordinated Debentures (Series C) due June 15, 2009. "SOUTHLAND" shall have the meaning ascribed to it in the preamble hereto. "STANDBY LETTER OF CREDIT" shall mean any Facility Letter of Credit which is not a Commercial Letter of Credit. "SUBORDINATED INDEBTEDNESS" shall mean the Indebtedness evidenced by, or in respect of, (i) the Senior Subordinated Debentures, (ii) the Employee Convertible Subordinated Debentures, (iii) the QUIDS Subordinated Notes and (iv) any additional Indebtedness (A) subordinated in right of payment on terms not less favorable to the Senior Lenders, and subject to covenants and events of default not more burdensome to Southland, than the subordination provisions, covenants and events of default applicable to the Senior Subordinated Debentures or (B) incurred on other terms approved in writing by the Requisite Senior Lenders. "SUBSIDIARY" of a Person shall mean any corporation, limited liability company, general or limited partnership, or other entity of which Securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such entity are at the time directly or indirectly owned or controlled by, or the management of which is otherwise controlled directly or indirectly through one or more intermediaries, or both, by such Person, one or more subsidiaries of such Person or any combination thereof. "TERM LOAN" shall have the meaning ascribed to it in SECTION 2.01(a). -20- TERM LOAN COMMITMENT" shall mean, with respect to any Senior Lender, the obligation of such Senior Lender to make its Term Loan pursuant to the terms and conditions of this Agreement, in an amount equal to the amount set forth under such Senior Lender's name under the heading "Term Loan Commitment" on the signature pages hereof or the signature page of the Assignment and Acceptance by which it became a Senior Lender, as modified from time to time pursuant to the terms of this Agreement or to give effect to any applicable Assignment and Acceptance, and "TERM LOAN COMMITMENTS" shall mean the aggregate principal amount of the Term Loan Commitments of all the Senior Lenders, the maximum amount of which shall be $225,000,000, as reduced from time to time pursuant to SECTION 2.01(d), 2.07(a) or 10.02(a). TERM NOTE" shall have the meaning ascribed to it in SECTION 2.01(d). TERMINATION EVENT" shall mean (i) a Reportable Event, (ii) the withdrawal of Southland, any Subsidiary of Southland or any ERISA Affiliate from a Defined Benefit Plan during a plan year in which it is a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate a Defined Benefit Plan, (iv) the treatment of a Defined Benefit Plan amendment as a termination under Section 4041 of ERISA, (v) the institution of proceedings by the PBGC to terminate a Defined Benefit Plan, (vi) any other event or condition which would constitute ground under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Defined Benefit Plan, (vii) the termination of, or appointment of a trustee to administer, any Defined Benefit Plan pursuant to Section 4042 of ERISA, or (viii) the partial or complete withdrawal of Southland or any ERISA Affiliate from a Multiemployer Plan if the amount of the withdrawal liability assessed by the plan sponsor against Southland or any such ERISA Affiliate would have a Material Adverse Effect. "TRANCHE A REVOLVING CREDIT NOTE" shall mean a Revolving Note. "TRANCHE B REVOLVING CREDIT NOTE" shall mean a Competitive Bid Note. "TRANSACTION COSTS" shall mean the fees, costs and expenses payable by Southland pursuant hereto or in connection herewith or in respect hereof and the fees, costs and expenses payable by Southland in connection with the Master Lease Facility. "TYPE" shall mean, with respect to any Term Loan or Revolving Loan, a Base Rate Loan or a Eurodollar Rate Loan. "UNIFORM COMMERCIAL CODE" shall mean the Uniform Commercial Code as enacted in the State of New York, as it may be amended from time to time. "UNREIMBURSED ISSUING BANK" shall have the meaning ascribed to it in SECTION 3.06(b)(ii). -21- "YEN ROYALTY FINANCING AGREEMENT" shall mean the Credit Agreement dated as of March 21, 1988 among Southland, the Yen Royalty Lender and Citicorp International Limited, as amended, supplemented or otherwise modified from time to time, PROVIDED that no amendment, supplement or other modification pertaining to the Yen Royalty Financing Collateral or the recourse of the Yen Royalty Lender thereto shall adversely affect the Administrative Agent, the Senior Lenders or the Issuing Banks without the prior written consent of the Requisite Senior Lenders. "YEN ROYALTY FINANCING COLLATERAL" shall mean the "Collateral" (as defined in the Assignment and Security Agreement dated as of March 21, 1988 between Southland and the Yen Royalty Lender entered into in connection with the Yen Royalty Financing Agreement). "YEN ROYALTY FINANCING INDEBTEDNESS" shall mean Indebtedness of Southland to the Yen Royalty Lender under the Yen Royalty Financing Agreement in a principal amount which shall not exceed Japanese Yen 41,000,000,000 PLUS the amount of all interest and yield protection costs capitalized in connection therewith pursuant to the terms of the Yen Royalty Financing Agreement. "YEN ROYALTY LENDER" shall mean Citicorp (Channel Islands) Limited, a company organized and existing under the laws of Jersey in the Channel Islands, together with successors to and assignees of its rights thereunder. 1.02. REFERENCES TO THIS AGREEMENT. The words "hereof", "herein", "hereunder" and similar terms when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, subsection, clause, schedule and exhibit references herein are references to articles, sections, subsections, clauses, schedules and exhibits to this Agreement unless otherwise specified. 1.03. COMPUTATION OF TIME PERIODS. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" shall mean "from and including" and the words "to" and "until" each mean "to but excluding". Periods of days referred to in this Agreement shall be counted in calendar days unless Business Days are expressly prescribed. Any period determined hereunder by reference to a month or months or year or years shall end on the day in the relevant calendar month in the relevant year, if applicable, immediately preceding the date numerically corresponding to the first day of such period, PROVIDED that if such period commences on the last day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month during which such period is to end), such period shall, unless otherwise expressly required by the other provisions of this Agreement, end on the last day of the calendar month. -22- 1.04. ACCOUNTING TERMS. Subject to SECTION 12.04, for purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. 1.05. MISCELLANEOUS TERMS. All terms defined in this Agreement in the singular shall have comparable meanings when used in the plural, and VICE VERSA, unless otherwise specified. The term "including" is by way of example and not limitation. 1.06. OTHER DEFINED TERMS. All other terms contained in this Agreement shall, unless the context indicates otherwise, have the meanings assigned to such terms by the Uniform Commercial Code to the extent the same are defined therein. 1.07. SCHEDULES AND EXHIBITS. The schedules and exhibits to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein. ARTICLE II AMOUNTS AND TERMS OF LOANS 2.01. TERM LOANS. (a) AMOUNT OF TERM LOANS. Subject to the terms and conditions set forth in this Agreement, each Senior Lender on the Effective Date hereby severally and not jointly agrees to make on the Effective Date, a term loan, in Dollars, to Southland in an amount equal to such Senior Lender's Term Loan Commitment (each individually, a "Term Loan" and, collectively, the "Term Loans"). All Term Loans shall be made by the Senior Lenders on the Effective Date simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Senior Lender shall be responsible for any failure by any other Senior Lender to perform its obligation to make any Term Loan hereunder nor shall the Term Loan Commitment of any Senior Lender be increased or decreased as a result of any such failure. (b) NOTICE OF BORROWING. Southland shall deliver to the Administrative Agent on or before the Effective Date a Notice of Borrowing, signed by it, with respect to the Term Loans to be made on the Effective Date. Such Notice of Borrowing shall specify (i) the aggregate amount of the Term Loans (which shall not exceed an amount equal to the aggregate Term Loan Commitments) and (ii) instructions for the disbursement of the proceeds of the Term Loans. The Term Loans shall initially be Base Rate Loans and thereafter may be continued as Base Rate Loans or converted into Euro- dollar Rate Loans in the manner provided in SECTION 2.05(c) and subject to the -23- conditions and limitations therein set forth and set forth in SECTION 2.09. Any Notice of Borrowing given pursuant to this SECTION 2.01(b) shall be irrevocable. (c) MAKING OF TERM LOANS. (i) On the Effective Date, each Senior Lender which is also a Senior Lender under (and as defined in) the Existing Credit Agreement shall be deemed to have advanced funds to Southland in respect of the Term Loans in an amount equal to the Senior Lender's Pro Rata Share (as defined in the Existing Credit Agreement) of the aggregate principal amount of the Term Loans outstanding under the Existing Credit Agreement. Southland and such Senior Lender acknowledge and agree that, upon the effectiveness of this Credit Agreement and the payment by such Senior Lender of the amounts described in SECTION 2.01(c)(ii) to be paid on the Effective Date with respect to such Senior Lender's Term Loans under this Agreement, the aggregate principal amount of such Senior Lender's Term Loans outstanding under the Existing Credit Agreement shall have been paid in full, and such Senior Lender shall be deemed to have advanced the full amount of its Pro Rata Share of Term Loans to be made on the Effective Date. (ii) Promptly after receipt of the Notice of Borrowing under SECTION 2.01(b) in respect of the Term Loans, the Administrative Agent shall notify each Senior Lender of the proposed Borrowing. Each Senior Lender shall deposit with the Administrative Agent at its office in New York, New York, in immediately available funds, on the Effective Date an amount equal to the excess of (A) its Pro Rata Share of Term Loans requested in accordance with SECTION 2.01(b) over (B) the Senior Lender's Pro Rata Share (as defined in the Existing Credit Agreement) of the aggregate principal amount of the Term Loans outstanding under the Existing Credit Agreement. Subject to the fulfillment of the conditions precedent set forth in SECTION 4.01, the Administrative Agent shall make the proceeds of such amounts received by it available to Southland at the Administrative Agent's office in New York, New York on the Effective Date and shall disburse such proceeds in Dollars and in immediately available funds in accordance with Southland's disbursement instructions set forth in such Notice of Borrowing. (iii) The failure of any Senior Lender to deposit with the Administrative Agent the amount described in SECTION 2.01(c)(ii) on the Effective Date shall not relieve any other Senior Lender of its obligations hereunder to make its Term Loan on the Effective Date. In the event the conditions precedent set forth in SECTION 4.01 are not fulfilled or duly waived as of the date specified as the Effective Date in the Notice of Borrowing delivered pursuant to SECTION 2.01(b), the Administrative Agent shall promptly return, by wire transfer of immediately available funds, the amount deposited hereunder by each Senior Lender to such Senior Lender. (d) TERM NOTES; REPAYMENT OF TERM LOANS. Southland shall execute and deliver to each Senior Lender on or before the Effective Date a promissory note, in substantially the form of EXHIBIT 6 and otherwise in form -24- and substance satisfactory to the Senior Lenders, in the principal amount of that Senior Lender's Term Loan Commitment (each individually, a "Term Note" and collectively, the "Term Notes"). Subject to SECTIONS 2.07(a) and 10.02, the Term Loans shall mature in sixteen (16) consecutive quarterly installments of $14,062,500 each, payable on the last Business Day in each calendar quarter, commencing March 31, 1998, and the Term Loan Commitments shall be permanently reduced by the amount of each installment on the date payment thereof is required to be made hereunder. The Term Loans shall be paid in full on or before December 31, 2001. 2.02. Revolving Loans. (a) AVAILABILITY. (i) Subject to the terms and conditions set forth in this Agreement, each Senior Lender hereby severally and not jointly agrees to make to Southland from time to time on any Business Day during the period from the Effective Date through and including the Business Day immediately preceding the Revolving Credit Termination Date revolving loans (each individually, a "Revolving Loan" and collectively, the "Revolving Loans"), in an amount which shall not exceed, in the aggregate at any time outstanding, such Senior Lender's Pro Rata Share of an amount equal to (A) the aggregate Revolving Credit Commitments at such time, MINUS (B) the aggregate Facility Letter of Credit Obligations at such time, MINUS (C) the aggregate principal amount of Competitive Bid Loans outstanding at such time (the "Revolving Loan Availability" at such time). (ii) All Revolving Loans under this Agreement shall be made by the Senior Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Senior Lender shall be responsible for any failure by any other Senior Lender to perform its obligation to make a Revolving Loan hereunder nor shall the Revolving Credit Commitment of any Senior Lender be increased or decreased as a result of the failure by any other Senior Lender to perform its obligation to make a Revolving Loan. (iii) Within the limits and on the conditions set forth in this Agreement, Southland may from time to time borrow and repay Revolving Loans under this SECTION 2.02, prepay Revolving Loans pursuant to SECTION 2.07(a) and reborrow Revolving Loans under this SECTION 2.02. (b) NOTICE OF BORROWING. (i) Whenever Southland desires to borrow under this SECTION 2.02, it shall deliver to the Administrative Agent a Notice of Borrowing, signed by it, (A) on or before the Effective Date, in the case of a Borrowing of Revolving Loans on the Effective Date and (B) no later than 11:00 a.m. (New York time) (I) on the proposed Funding Date in the case of a Borrowing of Base Rate Loans and (II) no later than 11:00 a.m. (New York time) at least three (3) Business Days in advance of the proposed Funding Date in the case of a Borrowing of Eurodollar Rate Loans. (ii) Each Notice of Borrowing for Revolving Loans shall specify (A) the Funding Date (which shall be a Business Day) in respect of such Revolving Loans, (B) the amount of the proposed Borrowing (which shall not be less than -25- $5,000,000 and, after giving effect to such Borrowing and all other Revolving Credit Advances and Facility Letters of Credit requested to be made or issued on the same Funding Date, shall not exceed the Revolving Loan Availability as of such Funding Date), (C) whether the proposed Borrowing will be of Base Rate Loans or Eurodollar Rate Loans, (D) in the case of Eurodollar Rate Loans, the requested Eurodollar Interest Period and (E) instructions for the disbursement of the proceeds of the Revolving Loans. The Revolving Loans made on the Effective Date shall initially be Base Rate Loans and thereafter may be continued as Base Rate Loans or converted into Eurodollar Rate Loans, in the manner provided in SECTION 2.05(c) and subject to the conditions therein set forth and in SECTION 2.09. (iii) In lieu of delivering the above-described Notice of Borrowing, Southland may give the Administrative Agent telephonic notice of any proposed Borrowing by the time required under this SECTION 2.02(b); PROVIDED, that such notice shall be confirmed in writing by delivery to the Administrative Agent promptly (but in no event later than the Funding Date of the requested Revolving Loan) of a Notice of Borrowing. (iv) Any Notice of Borrowing (or telephone notice in lieu thereof) pursuant to this SECTION 2.02(b) shall be irrevocable. (c) MAKING OF REVOLVING LOANS. (i) On the Effective Date, each Senior Lender which is also a Senior Lender under (and as defined in) the Existing Credit Agreement shall be deemed to have advanced funds to Southland in respect of the Revolving Loans in an amount equal to the Senior Lender's Pro Rata Share (as defined in the Existing Credit Agreement) of the aggregate principal amount of the Revolving Loans outstanding under the Existing Credit Agreement. Southland and such Senior Lender acknowledge and agree that, upon the effectiveness of this Credit Agreement and the payment by such Senior Lender of the amounts described in SECTION 2.02(c)(ii) to be paid on the Effective Date with respect to such Senior Lender's Revolving Loans under this Agreement, the aggregate principal amount of such Senior Lender's Revolving Loans outstanding under the Existing Credit Agreement shall have been paid in full, and such Senior Lender shall be deemed to have advanced the full amount of its Pro Rata Share of Revolving Loans to be made on the Effective Date. (ii) Promptly after receipt of a Notice of Borrowing under SECTION 2.02(b) (or telephonic notice in lieu thereof) in respect of Revolving Loans, the Administrative Agent shall notify each Senior Lender of the proposed Borrowing. Each Senior Lender shall make available to the Administrative Agent in Dollars and in immediately available funds, to such bank and account, in New York, New York, as the Administrative Agent may designate, not later than 11:00 a.m. (New York time), (A) on the Effective Date, the excess of (1) the amount of such Senior Lender's Revolving Loan to be made on the Effective Date over (2) the aggregate principal amount of such Senior Lender's Revolving Loans deemed made pursuant to SECTION 2.02(c)(i) and (B) on each Funding Date other than the Effective Date, the amount of such Senior Lender's Revolving Loan to be made on that Funding Date. Subject to the fulfillment of the conditions precedent set forth in SECTION 4.01 or 4.02, as -26- applicable, after the Administrative Agent's receipt of the proceeds of such Revolving Loans the Administrative Agent shall make the proceeds of such Revolving Loans available to Southland in New York, New York, on such Funding Date and shall disburse such funds in Dollars and in immediately available funds in accordance with Southland's disbursement instructions set forth in the Notice of Borrowing. (iii) The failure of any Senior Lender to deposit with the Administrative Agent the amount described in SECTION 2.02(c)(ii) on any Funding Date shall not relieve any other Senior Lender of its obligations hereunder to make its Revolving Loan on any such date. In the event the conditions precedent set forth in SECTION 4.01 or 4.02, as applicable, are not fulfilled or duly waived as of the applicable Funding Date, the Administrative Agent shall promptly return, by wire transfer of immediately available funds, the amount deposited hereunder by each Senior Lender to such Senior Lender. (iv) Unless the Administrative Agent shall have been notified by any Senior Lender prior to any Funding Date in respect of any Borrowing of Revolving Loans that such Senior Lender does not intend to make available to the Administrative Agent such Senior Lender's Revolving Loan on such Funding Date, the Administrative Agent may assume that such Senior Lender has made such amount available to the Administrative Agent on such Funding Date and the Administrative Agent in its sole discretion may, but shall not be obligated to, make available to Southland a corresponding amount on such Funding Date. If such corresponding amount is not in fact made available to the Administrative Agent by such Senior Lender on or prior to a Funding Date, such Senior Lender agrees to pay and Southland agrees to repay severally to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to Southland until the date such amount is paid or repaid to the Administrative Agent, at (A) in the case of Southland, the interest rate applicable at the time to a Borrowing of Base Rate Loans made on such Funding Date and (B) in the case of such Senior Lender, the Federal Funds Rate. If such Senior Lender shall pay to the Administrative Agent such corresponding amount, such amount so paid shall constitute such Senior Lender's Revolving Loan, and if both such Senior Lender and Southland shall have paid and repaid such corresponding amount, the Administrative Agent shall promptly return to Southland such corresponding amount in same day funds. Nothing in this SECTION 2.02(c) shall be deemed to relieve any Senior Lender of its obligation hereunder to make its Revolving Loan on any Funding Date. (d) REVOLVING NOTES. Southland shall execute and deliver to each Senior Lender on or before the Effective Date a promissory note, in substantially the form of EXHIBIT 7 and otherwise in form and substance satisfactory to the Senior Lenders, in the principal amount of that Senior Lender's Revolving Credit Commitment (each individually, a "Revolving Note" and collectively, the "Revolving Notes"). The Revolving Note delivered to -27- each Senior Lender shall mature, and all Revolving Credit Obligations evidenced thereby shall be paid in full (or, in the case of unmatured Facility Letter of Credit Obligations, provision for payment shall be made to the satisfaction of the Issuing Banks and the Requisite Lenders), on the Revolving Credit Termination Date. Each Senior Lender is hereby authorized, at its option, to either (i) endorse the date and amount of each Revolving Loan made by such Senior Lender and each prepayment of principal of Revolving Loans made with respect to such Revolving Note on the back of such Note or (ii) record such Revolving Loans and prepayments in its books and schedule or such books and records, as the case may be, constituting PRIMA FACIE evidence, absent manifest error, of the accuracy of the information contained therein. 2.03. COMPETITIVE BID LOANS. (a) AVAILABILITY. (i) Subject to the terms and conditions set forth in this Agreement, each Senior Lender hereby severally and not jointly agrees that Southland may borrow from time to time on any Business Day during the period from the Effective Date through the date occurring thirty (30) days (or, in the case of Competitive Bid Loans bearing interest at a fixed rate, seven (7) days) prior to the Revolving Credit Termination Date revolving loans (each individually, a "Competitive Bid Loan" and collectively, the "Competitive Bid Loans") in the manner set forth in this SECTION 2.03 in an amount which shall not exceed, in the aggregate at any time outstanding, (A) the lesser of (1) the aggregate Revolving Credit Commitments at such time and (2) $200,000,000, MINUS (B) the aggregate Facility Letter of Credit Obligations at such time, MINUS (C) the aggregate principal amount of Revolving Loans outstanding at such time (the "Competitive Bid Availability" at such time). (ii) Within the limits and on the conditions set forth in this Agreement, Southland may from time to time borrow and repay Competitive Bid Loans under this SECTION 2.03, prepay Competitive Bid Loans pursuant to SECTION 2.07(a), and reborrow Competitive Bid Loans under this SECTION 2.03, PROVIDED that a Borrowing of Competitive Bid Loans shall not be made within three (3) Business Days of the date of any other Borrowing of Competitive Bid Loans. (b) NOTICE OF BORROWING. (i) Whenever Southland desires to borrow under this SECTION 2.03, it shall deliver to the Administrative Agent a Notice of Borrowing, signed by it, no later than 11:00 a.m. (New York time) (A) at least one (1) Business Day prior to the date of the proposed Funding Date for such Borrowing, if Southland shall specify in the Notice of Borrowing that the rates of interest to be offered by the Senior Lenders shall be fixed rates per annum and (B) at least four (4) Business Days prior to the date of the proposed Funding Date for such Borrowing, if Southland shall specify in the Notice of Borrowing a different basis to be used by the Senior Lenders in determining the rates of interest to be offered by them. (ii) Each Notice of Borrowing for Competitive Bid Loans shall specify (A) the Funding Date (which shall be a Business Day) in respect of such Competitive Bid Loans, (B) the minimum and maximum amounts of the -28- proposed Borrowing (which amounts shall not be less than $10,000,000 and, after giving effect to such Borrowing and all other Revolving Credit Advances requested to be advanced and Facility Letters of Credit requested to be issued on the same Funding Date, shall not exceed the Competitive Bid Availability as of such Funding Date), (C) the maturity date for repayment of each Competitive Bid Loan to be made as part of such Borrowing (which maturity date may not be earlier than the date occurring 30 days (or, in the case of Competitive Bid Loans bearing interest at a fixed rate, seven (7) days) after the Funding Date of such Borrowing or later than the Revolving Credit Termination Date), (D) the interest payment date or dates relating thereto, (E) instructions for the disbursement of the proceeds of the Competitive Bid Loans and (F) any other terms to be applicable to such Borrowing. (c) MAKING OF COMPETITIVE BID LOANS; AUCTION BIDDING PROCEDURE. (i) Promptly after receipt of a Notice of Borrowing under SECTION 2.03(b) in respect of Competitive Bid Loans, the Administrative Agent shall notify each Senior Lender by telex or telecopy or other similar form of transmission of the proposed Borrowing, together with a copy of the related Notice of Borrowing. (ii) Each Senior Lender may, in its sole discretion, irrevocably offer to make one or more Competitive Bid Loans to Southland as part of the proposed Borrowing at a rate or rates of interest specified by such Senior Lender in its sole discretion, by notifying the Administrative Agent (which shall give prompt notice thereof to Southland), before 10:00 a.m. (New York time) (A) on the date of such proposed Borrowing, in the case of a Notice of Borrowing delivered pursuant to SECTION 2.03(b)(i)(A) and (B) three (3) Business Days before the date of such proposed Borrowing, in the case of a Notice of Borrowing delivered pursuant to SECTION 2.03(b)(i)(B), of (X) the minimum amount and maximum amount of each Competitive Bid Loan which such Senior Lender would be willing to make as part of such proposed Borrowing (which amounts may exceed such Senior Lender's Revolving Credit Commitment but in no event shall such amounts exceed the Competitive Bid Availability as of the Funding Date for such Borrowing), (Y) the rate or rates of interest therefor and (Z) such Senior Lender's lending office with respect to such Competitive Bid Loan, PROVIDED that, if the Administrative Agent in its capacity as a Senior Lender shall, in its sole discretion, elect to make any such offer, it shall notify Southland of such offer before 9:00 a.m. (New York time) on the date on which notice of such election is to be given to the Administrative Agent by the other Senior Lenders. If any Senior Lender shall elect not to make such an offer, such Senior Lender shall so notify the Administrative Agent, before 10:00 a.m. (New York time) on the date on which notice of such election is to be given to the Administrative Agent by the other Senior Lenders, and such Senior Lender shall not be obligated to, and shall not, make any Competitive Bid Loan as part of such Borrowing, PROVIDED that the failure by any Senior Lender to give such notice shall not cause such Senior Lender to be obligated to make any Competitive Bid Loan as part of such proposed Borrowing. (iii) Southland shall, in turn, (A) before 11:00 a.m. (New York time) on the date of such proposed Borrowing, in the case of a Notice of -29- Borrowing delivered pursuant to SECTION 2.03(b)(i)(A) and (B) before 1:00 p.m. (New York time) three (3) Business Days before the date of such proposed Borrowing, in the case of a Notice of Borrowing delivered pursuant to SECTION 2.03(b)(i)(B), either: (X) cancel such Borrowing by giving the Administrative Agent notice to that effect (and if Southland shall not have notified the Administrative Agent of its acceptance of any offers pursuant to SECTION 2.03(c)(iii)(Y) prior to the times stated in this Section 2.03(c)(iii), such Borrowing shall be deemed to have been canceled), or (Y) accept one or more of the offers made by any Senior Lender or Senior Lenders pursuant to SECTION 2.03(c)(ii), in its sole discretion, by giving notice to the Administrative Agent of the amount of each Competitive Bid Loan (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to Southland by the Administrative Agent on behalf of such Senior Lender for such Competitive Bid Loan pursuant to SECTION 2.03(c)(ii)) to be made by each Senior Lender as part of such Borrowing, and reject any remaining offers made by Senior Lenders pursuant to SECTION 2.03(c)(ii) by giving the Administrative Agent notice to that effect. (iv) If Southland notifies the Administrative Agent that such Borrowing is canceled (or if such Borrowing is deemed to be canceled) pursuant to SECTION 2.03(c)(iii)(X), the Administrative Agent shall give prompt notice thereof to the Senior Lenders and such Borrowing shall not be made. If Southland accepts one or more of the offers made by any Senior Lender or Senior Lenders pursuant to SECTION 2.03(c)(iii)(Y), the Administrative Agent shall in turn promptly notify (A) each Senior Lender that has made an offer or offers as described in SECTION 2.03(c)(ii), of the date and aggregate amount of such Borrowing and whether any such offer or offers made by such Senior Lender have been accepted by Southland, (B) each Senior Lender that is to make a Competitive Bid Loan as part of such Borrowing, of the amount of each Competitive Bid Loan to be made by such Senior Lender as part of such Borrowing, and (C) each Senior Lender that is to make a Competitive Bid Loan as part of such Borrowing, upon receipt, that the Administrative Agent has received forms of documents appearing to fulfill the conditions set forth in SECTION 4.01 or SECTION 4.03, as applicable. Each Senior Lender that is to make a Competitive Bid Loan as part of such Borrowing shall, not later than 12:00 noon (New York time) on the Funding Date specified in the notice received from the Administrative Agent pursuant to CLAUSE (A) of the immediately preceding sentence or any later time when such Senior Lender shall have received notice from the Administrative Agent pursuant to CLAUSE (C) of the immediately preceding sentence, make available to the Administrative Agent in Dollars and in immediately available funds to such bank account, in New York, New York, as the Administrative Agent may designate. Subject to the fulfillment of the conditions set forth in SECTION 4.01 or SECTION 4.03, as applicable, after the Administrative Agent's -30- receipt of the proceeds of such Competitive Bid Loans, the Administrative Agent will make such proceeds available to Southland in New York, New York, on such Funding Date and shall disburse such funds in Dollars and in immediately available funds in accordance with Southland's disbursement instructions set forth in the Notice of Borrowing. Promptly after each Borrowing of Competitive Bid Loans, the Administrative Agent will notify each Senior Lender of the amount of such Borrowing, the Funding Date for the Competitive Bid Loans comprising such Borrowing and the maturity date for such Competitive Bid Loans. (d) COMPETITIVE BID NOTES. Southland shall execute and deliver to each Senior Lender on or before the Funding Date for each Borrowing of Competitive Bid Loans a promissory note, in substantially the form of EXHIBIT 8 and otherwise in form and substance reasonably satisfactory to each Senior Lender making such Competitive Bid Loans, in the principal amount of the Competitive Bid Loan advanced by such Senior Lender in connection with such Borrowing (each individually, a "Competitive Bid Note" and collectively, the "Competitive Bid Notes"). The Competitive Bid Note delivered to each Senior Lender shall mature, and all Revolving Credit Obligations evidenced thereby shall be paid in full on the maturity date specified in such Note (such maturity date being that specified by Southland for repayment of such Competitive Bid Loan in the related Notice of Borrowing delivered pursuant to SECTION 2.03(b)). 2.04. USE OF PROCEEDS OF LOANS. The proceeds of the Loans made (or deemed to have been made) on the Effective Date shall be used (i) to repay in full all outstanding obligations of Southland under the Existing Credit Agreement, (ii) to pay the Transactions Costs and (iii) for the purposes described in the following sentence. The pro- ceeds of all other Loans shall be used for working capital in the ordinary course of business and for other lawful and permitted corporate purposes of Southland. 2.05. INTEREST ON THE LOANS. (a) RATE OF INTEREST. All Loans shall bear interest on the unpaid principal amount thereof from the date made until paid in full. The applicable basis for determining the rate of interest shall be selected by Southland at the time a Notice of Borrowing is given by Southland pursuant to SECTION 2.01(b), 2.02(b) or 2.03(b) (as applicable) or, in the case of all Base Rate Loans or Eurodollar Rate Loans, at the time a Notice of Conversion/Continuation is delivered by Southland pursuant to SECTION 2.05(c); PROVIDED, HOWEVER, that (x) Southland may not select the Eurodollar Rate as the applicable basis for determining the rate of interest on a Term Loan or Revolving Loan if at the time of such selection an Event of Default or a Potential Event of Default has occurred and is continuing and (y) all Loans (other than Competitive Bid Loans) made on the Effective Date shall be -31- Base Rate Loans. If on any day any Loan (other than a Competitive Bid Loan) is outstanding with respect to which notice has not been delivered to the Administrative Agent in accordance with the terms of this Agreement specifying the basis for determining the rate of interest, then for that day that Loan shall be a Base Rate Loan. The Loans and other Obligations shall bear interest, subject to SECTIONS 2.05(d) and 12.23, as follows: (i) If a Base Rate Loan or such other Obligation (other than a Competitive Bid Loan), then at a rate per annum equal to the Base Rate as in effect from time to time as interest accrues; (ii) If a Eurodollar Rate Loan, then at a rate per annum equal to the sum of (A) 0.225% per annum PLUS (B) the Eurodollar Rate determined for the applicable Eurodollar Interest Period; or (iii) If a Competitive Bid Loan, then at a rate per annum equal for such Competitive Bid Loan specified by the Senior Lender making such Competitive Bid Loan in its notice with respect thereto delivered pursuant to Section 2.03(c)(ii), as provided in the Competitive Bid Note evidencing such Competitive Bid Loan. (b) INTEREST PAYMENTS. Subject to Sections 2.05(d) and 12.23, interest accrued on all Base Rate Loans in any calendar quarter shall be payable in arrears (i) on the first Business Day of the immediately succeeding calendar quarter, commencing on the first such day following the making of each such Base Rate Loan, (ii) upon the prepayment thereof in full or in part and (iii) at maturity. Interest accrued on each Eurodollar Rate Loan shall be payable in arrears (x) on each Eurodollar Interest Payment Date applicable to that Loan, (y) upon the prepayment thereof in full or in part (together with payment of the amounts described in SECTION 2.09(f)) and (z) at maturity. Interest accrued on each Competitive Bid Loan shall be payable on the interest payment date or dates specified by Southland for such Competitive Bid Loan in the related Notice of Borrowing delivered pursuant to SECTION 2.03(b), as provided in the Competitive Bid Note evidencing such Competitive Bid Loan. (c) CONVERSION OR CONTINUATION. Subject to the provisions of SECTION 2.09, Southland shall have the option (i) to convert at any time all or any part of outstanding Term Loans and Revolving Loans which comprise part of the same Borrowing and which, in the aggregate, equal $10,000,000 or an integral multiple of $5,000,000 in excess of that amount from Base Rate Loans to Eurodollar Rate Loans; or (ii) to convert all or any part of outstanding Term Loans and Revolving Loans which comprise part of the same Borrowing and which, in the aggregate, equal $10,000,000 or an integral multiple of $5,000,000 in excess of that amount from Eurodollar Rate Loans to Base Rate Loans on the expiration date of any Eurodollar Interest Period applicable thereto; or (iii) upon the expiration of any Eurodollar Interest Period applicable to Borrowing of Eurodollar Rate Loans, to continue all or any portion of such Loans equal to $10,000,000 or an integral multiple of $5,000,000 in excess of that amount as Eurodollar Rate Loans of the same type, and the succeeding Eurodollar Interest Period of such continued Loans shall commence on the expiration date of the Eurodollar Interest Period applicable thereto; PROVIDED, that no outstanding Term Loan or Revolving Loan -32- may be continued as, or be converted into, a Eurodollar Rate Loan when any Event or Default or Potential Event of Default has occurred and is continuing. In the event Southland shall elect to convert or continue a Loan under this SECTION 2.05(c), Southland shall deliver a Notice of Conversion/Continuation to the Administrative Agent no later than 11:00 a.m. (New York time) on the proposed conversion date in the case of a conversion to a Base Rate Loan, and not later than 11:00 a.m. (New York time) at least three (3) Business Days in advance of the proposed conversion/continuation date in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan. A Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount of the Term Loan or Revolving Loan to be converted/continued, (iii) the nature of the proposed conversion/continuation, and (iv) in the case of a conversion to, or continuation of, a Eurodollar Rate Loan, the requested Eurodollar Interest Period. In lieu of delivering the above-described Notice of Conversion/Continuation, Southland may give the Administrative Agent telephonic notice of any proposed conversion/continuation by the time required under this SECTION 2.05(c); PROVIDED, that such notice shall be confirmed in writing by delivery to the Administrative Agent promptly (but in no event later than the proposed conversion/continuation under this SECTION 2.05(c). Promptly after receipt of a Notice of Conversion/Continuation under this SECTION 2.05(c) (or telephonic notice in lieu thereof), the Administrative Agent shall notify each Senior Lender by telex, telecopy, telegram, telephone or other similar form of transmission, of the proposed conversion/continuation. Any Notice of Conversion/Continuation for conversion to, or continuation of, a Loan (or telephonic notice in lieu thereof) shall be irrevocable and Southland shall be bound to convert or continue such Loan in accordance therewith. (d) DEFAULT INTEREST. Notwithstanding the rates of interest specified in SECTION 2.05(a), effective upon notice from the Administrative Agent or the Requisite Senior Lenders at any time after (i) the occurrence of an Event of Default under SECTION 10.01(a) or (ii) the date of acceleration of the maturity of the Obligations pursuant to SECTION 10.02(a) and for as long thereafter as such Event of Default shall be continuing or until such acceleration has been rescinded pursuant to SECTION 10.02(c) (as applicable), the principal balance of all Loans and other Obligations then outstanding shall bear interest payable upon demand at a rate which is two percent (2%) per annum in excess of the rate of interest otherwise payable under this Agreement, but not to exceed the maximum rate permitted by applicable law. (e) COMPUTATION OF INTEREST. Interest on Base Rate Loans and Eurodollar Rate Loans shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 360 days (subject to the provisions of this Agreement, the Term Notes and the Revolving Notes limiting the rate of interest to that permitted by applicable law). Interest on Competitive Bid Loans shall be computed on the basis set forth in the related Competitive Bid Notes. In computing interest on any -33- Loan, the date of the making of the Loan or the first day of a Eurodollar Interest Period, as the case may be, shall be excluded; PROVIDED that if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. (f) CHANGES; LEGAL RESTRICTIONS. Except as provided in SECTION 2.09(d) with respect to certain determinations on Eurodollar Interest Rate Determination Dates, in the event that after the date hereof (a) the adoption of or any change in any law, treaty, rule, regulation, guideline or determination of a court or Governmental Authority or any change in the interpretation or application thereof by a court or Governmental Authority, or (b) compliance by any Senior Lender or Issuing Bank with any request or directive (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) from any central bank or other Governmental Authority or quasi-governmental authority: (i) does or will subject a Senior Lender or Issuing Bank (or its applicable lending office or Eurodollar Affiliate) to any tax, duty or other charge of any kind which such Senior Lender or Issuing Bank reasonably determines to be applicable to this Agreement, the Notes, the Commitments, the Loans or the Facility Letters of Credit or change the basis of taxation of payments to that Senior Lender or Issuing Bank of principal, fees, interest, or any other amount payable hereunder, except for taxes imposed on or measured by the overall net income of that Senior Lender or Issuing Bank or its applicable lending office or Eurodollar Affiliate or franchise taxes imposed by the jurisdiction in which such Senior Lender's or Issuing Bank's principal executive office, applicable lending office or Eurodollar Affiliate is located (all such non- excepted taxes, duties and other charges being hereinafter referred to as "Taxes"); or (ii) does or will impose, modify, or hold applicable, in the determination of a Senior Lender or Issuing Bank, any reserve, special deposit, compulsory loan, FDIC insurance, capital allocation or similar requirement against assets held by, or deposits or other liabilities (including those pertaining to Facility Letters of Credit) in or for the account of, advances or loans by, Commitments made, or other credit extended by, or any other acquisition of funds by, a Senior Lender or any applicable lending office or Eurodollar Affiliate of that Senior Lender or Issuing Bank (except, with respect to Base Rate Loans, to the extent that the reserve and FDIC insurance requirements are reflected in the definition of "Base Rate" and, with respect to Eurodollar Rate Loans, to the extent that the reserve requirements are reflected in the definition of "Eurodollar Rate"); or (iii) does or will impose on that Senior Lender or Issuing Bank any other condition materially more burdensome in nature, extent or consequence than those in existence as of the Effective Date; -34- and the results of any of the foregoing is to increase the cost to the Senior Lender or Issuing Bank of making, renewing or maintaining the Loans or its Commitment or issuing or participating in the Facility Letters of Credit or to reduce any amount receivable thereunder; THEN, in any such case, Southland shall promptly pay to that Senior Lender or Issuing Bank, upon demand, such amount or amounts (based upon a reasonable allocation thereof by such Senior Lender or Issuing Bank to the financing transactions contemplated by this Agreement and affected by this SECTION 2.05(f)) as may be necessary to compensate that Senior Lender or Issuing Bank for any such additional cost incurred or reduced amount received. Such Senior Lender or Issuing Bank shall deliver to Southland a written statement of the costs or reductions claimed and the basis therefor, and the reasonable allocation made by that Senior Lender or Issuing Bank of such costs and reductions shall be conclusive, absent manifest error. If a Senior Lender or Issuing Bank subsequently recovers any amount of Taxes previously paid by Southland pursuant to this SECTION 2.05(f), such Senior Lender or Issuing Bank shall, within 30 days after receipt of such refund and to the extent permitted by applicable law, pay to Southland the amount of any such recovery. (g) REFERENCE BANKS. Each Reference Bank which is also a Senior Lender agrees to furnish to the Administrative Agent timely information for the purpose of determining each Eurodollar Rate. Upon the reasonable request of Southland from time to time, the Administrative Agent shall promptly provide to Southland such information with respect to the applicable Eurodollar Rate as may be reasonably required by Southland, and each Reference Bank which is also a Senior Lender agrees to furnish to the Administrative Agent such information as may be required in connection therewith. 2.06. Fees. (a) FEE LETTER. Southland shall pay to the Administrative Agent and to Citicorp Securities, in each case solely for its own account, the fees payable to the Administrative Agent or Citicorp Securities, respectively, as specified in the Fee Letter and on the dates specified therein. No Person other than the Administrative Agent or Citicorp Securities, as the case may be, shall have any interest in these fees. (b) COMPETITIVE BID AUCTION FEE. Southland shall pay to the Administrative Agent, together with each Notice of Borrowing delivered pursuant to SECTION 2.03(b), a fee in the amount of $1,500. (c) FACILITY FEE. Southland shall pay to the Administrative Agent, for the account of each Senior Lender, a fee accruing at the rate of 0.15% per annum applied to the aggregate amount of the Commitments in effect from day to day during any calendar quarter, payable quarterly in arrears on the first Business Day of the immediately succeeding calendar quarter. (d) LETTER OF CREDIT FEES. Southland shall pay to the Administrative Agent, for the account of the Senior Lenders or the Issuing Banks, as applicable, the fee for Facility Letters of Credit, determined as set forth in SECTIONS 3.08(a) and (b). -35- (e) PAYMENT OF FEES. The fees described in this SECTION 2.06 represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention or forbearance of money, and the obligation of Southland to pay each fee described herein shall be in addition to, and not in lieu of, the obligation of Southland to pay interest, other fees described herein and expenses otherwise described in this Agreement. Fees shall be payable when due in New York, New York in immediately available funds. All fees shall be non- refundable when paid. All fees specified or referred to in this Agreement due to a Senior Lender, including, without limitation, those referred to in this SECTION 2.06, shall bear interest, if not paid when due, at the rate then applicable to past due Base Rate Loans (but not to exceed the maximum rate permitted by law) and shall constitute Obligations. 2.07.Prepayments of Loans; Reductions and Termination of Commitments. (a) VOLUNTARY PREPAYMENTS OF LOANS. Southland may, upon not less than two (2) Business Days' prior written or telephonic notice confirmed promptly in writing to the Administrative Agent (which notice the Administrative Agent shall promptly transmit by telegram, telex or telephone to each Senior Lender), at any time and from time to time, prepay any Base Rate Loans in whole or in part, without premium or penalty, in an aggregate minimum amount of $5,000,000, PROVIDED, HOWEVER, that Southland may prepay such Loans in full without regard to such minimum amount. Eurodollar Rate Loans may be prepaid in whole or in part, without premium or penalty, on the expiration date of the Eurodollar Interest Period applicable thereto and otherwise only upon payment of the amounts described in SECTION 2.09(f). Southland shall have no right to prepay any principal amount of any Competitive Bid Loan unless, and then only on the terms, specified by Southland for such Competitive Bid Loan in the related Notice of Borrowing delivered pursuant to SECTION 2.03(b) and set forth in the Competitive Bid Note evidencing such Competitive Bid Loan (or as otherwise agreed by the holder of the Competitive Bid Note). Any notice of prepayment given to the Administrative Agent under this SECTION 2.07(a) shall specify the date of prepayment, the aggregate principal amount of the prepayment and the allocation of such amount among Base Rate Loans, Eurodollar Rate Loans and Competitive Bid Loans. Voluntary prepayments of the Term Loans shall be applied to unpaid installments thereof in the direct order of their maturity (with a corresponding permanent reduction in the Term Loan Commitment of each Senior Lender proportionately in accordance with its Pro Rata Share). Notice of prepayment having been delivered as provided herein, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date. (b) MANDATORY PREPAYMENT OF REVOLVING CREDIT ADVANCES. Southland shall make prepayments of Revolving Loans to the extent necessary to assure that the Revolving Credit Obligations at any time do not exceed the Revolving Credit Commitments at such time. If, after giving effect to any prepayment of the Revolving Loans made pursuant to the immediately preceding sentence, the Revolving Credit Obligations at such time continue to exceed the -36- Revolving Credit Commitments at such time, Southland shall, notwithstanding any provision to the contrary herein or in any Competitive Bid Note, make prepayments of Competitive Bid Loans to the extent necessary to assure that the Revolving Credit Obligations at such time do not exceed the Revolving Credit Commitments at such time. (c) VOLUNTARY REDUCTION AND TERMINATION OF REVOLVING CREDIT COMMITMENTS. Southland shall have the right, at any time and from time to time, to terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Credit Commitments; PROVIDED, HOWEVER, that (A) the aggregate amount of the Revolving Credit Commitments shall not be reduced to an amount which is less than the sum of (I) the aggregate principal amount of the Competitive Bid Loans at such time, PLUS (II) the Facility Letter of Credit Obligations at such time, (B) each partial reduction shall be in the aggregate amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount and (C) Southland shall have made whatever payment may be required to reduce the Revolving Credit Obligations to an amount less than or equal to the Revolving Credit Commitments as reduced or terminated. Southland shall give not less than three (3) Business Days' prior written notice to the Administrative Agent designating the date (which shall be a Business Day) of such termination or reduction of the Revolving Credit Commitments and, in the case of a partial reduction, the amount of such reduction. Promptly after receipt of a notice of such termination or reduction, the Administrative Agent shall notify each Senior Lender of the proposed termination or reduction. Such termination or reduction of the Revolving Credit Commitments shall be effective on the date specified in Southland's notice and shall terminate or permanently reduce the Revolving Credit Commitment of each Senior Lender proportionately in accordance with its Pro Rata Share. (d) MANDATORY TERMINATION OF REVOLVING CREDIT COMMITMENTS. Each Senior Lender's Revolving Credit Commitment shall expire without further action on the part of the Administrative Agent, any Senior Lender or Southland on the Revolving Credit Termination Date. 2.08. Payments. (a) MANNER AND TIME OF PAYMENT. All payments of principal, interest, Reimbursement Obligations and fees hereunder and under the Notes or a Facility Letter of Credit payable to the Senior Lenders or any Issuing Bank shall be made without condition or reservation of right, in Dollars and in immediately available funds, delivered to the Administrative Agent not later than 11:00 a.m. (New York time) on the date due, to such account of the Administrative Agent in New York, New York, as the Administrative Agent may designate, for the account of the Senior Lenders or such Issuing Bank, as the case may be, and funds received by the Administrative Agent after that time, shall be deemed to have been paid on the next succeeding Business Day. Payments actually received by the Administrative Agent for the account of the Senior Lenders or the Issuing Banks, or any of them, shall be paid to them promptly after receipt thereof by the Administrative Agent, PROVIDED, that the Administrative Agent shall pay to such Senior Lenders or Issuing Banks interest thereon, at the Federal -37- Funds Rate, from the Business Day following receipt of such funds by the Administrative Agent until such funds are paid to such Senior Lenders and Issuing Banks. (b) APPORTIONMENT OF PAYMENTS. (i) Subject to the provisions of SECTION 2.05(f), SECTION 2.06, SECTION 2.07, SECTION 2.08(b)(ii), SECTION 2.08(b)(iii), SECTION 3.05 and SECTION 3.06(b)(ii), all payments of principal and interest in respect of outstanding Loans (other than Competitive Bid Loans), all payments in respect of Reimbursement Obliga- tions, all payments of fees and all other payments in respect of any other Obligations (other than Competitive Bid Loans), shall be allocated among such of the Senior Lenders and Issuing Banks as are entitled thereto, in proportion to their respective Pro Rata Shares or otherwise as provided herein. Except as provided in SECTION 2.08(b)(ii) with respect to payments received after the occurrence of an Event of Default, all such payments and any other amounts received by the Administrative Agent from or for the benefit of Southland shall be allocated among such of the Senior Lenders as are entitled thereto, in proportion to their respective Pro Rata Shares, or otherwise as provided herein. All such principal and interest payments in respect of Term Loans and Revolving Loans shall be applied FIRST, to the Term Loans and accrued interest thereon and SECOND, to the Revolving Loans and accrued interest thereon; in either case, FIRST, to repay outstanding Base Rate Loans and THEN to repay outstanding Eurodollar Rate Loans with those Eurodollar Rate Loans which have earlier expiring Eurodollar Interest Periods being repaid prior to those which have later expiring Eurodollar Interest Periods. All such principal and interest payments in respect of Competitive Bid Loans shall be applied in accordance with the related Competitive Bid Note. (ii) After the occurrence of an Event of Default and while the same is continuing, the Administrative Agent shall apply all payments in respect of any Obligations in the following order: (A) FIRST, to pay Obligations in respect of any fees, expense reimbursements or indemnities then due to the Administrative Agent from Southland; (B) SECOND, to pay Obligations in respect of any fees and indemnities then due to the Senior Lenders from Southland; (C) THIRD, to pay interest due in respect of Loans and other Obligations; PROVIDED, that if sufficient funds are not available to fund all payments to be made to the Holders in respect of the Obligations described in this CLAUSE (C), the available funds shall be allocated to the payment of such Obligations ratably, based on the proportion of the amount of interest due each Holder; (D) FOURTH, to pay or prepay principal of Loans and Reimbursement Obligations and to pay (or, to the extent such Obligations are contingent, prepay or provide cash collateral in -38- respect of) Facility Letter of Credit Obligations; PROVIDED, that if sufficient funds are not available to fund all payments to be made to the Holders in respect of the Obligations described in this CLAUSE (D), the available funds shall be allocated to the payment of such Obligations ratably, based on the proportion of each Holder's interest in the aggregate outstanding Loans, Reimbursement Obligations and other Facility Letter of Credit Obligations (in each instance whether or not due); (E) FIFTH, to the ratable payment of all other Obligations then due and payable for expense reimbursements; and (F) SIXTH, to the ratable payment of all other Obligations due to any and all Holders. Subject to SECTION 2.08(b)(iii) and SECTION 3.06(b)(ii), the Administrative Agent shall promptly distribute to each Senior Lender and Issuing Bank at its primary address set forth on the appropriate signature page hereof, or the signature page to the Assignment and Acceptance by which such Person became a Lender or Issuing Bank, or at such other address as a Senior Lender, an Issuing Bank or Holder may request in writing, such funds as it may be entitled to receive, subject to the provisions of ARTICLE XI and PROVIDED THAT the Administrative Agent shall in any event not be bound to inquire into or determine the validity, scope or priority of any interest or entitlement of any Holder and may suspend all payments or seek appropriate relief (including, without limitation, instructions from the Requisite Senior Lenders or an action in the nature of interpleader) in the event of any doubt or dispute as to any apportionment or distribution contemplated hereby. The order of priority herein is set forth solely to determine the rights and priorities of the Senior Lenders and other Holders as among themselves and may at any time or from time to time be changed by the Senior Lenders as they may elect, in writing in accordance with Section 12.07, without necessity of notice to or consent of or approval by Southland or any other Person. (iii) In the event that any Senior Lender fails to fund its Pro Rata Share of any Revolving Loan requested by Southland which such Senior Lender is obligated to fund under the terms of this Agreement (the funded portion of such Borrowing of Revolving Loans being hereinafter referred to as a "Non Pro Rata Loan"), until the earlier of such Senior Lender's cure of such failure and the termination of the Revolving Credit Commitments, the proceeds of all amounts thereafter repaid to the Administrative Agent by Southland and otherwise required to be applied to such Senior Lender's share of all other Obligations pursuant to the terms of this Agreement shall be advanced to Southland by the Administrative Agent on behalf of such Senior Lender to cure, in full or in part, such failure by such Senior Lender, but shall nevertheless be deemed to have been paid to such Senior Lender in satisfaction of such other Obligations. Notwithstanding anything in this Agreement to the contrary: -39- (A) the foregoing provisions of this SECTION 2.08(b)(iii) shall apply only with respect to the proceeds of payments of Obligations and shall not affect the conversion or continuation of Loans pursuant to SECTION 2.05(c); (B) a Senior Lender shall be deemed to have cured its failure to fund its Pro Rata Share of any Revolving Loan at such time as an amount equal to such Senior Lender's original Pro Rata Share of the requested principal portion of such Revolving Loan is fully funded to Southland, whether made by such Lender itself or by operation of the terms of this SECTION 2.08(b)(iii), and whether or not the Non Pro Rata Loan with respect thereto has been repaid, converted or continued; (C) amounts advanced to Southland to cure, in full or in part, any such Senior Lender's failure to fund its Pro Rata Share of any Revolving Loan ("Cure Loans") shall bear interest at the rate in effect from time to time pursuant to SECTION 2.05(a)(i) and for all other purposes of this Agreement shall be treated as if they were Base Rate Loans; and (D) regardless of whether or not an Event of Default has occurred or is continuing, and notwithstanding the instructions of Southland as to its desired application, all repayments of principal which, in accordance with the other terms of this SECTION 2.08, would be applied to the outstanding Revolving Loans which are Base Rate Loans shall be applied FIRST, ratably to all such Base Rate Loans constituting Non Pro Rata Loans, SECOND, ratably to such Base Rate Loans other than those constituting Non Pro Rata Loans or Cure Loans and THIRD, ratably to such Base Rate Loans constituting Cure Loans. (c) PAYMENTS ON NON-BUSINESS DAYS. Whenever any payment to be made by Southland hereunder or under the Notes shall be stated to be due on a day which is not a Business Day, payments shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or under the Notes and of any of the fees specified in Section 2.06, as the case may be. (d) ADMINISTRATIVE AGENT'S, ISSUING BANK'S OR SENIOR LENDER'S ACCOUNTING. Any accounting as to Loans, fees or Facility Letters of Credit which any of the Administrative Agent, any Issuing Bank or any of the Senior Lenders at its option may provide to Southland, including any periodic statement of account, will be presumed, rebuttably, to be correct. 2.09. Special Provisions Governing Eurodollar Rate Loans. Notwithstanding other provisions of this Agreement, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered: -40- (a) AMOUNT OF EURODOLLAR RATE LOANS. Each Eurodollar Rate Loan shall be for a minimum amount of $10,000,000 and in integral multiples of $5,000,000 in excess of that amount. (b) DETERMINATION OF EURODOLLAR INTEREST PERIOD. By giving notice as set forth in SECTION 2.02(b) (with respect to a Borrowing of Eurodollar Rate Loans after the Effective Date) or SECTION 2.05(c) (with respect to a conversion into or continuation of Eurodollar Rate Loans), Southland shall have the option, subject to the other provisions of this SECTION 2.09, to specify an interest period (each a "Eurodollar Interest Period") to apply to the Borrowing of Eurodollar Rate Loans described in such notice, which Eurodollar Interest Period shall be a period of either one, two, three, six or, if available to each of the Senior Lenders, twelve months. The determination of Eurodollar Interest Periods shall be subject to the following provisions: (i) In the case of immediately successive Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans, each successive Eurodollar Interest Period shall commence on the day on which the immediately preceding Eurodollar Interest Period expires; (ii) If any Eurodollar Interest Period would otherwise expire on a day which is not a Business Day, the Eurodollar Interest Period shall be extended to expire on the next succeeding Business Day; PROVIDED, that if any such Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in that month, that Eurodollar Interest Period shall expire on the immediately preceding Business Day; (iii) Southland may not select a Eurodollar Interest Period for any Borrowing of Revolving Loans which terminates later than the Revolving Credit Termination Date; or for the Term Loans, or any portion thereof, which terminates later than December 31, 2001; (iv) Southland may not select a Eurodollar Interest Period with respect to any portion of principal of a Eurodollar Rate Loan which extends beyond a date on which Southland is required to make a scheduled payment of that portion of principal, it being understood and agreed that any Eurodollar Rate Loan whose Eurodollar Interest Period ends less than one month prior to such date shall be deemed converted to a Base Rate Loan as of the last day of such Eurodollar Interest Period for purposes of determining whether any portion of principal of any Eurodollar Rate Loan is required in order to make a mandatory payment of principal; and -41- (v) There shall be no more than ten (10) Eurodollar Interest Periods in effect at any one time. (c) DETERMINATION OF INTEREST RATE. As soon as practicable after 11:00 a.m. (New York time) on the Eurodollar Interest Rate Determination Date, the Administrative Agent shall determine (which determination shall, absent manifest error, be presumptively correct, subject, however, to the provisions of SECTION 12.23) the interest rate which shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Eurodollar Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Southland and to each Senior Lender. (d) INTEREST RATE UNASCERTAINABLE, INADEQUATE OR UNFAIR. If with respect to any Eurodollar Interest Period: (i) the Administrative Agent is advised by any Reference Bank that deposits in Dollars (in the applicable amounts) are not being offered by such Reference Bank in the relevant market for such Eurodollar Interest Period; or (ii) Requisite Senior Lenders advise the Administrative Agent that the Eurodollar Rate as determined by the Administrative Agent is less than the cost to such Senior Lenders of obtaining funds in the London interbank Eurodollar market in the amount substantially equal to such Senior Lenders' Eurodollar Rate Loans and for a period equal to such Eurodollar Interest Period; the Administrative Agent shall forthwith give notice thereof to Southland, whereupon until the Administrative Agent notifies Southland that the circumstances giving rise to such suspension no longer exist, the right of Southland to elect to have the Term Loans and the Revolving Loans bear interest based on the Eurodollar Rate shall be suspended, and each outstanding Eurodollar Rate Loan made by the Senior Lenders shall be converted into a Base Rate Loan on the last day of the then current Eurodollar Interest Period therefor, notwithstanding any prior election by Southland to the contrary. (e) ILLEGALITY. (i) In the event that on any date any Senior Lender shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties) that the making or continuation of any Eurodollar Rate Loan has become unlawful by compliance by that Senior Lender in good faith with any law, governmental rule, regulation or order of any Governmental Authority (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), then, and in any such event, that Senior Lender shall promptly give notice (by telephone promptly confirmed in writing) to Southland and the Administrative Agent (which notice the Administrative Agent shall promptly transmit to each Senior Lender) of that determination. -42- (ii) Upon the giving of the notice referred to in SECTION 2.09(e)(i), (A) Southland's right to request and such Senior Lender's obligation to make Eurodollar Rate Loans shall be immediately suspended, and such Senior Lender shall make a Loan, as part of any requested Borrowing of Eurodollar Rate Loans, as a Base Rate Loan, which Base Rate Loan shall, for all purposes, be considered a part of such Borrowing, and (B) if the affected Eurodollar Rate Loan(s) are then outstanding, Southland shall immediately, or if permitted by applicable law, no later than the date permitted thereby, upon at least one (1) Business Day's written notice to the Administrative Agent and the affected Senior Lender, convert each such Eurodollar Rate Loan into a Base Rate Loan. (iii) In the event that such Senior Lender determines at any time following its giving of the notice referred to in SECTION 2.09(e)(i) that such Senior Lender may lawfully make Eurodollar Rate Loans of the type referred to in such notice, such Senior Lender shall promptly give notice (by telephone confirmed in writing) to Southland and the Administrative Agent (which notice the Administrative Agent shall promptly transmit to each Senior Lender) of that determination, whereupon Southland's right to request and such Senior Lender's obligation to make Eurodollar Rate Loans of such type(s) shall be restored. (f) COMPENSATION. In addition to such amounts as are required to be paid by Southland pursuant to SECTIONS 2.05(a), 2.05(d) and 2.05(f), Southland shall compensate each Senior Lender, upon written request by that Senior Lender (which request shall set forth in reasonable detail the basis for requesting such amounts), for all losses, expenses and liabilities, including, without limitation, any loss or expense incurred by reason of the liquidation of reemployment of deposits or other funds acquired by that Senior Lender to fund or maintain that Senior Lender's Eurodollar Rate Loans to Southland which that Senior Lender may sustain (i) if for any reason a Borrowing, conversion or continuation of Eurodollar Rate Loans does not occur on a date specified therefor in a Notice of Borrowing or a Notice of Conversion/Continuation or in a telephonic request for borrowing or conversion/continuation or a successive Eurodollar Interest Period does not commence after notice therefor is given pursuant to SECTION 2.05(c), (ii) if any prepayment of any Eurodollar Rate Loan (including without limitation, any prepayments pursuant to SECTION 2.07) occurs for any reason on a date which is not the last day of the applicable Eurodollar Interest Period, (iii) as a consequence of any required conversion of a Eurodollar Rate Loan to a Base Rate Loan as a result of any of the events indicated on SECTION 2.09(e), or (iv) as a consequence of any other default by Southland to repay Eurodollar Rate Loans when required by the terms of this Agreement. (g) QUOTATION OF EURODOLLAR RATE. If on any Eurodollar Interest Rate Determination Date any of the Reference Banks shall have failed to provide offered quotations to the Administrative Agent in accordance with the definition of "Eurodollar Rate" the Administrative Agent shall determine the Eurodollar Rate using the quotation of the other Reference Banks. (h) EURODOLLAR RATE TAXES. Southland agrees that: -43- (i) Southland will pay, prior to the date on which penalties attach thereto, all present and future income, stamp and other taxes, levies, or costs and charges whatsoever imposed, assessed, levied or collected on or in respect of a Loan solely as a result of the interest rate being determined by reference to the Eurodollar Rate or the provisions of this Agreement relating to the Eurodollar Rate or the recording, registration, notarization or other formalization of any thereof or any payments of principal, interest or other amounts made on or in respect of a Loan when the interest rate is determined by reference to the Eurodollar Rate (all such taxes, levies, costs and charges being herein collectively called "Eurodollar Rate Taxes"); PROVIDED that Eurodollar Rate Taxes shall not include: taxes imposed on or measured by the overall net income of the Senior Lender or any foreign branch or Subsidiary of that Senior Lender by the United States of America or any taxing authority of any jurisdiction in which the Senior Lender or any such foreign branch or Subsidiary conducts business. Southland shall also pay such additional amounts equal to increases in taxes payable by that Senior Lender described in the foregoing proviso which increases are attributable to payments made by Southland described in this sentence and in the immediately preceding sentence of this CLAUSE (i). Promptly after the date on which payment of any such Eurodollar Rate Tax is due pursuant to applicable law, Southland will, at the request of that Senior Lender, furnish to that Senior Lender evidence, in form and substance satisfactory to that Senior Lender, that Southland has met its obligation under this SECTION 2.09(h); and (ii) Southland will indemnify each Senior Lender against, and reimburse each Senior Lender on demand for, any Eurodollar Rate Taxes paid by such Senior Lender, as determined by that Senior Lender in its sole discretion. That Senior Lender shall provide Southland with (A) appropriate receipts for any payments or reimbursements made by Southland pursuant to this SECTION 2.09(h)(ii) and (B) such information as may reasonably be required to indicate the basis for such Eurodollar Rate Taxes; PROVIDED that if a Senior Lender or Issuing Bank subsequently recovers, or receives a net tax benefit with respect to, any amount of Eurodollar Rate Taxes previously paid by Southland pursuant to this SECTION 2.09(h)(ii), such Senior Lender or Issuing Bank shall, within 30 days after receipt of such refund, and to the extent permitted by applicable law, pay to Southland the amount of any such recovery or permanent net tax benefit. (i) BOOKING OF EURODOLLAR RATE LOANS. Any Senior Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of, any of its branch offices or the office of an Affiliate of that Senior Lender; PROVIDED, however, no such Senior Lender shall be entitled to receive any greater amount under SECTION 2.05(f) or 2.09(h) as a result of the transfer of any such Eurodollar Rate Loan than such Senior Lender would be entitled to immediately prior thereto unless (A) such transfer occurred at a time when -44- circumstances giving rise to the claim for such greater amount did not exist and (B) such claim would have arisen even if such transfer had not occurred. (j) AFFILIATES NOT OBLIGATED. No Eurodollar Affiliate or other Affiliate of any Senior Lender shall be deemed a party to this Agreement or shall have any rights, liability or obligation under this Agreement. 2.10. INCREASED CAPITAL. If either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) compliance by any Senior Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) affects or would affect the amount of capital required or expected to be maintained by such Senior Lender or any corporation controlling such Senior Lender and such Senior Lender reasonably determines that the amount of such capital is increased by or based upon the existence of such Senior Lender's Commitment and other commitments of this type then, upon demand by such Senior Lender, Southland shall immediately pay to such Senior Lender, from time to time as specified by such Senior Lender, additional amounts sufficient to compensate such Senior Lender in the light of such circumstances, to the extent that such Senior Lender reasonably determines such increase in capital to be allocable to the existence of such Senior Lender's Commitment. A certificate as to such amounts submitted to Southland by such Senior Lender, shall, in the absence of manifest error, be conclusive and binding for all purposes. 2.11. REPLACEMENT OF SENIOR LENDER IN EVENT OF ADVERSE CONDITION. In the event Southland becomes obligated to pay additional amounts to any Senior Lender or Issuing Bank pursuant to SECTION 2.05(f), 2.09(h), 2.10 or 3.08(c) as a result of any condition described in any such Section, then, unless such Senior Lender or Issuing Bank has theretofore taken reasonable steps (to the extent not inconsistent with the internal policies of such Senior Lender or Issuing Bank and any applicable legal or regulatory restrictions) to remove or cure, and has removed or cured, the conditions creating the cause for such obligation to pay such additional amounts (to the extent such removal or cure would not, in the determination of the Senior Lender or Issuing Bank, otherwise adversely affect its Commitments, Loans or Letters of Credit), Southland may designate another bank or financial institution which is reasonably acceptable to the Administrative Agent and the Requisite Senior Lenders (any such bank or financial institution being herein called a "Replacement Lender") to purchase the Notes of such Senior Lender and such Senior Lender's rights hereunder, without recourse to or warranty by, or expense to, such Senior Lender for a purchase price equal to the outstanding principal amount of such Notes payable to such Senior Lender plus any accrued but unpaid interest on such Notes plus the greatest amount for which all outstanding Facility Letters of Credit issued by such Senior Lender may be drawn plus accrued but unpaid fees payable pursuant to Section 2.06 and any other amounts due and payable hereunder and upon such purchase, such Senior Lender shall no longer be a party hereto or have any rights hereunder, and the Replacement Lender shall succeed to the rights of such Senior Lender hereunder. -45- 2.12. AUTHORIZED OFFICERS AND AGENTS. Southland shall notify the Administrative Agent in writing of the names of the officers and employees authorized to request Loans on behalf of Southland and shall provide the Administrative Agent with a specimen signature of each such officer or employee. The officers and employees of Southland authorized to request a Loan on behalf of Southland shall also be authorized to request a conversion/continuation of any Revolving Loan or any Term Loan on behalf of Southland. The Administrative Agent shall be entitled to rely conclusively on such officer's or employee's authority to request, convert or continue a Loan on behalf of Southland until the Administrative Agent receives written notice to the contrary. The Administrative Agent shall have no duty to verify the authenticity of the signature appearing on any written Notice of Borrowing or Notice of Conversion/Continuation and, with respect to an oral request for a Loan or a conversion or continuation thereof, the Administrative Agent shall have no duty to verify the identity of any person representing himself as one of the officers or employees authorized to make such request on behalf of Southland. Neither the Administrative Agent nor any Senior Lender shall incur any liability to Southland in acting upon any telephonic notice referred to above which the Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Southland or for otherwise acting in good faith under this Agreement. ARTICLE III THE LETTER OF CREDIT SUBFACILITY 3.01. OBLIGATION TO ISSUE. Subject to the terms and conditions set forth in this Agreement, each Issuing Bank hereby severally agrees to issue for the account of Southland one or more Facility Letters of Credit, up to an aggregate face amount at any one time outstanding equal to its Letter of Credit Commitment, from time to time through the earlier of (i) the expiration of such Issuing Bank's Letter of Credit Commitment or (ii) the Business Day immediately preceding the Revolving Credit Termination Date. 3.02. TYPES AND AMOUNTS. (a) An Issuing Bank shall not have any obligation to issue, amend or extend, and shall not issue, amend or extend, any Facility Letter of Credit at any time: (i) if the aggregate maximum amount then available for drawing under Facility Letters of Credit issued by such Issuing Bank after giving effect to the Facility Letter of Credit requested hereunder, shall exceed any limit imposed by law or regulation upon such Issuing Bank; (ii) if, immediately after the issuance of such Facility Letter of Credit, the aggregate principal amount of Facility Letter of Credit Obligations then existing with respect to Facility Letters of Credit issued by that Issuing Bank (which amount shall be calculated without giving effect to the participation of the Senior -46- Lenders pursuant to SECTION 3.06) would exceed such Issuing Bank's then effective Letter of Credit Commitment; (iii) if the Issuing Bank receives written notice from the Administrative Agent or the Requisite Senior Lenders at or before 11:00 a.m. (New York time) on the date of the proposed issuance, amendment or extension of such Facility Letter of Credit that (A) immediately after the issuance, amendment or extension of such Facility Letter of Credit, (I) the Facility Letter of Credit Obligations at such time would exceed the Letter of Credit Subfacility then in effect or (II) the Revolving Credit Obligations at such time would exceed the aggregate Revolving Credit Commitments then in effect, or (B) one or more of the conditions precedent contained in SECTION 4.01 or 4.02, as applicable, will not on such date be satisfied, and an Issuing Bank shall not otherwise be required to determine that, or take notice whether, the conditions precedent set forth in SECTION 4.01 or 4.02, as applicable, have been satisfied; or (iv) which has an expiration date (A) more than one year after the date of issuance or extension, as applicable or (B) after the Business Day immediately preceding the Revolving Credit Termination Date. (b) Any Senior Lender may, in its discretion, issue or extend Letters of Credit permitted under SECTION 8.01(vii) without regard to the terms and provisions of this ARTICLE III, and no other Senior Lender will have any obligation to purchase any participation or any other interest in such Letters of Credit pursuant to SECTION 3.06. 3.03. CONDITIONS. In addition to being subject to the satisfaction of the conditions precedent contained in SECTION 4.01 or 4.02, as applicable, the obligation of an Issuing Bank to issue any Facility Letter of Credit is subject to the satisfaction in full of the following conditions: (i) Southland shall have delivered to that Issuing Bank, at such times and in such manner as that Issuing Bank may prescribe, a Letter of Credit Reimbursement Agreement and such other documents and materials as may be required pursuant to the terms thereof and the terms of the proposed Letter of Credit shall be satisfactory to that Issuing Bank; and (ii) As of the date of issuance no order, judgment or decree of any court, arbitrator or Governmental Authority shall purport by its terms to enjoin or restrain that Issuing Bank from issuing the Facility Letter of Credit and no law, rule or regulation applicable to that Issuing Bank and no request or directive (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) from any Governmental Authority with jurisdiction over that Issuing Bank shall prohibit or request that such Issuing Bank refrain from the issuance of Letters of Credit generally or the issuance of that Facility Letter of Credit. -47- 3.04. ISSUANCE OF FACILITY LETTERS OF CREDIT. (a) Southland shall give an Issuing Bank and the Administrative Agent written notice that it has selected that Issuing Bank to issue a Facility Letter of Credit not later than 11:00 a.m. (New York time) on the fifth (5th) Business Day preceding the requested issuance thereof under this Agreement, or such shorter notice as may be acceptable to such Issuing Bank and the Administrative Agent. Such notice shall be irrevocable and shall specify (i) the stated amount of the Facility Letter of Credit requested, (ii) the effective date (which day shall be a Business Day) of issuance of such requested Facility Letter of Credit, (iii) the date on which such requested Facility Letter of Credit is to expire (which date shall be a Business Day and shall in no event be later than the expiration date permitted by SECTION 3.02(a)(iv)), (iv) the Person for whose benefit the requested Facility Letter of Credit is to be issued, and (v) the amount of then outstanding Facility Letter of Credit Obligations in respect of Facility Letters of Credit issued by that Issuing Bank. (b) An Issuing Bank shall not extend or amend any Facility Letter of Credit if the issuance of a new Facility Letter of Credit having the same terms as such Facility Letter of Credit as so extended or amended would be prohibited by SECTION 3.02(a). 3.05. REIMBURSEMENT OBLIGATIONS; DUTIES OF ISSUING. (a) Notwithstanding any provisions to the contrary in any Letter of Credit Reimbursement Agreement: (i) Southland shall reimburse an Issuing Bank for drawings under a Facility Letter of Credit used by it no later than the earlier of (a) the time specified in such Letter of Credit Reimbursement Agreement, and (b) three (3) Business Days after the payment by that Issuing Bank; and (ii) any Reimbursement Obligation with respect to any Facility Letter of Credit shall bear interest from the date of the relevant drawing under the pertinent Facility Letter of Credit at the interest rate applicable to Base Rate Loans for three (3) Business Days after such date and thereafter at the interest rate for past due Base Rate Loans in accordance with SECTION 2.05(d). (b) No action taken or omitted to be taken by an Issuing Bank under or in connection with any Facility Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall put that Issuing Bank under any resulting liability to any Senior Lender or, subject to SECTION 3.02, relieve that Senior Lender of its obligations hereunder to that Issuing Bank. In determining whether to pay under any Facility Letter of Credit, an Issuing Bank shall have no obligation to the Senior Lenders other -48- than to confirm that any documents required to be delivered under such Facility Letter of Credit appear to have been delivered and that they appear on their face to comply with the requirements of such Facility Letter of Credit. 3.06. PARTICIPATIONS. (a) Immediately upon issuance by an Issuing Bank of any Facility Letter of Credit in accordance with the procedures set forth in this ARTICLE III and immediately upon conversion of a Letter of Credit of an Issuing Bank to a Facility Letter of Credit pursuant to SECTION 3.11, each Senior Lender shall be deemed to have irrevocably and unconditionally purchased and received from that Issuing Bank, without recourse or warranty, an undivided interest and participation to the extent of such Senior Lender's Pro Rata Share in such Facility Letter of Credit (including, without limitation, all obligations of Southland with respect thereto other than amounts owing to the Issuing Bank under SECTIONS 3.08(b) and 3.08(c)) and any security therefor or guaranty pertaining thereto. (b) (i) If any Issuing Bank makes any payment under any Facility Letter of Credit and Southland does not repay such amount to such Issuing Bank pursuant to SECTION 3.05(a) or 3.07, such Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Senior Lender of such failure, and each Senior Lender shall promptly and unconditionally pay to the Administrative Agent for the account of such Issuing Bank the amount of such Senior Lender's Pro Rata Share of such payment, in Dollars and in same day funds, and the Administrative Agent shall promptly pay such amount, and any other amounts received by the Administrative Agent for such Issuing Bank's account pursuant to this SECTION 3.06(b)(i), to the Issuing Bank. If the Administrative Agent so notifies such Senior Lender prior to 11:00 a.m. (New York time) on any Business Day, such Senior Lender shall make available to the Administrative Agent for the account of such Issuing Bank its Pro Rata Share of the amount of such payment on such Business Day in immediately available funds in New York, New York. (ii) If and to the extent such Senior Lender shall not have so made its Pro Rata Share of the amount of such payment available to the Administrative Agent for the account of such Issuing Bank, (A) such Senior Lender agrees to pay to the Administrative Agent for the account of such Issuing Bank forthwith on demand such amount together with interest thereon, for each day from the date such payment was first due until the date such amount is paid to the Administrative Agent for the account of such Issuing Bank, at the Federal Funds Rate, (B) with respect to any Senior Lender which is also an Issuing Bank hereunder or whose Affiliate is an Issuing Bank hereunder and, in either case, such Issuing Bank has not received a requested reimbursement under SECTION 3.06(b)(i) in respect of a payment made by such Issuing Bank under a Facility Letter of Credit (an "Unreimbursed Issuing Bank"), the obligations of such Senior Lender under SECTION 3.06(b)(i) shall be suspended solely as to any Issuing Bank with respect to which such Issuing Bank (in its capacity as a Senior Lender) or the Affiliate of such Issuing Bank which is a Senior Lender has failed to reimburse such Unreimbursed Issuing Bank (a "Defaulting L/C Participant"), until the amount of such reimbursement is paid in full and (C) until the earlier of such Defaulting L/C Participant's cure of such failure to reimburse such Unreimbursed Issuing -49- Bank, the proceeds of all amounts thereafter repaid to the Administrative Agent by Southland and otherwise required to be applied to such Defaulting L/C Participant's share of all other Obligations pursuant to the terms of this Agreement shall be advanced to the Unreimbursed Issuing Bank by the Administrative Agent on behalf of such Defaulting L/C Participant to cure, in full or in part, such failure by such Defaulting L/C Participant, but shall nevertheless be deemed to have been paid to such Defaulting L/C Participant in satisfaction of such other Obligations. Notwithstanding anything in this Agreement to the contrary, a Defaulting L/C Participant shall be deemed to have cured its failure to fund its Pro Rata Share of any reimbursement requested under SECTION 3.06(b)(i) at such time as an amount equal to such Defaulting L/C Participant's original Pro Rata Share of the requested principal portion of such reimbursement is fully funded to the Unreimbursed Issuing Bank, whether made by such Defaulting L/C Participant itself or by operation of the terms of this SECTION 3.06(b)(ii). (iii) The failure of any Senior Lender to make available to the Administrative Agent for the account of any Issuing Bank its Pro Rata Share of any such payment shall not relieve any other Senior Lender of its obligation hereunder to make available to the Administrative Agent for the account of such Issuing Bank its Pro Rata Share of any payment on the date such payment is to be made. (c) Whenever an Issuing Bank receives a payment on account of a Reimbursement Obligation, including any interest thereon, as to which the Administrative Agent has previously received payments from any or all of the Senior Lenders for the account of such Issuing Bank pursuant to this SECTION 3.06, such Issuing Bank shall promptly pay to the Administrative Agent and the Administrative Agent shall promptly pay to each Senior Lender which has funded its participating interest therein, in New York, New York, in Dollars and in the kind of funds so received, an amount equal to (i) the amount paid by such Issuing Bank, MULTIPLIED BY (ii) a fraction, the numerator or which shall be the amount funded by such Senior Lender in respect of its participating interest and the denominator of which shall be the amount funded by all of the Senior Lenders in respect of their respective participating interests. Each such payment shall be made by the Issuing Bank or the Administrative Agent, as the case may be, on the Business Day on which such Person receives the funds paid to such Person pursuant to the preceding sentence, if received prior to 11:00 a.m. (New York time) on such Business Day, and otherwise on the next succeeding Business Day. (d) Upon the request of the Administrative Agent or any Senior Lender, an Issuing Bank shall furnish to the Administrative Agent or such Senior Lender copies of any Facility Letter of Credit or Letter of Credit Reimbursement Agreement to which that Issuing Bank is party and such other documentation as may reasonably be requested by the Administrative Agent or such Senior Lender. -50- (e) The obligations of a Senior Lender to make payments to the Administrative Agent for the account of each Issuing Bank with respect to a Facility Letter of Credit shall be irrevocable, shall not be subject to any qualification or exception whatsoever, and shall be honored in accordance with the terms and conditions of this Agreement under all circumstances (subject to SECTION 3.02), including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, set-off, defense or other right which Southland may have at any time against a beneficiary named in a Facility Letter of Credit or any transferee of any Facility Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Issuing Bank, any Senior Lender, or any other Person, whether in connection with this Agreement, any Facility Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between Southland or any Subsidiary of Southland and the beneficiary named in any Facility Letter of Credit); (iii) any draft, certificate of any other document presented under the Facility Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) any failure by the Administrative Agent or that Issuing Bank to make any reports required pursuant to SECTION 3.09; or (v) the occurrence of any Event of Default or Potential Event of Default. 3.07. PAYMENT OF REIMBURSEMENT OBLIGATIONS. (a) Southland agrees to pay to each Issuing Bank the amount of all Reimbursement Obligations, interest and other amounts payable to such issuing Bank under or in connection with any Facility Letter of Credit immediately when due; irrespective of any claim, setoff, defense or other right which Southland may have at any time against any Issuing Bank or any other Person. (b) In the event any payment by Southland received by an Issuing Bank with respect to a Facility Letter of Credit and distributed by the Administrative Agent to the Senior Lenders on account of their participations is thereafter set aside, avoided or recovered from that Issuing Bank in connection with any receivership, liquidation or bankruptcy proceeding, each Senior Lender which received such distribution shall, upon demand by that -51- Issuing Bank, contribute such Senior Lender's Pro Rata Share of the amount set aside, avoided or recovered together with interest at the rate required to be paid by that Issuing Bank upon the amount required to be repaid by it. 3.08. COMPENSATION FOR FACILITY LETTERS OF CREDIT. (a) FACILITY LETTER OF CREDIT FEES. Southland shall pay quarterly in arrears, on the tenth (10th) Business Day of each calendar quarter in respect of the previous calendar quarter and promptly upon receipt of each quarterly report referred to in SECTION 3.09, in the case of each Facility Letter of Credit covered by such quarterly report, a fee equal to 0.225% per annum applied (on the basis of actual days elapsed in a 360 day year) to the maximum amount available to be drawn under such Facility Letter of Credit from day to day during the previous calendar quarter. This fee shall be paid to the Administrative Agent for the account of the Senior Lenders in proportion to their respective Pro Rata Shares. (b) ISSUING BANK CHARGES. Southland shall pay to each Issuing Bank, solely for the account of the Issuing Bank, (i) by the tenth Business Day of each calendar quarter, a fee equal to one-tenth of one percent (0.10%) per annum applied (on the basis of actual days elapsed in a 360- day year) to the maximum amount available to be drawn from day to day during the immediately preceding calendar quarter under each Facility Letter of Credit issued by the Issuing Bank, and (ii) upon the Issuing Bank's demand therefor, the standard charges assessed by such Issuing Bank in connection with the issuance, administration, amendment and payment or cancellation of each Facility Letter of Credit issued by the Issuing Bank. (c) INCREASED CAPITAL. If either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) compliance by any Issuing Bank or Senior Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) affects or would affect the amount of capital required or expected to be maintained by it or any corporation controlling it and such Senior Lender or Issuing Bank determines, on the basis of reasonable allocations, that the amount of such capital is increased by or is based upon its issuance or maintenance of or participation in, or commitment to issue or to participate in, the Facility Letters of Credit then, upon demand by any such Senior Lender or Issuing Bank, Southland shall immediately pay to such Senior Lender or Issuing Bank, from time to time as specified by such Senior Lender or Issuing Bank, additional amounts sufficient to compensate such Senior Lender or Issuing Bank therefor. A certificate as to such amounts submitted to Southland by any such Senior Lender or Issuing Bank shall, in the absence of manifest error, be conclusive and binding for all purposes. 3.09. ISSUING BANK REPORTING REQUIREMENTS. Each Issuing Bank shall, no later than the tenth Business Day following the last day of each calendar quarter, provide to the Administrative Agent and Southland separate schedules for Commercial Letters of Credit and Standby Letters of Credit issued as Facility Letters of Credit, in form and substance reasonably -52- satisfactory to the Administrative Agent, showing the date of issue, account party, amount, expiration date and the reference number of each Facility Letter of Credit issued by it outstanding at any time during such calendar quarter and the aggregate amount paid by Southland during the calendar quarter pursuant to SECTION 3.07. Copies of such reports shall be provided promptly to each Senior Lender by the Administrative Agent. 3.10. INDEMNIFICATION; EXONERATION. (a) In addition to amounts payable as elsewhere provided in this ARTICLE III, Southland hereby agrees to protect, indemnify, pay and save the Administrative Agent, each Issuing Bank and each Senior Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which the Administrative Agent or such Issuing Bank or Senior Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Facility Letter of Credit other than, in the case of an Issuing Bank, as a result of its gross negligence or willful misconduct, as determined by a court of competent jurisdiction or (ii) the failure of the Issuing Bank issuing a Facility Letter of Credit to honor a drawing under such Facility Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority (all such acts or omissions herein called "Government Acts"). (b) As between Southland, the Senior Lenders and each Issuing Bank issuing a Facility Letter of Credit, Southland assumes all risks of the acts and omissions of, or misuse of such Facility Letters of Credit by, the respective beneficiaries of the Facility Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letter of Credit applications, the Issuing Banks and the Senior Lenders shall not be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Facility Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Facility Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Facility Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Facility Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of a Facility Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (viii) for any consequences arising from causes beyond the control of the Administrative Agent, Issuing Banks and Senior Lenders including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of any of an Issuing Bank's rights or powers under this SECTION 3.10. -53- (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by an Issuing Bank under or in connection with the Facility Letters of Credit or any related certificates, if taken or omitted in good faith, shall not put the Issuing Bank, the Administrative Agent or any Senior Lenders under any resulting liability to Southland or relieve Southland of any of its obligations hereunder to any such Person. (d) Notwithstanding anything to the contrary contained in this Section 3.10, Southland shall have no obligation to indemnify an Issuing Bank under this Section 3.10 in respect of any liability incurred by such Issuing Bank arising out of the gross negligence or willful misconduct of such Issuing Bank. 3.11. TRANSITIONAL PROVISIONS. SCHEDULE 3.11 contains a schedule of certain Letters of Credit issued for the account of Southland outstanding as of the Effective Date by one or more of the Issuing Banks. Subject to the satisfaction of the conditions precedent contained in ARTICLE IV, on the Effective Date (i) such Letters of Credit, to the extent still outstanding, shall be deemed to be converted into Facility Letters of Credit issued pursuant to SECTION 3.04 and subject to the provisions of this Agreement, and for this purpose the fees specified in SECTION 3.08 shall be payable as if such Letters of Credit had been issued on the Effective Date, (ii) the face amount of such Letters of Credit shall be included in the calculation of Facility Letter of Credit Obligations which when, aggregated with all other Facility Letter of Credit Obligations outstanding as of the Effective Date, shall not exceed the Letter of Credit Subfacility, and (iii) all liabilities of Southland with respect to such Letters of Credit shall constitute Obligations. 3.12. AMOUNT OF LETTER OF CREDIT SUBFACILITY. (a) The amount of the Letter of Credit Subfacility shall initially be equal to $150,000,000, but in any event shall not exceed the aggregate amount of the Revolving Credit Commitments. Any termination of the Revolving Credit Commitments pursuant to SECTION 2.07 shall terminate each Issuing Bank's Letter of Credit Commitment. (b) The amount of the Letter of Credit Subfacility shall be determined as set forth in SECTION 3.12(a) whether or not the aggregate of all of the Issuing Banks' then effective Letter of Credit Commitments shall exceed the amount of the then Letter of Credit Subfacility. (c) Upon five (5) Business Days' prior written notice thereof to the Administrative Agent and each Issuing Bank, or upon such other prior written notice as the Administrative Agent may elect to accept in any particular instance, Southland may: (i) with the written consent of such Senior Lender (or Affiliate thereof) and the Administrative Agent, designate as an Issuing Bank any Senior Lender (or Affiliate thereof) which is not then an Issuing Bank and the Letter of Credit Commitment of such newly- designated Issuing Bank; and -54- (ii) whether or not in connection with the addition of an Issuing Bank pursuant to this SECTION 3.12(c), reduce or (with the consent of the Issuing Bank) increase any Issuing Bank's Letter of Credit Commitment, subject to SECTION 3.12(d) below. (d) The appointment of additional Issuing Banks pursuant to SECTION 3.12(c)(i) and the reduction or increase of any Issuing Bank's Letter of Credit Commitment pursuant to SECTION 3.12(a) or 3.12(c)(ii) shall at all times be subject to the qualifications and restrictions that (i) at no time shall any Issuing Bank's Letter of Credit Commitment exceed the amount agreed to by such Issuing Bank and (ii) Southland shall not reduce any Issuing Bank's Letter of Credit Commitment to an amount less than the amount of all of the then existing Facility Letter of Credit Obligations in respect of Facility Letters of Credit issued by such Issuing Bank. 3.13. OBLIGATIONS SEVERALY. The obligation of each Issuing Bank and each Senior Lender under this ARTICLE III is several and not joint, and no Issuing Bank or Senior Lender shall be responsible for the Letter of Credit Commitment or participation obligation hereunder, respectively, of any other Issuing Bank or Senior Lender. ARTICLE IV CONDITIONS TO LOANS AND FACILITY LETTERS OF CREDIT 4.01. CONDITIONS PRECEDENT TO INITIAL LOANS AND FACILITY LETTERS OF CREDIT. The obligation of each Senior Lender on the Effective Date to make its Term Loan and any Revolving Credit Advance requested to be made by it, and the agreement of each Issuing Bank on the Effective Date to issue Facility Letters of Credit, shall be subject to the satisfaction of all of the following conditions precedent: (a) DOCUMENTS. The Administrative Agent shall have received on or before the Effective Date all of the following, each of which shall be duly executed, completed and acknowledged where appropriate and in form and substance satisfactory to Southland, the Administrative Agent and the Senior Lenders: (i) this Agreement, together with all Schedules hereto which shall be in each case true, complete and correct in all material respects as of the Effective Date; (ii) (A) for the benefit of each Senior Lender, a Term Note and a Revolving Note dated the Effective Date and made payable to the order of such Senior Lender and (B) to the extent any Competitive Bid Loans are to be made on the Effective Date, for the benefit of each Senior Lender making such Loans, a Competitive Bid Note, dated the Effective Date and made payable to the order of such Senior Lender; -55- (iii) Notices of Borrowing completed in accordance with the provisions of SECTION 2.01(b), SECTION 2.02(b) and, if applicable, SECTION 2.03(b); (iv) (A) A certified copy of the resolutions of Southland's Board of Directors designating this Agreement as the "Credit Agreement" or the "Bank Credit Agreement" (as applicable) under the documents governing Southland's Subordinated Indebtedness and (B) an acknowledgment of Citicorp North America, Inc., as "Administrative Agent" under (and as defined in) the Existing Credit Agreement that the Existing Credit Agreement has been terminated (other than provisions which, by their terms, survive the termination of the Existing Credit Agreement) and that all outstanding indebtedness and obligations thereunder or with respect thereto have been repaid in full in cash and discharged; (v) the Payoff Letter; (vi) a commitment (subject to review of definitive documentation) from each of the Senior Lenders to fund its Pro Rata Share of "Tranche A" under (and as defined in) the Master Lease Facility; (vii) Favorable legal opinions, each dated the Effective Date and otherwise in form and substance satisfactory to the Administrative Agent, addressed to the Administrative Agent, the Senior Lenders and the Issuing Banks from: (A) Bryan F. Smith, Vice President and General Counsel of Southland, dated the Effective Date, in substantially the form of EXHIBIT 10-A attached hereto; and (B) Shearman & Sterling, New York counsel to Southland, dated the Effective Date, in substantially the form of EXHIBIT 10-B attached hereto; Southland hereby directs its counsel to prepare and deliver to the Administrative Agent, the Senior Lenders and the Issuing Banks the respective opinions described in CLAUSES (A) and (B) above; (viii) a letter to Southland, dated on or near the Effective Date, from Coopers & Lybrand, in substantially the form attached as EXHIBIT 11; (ix) Southland's Articles of Incorporation, as amended, modified or supplemented to the Effective Date, certified to be true, correct and complete by the Secretary of State of Texas as of a recent date prior to the Effective Date, together with good standing certificates from the Secretaries of State of such States -56- in which Southland is qualified to do business as the Administrative Agent may request, each to be dated a recent date prior to the Effective Date; (x) A certificate of the Secretary or Assistant Secretary of Southland, in each case dated the Effective Date, certifying (A) the names and true signatures of the incumbent officers of Southland authorized to sign the Loan Documents, (B) the By- Laws of Southland as in effect on the date of such certification, (C) the resolutions of Southland's Board of Directors approving and authorizing the execution, delivery and performance of the Loan Documents executed by such Person, and (D) that Southland's Articles of Incorporation have not been amended, supplemented or otherwise modified since the date of certification from the Secretary of State of Texas under SECTION 4.01(a)(ix) and that such Articles of Incorporation are in full force and effect; (xi) the financial statements and materials referred to in SECTION 5.01(viii), in form and substance satisfactory to the Administrative Agent; (xii) a certificate signed by the principal financial officer or treasurer of Southland certifying that all conditions precedent set forth in this Agreement have been met and no Potential Event of Default or Event of Default has occurred or is continuing; and (xiii) such additional documentation as the Administrative Agent may reasonably request. (b) FEES AND EXPENSES PAID. Southland shall have paid to the Administrative Agent, for the benefit of the Persons entitled thereto, all fees and expenses due and payable on or before the Effective Date. (c) REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of Southland contained in SECTION 5.01 and in any other Loan Documents (other than representations and warranties which expressly speak only as of a different date) shall be true and correct in all material respects on and as of the Effective Date as though made on and as of that date. (d) NO DEFAULT. No Event of Default or Potential Event of Default shall have occurred and be continuing or would result from the effectiveness of this Agreement, the making of the Loans requested or deemed to be made on the Effective Date or the issuance of or participation in the Facility Letters of Credit requested to be issued or converted on the Effective Date. (e) NO LEGAL IMPEDIMENTS. No law, regulation, order, judgment or decree of any Governmental Authority shall, and the Administrative Agent -57- shall not have received any notice that litigation is pending or threatened which seeks to enjoin, prohibit or restrain the making of the Loans requested or deemed to be made on the Effective Date or the issuance of or participation in the Facility Letters of Credit requested to be issued or converted on the Effective Date. (f) NO NOTICE FROM SENIOR LENDERS. The Administrative Agent shall not have received any notification from the Requisite Senior Lenders that any condition precedent set forth in this SECTION 4.01 has not then been satisfied. (g) NO CHANGE IN CONDITION. No change in the business, assets, operations or condition (financial or otherwise) of Southland or any of its Subsidiaries shall have occurred since December 31, 1995 which change will, or is reasonably likely to, result in a Material Adverse Effect. 4.02. CONDITIONS PRECEDENT TO ALL SUBSEQUENT REVOLVING LOANS AND FACILITY LETTERS OF CREDIT. The obligation of each Senior Lender to make any Revolving Loan requested to be made by it and the agreement of each Issuing Bank to issue any Facility Letter of Credit pursuant to ARTICLE III, on any date after the Effective Date, is subject to the following conditions precedent as of such date: (a) NOTICE OF BORROWING. With respect to a request for a Revolving Loan, the Administrative Agent shall have received in accordance with the provisions of SECTION 2.02(b), on or before any Funding Date, an original and duly executed Notice of Borrowing. (b) ADDITIONAL MATTERS. As of the Funding Date for any Revolving Loan and the date of issuance of any Facility Letter of Credit: (i) All of the representations and warranties of Southland contained in SECTION 5.01 (other than the statements set forth in SECTION 5.01(iii)(A)) and in any other Loan Document (in each case, other than representations and warranties which expressly speak only as of a different date) shall be true and correct in all material respects on and as of that Funding Date or issuance date, as though made on and as of that date; (ii) No Event of Default or Potential Event of Default shall have occurred and be continuing or would result from the making of the requested Revolving Loan or issuance of the requested Facility Letter of Credit; and (iii) No law or regulation shall prohibit, and no order, judgment or decree of any Governmental Authority shall, and no litigation shall be pending or threatened which in the judgment of the Administrative Agent or the Requisite Senior Lenders would, -58- enjoin, prohibit or restrain, or impose or result in the imposition of any material adverse condition upon, any Senior Lender or Issuing Bank from making the requested Revolving Loan or issuing or participating in the requested Facility Letter of Credit. Each submission by Southland to the Administrative Agent of a Notice of Borrowing with respect to a Revolving Loan and the acceptance by Southland of the proceeds of each such Loan made hereunder, or submission to an Issuing Bank of a request for the issuance of a Facility Letter of Credit and the issuance of such Facility Letter of Credit, shall constitute a representation and warranty by Southland as of the Funding Date in respect of such Revolving Loan or the issuance of such Facility Letter of Credit that all the conditions contained in this SECTION 4.02 have been satisfied. 4.03. CONDITIONS PRECEDENT TO ALL SUBSEQUENT COMPETITIVE BID LOANS. The obligation of each Senior Lender which has agreed pursuant to the procedures set forth SECTION 2.03 to make any Competitive Bid Loan requested to be made by it on any date after the Effective Date, is subject to the following conditions precedent as of such date: (a) NOTICE OF BORROWING. The Administrative Agent shall have received in accordance with the provisions of SECTION 2.03(b), on or before any Funding Date, an original and duly executed Notice of Borrowing. (b) COMPETITIVE BID NOTES. The Administrative Agent shall have received on or before any Funding Date, but prior to the time proceeds of Competitive Bid Loans are made available to Southland a Competitive Bid Note payable to the order of each Senior Lender for each of the one or more Competitive Bid Loans to be made by such Senior Lender as part of the Borrowing, in a principal amount equal to the principal amount of the Competitive Bid Loan to be evidenced thereby and otherwise on such terms as were agreed to for such Competitive Bid Loan in accordance with SECTION 2.03. (c) ADDITIONAL MATTERS. As of the Funding Date for any Competitive Bid Loan: (i) All of the representations and warranties of Southland contained in SECTION 5.01 (other than the statements set forth in SECTION 5.01(iii)(A)) and in any other Loan Document (in each case, other than representations and warranties which expressly speak only as of a different date) shall be true and correct in all material respects on and as of that Funding Date, as though made on and as of that date; (ii) No Event of Default or Potential Event of Default shall have occurred and be continuing or would result from the making of the requested Competitive Bid Loan; and (iii) No law or regulation shall prohibit, and no order, judgment or decree of any Governmental Authority shall, and no litigation shall be pending or threatened which in the judgment of -59- the Administrative Agent or of any Senior Lender or Lenders making such Competitive Bid Loan would, enjoin, prohibit or restrain, or impose or result in the imposition of any material adverse condition upon, any such Senior Lender from making the requested Competitive Bid Loan. Each submission by Southland to the Administrative Agent of a Notice of Borrowing with respect to a Competitive Bid Loan and the acceptance by Southland of the proceeds of each such Loan made hereunder shall constitute a representation and warranty by Southland as of the Funding Date in respect of such Competitive Bid Loan that all the conditions contained in this SECTION 4.03 have been satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES 5.01. REPRESENTATIONS AND WARRANTIES. In order to induce the Senior Lenders and the Issuing Banks to enter into this Agreement and to make the Loans and the other financial accommodations to Southland and to issue the Facility Letters of Credit described herein, Southland hereby represents and warrants to each Senior Lender, each Issuing Bank and the Administrative Agent that the following statements are true, correct and complete: (i) ORGANIZATION; CORPORATE POWERS. Southland and each Subsidiary of Southland (A) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (B) is duly qualified to do business as a foreign corporation and in good standing under the laws of each jurisdiction in which it owns or leases real property or in which failure to be so qualified and in good standing would be likely to have a Material Adverse Effect, and (C) has all requisite corporate power and authority to own, operate and encumber its property and assets and to conduct its business as presently conducted. (ii) AUTHORITY. (A) Southland has the requisite corporate power and authority (I) to execute, deliver and perform each of the Loan Documents executed by it, or to be executed by it, and (II) to file the Loan Documents filed by it, or to be filed by it, with any Governmental Authority. (B) The execution, delivery and performance (or filing, as the case may be) of each of the Loan Documents to which it is party and the consummation of the transactions contemplated thereby, have been duly approved by the Board of Directors of Southland and no other corporate proceedings on the part of Southland are necessary to consummate such transactions. -60- (C) Each of the Loan Documents to which it is party has been duly executed and delivered (or filed, as the case may be) by Southland and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, is in full force and effect and no material term or condition thereof has been amended, modified or waived from the terms and conditions contained in the Loan Documents without the prior written consent of the Administrative Agent, and no material default by any such party exists thereunder. (iii) SUBSIDIARIES AND OWNERSHIP OF CAPITAL STOCK; INVESTMENTS. (A) Part A of SCHEDULE 5.01(iii) attached hereto (I) contains a summary of the corporate structure of Southland and its Subsidiaries and (II) accurately sets forth (a) the correct legal name of each Subsidiary, the jurisdiction of its incorporation or organization and the jurisdictions in which it is qualified to transact business as a foreign corporation or otherwise and (b) the authorized, issued and outstanding shares or interests of each class of equity Securities of Southland and each of its Subsidiaries and, with respect to each Subsidiary, the owners of such shares or interests. As of December 31, 1996, the Majority Owners owned more than 65% of the Common Stock of Southland outstanding on such date. Other than the preferential purchase rights with respect to shares of Puerto Rico-7, Inc., as set forth in the By-Laws dated as of April 23, 1987 of Puerto Rico-7, Inc., none of the issued and outstanding equity Securities of any Subsidiary of Southland is subject to any vesting, redemption, or repurchase agreement, and no warrants or options granted by Southland or any of its Subsidiaries are outstanding with respect to such equity Securities. There are outstanding no shares of any class of capital stock of Southland other than Common Stock, and other than pursuant to the QUIDS Subordinated Notes, not more than five percent (5%) of the Common Stock, on a fully-diluted basis, is subject to issuance upon the exercise of outstanding options, warrants or other similar rights to acquire shares of such stock which have been granted by Southland. The outstanding equity Securities of Southland and each of its Subsidiaries are duly authorized, validly issued, fully paid and nonassessable free and clear of any Liens (except for the Liens described in CLAUSE (i) of the definition of "Customary Permitted Liens") and are not Margin Stock. (B) Part B of SCHEDULE 5.01(iii) accurately sets forth, as of December 31, 1996, the aggregate outstanding amount of all Investments of Southland or any of its Subsidiaries (other than Cash Equivalents and interests in Subsidiaries of Southland or such Subsidiary) as of such date. Except for permitted Investments in excess of $5,000,000 disclosed in writing to the Administrative Agent, neither Southland nor any Subsidiary of Southland holds a direct or indirect partnership, joint venture or other equity interest in any Person (other than a Subsidiary of Southland) as the result of an Investment with respect to which the unrecovered amount is greater than or equal to $5,000,000. (iv) NO CONFLICT. The execution, delivery and performance of each Loan Document to which it is party by Southland do not and will not (A) constitute a tortious interference with any Contractual Obligation of any Person or conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under any Requirement of Law or Contractual Obligation of Southland, or require termination of any -61- Contractual Obligation, the consequences of which violation, breach or default or termination, singly or in the aggregate, are likely to have a material adverse effect on the ability of Southland to perform its obligations under any Loan Document or likely to have a Material Adverse Effect, or likely to subject the Administrative Agent, any of the Senior Lenders or any of the Issuing Banks to any liability (whether criminal or civil, other than as a result of a regulatory requirement applicable to it in its capacity as a bank or commercial lender), or (B) result in or require the creation or imposition of any Lien whatsoever upon any of the properties or assets of Southland, or (C) require any approval of stockholders. (v) GOVERNMENT CONSENTS. The execution, delivery and performance of each Loan Document to which it is party by Southland do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by any Governmental Authority, except filings, consents or notices which have been, or will in due course, be made, obtained or given (or the failure to obtain which will not have a Material Adverse Effect), and except any consents, approval or filings required as to a Senior Lender because of a regulatory requirement applicable to it in its capacity as a bank or a commercial lender. (vi) GOVERNMENTAL REGULATION. Southland is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, the Investment Company Act of 1940 or any other federal or state statute or regulation such that its ability to incur indebtedness is limited or its ability to consummate the transactions contemplated hereby is materially impaired. (vii) RESTRICTED JUNIOR PAYMENTS. Since December 31, 1995, neither Southland nor any Subsidiary of Southland has directly or indirectly declared, ordered, paid or made or set apart any sum or property for any Restricted Junior Payment or agreed to do so, except as may be permitted pursuant to this Agreement. (viii) FINANCIAL POSITION. Complete and accurate copies of the following financial statements and materials have been delivered to each of the Senior Lenders: the Annual Reports of Southland on Form 10-K for each of the Fiscal Years ended during 1994 and 1995 (including audited financial statements) and the Quarterly Report on Form 10-Q for the first three fiscal quarters of 1996. All financial statements included in such materials were prepared in conformity with GAAP, except as otherwise noted therein, and fairly present the consolidated financial position of Southland and its Subsidiaries as at the respective dates thereof and the consolidated results of operations and changes in the financial position of Southland and its Subsidiaries for each of the periods covered thereby, subject, in the case of any unaudited interim financial statements, to changes resulting from audit and normal year- end adjustments. As of the Effective Date, Southland does not have any Accommodation Obligation, contingent liability or liability for any taxes, long-term lease or commitment, not reflected in its audited financial statements for its Fiscal Year ended December 31, 1995, or otherwise disclosed to the Administrative Agent in writing prior to the Effective Date, which has or is likely to have a Material Adverse Effect. -62- (ix) FUNDAMENTAL CHANGES. Since December 31, 1995, Southland has not entered into any agreement with respect to a merger or consolidation or adopted a plan of recapitalization or liquidation, except as permitted by this Agreement. (x) INDEBTEDNESS; EXISTING CREDIT AGREEMENT OBLIGATIONS. SCHEDULE 1.01-A accurately describes all Indebtedness for borrowed money and Accommodation Obligations of Southland and its Subsidiaries, and with respect to any Indebtedness or Accommodation Obligations with a principal amount in excess of $5,000,000, there are no defaults in the payment of principal or interest on any such Indebtedness or Accommodation Obligations and no payments thereunder have been deferred or extended beyond their stated maturity (except as disclosed on such Schedule). All obligations and liabilities of Southland under the Existing Credit Agreement have been paid in full, and there are no setoffs, defenses or counterclaims with respect to such obligations and liabilities. (xi) LITIGATION; ADVERSE EFFECTS. Except as set forth in SCHEDULE 5.01(xi) hereto, (A) there is no action, suit, proceeding, governmental investigation or arbitration, at law or in equity, before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending, or to the Knowledge of Southland, probable of assertion against Southland or any of the Subsidiaries of Southland or any property of any of them which could reasonably be expected (I) to result in any Material Adverse Effect, (II) materially and adversely to affect the ability of any party to any of the Loan Documents to perform its obligations thereunder, or (III) materially and adversely to affect the ability of Southland to perform its obligations to the Senior Lenders or the Senior Lenders' ability to enforce such obligations, and (B) there is no material loss contingency within the meaning of GAAP which has not been reflected in the consolidated financial statements of Southland. Neither Southland nor any of Southland's Subsidiaries is (x) in violation of any applicable law which violation has or is likely to have a Material Adverse Effect, or (y) subject to or in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or Governmental Authority which has or is likely to have a Material Adverse Effect. Except as set forth in SCHEDULE 5.01(xi) hereto, there is no action, suit, proceeding or investigation pending or, to the Knowledge of Southland, threatened against or affecting Southland or any of the Subsidiaries of Southland challenging the validity or the enforceability of any of the Loan Documents. (xii) NO MATERIAL ADVERSE CHANGES. Since December 31, 1995, there has occurred no event which materially and adversely affects, and no material adverse change in, the business, ownership, operations, properties, assets or condition (financial or otherwise) of Southland or Southland and its Subsidiaries, taken as a whole, or the ability of Southland to perform its obligations under the Loan Documents to which it is a party and the transactions contemplated thereby. (xiii) TAX EXAMINATIONS. The Federal income tax returns of Southland have been examined by the Internal Revenue Service (or closed by -63- applicable statutes) for all tax periods prior to and including the taxable year ending December 31, 1993. All deficiencies which have been asserted against Southland as a result of such examination for each taxable year in respect of which an examination has been conducted have been fully paid or finally settled or are being contested in good faith, and no issue has been raised in any such examination which, by application of similar principles, reasonably can be expected to result in a deficiency which will have a Material Adverse Effect unless such issue is being contested in good faith or such deficiency has been reserved for in Southland's audited financial statements for its Fiscal Year ended December 31, 1995. To its Knowledge, Southland has not taken any reporting positions in its Federal income tax returns for which it does not have a reasonable basis and does not anticipate any further tax liability with respect to the years which have not been examined by the Internal Revenue Service (or closed by applicable statutes), taken as a whole, except for tax liabilities which will not have a Material Adverse Effect and (x) which have been reserved for in Southland's audited financial statements for its Fiscal Year ended December 31, 1995 or (y) are being contested in good faith. For purposes of this SECTION 5.01(xiii), the term "Southland" shall include each other corporation with which Southland files consolidated or combined income tax returns or reports. (xiv) PAYMENT OF TAXES. All tax returns and reports of Southland and each Subsidiary of Southland required to be filed, the failure of which to file has or is likely to have a Material Adverse Effect, have been timely filed, and all taxes, assessments, fees and other governmental charges thereupon and upon their respective properties, assets, income and franchises which are due and payable, the failure of which to pay when due and payable has or is likely to have a Material Adverse Effect, have been paid when due and payable. Southland has no Knowledge of any proposed tax assessment against Southland or any Subsidiary of Southland, that is likely to have a Material Adverse Effect, which is not being actively contested in good faith by such Person. (xv) CONDUCT OF BUSINESS. Southland and its Subsidiaries are principally engaged only in the businesses described in Southland's Annual Report on Form 10-K for its 1995 Fiscal Year and other businesses permitted by SECTION 8.06. (xvi) MATERIAL ADVERSE AGREEMENTS. Neither Southland nor any Subsidiary of Southland is a party to or subject to any material Contractual Obligation or other restriction contained in their respective charters, By-laws or similar governing documents which has or is likely to have a Material Adverse Effect. (xvii) PERFORMANCE. Neither Southland nor any Subsidiary of Southland is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Contractual Obligation applicable to it, and no condition exists which, with the giving of notice of the lapse of time or both, would constitute a default, in each case, except where the consequences, direct or indirect, of such default or defaults, if any, would not have a Material Adverse Effect. -64- (xviii) SECURITIES ACTIVITIES. Neither Southland nor any Subsidiary of Southland is engaged principally in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. (xix) DISCLOSURE. The representations and warranties of Southland made to the Senior Lenders contained in the Loan Documents, and all certificates and other documents delivered to the Administrative Agent in connection therewith, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. Southland has not withheld any fact from the Senior Lenders in regard to any matter with respect to which Southland has Knowledge or reasonably should have Knowledge and which has or is likely to have a Material Adverse Effect. (xx) REQUIREMENTS OF LAW. Southland and each Person acting on behalf of Southland is in compliance with all Requirements of Law (including, without limitation, the Securities Act and the Securities Exchange Act, and the applicable rules and regulations thereunder, state Securities law and "Blue Sky" law) applicable to them and their respective businesses, in each case where the failure to so comply would have a Material Adverse Effect. (xxi)PATENTS, TRADEMARKS, PERMITS, ETC. Southland and each Subsidiary of Southland owns, is licensed or otherwise have the lawful right to use, or have all permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how and processes used in or necessary for the conduct of its business as currently conducted which are material to its business, ownership, operations, properties, assets or condition (financial or otherwise), taken as a whole. To the Knowledge of Southland, the use of such permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how and processes by Southland and each of its Subsidiaries, does not infringe on the rights of any Person, subject to such claims and infringements as do not, in the aggregate, give rise to any liability on the part of Southland or any of its Subsidiaries which has or is likely to have a Material Adverse Effect. (xxii) ENVIRONMENTAL MATTERS. (A) Except as disclosed on SCHEDULE 5.01(xxii) or as disclosed to the Senior Lenders pursuant to SECTION 6.02 (or as disclosed in the quarterly or annual reports filed with the Commission and delivered to the Senior Lenders prior to the Effective Date), neither Southland nor any of its Subsidiaries (I) has received notice or otherwise learned of any claim, demand, action, event, condition, report or investigation indicating or concerning any potential or actual liability which would individually or in the aggregate have a Material Adverse Effect arising in connection with: (x) any noncompliance with or violation of the requirements of any applicable federal, state and local environmental health and safety statutes and regulations or (y) the release or threatened release of any toxic or hazardous waste, substance or constituent, or other substance into the environment, (II) has any threatened or actual liability in connection with the release or threatened release of any toxic or hazardous waste, substance or constituent, or other substance into the environment -65- which would individually or in the aggregate have a Material Adverse Effect or (III) has received notice that Southland or any of its Subsidiaries is or may be liable to any Person under CERCLA or any analogous state law. (B) Southland has entered into an effective and fully-executed administrative consent order (the "Order") with the New Jersey Department of Environmental Protection pursuant to the Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq. ("ISRA") which Order provides that Southland will comply with the requirements of ISRA, and Southland has obtained the financial assurance required under the Order. The Order is in full force and effect and has not been rescinded or revoked and Southland is in compliance with the terms and conditions of the Order. (C) Southland and each of its Subsidiaries is in compliance with the financial responsibility requirements of federal and state environmental laws, including, without limitation, those contained in 40 C.F.R., Parts 264 and 265, Subps. H, and any state law equivalents. (xxiii) ERISA. No Defined Benefit Plan has or will have as of the most recent plan year any "accumulated funding deficiency", as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Internal Revenue Code, whether or not waived. Each Benefit Plan which is intended to be a qualified plan under Section 401(a) of the Internal Revenue Code as currently in effect has been determined by the Internal Revenue Service to be qualified under Section 401(a) of the Internal Revenue Code as currently in effect (or timely applications for such determinations are pending with the Internal Revenue Service) and the trust related thereto is exempt from federal income tax under Section 501(a) of the Internal Revenue Code. Each Benefit Plan has been administered in substantial compliance with ERISA, and each Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code has been administered in substantial compliance with such section. Neither Southland, any Subsidiary of Southland nor any ERISA Affiliate has any liability to the PBGC other than the payment of premiums, and there are no premium payments which have become due which are unpaid. Neither Southland, any Subsidiary of Southland, nor any ERISA Affiliate has breached any of the responsibilities, obligations or duties imposed on it by ERISA with respect to any Benefit Plan resulting or which will result in an obligation of Southland, any such Subsidiary or any ERISA Affiliate to pay money which payment has or will have a Material Adverse Effect. Except as disclosed on SCHEDULE 5.01(xxiii), neither Southland, any Subsidiary of Southland, any ERISA Affiliate, nor any fiduciary of or any trustee to any Benefit Plan has engaged in a nonexempt "prohibited transaction" described in Section 406 of ERISA or Section 4975 of the Internal Revenue Code, or taken any action which would constitute or result in a Termination Event, with respect to any Benefit Plan which prohibited transaction or Termination Event has caused or would in the future cause a Material Adverse Effect. No Defined Benefit Plan has been terminated by the plan administrator thereof or by the PBGC for which there is any liability of Southland or any Subsidiary of Southland or any ERISA Affiliate for unfunded accrued benefits in excess of $5,000,000. The present value of the accrued benefits of all Defined Benefit Plans as of -66- the end of the most recent plan year of such plans did not exceed the current value of the assets of all Defined Benefit Plans by more than $5,000,000, and neither Southland nor any such Subsidiary knows or has reason to know of any facts or circumstances occurring since such year which would change the value of such assets or such benefits of such Defined Benefit Plan such that the value of such benefits would exceed the value of such assets by more than $5,000,000. For purposes of the preceding sentence, the current value as of any day of the assets of any Defined Benefit Plan and the present value as of any day of the accrued benefits under any Defined Benefit Plan shall be such values as calculated for purposes of completing Form 5500 for such Defined Benefit Plan for the plan year of such Defined Benefit Plan ending on such day. No liability having a Material Adverse Effect has been, or is expected to be, incurred by Southland or any of its Subsidiaries with respect to any applicable collective bargaining agreement. Full payment has been made of all contributions which Southland, any of its Subsidiaries or any ERISA Affiliate is required under the terms of any Multiemployer Plan or applicable collective bargaining agreement to have paid as a contribution to any Multiemployer Plan, except that this representation and warranty shall not apply to any such contributions which at any one time are in the aggregate less than $3,000,000 and are being reasonably contested by either Southland, its Subsidiaries or its ERISA Affiliates. Full payment has been made of all withdrawal liability which Southland or any of its Subsidiaries or any ERISA Affiliate is required under the terms of any Multiemployer Plan to have paid to any Multiemployer Plan. Southland and each Subsidiary of Southland has delivered to the Administrative Agent all of the following: a copy or summary plan description of each Defined Benefit Plan in existence or committed to, the most recent Form 5500 filed in respect of each such Benefit Plan in existence (other than Benefit Plans not required under applicable law or regulations to file Form 5500), a copy of the most recent report of valuation prepared with respect to each Defined Benefit Plan, a list designating each Multiemployer Plan to which Southland, any Subsidiary of Southland or any ERISA Affiliate is obligated to make an annual contribution in excess of $500,000 and listing the amount of such annual contribution, a copy of any information which is provided to Southland, any Subsidiary of Southland or any ERISA Affiliate regarding withdrawal liability under any such plan, and a copy of the collective bargaining agreement or trade association agreement pursuant to which such contribution is required to be made. (xxiv) CONSENTS AND AUTHORIZATIONS. Southland has obtained all consents and authorizations required pursuant to any of its material Contractual Obligations with any other Person and shall have obtained all consents and authorizations of, and effected all notices to and filings with, any Governmental Authority, as may be necessary to allow Southland, lawfully to execute, deliver and perform its obligations under the Loan Documents and each other agreement or instrument to be executed and delivered by it pursuant thereto or in connection therewith, except where the failure to obtain any such consent or authorization would not have a Material Adverse Effect. -67- (xxv) NO NEGATIVE PLEDGES. Except for this Agreement and the Master Lease and as set forth on SCHEDULE 5.01(xxv), no Contractual Obligation to which Southland is a party or by which it or any of its properties is bound or to which it or any of its properties is subject restricts Southland from granting security interests or liens in its real or personal property. (xxvi) NO IMPAIRMENT. The consummation of the transactions contemplated by the Loan Documents will not impair the ownership of or rights under (or the license or other right to use, as the case may be) any permits and governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how or processes by Southland or any of its Subsidiaries in any manner which has or is likely to have a Material Adverse Effect. (xxvii) OBLIGATIONS CONSTITUTE SENIOR INDEBTEDNESS. The obligations of Southland for principal of and interest on all Loans and other extensions of credit under this Agreement and all fees, expenses, reimbursements, indemnities and other amounts owing by Southland pursuant to this Agreement to the Administrative Agent, any Senior Lender or Issuing Bank (whether or not such Person then is acting in its capacity as a Senior Lender or Issuing Bank) and all other Obligations, and any renewals, extensions, modifications or refinancings thereof, constitute "Senior Indebtedness" within the meanings ascribed to such term in QUIDS Subordinated Notes and each indenture pertaining to any outstanding Subordinated Indebtedness. ARTICLE VI REPORTING COVENANTS Southland covenants and agrees that so long as any Senior Lender shall have any obligation hereunder and until payment in full of all of the Obligations, unless the Requisite Senior Lenders shall otherwise give prior written consent thereto: 6.01. FINANCIAL STATEMENTS. Southland shall maintain or cause to be maintained a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP, and each of the financial statements described below shall be prepared from such system and records. Southland shall deliver or cause to be delivered to each Senior Lender: (i) As soon as practicable, and in any event within thirty-five (35) days after the end of each month other than December and within forty (40) days after the end of each December, the internal report on operations of Southland in respect of such month and for the period from the beginning of the current Fiscal Year to the end of such month, in substantially the same format, and containing substantially the same types of information in -68- the same level of detail, as the internal report on operations of Southland covering the month of November, 1996 and the period commencing January 1, 1996 and ending November 30, 1996 and provided to the Senior Lenders prior to the Effective Date (the "Report on Operations"), including, without limitation, such information with respect to each of Southland's business units, certified by the principal financial officer or treasurer of Southland that the consolidated balance sheet and statements of earnings and changes in financial position included in the Report on Operations fairly present the consolidated financial position of Southland and its Subsidiaries as at the dates indicated, subject to normal year-end adjustment. (ii) As soon as practicable, and in any event within fifty (50) days after the end of each fiscal quarter in each Fiscal Year (except the fourth quarter in each Fiscal Year), Southland's Quarterly Report on Form 10-Q filed with the Commission in respect of such fiscal quarter, which shall be prepared and presented in accordance with the rules and regulations of the Commission applicable thereto at the time of such filing, together with a summary, prepared in reasonable detail, of asset dispositions consummated since the beginning of the current Fiscal Year, PROVIDED, HOWEVER, that if at any time Southland is not required under the Commission's rules and regulations to file a Quarterly Report on Form 10-Q in respect of any fiscal quarter, it shall furnish to each Senior Lender in lieu thereof, within the time specified above, the information that would have been required to be included therein if Southland had been required to file such Quarterly Report with the Commission, prepared and presented in accordance with the rules and regulations which would have been applicable thereto, certified by the principal financial officer or treasurer of Southland that the consolidated balance sheets and statements of earnings and changes in financial position of Southland and its Subsidiaries included therein fairly present the consolidated financial position of Southland and its Subsidiaries as at the dates indicated in accordance with GAAP, subject to normal year end adjustment. (iii) As soon as practicable, and in any event within ninety-five (95) days after the end of each Fiscal Year, Southland's Annual Report on Form 10-K filed with the Commission in respect of such Fiscal Year, which shall be prepared and presented in accordance with the rules and regulations of the Commission applicable thereto at the time of such filing, together with a summary, prepared in reasonable detail, of asset dispositions consummated during the preceding Fiscal Year, PROVIDED, HOWEVER, that the report of Coopers & Lybrand or other independent certified public accountants of recognized national standing satisfactory to the Administrative Agent, which accompanies the consolidated balance sheets and statements of earnings and changes in financial position of Southland and its Subsidiaries included in such Form 10-K shall be unqualified as to going concern and scope of audit, PROVIDED, FURTHER, that if at any time Southland is not required under the Commission's rules and regulations to file an Annual Report on Form 10-K in respect of any Fiscal Year, it shall furnish to each Senior Lender in lieu thereof, within the time specified above, the information that would have been required to be included therein if Southland had been required to file such Annual Report with the Commission, prepared and presented in accordance with the rules and regulations which would have been applicable thereto, -69- accompanied by a report thereon of Coopers & Lybrand or other independent certified public accountants of recognized national standing satisfactory to the Administrative Agent, which report shall be unqualified as to going concern and scope of audit and state that the consolidated balance sheets and statements of earnings and changes in financial position of Southland and its Subsidiaries included therein fairly present the consolidated financial position of Southland and its Subsidiaries as at the dates indicated in conformity with GAAP and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards. (iv) Together with each delivery of any financial statements pursuant to SECTIONS 6.01(ii) and 6.01(iii), (A) an Officers' Certificate of Southland substantially in the form of EXHIBIT 12, stating that the executive officers signatory thereto have reviewed the terms of this Agreement and the principal Loan Documents, and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Southland and its Subsidiaries taken as a whole, during the accounting period covered by such financial statements, and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of the Officers' Certificate, of any condition or event which constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Southland or its applicable Subsidiaries have taken, is taking and proposes to take with respect thereto; and (B) a Compliance Certificate demonstrating in reasonable detail compliance at the end of such accounting periods (and during such periods to the extent such compliance is required hereby) with the covenants contained in ARTICLE IX. (v) Simultaneously with the delivery of an Annual Report on Form 10-K or the financial statements referred to in SECTION 6.01(iii), (A) a statement of the firm of independent certified public accountants which reported on the financial statements included therein that nothing has come to their attention to cause such independent certified public accountants to believe that the financial covenant calculations in the Compliance Certificate are inaccurate, or that on the last day of such accounting period Southland is not in compliance with SECTIONS 8.01(ii), (iv), (xi), (xii) and (xvi); 8.02(a)(ii) and (iv); 8.03(ii), (iii), (v) and (vii); 8.05(i), (iii), (iv), (v) and (vi); and 8.11 and (B) a letter to Southland from Coopers & Lybrand, in substantially the form attached as EXHIBIT 11, with respect to the financial statements included therein. (vi) As soon as practicable, and in any event no later than September 15 of each Fiscal Year, Southland's financial forecast for the remainder of such Fiscal Year and the two subsequent Fiscal Years, in substantially the form of the financial forecast prepared by Southland and delivered to the Senior Lenders prior to the Effective Date. (vii) Promptly upon Southland obtaining Knowledge (A) of any condition or event which constitutes an Event of Default or Potential Event -70- of Default, or becoming aware that any Senior Lender has given any notice or taken any other action with respect to a claimed Event of Default or Potential Event of Default under this Agreement, (B) of any condition or event which would be required to be disclosed in a current report filed by Southland with the Commission on Form 8-K (Items 1, 2 and 4 of such Form as in effect on the Effective Date), or (C) of any condition or event which would be likely to have a Material Adverse Effect, an Officers' Certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such Senior Lender and the nature of such claimed default, Event of Default, Potential Event of Default, event or condition, and what action Southland has taken, is taking and proposes to take with respect thereto. (viii) Promptly upon Southland obtaining Knowledge of (A) the institution of, or threat of, any action, suit, proceeding, governmental investigation or arbitration against or affecting Southland or any of its Subsidiaries or any property of Southland or any of its Subsidiaries not previously disclosed in writing by Southland to the Senior Lenders pursuant to this SECTION 6.01(viii), or (B) any material development in any action, suit, proceeding, governmental investigation or arbitration already disclosed, which is likely to, in either case, have a Material Adverse Effect, Southland shall promptly give notice thereof to the Senior Lenders and provide such other information as may be reasonably available to it to enable the Senior Lenders and their counsel to evaluate such matters. (ix) Promptly upon becoming aware of the occurrence of any Reportable Event, Termination Event, or "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code, in connection with any Benefit Plan or Multiemployer Plan or any trust created thereunder, a written notice specifying the nature thereof, what action Southland, any Subsidiary of Southland or any ERISA Affiliate, as applicable, has taken, and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto. (x) With reasonable promptness, copies of (A) all notices received by Southland, any Subsidiary of Southland or any ERISA Affiliate of the PBGC's intent to terminate any Defined Benefit Plan or to have a trustee appointed to administer any Defined Benefit Plan; (B) upon the request of any Senior Lender, each actuarial report and each annual report (Form 5500 Series, including any Schedule B (Actuarial Information) thereto) filed by Southland, any Subsidiary of Southland or any ERISA Affiliate with the Internal Revenue Service with respect to any or all Benefit Plans; (C) all notices received by Southland, any Subsidiary of Southland or any ERISA Affiliate from a Multiemployer Plan sponsor, pursuant to Section 4202 of ERISA, involving a withdrawal liability payment in excess of $100,000; and (D) all funding waiver requests filed by Southland, any Subsidiary of Southland or any ERISA Affiliate with the Internal Revenue Service with respect to any Benefit Plan and all communications received by Southland, any Subsidiary of Southland or any ERISA Affiliate from the Internal Revenue Service with respect to any such funding waiver request. -71- (xi) As promptly as practicable after approval thereof by the Board of Directors, an annual budget for each Fiscal Year, in form and substance satisfactory to the Senior Lenders. (xii) As soon as practicable, and in any event no later than April 30 of each Fiscal Year, a statement of earnings for the immediately preceding Fiscal Year and balance sheet as of the last day of such Fiscal Year for each Subsidiary of Southland which accounts for more than five percent (5%) of either Consolidated Net Income or the total assets of Southland and its Subsidiaries on a consolidated basis. (xiii) With reasonable promptness, such other information, reports, filings, projections, business plans and data with respect to Southland or any of its Subsidiaries as from time to time may be reasonably requested by the Administrative Agent or the Requisite Senior Lenders. 6.02. ENVIRONMENTAL NOTICES. Except as disclosed on SCHEDULE 5.01(xxii), Southland shall notify each Senior Lender, in writing, promptly upon Southland's learning that either Southland or any of its Subsidiaries has received notice or otherwise learned of any claim, demand, action, event, condition, or report or investigation indicating any potential or actual liability arising in connection with: (A) a non-compliance with or violation of the requirements of any applicable federal, state or local environmental health and safety statute or regulation which individually or in the aggregate would be likely to have a Material Adverse Effect; (B) the release or threatened release of any toxic or hazardous waste, substance or constituent, or other substance into the environment which individually or in the aggregate would be likely to have a Material Adverse Effect or which release Southland or one of its Subsidiaries would have a duty to report to a Governmental Authority under CERCLA or any analogous state law; or (C) the existence of any Environmental Lien on any properties or assets of Southland or its Subsidiaries; PROVIDED, HOWEVER, if Southland or any of its Subsidiaries has received a notice from any Governmental Authority stating (i) that Southland or any of its Subsidiaries is or may be liable to any person under CERCLA or any analogous state law or (ii) alleging a violation of any federal, state or local environmental health and safety statute or regulation where such alleged violation which would be likely to have a Material Adverse Effect and is not cured or such notice is not withdrawn within thirty (30) days from the date of receipt thereof, then Southland shall deliver a copy of such notice to each Senior Lender. 6.03. OTHER REPORTS. Southland shall deliver or cause to be delivered to the Senior Lenders (i) copies of all financial statements, reports and notices, if any, sent or made available generally by Southland to its Securities holders or filed with the Commission, and of all press releases made available generally by Southland or any of its Subsidiaries to the public concerning material developments in the business of Southland or any such Subsidiary, (ii) copies of any management reports prepared by Southland's independent certified public accountants in connection with the annual audit and (iii) such other information in respect of the condition -72- (financial or otherwise) or operations of Southland or any of its Subsidiaries that the Administrative Agent may request from time to time. ARTICLE VII AFFIRMATIVE COVENANTS Southland covenants and agrees that so long as any Senior Lender shall have any obligation hereunder and until payment in full of all of the Obligations, unless the Requisite Senior Lenders shall otherwise give prior written consent thereto: 7.01. CORPORATE EXISTENCE, ETC. Southland shall at all times maintain its corporate existence and preserve and keep in full force and effect its rights and franchises the loss or termination of which would be likely to have a Material Adverse Effect. Southland shall cause to be maintained, preserved and kept the corporate existence and rights and franchises of each of its Subsidiaries if the loss or termination thereof would be likely to have a Material Adverse Effect, except for transactions permitted pursuant to SECTION 8.08. Southland shall promptly provide the Senior Lenders with a complete list of the Subsidiaries of Southland together with the delivery of the financial statements required by SECTION 6.01(iii). 7.02. COMPLIANCE WITH LAWS, etc. Southland shall, and shall cause its Subsidiaries to, exercise all due diligence in order to comply with all Requirements of Law and all restrictive covenants, noncompliance with which would be likely to have a Material Adverse Effect. 7.03. PAYMENT OF TAXES AND CLAIMS. Southland shall pay, and cause each of its Subsidiaries to pay, (i) all taxes, assessments and other charges of Governmental Authorities which, to its Knowledge, it is obligated to pay, including any such tax, assessment or other charge on any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, and (ii) all claims (including, without limitation, claims for labor, services, materials and supplies) for sums, material in the aggregate to Southland or any such Subsidiary, as the case may be, which have become due and payable and which by law have or may become a Lien (other than a Customary Permitted Lien) upon any of Southland's or such Subsidiary's properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; PROVIDED that no such taxes, assessments and governmental charges referred to in CLAUSE (i) above (including interest or penalties thereon) or claims referred to in CLAUSE (ii) above (including any penalties or fines with respect thereto) need be paid if such taxes, assessments, charges of Governmental Authorities or claims are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. -73- 7.04. MAINTENANCE OF PROPERTIES; INSURANCE. Southland shall maintain or cause to be maintained in good repair, working order and condition, excepting ordinary wear and tear and damage due to casualty, all of its properties material to the operations of Southland and its Subsidiaries taken as a whole (other than closed convenience stores deemed by management not to be material) and will make or cause to be made all appropriate repairs, renewals and replacements thereof, consistent with past practice. Southland shall maintain or cause to be maintained, with financially sound and reputable insurers, insurance policies and programs in such amounts (subject to customary deductibles and retentions) and against such risks as is usually carried by responsible companies of similar size engaged in similar businesses and owning similar assets in the general areas in which Southland and its Subsidiaries operate. 7.05. INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. Southland shall permit, and cause each of its Subsidiaries to permit, any authorized representative(s) designated by the Administrative Agent or the Requisite Senior Lenders to inspect any of the properties of Southland or any of its Subsidiaries, including their financial and accounting records, and to make copies and take extracts therefrom, and to discuss their affairs, finances and accounts with their officers and independent certified public accountants, all upon reasonable notice and at such reasonable times during normal business hours, as often as may be reasonably requested. Each such inspection by or on behalf of the Administrative Agent (or any Senior Lender acting on behalf of the Requisite Senior Lenders) shall be at Southland's expense. Southland will, and will cause each of its Subsidiaries to, keep proper books of record and account in which entries in conformity with GAAP (and all legal requirements) shall be made of all dealings and transactions in relation to their businesses and activities. 7.06 RELEASE OF LIENS. Southland shall use its best efforts to cause the termination of all filings (including, without limitation, filings under the Uniform Commercial Code and filings in the real property records) with respect to Liens securing obligations under the Existing Credit Agreement as promptly as practicable after (but in any event no later than 60 days after) the Effective Date. To the extent such filings cannot be terminated within 60 days after the Effective Date, despite Southland's best efforts to effect such termination, Southland shall continue to use its best efforts with reasonable diligence to cause the termination of such filings. ARTICLE VIII NEGATIVE COVENANTS Southland covenants and agrees that so long as any Senior Lender shall have any obligation hereunder and until payment in full of all of the Obligations, unless the Requisite Senior Lenders shall otherwise give prior written consent thereto: -74- 8.01. INDEBTEDNESS. Southland shall not, and shall not permit any of its Subsidiaries to, directly or indirectly create, incur, assume or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: (i) the Obligations and the obligations under the Master Lease Facility; (ii) Permitted Existing Indebtedness and extensions, renewals, replacements and refinancings of Permitted Existing Indebtedness (other than Subordinated Indebtedness), not exceeding the principal amount outstanding on the Effective Date (together with, in the case of a refinancing, interest accrued thereon and reasonable costs incurred in connection with the refinancing); (iii) Subordinated Indebtedness and extensions, renewals, replacements and refinancings thereof which satisfy the criteria set forth in the definition of "Subordinated Indebtedness", the aggregate principal amount of which shall not exceed the aggregate principal amount of Subordinated Indebtedness outstanding as of the Effective Date as set forth on SCHEDULE 1.01-A (which aggregate principal amount shall not exceed $750,000,000) (together with, in the case of a refinancing, interest accrued thereon and reasonable costs incurred in connection with the refinancing); (iv) Present or future Indebtedness of any Subsidiary of Southland to Southland in an amount not exceeding $100,000,000; and present and future Indebtedness of Southland to any of its Subsidiaries or of any such Subsidiary to any other such Subsidiary; PROVIDED, HOWEVER, that any Indebtedness of Southland to any such Subsidiary shall be unsecured and subordinated in right of payment to the Obligations; (v) (A) Capital Lease obligations (other than such obligations included in Permitted Existing Indebtedness and the Master Lease Facility) and Indebtedness incurred in connection with Capital Expenditures (and within a reasonable period of time thereafter), if (1) such Capital Lease obligations and Indebtedness are incurred in connection with the acquisition of assets at fair value after the Effective Date and (2) such Capital Lease Obligations and Indebtedness are either unsecured or secured by the assets subject to such Capital Lease or constituting such Capital Expenditure and other assets securing Capital Lease obligations and Indebtedness incurred in connection with Capital Expenditures in each case which are part of the same transaction, (B) sale and leaseback transactions (other than the Master Lease Facility), if (1) the obligations and Indebtedness incurred in connection with such transaction are either unsecured or secured only by the assets subject to such transactions and (2) the aggregate principal amount of such obligations and Indebtedness (other than such obligations or Indebtedness included in Permitted Existing Indebtedness) does not exceed $150,000,000 (of which no more than $50,000,000 shall be used -75- in transactions other than sales and leasebacks of store sites) at any time outstanding, and (C) extensions, renewals, replacements or refinancings thereof, not exceeding the principal amount outstanding before giving effect to the extension, renewal, replacement or refinancing (together with, in the case of a refinancing, interest accrued thereon and reasonable costs incurred in connection with the refinancing); (vi) Transaction Costs, not included in the Obligations, incurred in connection with the Master Lease Facility and the transactions contemplated thereby; (vii) Indebtedness in respect of Letters of Credit (other than Facility Letters of Credit) reasonably incident to Southland's business; (viii) Indebtedness in respect of foreign currency exchange agreements reasonably incident to Southland's business and Interest Rate Contracts permitted pursuant to SECTION 8.17; (ix) Indebtedness in respect of Accommodation Obligations permitted by SECTION 8.04; (x) surety bonds and appeal bonds required in the ordinary course of business or in connection with the enforcement of rights or claims of Southland or its Subsidiaries or in connection with judgments which do not result in an Event of Default hereunder or other breach hereof; (xi) Indebtedness of Southland Canada, Inc. to obligees other than Southland or its other Subsidiaries in an amount not exceeding $30,000,000 (or the Canadian dollar equivalent thereof) in the aggregate at any one time outstanding, PLUS Permitted Existing Indebtedness owing by Southland Canada, Inc. and any refinancings thereof, PROVIDED, HOWEVER, that at no time shall the aggregate of all of such Indebtedness exceed $90,000,000 (or the Canadian dollar equivalent); (xii) the Yen Royalty Financing Indebtedness; (xiii) Capital Lease obligations of Southland under the Lease Agreement dated as of February 15, 1987, as amended and restated as of December 21, 1990, between Southland and Cityplace Center East Corporation; (xiv) unsecured Indebtedness which is either (A) Commercial Paper or (B) owing to Ito-Yokado in connection with payments by Ito-Yokado of the principal of or interest on (or other amounts owing with respect to) Commercial Paper, PROVIDED that the instrument -76- evidencing the Indebtedness permitted by this SECTION 8.01(xiv)(B) shall provide that no payment (whether in respect of principal, interest or otherwise) of such Indebtedness shall be permitted or required other than (1) payments after the date which is one year after payment in full in cash of the Obligations and termination of the Commitments and (2) so long as there does not exist an Event of Default or Potential Event of Default and the Commercial Paper shall then have a rating of at least A-1 from S&P or Prime-1 from Moody's (or, if at any time neither S&P nor Moody's shall be rating the Commercial Paper, the Commercial Paper shall then have a rating at least equal to the highest rating from such other nationally recognized rating service as is acceptable to the Administrative Agent), payments of the principal amount of such Indebtedness made solely with proceeds of subsequent issuances of Commercial Paper by Southland; (xv) commercial paper (other than the Commercial Paper) issued by Southland (A) which is unsecured, (B) which qualifies for the exemption from registration under Section 3(a)(3) or Section 4(2) of the Securities Act and (C) the aggregate outstanding principal amount of which does not at any time exceed the lesser of (1) $200,000,000 and (2) the amount (if any) by which the Revolving Loan Availability exceeds the aggregate outstanding principal amount of Revolving Loans at that time; and (xvi) other present or future Indebtedness not in excess of $40,000,000 at any time outstanding; PROVIDED, that any Indebtedness arising from an election by Southland to pay a "Benefit" for "Value" pursuant to Section 9 of Southland's Equity Participation Plan shall be limited so that the amount payable by Southland in respect of all such Indebtedness complies with the restrictions set forth in SECTION 8.05(iv); PROVIDED, that no Indebtedness for borrowed money permitted hereunder, except for Permitted Existing Indebtedness to the extent provided therein or in extensions or renewals thereof, shall contain any provisions making a default under or in respect of some other Indebtedness for money borrowed, a default thereunder, unless such cross default provisions are applicable only with respect to defaults which have resulted in the acceleration of payment obligations for money borrowed in an amount not less than, in any particular case, $15,000,000. 8.02. DISPOSITIONS OF ASSETS; LIENS. (a) DISPOSITIONS. Southland shall not, and shall not permit any of its Subsidiaries to, sell, assign, transfer, lease, convey or otherwise dispose of any properties or assets, whether now owned or hereafter acquired, or any income or profits therefrom, or enter into any agreement to do so, other than pursuant to a sale, assignment, transfer, lease, conveyance or other disposition (i) upon foreclosure on the Yen Royalty Financing Collateral by the Yen Royalty Lender, (ii) dispositions not covered by CLAUSES (i), (iii), (iv), (v) or (vi) involving assets with a sales price of -77- not more than $50,000,000 in the aggregate in any calendar year (including any insurance proceeds or a condemnation award with respect to property (except Cityplace Center) having a fair market value in excess of $10,000,000 with respect to which Southland does not restore or replace the property damaged, lost or taken), (iii) constituting sales of inventory and transactions with franchisees occurring in the ordinary course of business; PROVIDED, HOWEVER, that neither Southland nor any of its Subsidiaries shall sell, assign, or otherwise transfer any interest in accounts receivable except in connection with a disposition of any business unit as a going concern, (iv) constituting a sale of vacant sites, surplus land or surplus convenience store properties which are no longer being used as or in connection with an operating retail convenience store of Southland made for immediate cash consideration or promissory notes on which not more than $25,000,000 (in the aggregate) is outstanding at any one time, (v) dispositions of assets in sale and leaseback transactions permitted by SECTION 8.11 or (vi) leases or sub-leases of real property pursuant to that certain Master Lease Agreement dated as of October 3, 1996 between Southland and AT&T Wireless Services, Inc. (b) LIENS. Southland shall not, and shall not permit any of its Subsidiaries to, directly or indirectly create, incur, assume or permit to exist any Lien on or with respect to any of their properties or assets except: (i) Permitted Existing Liens; (ii) any interest or title of a lessor or secured by a lessor's interest under any lease permitted by this Agreement, including, without limitation, such interests or title arising under the Master Lease Facility; (iii) Customary Permitted Liens; (iv) purchase money Liens (including the interest of a lessor under a Capital Lease) and Liens on property existing at the time of acquisition thereof by Southland or any of its Subsidiaries securing Indebtedness permitted by SECTION 8.01(v), PROVIDED that the Lien does not extend (or otherwise permit recourse) to any property other than the property being purchased or acquired; (v) Liens with respect to judgments or attachments which do not result in an Event of Default hereunder or other breach hereof; (vi) Liens securing reimbursement obligations for trade Letters of Credit permitted by SECTION 8.01(vii) which encumber only goods, or documents of title covering goods, which are purchased in transactions for which such trade Letters of Credit are issued; (vii) Environmental Liens with respect to liability or damages not in excess of $5,000,000; -78- (viii) Liens securing Indebtedness permitted by SECTION 8.01(xvi); PROVIDED that (A) the Indebtedness is incurred or assumed in connection with an acquisition of assets by Southland or a Subsidiary of Southland, (B) the amount of the Indebtedness so incurred or assumed in connection with such acquisition does not exceed 80% of the fair value of the assets at the time of their acquisition, (C) the Liens encumber only the assets acquired by Southland or its Subsidiary and (D) the aggregate outstanding principal amount of Indebtedness secured by the Liens does not exceed $20,000,000 at any time; (ix) Liens on property and (for so long as no Investment in Southland Canada, Inc. is outstanding under SECTION 8.03(iii) capital stock of Southland Canada, Inc., securing Indebtedness permitted under SECTION 8.01(xi); (x) Liens on the Yen Royalty Financing Collateral securing the Yen Royalty Financing Indebtedness; (xi) Liens constituting collateral assignments of the interest of Southland as lessor under any sublease (and any tenant improvements made in connection with such sublease) of any part of Cityplace East Tower currently leased to Southland under the Lease Agreement dated February 15, 1987, as amended and restated as of December 21, 1990, between Southland and Cityplace Center East Corporation; and (xii) to the extent Indebtedness secured thereby is permitted to be extended, renewed, replaced or refinanced pursuant to SECTION 8.01, a future Lien upon any property which is subject to a Lien described in SECTION 8.02(b)(i), (iv), (viii), (ix), or (x), if such future Lien attaches only to the same property, secures only such permitted extensions, renewals, replacements or refinancings and is of like quality, character and extent. 8.03. INVESTMENTS. Southland shall not, and shall not permit any of its Subsidiaries to, directly or indirectly make or own any Investment in any Person except: (i) Investments in Cash Equivalents; (ii) Permitted Existing Investments; PROVIDED that Southland shall not, directly or indirectly, make any additional Investments, in cash or in kind, in the Cityplace real estate development project in Dallas, Texas, except to the extent necessary to fulfill existing completion guaranties and to satisfy requirements of any Governmental Authority in effect on July 31, 1987; (iii) Investments between Southland and its Affiliates, other than Investments by Southland Canada, Inc. or any other -79- Foreign Affiliate in Southland, PROVIDED that (A) the aggregate amount of such Investments shall not exceed $150,000,000 at any one time outstanding, (B) the aggregate amount of Investments by Southland in Southland Canada, Inc. and any other Foreign Affiliate shall not exceed $50,000,000 at any one time outstanding, (C) the aggregate amount of Investments by Southland or its Subsidiaries in Melin Enterprises, Inc., a Colorado corporation, shall not exceed $5,000,000 at any one time outstanding and (D) Investments constituting Indebtedness shall be permitted only to the extent permitted by SECTION 8.01(iv); (iv) Investments in the capital stock of newly acquired convenience store businesses (and food service businesses dedicated to Southland's convenience store and distribution businesses), PROVIDED THAT, after giving effect to such Investment, such businesses are owned and operated by a Person that is a Subsidiary of Southland; (v) Investments by Southland Canada, Inc. and other Foreign Affiliates in Southland in compliance with all applicable laws and agreements; PROVIDED that (a) the amount of such Investments shall not exceed $50,000,000 at any one time outstanding, (b) before the Investment is made, Southland Canada or the Foreign Affiliate making the Investment shall execute and deliver to the Administrative Agent a Subordination Agreement substantially in the form of EXHIBIT 13, and (c) all such Investments shall be evidenced by a non-negotiable subordinated promissory note which by its terms shall be subject to the provisions of such Subordination Agreement, executed by Southland in favor of Southland Canada or such other Foreign Affiliate and delivered to the Administrative Agent pursuant to the provisions of such Subordination Agreement; (vi) The promissory notes referred to in SECTION 8.02(a)(iv), up to the amount stated therein; and (vii) Other Investments not in excess of $30,000,000. 8.04. ACCOMMODATION OBLIGATIONS. Southland shall not, and shall not permit any of its Subsidiaries to, directly or indirectly create or become or be liable with respect to any Accommodation Obligation EXCEPT (i) guaranties resulting from endorsement of negotiable instruments for collection in the ordinary course of business; (ii) any guaranty of the Obligations by any Subsidiary of Southland; (iii) reasonable obligations, warranties and indemnities made under any contracts effectuating any sale or transfer permitted under SECTION 8.02; (iv) obligations, warranties and indemnities, not relating to Indebtedness of any Person, which have been or are undertaken or made in the ordinary course of business (including reasonable and customary indemnities in engagement letters for professionals with respect to transactions permitted by this Agreement) and not for the benefit or in favor -80- of an Affiliate of Southland; (v) Accommodation Obligations of Southland with respect to any Indebtedness of any of its Subsidiaries permitted by SECTION 8.01 or any other obligation or liability of any of its Subsidiaries, except to the extent that such other obligation or liability otherwise constitutes a breach of this Agreement; (vi) Accommodation Obligations for Subsidiaries or Foreign Affiliates (including, for purposes of this SECTION 8.04(vi), all Joint Ventures) in lieu of Investments permitted under SECTION 8.03; (vii) Accommodation Obligations constituting Permitted Existing Indebtedness and extensions and renewals thereof, and substitutions therefor in the same or a lesser amount and in respect of the same transaction; (viii) Accommodation Obligations for the benefit of Southland's franchisees arising in the ordinary course of business; (ix) Accommodation Obligations arising in connection with the Transaction Documents; (x) indemnities made in the Yen Royalty Financing Agreement; (xi) Accommodation Obligations in an amount not to exceed $10,000,000 in the aggregate at any one time outstanding with respect to any obligation or liability of any Joint Venture or Foreign Affiliate; (xii) reasonable and customary indemnification obligations (not directly or indirectly supporting payment of any other Indebtedness) in favor of any dealer, placement agent or issuing and paying agent engaged to provide services related to the Commercial Paper (or the commercial paper described in SECTION 8.01(xv)) in respect of claims arising out of or resulting from such services; (xiii) indemnities continuing or made in favor of the "Assignors" or the "Past Default Interest Manager" under (and, in each case, as defined in) the Master Assignment Agreement; and (xiv) other Accommodation Obligations in an aggregate amount not to exceed $5,000,000 at any time outstanding. 8.05. RESTRICTED JUNIOR PAYMENTS. Southland shall not, and shall not permit any of its Subsidiaries to, declare or make any Restricted Junior Payment, except: (i) payments due on Subordinated Indebtedness and permitted to be made pursuant to the terms of such Subordinated Indebtedness, and repayment of Subordinated Indebtedness from the proceeds of new Subordinated Indebtedness; (ii) any dividends or distributions to Southland on the capital stock of any of its Subsidiaries or from any of such Subsidiaries to any other of such Subsidiaries; (iii) so long as there does not exist an Event of Default or a Potential Event of Default under SECTION 10.01(a) or (by reason of a breach of one or more covenants set forth in ARTICLE IX) SECTION 10.01(b) or an Event of Default or such Potential Event of Default would result therefrom, Southland may repurchase or redeem its Senior Subordinated Debentures, PROVIDED that such repurchases and redemptions shall be made with the proceeds of Common Stock or Subordinated Indebtedness issued after the Effective Date; -81- (iv) so long as there does not exist an Event of Default or Potential Event of Default, payments in respect of the repurchase of capital stock of Southland arising from an election by Southland to pay a "Benefit" for "Value" pursuant to Section 9 of Southland's Equity Participation Plan or otherwise required or permitted pursuant to agreements with employees of Southland, upon death, retirement or termination of employment of such employees, which payments (including payments on Indebtedness of Southland arising from any such election under its Equity Participation Plan) shall not in the aggregate exceed $2,000,000 per annum, PLUS the amount of consideration paid by the purchasers of such capital stock upon its issuance or reissuance by Southland; (v) so long as there does not exist an Event of Default or Potential Event of Default, dividends payable in kind, but not in cash, on any class or series of Southland's preferred stock and payments of cash (in an aggregate amount not in excess of $500,000) in lieu of the issuance of fractional shares; and (vi) the payments described in CLAUSES (1) and (2) of SECTION 8.01(xiv)(B) with respect to Indebtedness permitted under SECTION 8.01(xiv)(B). 8.06. CONDUCT OF BUSINESS. Southland shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by Southland and its Subsidiaries on December 31, 1995 and (ii) any business or activities substantially similar or related thereto (including, without limitation, food distribution and food service businesses). 8.07. TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES. Southland shall not, and shall not permit any of its Subsidiaries to, directly or indirectly enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder or holders of more than five percent (5%) of any class of equity Securities of Southland, or with any Affiliate thereof or of any such holder, on terms that are less favorable to any such corporation than those that might be obtained in an arm's-length transaction at the time from Persons who are not such a holder or Affiliate. Nothing contained in this SECTION 8.07 shall prohibit (i) any transaction expressly permitted by SECTION 8.05, (ii) customary directors' indemnities, (iii) the execution, delivery and performance by Southland of the Shareholders Agreement dated as of March 5, 1991 by and among Southland, Ito-Yokado, IYG Holding Company and certain other holders of Common Stock and extensions and renewals thereof on the terms as in effect on the date hereof and (iv) compensation arrangements for officers, directors and employees of Southland and its Subsidiaries approved by the board of directors (or a duly authorized committee thereof) of Southland. -82- 8.08. RESTRICTION ON FUNDAMENTAL CHANGES. Southland shall not, and shall not permit any of its Subsidiaries with total assets in excess of $5,000,000 to, enter into any merger or consolidation, or liquidate, wind- up or dissolve (or suffer any liquidation or dissolution), or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, all or any substantial part of its business, property or assets, whether now or hereafter acquired, except for (i) the merger of a wholly-owned Subsidiary of Southland into Southland, (ii) the sale or other transfer of all or any substantial part of the business, property or assets of any Subsidiary of Southland to Southland or any other Subsidiary of Southland, (iii) with respect to Subsidiaries of Southland with less than $5,000,000 in total assets, the merger or consolidation of a Subsidiary of Southland with or into any other Subsidiary of Southland, or (iv) as permitted by SECTION 8.02(a). 8.09. ERISA. Southland shall not, and shall not permit any of its Subsidiaries or ERISA Affiliates to: (i) Engage in any prohibited transaction for which an exemption is not available or has not been previously obtained from the Department of Labor and in connection with which Southland, any Subsidiary of Southland or any ERISA Affiliate could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA, or a tax imposed under Section 4975 of the Internal Revenue Code, in an amount which exceeds $5,000,000; (ii) Fail to make full payment when due of all amounts which, under the provisions of any Defined Benefit Plan, Southland, any of its Subsidiaries or any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any "accumulated funding deficiency" (as defined in Section 302(a) of ERISA and Section 412(a) of the Internal Revenue Code) with respect to any Defined Benefit Plan, or fail to pay any installment necessary to amortize any waived funding deficiency, with respect to any Defined Benefit Plan; (iii) (A) Fail to make any payments of withdrawal liability to any Multiemployer Plan, or (B) fail to make any contribution payments to any Multiemployer Plan that Southland, any of its Subsidiaries or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto, PROVIDED, HOWEVER, that this CLAUSE (B) shall not apply to any such payments which at any one time are in the aggregate less than $3,000,000 and are being reasonably contested by either Southland, any of its Subsidiaries or any ERISA Affiliate; (iv) Terminate any Defined Benefit Plan so as to result in any liability of Southland, any Subsidiary of Southland or any ERISA Affiliate under Title IV of ERISA in an amount which would have a Material Adverse Effect; or -83- (v) Permit to exist any occurrence of any Reportable Event, or any other event or condition which, in the reasonable opinion of the Administrative Agent communicated to Southland in accordance with SECTION 12.09, presents a material risk of a liability of Southland, any Subsidiary of Southland or any ERISA Affiliate under ERISA or the Internal Revenue Code which could have a Material Adverse Effect; or (vi) (A) Enter into any new Benefit Plans (other than welfare benefit plans, as defined in ERISA) under which Southland, its Subsidiaries and ERISA Affiliates would have annual costs in the aggregate among all such Benefits Plans in excess of $5,000,000, or (B) modify any existing Benefit Plan so as to increase its obligations thereunder in an amount which could have a Material Adverse Effect. 8.10. COMMERCIAL PAPER FACILITY. Southland shall not amend the terms of the documents governing or relating to the Commercial Paper other than (i) increases in the maximum amount of Commercial Paper which may at any time be outstanding and (ii) extensions of the date beyond which Southland may not issue Commercial Paper pursuant to such documents (including an extension of the guaranty of Ito- Yokado with respect to the Commercial Paper). 8.11. SALES AND LEASEBACKS. Southland shall not, and shall not permit any of its Subsidiaries to become liable, directly or by way of Accommodation Obligation, with respect to any lease (including a Capital Lease), of any property (whether real or personal or mixed) whether now owned or hereafter acquired, (i) which Southland or a Subsidiary of Southland has sold or transferred or is to sell or transfer to any other Person, or (ii) which Southland or a Subsidiary of Southland intends to use for substantially the same purposes as any other property which has been or is to be sold or transferred by that entity to any other Person in connection with such lease, except (a) as permitted by SECTION 8.01(v)(B), (b) the Master Lease Facility and (c) transactions involving properties owned by Southland or its Subsidiaries on the date hereof which have an aggregate fair market value of not more than $30,000,000. 8.12. SUBORDINATED INDEBTEDNESS. (a) NO CHANGE. Southland shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms applicable to any Subordinated Indebtedness. (b) NOTICES. Southland shall deliver to the Administrative Agent (i) a copy of each notice or other communication delivered by or on behalf of Southland to any trustee under any Subordinated Indebtedness indenture or to any holder (in its capacity as such) of any Subordinated Indebtedness not -84- issued pursuant to an indenture (including, without limitation, notice of the election of any Extension Period (as defined therein) under a QUIDS Subordinated Note), such delivery to be made at the same time and by the same means as such notice or other communication is delivered to such trustee or such holder, and (ii) a copy of each notice or other communication received by Southland from any trustee under any Subordinated Indebtedness indenture or from any holder (in its capacity as such) of any Subordinated Indebtedness not issued pursuant to an indenture, such delivery to be made promptly after such notice or other communication is received by Southland. (c) NOTICE UNDER QUIDS SUBORDINATED NOTE INDENTURE. In the event that Southland is required to enter into an indenture with respect to the QUIDS Subordinated Notes upon the exercise by Ito-Yokado or Seven-Eleven Japan Co., Ltd., of its registration rights with respect thereto, Southland shall promptly deliver to the Administrative Agent a certified copy of the resolutions of Southland's Board of Directors designating this Agreement as the "Credit Agreement" under the indenture. 8.13. AMENDMENT OF CHARTER OR BY-LAWS. Neither Southland nor any of its Subsidiaries shall amend its charter documents or By-Laws, except upon at least ten days' prior written notice to the Administrative Agent and then only if no Event of Default or Potential Event of Default would result therefrom. 8.14. DISPOSAL OF SUBSIDIARY STOCK. Except as permitted by SECTION 8.02 or SECTION 8.08, Southland will not (i) directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of (or warrants, rights or options to acquire shares or other equity Securities of) any of its Subsidiaries, except to qualify directors if required by applicable law; or (ii) permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other Securities of (or warrants, rights or options to acquire shares or other Securities of) such Subsidiary, or any other Subsidiary of Southland, except to qualify directors if required by applicable law and except that any Subsidiary of Southland may issue additional shares of its capital stock to any other Subsidiary of Southland or to Southland. 8.15. MARGIN REGULATIONS. No portion of the proceeds of any credit extended under this Agreement shall be used in any manner which might cause the extension of credit or the application of such proceeds to violate Regulation G, Regulation U or Regulation X or any other regulation of the Federal Reserve Board or to violate the Securities Exchange Act or the Securities Act, in each case as in effect on the date or dates of such Borrowing and such use of proceeds. 8.16. INTEREST RATE CONTRACTS. Southland shall not, and shall not permit any of its Subsidiaries to, enter into any Interest Rate Contract (or amend any Interest Rate Contract to increase the notional amount of Indebtedness subject thereto) if, after giving effect to the Interest Rate Contract (or amendment, as the case may be), the aggregate notional amount of Indebtedness subject to Interest Rate Contracts then in effect is in excess of -85- the then aggregate outstanding principal amount of obligations of Southland bearing interest at a variable rate. ARTICLE IX FINANCIAL COVENANTS Southland covenants and agrees that so long as any Senior Lender shall have any obligation hereunder and until payment in full of all of the Obligations, unless the Requisite Senior Lenders shall otherwise give prior written consent thereto: 9.01. SENIOR INDEBTEDNESS TO EBITDA. Southland shall not on any Quarterly Determination Date occurring during any period set out below permit the ratio of (i) Senior Indebtedness (other than Indebtedness not exceeding $35,000,000 under the Master Lease Facility) as of such Quarterly Determination Date to (ii) EBITDA as determined as of such Quarterly Determination Date for the four (4) calendar quarters ending on such date, to be greater than the ratio set out below opposite such period: Period Maximum Ratio ----------------------- ------------- Effective Date through March 31, 1998 3.40x April 1, 1998 through December 31, 1998 3.20x January 1, 1999 through December 31, 1999 2.80x January 1, 2000 and thereafter 2.25x 9.02. MINIMUM INTEREST AND RENT COVERAGE RATIO. Southland shall not on any Quarterly Determination Date occurring during any period set out below permit the ratio of (i) the sum of (A) EBITDA, PLUS (B) Rent Expense on Operating Leases to (ii) the sum of (A) Consolidated Cash Interest Expense, PLUS (B) Rent Expense on Operating Leases, in each case as determined as of such Quarterly Determination Date for the four (4) calendar quarters ending on such date, to be less than the ratio set out below opposite such period: -86- Period Minimum Ratio ----------------------- -------------- Effective Date through December 31, 1999 2.00x January 1, 2000 through December 31, 2000 2.25x January 1, 2001 and thereafter 2.50x 9.03. MINIMUM FIXED CHARGE COVERAGE RATIO. Southland shall not on any Quarterly Determination Date occurring during any period set out below permit the ratio of (i) EBITDA, MINUS Capital Expenditures to (ii) Consolidated Fixed Charges, in each case as determined as of such Quarterly Determination Date for the four (4) calendar quarters ending on such date, to be less than the ratio set out below opposite such period: Period Minimum Ratio ----------------------- ------------- Effective Date through December 31, 1997 0.65x January 1, 1998 through December 31, 1998 0.35x January 1, 1999 through March 31, 1999 0.50x April 1, 1999 through June 30, 1999 0.65x July 1, 1999 through September 30, 1999 0.80x October 1, 1999 through December 31, 1999 0.85x January 1, 2000 through December 31, 2000 1.10x January 1, 2001 and thereafter 1.30x -87- ARTICLE X EVENTS OF DEFAULT; RIGHTS AND REMEDIES 10.01. Events of Default. Each of the following occurrences shall constitute an Event of Default under this Agreement: (a) FAILURE TO MAKE PAYMENTS WHEN DUE. Southland shall fail to pay when due (i) any interest on any Loan or any fee or other amount payable hereunder (other than amounts described in SECTIONS 10.01(a)(ii) or 10.01(a)(iii)), and such failure shall continue for five (5) Business Days, or (ii) any Reimbursement Obligation, or (iii) any amount payable for principal on the Loans, including any mandatory prepayment payable under SECTION 2.07(b), but excluding any voluntary prepayment payable under SECTION 2.07(a). b) BREACH OF CERTAIN COVENANTS. Southland shall fail duly and punctually to perform or observe any agreement, covenant or obligation binding on Southland under ARTICLE VIII or Article IX. (c) BREACH OF REPRESENTATION OR WARRANTY. Any representation or warranty made or deemed made by Southland to the Administrative Agent, any Senior Lender or any Issuing Bank herein or in any of the other Loan Documents or in any statement or certificate at any time given by Southland or any of its Subsidiaries pursuant to any of the Loan Documents shall be false or misleading in any material respect on the date as of which made. (d) OTHER DEFAULTS. Southland shall default in the payment of any Obligation which is not referred to in SECTION 10.01(a) or in the performance of or compliance with any term contained in this Agreement or in any of the Loan Documents (other than as covered by SECTION 10.01(a) or 10.01(b)), and such default or event of default shall continue for thirty (30) days after (i) the Administrative Agent or any Senior Lender (acting through the Administrative Agent) notifies Southland or the applicable Subsidiary of Southland of any such default, or (ii) Southland or such Subsidiary acknowledges such default in writing. Notwithstanding the foregoing, the failure of Southland to deliver the Officers' Certificate required pursuant to SECTION 6.01(iv) shall constitute an Event of Default on the day such Officers' Certificate is due whether or not it continues thereafter and whether or not any notice is given to or received by Southland. (e) DEFAULTS AS TO OTHER INDEBTEDNESS, MASTER LEASE FACILITY. (i) Southland or any Subsidiary of Southland shall fail to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) on any Indebtedness, other than an Obligation, if the aggregate amount of such Indebtedness is $15,000,000 or more, and such failure shall continue beyond the applicable stated cure period therefor; or any breach, default or event of default shall occur, or any other event shall occur or condition shall exist, under any instrument, agreement or indenture pertaining -88- thereto, if the effect thereof (with or without the giving of notice or lapse of time or both) is to accelerate, or permit the holder(s) of such Indebtedness to accelerate, the maturity of any such Indebtedness and such breach, default, event of default, event or condition shall continue beyond the applicable stated cure period therefor; or any such Indebtedness shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled required prepayment prior to the stated maturity thereof), or the holder of any Lien (other than Liens upon property leased to Southland which were created by the landlord prior to the commencement of the lease), in any amount, shall commence foreclosure of such Lien upon property of Southland or any of its Subsidiaries having a value in excess of $1,000,000 and such foreclosure shall continue against such property to a date less than thirty (30) days prior to the date of the proposed foreclosure sale; PROVIDED, HOWEVER, that the failure to make a payment, or any such breach, default or event of default, under the Yen Royalty Financing Agreement or otherwise in respect of the Yen Royalty Financing Indebtedness shall not constitute an Event of Default hereunder unless recourse or recovery in respect thereof in excess of $15,000,000 is claimed or sought against Southland personally or against or out of any property of Southland other than the Yen Royalty Financing Collateral; PROVIDED, FURTHER, HOWEVER, that if, upon the maturity (whether by lapse of time, acceleration or otherwise) of any Commercial Paper permitted to be issued hereunder, Ito-Yokado (as opposed to Southland) makes payment (in accordance with the terms applicable to the Commercial Paper) of the Indebtedness evidenced by such Commercial Paper, Southland's failure to pay shall not be an Event of Default for purposes of this SECTION 10.01(e) to the extent such failure to pay is cured (at the maturity of such Commercial Paper) by the payment by Ito-Yokado. (ii) Southland shall fail to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) under the Master Lease Documents and such failure shall continue beyond the applicable cure period therefor; or any breach, default or event of default shall occur, or any other event shall occur or condition shall exist, under the Master Lease Documents if the effect thereof (with or without the giving of notice or lapse of time or both) is to accelerate, or permit the lessor(s) thereunder to accelerate, the maturity of any payment required thereunder and such breach, default, event of default, event or condition shall continue beyond the applicable cure period therefor; or any such payment shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled required prepayment prior to the stated maturity thereof), or the lessor(s) thereunder shall commence any proceeding to repossess any property leased thereunder and such repossession proceeding shall not be dismissed within thirty (30) days after the commencement thereof. (f) INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) An involuntary case shall be commenced against Southland or any of its Subsidiaries and the petition shall not be dismissed within sixty (60) days after commencement of the case, or a court having jurisdiction in the premises shall enter a decree or order for relief in respect of Southland or any of its Subsidiaries in an involuntary case, under any applicable bankruptcy, -89- insolvency or other similar law now or hereinafter in effect; or any other similar relief shall be granted under any applicable federal or state law. (ii) A decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Southland or any of its Subsidiaries or over all or a substantial part of the property of Southland or any of is Subsidiaries, shall be entered; or an interim receiver, trustee or other custodian of Southland or any of its Subsidiaries or of all or a substantial part of the property of Southland or any of its Subsidiaries shall be appointed or a warrant of attachment, execution or similar process against any substantial part of the property of Southland or any of its Subsidiaries shall be issued and any such event shall not be stayed, dismissed, bonded or discharged within thirty (30) days of entry, appointment or issuance. (g) VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. Southland or any of its Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; Southland or any of its Subsidiaries shall make any assignment for the benefit of creditors or shall be unable or fail, or admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of Southland or any of its Subsidiaries (or any committee thereof) adopts any resolution or otherwise authorizes any action to approve any of the foregoing. (h) JUDGMENTS AND ATTACHMENTS. Any money judgment, arbitration award (other than a money judgment or award covered by insurance, but only if the insurer has admitted liability with respect to such money judgment), writ or warrant of attachment, or similar process involving in any case an amount in excess of $5,000,000 shall be entered or filed against Southland or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of sixty (60) days. (i) DISSOLUTION. Any order, judgment or decree shall be entered against Southland or any of its Subsidiaries decreeing its involuntary dissolution or split up and such order shall remain undischarged and unstayed for a period in excess of thirty (30) days; or Southland or, except as permitted by this Agreement, any of its Subsidiaries shall otherwise dissolve or cease to exist. (j) LOSS OF PAYMENT PRIORITY; FAILURE OF SUBORDINATION. For any reason any of the subordination provisions of the documents and instruments evidencing any Subordinated Indebtedness shall, at any time, be invalidated or otherwise cease to be in full force and effect, or the Obligations shall be subordinated or shall not have the priority contemplated by this Agreement or such subordination provisions, for any reason; and the Requisite Senior Lenders shall have determined that any event described in this Section -90- 10.01(j) has or is likely to have Material Adverse Effect. (k) CHANGE OF CONTROL. A Change of Control shall have occurred. (l) UNFUNDED ERISA LIABILITIES. Any Defined Benefit Plan shall be terminated within the meaning of Title IV of ERISA or a trustee shall be appointed by an appropriate United States District Court to administer any Defined Benefit Plan or the PBGC shall institute proceedings to terminate any Defined Benefit Plan or to appoint a trustee to administer any Defined Benefit Plan, if, as of the date of such termination, appointment or institution of proceedings, the liability (after giving effect to the tax consequences thereof) of Southland, any Subsidiary of Southland or any ERISA Affiliate to the PBGC under Section 4062 of ERISA exceeds the current value of assets accumulated in such Defined Benefit Plan by more than $1,000,000 (or in the case of a termination of a Defined Benefit Plan involving a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), Southland's, such Subsidiary's or any ERISA Affiliate's proportionate share of such excess shall exceed such amount). (m) WITHDRAWAL LIABILITY UNDER MULTIEMPLOYER PLANS. Either (i) any Multiemployer Plan shall notify Southland, any Subsidiary of Southland of any ERISA Affiliate that it has incurred a withdrawal liability in an amount exceeding $1,000,000 and the installment payments of such liability shall not be paid when required to be paid in accordance with applicable law or the provisions of the subject Multiemployer Plan, or within five (5) Business Days thereafter; or (ii) any Multiemployer Plan shall be terminated within the meaning of Title IV of ERISA, or a trustee shall be appointed by an appropriate United States District Court to administer any Multiemployer Plan, or the PBGC shall commence proceedings to terminate any Multiemployer Plan or to appoint a trustee to administer any Multiemployer Plan and the aggregate outstanding liability of Southland and all of its Subsidiaries and all of its ERISA Affiliates with respect to such Multiemployer Plan (assuming that the Multiemployer Plan has terminated as of the day of any such appointment or commencement of proceedings) is an amount which exceeds $5,000,000. (n) OTHER ERISA LIABILITIES. Southland or any of its Subsidiaries or any ERISA Affiliate of Southland (i) shall engage in any prohibited transaction (other than the alleged prohibited transaction described on SCHEDULE 5.01(xxiii)) for which an exemption is not available or has not been previously obtained from the Department of Labor and in connection with which Southland or any such Subsidiary or any ERISA Affiliate could reasonably be expected to be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code, which penalty or tax is in excess of $5,000,000; (ii) shall fail to make full payment when due of all amounts which under the provisions or any Defined Benefit Plan it is required to pay as contributions thereto, or permit to exist any "accumulated funding deficiency" (as defined in Section 302(a) of ERISA and Section 412(a) of the Internal Revenue Code) or fail to pay any installment necessary to amortize each waived funding deficiency with respect to any Defined Benefit Plan, (iii) fail to make any contribution payments of -91- any Multiemployer Plan that Southland or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan or under such Multiemployer Plan or any law pertaining thereto, PROVIDED, however, that this CLAUSE (iii) shall not apply to any such payments which at any one time are in the aggregate less than $3,000,000 and are being reasonably contested by either Southland, any of its Subsidiaries or any ERISA Affiliates, or (iv) permit to exist any occurrence of any Reportable Event (other than the alleged prohibited transaction described on SCHEDULE 5.01(xxiii)) or any other event or condition which, in the opinion of the Administrative Agent communicated to Southland in accordance with SECTION 12.09 hereto, presents a material risk of liability of Southland, any Subsidiary of Southland or any ERISA Affiliate under ERISA or the Internal Revenue Code in an amount which exceeds $5,000,000. (o) MATERIAL ADVERSE CHANGE. There shall have occurred or been disclosed to the Senior Lenders any condition or event which the Requisite Senior Lenders determine has or is likely to have a Material Adverse Effect. An Event of Default shall be deemed "continuing" until cured or waived in writing in accordance with SECTION 12.07 to the extent and under the circumstances provided for therein. 10.02. RIGHTS AND REMEDIES. (a) ACCELERATION. Upon the occurrence of any Event of Default described in the foregoing SECTION 10.01(f) or 10.01(g) with respect to Southland, the Commitments shall automatically and immediately terminate and the unpaid principal amount of and any and all accrued interest on the Loans and all other Obligations shall automatically become immediately due and payable, with all additional interest from time to time accrued thereon and without presentment, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration), all of which are hereby expressly waived by Southland, and the obligation of each Senior Lender to make any Loan hereunder and of each Senior Lender or Issuing Bank to issue or participate in any Facility Letter of Credit shall thereupon terminate; and upon the occurrence and during the continuance of any other Event of Default, the Administrative Agent shall at the request, or may with the consent, of the Requisite Senior Lenders, by written notice to Southland, (i) declare that the Commitments are terminated, whereupon the Commitments and the obligation of each Senior Lender to make any Loan hereunder and of each Senior Lender or Issuing Bank to issue or participate in any Facility Letter of Credit shall immediately terminate, and/or (ii) declare the unpaid principal amount of, and any and all accrued and unpaid interest on, the Loans and all other Obligations to be, and the same shall thereupon be, immediately due and payable with all additional interest from time to time accrued thereon and without presentment, demand, or protest or other requirements of any kind (including, without limitation, valuation and -92- appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration), all of which are hereby expressly waived by Southland. (b) DEPOSIT FOR FACILITY LETTERS OF CREDIT. In addition, upon demand by the Administrative Agent or the Requisite Senior Lenders after the occurrence of any Event of Default, Southland shall deposit with the Administrative Agent for the benefit of the Senior Lenders with respect to each Facility Letter of Credit then outstanding, promptly upon the demand of the Administrative Agent, cash or Cash Equivalents in an amount equal to the greatest amount for which such Facility Letter of Credit may be drawn. Such deposit shall be held by the Administrative Agent for the benefit of the Senior Lenders as security for, and to provide for the payment of, the Reimbursement Obligations. (c) RESCISSION. If at any time after acceleration of the maturity of the Loans, Southland shall pay all arrears of interest and all payments on account of principal of the Loans and Reimbursement Obligations which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than nonpayment of principal of and accrued interest on the Loans due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to SECTION 12.07, then by written notice to Southland, the Requisite Senior Lenders may elect, in the sole discretion of such Requisite Senior Lenders, to rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right or remedy consequent thereon. The provisions of the preceding sentence are intended merely to bind the Senior Lenders and the Issuing Banks to a decision which may be made at the election of the Requisite Senior Lenders; they are not intended to benefit Southland and do not give Southland the right to require the Senior Lenders to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. ARTICLE XI THE ADMINISTRATIVE AGENT; THE CO-AGENT 11.01. APPOINTMENT. (a) Each Senior Lender and each Issuing Bank hereby designates and appoints Citibank as the Administrative Agent of such Senior Lender and such Issuing Bank under this Agreement and the Loan Documents, and each Senior Lender and each Issuing Bank hereby irrevocably authorizes the Administrative Agent to take such action on its behalf under the provisions of this Agreement and the Loan Documents and to exercise such powers as set forth herein or therein, together with such other powers as are reasonably incidental thereto. The Administrative Agent agrees to act as such on the express conditions contained in this ARTICLE XI. -93- (b) The provisions of this ARTICLE XI are solely for the benefit of the Administrative Agent and the Senior Lenders and Issuing Banks, and neither Southland nor any Subsidiary of Southland shall have any rights to rely on or enforce any of the provisions hereof (other than as expressly set forth in SECTION 11.07). In performing its functions and duties under this Agreement, the Administrative Agent shall act solely as agent of the Senior Lenders and the Issuing Banks and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for Southland or any Subsidiary of Southland. 1.02. NATURE OF DUTIES. The Administrative Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement or in the Loan Documents. The duties of the Administrative Agent shall be mechanical and administrative in nature. The Administrative Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Senior Lender or Issuing Bank. Nothing in this Agreement or any of the Loan Documents, expressed or implied, is intended to or shall be construed to impose upon the Administrative Agent any obligations in respect of this Agreement or any of the Loan Documents except as expressly set forth herein or therein. Each Senior Lender and each Issuing Bank shall make its own independent investigation of the financial condition and affairs of Southland in connection with the making and the continuance of the Loans hereunder and with the issuance of the Facility Letters of Credit and shall make its own appraisal of the creditworthiness of Southland, and the Administrative Agent shall not have any duty or responsibility, either initially or on a continuing basis, to provide any Senior Lender or Issuing Bank with any credit or other information with respect thereto. If the Administrative Agent seeks the consent or approval of the Requisite Senior Lenders to the taking or refraining from taking any action hereunder, the Administrative Agent shall send notice thereof to each Senior Lender. The Administrative Agent shall promptly notify each Senior Lender at any time that the Requisite Senior Lenders have instructed the Administrative Agent to act or refrain from acting pursuant hereto. 11.03. RIGHTS, EXCULPATION, etc. Neither the Administrative Agent nor any of its officers, directors, employees or agents shall be liable to any Senior Lender or Issuing Bank for any action taken or omitted by them hereunder or under any of the Loan Documents, or in connection herewith or therewith, except that the Administrative Agent shall be obligated on the terms set forth herein for performance of its express obligations hereunder and except that no Person shall be relieved of any liability imposed by law for intentional tort. The Administrative Agent shall not be liable for any apportionment or distribution of payments made by it in good faith pursuant to SECTION 2.08(b) or SECTION 3.06, and if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Holder to whom payment was due, but not made, shall be to recover from other Holders (or former Holders) any payment in excess of the amount to which they are determined to have been entitled. The Administrative Agent shall not be responsible to any Senior Lender, Issuing Bank or Holder for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or -94- sufficiency of this Agreement or any of the Loan Documents or any of the other Loan Documents, or for the financial condition of Southland or any of its Subsidiaries. The Administrative Agent shall not be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the Loan Documents or the financial condition of Southland or any of its Subsidiaries, or the existence or possible existence of any Potential Event of Default or Event of Default. The Administrative Agent may at any time request instructions from the Senior Lenders with respect to any actions or approvals which by the terms of this Agreement or of any of the Loan Documents the Administrative Agent is permitted or required to take or to grant, and if such instructions are promptly requested, the Administrative Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any person for refraining from any action or withholding any approval under any of the Loan Documents until it shall have received such instructions from the Requisite Senior Lenders. Without limiting the foregoing, no Senior Lender or Issuing Bank shall have any right of action whatsoever against the Administrative Agent as a result of the Administrative Agent acting or refraining from acting under this Agreement, the Notes or any of the other Loan Documents in accordance with the instructions of the Requisite Senior Lenders. 11.04. RELIANCE. The Administrative Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or any telephone message believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the Loan Documents and its duties hereunder or thereunder, upon advice of counsel selected by it. 11.05. INDEMNIFICATION. To the extent that the Administrative Agent is not reimbursed and indemnified by Southland, the Senior Lenders will reimburse and indemnify the Administrative Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it in any way relating to or arising out of this Agreement or any of the other Loan Documents or any action taken or omitted by the Administrative Agent under this Agreement or any of the other Loan Documents, proportionately based upon a fraction, the numerator of which is the amount of such Senior Lender's Commitment, and the denominator of which is the aggregate amount of the Commitments of all Senior Lenders PROVIDED that no Senior Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. The obligations of the Senior Lenders under this SECTION 11.05 shall survive the payment in full of the Loans and Reimbursement Obligations and the termination of this Agreement. 11.06. THE ADMINISTRATIVE AGENT INDIVIDUALLY. In the event the Administrative Agent at any time has a Commitment hereunder (a) with respect to its Pro Rata Share of the Commitments hereunder, the Loans made by it or -95- its Affiliates and any Notes issued to or held by it or its Affiliates, the Administrative Agent shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Senior Lender or holder of a Note and (b) the terms "Senior Lenders" or "Requisite Senior Lenders" or any similar terms shall, unless the context clearly otherwise indicates, include the Administrative Agent or its Affiliates as a Senior Lender or one of the Requisite Senior Lenders. The Administrative Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with Southland or any of its Subsidiaries as if it were not acting as Administrative Agent pursuant hereto. 11.07. SUCCESSOR ADMINISTRATIVE AGENT; RESIGNATION OF AGENT. (a) The Administrative Agent may resign from the performance of all its functions and duties hereunder at any time by giving at least thirty (30) Business Days' prior written notice to the Senior Lenders and Southland. Such resignation shall take effect upon the acceptance by a successor Administrative Agent of appointment pursuant to SECTION 11.07(b) or 11.07(c) or as otherwise provided below. (b) Upon any such notice of resignation by the Administrative Agent, the Requisite Senior Lenders shall appoint a successor Administrative Agent who shall be satisfactory to Southland. (c) If a successor Administrative Agent shall not have been so appointed within said thirty (30) Business Day period, the retiring Administrative Agent, with the consent of Southland (which may not be withheld unreasonably), shall then appoint a successor Administrative Agent who shall serve as Administrative Agent until such time, if any, as the Requisite Senior Lenders, with the consent of Southland, appoint a successor Administrative Agent as provided above. 11.08. THE CO-AGENT. The Co-Agent shall not have, and the Co-Agent hereby expressly disclaims, any rights or duties hereunder beyond those of a Senior Lender and, if applicable, an Issuing Bank. Except with respect to its rights and duties as a Senior Lender and, if applicable, an Issuing Bank, neither the Co-Agent nor any of its officers, directors, employees or agents shall be liable to any Person for any action taken or omitted by them hereunder or under any of the Loan Documents. ARTICLE XII MISCELLANEOUS 12.01. ASSIGNMENTS AND PARTICIPATIONS. (a) (i) Each Senior Lender shall have the right at any time, upon written notice to the Administrative -96- Agent of its intent to do so, to sell, assign, transfer or negotiate all or any part of its Commitments, Term Loans, Revolving Loans, Term Notes, Revolving Notes or interest in the Facility Letters of Credit to one or more Senior Lenders. Each Senior Lender shall have the right at any time, with the prior written consent of Southland and the Administrative Agent (which consent shall not be unreasonably withheld and shall be executed in substantially the form of EXHIBIT 14), to sell, assign, transfer or negotiate all or any part of its Commitments, Term Loans, Revolving Loans, Term Notes, Revolving Notes or interest in the Facility Letters of Credit to one or more commercial banks or other financial institutions. In the case of any sale, assignment, transfer or negotiation of all or part of such Commitments, Loans, Notes or interest in the Facility Letters of Credit authorized under this SECTION 12.01(a)(i), the assignee, transferee or recipient shall have, to the extent of such sale, assignment, transfer or negotiation, the same rights, benefits and obligations as it would if it were a Senior Lender hereunder and a holder of such Notes, including, without limitation, (A) the right to approve or disapprove actions which, in accordance with the terms hereof, require the approval of the Requisite Senior Lenders and (B) the obligation to fund Loans directly to the Administrative Agent pursuant to ARTICLE II hereof and to participate in Facility Letters of Credit pursuant to ARTICLE III hereof. All sales, assignments, transfers or negotiations of all or part of such Commitments, Loans, Notes or interests in the Facility Letters of Credit authorized under this SECTION 12.01(a)(i) shall be evidenced by, and made pursuant to, an Assignment and Acceptance. (ii) Upon its receipt of a fully executed Assignment and Acceptance, a processing and recordation fee of $2,500 and, if applicable, the written consent of Southland and the Administrative Agent, the Administrative Agent shall (A) accept such Assignment and Acceptance, (B) record the information contained therein, and (C) in the case of sales, assignments, transfers or negotiations made pursuant to the first sentence of SECTION 12.01(a)(i), give notice thereof to Southland. (iii) Notwithstanding anything to the contrary contained in this Agreement, no Senior Lender shall make any assignment of any of its Commitments, Term Loans, Revolving Loans, Term Notes, Revolving Notes or interests in Facility Letters of Credit except in the form of units consisting of pro rata interests in such Commitments, Loans, Notes or interests in Facility Letters of Credit. (b) Each Senior Lender shall have the right at any time, upon written notice to the Administrative Agent of its intent to do so, to sell, assign, transfer or negotiate to one or more banks or other financial institutions any Competitive Bid Note or Notes held by it. (c) Each Senior Lender may, with the prior written consent of Southland and the Administrative Agent (which consent shall not be unreasonably withheld and shall be executed in substantially the form of EXHIBIT 14), sell participations to one or more banks or other financial institutions in or to all or a portion of its rights and obligations under this Agreement, the Loans owing to it, the Facility Letters of Credit and the Note or Notes held by it; PROVIDED, HOWEVER, that the consent of Southland and -97- the Administrative Agent shall not be required for sales of participations in Competitive Bid Loans and Competitive Bid Notes held by any Senior Lender; PROVIDED, FURTHER, HOWEVER, that (i) such Senior Lender's obligations under this Agreement shall remain unchanged, (ii) such Senior Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Senior Lender shall remain the holder of any such Note or Notes for all purposes of this Agreement, (iv) Southland, the Administrative Agent, the Senior Lenders and the Issuing Banks shall continue to deal solely and directly with such Senior Lender in connection with such Senior Lender's rights and obligations under this Agreement, and the holder of any such participation shall not be entitled to require such Senior Lender to take or omit to take any action hereunder except action directly affecting the extension of the date fixed for payment of the principal amount of or interest on a Loan allocated to such participation or a reduction of the principal amount of or the rate of interest payable on the Loans, except as otherwise permitted under the Loan Documents, and (v) all costs and consequences incurred or sustained by any holder of a participation shall be added to those incurred or sustained by a Senior Lender for the purpose of SECTION 2.05(f), 2.09(f), 2.09(h), 2.10, 3.08(c), 12.02 and 12.03, limited in the aggregate to the amounts that would have been incurred or sustained by the Senior Lender granting the participation to such holder, had such participation not been granted. (d) Any Senior Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this SECTION 12.01, disclose to the assignee or participant or proposed assignee or participant, any information relating to Southland furnished to such Senior Lender by the Administrative Agent or by or on behalf of Southland; PROVIDED that, prior to any such disclosure, the assignee or participant, or proposed assignee or participant shall agree to preserve in accordance with SECTION 12.25 the confidentiality of any confidential information described therein. (e) Notwithstanding any other provision of this Agreement, any Senior Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, Obligations owing to it and Notes held by it) in favor of any Federal Reserve bank in accordance with Regulation A. (f) Notwithstanding any other provision of this Agreement, any Senior Lender may at any time, upon written notice to the Administrative Agent of its intent to do so, sell, assign, transfer, participate or negotiate all or any part of its rights and obligations under this Agreement and the other Loan Documents to any of its Affiliates without the consent of Southland or the Administrative Agent. 12.02. EXPENSES. (a) GENERALLY. Southland agrees upon demand to pay, or reimburse, the Administrative Agent for all the Administrative Agent's audit, legal (other than, for so long as no Potential Event of Default or Event of Default has occurred and is continuing, any allocated cost of the Administrative Agent's internal legal counsel), appraisal, valuation and investigation expenses and for all other out-of-pocket costs and expenses of every type and nature (including, without limitation, the reasonable fees, -98- expenses and disbursements of Sidley & Austin and any other attorneys retained by the Administrative Agent, auditors, accountants, appraisers, investment bankers, printers, insurance and environmental advisers, and other consultants and agents) incurred by the Administrative Agent in connection with (A) its own audit and investigation of Southland and Southland's Subsidiaries; (B) the negotiation, preparation and execution of this Agreement (including, without limitation, the satisfaction or attempted satisfaction of any of the conditions set forth in ARTICLE IV) and the other Loan Documents and the making of the Loans hereunder; (C) administration of this Agreement and the Loans, including consultation with attorneys in connection therewith; and (D) the protection, collection or enforcement of any of the Obligations. (b) AFTER DEFAULT. Southland further agrees to pay, or reimburse the Administrative Agent, the Issuing Banks and the Senior Lenders for all out-of-pocket costs and expenses, including, without limitation, reasonable attorneys' fees (including allocated costs of internal counsel, and costs of settlement) incurred by the Administrative Agent, any Issuing Bank or Senior Lender after the occurrence of an Event of Default (i) in enforcing any Obligation or in exercising or enforcing any other right or remedy available by reason of such Event of Default; (ii) in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or in any insolvency or bankruptcy proceeding; (iii) in commencing, defending or intervening in any litigation or in filing a petition, complaint, answer, motion or other pleadings in any legal proceeding relating to Southland and related to or arising out of the transactions contemplated hereby; or (iv) in taking any other action in or with respect to any suit or proceeding (bankruptcy or otherwise). 12.03. INDEMNITY. Southland further agrees to defend, protect, indemnify, and hold harmless the Administrative Agent, the Co-Agent and each and all of the Senior Lenders and Issuing Banks and each of their respective officers, directors, employees, attorneys and agents (including, without limitation, those retained in connection with the satisfaction or attempted satisfaction of any of the conditions set forth in ARTICLE IV) (collectively called the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitees shall be designated a party thereto), imposed on, incurred by, or asserted against such Indemnitees (whether direct, indirect or consequential and whether based on any federal or state laws or other statutory regulations, including, without limitation, Securities, environmental and commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise) in any manner relating to or arising out of this Agreement or the other Loan Documents, or any act, event or transaction related or attendant thereto, the Senior Lenders' Commitments, the making of and participation in the Loans and the issuance of and participation in Facility Letters of Credit hereunder, the management of such Loans or Facility Letters of Credit (including any liabilities or claims -99- under Federal, state or local environmental laws or regulations), or the use or intended use of the proceeds of the Loans or Facility Letters of Credit hereunder (collectively, the "Indemnified Matters"); PROVIDED that Southland shall have no obligation to an Indemnitee hereunder with respect to (i) matters for which such Indemnitee has been compensated pursuant to SECTION 2.05(f) or other provision of the Agreement and (ii) Indemnitee Matters caused by or resulting from the willful misconduct or gross negligence of that Indemnitee, as determined by a court of competent jurisdiction. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Southland shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Matters incurred by the Indemnities. 12.04. CHANGE IN ACCOUNTING PRINCIPLES. Except as otherwise provided herein, if any changes in accounting principles from those used in the preparation of the most recent financial statements referred to in SECTION 5.01(viii) are hereafter required or permitted by the rules, regulations, pronouncements and opinions of the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) and are adopted by Southland with the agreement of its independent certified public accountants and such changes result in a change in the method of calculation of any of the financial covenants, standards or terms found in ARTICLE VIII and ARTICLE IX hereof, the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating Southland's financial condition shall be the same after such changes as if such changes had not been made, PROVIDED, HOWEVER, that no change in generally accepted accounting principles that would affect the method of calculation of any of the financial covenants, standards or terms shall be given effect in such calculations until such provisions are amended, in a manner satisfactory to the Requisite Senior Lenders, to so reflect such change in accounting principles. 12.05. SET-OFF. In addition to any Liens granted to the Administrative Agent, any Senior Lender or any Issuing Bank and any rights now or hereafter granted under applicable law and not by way of limitation of any such Lien or rights, upon the occurrence and during the continuance of any Event of Default, each Senior Lender and each Issuing Bank are hereby authorized by Southland at any time or from time to time, without notice to Southland, or to any other Person (any such notice being hereby expressly waived) to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured but not including trust accounts) and any other Indebtedness at any time held or owing by the Senior Lender or that Issuing Bank (or any Affiliate thereof, and Southland hereby authorizes any such Affiliate to comply with the directions of the applicable Senior Lender or Issuing Bank with respect to such deposits or Indebtedness) to or for the credit or the account of Southland against and on account of the Obligations of Southland to that Senior Lender or the Issuing Bank including, but not limited to, all Loans and Facility Letters of Credit and all claims of -100- any nature or description arising out of or connected with this Agreement or the Notes, irrespective of whether or not (i) that Senior Lender or that Issuing Bank shall have made any demand hereunder or (ii) the Requisite Senior Lenders shall have declared the principal of and interest on the Loans and Notes and other amounts due hereunder to be due and payable as permitted by ARTICLE X and although said obligations and liabilities, or any of them, may be contingent or unmatured. Each Senior Lender and each Issuing Bank agrees, and each other Holder shall be entitled to any rights conferred upon it under this Agreement only on the condition and understanding, that it shall not, without the express consent of the Requisite Senior Lenders, and that it shall, to the extent it is lawfully entitled to do so, upon the request of the Requisite Senior Lenders, exercise its set-off rights hereunder against any accounts of Southland now or hereafter maintained with such Senior Lender or Issuing Bank or other Holder. 12.06. RATABLE SHARING. (a) Subject to SECTION 2.08(b) and SECTION 3.06(b)(ii), the Senior Lenders agree among themselves that (i) with respect to all amounts received by them which are applicable to the payment of the Obligations (excluding amounts paid with respect to Competitive Bid Loans, the fees described in SECTION 2.06 and the amounts described in SECTIONS 2.05(f), 2.09(f), 2.09(h), 2.10 and 3.05), equitable adjustment will be made so that, in effect, all such amounts will be shared among them ratably in accordance with their Pro Rata Shares, whether received by voluntary payment, by the exercise of the right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any or all of the Obligations (excluding amounts paid with respect to Competitive Bid Loans, the fees described in SECTION 2.06 and the amounts described in SECTIONS 2.05(f), 2.09(f), 2.09(h), 2.10 and 3.05) and (ii) if any of them shall by voluntary payment or by the exercise of any right of counterclaim, set-off, banker's lien or otherwise, receive payment of a proportion of the aggregate amount of the Obligations held by it, which is greater than its Pro Rata Share of the payments on account of the Obligations (excluding amounts paid with respect to Competitive Bid Loans, the fees described in Section 2.06 and the amounts described in SECTIONS 2.05(f), 2.09(f), 2.09(h) and 2.10), the one receiving such excess payment shall purchase, without recourse or warranty, an undivided interest and participation (which it shall be deemed to have done simultaneously upon the receipt of such payment) in such Obligations owed to the others so that all such recoveries with respect to such Obligations shall be applied ratably in accordance with their Pro Rata Shares. (b) If all or part of such excess payment received by a purchasing party under this SECTION 12.06 is thereafter recovered from such party, such party's purchases shall be rescinded and the purchase prices paid for such participation shall be returned to such party to the extent necessary to adjust for such recovery, but without interest except to the extent the purchasing party is required to pay interest in connection with such recovery. Southland agrees that any Senior Lender so purchasing a participation from another Senior Lender pursuant to this SECTION 12.06 may, to the fullest extent permitted by law, exercise all its rights of payment (including, subject to SECTION 12.05, the right of set-off) with respect to such -101- participation as fully as if such Senior Lender were the direct creditor of Southland in the amount of such participation. 12.07. AMENDMENTS AND WAIVERS. No amendment or modification of any provision of this Agreement, the Term Notes or the Revolving Notes shall be effective without the written agreement of the Requisite Senior Lenders and Southland, and no termination or waiver of any provision of this Agreement, the Term Notes or the Revolving Notes, or consent to any departure by Southland therefrom, shall in any event be effective without the written concurrence of the Requisite Senior Lenders, which the Requisite Senior Lenders shall have the right to grant or withhold at their sole discretion; EXCEPT that any amendment, modification, or waiver of any provision of ARTICLE I, II or III relating to (i) the Commitments, (ii) the principal amount and the extension of the final maturity of the Term Loans, the Revolving Loans and Facility Letters of Credit, (iii) the reduction of interest rates applicable to the Term Loans or the Revolving Loans, (iv) the amount of the fees payable pursuant hereto, (v) the definitions of "Requisite Senior Lenders", "Pro Rata Share" and "Revolving Credit Termination Date", and (vi) the provisions contained in SECTION 2.07(d) and in this SECTION 12.07, shall be effective only if evidenced by a writing signed by or on behalf of all Senior Lenders. No amendment, modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the holder of that Note. No amendment, modification, termination or waiver of any provision of any Facility Letter of Credit shall be effective without the written concurrence of the Issuing Bank which issued such Facility Letter of Credit. No amendment, modification, termination, or waiver of any provision of ARTICLE XI hereof or any other provision referring to the Administrative Agent or the Co-Agent shall be effective without the written concurrence of the Administrative Agent or the Co-Agent, as applicable. The Administrative Agent may, but shall have no obligation to, with the concurrence of any Senior Lender, execute amendments, modifications, waivers or consents on behalf of that Senior Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Southland in any case shall entitle Southland to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this SECTION 12.07 shall be binding on each holder of any Note at the time outstanding, each future holder of any Note, and, if signed by Southland, on Southland. 12.08. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 12.09. NOTICES. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by courier service or United States mail and shall be deemed to have been given -102- when delivered in person or by courier service, upon receipt of a telecopy or telex or four (4) Business Days after deposit in the United States mail (registered or certified, with postage prepaid and properly addressed). Notices to the Administrative Agent pursuant to ARTICLE II shall not be effective until received by the Administrative Agent. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this SECTION 12.09) shall be (a) with respect to Southland, as set forth below Southland's name on the signature pages of this Agreement, (b) with respect to the Senior Lenders and Issuing Banks, as set forth below each party's name on the signature pages of this Agreement or of the Assignment and Acceptance by which such Person became a Senior Lender or Issuing Bank hereunder or (c) as to each party, at such other address as may be designated by such party in a written notice to all of the other parties. 12.10. SURVIVAL OF WARRANTIES AND AGREEMENTS. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the Notes and the other Loan Documents, the making and repayment of the Loans and issuance and discharge of Facility Letters of Credit hereunder. 12.11. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of the Administrative Agent, any Senior Lender, any holder of a Note or any Issuing Bank in the exercise of any power, right or privilege under any of the Loan Documents shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercises thereof or of any other right, power or privilege. All rights and remedies existing under the Loan Documents are cumulative to and not exclusive of any rights or remedies otherwise available. 12.12. ADVICE OF COUNSEL. Southland and each Senior Lender and Issuing Bank understand that the Administrative Agent's counsel represents only the interests of the Administrative Agent and its Affiliates and that Southland, other Senior Lenders and other Issuing Banks are advised to obtain their own counsel. Southland represents and warrants to the Administrative Agent and the other Holders that it has discussed this Agreement with its counsel. 12.13. MARSHALING; PAYMENTS SET ASIDE. Neither any Senior Lender, any Issuing Bank, nor the Administrative Agent shall be under any obligation to marshall any assets in favor of Southland or any other party or against or in payment of any or all of the Obligations. To the extent that Southland makes a payment or payments to the Administrative Agent or the Senior Lenders or the Administrative Agent, the Senior Lenders exercise their rights of setoff, and such payment or payments or the proceeds of such setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part -103- thereof originally intended to be satisfied, and all rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred. 12.14. SEVERABILITY. In case any provision in or obligation under this Agreement or the Notes or the other Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 12.15. HEADINGS. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 12.16. GOVERNING LAW. THIS AGREEMENT AND THE LOAN DOCUMENTS, AND ALL ISSUES RELATING TO THIS AGREEMENT AND THE LOAN DOCUMENTS, INCLUDING THE VALIDITY, ENFORCEABILITY, INTERPRETATION OR CONSTRUCTION OF THIS AGREEMENT, ANY LOAN DOCUMENT OR ANY PROVISION OF ANY OF THEM, SHALL BE GOVERNED BY, AND SHALL BE DETERMINED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 12.17. LIMITATION OF LIABILITY. No claim may be made by Southland, any Senior Lender or other Person against the Administrative Agent, the Co-Agent, any other Senior Lender, any Issuing Bank or the Affiliates, directors, officers, employees, attorneys or agents of any of them for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and Southland and each Senior Lender hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. 12.18. SUCCESSORS AND ASSIGNS; SUBSEQUENT HOLDERS OF NOTES. This Agreement and the other Loan Documents shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and permitted assigns of the Senior Lenders. The terms and provisions of this Agreement shall inure to the benefit of any assignee or transferee of the Notes, and in the event of such transfer or assignment, the rights and privileges herein conferred upon Senior Lenders shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. Southland's rights or any interest therein hereunder may not be assigned without the written consent of all Senior Lenders. 12.19. CONSENT TO JURISDICTION AND SERVICE OF PROCESS; WAIVER OF JURY TRIAL. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST SOUTHLAND WITH RESPECT -104- TO THIS AGREEMENT OR ANY NOTE OR ANY OTHER LOAN DOCUMENTS MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, SOUTHLAND ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT OR ANY NOTE OR ANY OF THE OTHER LOAN DOCUMENTS FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. SOUTHLAND IRREVOCABLY DESIGNATES AND APPOINTS CT CORPORATION SYSTEM AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY SUCH PERSONS TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. SOUTHLAND IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE NOTICE ADDRESS SPECIFIED IN ACCORDANCE WITH SECTION 12.09, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. EACH OF SOUTHLAND, THE ADMINISTRATIVE AGENT, THE ISSUING BANKS AND THE SENIOR LENDERS IRREVOCABLY WAIVES TRIAL BY JURY AND ANY OBJECTION, INCLUDING WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH JURISDICTION. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF ANY SENIOR LENDER TO BRING PROCEEDINGS AGAINST SOUTHLAND IN THE COURTS OF ANY OTHER JURISDICTION. 12.20. COUNTERPARTS; EFFECTIVENESS; Inconsistencies. This Agreement and any amendments, waivers, consents, or supplements may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Agreement shall become effective against each party hereto as of the date when all of the conditions set forth in SECTION 4.01 have been satisfied or duly waived in accordance with SECTION 12.07 (the "Effective Date"). Subject to the provisions of this Agreement (including, without limitation, the premises hereto), this Agreement and each of the other Loan Documents shall be construed to the extent reasonable to be consistent with the other, but to the extent that the terms and conditions of this Agreement are actually inconsistent with the terms and conditions of any other Loan Document, this Agreement shall govern. -105- 12.21. FOREIGN BANK CERTIFICATIONS. Each Senior Lender that is not created or organized under the laws of the United States of America or a political subdivision thereof has delivered to Southland and the Administrative Agent, or in the case of a Senior Lender which becomes a party to this Agreement after the date hereof, will deliver to Southland and the Administrative Agent within fifteen (15) days after the date on which such Senior Lender becomes a Senior Lender pursuant to SECTION 12.01, a true and accurate certificate executed in duplicate by a duly authorized officer of such Senior Lender in the form set out in EXHIBIT 15-A or 15-B, as applicable, to the effect that such Senior Lender is capable under the provisions of an applicable tax treaty concluded by the United States of America (in which case the certificate shall be accompanied by two executed copies of Form 1001 of the Internal Revenue Service of the United States of America, the "IRS") or under Section 1442 of the Internal Revenue Code (in which case the certificate shall be accompanied by two copies of Form 4224 of the IRS) of receiving payments of interest hereunder without deduction or withholding of United States federal income tax. Each Senior Lender further agrees to deliver to Southland and the Administrative Agent from time to time a true and accurate certificate executed in duplicate by a duly authorized officer of such Senior Lender substantially in the form set out in EXHIBIT 15-A or 15-B, as applicable, before or promptly upon the occurrence of any event requiring a change in the most recent certificate previously delivered by it to Southland and the Administrative Agent pursuant to this SECTION 12.21. Further, each Senior Lender which delivers EXHIBIT 15-A covenants and agrees to deliver to Southland and the Administrative Agent within fifteen (15) days prior to every third anniversary of the Effective Date, on which this Agreement is still in effect, two accurate and complete original signed copies of Form 1001 (or any successor form or forms required under the Internal Revenue Code or the applicable regulations promulgated thereunder) and EXHIBIT 15-A, and each Senior Lender that delivers EXHIBIT 15-B covenants and agrees to deliver to Southland and the Administrative Agent within fifteen (15) days prior to the beginning of each subsequent taxable year of such Senior Lender during which this agreement is still in effect, two accurate and complete original signed copies of IRS Form 4224 (or any successor form or forms required under the Internal Revenue Code or the applicable regulations promulgated thereunder) and EXHIBIT 15-B. Each such certificate shall certify as to one of the following: (i) that such Senior Lender is capable of receiving payments of interest hereunder without deduction or withholding of United States of America federal income tax; (ii) that such Senior Lender is not capable of receiving payments of interest hereunder without deduction or withholding of United States of America federal income tax as specified therein but is capable of recovering the full amount of any such deduction or withholding from a source other than Southland; or (iii) that such Senior Lender is not capable of receiving payments of interest hereunder without deduction or withholding of -106- United States of America federal income tax as specified therein and that it is not capable of recovering the full amount of the same from a source other than Southland. Each Senior Lender shall promptly furnish to Southland and the Administrative Agent such additional documents as may be reasonably required by Southland or the Administrative Agent to establish any exemption from or reduction of any taxes required to be deducted or withheld and which may be obtained without undue expense to such Senior Lender. 12.22. PERFORMANCE OF OBLIGATIONS. Southland agrees that the Administrative Agent, upon direction of the Requisite Senior Lenders, may, but shall have no obligation to, make any payment or perform any act required of Southland under any of the Loan Documents. 12.23. LIMITATION ON AGREEMENTS. All agreements between Southland and the Administrative Agent, any Senior Lender or any Issuing Bank, 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 being made on the Notes or otherwise, shall the amount paid, or agreed to be paid, to the Administrative Agent, any Senior Lender or any Issuing Bank for the use, forbearance, or detention of the money to be loaned under this Agreement or otherwise or for the payment or performance of any covenant or obligation contained herein or in any other Loan Document exceed the maximum amount permissible under applicable law. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, IPSO FACTO, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, the Administrative Agent, any Senior Lender or any Issuing Bank shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of the Notes or the amounts owing on other obligations of Southland to the Administrative Agent, any Senior Lender or any Issuing Bank under the Loan Documents and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Notes and the amounts owing on other obligations of Southland to the Administrative Agent, any Senior Lender or any Issuing Bank under the Loan Documents, as the case may be, such excess shall be refunded to Southland. All sums paid or agreed to be paid to the Administrative Agent, any Senior Lender or any Issuing Bank for the use, forbearance or detention of the indebtedness of Southland to the Administrative Agent, any Senior Lender or any Issuing Bank shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full of the principal (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the maximum -107- amount permitted by applicable law. The terms and provisions of this SECTION 12.23 shall control and supersede every other provision of all agreements between Southland and the Lender. 12.24. CONSTRUCTION. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits hereto. 12.25. CONFIDENTIALITY. Subject to SECTION 12.01(d), the Senior Lenders shall hold all non- public information obtained pursuant to the requirements of this Agreement which has been identified as such by Southland in accordance with its customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure reasonably required by a bona fide transferee or participant in connection with the contemplated transfer of any Note or participation therein or as required or requested by any Governmental Authority or representative thereof or pursuant to legal process; PROVIDED, that unless specifically prohibited by applicable law or court order, each Senior Lender shall notify Southland of any request by any Governmental Authority or representative thereof (other than any such request in connection with an examination of the financial condition of such Senior Lender by such Governmental Authority) for disclosure of any such non-public information prior to disclosure of such information; and FURTHER provided, that in no event shall any Senior Lender be obligated or required to return any materials furnished by Southland. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first above written. BORROWER: THE SOUTHLAND CORPORATION By --------------------------------- Name: James W. Keyes Title: Executive Vice President and Chief Financial Officer Notice Address: Southland Corporation 2711 North Haskell Avenue Dallas, Texas 75221 Attn: Vice President and Treasurer Telecopier No. (214) 841-6571 with a copy to: The Southland Corporation 2711 North Haskell Avenue Dallas, Texas 75221 Attn: Legal Department Telecopier No. (214) 828-7119 -109- ADMINISTRATIVE AGENT, SENIOR LENDER AND ISSUING BANK: CITIBANK, N.A., as the Administrative Agent, as a Senior Lender and as an Issuing Bank By Name: Robert Snell Title: Attorney-in-Fact Notice Address and Domestic Lending Office: Citibank, N.A. 399 Park Avenue, 12th Floor, Zone 19 New York, New York 10043 Attn: Robert Snell Telecopier No. (212) 793-7585 with a copy to: Sidley & Austin 555 West Fifth Street Los Angeles, California 90013 Attn: Edward D. Eddy, III Telecopier No. (213) 896-6600 Eurodollar Lending Office or Eurodollar Affiliate: Citibank, N.A. 399 Park Avenue New York, New York 10043 Attn: Robert Snell Telecopier No. (212) 793-7585 Pro Rata Share: 17.06915477% Term Loan Commitment: $38,405,598.24 Revolving Credit Commitment: $68,276,619.10 -110- CO-AGENT, SENIOR LENDER AND ISSUING BANK: THE SAKURA BANK, LIMITED, NEW YORK BRANCH By: ----------------------------- Name: Yoshimi Miura Title: Senior Vice President Notice Address and Domestic Lending Office: The Sakura Bank, Limited, New York Branch 277 Park Avenue New York, New York 10172-0121 Attn: Toshihiro Funatsu Telecopier No. (212) 888-7651 with a copy to: Simpson Thacher & Bartlett 425 Lexington Ave. New York, NY 10017-3909 Attn: Terrence L. Dugan Telecopier No. (212) 455-2502 Eurodollar Lending Office or Eurodollar Affiliate: The Sakura Bank, Limited, New York Branch 277 Park Avenue New York, NY 10172-0098 Attn: Toshihiro Funatsu Telecopier No. (212) 888-7651 Pro Rata Share 17.06915477% Term Loan Commitment: $38,405,598.24 Revolving Credit Commitment: $68,276,619.10 -111- SENIOR LENDER AND ISSUING BANK: THE ASAHI BANK, LTD., NEW YORK BRANCH By: ------------------------------- Name: Mr. Junichi Yamada Title: Senior Deputy General Manager Notice Address and Domestic Lending Office: The Asahi Bank, Ltd., New York Branch 1 World Trade Center Suite 6011 New York, NY 10048-0476 Attn: Mr. Douglas E. Price (Credit Matters) Debbie Gopaul (Administrative Matters) Telecopier No. (212) 432-1135 Eurodollar Lending Office or Eurodollar Affiliate: The Asahi Bank, Ltd., New York Branch 1 World Trade Center Suite 6011 New York, NY 10048-0476 Attn: Mr. Douglas E. Price Telecopier No. (212) 432-1135 Pro Rata Share: 11.80021954% Term Loan Commitment: $26,550,493.96 Revolving Credit Commitment: $47,200,878.16 -112- SENIOR LENDER AND ISSUING BANK: BANK OF TOKYO MITSUBISHI TRUST COMPANY By: ----------------------------- Name: Ryohei Takashima Title: Senior Vice President Notice Address and Domestic Lending Office: Bank of Tokyo Mitsubishi Trust Company 1251 Avenue of the Americas, 39th Floor New York, New York 10020-1104 Attn: H. Kinumatsu/Japanese Corporate Banking Dept. Telecopier No. (212) 782-6486 with a copy to: Bank of Tokyo Mitsubishi Trust Company 1251 Avenue of the Americas New York, NY 10116-3138 Attn.: H. Thornhill/Legal Dept. Telecopier No. (212) 782-6420 Eurodollar Lending Office or Eurodollar Affiliate: Bank of Tokyo Mitsubishi Trust Company 1251 Avenue of the Americas New York, NY 10020-1104 Attn: H. Kinumatsu/Japanese Corporate Banking Dept. Telecopier No. (212) 782-6436 Pro Rata Share: 11.80021954% Term Loan Commitment: $26,550,493.96 Revolving Credit Commitment: $47,200,878.16 -113- SENIOR LENDER AND ISSUING BANK: THE FUJI BANK, LIMITED, HOUSTON AGENCY By: -------------------------------- Name: Philip C. Lauinger, III Title: Vice President and Joint Manager Notice Address and Domestic Lending Office: The Fuji Bank, Limited, Houston Agency 1 Houston Center, Suite 4100 1221 McKinney Street Houston, TX 77010 Attn: Philip C. Lauinger, III (Credit Matters) Jenny Lin (Administrative Matters) Telecopier No. (713) 759-0048 Eurodollar Lending Office or Eurodollar Affiliate: The Fuji Bank, Limited, Houston Agency 1 Houston Center, Suite 4100 1221 McKinney Street Houston, TX 77010 Attn: Philip C. Lauinger, III Telecopier No. (713) 759-0048 Pro Rata Share: 11.80021954% Term Loan Commitment: $26,550,493.96 Revolving Credit Commitment: $47,200,878.16 -114- SENIOR LENDER AND ISSUING BANK: THE MITSUI TRUST AND BANKING COMPANY, LIMITED, NEW YORK BRANCH By: ------------------------------- Name: Margaret Holloway Title: Vice President & Manager Notice Address and Domestic Lending Office: The Mitsui Trust and Banking Company, Limited, New York Branch 1251 Avenue of the Americas, 39th Floor New York, New York 10020-1104 Attn: Javier Cuebas Telecopier No. (212) 790-5435 Eurodollar Lending Office or Eurodollar Affiliate: The Mitsui Trust and Banking Company, Limited, New York Branch 1251 Avenue of the Americas, 39th Floor New York, NY 10020-1104 Attn: Edward Simnor Telecopier No. (212) 768-9044 Pro Rata Share: 11.80021954% Term Loan Commitment: $26,550,493.96 Revolving Credit Commitment: $47,200,878.16 -115- SENIOR LENDER AND ISSUING BANK: THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY By: THE INDUSTRIAL BANK OF JAPAN, LIMITED, HOUSTON OFFICE, Authorized Representative By: ------------------------------- Name: Kazutoshi Kuwahara Title: Executive Vice President Notice Address and Domestic Lending Office: The Industrial Bank of Japan Trust Company 1251 Avenue of the Americas New York, NY 10020 Attn: Atsushi Kawai Telecopier No. (212) 282-4250 Eurodollar Lending Office or Eurodollar Affiliate: The Industrial Bank of Japan Trust Company 1251 Avenue of the Americas New York, NY 10020 Attn: Atsushi Kawai Telecopier No. (212) 282-4250 Pro Rata Share: 5.90010977% Term Loan Commitment: $13,275,246.98 Revolving Credit Commitment: $23,600,439.08 -116- SENIOR LENDER AND ISSUING BANK: NATIONSBANK OF TEXAS, N.A. By: -------------------------------- Name: Bianca Nemmen Title: Senior Vice President Notice Address and Domestic Lending Office: NationsBank of Texas, N.A. 901 Main Street, 14th Floor Dallas, TX 75202-3714 Attn: Cynthia Amador Telecopier No. (214) 508-0944 with a copy to: NationsBank of Texas, N.A. 901 Main Street, 67th Floor Dallas, TX 75202 Attn: Joe Taylor Telecopier No. (214) 508-0980 Eurodollar Lending Office or Eurodollar Affiliate: NationsBank of Texas, N.A. 901 Main Street, 14th Floor Dallas, TX 75202-3714 Attn: Cynthia Amador Telecopier No. (214) 508-0944 Pro Rata Share: 5.90010977% Term Loan Commitment: $13,275,246.98 Revolving Credit Commitment: $23,600,439.08 SENIOR LENDER AND ISSUING BANK: BANKERS TRUST COMPANY By: ------------------------------ Name: Dana Klein Title: Vice President Notice Address and Domestic Lending Office: Bankers Trust Company 130 Liberty Street, 30th Floor New York, NY 10006 Attn: Frank Russo Telecopier No. (212) 250-7351 with a copy to: Bankers Trust Company 130 Liberty Street, 30th Floor New York, NY 10006 Attn: Dana Klein Telecopier No. (212) 250-7218 Eurodollar Lending Office or Eurodollar Affiliate: Bankers Trust Company 130 Liberty Street, 30th Floor New York, NY 10006 Attn: Frank Russo Telecopier No. (212) 250-7351 Pro Rata Share: 3.43029638% Term Loan Commitment: $7,718,166.85 Revolving Credit Commitment: $13,721,185.51 -118- SENIOR LENDER: CIBC, INC. By: CIBC WOOD GUNDY SECURITIES CORP., as Agent By: -------------------------------- Name: Chris Kleczkowski Title: Director Notice Address and Domestic Lending Office: CIBC, Inc. Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, GA 30339 Attn: Kelli Jones Telecopier No. (770) 319-4950 Eurodollar Lending Office or Eurodollar Affiliate: CIBC, Inc. Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, GA 30339 Attn: Kelli Jones Telecopier No. (770) 319-4950 Pro Rata Share: 3.43029638% Term Loan Commitment: $7,718,166.85 Revolving Credit Commitment: $13,721,185.51 -119- ISSUING BANK: CANADIAN IMPERIAL BANK OF COMMERCE By: CIBC WOOD GUNDY SECURITIES CORP., as Agent By:--------------------------------- Name: Chris Kleczkowski Title: Director Notice Address: Canadian Imperial Bank of Commerce Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, GA 30339 Attn: Kelli Jones Telecopier No. (770) 319-4817 -120- EX-10.(III)(A)(4) 4 1997 PERFORMANCE PLAN Exhibit 10 (iii)(A)(4) THE SOUTHLAND CORPORATION 1997 PERFORMANCE PLAN SECTION 1: PURPOSE The purpose of this Plan is to (a) provide incentives and rewards to eligible Employees of the Corporation by allowing Participants to earn Awards based upon the Corporation's performance; (b) assist the Corporation in attracting, retaining, and motivating employees of high ability and experience; (c) direct the focus of management on maximizing the value of the Corporation as a going concern over a multi-year period; and (d) promote the long- term interests of the Corporation and its shareholders. SECTION 2: DEFINITIONS 2.1 ACTUAL OPERATING EARNINGS, shall mean Operating Earnings in a particular Plan Year, as set forth on the Corporation's internal financial statements for such Plan Year, calculated in accordance with GAAP; both the calculation of Operating Earnings and the internal financial statements being certified by the Corporation's Chief Accounting Officer (1) as accurate and (2) that such Operating Earnings were calculated, and such financial statements were prepared, in a manner consistent with the accounting principles utilized in preparation of the Corporation's annual budget. 2.2 ANNUAL AWARD shall mean the amount payable to a Participant pursuant to Section 5.5 if the Annual Threshold Operating Earnings set forth on Exhibit 1 are achieved. 2.3 ANNUAL AWARD POOL shall mean the amount available for payment of Annual Awards as a result of the achievement of Actual Operating Earnings in excess of Threshold Operating Earnings in any Plan Year as described in Section 5.4. 2.4 AWARD shall mean the amount payable, either as an Annual Award or Cumulative Award, to Participants in this Plan. 2.5 BENEFICIARY shall mean a Participant's beneficiary designated in accordance with Section 7. 2.6 BOARD shall mean the Board of Directors of the Corporation. 2.7 BONUS AMOUNT shall mean the annual amount payable, as of the Determination Date (at 100% of normal bonus) under the Corporation's Annual Performance Incentive Plan, in each Plan Year for Employees in Grade Levels 50-58 and 41-44 or such equivalent Grade Levels as may be established. 2.8 BUDGETED OPERATING EARNINGS shall mean the amount of Operating Earnings included in the Corporation's annual budget for a particular year, as determined during the budgeting process, generally in the fourth quarter of the preceding year. Tab 3 2.9 CAUSE shall mean acts constituting insubordination, theft, dishonesty, fraud, embezzlement or other acts detrimental to the interests of the Corporation, or any breach of any employment, nondisclosure, noncompetition or other contract with the Corporation, all as determined in good faith by the Committee. 2.10 COMMITTEE shall mean the Compensation and Benefits Committee of the Board or, if such committee has not been designated, shall mean the Board. 2.11 CORPORATION shall mean The Southland Corporation, a Texas corporation, and any of its wholly owned subsidiaries, and any successor or assignee of The Southland Corporation, by merger, consolidation, acquisition or otherwise, of all or substantially all of the assets thereof. 2.12 CUMULATIVE AWARD shall mean an amount payable to participants based on the achievement of Excess Actual Operating Earnings in either, or both, Plan Years. 2.13 CUMULATIVE AWARD POOL shall mean the amount available to pay Cumulative Awards as a result of the achievement of Excess Actual Operating Earnings. 2.14 DEPARTMENT shall mean the Corporation's Compensation and Benefits Department. 2.15 DETERMINATION DATE shall mean the date designated by the Committee each Plan Year, or, if no date is so designated, May 1 of each Plan Year, for certain specified purposes under the Plan. 2.16 DISABILITY shall mean the mental or physical disability, either occupational or non-occupational in cause, which, in the opinion of the Committee, on the basis of medical evidence satisfactory to it, prevents the employee from engaging in any occupation or employment for wage or profit, which has continued for at least 12 months and is likely to be permanent. 2.17 DIVESTITURE shall mean the sale of, or closing by, the Corporation of the business operations in which the Participant was employed. 2.18 EMPLOYEE shall mean any person employed by the Corporation. 2.19 EXCESS ACTUAL OPERATING EARNINGS shall mean Actual Operating Earnings in a Plan Year that are in excess of the Actual Operating Earnings required to pay 100% of the Annual Awards under this Plan for the particular Plan Year. Excess Actual Operating Earnings shall be used to fund the Cumulative Award Pool. 2.20 GAAP shall mean generally accepted accounting principles in the United States as in effect from time to time. 2.21 GRADE LEVEL shall mean a Participant's grade level classification (as such grade levels are specified in the Corporation's exempt salary administration and/or job evaluation programs) as of the Determination Date in the Plan Year for which his or her Grade Level is to be determined. 2 2.22 OPERATING EARNINGS shall mean the earnings of the Corporation before non-operating income and expense items, interest expense, taxes and extraordinary items, as set forth on the Corporation's internal financial statements for such Plan Year, calculated in accordance with GAAP and in a manner consistent with the accounting principles utilized in preparation of the Corporation's annual budget for such Plan Year; both the calculation of Operating Earnings and the internal financial statements being certified by the Corporation's Chief Accounting Officer (1) as accurate and (2) that such Operating Earnings were calculated, and such financial statements were prepared, in a manner consistent with the accounting principles utilized in preparation of the Corporation's annual budget. 2.23 PARTICIPANT shall mean any Employee who is selected to participate in the Plan as of the Determination Date. 2.24 PERFORMANCE UNIT shall mean a unit of measurement for purposes of determining a Participant's Award under the Plan, as more fully described in Section 5.2. 2.25 PLAN shall mean The Southland Corporation 1997 Performance Plan, as it may be amended from time to time. 2.26 PLAN PERIOD shall mean the two-year period commencing on January 1, 1997, and ending on December 31, 1998. 2.27 PLAN YEAR shall mean a calendar year occurring during the Plan Period. 2.28 RETIREMENT shall mean, in the case of any Participant, the date established by the Corporation as his or her normal retirement date, generally when the Participant reaches age 65 (or earlier if approved by the President of the Corporation). 2.29 THRESHOLD OPERATING EARNINGS for a Plan Year shall equal Budgeted Operating Earnings for such Plan Year, or, if the Committee so determines, a different amount that is based on Budgeted Operating Earnings, with the number as determined for each year to be as set forth in Exhibit 1. SECTION 3: ADMINISTRATION 3.1 COMMITTEE. This Plan shall be administered by the Committee. 3.2 COMMITTEE'S POWERS. Subject to the express provisions hereof and in addition to the other powers set forth in this Plan, the Committee shall have the authority, in its sole and absolute discretion, to (i) determine criteria for eligibility for inclusion in this Plan; (ii) adopt, amend, and rescind administrative and interpretive rules and regulations relating to this Plan; (iii) construe this Plan or any agreements contemplated hereunder; and (iv) make all other determinations and perform all other acts necessary or advisable for administering this Plan, including the delegation of such ministerial acts and responsibilities as the Committee deems appropriate. The Committee may correct any defect or supply any omission or reconcile any inconsistency in this Plan or in any agreement contemplated hereunder in the manner and to the extent it shall deem expedient to carry it into effect and it shall be the sole and final judge of the necessity of such action. The determination of the Committee on the matters referred to in this Section 3.2 shall be final and conclusive. 3 3.3 ADMINISTRATION. The Department shall (i) prepare and distribute designation of beneficiary forms to Participants; (ii) maintain records of designations of Beneficiaries; (iii) prepare communications to Participants; (iv) prepare reports and data required by the Corporation, the Committee and government agencies; (v) obtain data requested by the Committee; and (vi) take such other actions requested by the Committee as are necessary for the effective implementation of the Plan. SECTION 4: PARTICIPATION 4.1 ELIGIBILITY. Eligibility for participation in the Plan shall be limited to those Employees who, as of the Determination Date, are in Grade Levels 50-58 or 41-44 or such equivalent Grade Levels as may be established, and who, in the judgment of the Committee or the President of the Corporation, have the ability and opportunity to influence significantly the Corporation's performance over a multi- year period. Employees shall be selected for participation in the Plan as of the Determination Date each year, as approved by the President of the Corporation. SECTION 5: AWARDS 5.1 GENERAL. A Participant shall be entitled to an Annual Award or Cumulative Award out of the applicable Award Pool with respect to any Plan Year or the Plan Period, if the performance level described in Section 5.3 is achieved. 5.2 PERFORMANCE UNITS. (a) Based on the Grade Level of each Participant as of the Determination Date in a Plan Year, the Committee shall grant to each Participant for such Plan Year a specified number of Performance Units as determined under subsection (b) below. Performance Units shall be solely units of account, shall imply no ownership interest in the Corporation, and shall carry no value outside the context of the Plan. (b) The number of Performance Units to be granted to each Participant for each Plan Year shall equal the Bonus Amount payable to a person earning the mid-point of such Participant's Grade Level (as determined as of the Determination Date) for such Plan Year. 5.3 PERFORMANCE LEVEL. The performance level under the Plan can be satisfied either on an annual or a cumulative basis. If at the end of any year in the Plan Period, Actual Operating Earnings exceed Threshold Operating Earnings, then the performance level under the Plan is satisfied for that year and the Annual Award Pool shall be determined in accordance with the formula for determining the Annual Award Pool for that year, as set forth in Section 5.4. In addition, if there are Excess Actual Operating Earnings in any Plan Year, then those Excess Actual Operating Earnings shall be used to fund the Cumulative Award Pool, using the formula in Section 5.4 for the year in which the Excess Actual Operating Earnings were achieved. 5.4 CALCULATION OF AWARD POOL. The amount to be credited to the Annual Award Pool for 1997 shall be determined as follows: if 1997 Actual Operating Earnings exceed 1997 Threshold Operating Earnings, as defined in Section 2.29, then $.15 of every excess dollar of 1997 Actual Operating 4 Earnings shall be contributed to the Annual Award Pool for 1997. In addition, if Actual Operating Earnings are sufficient to pay 150% of the annual performance incentive ("API") payable to all covered employees in the Corporation's 1997 Annual Performance Incentive Plan, then $.35 of every dollar of 1997 Actual Operating Earnings earned in excess of the amount necessary to pay 150% of the API payable pursuant to the Annual Performance Incentive Plan, shall be contributed to the Annual Award Pool, up to the maximum Annual Awards payable for 1997 under this Plan, as described in Section 5.6. If there are Excess Actual Operating Earnings in any Plan Year, then until 200% of the API payable to all covered employees pursuant to the Annual Performance Incentive Plan has been paid pursuant to the Annual Performance Incentive Plan, $.15 of every dollar of Excess Actual Operating Earnings shall fund the Cumulative Award Pool for this Plan and, after 200% of the API has been paid to all covered employees pursuant to the Annual Performance Incentive Plan, then $.35 of every additional dollar of Excess Actual Operating Earnings shall be designated to fund the Cumulative Award Pool for this Plan, up to the maximum Awards payable for the Plan Period, as described in Section 5.6. The 1998 Annual Award Pool shall be determined according to the same formula as 1997, unless a different formula is approved by the Committee. An Annual Award that is based on achievement of only the 1997 performance level shall be based on the Performance Units granted for that year only; an Annual Award that is based on the achievement of the 1998 performance level shall be based on the Performance Units granted for that year only; and any Cumulative Awards that are based on the achievement of Excess Actual Operating Earnings in either Plan Year shall be based upon the total Performance Units granted for both years in the Plan Period. 5.5 AWARDS. Subject to the limitations under Section 5.6, a Participant shall be entitled to an Annual Award equal to (a) the Annual Award Pool determined under Section 5.4 multiplied by (b) a fraction, the numerator of which is the number of such Participant's Performance Units granted for that Plan Year, and the denominator of which is the total Performance Units for that Plan Year granted and outstanding under the Plan to persons who are to participate in the Annual Awards for that Plan Year. If the Award is a Cumulative Award based on Excess Actual Operating Earnings from either Plan Year, then a Participant shall be entitled to a Cumulative Award equal to (a) the Cumulative Award Pool determined under Section 5.4 multiplied by (b) a fraction, the numerator of which is the number of such Participant's Performance Units granted for the Plan Period, and the denominator of which is the total Performance Units granted and outstanding under the Plan to persons who are to participate in the Cumulative Awards for the Plan Period. A Cumulative Award shall not be paid if the maximum Annual Awards have been paid for each Plan Year in the Plan Period. 5.6 LIMITATIONS ON AWARDS. Awards under the Plan shall be subject to the limitations described in subsections (a), (b) and (c) below. (a) The Awards payable to all Participants under the Plan shall not exceed the sum of the Bonus Amounts to all eligible Participants for (i) each Plan Year for an Annual Award and (b) the Plan Period, less any amounts paid as Annual Awards, for any Cumulative Awards. (b) The amount of Annual and Cumulative Awards payable under the Plan shall be subject to the condition that the Corporation has sufficient liquidity as determined by the President of the Corporation, either from available cash or from borrowings to make the payments under this Plan at the time provided in Section 5.7. 5 (c) Except as provided in Section 6.1 and Section 6.3, to be eligible for an Award, a Participant must be actively employed by the Corporation at the end of the applicable Plan Year for any Annual Award and at the end of the Plan Period to be eligible for a Cumulative Award based on Excess Actual Operating Earnings in either Plan Year. 5.7 PAYMENT. Except as set forth in Section 9.1, Awards will be paid to Participants within one hundred twenty (120) days after the end of the Plan Year for which an Annual Award is earned or within one hundred twenty (120) days after the end of the Plan Period for a Cumulative Award. As determined by the Committee, Awards may be paid in cash or stock of the Corporation, or a combination of cash and stock, and may be paid in different forms to different Participants. SECTION 6: TERMINATION OF EMPLOYMENT; CHANGE IN GRADE LEVEL 6.1 TERMINATION WITHOUT FORFEITURE. If a Participant ceases to be employed by the Corporation prior to the end of the applicable Plan Year or Plan Period because of (i) Disability, (ii) death, (iii) Retirement, (iv) a Divestiture, or (v) other termination by the Corporation for any reason other than Cause, then such Participant shall be entitled to an Award as provided in Section 6.3 below. 6.2 CHANGE IN GRADE LEVEL. If a Participant ceases participation in this Plan prior to the end of the applicable Plan Year or Plan Period because of a change in Grade Level, then such Participant shall be entitled to a partial Award as provided in Section 6.3. 6.3 PARTIAL AWARD. A Participant who ceases to be employed by the Corporation in accordance with any of the applicable conditions set forth in Section 6.1 or who ceases participation in the Plan for the reason set forth in Section 6.2, will be entitled to receive an Annual Award under Section 5.5 only for a Plan Year during which the Participant was employed and granted Performance Units and the Participant's Annual Award for that Plan Year shall be determined by multiplying the number of Performance Units granted to such Participant for that Plan Year by a fraction, the numerator of which is the number of days in the Plan Year prior to such cessation of employment or participation, and the denominator of which is the number of days in the particular Plan Year. If a Cumulative Award based on Excess Actual Operating Earnings is earned under the Plan for any Plan Year, then a Participant who is described in the first sentence of this section shall be entitled to a Cumulative Award based on (i) the Participant's Performance Units for each full Plan Year occurring prior to such Participant's cessation of employment or participation in the Plan, plus (ii) the number of Performance Units granted to such Participant for the Plan Year in which the Participant's employment or participation terminated multiplied by a fraction, the numerator of which is the number of days in the Plan Year prior to such cessation of employment or participation, and the denominator of which is the number of days in the particular Plan Year. Such resulting number of eligible Performance Units shall then share pro rata in the Cumulative Award Pool by multiplying the Cumulative Award Pool by a fraction, the numerator of which is the eligible number of such Participant's Performance Units, and the denominator is the total number of Performance Units granted and outstanding for the Plan Period. Awards paid in accordance with this Section 6.3 shall be paid at the same time and in the same manner as described in Section 5.7. 6 6.4 TERMINATION RESULTING IN FORFEITURE. If a Participant ceases to be employed by the Corporation for any reason other than those specified in Section 6.1 above, including, without limitation, voluntary termination of employment, then such Participant shall only be entitled to an Annual Award under the Plan if the Participant was actively employed on December 31 of the Plan Year for which the Annual Award was earned and shall not be entitled to share in any Cumulative Award, regardless of the Plan Year in which the Excess Actual Operating Earnings were achieved. SECTION 7: DESIGNATION OF BENEFICIARIES 7.1 DESIGNATION AND CHANGE OF DESIGNATION. Each Participant shall file with the Department a written designation of the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon his or her death. A Participant may, from time to time, revoke or change his or her Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Department. The last such designation received by the Department shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Department prior to the Participant's death, and in no event shall it be effective as of a date prior to the date of such receipt. 7.2 ABSENCE OF VALID DESIGNATION. If no such Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, or if such designation conflicts with law, the Participant's estate shall be deemed to have been designated his or her Beneficiary and shall receive the payment of the amount, if any, payable under the Plan upon his or her death. If the Committee is in doubt as to the right of any party to receive such amount, the Corporation may retain such amount, or the Corporation may pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Corporation therefor. SECTION 8: GENERAL PROVISIONS 8.1 NO ASSIGNMENT. A Participant may not assign an Award without the Committee's prior written consent. Any attempted assignment without such consent shall be null and void; provided, however, that an assignment to the Corporation to collateralize indebtedness of the Participant to the Corporation does not need the consent of the Committee. For purposes of this paragraph, any designation of, or payment to, a Beneficiary shall not be deemed an assignment. 8.2 UNFUNDED INCENTIVE COMPENSATION ARRANGEMENT. The Plan is intended to constitute an unfunded incentive compensation arrangement covering a select group of management or highly compensated employees. Nothing contained in the Plan, and no action taken pursuant to the Plan, shall create or be construed to create a trust of any kind. A Participant's right to receive an Award shall be no greater than the right of an unsecured general creditor of the Corporation. All Awards shall be paid from the general funds of the Corporation, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such Awards. 8.3 NO RIGHT TO EMPLOYMENT. Nothing contained in the Plan shall give any Participant the right to continue in the employment of the Corporation or affect the right of the Corporation to discharge a Participant. 7 8.4 GOVERNING LAW. The Plan shall be construed and governed in accordance with the laws of the State of Texas except to the extent Texas law is preempted by federal law. 8.5 NO RIGHT TO SPECIFIC ASSETS. There shall not vest in any Participant or Beneficiary any right, title, or interest in and to any specific assets of the Corporation. 8.6 NO EFFECT ON OTHER BENEFIT PLANS. Benefits under the Plan shall not increase, decrease, modify or otherwise be taken into account for purposes of determining benefits under any other employee benefit plan unless such other plan expressly provides, by referring to this Plan, that benefits under the Plan are to be so taken into account. 8.7 WITHHOLDING. The Corporation shall have the right to deduct from all payments made to any Participant pursuant to this Plan any federal, state or local taxes required by law to be withheld with respect to such payments, as well as any amount then owed by the Participant to the Corporation. 8.8 EFFECTIVE DATE. This Plan is effective as of January 1, 1997. Subject to Section 9.1, the Plan shall expire December 31, 1998. 8.9 HEADINGS. The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof. 8.10 WORD USAGE. Words used in the masculine shall apply to the feminine where applicable, and wherever the context of this Plan dictates, the plural shall be read as the singular and the singular as the plural. SECTION 9: AMENDMENT, SUSPENSION OR TERMINATION 9.1 The Board or the Committee may amend, terminate, extend or suspend the Plan at any time. If the Plan is terminated within the Plan Period, (i) Awards, if any, shall be determined as of the date of termination, (ii) Annual Awards for 1997 will be paid to Participants within one hundred twenty (120) days after December 31, 1997, and Annual Awards for 1998 and/or Cumulative Awards based on Excess Actual Operating Earnings shall be paid within one hundred twenty (120) days after December 31, 1998; (iii) for all other purposes under the Plan, the date of such termination shall be deemed the last day of the Plan Period. 8 EXHIBIT 1 THRESHOLD OPERATING EARNINGS 1997 Annual Threshold $ XXX.XX million (determined in accordance Operating Earnings --------- with Section 2.29, based on 1997 Budgets) 1998 Annual Threshold $ XXX.XX million (determined in accordance Operating Earnings --------- with Section 2.29, based on 1998 Budgets) 9 EX-10.(III)(A)(7) 5 NONQUALIFIED STOCK OPTION EXHIBIT 10.(iii)(A)(7) Award Number THE SOUTHLAND CORPORATION 1995 Stock Incentive Plan 1996 Award Agreement GRANT OF NONQUALIFIED STOCK OPTION (NQSO) The Southland Corporation (the "Company") hereby grants to _______________ ) (Social Security Number _____________) (the "Participant") on October 1, 1996 (the "Date of Grant"), subject to the approval by Company shareholders of the 1995 Stock Incentive Plan (the "Plan"), a stock option subject to the Plan and upon the terms and conditions set forth below. Capitalized terms used and not otherwise defined herein have the meanings given to them in the Plan. 1. GRANT OF OPTION Subject to the terms and conditions hereinafter set forth, the Company, with the approval and direction of the Committee, grants to the Participant, as of the Date of Grant, an option to purchase up to ____________ shares of Common Stock at a price of $ 3.00 per share, the Fair Market Value of the Common Stock on the Date of Grant. Such option is hereinafter referred to as the "Option" and the shares of stock purchasable upon exercise of the Option are hereinafter referred to as the "Option Shares." This Option is a Nonqualified Stock Option, and as such is not intended by the parties hereto to be an Incentive Stock Option (as such term is defined under the Code ). 2. EXERCISABILITY OF OPTIONS Subject to such further limitations as are provided herein, the Option shall become exercisable in five (5) installments, the Participant having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion: (a) on and after the first anniversary of the Date of Grant, up to one-fifth (ignoring fractional shares) of the total number of Option Shares; (b) on and after the second anniversary of the Date of Grant, up to an additional one-fifth (ignoring fractional shares) of the total number of Option Shares; (c) on and after the third anniversary of the Date of Grant, up to an additional one-fifth (ignoring fractional shares) of the total number of Option Shares; (d) on and after the fourth anniversary of the Date of Grant, up to an additional one-fifth (ignoring fractional shares) of the total number of Option Shares; and (e) on and after the fifth anniversary of the Date of Grant, the remaining Option Shares. Tab 4 3. PERFORMANCE ACCELERATED VESTING After the first anniversary of the Date of Grant, an additional one-fifth (ignoring fractional shares) of the total number of Option Shares shall become exercisable on and after each of the following events: (a) on and after the twentieth consecutive trading day that the Closing Price is equal to or greater than $4.00; (b) on and after the twentieth consecutive trading day that the Closing Price is equal to or greater than $5.00; (c) on and after the twentieth consecutive trading day that the Closing Price is equal to or greater than $6.50; and (d) on and after the twentieth consecutive trading day that the Closing Price is equal to or greater than $8.00. 4. TERMINATION OF OPTION (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ten (10) years from the Date of Grant (the "Option Term"). (b) If the Participant has an exercisable Option (in whole or in part) as of the date of the Participant's voluntary termination of employment with the Company, then the exercisable portion of such Option shall remain exercisable for a period equal to the lesser of (1) the remainder of the Option Term or (2) the date which is 60 days after the date of Participant's voluntary termination of employment. (c) Upon termination of the Participant's employment with the Company by reason of Normal Retirement, the Option shall become immediately one hundred percent (100%) vested, and the Participant shall have until the expiration of the Option Term to exercise the Option. (d) Upon termination of the Participant's employment with the Company by reason of Early Retirement or Disability, any portion of the Option that is not yet vested shall continue to vest and to be exercisable in accordance with the provisions of Sections 2 and 3 of this Award Agreement and, once vested, the Option shall remain exercisable until the expiration of the Option Term unless, prior thereto, the Participant reaches age 65, at which time all remaining Options shall vest. (e) Upon termination of the Participant's employment with the Company by reason of Divestiture, any portion of the Option that as of the date of termination is not yet exercisable shall become null and void as of the date of termination and the portion, if any, of the Option that is exercisable as of the date of termination shall remain exercisable for a period equal to the lesser of (1) the remainder of the Option Term or (2) the date which is one year after the date of termination. (f) In the event of death of the Participant, regardless whether the Participant had previously retired (either Early Retirement or Normal Retirement) or was Disabled at the time of death, the Option shall become immediately one hundred percent (100%) vested and the Participant's Designated Beneficiary shall have twelve (12) months following the Participant's death during which to exercise the Option. 2 (g) A transfer of the Participant's employment between the Company and any Subsidiary of the Company, shall not be deemed to be a termination of the Participant's employment. (h) Notwithstanding any other provisions set forth herein or in the Plan, if the Participant shall (i) commit any act of malfeasance or wrongdoing affecting the Company or any Subsidiary of the Company, (ii) breach any covenant not to compete, or employment contract with the Company or any Subsidiary of the Company, or (iii) engage in conduct that would warrant the Participant's discharge for cause (excluding general dissatisfaction with the performance of the Participant's duties, but including any act of disloyalty or any conduct clearly discrediting the Company or any Subsidiary or Affiliate of the Company), any unexercised portion of the Option shall immediately terminate and be void. 5. EXERCISE OF OPTIONS (a) The Participant may exercise the Option from time to time with respect to all or any part of the number of Option Shares then exercisable hereunder by giving the Manager of the Company's Compensation and Benefits Department written notice of the intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and the date of the exercise thereof (the "Exercise Date"), which date shall be within five days after the giving of such notice. (b) On or before the Exercise Date, the Participant shall pay the full amount of the purchase price for the Option Shares in cash (U.S. dollars) or through the surrender of previously acquired shares of Stock valued at their Fair Market Value on the Exercise Date. In addition, to the extent permitted by applicable law, the Participant may arrange with a brokerage firm for that brokerage firm, on behalf of the Participant, to pay the Company the Exercise Price of the Option being exercised (either as a loan to the Participant or from the proceeds of the sale of Stock issued pursuant to that exercise of the Option), and the Company shall promptly cause the exercised shares to be delivered to the brokerage firm. Such transactions shall be effected in accordance with such further procedures as the Committee may establish from time to time. On the Exercise Date or as soon thereafter as is practicable, the Company shall cause to be delivered to the Participant, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) upon full payment for such Option Shares. The obligation of the Company to deliver Option Shares shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or such other securities trading system or market or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of the Option Shares thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. (c) If the Participant fails to pay for any of the Option Shares specified in such notice or to pay any applicable withholding tax relating thereto or fails to accept delivery of the Option Shares, the Participant's right to purchase such Option Shares may be terminated by theCommittee. 6. FAIR MARKET VALUE 3 As used herein, the "fair market value" of a share of Stock shall be the Closing Price per share of Stock on The Nasdaq Stock Market, or such other securities trading system or exchange which is the primary market on which the Stock may then be listed or traded on the date in question, or if the Stock has not been traded on such date, the Closing Price on the first day prior thereto on which the Stock was so traded. 7. NO RIGHTS OF SHAREHOLDERS Neither the Participant nor any personal representative shall be, or shall have any of the rights and privileges of, a shareholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 8. NON-TRANSFERABILITY OF OPTION During the Participant's lifetime, the Option shall be exercisable only by the Participant or any guardian or legal representative of the Participant, and the Option shall not be transferable except, in case of the death of the Participant, by will or the laws of descent and distribution, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Participant to alienate, assign, pledge, hypothecate or otherwise dispose of the Option, except as provided for herein, or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Participant and it shall thereupon become null and void. Notwithstanding the above, in the discretion of the Committee, Options may be transferable pursuant to a QDRO. 9. RESTRICTIONS ON TRANSFER FOLLOWING EXERCISE (a) Thirty percent (30%) of the Option Shares (the "Restricted Option Shares") acquired upon exercise of the Option shall be delivered to Participant via a stock certificate bearing a legend restricting the transfer or sale of such Option Shares for a period of 24 months following the Exercise Date. Seventy percent (70%) of the Option Shares acquired upon exercise of the Option shall not be subject to any restriction against the transfer or sale of such Option Shares by the Participant. (b) If the Participant's employment with the Company is voluntarily terminated within the 24-month period following the Exercise Date (other than due to Early Retirement or Normal Retirement) or is terminated due to cause, the Company may repurchase the Restricted Option Shares at the Exercise Price paid by the Participant. If the Company elects not to purchase such Restricted Option Shares, the Participant shall continue to hold such Shares subject to the restrictions thereon. (c) Upon a termination of employment as a result of death, Disability, Divestiture, Early Retirement or Normal Retirement, any Restricted Option Shares then held by a Participant or a Participant's Designated Beneficiary shall be released from, and no Option Shares acquired after the date of termination shall be subject to, the restrictions on transfer or sale set forth in paragraph 9(a) above. Promptly after the date of any such termination, upon receipt of certificates representing any Restricted Option Shares, the Company shall exchange any such certificates for certificates representing such Shares free of any restrictive legend relating to the lapsed restrictions. 10. WITHHOLDING TAX REQUIREMENTS 4 Following receipt of each notice of exercise of the Option, the Company shall deliver to Participant a notice specifying the amount that Participant is required to pay to satisfy applicable tax withholding requirements. Participant hereby agrees to either (i) deliver to the Company by the due date specified in such notice from the Company a check payable to the Company and equal to the amount set forth in such notice or (ii) make other appropriate arrangements acceptable to the Company to satisfy such tax withholding requirements. 11. NO RIGHT TO EMPLOYMENT Neither the granting of the Option nor its exercise shall be construed as granting to the Participant any right with respect to continued employment with the Company. 12. CHANGE IN CONTROL The Committee shall, in its sole discretion, have the right to accelerate the vesting of any Option and to release any restrictions on the Restricted Option Shares, in the event of a Change in Control. 13. ADJUSTMENT OF AWARDS The terms of this Option and the number of Option Shares purchasable hereunder shall be subject to adjustment pursuant to Sections 5(c) through (h) of the Plan. 14. AMENDMENT OF OPTION The Option may be amended by the Committee at any time (i) if the Committee determines, in its sole discretion, that amendment is necessary or advisable in the light of any additions to or changes in the Code or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of the Participant. 15. NOTICE Any notice to the Company provided for in this Award Agreement shall be in writing and addressed to the Company in care of the Manager of the Company's Compensation and Benefits Department, and any notice to the Participant shall be in writing and addressed to the Participant at the Participant's current address shown on the records of the Company or such other address as the Participant may submit to the Company in writing. Any notice shall be deemed to be duly given if and when properly addressed with postage prepaid, or if personally delivered to the addressee or, in the case of notice to the Company, if sent via telecopy to the Compensation and Benefits Department's facsimile machine at such telephone number as may be published in the Company's published telephone directory. 16. INCORPORATION OF PLAN BY REFERENCE The Option is granted pursuant to the terms of the Plan, which terms are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Committee shall interpret and construe the Plan and this Award Agreement, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue 5 arising hereunder or thereunder. In the event of a conflict between the terms of this Award Agreement and the Plan, the terms of the Plan shall control. 17. GOVERNING LAW The validity, construction, interpretation and effect of this Award Agreement shall exclusively be governed by and determined in accordance with the law of the State of Texas, except to the extent preempted by federal law, which shall to that extent govern. IN WITNESS WHEREOF, The Southland Corporation has caused its duly authorized officer to execute this Grant of Nonqualified Stock Option, and the Participant has placed his or her signature hereon, effective as of the Date of Grant. THE SOUTHLAND CORPORATION By:____________________________________________ President and Chief Executive Officer ACCEPTED AND AGREED TO: By:____________________________________________ Participant Participant's Social Security Number:_____________ 6 EX-10 6 EXHIBIT 10 Exhibit 10(iii)(A)(9) FIRST AMENDMENT TO INDEPENDENT CONSULTANT'S AGREEMENT THIS AMENDMENT (the "Amendment") is made and entered into this 31st day of August, 1995, effective as of the 1st day of May, 1995, by and between THE SOUTHLAND CORPORATION, a Texas corporation ("Southland"), and TIM ASHIDA ("Ashida") (collectively, the "Parties"). WHEREAS, Ashida is currently serving as a director of Southland; WHEREAS, effective May 1, 1995, Southland increased the compensation paid to its directors who are non-employees of Southland; and WHEREAS, Ashida's compensation is set forth in the Independent Consultant's Agreement between Southland and Ashida dated as of the 1st day of July, 1991 (the "Agreement"); NOW, THEREFORE, the Parties wish to amend the Agreement as follows: 1. Paragraph 6(a) of the Agreement is hereby amended to read as follows: 6.(a) CASH COMPENSATION. SOUTHLAND SHALL PAY TO ASHIDA COMPENSATION OF $11,500 PER MONTH (THE "CASH COMPENSATION"). THE CASH COMPENSATION SHALL CONSTITUTE PAYMENT FOR ASHIDA'S DIRECTOR SERVICES AND HIS LIAISON SERVICES. 2. In all other respects the terms and conditions of the Independent Consultant's Agreement remain in full force and effect. EXECUTED AND AGREED TO: The Southland Corporation Attest: /s/ Carol S. Hilburn By: /s/ Clark J. Matthews, II - ------------------------------ ------------------------- Assistant Secretary Name: Clark J. Matthews, II Title: President and Chief Executive Officer Tim Ashida /s/ Tim Ashida -------------------------------- Tab 5 EX-11 7 EXHIBIT 11
EXHIBIT 11 THE SOUTHLAND CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS (IN THOUSANDS, EXCEPT PER-SHARE DATA) CALCULATION OF EARNINGS PER COMMON SHARE YEAR ENDED DECEMBER 31 ------------------------------------ 1996 1995 1994 ----------- ----------- ----------- Earnings before extraordinary gain ..................... $ 89,476 $ 167,594 $ 91,996 Add interest on Convertible Debt, net of tax ........... 8,297 1,093 - ----------- ----------- ----------- Earnings before extraordinary gain applicable to common stock and equivalents outstanding.............. 97,773 168,687 91,996 Extraordinary gain ..................................... - 103,169 - ----------- ----------- ----------- Net earnings applicable to common stock and equivalents outstanding........................................... $ 97,773 $ 271,856 $ 91,996 =========== =========== =========== Weighted average number of common shares outstanding.... 409,923 409,923 409,923 Weighted average number of common shares issuable upon exercise of stock options............................. 74 - - Weighted average number of common shares issuable upon conversion of Convertible Debt ....................... 72,112 6,811 - ----------- ----------- ----------- Weighted average number of common shares and equivalents outstanding............................... 482,109 416,734 409,923 =========== =========== =========== Earnings per common share and equivalents (Primary and Fully Diluted): Before extraordinary gain......................... $ .20 $ .40 $ .22 Extraordinary gain ............................... - .25 - ------ ------ ------ Net earnings ..................................... $ .20 $ .65 $ .22 ====== ====== ======
Tab 6 EX-21 8 EXHIBIT 21
EXHIBIT 21 SUBSIDIARIES OF THE SOUTHLAND CORPORATION (Wholly owned unless indicated otherwise) JURISDICTION OF ACTIVE: INCORPORATION - ------- --------------- Bawco Corporation_____________________________________________________________________________Ohio Brazos Comercial E Empreendimentos Ltda. (a)________________________________________________Brazil Cityplace Center East Corporation____________________________________________________________Texas HDS Sales Corporation (b)____________________________________________________________________Texas Melin Enterprises, Inc. (c)_______________________________________________________________Colorado Phil-Seven Properties Corporation (d)__________________________________________________Philippines Puerto Rico - 7, Inc. (e)______________________________________________________________Puerto Rico Sao Paulo-Seven Comercial, S.A. (f)_________________________________________________________Brazil 7-Eleven Beverage Company, Inc.______________________________________________________________Texas 7-Eleven Comercial Ltda. (g)________________________________________________________________Brazil 7-Eleven Mexico, S.A. de C.V. (h)___________________________________________________________Mexico 7-Eleven of Idaho, Inc. (b)__________________________________________________________________Idaho 7-Eleven of Massachusetts, Inc. (b)__________________________________________________Massachusetts 7-Eleven of Nevada, Inc.__________________________________________________________________Delaware 7-Eleven of Virginia, Inc.________________________________________________________________Virginia 7-Eleven Sales Corporation (b)_______________________________________________________________Texas Small Shops Holding A/S (I)_________________________________________________________________Norway Subsidiaries of Small Shops Holding A/S: 1. Small Shops Danmark A/S (active) (j)___________________________________________Denmark 2. Small Shops Norge A/S (active) (j)____________________________________________Norway 3. Small Shops Sverige AB (active) (j)____________________________________________Sweden Naroppet AB (inactive sub of Small Shops Sverige AB) (k)_______________Sweden Southland Canada, Inc. (l)__________________________________________________________________Canada Southland International, Inc._______________________________________________________________Nevada Southland International Investment Corporation N.V. (l)_______________________Netherlands Antilles Southland Sales Corporation__________________________________________________________________Texas TSC Lending Group, Inc.______________________________________________________________________Texas Valso, S.A. (m)_____________________________________________________________________________Mexico Subsidiary (active) of Valso, S.A.: 7-Eleven Mexico, S.A. de C.V. (h)___________________Mexico INACTIVE: Lavicio's, Inc._________________________________________________________________________California MTA CAL, Inc.___________________________________________________________________________California 7-Eleven, Inc._______________________________________________________________________________Texas 7-Eleven Limited____________________________________________________________________United Kingdom 7-Eleven Pty. Ltd. (n)___________________________________________________________________Australia 7-Eleven Stores (NZ) Limited (o)_______________________________________________________New Zealand SLC Financial Services, Inc._________________________________________________________________Texas The Seven Eleven Limited (p)_____________________________________________________________Hong Kong TITLE HOLDING COMPANY: The Southland Corporation Employees' Savings and Profit Sharing Plan Title Holding Corporation (q)______________________________________________________________________Texas
Tab 7
FOOTNOTES: - ---------- (a) 2,248,800 quotas (almost 100%) owned by Southland International Investment Corporation N.V. (a wholly owned subsidiary of Southland International, Inc., a wholly owned subsidiary of The Southland Corporation), and remaining 10 quotas owned by The Southland Corporation (b) 100% owned by Southland Sales Corporation (a wholly owned subsidiary of The Southland Corporation) (c) 100% owned by Bawco Corporation (a wholly owned subsidiary of The Southland Corporation) (d) 4.63% owned by The Southland Corporation, and remaining 95.37% owned by various investors (e) 59.07% owned by The Southland Corporation, and remaining 40.93% owned by group of investors in Puerto Rico (f) as of 6-30-96, 1.69% owned by The Southland Corporation, 98.25% owned by Super Trade, Ltd., and remaining .06% owned by other investors; Southland has options to purchase up to 49% of this affiliate until 1-97 (g) 15,999 quotas (almost 100%) owned by The Southland Corporation, and remaining 1 quota owned by 7-Eleven of Nevada, Inc. (a wholly owned subsidiary of The Southland Corporation) (h) 99.965% of Series A shares owned by Valso, S.A., and remaining .035% owned by Casa Chapa, S.A.; 100% of Series B shares owned by Valso, S.A. (I) 7.62% owned by The Southland Corporation, and remaining 92.38% owned by various investors (based on Class A common shares only) (j) owned by Small Shops Holding A/S (k) owned by Small Shops Sverige AB (l) 100% owned by Southland International, Inc. (a wholly owned subsidiary of The Southland Corporation) (m) 49% owned by The Southland Corporation, and remaining 51% owned by Valores Corporativos, S.A. (n) 50% owned by David Anthony Walsh, and remaining 50% owned by Anthony Peter John Kelly, for the benefit of Southland (o) 99% owned by The Southland Corporation, and remaining 1% owned jointly by Southland's local counsel, Bruce Nelson Davidson and Anthony Francis Segedin (p) 99.9% owned by The Southland Corporation, and remaining .1% owned by Wilgrist Nominees Limited, Southland's agent in Hong Kong (q) This company was established by The Southland Corporation Employees' Savings and Profit Sharing Plan to hold title to properties under tax code Section 501(c)(25). As of November 15, 1991, U.S. Trust Company of California, N.A. was appointed as trustee for The Southland Employees' Trust and The Southland Corporation Employees' Savings and Profit Sharing Plan and assumed all responsibility for this company. 2
EX-23 9 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the registration statements listed below of our reports dated February 18, 1997, on our audits of the consolidated financial statements and financial statement schedule of The Southland Corporation and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which reports are included in this Annual Report on Form 10-K. Registration No. ---------------- On Form S-8 for: Post-Effective Amendment No. 3 to The Southland Corporation Equity Participation Plan 33-23312 Post-Effective Amendment No. 1 to The Southland Corporation Grant Stock Plan 33-25327 The Southland Corporation 1995 Stock Incentive Plan 33-63617 COOPERS & LYBRAND L.L.P. Dallas, Texas March 25, 1997 TAB 8 EX-27 10 EXHIBIT 27 (FDS) FILED WITH FORM 10-K
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 36,494 0 114,422 5,009 109,050 350,900 2,587,492 1,237,653 2,039,148 674,932 1,938,828 41 0 0 (788,996) 2,039,148 6,868,912 6,955,263 4,893,061 4,893,061 1,841,174 0 90,204 130,824 41,348 89,476 0 0 0 89,476 0 0
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