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. [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE 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 Warrants to Purchase Common Stock at $1.75 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $522,873,796 at March 3, 1995, based upon 130,718,449 shares held by persons other than officers, directors and the parties to the Shareholders Agreement. 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 X No __ 409,922,935 shares of Common Stock, $.0001 par value (the registrant's only class of Common Stock), were outstanding as of March 3, 1995. 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 26, 1995 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, 1994 TABLE OF CONTENTS PAGE REFERENCE FORM 10-K PART I Item 1. Business 1 Executive Officers of the Registrant 17 Item 2. Properties 21 Item 3. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 25 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 26 Item 6. Selected Financial Data 27 Item 7. Management's Discussion and Analysis of Financial 28 Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 37 Independent Auditors' Report of Coopers & Lybrand L.L.P. 64 on The Southland Corporation and Subsidiaries' Financial Statements for each of the three years in the period ended December 31, 1994 Item 9. Changes in and Disagreements with Accountants on Accounting 65 and Financial 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 66 Signatures 72 ________________________ *Included in Form 10-K by incorporation by reference to the Registrant's Proxy Statement, dated March 22, 1995, for the April 26, 1995 Annual Meeting of Shareholders. PART I ITEM 1. BUSINESS. GENERAL The Southland Corporation ("Southland," the "Company" or "Registrant"), conducting business principally under the name 7-Eleven, is the largest convenience store chain in the world, with over 14,600 Company-operated, franchised and licensed locations worldwide, and is among the nation's largest retailers. The 7-Eleven 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 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. Convenience retailing is now the Company's only business focus. 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 1994, Southland's operations (for financial reporting purposes) were conducted in one business segment: the Operating and Franchising of Convenience Food Stores. At December 31, 1994, the Company's operations included 5,541 7- Eleven convenience stores in the United States and Canada, 38 High's Dairy Stores, and 51 Quik Mart and Super-7 high-volume gasoline outlets with mini-convenience stores. The Company also has an equity interest in 213 convenience stores in Mexico (most of which are now using the 7-Eleven name). Area licensees, or their franchisees, operate additional 7-Eleven 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 1994, the Company has an equity interest in three of the licensees whose area licenses cover six foreign countries and Puerto Rico. During 1994, the Company continued to focus on its business concept 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, on an individual store level, to remain in stock, at all times, on each particular store's best-selling items. Through proper ordering and successful implementation of other store functions, the Company continues to work toward providing convenience-oriented customers with the SPEED, QUALITY, SELECTION, PRICE and shopping ENVIRONMENT that will give the Company a sustainable competitive advantage. THE RESTRUCTURINGS. During the past eight years, the Company has gone through two financial restructurings -- a leveraged buyout in 1987 (the "LBO") and a voluntary bankruptcy reorganization, emerging from a four-month Chapter 11 proceeding in March 1991, with 1 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. 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 "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, and the Company issued 286,634,619 shares of common stock, $.0001 par value (the "Common Stock"), to IYG Holding Company, a Delaware corporation, jointly owned by Ito Yokado and Seven-Eleven Japan, and received $430 million in cash. In connection with the Closing, the Company entered into a Shareholders Agreement, a Warrant Agreement and Employment Agreements with the Thompsons (described below, see "Other Business Information"). Pursuant to the Plan, holders of the Company's Old Securities were entitled to exchange, until March 5, 1993, their Old Securities for new debt, equity and, in some cases, cash, and newly issued warrants (the "Thompson Warrants"), exercisable (through February 23, 1996) to acquire certain shares of common stock owned by the Thompsons and certain other old common stock shareholders of the Company (the "Warrant Shareholders"), at $1.75 per share pursuant to a Warrant Agreement with Wilmington Trust Company as Warrant Agent (the "Warrant Agreement"). 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 153 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 the execution of the March 21, 1990 stock purchase agreement, Ito-Yokado had no affiliation with the Company, other than through its majority-owned subsidiary, Seven-Eleven Japan (see below). On July 18, 1990, however, the Company borrowed $25 million pursuant to a term loan agreement with Ito-Yokado in order to obtain short-term liquidity. 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. 2 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. Seven-Eleven Japan is the largest area licensee of the Company with 5,809 stores in Japan and owns Seven- Eleven (Hawaii), Inc., which, as of year-end 1994, operated an additional 47 7-Eleven stores in Hawaii under a separate area license agreement covering that state. REFINANCING OF BANK DEBT. On December 21, 1994, the Company refinanced all of its remaining debt under the Credit Agreement, originally entered into in 1987, pursuant to an amendment to the Credit Agreement with a modified group of lenders. The bank group, led by Citicorp North America, Inc., as Agent, and The Sakura Bank, Limited, as Co-Agent, is comprised of six Japanese banks, four American banks and one Canadian bank. The amended Credit Agreement, which will mature at the end of 1999, provides for a $300 million term loan, $150 million letter of credit facility and a $150 million revolving credit facility. There are no scheduled term loan principal repayments until the first quarter of 1996. 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 .975%. OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES 7-ELEVEN STORES. On December 31, 1994, there were 5,541 7- Eleven convenience stores included in the Company's operations and 694 stores (in the United States) operated by area licensees. Such stores are operated principally under the name 7-Eleven and are located in 41 states, the District of Columbia, and five provinces of Canada. During 1994, the Company opened 18 convenience stores (of which 10 were rebuilds or relocations of existing stores) and closed 184 convenience stores, due to changing market patterns, lease expirations and the closing of selected stores that were not profitable. The Company may, and currently intends to, close approximately 150 additional stores in 1995. The Company's convenience stores are extended-hour retail stores, emphasizing convenience to the customer and providing groceries, take- out foods and beverages, gasoline (at many locations), dairy products, non-food merchandise, specialty items 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 2,400-3,100 square feet in size and carry 2,300-2,600 items. The vast majority of the stores operate 24 hours a day, with virtually all of the Company's stores open at least from 7 a.m. until 11 p.m. The stores attract lunch-time customers, early and late shoppers, weekend and holiday shoppers and customers who may need only a few items at any one time and desire rapid service. The Company has been emphasizing its new product mix of fresher, higher quality foods to encourage existing customers to increase their shopping frequency and to appeal to new customers, and has taken a new approach to providing fresh food merchandise to the stores, through the introduction of daily delivery of freshly made sandwiches and bakery products from commissaries and newly opened baking facilities operated to serve the needs of 7-Eleven stores and distributed from local area combined distribution centers that serve only 7-Eleven stores. In addition, there has been an increased focus on novelty and seasonal items to spur impulse buying around each holiday, sport season or other types of occasions, such as graduation or Mother's Day, which are designed to appeal to a broader mix of customers. 3 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 6% of sales, including gasoline. REMODELING OF STORES. During 1994, the Company remodeled approximately 1,200 stores, and anticipates remodeling an additional 1,400 stores in 1995. By the end of 1995, over 4,000 stores will have been remodeled, with virtually all stores scheduled to be completed by the end of 1996, to conform to the new store image which includes 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 replaces the mansard roofs of many existing stores. The remodeling process was streamlined in 1994, both to be less disruptive of the store's business and to focus on the changes that customers notice and appreciate most, such as brighter lighting and more user-friendly store layouts. MERCHANDISING. During 1994, the Company further intensified its focus on better inventory control at the store level and provided all levels of its field organization with training and constant reinforcement of the principles necessary to accomplish accurate order forecasting to avoid lost sales opportunities. 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 and avoid out-of-stock conditions by proper order forecasting. 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. Each store's merchandise must include a selection of core items as well as optional items selected by store operators to meet their customers' local needs and preferences. During 1994, the Company assisted the store operators by providing a new approach to seasonal and novelty items, taking advantage of each holiday or other identifiable event (such as graduation time, start of the football or baseball season, etc.) with a preplanned mix of merchandise made available to the stores on attractive end cap merchandisers in anticipation of possible impulse or last-minute shopping at such times as Valentine's Day, Mother's Day and Halloween. These new items were provided in a different merchandising format during 1994 to appeal to a broader range of customers and further enhance 7-Eleven's image as a convenient place to shop for last-minute needs. During 1994, as part of the Company's new merchandising focus, between 25 and 30 new items were made available to the stores each week. Store operators were encouraged to try new items and, through case study experiments, store operators were able to see the incremental benefits derived by offering the new items in the stores. In addition, during 1994 the Company continued to implement its everyday-fair-price strategy, which minimizes discounting, but lowers prices on some items to provide consistent, competitive prices throughout the store. The Company is applying a more flexible approach to pricing on different products in different markets, while working with suppliers to find ways to lower costs to the Company, so that any savings can be reflected in the price to the customer. 4 NEW PRODUCTS. During 1994, the Company continued its programs to introduce more fresh food products of a higher quality into the stores. In addition, the Company continued to expand its "New Age" beverages with the introduction of its own corporate brand "Classic Selection" spring water and soft drinks which were introduced nationally during 1994. In addition, as a complement to its gourmet- flavored coffees, the Company introduced its own proprietary regular and sugar-free "Cafe Select"-TM- gourmet hot chocolate and cappuccino, which added hot beverages that had appeal throughout the day, in addition to the traditional peak morning coffee hours. By year-end 1994, approximately 95% of the stores were offering the new hot chocolate and cappuccino products. During 1994, Prime Deli Corporation opened a fresh food commissary in Dallas, Texas to serve 7-Eleven stores. This commissary is designed to provide a wide range of freshly prepared food, using the new "Deli Central" name, including fresh sandwiches, salads and desserts that are delivered daily to the stores. By year-end, this commissary was servicing approximately 240 stores. (See "Distribution - Fresh Products," below). In late 1994, with the help of Pillsbury, "World Ovens"-TM- fresh bakery products were developed and introduced to 7-Eleven stores in Texas. These high-quality products are proprietary to 7-Eleven and are manufactured in a new bakery facility in Texas specifically opened and operated to serve 7-Eleven's needs. In addition, during 1994, deliveries began from a newly built commissary facility in the Philadelphia/New Jersey market area to approximately 400 stores (both corporate and franchised) in that market area. A commissary is also servicing approximately 160 franchised stores in the Long Island, New York market area. In addition, "World Ovens"-TM- products are also being supplied to stores in the Philadelphia/New Jersey market area from a bakery facility in Baltimore. During 1994, 7-Eleven increased the range of non-food services available when it began offering prepaid telephone cards, for long distance use, which were introduced in November. By year end, over 5,000 stores were selling the "phone cards" for prepaid long distance calling in 15-, 30- and 60-minute increments, and the Company plans to introduce a 90-minute card, as well as a collector card, during 1995. During 1993, the Company entered into a ten-year agreement with Electronic Data Systems Corporation ("EDS") for the installation and operation of automated teller machines (ATMs) in 7-Eleven stores, nationwide, in areas not already covered by other ATM agreements. As of year-end 1994, ATMs had been installed in over 3,200 stores under this agreement, with a total of approximately 4,500 ATMs in 7-Eleven stores around the country. EDS pays the Company a flat fee per month per ATM as well as transaction-based fees dependent upon the number of transactions per month. GASOLINE. In 1994, the Company sold approximately 1.40 billion gallons of gasoline at retail at approximately 2,000 7-Eleven 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 1994, the Company continued its program to upgrade the gasoline pump area of the stores, by adding canopies and new equipment. Approximately 700 stores are now equipped to accept credit cards for the purchase of gasoline at the pump, which makes gasoline shopping at 7-Eleven even more 5 convenient for the credit customer. Almost all of the Company's stores offer CITGO-branded gasoline. During 1994, the Company discontinued the sale of gasoline at approximately 40 locations (due, in many cases, to the closing or divestiture of the entire store, with the others eliminated due to the strategic decision to discontinue the sale of gasoline at the particular location). The Company currently anticipates that gasoline sales may be discontinued at about 30 additional locations in 1995. 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 stores. At year-end, there were over 1.33 million active "Citgo Plus" credit card accounts. DISTRIBUTION. Fresh Products - During 1994, the Company began to utilize a local distribution system for delivery of fresh food products (such as Deli Central-TM- sandwiches and salads and World Ovens-TM- bakery products) as well as for fresh produce, dairy products, bread and other packaged bakery items and items that had previously been provided to the store by vendors through "store door delivery." The Company entered into a five-year agreement with E. A. Sween Company for E.A. Sween to provide distribution services through operation of (i) a Combined Distribution Center ("CDC") facility in the Dallas/Fort Worth area to service approximately 250 stores in that area and (ii) a CDC facility in the Austin market area to service approximately 50 stores in that area. Included in the products distributed by E.A. Sween through the CDCs are those produced by Prime Deli Corporation from its commissary and the World Ovens-TM- products from Southbury Bakery, both in the Dallas area, and products from the commissary facility in Austin, which has now been open and serving 7-Elevens since 1992. In addition, pending finalization of long-term arrangements, the Company has entered into interim agreements with (i) AMR Distribution Systems (an operating division of AMR Services Corporation) to provide distribution services, through operation of a CDC facility, to approximately 400 (both corporate and franchised) stores in the Philadelphia/New Jersey market area, for distribution of the products produced by the commissary in that market area and (ii) The Constance Food Group, Inc., to provide distribution services, through operation of a CDC facility, to the approximately 160 stores it supplies with commissary products in the Long Island, New York area. Warehouse Products - The Company continued to utilize the distribution services of McLane Company Inc., 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 stocks and be increasingly responsive to individual store's needs. Franchisees are required only to carry merchandise of a type, quality, quantity and variety consistent with the 7-Eleven image. Except for consigned merchandise and certain proprietary items, franchisees 6 are not required to purchase merchandise from the Company or vendors it recommends, or to sell their 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. 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 convenience store sales in the United States by principal product categories for the last five years were as follows:
YEARS ENDED DECEMBER 31 ----------------------------------------- PRODUCT CATEGORIES 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Gasoline 24.2% 23.5% 22.5% 21.5% 22.3% Tobacco Products 17.2 18.0 19.2 19.1 18.0 Beer/Wine 9.4 9.5 10.0 10.7 10.4 Soft Drinks 8.8 9.7 10.0 10.3 10.4 Groceries 9.6 9.2 8.5 8.1 8.2 Food Service 8.5 8.5 8.4 8.4 8.7 Non-Foods 6.2 5.8 5.8 5.8 5.7 Dairy Products 4.6 4.8 4.9 5.0 5.2 Candy 3.8 3.7 3.8 3.9 3.7 Baked Goods 3.6 3.5 3.4 3.4 3.5 Customer Services 2.4 2.1 1.9 1.8 1.8 Health/Beauty Aids 1.7 1.7 1.6 2.0 2.1 ------ ------ ------ ------ ------ Total 100.0% 100.0% 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 the sale of certain products, the most significant of which limit or govern the sale of alcoholic beverages. 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 alcoholic beverages 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. Product categories that are affected by these types of regulations are alcoholic beverages, tobacco, lottery tickets and other similarly state-regulated products. Such regulation is subject to legislative and administrative change from time to time. The Company is the largest seller, nationwide, of state-sponsored lottery tickets. FRANCHISES. At December 31, 1994, 2,962 7-Eleven stores were operated by independent franchisees under the Company's franchise program for individual 7-Eleven stores. Sales by stores operated by franchisees (which are included in the Company's net sales) were $2,820,685,000 for the year ended December 31, 1994. In its franchise program for individual 7-Eleven 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 7 the trainees; and other costs relating to the franchising of the store. Under the standard form of franchise agreement, the Company leases or subleases, to the franchisee, a ready-to-operate 7-Eleven 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. Under the standard franchise agreements currently in effect, the Company shares 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 Charge," is its continuing royalty charge 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. Other optional services are available from or through the Company for additional fees. The Company is currently offering agreements that provide a three- tiered structure for calculating the 7-Eleven Charge, in Washington, Idaho and Oregon, under which the 7-Eleven Charge is based on the particular store's level of gross profit for the preceding 12 months. In March 1993, the Company also announced that it intends to revise its standard form of franchise agreement, but has postponed the anticipated roll-out of a new agreement indefinitely as a result of currently pending litigation (see "Legal Proceedings," below). Under Southland's standard franchise agreement, the franchise may be terminated by the franchisee at any time or by the Company 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 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 the franchisee has no continuing lease obligations. Many states in which the Company franchises individual 7-Eleven 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. These requirements are subject to amendment and similar legislation is contemplated at the federal level and pending at the state level. 8 AREA LICENSES. As of December 31, 1994, the Company had granted domestic area licenses to ten companies which were operating 694 convenience stores using the 7-Eleven system and name in certain areas of Alaska, Arkansas, Hawaii, Indiana (using the name Super-7 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 1994, foreign area license agreements covered the operation of 5,809 7-Eleven stores in Japan, 925 in Taiwan, 399 in Thailand, 310 in Hong Kong, 153 in Australia, 87 in Malaysia, 84 in Singapore, 75 in South Korea, 69 in Spain, 66 in the Philippines, 51 in the United Kingdom, 37 in Norway, 22 in Sweden, 19 in China, 14 in Brazil, 13 in Puerto Rico, 10 in Turkey, nine in Guam and eight in Denmark. 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. During 1994, the area license covering Panama was terminated. In addition, a license covering Guangdong Province in China is now in effect, and stores there should be under construction and open within the next year. 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 213 convenience stores in Mexico operated by an affiliate. These stores, which feature merchandise and services essentially the same as 7-Eleven, had been operating under the name "Super Siete" until 1991, when a program began to change their name to 7-Eleven, and now almost all stores are using the 7-Eleven name. 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 DAIRY STORES. As of December 31, 1994, the Company operated 38 High's Dairy Stores located primarily in Maryland and Virginia, which are similar in size and location to 7-Eleven stores and feature a product mix that emphasizes a variety of dairy products. QUIK MART AND SUPER-7. At December 31, 1994, 51 Quik Mart and Super-7 units were in operation in nine 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 is a high-volume, multi-pump, self- service gasoline-dispensing operation. 9 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 600,000 square feet, about one-half of Cityplace Center East. During 1994, leases covering approximately 281,000 square feet were signed with third party tenants, for occupancy to commence under such leases in 1994 and 1995. The building is now 97% leased or reserved for expansion under current leases. DIVESTITURES During 1994, the Company sold its former distribution centers in Champaign, Illinois and Tyler, Texas. OTHER INFORMATION ABOUT THE COMPANY CREDIT AGREEMENT AND DEBT COVENANTS. The Company's Amended Credit Agreement contains a number of financial and operating covenants requiring, among other things, the maintenance of certain financial ratios, including interest 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) 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. 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. 10 In addition, the warrants that were issued by the Company in 1987 in connection with the LBO (the "Old Warrants"), expired in 1992 without becoming exercisable. Pursuant to the terms of the Warrant Agreement relating to the Old Warrants, the Company offered to repurchase such Old Warrants at their independently determined fair value of $0. The repurchase offer expired, and all of the Old Warrants were cancelled as of March 15, 1993. 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 may not 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. Although transfers are permitted to certain permitted transferees or pursuant to Rule 144 under the Securities Act of 1933, other transfers are subject to the Purchaser's right of first refusal. The Shareholders Agreement provides each of the Existing Shareholders (and any persons who hold employee options or employee convertible debentures to purchase shares of Common Stock as a result of employment with the Company) with the right and option to require the Purchaser to purchase up to all of the shares of Common Stock held by such person on the fifth anniversary of the date of the Shareholders Agreement at the fair market value (to be determined in accordance with the terms of the Shareholders Agreement) of such shares on such date. In addition, the Shareholders Agreement, as amended on December 30, 1992, provides that the parties to the agreement shall cause Southland's Board of Directors to consist of, and shall vote their shares as to the election of directors so that the Board shall consist of, (i) two individuals designated by Existing Shareholders holding a majority of shares held by the Existing Shareholders, (ii) ten individuals selected by the Purchaser, (iii) two individuals initially designated by the Official Committee of Bondholders appointed by the Bankruptcy Court and, from and after the next annual or special meeting of the Company's shareholders at which the election of directors occurs, designated by the holders (the "Other Shareholders") of shares of Common Stock other than the Purchaser and the Existing Shareholders (the "Other Shareholder Nominees") and (iv) although no such obligation currently exists, two independent directors if, and to the extent, required to meet the listing or quotation requirements of any exchange or quotation system upon which the Common Stock is or shall be listed or traded (and only if, and to the extent that, the Other Shareholder Nominees fail to qualify as such independent directors). In addition, the Shareholders Agreement provides the Existing Shareholders with certain registration rights (if no exemption from registration is applicable for their sales), parallel exit rights and preemptive rights in certain circumstances. Moreover, under the Shareholders Agreement, Ito-Yokado has provided the Thompsons and certain of the parties to the Shareholders Agreement (other than participants in the Company's Grant Stock Plan with respect to shares acquired pursuant to participation in such Grant Stock Plan) with certain loans (the "Loans") based on the pledge of shares of Common Stock as collateral for the Loans (the "Collateral Shares"). Such loans are a nonrecourse obligation of the borrower except to the extent of the Collateral Shares. Such Collateral Shares may not be sold unless the Loan secured by such Shares is repaid simultaneously with such sales. 11 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. (collectively, the "Warrant Shareholders") entered into a Warrant Agreement with Wilmington Trust Company as Warrant Agent, the Company and Ito-Yokado. Pursuant to the Plan, the Company agreed to issue, on behalf of the Warrant Shareholders, the Thompson Warrants exercisable by the holder thereof to purchase up to an aggregate of 10,214,842 shares of Common Stock owned by the Warrant Shareholders. Under the Warrant Agreement, each Thompson Warrant entitles the holder to purchase, at the exercise price (the "Exercise Price") of $1.75 per Thompson Warrant, one of the underlying common shares, subject to adjustment as provided in the Warrant Agreement, during the period beginning three months after the date of the Warrant Agreement and ending on February 23, 1996. As of March 3, 1995, a total of 5,843,785 Thompson Warrants had been exercised. Until the termination of the Warrant Agreement, the underlying common shares will be issued to and held by the Warrant Agent (i) as trustee for the benefit of the appropriate Warrant Shareholder and the holders of the Thompson Warrants or (ii) if a secured loan is made pursuant to the terms of the Shareholders Agreement, as collateral agent solely on behalf of Ito-Yokado. Until the termination or expiration of the Warrant Agreement, neither a Warrant Shareholder nor the Warrant Agent may, among other things, dispose of or pledge the underlying common shares except in connection with (i) the exercise of the Thompson Warrants, (ii) a secured loan to a Warrant Shareholder or (iii) a sale of any pledged underlying common shares pursuant to, and in accordance with, a Pledge Agreement (the "Pledge Agreement"). At all times during the term of the Warrant Agreement, all underlying common shares held by the Warrant Agent as trustee, unless an event of default shall occur under a Pledge Agreement, shall be voted, on any matters submitted to the holders of record of Common Stock, in the same manner as a majority of the votes cast by the holders of record of the Common Stock other than Ito-Yokado and the Warrant Shareholders. If an event of default occurs under a Pledge Agreement, all underlying common shares held as security shall be voted, pursuant to the terms of such pledge agreement, in accordance with the instructions of Ito-Yokado. 12 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. Thompson, Jr. was terminated and Mr. Thompson was paid the present discounted value of the remaining balance payable to him under the Employment Agreement. The Employment Agreements were effective upon the Closing and provide for an annual base salary of $600,000 and an annual bonus equal to $360,000 under each agreement. In addition, under the Employment Agreements the Thompsons will have such duties and responsibilities as are agreed upon from time to time by them and the Board. In addition, John P. Thompson and Jere W. Thompson will participate in employee benefit plans and arrangements offered to key management employees of the Company during the term of the agreement. The Employment Agreements also provide vacation, holidays and expense reimbursement in accordance with current Company policy. In early 1995, the Thompsons' Employment Agreements were modified to provide for them to relinquish their office space in Cityplace but retain certain personal property used in their offices. RESEARCH AND DEVELOPMENT The Company did not incur any significant expenses for product testing or traditional research and development activities in 1993 or 1994. During 1994, 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 $60,000 for new product development and taste testings and to test equipment used for cooking and displaying food products. RETAIL AUTOMATION In December 1993, the Company signed agreements with Electronic Data Systems Corporation, AT&T Global Information Solutions Company (formerly NCR Corporation) and Canmax Retail Systems, Inc. for the automation of certain business functions for both corporate and franchisee-operated convenience stores and to provide an automated information link among the stores, Southland's division and accounting offices and its corporate headquarters. The retail automation project is expected to be completed in phases over the next four years, and, when completed, will be specifically designed to provide information about every important detail of the store's operations and to facilitate inventory tracking. The first phase, implementation of which began at the end of 1993, provided for the roll out of hardware with application software to automate certain store accounting functions and other store level tasks. By year-end 1994, the hardware was installed in about 35% of the Company's stores. 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"-TM- and "World Ovens"-TM- trademarks are being 13 introduced in stores nationwide, along with the "Classic Selection"-TM- trademark, covering the Company's corporate brand spring water and soft drink products, and "Cafe Select"-TM-, covering the Company's gourmet coffees, cappuccino and hot chocolate products. As part of the collateral securing the Credit Agreement, the Company granted the lenders a security interest in its various trademarks. ADVERTISING During 1994, the Company continued its very successful "Comedians" campaign, which first aired in December 1993. This campaign delivered the message of "So many changes it"s not even funny" and emphasized the store remodeling program and daily distribution of fresh food items. The Company also utilized several promotional and seasonal advertising campaigns such as the "Monsters of the Gridiron" during the football season, the Slurpee Brain Freeze commercials during the Summer selling season, the Super Bowl Bash Contest, in which the lucky winner was awarded ten consecutive annual trips to the Super Bowl, various radio promotions that highlighted specific promotions for ATMs, fountain soft drinks, gasoline pay-at-the-pump convenience, hot dogs and the introduction of 7-Eleven's proprietary phone card, and, beginning in early 1995, promotions that reminded customers that there are a "hundred ways to start the day" at 7-Eleven. Advertising to support the introduction of new items was provided both on television and radio in 1994 and, in 1995, the Company is planning to continue this advertising and to add a new focus to highlight the "convenience" aspects of finding fresh food at 7-Eleven rather than at any of the Company's competitors, such as traditional delis or bakeries. COMPETITION During the past few years the Company, like other traditional convenience retailers, has experienced increased competitive pressures from 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. 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 1993 for the convenience store industry were approximately $86.3 billion (including $43.9 billion of gasoline) and that over 66,300 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. 14 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 1994, the Company entered into subleases with new tenants covering about 281,000 square feet. The building is now approximately 97% 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. The Dallas real estate market currently has many office and retail sites available for lease. 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 ("RCRA") 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 state and local regulations, the Company has developed a comprehensive tank and associated equipment management program 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. 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"). The Company had previously been issued an Administrative Consent Order relating to groundwater conditions at this facility by the New Jersey Department of Environmental Protection ("NJDEP"). The Administrative Consent Order required the Company to 15 pay a civil penalty of $50,000, to conduct a remedial investigation/feasibility study ("RI/FS") and to provide financial assurance for the ultimate clean-up. The Company has submitted a proposed clean-up plan to the 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 received initial comments from the NJDEP, a final clean-up plan has not been finalized. At December 31, 1994, the Company's recorded liability is $39.3 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 parties executed a final settlement agreement pursuant to which the former owner agreed to pay a substantial portion of the cleanup costs described above. The Company has recorded a receivable of $23.0 million, at year-end 1994, representing the former owner's portion of the accrued clean-up costs. As of December 31, 1994, 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 occasionally discovers and repairs leaks in the underground storage tanks and piping systems associated with these retail outlets. The Company has established a comprehensive program to manage underground storage tanks and associated equipment and to ensure compliance with applicable laws. The Company anticipates that it will spend approximately $14 million in 1995 on capital improvements required to comply with environmental regulations relating to below-ground gasoline storage tank systems as well as above-ground vapor recovery equipment at store locations and approximately an additional $25 million on such capital improvements from 1996 through 1998. Additionally, the Company accrues for the anticipated future costs of environmental clean-up activities (consisting of contamination assessment and remediation) relating to detected releases of regulated substances at its existing and previously operated sites at which gasoline has been sold (including store sites and other facilities that have been sold by the Company). At December 31, 1994, the Company has an accrued liability of $63.4 million for such activities and anticipates that 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 analysis of such factors as the age of the tanks, location of tank sites and experience with contractors who perform contamination assessment and remedial work. The Company is eligible to receive reimbursement for a large portion of these remediation costs under state reimbursement programs and has recorded a gross receivable of $76.1 million (a net receivable of $57.2 million after an allowance of $18.9 million) for the estimated probable state reimbursement of paid and accrued assessment and remediation expenses. The Company reduced the estimated net environmental cost reimbursements at the end of 1994 by approximately $6.0 million as a result of the Company's ongoing review of state reimbursement programs. There is no assurance of the timing of the receipt of state reimbursement funds; however, based on its experience, the Company expects to receive state reimbursement funds within one to four years 16 after incurring eligible assessment and remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. The estimated future remediation expenditures and related state reimbursement amounts could change as governmental requirements and state reimbursement programs change in future years. 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 gasoline storage tank systems at store locations. EMPLOYEES At December 31, 1994, the Company had 30,417 employees, of whom approximately 29 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, although a few employees in one store in Canada have joined a union. The Company has in the past been able to satisfy substantially all of its requirements for managerial personnel 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 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 (other than Mr. Ito and Mr. Suzuki) 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.
AGE AT NAME 3/01/95 CURRENT POSITIONS AND OFFICES WITH REGISTRANT --------------------- ------- -------------------------------------------------------- Masatoshi Ito 70 Chairman of the Board and Director (1) Toshifumi Suzuki 62 Vice Chairman of the Board and Director (2) Clark J. Matthews, II 58 President, Chief Executive Officer and Director (3) Stephen B. Krumholz 45 Executive Vice President and Chief Operating Officer (4) Rodney A. Brehm 47 Senior Vice President, Distribution and Foodservice (5) James W. Keyes 39 Senior Vice President, Finance (6) Paul L. Bureau, Jr. 53 Vice President, Corporate Tax (7) Adrian O. Evans 58 Vice President, Construction and Maintenance (8) David M. Finley 54 Vice President, Human Resources (9) Stephen B. LeRoy 42 Vice President, International and Real Estate (10) Vernon P. Lotman 55 Vice President and Controller (11) Bryan F. Smith, Jr. 42 Vice President and General Counsel (12) David A. Urbel 53 Vice President, Planning and Treasurer (13)
________________________ 17 (1) Chairman of the Board and Director of the Company since March 5, 1991. Founder, Director and Advisor 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 1979. Chairman of York Mart Co., Ltd. since 1979. President of York Matsuzakaya Co., Ltd. since 1979. President of Robinson's Japan Co., Ltd. since 1984. Chairman of Maryann Co., Ltd. since 1977. President of Oshman's Japan Co., Ltd. since 1984. Chairman of Steps Co., Ltd. since 1981. Chairman of York-Keibi Co., Ltd. since 1977. President of Union Lease Co., Ltd. since 1975. 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 1977. 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 1978. 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; 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 Stores Operations, from 1990 to August 1992; Vice President, Marketing, from 1989 to 1990; Vice President, Northern Region, 7-Eleven Stores, from January 1989 to October 1989; Vice President, Northwest Region, 7-Eleven Stores, from 1987 to 1988; Division Manager, Mountain Division, 7-Eleven Stores, from 1986 to 1987; Regional Marketing Manager from 1981 to 1986; employee of the Company since 1972. (5) Senior Vice President, Distribution and Foodservice, since June 1993; Vice President, Merchandising, from February 1992 to June 1993; Vice President, Marketing, from 1990 to 1992; Vice President, Northwest Region, 7-Eleven Stores, from 1989 to 1990; National Marketing Manager from 1986 to 1989; Division Manager, Central Pacific Division, 7-Eleven Stores, from 1979 to 1986; employee of the Company since 1972. 18 (6) Senior Vice President, Finance, since June 1993; Vice President, Planning and Finance, from August 1992 to June 1, 1993; Vice President and/or Vice President, National Gasoline, from August 1991 to August 1992; General Manager, National Gasoline, from 1986 to 1991; employee of the Company since 1985. (7) 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. (8) Vice President, Construction and Maintenance, since August 1992. Vice President, Stores Development, from January 1989 to August 1992; Vice President, Mid-America Region, 7-Eleven 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) Vice President, Human Resources, since December 1987; Manager, Stores Human Resources, January 1987 to December 1987; Manager, Organizational Research & Development, from 1985 to 1987; Department Manager, Organizational Research and Development, from 1984 to 1985; Manager, Organizational Research and Development, from 1982 to 1984; employee of the Company since 1977. (10) Vice President, International and Real Estate, since May 1, 1994; Vice President Real Estate and Licensed Operations, from August 1992 until May 1994; Vice President, Atlantic Region, 7-Eleven Stores, from 1990 to 1992; Vice President, Chesapeake Region, 7-Eleven 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. (11) Vice President since April 1992. Controller since December 1987; Assistant Corporate Controller from 1977 to 1987; employee of the Company since 1973. (12) Vice President and General Counsel since August 1992. Assistant General Counsel from January 1990 to July 1992; Associate General Counsel from January 1987 to December 1989; employee of the Company since 1980. (13) 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. FORMER OFFICERS. The names, ages, positions and offices formerly held with the registrant and the business experience for at least the five years preceding their departure from Southland of all persons who served as officers of the Company during 1994 but who no longer serve as such are shown below. Also shown for each such person is the period during which he or she served in his or her office, as reflected in the footnotes to the following chart. 19
NAME AGE AT 3/01/95 ------------------- -------------- John H. Rodgers (1) 51 Michael K. Roemer (2) 46 Cecilia S. Norwood (3) 41
(1) Executive Vice President from June 1993, Chief Administrative Officer from 1991 and Secretary of the Company from 1987 until February 1995; Senior Vice President from 1987 to June 1993; General Counsel from 1979 to 1992; Vice President from 1980 to 1987; employee of the Company from 1973 to 1995. (2) Senior Vice President, Merchandising, from June 1993 until February 1995; Vice President, Line Management, from August 1992 to June 1993. Vice President, Central Region, 7-Eleven Stores, from October 1990 to August 1992; Vice President, Northeast Region or Eastern Region, 7-Eleven Stores, from 1987 to 1990; Division Manager, Northeast Stores Region, from 1984 to 1987; Vice President, Retail Marketing, of Citgo Petroleum Corporation from 1983 to 1984; Marketing Manager, Eastern Stores Region, 7-Eleven Stores, from 1981 to 1983; employee of the Company from 1966 to 1995. (3) Vice President, Corporate Communications, from August 1991 until July 1994; Manager, Corporate Communications, from 1989 to 1991; employee of the Company from 1982 to 1994. 20 ITEM 2. PROPERTIES Under the Credit Agreement, virtually all the Company's assets, not previously subject to liens, are encumbered, including both tangible and intangible property rights, as well as stock in the Company's non-foreign subsidiaries, where such encumbrance is not otherwise prohibited. As of December 31, 1994, there were approximately 3,898 operating 7-Eleven stores, 182 non-operating stores and 13 other properties throughout the United States subject to mortgages (including both owned and leased properties). The lien against the Company's ownership or leasehold interest in any property will be released, with the consent of the Company's Senior Lenders, if the Company sells the property, the lease to the Company terminates or upon payment by the Company of the amounts due under the Credit Agreement. OPERATING AND FRANCHISING OF CONVENIENCE FOOD STORES 7-ELEVEN. At the end of 1994, the 7-Eleven stores group utilizes 93 offices in 21 states and Canada. The following table shows the location and number of the Company's 7-Eleven convenience stores (excluding stores under area licenses and of certain affiliates) in operation on December 31, 1994.
STATE/PROVINCE OPERATING 7-ELEVEN CONVENIENCE STORES OWNED LEASED(A) TOTAL U.S. Arizona 40 57 97 California 227 966 1,193 Colorado 60 184 244 Connecticut 7 32 39 Delaware 10 17 27 District of Columbia 4 14 18 Florida 240 207 447 Idaho 6 8 14 Illinois 50 91 141 Indiana 6 10 16 Kansas 7 11 18 Maryland 96 231 327 Massachusetts 10 24 34 Michigan 51 47 98 Missouri 35 52 87 Nevada 87 100 187 New Hampshire 1 7 8 New Jersey 74 129 203 New York(b) 43 179 222 North Carolina 2 5 7 Ohio 10 5 15 Oregon 38 99 137 Pennsylvania 59 110 169 Rhode Island 0 9 9 Texas 110 195 305 Utah 37 81 118 Virginia 194 428 622 Washington 62 191 253 West Virginia 11 14 25 Canada (b) Alberta 19 103 122 Manitoba 13 39 52 Ontario 30 84 114 British Columbia 21 115 136 Saskatchewan 14 23 37 ----- ----- ----- Total 1,674 3,867 5,541 ===== ===== =====
21 (a) Of the 7-Eleven convenience stores set forth in the foregoing table, 818 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 1994, the Company also leased one location under construction and 81 closed convenience stores or office locations from the Savings and Profit Sharing Plan. (b) The above numbers include 17 stores in Canada that operate under a management contract and five stores in New York operating under a new franchise agreement ("Genesis"), one of which has subsequently closed. The Company has no interest in the real property on which those stores are located. OTHER RETAIL. As shown in the following table, at year-end 1994, the Company operated 48 Quik Mart stores in Illinois, Indiana, Maryland, Massachusetts, Missouri, New Hampshire, Texas, Virginia and Wisconsin and 38 High's Dairy Stores located in Maryland, Virginia, Pennsylvania and West Virginia. As of December 31, 1994, the Company also operated three Super-7 gasoline stations in California, which are all owned by the Company. The following table shows the location and number of the Company's Quik Mart, High's and Super-7 locations in operation on December 31, 1994.
OPERATING OTHER RETAIL LOCATIONS STATE OWNED LEASED TOTAL California 3 0 3 Illinois 10 0 10 Indiana 3 1 4 Maryland 1 18 19 Massachusetts 2 0 2 Missouri 2 0 2 New Hampshire 2 1 3 Pennsylvania 0 5 5 Texas 3 0 3 Virginia 7 10 17 West Virginia 0 4 4 Wisconsin 17 0 17 -- -- -- Total 50 39 89 == == ==
OTHER INFORMATION ABOUT PROPERTIES AND LEASES. At December 31, 1994, there were four 7-Eleven stores in various stages of construction (on property leased by the Company), and the Company owned 19, and had leases on 9, undeveloped convenience store sites. In addition, the Company held 183 7-Eleven, High's and Quik Mart properties available for sale consisting of 100 unimproved parcels of land, 65 closed store locations and 18 parcels of excess property adjoining store locations. At December 31, 1994, 43 of these properties were under contract for sale. On December 31, 1994, the Company held leases on 504 closed store or other non-operating facilities, 78 of which were leased from the Savings and Profit Sharing Plan. Of these, 357 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. 22 OTHER PROPERTIES. The Company leases a 10,700-square-foot satellite commissary constructed in 1991 in Austin, Texas, for fresh deli-style food preparation and distribution. The Company also leases 102,000-square-feet of office/warehouse space and an additional 43,600-square-feet of land in Denver, Colorado, for a regional equipment warehouse and service center. The Company owns residual property from its distribution and food processing operations that were divested in late 1992 and plans to dispose of the following properties: (1) a five-acre tract of land in Delanco, New Jersey, on which is located a 19,000-square-foot branch distribution facility and (2) a 21.5-acre tract of land in Salt Lake City, Utah, on which is located a leased 77,000-square-foot food processing plant (which includes 6,930 square feet of office space). The Salt Lake City, Utah, location is currently subleased to McLane on an interim basis and the Company intends to dispose of the facility in 1995. The Company also owns a 287-acre tract in Great Meadows, New Jersey, with a closed chemical plant, a part of which is currently involved in environmental clean-up. (See "Current Environmental Projects and Proceedings," pages 15 through 17, 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 1995, subleases had been signed with third parties so that (including the space leased by Southland) the building is 97% 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 also holds tracts in Dallas, Texas, not included in Cityplace, totaling about 30 acres. ITEM 3. LEGAL PROCEEDINGS 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. The Bankruptcy Court issued its opinion, on March 17, 1992, awarding approximately $12.2 million in additional interest to the Credit Agreement Banks. 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 1994. However, during 1994 and in connection with the amendment of the Credit Agreement, the Company and the Old Senior Lenders negotiated an out-of-court arrangement whereby a letter of credit was issued for the account of the Company to provide to the Old Senior Lenders assurance of payment of such additional interest expense if the Old Senior Lenders are successful in the appeal. 23 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 Owners for Fair Franchising, et, al. v. The Southland Corporation, et al., Case No. 722272-6, in the Superior Court for Alameda County, California. Also named as defendants in the Complaint are Southland's majority owners and approximately 16 vendors who supply goods to 7-Eleven franchisees in the State of California. The named plaintiffs purportedly represent all current 7-Eleven franchisees in the State of California and all former 7-Eleven franchisees in the State of California for the past six years. 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 stores. Discovery in this matter is proceeding. The Company intends to contest the certification of a class in this litigation and to defend vigorously against all of the plaintiffs' allegations. On August 17, 1990, the Superior Court for Alameda County, California approved the settlement of a class action suit filed against the Company. The suit was consolidated under the title Market Franchise Cases (Jud. Council Dkt. No. 387). The plaintiff class consisted of all persons who owned 7-Eleven franchises in California at any time from May 24, 1973, to June 15, 1990. To date, the Company has made settlement payments and credits (including attorneys' fees and litigation expenses awarded to class counsel) totalling $16.5 million. Class members' claims totalling less than $50,000 remain to be resolved. On June 11, 1993, the Company filed a lawsuit in the United States District Court for the Northern District of Texas, Dallas Division, against Occidental Petroleum Corporation and OXY Oil and Gas USA, Inc. ("OXY"), seeking damages pursuant to contractual indemnification provisions for present and future expenses that have been incurred (or are anticipated) by the Company associated with pre-existing environmental conditions at Quik Mart locations which the Company acquired from OXY in 1983. The lawsuit is still in the discovery phase and the Company is diligently prosecuting its claim. In the second quarter of 1994, Southland was served with a lawsuit (which was subsequently amended in July 1994) entitled Emil V. Sparano, et al., Plaintiffs, v. The Southland Corporation, a Texas corporation, IYG Holding Company, a Delaware corporation, Ito-Yokado, Ltd., a foreign corporation, Seven-Eleven Japan Co., Ltd., a foreign corporation, John P. Thompson, Jere W. Thompson, Joe C. (a/k/a "Jodie") Thompson, Jr., Clark J. Matthews, II, Walton Grayson, III, John H. Rodgers, and Frank Gangi, Defendants, Case No. 94 C 2098, in the U.S. District Court for the Northern District of Illinois. The plaintiffs, several current or former 7-Eleven franchisees, seek to represent a class, purportedly consisting of all persons or entities who owned one or more 7-Eleven convenience store franchises since 1987. Of the named defendants, Clark J. Matthews, II is a current officer and director of the Company; John H. Rodgers, Walton Grayson, III and Frank Gangi are former officers of the Company, and Mr. Grayson is also a former director; John P. Thompson and Jere W. Thompson have been directors both prior to, and at all times since, 1987; Joe C. Thompson is a former director of the Company (hereafter John P. Thompson, Jere W. Thompson and Joe C. Thompson, Jr., collectively, the "Thompsons"); IYG Holding Company holds approximately 64% of the shares of the Company and is a jointly owned subsidiary of Ito-Yokado Co., Ltd. and Seven-Eleven Japan Co., Ltd. 24 The second amended complaint alleges that, starting with the leveraged buyout of Southland in 1987, and continuing until the present time, Southland has breached its contractual obligations to 7-Eleven franchisees under the 7- Eleven Franchise Agreements by failing to spend adequate sums of money for advertising and other services and for maintaining and remodeling 7- Eleven stores and the equipment therein. In addition to alleging breach of contract, the second amended complaint includes claims against Southland for alleged breach of fiduciary duty, breach of an alleged covenant of good faith and fair dealing, fraudulent conveyance of corporate assets, fraudulent misrepresentations, conversion and unjust enrichment. Additional claims have been asserted against the individual defendants for alleged breach of fiduciary duty and breach of duties of competence, due care and loyalty. The second amended complaint requests damages, interest, costs and attorneys' fees "in excess of $1 billion." Southland has filed a motion to dismiss all claims asserted against it, except the breach of contract claim. The individual defendants and the foreign companies have filed motions to dismiss for lack of personal jurisdiction and for failure to state any claims upon which relief could be granted. None of these motions have been decided by the court, and the court has not yet decided whether the case will be permitted to proceed as a class action. Southland intends to contest plaintiffs' effort to prosecute the lawsuit as a class action, and it also intends to defend vigorously all of the claims on the merits. Southland believes that it has meritorious defenses to each of the claims. Information concerning other legal proceedings is incorporated herein from "Environmental Matters," pages 15 through 17, above. 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 1994. 25 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 3, 1995, there were 3,060 record holders of the Common Stock. The Company's Common Stock is traded on the NASDAQ Small-Cap Market.
PRICE RANGE QUARTERS BID ASK 1993 (A) HIGH LOW HIGH LOW First $3 1/2 $2 31/32 $3 9/16 $3 1/16 Second 5 1/2 3 1/2 5 19/32 3 9/16 Third 6 1/16 4 1/4 6 1/8 4 3/8 Fourth 7 5/8 5 5/16 7 11/16 5 3/8 PRICE RANGE QUARTERS BID ASK 1994 (A) HIGH LOW HIGH LOW First $6 11/16 $3 13/16 $6 3/4 $3 15/16 Second 6 3/16 3 7/8 6 1/4 3 15/16 Third 6 9/32 4 1/2 6 3/8 4 5/8 Fourth 5 3/4 4 1/4 5 13/16 4 3/8
(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. 26 ITEM 6. SELECTED FINANCIAL DATA THE SOUTHLAND CORPORATION AND SUBSIDIARIES
Years Ended December 31 -------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ------------ ------------ ------------ ----------- ----------- (Dollars in Millions, Except Per-Share Data) Net sales ....................................... $6,684.5 $6,744.3 $7,425.8 $8,009.5 $8,347.7 Other income .................................... 75.3 69.9 73.6 73.8 60.1 Total revenues .................................. 6,759.8 6,814.2 7,499.4 8,083.3 8,407.8 LIFO charge (credit) ............................ 3.0 (8.7) 1.5 (7.2) 27.9 Depreciation and amortization ................... 162.7 154.4 180.3 200.1 227.6 Interest expense ................................ 108.6 (a) 94.6 (a) 123.6 (a) 189.3 (a) 459.5 Earnings (loss) before income taxes, extraordinary items and cumulative effect of accounting changes ......................... 73.5 (2.6) (119.9)(d) (66.3) (430.0)(f) Income taxes (benefit) .......................... (18.5)(b) 8.7 11.5 8.0 (128.5) Earnings (loss) before extraordinary items and cumulative effect of accounting changes ... 92.0 (11.3) (131.4) (74.3) (301.5) Net earnings (loss) ............................. 92.0 71.2 (c) (131.4) 82.5 (e) (276.6)(g) Earnings (loss) per common share (primary and fully diluted): Before extraordinary items and cumulative effect of accounting changes ................................. 0.22 (0.03) (0.32) (0.22) (15.14) Net earnings (loss) applicable to common shares ........................... 0.22 0.17 (0.32) 0.24 (13.93) Total assets .................................... 2,000.6 1,990.0 2,039.7 2,607.7 2,813.6 Long-term debt, including current portion ....... 2,351.2 (a) 2,419.9 (a) 2,560.4 (a) 3,037.1 (a) 3,705.2 Redeemable preferred stock ...................... - - - - 148.5 ------------------------ (a)The Notes and Debentures are accounted for in accordance with SFAS No. 15 as explained in Note 9 to the Consolidated Financial Statements. (b)Income taxes (benefit) includes a $30,000,000 tax benefit from recognition of a portion of the Company's net deferred tax assets as explained in Note 15 to the Consolidated Financial Statements. (c)Net earnings include an extraordinary gain of $98,968,000 on debt redemption and a charge for the cumulative effect of an accounting change for postemployment benefits of $16,537,000 as explained in Notes 9 and 13 to the Consolidated Financial Statements, respectively. (d)Loss before income taxes. extraordinary items and cumulative effect of accounting changes includes a $45,000,000 loss on the sale and closing of the distribution and food centers as explained in Note 6 to the Consolidated Financial Statements. (e)Net earnings include an extraordinary gain on debt restructuring of $156,824,000 . (f)Loss before income taxes, extraordinary items and cumulative effect of accounting changes reflects a loss of $41,000,000 on Cityplace assets sold. (g)Net loss includes an extraordinary tax benefit from utilization of net operating loss carryforwards of $52,040,000 and a charge for the cumulative effect of an accounting change for postretirement benefits of $27,163,000.
27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SUMMARY OF RESULTS OF OPERATIONS The Company's net earnings for 1994 were $92.0 million, compared to net earnings of $71.2 million in 1993 and a net loss of $131.4 million in 1992. The Company showed marked improvement in its earnings before income taxes, extraordinary gain and cumulative effect of accounting change as reflected below:
Years Ended December 31 ------------------------------------ 1994 1993 1992 ---- ---- ---- (Dollars in Millions, Except Per-Share Data) Earnings (loss) before income taxes, extraordinary gain and cumulative effect of accounting change $ 73.5 $ (2.6) $ (119.9) Income tax (expense) benefit 18.5 (8.7) (11.5) Extraordinary gain from redemption of the Company's 12% Senior Notes (refinanced in August 1993) 99.0 Cumulative effect of accounting change for postemployment benefits (16.5) --------- --------- ---------- Net earnings (loss) $ 92.0 $ 71.2 $ (131.4) ========= ========= ========== Earnings (loss) per common share (primary and fully diluted) $ .22 $ .17 $ (.32) ========= ========= ==========
Each years' results included a number of special or unusual items which included among other things:
1994 1993 1992 ---- ---- ---- (Dollars in Millions) Loss for store closings and dispositions of properties $ (3.7) $ (48.2) $ (44.3) Severance and related costs (7.4) (7.2) (17.5) Deferred income tax benefit 30.0 Disposition of Citijet, a fixed-base operation at Dallas Love Field Airport (10.8) Loss on the sale and closing of the Company's distribution and food processing centers (45.0)
In addition to the special and unusual items noted above, the Company's improvement in 1994 earnings was primarily due to savings in selling, general and administrative expenses, offset by lower merchandise gross profit due to fewer stores. Although merchandise gross profit declined in total, merchandise sales and gross profits per store were favorable in 1994 compared to 1993 and 1992 and have been improving each quarter during 1994 over 1993. (EXCEPT WHERE NOTED, ALL PER-STORE NUMBERS BELOW REFER TO AN AVERAGE OF ALL STORES RATHER THAN ONLY STORES OPEN MORE THAN ONE YEAR) 28 SALES The Company recorded net sales of $6.68 billion for the year ended December 31, 1994, compared to sales of $6.74 billion in 1993 and $7.43 billion in 1992. The 1994 sales decline is primarily the result of fewer convenience stores due to closures (see Management Strategies). Sales also declined in 1993 and 1992, primarily due to fewer stores, lower same-store (stores open more than one year) merchandise sales and the September 1992 disposition of the Company's distribution and food center assets (see Liquidity and Capital Resources-Other). Merchandise sales for 1994 and 1993 were also affected by the deflationary effect of cigarette price reductions (on certain premium brands) associated with manufacturers' cost reductions starting in August 1993. Merchandise sales increases or (decreases) as compared to the prior year and inflation information is detailed below:
Years Ended December 31 --------------------------------- 1994 1993 1992 ---- ---- ---- Same-store sales 2.0 % (2.7)% (3.9)% Same-store real growth; excluding inflation/(deflation) 2.8 % (4.7)% (5.6)% 7-Eleven inflation/(deflation) (.7)% 2.2 % 1.9 %
Until 1994, same-store merchandise sales real growth (adjusted to exclude inflation) had declined since early 1989 primarily due to competitive pressures. This negative trend began to reverse in 1993, and in 1994 the Company achieved its first full year of same-store real growth in merchandise sales since 1988. The 1994 results also reflect the first four consecutive quarters of positive same-store merchandise sales growth (including the effects of deflation or inflation) since the third quarter of 1990. The Company believes the improvement is a result of its new merchandising processes, everyday-fair-pricing and store-remodeling strategies (see Management Strategies). Gasoline sales dollars per store increased 8.7%, 9.1% and 6.5% in 1994, 1993 and 1992, respectively. This increase is primarily due to per store gallonage improvement of 7.8% in 1994, 11.1% in 1993 and 6.3% in 1992. This continuing improvement reflects favorable market conditions, as well as the impact of several successful business strategies: ongoing remodeling to enhance the appeal and convenience of the Company's gas facilities; promoting the high quality of CITGO-brand gasoline; the closing of low-volume locations; and managing gasoline prices, inventories and product mix on a by- store basis. SOUTHLAND CONVENIENCE STORE SALES BY CATEGORY
(Percentages are estimates based on purchases) PRODUCT CATEGORIES 1994 ------------------ ------ Gasoline 24.2% Tobacco Products 17.2 Beer/Wine 9.4 Soft Drinks (includes Slurpee -R-) 8.8 Groceries 9.6 Food Service (includes coffee) 8.5 Non-Foods 6.2 Dairy Products 4.6 Candy 3.8 Baked Goods 3.6 Customer Services (includes lottery gross profits) 2.4 Health/Beauty Aids 1.7 ------ Total 100.0% ======
29 MANAGEMENT STRATEGIES Since 1992, the Company has been committed to several key strategies that it believes, over the long term, will further differentiate it from its competitors and allow 7-Eleven to maintain its position as the premier convenience store chain in the industry. These strategies include: the extensive remodeling of its store base; a customer-driven approach to product selection; an everyday-fair-pricing policy on all items; the daily delivery of fresh perishable items; the introduction of quality, ready-to-eat fresh foods; and the implementation of a retail automation system. The Company has been devoting the majority of its capital resources over the last couple of years toward the most extensive remodeling of its existing store base ever undertaken. In conjunction with the remodeling program, the Company has been pruning its store base as it identifies stores, which can be closed or disposed of, that are not expected to achieve an acceptable level of profitability in the future or meet minimum image standards. As a result, the Company closed 184 stores in 1994, 401 in 1993 and 358 in 1992. However, as the Company approaches completion of the remodeling program, it plans to strengthen its position in existing markets by expanding its store base. The planning process for this new store development is underway and new store openings should outpace store closures by 1997. The customer-driven approach to merchandising, which was adopted by the Company in 1992, continues to focus on providing the customer an expanded selection of quality products at a good value. This is being accomplished by prioritizing 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, which has contributed to improved sales and profits, will be an ongoing part of managing our business in order to satisfy the ever-changing preferences of our customers. The Company's everyday-fair-pricing strategy has provided consistent prices on all items by reducing its reliance on discounting of some products and lowering prices on others since its inception in 1992. Going forward, the Company will continue to migrate toward lower retail prices as the Company achieves decreased product costs through strategic alliances with its 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, fresh-food commissaries and bakery facilities in most 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 and improving in-stock conditions from daily deliveries, the combined distribution is also intended to lower product costs in part from vendor's savings on direct store deliveries. The Company expects the freshness and flexibility of the products from these operations to improve sales and gross profits. The implementation of a retail automation system was begun by the Company in 1994. The initial phase involves installing in-store processors, which will automate accounting and other store-level tasks. After future phases are complete, the system will provide each store and its suppliers and distributors with information to make better decisions in anticipating customer 30 needs. The in-store processors currently being installed will meet the demands of future phases of the automation process. GROSS PROFITS Consolidated gross profits were $1.54 billion for 1994, $32.9 million below 1993, which was $32.4 million below 1992, reflecting lower merchandise gross profits because of fewer stores. Even though total merchandise gross profits have declined, merchandise gross profit per store has consistently improved over prior year results for the last eight quarters. Also, the fourth quarter of 1994 showed growth in total merchandise gross profits over prior year results, for the first time since the first quarter of 1990. The following chart highlights the percent change in merchandise gross profit per store and the components thereof:
Years Ended December 31 -------------------------------- Increase/(decrease) from prior year 1994 1993 1992 ---- ---- ---- Average per store gross profit dollar change 2.1% 2.2% (.3)% Margin percentage point change (.38) 1.16 .75 Same-store sales growth 2.0% (2.7)% (3.9)%
Merchandise gross profit margins were greatly affected, beginning in 1992, by the implementation of the everyday-fair-price strategy, which reduced discounting and promotional activities, increasing the margins in 1992 and 1993 (see Management Strategies). The margins also benefited from lower cigarette costs (beginning in August 1993) and lower costs of products under the Company's supply agreement with McLane (see Liquidity and Capital Resources - Other). In 1994, with the reduction of discounting in place, the Company tested lower prices in certain parts of the country as part of a more aggressive everyday-fair-price strategy. These lower prices, combined with increased costs for disposal of slow moving merchandise was primarily responsible for the decrease in 1994 merchandise margins. Gasoline gross profits per store were 12.8%, 29.8% and 28.0% higher, compared to the preceding year, for 1994, 1993 and 1992, respectively. Gross profits improved due to the combination of an increase in gallons sold and higher margins. Gross profit margin on gasoline sales was 14.5 cents per gallon for 1994, an increase of .6 cents compared to 1993, which was 2.0 cents higher than 1992. The increase in margins is attributed to favorable market conditions, the positive impact of capital expenditure programs and the continued improvement in by-store management of gasoline merchandising strategies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
Years Ended December 31 --------------------------------------- 1994 1993 1992 ---- ---- ---- (Dollars in Millions) Total selling, general and administrative expenses $ 1,422.3 $ 1,538.7 $ 1,615.8 Ratio of reported SG&A to sales 21.3% 22.8% 21.8% (Decrease)/increase in reported SG&A compared to prior year $ (116.4) $ (77.1) $ 22.7 Decrease in adjusted SG&A compared to prior year* $ (61.3) $ (81.5) $ (24.7)
* ADJUSTED TO EXCLUDE SEVERANCE AND RELATED COSTS AND THE LOSS FOR STORE CLOSINGS AND DISPOSITIONS OF PROPERTIES, INCLUDING CITIJET (SEE SUMMARY OF RESULTS OF OPERATIONS). 31 The majority of the decrease in SG&A expense, as adjusted, resulted from cost savings realized from reductions in force that began late in 1992 and continued through 1994, combined with the effect of having fewer stores (see Management Strategies). Also, in the fourth quarter, the Company included 1994 year-to-date amounts of certain expenses, totaling approximately $20 million (approximately $15 million through September 30th) in selling, general and administrative expenses rather than in cost of goods sold where they had been included in prior periods. In 1993 and 1992, after reviewing the functions necessary to enable its stores to respond faster, more creatively and more cost efficiently to rapidly changing customer needs and preferences, the Company implemented certain reorganization plans. During the third quarter of 1994, the Company began a similar review that was completed in December. The Company anticipates that the latest review will result in approximately $18 million in annual savings beginning in 1995. The resultant plan will both realign and reduce personnel and will require changes in the location and size of office facilities. Approximately 335 employees throughout the Company will be terminated during 1995. In addition, one office facility will be sold at a loss and space at several leased facilities will be terminated or subleased. The $7.4 million cost of the plan was accrued in SG&A expense, and is comprised of $5.7 million for severance benefits and $1.7 million for changes in office facilities. Management intends for the review process to be ongoing, but currently can not predict what further recommendations will be made nor the timing of their implementation. INTEREST EXPENSE The Company's total interest expense in 1994 increased $14.0 million over 1993, primarily due to the refinancing of the 12% Senior Notes with working capital and bank debt in August 1993. Unlike the interest on the bank debt, interest on the 12% Senior Notes was subject to SFAS No. 15 treatment with interest payments recorded as a reduction of principal rather than interest expense (see Note 9 of "Notes to Consolidated Financial Statements"). Interest expense in 1993 and 1992 declined $29.1 million and $65.6 million as compared to prior years, respectively. The decline in interest expense in 1993 and 1992 was primarily due to declining interest rates on floating rate debt and lower term loan balances, combined with greater use of commercial paper in 1993, which has lower interest rates than other debt instruments. On December 21, 1994 the Company refinanced its bank debt under the senior bank credit agreement ("Credit Agreement") and obtained, among other things, a reduction in its borrowing spreads. As a result of this refinancing, the Company expects to save approximately $7 million in interest expense in 1995 over what it would have incurred under the previous terms of the facility. In February 1995, the Company extended the repayment of the debt relating to its headquarters facilities (Cityplace) at a lower interest rate, which will result in approximately $2.8 million of cash interest savings in 1995 (see Liquidity and Capital Resources - Financing Activities). The weighted average interest rate on the Company's floating rate debt was 5.51% in 1994, 4.52% in 1993 and 6.56% in 1992. Approximately 31% of the Company's debt contains floating rates that will be unfavorably impacted by rising interest rates. However, overall interest expense in 1995 is expected to decline when compared to 1994, as a result of factors noted above. 32 INCOME TAXES The Company recorded a tax benefit of $18.5 million in 1994, compared to a tax provision of $8.7 million and $11.5 million in 1993 and 1992, respectively. The 1994 tax benefit is primarily due to the realization of a portion of the Company's net deferred tax asset. Based on a one-year projection of taxable income, the Company has recognized a portion of its net deferred tax asset through a $30.0 million reduction in the valuation allowance with $13.9 million recorded in other current assets and the remainder in other assets. Taxable income for 1995 was projected by utilizing steady state assumptions defined as only inflationary increases in sales and no increase in gross profit margins. If the Company's current trend of profitability continues, then additional deferred tax assets of up to approximately $175 million could be recognized. 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 $150 million from its revolving credit facility. The Company believes that its operating activities coupled with its available short-term working capital facilities will provide sufficient liquidity for it to fund its current operating and capital expenditure programs and service debt requirements. FINANCING ACTIVITIES In December 1994, the Company amended its Credit Agreement, refinancing its old term loans ($281.7 million) and revolving credit facility, with a new term loan ("Term Loan") and new revolving credit facility. The new revolving credit facility was extended through December 31, 1999 and contains both a revolving loan ("Revolver") and letter of credit subfacility; these two facilities each have a maximum limit of $150 million. The Term Loan ($300 million) has scheduled quarterly repayments of $18.75 million commencing March 31, 1996 through December 31, 1999. Interest on the Revolver and Term Loan is generally 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 the Eurodollar rate plus .975% per year (see Results of Operations - Interest Expense). The amended Credit Agreement has eliminated certain financial and operating covenants required under the old agreement. These include, among other things, the attainment of certain levels of earnings before interest, taxes, depreciation and amortization ("EBITDA") and the ratio of senior indebtedness to subordinated indebtedness. Although certain covenants and the required levels have been modified under the amended Credit Agreement, they continue to require ongoing improvement in the Company's financial condition. For the period ended December 31, 1994, the Company was in compliance with all of the covenants required under the Credit Agreement as amended. The Company complied with the principal financial and operating covenants, which are calculated over the latest 12-month period, as follows: 33
Requirements: --------------------------- Covenants Actuals Minimum Maximum --------- ----------- ----------- ----------- Interest coverage* 2.61 to 1.0 2.35 to 1.0 Fixed charge coverage .82 to 1.0 .55 to 1.0 Senior indebtedness to EBITDA 4.35 to 1.0 4.85 to 1.0
* INCLUDES EFFECTS OF THE SFAS NO. 15 INTEREST PAYMENTS. In 1994, the Company paid $400.6 million of debt principal of which $281.7 million related to the amendment of the Credit Agreement. Other principal reductions during the course of the year were $118.9 million of which $83.7 million was for secured indebtedness ($47.3 million on the old term loans) and $35.2 million was SFAS No. 15 interest. Outstanding balances on December 31, 1994 for the commercial paper, the Revolver and the Term Loan were $391.3 million, $50.0 million and $300.0 million, respectively. As of December 31, 1994, outstanding letters of credit related to the Credit Agreement totaled $119.9 million. As a result of an agreement reached in conjunction with the Company's bankruptcy proceedings in 1990, on February 15, 1995, the 7-7/8% Cityplace notes, issued by Cityplace Center East Corporation ("CCEC"), a wholly owned subsidiary of the Company, were repaid under a drawing of a letter of credit issued by The Sanwa Bank, Ltd. Under such agreement, the term of maturity of the indebtedness of CCEC resulting from such draw has been extended by ten years to March 1, 2005. New terms include monthly payments of principal and interest over the ten year period, based upon a 25-year amortization at 7-1/2%, with the remaining principal due upon maturity. CASH FROM OPERATING ACTIVITIES Net cash provided by operating activities was $271.6 million for 1994 compared to $232.1 million in 1993 and $172.6 million in 1992. In 1994, the majority of cash was provided by operations, combined with a $24.3 million decrease in other assets primarily due to a reduction in cash collateral required for payment of anticipated insurance claims (see Results of Operations). CAPITAL EXPENDITURES During 1994, net cash used in investing activities consisted primarily of payments of $171.6 million for property, plant and equipment, the majority of which was used for remodeling stores, upgrading retail gasoline facilities, replacing equipment and complying with environmental regulations. The Company expects 1995 capital expenditures to be approximately $200 million, primarily to complete remodels started in 1994 and to remodel about 1,400 additional stores. In addition, the Company is expected to use approximately 13% of 1995's capital expenditures on the retail automation project (see Management Strategies). Through December 31, 1994, approximately 2,700 stores had been remodeled. As in 1994, the 1995 average-per-store capital expenditures and associated upfront expenses will be less than 1993 levels and will focus on the features that are most noticeable to customers and have the most immediate and positive impact on store performance, such as lighting and security, food service equipment, necessary maintenance and consistent image. Reducing the scope of the remodels has also virtually eliminated the need to close stores during construction, which negatively affected merchandise sales at stores remodeled in 1993. 34 CAPITAL EXPENDITURES - GASOLINE EQUIPMENT The Company anticipates that it will spend approximately $14 million in 1995 on capital improvements required to comply with environmental regulations relating to below-ground gasoline storage tank systems as well as above-ground vapor recovery equipment at store locations and approximately an additional $25 million on such capital improvements from 1996 through 1998. ENVIRONMENTAL COMPLIANCE - STORES The Company accrues for the anticipated future costs of environmental clean-up activities (consisting of contamination assessment and remediation) relating to detected releases of regulated substances at its existing and previously operated sites at which gasoline has been sold (including store sites and other facilities that have been sold by the Company). At December 31, 1994, the Company has an accrued liability of $63.4 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 analysis of such factors as the age of the tanks, location of tank sites and experience with contractors who perform contamination assessment and remedial work. The Company is eligible to receive reimbursement for a large portion of these costs under state reimbursement programs and has recorded a gross receivable of $76.1 million (a net receivable of $57.2 million after an allowance of $18.9 million) for the estimated probable state reimbursement of paid and accrued assessment and remediation expenses. The Company reduced the estimated net environmental cost reimbursements at the end of 1994 by approximately $6.0 million as a result of completing a review of state reimbursement programs. There is no assurance of the timing of the receipt of state reimbursement funds; however, based on its experience, the Company expects to receive state reimbursement funds within one to four years after payment of eligible assessment and remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. The estimated future assessment and remediation expenditures and related state reimbursement amounts could change as governmental requirements and state reimbursement programs change in future years. ENVIRONMENTAL COMPLIANCE - CHEMICAL PLANT 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 accrued a liability for this purpose. As required, the Company 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 received initial comments from the State, the clean-up plan has not been finalized. The Company has recorded liabilities representing its best estimates of the clean-up costs of $39.3 million and $38.9 million at December 31, 1994 and 1993, respectively. Of this amount, $34.2 million and $33.8 million 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 entered into a settlement agreement with a large chemical company that formerly owned the facility. Under the settlement agreement, the former owner agreed to pay a substantial portion of the clean-up costs 35 described above. The Company has recorded a receivable of $23.0 million at December 31, 1994, representing the former owner's portion of the clean-up costs. None of the amounts related to environmental liabilities, for the stores or the chemical plant, have been discounted. OTHER In November 1992, the McLane Company, Inc. ("McLane"), acquired certain of the Company's distribution and food center assets. In addition, Southland ceased operations in December 1992 at its distribution and food centers in Orlando, Florida and Tyler, Texas and in April 1993 at Champaign, Illinois. The Company disposed of its facility in Orlando in November 1993, its facility in Tyler in March 1994 and the Champaign facility in December 1994. These transactions did not have a material impact on 1994 or 1993 earnings, since they were included in the $45.0 million loss recognized in 1992 resulting from the sale to McLane and related plant closings. Since the transaction, the Company has benefited from lower cost of products purchased under a supply agreement with McLane. In addition to the $141.8 million in gross proceeds received from McLane in connection with the acquisition of the Company's distribution and food processing assets in 1992, $44.9 million of cash was received in 1993, primarily from the sale of inventories to McLane and $6.3 million was received in 1994 related to the sale of the Tyler facility. In 1993, the Company disposed of its last non-convenience retailing business, the Citijet fixed-base operation at Dallas Love Field Airport, and recognized a loss of $10.8 million on the transaction. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 37 THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Dollars in Thousands, Except Per-Share Data) -------------------------------------------------------------------------------
1994 1993 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 59,288 $ 13,486 Accounts and notes receivable 102,230 90,934 Inventories 101,468 109,363 Other current assets 40,411 31,954 ------------- ------------- Total current assets 303,397 245,737 PROPERTY, PLANT AND EQUIPMENT 1,314,499 1,328,793 OTHER ASSETS 382,698 415,422 ------------- ------------- $ 2,000,594 $ 1,989,952 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Trade accounts payable $ 203,315 $ 196,026 Accrued expenses and other liabilities 316,183 327,570 Commercial paper 41,322 41,220 Long-term debt due within one year 123,989 149,503 ------------- ------------- Total current liabilities 684,809 714,319 DEFERRED CREDITS AND OTHER LIABILITIES 245,807 253,626 LONG-TERM DEBT 2,227,209 2,270,357 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT): Common stock, $.0001 par value; 1,000,000,000 shares authorized; 409,922,935 shares issued and outstanding 41 41 Additional capital 625,574 625,574 Accumulated deficit (1,782,846) (1,873,965) ------------- ------------- Total shareholders' equity (deficit) (1,157,231) (1,248,350) ------------- ------------- $ 2,000,594 $ 1,989,952 ============= ============= See notes to consolidated financial statements. 38
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (Dollars in Thousands, Except Per-Share Data) -------------------------------------------------------------------------------------------------------------
1994 1993 1992 ---- ---- ---- REVENUES: Net sales (including $992,970, $962,955 and $986,962 in excise taxes) $ 6,684,495 $ 6,744,333 $ 7,425,844 Other income 75,312 69,902 73,570 ------------ ------------ ----------- 6,759,807 6,814,235 7,499,414 COST OF GOODS SOLD AND EXPENSES: Cost of goods sold 5,144,916 5,171,806 5,820,817 Selling, general and administrative expenses 1,422,311 1,538,719 1,615,799 Loss on sale and closing of distribution and food centers - - 45,000 Interest expense 108,588 94,559 123,647 Contributions to Employees' Savings and Profit Sharing Plan 10,496 11,731 14,100 ------------ ------------ ----------- 6,686,311 6,816,815 7,619,363 ------------ ------------ ----------- EARNINGS (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 73,496 (2,580) (119,949) INCOME TAXES (BENEFIT) (18,500) 8,700 11,500 ------------ ------------ ----------- EARNINGS (LOSS) BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 91,996 (11,280) (131,449) EXTRAORDINARY GAIN ON DEBT REDEMPTION - 98,968 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR POSTEMPLOYMENT BENEFITS - (16,537) - ------------ ------------ ----------- NET EARNINGS (LOSS) $ 91,996 $ 71,151 $ (131,449) ============ ============ =========== EARNINGS (LOSS) PER COMMON SHARE (PRIMARY AND FULLY DILUTED): Before extraordinary gain and cumulative effect of accounting change $.22 $(.03) $(.32) Extraordinary gain - .24 - Cumulative effect of accounting change - (.04) - ----- ------ ------ Net earnings (loss) $.22 $ .17 $(.32) ===== ====== ====== See notes to consolidated financial statements. 39
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (Dollars in Thousands, Except Share Amounts) --------------------------------------------------------------------------------------------------------------------
COMMON STOCK TOTAL ------------------- ADDITIONAL ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT) -------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1992 410,022,481 $ 41 $ 599,588 $ (1,809,912) $ (1,210,283) Net loss - - - (131,449) (131,449) Adjustment for redeemable common stock purchase warrants - - 26,136 - 26,136 Foreign currency translation adjustments - - - (3,163) (3,163) -------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1992 410,022,481 41 625,724 (1,944,524) (1,318,759) Net earnings - - - 71,151 71,151 Cancellation of shares (99,546) - (150) 112 (38) Foreign currency translation adjustments - - - (704) (704) -------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 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) =========== ==== =========== ============= ============== See notes to consolidated financial statements. 40
THE SOUTHLAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (Dollars in Thousands) ------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 91,996 $ 71,151 $ (131,449) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Extraordinary gain on debt redemption - (98,968) - Cumulative effect of accounting change for postemployment benefits - 16,537 - Depreciation and amortization of property, plant and equipment 143,670 134,920 160,502 Other amortization 19,026 19,430 19,778 Deferred income taxes (30,000) - - Noncash interest expense 11,384 8,497 12,429 Other noncash expense 614 3,393 4,874 Net loss on property, plant and equipment 274 48,017 46,064 Loss on sale and closing of distribution and food centers - - 45,000 (Increase) decrease in accounts and notes receivable (3,066) 24,937 5,190 Decrease in inventories 7,895 16,347 12,252 Decrease in other assets 24,273 3,344 6,052 Increase (decrease) in trade accounts payable and other liabilities 5,501 (15,528) (8,102) ------------ ------------ ------------ Net cash provided by operating activities 271,567 232,077 172,590 CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchase of property, plant and equipment (171,636) (195,146) (88,575) Proceeds from sale of property, plant and equipment 15,867 22,809 15,827 Net currency exchange principal transactions (5,133) (8,894) (6,635) Payments on notes from sales of real estate 2,105 1,152 1,317 Cash received from other investments 266 3,830 822 Cash utilized by distribution and food center assets (2,790) (17,739) (54,020) Proceeds from sale of distribution and food center assets 6,305 44,889 141,793 ------------ ------------ ------------ Net cash (used in) provided by investing activities (155,016) (149,099) 10,529 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from commercial paper and revolving credit facilities 4,451,774 4,111,500 2,007,239 Payments under commercial paper and revolving credit facilities (4,418,693) (3,927,234) (1,785,717) Proceeds from issuance of long-term debt 300,000 150,000 - Principal payments under long-term debt agreements (400,580) (403,125) (624,527) Debt issuance costs (3,250) (2,437) (5,329) ------------ ------------ ------------ Net cash used in financing activities (70,749) (71,296) (408,334) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 45,802 11,682 (225,215) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,486 1,804 227,019 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 59,288 $ 13,486 $ 1,804 ============ ============= =========== RELATED DISCLOSURES FOR CASH FLOW REPORTING: Interest paid, excluding SFAS No.15 Interest $ (98,157) $ (87,631) $ (116,931) ============ ============= ============ Net income taxes (paid) refunded $ (7,810) $ (7,969) $ 3,323 ============ ============= ============ See notes to consolidated financial statements. 41
THE SOUTHLAND CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 ------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The Southland Corporation and subsidiaries ("the Company") is owned approximately 64% 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 amounts have been reclassified to conform to current-year presentation. The Company's net sales are comprised of sales of products 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 $2,820,685,000, $2,810,270,000 and $2,931,494,000 from 2,962, 2,998 and 3,011 stores for the years ended December 31, 1994, 1993 and 1992, 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, training seminars and preparation of financial statements. The gross profit earned by the Company's franchisees of $517,955,000, $530,436,000 and $539,835,000 for the years ended December 31, 1994, 1993 and 1992, respectively, are included in the Consolidated Statements of Operations as selling, general and administrative expenses. 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 comprised of area license royalties and interest income. The area license royalties include amounts from area license agreements with SEJ of approximately 42 $42,000,000, $39,000,000 and $37,000,000 for the years ended December 31, 1994, 1993 and 1992, respectively. COST OF GOODS SOLD - Cost of goods sold includes buying and occupancy expenses. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include temporary cash investments of $3,028,000 and $11,345,000 at December 31, 1994 and 1993, respectively, stated at cost, which approximates market. The Company considers all highly liquid investment instruments purchased with maturities of three months or less to be cash equivalents. 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, provision is made on a current basis if anticipated expenses are in excess of expected sublease rental income. The recorded value of assets for certain stores with marginal financial results is periodically evaluated, and, if necessary, the carrying value of the asset is adjusted. BUSINESS SEGMENT - The Company operates in a single business segment - the operating and franchising of convenience food stores, primarily under the 7-Eleven name. 43 2. ACCOUNTS AND NOTES RECEIVABLE
December 31 ---------------------- 1994 1993 ---- ---- (Dollars in Thousands) Notes receivable (net of long-term portion of $15,309 and $18,310) $ 5,773 $ 3,030 Trade accounts receivable 42,856 48,609 Franchisee accounts receivable 47,682 38,823 Environmental cost reimbursements (net of long-term portion of $67,546 and $72,038) - see Note 14 12,709 8,294 ---------- --------- 109,020 98,756 Allowance for doubtful accounts (6,790) (7,822) ---------- --------- $ 102,230 $ 90,934 ========== =========
3. INVENTORIES Inventories stated on the LIFO basis that are included in inventories in the accompanying Consolidated Balance Sheets were $63,340,000 and $65,607,000 at December 31, 1994 and 1993, respectively, which is less than replacement cost by $28,286,000 and $25,292,000, respectively. At December 31, 1993 and 1992, inventories were reduced resulting in a liquidation of LIFO inventory layers recorded at costs that were lower than the costs of current purchases. The effects of these reductions were to decrease cost of goods sold by approximately $3,900,000 in 1993 and to decrease the loss on the sale and closing of the distribution and food centers by approximately $23,000,000 in 1992. 4. OTHER CURRENT ASSETS
December 31 ---------------------- 1994 1993 ---- ---- (Dollars in Thousands) Prepaid expenses $ 18,474 $ 19,165 Other 21,937 12,789 --------- --------- $ 40,411 $ 31,954 ========= =========
44 5. PROPERTY, PLANT AND EQUIPMENT
December 31 -------------------------- 1994 1993 ---- ---- (Dollars in Thousands) Cost: Land $ 475,611 $ 493,934 Buildings and leaseholds 1,223,128 1,211,531 Equipment 623,755 578,289 Construction in process 35,634 35,321 ------------ ------------ 2,358,128 2,319,075 Accumulated depreciation and amortization (1,043,629) (990,282) ------------ ------------ $ 1,314,499 $ 1,328,793 ============ ============
6. DIVESTED ASSETS In November 1992, the Company sold two of its five distribution centers and three of its six food centers to McLane Company, Inc. ("McLane"). The remaining facilities were disposed of in 1993 and 1994. For the years ended December 31, 1994, 1993 and 1992, the Company received cash proceeds of approximately $6,300,000, $44,900,000 and $141,800,000, respectively, from the disposition of distribution and food center assets. The $45 million pre-tax loss on the sale and closing of the distribution and food centers in 1992 included the loss from the sale of assets to McLane, the expected loss on dispositions of the remaining facilities, and the expected net cash outflows on all such facilities subsequent to August 31, 1992 (the measurement date), until the expected dates of disposition. Operating results prior to the disposition of the facilities, which were included in the loss, and adjustments to the loss upon final disposition were not material. 45 7. OTHER ASSETS
December 31 ---------------------- 1994 1993 ---- ---- (Dollars in Thousands) Japanese license royalty intangible (net of accumulated amortization of $116,972 and $100,957) $ 201,528 $ 217,543 Other license royalty intangibles (net of accumulated amortization of $20,914 and $18,077) 35,690 38,692 Environmental cost reimbursements (net of allowance of $18,890 and $12,529) - see Note 14 67,546 72,038 Other (net of accumulated amortization of $7,281 and $66,115) 77,934 87,149 ---------- ---------- $ 382,698 $ 415,422 ========== ==========
8. ACCRUED EXPENSES AND OTHER LIABILITIES
December 31 ----------------------- 1994 1993 ---- ---- (Dollars in Thousands) Accrued insurance $ 95,372 $ 94,121 Accrued payroll 51,024 47,690 Accrued taxes, other than income 40,372 39,173 Accrued environmental costs 35,574 28,904 Other 93,841 117,682 ---------- ---------- $ 316,183 $ 327,570 ========== ==========
Other includes accounts payable to The Southland Corporation Employees' Savings and Profit Sharing Plan (see Note 13) for contributions and contingent rent payables of $13,186,000 and $14,098,000 as of December 31, 1994 and 1993, respectively. In December 1994, the Company completed a review of the functions necessary to enable its stores to respond faster, more creatively and more cost efficiently to rapidly changing customer needs and preferences. The resultant plan will both realign and reduce personnel and will require changes in the location and size of office facilities. Approximately 335 employees in various positions throughout the Company will be terminated during 1995. In addition, one owned office facility will be sold at a loss and space at several leased facilities will be terminated or subleased. The $7,405,000 cost of the plan was accrued in selling, general and administrative expenses, and is comprised of $5,668,000 for severance benefits and $1,737,000 for changes in office facilities. 46 9. DEBT
December 31 ------------------------ 1994 1993 ---- ---- (Dollars in Thousands) Bank Debt Term Loans $ 300,000 $ 329,017 Bank Debt revolving credit facility 50,000 15,000 Commercial paper 350,000 350,000 5% First Priority Senior Subordinated Debentures due 2003 615,539 638,070 4-1/2% Second Priority Senior Subordinated Debentures (Series A) due 2004 294,597 303,884 4% Second Priority Senior Subordinated Debentures (Series B) due 2004 25,897 26,648 12% Second Priority Senior Subordinated Debentures (Series C) due 2009 59,696 62,311 6-1/4% Yen Loan 253,114 273,793 7-7/8% Cityplace Notes due 1995 289,698 287,363 Canadian revolving credit facility 5,678 7,499 Capital lease obligations 105,159 120,398 Other 1,820 5,877 ----------- ----------- 2,351,198 2,419,860 Less long-term debt due within one year 123,989 149,503 ----------- ----------- $ 2,227,209 $ 2,270,357 =========== ===========
BANK DEBT - The Company is obligated to a group of lenders under a credit agreement ("Credit Agreement") that includes term loans and a revolving credit facility (collectively "Bank Debt"). In December 1994, the Credit Agreement was amended to extend its maturity through December 31, 1999, and to change various financial and operating covenants to reduce certain restrictions. The financial and operating covenants require, among other things, the maintenance of certain financial ratios including interest coverage, fixed-charge coverage and senior indebtedness to earnings before interest, income taxes, depreciation and amortization. The Credit Agreement also contains various covenants 47 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 (except in connection with certain sinking fund obligations under the 5% First Priority Senior Subordinated Debentures due 2003). Under the Credit Agreement, all of the assets of the Company, with the exception of certain specified property, serve as collateral. The amendment to the Credit Agreement refinanced the existing term loans and revolving credit facility with a new term loan and a new revolving credit facility. The new term loan provided proceeds of $300 million, which were primarily used to retire the existing term loans. The new term loan is to be repaid in sixteen quarterly installments of $18,750,000 commencing March 31, 1996. The new revolving credit facility makes available borrowings and letters of credit totaling a maximum of $300 million. Maximum borrowings and letters of credit under the revolving credit facility are set at $150 million each. Upon expiration of the facility, 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, 1994, outstanding letters of credit related to the Credit Agreement totaled $119,927,000. Interest on the Bank Debt 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 .975% per year. The weighted-average interest rate on the term loan and revolving credit facility borrowings outstanding at December 31, 1994, was 7.1% and 8.5%, respectively. A fee of .925% per year on the outstanding amount of letters of credit is required to be paid quarterly. A .5% per year commitment fee on unadvanced funds, which for purposes of this calculation include unissued letters of credit, is payable quarterly. The weighted-average interest rate on revolving credit facility borrowings outstanding at December 31, 1993, was 7.5%. In 1992 and 1993, the Credit Agreement was amended in connection with certain activities of the Company. In September 1992, the Company entered into an amendment that permitted the establishment of a $400 million commercial paper facility. In connection with this amendment, the Company was required to make a $350 million prepayment on the term loans. In addition, as a result of the disposition of the distribution and food center assets (see Note 6) and in accordance with an October 1992 amendment, a $110 million prepayment on the term loans was made in December 1992. In August 1993, the Company completed a refinancing of its 12% Senior Notes with proceeds from working capital and an additional $150 million term loan under the Credit Agreement (the "Refinancing"). An amendment was executed to provide for the additional term loan, which was subsequently repaid from proceeds of the new term loan. COMMERCIAL PAPER - In September 1992, the Company obtained a facility that provides for the issuance of up to $400 million in commercial paper. At December 31, 1994, $350 million of the $391,322,000 outstanding principal, 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 1996. 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, 1994 and 1993, respectively, was 6.0% and 3.3%. 48 NOTES AND DEBENTURES - The Notes and 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 Notes and 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, with an aggregate principal amount of $450,614,000 at December 31, 1994, are redeemable at any time at the Company's option at 100% of principal amount. Annual sinking fund payments of $27,037,000 are due each December 15, commencing 1996 through 2002. These payments retire 42% of the debt before maturity. 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 principal amount and are described as follows: - 4-1/2% Series A Debentures, due June 15, 2004, had an aggregate principal amount of $206,373,000 at December 31, 1994. - 4% Series B Debentures, due June 15, 2004, had an aggregate principal amount of $18,766,000 at December 31, 1994. - 12% Series C Debentures, due June 15, 2009, had an aggregate principal amount of $21,787,000 at December 31, 1994. 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. The First and Second Priority Senior Subordinated Debentures are subordinate to the outstanding Bank Debt 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. The Company had an issuance of 12% Senior Notes, which was due December 15, 1996, with an aggregate principal amount of $250,553,000. These notes were redeemed in August 1993, resulting in an extraordinary gain of $98,968,000, which had no tax effect. YEN LOAN - In March 1988, the Company monetized its future royalty payments from SEJ, the area licensee in Japan, through a loan that is 49 nonrecourse to the Company as to principal and interest. The debt, payable in Japanese yen, was in the amount of 41 billion yen, or 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. The current interest rate of 6-1/4% will be reset after March 1998. 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. 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. 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. CITYPLACE DEBT - Cityplace Center East Corporation ("CCEC"), a subsidiary of the Company, issued $290 million of notes in March 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. SOUTHLAND CANADA DEBT - During 1988, Southland Canada, Inc. entered into a revolving credit facility with a Canadian chartered bank. The facility currently provides bank financing of up to Canadian $14,287,000 (approximately U.S. $10,185,000 at December 31, 1994), which will be reduced to Canadian $10,716,000 on June 30, 1995, and will be further reduced each year thereafter until June 30, 1998, when the facility will expire, and all amounts outstanding will be due and payable in full. At December 31, 1994, the Company had borrowings outstanding under this facility of Canadian $7,964,000 (approximately U.S. $5,678,000). Interest on such facility is generally payable monthly and is based upon the Canadian Prime rate (8.0% at December 31, 1994) plus .75% per year or a bankers' acceptance rate plus 1.5% per year. The weighted-average interest rate on revolving credit facility borrowings outstanding at December 31, 1994 and 1993, respectively, was 7.3% and 5.4%. 50 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): 1995 $ 123,989 1996 182,170 1997 186,660 1998 189,243 1999 190,281 Thereafter 1,478,855 ------------ $ 2,351,198 ============
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. REDEEMABLE COMMON STOCK PURCHASE WARRANTS In 1987, the Company issued 26,135,682 redeemable common stock purchase warrants (the "Warrants"). The Warrants were recorded at $1.00 per Warrant, which was the amount of proceeds allocated to the Warrants at the time of issuance. The Warrants were governed by a warrant agreement and were exercisable through December 15, 1992, only upon the occurrence of certain specified events. None of the specified events occurred on or before December 15, 1992, and all of the warrants expired on December 16, 1992. Under the provisions of the warrant agreement, the Company was obligated to repurchase the Warrants by March 15, 1995, at the fair market value of the Warrants as separate securities, as determined by an independent financial expert. A fair market value of $0 for the Warrants was determined by an independent financial expert in December 1992. The $26,135,682 difference between the carrying amount of the Warrants and their fair value was recorded as an increase in additional capital in 1992. 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair-value amounts have been determined by the Company using available market information and appropriate valuation methodologies. 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 51 other financial instruments at December 31, 1994, are listed in the following table:
Estimated Carrying Fair Amount Value ---------- ---------- (Dollars in Thousands) Bank Debt $ 350,000 $ 350,000 Commercial Paper 391,322 391,322 Debentures 995,729 452,368 Yen Loan 253,114 325,389
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 20 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, 1994, bid prices obtained from investment banking firms where traders regularly make a market for these financial instruments. The carrying amount of the Debentures includes $298,190,000 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. In February 1995, the original Cityplace notes were repaid with proceeds from the Cityplace Term Loan (see Note 9). At the date of issuance, the carrying amount and the fair value of the Cityplace Term Loan was $290,000,000 and $269,650,000, respectively. The fair value was estimated by calculating the present value of the future cash flows at current interest rates. 52 13. 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 are made by both the participants and Southland. Southland contributes the greater of approximately 10% of its net earnings before contribution to the Savings and Profit Sharing Plan and federal income taxes or an amount determined by Southland's president. The contribution by Southland is generally allocated to the participants on the basis of their individual contribution, years of participation in the Savings and Profit Sharing Plan and age. 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, 1994, 1993 and 1992 were $10,513,000, $11,956,000 and $14,647,000 (including amounts allocated to the distribution and food centers), respectively. 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 1994, 1993 and 1992 include the following components:
1994 1993 1992 ---- ---- ---- (Dollars in Thousands) Service cost $ 752 $ 824 $ 862 Interest cost 1,732 2,048 1,998 Amortization of unrecognized gain (61) - (564) -------- -------- -------- $ 2,423 $ 2,872 $ 2,296 ======== ======== ========
53 The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8% and 7% at December 31, 1994 and 1993, respectively. Components of the accrual recorded in the Company's consolidated balance sheets are as follows:
December 31 ---------------------- 1994 1993 ---- ---- (Dollars in Thousands) Accumulated Postretirement Benefit Obligation: Retirees $ 11,197 $ 13,380 Active employees eligible to retire 4,716 5,117 Other active employees 5,354 6,466 --------- --------- 21,267 24,963 Unrecognized gains 7,953 3,103 --------- --------- $ 29,220 $ 28,066 ========= =========
POSTEMPLOYMENT BENEFITS - As of January 1, 1993, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," and recorded an accumulated postemployment benefit obligation of $16,537,000. The accumulated postemployment benefit obligation, which had no tax effect, was recorded as the cumulative effect of an accounting change. The obligation primarily represents future medical costs relating to short-term and long-term disability. As of December 31, 1994 and 1993, the amount of the obligation was $18,460,000 and $16,537,000, respectively. EQUITY PARTICIPATION PLAN - During 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. The options were granted at the fair market value on the date of grant, which is the same as the conversion price provided in the debentures. All options expire, and the debentures mature, no later than December 31, 1997. All options and convertible debentures that were vested became exercisable as of December 31, 1994, pursuant to the terms of the Participation Plan. 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 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. At December 31, 1994, there were vested options outstanding to acquire 1,760,803 shares, of which 1,677,128 were at $7.50 per share and 83,675 were at $7.70 per share, and vested debentures outstanding that were convertible into 17,833 shares. Of the options and debentures that were vested as of December 31, 1994, 539,803 options to acquire 539,803 shares and debentures convertible into 11,167 shares will expire on March 31, 1995, for those participants who are no longer with the Company. 54 GRANT STOCK PLAN - During 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. The stock was fully vested upon the date of issuance. As of December 31, 1994, 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. 14. LEASES, COMMITMENTS AND CONTINGENCIES LEASES - Certain property, plant 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. The composition of capital leases reflected as property, plant and equipment in the consolidated balance sheets is as follows:
December 31 ------------------------ 1994 1993 ---- ---- (Dollars in Thousands) Buildings $ 125,600 $ 143,273 Equipment 225 226 ---------- ---------- 125,825 143,499 Accumulated amortization (78,103) (80,467) ---------- ----------- $ 47,722 $ 63,032 ========== ===========
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. 55 Future minimum lease payments for years ending December 31 are as follows:
Capital Operating Leases Leases ---------- ---------- (Dollars in Thousands) 1995 $ 23,937 $ 113,417 1996 22,629 104,700 1997 21,002 93,494 1998 19,317 78,021 1999 17,904 58,684 Thereafter 77,142 231,187 ---------- ---------- Future minimum lease payments 181,931 $ 679,503 ========== Estimated executory costs (519) Amount representing imputed interest (76,253) ---------- Present value of future minimum lease payments $ 105,159 ==========
Minimum noncancelable sublease rental income to be received in the future, which is not included above as an offset to future payments, totals $26,053,000 for capital leases and $26,051,000 for operating leases. Rent expense on operating leases for the years ended December 31, 1994, 1993 and 1992, totaled $120,850,000, $124,402,000 and $135,657,000, respectively, including contingent rent expense of $8,576,000, $8,214,000 and $9,037,000, but reduced by sublease rent income of $7,858,000, $8,545,000 and $8,252,000. Contingent rent expense on capital leases for the years ended December 31, 1994, 1993 and 1992, was $2,822,000, $3,084,000 and $3,964,000, respectively. Contingent rent expense is generally based on sales levels or changes in the Consumer Price Index. 56 LEASES WITH THE SAVINGS AND PROFIT SHARING PLAN - At December 31, 1994, the Savings and Profit Sharing Plan owned 253 stores leased to the Company under capital leases and 647 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, 43, 62 and 31 properties were sold by the Savings and Profit Sharing Plan to third parties in 1994, 1993 and 1992, respectively, and at the same time, the 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 ----------------------- 1994 1993 ---- ---- (Dollars in Thousands) Buildings (net of accumulated amortization of $9,619 and $9,973) $ 3,191 $ 4,884 ========= ========= Capital lease obligations (net of current portion of $1,945 and $2,307) $ 4,109 $ 6,583 ========= =========
Years Ended December 31 ----------------------------- 1994 1993 1992 ---- ---- ---- (Dollars in Thousands) Rent expense under operating leases and amortization of capital lease assets $ 28,195 $ 30,028 $ 31,291 ========= ======== ======== Imputed interest expense on capital lease obligations $ 696 $ 948 $ 1,213 ========= ======== ======== Capital lease principal payments included in principal payments under long-term debt agreements $ 2,075 $ 2,200 $ 2,302 ========= ======== ========
COMMITMENTS MCLANE - In connection with the 1992 sale of 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 income 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 57 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. CONTINGENCIES GASOLINE STORE SITES - The Company accrues future costs, as well as records the related probable state reimbursement amounts, for remediation of gasoline store sites where releases of regulated substances have been detected. At December 31, 1994 and 1993, respectively, the Company's estimated liability for sites where releases have been detected was $63,424,000 and $59,153,000, of which $32,924,000 and $35,333,000 is included in deferred credits and other liabilities and the remainder in accrued expenses and other liabilities. The Company has recorded receivables of $57,246,000 and $57,532,000 (net of allowances of $18,890,000 and $12,529,000) for the estimated probable state reimbursements, of which $47,746,000 and $52,238,000 is included in other assets and the remainder in accounts and notes receivable. The Company reduced the estimated net environmental cost reimbursements at the end of 1994 by approximately $6,000,000 as a result of completing a review of state reimbursement programs. The estimated future remediation expenditures and related state reimbursement amounts could change as governmental requirements and state reimbursement programs change in future years. The Company anticipates that substantially all of the future remediation costs for sites with detected releases of regulated substances at December 31, 1994, will be incurred within the next five years. There is no assurance of the timing of the receipt of state reimbursement funds. However, based on the Company's experience, the Company expects to receive state reimbursement funds within one to four years after payment of eligible remediation expenses, assuming that the state administrative procedures for processing such reimbursements have been fully developed. CHEMICAL MANUFACTURING FACILITY - 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 accrued a liability for this purpose. As required, the Company 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 received initial comments from the State, the clean-up plan has not been finalized. The Company has recorded liabilities representing its best estimates of the clean-up costs of $39,254,000 and $38,879,000 at December 31, 1994 and 1993, respectively. Of this amount, $34,180,000 and $33,795,000 are included in deferred credits and other liabilities and the remainder in accrued expenses and other liabilities for the respective years. The closed chemical manufacturing facility was previously owned by a large chemical company. In 1991, the Company and the former owner executed a final settlement agreement pursuant to which the former owner agreed to pay a substantial portion of the clean-up costs. The Company 58 has recorded receivables of $23,009,000 and $22,800,000 at December 31, 1994 and 1993, respectively, representing the former owner's portion of the clean-up costs. Of this amount, $19,800,000 is included in other assets and the remainder in accounts and notes receivable for both 1994 and 1993. 15. INCOME TAXES As of January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." There was no cumulative effect adjustment upon adoption, and there was no effect on net earnings for the year ended December 31, 1993. As permitted, the Company has not restated the financial statements of prior years. Prior to January 1, 1993, income taxes were recorded using the deferred method specified by Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes." SFAS No. 109 requires the use of the liability method, in which deferred tax assets and liabilities are recognized for 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. The components of earnings (loss) before income taxes, extraordinary gain and cumulative effect of accounting change are as follows:
Years Ended December 31 ---------------------------------- 1994 1993 1992 ---- ---- ---- (Dollars in Thousands) Domestic $ 70,615 $ 3,795 $ (113,940) Foreign 2,881 (6,375) (6,009) ---------- ---------- ----------- $ 73,496 $ (2,580) $ (119,949) ========== ========== ===========
59 The provision for income taxes in the accompanying Consolidated Statements of Operations consists of the following:
Years Ended December 31 ---------------------------------- 1994 1993 1992 ---- ---- ---- (Dollars in Thousands) Current: Federal $ 6,799 $ 2,759 $ 4,560 Foreign 8,515 5,941 5,411 State 350 - 1,529 ---------- ---------- ---------- 15,664 8,700 11,500 Tax benefit of operating loss carryforward (4,164) - - Reduction in valuation allowance (30,000) - - ---------- ---------- ---------- $ (18,500) $ 8,700 $ 11,500 ========== ========== ==========
Reconciliations of income taxes at the federal statutory rate to the Company's actual income taxes provided are as follows:
Years Ended December 31 --------------------------------- 1994 1993 1992 ---- ---- ---- (Dollars in Thousands) Taxes (benefit) at federal statutory rate $ 25,724 $ (903) $ (40,783) State income taxes, net of federal income tax benefit 228 - 1,009 Foreign tax rate difference 1,212 2,232 2,354 Loss providing no current benefit - - 5,061 Amortization of cost in excess of tax basis - - 23,286 Difference in LIFO as a result of purchase accounting - - 8,671 Net change in valuation allowance excluding the tax effect of extraordinary items and the cumulative effect of accounting changes (excluding $5,865 of tax credits and other items providing no benefit in 1994) (47,943) 4,112 - Other 2,279 3,259 11,902 ---------- --------- ---------- $ (18,500) $ 8,700 $ 11,500 ========== ========= ==========
60 At December 31, 1994, the Company had approximately $20,000,000 of general business credit carryforwards, $10,800,000 of foreign tax credit carryforwards and $17,900,000 of alternative minimum tax ("AMT") credit carryforwards. The AMT credits have no expiration date. The general business credits expire during the period from 2001 to 2009, and the foreign tax credits expire during the period 1998 to 1999. The valuation allowance for deferred tax assets decreased by $42,078,000 in 1994 due to changes in the Company's gross deferred tax assets and liabilities and the realization of a portion of the Company's net deferred tax asset. Based on a one-year projection of taxable income, the Company has recognized a portion of its net deferred tax asset through a $30 million reduction in the valuation allowance with $13,861,000 recorded in other current assets and the remainder in other assets. Taxable income for 1995 was projected by utilizing steady state assumptions defined as only inflationary increases in sales and no increase in gross profit margins. If the Company's current trend of profitability continues, then additional deferred tax assets of up to approximately $175 million could be recognized in future periods. In 1993, the valuation allowance decreased by $21,817,000 due to changes in the Company's gross deferred tax assets and liabilities. Significant components of the Company's deferred tax assets and liabilities at December 31, 1994 and 1993, are as follows:
Years Ended December 31 ------------------------- 1994 1993 ---- ---- (Dollars in Thousands) Deferred tax assets: SFAS No. 15 interest $ 125,694 $ 139,831 Accrued insurance 58,514 58,312 Tax credit carryforwards 48,765 43,562 Accrued liabilities 43,890 57,974 Compensation and benefits 34,029 33,535 Debt issuance costs 15,445 21,658 Other 5,537 4,055 ----------- ----------- Subtotal 331,874 358,927 Deferred tax liabilities: Area license agreements (92,515) (99,932) Property, plant and equipment (29,192) (36,751) Other (5,578) (5,577) ----------- ----------- Subtotal (127,285) (142,260) Valuation allowance (174,589) (216,667) ----------- ----------- Net deferred taxes $ 30,000 $ 0 =========== ===========
61 16. EARNINGS (LOSS) PER COMMON SHARE Primary earnings (loss) per common share is based on net earnings (loss) divided by the weighted average number of shares 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 1994 and 1993 is as follows:
Year Ended December 31, 1994: ----------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ------- (Dollars in Millions, Except Per-Share Data) Net sales $ 1,512 $ 1,720 $ 1,811 $ 1,641 $ 6,684 Gross profit 328 396 420 396 1,540 Income taxes (benefit) 1 6 6 (32) (19) Net earnings (loss) (8) 32 43 25 92 Primary and fully diluted earnings (loss) per common share (.02) .08 .10 .06 .22
The second quarter includes a $4,500,000 recovery on a 1992 insurance claim. The fourth quarter includes $30 million of realized deferred tax benefit (see Note 15), $7,405,000 of expenses accrued for severance and related costs (see Note 8), $7,696,000 of expense related to store closings and dispositions of properties, and approximately $6,000,000 in expense relating to the reduction of estimated net environmental cost reimbursements (see Note 14). 62
Year Ended December 31, 1993: ----------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ------- (Dollars in Millions, Except Per-Share Data) Net sales $ 1,582 $ 1,773 $ 1,780 $ 1,609 $ 6,744 Gross profit 350 418 434 371 1,573 Income taxes 2 2 2 3 9 Earnings (loss) before extraordinary gain and cumulative effect of accounting change (16) 19 22 (36) (11) Net earnings (loss) (33) 19 121 (36) 71 Primary and fully diluted earnings (loss) per common share before extraordinary gain and cumulative effect of accounting change (.04) .05 .05 (.09) (.03)
The first quarter includes $16,537,000 of expense resulting from the cumulative effect of an accounting change for postemployment benefits (see Note 13). The third quarter includes a $98,968,000 extraordinary gain on redemption of debt related to the Refinancing (see Note 9) and a $10,300,000 loss on disposition of the Company's aviation facility (which was subsequently adjusted to a total loss of $10,814,000 in the fourth quarter). The fourth quarter includes a loss of $42,791,000 related to store closings and dispositions of properties, a LIFO credit of $9,051,000 primarily due to lower cigarette and gasoline prices, and $5,989,000 of expense resulting from a cost-cutting program associated with the Company's 1993 reorganization. 63 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, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Notes 13 and 15 to the financial statements, in 1993 the Company changed its method of accounting for postemployment benefits and for income taxes to conform with Statements of Financial Accounting Standards No. 112 and No. 109, respectively. Coopers & Lybrand L.L.P. Dallas, Texas February 23, 1995 64 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 26, 1995 Annual Meeting of Shareholders. See also "Executive Officers of the Registrant" beginning on page 17, 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 26, 1995 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 26, 1995 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 26, 1995 Annual Meeting of Shareholders. 65 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, 1994 are included herein: PAGE Consolidated Balance Sheets - December 31, 1994 and 1993 38 Consolidated Statements of Operations - Years Ended December 31, 1994, 1993 and 1992 39 Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31, 1994, 1993 and 1992 40 Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992 41 Notes to Consolidated Financial Statements 42 Independent Auditors' Report of Coopers & Lybrand L.L.P. 64 2. The Southland Corporation and Subsidiaries' Financial Statement Schedules, included herein. PAGE Independent Auditors' Report of Coopers & Lybrand L.L.P. on Financial Statement Schedule 70 II - Valuation and Qualifying Accounts 71 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. 66 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 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.(2). 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, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 4.(i)(2). 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 November 1, 1988, by and among The Southland Corporation, Thompson Brothers, L.P., Thompson Capital Partners, L.P., The Hayden Company, The Williamsburg Corporation, Four J Investment, L.P., each Limited Partner of Thompson Capital Partners, L.P. as of the date thereof, and The Philp Co., incorporated by reference to File No. 0-676, Annual Report on Form 10-K for year ended December 31, 1988, Exhibit 4(i)(7), Tab 2. 4.(i)(4) 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)(5) First Amendment to Shareholders Agreement, dated December 30, 1992, 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)(6) Warrant Agreement dated as of March 5, 1991, among certain Holders of Common Shares of The Southland Corporation named therein, Wilmington Trust Company, as Warrant Agent, The Southland Corporation and Ito-Yokado Co., Ltd., incorporated by reference to Schedule 13D filed by Ito-Yokado Co., Ltd., Seven-Eleven Japan Co., Ltd. and IYG Holding Company, Exhibit B. 4.(i)(7) Specimen Warrant Certificates to Purchase Common Shares of The Southland Corporation pursuant to Warrant Agreement dated as of March 5, 1991, with Wilmington Trust Company as Warrant Agent, incorporated by reference to The Southland Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 4.(i)(7). 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 67 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) Indenture among Cityplace Center East Corporation, Security Pacific National Bank, as trustee, and The Sanwa Bank Limited, Dallas Agency, dated as of February 15, 1987, providing for 7 7/8% Notes due February 15, 1995, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1986, Exhibit 4(ii)(8). 4.(ii)(4) Specimen 7 7/8% Note due February 15, 1995, issued by Cityplace Center East Corporation, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1986, Exhibit 4(ii)(9). 9. VOTING TRUST AGREEMENT. NONE. (EXCEPT SEE EXHIBITS 4.(i)(2), 4.(i)(4) AND 4.(i)(5), ABOVE.) 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 July 31, 1987, amended Tab 1 and restated as of December 16, 1994, among The Southland Corporation, the financial institutions party thereto as Senior Lenders, the financial institutions party thereto as Issuing Banks, Citicorp North America, Inc., as Administrative Agent, and The Sakura Bank, Limited, New York Branch, as Co-Agent.* 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, Tab 2 dated as of February 10, 1995, by and between The Sanwa Bank, Limited, Dallas Agency and Cityplace Center East Corporation.* 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.(ii)(B)(1) Standard Form of 7-Eleven Store Franchise Agreement, incorporated by reference to File No. 0-676 and 0-16626, Annual Report on Form 10-K for year ended December 31, 1992, Exhibit 10.(ii)(B)(1). 10.(iii)(A)(1) John P. Thompson Employment Agreement dated as of 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 10.(iii)(A)(1). 68 10.(iii)(A)(2) Jere W. Thompson Employment Agreement dated as of 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 10.(iii)(A)(2). 10.(iii)(A)(3) 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)(4) 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)(5) Executive Interest Differential Reimbursement Program, incorporated by reference to File No. 0-676, Annual Report on Form 10-K for the year ended December 31, 1982, Exhibit 10(iii)(A)(9), Tab 4. 10.(iii)(A)(6) 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)(7) Form of documents relating to Collateral Assignment of Insurance Program, incorporated by reference to File Nos. 0-676 and 0-16626, Annual Report on Form 10-K for the year ended December 31, 1989, Exhibit 10.(iii)(A)(10), Tab 4. 10.(iii)(A)(8) 1993 Performance Plan, as amended January 1994, 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)(8). 10.(iii)(A)(9) 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. 11. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS. Tab 3 CALCULATION OF EARNINGS PER SHARE.* 21. SUBSIDIARIES OF THE REGISTRANT AS OF MARCH 1995.* Tab 4 23. CONSENTS OF EXPERTS AND COUNSEL. Consent of Coopers & Lybrand L.L.P., Independent Tab 5 Auditors.* 27. FINANCIAL DATA SCHEDULE. FILED ELECTRONICALLY ONLY, NOT ATTACHED TO PRINTED REPORTS. __________________________ File or furnished herewith (b) Reports on Form 8-K. During the fourth quarter of 1994, 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 schedules for The Southland Corporation and Subsidiaries are included herein. 69 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, which includes an explanatory paragraph describing the changes in methods of accounting for postemployment benefits and income taxes in 1993, is included on page 64 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 66 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 23, 1995 70 SCHEDULE II THE SOUTHLAND CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (DOLLARS IN THOUSANDS)
Additions ----------------------- Balance at Charged to Charged to Balance at beginning costs and other end of period expenses accounts Deductions (1) of period --------- ---------- ---------- -------------- ---------- Allowance for doubtful accounts: Year ended December 31, 1994.................... $ 7,822 $ 307 $ 153 (2) $ (1,492) $ 6,790 Year ended December 31, 1993.................... 11,925 6,021 1,209 (2) (11,333) 7,822 Year ended December 31, 1992.................... 13,397 9,028 335 (2) (10,835) 11,925 Allowance for environmental cost reimbursements: Year ended December 31, 1994.................... 12,529 6,361 - - 18,890 Year ended December 31, 1993.................... - - 12,529 (3) - 12,529 Year ended December 31, 1992.................... - - - - -
(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 (see Note 6 of Notes to Consolidated Financial Statements). (3) Prior to year ended December 31, 1993, the allowance and related receivables were netted with the environmental liability. 71 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 28, 1995 /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.
SIGNATURE TITLE DATE /s/ Masatoshi Ito Chairman of the Board and Director March 28, 1995 --------------------------- Masatoshi Ito /s/ Toshifumi Suzuki Vice Chairman of the Board and Director March 28, 1995 --------------------------- Toshifumi Suzuki /s/ Clark J. Matthews, II President and Chief Executive Officer March 28, 1995 --------------------------- and Director (Principal Executive Clark J. Matthews, II Officer) and Acting Chief Financial (Principal Financial Officer) Officer /s/ Vernon P. Lotman Vice President and Controller March 28, 1995 ---------------------------- (Principal Accounting Officer) Vernon P. Lotman /s/ Yoshitami Arai Director March 28, 1995 ---------------------------- Yoshitami Arai /s/ Timothy N. Ashida Director March 28, 1995 ---------------------------- Timothy N. Ashida /s/ Jay W. Chai Director March 28, 1995 ---------------------------- Jay W. Chai /s/ Gary J. Fernandes Director March 28, 1995 ---------------------------- Gary J. Fernandes /s/ Masaaki Kamata Director March 28, 1995 ---------------------------- Masaaki Kamata /s/ Kazuo Otsuka Director March 28, 1995 ---------------------------- Kazuo Otsuka /s/ Asher O. Pacholder Director March 28, 1995 ---------------------------- Asher O. Pacholder /s/ Nobutake Sato Director March 28, 1995 ---------------------------- Nobutake Sato /s/ Tatsuhiro Sekine Director March 28, 1995 ---------------------------- Tatsuhiro Sekine /s/ Jere W. Thompson Co-Vice Chairman of the Board and March 28, 1995 ---------------------------- Director Jere W. Thompson /s/ John P. Thompson Co-Vice Chairman of the Board and March 24, 1995 ---------------------------- Director John P. Thompson
EX-10.(I)(2) 2 EXHIBIT 10.I.2 CREDIT AGREEMENT AMENDMENT 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 among THE SOUTHLAND CORPORATION, THE FINANCIAL INSTITUTIONS PARTY HERETO AS SENIOR LENDERS, THE FINANCIAL INSTITUTIONS PARTY HERETO AS ISSUING BANKS, CITICORP NORTH AMERICA, INC., as Administrative Agent AND THE SAKURA BANK, LIMITED, NEW YORK BRANCH, as Co-Agent
Section Page ------- ---- ARTICLE I DEFINITIONS 1.01. Certain Defined Terms 3 1.02. References to this Agreement 28 1.03. Computation Of Time Periods 28 1.04. Accounting Terms 28 1.05. Miscellaneous Terms 28 1.06. Other Defined Terms 28 1.07. Schedules and Exhibits 29 ARTICLE II AMOUNTS AND TERMS OF LOANS 2.01. The Senior Term Loans 29 2.02. Revolving Credit Facility 31 2.03. Use of Proceeds of Loans. 35 2.04. Interest on the Loans 36 2.05. Fees. 40 2.06. Prepayments 41 2.07. Payments 42 2.08. Special Provisions Governing Eurodollar Rate Loans 46 2.09. Increased Capital 51 2.10. Replacement of Senior Lender in Event of Adverse Condition 51 ARTICLE III THE LETTER OF CREDIT SUBFACILITY 3.01. Obligation to Issue 52 3.02. Types and Amounts 52 3.03. Conditions 53 3.04. Issuance of Facility Letters of Credit 53 3.05. Reimbursement Obligations; Duties of Issuing Banks 54 3.06. Participations 55 3.07. Payment of Reimbursement Obligations 58 3.08. Compensation for Facility Letters of Credit 58 3.09. Issuing Bank Reporting Requirements 59 3.10. Indemnification; Exoneration 59 3.11. Transitional Provisions 61 3.12. Amount of Letter of Credit Subfacility 61 3.13. Obligations Several 63 -i-
Section Page ------- ---- ARTICLE IV CONDITIONS TO LOANS AND FACILITY LETTERS OF CREDIT 4.01. Conditions Precedent to Initial Loans and Facility Letters of Credit 63 4.02. Conditions Precedent to All Subsequent Revolving Loans and Facility Letters of Credit 66 ARTICLE V REPRESENTATIONS AND WARRANTIES 5.01. Representations and Warranties 67 ARTICLE VI REPORTING COVENANTS 6.01. Financial Statements 78 6.02. Environmental Notices 82 6.03. Other Reports 83 ARTICLE VII AFFIRMATIVE COVENANTS 7.01. Corporate Existence, etc. 83 7.02. Compliance with Laws, etc. 84 7.03. Payment of Taxes and Claims 84 7.04. Maintenance of Properties; Insurance 84 7.05. Inspection of Property; Books and Records; Discussions 85 7.06. Future Liens on Personal Property 85 ARTICLE VIII NEGATIVE COVENANTS 8.01. Indebtedness 86 8.02. Sales of Assets; Liens 89 8.03. Investments 91 8.04. Accommodation Obligations. 92 8.05. Restricted Junior Payments. 93 8.06. Conduct of Business. 95 8.07. Transactions with Shareholders and Affiliates. 95 8.08. Restriction on Fundamental Changes. 95 -ii-
Section Page ------- ---- 8.09. ERISA. 96 8.10. Commercial Paper Facility. 97 8.11. Sales and Leasebacks. 97 8.12. Subordinated Indebtedness. 97 8.13. Amendment of Charter or By-laws. 98 8.14. Disposal of Subsidiary Stock. 98 8.15. Margin Regulations. 98 8.16. Restrictions on Southland International, Inc. 98 8.17. Interest Rate Contracts 98 ARTICLE IX FINANCIAL COVENANTS 9.01. Senior Indebtedness to EBITDA. 99 9.02. Minimum Interest Coverage Ratio 99 9.03. Minimum Fixed Charge Coverage Ratio 100 ARTICLE X REAL ESTATE COVENANTS 10.01. Taxes. 101 10.02. Further Assurances. 101 10.03. Condemnation. 102 10.04. Future Liens on Real Property in Favor of the Senior Lenders. 102 10.05. Real Estate Procedures 102 ARTICLE XI EVENTS OF DEFAULT; RIGHTS AND REMEDIES 11.01. Events of Default. 102 11.02. Rights and Remedies. 107 ARTICLE XII THE ADMINISTRATIVE AGENT; THE CO-AGENT 12.01. Appointment. 109 12.02. Nature of Duties. 109 12.03. Rights, Exculpation, etc. 110 12.04. Reliance. 111 12.05. Indemnification. 111 12.06. The Administrative Agent Individually. 112 -iii-
Section Page ------- ---- 12.07. Successor Administrative Agent; Resignation of Agent. 112 12.08. Collateral Matters. 112 12.09. The Co-Agent. 115 ARTICLE XIII MISCELLANEOUS 13.01. Concerning the Collateral and the Collateral Documents. 116 13.02. Assignments and Participations. 116 13.03. Expenses. 118 13.04. Indemnity. 119 13.05. Change in Accounting Principles. 120 13.06. Set-Off. 120 13.07. Ratable Sharing. 121 13.08. Amendments and Waivers. 122 13.09. Independence of Covenants. 123 13.10. Notices. 123 13.11. Survival of Warranties and Agreements. 124 13.12. Failure or Indulgence Not Waiver; Remedies Cumulative. 124 13.13. Advice of Counsel. 124 13.14. Marshalling; Payments Set Aside. 124 13.15. Severability. 124 13.16. Headings. 125 13.17. Governing Law. 125 13.18. Limitation of Liability. 125 13.19. Successors and Assigns; Subsequent Holders of Notes. 125 13.20. Consent to Jurisdiction and Service of Process; Waiver of Jury Trial. 126 13.21. Counterparts; Effectiveness; Inconsistencies. 126 13.22. Foreign Bank Certifications. 126 13.23. Performance of Obligations. 128 13.24. Limitation on Agreements. 128 13.25. Construction. 129 13.26. Confidentiality. 129 13.27. No Novation. 130
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EXHIBITS Exhibit 1 - [Intentionally Omitted] Exhibit 2 - Form of Assignment and Acceptance Exhibit 3 - Terms of Commercial Paper Exhibit 4 - Form of Compliance Certificate Exhibit 5 - Provisions to be included in Eligible Interest Rate Contracts Exhibit 6-A - Notice of Borrowing (Senior Term Loans) Exhibit 6-B - Notice of Borrowing (Revolving Loans) Exhibit 7 - Notice of Conversion/Continuation Exhibit 8-A - Collateral Patent Agreement Exhibit 8-B - Form of Amendment and Supplement to Collateral Patent Agreement Exhibit 9 - Real Estate Procedures Memorandum Exhibit 10-A - Security and Pledge Agreement Exhibit 10-B - Form of Amendment and Supplement to Security and Pledge Agreement Exhibit 11-A - Third Party Pledge Agreement (Southland International, Inc.) Exhibit 11-B - Form of Amendment and Supplement to Third Party Pledge Agreement (Southland International, Inc.) Exhibit 12-A - Third Party Pledge Agreement (Southland Sales Corporation) Exhibit 12-B - Form of Amendment and Supplement to Third Party Pledge Agreement (Southland Sales Corporation) Exhibit 13-A - Collateral Trademark Agreement Exhibit 13-B - Form of Amendment and Supplement to Collateral Trademark Agreement Exhibit 14 - Form of Senior Term Note Exhibit 15 - Form of Revolving Credit Note Exhibit 16-A - Notice of Reduction in Letter of Credit Subfacility Exhibit 16-B - [Intentionally Omitted] Exhibit 17-A - Form of Opinion of Bryan F. Smith Exhibit 17-B - Forms of Opinions of Shearman & Sterling Exhibit 17-C - Form of Opinion of Johnson & Wortley Exhibit 18 - Form of Letter from Coopers & Lybrand Exhibit 19 - Form of Officers' No Default Certificate Exhibit 20 - Form of Southland Canada Subordination Agreement Exhibit 21 - Form of Consent to Assignments and Participations Exhibit 22-A - Form of Certificate Relating to Section 1001 Exemption From United States Withholding Tax Exhibit 22-B - Form of Certificate Relating to Section 1442 Exemption From United States Withholding Tax
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SCHEDULES Schedule 1.01-A - [Intentionally Omitted] Schedule 1.01-B - Existing Indebtedness Schedule 1.01-C - 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(xxv) - Conflicts
-vi- CREDIT AGREEMENT 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 and further amended and restated as of December 16, 1994 (as amended, restated, supplemented or otherwise modified from time to time, the "Agreement") among THE SOUTHLAND CORPORATION, a Texas corporation ("Southland" or the "Borrower") as successor in interest to JT ACQUISITION CORPORATION, a Texas corporation ("Acquisition"), the FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTY HERETO AS "SENIOR LENDERS" OR "ISSUING BANKS" (each as defined below) and CITICORP NORTH AMERICA, INC. (formerly known as CITICORP INDUSTRIAL CREDIT, INC.) ("Citicorp"), 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 12.07, the "Administrative Agent") and THE SAKURA BANK, LIMITED, NEW YORK BRANCH, as Co-Agent (in such capacity, the "Co-Agent" and, together with the Administrative Agent, the "Agents"). WITNESSETH: WHEREAS, Acquisition, the Administrative Agent, the Agents and the Senior Lenders and Issuing Banks party thereto entered into the Credit Agreement dated as of July 31, 1987 and amended and restated as of November 5, 1987 (the "Original Credit Agreement"); WHEREAS, Acquisition merged with and into Southland pursuant to an Agreement and Plan of Merger dated as of July 3, 1987, and Southland assumed all of the Obligations of Acquisition under the Original Credit Agreement pursuant to the Assumption Agreement dated as of December 15, 1987; WHEREAS, the Original Credit Agreement has been amended by the First Amendment dated as of February 17, 1988, the Second Amendment dated as of March 8, 1988, the Third Amendment dated as of June 9, 1988, the Fourth Amendment dated as of August 1, 1988, the Fifth Amendment dated as of October 12, 1988, the Sixth Amendment dated as of October 12, 1988, the Seventh Amendment dated as of December 12, 1988, the Eighth Amendment dated as of December 12, 1988, the Ninth Amendment dated as of May 8, 1989, the Tenth Amendment dated as of December 13, 1989, the Eleventh Amendment dated as of January 26, 1990, the Twelfth Amendment dated as of May 21, 1990, the Thirteenth Amendment dated as of June 15, 1990, the Fourteenth Amendment dated as of July 16, 1990, the Sixteenth Amendment dated as of August 15, 1990, the Seventeenth Amendment dated as of October 22, 1990, the Eighteenth Amendment dated as of February 15, 1991, the Nineteenth Amendment dated as of December 19, 1991, the Twentieth Amendment dated as of March 20, 1992, the Twenty-first Amendment dated as of September 3, 1992 and the Twenty-second Amendment dated as of October 28, 1992 (collectively, the "Original Amendments"; and the Original Credit Agreement, as amended by the Original Amendments, the "First Amended and Restated Credit Agreement"); WHEREAS, as of February 17, 1993, the First Amended and Restated Credit Agreement was amended and restated in its entirety to give effect to all of the Original Amendments thereto through and including the Twenty-second Amendment and to delete all provisions which were no longer operative (the First Amended and Restated Credit Agreement, as so amended and restated and, together with the First Amendment (as defined below), the "Second Amended and Restated Credit Agreement"); WHEREAS, pursuant to the First Amendment to Second Amended and Restated Credit Agreement dated as of July 30, 1993 (the "First Amendment"), Southland reborrowed a portion of the Senior Term Loans which had been repaid prior to the date thereof as "Readvanced Term Loans" from the "Readvancing Senior Lenders" (each as defined in the First Amendment); WHEREAS, in connection with the First Amendment, the Readvancing Senior Lenders became parties to the Second Amended and Restated Credit Agreement and, together with the "Prior Loan Parties" (as defined in the First Amendment), beneficiaries of the Collateral Documents; WHEREAS, Southland, the Senior Lenders and Issuing Banks which were party to the Second Amended and Restated Credit Agreement (respectively, the "Old Senior Lenders" and "Old Issuing Banks") and the Senior Lenders and Issuing Banks which are party to this Agreement (respectively, the "New Senior Lenders" and "New Issuing Banks") have entered into a Master Assignment and Assumption Agreement dated as of December 16, 1994 (the "Master Assignment Agreement"), pursuant to which, among other things, the Old Senior Lenders and Old Issuing Banks have assigned certain of their respective interests thereunder (or, in the case of certain Old Issuing Banks, made other arrangements acceptable to such Old Issuing Bank) to the New Senior Lenders and New Issuing Banks, and the New Senior Lenders and New Issuing Banks have assumed the obligations assigned by the Old Senior Lenders and Old Issuing Banks; upon consummation of the transactions contemplated by the Master Assignment Agreement, the New Senior Lenders and New Issuing Banks shall be the Senior Lenders and Issuing Banks, respectively, under the Second Amended and Restated Credit Agreement; and -2- WHEREAS, Southland, the Agents, the New Senior Lenders and the New Issuing Banks desire to amend and restate the Second Amended and Restated Credit Agreement in its entirety to give effect to the terms and provisions set forth in this Agreement, it being understood and agreed that (i) except as otherwise provided in the Master Assignment Agreement with respect to certain Letters of Credit and Past Default Interest, with respect to any date or time period occurring and ending prior to the Effective Date (as defined below), the rights and obligations of the parties thereto shall be governed by the provisions of the Second Amended and Restated Credit Agreement (including, without limitation, the Exhibits and Schedules thereto) which for such purposes, shall remain in full force and effect, (ii) except as otherwise provided in the Master Assignment Agreement with respect to certain Letters of Credit and Past Default Interest, with respect to any date or time period occurring or ending on or after the Effective Date, the rights and obligations of the parties hereto shall be governed by this Agreement (including, without limitation, the Exhibits and Schedules hereto) and (iii) it is the intent of Southland, the Agents, the New Senior Lenders and the New Issuing Banks that the New Senior Lenders, the New Issuing Banks and all other Holders of Secured Obligations are beneficiaries of the Collateral Documents and the Obligations owing to such Persons are secured thereby; AGREEMENT NOW THEREFORE, in consideration of the foregoing premises (each of which is incorporated herein), the parties hereto agree as follows: 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 -3- 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. "ACQUISITION" shall have the meaning ascribed to it in the preamble hereto. "ADMINISTRATIVE AGENT" shall have the meaning ascribed to it in the preamble hereto. In respect of the Collateral, the Administrative Agent shall also have the right to act on behalf of certain other Holders of Secured Obligations as set forth in this Agreement and the Collateral Documents. "ADMINISTRATIVE AGENT'S FEES" shall have the meaning ascribed to it in Section 2.05(a). "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. "AGENT" shall have the meaning ascribed to it in the preamble hereto. "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 2, executed by each party thereto with blanks appropriately completed. "BANKRUPTCY CODE" shall mean Title 11 of the United States Code (11 U.S.C. 101 et seq.), as amended from time to time, or any successor statute. "BASE RATE" shall mean, for any period, a fluctuating interest rate per annum as shall be in effect from time to time, -4- 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 2.04(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 the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate is an "employer" as defined in Section 3(5) of ERISA. "BORROWER" shall have the meaning ascribed to it in the preamble hereto. "BORROWING" shall mean, except as otherwise provided in SECTION 2.08(e)(ii), a borrowing consisting of Loans of the same type made on the same day by the Senior Lenders. "BUSINESS ACTIVITY REPORT" shall mean (A) a Notice of Business Activities Report from the State of New Jersey Division of Taxation or (B) a Minnesota Business Activity Report from the Minnesota Department of Revenue. -5- "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, the aggregate of all expenditures (whether paid in cash or accrued as liabilities during that period and including that portion of Capital Leases which is capitalized on the consolidated balance sheet of Southland and its Subsidiaries) 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. "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 nationally recognized rating -6- services 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 is a Senior Lender, and in any case having combined capital and surplus of not less than $250,000,000; (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 Purchaser (or any of them) shall cease to be the direct or indirect owner, 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 Purchaser (or any of them) 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 Purchaser 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 mean Citibank, N.A., a national banking association. "CITICORP" shall have the meaning ascribed to it in the preamble hereto. -7- "CLOSING FEE" shall have the meaning ascribed to it in SECTION 2.05(d). "CO-AGENT" shall have the meaning ascribed to it in the preamble hereto. "COLLATERAL" shall mean all property and interests in property now owned or hereafter acquired by Southland in or upon which a security interest, lien or mortgage is granted or a collateral assignment is made under the Collateral Documents. "COLLATERAL DOCUMENTS" shall mean the Security Agreement, the Trademark Security Agreement, the Patent Security Agreement, the Real Estate Collateral Documents, the Third Party Pledge Agreements and all security agreements, mortgages, deeds of trust, collateral assignments and other agreements or conveyances (and any amendments, supplements or modifications thereto) at any time delivered to the Administrative Agent to create or evidence Liens to secure the Obligations. "COMMERCIAL LETTER OF CREDIT" shall mean any documentary Letter of Credit which is drawable upon presentation of documents evidencing the sale or shipment of goods purchased by the Borrower in the ordinary course of its business. "COMMERCIAL PAPER" shall mean (a) commercial paper issued by Southland (i) which is unsecured, (ii) which qualifies for the exemption from registration under Section 3(a)(3) of the Securities Act, (iii) direct payment of which is fully and unconditionally guaranteed by the Purchaser and (iv) which is otherwise issued and outstanding on substantially the terms set forth in EXHIBIT 3, together with such other or different terms, and governed by such documents, as are acceptable to the Administrative Agent and (b) unsecured Indebtedness for money borrowed (to be used as a backup line for the commercial paper described in CLAUSE (a) above) (i) which is subject to terms, conditions and documentation satisfactory in form and substance to the Requisite Senior Lenders, (ii) resulting from advances (if any) which are applied to repay the commercial paper described in CLAUSE (a) at the maturity thereof and (iii) direct payment of which is fully and unconditionally guaranteed by the Purchaser. "COMMERCIAL PAPER FACILITY" shall mean, at any time, the aggregate maximum amount of Commercial Paper which is either then outstanding or may then be issued. "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 -8- 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. "COMPLIANCE CERTIFICATE" shall mean a certificate substantially in the form attached hereto as Exhibit 4 delivered to the Senior Lenders by the Borrower 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 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 Senior Term Loans (net of the application of all prepayments 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 -9- (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 2.07(b)(iii)(C). "CUSA" shall mean Citicorp USA, Inc., a Delaware corporation. "CUSTOMARY PERMITTED LIENS" shall mean (i) Liens (other than Environmental Liens and any Lien imposed under ERIASA) 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; (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 the Borrower 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; -10- (v) rights of tenants, subtenants, franchisees or parties in possession (other than a debtor in possession, trustee in bankruptcy or receiver in respect of the Borrower), 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 paragraphs (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 the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate. "DOLLARS" and "$" shall mean the lawful money of the United States of America. "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). -11- "EFFECTIVE DATE" shall mean the date on which this Agreement shall become effective in accordance with SECTION 13.21. "ELIGIBLE INTEREST RATE CONTRACT" shall mean an Interest Rate Contract made by Southland in a transaction permitted under this Agreement in respect of which (i) any Senior Lender is the counterparty, (ii) Southland has elected to make available to the counterparty the benefits of the Collateral Documents, to the extent permitted under SECTION 8.17, (iii) the provisions set forth in EXHIBIT 5, or their substantial equivalent, constitute part of the contract and (iv) the Borrower and Administrative Agent have executed an Acknowledgement as to Eligible Interest Rate Contract in substantially the form included in EXHIBIT 5. "EMPLOYEE CONVERTIBLE SUBORDINATED DEBENTURES" shall mean Southland's Employee Convertible Subordinated Debentures issued in an aggregate principal amount not exceeding $27,600,000 under Southland's Equity Participation Plan and pursuant to an Indenture in the form attached to Southland's Equity Participation Plan. "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 the Borrower; (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 the Borrower; and (iii) a member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as the Borrower, any corporation described in CLAUSE (i) above or any trade or business described in CLAUSE (ii) above. -12- "EURODOLLAR AFFILIATE" shall mean, with respect to each Senior Lender, the Affiliate of such Senior Lender set forth below such Senior 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 the Borrower and the Administrative Agent in accordance with SECTION 13.10. "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 2.08(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 (or, in the case of Citibank, to be made by CUSA) 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. -13- "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 2.04(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 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 11.01 after the expiration of any applicable grace period expressly provided 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 the Borrower pursuant to Article III. "FACILITY LETTER OF CREDIT FEE" shall have the meaning ascribed to it in SECTION 2.05(e). "FACILITY LETTER OF CREDIT OBLIGATIONS" shall mean, at any particular time, the sum of (i) Reimbursement Obligations plus (ii) the aggregate maximum amount available for drawing under the Facility Letters of Credit. "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 next 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 Administration Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. -14- "FEDERAL RESERVE BOARD" shall mean the Board of Governors of the Federal Reserve System or any Person succeeding to the functions thereof. "FIRST AMENDED AND RESTATED CREDIT AGREEMENT" shall have the meaning ascribed to it in the preamble hereto. "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 Loan, the date of the funding of that Revolving Loan. "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 OF SECURED OBLIGATIONS" 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 the Borrower of every type and description arising under in connection with this Agreement or any other Loan Document, (iv) each other Person entitled to indemnification pursuant to SECTION 13.04, in respect of the obligations and liabilities of the Borrower to such Person thereunder, (v) each -15- Senior Lender, in respect of all obligations and liabilities of the Borrower to such Senior Lender as exchange party or counterparty under any Eligible Interest Rate Contract and (vi) their respective successors, transferees and assigns. "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 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 Obliga- tions 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. -16- "ISSUING BANKS" shall mean the Senior Lenders (or their Affiliates) identified as Issuing Banks on the signature pages hereof and any other Senior Lender (or its Affiliate) which becomes an Issuing Bank for the purpose of issuing Facility Letters of Credit pursuant to ARTICLE III. An Affiliate of a Senior Lender which is not otherwise a Senior Lender shall become an Issuing Bank only with the consent of the Borrower, which consent shall not be unreasonably withheld. 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. "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. "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 agreed upon between the Borrower and such Issuing Bank (with respect to which the Administrative Agent has been notified in writing), as such amount may be modified from time to time pursuant to SECTION 2.02(e), 3.12 or 11.02(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 the Borrower 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 -17- 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, that portion of the Revolving Credit Commitments dedicated solely to Facility Letters of Credit which shall initially be equal to $150,000,000, as such amount may be reduced from time to time pursuant to SECTION 2.02(e), 3.12 or 11.02(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. "LOAN" shall mean a Senior Term Loan or a Revolving Loan, each of which may be either a Base Rate Loan or a Eurodollar Rate Loan. "LOAN DOCUMENTS" shall mean this Agreement (and, for the applicable periods, the First Amended and Restated Credit Agreement and the Second Amended and Restated Credit Agreement), the Notes, the Letter or Credit Reimbursement Agreements, the Collateral Documents and all other security agreements, mortgages, deeds of trust, financing statements, patent and trademark security agreements, lease assignments, guaranties and other agreements, instruments and written indicia of Contractual Obligations between Acquisition or Southland and any Agent, any Senior Lender, any Issuing Bank or any predecessor in interest to any of them, delivered to such Agent, Senior Lender, Issuing Bank or predecessor in interest by or on behalf of Acquisition or Southland pursuant to or in connection with the transactions contemplated hereby, by the First Amended and Restated Credit Agreement or by the Second Amended and Restated Credit Agreement. "MARGIN STOCK" shall have the meaning ascribed to it in Regulation U and Regulation G. "MASTER ASSIGNMENT AGREEMENT" shall have the meaning ascribed to it in the recitals hereto. -18- "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. "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 the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate. "NON PRO RATA LOAN" shall have the meaning ascribed to it in SECTION 2.07(b)(iii). "NOTES" shall mean the Senior Term Notes and the Revolving Credit Notes. "NOTICE OF BORROWING" shall mean, with respect to a proposed Borrowing pursuant to SECTION 2.01(b) or 2.02(b), as applicable, a notice in substantially the form of EXHIBIT 6-A or 6-B, respectively. "NOTICE OF CONVERSION/CONTINUATION" shall mean, with respect to a proposed conversion or continuation of a Loan pursuant to SECTION 2.04(c), notice substantially in the form of EXHIBIT 7. "OBLIGATIONS" shall mean all present and future obligations and liabilities of the Borrower 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 13.04, or any of their respective successors, transferees or assigns, and shall include, without limitation, (i) all liability of the Borrower for principal of and interest on the Loans or under the Notes, (ii) all Reimbursement Obligations of the Borrower to any Issuing Bank, (iii) all obligations and liabilities of the Borrower to any Senior Lender in respect to the Eligible Interest Rate Contracts and (iv) all liability of the Borrower 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) -19- or its president or any vice-president and (ii) by its principal financial officer, its controller or its treasurer. "OLD SENIOR LENDERS" shall have the meaning ascribed to it in the recitals hereto. "ORIGINAL CREDIT AGREEMENT" shall have the meaning ascribed to it in the recitals hereto. "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. "PATENT SECURITY AGREEMENT" shall mean the Collateral Patent Agreement dated as of December 15, 1987 between the Borrower and the Administrative Agent relating to certain of the Borrower's patents and patent applications, attached hereto as EXHIBIT 8-A, as the same has been or may be amended, supplemented or otherwise modified from time to time, including as amended and supplemented by the Amendment and Supplement to Collateral Patent Agreement of even date herewith, in substantially the form of EXHIBIT 8-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-B. "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-C. "PERSON" shall mean any natural person, corporation, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, and 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. -20- "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 13.02(a) (notwithstanding the termination of any such Commitments pursuant to SECTION 11.02(a)). "PURCHASE PRICE" shall have the meaning ascribed to it in the Master Assignment Agreement. "PURCHASER" 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. "QUARTERLY DETERMINATION DATE" shall mean each March 31, June 30, September 30 and December 31 during the term of this Agreement. "REAL ESTATE COLLATERAL DOCUMENTS" shall mean all mortgages, deeds of trust, leasehold mortgages, collateral assignments of leases and other documents relating to the Borrower's real property delivered (or to be delivered) on, prior to or after December 15, 1987 under or in connection with this Agreement, the Second Amended and Restated Credit Agreement or the First Amended and Restated Credit Agreement, as any of the same have been or may be amended, supplemented or otherwise modified from time to time. "REAL ESTATE PROCEDURES MEMORANDUM" shall mean the description of procedures in regard to conveyance by Southland of liens in its real property and leasehold interests in real property attached as EXHIBIT 9. "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. -21- "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 the Borrower to the Issuing Banks pursuant to Letter of Credit Reimbursement Agreements with respect to Facility Letters of Credit, for amounts paid out thereunder. "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 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 sixty-six and two-thirds percent (66-2/3%). "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 the Borrower 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 the Borrower 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 the Borrower or any of its Subsidiaries now or hereafter outstanding (other than the issuance of Common Stock upon the -22- exercise of any warrants, options or rights to acquire such stock). "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 conditions 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 Lenders, the maximum amount of which shall be $300,000,000, as such amount may be reduced from time to time pursuant to SECTION 2.02(e), 3.12 or 11.02(a), PROVIDED, HOWEVER, that the Revolving Credit Commitments shall not at any time exceed the sum of (i) the Revolving Loan Subfacility in effect at such time, PLUS (ii) the Letter of Credit Subfacility in effect at such time. "REVOLVING CREDIT NOTE" shall have the meaning ascribed to it in SECTION 2.02(d). "REVOLVING CREDIT OBLIGATIONS" shall mean, at any par- ticular time, the sum of (i) the outstanding principal amount of the Revolving Loans at such time, PLUS (ii) the Facility Letter of Credit Obligations at such time. "REVOLVING CREDIT TERMINATION DATE" shall have the meaning ascribed to it in SECTION 2.02(e)(iii). "REVOLVING LOAN" shall have the meaning ascribed to it in SECTION 2.02(a). "REVOLVING LOAN SUBFACILITY" shall mean, at any time, that portion of the Revolving Credit Commitments dedicated solely to Revolving Loans which shall initially be equal to $150,000,000, as such amount may be reduced from time to time pursuant to SECTION 2.02(e) or 11.02(a); PROVIDED that if at any time the Commercial Paper shall then have a rating lower than 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 lower than the highest rating from such other nationally recognized rating service as is acceptable to the Administrative Agent), the Revolving Loan Subfacility at such time shall be zero. -23- "S&P" shall mean Standard & Poor's Rating Group, a division of McGraw Hill, Inc. "SECOND AMENDED AND RESTATED CREDIT AGREEMENT" shall have the meaning ascribed to it in the recitals hereto. "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. "SECURITY AGREEMENT" shall mean the Security and Pledge Agreement dated as of December 15, 1987 between the Borrower and the Administrative Agent, relating to the Borrower's personal property, attached hereto as EXHIBIT 10-A, as the same has been or may be amended, supplemented or otherwise modified from time to time, including as amended and supplemented by the Amendment and Supplement to Security and Pledge Agreement of even date herewith, in substantially the form of EXHIBIT 10-B. "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). "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. -24- "SENIOR SUBORDINATED DEBENTURE INDENTURES" shall mean the indentures pursuant to which the Senior Subordinated Debentures have been issued. "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. "SENIOR TERM LOAN" shall have the meaning ascribed to it in SECTION 2.01(a). "SENIOR TERM NOTE" shall have the meaning ascribed to it in SECTION 2.01(d). "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. "STRUCTURING FEES" shall have the meaning ascribed to it in SECTION 2.05(b). "SUBORDINATED INDEBTEDNESS" shall mean the Indebtedness evidenced by, or in respect of, (i) the Senior Subordinated Debentures, (ii) the Employee Convertible Subordinated Debentures and (iii) 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 COMMITMENT" shall mean, with respect to any Senior Lender, the obligation of such Senior Lender to make its Senior Term Loan pursuant to the terms and conditions of this -25- 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 $300,000,000, as reduced from time to time pursuant to SECTION 2.01(d), 2.06(a) or 11.02(a). "TERMINATION EVENT" shall mean (i) a Reportable Event, (ii) the withdrawal of the Borrower, any Subsidiary of the Borrower 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 the Borrower or any ERISA Affiliate from a Multiemployer Plan if the amount of the withdrawal liability assessed by the plan sponsor against the Borrower or any such ERISA Affiliate would have a Material Adverse Effect. "THIRD PARTY PLEDGE AGREEMENTS" shall mean the Third Party Pledge Agreements dated as of December 15, 1987 between the respective Third Party Pledgors and the Administrative Agent, attached hereto as EXHIBITS 11-A and 12-A, relating to the capital stock of the Subsidiaries of such Third Party Pledgors, in each case as the same has been or may be amended, supplemented or otherwise modified from time to time, including as amended and supplemented by the respective Amendment and Supplement to Third Party Pledge Agreement of even date herewith, in substantially the forms of EXHIBITS 11-B and 12-B, respectively.. "THIRD PARTY PLEDGORS" shall mean (i) Southland International, Inc., a Nevada corporation and wholly-owned Subsidiary of Southland and (ii) Southland Sales Corporation, a Texas corporation and wholly-owned Subsidiary of Southland. "TRADEMARK SECURITY AGREEMENT" shall mean the Collateral Trademark Agreement dated as of December 15, 1987 between the Borrower and the Administrative Agent, relating to -26- certain of the Borrower's trademarks and trade names, attached hereto as EXHIBIT 13-A, as the same has been or may be amended, supplemented or otherwise modified from time to time, including as amended and supplemented by the Amendment and Supplement to Collateral Trademark Agreement of even date herewith, in substantially the form of EXHIBIT 13-B. "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 offer and sale of Subordinated Indebtedness. "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). "UNUSED COMMITMENT FEE" shall have the meaning ascribed to it in SECTION 2.05(c). "WARRANT AGREEMENT" shall mean the Warrant Agreement dated as of March 5, 1991 among Southland, the Purchaser, certain holders of Common Stock named therein and the warrant agent thereunder. "WARRANTS" shall mean the warrants to purchase an aggregate of 10,214,842 shares of Common Stock, issued pursuant to the Warrant Agreement. "YEN ROYALTY FINANCING AGREEMENT" shall mean the Credit Agreement dated as of March 21, 1988 among the Borrower, 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 the Borrower 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 -27- 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. 1.04. ACCOUNTING TERMS. Subject to SECTION 13.05, 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. -28- 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. THE SENIOR TERM LOANS. (a) AMOUNT OF SENIOR 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 the Borrower in an amount equal to such Senior Lender's Term Loan Commitment (each individually, a "Senior Term Loan" and, collectively, the "Senior Term Loans"). All Senior 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 Senior 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. The Borrower shall deliver to the Administrative Agent on the Effective Date a Notice of Borrowing, signed by it, with respect to the Senior Term Loans to be made on the Effective Date (other than the Senior Term Loans deemed made pursuant to SECTION 2.01(c)(i)). Such Notice of Borrowing shall specify (i) the aggregate amount of the Senior Term Loans (which shall not exceed an amount equal to the excess, if any, of the aggregate of the Term Loan Commitments over the amount of Senior Term Loans deemed made pursuant to SECTION 2.01(c)(i)) and (ii) instructions for the disbursement of the proceeds of the Senior Term Loans. The Senior Term Loans 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 2.04(c) and subject to the conditions and limitations therein set forth and set forth in SECTION 2.08. Any Notice of Borrowing given pursuant to this SECTION 2.01(b) shall be irrevocable. (c) MAKING OF SENIOR TERM LOANS. (i) Subject to the fulfillment of the conditions precedent set forth in SECTION 4.01 and the Master Assignment Agreement, each Senior Lender shall be deemed to have advanced funds to the Borrower on the Effective Date in respect of the Senior Term Loans equal to its Pro Rata -29- Share of the lesser of (A) $300,000,000 and (B) the amount of the Purchase Price, it being agreed and understood that (x) the funds deemed advanced to the Borrower pursuant to this SECTION 2.01(c)(i) shall be paid by each Senior Lender to the Administrative Agent and shall be applied to the payment of the Purchase Price, (y) such funds shall be transferred by the Administrative Agent to the appropriate Old Senior Lenders in accordance with the provisions of the Master Assignment Agreement and credited to the loan account maintained by each Old Senior Lender with respect to the Borrower and (z) no new funds shall actually be advanced to the Borrower in respect of the Senior Term Loans under this SECTION 2.01(c)(i). (ii) Promptly after receipt of the Notice of Borrowing under SECTION 2.01(b) in respect of the Senior Term Loans, if any, not deemed advanced pursuant to SECTION 2.01(c)(i), the Administrative Agent shall notify each Senior Lender of the proposed Borrowing. Each Senior Lender shall deposit an amount equal to its Pro Rata Share of such Senior Term Loans requested in accordance with SECTION 2.01(b) with the Administrative Agent at its office in New York, New York, in immediately available funds, on the Effective Date. 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 the Borrower at the Administrative Agent's office in New York, New York on the Effective Date and shall disburse such proceeds in accordance with the Borrower's disbursement instructions set forth in such Notice of Borrowing. (iii) The failure of any Senior Lender to purchase the obligations described in SECTION 2.01(c)(i) or 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 Senior 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 Effective Date, the Administrative Agent shall promptly return, by wire transfer of immediately available funds, the amount transferred pursuant to the Master Assignment Agreement or deposited hereunder by each Senior Lender to such Senior Lender. (d) SENIOR TERM NOTES. (i) The Borrower shall execute and deliver to each Senior Lender on the Effective Date a promissory note, in substantially the form of EXHIBIT 14 and otherwise in form and substance satisfactory to the Senior Lenders, in the principal amount of that Senior Lender's Senior Term Loan Commitment (each individually, a "Senior Term Note" and collectively, the "Senior Term Notes"). Subject to SECTIONS 2.06(a) and 11.02, the Senior Term Loans shall mature in sixteen (16) consecutive quarterly installments of $18,750,000 each, payable on the last Business Day in each calendar quarter, -30- commencing March 31, 1996, 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 Senior Term Loans shall be paid in full on or before December 31, 1999. 2.02. REVOLVING CREDIT FACILITY. (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 the Borrower from time to time through the Business Day next 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 that equals the then Revolving Loan Subfacility. (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) Revolving Loans may be voluntarily prepaid pursuant to SECTION 2.06(a) and, subject to the provisions of this Agreement, any amounts so prepaid may be reborrowed, up to the amount available under this SECTION 2.02(a) at the time of such Borrowing, through the Business Day next preceding the Revolving Credit Termination Date. (iv) Revolving Loans made on any Funding Date shall be in the aggregate minimum amount of $5,000,000. (b) NOTICE OF BORROWING. (i) Whenever the Borrower desires to borrow under this SECTION 2.02, it shall deliver to the Administrative Agent a Notice of Borrowing, signed by it, (A) on the Effective Date, in the case of a Borrowing of Revolving Loans on the Effective Date (other than the Revolving Loans deemed made pursuant to SECTION 2.02(c)(i)) and (B) no later than 11:00 a.m. (New York time) (I) at least one (1) Business Day in advance of 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. The Notice of Borrowing shall specify (w) the Funding Date (which shall be a Business Day) in respect of the Revolving Loan, (x) the amount of the proposed Borrowing (which, in the case of a -31- Borrowing of Revolving Loans on the Effective Date, shall not exceed an amount equal to the excess, if any, of the Revolving Loan Subfacility on such date over the amount of Revolving Loans deemed made pursuant to SECTION 2.02(c)(i)), (y) whether the proposed Borrowing will be of Base Rate Loans or Eurodollar Rate Loans, and (z) in the case of Eurodollar Rate Loans, the requested Eurodollar Interest Period. 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 2.04(c) and subject to the conditions therein set forth and in Section 2.08. In lieu of delivering the above-described Notice of Borrowing, the Borrower 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. Any Notice of Borrowing (or telephone notice in lieu thereof) pursuant to this SECTION 2.02(b) shall be irrevocable. (ii) The Borrower shall notify the Administrative Agent in writing of the names of the officers and employees authorized to request Revolving Loans on behalf of the Borrower and shall provide the Administrative Agent with a specimen signature of each such officer or employee. The Administrative Agent shall be entitled to rely conclusively on such officer's or employee's authority to request a Revolving Loan on behalf of the Borrower 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 and, with respect to an oral request for a Revolving Loan, 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 the Borrower. Neither the Administrative Agent, nor any other Agent nor any Senior Lender shall incur any liability to the Borrower 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 the Borrower or for otherwise acting in good faith under this SECTION 2.02(b). (c) MAKING OF REVOLVING LOANS. (i) Subject to the fulfillment of the conditions precedent set forth in SECTION 4.01 and the Master Assignment Agreement, each Senior Lender shall be deemed to have advanced funds to the Borrower on the Effective Date in respect of the Revolving Loans equal to its Pro Rata Share of the lesser of (A) the Revolving Loan Subfacility and (B) that portion of the Purchase Price which is not advanced pursuant to SECTION 2.01(c)(i), it being agreed and understood that (A) -32- the funds deemed advanced to the Borrower pursuant to this SECTION 2.02(c)(i) shall be paid by each Senior Lender to the Administrative Agent and shall be applied to the payment of the Purchase Price, (B) such funds shall be transferred by the Administrative Agent to the appropriate Old Senior Lenders in accordance with the provisions of the Master Assignment Agreement and credited to the loan account maintained by each Old Senior Lender with respect to the Borrower and (C) no new funds shall actually be advanced to the Borrower in respect of the Revolving Loans under this SECTION 2.02(c)(i). (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, if any, not deemed advanced pursuant to SECTION 2.02(c)(i), the Administrative Agent shall notify each Senior Lender by telex or telecopy or other similar form of transmission, of the proposed Borrowing. Each Senior Lender shall make the amount of its Revolving Loan 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) on the Funding Date. Subject to the fulfillment of the conditions precedent set forth in SECTION 4.01 or 4.02, as 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 the Borrower in New York, New York, on such Funding Date and shall disburse such funds in Dollars and in immediately available funds to an account of the Borrower, designated in writing by the Borrower in the Notice of Borrowing. (iii) The failure of any Senior Lender to purchase the obligations described in SECTION 2.02(c)(i) on the Effective Date or 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 transferred pursuant to the Master Assignment Agreement or 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 -33- Funding Date and the Administrative Agent in its sole discretion may, but shall not be obligated to, make available to the Borrower 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 the Borrower 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 the Borrower until the date such amount is paid or repaid to the Administrative Agent, at (A) in the case of the Borrower, 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 the Borrower shall have paid and repaid such corresponding amount, the Administrative Agent shall promptly return to the Borrower 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 CREDIT NOTES. The Borrower shall execute and deliver to each Senior Lender on the Effective Date a promissory note, in substantially the form of EXHIBIT 15 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 Credit Note" and collectively, the "Revolving Credit Notes"). The Revolving Credit Note delivered to each Senior Lender shall mature 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 Credit Note on the back of such Revolving Credit 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. (e) TERMINATION OF REVOLVING CREDIT COMMITMENTS; REDUCTION OF REVOLVING LOAN SUBFACILITY; REVOLVING CREDIT TERMINATION DATE. (i) The Borrower 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 any partial reduction of the Revolving Credit Commitments shall occur by the Borrower's reduction of the Revolving Loan Subfacility pursuant to SECTION -34- 2.02(e)(ii) or the Letter of Credit Subfacility pursuant to SECTION 3.12(a) or both; PROVIDED, FURTHER, HOWEVER, that the Borrower 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. (ii) The Borrower 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 of the Revolving Credit Commitments or reduction of the Revolving Loan Subfacility and 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 of the Revolving Credit Commitments or reduction of the Revolving Loan Subfacility shall be effective on the date specified in the Borrower's notice and shall permanently reduce the Revolving Credit Commitment of each Senior Lender proportionately in accordance with its Pro Rata Share. Any such partial reduction of the Revolving Loan Subfacility shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount. (iii) Each Senior Lender's Revolving Credit Commitment shall expire without further action on the part of the Senior Lenders and all Revolving Credit Obligations 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 earlier of (A) December 31, 1999, or (B) the date of termination of the Revolving Credit Commitments pursuant to SECTION 11.02(a) (the "Revolving Credit Termination Date"). 2.03. USE OF PROCEEDS OF LOANS. The proceeds of the Loans deemed made under SECTION 2.01(c)(i) or 2.02(c)(i) shall be used solely for the purposes set forth in such Sections and the Master Assignment Agreement. The proceeds of all other Loans made on the Effective Date shall be used (i) to repay in full all other matured obligations of the Borrower under the Second Amended and Restated Credit Agreement, as set forth in the Master Assignment Agreement, (ii) to pay the Transactions Costs and (iii) for the purposes described in the following sentence. The proceeds 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. Southland hereby acknowledges that the restrictions as to use of proceeds in this Agreement or any of the other Loan Documents are commercially reasonable and made in good faith. -35- 2.04. 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 at a fluctuating rate determined from time to time by reference to the Base Rate or the Eurodollar Rate, but not to exceed the maximum rate permitted by applicable law. The applicable basis for determining the rate of interest shall be selected by the Borrower at the time a Notice of Borrowing is given by the Borrower pursuant to SECTION 2.01(b) or 2.02(b) (as applicable) or, in the case of all Loans, at the time a Notice of Conversion/Continuation is delivered by the Borrower pursuant to SECTION 2.04(c); PROVIDED, HOWEVER, that (x) the Borrower may not select the Eurodollar Rate as the applicable basis for determin- ing the rate of interest on a 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 made or deemed made on the Effective Date shall be Base Rate Loans. If on any day a 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 2.04(d) and 13.24, as follows: (i) If a Base Rate Loan or such other Obligation, then at a rate per annum equal to the Base Rate as in effect from time to time as interest accrues; or (ii) If a Eurodollar Rate Loan, then at a rate per annum equal to the sum of (A) 0.975% per annum PLUS (B) the Eurodollar Rate determined for the applicable Eurodollar Interest Period. (b) INTEREST PAYMENTS. Subject to SECTIONS 2.04(d) and 13.24, 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 2.08(f)) and (z) at maturity. (c) CONVERSION OR CONTINUATION. Subject to the provisions of SECTION 2.08, the Borrower shall have the option (i) to convert at any time all or any part of outstanding Loans which comprise part of the same Borrowing and which, in the -36- 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 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 Loan 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 the Borrower shall elect to convert or continue a Loan under this SECTION 2.04(c), the Borrower shall deliver a Notice of Conversion/Continuation to the Administrative Agent no later than 11:00 a.m. (New York time) at least one (1) Business Day in advance of 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 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, the Borrower may give the Administrative Agent telephonic notice of any proposed conversion/continuation by the time required under this SECTION 2.04(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 2.04(c). Promptly after receipt of a Notice of Conversion/Continuation under this SECTION 2.04(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. The officers and employees of the Borrower authorized to request a Revolving Loan on behalf of the Borrower shall also be authorized to request a conversion/continuation of any such -37- Revolving Loan or any Senior Term Loan on behalf of the Borrower. The Administrative Agent shall be entitled to rely on such officer's or employee's authority until the Administrative Agent is notified to the contrary in writing pursuant to SECTION 2.02(b)(ii). The Administrative Agent shall have no duty to verify the authenticity of the signature appearing on any written Notice of Conversion/Continuation and, with respect to an oral request therefor, 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. Neither the Administrative Agent, any other Agent nor any Senior Lender shall incur any liability to the Borrower 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 act on behalf of the Borrower or such other obligor or for otherwise acting in good faith under this SECTION 2.04(c). Any Notice of Conversion/Continuation for conversion to, or continuation of, a Loan (or telephonic notice in lieu thereof) shall be irrevocable and the Borrower shall be bound to convert or continue in accordance therewith. (d) DEFAULT INTEREST. Notwithstanding the rates of interest specified in SECTION 2.04(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 11.01(a) or (ii) the date of acceleration of the maturity of the Obligations pursuant to SECTION 11.02(a) and for as long thereafter as such Event of Default shall be continuing or until such acceleration has been rescinded pursuant to SECTION 11.02(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 and the Notes limiting the rate of interest to that permitted by applicable law). In computing interest on any 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 2.08(d) with respect to certain determinations on -38- 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 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 -39- burdensome in nature, extent or consequence than those in existence as of the Effective Date; 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, the Borrower 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 2.04(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 the Borrower 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 the Borrower pursuant to this SECTION 2.04(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 the Borrower 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 the Borrower from time to time, the Administrative Agent shall promptly provide to the Borrower such information with respect to the applicable Eurodollar Rate as may be reasonably required by the Borrower, 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. 2.05. FEES. AGENT'S FEE (a) ADMINISTRATIVE S AND OTHER FEES. The Borrower shall pay to the Administrative Agent, solely for its own account, the fees (the "Administrative Agent's Fees") specified in the letter agreement dated November 14, 1994 between the Administrative Agent and Southland, on the dates specified therein. No Persons other than the Administrative Agent shall have any interest in the Administrative Agent's Fees. (b) STRUCTURING FEES. The Borrower shall pay to the Administrative Agent, solely for account of each Agent, the fees (the "Structuring Fees") specified in the letter agreement dated November 14, 1994 between the Borrower and each of the Agents on the date specified therein. No Persons other than the Agents shall have any interest in the Structuring Fees. -40- (c) UNUSED COMMITMENT FEE. The Borrower shall pay to the Administrative Agent, for the account of each Senior Lender, a fee (an "Unused Commitment Fee") accruing at the rate of one- half of one percent (0.50%) per annum through the Revolving Credit Termination Date, upon the daily excess, if any, of such Senior Lender's Revolving Credit Commitment then in effect over such Senior Lender's Pro Rata Share of the Revolving Credit Obligations outstanding at such time. All Unused Commitment Fees which have accrued in any calendar quarter shall be payable quarterly in arrears on the first Business Day of the immediately succeeding calendar quarter. All Unused Commitment Fees shall be calculated on the basis of the actual number of days elapsed in a 360-day year. (d) CLOSING FEES. The Borrower shall pay to the Administrative Agent, for the account of each Senior Lender, a fee (a "Closing Fee") equal to such Senior Lender's Pro Rata Share of $1,500,000.00. All Closing Fees shall be payable on the Effective Date. (e) LETTER OF CREDIT FEES. The Borrower shall pay to the Administrative Agent, for account of the Senior Lenders or the Issuing Banks, as applicable, a fee for Facility Letters of Credit (the "Facility Letter of Credit Fee"), determined as set forth in SECTIONS 3.08(a) and (b). (f) PAYMENT OF FEES. The fees described in this SECTION 2.05 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 the Borrower to pay each fee described herein shall be in addition to, and not in lieu of, the obligation of the Borrower 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 2.05, 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), shall constitute Obligations and shall be secured by all of the Collateral. 2.06. PREPAYMENTS. (a) VOLUNTARY PREPAYMENTS. The Borrower 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 -41- aggregate minimum amount of $5,000,000, PROVIDED, HOWEVER, that the Borrower 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 2.08(f). Any notice of prepayment given to the Administrative Agent under this SECTION 2.06(a) shall specify the date of prepayment, the aggregate principal amount of the prepayment and the allocation of such amount among Base Rate Loans and Eurodollar Rate Loans. Voluntary prepayments of the Senior 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 LOANS. The Borrower shall make prepayments of Revolving Loans to the extent necessary to assure that the aggregate principal amount of the Revolving Loans outstanding at any time does not exceed the Revolving Loan Subfacility at such time. 2.07. 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 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 2.06, SECTION 2.07(b)(iii) and SECTION 3.06(b)(ii), all payments of principal and interest in respect of outstanding Loans, all payments in respect of Reimbursement Obligations, all payments of fees and all other payments in respect of any other Obligations, shall be allocated among such -42- 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 2.07(b)(ii) with respect to payments and proceeds of Collateral 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 the Borrower 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 Senior Term Loans and Revolving Loans shall be applied FIRST, to the Senior Term Loans (to installments and accrued interest then due and payable, ratably, in accordance with the Senior Lenders' respective Pro Rata Shares) 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. (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 and all proceeds of Collateral 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 the Borrower; (B) SECOND, to pay Obligations in respect of any fees and indemnities then due to the Senior Lenders from the Borrower; (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 of Secured Obligations 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 of Secured Obligations; (D) FOURTH, to pay or prepay principal of Loans and Reimbursement Obligations, to pay (or, to the extent such Obligations are contingent, prepay or provide cash collateral in respect of) Facility Letter of Credit Obligations, and to pay Obligations then due and payable in respect of the Eligible Interest Rate Contracts, if any; PROVIDED, that if sufficient funds -43- are not available to fund all payments to be made to the Holders of Secured Obligations 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) and in the Obligations then due and payable in respect of Eligible Interest Rate Contracts; (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 of Secured Obligations. Subject to SECTION 2.07(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 of Secured Obligations may request in writing, such funds as it may be entitled to receive, subject to the provisions of ARTICLE XII 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 of Secured Obligations 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 of Secured Obligations 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 13.08, without necessity of notice to or consent of or approval by the Borrower 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 the Borrower 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 -44- Administrative Agent by the Borrower 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 the Borrower by the Administrative Agent on behalf of such Senior Lender to cure, in full or in part, such failure by such Lender, but shall nevertheless be deemed to have been paid to such Lender in satisfaction of such other Obligations. Notwithstanding anything in this Agreement to the contrary: (A) the foregoing provisions of this SECTION 2.07(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 2.04(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 the Borrower, whether made by such Lender itself or by operation of the terms of this SECTION 2.07(b)(iii), and whether or not the Non Pro Rata Loan with respect thereto has been repaid, converted or continued; (C) amounts advanced to the Borrower 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 2.04(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 the Borrower as to its desired application, all repayments of principal which, in accordance with the other terms of this SECTION 2.07, 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 the Borrower 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 -45- 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 2.05, 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 the Borrower, including any periodic statement of account, will be presumed, rebuttably, to be correct. 2.08. 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: (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 2.04(c) (with respect to a conversion into or continuation of Eurodollar Rate Loans), the Borrower shall have the option, subject to the other provisions of this SECTION 2.08, 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 next 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; -46- (iii) The Borrower 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 Senior Term Loans, or any portion thereof, which terminates later than December 31, 1999; (iv) The Borrower 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 the Borrower 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 (v) There shall be no more than six (6) 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 13.24) 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 the Borrower 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 at least fifteen (15) basis points less than the cost to such Senior Lenders of obtaining funds in the London interbank Eurodollar market in the amount substantially -47- 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 the Borrower, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the right of the Borrower to elect to have the Senior 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 the Borrower 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 the Borrower and the Administrative Agent (which notice the Administrative Agent shall promptly transmit to each Senior Lender) of that determination. (ii) Upon the giving of the notice referred to in SECTION 2.08(e)(i), (A) the Borrower'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, the Borrower 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 2.08(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 the Borrower and the Administrative Agent (which notice the Administrative Agent shall promptly transmit to each Senior Lender) of that determination, whereupon the Borrower's right to request and such Senior Lender's -48- 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 the Borrower pursuant to SECTIONS 2.04(a), 2.04(d) and 2.04(f), the Borrower 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 the Borrower 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 2.04(c), (ii) if any prepayment of any Eurodollar Rate Loan (including without limitation, any prepayments pursuant to SECTION 2.06) 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 2.08(e), or (iv) as a consequence of any other default by the Borrower 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. The Borrower agrees that: (i) the Borrower 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 -49- 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. The Borrower 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 the Borrower described in this sentence and in the immediately preceding sentence of this paragraph. Promptly after the date on which payment of any such Eurodollar Rate Tax is due pursuant to applicable law, the Borrower will, at the request of that Senior Lender, furnish to that Senior Lender evidence, in form and substance satisfactory to that Senior Lender, that the Borrower has met its obligation under this Section 2.08(h); and (ii) The Borrower will indemnify each Senior Lender against, and reimburse each 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 the Borrower with (A) appropriate receipts for any payments or reimbursements made by the Borrower pursuant to this SECTION 2.08(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 the Borrower pursuant to this SECTION 2.08(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 the Borrower 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 2.04(f) or 2.08(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 circumstances giving rise to the claim -50- 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. 2.09. 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, the Borrower 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 the Borrower by such Senior Lender, shall, in the absence of manifest error, be conclusive and binding for all purposes. 2.10. REPLACEMENT OF SENIOR LENDER IN EVENT OF ADVERSE CONDITION. In the event the Borrower becomes obligated to pay additional amounts to any Senior Lender pursuant to SECTION 2.04(f), 2.08(e), 2.08(h), 2.09 or 3.08(c) as a result of any condition described in any such Section, then, unless such Senior Lender has theretofore taken steps to remove or cure, and has removed or cured, the conditions creating the cause for such obligation to pay such additional amounts, the Borrower 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 the Notes payable to such Senior Lender plus any accrued but unpaid interest on such Notes and, in the case of a Senior Lender, accrued but unpaid Unused Commitment Fees in respect of that Senior Lender's Commitment 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 -51- hereunder, and the Replacement Lender shall succeed to the rights of such Senior Lender hereunder. 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 the Borrower 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 next preceding the Revolving Credit Termination Date. 3.02. TYPES AND AMOUNTS. (a) An Issuing Bank shall not have any obligation to issue, and shall not issue, 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 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 of such Facility Letter of Credit, (I) the then Facility Letter of Credit Obligations would exceed the then Letter of Credit Subfacility 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 -52- 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 (B) after the Business Day immediately preceding the Revolving Credit Termination Date. (b) Any Senior Lender or Citibank 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) The Borrower 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. 3.04. ISSUANCE OF FACILITY LETTERS OF CREDIT. (a) The Borrower shall give an Issuing Bank written notice that it has selected that Issuing Bank to issue a Facility -53- 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. 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 Business Day immediately preceding the Revolving Credit Termination Date), (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 BANKS. (a) Notwithstanding any provisions to the contrary in any Letter of Credit Reimbursement Agreement: (i) the Borrower 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 2.04(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 than to confirm that any -54- 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 the Borrower 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 the Borrower 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 -55- 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 Bank, the proceeds of all amounts thereafter repaid to the Administrative Agent by the Borrower 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 -56- 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. (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 of enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, set-off, defense or other right which the Borrower 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, the First Amended and Restated Credit Agreement, the Second Amended and Restated Credit Agreement, any Facility Letter of Credit, the transactions contemplated herein or therein or any unrelated transactions (including any underlying transactions between the Borrower or any Subsidiary of the Borrower 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; -57- (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; (v) any failure by the Administrative Agent or that Issuing Bank to make any reports required pursuant to SECTION 3.09; or (vi) the occurrence of any Event of Default or Potential Event of Default. 3.07. PAYMENT OF REIMBURSEMENT OBLIGATIONS. (a) The Borrower 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 the Borrower may have at any time against any Issuing Bank or any other Person. (b) In the event any payment by the Borrower 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 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. The Borrower shall pay quarterly in arrears, on the tenth (10th) 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 Facility Letter of Credit Fee equal to four-fifths of one percent (0.80%) 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. The Borrower shall pay to each Issuing Bank, solely for its own account, (i) by the tenth (10th) Business Day of each calendar quarter, a fee equal to one- eighth of one percent (0.125%) per annum applied (on the basis of -58- 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 it, and (ii) the standard charges assessed by such Issuing Bank in connection with the issuance, administration, amendment and payment or cancellation of Facility Letters of Credit. (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, the Borrower 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 the Borrower 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 the Borrower separate schedules for Commercial Letters of Credit and Standby Letters of Credit issued as Facility Letters of Credit, in form and substance reasonably 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 the Borrower 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, the Borrower 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 -59- 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 the Borrower, the Senior Lenders and each Issuing Bank issuing a Facility Letter of Credit, the Borrower 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. (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 -60- taken or omitted in good faith, shall not put the Issuing Bank, the Administrative Agent or any Senior Lenders under any resulting liability to the Borrower or relieve the Borrower of any of its obligations hereunder to any such Person. (d) Notwithstanding anything to the contrary contained in this SECTION 3.10, the Borrower 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 (i) the Issuing Banks and (ii) the Senior Lenders other than 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. Except as set forth in SECTION 2.02(e)(ii) with respect to a termination of the Revolving Credit Commitments, upon five (5) Business Days' prior written notice thereof 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, in substantially the form of EXHIBIT 16-A, the Borrower may from time to time permanently reduce the Letter of Credit Subfacility (without premium or penalty) in a minimum amount of $5,000,000 and in increments of $1,000,000 in excess thereof to an amount which is not less than the then outstanding Facility Letter of Credit Obligations. Any reduction of the Letter of Credit Subfacility shall permanently reduce each Senior Lender's Revolving Credit Commitment ratably. Any termination of the Revolving Credit Commitments pursuant to SECTION 2.02(e) 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 -61- 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, the Borrower may: (i) with the written consent of such Senior Lender (or Affiliate thereof), 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; PROVIDED, HOWEVER, that, if at any time the aggregate Letter of Credit Commitments then in effect are less than the amount of the Letter of Credit Subfacility, the Borrower and the Administrative Agent shall have the right to 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; PROVIDED, FURTHER, HOWEVER, that the Letter of Credit Commitment of any Issuing Bank so designated by the Borrower and the Administrative Agent shall not exceed the lesser of (A) the amount by which the Letter of Credit Subfacility exceeds the aggregate Letter of Credit Commitments prior to such designation and (B) an amount equal to such Senior Lender's Pro Rata Share of the Letter of Credit Subfacility then in effect; and (ii) whether or not in connection with a reduction of the Letter of Credit Subfacility pursuant to SECTION 3.12(a), or the addition of an Issuing Bank pursuant to this SECTION 3.12(c), reduce or increase any Issuing Bank's Letter of Credit Commitment, subject to SECTION 3.12(d) below. (d) The Borrower's discretion to designate additional Issuing Banks pursuant to SECTION 3.12(c)(i) and to reduce or increase each Issuing Bank's Letter of Credit Commitment pursuant to SECTION 3.12(a) or 3.12(c)(ii) or otherwise to act pursuant to this SECTION 3.12, 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 or, in the case of an Issuing Bank designated as such by the Borrower, the amount specified or determined in accordance with SECTION 3.12(c)(i) and (ii) the Borrower 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. -62- 3.13. OBLIGATIONS SEVERAL. 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 Senior Term Loan and any Revolving Loan 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 Closing Date all of the following: (i) this Agreement, executed by Southland, 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) for the benefit of each Senior Lender, a Senior Term Note and Revolving Credit Note dated the Effective Date, executed by Southland and made payable to the order of such Senior Lender; (iii) an original and duly executed Notice of Borrowing completed in accordance with the provisions of SECTION 2.01(b) and/or SECTION 2.02(b); (iv) original and duly executed amendments or supplements to each of the Security Agreement, Patent Security Agreement, Trademark Security Agreement and the Third Party Pledge Agreements, in each case dated as of the date hereof, in substantially the forms of EXHIBITS 8-B, 10-B, 11-B, 12-B and 13-B, respectively; (v) Southland's and each Third Party Pledgor'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 such Person's State of incorporation as of a recent date prior to the Effective Date, together with good standing certificates from the Secretaries of State of -63- such States in which Southland or such Third Party Pledgor is qualified to do business as the Administrative Agent may request, each to be dated a recent date prior to the Effective Date; (vi) A certificate of the Secretary or Assistant Secretary of Southland and each Third Party Pledgor, in each case dated the Effective Date, certifying (A) the names and true signatures of the incumbent officers of Southland or such Third Party Pledgor authorized to sign the Loan Documents executed by such Person, (B) the By-Laws of such Person as in effect on the date of such certification, (C) the resolutions of such Person's Board of Directors approving and authorizing the execution, delivery and performance of the Loan Documents executed by such Person, and (D) that there have been no changes in the Articles of Incorporation of such Person since the date of the most recent certification thereof by the Secretary of State of the State of such Person's incorporation; (vii) Favorable legal opinions, each dated the Effective Date and otherwise in form and substance satisfactory to the Administrative Agent, addressed to the Agents, 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 17-A attached hereto; (B) Shearman & Sterling, New York and California counsel to Southland, dated the Effective Date, in substantially the form of EXHIBIT 17-B attached hereto; (C) Johnson & Wortley, Texas counsel to Southland, dated the Effective Date, in substantially the form of EXHIBIT 17-C attached hereto; and (D) local counsel to the Administrative Agent, in form and substance satisfactory to the Administrative Agent, in the States of Florida, Maryland and Virginia with respect to (I) the Loans and other Obligations arising under this Agreement are secured by the Liens granted under the existing Collateral Documents and (II) the existing mortgages and Uniform Commercial Code filings in such States are effective to perfect such Liens under the respective laws of such States. -64- The Borrower hereby directs, and shall cause each of the Third Party Pledgors to direct, their counsel to prepare and deliver to the Agents, the Senior Lenders and the Issuing Banks the respective opinions described in CLAUSES (A), (B) and (C) above; the Administrative Agent hereby directs its counsel to prepare and deliver to the Agents, the Senior Lenders and the Issuing Banks the respective opinions described in CLAUSE (D) above; (viii) the financial statements and materials referred to in SECTION 5.01(viii), in form and substance satisfactory to the Administrative Agent; (ix) a letter to Southland, dated on or near the Effective Date, from Coopers & Lybrand, in substantially the form attached as EXHIBIT 18; (x) a certificate signed by the principal financial officer or treasurer of Southland certifying that all conditions precedent have been met and no Potential Event of Default or Event of Default has occurred or is continuing; (xi) a fully executed copy of the Master Assignment Agreement; and (xii) 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, including the Administrative Agent's Fee, the Structuring Fee, the Closing Fee and all other fees required to be paid in connection with this proposed Agreement. (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 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 -65- Administrative Agent 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) COMPLIANCE WITH REAL ESTATE PROCEDURES. Southland shall have complied in all material respects with the procedures prescribed in the Real Estate Procedures Memorandum. (g) 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. (h) 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, 1993 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 the Borrower 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; -66- (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, 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 the Borrower to the Administrative Agent of a Notice of Borrowing with respect to a Revolving Loan and the acceptance by the Borrower 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 the Borrower 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. 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, (C) has filed and maintained effective (unless exempt from the -67- requirements for filing) a current Business Activity Report with the appropriate Governmental Authority in the states of Minnesota and New Jersey, and (D) 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 (x) to execute, deliver and perform each of the Loan Documents executed by it, or to be executed by it, and (y) 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. (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 the Borrower and each of its Subsidiaries and the owners of such shares or interests. None of such issued and outstanding equity Securities is subject to any vesting, redemption, or repurchase agreement, and there are no warrants or options 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 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. The outstanding equity Securities of the Borrower and each of its Subsidiaries are duly authorized, validly issued, fully paid and nonassessable free and clear of any Liens (except for the Liens granted pursuant to the Loan -68- Documents and 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 October 31, 1994, 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 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 either 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 (other than Liens in favor of the Administrative Agent arising pursuant to the Loan Documents), 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. -69- (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 November 14, 1994, 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 or the Second Amended and Restated Credit 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 1992 and 1993 (including audited financial statements) and the Quarterly Report on Form 10-Q for the first three fiscal quarters of 1994. 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, 1993, 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. (ix) FUNDAMENTAL CHANGES. Since December 31, 1993, 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; PRIOR CREDIT AGREEMENT OBLIGATIONS. SCHEDULE 1.01-B accurately describes all Indebtedness for borrowed money and Accommodation Obligations of the Borrower 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 -70- their stated maturity (except as disclosed on such Schedule). Except for Past Default Interest or as otherwise provided in the Master Assignment Agreement, (A) all obligations and liabilities of Southland under the First Amended and Restated Credit Agreement and the Second Amended and Restated Credit Agreement have been paid in full or assumed under this Agreement and (B) 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 or as otherwise disclosed in writing to the Senior Lenders pursuant to SECTION 6.01(viii) prior to the Effective Date (or as disclosed in the quarterly or annual reports filed with the Commission and delivered to the Senior Lenders prior to the Effective Date), (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 the Borrower, 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 CHANGE. Since December 31, 1993, 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, except financial obligations incurred pursuant to the Loan Documents. -71- (xiii) TAX EXAMINATIONS. The Federal income tax returns of Southland have been examined by the Internal Revenue Service (or closed by applicable statutes) for all tax periods prior to and including the taxable year ending December 31, 1988. 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, 1993. 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, 1993 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 1993 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 -72- 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. (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 Agents, or any of them, 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 -73- 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 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 New Jersey Environmental Cleanup Responsibility Act, N.J.S.A. 13:1K-6 et seq. ("ECRA") which Order provides that Southland will comply with the requirements of ECRA, 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 Code, whether or not waived. Each Benefit Plan which is intended to be a qualified plan under SECTION 401(a) of -74- 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. 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 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 -75- 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 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 Benefit Plan which is a 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 (i) 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 and (ii) to create and perfect or continue the perfection of the Liens on the Collateral owned by it in the manner and for the purpose contemplated by, and to the extent required by, this Agreement, the Collateral Documents and the Real Estate Procedures Memorandum, except where the failure to obtain any such consent or authorization would not have a Material Adverse Effect. (xxv) NON-CONTRAVENTION. Except as set forth on SCHEDULE 5.01(xxv) or with respect to Excluded Property under (and as defined in) the Security Agreement, the Patent Security Agreement or the Trademark Security Agreement, respectively, 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 -76- properties is subject restricts Southland from granting security interests or liens in its real or personal property. (xxvi) TITLE TO PROPERTY; LIENS; PLEDGE OF COLLATERAL. (A) Southland has good, sufficient and legal title to all of its properties and assets reflected in the most recent financial statements delivered pursuant to SECTION 6.01, except for assets disposed of in the ordinary course of business since the date of such financial statements and assets otherwise disposed of in accordance herewith, and all of such properties and assets are free and clear of all Liens except for Liens permitted by SECTION 8.02(b). (B) Each of the Collateral Documents to which Southland or any of its Subsidiaries is a party creates valid Liens in the Collateral covered thereby securing the payment of all of the Obligations purported to be secured thereby which Liens (I) shall have the same relative priorities as in effect immediately prior to the Effective Date and (II) except with respect to Collateral having a fair market value at any time not exceeding $5,000,000, are perfected, to the extent a valid Lien can be perfected, and is required to be perfected by the Collateral Documents or the Real Estate Procedures Memorandum, by (w) possession, (x) the filing of a mortgage, deed of trust, fixture filing or similar instrument relating to interests in real property, (y) the filing of a financing statement under the Uniform Commercial Code in any State or (z) filing with the U.S. Patent and Trademark Office. (C) The granting and perfecting of the security interest in the capital stock of the Subsidiaries of Southland constituting a portion of the Collateral for the benefit of the Senior Lenders, as contemplated by the terms of the Collateral Documents, is not made in violation of the registration provisions of the Securities Act, any other applicable federal Securities laws, applicable state Securities or "Blue Sky" law, any applicable provisions of the Texas Business Corporation Act or any other Requirements of Law. (xxvii) 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. (xxviii) OBLIGATIONS CONSTITUTE SENIOR INDEBTEDNESS. The obligations of the Borrower for principal of and interest on -77- ARTICLE VI REPORTING COVENANTS The Borrower 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. The Borrower 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 the same level of detail, as the internal report on operations of Southland covering the month of October, 1994 and the period commencing January 1, 1994 and ending October, 1994 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. -78- (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, accompanied by a report thereon of Coopers & Lybrand or other independent certified public accountants of recognized national -79- 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 19, 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 state- ments, 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 (xv); 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 18, 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 -80- 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 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 -81- 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. (xi) On or before the first anniversary of the Effective Date, Southland shall deliver to the Administrative Agent and Senior Lenders a business plan for the next succeeding Fiscal Year, in form and substance satisfactory to the Senior Lenders, addressing, among other matters, Southland's capital structure. (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), the Borrower shall notify each Senior Lender, in writing, promptly upon the Borrower'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 -82- 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 the Borrower 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 the Borrower shall deliver a copy of such notice to each Senior Lender. 6.03. OTHER REPORTS. The Borrower 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 (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 The Borrower 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 -83- permitted pursuant to SECTION 8.08. The Borrower 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. 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. -84- 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 the Borrower'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. FUTURE LIENS ON PERSONAL PROPERTY. Promptly, and in any event within thirty (30) days after the removal, termination or expiration of any prohibitions of the granting of a security interest in all or any part of the Excluded Property (as defined in the Security Agreement or any pledge agreement), the Borrower shall execute and deliver to the Administrative Agent all further instruments and documents (including, without limitation, certificates and instruments representing shares of stock or evidencing indebtedness), and take all further action that may be necessary or desirable, or that the Administrative Agent may reasonably request, to grant, perfect and protect a security interest in favor of the Administrative Agent in such Excluded Property or part thereof, as security for the Obligations. Upon the request of the Administrative Agent or the Requisite Senior Lenders, the Borrower will cause any or all of its Subsidiaries to pledge to the Administrative Agent, as security for the Obligations, all or any part of the capital stock held by any such Subsidiary and issued by any Subsidiary of such Subsidiary, and in furtherance thereof to execute and deliver to the Administrative Agent a pledge agreement satisfactory to the Administrative Agent. ARTICLE VIII NEGATIVE COVENANTS The Borrower 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: -85- 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; (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", 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); (iv) Present or future Indebtedness of any Subsidiary of Southland to Southland in an amount not exceeding $250,000,000; 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 any such Subsidiary to Southland, in excess of $10,000,000, shall be evidenced by promissory notes which shall be pledged to the Administrative Agent, PROVIDED, FURTHER, 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 Indebtedness incurred in connection with Capital Expenditures (and within a reasonable period of time thereafter), if such Capital Lease obligations and Indebtedness (1) are incurred in connection with the acquisition of assets at fair value after the Effective Date, (2) do not exceed the cost of the assets acquired and (3) are either unsecured or secured solely by Liens which do not extend (or otherwise permit recourse) to any property other than the property leased under such Capital Lease or constituting such Capital Expenditure, (B) sale and -86- leaseback transactions, if (1) the documents executed in connection with such transaction do not provide the purchaser/lessor with recourse to any property other than the property being purchased and leased and (2) the amount of the Indebtedness incurred in connection with such transaction does not exceed 100% of the fair market value of the assets being purchased and leased, (C) Indebtedness of a Person that becomes a Subsidiary of Southland existing at the time such Person becomes such a Subsidiary, if the amount of the Indebtedness does not exceed 80% of the fair value of the assets of the Subsidiary at the time and (D) 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 offer and sale of Subordinated Indebtedness and the transactions contemplated hereby; (vii) Indebtedness in respect of Letters of Credit (other than Facility Letters of Credit) reasonably incident to the Borrower's business; (viii) Indebtedness in respect of foreign currency exchange agreements reasonably incident to the Borrower'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 -87- 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 the Purchaser (or either of them) in connection with payments by the Purchaser (or either of them) of the principal of or interest on (or other amounts owing with respect to) Commercial Paper, PROVIDED that the instrument 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 Revolving Loan Subfacility does not then equal zero, payments of the principal amount of such Indebtedness made solely with proceeds of subsequent issuances of Commercial Paper by Southland; and (xv) 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. -88- 8.02. SALES OF ASSETS; LIENS. (a) SALES. 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) or (iv) involving assets with a sales price of 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 the Borrower does not restore or replace the property damaged, lost or taken), PROVIDED that, if all or any part of the consideration for any such disposition consists of promissory notes, such promissory notes are pledged (and, if applicable, delivered) to the Administrative Agent in accordance with the Security Agreement, (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 or (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, PROVIDED that such promissory notes are pledged (and, if applicable, delivered) to the Administrative Agent in accordance with the Security Agreement. (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 (including all Collateral) except: (i) Liens securing the Obligations; (ii) Permitted Existing Liens; (iii) any interest or title of a lessor or secured by a lessor's interest under any lease permitted by this Agreement; (iv) Customary Permitted Liens; -89- (v) 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; (vi) Liens with respect to judgments or attachments which do not result in an Event of Default hereunder or other breach hereof; (vii) Liens identified as permitted Liens in the Real Estate Collateral Documents; (viii) 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; (ix) Environmental Liens with respect to liability or damages not in excess of $5,000,000; (x) Liens on assets of a Person that becomes a Subsidiary of Southland existing at the time such Person becomes such a Subsidiary and securing Indebtedness permitted by SECTION 8.01(v)(C); (xi) 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); (xii) Liens on the Yen Royalty Financing Collateral securing the Yen Royalty Financing Indebtedness; (xiii) 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 -90- (xiv) 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)(ii), (v), (x) or (xii), 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 Foreign Affiliate in Southland, PROVIDED that (A) the aggregate amount of such Investments shall not exceed $300,000,000 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, PROVIDED, FURTHER, that, all of the shares of such stock shall be pledged to the Administrative Agent pursuant to the Security Agreement to secure the Obligations; -91- (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 20, 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 SECTIONS 8.02(a)(ii) and 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 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 -92- 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 of Southland pursuant to the engagement letter dated December 9, 1988 between Southland and Drexel Burnham Lambert, Inc., in connection with the exchange offer described therein; (xii) 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; (xiii) indemnification obligations (not directly or indirectly supporting payment of any other Indebtedness) undertaken on or after November 20, 1989 in favor of (a) any financial advisor, accountant, legal counsel or investment banker engaged to provide services related to a capital restructuring or the prepackaged bankruptcy restructuring in respect of claims arising out of or resulting from such services, and (b) any bondholder in its capacity as a member of the steering committee of holders of outstanding public indebtedness or public preferred stock in assisting Southland in the negotiation, preparation, and implementation of a capital restructuring or the prepackaged restructuring in respect of claims arising out of or resulting from services provided in such capacity; (xiv) 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 Facility in respect of claims arising out of or resulting from such services; and (xv) 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. 8.05. RESTRICTED JUNIOR PAYMENTS. The Borrower 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 11.01(a) or (by reason of a breach of one or more -93- covenants set forth in ARTICLE IX) SECTION 11.01(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 all repurchases or redemptions in excess of the amount required to satisfy sinking fund payments which shall become due with respect to such debentures prior to the Revolving Credit Termination Date shall be made either (A) with the proceeds of Common Stock or Subordinated Indebtedness issued after the Effective Date or (B) in an aggregate additional amount not exceeding 75% of the cumulative excess, for all Fiscal Years commencing after the Effective Date and ending on or before the date of repurchase or redemption, of (1) actual Consolidated Net Income (adjusted for extraordinary items and, to the extent not included in extraordinary items in accordance with GAAP, unusual items in excess of $5,000,000 arising in or outside of the ordinary course of business in each case which have been included in the determination of Consolidated Net Income) over (2) Consolidated Net Income reflected in the five-year forecast dated as of November 11, 1994, as delivered to the Senior Lenders prior to the Effective Date; (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 or 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). -94- 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, 1993 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 (A) the Shareholders Agreement dated as of March 5, 1991 by and among Southland, Ito-Yokado Co., Ltd., IYG Holding Company and certain other holders of Common Stock and (B) the Employment Agreements each dated as of March 5, 1991 between Southland and John P. Thompson and Jere W. Thompson, respectively, and, in each case, 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. 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). -95- 8.09. ERISA. The Borrower 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 the Borrower, any Subsidiary of the Borrower 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 Benefit Plan, the Borrower, 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 Benefit Plan, or fail to pay any installment necessary to amortize any waived funding deficiency, with respect to any 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 the Borrower, 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 the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate under Title IV of ERISA in an amount which would have a Material Adverse Effect; or (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 the Borrower in accordance with SECTION 13.10, presents a material risk of a liability of the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate under ERISA or the Internal Revenue Code which could have a Material Adverse Effect; or -96- (vi) (A) Enter into any new Benefit Plans 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 Facility (including the amount of the Commercial Paper Facility) 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 the Purchaser 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) and (b) 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, 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, and (ii) a copy of each notice or other communication received by Southland from any trustee under any Subordinated Indebtedness indenture, such delivery to be made promptly after such notice or other communication is received by Southland. -97- 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 if such shares are pledged pursuant to the Security Agreement. 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. RESTRICTIONS ON SOUTHLAND INTERNATIONAL, INC. Southland shall not permit Southland International, Inc., directly or indirectly, (i) to create, incur, assume or otherwise become or remain directly or indirectly liable with respect to any Indebtedness, except the Obligations, (ii) to conduct any business operations or to own any assets, other than to own and to hold the capital stock of Southland International, N.V. and Southland Canada, Inc., or (iii) to create, incur, assume or permit to exist any Lien on or with respect to any of its properties or assets, except any Lien securing the Obligations. 8.17. 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 -98- in excess of $700,000,000. At no time shall Southland or any of its Subsidiaries have in effect an Eligible Interest Rate Contract which has a termination date after the Revolving Credit Termination Date or any other Interest Rate Contract which has a termination date more than two (2) years after the Revolving Credit Termination Date. In the event a Senior Lender elects to enter into an Interest Rate Contract with Southland which meets the requirements set forth in SECTION 1.01 in the definition of "Eligible Interest Rate Contract", Southland and such Senior Lender shall have the right jointly to designate such Interest Rate Contract as an Eligible Interest Rate Contract for the purposes of this Agreement, and such designation shall become effective only if the Administrative Agent executes an Acknowledgement as to Eligible Interest Rate Contract (in substantially the form included in EXHIBIT 5) with respect to such Interest Rate Contract. ARTICLE IX FINANCIAL COVENANTS The Borrower 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 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 September 30, 1995 4.85x October 1, 1995 through September 30, 1996 4.10x October 1, 1996 through September 30, 1997 3.50x October 1, 1997 and thereafter 3.00x
9.02. MINIMUM INTEREST COVERAGE RATIO. Southland shall not on any Quarterly Determination Date occurring during -99- any period set out below permit the ratio of (i) EBITDA to (ii) Consolidated Cash Interest Expense, 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 September 30, 1995 2.35x October 1, 1995 through September 30, 1996 2.70x October 1, 1996 through September 30, 1997 3.00x October 1, 1997 and thereafter 3.20x
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, 1994 0.55x January 1, 1995 through March 31, 1995 0.60x April 1, 1995 through June 30, 1995 0.65x July 1, 1995 through September 30, 1995 0.75x October 1, 1995 through September 30, 1996 1.00x October 1, 1996 through September 30, 1997 0.90x October 1, 1997 through September 30, 1998 1.15x October 1, 1998 and thereafter 1.30x
-101- ARTICLE X REAL ESTATE COVENANTS The Borrower 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: 10.01. TAXES. If the United States or any State or any subdivision thereof having jurisdiction shall levy, assess, or charge any tax (excluding any income, franchise or doing business tax), assessment or imposition upon any Real Estate Collateral Document or the Obligations secured thereby, or the interest of the Administrative Agent, the Senior Lenders or the Issuing Banks in the real property which is the subject of such Real Estate Collateral Document, or upon the Administrative Agent, the Senior Lenders or the Issuing Banks by reason of or as holder of any of the foregoing, then the Borrower shall promptly pay, or cause to be paid (or, to the extent permitted by law, reimburse the Administrative Agent, or any Senior Lender or Issuing Bank or other party which shall have paid) such taxes, assessments or impositions. The Borrower shall exhibit to the Administrative Agent, the Senior Lenders or the Issuing Banks, at any time upon request of any such party or parties, official receipts showing payment of all such taxes, assessments and charges which the Borrower is required or elects to pay or cause to be paid. 10.02. FURTHER ASSURANCES. In accordance with the Real Estate Procedure Memorandum, upon request of the Administrative Agent from time to time, the Borrower shall, or shall cause the appropriate Person to, execute, acknowledge, deliver and cause to be recorded (if so requested) all such additional instruments and further assurances of title (and will cause each of the Subsidiaries to do the same) and will do or cause to be done all such further acts and things as may reasonably be necessary to preserve the lien of each Real Estate Collateral Document, and priority thereof, and fully effectuate the intent of each Real Estate Collateral Document. In the event that the Borrower shall fail to do any of the foregoing, or so cause the same to be done, the Administrative Agent may, in its sole discretion, do so in the name of the Borrower, and the Borrower hereby irrevocably appoints the Administrative Agent as its attorney-in-fact to do any of the foregoing. -101- 10.03. CONDEMNATION. The Borrower shall, immediately upon learning of the institution of any proceeding for the condemnation or other taking of the real property subject to any Real Estate Collateral Document, notify the Administrative Agent of the pendency of such proceeding affecting property which the Borrower values in excess of $10,000,000, and agrees that the Administrative Agent at its discretion may participate in any such proceeding, and the Borrower from time to time will deliver to the Administrative Agent all instruments reasonably requested by the Administrative Agent to permit such participation. 10.04. FUTURE LIENS ON REAL PROPERTY IN FAVOR OF THE SENIOR LENDERS. The Borrower shall execute and deliver to the Administrative Agent, promptly after the acquisition or leasing of any real property and in accordance with the Real Estate Procedures Memorandum, a mortgage, deed of trust, assignment or other appropriate instrument evidencing a Lien upon any such acquired property, lease or interest, the same to be in form and substance substantially the same as the Real Estate Collateral Documents executed and delivered on or about December 15, 1987 and to be subject only to (i) Customary Permitted Liens, (ii) Liens permitted by SECTION 8.02(b)(v) and (iii) such other Liens as the Requisite Senior Lenders may reasonably approve, it being understood that the granting of such additional security for the Obligations is a material inducement to the execution and delivery of this Agreement by each Senior Lender. 10.05. REAL ESTATE PROCEDURES. Southland will complete the tasks contemplated by the Real Estate Procedures Memorandum as promptly as practicable after the Effective Date. ARTICLE XI EVENTS OF DEFAULT; RIGHTS AND REMEDIES 11.01. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an Event of Default under this Agreement: (a) FAILURE TO MAKE PAYMENTS WHEN DUE. The Borrower 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 11.01(a)(ii) or 11.01(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 -102- payable under SECTION 2.06(b), but excluding any voluntary prepayment payable under SECTION 2.06(a). (b) BREACH OF CERTAIN COVENANTS. The Borrower shall fail duly and punctually to perform or observe any agreement, covenant or obligation binding on the Borrower under ARTICLE VIII or ARTICLE IX, other than an agreement, covenant or obligation covered by SECTION 11.01(a). (c) BREACH OF REPRESENTATION OR WARRANTY. Any representation or warranty made or deemed made by the Borrower 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 the Borrower 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. The Borrower shall default in the payment of any Obligation which is not referred to in SECTION 11.01(a) or in the performance of or compliance with any term contained in this Agreement or in any of the Loan Documents or any default or event of default shall occur under any of the Collateral Documents (other than as covered by SECTION 11.01(a) or 11.01(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 the Borrower or the applicable Subsidiary of Southland of any such default, or (ii) the Borrower or such Subsidiary acknowledges such default in writing. Notwithstanding the foregoing, the failure of the Borrower 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 the Borrower. (e) DEFAULT AS TO OTHER INDEBTEDNESS. The Borrower or any Subsidiary of the Borrower 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 for five (5) Business Days or beyond the applicable cure period therefor, whichever is less; 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 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, -103- event or condition shall continue for thirty (30) days or beyond the applicable cure period therefor, whichever is less; 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 the Borrower 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 the Borrower 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 of the Collateral 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, the Purchaser (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 11.01(e) to the extent such failure to pay is cured (at the maturity of such Commercial Paper) by the payment by the Purchaser. (f) INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) An involuntary case shall be commenced against the Borrower 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 the Borrower or any of its Subsidiaries in an involuntary case, under any applicable bankruptcy, 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 the Borrower or any of its Subsidiaries or over all or a substantial part of the property of the Borrower or any of is Subsidiaries, shall be entered; or an interim receiver, trustee or other custodian of the Borrower or any of its Subsidiaries or of all or a substantial part of the property of the Borrower or any of its Subsidiaries shall be appointed or a warrant of attachment, execution or similar process against any -104- substantial part of the property of the Borrower or any of its Subsidiaries shall be issued and any such event shall not be stayed, dismissed, bonded or discharged within sixty (60) days of entry, appointment or issuance. (g) VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. The Borrower 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; the Borrower 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 the Borrower 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 the Borrower 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, or (ii) any judgment, arbitration award or order of any court or administrative agency awarding material damages shall be entered against the Borrower in any action under the Federal Securities laws seeking rescission of the purchase or sale of, or for damages arising from the purchase or sale of, any Subordinated Indebtedness or in any action seeking reimbursement, indemnification or contribution with respect to the payment of any such claim, and such judgment, award or order shall have become final after exhaustion of all available appellate remedies. (i) DISSOLUTION. Any order, judgment or decree shall be entered against the Borrower 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 sixty (60) days; or the Borrower or, except as permitted by this Agreement, any of its Subsidiaries shall otherwise dissolve or cease to exist. (j) COLLATERAL DOCUMENTS; FAILURE OF SECURITY OR SUBORDINATION. For any reason any Collateral Document ceases to -105- be in full force and effect and the Liens intended to be created thereby cease to be or are not valid and perfected; or Liens in favor of the Administrative Agent contemplated by this Agreement or the Collateral Documents, or 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 such Liens and Obligations shall be subordinated or shall not have the priority contemplated by this Agreement, the Collateral Documents or such subordination provisions, for any reason; and the Requisite Senior Lenders shall have determined that any event described in this SECTION 11.01(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 the Borrower, any Subsidiary of the Borrower 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), the Borrower'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 the Borrower, any Subsidiary of the Borrower 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 the Borrower and all of its Subsidiaries and all of its ERISA Affiliates with respect to such Multiemployer Plan (assuming that the Multiemployer Plan has -106- 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. The Borrower or any of its Subsidiaries or any ERISA Affiliate of the Borrower (i) shall 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 the Borrower or any such Subsidiary or any ERISA Affiliate could 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 any Multiemployer Plan that the Borrower 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 or any other event or condition which, in the opinion of the Administrative Agent communicated to the Borrower in accordance with SECTION 13.10 hereto, presents a material risk of liability of the Borrower, any Subsidiary of the Borrower 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 13.08 to the extent and under the circumstances provided for therein. 11.02. RIGHTS AND REMEDIES. (a) ACCELERATION. Upon the occurrence of any Event of Default described in the foregoing SECTION 11.01(f) or 11.01(g) with respect to the Borrower, 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 -107- 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 the Borrower, 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 the Borrower, (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 appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration), all of which are hereby expressly waived by the Borrower. (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, the Borrower 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, the Borrower 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 -108- SECTION 13.08, then by written notice to Borrower, 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 the Borrower and do not give the Borrower the right to require the Senior Lenders to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. ARTICLE XII THE ADMINISTRATIVE AGENT; THE CO-AGENT 12.01. APPOINTMENT. (a) Each Senior Lender and each Issuing Bank hereby designates and appoints Citicorp as the Administrative Agent of such Senior Lender and such Issuing Bank under this Agreement and the Collateral 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 XII. (b) The provisions of this ARTICLE XII are solely for the benefit of the Administrative Agent and the Senior Lenders and Issuing Banks, and neither the Borrower nor any Subsidiary of the Borrower shall have any rights to rely on or enforce any of the provisions hereof (other than as expressly set forth in SECTION 12.07 or 12.08). 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 of trust with or for the Borrower or any Subsidiary of the Borrower. 12.02. 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 -109- intended to or shall be construed to impose upon the Administrative Agent any obligations in respect of this Agreement or any of the Collateral 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 the Borrower 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 the Borrower, 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. 12.03. 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 2.07(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 of Secured Obligations to whom payment was due, but not made, shall be to recover from other Holders of Secured Obligations 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 or Issuing Bank for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or sufficiency of this Agreement or any of the Collateral Documents or any of the other Loan Documents, or for the financial condition of the Borrower 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 the Borrower or any of its Subsidiaries, or the existence or possible existence of any Potential Event of Default or Event of -110- 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, the Collateral Documents or any of the other Loan Documents in accordance with the instructions of the Requisite Senior Lenders. 12.04. 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 Collateral Documents and its duties hereunder or thereunder, upon advice of counsel selected by it. 12.05. INDEMNIFICATION. To the extent that the Administrative Agent is not reimbursed and indemnified by the Borrower, 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, the Collateral Documents or any of the other Loan Documents or any action taken or omitted by the Administrative Agent under this Agreement, the Collateral Documents 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 12.05 shall survive the payment in full of the Loans and Reimbursement Obligations and the termination of this Agreement. -111- 12.06. 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 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 the Borrower or any of its Subsidiaries as if it were not acting as Administrative Agent pursuant hereto. 12.07. 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 the Borrower. Such resignation shall take effect upon the acceptance by a successor Administrative Agent of appointment pursuant to SECTION 12.07(b) or 12.07(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 the Borrower. (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 the Borrower (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 the Borrower, appoint a successor Administrative Agent as provided above. 12.08. COLLATERAL MATTERS. (a) The Administrative Agent is hereby authorized on behalf of all of the Holders of Secured Obligations, without the necessity of any notice to or further consent from any Holder of Secured Obligations, from time to time prior to an Event of Default, to take any action with respect to any Collateral or Collateral Documents which may be necessary to perfect and maintain perfected the security interest in and liens upon the Collateral granted pursuant to the Security Agreement and the other Collateral Documents. -112- (b) The Holders of Secured Obligations hereby irrevocably authorize the Administrative Agent, at its option and in its discretion, to release any Lien granted to or held by the Administrative Agent upon any Collateral (i) upon termination of the Commitments and payment and satisfaction of all Loans, Reimbursement Obligations, other Facility Letter of Credit Obligations (whether or not due) and all other Obligations which have matured and which the Administrative Agent has been notified in writing are then due and payable; or (ii) constituting property being sold or disposed of if the Borrower certifies to the Administrative Agent that the sale or disposition is made in compliance with SECTION 8.02 (and the Administrative Agent may rely conclusively on any such certificate, without further inquiry); or (iii) constituting property in which the Borrower owned no interest at the time the Lien was granted or at any time thereafter; or (iv) constituting property leased to the Borrower for which a landlord's consent to encumber was required but not obtained or which the Borrower was otherwise not obligated to encumber pursuant to the Real Estate Procedures Memorandum; or (v) constituting property leased to the Borrower under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Borrower to be, renewed or extended; or (vi) consisting of an instrument evidencing Pledged Debt (as defined in the Security Agreement) or other debt instrument, if the indebtedness evidenced thereby has been paid in full; or (vii) constituting property leased to the Borrower under the Lease Agreement dated February 15, 1987, as amended and restated as of December 21, 1990, between the Borrower and Cityplace Center East Corporation and subsequently subleased by the Borrower to a third party (including any tenant improvements made in connection with such sublease); or (viii) if approved, authorized or ratified in writing by the Administrative Agent or the Requisite Senior Lenders. In addition, and not in limitation of the foregoing, the release procedures set forth in the Real Estate Procedures Memorandum shall apply with respect to real property. Upon request by the Administrative Agent at any time, the Senior Lenders will confirm in writing the Administrative Agent's authority to release particular types or items of Collateral pursuant to this SECTION 12.08(b). (c) Without in any manner limiting the Administrative Agent's authority to act without any specific or further authorization or consent by the Requisite Senior Lenders (as set forth in SECTION 12.08(b)), each Senior Lender agrees to confirm in writing, upon request by the Borrower, the authority to release Collateral conferred upon the Administrative Agent under CLAUSES (i) through (vii) of SECTION 12.08(b). So long as no Event of Default is then continuing, upon receipt by the Administrative Agent of any such written confirmation from the Requisite Senior Lenders of its authority to release any -113- particular items or types of Collateral, and in any event upon any sale and transfer of Collateral which is expressly permitted pursuant to the terms of this Agreement, and upon at least five (5) Business Days' prior written request by the Borrower, the Administrative Agent shall (and is hereby irrevocably authorized by the Holders of Secured Obligations to) execute such documents as may be necessary to evidence the release of the Liens granted to the Administrative Agent for the benefit of the Holders of Secured Obligations herein or pursuant hereto upon such Collateral PROVIDED, that (i) the Administrative Agent shall not be required to execute any such document on terms which, in the Administrative Agent's opinion, would expose the Administrative Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of the Borrower in respect of) all interests retained by the Borrower, including (without limitation) the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (d) The Administrative Agent shall have no obligation whatsoever to any Holder of Secured Obligations or to any other Person to assure that the Collateral exists or is owned by the Borrower or is cared for, protected or insured or has been encumbered or that the Liens granted to the Administrative Agent herein or pursuant hereto have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to the Administrative Agent in this SECTION 12.08 or in any of the Collateral Documents, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, the Administrative Agent may act in any manner it may deem appropriate, in its sole discretion, given the Administrative Agent's own interest in the Collateral as one of the Holders of Secured Obligations and that the Administrative Agent shall have no duty or liability whatsoever to any Holder of Secured Obligations. (e) The benefit of the Collateral Documents and of the provisions of this Agreement relating to the Collateral shall extend to and be available in respect of any Obligations ("Related Obligations") which arise under any Eligible Interest Rate Contracts or which are otherwise owed to Persons other than the Administrative Agent, the Senior Lenders and the Issuing Banks, solely on the condition and understanding, as among the Administrative Agent and all other Holders of Secured Obligations, that (i) the Related Obligations shall be entitled -114- to the benefit of the Collateral to the extent expressly set forth in this Agreement and the Collateral Documents, and to such extent the Administrative Agent shall hold, and have the right and power to act with respect to, the Collateral on behalf of and as agent for the holders of the Related Obligations; but the Administrative Agent is otherwise acting solely as agent for the Senior Lenders and the Issuing Banks and shall have no fiduciary duty, duty of loyalty, duty of care, duty of disclosure or other obligations whatsoever to any holder of Related Obligations; and (ii) all matters, acts and omissions relating in any manner to the Collateral, or the omission, creation, perfection, priority, abandonment or release of any Lien, shall be governed solely by the provisions of this Agreement and the Collateral Documents, and no separate Lien, right, power or remedy shall arise or exist in favor of any Holder of Secured Obligations under any separate instrument or agreement or in respect of any Related Obligations; and (iii) each Holder of Secured Obligations shall be bound by all actions taken or omitted, in accordance with the provisions of this Agreement and the Collateral Documents, by the Administrative Agent and the Requisite Senior Lenders, each of whom shall be entitled to act at its sole discretion and exclusively in its own interest given its own Commitments and its own interest in the Loans, Reimbursement Obligations, Facility Letter of Credit Obligations and other Obligations to it arising under this Agreement or the other Loan Documents, without any duty or liability to any other Holder of Secured Obligations or as to any Related Obligations and without regard to whether any Related Obligations remain outstanding or are deprived of the benefit of the Collateral or become unsecured or are otherwise affected or put in jeopardy thereby; and (iv) no holder of Related Obligations and no other Holder of Secured Obligations (except the Administrative Agent and the Senior Lenders, to the extent set forth in this Agreement) shall have any right to be notified of, or to direct, require or be heard with respect to, any action taken or omitted in respect of the Collateral or under this Agreement or the Collateral Documents; and (v) no holder of any Related Obligations shall exercise any right of setoff, banker's lien or similar right except as expressly provided in SECTION 13.06. 12.09. 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. -115- ARTICLE XIII MISCELLANEOUS 13.01. CONCERNING THE COLLATERAL AND THE COLLATERAL DOCUMENTS. Each Senior Lender and each Issuing Bank authorizes and directs the Administrative Agent to enter into the Collateral Documents for the benefit of the Senior Lenders and the Issuing Banks. Each Holder of Secured Obligations agrees that any action taken by the Requisite Senior Lenders in accordance with the provisions of this Agreement or the Collateral Documents, and the exercise by the Requisite Senior Lenders of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Holders of Secured Obligations. 13.02. ASSIGNMENTS AND PARTICIPATIONS. (a) (i) 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 all or any part of its Commitments, Loans, 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 the Borrower and the Administrative Agent (which consent shall be executed in substantially the form of EXHIBIT 21), to sell, assign, transfer or negotiate all or any part of its Commitments, Loans, Notes or interest in the Facility Letter 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 Loans, Notes or interest in the Facility Letters of Credit authorized under this SECTION 13.02(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 Loans, Notes or interests in the Facility Letters of Credit authorized under this SECTION 13.02(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 the Borrower 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, -116- transfers or negotiations made pursuant to the first sentence of SECTION 13.02(a)(i), as applicable, give notice thereof to the Borrower. (b) Each Senior Lender may, with the prior written consent of the Borrower and the Administrative Agent (which consent shall be executed in substantially the form of EXHIBIT 21), 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 (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) the Borrower, 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 or the release of all or substantially all of the Collateral, 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 2.04(f), 2.08(f), 2.08(h), 2.09, 3.08(c), 13.03 and 13.04, 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. (c) Notwithstanding anything to the contrary contained in this Agreement, no Senior Lender shall make any assignment of any of its Commitments, Loans, 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. (d) Any Senior Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this SECTION 13.02, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Senior Lender by the Administrative Agent or by or on behalf of the Borrower; PROVIDED that, prior to any such disclosure, the -117- assignee or participant, or proposed assignee or participant shall agree to preserve in accordance with SECTION 13.26 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 the Borrower or the Administrative Agent. (g) If CUSA ceases to be a Senior Lender under this Agreement by virtue of any assignment made pursuant to this Section 13.02, then, as of the effective date of such cessation, Citibank's obligations to issue Facility Letters of Credit pursuant to ARTICLE III shall terminate and Citibank shall be an Issuing Bank hereunder only with respect to outstanding Facility Letters of Credit issued prior to such date. 13.03. EXPENSES. (a) GENERALLY. The Borrower agrees upon demand to pay, or reimburse, the Administrative Agent for all the Administrative Agent's internal and external audit, legal, 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, 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 the Borrower and the Borrower'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), the Collateral Documents and the other Loan Documents and the making of the Loans hereunder; (C) the creation, perfection or protection of the Administrative Agent's Liens in the Collateral (including, without limitation, any fees and expenses for title and lien searches, local counsel in various jurisdictions, survey costs, title commitment and insurance fees, filing and recording fees and taxes, duplication costs and corporate search fees); (D) administration of this -118- Agreement, the Loans and the Collateral, including consultation with attorneys in connection therewith; and (E) the protection, collection or enforcement of any of the Obligations or the Collateral. (b) AFTER DEFAULT. The Borrower 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 foreclosing against the Collateral or 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 the Borrower and related to or arising out of the transactions contemplated hereby or by the First Amended and Restated Credit Agreement or Second Amended and Restated Credit Agreement; (iv) in taking any other action in or with respect to any suit or proceeding (bankruptcy or otherwise); (v) in protecting, preserving, collecting, leasing, selling, taking possession of, or liquidating any of the Collateral; or (vi) attempting to enforce or enforcing any security interest in any of the Collateral or any other rights under the Collateral Documents. 13.04. INDEMNITY. The Borrower 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 -119- cause, or on contract or otherwise) in any manner relating to or arising out of this Agreement, the Collateral Documents 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 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 the Borrower shall have no obligation to an Indemnitee hereunder with respect to (i) matters for which such Indemnitee has been compensated pursuant to SECTION 2.04(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, the Borrower 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. 13.05. 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 the Borrower 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 the Borrower'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. 13.06. 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 -120- 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 the Borrower at any time or from time to time, without notice to the Borrower, 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 the Borrower against and on account of the Obligations of the Borrower to that Senior Lender or the Issuing Bank including, but not limited to, all Loans and Facility Letters of Credit and all claims of 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 XI 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 of Secured Obligations 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 the Borrower now or hereafter maintained with such Senior Lender or Issuing Bank or other Holder of Secured Obligations. 13.07. RATABLE SHARING. (a) Subject to SECTION 2.07(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 the fees described in SECTION 2.05 and the amounts described in SECTIONS 2.04(f), 2.08(f), 2.08(h) and 2.09), 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 the fees described in SECTION 2.05 and the amounts described in SECTIONS 2.04(f), 2.08(f), 2.08(h) and 2.09) or the Collateral and (ii) if any of them shall by voluntary payment or by the exercise of any right of counterclaim, set-off, banker's -121- 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 the fees described in SECTION 2.05 and the amounts described in SECTIONS 2.04(f), 2.08(f), 2.08(h) and 2.09), 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 13.07 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. The Borrower agrees that any Senior Lender so purchasing a participation from another Senior Lender pursuant to this SECTION 13.07 may, to the fullest extent permitted by law, exercise all its rights of payment (including, subject to SECTION 13.06, the right of set-off) with respect to such participation as fully as if such Senior Lender were the direct creditor of the Borrower in the amount of such participation. 13.08. AMENDMENTS AND WAIVERS. No amendment or modification of any provision of this Agreement or of the Notes shall be effective without the written agreement of the Requisite Senior Lenders and the Borrower, and no termination or waiver of any provision of this Agreement or of the Notes, or consent to any departure by Borrower 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 II or III relating to any increase of the Revolving Credit Facility, the Commitments, the principal amount and the extension of the final maturity of the Loans and Facility Letters of Credit, the reduction of interest rates applicable to the Loans, the amount of the fees payable pursuant hereto, the definitions of "Requisite Senior Lenders" and "Pro Rata Share", the provisions contained in SECTION 2.02(e)(iii) and in this SECTION 13.08 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 to the provisions relating to the relative priority of the Eligible Interest Rate Contracts and the other -122- Obligations shall be effective without the written concurrence of each Holder of Secured Obligations adversely affected thereby. No amendment, modification, termination, or waiver of any provision of ARTICLE XII 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 the Borrower in any case shall entitle the Borrower to any other or further notice of demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this SECTION 13.08 shall be binding on each holder of the Notes at the time outstanding, each future holder of the Notes, and, if signed by the Borrower, on the Borrower. 13.09. 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. 13.10. 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 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 13.10) shall be (a) with respect to the Borrower, as set forth below the Borrower'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. -123- 13.11. 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. 13.12. 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. 13.13. ADVICE OF COUNSEL. The Borrower 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 the Borrower, other Senior Lenders and other Issuing Banks are advised to obtain their own counsel. The Borrower represents and warrants to the Administrative Agent and the other Holders of Secured Obligations that it has discussed this Agreement with its counsel. 13.14. MARSHALLING; 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 the Borrower or any other party or against or in payment of any or all of the Obligations. To the extent that the Borrower makes a payment or payments to the Administrative Agent or the Senior Lenders or the Administrative Agent, the Senior Lenders enforce their security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or 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 thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set-off had not occurred. 13.15. SEVERABILITY. In case any provision in or obligation under this Agreement or the Notes or the other Loan -124- 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. 13.16. 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. 13.17. 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 EITHER OF THEM (EXCEPT TO THE EXTENT THAT THE LAWS OF OTHER JURISDICTIONS GOVERN THE PERFECTION OF SECURITY INTERESTS IN PERSONAL PROPERTY AND THE TRANSFER OR CREATION OF INTERESTS IN REAL PROPERTY), SHALL BE GOVERNED BY, AND SHALL BE DETERMINED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 13.18. LIMITATION OF LIABILITY. No claim may be made by the Borrower, 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, the First Amended and Restated Credit Agreement or the Second Amended and Restated Credit Agreement, or any act, omission or event occurring in connection therewith; and the Borrower 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. 13.19. 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. The Borrower's rights or any interest therein hereunder may not be assigned without the written consent of all Senior Lenders. -125- 13.20. CONSENT TO JURISDICTION AND SERVICE OF PROCESS; WAIVER OF JURY TRIAL. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE BORROWER WITH RESPECT 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, THE BORROWER 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. THE BORROWER 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 13.10, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. EACH OF THE BORROWER, 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 THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. 13.21. 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 13.08 (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. 13.22. FOREIGN BANK CERTIFICATIONS. Each Senior Lender that is not created or organized under the laws of the -126- United States of America or a political subdivision thereof has delivered to the Borrower 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 the Borrower and the Administrative Agent within fifteen (15) days after the date on which such Senior Lender becomes a Senior Lender pursuant to SECTION 13.02, a true and accurate certificate executed in duplicate by a duly authorized officer of such Senior Lender in the form set out in EXHIBIT 22-A or 22-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 the Borrower 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 22-A or 22-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 the Borrower and the Administrative Agent pursuant to this SECTION 13.22. Further, each Senior Lender which delivers EXHIBIT 22-A covenants and agrees to deliver to the Borrower 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 Code or the applicable regulations promulgated thereunder) and EXHIBIT 22-A, and each Senior Lender that delivers EXHIBIT 22-B covenants and agrees to deliver to the Borrower 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 22-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 -127- full amount of any such deduction or withholding from a source other than the Borrower; or (iii) 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 and that it is not capable of recovering the full amount of the same from a source other than the Borrower. Each Senior Lender shall promptly furnish to the Borrower and the Administrative Agent such additional documents as may be reasonably required by the Borrower 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. 13.23. PERFORMANCE OF OBLIGATIONS. The Borrower 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 the Borrower under the Loan Documents or any of them, or take any other action which such party in its reasonable discretion deems necessary or desirable to protect or preserve the Collateral, including, without limitation, any action to (i) pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against any Collateral and (ii) effect any repairs or obtain any insurance called for by the terms of any of the Loan Documents and to pay all or any part of the premiums therefor and the costs thereof. 13.24. LIMITATION ON AGREEMENTS. All agreements between the Borrower 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 -128- 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 the Borrower 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 the Borrower 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 the Borrower. 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 the Borrower 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 amount permitted by applicable law. The terms and provisions of this SECTION 13.24 shall control and supersede every other provision of all agreements between the Borrower and the Lender. 13.25. 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. 13.26. CONFIDENTIALITY. Subject to SECTION 13.02(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 the Borrower 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 the Borrower 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 -129- PROVIDED, that in no event shall any Senior Lender be obligated or required to return any materials furnished by the Borrower. 13.27. NO NOVATION. This Agreement is an amendment and restatement of the Second Amended and Restated Credit Agreement. The Notes delivered by Southland to the Senior Lenders on the Effective Date are given in renewal of and rearrangement and substitution, but not in payment, for the "Notes" and "Readvanced Term Notes" (in each case as defined in the Second Amended and Restated Credit Agreement) issued by Southland to the Senior Lenders (in their capacity as Senior Lenders under the First Amended and Restated Credit Agreement or the Second Amended and Restated Credit Agreement) or assigned to the Senior Lender pursuant to the Master Assignment Agreement (the "Prior Notes"), it being acknowledged and agreed that the Indebtedness evidenced by the First Amended and Restated Credit Agreement, the Second Amended and Restated Credit Agreement and the Prior Notes constitutes the same Indebtedness evidenced by this Agreement and the Notes delivered pursuant hereto and this Agreement and such Notes are in no way intended to constitute a novation of the First Amended and Restated Credit Agreement, the Second Amended and Restated Credit Agreement or such Prior Notes or the outstanding principal amount of such Prior Notes. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first above written. BORROWER: THE SOUTHLAND CORPORATION By_____________________________ Name: David A. Urbel Title: Vice President and Treasurer Notice Address: The 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 -130- ADMINISTRATIVE AGENT: CITICORP NORTH AMERICA, INC., as Administrative Agent By_____________________________ Name: Frank R. Garrott Title: Vice President Notice Address: Citicorp North America, Inc. 2001 Ross Avenue Suite 1400 Dallas, Texas 75201 Attn: Frank R. Garrott Telecopier No. (214) 953-3888 with a copy to: Sidley & Austin 555 West Fifth Street Los Angeles, California 90013 Attn: Edward D. Eddy, III Telecopier No. (213) 896-6600 -131- CO-AGENT AND SENIOR LENDER: 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: Shinichi Miyashita Telecopier No. (212) 888-7651 with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017-3909 Attn: Terrence L. Dugan Telecopier No. (212) 455-2505 Eurodollar Lending Office or Eurodollar Affiliate: The Sakura Bank, Limited, New York Branch 277 Park Avenue New York, NY 10172-0098 Attn: Patricia Walsh Telecopier No. (212) 754-6690 Pro Rata Share: 19.58333333% Term Loan Commitment: $58,750,000.00 Revolving Credit Commitment: $58,750,000.00 -132- 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) Ms. Lily Chan (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: 10.00000000% Term Loan Commitment: $30,000,000.00 Revolving Credit Commitment: $30,000,000.00 -133- SENIOR LENDER: THE BANK OF TOKYO TRUST COMPANY By:____________________________ Name: Tatsuo Tanaka Title: Senior Vice President Notice Address and Domestic Lending Office: The Bank of Tokyo Trust Company 1251 Avenue of the Americas New York, New York 10116-3138 Attn: H. Kifune/Japanese Corporate Dept. Telecopier No. (212) 782-6435 with a copy to: The Bank of Tokyo Trust Company 1251 Avenue of the Americas New York, New York 10116-3138 Attn: Mr. H. Thornhill Telecopier No. (212) 782-6420 Eurodollar Lending Office or Eurodollar Affiliate: The Bank of Tokyo Trust Company 1251 Avenue of the Americas New York, New York 10116-3138 Attn: H. Kifune/Japanese Corporate Dept. Telecopier No. (212) 782-6435 Pro Rata Share: 10.00000000% Term Loan Commitment: $30,000,000.00 Revolving Credit Commitment: $30,000,000.00 -134- 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 St. New York, NY 10006 Attn: Frank Russo Telecopier No. ______________ with a copy to: _____________________________ _____________________________ _____________________________ Attn: _______________________ Telecopier No. _____________ Eurodollar Lending Office or Eurodollar Affiliate: Bankers Trust Company Attn: 130 Liberty St. New York, NY 10006 Frank Russo Telecopier No. _____________ Pro Rata Share: 4.16666667% Term Loan Commitment: $12,500,000.00 Revolving Credit Commitment: $12,500,000.00 -135- ISSUING BANK: CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY By:____________________________ Name: E. Lindsay Gordon Title: Authorized Signatory Notice Address: Canadian Imperial Bank of Commerce, New York Agency Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, GA 30339 Attn: Kim Perrone Telecopier No. (401) 319-4950 -136- SENIOR LENDER: CIBC, INC. By:____________________________ Name: E. Lindsay Gordon Title: Vice President Notice Address and Domestic Lending Office: CIBC, Inc. Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, GA 30339 Attn: Mary Fann Telecopier No. (401) 319-4950 Eurodollar Lending Office or Eurodollar Affiliate: CIBC, Inc. Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, GA 30339 Attn: Mary Fann Telecopier No. (401) 319-4950 Pro Rata Share: 4.16666667% Term Loan Commitment: $12,500,000.00 Revolving Credit Commitment: $12,500,000.00 -137- SENIOR LENDER: CHEMICAL BANK By:____________________________ Name: Frances L. Bonham Title: Vice President Notice Address and Domestic Lending Office: Chemical Bank Asia Pacific 220 Park Ave, NY, NY 10017 Attn: Fran Bonham Telecopier No. 212-972-5363 with a copy to: _____________________________ _____________________________ _____________________________ Attn: _______________________ Telecopier No. _____________ Eurodollar Lending Office or Eurodollar Affiliate: Chemical Bank Asia/Pacific 220 Park Ave. NY,NY 10017 Attn: Fran Bonham Telecopier No. 212-972-5363 Pro Rata Share: 4.16666667% Term Loan Commitment: $12,500,000.00 Revolving Credit Commitment: $12,500,000.00 -138- ISSUING BANK: CITIBANK, N.A. By_____________________________ Name: Title: Vice President Notice Address: Citibank, N.A. 399 Park Avenue New York, New York 10043 Attn:____________________ Telecopier No. (212) ________ SENIOR LENDER: CITICORP USA, INC. By_____________________________ Name: Barbara A. Cohen Title: Vice President Notice Address and Domestic Lending Office: Citicorp USA, Inc. 399 Park Avenue New York, New York 10043 Attn:____________________ Telecopier No. (212) ________ Eurodollar Lending Office or Eurodollar Affiliate: Citicorp USA, Inc. c/o Citibank, N.A. 399 Park Avenue New York, New York 10043 Attn:____________________ Telecopier No. (212) ________ Pro Rata Share: 19.58333333% Term Loan Commitment: $58,750,000.00 Revolving Credit Commitment: $58,750,000.00 -139- SENIOR LENDER AND ISSUING BANK: THE FUJI BANK, LIMITED, HOUSTON AGENCY By:____________________________ Name: David L. Kelly Title: Vice President and Senior Manager Notice Address and Domestic Lending Office: The Fuji Bank, Limited, Houston Agency 1 Houston Center, Suite 4100 1221 McKinney Street Houston, Texas 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, Texas 77010 Attn: Philip C. Lauinger III Telecopier No. (713) 759-0048 Pro Rata Share: 10.00000000% Term Loan Commitment: $30,000,000.00 Revolving Credit Commitment: $30,000,000.00 -140- SENIOR LENDER AND ISSUING BANK: THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY By:____________________________ Name: Kazuo Momiyama Title: Senior Vice President Notice Address and Domestic Lending Office: The Industrial Bank of Japan Trust Company 245 Park Avenue New York, New York 10167 Attn: Noboru Himata Telecopier No. (212) 986-7973 Eurodollar Lending Office or Eurodollar Affiliate: The Industrial Bank of Japan Trust Company 245 Park Avenue New York, New York 10167 Attn: Noboru Himata Telecopier No. (212) 986-7973 Pro Rata Share: 4.16666667% Term Loan Commitment: $12,500,000.00 Revolving Credit Commitment: $12,500,000.00 -141- SENIOR LENDER: THE MITSUI TRUST AND BANKING COMPANY, LIMITED, NEW YORK BRANCH By:____________________________ Name: Shigeru Tsujimoto Title: Vice President & Manager Notice Address and Domestic Lending Office: with a copy to: The Mitsui Trust and Banking Company, Limited, New York Branch One World Financial Center 200 Liberty Street New York, New York 10281 Attn: Gerard Machado Telecopier No. 212-945-4170 Eurodollar Lending Office or Eurodollar Affiliate: The Mitsui Trust and Banking Company, Limited, New York Branch One World Financial Center 200 Liberty Street New York, New York 10281 Attn: Richard Miller Telecopier No. 212-945-4170 Pro Rata Share: 10.00000000% Term Loan Commitment: $30,000,000.00 Revolving Credit Commitment: $30,000,000.00 -142- SENIOR LENDER: NATIONSBANK OF TEXAS, N.A. By:____________________________ Name: Joseph G. Taylor Title: Senior Vice President Notice Address and Domestic Lending Office: NationsBank of Texas, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Joseph G. Taylor Telecopier No. (214) 508-0980 with a copy to: NationsBank of Texas, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Dan Killian Telecopier No. (214) 508-0980 Eurodollar Lending Office or Eurodollar Affiliate: NationsBank of Texas, N.A. 901 Main Street, 14th Floor Dallas, Texas 75202 Attn: Karen Puente Telecopier No. (214) 508-0944 Pro Rata Share: 4.16666667% Term Loan Commitment: $12,500,000.00 Revolving Credit Commitment: $12,500,000.00 -143- Tab 1 EX-10.(I)(4) 3 EXHIBIT 10.I.4 SANWA AGREEMENT AMENDMENT THIRD AMENDMENT TO CREDIT AND REIMBURSEMENT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AND REIMBURSEMENT AGREEMENT (this "THIRD AMENDMENT") is made and entered into as of February 10, 1995, by and between CITYPLACE CENTER EAST CORPORATION, a Texas corporation (the "COMPANY") and THE SANWA BANK, LIMITED, DALLAS AGENCY, a foreign bank agency licensed under the laws of the State of Texas, acting for and on behalf of THE SANWA BANK, LIMITED, a banking corporation duly organized and existing under the laws of Japan (collectively, the "BANK"). W I T N E S S E T H: WHEREAS, the Company and Bank are parties to a Credit and Reimbursement Agreement dated as of February 15, 1987 (the "Original Reimbursement Agreement"), as amended by a First Amendment to Credit and Reimbursement Agreement dated as of December 21, 1990 (the "First Amendment") and a Second Amendment to Credit and Reimbursement Agreement dated as of January 4, 1993 (the "Second Amendment") (the Original Reimbursement Agreement, as amended by the First Amendment and the Second Amendment, being herein referred to as the "AGREEMENT"); and WHEREAS, Borrower has satisfied all of the Conditions to Schedule of Terms on or prior to the Term Schedule Date and, accordingly, the terms applicable to the Obligation are to be governed by the Schedule of Terms; and WHEREAS, based on the occurrence of certain events between the date of the First Amendment and the date hereof, the Borrower and the Bank desire to restate the Schedule of Terms in its entirety in order to more properly reflect the current circumstance; NOW, THEREFORE, it is agreed: 1. DEFINITIONS. All capitalized terms used herein and not otherwise defined shall have the respective meanings provided such terms in the Agreement. 2. AMENDMENTS TO AGREEMENT. On and as of the Term Schedule Date, the Schedule of Terms is hereby amended and restated in its entirety in the form of the Schedule of Repayment Terms attached hereto as Schedule A. 3. GOVERNING LAW. This Third Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Texas and the applicable federal laws of the United States of America. 4. REFERENCES TO AGREEMENT. From and after the date first above written, all references to the Agreement shall be deemed to be references to the Agreement after giving effect to this Third Amendment. IN WITNESS WHEREOF, each of the parties hereto has caused this Third Amendment to be executed and delivered as of the date first above written. COMPANY: CITYPLACE CENTER EAST CORPORATION By: ________________________ David A. Urbel Treasurer BANK: THE SANWA BANK, LIMITED,DALLAS AGENCY, acting for and on behalf of THE SANWA BANK, LIMITED By: ________________________ Matthew G. Patrick Assistant Vice President d-0161077.01 -2- SCHEDULE A to Third Amendment to Credit and Reimbursement Agreement dated as of February 10, 1995, by and between Cityplace Center East Corporation, as Borrower, and The Sanwa Bank, Limited, Dallas Agency, acting for and on behalf of The Sanwa Bank, Limited, as Lender SCHEDULE OF REPAYMENT TERMS by and between CITYPLACE CENTER EAST CORPORATION as Borrower and THE SANWA BANK, LIMITED, DALLAS AGENCY acting for and on behalf of THE SANWA BANK, LIMITED as Lender * * * US $290,000,000 * * * I N D E X
Page ---- ARTICLE I DEFINITIONS 1 1.01. Defined Terms 1 ARTICLE II REIMBURSEMENT OBLIGATION 24 2.01. Promise to Pay 24 ARTICLE III PAYMENT TERMS 24 3.01. Evidence of Indebtedness 24 3.02. Interest Rate 24 3.03. Calculation of Interest Rate 24 3.04. Payment of Principal of and Interest on the Loan 24 3.05. Manner and Application of Payments 25 3.06. Prepayments 25 3.07. Taxes 26 3.08. Increased Capital and Yield Protection 28 3.09. Lending Office 29 ARTICLE IV SECURITY 30 4.01. Liens and Security Interests 30 4.02. Cash Reserve Account 30 4.03. Lender Offset 31 4.04. Agreement to Deliver Additional Collateral Documents 32 ARTICLE V CONDITIONS PRECEDENT 33 5.01. Collateral Documents 33 5.02. Third Amendment to Completion Guaranty Agreement 33 5.03. Assignment of Trustee Deed of Trust 33 5.04. Confirmation of Collateral Assignment of Management Agreement 33 5.05. Confirmation of Collateral Assignment of Submanagement Agreement 33 5.06. Confirmation of Assignment of Listing Agreement 33 5.07. Confirmation of and Amendment to Other Collateral Documents 33 5.08. Confirmation of Subordination, Attornment and Non-Disturbance Agreement 34 5.09. Governmental Approvals 34 5.10. Appraisal 34 5.11. Insurance 34 5.12. Survey 34 i
5.13. Title Insurance 34 5.14. UCC Searches 34 5.15. Rent Roll, Leases, and Estoppel Letters 34 5.16. Release 34 5.17. Financial Information 35 5.18. Officer's Certificate 35 5.19. Incumbency Certificate of Borrower 35 5.20. Incumbency Certificate of Southland 35 5.21. Resolutions of Borrower 35 5.22. Resolutions of Southland 35 5.23. Corporate Certificates of Borrower and Southland 36 5.24. Articles of Incorporation and Bylaws of Borrower and Southland 36 5.25. Opinion of Counsel to Borrower 36 5.26. Opinion of Counsel to Southland 36 5.27. Certain Required Payments 36 5.28. Additional Information 36 ARTICLE VI REPRESENTATIONS AND WARRANTIES 37 6.01. Organization and Good Standing of Borrower 37 6.02. Authorization and Power 37 6.03. No Conflicts or Consents 37 6.04. Enforceable Obligations of Borrower 37 6.05. Priority of Liens 37 6.06. Financial Condition 37 6.07. Full Disclosure 38 6.08. No Default 38 6.09. Southland Lease 38 6.10. No Litigation 38 6.11. Taxes 38 6.12. Compliance with Law 39 6.13. Principal Office 39 6.14. ERISA 39 6.15. Government Regulation 39 6.16. Title to the Property 39 6.17. Use of Property 39 6.18. Completion of Improvements 39 6.19. Access Roads 40 6.20. Condition of Premises 40 6.21. Hazardous Substances 40 6.22. Fiscal Year 40 6.23. Easement and Use Agreement 40 6.24. Zoning Obligations 41 6.25. Survival of Representations and Warranties 41 ii
ARTICLE VII AFFIRMATIVE COVENANTS 42 7.01. Financial Statements, Reports and Documents of Borrower 42 7.02. Financial Statements, Reports and Documents of Southland 44 7.03. Payment of Taxes 45 7.04. Maintenance of Existence and Rights 46 7.05. Notice of Default 46 7.06. Other Notices 46 7.07. Compliance with Law 46 7.08. Compliance with Loan Documents 47 7.09. Operations and Properties 47 7.10. Books and Records; Access 47 7.11. Inspection of Property 47 7.12. Insurance 47 7.13. Authorizations and Approvals 47 7.14. Maintenance of Liens 47 7.15. Correction of Defects 48 7.16. Environmental Risk Assessment 48 7.17. Management of Property 48 7.18. Southland Lease 48 7.19. Leasing Commission and Tenant Finishout 49 7.20. Compliance with Government Development Documents 49 7.21. Costs and Expenses 50 7.22. Further Assurances 50 7.23. Indemnity by Borrower 50 7.24. License Agreement 52 ARTICLE VIII NEGATIVE COVENANTS 53 8.01. Cash Flow Coverage Ratio 53 8.02. Debt 53 8.03. Liens 53 8.04. Distributions and Debt Repayment 53 8.05. Southland Lease 53 8.06. Subleases 53 8.07. Sales, Etc. of Assets 54 8.08. Name, Fiscal Year and Accounting Method 54 8.09. Consolidation, Merger, Conveyance, Transfer or Lease 54 8.10. ERISA Compliance 54 8.11. Transactions with Affiliates 54 8.12. Environmental Matters 54 8.13. Lines of Business 55 8.14. License Agreement 55 8.15. Changes in Zoning Requirements 55 iii
ARTICLE IX EVENTS OF DEFAULT 56 9.01. Events of Default 56 9.02. Remedies Upon Event of Default 58 9.03. Performance by Lender 58 ARTICLE X MISCELLANEOUS 60 10.01. Waiver 60 10.02. Payment of Expenses 60 10.03. Notice 60 10.04. Governing Law 61 10.05. Choice of Forum; Consent to Service of Process and Jurisdiction 61 10.06. Invalid Provisions 62 10.07. Interest Rate 62 10.08. Entirety and Amendments 62 10.09. Parties Bound; Assignment 63 10.10. Participations 63 10.11. Headings 63 10.12. Time of the Essence 64 10.13. Confidentiality 64 10.14. Survival of Certain Provisions 64 iv
INDEX OF EXHIBITS
EXHIBIT A: Renewal Assignment of Leases and Rents EXHIBIT B: Renewal Assignment of Subleases and Rents EXHIBIT C: Assignment of Deed of Trust and Other Security Documents EXHIBIT D: Ratification and Confirmation of Assignment of Cash Reserve Account EXHIBIT E: Ratification and Confirmation of Collateral Assignment of Rights Under Exclusive Leasing and Marketing Agreement EXHIBIT F: Ratification and Confirmation of Collateral Assignment of Management Agreement and Service Contracts EXHIBIT G: Ratification and Confirmation of Collateral Assignment and Modification of Submanagement Agreement EXHIBIT H: Ratification and Confirmation of and Amendment to Other Collateral Documents EXHIBIT I: Ratification and Confirmation of Subordination, Attornment and Non- Disturbance Agreement (Southland Lease) EXHIBIT J: Renewal Deed of Trust, Security Agreement, Financing Statement, and Assignment of Rental EXHIBIT K: Release EXHIBIT L: Security Agreement EXHIBIT M: Southland Estoppel Letter EXHIBIT N: Sublease Estoppel Letter EXHIBIT O: Third Amendment to Completion Guaranty Agreement EXHIBIT P: Form of Opinion of Borrower's Counsel EXHIBIT Q: Form of Opinion of Southland's Counsel SCHEDULE 1: Amortization Schedule SCHEDULE 2: Request for Advance SCHEDULE 3: Schedule of Zoning Obligations SCHEDULE 4: Underground Storage Tank Disclosure v
SCHEDULE OF REPAYMENT TERMS THIS SCHEDULE OF REPAYMENT TERMS is a part of and shall govern the terms of repayment of the indebtedness of CITYPLACE CENTER EAST CORPORATION, a corporation duly organized and existing under the laws of the State of Texas (herein called the "Borrower"), a subsidiary of THE SOUTHLAND CORPORATION, a corporation duly organized and existing under the laws of the State of Texas (herein called "Southland"), to THE SANWA BANK, LIMITED, DALLAS AGENCY, a foreign bank agency, licensed under the laws of the State of Texas, acting for and on behalf of THE SANWA BANK, LIMITED, a banking corporation duly organized and existing under the laws of Japan (herein collectively called "Lender") under SECTION 2.2(D) of that certain Credit and Reimbursement Agreement dated as of February 15, 1987, as same has been amended by that certain First Amendment to Credit and Reimbursement Agreement dated as of December 21, 1990, that certain Second Amendment to Credit and Reimbursement Agreement dated as of January 4, 1993, and that certain Third Amendment to Credit and Reimbursement Agreement dated as of February 10, 1995 (such agreement, as amended, being herein collectively referred to as the "REIMBURSEMENT AGREEMENT"), which terms are as follow: ARTICLE I DEFINITIONS 1.01. DEFINED TERMS. For the purposes of this Agreement, unless the context otherwise requires, the following terms shall have the respective meanings assigned to them in this Article I or in the Section or recital referred to: "ADVANCE" shall mean the disbursement by Lender to Trustee of the amount drawn under the Letter of Credit. "AFFILIATE" of any Person shall mean any other Person which, directly or indirectly, controls or is controlled by, or is under common control with, such Person. For purpose of this definition, "control" and the correlative meanings of the terms "controlled by" and "under common control with" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting shares or partnership interests or by contract or otherwise. "AGREEMENT" shall mean this Schedule of Repayment Terms, of which this ARTICLE I forms a part, together with all amendments, modifications and restatements hereof and supplements and attachments hereto. "AMORTIZED INSTALLMENT" shall mean the monthly payment of principal and interest, calculated as of the Closing Date, and as shown on SCHEDULE 1 attached hereto, to be the monthly payment of principal and interest required to amortize a loan with an unpaid principal balance equal to the Loan Amount as of the Closing Date, at a rate of interest equal to the Annual Rate as of the Closing Date, over a period of twenty-five (25) years. Should the Annual Rate be modified at any time or from time-to-time during the term of the Loan, the Amortized Installment shall be recalculated on the first day of the immediately succeeding calendar month (the "FIRST DAY") to be the monthly payment of principal and interest required to amortize a loan with an unpaid principal balance equal to the unpaid principal balance of the Loan as of the First Day, at a rate of interest equal to the new Annual Rate, over a period of time equal to the number of months remaining between such First Day and the date twenty-five (25) years following the Monthly Commencement Date. "AMORTIZED INSTALLMENT DATE" shall mean any date an Amortized Installment is due. "ANNUAL OPERATING BUDGET" shall mean an annual cash budget of income, operating expenses and capital expenditures for the Property submitted to the Lender by the Borrower, and approved by the Lender in writing, specifying by month in reasonable detail all estimated costs and expenses anticipated by the Borrower to be incurred by it during such calendar year in connection with the Borrower's ownership and operation of the Property. Borrower may from time to time request that Lender approve a revised Annual Operating Budget for the remainder of any calendar year. Lender shall not unreasonably withhold or delay its approval to any Annual Operating Budget or any amendment thereto so long as the costs and expenses shown therein meet all Conditions for Budget Approval. "ANNUAL RATE" shall mean 7-1/2% per annum, or such higher rate as the parties hereto may from time to time mutually agree. "APPRAISAL" shall mean an appraisal addressed to Lender (acceptable to Lender as to form, substance and appraisal date), prepared by a professional appraiser who is a Member of the Appraisal Institute ("MAI"), certifying as to the value of the Property and prepared in accordance with all laws and regulations applicable to Lender and the Participants with respect to the Loan. "APPROVED LEASE PARAMETERS" shall mean Lease Parameters approved by Lender, which approval shall not be unreasonably withheld or delayed. "APPROVED LEASING AGENT" shall mean an exclusive leasing agent for marketing subleases in the Premises which (a) is approved by the Lender, and (b) is not an Affiliate of the Borrower or Southland. "APPROVED LEASING AGREEMENT" shall mean an exclusive listing agreement between Southland and an Approved Leasing Agent, which has been approved in writing by the Lender (which approval shall not be unreasonably withheld or delayed) and which shall in any event contain the following provisions: (a) a fee structure acceptable to the Lender; (b) a requirement for the Approved Leasing Agent to prepare and deliver monthly Leasing Activity Summaries as required hereby; (c) a provision for termination by Southland or its successor upon thirty (30) days' notice, without cause, and without payment of any penalty; (d) a consent by the Approved Leasing Agent to the collateral assignment of such contract to the Lender; (e) upon a foreclosure or deed in lieu of foreclosure of the Property, the Lender, at its sole option, may elect to (i) continue the listing agreement upon its existing terms, (ii) enter into a new listing agreement with such Approved Leasing Agent upon terms similar to the listing agreement, or (iii) terminate the listing agreement pursuant to the termination provisions described in subparagraph (c) above; and (f) should the Lender elect to continue the listing agreement on the same terms and conditions as existed prior to the foreclosure or deed in lieu of foreclosure, the Lender shall not be responsible for any fees, commissions or other amounts payable by the Borrower or Southland which accrued prior to the date of transfer nor shall the Lender be liable for any loss, costs, damages, claims or other expenses which accrued prior to the date of such transfer. Further, no such agreement shall constitute an Approved Leasing Agreement unless and until it has been collaterally assigned to the Lender to secure the Obligation, in form and substance reasonably acceptable to the Lender. "APPROVED MANAGEMENT AGREEMENT" shall mean (a) so long as all Conditions to Southland Management Agreement have been met, the Southland Management Agreement, and (b) in all other cases (including so long as the Southland Management Agreement is in effect), an agreement relating to the management or operation of the Property with an Approved Manager, as manager, which has been approved in writing by the Lender (which approval shall not be unreasonably withheld or delayed) and which shall in any event contain the following provisions: (i) a compensation structure acceptable to the Lender; (ii) a provision for termination by the party who is not the Approved Manager, or its successor, upon thirty (30) days notice, without cause, and without payment of any penalty; (iii) a consent by the manager to the collateral assignment of such contract to the Lender; (iv) upon a foreclosure or deed in lieu of foreclosure of the Property, the Lender, at its sole option, may elect to (A) continue the management agreement upon its existing terms, (B) enter into a new management agreement with such manager upon such terms similar to the Approved Management Agreement, or (C) terminate the management agreement pursuant to the termination provisions described in subparagraph (ii), above; and (v) should the Lender elect to continue the management agreement on the same terms and conditions as existed prior to the foreclosure or deed in lieu of foreclosure, the Lender shall not be responsible for any fees, commissions or other amounts payable by the Borrower which accrued prior to the date of transfer nor shall the Lender be liable for any loss, costs, damages, claims or other expenses which accrued prior to the date 3 of such transfer. Further, no such agreement shall constitute an Approved Management Agreement unless and until it has been collaterally assigned to the Lender to secure the Obligation, in form and substance reasonably acceptable to the Lender. "APPROVED MANAGER" shall mean a Property manager approved by the Lender and which is not an affiliate of the Borrower or Southland. "APPROVED SUBLEASE" shall mean a sublease for a portion of the Improvements which (a) is executed on the form of sublease approved by Lender (which approval of such form and any modifications thereto shall not be unreasonably withheld or delayed), (b) includes a fully-executed Approved Sublease Subordination, and (c) either (i) has been expressly approved by Lender in writing (which approval shall not be unreasonably withheld or delayed), or (ii) falls within the Approved Lease Parameters. "APPROVED SUBLEASE SUBORDINATION" shall mean a subordination, non-disturbance and attornment agreement to be executed by Southland, the Borrower, the tenant under an Approved Sublease and the Lender, in form and substance reasonably acceptable to the Lender, and including, without limitation, the following terms: (a) a confirmation and consent to the collateral assignment of such Approved Sublease to the Lender; (b) an agreement of the subtenant to attorn to the then-owner of the Property upon a foreclosure by the Lender of such collateral assignment of Approved Sublease; (c) an agreement of the subtenant to enter into a new lease with the then-owner of the Property, upon the same terms as such Approved Sublease, if the Southland Lease is terminated in whole or with respect to any portion of the Premises subject to such Approved Sublease; (d) an agreement that the Lender shall not be bound, (i) unless reasonably approved by Lender in writing (A) by any amendment to the economic terms of such Approved Sublease or (B) by any material amendment to any other term of such Approved Sublease, (ii) by any rent paid more than one (1) month in advance, or (iii) by any security deposit unless such security deposit is paid to the Lender to be segregated for availability under the Approved Sublease; and (e) an agreement of the subtenant that neither the Lender nor any other owner of the Property following foreclosure (1) shall be bound by or obligated for any breach or default by the landlord under the Approved Sublease occurring prior to the date such Person acquires fee title to the Property, or (2) shall have any personal, partnership or corporate liability for landlord's obligations thereunder except such Person's interest in the Property. "APPROVED SUBMANAGEMENT AGREEMENT" shall mean an Approved Management Agreement between Southland and an Approved Manager. 4 "ASSIGNMENT OF CASH RESERVE ACCOUNT" shall mean that certain Assignment of Cash Reserve Account dated as of December 21, 1990, executed by Borrower for the benefit of Lender with respect to the Cash Reserve Account, confirmed by the Confirmation of Assignment of Cash Reserve Account. "ASSIGNMENT OF LEASES AND RENTS" shall mean the Renewal Assignment of Leases and Rents in the form of EXHIBIT J attached hereto and incorporated herein by reference, with blanks appropriately completed in conformance herewith, either as originally executed, or as it may from time to time be renewed, supplemented, modified or restated. "ASSIGNMENT OF SUBLEASES AND RENTS" shall mean the Renewal Assignment of Subleases and Rents in the form of EXHIBIT K attached hereto and incorporated herein by reference, with blanks appropriately completed in conformance herewith, either as originally executed, or as it may from time to time be renewed, supplemented, modified or restated. "ASSIGNMENT OF TRUSTEE DEED OF TRUST" shall mean that certain Assignment of Deed of Trust and Other Security Documents dated February 10, 1995, to be effective as of February 14, 1995, pursuant to which Trustee assigns to Bank its Liens on the Property which secured the repayment of the Debt Securities issued pursuant to the Indenture, in the form of EXHIBIT A attached hereto. "BASE RATE" shall mean the rate per annum then most recently announced by The Sanwa Bank, Limited, New York Branch as its "base", "prime commercial" or "prime rate" of interest. Borrower acknowledges that these financial institutions may, from time to time, extend credit to other borrowers at rates of interest varying from, and having no relationship to, such reference rates. Each change in the Base Rate shall become effective without prior notice to Borrower automatically as of the opening of business on the date of such change in the Base Rate. "BORROWER" shall have the meaning assigned to it in the preamble hereof. "BUDGET RESERVE" shall mean, for each Fiscal Year, an amount equal to ten percent (10%) of the aggregate costs and expenses shown on the Annual Operating Budget, including amendments thereto, for such Fiscal Year. "BUILDING" shall have the meaning assigned to it in the Southland Lease. "BUSINESS DAY" shall mean any day except Saturday, Sunday and any other day which shall be in Dallas, Texas and New York, New York a legal holiday or a day on which banking institutions are authorized by law or other government action to close. 5 "CAPITAL STOCK" of any Person shall mean any and all shares, interests, participations or other equivalents (however designated) of corporate stock and any and all forms of partnership interests or other equity interests in a Person, including but not limited to any type of preference stock which for other purposes may not be treated as equity. "CASH FLOW COVERAGE RATIO" shall mean (a) Net Operating Income, DIVIDED BY (b) the sum of scheduled Amortized Installments. "CASH RESERVE" shall mean, on any day, the amount of collected funds held in the Cash Reserve Account. "CASH RESERVE ACCOUNT" shall mean the account of Borrower at The Sanwa Bank, Limited, New York Branch, Account No. 077742 and styled "CCEC Cash Reserve Account", which account is pledged to Lender pursuant to the Assignment of Cash Reserve Account. "CHANGE IN CONTROL" shall mean (a) the failure of the Owner and its Affiliates to directly or indirectly beneficially own (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934) in the aggregate 50% or more of (i) the outstanding shares of Common Stock of Southland or (ii) the total voting power of all classes of Capital Stock of Southland entitled to vote generally in the election of directors of Southland unless, in each case, the Owner and its Affiliates directly or indirectly beneficially own (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934) in the aggregate at least 5% more of such Common Stock or voting power, as the case may be, than any other person or persons (including any syndication or group deemed to be a "person" for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934) acting together as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934) or (b) the failure of the Owner and its Affiliates to directly or indirectly beneficially own (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934) in the aggregate 35% or more of (i) the outstanding shares of Common Stock of Southland or (ii) the total voting power of all classes of Capital Stock of Southland entitled to vote generally in the election of directors of Southland. "CLOSING DATE" shall mean the date of the Advance. "CODE" shall mean the Uniform Commercial Code as adopted in the State of Texas and any other state which governs creation or perfection (and the effect thereof) of security interests in any collateral for the Loan. "COLLATERAL" shall mean and include all collateral under, and as defined in, any Collateral Document, and including in any event, the forms of collateral described in ARTICLE IV hereof. 6 "COLLATERAL ASSIGNMENT OF LISTING AGREEMENT" shall mean that certain Collateral Assignment of Rights Under Exclusive Listing and Marketing Agreement dated March 6, 1993, pursuant to which Southland has assigned to Lender all of its rights in the Exclusive Listing and Marketing Agreement for the Property with Prentiss Properties Limited, Inc., as ratified and confirmed by the Confirmation of Assignment of Listing Agreement. "COLLATERAL ASSIGNMENT OF MANAGEMENT AGREEMENT" shall mean that certain Collateral Assignment of Management Agreement dated February 15, 1987, pursuant to which Borrower has assigned to Lender all of Borrower's right, title and interest, but not its obligations in, under and to, the Southland Management Agreement, as amended by the First Amendment thereto dated as of December 21, 1990, and as ratified and confirmed by the Confirmation of Collateral Assignment of Management Agreement. "COLLATERAL ASSIGNMENT OF SUBMANAGEMENT AGREEMENT" shall mean that certain Collateral Assignment and Modification of Submanagement Agreement dated December 18, 1992, pursuant to which Southland has assigned to Lender all of Southland's right, title and interest, but not its obligations in, under and to, that certain Management Agreement dated as of January 1, 1993 between Southland (as successor by merger to Cityplace Development Corporation) and the Approved Mananager, Premysis Real Estate Services, Inc., as amended and extended by agreement dated as of January 1, 1995, and as ratified and confirmed by the Confirmation of Collateral Assignment of Submanagement Agreement. "COLLATERAL DOCUMENTS" shall mean deeds of trust, assignments, security agreements, financing statements, and other documents and instruments from time to time executed and delivered pursuant to this Agreement and any documents or instruments amending or supplementing the same, and shall include, in any event, each of the documents described in ARTICLE IV hereof. "COMMON STOCK" shall mean common stock of Southland. "COMPLETION GUARANTY AGREEMENT" shall mean that certain Completion Guaranty Agreement dated as of February 15, 1987, executed by Southland for the benefit of Lender with respect to the completion of the Project, as same has been amended by that certain (a) First Amendment to Completion Guaranty Agreement dated as of December 21, 1990, (b) Second Amendment to Completion Guaranty Agreement dated as of January 4, 1993 and (c) Third Amendment to Completion Guaranty Agreement dated February 10, 1995, and any and all further renewals thereof or modifications or supplements thereto. "CONDITIONS FOR BUDGET APPROVAL" shall mean, with respect to any proposed cost or expense, that such cost or expense (a) shall be incurred by Borrower, (b) is reasonably necessary for the 7 operation of the Property, (c) is not the responsibility of Southland under the Southland Lease, and (d) is reasonable in amount for the services or goods to be furnished in a manner consistent with the quality of construction and operation of the Property. "CONDITIONS TO SOUTHLAND MANAGEMENT AGREEMENT" shall mean (a) Southland has assigned or delegated its obligations under the Southland Management Agreement to an Approved Manager pursuant to an Approved Submanagement Agreement, (b) such Approved Submanagement Agreement is then in effect, (c) all costs and expenses due and owing by the Borrower under the Southland Management Agreement are "Expenses" passed through to and reimbursable by Southland under the Southland Lease, (d) Southland has not failed or threatened to fail to pay all of such costs and expenses of the Approved Submanagement Agreement as an "Expense" under the Southland Lease, and (e) no circumstances or events have occurred which (i) could have any material adverse effect whatsoever upon the validity, enforceability or performance of, or (ii) could materially impair, impede or jeopardize the ability of Southland to fulfill its obligations under, this Agreement, any Approved Submanagement Agreement, the Southland Management Agreement or any of the other Loan Documents. "CONFIDENTIAL INFORMATION" shall mean, at any time, all confidential and proprietary data and information made available by or on behalf of Borrower or Southland pursuant to this Agreement in writing to the Lender or their attorneys, certified public accountants or agents, which Borrower or Southland clearly and conspicuously marked or communicated as "Confidential" prior to such time, or otherwise requested by Borrower or Southland in writing to be held confidential, but shall not include any data or information which (a) was or became generally available to the public at or prior to such time (unless divulged by the Lender or their respective attorneys, certified public accountants or agents) or (b) was or became available to the Lender or their attorneys, certified public accountants or agents on a non-confidential basis from Borrower or Southland or any other source at or prior to such time. "CONFIRMATION OF ASSIGNMENT OF CASH RESERVE ACCOUNT" shall mean the Ratification and Confirmation of Assignment of Cash Reserve Account in the form of EXHIBIT B attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, amended, renewed or extended. "CONFIRMATION OF ASSIGNMENT OF LISTING AGREEMENT" shall mean the Ratification and Confirmation of Collateral Assignment of Rights Under Exclusive Leasing and Marketing Agreement in the form of EXHIBIT C attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may 8 from time to time be supplemented, modified, amended, renewed or extended. "CONFIRMATION OF COLLATERAL ASSIGNMENT OF MANAGEMENT AGREEMENT" shall mean the Ratification and Confirmation of Collateral Assignment of Management Agreement in the form of EXHIBIT D attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed or extended. "CONFIRMATION OF COLLATERAL ASSIGNMENT OF SUBMANAGEMENT AGREEMENT" shall mean the Ratification and Confirmation of Collateral Assignment of Submanagement Agreement in the form of EXHIBIT E attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed or extended. "CONFIRMATION OF AND AMENDMENT TO OTHER COLLATERAL DOCUMENTS" shall mean the Ratification and Confirmation of and Amendment to Other Collateral Documents in the form of EXHIBIT F attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed or extended. "CONFIRMATION OF SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE AGREEMENT" shall mean the Ratification and Confirmation of Subordination, Attornment and Non-Disturbance Agreement (Southland Lease) in the form of EXHIBIT G attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed or extended. "CONSEQUENTIAL LOSS" shall, with respect to Borrower's prepayment (whether voluntary or involuntary because of acceleration of the Obligation after an Event of Default) of all or any portion of the then-outstanding principal amount of the Loan on any date other than the Maturity Date, mean any direct and actual loss, cost, penalty or expense reasonably incurred by Lender or any Participant as a result of the timing of such pre-payment or in liquidating or redepositing such principal amount, including without limitation any direct and actual loss, cost, penalty or expense incurred by Lender or any Participant with respect to the early termination of any interest rate exchange or other hedging arrangement of the type commonly entered into by prudent lenders and borrowers to reduce or eliminate the risks of increased interest rates, and entered into by Lender or any Participant with respect to the Loan. 9 "CONTROLLED GROUP" shall mean (a) the controlled group of corporations as defined in Section 1563 of the Internal Revenue Code or (b) the group of trades or businesses under common control as defined in Section 414(c) of the Internal Revenue Code, of which Borrower is a part or may become a part. "DEBT" shall mean (a) indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which the Borrower is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss, and (b) obligations under leases which shall have been or should be, in accordance with Generally Accepted Accounting Principles, recorded as capital leases in respect of which obligations the Borrower is liable, contingently, or otherwise, or in respect of which obligations the Borrower otherwise assures a creditor against loss. "DEBTOR RELIEF LAWS" shall mean any applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar laws affecting the rights, remedies, or recourses of creditors generally, including without limitation the U.S. Bankruptcy Code and all amendments thereto, as are in effect from time to time during the term of the Loan. "DEBT SECURITIES" shall mean Borrower's 7-7/8% Notes due February 15, 1995, in the aggregate principal amount of U. S. $290,000,000, issued by Borrower pursuant to the Indenture. "DEED OF TRUST" shall mean the Renewal Deed of Trust, Security Agreement, Financing Statement and Assignment of Rents securing the payment of the Loan and the Obligation and the payment and performance of all obligations specified in the Loan Documents and herein, and evidencing a valid and enforceable first priority Lien against the Property, in the form of Exhibit H attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be renewed, supplemented, modified, amended or restated. "DEFAULT RATE" shall mean a rate per annum equal to the lesser of (a) the Base Rate in effect from day to day, plus two percent (2%), or (b) the Maximum Rate. "DOLLARS" and the sign "$" shall mean lawful currency of the United States of America. "EASEMENT AND USE AGREEMENT" shall mean the Easement and Use Agreement between the Borrower and Oak Creek, dated December 4, 1990, as it may from time to time be amended with Lender's written consent. 10 "ENVIRONMENTAL COMPLAINT" shall mean any complaint, order, citation or notice with regard to air emissions, water discharges, noise emissions or any other environmental matter affecting Borrower or the Property. "ENVIRONMENTAL LAWS" shall mean (a) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. 9601 ET SEQ., (b) the Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, 42 U.S.C.A. 6901 ET SEQ., (c) the Clean Air Act, 42 U.S.C.A. 7401 ET SEQ., as amended by the Clean Air Act Amendments of 1990, (d) the Clean Water Act of 1977, 33 U.S.C.A. 1251 ET SEQ., (e) the Toxic Substances Control Act, 15 U.S.C.A. 2601 ET SEQ., (f) the Texas Water Code, (g) the Texas Solid Waste Disposal Act, (h) all other federal, state, and local laws relating to pollution or protection of the environment including, without limitation, air pollution, water pollution, noise control and/or the handling, discharge, disposal or recovery of on-site or off-site hazardous substances or materials, as each of the foregoing may be amended from time to time, and (i) any and all regulations promulgated under or pursuant to any of the foregoing statutes, excluding, however, any Government Development Documents or other zoning or abandonment ordinances. "ENVIRONMENTAL LIABILITY" shall mean any claim, demand, obligation, cause of action, order, violation, damage (including without limitation person, property or natural resources), injury, judgment, penalty or fine, cost of enforcement, cost of remedial action, clean-up, restoration or any other cost or expense whatsoever, including reasonable attorneys' fees and disbursements, resulting from the violation of any Environmental Law or the imposition of any Environmental Lien, or otherwise arising under any Environmental Law. "ENVIRONMENTAL LIEN" shall mean a Lien in favor of any Governmental Authority or other Person (a) under any Environmental Law or (b) for any liability or damages arising from or costs incurred by such Governmental Authority or other Person in response to a release or threatened release of hazardous or toxic waste, substance or constituent into the environment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder by any Governmental Authority, as from time to time in effect. "ESTIMATED NET PROCEEDS" shall mean, with respect to (a) a Permitted Refinancing, the positive difference between (i) the value of the Property as of the Value Interest Payment Date as shown in an Appraisal obtained by Lender (at Borrower's sole cost and expense) dated no earlier than sixty (60) days prior to the Value Interest Payment Date or as soon thereafter as reasonably practicable, and (ii) $275,000,000 plus all Permitted Refinancing Closing Costs or (b) a Permitted Sale, the positive 11 difference between (i) the Sales Price, and (ii) $275,000,000 plus all Permitted Closing Costs. "EXCESS CASH RESERVE AMOUNT" shall mean, at any time, that amount held in the Cash Reserve Account in excess of $15,000,000, after deduction therefrom of all amounts held in the Cash Reserve Account through the date of a disbursement and on a Fiscal Year to date basis for the Annual Operating Budget. "EXTRAORDINARY BUDGET ITEMS" shall mean costs and expenses which meet all Conditions for Budget Approval and which are approved by Lender (which approval shall not be unreasonably withheld or delayed) and which are not shown in the then current Annual Operating Budget. "EVENT OF DEFAULT" shall have the meaning assigned to such term in Article IX hereof. "FISCAL YEAR" shall mean the fiscal year of Borrower and Southland, which shall be the twelve (12)-month period ending on December 31 of each year or such other period as Borrower or Southland may designate and the Lender may reasonably approve in writing. "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" shall mean those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof, and which are consistently applied for all periods, after the date hereof, so as to properly reflect the financial position of Borrower, except that any accounting principle or practice required to be changed by the said Financial Accounting Standards Board (or other appropriate board or committee of the said Board) in order to continue as a generally accepted accounting principle or practice may be so changed. "GOVERNMENT DEVELOPMENT DOCUMENTS" shall mean (a) the zoning ordinances covering the Property or any portion thereof, and (b) any laws, rules, regulations, ordinances or agreements relating to the zoning, use or development of the Property or any portion thereof, with or issued by any Governmental Authority and including, without limitation, the Scheduled Zoning Ordinances. "GOVERNMENTAL AUTHORITY" shall mean any government (or any political subdivision or jurisdiction thereof) including the United States, the State of Texas, the County of Dallas, the City of Dallas, and any other court, bureau, agency, planning and/or zoning commission or other governmental authority having jurisdiction over Borrower, Southland or the Property. 12 "GOVERNMENTAL REQUIREMENTS" shall mean, (a) all laws, orders, decrees, ordinances, rules and regulations of any Governmental Authority applicable to the Borrower, Southland or the Property or any portion thereof, together with all interpretations thereof, and (b) any one of them, and including, without limitation, the Americans with Disabilities Act (to the extent applicable to the Borrower, Southland or the Property). "GOVERNMENTAL REQUIREMENTS APPLICABLE TO THE PROPERTY" shall mean the Governmental Requirements applicable to the Property and including, without limitation, the Government Development Documents. "HAZARDOUS DISCHARGE" shall mean the happening of any event involving the spill, discharge or cleanup of any Hazardous Material. "HAZARDOUS MATERIAL" shall mean any hazardous, toxic or dangerous waste, substance or material regulated under Environmental Laws, including, without limitation, petroleum, petroleum products and petroleum waste materials. "IMPROVEMENTS" shall mean all of the improvements, structures, equipment, and amenities already constructed upon the Land, including without limitation, the Building. "INDENTURE" shall mean that certain Indenture, dated as of February 15, 1987, among Borrower, Lender and Trustee, pursuant to which Borrower issued the Debt Securities, as it may from time to time be supplemented or amended by one or more indentures supplemental thereto entered into pursuant to the applicable provisions thereto. "INSPECTING ARCHITECTS/ENGINEERS" shall mean such architects and/or engineers as may be designated by Lender from time to time. "INSURANCE POLICIES" shall mean insurance and reinsurance policies issued by (a) responsible and reputable insurance companies or associations having a Best's rating of at least B+:VII, (b) Lloyds of London or (c) other insurers reasonably acceptable to the Lender, in such amounts as shall be acceptable to the Lender. Such policies shall include (i) real and personal property insurance written on builder's risk basis during construction of the Improvements, and thereafter, on an all risk basis, subject to such exclusions as are reasonably acceptable to the Lender and, subject to such exclusions, in the broadest form and amount then currently available at a reasonable cost, (ii) flood insurance if the Premises are in an area which is considered a flood risk area by the U.S. Department of Housing and Urban Development, (iii) comprehensive general liability, auto liability and umbrella liability insurance in the broadest form and amount then currently available at a reasonable cost, and (iv) worker's compensation including employer's liability and any other appropriate insurance normally carried by companies engaged in 13 similar business and owning similar properties, in the broadest form and amount then currently available at a reasonable cost, including, without limitation, rent interruption insurance. Such insurance policies shall name Lender, as loss payee, mortgagee or additional insured, as their interests may appear, as may be appropriate for the particular types of insurance. "INTERCOMPANY DEBT" shall mean Debt of Borrower to any of its Affiliates, subordinated to the payment and performance of the Obligation. "INTEREST REIMBURSEMENT AGREEMENT" shall mean that certain Reimbursement Agreement dated as of February 15, 1987, by and between Borrower and Lender, as same has been amended by that certain First Amendment to Interest Reimbursement Agreement dated as of December 21, 1990, pursuant to which Lender issued for the account of Borrower and the benefit of Trustee a letter of credit to support the interest obligations of Borrower under the Debt Securities. "INTERNAL REVENUE CODE" shall mean the United States Internal Revenue Code of 1986, as amended. "LAND" shall mean the real property situated in Dallas County, Texas described by metes and bounds upon Exhibit A attached to the Deed of Trust and incorporated herein by reference. "LENDER" shall have the meaning assigned to it in the preamble hereof. "LEASE PARAMETERS" shall mean parameters for the terms of subleases for portions of the Improvements and which shall in any event include rental rate, expense pass-throughs, rental concessions, finish out allowance, term, use limitations, extension options, creditworthiness standards, pre-approved contractors and subcontractors and such other standards and items as the Lender shall reasonably determine to be required. "LEASE PURCHASE PRICE" shall mean all amounts paid by Southland under the Southland Lease to purchase the Property pursuant to Section 7.6, 7.7 or 8.4 of the Southland Lease. "LEASING ACTIVITY SUMMARY" shall mean a report pertaining to the occupancy, leasing and marketing of the Premises as required by Lender to monitor Southland's compliance with its obligations under the Southland Lease and the Completion Guaranty, which summaries shall include, without limitation, a report on all inquiries and requests for proposals received, all expressions of interest, all offers submitted and the status thereof, all offers rejected or accepted, all subleases executed, all requests for modification of existing 14 subleases received, and all Leasing Commissions and Tenant Finishout paid or incurred. "LEASING COMMISSIONS" shall mean leasing commissions and fees due and payable with respect to Approved Subleases. "LETTER OF CREDIT" shall mean that certain Irrevocable Letter of Credit No. 677/259/00008 dated March 3, 1987, in the face amount of US$290,000,000 issued by Lender, for the account of Borrower and for the benefit of Trustee in support of the Debt Securities. "LICENSE AGREEMENT" shall mean the License Agreement dated December 4, 1990, by and between the Borrower, Southland and Oak Creek, as it may from time to time be amended with the Lender's written consent. "LIEN" shall mean any lien, mortgage, security interest, tax lien, pledge, encumbrance, or conditional sale or title retention arrangement, or any other interest in property designed to secure the repayment of indebtedness, whether arising by agreement or under any statute or law, or otherwise. "LISTING AGREEMENT" shall mean that certain Exclusive Leasing and Marketing Agreement dated March 6, 1993, between Southland and Prentiss Properties Limited, Inc., pursuant to which Southland has granted to Prentiss Properties Limited, Inc. the exclusive right to sublease the Premises. "LOAN" shall mean, on any day, the unpaid principal balance of the Loan Amount. "LOAN AMOUNT" shall mean the amount paid or disbursed by Lender to Trustee under the Letter of Credit LESS the amounts of all Special Lease Payments and the Lease Purchase Price; PROVIDED, HOWEVER, that in no event shall the Loan Amount exceed US$290,000,000. "LOAN DOCUMENTS" shall mean this Agreement, each of the Collateral Documents, the Completion Guaranty Agreement, the Assignment of Cash Reserve Account and the confirmation thereof, and any such other agreements, documents, and estoppel letters, any amendments or supplements thereto or modifications thereof executed or delivered pursuant to the terms of this Agreement or any of the other Loan Documents. "MATERIAL ADVERSE EFFECT" shall mean any circumstances or events which (a) could have any material adverse effect whatsoever upon the validity, performance, or enforceability of any of the Loan Documents, or the Southland Lease, (b) could materially impair, impede or jeopardize the ability of Borrower or Southland to fulfill their respective obligations under this Agreement, the 15 Loan Documents or the Southland Lease, or (c) causes an Event of Default or any event which, with notice or lapse of time, or both, could become an Event of Default. "MATURITY DATE" shall mean the tenth (10th) anniversary of the Monthly Commencement Date, or such earlier date pursuant to acceleration of the maturity of the Loan as described herein or in the other Loan Documents. "MAXIMUM RATE" shall mean, on any day, the highest non-usurious rate of interest (if any) permitted by applicable law on such day. Lender hereby notifies Borrower that, and discloses to Borrower that, for purposes of TEX. REV. CIV. STAT. ANN. Art. 5069-1.04, as it may from time to time be amended, the "applicable rate ceiling" shall be the "indicated rate" ceiling referred to in Art. 5069-1.04(a)(1) and 5069-1.04(h)(2), from time to time in effect, as limited by Art. 5069-1.04(b); PROVIDED, HOWEVER, that to the extent permitted by applicable law, Lender reserves the right to change the "applicable rate ceiling" from time to time by further notice and disclosure to Borrower in accordance with applicable law; and, provided further, that the "highest non-usurious rate of interest permitted by applicable law" for purposes of this Agreement shall not be limited to the "applicable rate ceiling" under Art. 5069-1.04 if federal laws or other state laws now or hereafter in effect and applicable to this Agreement (and the interest contracted for, charged and collected hereunder) shall permit a higher rate of interest. "MONTHLY COMMENCEMENT DATE" shall mean, (a) if the Closing Date occurs on the first day of a calendar month, the Closing Date, or (b) if the Closing Date does not occur on the first day of a calendar month, the first day of the first full calendar month following the Closing Date. "MORTGAGED PROPERTY" shall have the meaning assigned to it in the Deed of Trust. "NET OPERATING INCOME" shall mean (a) the difference between (i) total revenues and (ii) total expenses (exclusive of Amortized Installments and income taxes of Borrower), PLUS (b) expenses not requiring the outlay of cash. "NET SUBLEASE INCOME" shall mean the Consolidated Net Sublease Income as defined in the Southland Lease. "OAK CREEK" shall mean Oak Creek Partners, Ltd., a Texas limited partnership. "OBLIGATION" shall mean all present and future indebtedness, obligations, and liabilities, and all renewals and extensions thereof, or any part thereof, arising pursuant to this Agreement, or as evidenced by the other Loan Documents, including any Consequential Loss, and all interest 16 accruing thereon, and reasonable attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations, and liabilities are direct, indirect, fixed, contingent, joint, several, individual or joint and several. "OTHER TAXES" shall have the meaning assigned to it in SECTION 3.07(B) hereof. "OWNER" shall mean Ito-Yokado Co., Ltd., a Japanese corporation, and Seven-Eleven Japan Co., Ltd., a Japanese corporation, jointly, or Affiliates thereof, which own approximately 64.32% of the issued and outstanding shares of Common Stock of Southland. "PARTICIPANT" shall have the meaning assigned to it in SECTION 10.10 hereof. "PERMITTED CLOSING COSTS" shall mean the ordinary, actual costs incurred by Borrower as seller of the Property (including without limitation, brokerage commissions, recording taxes and fees, attorneys' fees and other reasonable expenses) except costs and expenses paid to Borrower or an Affiliate of Borrower and payments of the Loan. "PERMITTED DEBT" shall mean (a) indebtedness created and evidenced by this Agreement or any of the other Loan Documents, (b) trade payables arising in the ordinary course of owning and operating the Property, (c) unsecured Intercompany Debt of the Borrower, and (d) all indebtedness secured by Permitted Liens. "PERMITTED INVESTMENTS" shall mean (a) direct obligations of, or obligations which the principal of and interest on are unconditionally guaranteed by, the United States of America; (b) any U.S. or Eurodollar time deposits, overnight bank deposits and other interest-bearing deposit accounts (which may be represented by certificates of deposit, including U.S. dollar certificates of deposit issued in the United States or Eurodollar certificates of deposit) in the Lender, any Participant or any national, state or foreign bank having a combined capital and surplus of not less than US$100,000,000; (c) bankers' acceptances drawn on and accepted by banks, including Lender and any Participant, having a combined capital and surplus of not less than US$100,000,000; (d) obligations of any agency or instrumentality of the United States of America, provided that the full faith and credit of the United States of America is pledged in support thereof; (e) commercial or finance company paper, or any municipal notes or bonds which are rated in the two highest rating categories by a nationally recognized rating agency; and (f) repurchase agreements in U.S. Government securities entered into with primary dealers recognized by the Federal Reserve Bank of New York. "PERMITTED LIENS" shall mean (a) the Liens granted to Lender to secure the Obligation, (b) the Liens defined as Permitted Exceptions in the Deed of Trust, (c) Liens for taxes not delinquent or 17 being contested in good faith, by appropriate proceedings and for which a surety bond reasonably satisfactory to Lender has been obtained or reserves are being maintained in accordance with Generally Accepted Accounting Principles, (d) mechanic's and materialmen's Liens with respect to obligations not overdue or being contested in good faith, by appropriate proceedings and for which a surety bond reasonably satisfactory to Lender has been obtained or reserves are being maintained in accordance with Generally Accepted Accounting Principles, (e) statutory or contractual landlord's Liens, (f) Liens resulting from deposits to secure the payment of workmen's compensation or other social security obligations, or to secure the performance of bids or contracts in the ordinary course of business, (g) judgment Liens which are being appealed by Borrower to the reasonable satisfaction of Lender, and (h) other Liens consented to by Lender in writing. "PERMITTED REFINANCING" shall mean any refinancing or repayment of the Loan in which the Obligation is paid and discharged in full. "PERMITTED REFINANCING CLOSING COSTS" shall mean (a) with respect to a Permitted Refinancing, the ordinary, actual closing costs incurred or expected to be incurred by Borrower in connection therewith or (b) with respect to any other repayment of the Loan in which the Obligations are paid and discharged in full, the reasonable estimate of ordinary closing costs which would have been incurred by Borrower had such repayment been made through a refinancing. "PERMITTED SALE" shall mean any sale of the Property as a whole for an all-cash purchase price not less than the fair market value of the Property in which the Obligation is paid and discharged in full. "PERMITTED TRANSFER" shall mean a sale or conveyance of the Property as a whole to an Affiliate of the Borrower other than Southland which has been approved by Lender (such approval to not be unreasonably withheld) if, in connection therewith, the Borrower executes and delivers and causes the execution and delivery of such documents, instruments and other information as Lender may reasonably request to confirm (a) the Obligation, (b) the existence and priority of the Liens securing same, and (c) the rights and interests underlying such liens, pledges, assignments and security interests. "PERSON" shall mean an individual, bankruptcy trustee, sole proprietorship, joint venture, association, trust, estate, business trust, corporation, non-profit corporation, sovereign government or agency, instrumentality, or political subdivision thereof, or any similar entity or organization. 18 "PLAN" shall mean any plan, including both single employer and multi-employer plans, established or maintained for employees of Borrower or any member of the Controlled Group to which Section 4021(a) of ERISA applies. "PREMISES" shall have the meaning assigned to it in the Southland Lease. "PROPERTY" shall mean the Land, together with the Improvements and all other property and appurtenances constituting the Real Estate. "REAL ESTATE" shall have the meaning assigned thereto in the Deed of Trust. "REGULATION X" shall mean Regulation X promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 224, or any other regulation hereafter promulgated by said Board to replace the prior Regulation X and having substantially the same function. "REIMBURSEMENT AGREEMENT" shall mean that certain Credit and Reimbursement Agreement dated as of February 15, 1987, by and between Borrower and Lender, as same has been amended by that certain First Amendment to Credit and Reimbursement Agreement dated as of December 21, 1990, that certain Second Amendment to Credit and Reimbursement Agreement dated as of January 4, 1993, and that certain Third Amendment to Credit and Reimbursement Agreement dated as of February 10, 1995, of which this Schedule A forms a part. "RELEASE" shall mean the agreement whereby Borrower and Southland release Lender from any claims, in the form of EXHIBIT I attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, or amended. "RENEWAL ASSIGNMENT OF LEASES AND RENTS" shall mean the written agreement whereby Borrower assigns to Lender all leases and rentals derived from the Property in the form of EXHIBIT J attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed or extended. "RENEWAL ASSIGNMENT OF SUBLEASES AND RENTS" shall mean the written agreement whereby Southland assigns to Lender all Subleases and the rents and income derived therefrom in the form of EXHIBIT K attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed or extended. 19 "RENTAL INTEREST" shall mean, for any Rental Interest Payment Date, the amount of Net Sublease Income due and payable as of such date pursuant to the Southland Lease; PROVIDED, HOWEVER, that if on any Rental Interest Payment Date, the amount of Net Sublease Income payable under the Southland Lease, as of such date, when added to all other interest charged, paid or payable on the Loan (including without limitation, interest at the Stated Rate, the Default Rate and the Value Interest) exceeds interest calculated at the Maximum Rate, then Rental Interest shall be reduced to an amount such that the aggregate rate of interest on the Loan shall never exceed the Maximum Rate. "RENTAL INTEREST PAYMENT DATE" shall mean the fifteenth (15th) Business Day of each calendar month until the Obligation is paid in full. "REQUEST FOR ADVANCE" shall mean the form of Request for Advance attached hereto as SCHEDULE 2, appropriately completed and certified by a responsible and authorized officer of the Borrower or other employee of the Borrower designated by the Borrower. "SALES PRICE" shall mean the contract sales price for the Property pursuant to a Permitted Sale. "SCHEDULED ZONING ORDINANCES" shall mean the zoning ordinances affecting the Property shown in the Zoning Schedule. "SECURITY AGREEMENT" shall mean the written security agreement granting to Lender a security interest in all personal property of the Borrower included in the Property as collateral for the Loan in addition to any collateral which is described in the Deed of Trust and covered by the security agreement included therein in the form of EXHIBIT L attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed or extended. "SOUTHLAND" shall have the meaning assigned to it in the preamble hereof. "SOUTHLAND ESTOPPEL LETTER" shall mean the estoppel letter duly executed by Southland, dated no earlier than ten (10) days prior to the Closing Date, in the form of EXHIBIT M attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time-to-time be supplemented, modified or amended. "SOUTHLAND LEASE" shall mean that certain Amended and Restated Lease Agreement, dated as of December 21, 1990, executed by Borrower, as landlord, and Southland, as tenant, and all renewals thereof, or modifications or supplements thereto. 20 "SOUTHLAND MANAGEMENT AGREEMENT" shall mean that certain Management Agreement dated February 15, 1987, between Borrower, as owner of the Property, and Southland (as successor by merger to Cityplace Management Corporation), as manager of the Property, as amended. "SOUTHLAND SUBORDINATION AGREEMENT" shall mean the certain Amended and Restated Subordination, Attornment and Non-Disturbance Agreement, dated as of December 21, 1990, between Southland and Lender, executed in connection with the Southland Lease. "SPECIAL LEASE PAYMENTS" shall mean all insurance proceeds, awards, and cancellation fees, if any, paid to Lender or Borrower pursuant to Section 7.6 or 7.7 of the Southland Lease, less amounts expended from such proceeds and awards by Borrower, as the landlord under the Southland Lease, to restore the Premises as and to the extent required by the Southland Lease. "STATED RATE" shall mean the Annual Rate; PROVIDED, HOWEVER, that if interest at the Annual Rate, when added to all other interest charged, paid or payable on the Loan (including, without limitation, Value Interest, Rental Interest and interest at the Default Rate) exceeds the Maximum Rate, then the Stated Rate shall be reduced to an amount such that the aggregate rate of interest on the Loan shall never exceed the Maximum Rate. If, however, on any Amortized Installment Date, Lender does not receive interest on the Loan computed (as if no Maximum Rate limitations were applicable) at the Annual Rate, because the Annual Rate exceeds or would cause the Maximum Rate to be exceeded, then Borrower shall, upon the written demand of Lender, pay to Lender, in addition to interest otherwise required, on each Amortized Installment Date thereafter, the Excess Interest Amount (hereinafter defined) calculated as of such later interest payment date; PROVIDED, HOWEVER, that in no event shall Borrower be required to pay, for any appropriate computation period, interest at a rate exceeding or which would cause interest on the Loan to exceed the Maximum Rate effective during such period. The term "EXCESS INTEREST AMOUNT" shall mean, on any date, with respect to the Loan, the amount by which (a) the amount of all interest which would have accrued prior to such date on the principal of such Loan (had the Annual Rate at all times been in effect, without limitation by the Maximum Rate) EXCEEDS (b) the aggregate amount of interest actually paid to Lender on the Loan on or prior to such date. "SUBLEASE ESTOPPEL LETTER" shall mean an estoppel letter executed by each Subtenant under each Approved Sublease in the form of EXHIBIT N attached hereto and incorporated herein by reference, with blanks appropriately completed in conformity herewith, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed or extended. 21 "SUBORDINATION AND ATTORNMENT AGREEMENT" shall mean that certain Subordination, Attornment and Non-Disturbance Agreement (Southland Lease) dated as of February 15, 1987, by and between Southland, Borrower, Bank and Trustee with respect to certain rights, obligations and benefits under the Southland Lease, as amended and restated by the Southland Subordination Agreement and as ratified and confirmed by the Confirmation of Subordination, Attornment and Non-Disturbance Agreement. "SURVEY" shall mean a current, certified survey of the Land in form and substance satisfactory to Lender. "TAXES" shall have the meaning assigned to it in SECTION 3.07(A) hereof. "TENANT FINISHOUT" shall mean the labor, materials and services required to prepare any portion of the Building for a subtenant pursuant to an Approved Sublease, and additional elevators as reasonably necessary when considering all relevant factors, including, without limitation, the economic benefit derived from any additional elevator service, which economic benefit analysis shall take into account (a) the cost of such additional elevator service, (b) the resulting impact on elevator service for the Improvements, (c) the corresponding need for the resulting additional elevator service as it relates to existing and future occupants of the Improvements, and their employees and clientele to adequately service the occupants of the Improvements and their employees and clientele in a manner consistent with a first-class office property in the Dallas, Texas central business district, and (d) the additional rent to be achieved from the Approved Sublease(s) requiring such additional elevator. "THIRD AMENDMENT TO COMPLETION GUARANTY AGREEMENT" shall mean the Third Amendment to Completion Guaranty Agreement dated as of February 10, 1995, in the form of Exhibit O attached hereto which modifies and confirms the obligations of Southland under the Completion Guaranty. "TITLE COMPANY" shall mean American Title Company, as agent for Lawyers Title Insurance Corporation, or another insurer reasonably satisfactory to Lender. "TITLE INSURANCE COMMITMENT" shall mean a commitment to issue the Title Insurance Policy, issued by the Title Company, along with copies of all instruments creating or evidencing exceptions or encumbrances to title. "TITLE INSURANCE POLICY" shall mean a Mortgagee Policy of Title Insurance equal to the Loan Amount insuring that the Lien of the Deed of Trust constitutes a valid first lien against the Property, subject only to the Liens defined as Permitted Exceptions in the Deed of Trust and such other exceptions and encumbrances which Lender may approve, 22 such approval not to be unreasonably withheld, issued by the Title Company. "TRUSTEE" shall mean Bank of America National Trust & Savings Association, a national banking association, as successor trustee to Security Pacific National Bank, or any successor trustee who shall have become such pursuant to the applicable provisions of the Indenture. "UCC SEARCHES" shall mean a search of Code financing statement filings affecting the Borrower and the Property including, but not limited to filings designated as fixture filings. "VALUE INTEREST" shall mean an amount equal to the Value Interest Amount determined as of the Value Interest Payment Date; PROVIDED, HOWEVER, that if Value Interest, when added to all other interest charged, paid, or payable on the Loan (including, without limitation, interest at the Stated Rate, the Default Rate and Rental Interest) exceeds interest calculated at the Maximum Rate, then Value Interest shall be reduced to an amount such that the aggregate rate of interest on the Loan shall never exceed the Maximum Rate. "VALUE INTEREST AMOUNT" shall mean the product of (a) sixty percent (60%) TIMES (b) the Estimated Net Proceeds. "VALUE INTEREST PAYMENT DATE" shall mean the first to occur of (a) payment in full of the unpaid principal balance of and accrued unpaid interest on the Loan, whether by a Permitted Sale or a Permitted Refinancing, and (b) the Maturity Date. "ZONING SCHEDULE" shall mean SCHEDULE 3 attached hereto, as it may, from time to time be modified, updated or supplemented as provided in SECTION 7.01(H) hereof or pursuant to the Completion Guaranty. 1.02. OTHER DEFINITIONAL PROVISIONS. (a) All terms defined in this Agreement shall have the above-defined meanings when used in any of the other Loan Documents or any certificate, report or other document made or delivered pursuant to this Agreement, unless the context therein shall otherwise require. (b) Defined terms used in the singular shall import the plural and vice versa. (c) 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 provisions of this Agreement. 23 ARTICLE II REIMBURSEMENT OBLIGATION 2.01. PROMISE TO PAY. Subject to the terms and conditions herein set forth, Borrower shall pay to Lender the Loan Amount. The Loan is not revolving and any principal payments made hereunder may not be reborrowed. ARTICLE III PAYMENT TERMS 3.01. EVIDENCE OF INDEBTEDNESS. The Lender shall maintain in accordance with its usual practice an account or accounts evidencing the Loan and the amounts of principal and interest payable and paid from time to time hereunder. The entries made on such account or accounts shall be conclusive and binding for all purposes, absent manifest error. 3.02. INTEREST RATE. The Loan shall bear interest from the date of the Advance until due and payable at the Stated Rate. Past due principal and interest (including Rental Interest and Value Interest and interest accruing at the Stated Rate) on the Loan shall bear interest, to the extent permitted by applicable law, at the Default Rate. 3.03. CALCULATION OF INTEREST RATE. Interest on the unpaid principal balance of the Loan shall be computed on the basis of twelve 30-day months and a year consisting of 360 days. 3.04. PAYMENT OF PRINCIPAL OF AND INTEREST ON THE LOAN. Payments of principal of and interest on the Loan shall be made as follows: (a) Principal of and interest on the Loan, computed at the Stated Rate, shall be due and payable in arrears as follows: (i) in one hundred and nineteen (119) Amortized Installments, commencing on the first day of the first calendar month immediately following the Monthly Commencement Date, and thereafter, on the first day of each of the one hundred and eighteen (118) succeeding calendar months; and (ii) in one final installment on the Maturity Date in the amount of the then-unpaid principal balance of and accrued unpaid interest on the Loan; (b) Value Interest shall be due and payable on the Value Interest Payment Date; and 24 (c) Rental Interest shall be due and payable on each Rental Interest Payment Date. 3.05. MANNER AND APPLICATION OF PAYMENTS. All payments of principal of and interest on the Loan, and of all other amounts payable under this Agreement by Borrower to or for the account of Lender, shall be made by Borrower to Lender before 11:00 a.m. (Dallas time) in federal or other immediately available funds. Should any Amortized Installment, Rental Interest or Value Interest become due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day. Funds received after 11:00 a.m. (Dallas time) shall be treated for all purposes as having been received by Lender on the first Business Day next following receipt of such funds. Prior to the occurrence of an Event of Default, all payments made on the Loan shall be credited, to the extent of the amount thereof, in the following manner: (a) first, against the amount of interest accrued and unpaid on the Loan as of the date of such payment as provided in SCHEDULE 1, (b) second, against all principal due and owing on the Loan as of the date of such payment as provided in SCHEDULE 1, (c) third, against all costs, expenses and other fees (including attorneys' fees) arising under the terms hereof to the extent not paid when due, and (d) fourth, to all other amounts constituting a portion of the Obligation. Upon the occurrence and continuance of an Event of Default, all payments made on the Loan shall be applied in the manner designated by Lender in its sole discretion, notwithstanding any directions of Borrower or any other Person to the contrary. 3.06. PREPAYMENTS. (a) VOLUNTARY PREPAYMENTS. At any time and from time to time Borrower may, upon five (5) Business Days' written notice to Lender, prepay the principal of the Loan then outstanding, in whole or in part; PROVIDED, HOWEVER, that (i) each prepayment of less than the full outstanding principal balance of the Loan shall be in an amount equal to at least US $5,000,000 and integral multiples of US $1,000,000 thereof, and (ii) if the Borrower shall prepay all or any part of the principal of the Loan on any day other than the Maturity Date, then Borrower shall pay to Lender the amount of any Consequential Loss arising therefrom. (b) MANDATORY PREPAYMENTS. Borrower shall pay to Lender (i) immediately upon payment, release or assignment of same by Southland under the Southland Lease, Special Lease Payments and any Lease Purchase Price, and (ii) the amount of any Consequential Loss resulting from the acceleration of the maturity of the Obligation after the occurrence of an Event of Default. (c) MANNER AND APPLICATION OF PREPAYMENTS. All prepayments by Borrower to Lender hereunder shall be made by Borrower to Lender before 25 11:00 a.m. (Dallas time) in federal or other immediately available funds. Funds received after 11:00 a.m. (Dallas time) shall be treated for all purposes as having been received by Lender on the first Business Day next following receipt of such funds. All prepayments made on the Loan hereunder shall be made together with interest accrued (through the date of such prepayment) on the principal amount prepaid, and shall be applied in the following manner: (i) first, against all costs, expenses and other fees (including any Consequential Loss) due hereunder as of the date of such prepayment to the extent not paid when due; (ii) second, against the amount of interest accrued on the principal amount prepaid as of the date of the prepayment; and (iii) third, as a prepayment of the outstanding principal amount of the Loan. Prepayments of principal of the Loan shall be applied to remaining installments of principal on the Loan in the inverse order of their maturity. 3.07. TAXES. (a) Any and all payments made to Lender, Lender's successors and assigns or any Participant or any designated lending office pursuant to SECTION 3.09 hereof (such successors, assigns, Participants and designated lending office pursuant to Section 3.09 shall, for purposes of this SECTION 3.07, be referred to collectively hereinafter as "ASSIGNEES") by the Borrower hereunder shall be made, free and clear of, and without deduction for, any future United States taxes, levies, imposts, deductions, charges, withholdings, and all liabilities with respect thereto, EXCLUDING, (i) taxes imposed on or measured by its overall net income, and franchise taxes and tax on overall capital imposed on it, by the jurisdiction under the laws of which Lender or Assignee (as the case may be) is organized or any political subdivision thereof, (ii) taxes imposed on or measured by its overall net income, and franchise taxes and taxes on overall capital imposed on it, by the jurisdiction of such Lender's or Assignee's lending office, seat of management or principal office, or any political subdivision thereof, and (iii) United States withholding tax payable with respect to payments hereunder under laws (including, without limitation, any statute, treaty, ruling, determination or regulation) as in effect on the Initial Date (as hereinafter defined) for such Lender or Assignee BUT NOT EXCLUDING any United States withholding tax payable as a result of any change in such laws occurring after the Initial Date (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "TAXES"). For purposes of this section, the term "INITIAL DATE" shall mean, in the case of Lender, December 21, 1990, and, in the case of each Assignee, the date of the assignment of Lender's rights under this agreement or the date that the participation agreement (discussed under SECTION 10.10) is entered into, as the case may be. 26 (b) In addition, Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made by Borrower hereunder or under the Loan Documents or from the execution, delivery, or registration of, or otherwise with respect to, this Agreement or the other Loan Documents excluding, HOWEVER, any tax, impost, charge or levy (i) excluded under SECTION 3.07(a) hereof and (ii) imposed on any Assignee other than Participants (all such taxes, imposts, charges or levies being referred to hereinafter as "OTHER TAXES"). (c) Borrower will indemnify Lender for the full amount of Taxes or Other Taxes. (d) Lender agrees, and agrees to cause the Assignees, to use good faith efforts to carry out its obligations under this Agreement in such a way as to reduce or eliminate the amount of Taxes or Other Taxes attributable to the Loan and other payments hereunder, including the use of a different lending office, as long as such actions would not materially adversely affect Lender or such Assignee, or materially increase the cost of maintaining the Loan. If there shall occur such a material increase in Borrower's obligations under SECTIONS 3.07(A), 3.07(B) or 3.07(C) hereof, Borrower shall have the right, but not the obligation, to prepay to Lender or any Assignee such Person's share of the outstanding amount of the Loan. (e) In the case of any Taxes or Other Taxes not required by law to be deducted by the Borrower from or in respect of any sum payable hereunder to Lender or Assignee, payment under this indemnification must be made by the Borrower within sixty (60) days from the date on which Lender or Assignee, as the case may be, makes written demand therefor promptly after becoming liable to make such payment of the Taxes or Other Taxes to the relevant taxing authority. Borrower shall have no obligation hereunder for the payment of any interest, penalties or other increased amounts due to the failure of Lender or an Assignee to timely notify Borrower of its obligations under this SECTION 3.07. (f) On or prior to the Initial Date, and from time to time thereafter if reasonably requested by Borrower, each Lender and Assignee organized under the laws of a foreign jurisdiction will provide the Borrower with an Internal Revenue Form 4224 or Form 1001 or other certificate or document required under United States law to establish complete exemption from United States federal withholding tax or any other certificate or document providing for an exemption from the imposition of Other Taxes. Such form, certificate or document also will be provided by Lender and each Assignee (i) as is required by law due to a change in the factual circumstances of any such Lender 27 (but not due to a change in applicable law) and (ii) from time to time after the Initial Date as is required by applicable law to effect a renewal of such form, certificate or document. Borrower shall not be required to pay any increased amounts on account of any Taxes pursuant to SECTION 3.07(A), (B), OR (C) to Lender or any Assignee to the extent that such Taxes and Other Taxes would not have been payable if such Lender or Assignee had furnished a form (properly and accurately completed in all material respects by such Lender or Assignee) which it was otherwise required to furnish in accordance with this Section 3.07 hereof. 3.08. INCREASED CAPITAL AND YIELD PROTECTION. (a) If any Governmental Authority, central bank or other comparable authority, shall at any time after December 21, 1990, impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, Lender, or shall impose on Lender any other condition affecting the Loan (other than taxes), and the result of any of the foregoing is to materially increase the cost to Lender of making or maintaining the Loan, or to materially reduce the amount of any sum received or receivable by Lender under this Agreement, then Borrower shall pay to Lender such additional amount or amounts as will compensate Lender for such actual increased cost or reduction. Lender will deliver to Borrower, as promptly as practicable after it becomes aware of any event of which it has knowledge which will entitle Lender to compensation pursuant to this SECTION 3.08(A), a certificate setting forth in reasonable detail the basis for the determination of such amount. Each such certificate shall be conclusive evidence of the amount due in the absence of manifest error. Borrower shall pay the amount shown as due on any such certificate within twenty (20) days after the receipt of the certificate from Lender. (b) If either (i) the introduction of, or any change in, or in the interpretation of, any law or regulation, after December 21, 1990, or (ii) compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) materially affects or would affect the amount of capital required or expected to be maintained by Lender or any corporation controlling Lender, and Lender reasonably determines that the amount of such capital is materially increased by or based upon the existence of the Loan, then, upon demand by Lender, Borrower shall pay to Lender, from time to time as specified by Lender, additional actual amounts sufficient to compensate Lender in the light of such circumstances, to the extent that Lender reasonably determines such increase in capital to be allocable to the existence of the Loan. Lender will deliver to Borrower, as promptly as practicable after it becomes aware of any event of which it has knowledge which will entitle Lender to compensation pursuant to this 28 SECTION 3.08(B), a certificate setting forth in reasonable detail the basis for the determination of such amount. Each such certificate shall be conclusive evidence of the amount due in the absence of manifest error. Borrower shall pay the amount shown as due on any such certificate within twenty (20) days after the receipt of the certificate from Lender. (c) Lender agrees to use good faith efforts to carry out its obligations under this Agreement as to reduce or eliminate the amount, if any, of any increased costs contemplated by this SECTION 3.08 attributable to the Loan, including the use of a different office. 3.09. LENDING OFFICE. Lender may designate its principal office or another foreign branch, agency, subsidiary or Affiliate of Lender as its lending office for the Loan, and may change its lending offices from time to time by notice to the Borrower. 29 ARTICLE IV SECURITY 4.01. LIENS AND SECURITY INTERESTS. To secure the performance by Borrower of the payment of the Obligation, Borrower shall grant or cause to be granted to Lender the following: (a) a first priority Lien on the Property pursuant to the terms of the Deed of Trust, subject to the Permitted Liens; (b) an assignment of leases and rents and of all income arising out of the ownership and/or operation of the Premises, pursuant to the terms of the Assignment of Leases and Rents; (c) an assignment of subleases and rents and of sublease income arising out of the Premises, pursuant to the terms of the Assignment of Subleases and Rents; (d) a first priority Lien in and to all personal property owned by Borrower and used in the operation or enjoyment of the Property pursuant to the terms of the Security Agreement, subject to the Permitted Liens; and (e) an assignment of the Cash Reserve Account, pursuant to the terms of the Assignment of Cash Reserve Account. 4.02. CASH RESERVE ACCOUNT. In order to further secure the payment and performance of the Obligation and to effect and facilitate Lender's right of offset, Borrower shall require that Southland wire transfer to the Cash Reserve Account, for the account of Borrower, all monies or sums paid or to be paid by Southland to Borrower under the Southland Lease, including all rental, expense payments and reimbursements, Special Lease Payments and any Lease Purchase Price. In addition, Borrower shall, upon receipt, deposit in the Cash Reserve Account any payment and monies which Borrower receives directly from Southland or any other Person as payments under the Southland Lease. So long as there does not exist an Event of Default, Borrower may direct Lender to disburse from the Cash Reserve Account by delivering to Lender a Request for Advance (a) on a monthly basis, the costs and expenses in the aggregate shown for such month or unadvanced amounts on a Fiscal Year to date basis for prior months on the applicable Annual Operating Budget, (b) immediately following any approved amendment to the Annual Operating Budget, any additional costs or expenses for such month reflected therein, (c) from time-to-time any portion of the Budget Reserve for such Fiscal Year which has not been paid to the Borrower so long as such advance is being made for a cost or expense which meets all Conditions for Budget Approval, (d) from time-to-time for 30 Extraordinary Budget Items, and (e) from time to time all, or any portion of the Excess Cash Reserve Amount. The Borrower hereby irrevocably authorizes and directs Lender to charge from time to time the Cash Reserve Account and any other accounts of the Borrower at The Sanwa Bank, Limited, New York Branch for amounts due to Lender hereunder or under the Loan Documents; provided, however, that Lender shall give Borrower written notice of withdrawal one (1) Business Day prior to any such withdrawal if the withdrawal is being made for any purpose other than a regularly scheduled Amortized Installment unless an Event of Default shall have occurred, in which case no such notice need be given prior to withdrawal. The Borrower shall use any and all amounts advanced under the Annual Operating Budget only for the aggregate purposes shown therein, and shall use any and all amounts advanced from the Budget Reserve or as an Extraordinary Budget Item only for the purpose for which such amounts were requested. The Cash Reserve may be invested and reinvested from time to time in Permitted Investments as Borrower shall determine, which Permitted Investments shall be held in the name of Lender, for the benefit of Borrower. The tax identification number used in connection with each such Permitted Investments shall be that of Borrower. Any income or other earnings from such Permitted Investments shall remain in or be deposited in the Cash Reserve Account. Appropriate measures shall be taken in order to provide Lender with a perfected first priority security interest with respect to each Permitted Investment purchased with the Cash Reserve. If immediately available funds on deposit in the Cash Reserve Account are not sufficient to make any authorized distributions therefrom, Lender shall liquidate at its discretion and as promptly as practicable Permitted Investments purchased with the Cash Reserve as required to obtain sufficient immediately available funds to make such distributions and such distributions shall not be made until such liquidation has taken place. Upon the occurrence of an Event of Default, Lender shall have the right to liquidate any Permitted Investments and deposit the proceeds in the Cash Reserve Account, apply the amounts of immediately available funds held in the Cash Reserve Account to the Obligation, retain such amounts as security for the Obligation or exercise such of the rights and remedies as may be provided herein or in the other Loan Documents. 4.03. LENDER OFFSET. In addition to the rights granted to the Lender under SECTION 4.02 hereof, Borrower hereby grants to the Lender a right of offset, to secure repayment of the Obligation, upon any and all monies, securities, or other property of Borrower and the proceeds therefrom, now or hereafter held or received by or in transit to Lender, from or for the account of Borrower, whether for safekeeping, custody, pledge, transmission, collection, or otherwise, and also upon any and all deposits (general or specified) and credits of Borrower, including, without limitation, the Cash Reserve Account, and any and all claims of Borrower against Lender at any time existing. Lender is hereby authorized at any time and from time to time during the occurrence of an Event of Default, without 31 notice to Borrower, to offset, appropriate, apply, and enforce such right of offset against any and all items hereinabove referred to against the Obligation. For purposes of this SECTION 4.03, Borrower shall be deemed directly indebted to Lender and the Participants in the full amount of the Obligation, and Lender and the Participants shall be entitled to exercise the rights of offset provided for above. 4.04. AGREEMENT TO DELIVER ADDITIONAL COLLATERAL DOCUMENTS. Borrower shall deliver such deeds of trust, assignments, security agreements, financing statements, estoppel certificates (except in the case of Sublease Estoppel Letters, in which case Borrower is only required to use its best efforts to so deliver) and other collateral documents (all of which shall be deemed part of the Collateral Documents), in form and substance reasonably satisfactory to the Lender, as the Lender may reasonably request from time to time for the purpose of maintaining or perfecting in favor of Lender, first and exclusive liens in any Collateral, together with other assurances of the enforceability and priority of Lender's Liens and assurances of due recording and documentation of the Collateral Documents, as the Lender may reasonably require to avoid material impairment of the Liens granted or purported to be granted pursuant to this ARTICLE IV. 32 ARTICLE V CONDITIONS PRECEDENT The terms and conditions of this Agreement and the rights and obligations of the parties hereunder are subject to the condition precedent that, on the Closing Date, Lender shall have received the following in form and substance reasonably satisfactory to Lender: 5.01. COLLATERAL DOCUMENTS. The Collateral Documents required to be delivered under ARTICLE IV hereof, duly executed by the appropriate parties, together with evidence that (to the extent necessary) the Collateral Documents have been duly filed, evidenced and documented, that all recording taxes and fees have been paid, and that all other actions have been taken in the manner necessary to establish, protect, preserve and perfect, as a valid first lien or security interest the Liens granted to Lender thereunder, including without limitation, the filing of financing statements in form and substance satisfactory to Lender. 5.02. THIRD AMENDMENT TO COMPLETION GUARANTY AGREEMENT. Duly executed Third Amendment to Completion Guaranty Agreement, confirming and modifying the obligations of Southland under the Completion Guaranty Agreement. 5.03. ASSIGNMENT OF TRUSTEE DEED OF TRUST. Duly executed Assignment of Trustee Deed of Trust and related UCC-3 assignments, pursuant to which Trustee transfers and assigns its lien on the Property which secured the repayment of Debt Securities to Bank. 5.04. CONFIRMATION OF COLLATERAL ASSIGNMENT OF MANAGEMENT AGREEMENT. Duly executed Confirmation of Collateral Assignment of Management Agreement, which provides Lender a valid assignment of management agreements on the Property. 5.05. CONFIRMATION OF COLLATERAL ASSIGNMENT OF SUBMANAGEMENT AGREEMENT. Duly executed Confirmation of Collateral Assignment of Submanagement Agreement, which provides Lender a valid assignment of management agreements on the Property. 5.06. CONFIRMATION OF ASSIGNMENT OF LISTING AGREEMENT. Duly executed Confirmation of Assignment of Listing Agreement, which provides Lender a valid assignment of the listing agreement executed by and between Southland and Prentiss Properties Limited, Inc. 5.07. CONFIRMATION OF AND AMENDMENT TO OTHER COLLATERAL DOCUMENTS. Duly executed Confirmation of and Amendment to Other Collateral Documents, which 33 modifies and confirms the liens and security interests of the Lender in all other Collateral Documents. 5.08. CONFIRMATION OF SUBORDINATION, ATTORNMENT AND NON- DISTURBANCE AGREEMENT. Duly executed Confirmation of Subordination, Attornment and Non-Disturbance Agreement, confirming the obligations under the Subordination and Attornment Agreement with respect to the Southland Lease. 5.09. GOVERNMENTAL APPROVALS. Appropriate written documentation evidencing that the Property (a) does not lie within an area which has been designated or identified by the Secretary of Housing and Urban Development as within a flood plain pursuant to the National Flood Insurance Act of 1968, as amended and (b) complies with the Americans With Disabilities Act of 1990, Pub. L. No. 89-670, 104 Stat. 327 (1990), as amended, and all regulations promulgated pursuant thereto, to the extent compliance is required thereby. 5.10. APPRAISAL. An Appraisal of the Property dated within ninety (90) days of the Closing Date. 5.11. INSURANCE. Evidence of Insurance Policies covering the Property. 5.12. SURVEY. A Survey of the Land dated within ninety (90) days of the Closing Date. 5.13. TITLE INSURANCE. A Title Insurance Commitment, whereby the Title Insurance Company commits to issue the Title Insurance Policy. 5.14. UCC SEARCHES. UCC Searches of Borrower and the Property dated within thirty (30) days of the Closing Date. 5.15. RENT ROLL, LEASES, AND ESTOPPEL LETTERS. A current rent roll summarizing the terms of the Southland Lease, all Approved Subleases, all tenant leases, subleases or occupancy agreements for space in the Premises, together with (a) a copy of the Southland Lease, each Approved Sublease, each and every other tenant lease, sublease or occupancy agreement, if any, affecting the Property, (b) a copy of the Southland Subordination Agreement, (c) a copy of the Approved Sublease Subordination for each Approved Sublease, each tenant lease, each sublease or occupancy agreement, and (d) the Southland Estoppel Letter. 5.16. RELEASE. Duly executed Release, which provides for the release by Borrower and Southland of any and all claims which they have or may have against Lender and Participants, arising on or before the Closing Date. 34 5.17. FINANCIAL INFORMATION. The latest financial statements then available for Borrower, Southland, and the Property, complying with the provisions of SECTIONS 7.01 and 7.02 hereof, dated within thirty (30) days of the Closing Date. 5.18. OFFICER'S CERTIFICATE. A certificate signed by a duly authorized officer of Borrower, stating that: (a) all of the representations and warranties contained in ARTICLE VI hereof and the other Loan Documents are true and correct as of such date; (b) no event has occurred and is continuing, or would result from the advance of the Loan Amount, which constitutes an Event of Default or which, with the lapse of time or the giving of notice or both, would constitute an Event of Default; and (c) Southland is not in default under the Southland Lease. 5.19. INCUMBENCY CERTIFICATE OF BORROWER. A signed certificate of the Secretary or Assistant Secretary of Borrower which shall certify the names of the officers of Borrower authorized to sign each of the Loan Documents and the other documents or certificates to be delivered pursuant to the Loan Documents, together with the true signatures of each such officers. Lender may conclusively rely on such certificate until Lender shall receive a further certificate of the Secretary or Assistant Secretary of Borrower cancelling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. 5.20. INCUMBENCY CERTIFICATE OF SOUTHLAND. A signed certificate of the Secretary or Assistant Secretary of Southland which shall certify the names of the officers of Southland authorized to sign each of the Loan Documents to which it is a party and the other documents or certificates to be delivered pursuant to the Loan Documents to which it is a party, together with the true signatures of each such officers. Lender may conclusively rely on such certificate until Lender shall receive a further certificate of the Secretary or Assistant Secretary of Southland cancelling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. 5.21. RESOLUTIONS OF BORROWER. Resolutions of Borrower approving the execution, delivery and performance of this Agreement, the Loan, the other Loan Documents and the transactions contemplated herein and therein, duly adopted by the Board of Directors of Borrower and accompanied by a certificate of the Secretary or Assistant Secretary of Borrower stating that such Resolutions are true and correct, have not been altered or repealed and are in full force and effect. 5.22. RESOLUTIONS OF SOUTHLAND. Resolutions of Southland approving the execution, delivery and performance of the Southland Lease and the other Loan Documents to be executed by Southland and the transactions contemplated therein, duly adopted by the Board of Directors of Southland and accompanied by a certificate of the Secretary or Assistant Secretary of Southland stating that such Resolutions are true and correct, have not been altered or repealed and are in full force and effect. 35 5.23. CORPORATE CERTIFICATES OF BORROWER AND SOUTHLAND. Certificates of incorporation and good standing (or other similar instruments) for Borrower and Southland issued by the Secretary of State of the State of Texas, each dated within ten (10) days of the Closing Date. 5.24. ARTICLES OF INCORPORATION AND BYLAWS OF BORROWER AND SOUTHLAND. A copy of the Articles of Incorporation of Borrower and Southland, and all amendments thereto, certified by the Secretary of State of Texas, and dated within ten (10) days of the Closing Date, and a copy of the bylaws of Borrower and Southland, and all amendments thereto, certified by the Secretary or Assistant Secretary of Borrower and Southland, as the case may be, as being true, correct and complete as of the date of such certification, dated within ten (10) days of the Closing Date. 5.25. OPINION OF COUNSEL TO BORROWER. A favorable opinion of the general counsel for Borrower, substantially in the form of Exhibit P attached hereto. 5.26. OPINION OF COUNSEL TO SOUTHLAND. A favorable opinion of the general counsel for Southland, substantially in the form of Exhibit Q attached hereto. 5.27. . CERTAIN REQUIRED PAYMENTS Payment of (a) all amounts due under the Reimbursement Agreement, if any, after the application of the Advance thereto, (b) all amounts due under the Interest Reimbursement Agreement, if any, and (c) the amount of interest due on the Loan from the Closing Date to the Monthly Commencement Date. 5.28. ADDITIONAL INFORMATION. Such other information and documents as may reasonably be required by Lender and its counsel. 36 ARTICLE VI REPRESENTATIONS AND WARRANTIES In consideration for the mutual promises herein contained and for other valuable consideration, Borrower represents and warrants to Lender that: 6.01. ORGANIZATION AND GOOD STANDING OF BORROWER. Borrower is a corporation duly organized and existing in good standing under the laws of the State of Texas, and has the corporate power and authority to own its properties and assets and to transact the business in which it is engaged. 6.02. AUTHORIZATION AND POWER. Borrower has the corporate power and requisite authority to execute, deliver, and perform under this Agreement and the other Loan Documents to be executed by the Borrower; Borrower is duly authorized to, and has taken all corporate action necessary to authorize Borrower to, execute, deliver, and perform under this Agreement and each of the other Loan Documents and is and will continue to be duly authorized to perform under this Agreement and the other Loan Documents. 6.03. NO CONFLICTS OR CONSENTS. Neither the execution and delivery of this Agreement or the other Loan Documents, nor the consummation of any of the transactions herein or therein contemplated, nor compliance with the terms and provisions hereof or with the terms and provisions thereof, will contravene or conflict with any provision of law, statute, or regulation to which Borrower is subject or any judgment, license, order, or permit applicable to Borrower or any indenture, mortgage, deed of trust, or other agreement or instrument to which Borrower is a party or by which Borrower may be bound, or to which Borrower may be subject. No consent, approval, authorization, or order of any court or Governmental Authority or third party is required in connection with the execution and delivery by Borrower of the Loan Documents or to consummate the transactions contemplated hereby or thereby. 6.04. ENFORCEABLE OBLIGATIONS OF BORROWER. This Agreement and the other Loan Documents executed by Borrower are the legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms, subject to Debtor Relief Laws. 6.05. PRIORITY OF LIENS. Lender has a valid, exclusive, enforceable, first priority lien in the Collateral, subject only to the Permitted Liens. 6.06. FINANCIAL CONDITION. Borrower has delivered to Lender copies of the balance sheet of Borrower as of the end of the most recent complete Fiscal Year for which statements are available, and the related statements of income, stockholders' equity and changes in financial 37 position for the year ended on such date, certified by an independent certified public accountant; such financial statements are true and correct, fairly present the financial condition of Borrower as of such date and have been prepared in accordance with Generally Accepted Accounting Principles applied on a basis consistent with that of prior periods; as of the date hereof, there are no material obligations, liabilities or indebtedness (including contingent and indirect liabilities and obligations) that are not reflected in such financial statements; and no changes having a Material Adverse Effect have occurred since the date of such financial statements. 6.07. FULL DISCLOSURE. There is no material fact that Borrower has not disclosed to Lender which could have a Material Adverse Effect. Neither the financial statements referred to in SECTION 6.06 hereof, nor any certificate or statement delivered herewith or heretofore by Borrower to Lender in connection with this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to keep the statements contained herein or therein from being misleading. 6.08. NO DEFAULT. No event has occurred and is continuing which constitutes an Event of Default or which, with the lapse of time or giving of notice, or both, would constitute an Event of Default. 6.09. SOUTHLAND LEASE. The Southland Lease is the legal, valid and binding obligation of the parties thereto enforceable in accordance with its terms, subject to Debtor Relief Laws; and neither Borrower nor Southland is in default under the Southland Lease. 6.10. NO LITIGATION. There are no actions, suits or legal, equitable, arbitration or administrative proceedings pending, or to the knowledge of Borrower threatened, against Borrower or Southland that would, if adversely determined, have a Material Adverse Effect. 6.11. TAXES. All tax returns required to be filed by the Borrower in any jurisdiction have been filed and all material taxes (including mortgage recording taxes), assessments, fees, and other governmental charges upon Borrower or upon any of its properties, income or franchises have been paid that are required to be paid prior to the time that the non-payment of such taxes could give rise to a Lien thereon, unless such tax, assessment, fee or charge is being contested in good faith by Borrower through appropriate proceedings after the establishment of appropriate reserves therefor in accordance with Generally Accepted Accounting Principles. There is no material proposed tax assessment against Borrower or any basis for such assessment which is material and not being contested in good faith by Borrower through appropriate proceedings after the establishment of appropriate reserves therefor in accordance with Generally Accepted Accounting Principles. 38 6.12. COMPLIANCE WITH LAW. Except as disclosed in the Zoning Schedule or SECTION 6.21 hereof, Borrower is in compliance with all laws, rules, regulations, orders, and decrees which are applicable to Borrower, the Property, or its other properties and which Borrower's failure to comply with could have a Material Adverse Effect. 6.13. PRINCIPAL OFFICE. The principal office, chief executive office, and principal place of business of Borrower is at 2711 North Haskell Avenue, Dallas, Texas 75204. 6.14. ERISA. Borrower has not established and does not maintain any Plan. 6.15. GOVERNMENT REGULATION. Borrower is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940, the Interstate Commerce Act (as any of the preceding acts have been amended), or any other law similar to the foregoing (other than Regulation X) which regulates the incurring by Borrower of Debt. 6.16. TITLE TO THE PROPERTY. Borrower holds full legal and equitable title to the Property, subject only to the Permitted Liens. 6.17. USE OF PROPERTY. The Property and the use which Borrower and Southland makes and intends to make thereof comply with Governmental Requirements, all applicable restrictive covenants, zoning ordinances, and building codes, all applicable health and Environmental Laws and regulations, and all other applicable laws, rules, and regulations; Borrower and Southland have obtained all requisite zoning, utility, building, health, and operating permits from the Governmental Authority having jurisdiction over the Property; and all engineering specifications with respect to the Property are within applicable environmental standards. In addition, the sanitary water supply, storm and sanitary sewers, water lines, and other necessary utility facilities (including gas, electric and telephone facilities) are available to the Property and sufficient to meet the reasonable needs of the Property, at or within the boundary lines of the Land, and design and as- built conditions of the Property are such that no drainage or surface or other water will drain across or rest upon either the Property or the land of others. None of the Improvements create an encroachment over, across, or upon any of the Property boundary lines, rights of way, or easements and no buildings or other improvements on adjoining land create such an encroachment on the Land except for Permitted Exceptions as defined in the Deed of Trust. 6.18. COMPLETION OF IMPROVEMENTS. The Improvements have been completed in a good and workmanlike manner substantially in accordance with the plans and specifications for the Improvements approved by Lender. All bills for labor and materials furnished in connection with the Improvements have been paid in full, and there are no unpaid bills for labor 39 or materials of any nature whatsoever outstanding in connection with the construction of the Improvements, accrued or yet to accrue. 6.19. ACCESS ROADS. The Land has access to and from public streets and roads adequate for its intended use; all such streets and roads either (a) have been completed or (b) the rights-of-way therefor have either been acquired by the appropriate Governmental Authority or have been dedicated to the public use and accepted by the appropriate Governmental Authority, and Lender has been informed of arrangements made to assure the complete construction and installation thereof. 6.20. CONDITION OF PREMISES. The Improvements, personal property and fixtures forming a part of the Premises are in good condition and repair with no deferred maintenance. Borrower is not aware of any latent or patent structural or other significant defect or deficiency in the Improvements, personal property or fixtures. 6.21. HAZARDOUS SUBSTANCES. Neither Borrower nor Southland (a) has received any notice or otherwise learned of any material Environmental Liability arising in connection with (i) any non-compliance with or violation of the requirements of any Environmental Law on or from the Property, or (ii) the release or threatened release of any Hazardous Material into the environment on or from the Property, (b) has any threatened or actual liability in connection with the release or threatened release of any Hazardous Material into the environment on or from the Property which would individually or in the aggregate have a Material Adverse Effect, (c) has received notice or otherwise learned of any investigation by any Governmental Authority or other Person evaluating whether any remedial action is needed to respond to a release or threatened release of any Hazardous Material into the environment on or from the Property for which Borrower or Southland is or may be liable, or (d) has any actual knowledge that either Borrower, Southland or any previous owner, tenant, occupant or user of the Property has used, generated, released, discharged, stored or disposed of any Hazardous Material on, under, in or about the Property, or transported any Hazardous Material to or from the Property, except in compliance with Environmental Laws or as disclosed in the Environmental Assessment on Cityplace Center (140 acres, 64 Buildings), dated November 8, 1990, prepared by Maxim Engineers, Inc., or any other environmental reports provided to Lender in connection herewith. Except as disclosed on SCHEDULE 4 or as previously approved by Lender, no underground storage tanks, whether or not containing any Hazardous Materials, petroleum product, or any other substance, are located on or under the Property. 6.22. FISCAL YEAR. The fiscal year of Borrower is the calendar year. 6.23. EASEMENT AND USE AGREEMENT. Borrower and Southland have fully performed their respective obligations under numerical paragraphs 3, 4, 5 and 6 of the Easement and Use Agreement, and neither 40 Oak Creek, nor its successors or assigns has any further rights with respect to Borrower, Southland or the Mortgaged Property under such enumerated paragraphs. No default, breach or failure of performance has occurred under the Easement and Use Agreement, and to Borrower's best knowledge, no Person has alleged that any default, breach or failure of performance has occurred thereunder. 6.24. ZONING OBLIGATIONS. The Scheduled Zoning Ordinances constitute all of the Government Development Documents other than general zoning ordinances of the City of Dallas. No breach, default or failure of performance has occurred under any Scheduled Zoning Ordinance. Neither Borrower nor Southland has received any notice, demand, citation, petition, claim or other communication alleging a violation of any Government Development Document. 6.25. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties by Borrower herein shall survive the issuance and delivery of the Loan Documents, the making of the Loan, and any investigation at any time made by or on behalf of the Lender shall not diminish Lender's right to rely thereon until the payment and performance in full of the Loan. 41 ARTICLE VII AFFIRMATIVE COVENANTS Until payment in full of the Loan and the performance of all other obligations of Borrower under this Agreement and the other Loan Documents, Borrower agrees that (unless the Lender shall otherwise consent in writing): 7.01. FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS OF BORROWER. Borrower will deliver to the Lender each of the following: (a) QUARTERLY FINANCIAL STATEMENTS. As soon as practicable, and in any event within sixty (60) days after the end of each quarterly fiscal period (except the last) of each Fiscal Year of Borrower, copies of the balance sheet of Borrower as of the end of such quarterly fiscal period, and statements of operations and retained earnings or accumulated deficits and cash flow of Borrower for that quarterly fiscal period and for the portion of the Fiscal Year ending with such period, in each case setting forth in comparative form the figures for the corresponding period of the preceding Fiscal Year, all in reasonable detail, and certified by a responsible and authorized officer of the Borrower as being presented fairly in accordance with Generally Accepted Accounting Principles, subject to normal year end adjustments. (b) ANNUAL FINANCIAL STATEMENTS. As soon as practicable and in any event within ninety (90) days after the close of each Fiscal Year of Borrower, copies of the balance sheet of Borrower as of the close of such Fiscal Year and statements of operations and retained earnings or accumulated deficits and cash flow of Borrower for such Fiscal Year, in each case setting forth in comparative form the figures for the preceding Fiscal Year, all in reasonable detail and accompanied by an opinion thereon, which shall be unqualified as to scope of audit, of independent public accountants of recognized national standing selected by Borrower, to the effect that such financial statements have been prepared in accordance with Generally Accepted Accounting Principles, and that the examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards; (c) COMPLIANCE CERTIFICATE. Concurrently with the delivery of the financial statements required by SECTIONS 7.01(a) and (b) hereof, a certificate executed by a responsible and authorized officer of Borrower stating that a review of the activities of Borrower during such fiscal quarter has been made under his supervision and that to the best of his knowledge and belief after reasonable and due investigation (i) Borrower has observed, performed and fulfilled each and every material obligation and covenant contained herein and in each of the Loan Documents and in 42 the Southland Lease or, if there is any exception to the foregoing, specifying the nature and status thereof, (ii) Southland has observed, performed and fulfilled each and every material obligation and covenant contained in the Southland Lease and the Completion Guaranty or, if there is any exception to the foregoing, specifying the nature and status thereof, (iii) the representations and warranties contained in ARTICLE VI hereof are true and correct in all respects on the date of such certificate (except that the date of reference in such certificate with respect to the financial statements referred to in SECTION 6.06 hereof shall instead be the date of the most recent financial statement delivered by Borrower under SECTION 7.01 hereof), with the same force and effect as though made on and as of the date of such certificate or, if there is any exception to the foregoing, specifying the nature and status thereof, and (iv) there exists no Event of Default or event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default as of the date of such certificate or, if any Event of Default shall have occurred, specifying the nature and status thereof; (d) NOTICES BY GOVERNMENTAL AUTHORITIES. Promptly upon receipt of the same, true and complete copies of any official notice or claim, or Environmental Complaint by any Governmental Authority pertaining to the Property; (e) ENVIRONMENTAL REPORTS. Promptly upon it becoming available, a copy of each report sent by Borrower to any Governmental Authority pursuant to any Environmental Law; (f) LEASE AND SUBLEASE INFORMATION. Promptly upon it becoming available, true and complete copies of any information, correspondence, reports or other documentation given or received with respect to the Southland Lease and all Approved Subleases; (g) ANNUAL OPERATING BUDGET. As soon as available and in any event on or before December 15 of each Fiscal Year, an Annual Operating Budget of Borrower for the Property for the following Fiscal Year, in such detail and form as Lender may reasonably request; (h) ZONING REPORTS AND INFORMATION. Promptly upon its becoming (i) aware of the occurrence of any of the following events, a notification executed by a responsible and authorized officer of Borrower reporting (A) any change, supplement, addition to or modification of any Government Development Document, or (B) any default under, breach of or failure of compliance with respect to any Government Development Document, or any claim of any default under, breach of or failure of compliance with respect to any Government Development Document; and (ii) available, true and complete 43 copies of any information, correspondence, reports, studies or other documentation submitted by Borrower or Southland with respect to the Government Development Documents; (i) OTHER AGREEMENTS. Promptly upon its becoming aware of the occurrence of any of the following events, a notification executed by a responsible and authorized officer of Borrower reporting (i) any change, supplement, addition to, or the modification of the Easement and Use Agreement or the License Agreement and (ii) any default under, breach of or failure of compliance with respect to, or any claim of any default under, breach of or failure of compliance with respect to the Easement and Use Agreement or the License Agreement; and (j) OTHER INFORMATION. Such other information concerning the business, properties, or financial condition of Borrower and Southland (to the extent Borrower has access to such information), as the Lender shall reasonably request. 7.02. FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS OF SOUTHLAND. Borrower will deliver to the Lender each of the following concerning Southland, such information having been required of Southland and delivered to Borrower under the terms of the Southland Lease: (a) MONTHLY FINANCIAL STATEMENTS. As soon as practicable, and in any event within thirty-five (35) days after the end of each month, other than each December, beginning with the Monthly Commencement Date, and within forty (40) days after the end of each December, the internal unaudited consolidated balance sheet of Southland as of the end of such month and the related consolidated statements of operations and cash flows for such month and for the elapsed portion of the Fiscal Year ended with the last date of such month, as included in Southland's Internal Report of Operations; (b) QUARTERLY FINANCIAL STATEMENTS. As soon as practicable, and in any event within fifty (50) days after the close of each quarterly accounting period in each Fiscal Year of Southland other than the last such quarter of any Fiscal Year, copies of the consolidated balance sheet of Southland as at the end of such quarterly period and the related consolidated statements of operations and cash flows for such quarterly period and for the elapsed portion of the Fiscal Year ended with the last day of such quarterly period, in each case setting forth comparative figures for the related periods in the prior Fiscal Year, all of which shall be certified by the Chief Financial Officer, Senior Vice President-Finance, Treasurer or Controller of Southland as being presented fairly in accordance with Generally Accepted Accounting Principles, subject to normal year end adjustments; 44 (c) ANNUAL FINANCIAL STATEMENTS. As soon as practicable, and in any event, within ninety-five (95) days after the close of each Fiscal Year of Southland, copies of the consolidated balance sheet of Southland as at the end of such Fiscal Year and the related consolidated statements of operations, shareholders' equity and cash flows for such Fiscal Year, in each case setting forth comparative figures for the preceding Fiscal Year, all in reasonable detail and accompanied by an opinion thereon, which shall be unqualified as to scope of audit, of Coopers & Lybrand or such other independent public accountants of recognized national standing selected by Southland, to the effect that such financial statements have been prepared in accordance with Generally Accepted Accounting Principles, and that the examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards; (d) LEASING ACTIVITY SUMMARY. Simultaneously with Southland's receipt of same, copies of monthly Leasing Activity Summary; provided, however, that notwithstanding the provisions of SECTION 9.01(c) hereof, it shall be an Event of Default if Lender fails to receive, on or before the fifth (5th) day of each calendar month, a monthly Leasing Activity Summary for three (3) or more consecutive months or for four (4) or more months within any consecutive twelve (12) month period; (e) REPORTS OF SUBLEASE INCOME. As soon as available, and in any event within fifteen (15) Business Days after the end of each calendar month, if applicable, an accounting of all accrued but unpaid Net Sublease Income for the immediately preceding calendar month, in a form reasonably satisfactory to Lender and containing such information as Lender may reasonably request; and (f) OTHER REPORTS AND FILINGS. Promptly, copies of all financial information, proxy materials and other information and reports concerning material developments in the business, operations, property, assets or condition (financial or otherwise) of Southland, if any, which Southland or any of its subsidiaries (i) has filed with the Securities and Exchange Commission or any governmental agencies substituted therefor or any comparable agency outside of the United States or (ii) has delivered to holders of, or to any agent or trustee with respect to, indebtedness of Southland or any subsidiary in their capacity as such a holder, agent or trustee. 7.03. PAYMENT OF TAXES. Borrower will pay and discharge all material taxes, assessments, and governmental charges or levies imposed upon it, or upon its income or profits, or upon the Property or upon any other property belonging to it before delinquent; PROVIDED, HOWEVER, that Borrower shall not be required to pay any such tax, assessment, charge, or levy if and so long as the amount, applicability, or validity thereof shall 45 currently be contested in good faith by appropriate proceedings and appropriate reserves therefor have been established. 7.04. MAINTENANCE OF EXISTENCE AND RIGHTS. Borrower will preserve and maintain its existence. Borrower shall further preserve and maintain all of its rights, privileges, and franchises necessary in the normal conduct of its business and in accordance with all valid regulations and orders of any Governmental Authority. 7.05. NOTICE OF DEFAULT. Borrower will furnish to Lender, immediately upon becoming aware of the existence of any condition or event which constitutes an Event of Default or which, with the passage of time or giving of notice, or both, would become an Event of Default, a written notice specifying the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. 7.06. OTHER NOTICES. Borrower will promptly notify Lender of (a) any material adverse change in the financial condition of Borrower or Southland, (b) any default under any material agreement (including the Southland Lease or any Approved Sublease), contract, or other instrument to which Borrower or Southland is a party or by which any of its properties are bound, or any acceleration of the maturity of any material indebtedness owing by Borrower or Southland, (c) any material adverse claim against or affecting Borrower or Southland or any of their properties, including the Property, (d) the commencement of, and any material determination in, any litigation with any third party or any proceeding before any Governmental Authority affecting Borrower or Southland, (e) any fire or other casualty or any notice of taking or eminent domain action or proceeding affecting the Property, (f) any Hazardous Discharge affecting the Property, if Borrower would have a duty to report such Hazardous Discharge to any Governmental Authority under Environmental Laws, (g) any claim, demand, action, event, condition, or report of investigation indicating any potential or actual liability arising in connection with (i) the non-compliance with or violation of the requirements of any Environmental Law with respect to the Property which individually or in the aggregate might have a Material Adverse Effect, (ii) the release or threatened release on or from the Property of any Hazardous Material into the environment which individually or in the aggregate might have a Material Adverse Effect or which release Borrower or Southland would have a duty to report to a Governmental Authority under an Environmental Law, or (iii) the existence of any Environmental Lien on any properties or assets of Borrower, and (h) any communications given or received by the Borrower or Southland under the Easement and Use Agreement or the License Agreement immediately upon the giving or receipt of same. 7.07. COMPLIANCE WITH LAW. Borrower will comply with all applicable laws, rules, regulations, and all orders of Governmental Authorities applicable to it or any of its property (including the Property), business operations or transactions. In this regard, Borrower agrees to 46 promptly comply with any requirement or order of any Governmental Authority requiring the removal, treatment, or disposal of any Hazardous Material and provide Lender with satisfactory evidence of such compliance unless Borrower elects, with Lender's prior written consent (which consent shall not unreasonably withheld), to contest such requirement or order. 7.08. COMPLIANCE WITH LOAN DOCUMENTS. Borrower will promptly comply with any and all covenants and provisions of this Agreement, and all other of the Loan Documents executed by Borrower. 7.09. OPERATIONS AND PROPERTIES. Borrower will act prudently and in accordance with customary industry standards in managing or operating its assets, properties (including the Property), business, and investments; Borrower will keep in good working order and condition, ordinary wear and tear excepted, the Property and all of its assets and properties which are reasonably necessary to the conduct of its business. 7.10. BOOKS AND RECORDS; ACCESS. Borrower will give any representative of the Lender access during all business hours to, and permit such representative to examine, copy, or make excerpts from, any and all books, records, and documents in the possession of Borrower and relating to its affairs and to the Property; and such inspection shall be at the expense of Borrower, payable upon ten (10) days' prior written notice. 7.11. INSPECTION OF PROPERTY. From time to time, as considered necessary or desirable by the Lender, permit the Lender or any Participant and their respective agents and representatives, any Governmental Authority and their respective agents and representatives, to enter upon the Property for the purpose of inspection thereof. 7.12. INSURANCE. Borrower will keep, maintain, or cause to be maintained, in full force and effect, the Insurance Policies, and shall deliver or cause to be delivered to Lender, (a) the Insurance Policies or certificates evidencing the Insurance Policies and (b) all renewal Insurance Policies, or certificates thereof, at least fourteen (14) days before the expiration date of each expiring Insurance Policy. 7.13. AUTHORIZATIONS AND APPROVALS. Borrower will promptly obtain, from time to time at its own expense, all such governmental licenses, authorizations, consents, permits and approvals as may be required to enable Borrower to comply with their obligations hereunder and under the other Loan Documents. 7.14. MAINTENANCE OF LIENS. Borrower will perform all such acts and execute all such documents as the Lender may reasonably request in order to enable Lender to report, file, and record every instrument that the Lender may deem necessary in order to perfect and maintain Lender's Liens in the Property and in any personal property of the Borrower, and 47 otherwise to preserve and protect the rights of Lender therein. 7.15. CORRECTION OF DEFECTS. Upon demand of the Lender, which shall be based upon the reasonable recommendation of the Inspecting Architects/Engineers, Borrower will correct or cause to be corrected (a) any defect in the Improvements, (b) any material departure in the construction of the Improvements, or (c) any encroachment by any part of the Improvements or any other structure located on the Property on any building line, easement, property line or other restricted area. 7.16. ENVIRONMENTAL RISK ASSESSMENT. At any time, and from time to time, that Lender shall have reasonable belief that any Hazardous Material shall have been disposed of on or released to the Property which will require remediation under any Environmental Law, Borrower will (a) order within ten (10) days of a written request by Lender to Borrower setting forth the basis of such request, an environmental audit report prepared by an engineering firm acceptable to Lender in Lender's reasonable judgment, at Borrower's cost and expense, detailing the results of an environmental investigation of the Property, including without limitation, the interpretation of and results of a chemical analysis of soil and groundwater samples, if appropriate, (b) cause such audit report to be completed as quickly as reasonably possible, and (c) deliver such audit report to Lender immediately upon its receipt thereof. 7.17. MANAGEMENT OF PROPERTY. Borrower shall cause the Property to be managed by an Approved Manager pursuant to an Approved Management Agreement. If at any time all Conditions to Southland Management Agreement are not satisfied, the Borrower shall terminate the Southland Management Agreement and enter into an Approved Management Agreement. Additionally, if at any time Lender notifies Borrower that Lender in good faith believes that the Property is not being managed as a first-class office facility in the Dallas, Texas, central business district, and the Approved Manager fails to upgrade the management and operation of the Property in a manner reasonably acceptable to Lender within thirty (30) days following the date of such notice, then, at Lender's option after consultation with Borrower, Borrower shall, in accordance with Lender's instructions in such notice, terminate or cause the termination of the Approved Management Agreement with such Approved Manager and cause a new Approved Manager to manage the Property pursuant to a new Approved Management Agreement. From time to time prior to the satisfaction of the Obligation, Lender shall have the option to require the Borrower to change the Property manager in accordance with the terms set forth in this SECTION 7.17 so long as such determination is made by Lender in good faith, acting reasonably, and after consultation with Borrower. 7.18. SOUTHLAND LEASE. Borrower will perform all of the covenants, agreements, terms and conditions of the Southland Lease to be observed or performed by the Borrower as landlord thereunder, subject to applicable grace 48 periods expressly granted therein. 7.19. LEASING COMMISSION AND TENANT FINISHOUT. In the event Southland for any reason fails or neglects to prosecute or cause the prosecution with diligence and continuity the completion of the Tenant Finishout or to pay Leasing Commissions as required by Southland Lease or the Completion Guaranty, Borrower will, at its sole cost and expense, (a) complete or cause the completion of the Tenant Finishout as and when required by the Southland Lease or any Approved Sublease and in conformance with all Governmental Requirements Applicable to the Property and the Government Development Documents, including without limitation the Scheduled Zoning Ordinances, free and clear of any and all liens and encumbrances (except for Permitted Liens) and (b) pay or cause to be paid all Leasing Commissions as and when they become due and owing, unless contested in good faith by appropriate proceedings with appropriate records being maintained in accordance with Generally Accepted Accounting Principles. Borrower shall indemnify and hold Lender harmless from any and all losses, costs, liabilities or expenses incurred in connection with Southland's failure to so complete the Tenant Finishout or pay such Leasing Commissions. It is understood and agreed that in the event Tenant Finishout and Leasing Commissions are not paid and performed by Southland or a tenant under an Approved Sublease as required by the Southland Lease or the Completion Guaranty, Lender shall have no obligation to notify or otherwise require that Southland pay and perform such obligations prior to Lender making demand on Borrower to pay and perform such obligations hereunder. Notwithstanding the foregoing, Borrower and Lender acknowledge and confirm that Southland's failure shall, at Lender's option, constitute an Event of Default herein, notwithstanding the Borrower's performance under this SECTION 7.19. 7.20. COMPLIANCE WITH GOVERNMENT DEVELOPMENT DOCUMENTS. Borrower unconditionally covenants and agrees with Lender to (a) comply with, pay and perform or (b) cause to be carried out, complied with, paid and performed, or waived, invalidated or nullified, all terms, conditions, requirements, liabilities, obligations, indemnities and other conditions set forth in the Government Development Documents. Borrower will and will cause Southland to pay and perform their respective obligations and duties under the Easement and Use Agreement and the License Agreement as and when required thereby, and will notify Lender immediately if Oak Creek or its successors or assigns gives notice of or otherwise alleges or states that Borrower or Southland has failed to perform any of its material obligations or duties thereunder or that any other default or event of default has occurred thereunder. Furthermore, Borrower will and will cause Southland to (i) cause Oak Creek or its successors or assigns to pay and perform its obligations under the Easement and Use Agreement as and when required thereby, and (ii) promptly enforce all rights and remedies available upon the occurrence of an event of default or default by Oak Creek or its 49 successors or assigns thereunder, unless Lender consents in writing to such failure of performance. 7.21. COSTS AND EXPENSES. In addition to the payment of the expenses provided for in Section 10.02 hereof, Borrower will pay when due all costs and expenses required by this Agreement, including without limitation (a) all taxes and assessments applicable to the Property (subject, however, to certain rights Borrower may have under this Agreement or the other Loan Documents to contest same), (b) all fees for filing or recording the Collateral Documents, (c) all fees and commissions lawfully due to brokers, salesmen, and agents in connection with the Property, (d) all reasonable fees and expenses of legal counsel to Lender, (e) all reasonable fees and expenses of the Appraisal, (f) all title insurance and title examination charges, including premiums for the Title Insurance Policy, (g) all survey costs and expenses, including the cost of the Survey, (h) all premiums for the Insurance Policies, (i) all reasonable fees charged by the Inspecting Architects/Engineers, (j) all reasonable fees charged by the real estate and financial advisors to Lender, (k) all reasonable fees and expenses incurred by Lender in any determination of "Market" with respect to any such calculations in the Loan Documents or the Southland Lease, and (l) all reasonable fees and expenses incurred by Lender in addressing Borrower's or Southland's compliance with the Governmental Requirements Applicable to the Property, the Government Development Documents, the Easement and Use Agreement or the License Agreement. 7.22. FURTHER ASSURANCES. Borrower will make, execute or endorse, and acknowledge and deliver or file or cause the same to be done, all such vouchers, invoices, notices, certifications, additional agreements, undertakings, conveyances, deeds of trust, mortgages, transfers, assignments, financing statements or other assurances, and take all such other action, as the Lender may, from time to time, deem reasonably necessary or proper in connection with this Agreement or any of the other Loan Documents, the obligations of Borrower hereunder or thereunder, or for better assuring and confirming unto Lender all or any part of the security for any of the Obligations, or for granting to Lender any additional security for the Obligation which Lender may request from time to time. 7.23. INDEMNITY BY BORROWER. Borrower will indemnify, save, defend, and hold harmless Lender and its directors, officers, agents, attorneys, and employees (collectively, the "indemnitee") from and against: (a) any and all claims, demands, actions, or causes of action that are asserted against any indemnitee by any Person if the claim, demand, action, or cause of action relates to a claim, demand, action, or cause of action that the Person asserts or may assert against Borrower or Southland, any Affiliate of Borrower or Southland or the Property, (b) any and all claims, demands, actions or causes of action that are asserted against any indemnitee if the claim, demand, action or cause of action directly or indirectly relates to the failure of Borrower to perform or comply with any of the terms, covenants or provisions of this Agreement or of any of the other Loan Documents, 50 PROVIDED HOWEVER, in no event shall Borrower be liable to Lender for the diminution in value of the Property unless such diminution in value is caused by Borrower's failure to perform or comply with any of the terms, covenants or provisions of this Agreement or of any of the other Loan Documents, (c) any and all claims, demands, actions or causes of action, asserted against or incurred by an indemnitee at any time and from time to time under any applicable Environmental Law, by reason of any and all matters arising out of any act, omission, event, condition, or circumstance occurring on or in relation to the Property or the operation of the Property (including without limitation, the presence on the Property, or the release from or to the Property, of any Hazardous Material requiring remediation under any Environmental Law) regardless of whether the act, omission, event, or circumstance constituted a violation of any applicable Environmental Law at the time of the existence or occurrence, (d) any and all claims, demands, actions or causes of action that are asserted against any indemnitee if the claim, demand, action or cause of action directly or indirectly relates to any failure of condition or any other breach or default under any Governmental Requirements Applicable to the Property, or any Government Development Document or Easement and Use Agreement, (e) any administrative or investigative proceeding by any Governmental Authority directly or indirectly related to a claim, demand, action or cause of action described in clauses (a), (b) or (c) or (d) above, and (f) any and all liabilities, losses, costs, or expenses (including reasonable attorneys' fees and disbursements) that any indemnitee suffers or incurs as a result of any of the foregoing; PROVIDED, HOWEVER, that Borrower shall have no obligation under this SECTION 7.23 to Lender with respect to any of the foregoing arising out of the gross negligence or willful misconduct of Lender. If any claim, demand, action or cause of action is asserted against any indemnitee, such indemnitee shall promptly notify Borrower, but the failure to do so shall not affect Borrower's obligations under this SECTION 7.23 unless such failure materially prejudices Borrower's right to participate in the contest of such claim, demand, action or cause of action, as hereinafter provided. If requested by Borrower in writing and so long as no Event of Default shall have occurred and be continuing, such indemnitee shall in good faith contest the validity, applicability and the amount of such claim, demand, action or cause of action and shall permit Borrower to participate in such contest. Any indemnitee that proposes to settle or compromise any claim or proceeding for which Borrower may be liable for payment of indemnity hereunder shall give Borrower written notice of the terms of such proposed settlement or compromise reasonably in advance of settling or compromising such claim or proceeding and shall obtain Borrower's concurrence thereto. Each indemnitee is authorized to employ counsel in enforcing its rights hereunder and in defending against any claim, demand, action, or cause of action covered by this SECTION 7.23; PROVIDED, HOWEVER, that each indemnitee shall endeavor, but shall not be obligated, in connection with any matter covered by this SECTION 7.23 which also involves other indemnitees, to use reasonable efforts to avoid unnecessary duplication of effort by counsel for all indemnitees. Any obligation or liability of Borrower to any indemnitee under this SECTION 7.23 shall survive for a period of five 51 (5) years after the later of (i) the expiration or termination of this Agreement, (ii) the satisfaction of the Obligation, and (iii) the release or foreclosure of the Deed of Trust and/or other Collateral Documents. 7.24. LICENSE AGREEMENT. Borrower will notify Lender if Oak Creek or its successors or assigns notifies Borrower or Southland or alleges or otherwise states that a default or violation has occurred by Southland or Borrower under the License Agreement. 52 ARTICLE VIII NEGATIVE COVENANTS Until payment in full of the Loan and the performance of all other obligations of Borrower under this Agreement and the other Loan Documents, Borrower agrees that (unless the Lender shall otherwise consent in writing): 8.01. CASH FLOW COVERAGE RATIO. Unless or until the Annual Rate is modified, Borrower will not permit its Cash Flow Coverage Ratio calculated as of June 30 and December 31 of each year during the term hereof, for the twelve (12) months ending on each said date, to be less than 1.05 to 1.0. 8.02. DEBT. Borrower will not create or suffer to exist, any Debt, other than Permitted Debt. 8.03. LIENS. Borrower will not create or suffer to exist any Lien, or any other type of preferential arrangement (other than Permitted Liens) upon or with respect to the Property or any right to receive income therefrom. 8.04. DISTRIBUTIONS AND DEBT REPAYMENT. Borrower will not make any distribution or dividend of cash, stock or otherwise or repay the principal or pay the interest on any Intercompany Debt unless Borrower maintains a Cash Reserve of at least $15,000,000.00 after giving effect to such distribution, dividend or repayment. 8.05. SOUTHLAND LEASE. Borrower will not (a) amend, modify, restate or supplement or agree to any such amendment modification, restatement or supplement of, the Southland Lease which would result in any change in any economic term of the Southland Lease or in any material change in any other term of the Southland Lease, (b) grant any adjustment, indulgence, forbearance or compromise to Southland with respect to any of Southland's economic obligations under the Southland Lease or (c) grant any adjustment, indulgence, forbearance or compromise to Southland which would materially affect any of Southland's other obligations under the Southland Lease, or (d) exercise any approval or rejection rights under with respect to Lease Parameters, Approved Subleases including, without limitation, the form of Approved Sublease Subordination, the Approved Leasing Agent or the Approved Leasing Agreement, or any other transfer, sublease or assignment by Southland thereunder. 8.06. SUBLEASES. Without the prior written consent of Lender, Borrower will not, and will not permit Southland, to enter into any sublease except an Approved Sublease, and will not, and will not permit Southland to, reject any proposal to sublease a portion of the Improvements in accordance with the Approved Lease Parameters. In addition, Borrower will not approve or reject any Lease Parameters, Approved Sublease, rejection of 53 sublease, form of sublease, form of Approved Sublease Subordination, Approved Leasing Agent or Approved Leasing Agreement or any other transfer, assignment or sublease by Southland under the Southland Lease, for which Borrower has approval rights or other discretionary review pursuant to the Southland Lease. 8.07. SALES, ETC. OF ASSETS. Borrower will not sell, lease, transfer or otherwise dispose of any of its assets which (a) are subject to a Lien in favor of Lender UNLESS such assets (i) are not necessary or instrumental to the operation of the Property, or (ii) are immediately replaced with an asset subject to a first and prior Lien in favor of Lender, or (b) are not subject to any Lien in favor of Lender, provided any such assets (i) do not have an aggregate book value in excess of $750,000 per calendar year, and (ii) are being sold, leased, transferred or otherwise disposed of in the ordinary course of the Company's business. 8.08. NAME, FISCAL YEAR AND ACCOUNTING METHOD. Borrower will not change its name, fiscal year or method of accounting except as required by Generally Accepted Accounting Principles (other than immaterial changes permitted by Generally Accepted Accounting Principles in which its auditors concur); PROVIDED, HOWEVER, that Borrower may change its name if it has given Lender sixty (60) days prior written notice of such name change and taken such action as Lender deems necessary to continue the first and senior most priority and perfection of the Liens securing payment of the Obligation. 8.09. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. Except for a Permitted Transfer, Borrower will not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person. 8.10. ERISA COMPLIANCE. Borrower will not establish or maintain any Plan. 8.11. TRANSACTIONS WITH AFFILIATES. Borrower will not enter into any transaction with, or pay any management fees to, any Affiliate except pursuant to the Southland Management Agreement; provided, however, that Borrower may enter into transactions with Affiliates upon terms not less favorable to Borrower than would be obtainable at the time in comparable transactions of Borrower in arms-length dealings with Persons other than Affiliates. 8.12. ENVIRONMENTAL MATTERS. Except in compliance with relevant Environmental Laws, Borrower will not (a) cause or permit the presence, use, generation, release, discharge or disposal of any Hazardous Material on, under, in or about, or the transportation of any Hazardous Material to or from, the Property, or (b) permit the Property to be used as a dumpsite or storage site (whether permanent or temporary) for any Hazardous Material. Borrower will not construct or install, or permit to be 54 constructed or installed, under the Property any underground storage tank except (a) in conformity with all requirements of 40 C.F.R. Part 280 and 31 Tex. Adm. Code 334, and (b) with the prior written consent of the Lender. 8.13. LINES OF BUSINESS. Borrower will not, directly or indirectly, engage in any businesses other than those in which it is presently engaged, or discontinue any of its existing lines of business or substantially alter its method of doing business. 8.14. LICENSE AGREEMENT. Neither Borrower nor Southland will modify, release or terminate the License Agreement or any rights or interest of Borrower or Southland with respect to the Cityplace Marks (as described therein), without Lender's prior written consent, which consent will not be unreasonably withheld or delayed, or use the Cityplace Marks in violation of the License Agreement. 8.15. CHANGES IN ZONING REQUIREMENTS. Borrower will not and will not permit Southland to request or obtain any change to, or consent to any request for or change in, any Governmental Requirements Applicable to the Property or any Government Development Document or any other law, ordinance, rule or regulation affecting the zoning, development or use of the Property, or any variance or special exception therefrom, without the prior written consent of Lender, which consent will not be unreasonably withheld or delayed. Furthermore, without the prior written consent of Lender, which consent will not be unreasonably withheld or delayed, Borrower will not and will not permit Southland to amend, release or terminate or consent to or allow the amendment, release or termination of the Easement and Use Agreement or any term or provision thereof. 55 ARTICLE IX EVENTS OF DEFAULT 9.01. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall exist if any one or more of the following events (herein collectively called "EVENTS OF DEFAULT") shall occur and be continuing: (a) any failure to pay when due any principal of, or interest on, the Loan or any failure to pay when due any fee, expense, or other payment required hereunder or under any other Loan Document, and any such failure shall continue for three (3) Business Days following such due date; (b) any representation or warranty made by Borrower and/or Southland under this Agreement, or any of the other Loan Documents executed by any of them, or in any certificate or statement furnished or made to Lender by Borrower and/or Southland pursuant hereto or in connection herewith or with the Loan, shall prove to be untrue or inaccurate as of the date on which such representation or warranty is made; (c) default shall occur in the performance of any of the covenants or agreements contained herein (except as provided in SECTION 9.01(e) hereof), and such default shall continue uncured to the satisfaction of the Lender for a period of thirty (30) days after the earlier of (i) notice of default to Borrower from Lender, or (ii) Lender is notified of such default to Borrower or should have been so notified pursuant to SECTION 7.05 hereof; (d) default shall occur in the performance of the covenants and agreements contained in SECTION 7.12 hereof and such default shall continue uncured until the first to occur of (i) the termination or expiration of any of the Insurance Policies required hereby, and (ii) ten (10) days after the earlier of (A) notice of default to Borrower from Lender, or (B) Lender is notified of such default to Borrower or should have been so notified pursuant to SECTION 7.05 hereof; (e) default shall occur in the performance of any of the covenants or agreements of Borrower contained in ARTICLE VIII or SECTIONS 4.02, 7.01(h), 7.02(d), 7.05, 7.06, 7.10, 7.11, 7.16, 7.17, 7.18 or 7.19 hereof; (f) any of the Loan Documents executed by Borrower and/or Southland, shall cease, in whole or in part, to be legal, valid, binding agreements of Borrower and/or Southland enforceable against Borrower and/or Southland, as the case may be, in accordance with the terms thereof or shall in any way be terminated or become or be declared 56 ineffective or inoperative or shall in any way whatsoever cease to give or provide the respective liens, security interest, rights, titles, interest, remedies, powers, or privileges intended to be created thereby; (g) default shall occur on the payment of any material Debt of Borrower or default shall occur in respect of any note, loan agreement or credit agreement relating to any such Debt and such default shall continue for more than the period of grace, if any, specified therein; or any such Debt shall become due before its stated maturity by acceleration of the maturity thereof or shall become due by its terms and shall not be promptly paid or extended; (h) Borrower or Southland shall (i) apply for or consent to the appointment of a receiver, trustee, custodian, intervenor, or liquidator of itself or of all or a substantial part of its assets, (ii) file a voluntary petition in bankruptcy or admit in writing that it is unable to pay its debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any Debtor Relief Laws, (v) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or (vi) institute or voluntarily be or become a party to any other judicial proceedings intended to effect a discharge of the debts of Borrower, in whole or in part, or a postponement of the maturity or the collection thereof, or a suspension of any of the rights or powers of Lender granted in this Agreement or any other Loan Document, or (vii) take corporate action for the purpose of effecting any of the foregoing; (i) an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition seeking reorganization of Borrower or Southland, appointing a receiver, custodian, trustee, intervenor, or liquidator of Borrower or Southland, or of all or substantially all of either's assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days; (j) any final judgment(s) for the payment of money in excess of the sum of US $1,000,000 in the aggregate shall be rendered against Borrower and such judgment or judgments shall not be satisfied or discharged at least ten (10) days prior to the date on which any of Borrower's assets could be lawfully sold to satisfy such a judgment; (k) the occurrence of any default, breach or failure of performance by Southland of any of its obligations or duties under the Southland Lease (subject, however, to any cure period expressly granted to Borrower or Southland in the Southland Lease) OR the 57 termination of the Southland Lease, for any reason whatsoever; (l) the occurrence of any default, breach or failure of performance by Borrower under any of the other Loan Documents (subject, however, to any cure period expressly granted to Borrower therein); (m) there shall occur any event which has a Material Adverse Effect; (n) the ownership of the Property, or any part thereof, or any legal, beneficial or equitable interest therein (including, without limitation, any sale, pledge, exchange, encumbrance, transfer, assignment or other disposition), including the right to receive distributions or profits therefrom, becomes vested in a Person other than Borrower or Lender, except with respect to sales permitted by SECTION 8.07 hereof and a Permitted Transfer pursuant to SECTION 8.09 hereof; (o) Southland shall cease to own, legally and beneficially, all of the issued and outstanding Capital Stock of Borrower; or (p) a Change in Control of Southland shall occur. 9.02. REMEDIES UPON EVENT OF DEFAULT. If an Event of Default shall have occurred and be continuing, then the Lender may declare the principal of, and all interest then accrued on, the Loan and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of default, notice of acceleration, or of intention to accelerate or other notice of any kind all of which Borrower hereby expressly waives, anything contained herein to the contrary notwithstanding, and without notice of default or demand, pursue and enforce any of the Lender's rights and remedies under the Loan Documents, or otherwise provided under or pursuant to any applicable law or agreement; PROVIDED, HOWEVER, that if any Event of Default specified in SECTIONS 9.01(h) or (i) shall occur, the principal of, and all interest on, the Loan and other liabilities hereunder shall thereupon become due and payable concurrently therewith, without any further action by Lender and without presentment, demand, protest, notice of default, notice of acceleration of or intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives. 9.03. PERFORMANCE BY LENDER. Should Borrower fail to perform any covenant, duty, or agreement contained herein or in any of the Loan Documents, the Lender may perform or attempt to perform such covenant, duty, or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Lender promptly pay any amount expended by the Lender in such performance or attempted performance to the Lender at its principal office in Dallas, Texas, together 58 with interest thereon at the Default Rate from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly understood that Lender assumes no liability or responsibility for the performance of any duties of Borrower hereunder or under any of the Loan Documents or other control over the management and affairs of Borrower, nor by any such action shall the Lender be deemed to create a partnership arrangement with the Borrower. 59 ARTICLE X MISCELLANEOUS 10.01. WAIVER. No failure to exercise, and no delay in exercising, on the part of the Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of the Lender hereunder and under the Loan Documents shall be in addition to all other rights provided by law. No modification or waiver of any provision of this Agreement or any Loan Documents, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. The Lender and Borrower may from time to time enter into agreements amending or changing any provision of this Agreement or the rights of Lender or Borrower hereunder, or may grant waivers or consents to a departure from the due performance of the obligations of Borrower hereunder. 10.02. PAYMENT OF EXPENSES. Borrower agrees to pay all out-of-pocket costs and expenses of Lender and Participants (including, without limitation, the reasonable attorneys' fees of Lender's and Participants' legal counsel) incurred by them in connection with the enforcement of Lender's rights under this Agreement and/or the other Loan Documents, and all out-of-pocket costs and expenses of Lender (including without limitation the reasonable fees and expenses of Lender's counsel) in connection with the negotiation, preparation, execution and delivery of this Agreement and the other Loan Documents and any and all amendments, modifications and supplements thereof or thereto. 10.03. NOTICE. Any notice, demand, request or other communication which any party hereto may be required or may desire to give hereunder shall be in writing (except where telephonic instructions or notices are expressly authorized herein to be given) and shall be deemed to be effective (a) if by hand delivery, telex, telecopy or other facsimile transmission, on the day and at the time on which delivered to such party at the address, telex or telecopier numbers specified below; (b) if by mail, on the day which it is received after being deposited, postage prepaid, in the United States registered or certified mail, return receipt requested, addressed to such party at the address specified below; or (c) if by FedEx or other reputable express mail service, on the next Business Day following the delivery to such express mail service, addressed to such party at the address set forth below; or (d) if by telephone on the day and at the time communication with one of the individuals named below occurs during a call to the telephone number or numbers indicated for such party below: 60 If to Lender: The Sanwa Bank, Limited, Dallas Agency 2830 NationsBank Plaza 901 Main Street Dallas, Texas 75202 Telephone: (214) 744-5555 Telecopier: (214) 741-6535 Telex: 735282 (Answerback: SANWA BK DAL) Attention: Mr. Matthew G. Patrick With Copy to: Haynes and Boone 3100 NationsBank Plaza 901 Main Street Dallas, Texas 75202 Telephone: (214) 651-5000 Telecopier: (214) 651-5940 Telex: 730187 (Answerback: HB LAW DAL) Attention: Timothy E. Powers, Esq. If to Borrower: Cityplace Center East Corporation P.O. Box 711 2711 North Haskell Avenue, Suite 2900 Dallas, Texas 75204 Telephone: (214) 828-7255 Telecopier: (214) 828-7119 Telex: 730895 (Answerback: SOUTHLAND DAL) Attention: Legal Department Any telephonic or any other notice received by the Lender after 11:00 a.m. (Dallas time) shall be deemed for the purposes of such Section to have been given by Borrower on the next succeeding Business Day. Any party may change its address for purposes of this Agreement by giving notice of such change to the other parties pursuant to this SECTION 10.03. 10.04. GOVERNING LAW. This Agreement has been prepared, is being executed and delivered, and is intended to be performed in the State of Texas, and the substantive laws of such state and the applicable federal laws of the United States of America shall govern the validity, construction, enforcement and interpretation of this Agreement and (except for the Assignment of Cash Reserve Account) all of the other Loan Documents. 10.05. CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION. Any suit, action or proceeding with respect to this Agreement or any judgment entered by any court in respect thereof, may be brought in the courts of the State of Texas, County of Dallas, or in the United States courts located in the State of Texas and the Borrower 61 hereby submits to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding. Borrower hereby irrevocably waives any objections which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Documents brought in the courts located in the State of Texas, County of Dallas, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. 10.06. INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement, unless such continued effectiveness of this Agreement, as modified, would be contrary to the basic understandings and intentions of the parties as expressed herein. 10.07. INTEREST RATE. Regardless of any provisions contained in this Agreement, the Loan or in any of the other Loan Documents, Lender shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Loan, any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and, in the event that Lender ever receives, collects or applies as interest any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Loan, and, if the principal balance of the Loan is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (a) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense, fee, or premium, rather than as interest, (b) exclude voluntary prepayments and the effect thereof, and (c) spread the total amount of interest throughout the entire contemplated term of the Loan so that the interest rate is uniform throughout such term. 10.08. ENTIRETY AND AMENDMENTS. (a) The Loan Documents embody the entire agreement between the parties and supersede all prior agreements and understandings, if any, relating to the subject matter hereof and thereof, and this Agreement and the other Loan Documents may be amended only by an instrument in writing executed by the authorized officer of Borrower and Lender. 62 (b) The following Notice is given by Lender, with respect to this Agreement pursuant to Section 26.02 of the Texas Business and Commerce Code. Borrower, and each other obligor and party in interest to this Agreement represent and warrant to Lender that this Notice of Final Agreement was given: NOTICE OF FINAL AGREEMENT (i) THIS WRITTEN LOAN AGREEMENT (HEREIN REFERRED TO AS AGREEMENT) REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. (ii) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 10.09. PARTIES BOUND; ASSIGNMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of Lender. The commitment of Lender to Borrower hereunder is a non-assignable contract to lend money within the meaning of sections 365(c)(2) and 365(e)(2)(B) of the U.S. Bankruptcy Code. 10.10. PARTICIPATIONS. In addition to its rights to assign duties and rights hereunder pursuant to SECTION 10.09 hereof, Lender shall have the right to enter into a participation agreement with any bank or other financial institution (each a "PARTICIPANT ") with respect to the Loan and the Loan Documents, but such participation shall not affect the rights and duties of Lender hereunder VIS-A-VIS Borrower. Borrower agrees that each Participant shall be entitled to the benefits of SECTIONS 3.06, 3.07, 3.08 and 4.03 with respect to its participation interest as if it were a direct lender hereunder; provided, however, that, with respect to the indemnifications set forth in SECTION 3.08 hereof, (a) Borrower shall never be obligated to any Participant for any cost or expense in excess of amounts which would be due by Borrower to Lender thereunder if Lender had never granted any such participation hereunder, and (b) each Participant shall comply with the requirements set forth in SECTION 3.08 prior to any right to reimbursement arising thereunder. Borrower may make all payments due hereunder to Lender and may rely upon any consent or approval given by Lender and shall not be required to seek any consent or approval from any Participant. 10.11. HEADINGS. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Agreement. 63 10.12. TIME OF THE ESSENCE. Time is of the essence with respect to the provisions of this Agreement. 10.13. CONFIDENTIALITY. Lender and each Participant shall maintain, at all times, the confidentiality of all data and information which constitutes Confidential Information and shall not use, at any time, any data and information which constitutes Confidential Information except to exercise any right or remedy hereunder or for other purposes specifically contemplated by this Agreement and the other Loan Documents. Anything herein to the contrary notwithstanding, the provisions of this SECTION 10.13 shall not preclude or restrict Lender or a Participant from disclosing any Confidential Information: (a) with the prior written consent of Borrower, (b) upon the order of or pursuant to the rules and regulations of any Governmental Authority having jurisdiction over Lender or Participants, (c) in connection with any audit by an independent public accountant of Lender or a Participant; provided, such auditor prior thereto agrees in writing to be bound by the provisions of this SECTION 10.13, or in connection with any audit, discussion or conference between Lender or a Participant, or any Affiliates thereof and their respective counsels, (d) to examiners or auditors of any applicable Governmental Authority which examines Lender's or a Participant's books and records while conducting such examination or audit, or (e) as otherwise specifically required by law. 10.14. SURVIVAL OF CERTAIN PROVISIONS. Notwithstanding anything to the contrary set forth herein, the covenants, agreements and indemnities of Borrower contained in SECTIONS 7.20, 7.23(d) and 8.15 of this Agreement shall survive until (a) if the Obligation is satisfied without foreclosure or deed in lieu of foreclosure of the Deed of Trust, the date the Obligation is paid in full or (b) if the remaining Obligation is satisfied and a foreclosure or a deed in lieu of foreclosure has occurred under the Deed of Trust as of such date, so long as Lender, the Participants or their Affiliates own the Property or have any liability or obligations with respect to Government Development Documents which exist as of the date of such foreclosure or deed in lieu of foreclosure. d-0049073.05 64 Tab 2 EX-11 4 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 (LOSS) PER COMMON SHARE
Year Ended December 31 ----------------------------------- 1994 1993 1992 --------- ---------- ----------- Earnings (loss) before extraordinary gain and cumulative effect of accounting change applicable to common shares ............... $ 91,996 $ (11,280) $ (131,449) Extraordinary gain ...................................................... - 98,968 - Cumulative effect of accounting change for postemployment benefits .............................................................. - (16,537) - --------- ---------- ----------- Net earnings (loss) for earnings (loss) per-share calculation ........................................................... $ 91,996 $ 71,151 $ (131,449) ========= ========= =========== Average number of common shares outstanding ............................. 409,923 409,938 410,022 ========= ========= =========== Earnings (loss) per common share (Primary and Fully Diluted): Before extraordinary gain and cumulative effect of accounting change .................................................. $.22 $(.03) $(.32) Extraordinary gain ................................................... - .24 - Cumulative effect of accounting change ............................... - (.04) - ---- ------ ------ Net earnings (loss) .................................................. $.22 $ .17 $(.32) ==== ====== ====== Tab 3
EX-21 5 EXHIBIT 21 EXHIBIT 21 THE SOUTHLAND CORPORATION LIST OF SUBSIDIARIES (Wholly owned unless otherwise indicated) NAME JURISDICTION OF INCORPORATION ACTIVE: Brazos Comercial E Empreendimentos Ltda. (a) Brazil Cityplace Center East Corporation Texas Cityplace Management Corporation* Texas HDS Sales Corporation (b) Texas Melin Enterprises, Inc. (c) Missouri Naroppet AB Sweden 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 of Idaho, Inc. (b) Idaho 7-Eleven of Massachusetts, Inc. (b) Massachusetts 7-Eleven Mexico, S.A. de C.V. (h) Mexico 7-Eleven of Nevada, Inc. Delaware 7-Eleven of Virginia, Inc. Virginia 7-Eleven Sales Corporation (b) Texas SLC Financial Services, Inc. Texas Small Shops Holding A/S (i) Norway Subsidiaries (all active) of Small Shops Holding, A/S: - Small Shops Denmark A/S (j) Denmark - Small Shops Norge A/S (j) Norway - Small Shops Sverige A/B (j) Sweden Southland Canada, Inc. (k) Canada Southland International, Inc. Nevada Southland International Investment Corporation N.V. (k) Netherlands Antilles Southland Sales Corporation Texas TSC Lending Group, Inc. Texas Tylerland Properties Corp.* Texas Valso, S.A. (l) Mexico Subsidiary of Valso, S.A.: Mexico - 7-Eleven Mexico, S.A. de C.V. (h) *This company was merged into Southland or another subsidiary during 1994. **This company was dissolved during 1994. NAME JURISDICTION OF INCORPORATION INACTIVE: Bawco Corporation Ohio Citijet Corporation** Texas Lavicio's, Inc. California MTA CAL, Inc. California 7-Eleven Limited (m) United Kingdom The Seven Eleven Limited (n) Hong Kong 7-Eleven of Florida, Inc.* Texas 7-Eleven, Inc. Texas 7-Eleven Pty., Ltd. (o) Australia 7-Eleven Stores (NZ) Limited (p) New Zealand Southland of Florida, Inc.* Texas Superior 7-11 Stores, Inc. Wisconsin PERMIT HOLDING COMPANY: 7-Eleven Beverage Company, Inc. (Texas beer license) Texas TITLE HOLDING COMPANY: The Southland Corporation Employees' Savings and Profit Sharing Plan Title Holding Corporation (q) Texas *This company was merged into Southland or another subsidiary during 1994. **This company was dissolved during 1994. 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 (an inactive, wholly owned subsidiary of The Southland Corporation) (d) 5.38% owned by The Southland Corporation, and remaining 94.62% owned by various investors (e) 59.07% owned by The Southland Corporation, and remaining 40.93% owned by group of Puerto Rican investors (f) 10% owned by The Southland Corporation, 89.4% owned by Super Trade, Ltd., and remaining .6% owned by other investors. (Southland has options to purchase up to 49% of this affiliate until January 1997.) (g) 99.99% owned by The Southland Corporation, and remaining .01% owned by 7-Eleven of Nevada, Inc. (a wholly owned subsidiary of The Southland Corporation) (h) 99.97% of Class A shares owned by Valso, S.A., and remaining .03% owned by other parties. 100% of Class B shares owned by Valso, S.A. (i) 8.11% owned by The Southland Corporation, and remaining 91.89% owned by various investors (based on Class "A" common shares only) (j) 100% owned by Small Shops Holding A/S (k) 100% owned by Southland International, Inc. (a wholly owned subsidiary of The Southland Corporation) (l) 49% owned by The Southland Corporation, 51% owned by Valores Corporativos, S.A. de C.V., and remaining 3 shares owned by other parties (m) 50% owned by The Southland Corporation, and remaining 50% owned jointly by The Southland Corporation and John H. Rodgers (n) 99.9% owned by The Southland Corporation, and remaining .1% owned by Wilgrist Nominees Limited, Southland's agent in Hong Kong (o) 50% owned by David Anthony Walsh, and remaining 50% owned by Anthony Peter John Kelly, for the benefit of Southland (p) 99% owned by The Southland Corporation, and remaining 1% owned jointly by Southland's local counsel, Bruce N. Davidson and Bruce E. Tunnicliffe (q) established by The Southland Corporation Employees' Savings and Profit Sharing Plan to hold title to properties under tax code Section 501(c)(25) Tab 4 EX-23 6 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the registration statements listed below of our reports, which include an explanatory paragraph describing the changes in methods of accounting for postemployment benefits and income taxes in 1993, dated February 23, 1995, on our audits of the consolidated financial statements and financial statement schedule of The Southland Corporation and Subsidiaries as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, which reports are included in this Annual Report on Form 10-K. Registration 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 Coopers & Lybrand L.L.P. Dallas, Texas March 28, 1995 Tab 5 EX-27 7 EXHIBIT 27 (FDS) FILED WITH FORM 10-K
5 1,000 12-MOS DEC-31-1993 DEC-31-1994 59,288 0 109,020 6,790 101,468 303,397 2,358,129 1,043,630 2,000,594 684,809 2,227,209 41 0 0 (1,157,272) 2,000,594 6,684,495 6,759,807 5,144,916 5,144,916 1,432,807 0 108,588 73,496 (18,500) 91,996 0 0 0 91,996 .22 .22